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In this episode of The Week Ahead, we’re diving into some key topics that are making waves with Deer Point Macro, Tracy Shuchart, and Albert Marko.

First up, Deer Point Macro takes the lead in discussing the mystery behind China’s credit growth. For years, credit growth has fueled China’s economic progress. But recent times have brought some twists and turns. What’s the deal with the current credit growth, and how is it connected to the country’s economic landscape? Tune in as we explore who’s borrowing, who’s extending credit, and how credit markets might just hold the key to fixing China’s real estate scene.

Next, Tracy Shuchart steps in to shed light on Saudi Arabia’s latest move to cut crude supply once again. You might remember we talked about their 1 million barrel cut last month. But now, whispers suggest another extension. What’s the bigger story behind these cuts? Could this signal weaker demand from China? Join us as we discuss whether OPEC is waiting for a sign that China’s demand is on the upswing before easing up on the supply cuts.

Lastly, Albert Marko takes the stage to expose the drama around the upcoming presidential election. Yep, it’s that time again, and the spotlight is on none other than Donald Trump. With the first Republican debate making headlines, everyone’s wondering if it’s truly Trump’s race to lose. But with a hefty 65% of voters viewing him unfavorably, could the Republicans face a major divide? Could they struggle to find a strong contender against Biden? We’ll dissect the major issues that will shape this campaign.

Join us for insights, discussions, and a deep dive into what lies ahead. It’s all happening on this episode of “The Week Ahead.” Don’t miss out!

Key themes:
1. China’s credit growth
2. Saudi cuts crude supply again
3. Trump’s to lose?

This is the 77th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Deer Point Macro: https://twitter.com/deerpointmacro
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

AI

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Tony Nash

Hi. Everyone, and welcome to the week ahead. My name is Tony Nash, and today we’re joined by Deer Point Macro, Tracy Shuchart, and Albert Marko. It’s a really great week. We’ve got a lot going on with the Fed meeting soon and talking about everything in Wyoming. We’ve had quite a few things happening in tech and markets. There are some things that we need to talk about as a carry-over from last week. We talked about China last week. This week, I want to start with China’s credit growth. We’ve seen the CNY devalue even more over the past week, and it’s really important to understand China’s credit growth within that context. We’re also going to talk about Saudi crude cuts. They’ve been extended another month. That’s indirectly what we really want to talk about. As a part of that, we want to talk about Chinese demands, so Tracy is going to cover us there. Then I was going to bring us into the US presidential election. I know that’s over a year away, but I think it’s important to start paying attention to what’s going on. There was a Republican debate this week and a big interview with Trump and Tucker Carlson. We’re going to talk through some of that and figure out really what’s happening in the presidential election at this early date.

Tony Nash

Before we get started, I’d like to cover a couple of items regarding CI Markets, our forecasting platform for stocks, ETFs, commodities, currencies, and economics. On September 1st, we’re raising our prices from $25 a month to $50 a month. Subscribe to that product before the end of August before we have to raise those prices. The second announcement is we have released portfolios for CI markets. This allows you to see your stocks and ETFs and commodities and other things in a portfolio configuration where you can see the forecast for all of those assets on an individual and combined basis, together over a 12-month horizon. You can see the return by month, the expected return by month, the expected total value, the individual stock and ETF and commodity price in each month. It’s really, really interesting. I hope you guys can check it out. If you subscribe before the end of August, you get that with your CI Market subscription. Thanks very much.

Tony Nash

Guys, thanks so much for taking the time for this week. Deer, I want to start with you, and thanks for coming on this week. I really appreciate it. Credit growth has really fueled China’s economic growth for a couple of decades. That’s really not a surprise to anybody. It’s pretty tightly correlated with GDP growth. Recent credit growth looks fairly positive, but GDP looks pretty dire. You put out this tweet this week.

Can you help us talk through what’s happening there. Who has credit to extend and who is borrowing?

Deer Point Macro

Thank you so much for having me on, Tony. To that, I think the easiest way to discuss what’s happening in China now is through this idea of what is known as a liquidity trap. To explain that in very simplistic terms, just think about where the central bank is trying to ease monetary policy to fuel consumption or fuel economic growth. But instead of that happening, you have a hoarding of savings or the paying down of debt. What we’re really seeing in China is there’s not a lot of social demand at the private sector level for credit. Banks obviously have to lend. The only person that really has an appetite for credit right now is the public sector. Essentially, what banks are doing is they’re lending to the public sector. But as we know with what happens in China, a lot of that public sector debt is not utilized really effectively. As a function of that, I think China is seeing extreme contractions in GDP just because they don’t have the ability to actually produce with debt assets that are actually going to help grow the economy. Instead, as most people know, they built things like Ghost Cities or governments essentially doing other things with that money that are not all that effective. When I’m looking at China, I think the easiest way to see what’s happening is they’re just stuck in a liquidity trap and they’re not able to really fuel consumption. With most Asian nations, Japan, China, etc, They don’t have a very high consumption rate in general. These are nations that are much larger in terms of household savings. But the fact is you would think that as interest rates started to come down, whether it be from the private sector and general corporations, etc, you would assume that there would be demand for credit from the private sector in aggregate, but we’re just not seeing that.

Deer Point Macro

It seems like most of that’s being funneled into government entities.

Tony Nash

That’s great to know. Obviously, not efficient credit extension. But we’ve also heard about a mandate over the past week or so where the PBOC has instructed banks to help prop up the currency. Those banks only have so many funds or so much funds. They’re spending some of their funds on propping up the currencies, and they’re extending some of their funds for loans. Can they do both?

Deer Point Macro

I don’t think that they can do both for a significant amount of time. There’s been other things that have happened, as you mentioned, the banks. China also raised, I think it was the one year high bore rate, which is essentially the cost to short the the Taiwan, and they were hoping that that was obviously going to alleviate some of the tensions in the offshore market from shorts. But really, that hasn’t done a lot. Then the third thing that China is actually doing is they’re utilizing FX forwards. Essentially, the PBOC is buying the Taiwan and forward markets as well, hoping that that eases pain. But thus far, none of that has really helped the situation in the Taiwan. Again, I think that at some point these banks are going to have to choose either lending or doing what China is telling them to. Obviously, with the political situation of China, if you go the opposite route, there’s going to be hell to pay. Most of these banks will probably try to continue as long as they can in the sense of trying to facilitate a stronger year on because that’s the government mandate currently. That could to further credit contractions probably going into the next quarter.

Tony Nash

Okay, so you talk about the debt trap, and we have a huge amount of CNY denominated debt domestically. A lot of it, this has continued to roll over from, say, the 2007, 2008 period, very difficult for them to write off, so they continue to evergreen it. Can or is it in China’s best interest to devalue CNY so they can make USD through exports to repay their debt, their CNY-denominated debt, at a devalued CNY? Is that a plausible solution, at least for some of the debt that they have?

Deer Point Macro

I think for China that’s probably the most plausible solution because if we look at overall macro leverage, so just overall leverage in China’s economy as a whole, I think it’s like 228 %, something around there, I believe, off the top of my head, if anybody knows better, please correct me, as a percentage of GDP, so obviously China does need to deliver it. The problem is they haven’t really been able to do that. No, I would agree this is probably the best route for China going forward. The BIS does release those numbers. It should be interesting, again, like I said, in the next quarter, if we do start to see leverage start to come down. Thus far, we haven’t seen that. That data is only up into Q1 of 2023. As of now or the latest data point, China does continue to add on leverage. But I do think that obviously using US dollar exports, et cetera, to help drive down the overall leverage in the system would be the best route for China. But it is most likely as well going to come at the cost of slowing economic growth.

Tony Nash

Yeah. Just so you know, our complete intelligence forecast, we forecast 1,300 assets every week. We have CNY going to about 7.5 by December or in Q1. I can’t remember the specific time, but we do have it continuing to devalue to about 7.5. I think that would really help with some runway for them to pay down some of this legacy debt. Now, you mentioned that 200% debt to GDP. That, I don’t believe includes these local government finance vehicles, right? Those LGFVs. I mean, this is something like… I mean, officially it’s $2 trillion. I think it’s probably double that in reality. Is that included in the debt to GDP number that you’re talking about?

