The US Federal Reserve has left interest rates unchanged at a 22 year high in a bid to stabilise price rises which has reached record levels. We’ll be getting the latest reaction from a business in the US.
Shares in the world’s biggest offshore wind developer Orsted has fallen all because they abandoned a project to build two huge wind farms off the east coast of the United States. We hear why it seems so hard to get these developments of the ground.
And would you fancy a 70-hour working week? Well one man in India has sparked a debate in the country with this call saying young Indian professionals need to work harder and longer.
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Transcript
BBC
Tony Nash is also with us, CEO of Complete Intelligence. Of course, he’s there in Texas. Tony, if you were to be interviewed by anybody, who would you want it to be?
Tony Nash
Oh, gosh. Elon Musk is not a bad choice. Joe Rogan is not a bad choice. I mean, or are you?
Rachel Cartland
Yeah, exactly. One of those BBC seasoned professionals, these are the people.
Tony Nash
Right, exactly.
BBC
Yeah, well, I’m certainly not seasoned and certainly not professional either, to be perfectly honest with both of you. But, I mean, interestingly, Joe Rogan did interview Elon Musk quite recently, didn’t he?
Tony Nash
He did just last week.
BBC
Yeah, good chat there. Tony, everybody expected this. There’s rates between five and a quarter to five and a half %. The key is, is this the end of the rises or could we see more? And how long are they going to be paused at these high levels? Do you want to have a bash in answering all those questions?
Tony Nash
Sure, yeah. I honestly think they don’t know. I think there is still instability in the banking sector, so they have to be very careful how much higher they push things. I think there’s difficulty on personal balance sheets, household-level balance sheets. I think with higher mortgage payments, things are delicate there. But we do have persistent inflation. I really do think these guys are taking it month by month to see they’ll raise if they have to. But I think things are fairly delicate right now and they’re trying to see how long they can keep this going.
BBC
When you say they’re fairly delicate, in what way?
Tony Nash
Well, we have a lot of, say, commercial real estate buildings right now that have lost a lot of value. A lot of that commercial real estate is on the balance sheets of regional banks, which came into problems in March of this year. But some of them are on the balance sheets of bigger banks. The Fed doesn’t want those regional banks to, any more of those regional banks, to fail because they don’t want to force a larger bank to buy any more regional banks. They had JPMorgan buy Silicon Valley Bank. That’s just one example. But when you look at, say, household cash flows and what’s happening because of higher mortgage interest. Now, a lot of people are at 3% mortgage interest rates. But for those people who aren’t, it’s really stressful on households to pay those. When we look at even things like grocery prices, the tightness of personal budgets and household budgets is very high. We’ve seen 22% or 24% price rises on average since 2020, and wages have not kept up. It’s tight all around. He has to really put pressure on downward and pressure on inflation. But interest rates are really to the point where they’re hurting people a little bit.
Tony Nash
I wouldn’t say they’re excessive interest rates, but if he can keep it at the current rate, he’s going to try to do that.
BBC
A quick one for you, Tony. When will we see rates being cut? It could be six months, nine months.
Tony Nash
Oh, yeah. I don’t think it’ll be until at least the first half of ’24 is over, unless there’s a catastrophic event, of course. But short of that, I think it’ll be mid ’24 by the time we see starting to talk about talking about interest rates coming down. Yeah, and that, of course. The inflation has been very high. And so, yeah, it’ll be sometime.
BBC
Yeah. And we’ll be heading right into the election period. There you are in Texas. Everyone talks about Silicon Valley, but a huge tech industry in Texas, isn’t there? At the moment in places like Austin, et cetera. Do you think there’s a lot of interest there in what’s happening here in the UK? Or do people think, Actually, it’s really not that important, this conference? Sure.
Tony Nash
Sure. And, Rahul, you know I run an AI company, right? Yeah. This is very relevant to us. I think when multilateral statements like this are made, I think it’s a nice sentiment, but there is no enforcement mechanism to this. Do we think the US, China, the UK, EU are going to abide by this? Probably not. Okay. Most of those places, I doubt, try to know, but most of those places have laws against things like malicious code, which is viruses and malware. There are existing laws against this stuff. Ai is just software. Many of the worries that people have about AI, around things like doing bad things, around racial profiling, these sorts of things, there is existing law in place about doing these things. If we look at Joe Biden’s executive order from yesterday, every single point that was in his executive order, there is existing law and regulation already on the books for all of those things. This is an interesting event, but none of these countries are really going to adhere to it. When somebody like Elon Musk stands up and says AI is terrifying, we have to ask why he’s saying that. He’s saying that because he has existing AI technologies, and he and the other large AI companies are trying to build a regulatory moat around their businesses.
Tony Nash
They’re trying to stuff down companies like mine so that they can be entrenched from a regulatory perspective in the AI space.
BBC
Well, yeah, it’s fascinating to hear from you.
Tony Nash
Why do you laugh? I’m just curious.
BBC
No, that was Rachel.
Rachel Cartland
That was me. Sorry. I was just wondering if there’s a, I don’t want to be rude, but is there the teeniest, tiniest bit of self-interest creeping in here?
Tony Nash
For me or for Elon Musk?
Rachel Cartland
Yeah, for you.
Tony Nash
No. Look, of course, I want to compete, but who are the loudest voices around AI regulation? It’s Sam at ChatGPT, it’s Elon Musk, it’s Facebook, and so on. These are the largest AI businesses out there today. Amazon, they just invested in a large language model called Anthropic. These are the largest AI companies out there today, and they’re out screaming for regulation. Why do big companies scream for regulation? Because they want to be entrenched into the business. And so there is no other reason for them to want to scream for regulation.
BBC
It is a subject we’re going to discuss, but fascinating to hear that conversation between Tony and Rachel. Before we went to the news, we were having this discussion about offshore wind as the world’s biggest offshore wind company, Austin, actually canceled two wind projects in the US. And, Tony, there you are in Texas. We think about it. We think of Texas and oil, don’t we? A lot. But there’s a lot of renewable energy there. But interesting that another big energy company recently said, BP, that the US offshore wind industry was fundamentally broken.
Tony Nash
Yeah, I mean, it is. Obviously, this Orsted issue, they got a billion dollars from the New Jersey government just recently, sorry, from the state government of New Jersey. So if these guys can’t survive without subsidies in a market environment, then there’s only so long over which you can amortize the initial costs of these. Windmills, I see windmill blades, used windmill blades going up and down the highway near my house on a regular basis. Those windmill blades only last so long. Then there’s actually a burial ground for windmill blades here in Texas. It’s a massive site where they can’t recycle windmill blades, so they have to take them out into the middle of West Texas and bury them. There’s the cost of them. There’s the cost of repairing them and maintaining them. There’s just not a feasible scenario for it. Texas was one of the first places in the US to deploy massive wind farms in the 1990s, and at one point had the largest wind farm in the US. And now obviously there’s been so much subsidy across the US for wind farms that other places are competing for that.
BBC
To this issue of productivity, it is an important one, isn’t it? Because for many economies, if they want to drive growth, it’s going to have to come through increased productivity.
Tony Nash
Yeah, you’re exactly right. And whether it was literal or figurative, you just need to work harder. Predictivity is output per worker. You get that either by investing in some technology, whether it’s mechanical or software or whatever, or by workers working harder. I think all he’s saying is it’s unlikely that a lot of this investment is going to come for some companies. So people are going to have to do it by working more. Is 78, 5 hours excessive? I mean, I’ve done it through my career. I’m not German or Japanese, but I don’t do it anymore. But for 15, 20 years, that’s what I did probably longer. I think people have to realize that if you want to have a higher income at a national level and or a personal level, in most cases, you’re going to have to work harder. You’re going to have to be more productive. I think that’s really all he’s saying.
BBC
Rachel, is there something a little bit generational about this? My dad said to me, You don’t work as hard as I do, and I find that I say that to my kids nowadays. We all think that maybe the next generation doesn’t work quite as hard as we do.
Rachel Cartland
Yeah, and I think we’ve got to be careful to avoid this looking back with rosy tinted glass and thinking we were so wonderful. But on this quiet quitting thing, I happened to be in a coffee shop the other day and a really well-dressed, well-spoken, obviously well-educated young woman was speaking, chatting at the next table so bitterly to a friend, I suppose, saying that she was not going to do a moment more than she considered that she was being paid for, that she would work out how many dollars worth of effort she needed to put in. At that point, she would turn off. I must say it was all I could do not to get up and go, Hey, this really isn’t having a way to have a happy life, believe me. Find a job you really can put your heart into and then do it.
BBC
I can hear you nodding in agreement there, Tony.
Tony Nash
Well, yeah. If people don’t want the job, then they can work for something else. It’s really interesting the generational question because the generation that, say, really gains the wealth. If you look at in China through the say, ’90s and 2000s, ’80s, ’90s, and 2000s, a lot of hard work, a lot of hours have gone in. Do Chinese workers today work as hard as people did 20 years ago? Probably not because they’ve hit a certain income level and they don’t have to. In the US and in the West, largely people talk about work-life balance. That’s a luxury to be able to talk about work-life balance because a level of wealth has been achieved in the West. That level of wealth hasn’t been achieved in India yet. So is that a luxury that people in India can talk about? Yeah, maybe in certain social classes and certain income strata, but generally across the board, it’s just not a luxury that people have.
BBC
Yeah, it’s a good point that I know many people in India, many women who were doing three or four different jobs just to try and make ends meet and just to keep the families going. Tony, whatever happens in this case, there are going to be a lot of questions at the end of it about the regulation that took place of this company. And there are concerns there, aren’t there?
Tony Nash
Oh, there are concerns were voiced for years. This isn’t something that just happened because of FTX. People have been shouting about regulation that was needed around crypto for years. This is just a symptom, as the commentator said, of a wider problem. It’s interesting that I think that what’s going to happen with SPF is he’ll be found guilty of something, but I really don’t think he’s going to serve that much of a sentence, and he’s probably going to be the CEO of another company in 2-3 years. This is really something that I think likely is going to be overlooked at some point.
BBC
Let us see what happens. Of course, he has quite strenuously denied those charges that have been, We’re going to end the program. Rachel set the theme for the program today, which she started by talking about her concerns about what happened with her We talked about the world’s largest wind offshore company seeing its shares collapse. Well, we’ve also seen WeWork see, it shares plunge in after hours trading, following reports that the troubled flexible office sharing firm is preparing to file for bankruptcy. No confirmation yet of that. I mean, Tony, have you ever used a WeWork yourself?
Tony Nash
I’ve never done it for my company, but I’ve met other companies in a WeWork. I actually knew the guy who broke the WeWork story about how their revenues were pretty hollow. And he was actually a WeWork tenant when he broke that story. And they kicked him out because he’s the one who broke the story about WeWork.
Welcome to “The Week Ahead” with your host Tony Nash. In this episode, we discussed three crucial topics:
1. Housing: Time to pay attention:David Cervantes addresses the US housing market, noting its robustness during the pandemic due to backlogs but predicting a slowdown now that those backlogs have resolved. He stresses the significance of monitoring housing prices, especially rental prices, as indicators of inflation. Cervantes also discusses the frozen state of existing home sales, emphasizing the influence of wages on rents. He highlights the Federal Reserve’s focus on real estate and wage channels to manage aggregate demand. Additionally, he suggests potential investment prospects in the housing sector, including home builders and mortgage real estate investment trusts (REITs).
2. Fed & Bond Vigilantes:Gary Brode covers various topics in his discussion, including concerns about excessive government spending and monetization of debt. He highlights the impact on the bond market, expressing concern about inflation and the potential slowdown in the economy. Brode also discusses historical income taxes, property taxes in Texas, and challenges faced by the orange crop in Florida.
3. Soft commodities gone wild:Tracy Shuchart conversation covers a range of topics, from California’s potential as the top orange crop producer to student loan repayment’s possible impact on the housing market. Additionally, she touches on the conflict between monetary and fiscal policies, factors affecting soft commodities, and regional issues in the NatGas market. The discussion wraps up with speculation about the effect of snowfall on natural gas prices.
Join us for a clear and concise analysis of these important topics in plain language you can understand. Stay informed for the week ahead! Don’t forget to like, subscribe, and share for more valuable insights.
Key themes:
1. Housing: Time to pay attention
2. Fed & Bond Vigilantes
3. Soft commodities gone wild
Transcript
Gary Brode
The Republican financial plan is like being a waiter and coming to the table and saying, By the way, if you’d like, we’ve got a Republican plan for your dinner. I’m going to put enough poison in your dinner to kill you. The Democratic plan is we’ll offer you more poison than that. Either way, you’re dead.
Tracy Shuchart
Court is a really interesting case because it’s the largest orange juice or it’s the largest orange crop producer in the world. For the very first time this year, California is going to beat us.
David Cervantes
The existing home sales market is basically frozen shut.
Gary Brode
When he’s been screaming higher for longer and the whole market said, He doesn’t mean it. He’s going to pause. He’s going to pivot. We’ve heard all that. I’m like, No, no, no. The reason I believe this is because I think Powell is terrified of being the next Arthur Burns and he wants to be the next Volker.
David Cervantes
Rental prices will moderate and chip away at that sticky OER.
Tracy Shuchart
Their storage may be 90% full, but that 90% is only 25% of what they use during the whole winter.
Tony Nash
Hi, everyone, and welcome to the week ahead. My name is Tony Nash. Today, we’re joined by David Cervantes, Gary Brode, and Tracy Shuchart. Gosh, we’ve got a lot to cover this week. First is housing. And David is telling us that it’s time to pay attention to housing. When everyone was freaking out last year, David had a very cool head, and now he’s starting to pay a lot more attention to it. Gary is going to talk to us about the Fed and bond vigilantes, which I think will be a really interesting discussion. And then Tracy is going to talk to us about soft commodities. We may be able to get a little bit talk about the NatGas stuff that happened this week, but we’ll talk about soft commodities and why they’re rallying so hard.
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Thank you. Guys, thanks so much for joining us. Gary, thanks for joining us for the first time this week. I really appreciate the time you guys take for this.
Gary Brode
Thanks, Tony. Great to be here.
Tony Nash
David, you remained fairly bullish on housing, or I would say not as bearish as many people last year when it got a lot of attention. You kept your head. You saw housing backlogs really as a key driver there. Lillie, you’ve really started to rethink that a bit. Part of this is based on the permits data, which we’ve got some of that on screen right now, both the % change and the total permits, which were down pretty hard in September. You say the backlogs are pretty played out. Can you walk us through what you’re looking at in housing now and what you think will play out in the near term?
David Cervantes
Yeah. First of all, thanks for having me. Glad to be here with everyone. Let’s just take a step back into the initial thesis and how that evolved. I think when the housing market started freezing up, mortgages rates started mooning and sales started collapsing, a lot of people conflated that for the impact or for actual economic activity. In reality, that’s just paper shifting. When people buy a house, there’s no new wealth created. I mean, maybe for somebody, but it’s zero sum. It’s a wealth transfer maybe, but there’s no new net wealth created. It’s like buying stocks. In any case, I was focused on actual economic activity that goes into national accounts for GDP accounting. What really matters for the cycle is construction spending and construction employment. Due to the backlogs, those were at all-time highs. Despite sales falling off the cliff and mortgage rates moonshotting, actual economic activity that made it into national GDP accounting remains strong. In addition, fixed residential investment was down, I believe, in Q3, 26% and Q4, 22 %. And I hypothesize, well, it doesn’t need to get necessarily better, it needs to get less bad. And I figured if it got less bad, we could get a growth impulse later in the year.
David Cervantes
And that’s exactly what happened. Fixed residential investment went from detracting from GDP to becoming mildly additive to GDP. We just got the GDP report yesterday. Q3 expectation was for it being 19 basis points additive to GDP came in line at additive 15 basis points to GDP. Now that’s all in the past. I think now with the backlog cleared out, we need to start paying attention to the data that we used to pay attention to, but that became noisy and muted due to the backlogs. So with the backlogs out of the way, I think that some of the signal in things like permits is going to start to matter more now because there are no backlogs to fill that gap anymore, or there’s less of them rather to fill that gap. So the expectation that I have is that with that impulse out of the way, we will see some deceleration not only in the sector, but also in the general economy. In fact, today, Atlanta Fed GDP, just a few minutes ago, I posted on Twitter, came out with a 2.3 expectation for the fourth quarter of this year. Yesterday came out saying 2.5 was my estimate.
David Cervantes
That was 20 basis points off. This is a fluid thing, but that’s where we’re starting from, is that we are already baking in a slowdown from the toward pace of growth we saw in the last quarter.
Tony Nash
Okay, so 2,3 is more in line with, say, a slightly above trend growth for the US, right? So 4,8 or whatever it was yesterday, obviously way ahead of where we should be where we are right now as an economy. I know you’ve been very bullish on economic growth all year, which is great, and you’ve called this excellently. With housing, so you’re saying even with the backlog is clear, do you expect housing, say, construction jobs to continue to decline? Is that what you’re saying?
David Cervantes
The answer is on the residential side, yes. Right now, it’s a huge market. There’s industrial construction, there’s manufacturing construction, and there’s a lot of IRA money that’s going to go into those sectors. But for purposes of tracking the economy, I really pay attention to the residential side. The reason is that’s the most volatile of the construction sectors, and that is what typically leads into and out of a recession. Seven out of 11 post-war recessions have started with a significant drop in fixed residential investment. That’s been the historical experience. I’m watching the residential side. That’s the answer.
Tony Nash
Can we talk a little bit about meeting house prices? If we look at meeting house prices, they started to fall in Q1 of this year. Of course, that’s local markets. San Francisco would be the same as Houston, Texas or whatever. Q2 and Q3, that decline accelerated. Can you talk us through what do you have expectations on, say, median house price to go in line with your housing thesis?
David Cervantes
The answer is not really, and here’s why. Again, house prices aren’t in and of themselves economic activity. But I still watch them for this reason. Rental prices lag, housing prices with the 12-18-month lag. As we know, the real sticky part of inflation has been OER. I forgot the. I’ve had a brain fart now on the acronym.
Tony Nash
Owners equivalent rent.
David Cervantes
Exactly. Thank you. Owners equivalent rent. That’s been sticky and still at a high single-digit level. I believe it’s 7.8, the last reading, but tomato, tomato, give or take, a few basis points. It’s still high historically. I think as long as house pressure prices have continued to moderate, either outright declines or at least increasing at a slower rate, I do think that rental prices will moderate and chip away at that sticky OER. For me, that’s really why I’m watching house prices. Not for any tells on the economy per se, but on the inflation front.
Tony Nash
Okay, so I want to come back to that in a second, but I want to also talk about this information we have about home sales, which came out this week. Actual home sales in September in the US were 759,000. The expectation was 680,000. Year on year, it’s 12.3% growth where it was… Sorry, that’s month-on-month, 12.3% growth. The expectation was a negative 8% growth. With housing prices falling, are people going in with cash to buy those houses? Or why do we see this a little bit higher than expectations?
David Cervantes
Well, I think that’s a really good thing you bring up. Here, I think, is part of the issue. The number you referenced was for new home sales, not for existing home sales. The existing home sales market is frozen. There is no action. Whether it’s sellers that have a 3% mortgage and don’t want to leave it or they just can’t pull up the funds for a different, I don’t know, for whatever reason, the existing home sales market is basically frozen shut. And so we’re seeing a lot of that activity shift to new housing, especially with the larger home builders. They’re offering the rate buy downs. They’ve got the balance sheet, they’ve got the institutional wholesale funding to buy down these mortgage rates. Because of that dynamic, a lot of this is just shifting from existing to new.
Tony Nash
Okay. Let me open this up a little bit. If we go back to the rent discussion and we look at how price is declining, especially with rent, as rent starts to fall, does that have an impact on service industry inflation? Meaning, is the pressure on hourly wages, the upward pressure on hourly wages, is that alleviated a bit if rents start to fall?
David Cervantes
I think the answer is no. Wages come first and wages drive rents. What we’re seeing now, what we are seeing though, is a decline in the rate of growth of wages. I believe that the most recent one came out at 4.3. It was previously at 4.5. The Atlanta Fed does have a wage tracker. If you pull up a graph of that, you will see a precipitous decline in wages over the past few months. Okay. That’s actually what the Fed is. They have different economic linkages that they’re targeting. One of them is the real estate channel, the other one is the wage channel. They’re trying to address both of those so that they reduce aggregate demand. Ultimately, reducing aggregate demand is what they’re trying to do.
Tony Nash
Right. Gary, did you have something on that?