Deer Point Macro

No, it’s not. If you started to include that, I believe when we look at it, it would probably be much worse. That figure includes things like central government debt, sorry, federal government debt, as well as the entirety of the private sector. You have things like household and corporations in that figure. But no, the locales aren’t actually or the municipalities aren’t included. If we were to include that, like you said, it could probably be somewhere in excess of $8 trillion. That figure would just… It would worsen it overall. The problem is China is having this massive increase in macro leverage. But at the same time, what we’re actually seeing, and I put out something on that as well, if you purchase power, parity, adjust, China’s productivity metrics, productivity is starting to come down. So it’s declining as well in terms of overall output, and it has been for a very long period of time. I think one function of that is, China has been using a lot of money, but it hasn’t been at the expense of adding more capital per worker, etc. So as a function of that, what you’re getting is you’re getting a declining labor force and capital consumption or the depreciation of capital that’s depreciating at a more rapid pace than population growth.

Deer Point Macro

What you’re essentially having is you’re just continuously having lower and lower productivity that’s coming out of China. I think that that’s obviously going to continue to hurt them as well. Because me personally, I’m a big believer in Robert Solow’s, the solo growth residual. I think absent some of these factors of production and increasing the capital stock, and if you use debt in the right way, you can get massive payoffs. But if you use it in the wrong way, you’re just going to continue to have to divert future income and current income to the repayment of useless debt. I think that that’s where most of the world is. The US, as Lacey, Hant, has said, is in a very similar situation. But China is probably three times as bad as the current state of the United States.

Tony Nash

I just want to interject here. I think it’s easy for us to poke at China with the assumption that these guys just don’t know what they’re doing. There are incredibly, incredibly, incredibly smart people in think tanks, in the economic planning unit and other places in China. They have some of the smartest people in the world focused on these problems. But the political reality in China is one that does not allow them to do what we would normally do in an economy with an open account. These guys aren’t stupid. They’re really, really bright. One of the things, and this is a favorite topic for us here, so I want to bring you into this is there have been there’s been a lot of discussion this week about the Bricks meeting. Albert’s about to laugh here. Yep, a big eye roll. We had Brazil’s President say that countries want to use their own currencies and people proclaiming the death of the dollar and all this stuff happening. What does, say, a BRX currency usage look like? Does that look like a single currency? Or does that look like an atomization of emerging market currencies used for cross-border debt and trade?

Deer Point Macro

Yeah, that’s a good question because I think that when you talk to people who are very pro-bricks, they don’t even know the answer to that question. Some people say it’s going to be this commodity-backed currency. Okay, if you believe that it’s going to be gold, because most of these people believe that for some reason it’s going to be gold. What’s very interesting is Alpine Macro actually put out a chart on this, which I believe is a Montreal-based sell-side shop. But essentially, if you were to look at gold as a percentage of total reserves for bricks and aggregate before they added these other six, bricks and aggregate, about seven % of total reserves are gold. You take the G7, it’s about 45 %. Right now, China alone has, I think, as a percentage of total reserves, gold accounts for about 4% of that. Saudi Arabia, who just joined because I did something on them recently, I know the number off the top of my head, their gold reserves as a percentage of total reserves is 10 basis points. When you start to look at these things, I don’t think it’s going to be gold. The next problem is, well, can it be the Wang?

Deer Point Macro

Well, the Wang doesn’t have… They have capital controls, so that wouldn’t be very efficient. Obviously, if China did open or get rid of capital controls, you would see a max exodus of money from China. That would come at the detriment of Chinese growth and the Chinese economy. Then for me, it’s like, well, what else are they really going to do besides settle trade and these currencies, which is all fine and dandy. But one of the greatest or one of the most ironic aspects of this is if you look at Argentina and Brazil, people who have been using settlement, what you actually see is you’ve now seen a spike in PBOC swap lines. What seems to be happening is these people are more than happy to settle trade in year one. But after they hold these, and I know Albert talks about this as well, it’s not like the euro dollar system where you can essentially create liabilities and you can do something with that. They just sit on the balance sheet of these banks, so they’re pretty much useless. What then happens is all of these central banks go, Okay, let’s utilize swap lines and swap these Taiwan back to the Central Bank of China and get dollars back.

Deer Point Macro

The funniest thing about Argentina as well was it’s like, Let’s use Taiwan to pay off all of this debt, but then let’s get a $7 billion aid package from the IMF that’s in dollars. I don’t think that this is really going anywhere besides settlement. But settlement and other currencies has happened for a long period of time. But I tweeted about this today, but what I care more about is invoicing, which in very simplistic terms is, what’s the denominator of foreign domestic exports? What’s that vehicle currency that’s being used? Nobody is invoicing in any currency other than the dollar because I just don’t think that it’s possible. You would have volatility without getting too complicated. But that affects things like exchange rate pass-through. If you have massive volatility and exchange rate pass-through, it slows domestic exports. It changes the pricing of domestic exports, and then you have a real crisis on your hands. Even in terms of invoicing, I think that’s much more important than settlement. If Bricks comes out and says we’re invoicing an X currency, that will be where things start to get more interesting.

Tony Nash

Yeah. I just want to ask all three of you guys. Okay, of the BRICS currencies, if they had to choose one to be the main vehicle for them, which one would it be? Now it can’t be the CNY because they’d have to open their capital account. Let me do that. CNY, Brazil Real. Raise your hand when I say one that would be vital. CNY, not you, dear, of course. CNY, Brazil Real, South African Rand, Russian Fun Tickets, and Indian rupee. Like Indian Rupee.

Albert Marko

You forgot horse shit. That’s what it is. That’s the answer. It’s horse shit.

Tracy Shuchart

I think you could do the Indian Rupee, but I don’t think they’re interested to be in the mix.

Tony Nash

Right. Let’s talk about that. Brazil, Real. I mean, nobody wants to real, right? Not even Brazil. They’re going around, same thing. Nobody wants… Those central banks are just not credible.

Tracy Shuchart

They’re all just-.

Tony Nash

Russian Ruble, same thing. Not a credible central bank, not a credible currency. The only one, even the PBOC, honestly, not a credible central bank. Smart people, but they’re so mysterious, not a credible central bank. The only one that has a credible central bank is the Bank of India. Am I wrong?

Albert Marko

If you put a gun to my head, that would be the only one. But we’re talking about a group that some of their members are defaulting on debt. Other members have militaries piled up on the mountainside against the Chinese border. Other ones have civil war. What are we talking about? What are we talking about? This isn’t like a group of France and Italy and Germany getting together with China. None of that’s happening. We’ve gone through this whole cycle of gold is going to dethrone the dollar. And then it was the Europe and then it was crypto and now we’re back at gold. When do we just stop this horse shit nonsense that people pedal out there saying the dollar is going to die of some horrible death and China is going to take over with bricks. It’s just simply not going to happen in our lifetime.

Tracy Shuchart

Albert Welles and chose violence today.

Albert Marko

Every time I wake up in the morning in Twitter, there’s this new BRICS guy coming out, and some people selling a newsletter about the dollar going to die of the horrible death to the Chinese. There are so many geopolitical issues that have to happen. There’s so many food security issues that have to happen, debt problems that have to happen, so on and so forth. We are so far away from the dollar dying that none of us are going to see this in our lifetimes. I’m really… On one hand, I’m just pissed off. On the other hand, I feel really sad for retail investors and youth coming up in the educational systems that hear this crap coming out of people’s mouths.

Albert Marko

My point of view, it’s not going to happen. It’s not worth thinking about. You want to talk about vacuums and trade and geopolitical issues, where the Chinese and the Indians can patchwork themselves in? Sure. But that’s only until the United States gets their act together.

Tony Nash

It’s not the margin, right? I mean, it really is. It’s some marginal cross-border activities, and like Deer said, ultimately, they end up converting it to dollars anyway.

Albert Marko

If the Japanese and the Sweden want to interact on any trade, that goes to the New York Fed to get converted. Otherwise, it doesn’t work. That’s what people don’t understand. Snyder talks about this multiple times in his Eurodouble University thing. That’s just the way the plumbing works right now. And there is no other mechanism that can dethrone that at the moment. I’m not saying something can’t happen in 100 years or whatever. At the moment, that is how it works. It or not.

Tony Nash

Yeah. Look, if the euro hasn’t dethroned the dollar, and there are some very smart central banking people in Europe, if the euro hasn’t dethroned the dollar over the last 20-some years, then the CNY is not going to dethrone the dollar.

Albert Marko

That’s exactly right. I mean, Europe has had a bustling economy with manufacturing and purchasing power for their citizens. I mean, they had every component there except for the military geopolitical part. And it failed. Now it’s half the size of what it was versus the United States market. If you can’t look at that and say, What’s China going to do? Then I can’t help you people anymore.

Tony Nash

Okay.

Deer Point Macro

I would be- What.

Tracy Shuchart

Else is – problematic for CNY is also the fact that they’re known as currency manipulators, and this does not help them in the long term trying to be seen international currency. What we’re seeing right now is exactly that happening, and it rears its head every once in a while. If CI Futures is right and we go to 7.5, for a fact, that’s pushing the limit of…

Albert Marko

China’s economy is 400 or 500 times leveraged. What are we talking about here? China.

Deer Point Macro

And then to, and maybe, Tracy can speak about that as well. But even to India, which we all agreed would be the most practical currency to settle trade in. What was it? A month ago Russia was like, Hey, we don’t want to take payment in rupies because the rupee was depreciating. Now you have Iran joining and it’s like what? People are going to take Iranian, Tolmond in the settlement of trade, which is devalued like a million %. I mean, not really, but obviously that currency has become an absolute cluster. It’s like, how are they going to settle trade? I think with the UAE and Saudi Arabia joining, those would actually be the only two currencies that would make sense. But again, both of those are hard pegged to the dollar. So essentially, you’re still trading in dollars. You’re essentially…

Tracy Shuchart

Trading in dollars.

Albert Marko

The only reason they would even consider the dirum and the Saudi is just because in the real is because it’s pegged to the dollar. Forget about debt.

Tony Nash

Maybe they’ll ultimately back into that. One thing I want to go back to, Tracy, you talked about trying to be a currency manipulator. I’m sorry, the other side of me is going to say this. Everyone’s a currency manipulator. I know. The US is a currency manipulator. Everyone’s a currency manipulator. But they.

Tracy Shuchart

Have to be careful how much they let the Yuan go because everybody’s watching that. Because everybody knows they’re doing that to help their experts, et cetera, et cetera. It’s just a little bit more obvious where they are concerned. We all know that.

Tony Nash

Yeah. That’s fair.

Albert Marko

But yes, that’s. The Renminbi is nothing more than a Ponzi arbitra scheme for more dollars for the PBOC. Absolutely. That’s all it is.

Tony Nash

Yeah, absolutely. I just wanted to say that because I know in fairness, people will make comments saying.

Tracy Shuchart

Oh, no. Yes, I agree with you. Everybody’s the manipulator.

AI

Heads up for a short break.

AI

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AI

Thank you, and now back to the show.

Tony Nash

Okay, great. Let’s move on to crude oil. Tracy, last month we discussed Saudi Arabia extending their million barrel-a-month cut into September. There’s been chatter this week about another extension of Saudi’s cut into October.

I know that on the face of it, that’s a thing. It doesn’t really matter that much. It’s more the same. I’m just wondering, is there a bigger story here? Is this indicative of Saudi worries about crude demand?

Tracy Shuchart

I think that not necessarily. I think Saudi Arabia right now feels very in control of the market for the very first time in a very long time. I think that’s good news. That is good news for them. I think they realized after many years of having tips and flooding the market, that didn’t really work out for them economically as well as they may have expected. Really at this point, I look at this as in really this is Saudi Arabia is feeling very in control of the market right now. They are the swing producer. I know we’ve seen all these… EIA recently said, it expects this big production increase from the US. I have mentioned on prior weeks that I think will probably start seeing less production in Q4, and they’re a little bit more optimistic than perhaps they should be at this point, which would not be very surprising. 

Tony Nash

On the one hand, we have Atlanta Fed GDP now, which is forecasting like 20% GDP growth for the US in Q3, right? It’s actually more like six, but it’s ridiculous.

Tracy Shuchart

Yeah, we get it at 5.9%. But.

Tony Nash

Then we have what appears to be the bottom falling out of China’s economy. Over the past week, we have Brent that’s I think it’s trading at 83 today. It’s down or something this week. Even with this announcement, crude prices are falling. Is it possible that Saudi Arabia or OPEC or somebody piles onto more supply cuts given some of the uncertainty, especially in China?

Tracy Shuchart

That could be an absolute possibility, although we are starting to see bigger pickup in, say, freight, demand and flight demand coming out of… I think I posted something today being Thursday about we are seeing a pickup in areas in China that would affect fuel demand, which is very interesting.

I think that if we look at overall commodities, people are starting to get interested in the commodity sector again, money is starting to pile in as far as ETFs. We’re also seeing the CRV index hasn’t been falling. If you look at this, China is going to bring down the entire world because of its poverty and explosion, and we’re all going to go into this big depression, big of the bit. No, no, no. Crv index, it’s still maintaining levels pretty well and well above the 200 A of your technical person. I think that things are not as dire as one may think. Again, this narrative that we’re all way into this what a recession, which has been the narrative for most of this year for the oil and gas markets, that still hasn’t really gone away.

Tony Nash

Okay, so I’m looking at your tweet now, and it says that China’s freight volume expense is 7.1% year-on-year. But isn’t that against a China that was effectively closed a year ago?

Tracy Shuchart

Well, absolutely. They say that as well. But those numbers are up from when they were in June as well. We’re seeing a little bit of a pickup there. We are seeing a bit of pickup if we look at the flight data. Domestic demand is a little bit below 2019 levels, If you look at international travel, they just opened up international travel. A while, we’ll probably need another month to really see how that data factors it.

Tony Nash

Okay. Are you seeing strong… What’s your expectation for crude demand? Do you think we continue where we are? Do you see strong growth into the end of the year? Do you see uncertainty? I guess in general, what’s your feel for crude demand?

Tracy Shuchart

Yeah, well, I think we talked about this in another episode where I said I thought that China demand has been very strong for the first three quarters of this year, but I do expect Q4 for that demand to come off because they have been stockpiling. Because I think I believe that when they issue new quotas for the tea pots, it’s going to be less. That’ll be the end of August. We’ll have to see. I could be wrong. That’s just my gut feeling that we’ll probably see demand from China queue for subside a little bit. That’s seasonal as well. I don’t think that’s going to really affect global demand entirely.

Tony Nash

Okay. The other part is given the issue with dollars in China and defending their currency, do they want to spend their dollars on crude since they have so much stockpile?

Tracy Shuchart

Of course not. They don’t need to. They have enough stockpile to have it. They can essentially pull back on purchases, even with their demands being the same as it was all year. Even if demand increases in China, they can effectively pull back on purchases because they have been stockpiling in their SPRs, in other words.

Tony Nash

Okay, great. Albert, Deer, do you guys have any thoughts on crude demand and China demand going to the end of the year?

Deer Point Macro

I just have a question for, unless if Albert wants to go first, but I have a question for Tracy.

Tony Nash

Go for it.

Deer Point Macro

Yeah, so, Tracy, don’t you think that if you’re the Saudi’s, and I know Laurie Johnson put out a piece on this today, or not really a piece, but somebody was essentially saying Saudi Arabia, the central bankers of oil, but now it seems like they’ve lost their ability to be able to control volatility. But what’s interesting is that when we’re looking at what’s happening, you’ve had oil at this let’s say $70, $80 range for months now. But even with that, Saudi Arabia, their fiscal balance is continuously in a deficit. I assume some of the cuts are to that because MBS is spending money like crazy and they’re essentially trying to balance the budget. But now what’s happening is the higher it seems that they are… The more cuts they do, the higher it’s going to take their breakeven price. It seems like they’re essentially digging themselves into a hole. Then I’m wondering, okay, and somebody brought this point up to me as well. Let’s say oil stays trade or range-bound. Do they just flood the market with oil to essentially get a cash injection into themselves to help smooth over the fiscal situation from where it’s standing today?