Gary Brode
Yeah, David, I want to ask you a question on one part of what you were talking about related to the residential market. I agree with you that people, if we’re going to say trapped with a 3% mortgage rate, they have an incentive not to sell. That’s kept inventory off the market. It’s kept housing prices very high in an 8% mortgage environment where affordability has plummeted. The question I’ve got for you is don’t you think one of the things that will help bring this in equilibrium, meaning more transactions at lower prices, is people will often sell houses for non-financial reasons. Like a death or a birth or somebody ages and they’re going to assisted living or change a job. This is one of those things where people might be able to hold off for a while, but at some point, life circumstances mean you have to dump the 3% mortgage and deal with whatever your current life situation is. Don’t you think that ends up bringing more inventory on the market and bringing prices more into equilibrium? By equilibrium, I mean more transactions at lower housing prices, particularly with 8% mortgages.
David Cervantes
The answer is yes, but that’s a slower moving… The answer is yes. It’s a question about what rate. And does that happen in time to unlock that market to make it economically beneficial? So all these things you mentioned are life things that you can probably kick the can on for a year or a year or two. Eventually, yes, you got to face reality. If you’re an empty nest or your kids are off to college and you just don’t need that 4,000-square-foot-Mid-Mansion or whatever it is you have. Yeah, at some point reality kicks in. But to make it cyclically important, I think we’re at a different bind right now for that to make a difference.
AI
Heads up for a short break.
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Tony Nash
Can I ask you guys another probably weird question, but with the amount of money on credit cards in the US, could credit card debt push a segment of the population to sell their homes? Because that’s been rolling around in my head for a few months, and I’ve never really looked into the research on that. But could that be something that could move the housing market? Yes, somebody has a 3% loan or a segment of the population has a 3% loan, but they’ve had to put so much on credit cards over the last two or three years, and that’s bursting at the seams. Could that be something that pushes the housing market or is that just too on the edge that it’s really not going to impact that much?
David Cervantes
I would think as long as employment stays low or unemployment stays low, employment high, I think it’s a non-issue because as long as people can service their debt and hit their monthly or whatever, but look, a lot of houses are owned free and clear. I don’t know what the number is. I know it’s at a historical high where there’s a lot of equity. Granted that with rates aren’t where they are, that cost of equity is expensive, but it’s probably cheaper than your credit card debt. So I think at the macro aggregate level, there’s a ton of housing equity that can cover any shortfalls for a while as long as the employment picture stays okay, which right now it’s still a hot… By all definitions, it’s still a hot labor market.
Tony Nash
Okay, great. Go ahead. Go ahead, Tracy.
Tracy Shuchart
I had a question, Mario, on this. Do you foresee any problem right now with repayment of student loans and say, new first time home buyers and/or renters coming onto the market and having that cost some ripple in that market, in the housing market?
David Cervantes
I know. I think the student loan issue is overblown from a macro standpoint. Again, looking at the numbers sound big and scary, but my heuristic is take whatever macro doom problem you have divided by nominal GDP and you probably get a really small number. Typically it’s not big enough to really make a difference at the aggregate level. This is a $27 trillion nominal economy. It is huge. Last quarter, in one quarter alone, we grew the size of New Zealand’s GDP. Just to let that sink in for a moment, how big this economy is. When you take a problem like student loans, I don’t know exactly what the number is, a couple of hundred billion and you divide it by an auto GDP, you end up with a small number.
Gary Brode
David, I agree with you. One thing I’d add to that as well is for all the talk about our very high credit card debt, and granted, it has gone up a lot, but one of the things people don’t add to their evaluation of that is inflation. If we go from a certain level of credit card debt to a higher level, part of that, yeah, it’s more nominal dollars, but what does that actually represent as a percentage of household budgets? The issue that you’re talking about, how much does this matter in terms of GDP, that also plays out at the household level as well. How much does this play out in terms of our assets or our high income? Again, in nominal dollars.
David Cervantes
Right. It puts consumers in the privileged position of being a debtor in a higher than normal inflation regime, which means it deflates. Your debt is nominally fixed, but as long as inflation remains high, it gets deflated over time, especially if your wages rise. If your wages continue to rise, that real burden falls over time. It’s like what governments do all the time: deflate their debt.
Tony Nash
Okay, so great info on housing. What action can I take as a result of that? What are you watching as a result of where housing is right now and what’s happening in housing markets?
David Cervantes
I’m actually watching The Home Builders. I had a fantastic trade lap first half of last year. Killed it. Took off risk in middle of August. It was partially I got vibes and partially I was on vacation and I don’t like having a risk on when I’m on vacation. I got lucky, partly. But since late summer, housing stocks have been hit hard. But I think once we see some normalization in the yield curve, anything that any trade that involves borrowing low and lending high, a normalized yield curve is going to potentially do really well. Though, home builders being very leveraged to the economic cycle, home builders using their institutional buying power to buy down rates and deal with that. I think once we see some normalization of the curve, and we’re starting to see that, once we see some normalization of the curve, I think the home builders could be at play again. I’m looking at that. I’m also looking at Annaly Mortgage and REM, similar type of business that the Mortgage REITs. They’re basically just levered, borrow near, land-high operations. I think those trades could do really well.
Tony Nash
Perfect. That’s great. I love it when an extraordinarily smart person attributes their success to luck. It’s just it’s so humble. Thanks for that. I love it.
David Cervantes
I’ve burnt my hand on the stove enough times to know that I don’t know all the answers.
Tony Nash
Yeah. I’ll take luck over intelligence any day of the week. Let’s move on to the Fed and bonds. Gary, one of your recent tweets says that the Fed has lost control. I want to hear about that. Your tweet about this saying that Powell acknowledges that the bond vigilantes are in control. Can you talk about that? Why is that important and what near-term impacts do you expect?
Gary Brode
Sure. Thanks, Tony. The key thing is, at the last Fed meeting, the Fed kept interest rates flat. They basically paused three months ago. One of the things he acknowledged, which I think is accurate, as he said, the bond market is doing a lot of the Fed’s work for him. He’s right about that. If we go back three months to the last time the Fed raised rates, we had the yield curve where it was. In the three months since then, the short end of the curve, the Fed funds rate through the three-month treasury have all traded about flat. Well, the Fed funds rate has been completely flat. But the long end of the curve, the 10 year, the 20 year, the 30 year have all traded up about 100 basis points, and roughly half of that move has come in the last month, the last four weeks. What he’s recognizing is that the bond market is starting to price the long end of the curve at a much higher yield than it was despite the fact that the Fed hasn’t done anything. He’s saying, Wait a minute, the bond market is going to slow down the economy for me.
Gary Brode
We don’t need to do as much. I think he’s right about that. But to me, the key point is let’s take a look at why the bond market is reacting the way it is. We got this great question. I forget who it was, but somebody on Twitter asked this brilliant question, Wait a minute. We’ve got higher bond yields and gold and Bitcoin are going up. What in the world is going on here? My assertion is that all three of those markets and Powell are all watching Congress. We have a situation now where we had this budget deal back in June, July, where both sides pretended that there was this horrible, long, bitter, six-month fight. But we all knew the end result was going to be a solution that just guaranteed more and more and more spending. They agreed on a solution that would result in an excess of $4 trillion of spending in the roughly year and a half between then and the next election. It’s always amazing to me how they always finance it through the next election. Because, of course, we’re not concerned about our jobs. We’re not being selfish or self-interested where this is what we’re doing for the American people. Okay, great job.
Tony Nash
They’re all on the same side.
Gary Brode
I completely agree. I completely agree. We have one party. One of the things that I’ve said is the Republican financial plan is like being a waiter and coming to the table and saying, By the way, if you’d like, we’ve got a Republican plan for your dinner. I’m going to put enough poison in your dinner to kill you. The Democratic plan is we’ll offer you more poison than that. Either way, you’re dead. What’s the difference? If there’s anybody in Washington, the people that are serious are saying, We’ll give you your poison with dessert and acting like that’s a favor. What’s happened here is they’ve agreed to overspend by $4 trillion over less than two years. This is all happening with higher interest rates. Let’s just take that $4 trillion of spending, they’re going to monetize. It was just a fancy way of saying there’ll be more currency units created. If you assume a 5% rate on that, great. That’s another more than $200 billion over the next two years. That’s just the interest on the excess spending for the next two years. Add to that the fact that we’ve got 10-year securities rolling off with a rate of less than 1%.
Gary Brode
They’re replacing that with 5% paper. What we’re looking at is a situation where interest expense for the federal government was $400 billion a decade ago. It was $600 billion a couple of years ago. It’s now a trillion dollars heading for in the next couple of years, somewhere between 1.5 and $2 trillion. Let’s add that to the calculation. Basically, Congress is going to monetize another maybe $5 trillion over the next year and a half, and that’s assuming they’re on budget. Anybody wants to take the under on that, I will take that bet right now. What happens now is you have more currency units being created. In this case, it’s the dollar, the Fiat dollar, and it’s chasing the same amount of goods in the economy. All we’ve done is replace the meme that we’ve had over the last decade. We’ve all seen the meme of Powell and the Fed making the money printer go bur. Well, great. Now it’s Congress. What’s happening right now is the bond market, the Federal Reserve, the gold market, and the Bitcoin market are all watching Congress. Yeah, we’ll watch Powell’s press conferences and we’ll be interested in what they do next.
Gary Brode
But the truth is, at this point, it’s the bond market that has control, and they’re watching Congress. Tony, as you’ve pointed out, there is other than Rand Paul, there is no one in Congress even making noises about being fiscally responsible. There’s just going to be unlimited currency creation.
Tony Nash
Okay, so let me take a step back and ask a couple of questions, and David and Tracy jump in here. You started out talking about the Fed and the bond guys taking over, David talked about how the service wages are going down and other indicators that the Fed has managed are moving in the direction. The Fed has handed off some of their work to these bond vigilantes, whether they wanted to or not. Service wages are coming down as a result. From my perspective, although I don’t love to love these guys, it sounds like the Fed’s job is being done. Is that fair?
Gary Brode
I think what created the problem was more than a decade of zero or near zero rates.
Tony Nash
Of course. Yeah. I’m talking about.
Gary Brode
Their job- Right now. -let’s say.
Tony Nash
Over the past 2-3 years.
Tony Nash
Their job is being done. We don’t want to acknowledge that and we don’t want to say we like the Fed, but their job is being done. David, do you agree with that?
David Cervantes
I mean, beauty is in the eye of the beholder. It’s a question of what do you think their job is? If you take the- The inflation right now. Yeah. We’re experiencing a disinflationary impulse. There’s no argument there. The question is, what does the future look like based on what Gary said? I respect what he said. I’ll just take it as truth. Then maybe not. If they’re not doing their job. If you look at nominal… My favorite metric is nominal GDP. Right now, as of yesterday, 8.5%. It’s not in line with their target. Their target is around four, four and a half %. Five would be in the high side, but we can probably excuse that away. If you use a nominal GDP as a metric, the answer is no, they’re failing. That’s the answer. It really depends. What’s your metric?
Tony Nash
Okay, that’s great. That’s perfect.
Gary Brode
David, I would add one thing to what you’re saying, which is a huge part of nominal GDP right now is government spending. We have this really weird quirk in the way we calculate this where government spending is additive to GDP, nominal or adjusted, whether it creates value or not. We’ve all heard the constant example of you pay half the country to dig ditches, the other half to fill in ditches, and if the government pays for it, we’re adding that to GDP. I agree with you, Tony, that the Fed has done the right thing right now. The problem is everything the Fed is doing, Congress is undoing, and they have diffuse responses responsibility. My belief and one of the reasons why I have believed Powell over the last two years when he’s been screaming higher for longer and the whole market said, He doesn’t mean it. He’s going to pause. He’s going to pivot. We’ve heard all that. I’m like, No, the reason I believe this is because I think Powell is terrified to be the next Arthur Burns and he wants to be the next Volker. He does not want to have his last job in the public sphere being the next guy who failed on inflation.
Gary Brode
The issue he’s got is he’s now fighting Congress and they have to diffuse responsibility and they will blame everybody but themselves for the inflation that will inevitably come when they monetize the next two, three, five, six trillion dollars of currency units. They’ll blame Vladimir Putin, they’ll blame greedy corporations because corporations only became greedy in 2021. They didn’t want to make profits before that. I think they’ve done the right thing, but they’re like the Bank of Japan. I know you guys were talking about this in a recent episode. They’re stuck. There’s nothing they can do to go forward or backwards and whatever they do is being undone in Congress right now.
Tony Nash
Okay. Tracy, you keep nodding yes.
Tracy Shuchart
Yeah, I’ve been saying that, and I think this problem is going to get worse headed into an election year because this administration is going to do everything they can to avoid a recession. Obviously, nobody wants a recession. They want to get reelected. I know everybody says, Yeah, but we have the House that’s dominated by Republicans, but they’re wishy washy.
Tony Nash
They spend as much as everyone else.
Tracy Shuchart
Let’s call a spade to spade. I just think this problem is going to get worse and we’re going to still have monetary policy butting up against fiscal policy, in my opinion.
Tony Nash
Let me ask all of you. Guys this-
Tracy Shuchart
Maybe, Gary, we can expand on that.
Tony Nash
Yeah. David’s talked about nominal GDP, not overheating, but accelerating. We’ve got a disinflationary environment. Gary’s talking about the Congress doing trillions of dollars of additional spending, but unless we have a recession or an emergency, how are they going to justify a multi-trillion dollar spending plan?
Gary Brode
Well, they’ve already done that.
Tony Nash
Additional.
Gary Brode
That’s where we are now. We had a situation where we had GDP growth, insanely low unemployment, rising wages, an economy that was in really good shape and high levels of government spending. Remember, every time we’ve had a so-called emergency, we ramp up spending and then that’s the new baseline. We saw that in 2008. We took the baseline spending from the TARP plan and a trillion dollars of supposedly shovel-ready plan. All of that was the new baseline. Then we had COVID spending. That was a one-time emergency. That’s now the baseline. They’ve passed $2 trillion dollars of hilariously named inflation reduction as if the government pouring another $2 trillion of currency into the economy was going to lower prices for people. We’re already at insane levels of spending and nobody’s showing any signs of slowing down. Here’s the better question, Tony. Who in Congress is going to stop the next big spending bill?
Tony Nash
Well, okay. That’s a great question, but if this is going to happen anyway, why should we worry about it? I mean, I hate to be so fatalistic, but if we know this is going to happen anyway, why does it matter?
David Cervantes
I think it matters because if you have a situation with fiscal dominance, if we move to a regime of… We’re already in a regime of fiscal dominance. The question is, does monetary policy offset that and try to keep nominal and real GDP at a sustainable level? Or does the Fed have to do a monetary offset? I’m sorry, do they avoid monetary offset? And then policy goes off the rails. To Gary’s point, I don’t think that would happen because Powell is concerned about his legacy, and I think he cares about the institution as well. I think he’s trying his best as a public servant. I think if fiscal dominance does overreach, I think the Fed will deliver monetary offset. The way that will express itself will be in the yield curve. We’ll see even higher for longer.
AI
Heads up for a short break.
AI
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Thank you and now back to the show.
Tony Nash
Higher or for longer? Okay, great.
David Cervantes
With lots of ERs at the end.
Tony Nash
Exactly. It’s like Abenomics from 2012 until whenever. It just became more and more intense. We could have something similar here. Gary, just back to your report that you sent me, inflation targeting is something that obviously is talked about, and one of your reports talks about that. Can you talk about how changing the inflation target would matter in an environment like this?
Gary Brode
Yeah. So it’s a great question because what we’re seeing right now are a large number of people saying, Oh, well, we can fix the problem by changing the inflation target. Right? I mean, this is like you’re a marathoner and you get to the 24-mile mark and someone’s like, close enough, let’s just stop. Okay, great. But that’s not effective. Tony, you’ve been, in my opinion, correctly critical of the Federal Reserve. I’m 100% with you. Let’s talk for just one second about the danger of the existing discussion. Everybody accepts 2% as the correct reasonable, moral, fine inflation target. We all just… It’s and it’s only 2%. You pay a dollar for something one year and it’s a dollar two next year and who cares? It’s small. Okay, this is theft. Because over a 40-year working life, and most people have a 40-year working career, a 2% inflation rate, people forget about compounding, destroys 55% of the value of your money. That is value that is going from you to the government and the ability to do that is called senior. Just a fancy word for stealth stealing by the government. People say, Oh, well, you know what’s the big deal?
Gary Brode
We’ll just move the inflation rate to 3% or 4%. Okay, well, let’s talk about the implications of that. A 4% inflation rate over that same 40-year working life for people takes 79% of your money. Four out of every $5. There are people-
Tony Nash
What you’re saying is I get to keep 21% of it.
Gary Brode
Yeah, right. Congratulations. Fiat economics. It’s phenomenal for everybody. Part of the problem is they only steal a little bit at a time. By the way, that’s assuming you believe the CPI. I don’t. The CPI is hugely understated. OER, which you and David were talking about earlier, is a huge reason why that’s a big part of it. But because they’re stealing slowly and quietly and no one really knows who to blame and Congress can blame everybody, people, they let it go. But the real correct moral rate of inflation is zero. Two % is itself obscene, but going to 4 % and you’re losing, like you said, you get to keep 21 cents out of every dollar you make over your working career.
Tony Nash
Pre-taxes.
Gary Brode
Yeah, exactly. They’re stealing from you in a lot of ways, but at least taxes people know who to be angry about. Inflation is stealth stealing. What we’re seeing, one of the things that I think is really interesting is last week, one of the leading candidates in Argentina promised his people no taxes. This was not a President Bush, no new taxes. This was no taxes. He’s not offering to cut the massive size of the Argentinean government. Basically, what he’s saying is we will pay for 100% of our spending in inflation. The Congress, rather than viewing that at the US Congress, rather than viewing that as a warning, is saying, Oh, wait, that’s a great model. We can tax people an unlimited amount with this and we won’t get voted out of office. We can now be the Santa Claus of free stuff. We can be the Santa Claus of low taxes and we can blame inflation and everybody but ourselves. It doesn’t matter. It still ends in disaster either way. To anyone listening to this, I would strongly suggest that the next time you hear somebody talking about, Oh, just raise the inflation rate and that’ll solve the problem, push back on that.
Gary Brode
Help people understand that inflation is the way a government harnesses the currency to take money from you without you noticing, but it’s still theft.
Tony Nash
Yeah, but it’s just 4%, Gary.
Gary Brode
By the way, here’s the best one. We remember every time a taxing authority, whether it’s a state or the federal government in the United States, income taxes, it always starts at 1% and it’s temporary. That worked its way up to 90% tax rates at one point, and nothing is ever temporary. I promise you, if we don’t hold the line on this and we say, Okay, fine, we agree to 4%, does anyone here think it’ll stay at 4%, there’s no way in the world. Tracy, what’s next? 6, 8, 10?
Tracy Shuchart
Exactly.
David Cervantes
Sounds like my property taxes, I think they’ve doubled since we moved into the suburbs.
Tony Nash
I live in Texas, we have very high property taxes. No state income tax, but we make up for it in property tax. Okay, Gary, that’s all great. Thank you for all of that. Let’s move on to commodities. Tracy, we have seen a lot of upward pressure on soft commodities, really since the pandemic. Things like cocoa, orange juice, sugar, cattle. What’s happening with these soft commodities to push up those prices?
Tracy Shuchart
Well, I mean, I think you have to look at each one of these individually because they have their own unique set of problems you’re having. So for cocoa, for instance, we have most of those crops are located in West Africa. West Africa crop is doing poorly. Obviously, bean deliveries and ports on the Ivory Coast are about 16% behind this season. I won’t go into total details, but again, it’s a weather issue as well. El Niño is threatening dryness in West Africa, et cetera. That’s because so cocoa is really because the crop is really in one specific area. A lot of the crops are in one specific area. If we look at sugar, for example, we have a deficit that’s grown as a result of poor Indian Thai crops, which are huge. We also have issues in Latin America right now in Colombia and also in North America, in Mexico. We’re having issues there. If we look at cattle, I think cattle was on your thing, but it’s not a soft, so let’s move to OJ. If we look at… Florida is a really interesting case because it’s the largest orange juice or it’s the largest orange crop producer in the world.