Deer Point Macro

Because I focus on the Middle East just as a function of family ties, but everybody thought that they were going to just be printing money. When you compare it to the rest of the Gulf, it seems like they’re having a bit of an issue just from smoothing things over. I’m not sure if you have any thoughts on the possibility of something like that where they just flood the market just to get a cash injection to try to help smooth over the fiscal aspect because their break-even price, I believe now with the cuts is like almost $90 or something around there.

Tracy Shuchart

Oh, their fiscal break even? Yeah, the fiscal break even is high. Yes, they are needing cash a little bit. Do I see a scenario where they’ll flood the market again? No, absolutely not. I think they learned their lesson. 2020 was a horrible experience. I think they feel more in control than anything right now. And you know what? It’s filled the gap of that, of the deficits in whether they’re making in crude oil, they’re getting back in dividends from a ranfo. And that’s filling that financial void, so to speak. And so I do not see a scenario at this point, and they’re still making money on the dividend side as being investors in a ranco, even though it’s state-owned. How they work that investment within their own country means they’re getting back money from a rampo via a dividend, believe it or not. That’s actually filling that fiscal void.

Deer Point Macro

Last question here. If you were to look like project out into the future of possible nations that look attractive from a commodity standpoint? Me personally, I’m slightly biased and I have political biases as well. With that being said, I do not favor Saudi Arabia personally, but we won’t go into that. But if I’m looking at places like Qatar or maybe even Kuwait, do you think that those might be, or the UAE even, do you think that those might be more attractive opportunities? Obviously, there are ways to get access to those as well, just from going into the year. Or do you think that Saudi Arabia is going to be the outperformer in terms of OPEC nation? I know Qatar isn’t part of OPEC, but just let’s just say.

Tracy Shuchart

If we’re talking about Qatar, that’s more of looking at the gas point because they did leave OPEC. If I were looking for opportunities and markets that would… I would probably be looking in markets that were under talked about and not so established. I think we talked about Aza-Vijem before, especially as far as gas is concerned to Europe. I think some things have been very attractive in Africa, even though there is huge geopolitical risk there. But I think there’s a lot going on there as well. As far as if I was investing in natural resources, I think Saudi Arabia is always going to be your state and.

Albert Marko

Your gold standard?

Tracy Shuchart

Your gold standard, yes. Your oil standard, your gold standard, they’re always going to be fine. I mean, Aramco is on its way to be the second largest company in the world. Again, if I was an investor, I’d be looking for opportunities probably outside of those big nations that they were already looking at and that we have been looking at for 100 years.

Albert Marko

It’s hard to get around Saudi Arabia, especially in the Persian Gulf area, because, I mean, Aramco does such big deals and they lock in the oil trade all over the area. I mean, the Dubai is pretty much subject to whatever the Saudi want to do. Qatar also, I mean, they have political ramifications if they ever decide to split off from the Saudi’s. Aramco had just a huge tender from what the rumors were in Iraq, and they locked up that supply too. So it’s really hard to get around Saudi Arabia in my opinion. I have a small budding oil brokerage firm developing at the moment, and the supply is just so tight. Even with the Chinese, most likely going to come off a little bit just because of their economic situation. In Q4, the supply for Q1 and Q2 in the next year is just taken everywhere from jet fuel to diesel to whatever refined product you want to even quote out.

Tony Nash

Even if demand isn’t there, say, from China.

Tracy Shuchart

It doesn’t matter. 

Albert Marko

Taken into it. It doesn’t matter.

Tracy Shuchart

It’s hard for these cuts to filter in. That’s what people don’t understand. We’re just starting to see June cut. Forget about the July, August, September new cuts from Saudi Arabia. That isn’t even.

Albert Marko

People are overlooking or not talking about as much, at least in the public and Twitter domains of how bad the shortages are because of the Turkish pipeline being shut down in the Mediterranean. Because it makes all the costs going from Basra to Fugira around to the Suez and up into Europe exponentially more expensive. And nobody really discusses that. I know that there’s diesel shortages in Europe, in Northern Europe at the moment.

Tony Nash

Great. Think we could talk about this for another hour. This is a topic, and we’ll resume this maybe next week.

Tony Nash

I want to move to a completely different topic, and this may be the PG-13 section of the of the show. I want to start talking about the US election. I want your unedited version of the US presidential election. Last night, this is Wednesday night in the US. Donald Trump was on Tucker Carlson for a very softball interview. The rest of the Republican candidates had a debate.

I’m really curious, what are your thoughts right now? Because the prevailing narrative in the US is that Trump has this massive lead on DeSantis and everyone else, and that Ramaswani is overtaking DeSantis and all this other stuff. Can you help us think through what’s actually happening?

Albert Marko

Listen, Vivek Ramaswani, he’s a car salesman. He says all these ludicrous things that the generic voter of the Republican Party likes to hear at the moment. But once you start getting into the weeds and the details of some of his policies, they’re just absolute insane. And then it won’t happen. Not that they’re insane, they just won’t happen. Like, getting rid of 75 % of the government and being non-interventionist across the world and this and that. He’s just full of shit. It’s a guy that I don’t even take seriously at the moment. From my opinion, this is a DeSantis-Trump two-way race at the moment. The media is desperate to not allow DeSantis to get any momentum because if he does beat out Trump for the GOP candidacy, Biden’s got no chance. And the media knows this, the Democrats know this, all the polling out there, whatever they want to throw out, I don’t believe not even a single poll out there at the moment. And it’s still a little bit too early. This is still fundraising season for most of the candidates. I know they had this first debate. I didn’t even bother to watch it.

Albert Marko

I saw some types of notes and whatnot. But until late September, October hits when things get serious and money’s really starting to get spent, then we can talk about what the polls look like and so on and so forth. But there’s a lot of complexities to the US election, specifically the primaries that people don’t really quite understand, especially the European audience and the Asian audience, actually, even some of the Americans. In some of the states, it’s not a Republican versus only Republicans in the primary to vote. They’re open primaries. Some states don’t even have registration of a Republican or Democrat. So you have no way of polling somebody in one of those states like Wisconsin, for instance, to say, Oh, yeah, the Republicans nationally like Trump by 74 points. Well, it’s not a national race. It’s a state-by-state delegate race. And on top of that, some of them are proportional versus or all or nothing. So the proportional races, if Trump doesn’t win the outright majority, well, okay, he might win 40%, but then 60% of the delegate vote is for not Trump, which they’ll end up consolidating towards DeSantis, in my opinion, in some of those states. It’s a little early.

Tony Nash

We have these guys like Assa Hutchinson and these sorts of guys who are in, and there’s no way they can win. Why are they in? Why are they in right now? Why are guys like Tim Scott and these guys, why are they in the race right now?

Albert Marko

Well, different reasons. Tim Scott and Vivek are most likely running for a vice presidential seat. Assa Hutchinson is looking to raise money and then distribute it out to whoever the leader is where he can get political favors at that point because they take that money. The money they don’t spend it can actually donate it to a PAC or a Super PAC to whatever candidate and whatnot, and then they get political favors and that and the return for that.

Tony Nash

Okay, so that makes sense. When do some of these guys at the bottom say with, say, 3% or less, when do they start dropping out? Is that October?

Albert Marko

October. That’s when the money starts running out. Desantis and Trump obviously have the most money of the two candidates, and that’ll start showing in advertisements and debates and so on and so forth.

Tony Nash

Okay. Do you know how much DeSantis and Trump have raised? Is that posted or reported?

Albert Marko

It’s posted somewhere. I don’t know offhand of what the numbers are, but I mean, like Ken Griffin came out and said DeSantis has all the money in the world he needs to run.

Tony Nash

Okay.

Albert Marko

Then if you compare that with Trump, Trump is going to be really looking for grassroots donations, but that’s not going to be really enough to offset some of the corporate spending. And certainly Trump is not going to use his own money to run this time around.

Tony Nash

Right. Yeah. A lot of these stories saying that DeSantis should just drop out, this thing, when you see that stuff, what do you think?