Tracy Shuchart
For the very first time this year, California is going to beat us. Really, we have had our worst orange crop in the last 70 years. This is due to several problems that are really unique. Well, one, hurricanes, that’s not. We’ve had weather-related issues. We also have a deadly disease called citrus screening, which is an invasive Asian bug, essentially. But what is unique to Florida and really different is that what is happening is as people are moving into the state, those properties are actually being sold. Those crop properties are actually being sold to residential home construction. This is what is happening in particularly the Orange juice market in Florida.
David Cervantes
Hey, Tracy, I have some questions for you. You mentioned California. California has been a drought for a long time. Up until I believe it’s last year, they’ve gotten so much rain, they are no longer in drought conditions. In fact, some of the areas where I grew up in the Central Valley, some of the lakes that were drained and dikes and levees were put up for the irrigation system have returned. You’ve got these-
Tony Nash
Really?
David Cervantes
Yeah. Lake Tilare, I believe it’s called, was filled in the 1800s and it’s now refilled and yet farmers… This whole system was developed around farmer interests and looks like Mother Nature just took over instead. Too bad. But is the causality of California getting more involved in the secretion market due to the rehydration of the state or is that just some other factor? I’m just curious.
Tracy Shuchart
Yeah, I think it’s definitely helping. But we really haven’t seen the results of that yet. We really won’t know for a couple more seasons how that really pans out. Yes, their crop, their 23, 24 crop is much larger than it’s been, but I think we need to give it a couple more seasons to see how really those weather patterns filter into actual production.
Gary Brode
Tracy, any thoughts on fertilizer? Because you’re talking about these increases in prices. There have been fertilizer shortages. I know Russia has declined to export to certain parts of the world that we would care about in this case. Where do people get fertilizer now and how much is that impacting all of the issues that you’re talking about?
Tracy Shuchart
Yeah, well, I think right now, obviously, we saw that big run-up in 2021 to 2022 where we had a lot of shortages. We saw a big spike in prices. Everything’s come back down to normalized prices now because that might calm down a little bit. But I think what we really need to focus on right now is the drought situation in the Mississippi River, because what’s happening is that’s impacting not only what farmers, which farmers use that Mississippi River to send their goods to the Gulf Coast to be exported elsewhere, which is huge. With lower river levels, that means that you either can’t pass through and/or higher shipping costs because you need to split your product to make your vessel lighter. We’re also seeing problems with that in shipping fertilizer. Then again, in Florida, Florida is a huge fertilizer producer, has also been impacted over the last two seasons during hurricane season. We need to keep an eye on it. I’m not that worried about it right now, but it’s definitely worth keeping an eye on, especially if we start to see some rise in natural gas prices, which if you look at the weekly chart right now, we’re just about starting to break out.
Tracy Shuchart
We could have problems in Europe this winter. If we see a spike in natural gas prices again, you’ll probably see a spike and corresponding spike in fertilizer prices.
Tony Nash
As well. Okay, before we go on to NatGas because I do want to ask you some bonus questions on NatGas. But I do want to say that whenever I see AG prices spike, the first thing that I think of, you know what it is? Coffee prices.
Tracy Shuchart
You’re like, I could do it.
David Cervantes
I know why. I know why. I know why. I know why. I know why.
Tony Nash
Much to my relief, coffee prices are down 40% from the peak. We’re not seeing the run-up in coffee prices like we are with some of the other softs, which is such a relief. Tracy, can you talk us through some of the NatGas drama that’s happened this week? I know there’s been a lot of noise about it. I just want to help people understand what’s happening in those markets.
Tracy Shuchart
Well, we’ve had… Well, first of all, the obvious-obviously being the Israel-Hamas conflict, and they shut down the Tamar Field right off the Coast of Israel. However, I will say that’s relegated to being a regional issue more than a global issue, being that Jordan is the main importer of Israeli gas from that particular field. They’re more impacted than anything else. There is a pipeline to Egypt, so that means less exports out of Egypt. But again, I think the problem is mostly regional. I think we saw a kick-up in prices initially, obviously because of the region. We saw a kick-up in oil prices as well. Then we had the first cold snap in Europe, and I think that got the market a little bit jittery. I think that’s what the market is reacting to right now. But I do think Europe is not out of the problem. You have to realize their storage may be 90% full, but that 90% is only 25% of what they use during the whole winter. It’s not like their storage, We’re 95% full, so we’re good all winter long. No, it’s not really how it works. If we do have a colder winter, they’re still not out of the woods yet.
Tracy Shuchart
If manufacturing picks up for some reason, I don’t know what that would be, but if it does, then you’re also going to have a bigger problem. It’s definitely a market to watch right now. If we’re just looking at it from a technical standpoint, this market is very short. Any breakouts you could very easily see a short squeeze.
Tony Nash
Just for reference, NatGas is up over 10% today on Friday. The price right now at 350 is about half of what the price was a year ago at just over seven bucks.
Tracy Shuchart
Yeah, you have to… We just spent almost nine months flat.
Tony Nash
Exactly. We were-
Tracy Shuchart
In consolidation.
Tony Nash
-260 or something like that. This rise is really coming on fast. I don’t know, do you think we’ll get to the levels that we were at last year, or do you think we’re going to pass that?
Tracy Shuchart
Well, I’m not a weather expert, so I have to see it is a Linear year. Who knows what could happen? Who knows what could happen geopolitically. Those are all things that you need to watch. I think right now, if experts continue out of the Middle East because everybody wants to do business, as usual, even with BombSquad, we’ve seen that in the past. In Texas.
Tony Nash
They can always do business in Texas. That’s good.
Tracy Shuchart
They can always do businesses in Texas. But I could see a squeeze at $5, $6 easily. I don’t know about hitting the highs. But again, I don’t want to be a person that….
David Cervantes
Hey, Tracy. I’m an armchair weatherman only because I’m a snowboarder and I plan my snowboarding trips far in advance. I know it’s going to be a really good season. There’s already snow in Jackson Hole. There’s snow in Mountain hood, Washington. I don’t know if it’s the El Niño effect or some other effect, but it’s going to be an epic snowboarding season. I’m getting my stuff ready. I don’t know how that impacts natural gas prices, but I’m looking forward to the weather.
Tracy Shuchart
Okay, I’m with you.
David Cervantes
Snowboarder or skier?
Tracy Shuchart
I’m a skier, but I’ll tell you. Great.
Tony Nash
All right, guys. Hey, this has been fantastic. Thank you so much for all the stuff that you guys have talked about. This has really been really educational for me. I know you guys put time into it and a lot of thought, so I just want to thank you so much. Have a great weekend. Have a great week ahead. Thank you.
David Cervantes
Thank you all. Take care.
Tracy Shuchart
Thank you.
Gary Brode
Thanks. Bye.
AI
That’s it for this week’s episode of the week ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.
This video is first and originally published by TalkTVon Youtube.
In a recent interview, Tony Nash, the founder of Complete Intelligence, discussed the impact of artificial intelligence (AI) on jobs and society.
He highlighted that while AI and automation may lead to the loss of certain jobs, it also presents an opportunity for individuals to engage in more interesting and problem-solving tasks.
Nash emphasized that white-collar professionals will need to learn new skills and adapt to the changing workforce.
He also expressed concerns about the data collected by AI tools and how it may be used, noting that the profiling capabilities of AI can be unsettling.
Overall, Nash believes that AI is transforming the workforce by automating mundane tasks and allowing individuals to focus on more meaningful and engaging work.
Transcript
Rosanna Lockwood
Well, this morning, Rishi Sunak sought to reassure us, the public, about the risks posed by artificial intelligence. His speech came with the release of a government paper into the capabilities and risks from AI, with increased unemployment and poverty being highlighted as possible consequences by 2030.
Rosanna Lockwood
Ahead of next week’s AI Safety Summit at Bletchley Park, you’re going to hear a lot about that. Trust me, Sunak said, quote, AI will bring a transformation as far reaching as the Industrial Revolution, the coming of electricity, or the birth of the Internet. But with more than 10,000 jobs to be replaced by new tech, including AI, what could this new world look like? That’s what we’re asking this evening.
Rosanna Lockwood
Joining me to discuss this found of Complete Intelligence, Tony Nash. Tony, thanks for making time. Look, starting with Sunak’s speech this morning, if the aim was to reassure the public about the risk being posed by AI, this is our British Prime Minister saying, Look, you just got to work with it and it will be okay. Do you think we should feel reassured?
Tony Nash
I don’t know if it’s a matter of feeling reassured or just becoming more educated about what AI is. Ai is really just processing more information and completing tasks. It’s synthesizing the information you’re putting in, and it’s completing tasks on your behalf. I think the bigger issue… your report said that we’d be losing 10,000 jobs or the UK would be losing 10,000 jobs by 2030. The UK lost 11,000 jobs just in the month of September. In context, that 10,000 jobs really isn’t that much.
Tony Nash
We’ve seen a lot of technology change over the last 150 years or something, and we don’t have things like typing pools in companies anymore. Some of the low-level analytical work that say AI would be doing, or maybe some of the low-level creative work that AI would be doing. I think that stuff is going to be changed by automation, regardless whether this technology is called AI or something else.
Rosanna Lockwood
Remind us… Our view is what Complete Intelligence does, because you’re working with AI already. We are. Yeah. Tell us about what it is you do.
Tony Nash
Yes. We work with corporate finance, and we take the annual budgeting process and the monthly re-budgeting process that people do in finance, in supply chain, and other things, and we forecast that.
We take over that automation. So everyone hates the annual budget process. We take that off of people’s hands and we automate it. We are in some cases, nine times more accurate than companies can do it themselves. Companies have hundreds of people involved in these processes, and it takes months. We take it down to less than a day with zero people involved.
Tony Nash
And then the experts within those companies can validate what we do. I think that’s the key part about AI that really helps people is the mundane work is taken off of them, and then people can use their expertise to validate what the AI does.
Rosanna Lockwood
A lot of people can get on board the efficiency of that and the accuracy. It’s sometimes called the new Industrial Revolution, and we hear these claims that we need to be working with AI to get forward. But in terms of the jobs that have been taken out by those processes, and this isn’t I’m not levying this at you and your company because this is what it’s all about. What do you think society is going to be like without those jobs? You mentioned there it’s a low rate of loss, but ultimately people are going to not have that work.
Tony Nash
I think what’s interesting about the AI discussion is when we talk about, say, automation of, say, warehouse jobs or something, it’s seen as a technological marvel. But when we talk about AI and it’s the automation of white-collar jobs or professional jobs, then it’s a tragedy. I think AI and automation is hitting across the workforce. And like those warehouse workers have had to learn new skills, white-collar professionals are going to have to learn new skills as well. And it’s not a learn to code, lame response. You actually get to do the things that are more interesting. So when we work with companies, their staff love us because they get to do more interesting things to solve company problems. Rather than sitting in data, rather than sitting in Excel, these sorts of things, sitting in budget meetings, they actually get to engage and solve company problems, which is a lot more interesting. Again, I think at this phase of AI, what’s really happening is those lower-level boring jobs are being taken away.
Tony Nash
So with this consumer AI that people are seeing on their social media or with, say, ChatGPT, the worry that I would have about that manifestation of AI is what data are those tools collecting and how are they using it?
Tony Nash
So this goes back to internet stuff, where how much data is your social media taking from you? With AI, they’ll actually profile you more specifically and more precisely. And that itself, to be honest, is a little bit scarier than, say, the job loss we’ll see from AI.
Rosanna Lockwood
Yeah, those questions about the data being used and how it can be manipulated as well by humans, it must be said, are all going to be addressed next week. There’s AI Summit here in the UK. Tony Nash, founder of Complete Intelligence. Thank you.
With CI Markets Free, our goal is to democratize financial insights. We believe that everyone should have access to powerful forecasting tools, enabling them to make informed decisions that align with their financial goals.
In terms of the oil and gas industry, the geopolitical crisis in the Middle East is not expected to have a significant impact on the industry. Despite the volatility in oil prices, there have been consolidation deals within the industry, as companies look to prepare for the future and navigate the shift towards green energy.
In the US markets, there is a sense of nervousness regarding the future of AI and tech valuations. The recent earnings reports have shown that 77% of S&P 500 companies have beaten street expectations, but this could be attributed to a game of meeting or beating numbers rather than a true reflection of corporate America’s performance. Business activity in the US has picked up in October, driven by a rebound in factory demand and an easing in service sector inflation. This trend is expected to continue into 2024. The Yen has weakened against the dollar, but the BOJ is not expected to intervene unless it reaches a level of discomfort.
Meta, formerly known as Facebook, reported better-than-expected third-quarter profits and revenues, driven by a recovery in digital advertising. The company’s operating margin doubled to 40%, its best in two years, largely due to cost-cutting measures. However, its augmented reality division, the metaverse, has incurred significant operating losses. Despite this, Meta’s CEO, Mark Zuckerberg, remains committed to the metaverse. The company expects revenue to be between $36.5 billion and $40 billion for the fourth quarter. Meta is also facing a legal challenge over its addictive qualities and impact on the mental health of younger users.
Transcript:
BFM
BFM 89.9, it’s 7:06 AM on Thursday, the 26th of October. You’re listening to The Morning Run. I’m Shazana Mokhtar with Wong Shou Ning. We’re going to kickstart this rather lovely-looking Thursday morning with a recap on how global markets closed overnight.
BFM
Okay, it’s a nice day, but it wasn’t such a nice night for US markets. They all ended in the red. The Dow is down 0.3 %. And I want to highlight on a year to date basis, it is now in negative territory. It is down on a year to date basis also by 0.3 %. And Nasdaq had its worst day so far this year, down almost 2.5 %. So it’s only up 22 % on a year to date basis. Meanwhile, we look at the S&P 500, it was also down 1.4 %, only up nine % on a year to date basis. So all these earlier gains that we saw throughout the year seem to be slowly disappearing. Meanwhile, if we look at the Asian markets, the Nikkei225, however, was up 0.7 %. Hang Seng was up 0.6 %. Shanghai Composite up 0.4 %. The Singapore Straits Times were however down by 0.2 %, while our very own FBMKLCI was actually up by 0.5 %.
BFM
So for some thoughts on what’s moving international markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. I would like to start with oil and gas. So Shell Oil has given the US some measure of energy independence, but the number of operating oil rigs, a barometer for activity has dropped 16 % to 502, compared with the same time last year. How do you see the geopolitical crisis in the Middle East affecting the fortunes of this industry?
Tony Nash
Yeah, it’s a great question. At this point, I don’t see too much impact at this point. There is a lot of pressure to continue to reduce crude prices. And we’ll see actions in markets, we’ll see intervention by, say, central banks to try to reduce crude prices. But I think we’ll also see, even with the geopolitical risk in the Middle East, we’ll see the supply from Iran continue to hit global markets. We saw with the geopolitical issues in Russia and Ukraine that Russian oil continued to hit markets. I think the go-to place for crude traders is, Oh, gosh, geopolitical risk in the Middle East, that must mean crude prices are going to rise. Not necessarily the case. If they don’t rise, you probably won’t see those rigs come back online.
BFM
Meanwhile, Tony, we have seen a lot of consolidation or quite some pretty big consolidation deals within the oil and gas industry. I think despite the volatility in oil prices. How do you see this trend moving forward?
Tony Nash
Well, yeah, I think these companies are seeing that if the 2030, 2035 goals are kept by a lot of the companies that have… Sorry, national legislatures and regulatory bodies that are trying to push green energy and force, say, electric cars by 2035, which I believe California is doing other things, then really the for these guys are capped, so it’s time to start consolidating. But if that doesn’t happen, which we’re starting to see some pushback on that, then it’s also a great time to consolidate because we’re in a sweet spot where crude prices are, it’s not too high, it’s not too low. And so we’ll likely see more of these deals, not a lot more, but a couple more of these deals on the horizon.
BFM
And let’s talk about U. S. Markets. Well, Nasdaq had a pretty rough day down 2.5 %, pretty much the worst for the year. We did see Meta and IBM come out with their numbers, both actually beating street expectations. What’s driving this nervousness?
Tony Nash
I think a lot of people are feeling that, at least for now, AI has played out. You even had Bill Gates today come out and say that large language models are not what people think they are in terms of the level of innovation, that thing. I think large language models and AI are really cool, and I think there’s a lot more room to run. But I do think valuations are very stretched right now. With interest rates rising, it’s very hard to stretch tech valuations much further. A lot of these companies for the past, say, four quarters, you can count the number of times they say AI in their quarterly earnings calls, and it’s just increased. As they’ve said AI more and more, it’s just helped their share price. But I think that’s a little bit played out. I think until people start to see real gains from AI outside of the chip makers, like CONVIDIA, real gains within corporate sectors, real gains within the user sectors, then I think we may see valuations as stretched as they can be, at least for now.
BFM
Okay, so far, about a quarter of the S&P 500 companies have reported earnings, and apparently, 77 % of them have actually beat street expectations. I’m not sure whether it’s just the street being conservative or really corporate America is doing better than I expected. So is there some contradiction? Because everyone’s been talking about that recession that’s coming, but just never seems to happen yet.
Tony Nash
Yeah. The recession calls are a big game, too. It’s a little bit of conservatism on behalf of analysts and a meeting of the minds between, say, the CFO to the publicly traded companies and analysts, and everyone wants to beat their earnings, right? So it’s a game. Everything, it’s a game. We saw MetaBeat and we saw Microsoft Beat and all this stuff. That’s great, but it’s a game number. Nobody’s going to put a number out there that they knowingly that they’re going to either meet or not meet. They all want to beat everything by a certain amount. It’s a bit of a game. I think we’ve seen in sectors like real estate where things haven’t gone so well. We’ve seen in energy where things haven’t gone so well. Again, those energy valuations are down a bit and that’s created some room for some of those deals that we just talked about. Sectors like materials and health care, they’re down a bit as well compared to a year ago. So even though some of these current firms beat, they are a bit sensitive to market conditions of debt and other things. And so it’s not all good all around.
BFM
Can we talk about US business activity, which picked up in October after back to back months of stagnation, helped by a rebound in factory demand and an easing in service sector inflation? So do you see this trend continuing into 2024?
Tony Nash
Yes. What we’ve seen with business activity is we have seen some prices come off a little bit. With service sector activity, really service sector inflation comes down to the wages of service sector workers for the most part. As the rate of inflation for those service sector wages have started to slow, you’ve seen on a relative basis, more activity. A lot of this is really inflation-slowing and the impact of interest rate rises hitting markets. In some ways, like we said, real estate and some other sectors, it’s not a good thing. But in services, as we start to see some pressure on those prices, it can be a better thing for consumption because we do have wages rising in a lot of the economy, but costs have just continued to rise, especially in services. So as people are seeing some of their service costs slow down a little bit and in some cases even decline, people are more willing to spend.
BFM
Okay, I’ve got a quick question on the Yen. It’s slumpab past $150 per dollar, weakest level this year. BOJ, are they going to intervene?
Tony Nash
I think at 150, it’s okay. I think at 155, it becomes a little bit uncomfortable. I think it’s a delicate balance, and they’ll try to keep it at 150 as long as they can. But it really all depends on what happens with the dollar. With geopolitical risk, the dollar becomes more appealing generally, not in all cases, but it becomes more appealing generally as a safe haven. The Yen is a secondary safe haven currency, but it really depends on their monetary policy. If they continue with YCC and some of these other policies, they really need to tighten slightly. Not a lot, but slightly. I’m sure you guys remember 2012. Maybe you were in school. I don’t know, but maybe I’m sure you remember 2012 when Abenomics first came into discussion. The Yen was trading at ’76, I think, right? And then within a month or two, it was in the ’80s or ’90s, and it ripped really quickly.
BFM
Yeah, Tony, I’m the only one in the room that remembers that. You and I.
BFM
I read history books.
Tony Nash
That’s right. The Yen can really fluctuate. It hits these extremes. Once they change policy, it can really boomerang back fairly quickly. If they made some policy tweaks, we could see a Yen at 1:30 or 1:35 or something like that. It sounds like it’s a long way from here, but it’s actually not.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. A lot to watch there, especially as we’re in the thick of earning season. Speaking of that, let’s talk about some of the earnings that have crossed our table this morning. A Meta, third quarter profit and revenue beat analyst expectations thanks to a recovery in digital advertising ahead of the holiday season. We saw this exact same trend with Alphabit yesterday. They also saw digital advertising recover. So Meta is also seeing the same thing. Revenue rose by 23 %. It’s the fastest rate of growth since 2021. They achieved $34.2 billion better than the expected $33.6 billion.
BFM
Okay, so at the same time, their operating margin in the third quarter doubled to 40 %. It’s best in two years. Now, a lot of it is actually driven by their cost cutting measures, right? They’re keeping an eye on this because they’re a bit uncertain in terms of the outlook. So the best thing to do is just really just not spend very much money. Remember their augmented virtual reality thing that they.
BFM
Are so The metaverse. It was all the rage a while back. It’s largely forgotten right now.
BFM
Well, it’s cost them $3.74 billion in operating losses. So you might have forgotten, but they’re paying the price of your forgetfulness. Clearly, it’s not going to turn around so quickly. Since the start of 2022, this division has lost close to $25 billion. But Mark Zuckerberg is plowing ahead. He’s not giving it up. So the outlook, they expect revenue to come in between 36 and a half to 40 billion for the fourth quarter. Analyst will however expect sales for that quarter of 38.5, like the analysts being a bit chicken and really coming in the middle. Now, does the street like this name? The answer is still yes. 60 buys, seven holds, two sells. Consensus target price, 373 US dollars and 87 cents. During regular market hours, the stock was actually down $13. $2.99 to $299.53. The stock’s still up 148 % on a year to date basis.
BFM
Well, Meta has found itself in a bit of a legal pickle over in the US. We’ve got several states that are actually filing a lawsuit against Meta for its addictive qualities impacting the mental health of the younger generation. We are going to get more into that social media impact a little later in the show. 7:19 in the morning, we’re going to head into some messages, but we’ll come back to cover the top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9.
The World Health Organisation says it needs urgent safe passage to send supplies as people are ‘dying unnecessarily from a lack of water and medical care’.
President Biden and other world leaders have called on Egypt to open the border known as the Rafah crossing as tonnes of aid piles up.
Sam Fenwick discusses this and more business news from around the world with Tony Nash, chief economist at Complete Intelligence, in Texas, and Rachel Cartland, author, writer and expert on Hong Kong.
With CI Markets Free, our goal is to democratize financial insights. We believe that everyone should have access to powerful forecasting tools, enabling them to make informed decisions that align with their financial goals.
Transcript
BBC
Ask our guests today who join us from Hong Kong and Houston, Texas. Good evening to Tony Nash, CEO of Complete Intelligence. It’s an AI forecasting firm, so you should be quite well-placed to talk to us about chips and AI.
Tony Nash
Absolutely, yes. Thank you for having me.
BBC
It’s always good to have you on the show, Tony. Thank you for joining us. I want to just come to Tony Nash on this. As we say, Joe Biden arriving in the region on Wednesday had planned meetings with Jordanian which have now been canceled, also had a meeting with President Abbas of the Palestinian Authority and President CC of Egypt, all of which have been postponed according to the White House. What do you think Mr. Biden will want to achieve from this visit now?
Tony Nash
I think the biggest thing that Biden wants to achieve is the release of American hostages. And if that’s all that can be coordinated, then that’s a major win. It looks very good for the domestic population in the US, and it brings American citizens free and clear from this conflict. I really think that that’s the main priority for Biden’s visit at this moment.
BBC
Okay, thank you, Tony Nash. Let’s bring in Tony Nash. He’s the CEO of Complete Intelligence, and it’s an AI forecasting firm. He’s based in Houston in Texas. As we said, this policy has been in place 12 months. Do you think it has done anything more than just annoy chip makers in the United States?
Tony Nash
NVIDIA says that they comply with the laws that are in place, and they’ve already said that any announcement they made today really won’t have a meaningful hit on their business.
BBC
Although their shares nose-dived, and lots of other chip companies did the same.
Tony Nash
Yeah, they did. There was an estimate that it would hit about $100 billion for their business. It’s really unclear, but they’re a regulated company, they have to comply with what are called ITAR regulations, which is International Technology Regulations that the US government puts out. The real issue here is, will NVIDIA chips be used for Chinese military applications? That’s really what the US government is worried about. And so there are a thousand ways to circumvent the regulation, ship into a third country, all these sorts of things. So it’s not as if the chips won’t get into China. There have been ways to circumvent these regulations for hundreds of years. So they’ll find a way to get them. The real question is, will they get them at the scale that they want them?
BBC
We talked about this time, 12 months ago, we were having the conversations about why this policy had been brought in. And it seemed to be, prior to this, it had been about keeping China and the technology 20 years behind the advancements of the US. And now the policy had changed and they wanted to stop all advancements completely, just cut them off. It doesn’t sound like it’s working from what you’ve said.
Tony Nash
I don’t think anybody expects China’s advancements to stop completely, but I think having the state-of-the-art technology shipped into China to be placed in Chinese military equipment when China has been threatening Taiwan, they’ve been making other threats, the US has been threatening China, these sorts of things, of course, you want to hamper your adversary as much as you can. I think this is just normal technology regulation, export controls. Whoever has the leading edge technology wants to control the leading edge technology. Will China continue to develop its chips? Yeah, absolutely. Are they behind what NVIDIA is producing? Yes, they are. Will it take them a few years to catch up? Yeah, it’ll take them 5-10 years to catch up. But I think over time, China will definitely catch up with where the US is. It’s just going to take some time.
BBC
Now, apparently, NVIDIA was selling an A-800 and an H-800 type of chip, and they were able to do that because it went around the original ban, and then now those have been banned. Will it be that these chip companies will just make a chip that isn’t covered by the ban, and then the government will change the goalpost again?
Tony Nash
Well, that’s the way it works, right? That’s how regulatory arbitrage works. So NVIDIA will look to the letter of the law and conform a chip to match the letter of the law. And then if the trade regulators in the US want them to change, they’ll change. These types of regulations change pretty regularly, and technology companies have to adjust their output according to what the regulators say. This sounds extreme. It’s actually not extreme because there are ITAR regulations, technology export control regulations in most countries. It’s just because it applies to AI-specific chips that it’s really getting this level of attention.
BBC
Let’s talk to Tony Nash first. What do you make of this plan? Do you think it could rival the Panama Canal?
Tony Nash
Yeah, absolutely. I think it’s a great plan. I live in Texas, which is on the US border with Mexico. I think this railway plan is fantastic. There is already a lot of electronics manufacturing moving from Asia to Mexico to service the US. I think three years ago is the first year in 20 years that the US imported more televisions from Mexico than from China. So televisions are pretty straightforward to assemble now. And so more and more sophisticated electronics is moving to Mexico. What your guest said about obviously transiting things across Mexico, but also manufacturing things in Mexico, I think that’s very much on the table, especially as we see more trade regionalization and manufacturing regionalization.
BBC
Is that because of what we’re calling nearshoring, this thing that occurred during the pandemic?
Tony Nash
That’s right. Exactly. Similar. So the risks of having a majority of your manufacturing concentrated, I think Northeast Asia makes 35, 40 % of the world’s manufacturing goods. And so during the pandemic, we saw all the supply chains lengthened because they were bottlenecks. Whereas if we had had those, whether they’re in, say, Eastern Europe or for Europe or Mexico for the US or something like that, I think it reduces a lot of that transit risk for a lot of people. And I think East Asia is probably facing some reinvestment over the next, say, 10 years because that nearshoring or regionalization is a real… It’s definitely on the horizon.
BBC
What was interesting, Tony, is that Benjamin there was talking about investors from the US being interested in building that original rail line a century ago.
Tony Nash
Yes, and obviously, the US was very instrumental in building the Panama Canal as well. The US is very interested in developing Mexico and developing Central America. It doesn’t surprise me that that was the case 120 years ago. It doesn’t surprise me that that’s the case today.
BBC
Tony, there were concerns or have been concerns about what’s known as debt trap diplomacy, that if you borrow money off China, then they will somehow have you over a barrel. Has that come… That still a worry for the US, do you think?
Tony Nash
For the US? Not necessarily, but certainly for African countries. I remember speaking with African representatives probably six or seven years ago, talking to me about how can they restructure their debt for the Belt and Road. The really strange part about the Belt and Road is it’s fully financed in US dollars. We have a time right now where the US dollar is appreciating. Not only is that debt at a relatively high rate, I wouldn’t say it’s sky high, but a relatively high rate, but you have it in a currency that’s appreciating against most emerging market currencies. It’s very difficult for companies to pay back or countries to pay back. I think one of the things about Belt and Road that really isn’t covered that much is the Belt and Road peaked in 2017 and 2018. The funding that you have going into the Belt and Road today is about a fifth of what you had in 2017 and 2018. Construction projects like the transport construction projects that you highlighted, those things all happened in 2013 through 2018, really. The largest portion of investment coming out of Belt and Road right now today in 2023 is for mining. It’s not construction, it’s investment.
Tony Nash
When you look at what’s tabulated as Belt and Road investment, it’s really Chinese money going into mining worldwide.
BBC
Just gives us time at the end of the show to ask our two guests who’ve joined us today, Rachel Cartland and Tony Nash. What are your side hustles? Rachel, you tell me what you’re earning money from.
Rachel Cartland
What’s your side hustle? I’m retired. My husband is constantly reminding me that I’m busy all the time, but with nothing that brings in a dollar, although I have endless voluntary commitments, which are great things to do. I think it’s what they call a portfolio, isn’t it? -bits and pieces of things –
BBC
Absolutely.
Rachel Cartland
-rather than a side hustle.
BBC
-it sounds very satisfying. Tony Nash, do you have time for a side hustle when you’re doing your AI forecasting?
Tony Nash
I make time, Sam. I have to make time. So I run an AI company during the day. On the weekends, I have my own coffee roastery called Nerve Roaster, and I sell coffee as my side hustle because it’s what I love.
BBC
You love drinking coffee?
Tony Nash
Sorry?
BBC
You love drinking coffee?
Tony Nash
I love roasting coffee, so I sell roasted beans.
BBC
Fantastic. I had no idea, Tony. You are a man of many talents. Thank you very much for joining us on Business Matters. And thank you also to Rachel Cartland, author, writer, and expert on Hong Kong. That was Business Matters. Thank you so much for listening. My name was Sam Fenwick. The producer today was Hannah Malane. I’ll be back the same time tomorrow. Don’t join me if you can.
Welcome to “The Week Ahead” with your host Tony Nash. Key themes for this discussion are:
Supply Chain Risk: Middle East Conflict
Ross Kennedy leads this segment, diving into the critical issue of supply chain risk amid the current Middle East conflict. He explores the US’s supply chain capabilities in the face of geopolitical risks, including the historical context before WW2 and analyzes US political realities in Washington, D.C., and its intelligence gathering capability.
Ross also examines the US’s share of container shipping, the challenges of distance, and dependence on different shipping carriers and discusses the inhospitable nature of the Suez Canal and Eastern Mediterranean.
Further, Ross assesses the US’s reliance on European “commercial navies” and considers the potential impact on various commodities over the medium term due to ongoing political risks in the Middle East and beyond.
Geopolitical Dovishness
Albert Marko takes the lead in discussing geopolitical dovishness. He examine how dovish statements by Fed speakers have unfolded in response to recent geopolitical events, such as those in Israel. Albert also analyzes the elevated PPI and CPI reports and their impact on market dynamics, including fluctuating yields. He also gave insights into the future of the Federal Reserve and Treasury activities, and how we can discern the direction they’re taking.
Risk or Recession Back On?
Michael Belkin guides us through this segment and explores the dynamics of the tech trade and the recent resurgence of shares in companies like META. He takes into the intriguing analysis of a potential recession following a series of rate hikes and a 19-month lag.
Understand what he expects as the economy slows. What factors contribute to this scenario regarding the VIX (volatility index) and whether its movement is primarily influenced by recession expectations or other factors.
Transcript
Tony Nash
Hi, everyone, and welcome to the week ahead. I’m Tony Nash. Today, we’re joined by Ross Kennedy, Michael Belkin, and Albert Marco. It’s quite a lot happened this week on the geopolitical side, so we’re going to start there and we’re going to move into markets. The key themes this week, first are supply chain risks, looking at Middle East conflict. We’re also looking at geopolitical or the possibility of that. And then we’re looking at risk or recession, which one is back on.
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Tony Nash
So, Ross, thanks for coming on again. It’s a great week to have you on. I know you’ve probably had a lot of discussion with your clients this week, given the current level of geopolitical risk. So, given that does the US have the supply chain capability to weather the storm of the current geopolitical environment or potentially even more intensive geopolitical environments?
Ross Kennedy
Short answer, yes and no.
Tony Nash
Good.
Ross Kennedy
And it’s really scenario-dependent. Like any good analyst, there’s a wide range of outcomes that you look at and you say, What’s my confidence that one scenario will emerge versus another? As things stand right now, we’re talking about a significant amount of naval traffic and activity happening on water, of course, primarily very close to the Suez Canal. There’s obviously already been a significant amount of disruption to particularly the grains and the energy supply chains coming out of the Black Sea region since the Ukraine-Russian conflict kicked off February last year. So in a sense, you do have a bit of a one-two punch. A lot of it comes down to what happens next. We saw these just really horrific videos and accounts emerge over the weekend seemingly out of nowhere. Depending on the story, Israel was either caught flat-footed in some way or there were some other factors potentially at play. But at the end of the day, the claim that the situation is contained now, this does follow patterns that we’ve seen in the past. Certainly to my criminal mind, if you will, you could easily be seeing a situation where you have a surprise attack.
Ross Kennedy
You suck, allied and other assets into the region with the intention of creating more significant widespread follow on destabilizationment. So in a scenario where Hezbollah begins emptying their pretty substantial arsenal of anti-ship missiles and making it rain in the Eastern Med, now we have a real startling situation. Egypt will do everything they can to avoid the closure of the Suez Canal. They’ve deployed or called up very significant portions of their military to ensure that that scenario doesn’t happen. But the Sinai has not exactly been the most stable either, going back 20 years. It doesn’t get a lot of press here in the US, but that’s certainly been a challenge, if you will. And then given the conflict between ISIS and the Sinai, Hamas, very much at war with one another two on the border region of Gaza and Egypt. It is a powder keg.
Tony Nash
Okay. If we assume that the situation stays as it is right now, Israel and Hamas, West Bank, that thing, and there isn’t a wider conflict. Are there issues with, say, ags and supply chains and other stuff? It stays local. Is that risk fairly contained? I know that’s a big assumption to make, but we see the terrible footage on the news, our heart breaks. But does that impact supply chains, agriculture, energy, that thing?
Ross Kennedy
Not to a great extent. Rude certainly won’t be, I guess in my view, that impacted. Certainly the disruption we’ve already seen to the net gas fields in the Eastern Med is a major challenge. That’s something that other players in the region, whether it’s Turkey, whether it’s Saudi Arabia, Israel, Egypt, all of them have some skin in the game, particularly on the NatGas issue. So we could see some potential disruption there, even if hostilities don’t escalate further. Infrastructure becomes obvious targets in the event of a larger theater-wide escalation. That’s really where we go from zero to 60 on the risk calculation. As it stands right now, not bad.
Tony Nash
Okay, so let’s go to that. We go out concentrically. Now, you don’t have to go too far to have major issues. First is you go north and let’s say, Hizbollah gets involved in the north. What are the issues?
Ross Kennedy
Well, you’re talking about certainly a significant disruption to commercial maritime traffic in the region. All risk and insurance on vessels and war clauses and things like that only go so far. So you’re certainly, I think, going to see a lot of commercial carriers elect away from obviously Port calls in Haifa, Alexandria, Piraeus in Greece. And that’s just as the situation stands now. If we’re talking about a really significant disruption to maritime traffic in the med, you don’t have to blockade the Suez Canal to begin to see a significant portion of freight that moves on water through that corridor, whether it’s grains going south, crude going north, certainly manufactured goods out of the Indian subcontinent, things coming out of Africa that tend to move north. That two-way traffic slows even if you don’t close the canal just by virtue of the risk inherent in the med. Really, the other shoe I’m almost waiting to drop on the premise that a lot of this is sponsored by and organized by Iran.
Tony Nash
Hold on, hold on, hold on. Let’s not go there yet. Let’s not go to Iran yet. Let’s just stay on the north. When you talk about if things escalate north of Israel, that can have significant impact on the med. We saw, for example, say, grains coming out of Ukraine, restricted because of issues with Russia, Ukraine. Turkey really tried to get that trade moving. How much of an impact could Turkey have if things go north and you start to see issues in the, say, the northeastern men?
Ross Kennedy
Turkey gets negatively impacted by the fact that most of their major commercial ports from where they export a significant amount of heavy equipment, minerals, manufactured goods for industrial uses. They do face a risk to their. Turkey benefits, though, opportunistically from the ability to pretty expediently open overland corridors to and from the Black Sea, being able to provide some level of guaranteed safe transport away from the risk of conflict in Lebanon and Syria, and being able to get things on water if they can obviously defend their own waters as it will and provide that safe passage north of Cyprus between Greece. On net, I say Turkey probably has the ability, if they play it smart to benefit more from this than less or be negatively impacted. We’ve seen they’ve been pretty savvy over the last 20-something months and how they’ve managed the Black Sea corridors by using the Montreux Convention.
Tony Nash
Absolutely. It’s really easy to forget the impact that trip can have if things go north, right? But they actually really do have a lot of impact. Now, let’s go southwest. Let’s say things boil over into the Suez nightmare scenario. What happens then?
Ross Kennedy
Well, at that point, you’re talking about anywhere from 10-12 % of everything manufactured in the world transits to Suez Canal. Every year you’re talking about 30-50 vessel passages a day going through there. There’s really two key domains that I’m looking at there from a negative impact standpoint, because oil and that gas have the optionality of pipelines at some level through Saudi Arabia, up in Egypt. TurkStream is always available as well. So from an energy standpoint, it’s probably not as crippling. However, Saudi Arabia does have a pretty significant amount of extraction and refining and transload capacity to bulk carriers on their Western shores, which is inside the Red Sea. At that point, those vessels get redirected, flows begin to redirect as well anything that’s moving north. There’s also the issue of food in Africa in particular. We saw that and have continued to see that be a pressing issue from a food aid standpoint because so much of that traffic moves to the Suez and terminates in the Horn or in the Red Sea. The third challenge is going to be to the Indian subcontinent. The Suez is the major corridor for trade between India and the Middle East, India and Europe, and India and the United States.
Ross Kennedy
We’re talking about Navasheva, one of the largest container ports. It’s right outside of Madras. In all of Southeast Asia or the Indian subcontinent is located there. 90 % of something that’s vessel traffic is going to go that way. It’s going to move northwest into the Suez. So India has some real skin in the game on this issue too, not only because of its connections commercially and from an energy standpoint to Iran and to Russia. Iran is more tenuous. They’re pretty tied at the hip to Russia in a lot of ways. So India’s calculus in this is that right now they lose the Imek for sure, the Indian Middle East economic corridor. That’s a dead letter at this point until things change. But for them, a significant amount of their export trade is with Europe and with the United States. They face a dramatically negative impact because the only alternative options are things like double-trans shipments of containers through Singapore, you go west, you’re talking a 60-day transit now versus about 35, or they have to go around the Cape. You’re talking adding 10-14 days to your vessels there too.
Tony Nash
This part is fascinating. So talk about Turkey’s impact if things go north, talk about India’s impact if things go down to the Suez. India has positive relationship with Iran. They have positive relationship with Israel. They have positive relationship with Russia. They can pull some strings. I think the US in particular needs to stay close to India on this issue, and Turkey, of course, so that all of this stuff can be positively impacted, right?
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Tony Nash
Sticking specifically with the med, can you talk to me a little bit about… I heard you make some comments about the US being dependent on European commercial navies for activities in the med. Can you talk a little bit about how the US doesn’t really have the capability there to move things if needed?
Ross Kennedy
Absolutely. At one time, particularly in the first 20-30 years of PAX Americana, we had the largest commercial fleet in the world. And we were a shipbuilding powerhouse. Liberty Ships taught us how to make vessels that can move fairly fast and carry cargo. Quantity has a quality all its own. We’ve really eroded that advantage with the advent of steamship lines. We begin to optimize more for outsourcing, and so our shipbuilding capacity, our maritime, sea lift capacity, so vehicles, manpower, all of that has eroded not just the commercial fleet, not just the tanker fleet, were a shadow of what we once were. And so the reference to commercial navies is really the big three ocean carriers in the world are MSC, domiciled in Geneva, but owned by an Italian family, the Apontes, and then Maersk, based in Denmark, and CMA CGM based in France. And given that in the case of MSC is really an independent player, but certainly Maersk and CMA are major participants in US maritime trade, significant parts along with Hapag-Lloyd out of Germany, the auxiliary, essentially our ability to call up US flagships with these carriers and press them into service. But to the extent that we have the ability to have the optionality to be able to put our own stuff on ships with our own sailors, we don’t really have that.