Albert Marko

I immediately think that they’re manipulated post media narratives. They’re planted on purpose. I know people that used to do this for a living. I know the game of how that works. They call up a couple of anchors, a couple of journalists and say, Hey, here’s a sack of cash. Run the story. And that’s just the way it works.

Tony Nash

So do you think that the DeSantis campaign is wise to that? And that they’re… All these guys saying DeSantis should drop out. Are they just trying to do that?

Albert Marko

When have we ever heard of a top two or top three candidate so early being told to drop out? I mean, Biden and Bernie Sanders and Elizabeth Warren were in a three-way race for six months, and no one said one of them should drop out. The only people saying that is so they consolidate the votes to their preferred candidates, and they don’t want DeSantis to run.

Tony Nash

Okay, so since we’re talking about DeSantis, I want to ask two questions. First, I want to ask, why does Trump fear DeSantis? Or does he?

Albert Marko

He, of course, he fears DeSantis. Desantis is a popular candidate, especially with the independence. I mean, everyone wants to look at the Republican votes, so on and so forth. What about the independent vote? Independent vote is like 60-20 in favor of DeSantis at the moment.

Tony Nash

Okay. And the independents are usually the swing in elections.

Albert Marko

Of course, especially in the Rust Belt of Wisconsin, Pennsylvania, Michigan, so on and so forth. A lot of the states that have open primaries, a lot of the independents voting candidates.

Tony Nash

So why do the Democrats fear DeSantis? Or do they think he’s a joke or do they fear him?

Albert Marko

No, they fear him. He’s been an effective governor for years since COVID. He’s completely destroyed their COVID narratives and the state’s been bustling. Tracy and I both live in Florida, and we can attest to it. This state is just buzzing. The real estate market’s up, the job market’s up, the migration is up, construction is up. I don’t think the only city that’s lost population is Miami because Miami is well, Mimi.

Tony Nash

Because crypto guys went back home. Yeah, exactly. Albert, while you’re on this, I just want to do a promo for Florida as a destination. If you’re moving to California.

Tony Nash

I just want to encourage you to move to Florida because it’s so beautiful. Just go right past Texas and go to Florida. Deer, you have your hand up.

Deer Point Macro

Yeah, I got a drop in a minute, but I did want to ask Albert a question. I’m young. I’m in my late 20s, but I’m born and raised in South Carolina. I lived there for 24 out of the 28 years of my life. I feel that when I look at Nikki Haley, even yesterday, I feel like she’s the only one that really on the stage actually had a bit of a plan. It seemed like DeSantis was very scripted. I think she was right to point out that Veevik has essentially no international relation experience. She strikes me as really a traditional neocon in South Carolina is very famous for those even McMaster, etc. And so when I look at her, she reminds me somewhat of the GOP after Reagan before Trump, in the intermediate up to Bush. But I’m not sure if you have really any thoughts on her. But me personally, I’m biased. She was my governor. I like her as a person.

Albert Marko

She wrote a book not too long ago, what, like three, four years ago that was critical of the Republican Party, specifically Trump. She burned a lot of bridges. She’s not going to have any donors to support her because of that. She took an educated guess and a gamble of going against Trump early on, and then that backfired on her. And at that point, her political career as a presidential candidate is pretty much next to nothing at the moment because of that. So she’s most likely running for DeSantis’s VP spot in my opinion.

Tony Nash

Yeah, dear, I’ve heard the same that she upset so many people in the National Republican Party. Yeah. She burned so many bridges that she could have popular support in some areas, but the party will never support her.

Albert Marko

No.

Tony Nash

With the way she treated some people.

Albert Marko

Yeah. You don’t write a book and then air out all the grievances for money and get away with it in the Republican Party or the Democratic Party for that matter.

Tony Nash

If you’re a politician, you have to play party politics.

Albert Marko

Yeah, I could write a book right now and up in both parties if I really wanted to, you know what I mean? But I don’t want to be a target. But she needed the money and she did, and that’s that. She has to look at the consequences politically.

Tony Nash

Okay, so, Albert, we’re going to wrap this up because it’s early in the election cycle. But if you were to give people some advice, especially the people in, say, Europe and Asia who have opinions on US politics, one would be national polls are worthless right?

Albert Marko

Yes, they are.

Tony Nash

Okay. The other would be a lot of the guys on the Republican side who are in are probably in for three more months and then they’re out. Is that right? Absolutely.

Albert Marko

That’s correct. Most of it is fundraising. Other guys are in there for hopefully a VP spot or even a cabinet spot.

Tony Nash

Right. And so that’s the third thing. Watch the fundraising. Watch the fundraising. The fundraising is what allows these people to last.

Albert Marko

That’s exactly right. I mean, you’re not going to be able to take a taxi cab from South Carolina to Wisconsin to go to a rally. You need planes, you need grassroot offices sprinkled around you need advertising campaigns. You need people on the ground. That’s just the way it works. If you don’t have money, it’s a pointless endeavor.

Tony Nash

Good. Okay. There’s more to come here, guys. We’re early in this election cycle. Albert is a political expert. I don’t know how much you know his background, but he is a political expert. And so we’ll draw on him more and more through the US presidential campaign season. So, guys, thank you so much. I know Deer is gone, but he’s incredibly valuable. And we love his insights. Albert, Tracy, thank you so much. You guys are really generous with your time. So really appreciate this. Have a great weekend and have a great week ahead.

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.

In this episode of The Week Ahead, Tony Nash hosts a discussion with Tony Greer, Albert Marko, and Tracy Shuchart, covering various market events and trends.

Tony Greer explains the concept of a bear steepener, which is causing a necessary rotation in the market, with tech stocks and the AI bubble deflating while natural resources and energy hold their ground.

The panel discusses the current market pullback, viewing it as orderly and temporary. They mention the spike in the VIX, indicating increased fear, but not impending doom. Tony Greer expresses bullishness in the oil market, citing tightening gasoline spreads and the strength of the physical oil market.

Tracy Shuchart agrees with Tony Greer’s assessment of the oil market, emphasizing extreme backwardation and market tightness. Tony Greer expects a continuation of the rotation out of tech stocks and a potential further pullback before finding a comfortable bottom for the S&P 500.

Tony Greer discusses his bullish view on the equity market, expecting a pullback in the tech sector due to bubble sentiment. Albert agrees and believes China will act decisively to address the current situation. They mention China’s potential sale of treasuries and discuss various developments in China, including domestic weakness, deflation, and Evergrande’s bankruptcy filing.

The episode also touches on the potential impact of selling Chinese treasuries and the belief that other countries, including the US, would buy them. They discuss China’s potential sale of overseas assets and domestic political dynamics. The conversation briefly mentions the depreciated Japanese yen and its impact on China’s export competitiveness.

The discussion then shifts to crack spreads and refinery capacity, with Tracy explaining their significance and the underlying issues caused by underinvestment. Tony Greer expresses bullishness on energy due to strong gas demand and potential disruptions in refining capacity. Tracy mentions the potential impact of companies requiring employees to return to the office on gasoline demand. Albert adds that a potential slowdown in China could temporarily bring oil prices down.

Key themes:
1. Bear Steepener
2. China death spiral
3. Your crack(spread) is showing

This is the 76th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Tony Greer: https://twitter.com/TgMacro
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

Tony Nash

Hi everyone, and welcome to The Week Ahead. I’m Tony Nash. Today, we’re joined by Tony Greer, Albert Marko, and Tracy Shuchart. We’re going to talk through a bunch. There’s been so much happening in markets this week with China, with US markets, with bonds, all sorts of things. We’re going to talk through the Bear Steepener with Tony Greer. He’s going to take us through that. Then we’re going to talk about the China death spiral with Albert, which sounds really bad. Then we’re going to talk about refining and crack spreads with Tracy Shuchart.

Tony Nash

Before we get started, I’d like to cover a couple of items regarding CI Markets, our forecasting platform for stocks, ETFs, commodities, currencies, and economics. On September first, we’re raising our prices from $25 a month to $50 a month. Subscribe to that product before the end of August before we have to raise those prices. The second announcement is we have released portfolios for CI Markets. This allows you to see your stocks and ETFs and commodities and other things in a portfolio configuration where you can see the forecast for all of those assets on an individual and combined basis together over a 12-month horizon. You can see the return by month, the expected return by month, the expected total value, the individual stock and ETF and commodity price in each month. It’s really, really interesting. I hope you guys can check it out. If you subscribe before the end of August, you get that with your CI Market subscription. Thanks very much.

Tony Nash

Guys, thank you so much for joining us. It’s been a pretty crazy week, and I can’t wait to sort through this stuff and really understand what this means for really next week and the week after. Tony, when I was talking to you about this earlier this week, you started talking about a bear steepener. We’ve seen equities fall 5% since their peak on July 31.

Tony Nash

Two weeks ago, all the bears were hiding. The last bear said, “Oh, no, we’re not going to see a recession anymore” or whatever. Today, the bulls are slightly less vocal. Things have changed just a little bit in terms of, I think, the sentiment. Earnings this quarter were okay, I mean, depending on the sector, but they weren’t stellar. We’ve seen margins collapse a little bit. We’ve seen our compress a little bit. We’ve seen earnings a little bit harder to get. Rates are rising, of course. CPI is slowing, but it’s not really where the Fed wants it. Employment is still tight. Atlanta GDP now says we’re going to go at 6% this quarter, which I don’t know of a single person who believes that, but everyone likes to point to that number. You’re telling me that we have a bear stepener. Can you walk us through that? What exactly is a bear stepener and why are we here?

Tony Greer

Yeah. Now, I’m not an expert on the bond market tone, but I’m just saying- That’s okay. Yeah, this is what I see as affecting the equity market. The bear stepener in bonds is very simply the fact treasuries are trading off, that’s the bear part. Rates are going up, treasuries are going down. Steepener is the fact that the curve is steepening. The two’s tens curve has traded from about -85, 90 basis points back to about -65 or so basis points. That’s a sharp increase. Remember, we had it buried at -100 basis points for a lot of the year. This steepener is what woke up the VIX. The volatility picked up as the curve steepened and rates rose. In my opinion, that was direct response to the Fitch downgrade, which every analyst out there is saying, No, the downgrade doesn’t mean anything. I can point to markets that are moving in direct response to the ratings downgrade. I feel like we are experiencing an extremely violent rotation. I shouldn’t say that. A fairly violent rotation in equity is not as much a curl-over-sell-off. What the Bear-steepener is doing is just adjusting to what the markets are looking at inflation now, the way the markets are looking at inflation now and looking at the economy.

Tony Greer

While I’m not an economist, I think it’s fair to say that the recession fears have been put off for another day, and inflation, like you said, is not exactly going back in the bottle, certainly. We just got the first uptick in CPI in several months. This is the stuff that’s shaken up the bond market. When the bond market gets shaken up, especially in the long end, portfolio managers are going to react. That’s what I see as going on now. It makes total sense to me that some of the air should come out of the AI bubble that we’ve just blown and tech should back off. It makes perfect sense to me that some of the natural resources, names, and energy are actually holding ground during the sell-off, not backing off much. It makes sense to me that home builders finally backed off their highs with rates in the long end, rallying sharply. To me, this is a necessary rotation. Maybe the market was off sides in a couple of different places, but I think that that’s what the market is reacting to. I think that we probably have a little bit more to go before we find a comfortable bottom, again, the S&P that we can trade off of.

Tony Nash

You’re not a bonds expert and you’re not an economics expert, but you sure sound like it.

Tony Greer

I have a strong opinion on some of it, though.

Tony Nash

Yeah, you do. That’s good. In this pullback, would you say this pullback is fairly orderly in the way it’s happening?

Tony Greer

Yeah, I would, Tony. Until this week, we didn’t get any large downside extremes in the Tick Index, or at least they were scattered. That usually means agnostic selling when we are hitting bids across the board in the stock market. The last four days, we’ve finally seen some downside extremes wider than -1500 in the Tick Index. We finally got the VIX to wake up and approach 20. I think it got to a high of around 19 today.

Tony Nash

That’s crazy.

Tony Greer

Yeah, exactly. Vix at 19 isn’t generally an end-of-the-world trade. That’s why I’m looking at it as a fairly orderly pullback. It feels and looks and feels like it’s backing off at the same pace that it was going up, which is really odd in equities because we know them very well to take the stairs up and the elevator down. Now we could be in the middle of a little bit of a steeper sell-off. I just get a little bit more comfortable with the pulling into moving average support. We’re seeing a little bit of panic finally. Today we finally have a chance at a red to green day today, which often marks the bottom of tradable pullbacks. That’s how I’m approaching it. It’s not Armageddon, it’s not Doomsday. It’s just market dynamics adjusting to some interest rate changes and that’s it.

Tony Nash

Go ahead. Sorry.

Albert

It seems oddly similar to the bank crisis that we had last time around. It’s very order to sell off and then get set to relaunch back up to the stratosphere.

Tony Greer

Yeah, there are pockets that are definitely getting hit. This week, gold miners are off 6 or seven %. A couple of social media is off 5% or so. A couple of sectors of tech are getting put back to where they came from. It was a sharp rally. Yeah, exactly. With rates rising, you would have to think that growth is going to get hit a little bit, right? A little bit. It only makes sense. I’m pretty comfortable with what’s going on here.

Tony Nash

Okay, so, Tony, just a technical point. I want to make sure that we understand some of the technical things you’re talking about. The VIX, there are a lot of preconceptions and a lot of misunderstandings of what the VIX measures. Can you tell us, from a technical perspective, what the VIX actually measures?

Tony Greer

Yeah. It’s obviously a measure of options volatility at some level—I look at it as I read it a little bit as a sentiment gage, as a tactical traitor, like a live fear and greed index type of thing. When the VIX gets buried where it has been in the low teens, you have low volatility in the stock market. It usually means rallying S&P. When you see the VIX volatility index pick up and spike into the 20s and 30s, that’s usually what happens when we see steep sell-offs. Everybody is scrambling to protect their entire S&P portfolio by buying downside protection on it, volatility picks up. What happens at the end of that is it’s always one of those exhaustion trades, right? When the last guy stops himself out, sells his stocks on the low, they buy volatility at the highs, and then the market normalizes again and gets back to its range trade. That’s how I look at the VIX.

Tony Nash

Yeah. It’s volatility and options for the S&P 500 for the next 30 days. That’s all the VIXs. It’s not the next 24 hours, it’s not the next six months. It’s the next 30 days. This is something that I, on a very basic level, I’ll try to drive home with people because there’s this expectation that the VIX is something that measures volatility in this trading session or in tomorrow’s trading session, but it’s the next 30 days. That’s why we don’t see as much spike in the VIX as we think we’ll see sometimes because it’s over the next role. Okay, great. Can you also—and this is bleeding over into Tracy’s territory a little bit, but you talk about oil bullorns. Can you tell us what you mean by that? Then, Tracy, can you jump in and tell us where Tony’s wrong?

Tony Greer

Yeah. I don’t want to steal the oil floor from Tracy at all. I just want to state that I’ve gotten a little bit bullish. Luckily, I was early because I’m sitting here waiting for this oil consolidation to end. There’s a big back and forth going on between the Biden SPR selling and OPEC output cuts. That’s the narrative that’s gone on. What just happened recently, gasoline spreads tightened up the entire physical crude oil calendar, tightened up into backwardation. We got a little rally in price that finally did something meaningful technically for me. We broke above the moving averages. We traded up to the range top. Now the market’s got potential crack spreads. I know Tracy is going to talk about have got the refiners on a run. There’s a lot of signs of strength in the physical oil market, and I’ll leave it at that.

Tony Nash

Great. Tracy, what do you got on that?

Tracy

I cannot disagree with them.

Tony Nash

Of course.

Tracy

Obviously. I mean, if you look at the curve, and I was just talking about this yesterday on Twitter, X, whatever we’re calling it these days, I was just talking about the strength of the curve and the fact that if you look at the curve, it’s still an extreme back gradation, even though we had that dip yesterday or prior to yesterday, to ’78. Usually, we see this hook on the front of the curve as you’re moving into the next month. We are not seeing that at all. To me, that says this market is very tight and this market remains very bullish, even though we saw a few dollars sell-off before options are free.