Ross Kennedy
Not at any scale that can defend the supply chains in the US from major disruption, particularly in the med.
Tony Nash
Before we get to Iran, because I know that’s a sweet, juicy thing that you and Albert are going to dig into. Hey, Michael, what are you seeing in terms of transport? Does it look like appealing to invest in European transport companies or is there too much risk there?
Michael Belkin
I’m agnostic. I’m not familiar with some of the names that he just mentioned, but in terms of global shipping, Maersk and Hapag-LLoyd are the two big ones listed in Europe. They’re shorts for me, but not very high confidence. But that’s something else. That’s not Middle East. That’s just global trade is not doing well and freight rates are falling and ships are not being booked as heavily. So agnostic, but slightly negative on the only ships I follow.
Tony Nash
Okay, perfect. That’s great to know. Thank you. Okay, so Ross and Albert, given that these aren’t major oil and gas producers, but we also have the US SPR at a very low level, and we have already crude exports that have been accelerating over the past couple of years. Aside from the $6 billion that was announced, I think, earlier today that the US is going to hold back with the Qatari government. Do you think there’s a possibility of seeing new sanctions on Iran? Is that a possibility? And what would have to happen for that to be a possibility?
Albert Marko
I do think new sanctions will most likely be enacted by the US on Iranian oil. Do I think it’s going to matter much? Probably not. They do ship-to-ship transfers all the time by turning off transponder. God knows how much oil they mix in Basrah with Iraqi crude. So sure, we can pay lip service to that, but I don’t think it’s going to make much of a difference.
Ross Kennedy
Yeah, I’d concur with as much as I love a good fight with Albert or anybody else, hey, I’d probably lose. But certainly on both the premise and I think just the factors that are in play here. Do I think sanctions are coming? Yeah, absolutely. It’s an absolute layup for an administration that’s been rightfully dragged through the mud over the fact that they released $6 billion in funds to buy seven Americans back. It’s the obvious go-to move. It’s the last option, not a very creative one, but it’s the last option. But Iran has already demonstrated like Russia, significant capacity to actually move sanctioned material. But more than that, it represents a significant buying opportunity, particularly for China, who does not give a crap about anything that the US State Department or Commerce Department does with regards to sanctions. I think it’s inevitable if we sanction them. All we do is we simply depreciate the price of Iran and crude and increase the amount that we will see moving between Iran and the Pacific Rim.
Tony Nash
I mean, crude is on sale for Asia, right? Most of Iran and crude goes to Asia anyway, right?
Ross Kennedy
Absolutely.
Tony Nash
India, China, other places.
Albert Marko
I’m actually more keen on finding out what Turkey is going to end up doing with Iraq since that oil pipeline has actually been blocked to the Mediterranean for many reasons. They say earthquake. The other ones say a lawsuit, but it’s many reasons. I think that that thing is going to probably be important in negotiations going forward, especially in terms of the crude oil market.
Tony Nash
Interesting. In Iraq, Turkey pipeline?
Albert Marko
Yeah. Well, they already have it, but they shut it down because of lawsuits.
Tony Nash
Okay.
Ross Kennedy
It’s interesting that, Albert, I’ll interject real quick. It’s not quite on script. But there is a real dark horse factor here with the broader Kurdish population that occupies that region. It’s the only population that is spread out at scale in Iran, Iraq, Turkey, and Syria. And yes, there are factions within it and all of that. And yes, to some extent, they’re insulated from the larger conflict to the extent they don’t get sideways with one of the main governments. But the ability of these very substantial Kurdish minorities in all of those countries definitely could impact anything from a logistics and supply chain standpoint. Certainly, that has to transit on rail or transit over land. They sit right in the middle of the new Silk Road corridor that China and others have been cooperating on to connect Chinese trade on land through the Eurasian continent. So that definitely bears watching because depending on how each of these parties responds, the calculus of the Kurdish populations in these countries changes too.
Tony Nash
Interesting.
Albert Marko
A lot of the oil is out of the Kurdish area right now because the pipelines are shut down, it’s trucked back and forth into Turkey and whatnot. But like you said, if the Kurds decide to act up, that’ll get shut down pretty quickly. Those are definitely something to… I wish you didn’t say anything about the curves. It’s a whole Pandora’s box.
Tony Nash
Yeah, we can do a special segment on that.
Albert Marko
I really just…
Ross Kennedy
That’s its own episode.
Albert Marko
I want to allow Michael Belkin to actually talk to me.
Tony Nash
Right, exactly. Guys, let’s get into… Albert, I’ve been wondering, given what we saw the Fed and Treasury say earlier this week within the context of these events, we saw Fed speakers out early making very doveish comments early in their week. But we also saw elevated PPI and CPI reports this week. Yields fell for most of the week, but then came back up later in the week. What’s ahead? Given the geopolitical backdrop and given what we’re seeing with CPI and PPI and other prints, and then we saw some consumption data out today where consumption is down, US consumers, what’s ahead for Fed and Treasury activity? And how do they balance this?
Albert Marko
How do they balance? They haven’t been able to do anything properly in the past, so I don’t know how they’re going to be able to balance this. I mean, the auctions have been absolutely atrocious. They obviously knew what CPI and PPI and the Michigan sentiment was going to be because they had every single person they could throw out into the media say, inflation is over, like Krugman and whatnot, or this is a success. They know what they’ve been doing. They know that they’ve been making mistakes. Yellen, I think two weeks ago, was at a staff meeting, screaming of why isn’t the bond market bondholders paying attention to problem? Why aren’t they listening to me? Well, you got a geopolitical event, and now they’re going to listen to you. The auctions aren’t good. The economy is certainly not good. Inflation is starting to kick back up no matter what they do.
Tony Nash
Sorry, let’s go back. You said the auctions aren’t good. Can you walk us through that?
Albert Marko
Well, there’s no bids in the bond market, especially the long bonds. Nobody wants them at the moment. There’s no bids. The only people that are bidding on it is the government itself.
Tony Nash
Why are there no bids?
Albert Marko
No confidence? No confidence of what’s going on specifically policy-wise in this country? Why would you bid on it?
Tony Nash
Okay.
Albert Marko
From there, it’s just like I don’t see how we get out of this situation without a recession and a pretty sizable recession. I know they talked about soft landing and whatnot, but they’re going to really need a recession and unemployment to tick up to even start denting inflation going forward.
Tony Nash
Okay. In the background, I’ve been seeing headlines of Company X lays off 1,500 people, Company Y lays off 5,000 people, other things. That seems to be happening pretty quietly so far. We’re not really seeing the recession. We’re too much out there. Given where consumption, those consumption numbers that came out today and given the need, I hate to say it, but the need for a recession, do you think that the news of layoffs will be more prominent in headlines so that we start to see the table set for some of these Fed and treasure actions to really be appropriate?
Albert Marko
I really think that a lot of the corporations are trying to slow out these layoffs because they don’t want to catch the IRA of the Biden administration calling them and arguing a wireline of people. But I just think that the margins because of wage inflation just getting out of control is going to take over to the point where companies are going to face either bankruptcy or lay enough workers. And neither one of them are actually neither one of them are a good thing to happen and going into an election year. I don’t know who wins, to be honest with you. Until I see earnings start dropping and unemployments going to go up, I don’t see how the economy is going to be able to get itself right.
Tony Nash
Okay, so if you could architect a recession, when would it happen to be the most politically ideal for a presidential year?
Albert Marko
Right now. Before Christmas.
Tony Nash
Right now.
Albert Marko
Yeah, right now. Going Q4 maybe into Q1 and get it over and done with and try to rally the markets and the economy going into the election. That’s what I would do. If I was an architect.
Tony Nash
Okay. So Q1 recession. Again, we’re not saying this is going to happen.
Albert Marko
No.
Tony Nash
In your ideal plan, Q1, Q2, new stimulus plan, Q3, it gets out there. It’s in everyone’s pockets. Then election, everyone’s happy, right? Yeah. That would be an ideal runway.
Albert Marko
That would be an outline that I would play.
Tony Nash
Okay. What do you think will actually happen?
Albert Marko
I think they’re just going to try to maintain the facade that the economy and the market is doing great and slow walking into a soft landing. I think at some point something’s going to break or it just gets out of control for them. Whether that’s in 2024, I don’t know. But certainly after the election, they’re going to have problems.
Tony Nash
Okay. Great.
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Tony Nash
Speaking of things breaking, Michael, let’s get into some data and whether we’re looking at risk on or recession on. You’ve told us for a while that the technology trade is pretty played out. We saw shares like Meta earlier this week just rise pretty dramatically. There were all-time highs, I think, on Wednesday and Thursday. Why the pop this week? What’s happening there?
Michael Belkin
Okay, good question. Let me just set the stage here. The consensus believes that inflation and higher interest rates are the biggest threat to the stock market. I think that’s over. The downward impact of monetary tightening on the economy is arriving with a 19-month lag. The US money supply, M1, is declining at a 10.5% annual rate. That’s the biggest ever on record and Federal Reserve data. Same thing in Europe. European M1 declining at a -10.4%. That was the chart. We’re probably going to show that.
Tony Nash
Yeah, no, charts up on the screen.
Michael Belkin
Okay. So these M1 money supply declines suggest central banks are driving economies into a depression, not a recession. This is 1930 stuff. And blowback is the unintended consequences of a policy mistake. The 9 % CPI inflation rate and 11 Fed rate hikes are blowback from unnecessary stimulus that they did in 2020, COVID stimulus, way over did it. The blowback we are about to experience is an economic slump caused by monetary and fiscal tightening that they impose to rectify their previous policy error. It’s a doom loop of overreacting to previous policy mistakes. The stock market investors are so far from realizing this, it isn’t funny. Wall Street, Robot, trading machines, and individual investors firmly believe central bank interest rates cuts are bullish for the stock market. Nothing could be further from the truth. In the last two major Federal Reserve rate cut campaigns that was starting in early 2000 after the TMT bubble and then 2007, the credit bubble, the S&P 500 fell by 50 %, more than 50 % from peak to trough while the Fed was cutting interest rates. Why? Because the economy and corporate earnings collapsed in recessions. Tell that to the algorithms, this is how I’m finally getting around to answering your question here, who dominate day to day stock market trading.
Michael Belkin
Those who programmed the Algoes seem to have skipped the stock market history class. The ingredients of a global risk off moving financial assets are falling into place. In the last few weeks, emerging market currencies, EM debt, EM equities, junk bonds, and cyclical stock market sectors have toppled. The Israel attack comes at a vulnerable time. This was already happening before that. Let me be a little more specific here. One of my clients is an Alpha-captured fund. I hate to boast, but it’s a reality check because we have a 100-70, 180 contributors on there. I was number one in last quarter of 19 % market neutral. I’m also number one right now to moving target, up 4%. And what I am is I am short crappy tech stocks. Not so much Meta, but the Shopify, these really overvalued software stocks, Carvana. That has heavy short interest, but the list goes on and on. We don’t have time for the whole list. I don’t want to disclose it. But we have 50 positions on there. And what it tells me… The reason I say that, again, not to boast because boasting comes before a fall. But I can tell what everybody else has on that my competitors in this Alpha Capture Fund, I watched my ranking go up and down according to the market.
Michael Belkin
So earlier this week I was down, I was number 10 or 20 or something and I saw these others. So what I know is it’s a feeling of consensus. Everybody’s still buying the same crappy stocks. The same stocks that blew up Tiger Global. Of course, they’re buying the Magnificent Seven and everything too, and those aren’t going down that much yet. So beneath the surface, these lousy tech stocks are going down and I think they’re shorts. So this is not a quick flip for me. I think I’ve been saying this for a while. These positions are on. I think you should be shorting on balances like we had earlier this week. Sell in short. Don’t get squeezed and say, Oh, God, it’s going up. It’s time to cover my shorts. I need to go long. That’s a trap. I think the market is going down big time. Just to final note on that. I was hired into Solomon Brothers. My background came out of UC Berkeley Business School, Staff Department. I developed… Everything I do is based on this quantitative model algorithm that I developed, which is a forecasting model based on time series analysis. I was hired into Solomon in 1986, right before the ’87 crash.
Michael Belkin
In ’87, what happened is the bonds sold off, Greenspan came in as the new Fed chairman, raised rates. The bond sold off about 24%. The stock market went up all summer, peaked in August, sold off, rallied back in September, and then crashed. We’re following… Nothing’s ever exactly like anything else. I hate overlaying one chart without another chart, expecting the same exact thing. Never works out exactly. But we have something history, rimes. So this year, the TLT, T-bond ETF is down 22 % since I think March. It looks like it may have bottomed last Friday. The thing that would make a crash happen is a major asset allocation shift out of stocks into bonds. When the consensus is super hyped up and bullish on stocks and overloaded, when they get squeezed and then all of a sudden they push the sell button and then bonds start to rally, you get this huge gyration where bonds go up and stocks go down just because of asset allocation flows. I think we have the potential for that. I’m not standing out here saying the market is going to crash. It could potentially happen.
Tony Nash
When could that potentially happen? Tomorrow or April?
Michael Belkin
Soon. So here we are in early Friday the 13th, right before solar eclipse on tomorrow. Not that it has anything to do anything, but I think it’s setting up for that. Basically, it has to do with sentiment. Another one of my clients is a big hedge fund. All they care about is sentiment. When people are too bullish or too bearish, and I just think I don’t get it. A little digression here. So the definition of psychosis is when you think you’re the only smart person and everybody else is crazy. I worry about that because that’s what I think. I think everybody else is out of their minds for after 19 months after the Fed has started tightening, the money supply is shrinking and people can’t get enough stocks to buy? Hello? Have you ever heard the Don’t fight the Fed. I don’t understand where this ebullient, excessive exuberance comes from. I just think it’s misplaced timing, misplaced from the what’s going on underneath the surface of the market. By the way, one other little point here. We went really… In the Alpha Capture Fund and also in the Belkin Report, I’m long defensive sectors, which nobody likes, which have been underperforming until this week.
Tony Nash
They liked them on Monday. They were up 10% on Monday. Are you talking about Fed stocks or defensive sector?
Michael Belkin
No, defensive. I’m talking about utilities. So things that nobody wants to touch with a 10-foot pole. Anybody that’s really bullish on the market, utilities, forget about it. They wouldn’t even think about it. So utilities, up 4% this week with the S&P up one. So 3% alpha. TLT, the T-bond ETF, up 3% this week. So it’s outperformed the index by S&P by 2%. Here’s another one for you, GDX, gold stocks, and gold. So gold is up 5% this week, GDX up 8% this week. That’s up 7% more than the S&P. We’re getting this risk-off move into defensive stuff, GDX, utilities, and bonds and then the VIX you probably want to… We’re going to talk about that in a minute.
Tony Nash
Let’s talk about the VIX. You are expecting a higher move in the VIX or a move higher in the VIX. Is it largely due to recession expectations or what are the factors you expect in that?
Michael Belkin
My model gives direction, position, intensity. It’s a 12-period forward forecast based on my studies of Fourier and Box-Jenkins in the UC Berkeley Statistics Department and the business school. Nobody else was looking at this stuff when I was doing it. I was not happy with what I learned in economic forecasting. It wasn’t very powerful. So I developed my own algorithm. So that says direction up, intensity strong, position just starting. And again, it’s another one of these things where the bubble people, as I call them, whoever they are, whoever they are, love to bomb the VIX. The market goes up, the VIX goes up, out of the woodwork comes huge selling and they knock the VIX down almost every time until that right tail kicks in. All of a sudden, the VIX is not… They can’t do it anymore. And then the VIX goes up in their face and the ball sellers get squeezed out of existence. So I think that’s the potential where the VIX could go up. So when it’s down, by the way, options are cheap. And this is very complicated and I don’t have all the answers. So now there’s these zero-day options, and the institutions are selling those things and retail investors are buying them.
Michael Belkin
So options selling tends to depress the VIX, and option buying tends to increase it. But options are still relatively cheap. I would say put options on the Nasdaq, which I think is like 20, 30 % too high just for starters. I like put options on QQQ, put options. I think they’re cheap. I think it’s a good entry point. I think the index goes down, so the value of the option goes up and the volatility goes up. You get a double kicker. Is it going to happen this afternoon or today, tomorrow or next week? I don’t know, but soon. I think it’s setting up for that in the model forecast.
Tony Nash
Fantastic. Albert?
Albert Marko
I like that. No, I like his idea. I hear people trying to short the two and 10-year, which I think is lame trade, to be honest with you. If you think that 10-year is going to end up going to five and a half to 6%, you might as well just shorten Nasdaq and some of the tech stocks. I mean, you get more juice doing that. Michael’s right. I don’t really see how this market can stay so elevated with so many just policy errors and bad sentiment out there. It’s just crazy to me.
Tony Nash
Given the policy errors, and I know we’ve talked about this a few times in the last couple of months, but it seems to me also that what both Michael, you and Albert are saying is that a lot of these companies, their margins are really compressing. Is that part of the reason you’re seeing this rotation into these other segments?
Albert Marko
Is that me, Tony? The only thing I have about margins and earnings is inflation does inflate earnings, at least with the headline numbers and temporarily. But I just don’t… Like I said before, margins are getting tight and wage inflation is getting out of control. It’s an inevitable thing. Historically, you’re going to see this market retract to something where it’s fair value, whether that’s 3,200 or 3,900, I don’t know. I can’t answer that. I’m out of my league.
Michael Belkin
Okay, so margins are one thing, but top line is another thing. In my scenario, so we’re moving into earnings reporting season and the banks were supposedly good today. But if the economy is going to do what I forecast it will do, then we’re going to see warnings. So basically in the rear view mirror, it shouldn’t be too bad. Q3, right? You can say, Okay, good. That’s okay. Worked out great blah blah. Going forward, I think it’s going to be bad. And the way this works is the companies say we’re downgrading our forward revenue. Our sales are going down. You can see it across the board in retailers, industrial companies, things like that already. It’s not so much tech stocks yet. But if they say, Well, all of a sudden at the end of Q3, beginning of Q4, our orders started to fall. Then you get these Wall Street analysts downgrading the stocks. And then you get this Pi Piper thing where all these long only managers that only listen to Wall Street analysts and consensus earnings forecast all of a sudden say, Oh, you mean Micron, semiconductor sales aren’t going to be that good. Maybe I should sell.
Michael Belkin
So you get this snowball effect, right?
Tony Nash
Sure.
Michael Belkin
The brokers announce the portfolio manager starts selling, and then it turns into the snowball thing. And one final point on that. So today somebody mentioned this in passing, EM consumer sentiment down from 67.3 to 63 in early October. So that’s anecdotal evidence of what’s happening. So when consumer sentiment falls, willingness to spend falls, and if you look at the rate on car loans and and stuff like that, forget about it. I’m also short on home builders. Home builders had enormous rally rolled over a month or two ago. They’re declining. Auto makers, they’re not the greatest short. They’re not up a lot. I would prefer to short something. But anyways, the point is the financing cost for a house and auto sales are off the map. It’s unaffordable for so many people now, particularly subprime lenders. So that feeds into the financials, the banks. So we heard, JP Morgan, the city bank, and Wells Fargo today were okay, earnings are supposedly good. Let’s wait until we hear what’s happening with the regional banks, which are short for me. I think that we’re in for another round where the regional bank start going down liquidation, they start warning of loan losses, deposit outflows, all the same stuff as last time.
Tony Nash
Okay. We have geopolitical risk, rising geopolitical risks. We have rising market sector risks. We have risk with a Fed mistake. Sounds like a lot going on out there. Michael, this has been really enriching, just hearing how to apply this broader stuff within specific market segments. So guys, I really appreciate this. You’ve really helped us sort through a lot of the noise and action this week. So thanks very much for all of this. Thanks, guys. Have a great weekend and have a great weekend. Thank you.
Ross Kennedy
Thank you.
Albert Marko
Thank you.
AI
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Transcript:
BFM
BFM 89.9, good morning at 7:07 AM on Thursday, the 12th of October. You are listening to The Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Keith Kam. We’re going to kickstart the morning with a look at how global markets closed overnight.
BFM
Wall Street ended higher with investors looking at the minutes of the latest Fed meeting. The Dow Jones was up 0.2%. The close to 0.4% higher, while the Nasdaq rose 0.7%. Earlier in the day, the Nikkei in Japan was up 0.6%. Hong Kong’s Hang Seng was up 1.3%. Shanghai’s Composite was up 0.1%. STI in Singapore was down 0.2%. Back home, the FBMKLCI closed 0.1% higher.
BFM
For some insights on what’s moving international markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks for joining us. Let’s take a look at oil prices. Tensions in the Middle East have caused a surge in oil prices, although there has been some pullback. I think currently Brent crude is hovering at around $85 per barrel. How do you think OPEC is going to react to these events over the next few weeks and how is that going to impact the trajectory of oil prices?
Tony Nash
Yeah, it was interesting seeing crude spike early this week. Unless things change materially on the ground and we see a much broader conflict, I’m not really sure it’ll impact prices much. We’ve said for months that we expect prices to peak out in late September, October, and then fall into the end of the year. Will we see OPEC, say, shut off supply or constrict supply in some way because of the conflict? Not necessarily something we’re seeing yet. Although if let’s say US embargo on Iran is, say, intensified or something, that could really change the narrative.
BFM
Tony, some analysts are betting that the share prices of defense companies will so in the coming months. We’re looking at the share prices of Lockheed and Northrop Grumman, which have shot up nearly 9% over the last few days. What are your thoughts on this?
Tony Nash
Yeah, we saw the Fed stocks, as you said, 9%, 10% up early in the week, and they’ve settled a bit. I think if you’re looking at specific companies and have specific reasons for investing in those companies, I think it’s different. But whether or not they continue to rally as a group or not really depends on the breadth of the conflict. So at this point, if you’re investing them in them as a group, probably pretty speculative bet, a gruesome speculative bet, but probably speculative. I’m not sure I’d take that group bet, but of course, individual companies have different tactics and strategies. So I’d look harder at those individual companies before betting as a group.
BFM
Tony, JPMorgan, City Group, and Wells Fargo will kick off earning seasons on Friday. What are your expectations in terms of how the big banks will do? And what picture will they paint about the health of the US economy and consumer?
Tony Nash
There’s a lot there. I think first, in terms of their, say, the interest they can charge, that thing, I think their interest margins are widening out as interest rates rise, which is obviously good for them. Now, those are the big banks for the, say, regional banks are still, I think, although they’re relatively stable, I think they’re still facing some pretty choppy waters. And I think there’s a given or I guess, depending on what happens in commercial real estate, you could see some difficulties in regional banks. But the bigger banks, I think, the consumer slowed down a bit in September, and I think they’re taking a breather before they go into the holidays at the end of the year. So there are a number of things to think about in terms of their net interest margins, in terms of their lending and the consumer spending. So credit card debt, for example, in the US, I believe, is at all time highs. And so the interest that they’ll make off of that will grow as well.
BFM
But generally, do you expect this time round, the results season to come in within expectations or even exceed analysts’ expectations because they’ve been cutting their numbers rather aggressively?
Tony Nash
Yeah, I don’t think so. I think they’ll be okay. I don’t think they’ll be great. I think a lot of companies right now are dealing with tighter workforce still, higher wages still, higher prices still for things on the services side. So these guys are very dependent on services expenses. So I think they’ll be okay. I don’t think they’ll exceed or disappoint dramatically either way.
BFM
And we are expecting the release of the latest CPI and PPI numbers sometime tomorrow, your time, I believe. Do you have any thoughts on what that figure could stand at and how this is going to impact what the Fed does in its remaining two meetings for the year?
Tony Nash
Yeah, PPI came in a little bit high, actually quite a lot higher than expected. So I guess Wednesday’s CPI or the next CPI, sorry, will likely also run hot. I think this puts additional pressure on the Fed to hike. Even though there’s heightened geopolitical risk, there may be continued pressure to squeeze out one more hike. Whether they’ll do it or not is a real question. They’ll continue to talk about lags between Fed policy and the market. So the Fed will try to push back on additional rate hikes. They may have to do it, say, in November. Part of the reason they’ll push back on it is because people are already feeling it in the housing space. And nobody wants another housing crisis in the fast. So they’ll try to push back on rate hikes. They’ll try to tighten money in different ways by doing things like selling off its balance sheet.
BFM
All right, Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead, talking a little bit about expectations for CPI, also how oil prices are going to trend. I think we’re still not certain how everything’s playing out, right? It’s a very touch and go situation. All right, it’s 7:18 AM. We are going to head into some messages, but we’ll come back with more of the top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9.
As the conflict continues, we hear how a business tries to stay afloat in Israel, and we look into the role cryptocurrencies may have played in the financing of Hamas.
The trial of the founder of FTX, Sam Bankman-Fried, goes on in New York. We get the latest from our correspondent.
An undercover investigation by the BBC has exposed a blackmail scam using instant loan apps to entrap and humiliate people across Asia, Africa, and Latin America. We hear more about how it worked.
Rahul Tandon discusses these and more business stories with two guests on opposite sides of the world: Mehmal Sarfraz, Co-founder of The Current in Lahore, and Tony Nash, chief economist at Complete Intelligence in Houston.
With CI Markets Free, our goal is to democratize financial insights. We believe that everyone should have access to powerful forecasting tools, enabling them to make informed decisions that align with their financial goals.
Transcript
BBC
Tony, let’s bring you in on this. This is not the first time we’ve had questions about how cryptocurrencies are being used or who is using them. I suppose when we live in a world now where it’s much easier to transfer money, we’re going to have these questions, aren’t we?
Tony Nash
Sure. Yeah, absolutely. I think the way it’s being used or when it’s used for these types of activity, it’s effectively money laundering, right? They’re taking money from legitimate sources and taking it to use it for not great activity. It’s effectively almost a reverse money laundering operation. And as your guest said, they can track a lot of that stuff now, which is great. And so they can track down that money and figure out where it’s coming from and where it’s going to, which is a good thing.
BBC
Yeah. And tell me, on that point, people will point the finger at cryptocurrency saying, Oh, this is one of the problems with them. We had money laundering before. We had cryptocurrencies, didn’t we?
Tony Nash
Oh, yeah. We’ve had money laundering through all kinds of different means. As your guest mentioned, art, it’s done through real estate, it’s done through all sorts of different factors. And he said those can be harder to trace. So maybe crypto is a simple way to trace money laundering, and maybe that use is a little bit stale now, we can hope.
BBC
Tony, can I bring you in here, firstly? Because really this is a debate centered on the US. How serious do you think that Republican threat is to cut some of the funding for Ukraine in the long term?
Tony Nash
Absolutely very serious. I think I hear people saying, Don’t worry, the funding for Ukraine is going to be there. I think it really underestimates the capacity of American politicians to hold two international issues in their mind at the same time. I really don’t believe that American politicians can hold Israel and Ukraine in their mind at the same time. They can really only focus on one word at a time. I think the events of Saturday and Sunday and the ongoing events in the Middle East have really superseded Ukraine in terms of American spending, and American political opinion and media attention. I think Ukraine is, as of Saturday, it’s yesterday’s news. There may be some funding there, but I think for the most part, those days are gone.
BBC
We’ve got Tony, of course, who is in Houston. What’s the air quality like there, Tony?
Tony Nash
It’s pretty good, but don’t forget we have a lot of refineries here, so we have some days that aren’t great. The worst air quality I was in was when I was in Singapore in the Hayes, which is these days when palm plantations burn their excess palm leaves and plants. But Houston is nowhere near the Hayes.
BBC
Yeah, you’ve managed to avoid that. It’s interesting what you talk there about burning because we’re seeing that in Manout, aren’t we? There in the Amazon where the air quality is so bad because of those fires in the rainforest. Let us talk about some political developments, Tony, that are taking place in the US. That’s right. Republicans in the US House of Representatives have nominated Steve Scalise to be the chamber’s next speaker. Just remind listeners why we got into this situation.
Tony Nash
We had a speaker of the House who was fairly middle ground. He wasn’t responsive to a number of conservative representatives, and they voted to outst him.
BBC
Very good. We’re now making you a political correspondent. And this is important, isn’t it, Tony? Because at the moment, a lot of decisions, whether it’s about funding for Ukraine, etc, It’s difficult to take them until we have a speaker in place.
Tony Nash
Right, exactly. So the speaker controls the bills that come to the floor. And without a speaker, you can’t really vote on bills like that. And so it’s a big deal taking the speaker out.
BBC
Tell me, how easy is it going to be for the Republicans to agree on getting a new speaker? Because the process of getting Kevin McCarthy in place was extraordinary, wasn’t it?
Tony Nash
Yeah, I’m pretty sure Steve Scalise is already replacing. Look, it’s like a no-contest vote in the UK. And so as a person who likes representative democracy, I like my representatives to represent what I want in them. Although it’s portrayed in media as this terrible process and Republicans being not in control of their own caucus. I think it shows that Republicans are demanding that their leadership is more responsible to their voters. These guys vote out based upon when their leader isn’t useful for them anymore. I think as someone who likes representative democracy, it’s a good thing. Steve Scalise was up against another guy, and Steve Scalise is more of a middle ground representative than the person he was against. I actually think Steve Scalise is the most useful applicant for the job because he’ll make sure that legislation works. He’s very experienced. If you remember, Steve Scalise was shot probably 10 years ago while playing softball. There was a Democrat shooter, nobody holding office, but they were a very partisan Democrat, and they shot him while he was playing softball in Washington, D.C. So he’s fairly well known in the US because he went to the hospital, he almost died, and then he returned to Congress.
Tony Nash
So he’s now, I think, he should be Speaker of the House soon.
BBC
Okay, let us see how that goes for him. Tony, election coming up, of course, next year. We’ll be talking a lot to you about that over the course of the next year or so.
Tony Nash
Sure.
BBC
Those prices at the pumps in the US, President Biden really worried about oil prices going up. How significant could they be?
Tony Nash
Oh, very. I just noticed here in Texas, I think a week or so ago, petrol was under three dollars a gallon for the first time in quite a while. That definitely matters for voters. It’s still relatively high on the Coast, especially, but it matters. And so if, say, geopolitical events or other things contribute to fuel price rises, it’ll definitely impact voters. This is part of the reason the dollar continues to remain strong is the US is trying to keep crude prices down, import prices down for crude with a strong dollar.
BBC
Let us see if that policy works. I’m sure President Biden hopes that it may. Let’s move on. That was a fascinating report. They’re really looking at the way that some of these scams are operating and then the way that they’re able to access so much information about the people that they’re trying to scam as well.
Tony Nash
Obviously, people need to have security software on their phone when they can. But I think it’s really hard for a lot of people to understand how strapped many people in South Asia and Southeast Asia are. I was on the board of a microfinance firm in Cambodia for many years, and the interest rates we could charge were regulated. The number of factors around this were regulated because the ability to pay at certain income levels is very, very delicate. And so upsetting that delicate balance can really have devastating results, and obviously, as we saw here. So this is a tragedy, and these types of things obviously need to be addressed as quickly and as harshly as possible.
BBC
Yeah, definitely. Tony, do you have a copy of the Houston Chronicle in your hand?
Tony Nash
Oh, no, I don’t. Definitely not. But I was with the publication, as you probably know, I was with The Economist for several years. And so print journalism, print media generally, obviously very difficult business. I was there as things were changing quite a lot and the nature of the business and the sales were changing a lot. So not easy to keep that business going. And kudos to them for being able to pull this off, at least for now.
BBC
Yeah, at least for now, I think is the key phrase that you use there. And what about, Tony? I mean, as long as you’re reading the articles, whether you’re reading it on your phone or you’re reading it on a physical form, does it really make any difference? As long as you’re absorbing that content.
Tony Nash
As a consumer, I don’t think it matters much as on the business side of it. I think it does matter because I think when people feel something in print and they see maybe a photo of the journalist or the editorialist, I think it’s different. I think seeing it online, it’s a bit less human and a bit more commoditized. So it is different. As it changes, I think the skill of journalism, I’m sorry to say, is possibly a little bit less than it had been at the time. Maybe that’s something that has to do with ease of information access now makes it a bit easier. Maybe AI, composers makes it easier, but I think it’s different.
BBC
It is. There are a lot of people saying that my sons actually start buying a newspaper recently and then after doing it for about two days, realized how expensive it suddenly become and he has ditched that idea completely. Or he said, Can I pay for his subscription? That will not be happening. Tony, always a pleasure to have you on the program.
Tony Nash
Thank you.
BBC
Mehmal, good luck.
Mehmal Sarfraz
Thank you.
BBC
Good luck in that smog in Lahore. Hope it improves over the course of the next few weeks. That is it for Business Matters. Team will be back at the same time, same place tomorrow.
The possibility of former President Trump becoming the Speaker of the House.
Americans’ frustration with politics and the desire for a generational change.
The impact of government debt, the recent volatility in bond markets, higher interest rates on the real estate market, a potential recession and disinflation, and the importance of the interest rate environment on equity markets.
CI Markets Free is now available. Get AI-powered forecasts for major currencies, Nikkei 100 stocks, and top 50 economies. No credit card is required!
Transcript
Peter Lewis
I’m joined now by Tony Nash, Founder of Complete Intelligence over in the USA. Morning, Tony.
Tony Nash
Good morning, Peter.
Peter Lewis
Now it’s been an extraordinary week, hasn’t it? In the House of Representatives, the Republican Party have kicked out their own speaker for the first time ever, I think, in history that’s happened, isn’t it? So we’re really in pretty much on chartered territory now. What happens next?
Tony Nash
There’s a lot that can happen next. There are a number of people who are up for speaker. One is former President Trump. I think he’s taking all the air out of the room right now.
Peter Lewis
Is that serious? Is that serious? The idea that he could be the speaker?
Tony Nash
I think it’s possible. I don’t think it’s probable, but I think it’s possible. I think people are pushing it simply because it’s something unconventional. Look, Americans are really tired of politics right now. Really tired. And it looks like a circus from overseas. Here, it’s a shoulder shrug. It’s like, okay, now what are they doing? And so I think people are just tired of business as usual, and they’re tired of seeing a lot of money go to the federal government. They’re just tired of seeing the money that they send there. They’re tired of seeing people like Dianne Feinstein, who just passed away this week, have a job that pays $140,000 a year, yet she retires having $110 million net worth, okay? So Americans are tired of seeing this. And so I’m not in any way advocating Trump as Speaker of the House. I’m just trying to help people understand why Americans are even entertaining some of this stuff. Americans are tired of paying in, they’re tired of seeing their politicians retire as multi-millionaires after spending time in politics, this thing. And so they’re really looking for something different. They’re looking for a generational change. Is Trump that generational change?
He’s not, but he’s different. I think the people in the House of representatives right now who are really interested in some change are looking for… There was a motion today to set term limits, so people can’t serve longer than 12 years, to say that people while they’re in the House, they can’t trade stocks, these sorts of things. And we’ve had people like my own representative in Texas, his name is Dan Crenshaw. He was a regular guy when he became a representative. When he started in the House of representatives, he started miraculously trading stocks, and now he’s a multimillionaire. While… He’s in that… Again, there is a level of frustration that Americans have in politics, and that’s part of the reason some of these characters like Donald Trump come into the fold as possible nominees for the House. Can they do it legally? Yeah. I mean, you don’t necessarily have to be an elected official to become Speaker of the House.
Peter Lewis
Is there a worry, though, that in trying to get something different, people are also turning to extremists because some of these people are pretty extreme, aren’t they?
Tony Nash
Yeah, that’s why. I don’t think Trump will get it. Okay, people like Jim Jordan, who’s been in the House for a long time, he’s likely to get it, or Steve Scalise, who’s been in the for a long time. Steve Scalise is famous because he was actually shot by a Democrat partisan when he was playing softball in a park in DC 10 years ago or something. So he’s the majority leader in the House right now. And so I think it’s really between him and Jim Jordan as to who’s really going to get it. But I think when people at Overseas hear about this, they hear about Donald Trump and they hear about he might be speaker of the House, there has to be this understanding that Americans are just incredibly frustrated with politics in America, and the partisanship and the media blowing everything up into a huge scandal or a huge, or a clutching incident or something, and it’s just not. It’s politics as usual. It’s drama as usual in DC. Is the government going to shut down? Nobody really thought the government was going to shut down. Last week, right? This was just a story from last week.
Weeks of drama leading up to, Will the government shut down? At the end of the day, surprising no one, the government decided to fund itself. So nobody cares, right? I mean, these things come out and they’re hyped and they’re big stories, but at the end of the day, most Americans look at this stuff and just shrug their shoulders and go, Well, it’s those guys in DC. They’re doing what they do.
Peter Lewis
Has all of this, though, increased the chances now of a government shutdown? Because it seems that it’s going to be really hard for whoever leads the Republicans to be able to work under any circumstances with the Democrats in the House and get anything done, doesn’t it? It seems to increase the possibility that we can actually get a shutdown.
Tony Nash
I don’t think so. I think so. I think that the government, the representatives in government will find a way to make us think that there will be a shutdown and there may be a very short-term shutdown, but this is all theatrics. Again, as a political observer, all my life in the US, and for most of my life I was outside of the US observing US politics. I’m living in Asia for a long time, living in Europe for a few years, and this is theatrics. The government isn’t really going to shut down. There isn’t really going to be reform. These things that most Americans are shocked that we pay so much for, it’s not going to change. Will the government shut down? Maybe, but it’s not going to be for very long. Are there going to be dramatic changes in spending by the US government? Highly unlikely. So all of the suspension and government shutdown and good luck and all this other stuff, it’s drama. It’s made for TV drama. But these guys are friends and they golf together and they go to the club together, and they do all sorts of stuff together, regardless of partisan differences.
And so they’re going to get it done. So whoever is Speaker of the House is going to do it. If Trump has voted in as Speaker of the House, he will turn it into a presidential campaign post, and the House probably won’t get much done for the next year, which again, most Americans are probably okay with that. Because again, most Americans are very tired. It’s just the eye-rolling nature of what happens in DC. It’s craziness. And so do they want to see the drama of Donald Trump as speaker of the House? No. Very few people want to see that. But if it did bring people to really question and expose things that are happening in DC, overspending and corruption and all this other stuff, I think over time, people would probably be okay with it. But when you look back at Donald Trump’s presidency, what did he really do that was remarkable? He did a few things, but you can’t look back at it and say, Oh, wow, that was an amazing presidency. He didn’t do all the things he said he was going to do. It’s like looking back at the Biden presidency. Unremarkable.
Both of them are unremarkable. I don’t necessarily think Trump would get amazing things done in the Speaker of the House. I think it’ll be Jim Jordan or it’ll be Steve Scalise who ends up being Speaker.
Peter Lewis
Okay. Now, presumably one of the things that’s going to be very much in focus is debt, isn’t it? The amount of government debt. In particular with what’s going on in the bond markets recently, we’ve seen the 10-year yield jump 60 basis points in the space of about a week, which is a pretty extreme move for the bond markets. What’s causing these gyrations and these yields to shoot up to what are multi-year highs, 16-year highs in the case of the 10-year?
Tony Nash
Good news is bad news. We’re in a place where when people hear that we’re not going to have a recession and that job growth is strong and other things, that’s actually bad news, meaning interest rates jump on that because there is an expectation that if high hiring continues to be strong, if the job markets continue to be strong, then the Fed is going to have to continue to raise interest rates. And so if we have strong payroll numbers and let’s say we continue to have strong, say, real estate numbers and other things, when the bond markets look at that as the Fed not raising interest rates enough. And so we had a strong jobs report a couple of days ago, and that caused interest rates to spike because people looked at it and said, Oh, gosh, okay, the job market is still very, very strong. That means spending is going to continue and so that means the Fed is going to continue raising rates and they’re not going to just do 25. There’s going to be two or three or whatever more rate hikes, right? Again, that’s possible. But when you look at, say, consumer spending, it did dial down a little bit in September.
And some of these other indicators have dialed down a little bit in September. I think we’re in that part of the cycle where people are talking in both ways. Growth is tempering down. Oh, no, it’s strong growth. Oh, no, it’s not as bad as you think, or whatever. Depending on the day, the market is trying to find the levels that it should trade at, and that’s normal. In this part of the cycle, people trying to find, Are we in a new bull market, or is this a longer bear market? We’re at that part of the cycle where people are trying to figure it out. What we saw in bond markets on Thursday are not the end of that volatility. We’re going to have volatility for several months until we figure out what the direction is, until we have a clear idea from the Fed, until we have a clear idea from, say, the jobs market, what’s happening, until we have a clear idea in terms of wage is what’s happening. I think what we’ve seen, particularly in crude markets, over the past couple of days has really helped because when you look at crude, you’re not only looking at the crude prices, you’re looking at the expected primary and secondary impacts of inflation.