Tony Nash

Okay. Tony, what do you expect for markets in the near term generally? Just covering equity markets first? I mean, S&P 500 is back to June 27th levels, so ancient history all the way back to six weeks ago. What do you expect to see over the next week or two in equity markets generally? Is it continue the rotation out of tech, potentially lower level, these sorts of things?

Tony Greer

I’m looking for this pull, but I wake up bullish in the equity market, right, Tone? With that view, I’ve been expecting tech to pull back because obviously we’ve got bubble sentiment type of thing. I think that’s the heart of what’s going on, is that we’re letting air out of technology. I have a big tech index that I monitor that’s seven or eight of the largest cap tech stocks. It’s been off over two % for three weeks in a row now. That is what was leading the market in total fairness. We know that. Nobody would probably argue too hard about that. We’re seeing a serious pullback there that directly coincides with the rise in yields. Now, I don’t see it as a thing that’s terminally bearish for the stock market because remember we just said we had to pump the recession fears down the road a little bit, or at least the recession bros on Fin2it have got to be a little disappointed because we’re not there yet.

Tony Nash

Everyone’s disappointed. Bulls, bears, recession bros, everyone.

Tony Greer

Yeah, for sure.

Tony Nash

Everyone’s disappointed.

Tony Greer

Yeah. Because everyone’s disappointed, I still look at it as sentiment to me is fairly balanced in the stock market. I feel like I could find as many bulls as I can bears. I even feel like that I can find more bears than bulls, to be quite honest with you. With that a balanced backdrop, when you have the economy that if it’s not going into a recession, we’re going to say that it’s growing. If you have an economy that’s growing a little bit, the stock market can tolerate higher yields. We’ve seen periods like that in history. We saw it in 2011, 2012. We saw it in 2016, 2017, and we saw it in 2021, 2022. Stocks rallying with higher interest rates. If the economy is not rolling over into a ditch, the stock market can bear it. That’s how I look at it, and I feel like we have a recipe for a slow moving bull market. While tech has to pull back, I certainly am not a fader of the AI craze and the AI investment theme. That is going to be with us for a long time. Thank you. What?

Tony Nash

Thank you. As an AI company, I love what you just said.

Tony Greer

Yeah. I feel like we’re in the first inning of this discussion. That’s why it’s gotten so exciting. Now you see a pullback. While I’m more interested in staying with my natural resources length, I’m getting to points on some of the tech charts where I’m like, Well, this is interesting at this price now. I think that the tech can actually get back to a level where if rates stop rising and stop rising at such quick pace that we just saw, tech can get back on its feet again. As Tracy pointed out, we’ve got a pretty tight energy market. If energy can lift some of the other commodities out of the whole bear market that they’ve been in, I don’t see why the S&P has to curl over. I’m not a double-horn bull in stock market. I’m not too bearish at all, but I don’t see a reason for it to curl over right now. This is a tradable dip to me.

Tony Nash

Albert, what do you think about that, specifically with regard to tech and some of the other transitions to other sectors?

Albert

Tony’s right. It’s definitely a tradable dip. The Fed has talked about soft landing for God knows how long now, and everything points to it. Whether they script the manufactured bank crisis and script this new Chinese crisis, it’s simply to get this market to a level where it’s somewhat normal and go right back up. I mean, it’s just what they’ve talked about it. That’s nothing new.

Tony Nash

Albert, it’s been pretty lazy for the feds to invest in fangs to goose the market whenever it’s convenient. Do you think they move away from that?

Albert

No. Why would you move away from something that works? I’ve been embarrassed since 4300 because it’s just I just saw this market being stupid bubble-like and I knew that it was going to start relaunching inflation. But I was to give myself credit, I had to do tech calls to hedge because that’s just what they keep doing. It’s just silly. It’s silly not to. You have to be insane not to look at tech at certain levels to play at knowing what the Fed does and knowing what the market’s been doing.

Tony Nash

Yeah. Okay, while we’re here on markets generally, before we get to China, can we talk a little bit about TLT, guys? There’s been a lot of talk about TLT, hitting lows. A lot of people saying, Get out of the way, or it’s time to get in, or whatever. Can we talk a little bit about TLT and just see what your general thoughts are there?

Albert

Oh, boy.

Tracy

I’m like, I have nothing to say about TLT.

Albert

It’s TLT. TLT for me is probably a buy 93. You have a bunch of players selling TLT, and you have definitely Yellens putting out a bid to swallow them up to keep things somewhat normal. So there’s obviously, again, soft landing scenario, but there’s definitely a place in the 94, 93 area where TLT is very attractive.

Tony Nash

Okay. Tony, any thoughts on that?

Tony Greer

Yeah. I don’t trade. I don’t have any risk on in the bond market, so I want to preface this conversation with that. I don’t have any money where my mouth is, but I have to say that I’m trading from the bias that I’m accepting rates can go higher. I feel like we’re at the point in headline inflation where we went from 2%-9%, to a 50% pullback now to four % or so or three and a half, four, and I feel like it’s going to hold here and rally. If I’m expecting inflation to creep back into the picture, I can expect rates to go a little higher. While I’m not on the… I think yields can go higher while I’m a bond bear. I’m not like a terminal bond bear. I’m just on guard for downside dislocations because that’s the risk to my equity bull scenario, is that the bond market really has a big downside move, rates jacked higher in a super fast move or something like that. That is something that would derail the S&P. That’s how I’m looking at that. Perfect, guys.

Tony Nash

This is perfect. Thank you for that. Thanks very much.

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Tony Nash

Let’s move on to China. Albert, we saw a lot happening in North Asia this week from Japan’s GDP print that broke out on an export boom and an import collapse. The China macro prints that showed domestic weakness and deflation, rapidly valuing CNY, property developers like Country Garden stating they won’t be able to service some domestic bonds and the US bankruptcy filing that chapter 15, I think, bankruptcy filing in the US of Evergrande, there’s a lot going on. We saw CNY fall to 7.3, and we saw CNH, the offshore currency, fall a little bit further. Just for a little bit of context, this is boring on the weakest point since 2007, which is a big deal.

From a CNY as national strength projector really makes the Chinese leadership look messy. The only slightly weaker value was in November 2022, but they defended that very aggressively. In response, of course, the central government is supposedly planning all sorts of stimulus. The PBOC, the central bank there says they’ll be precise and forceful in their response.

I guess first, Albert, do we believe that? Do we believe they’ll be precise and forceful? Will they do it anytime soon?

Tony Nash

That’s my first starting question. But also I want to understand the Chinese government told their banks to defend the currency aggressively over the past couple of days. I’m curious how much you think they’ve spent defending a 7.3 CNY over the past couple of days?

Albert

For your first part, do I think they’re going to act decisive and forceful? I do. I think they’re absolutely coordinating with Yellen on the issue. China is a big inflationary player, so having China play ball is paramount to whatever Yellen and the Fed have in mind. I think they’re absolutely coordinating and they will be decisive. To how much have they spent? Defending the Juan, probably about 400 billion at the moment. I know that they just hit from… People I’ve talked to, I know that they just hit the treasury market for about 100 billion a few days ago, maybe a week ago. They are the…

Tony Nash

What? The Chinese are buying treasuries?

Albert

No, they’re selling.

Tony Nash

Oh, they’re selling.

Albert

Okay. Yeah, they’re selling. I think they’re using Kman entities, whatever proxy. It doesn’t look off, but they’re arguing. They’ve been defending the one here for the CNY for months. We’ve been talking about it for months doing this. They’ve been staggering their way down. They’re really keen on not collapsing the currency. G can’t look like an idiot, can’t lose power or face. That’s just the way Chinese work. They don’t really have to devalue. As much as people want to say, as much as we’ve even said that they’re probably going to have to, they don’t really have to as long as they’re staggering and playing ball with the feds. But they have maybe 600 billion left in treasuries that they can use to defend the CNY. That’ll probably get them through the next three months if they want to unload it.

Tony Nash

I’m going to ask a really somewhat cynical question here. If the Chinese sell their treasuries, does that mean the end of the dollar? I’m going to try to say that without laughing.

Albert

I mean, end of the dollar thing is just silly and just click-baity stuff. Yeah.