Not just crude, but what goes into, say, gasoline, what goes into plastic, even tertiary impacts of inflation. When crude prices fall, that helps a lot of the economy to have lower prices, hopefully. Go ahead
Peter Lewis
Are these yields at these types of levels? Have they now actually increased the chances of the US economy going into recession? Because at the beginning of the year, people were predicting a recession, but we’re simply wrong. The economy held up much better than people thought. The jobs market has held up much better than people thought. But now we have yields at interest rates at restrictive levels, yields moving higher. Are the chances of a recession, ironically, now increasing?
Tony Nash
Well, the recession is that interesting of economist dilemma. Last year people said it was going to be in the first half of ’23, then we got in the first half of ’23, then they said it’s in the back of ’23. Now people are saying there will be a recession in the first half of ’24. We’re always chasing our tails on that. With these types of things, I like to talk to people in the markets and on the street. I was talking to a mortgage broker here in the US yesterday, and I said, Hey, how much have things slowed down? Have things slowed down a lot? They said, Yes, things have slowed down a lot. The housing market in the US right now, according to this person, is mostly cash purchases. The homes that are being bought are largely not done through mortgages because mortgage rates are so high. That’s what the Fed wants. They want the number of transactions and the nominal rate of those transactions to slow down. They want the prices to slow down. If people are paying cash, then they’re probably buying a higher-end property or something like that. But the legs are coming out from underneath the mortgage market, and that’s exactly what the Fed has wanted to do.
These people who own two or three houses and have Airbnb’s and rental houses and stuff, they’re not able to rent those out as much. They won’t be able to afford the mortgages on multiple houses, so they’ll be foreclosed on, or they’ll sell at a lower price. What ultimately the Fed wants is they want those people who own three, four, five Airbnb’s and rent houses to have to sell at a lower price because it brings the froth out of the real estate market. Do these higher rates mean we will have a recession? Maybe. It really all depends on where people keep their wealth and where that employment is. But what’s more likely to happen? I know this isn’t really a mainstream view, but it’s actually possible that we have disinflation next year. What that means is the margins that companies get are smaller. If the margins are smaller, then the valuations for those companies will be smaller. If the valuations are smaller, then we’ll see a market pullback. Unless those valuation multiples go up for some reason, right? But those valuation multiples wouldn’t go up in a higher interest rate environment. Those valuation multiples would only go up if we saw a strong pullback in interest rates
Tony Nash
And so if we are truly in this higher for longer environment, which I believe we are, if we’re in that environment and we have pullback in margins and disinflation, then we’ll necessarily have to see a pullback in equity markets because valuations will pull back.
Peter Lewis
Okay, well, Tony, look, thank you very much. It’s always good to hear your thoughts. That’s Tony Nash, who is founder of Complete Intelligence over in Texas in the United States.
Welcome to “The Week Ahead” with your host, Tony Nash! In this episode, we engage in thought-provoking discussions on a range of critical topics:
1. Price Disinflation Recession: Our expert panel, featuring Seth Golden, challenges conventional wisdom by analyzing the rise in manufacturing volumes and its implications for the economy. Are we on the cusp of a period where valuation multiples could expand once again?
Also, discover differing perspectives on inflation and disinflation as our panelists share their views on the deceleration of inflation rates and concerns about wage inflation and political policies. Explore the impact of interest rates on the housing market and the potential for lower prices due to disinflation. We also shed light on the critical role of diesel prices in the economy.
2. Crude Tumbling: This discussion, led by Tracy Shuchart, dissects the secondary impacts of rising gas prices and the global dynamics affecting fuel prices. Stability in oil prices becomes a focal point as we examine the intricate interplay of factors like global demand and export policies. Comparisons are drawn between OPEC’s influence on energy markets and the Federal Reserve’s impact on equities.
3. DC Drama & Markets:Albert Marko led this discussion and he doesn’t shy away from discussing the lack of unity within political parties and the need for stable economic and fiscal policies. The panel raises concerns about wealth accumulation among politicians and calls for a reevaluation of the system.
The discussion also touches on the significance of the Speaker of the House in US politics and potential candidates for the role. Learn why an efficient speaker is vital for the productivity of the legislative body as we wrap up our discussions.
Transcript
Tony Nash
First is the Price Disinflation Recession, Crude Tumbling, which has… It dovetails with Price Disinflation, DC drama, and the relevance to markets. So… Hi, welcome, everybody. Welcome to the week ahead. I’m Tony Nash. This week, we are joined by Seth Golden, Tracy Shuchart, and Albert Marko. We’ve got some key themes this week. First is the Price Disinflation Recession, which is a really interesting concept that Seth’s been talking about. I just want to talk about crude tumbling, which dovetails with Price Disinflation. And then we’re going to talk with Albert about DC drama and the relevance to markets.
Tony Nash
So before we get started, I want to let you know about a new free tier we have within CI Markets, our global market forecasting platform. We want to share the power of CI Markets with everyone. So we’ve made a few things free. First, economics. We share all of our global economics forecast for the top 50 economies. We also share our major currency forecasts as well as Nikkei 100 stocks. So you can get a look at what do our stock forecast look like. There is no credit card required. You can just sign up on our website and get started right away. So check it out. CI Markets free. Look at the link below and get started ASAP. Thank you.
Tony Nash
Seth, thanks for coming on. First time, really appreciate it. It’s great to have you. I’ve been following you for a long time, and I love your Twitter presence. I saw your tweet about the NOPE index and rising PMIs. Your expectation is for a price disinflation recession, which is at odds with what Albert’s baseline hypothesis, I think, but not a volume-based recession, price deflation-based. Can you walk us through that? I’ve got that tweet up on the screen now. If you can walk us through your NOPE index tweet.
Seth Golden
Yeah. The NOPE index was actually developed by the Leuthold Groups, Jim Paulsen, who retired recently. But it essentially tries to strip out the sentiment factor within these soft data. The ISM is a survey-based report. And I think what becomes a greater magnitude in these survey data is what’s happening at the most basic level in price. So what the NOPE index does is it takes the new orders, that’s the NOV part, and then the price, which is the P part, and it basically takes the new orders and subtracts it from the price. Because when you look at the questions within the survey, the ISM, whether it’s the manufacturing survey or the services survey, there’s never any good price. There’s always this underlying bias within the ISM that is lower bound as opposed to above 50 or expansionary. Jim Paulsen created the NOPE index, which just says, hey, focus on this. It’s already soft data. But let’s see what’s really going on in the economy. So if you take the actual new orders and you subtract them from the price, whatever the reading is, if it’s above zero, you actually typically have a better manufacturing situation, then maybe the overall index is implying, the ISM manufacturing index is implying.
Seth Golden
The threshold or line of demarcation, if you will, in the NOPE index is zero. So a reading above zero is typically expansionary, and typically that is good for the S&P 500. The forward S&P 500 returns on an annualized basis when the NOPE index is above zero is about 13%, I believe. It’s a good gage, not only of what’s going on in the economy, but what could possibly foreshadow market performance going forward. I know that we’ve had this seemingly recession in the manufacturing sector, but there’s various data that says not even close. If we look at just the ISM, if we look at the S&P also, their measure of manufacturing, they’re both under 50, which technically is a recession in those particular industries within the economy. But the reality is if you look at, let’s say, the St. Louis Fed, the total manufacturing output in the United States has been booming. We’re out the from 2022 and through this calendar year. But we’re not getting the manufacturing inputs that we usually do get, which are driving this manufacturing expansion. Usually it’s the refining capacity, and usually there’s some various variables of goods production that is taking place, textiles or otherwise that are driving the ISM and S&P manufacturing data.
Seth Golden
But we have this dynamic since ’22 where it’s actually construction manufacturing, as well as electronics manufacturing that is driving this boom in the total manufacturing here stateside. So I’m not necessarily looking for a recession based on this NOPE index or what have you, I’m just trying to define what is actually going on through the NOPE index. Is it a real recession in manufacturing and or services, or is there underlying strength that just isn’t being realized by the ISM or the S&P manufacturing indices?
Tony Nash
Okay, so you’re saying that the manufacturing volumes are continuing to rise?
Seth Golden
Correct. That’s the most important thing about this. The NOPE index is that it strips out the price sentiment, basically. It gives you what’s actually taking place in new orders. Because if you subtract the price and you’re above zero in the NOPE index, you still have an expansion situation in manufacturing. You don’t really have a recession.
Tony Nash
Okay, so let’s take a look at that.
Seth Golden
Let’s take a look at the actual price that is influencing how respondents are actually answering the questions in the survey.
Tony Nash
Okay, so let’s look at this second chart you sent me, and I want to talk about that. I also want to put the price layer on that because I want to make sure that that’s not missed. You sent me this chart, recent rise in US manufacturing construction driven by computer, electronic, and electrical sector. Since these two acts were signed, the CHIPS Act and the IRA signed, we’ve had a spike in computer, electronic, and electrical manufacturing, right? That’s good, right? That’s good for US manufacturing.
Seth Golden
Right. Yeah, you’re getting a lot of transactional volume through that fiscal policy initiative, getting a lot and minimal. I mean, there is some price appreciation in there, but it’s nowhere on the scale of, let’s say, what we see in refining prices through that manufacturing capacity.
Tony Nash
Okay. Where do you pick up the construction or manufacturing?
Seth Golden
Yeah, you’re getting materials. That’s another way that you can validate that this is… Those aspects or industries where we are seeing electronics and computing and construction, we know construction materials and whatnot have actually been disinflating for more than a year now. Whether it’s lumber, sheetrock, concrete, all of those necessary construction inputs are actually disinflating for more than a year, but the transactional volume is basically superseding the price disinflation. Hence, you’re still getting this boom in manufacturing overall.
Tony Nash
Okay. Based on your thesis, so in ’22 and the first half of ’23, we saw manufacturers and services firms able to grow their margins because of the inflationary tailwinds. They could add margin, they had their top line growing, they had their bottom line growing. And they didn’t really care about the volume of transactions in many companies because they were still hitting top and bottom line numbers that were better year on year. Now you’re saying that because of disinflation, that margin is collapsing and those volume of transactions matter as much or more than the price itself.
Seth Golden
Right. Yeah, that’s a great way to summarize it because when you have this volume, you get this a reading in the total manufacturing layout. But it’s in sharp contrast to what we’ve seen in ISE because there’s no price situation that is ever really good for the respondents. Take, for example, we had an inflation boom. We got the ISM up to 60. It was there for what? One month before it collapsed? Because the respondents know this can’t last forever. I can’t push my cost onto the end producer and then the consumer. I’m going to start responding negatively because I know there’s an inevitability in this inflationary boom. Well, okay. Then the reading starts coming down. There wasn’t even in inflation times, that’s only going to live for so long. Then you get into disinflationary situation. Again, will prices keep coming down? Now, my profit margins, as you are alluding to, are also coming down. I’ve got to rely on volume, but how do I increase demand? The number one problem for a CEO, every single morning he’s always thinking about, I wake up every morning, I’ve got to figure out how to increase demand. So these ISM readings, they’re so sentimental and it’s always focused on price.
Seth Golden
One way or the other, price is bad always. So the note model does a great job of distinguishing the true strength and what the trend is in manufacturing, overall.
Tony Nash
Okay. Albert, I want to bring you in here in just a minute, but I have just a couple more things with Seth that I want to put on through. Okay, so we’ve gone from a very low interest rate to a significant interest rate rise over the past year. We’ve gone from very nice margins on marginally lower transaction volume to thinner margins on transaction volumes that may or may not be increasing. When we take those two worlds and we look at the valuations that companies have had, we had really nice valuations in a low interest rate environment with high margins. Now we’re in a higher interest in the environment, and I assume a higher for longer environment where we have lower margins and the transactions may or may not be increasing. What happens to valuations under your hypothesis, what happens to equity valuations in general? Without talking about specific sectors, but what happens in general?
Seth Golden
All right, yeah, if we just use the benchmark S&P 500, the consensus is that valuation should compress level. So far as the margins are concerned, there’s a bit more nuance there because while the actual margins per sale may indeed decline, the total profitability may not follow suit or the earnings per share may not follow suit because we have this dynamic of higher rates where part cash, be it households or corporations, is earning millions upon millions and billions every single month. So you have this free cash flow that also has to work itself way into the valuation model. Again, the consensus belief is that higher rates, higher for longer, should compress the earnings multiple. When in reality, that has been the exact opposite. If we go back to, let’s say, 1960s, 1970s, all the way up to the early 1990s, the S&P 500’s multiple was actually higher over a good 23-year span. I think it was 17.7 times from the late ’70s to the 1990s in that higher rate environment than even where we are today after the Federal Reserves program here. And now we’re at 17.4. But of course, we won’t know where we’ll be going forward.
Seth Golden
But there’s not hard and fast data suggesting that the multiple should compress because we’re not even where we were back in the ’70s or ’80s when it comes to the federal funds rate, let alone, let’s say, the benchmark 10-year Treasury yield. I don’t fall into the camp that aligns with a compressed multiple. If you look at the PE multiple, if you look at the CAPE ratio, they do nothing but expand over time. That’s the history of multiples. They expand over time, mostly because for every dollar that goes toward wages or whatnot, we get that much more productivity, so we have that much more cash flow. With that being said, the common pushback is no multiples don’t look at the peak. We still haven’t made it back to the peak of the dot com period. Okay, so fine, X dot com, that hyperbolic event or parabolic event, multiples indeed expand over time. So who’s to say that we are not in that new period, this post-pandemic period, where we once again jump the shark? Because there’s always this jump the shark moment when it comes to PE expansion. In real time, we shun it, we belittle it, we berate the multiple expansion.
Seth Golden
It’s only in hindsight that we realize, Oh, we just took a leap.
Seth Golden
That’s how I look at it secondarily, I say, if you look at the long term history of yields, they go lower over time. We might be in this vacuum moment where we’re becoming prisoners of the moment given the monetary policy initiatives. But in hindsight, again, we look back and we say, well, of course, the 10-year yield is lower over time. It’s just a matter of when it finds that new lower, low bound territory. So I’m comfortable with saying… And if, in fact, we finish at a 20-time multiple here this calendar year over the trailing five-year period, the S&P 500 forward PE multiple will have averaged 20 times for the first time in history, hence the jump the shark moment.
Tony Nash
Very interesting. All very sophisticated. Thank you so much for this. Albert, I know you are not well. I suspect you were not in line with the disinflationary underpinning of Seth’s hypothesis. Can you walk us through that?
Albert Marko
Yeah, Nope.
Seth Golden
I’ve been wrong twice before. No, I’m on you.
Albert Marko
I don’t even want to discuss this inflation until wage inflation is under control, and that is nowhere near getting control at the moment. On top of that, inflation in the last year and a half has only shown that companies can earn more. Put earnings through the roof. Until I see wage inflation actually coming down, I don’t want to talk about this inflation, to be honest with you. I can’t see it. Even the CPI prints have been completely nonsensical. Goods are just still 17%-20% higher than they were pre-COVID. Energy, as much as they want to push it down, energy is just bursting at the seams to go back to 100 on the Brent. I can’t see a pathway for disinflation. But of course, I’m only talking for the next 6-12 months after that. That’s just a different era, in my opinion.
AI
Heads up for a short break.
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Thank you and now back to the show.
Tony Nash
Seth, do you have a timeline on yours? Are you thinking ’24? What are your thoughts on the timeline?
Seth Golden
So far as getting to the Fed’s target?
Tony Nash
No, getting to this disinflationary environment that you’re talking about.
Seth Golden
Philosophically, obviously, Albert and I disagree. I understand where… He’s absolutely right. We have absolute inflation. That’s all we actually ever have. But in terms of what’s being measured by CPI, PCE and PPI, consumer price index and producer price index, they measure rate of change. So it’s the month of the month or year over year. So philosophically, I think we agree on the fact that there’s always inflation, but it’s a matter of what’s being measured is the rate of change of that inflation. So do I see that deceleration continuing? Yeah, I would suggest I see that disinflation or deceleration in the inflation rate continuing through the end of this year and at least for the better part of 2024. And so far as the wage inflation is concerned, we are starting to see an increase in the labor participation rate, which will facilitate some of that, at least to some degree, that deceleration in wages. This morning’s report may be a prime example, or the last two monthly reports, in fact, might be a prime example of an increase in the labor participation rate, working in favor of reducing that overall wage inflation.
Tony Nash
Right.
Albert Marko
Yeah, I just don’t take those numbers at face value. I’m just over the fact that CPI is at whatever, 3.3%. They’ve changed the weighting of it. They use the BLS deflators to manipulate the numbers on unemployment. The revisions come in every 3-6 months later that shows that it was actually worse than they were reporting. Like I said, until wage inflation, in my opinion, gets sorted out and they actually have political policies to address the oil and gas and energy markets, I don’t want to even discuss this inflation in my opinion.
Tony Nash
Interesting. Seth, I do think that your thoughts about the volume of manufacturing will be very interesting. I’m really intrigued by the disinflationary underpinning of it and how that could drive things. I think that’s very, very interesting. Definitely not a consensus view right now.
Albert Marko
If you get disinflation, like he’s saying, six months later, we’re just going to have another inflationary event because people are going to go out and buy everything. I mean, houses, goods.
Seth Golden
Yeah, I agree. One of the caveats or antithesis that I put into my models does center on the resilience of the consumer, the strengthening the labor market being what it is. And just the monthly, and I think it gets just way overlooked in terms of people that have been calling for a session since last year. The Fed is actually stimulating while it’s trying to ease the economic situation by tightening. We’re not as rate-sensitive as we used to be. Probably the least rate-sensitive economy as a whole, households and corporations in history. You have all these people that have fixed rate mortgages at three and four %, so the Fed raises to 550 basis points. What do they care? It’s not really affecting them to any monthly bill payment degree. Now they take that, their savings and they put it into a money market fund for 5 and 6% of monthly income coming. The Fed is tightening while these people are actually seeing the benefits of the tightening cycle. Unless you say, Well, the service industry, that’s where the real inflation is. I would totally agree. You go to any restaurant. You go to even some of the lesser Darden Restaurants like an olive garden, you can’t get a chicken parmigiana for less than $25.
Seth Golden
Your boy likes chicken parmigiana. I’m trying to feed a family of four out at the olive garden for dinner, and you get a bill for 150 bucks and you’re like, Whoa. I’m the consumer spending.
Tracy Shuchart
You also can’t forget what the government is doing, right? Fiscal policy is doing. I mean, the IRA act, which is very inflationary, for me. It’s butting heads. I just don’t see disinflation either at any point soon, except for maybe what the Fed is looking at in their core. But it’s hard for me to get on board with this disinflation theory.
Albert Marko
For me, it’s like a double-edged. Everything that Seth says is most likely correct. But the flip side is there’s double-edged swords everywhere. If you have disinflation, let’s say housing starts coming down or they have rate hikes coming down, mortgage is coming down.
Albert Marko
You have such low inventory of homes in certain states that they get snapped up like this because people are just cash rich at the moment. They sold whatever they did or their stock market. They’ve had calls on NVIDIA, made them 10 million bucks, and they come back and they start buying things cash. So you’re right. They don’t care about rates at all. They don’t care about it.
Tony Nash
I was talking to Morgan’s broker earlier this week, and I said, How is your business doing? Has it slowed down? And they said, Oh, yeah, a lot. It’s slowed down a lot. But they said, Most of the buyers that we’re seeing are cash buyers. So what you’re saying, Albert, is right, is people are not taking out a mortgage. They’re using their cash to buy a home. Has the volume declined? Yeah, it has. But I think that what the Fed has done with interest rates is working because you have these guys with two and three and four Airbnb’s who are not seeing the occupancy that they saw a year or two years ago. Because of the higher mortgage rates, those houses are eventually going to have to come on the market because it can’t service those mortgages. Those will come on at a lower rate. Will they get stopped up for cash? Maybe they will. Maybe they’ll stay on the market for a while longer. But I do think that the game that the Fed is playing is a medium term game, and it’s slow to get to where it’s going. So I don’t want Seth to feel like he’s being hanged up on it. I’m actually –
Seth Golden
Oh, no. No, no. I always do. I’m fine with the constraint.
Albert Marko
It’s good to test your theories on the other side. It’s not important to have that.
Tony Nash
I think one day in ’24, we could wake up, and the disinflationary part of our hypothesis could be very true. It could be or Feb, sorry, April, May, something like that. We got the the boob in this this disinflationary and people are just like, Wow, we’ve got high rates, but we’ve got my olive garden dinner is now 15 bucks instead of 25 bucks. Maybe that happens, right?
Albert Marko
I think that Seth is right. I just don’t know about the timing. I don’t buy it for the next six months for sure. On the next 12 months, 50-50. 18-24 months, absolutely. That’s-
Tony Nash
50-50, so that’s a win. Take the win.
Albert Marko
Because it’s an election year, right? It’s an election year, and political policies always want to be… They’re always inflationary. Food, corn, energy, all that stuff, and then mixing them up.
Seth Golden
No president has been reelected when there’s been a recession.
Tracy Shuchart
A recession, exactly.
Albert Marko
Yeah.
Tracy Shuchart
So they gonna do everything they can to halt that recession.
Tony Nash
Interesting. Tracy, I want to bring you on on this… While on some of this first topic. You had a great tweet about US manufacturing, rebound stretching diesel supplies and pushing up diesel prices. With Cess Hypothesis about the manufacturing volume coming back, which is great, how much of an impact do you think diesel prices will have on overall inflation readings? Is that a big driver of inflation in the US?
Tracy Shuchart
Well, I think that diesel runs the economy, period, end of story. It has everything to do with manufacturing, transportation, with agriculture. It is at the heart of what makes the economy go around, essentially. If you want to move anything anywhere, if you want to produce anything, you’re going to need diesel. Of course, that’s going to make a big impact on inflation. That said, that energy is not part of what the Fed looks at conveniently. That may not figure into their metric when they’re looking at for inflation, so to speak. But does that impact the consumer? Absolutely, that impacts the consumer because those costs are obviously passed on to the consumer.
Tony Nash
Yeah, there are secondary tertiary impacts, of course, that are passed on to consumers or that service industry people need higher wages, gas prices are higher and so on. Last night here in Houston, I noticed our gas prices were under $3 for the first time in a long time.
Seth Golden
Here in Florida, well, north where we are as of last week, $2.99, at one of the local stations.
Tony Nash
Yeah. If you’re on the Coast, I’m sorry, guys, but…
Tracy Shuchart
I’m like, Sir, our gas is not there yet, but it has come down, obviously. But we’re not really having a gasoline issue so much as a distillate issue, and people have to seem to separate those two because it’s it’s not doesn’t run the economy, Distillates.
Tony Nash
You’re right.
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Thank you. And back to the show.
Tony Nash
Let’s look at those fuel stocks. You sent me a chart from Morgan Stanley and the EIA looking at fuel stocks in the US. They look to be at definitely lows within a a five-year range for ’23. That’s the dark blue line on the chart. Can you talk us through, since we do have low stocks, if we see this rise in the volume of manufacturing in the US, would it be almost this bullwhip-y rise in diesel prices because of that surge in demand?
Tracy Shuchart
Absolutely. Obviously, you’re going to see knock-on effects of that. Even though we’ve seen prices come come back, just had Russia this morning decide they’re going to allow diesel pipeline exports. That’s not all of their diesel prices. Remember, on the 21st, they said that we are stopping all gasoline and diesel exports, which really affects Europe more than anything. But they did come out this morning and say they are going to allow pipeline diesel exports, but still no gasoline gasoline That did alleviate some of the pressure across global markets. You saw some of those fuel prices come down, those diesel fuel prices come down globally. But that said, there’s still a global crunch. If we look at countries that are reporting, reporting, so OPEC countries, for example, because because they’re The US reporting is the best, but they’re next. If we’re looking at what they’re selling, their light sweet barrels will take Nigeria, for example. Their light sweet barrels are not really selling. There’s a lot of pressure on on light right now because all you can make from that is gasoline, essentially. But if you look at their heavier barrels right now in countries that produce crude oil that can be cracked into diesel fuel, those are selling for $8 or $9 above Brett prices right now.
Tony Nash
Russian are the selling you $9 above Brett.
Tracy Shuchart
No, not Russian. Other countries, because Russia obviously has a price cap, et cetera, but they are selling for it about $85 for their heavier crude distillates. But Russia is a totally different story because of the price caps and things of that nature, because they’ve had a very large discount to Brett. But I’m talking about other OPEC countries that are selling. In fact, we just had Saudi Arabia come out this week and they’re selling OSP, which is their official selling price is above above brand. Selling that across Europe and Asia and to the US.
Tony Nash
Yes. That is a perfect segue into our next subject, which is tumbling crude prices. As you were just talking about, as we’ve talked about for several weeks, our most visible discussion about this was crude not hitting $100. That was about a month ago. We’ve seen seen crude fall ten this week, I’ve got the light, sweet futures on the screen. In addition to what you were just saying, can you tell us what’s happening and how far do you expect it to go?
Tracy Shuchart
Well, I think it’s because we had such an initial… Every reaction creates an equal and opposite reaction. We had that that kick to almost $100 on Brent, $95 on WTI. That was just a major… That was a major chase push-up, CTA following people got on the trade, etc, etc, and then it’s a momentum. It’s a Mo-mo trade, right? When you have CTA traders, they tend to jump on any momentum no matter what product that is. That pushed prices to what levels that were where they really probably shouldn’t have have been? I mean, don’t need to be that high. High. That’s terrible. When we saw prices push up to $95, that is terrible for refiners. We saw margins collapse. You knew immediately these prices were too high and that we would have to see oil prices come down again because it was just awful for the industry in general. It’s horrible on emerging markets, especially with the dollar pushing up and you have dollar-denominated debt and then you have the pressure of oil prices being high. It’s a terrible scenario. It’s not surprising that we have seen a pullback. Has this pullback been more exaggerated than it likely should have been?
Tracy Shuchart
Probably. But I think what we really need is stability in oil prices because what happens is when you have this volatility in oil prices, this does not encourage producers to go out and spend money on new wells and new production, etc, where they’re all going to hold up. In the end, then this is going to hurt us in the long term because they’re going to be like, Oil prices are too volatile. We’re not going to invest. We’re not going to invest in new production right now. We just can’t. We don’t know what our oil prices will be tomorrow. In the long run, this adds to the theory that there’s higher oil prices for later because we’re going to see demand increase regardless if we see demand decrease in the we’re still seeing demand increasing in, in, again, emerging markets, Asia in particular. I think right right what we really need is some stability in oil prices. That encourages producers to at least start producing a little more to keep up with with so it’s not becomes crushing later on.
Tony Nash
Okay. How do we go and what is that stability oil price? Because I don’t think those two numbers are the same.
Tracy Shuchart
Well, I think $80, $90 range for right now is great. I think OPEC would be thrilled with that.
Seth Golden
That’s what I’ve been saying, OPEC, I think that’s-.
Tracy Shuchart
Would be thrilled with that. How low does it go right now? I don’t know how long. We’ve seen this drastic sell-off reside over the last couple of days. We’ve seen oil prices here stabilizing a bit today and yesterday, even though we had a little bit more of a a I don’t know. I think if you’re looking at $79, I would be a long-term buyer there for swing higher.
Tony Nash
Higher. I thought it was drilling.
Tracy Shuchart
I’m not saying that it can’t. Here is not a bad level either. I think the way… The oil markets are telling you that because the oil markets have stabilized again over the last couple of days. Yeah, we’re moving sideways over the last couple of days, but that drastic sell-off is over. I think people are done.
Tony Nash
So, OPEC’s happy where we we are mid 80’s. Low to mid 80’s. Dollar is happy where we are, 106. Is the world happy with where the dollar is? No.
Albert Marko
No.
Seth Golden
I mean
Tracy Shuchart
I’ll leave the dollar up to Albert.
Albert Marko
I would love to see oil go back down to 75-77.
Seth Golden
That’s my call. I think if I were a step aside long enough to get it down there.
Albert Marko
Yeah. I just don’t buy into these… I mean, last week we were talking to a couple of guys, and everyone last week was like, 120 coming, 150 coming. I don’t buy into these extreme moves, especially when you have OPEC and the Fed playing all these games. They’re not stupid. Saudis don’t want it over 100. The US doesn’t want it under 65. So you pick a range 75-90, 95. We’ve been talking about that for how long, Tracy? A month. A year almost. That’s such a nice sweet spot for everybody. They can do whatever they want with their CPI prints of crushing it down to 75. They’ll make the Saudis happy at 90, ping-pong back and forth. I just see sitting there for quite a long time, to be honest with you.
Tony Nash
That’s good. We need that. We need some stability, right? Some –
Tracy Shuchart
Absolutely.
Albert Marko
It’s crazy, though, because you look at these 6% drops the other day.
Tracy Shuchart
It’s ridiculous.
Albert Marko
What is that? Bitcoin? Is that what we are now? Oil is the Bitcoin market? Yeah, 6, 7% drop is insane.
Tracy Shuchart
You need stability in the oil market. I think think if you’re looking at oil equities in particular, if you’re trading those, that’s what you need to see. You don’t need to see this this volatility, does not help investors and it does not help producers.
Albert Marko
It doesn’t even help the shipping. By the time you ship something two months later, you can have a drastic swing of like $15. That’s way over my head, but I’ve heard complaints where traders had to hedge because they have ships out to sea.
Tracy Shuchart
Oh, absolutely.
Tony Nash
Yup.
Seth Golden
Think of OPEC just like the Fed. OPEC with these announcements that made more frequently this year than I can recall in the more recent past. It’s helped to create, I should say, volatility in the energy market in the same way that the Fed. With their ongoing, every day of every week post an FOMC meeting, we just get these wild swings in the equity markets. It’s realized volatility in the equity markets, not so much in the VIX, which is implied. But that’s how we’ve had these 6% positive swings include in in and then you get the adverse effect as well, mean reversion. But both of these entities with their press conferences and their press releases here and there and interviews with Saudi members and what have you, it’s helping to sustain the volatility that really does not need to be there and is not productive.
Tony Nash
And not helpful for for consumers, Right. People freak out about oil for a few few or gasoline prices, petrol prices for a few weeks, and then they’re relieved. And then they freak out and then they’re relieved. And it’s just uncertainty at the consumer level. Okay, so good. Thanks, guys. So let’s change the topic to a completely ridiculous one, which is a clown show that we call Washington, D. C. We’re going to talk about DC drama and markets. We’ve seen a lot of drama drama in this week. Us politics just doesn’t seem to make sense to foreigners, really. But Americans are in the middle of this. Government closures, House leadership contests, all this stuff. We care, but we don’t care. I could be wrong on on that, I think with every day, we’re just washed over with this news. I don’t know that it really makes that much emotional sense to us anymore. Can you tell us why the Speaker of the House is such an important role in Congress. Let’s dig into that a little bit. Also, where is the American mind on this? Because we have some people from overseas who watch watch and they’re hearing that this this the first speaker of the House that was let go outside of an election in 150 years or something.
Tony Nash
I don’t know. But I don’t know that most Americans really care all that much because of the drama that’s coming out of DC every day.
Albert Marko
Yeah. I mean, McCarthy was hated from both sides. It took him like two dozen votes to get elected to the speaker the first time around. It was a deal between seven or eight GOP members with McCarthy saying, do this, otherwise we’re going to vacate you. And McCarthy thought, and actually a lot of the congressional members that I talked to thought that he was going to be able to survive this. And last week, I’m a senator for shutdown because I didn’t think think would be that dumb to work with the Democrats and face vacation. And so all his famous tweet, bring it on, they brought it and he’s gone and not going to run again. And this is is worse than a shutdown, in my opinion, because now we have a contentious speakership of between three individuals, Scalise, which is basically McCarthy 2.0, Tom Emer, I’m not a big fan of him and his ridiculous Bitcoin antics. I don’t even know who else would be.
Seth Golden
Jordan.
Albert Marko
Jordan is not going to make it. He’s not going to make it. I would probably say Scalise or Emer are the top two guys.
Tony Nash
You know who is? I pay attention to this stuff.
Albert Marko
Yeah. I would say it’s problematic because the speaker is used as the mechanism to bring floor votes to whip up the majority, find the the and pass bills. We have eight appropriate… Well, seven Appropriations bills that need to get get passed. One has to be reworked all before 40 days comes up and a new shutdown deadline looms. The house is not even in session for another week. Take 10 days of that out of the way. You have 30 days to somehow get get bill that funds the government through. Like I said, this is so much worse than a shutdown at the moment. I would rather have a week’s shutdown and some compromise has been found and then get back to the the table get back to work, rather than now we have a speakership race between three monkeys that really shouldn’t even be there in the speakership saying ridiculous things and throwing out Trump’s name left and right. This is just an absurd clown show that we’re having at the moment.
Tony Nash
Is it feasible that Trump becomes a speaker? Yes or no?
Albert Marko
Absolutely not. I don’t want to even hear that stupid.
Tracy Shuchart
I wanted to add that, Tony.
Tony Nash
Tony. Sorry, sorry.
Seth Golden
I think you are potting, Albert,
Tracy Shuchart
The Twitter for the last two days have been like…
Albert Marko
You guys are just trying to give me a heart attack. That’s the color of that.
Tony Nash
I have a question about it.
Albert Marko
Trump has no chance to be a speaker nor should he even be a speaker. He doesn’t know anything about the mechanism about being a speaker. It would be nothing more than a campaign ad for the next seven months.
Albert Marko
This is a stupid idea put on by stupid griifters that we were trying to get into Trump’s favor for the 2024 election. That’s all it is.
Tony Nash
I was just talking about this yesterday with somebody in Asia. Americans see someone like Dianne Feinstein who made made salary for whatever, 35 years in the Senate, but passed away with $110 million estate. That is, I think, a perfect example of how Americans view people in Congress, House or Senate, and how they go to Congress as relatively normal people and then emerge these multi-multi-millionaires. So the frustration —
Seth Golden
It looks extortionist.
Tony Nash
Exactly.
Albert Marko
Don’t vote him in.
Seth Golden
They’re extortionists. Well, any time —.
Albert Marko
If you have a problem about your congressional member making $10 million every five years, don’t vote vote in. I don’t understand what the people are talking.
Tony Nash
My congressional member is Dan Crenshaw.
Seth Golden
What are we going to do about MTVs rock to vote then?
Tony Nash
Right. My congressional member —.
Albert Marko
Dan Crenshaw is a moron.
Tony Nash
I complain about that.
Albert Marko
Dan Crenshaw is nothing more than a corporate chill. He’s a corporate chill.
Tony Nash
That’s right. I can’t get used to it.
Albert Marko
Don’t vote him in.
Tracy Shuchart
But why do people keep voting these people in? This is what what it all mentions, Nancy.
Tony Nash
Because every election they vote.
Tony Nash
We were doing our civic duty.
Tony Nash
Every election that he says maybe —.
Seth Golden
Every time we get to the conversation of politics, I always go back to the same thing. When was the last two-party system that has succeeded in perpetuity for its population might drop? Because it should be be after that. We get to a certain tipping point, if you will, where the structure of the system just doesn’t work to the benefit of the average person. The other aspect of, and why, in my opinion, it’s become so contentious in the turn of the century is I think if you go back to the great financial financial crisis, were already in the deficit, but that compounded the deficit. And then you get the pandemic. And there’s no win here for politicians. When you have a deficit that is entrenched, what can you really do? You’re really just just a that guy who appeases that guy. It’s all a chain of appeasement at this point because we’re not paying our bills one way or the other at the end of the the day. Come out of this to what? $31, $32, $33 trillion. So it’s who can I appease best and can I amass a certain population of people where I can get elected?
Seth Golden
But then it’s just still about appeasement. And at some point, it just becomes unsatisfactory to the general population. And we’re at the point where there’s no such thing as as on a real continuum. It just doesn’t work.
Albert Marko
Bipartisanship is dead. It’s dead.
Tony Nash
Okay, Albert, given what Seth said, does whoever the speaker is even matter?
Albert Marko
Not really. Not in this day and age. It’s more about groups within each party that are controlling something. I mean, the democrats-
Seth Golden
It’s It’s too much within the parties.
Albert Marko
Yeah. I mean, the Democrats are more unified than the GOP at the moment because it’s the Trump GOP versus the rest of the GOP. They’re simply not unified, nor are they going to be unified.
Tony Nash
But I’ll argue you even have have I don’t believe we have a two-party system. I believe we have parties within parties. He’s going to be able have the party and all that stuff. You even have people like Marjorie Taylor Greene who are at odds with Matt Gaetz or at odds withand and these are all Trump people. So not necessarily two parties. There are are Bolsheviks Menshevik within each party. Sorry for that.
Seth Golden
You get stalemates. You get Mexican standoffs and and in perpetuity, year after year after year.
Albert Marko
I would gladly take stalemates with this clown Congress. Gladly. Because honestly, if you’re a corporation and you’re trying to do a five-year to 10-year outlook, I would rather have stable stalemates than extreme policies on the left and the right every time a new Congress gets elected in.
Seth Golden
You could just take line items out of the budget. You could just take line like they did with the Department of Weight and Measures. When was the last time you saw the Department of Weight and Measures in the congressional budget line items? It just hasn’t existed since 2014. Why hasn’t it existed since 2014? Because Amazon literally pays fines to equate to their entire budget. Just find other companies that will satisfy that as well.
Tony Nash
I had no idea about that, Seth. That’s amazing.
Tracy Shuchart
Me neither. That’s insane.
Tony Nash
Okay, so Albert, What happens? So is this intractable environment, one that actually creates some stability for, say, the private sector?
Albert Marko
No.
Tony Nash
No.
Albert Marko
No. Only because we don’t have normal, logical, economic, fiscal policies in act right now. We have insane things going on at the Fed and the Treasury and out of the White House. So we don’t have anything normal happening. So why would we… We have no chance to fix it. That’s the problem that I’m seeing going forward. We have dumb EPA rules, we have dumb immigration rules, we have dumb foreign policy, we have dumb economic policy. So until we actually have a decent congressional opposition to the White House, nothing’s going to get fixed, nothing’s going to get resolved.
Tony Nash
Does this change before, say, 2030? Is this a generational thing where we’re waiting for baby boomers to-
Seth Golden
I think we have to lower our expectations.
Albert Marko
No, baby boomers are checked out. They’re checked out. They’re cashing out of this market.
Seth Golden
We’re just still going to –
Tracy Shuchart
We need GenX to step up people.
Albert Marko
Boomers are using these market rallies. Boomers are using these market rallies for exit liquidity on the backs of millennials and Gen Z, where the GenX are going to have to step up and run the show for whatever’s left until the Marxist progressives are coming out of college and run things. That’s just the way it is. It’s a cyclical thing. I’m not even complaining about it. It’s It’s a thing. It happens in every society, every government. You have extreme right, extreme left, and then it falls back in the center a decade or two later.
Tony Nash
Okay, so there will be a speaker, right? It will not be done with someone, but we will have a a speaker.
Albert Marko
For sure. Sure. Two weeks.
Tony Nash
That will happen happen –
Albert Marko
Two weeks.
Tony Nash
-two or something, right?
Albert Marko
Yeah.
Tony Nash
Okay. Okay. And person is just really a tool to serve as a traffic light for things to work in the house. That’s all they do.
Albert Marko
That’s right.
Tony Nash
Okay. So once that is in, we have… I like a legislature that can’t do that much. Much. So does that mean when this person is in? Are they full scheme ahead, making legislation that we all can’t stand? Or is it a minimalist legislative body where there’s so much disagreement that very little gets through?
Albert Marko
It depends on who’s running the show. If it’s Jim Jordan, nothing’s going to happen at all whatsoever. If it’s Scalise, it’ll be status quo for what McCarthy was doing. Yeah, we’ll get some stuff done here and there. If it’s Tom Emer, yeah, I think it’s probably a little bit more efficient from the GOP side.
Tony Nash
Okay. Not who do you want to win, but who do you think would be the best to win for the functioning of that legislative body? Is it Tom Emer?
Albert Marko
No, I think it’d be Scalise. As much as I don’t like it, it’s Scalise.
Tony Nash
Okay.
Seth Golden
It’s status quo.
Tony Nash
It’s status quo. Okay.
Tracy Shuchart
Better the devil you know than the devil you don’t know.
Albert Marko
Well, the thing. That’s always the case. With Russia and Putin, the DOD guys say, Oh, we can get rid of him. Well, who’s coming next? You have no idea. I know what Scalise is going to do. I don’t know what Jim Jordan is going to do. God knows what he’s going to do. Do. So just the reality of it.
Tony Nash
Interesting. Such as American politics. Guys, thank you so much for this week. This is great. I appreciate your thoughts. Have a great weekend. Have a great weekend. Thanks, guys.
Albert Marko
Thanks, guys.
Seth Golden
Take care.
AI
That’s it for this week’s episode of The Week Ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.