Tony Nash

Chinese sell their treasuries. Who’s going to buy them?

Albert

The reality is-

Tony Nash

Everyone?

Albert

Everyone will. Absolutely everyone will. I think Yellen prepared to buy back 1.5 trillion in the treasury. He has to. They certainly have the account for it. I mean, the Chinese, they killed animal spirits on a 400% leveraged economy, where unaffordable real estate was the core asset. What do people think was going to happen with Evergrand? It’s just been in trouble for years.

Tony Nash

Right. Right.

Albert

Again, this is a staggered way down. It helps the inflation fight. They probably scripted it out a while back. The bank crisis, now China crisis, and God knows what the next crisis is going to be in the spring to bring back the market to some normal level so they can launch it again. I’m a big believer in systemic protection. Whenever there’s a system, whether it be the US or Europe or Asia, that they’re at critical levels where the system could break down, they’re absolutely going to jump in and the world works together in that respect.

Tony Nash

Will this result in China selling off any overseas assets? Maybe some of the infrastructure they built overseas that they own, not really, but they own that thing?

Albert

I’m thinking they’re going to have to. You don’t want to get to critical levels on their dollar reserves or their gold reserves or whatever else they’re leveraging to keep the CNY up. You don’t want to get that far down. Yeah, I’m pretty sure they’ll probably let go of something. I don’t know. I can sit there, speculate they’ll let go a third or fourth of what they have overseas, but probably they will.

Tony Nash

Yeah. Like, Chinese data and entities that own, say, power generators in Portugal and ports in Greece and all this stuff.

Tony Nash

They really need that? Is that a way for them to get cash? Can they sell that to some Middle Eastern entity and that’ll be fine and it’ll build those relationships for crude sale, all that stuff, right?

Albert

Yeah, of course. Qatar or Dubai or one of the Saudi’s or someone will jump in and buy something in Turkey or God knows where else, just to give them some cash.

Tony Nash

Okay. There was some news out, I think, Thursday or Friday talk about how Xi Jinping will not take responsibility for the current economic difficulties. He’s going to pawn that off on Lee Chang, his deputy. Nobody overseas believes that, but do you think that will sell in a domestic audience?

Albert

Yeah, when you control the media and you rule by fear, of course, whatever the ruler says is going to go whether people believe it or not privately. That’s what the narrative is going to be. When do national leaders take responsibility for things that go wrong? You find scapegoat. Just like the US, the Europeans, the Chinese, they’re just going to find scapegoat.

Tony Nash

Is the clock ticking for denunciation of Lee-Chong? We have two years. Set the Timer in two years, he’s going to be found guilty of some corruption or something?

Albert

I could definitely see it. Internal Chinese politics within the PLA and the CCP are so muddy.

Tony Nash

It’s tediously predictable, right? I mean, these things are tediously predictable. I want to also talk a little bit about the Japanese, Chinese dynamic in terms of the depreciated JPY and the currency dynamics with CNY is that a factor? Japan just reported stellar GDP numbers on an export boom with a very cheap JPY. China is having difficulties with the exports and with imports on a not as depreciated on a relative basis, CNY. I know you say that China doesn’t have to depreciate CNY, but are those regional dynamics not forcing the PBOC to look at the CNY value and maybe push it for export competitiveness or something? Especially in light of the regionalization and the FDI numbers, the terrible FDI numbers that China has seen so far in 2023?

Albert

Normally, I would say yes, but the problem that Japan has at the moment is they actually have inflation creeping up higher and higher. They’ve really done probably better than anybody else in the world up until now. But wage inflation is taking hold there. Their currency, they’ve devalued it as much as they possibly can without causing issues. But I don’t think… Well, Japan is getting a lot of help from the treasure and the Fed in that respect to push China to cooperate. But I don’t think that it’s as vital for the Chinese to look at the Japanese Yen at the moment. Not yet. I wouldn’t say yet. Give it 3-6 months to see where we’re at to see if Japan can actually tame inflation, then we’ll probably have to readdress that question.

Tony Nash

Okay. I just want everyone to know we’re not even talking about the European GDP number that came out this week that was horrific, except for Ireland, all that stuff.

Albert

They’re back from vacation yet? What’s the date.

Tony Nash

Of the year? Exactly. They’ve been on vacation since April, right?

Albert

2020.

Tony Nash

Right, exactly. Okay, Albert, that’s great. Thank you very much. Tracy, let’s talk about crack spreads. Crude prices are rising. I mean, given the day over the past month or so, they’ve been rising. Gasoline prices are on the rise. Crack spreads are rising. We’re seeing record oil demand and I believe record refinery throughput. Can you talk us through some of those numbers about refinery, throughput, and crack spreads? First of all, just for a definition, what is a crack spread for people who aren’t really sure what that is, is. What are the factors that are contributing to that?

Tracy

Crack spread is basically, the easiest way to explain it is, what can you refine a barrel of crude oil into? There are many different ratios for crack spreads that trade, but it’s really what can you refine from a barrel of crude oil, depending on whether that’s going to be gasoline or heavier visco. But the ratio is very different. There’s many different ratios. Three to one crack spread is the most popular. But anyway, it’s really what can you refine in a barrel through the oil?

Tony Nash

Okay, so on the screen, we’ve got the RBOB, gasoline, crack spread, and CL price.

Why are these important? Is it important to look at these together?

Tracy

Yeah, well, it is important to look at these together, depending on how you would look at it, really. If you see, say, oil prices getting softer, but you have product demand still higher, obviously, that’s very good news for refiners. That’s where you see a divergence, sometimes where you see lower oil prices, but higher refining prices or crack spread prices. However, I think that’s just looking at one portion of the big picture. I think we need to look at the macro view of this because I think the underlying issue in refining that remains still unresolved is lack of capacity. We’ve had a lot of capacity come off over the last seven years. There’s a lot of underinvestment with the onslaught of this EV narrative, many refiners aren’t really interested in expanding capacity at this point. We’ve also had significant disruptions due to not COVID and due to the fact that we’re running our refineries at a very high utilization rate, which leads me into another section of this.

Tony Nash

But Let’s talk about that. What’s the utilization rate around if-ish?

Tracy

Well, last week EIA was 94.7%. Now, the problem comes is that if we’re looking at the US, for example, we have a lot of older refineries and we haven’t had a significant greenfield project in decades. Greenfield project meaning that we’re starting a whole new refinery. We’ve had a lot of brownfield projects, which means we’re expanding existing refinery capabilities, but no new green book in decades, literally decades. What happens is that these refineries are older. When you start running them over 90%, they consistently, which we have had to do, things tended to break, thus causing more disruptions, which we have more breakdowns, which we have seen this summer.

Tony Nash

Okay. I’m sitting in Houston, Texas, and I’m hearing that by Wednesday we could have a tropical storm in the Gulf and that there are potentially two hurricanes out in the Atlantic that could come toward us. So given the almost 95% capacity utilization of refineries, if we start seeing that in some of these ancient refineries, when they get hit in Louisiana or on the Texas Coast or whatever, and they get shut down for say, four or five days, and then it takes them how long to get them back up? Ten days or something? If they shut down for five days. They’re out for like 15, right? Minimum, yes. General. Let’s say some refinery in Baytown or Louisiana gets put out. That marginal refinery on average, would that increase margins for the other refiners pretty dramatically pretty quickly?

Tracy

Absolutely. Because you’re taking capacity from offline in general, and that’s going to be better for other refiners. The problem is you also have to factor in is how much production is being taken offline. Now, generally, production is easier, especially if you’re talking about a hurricane in the Gulf or something like that and offshore. Usually, that production comes back very quickly. We generally see production come back much more quickly than we would see the mining capacity come back online. But in general, if we’re just talking about a tropical storm or something like that, that’s probably not going to affect actual production capability. You have to keep an eye out for both.

Tony Nash

Right. But in terms of refineries, this hurricane season so far has been equivalent to the warm winter in Europe for natgas.

Tracy

It’s the knock on wood.

Tony Nash

It’s almost been perfect, right? We’ve had no refinery outages due to storms, due to hurricanes, all that stuff so far. We have almost a zero risk environment for refining. Any of this stuff comes, for a refiner utilization that’s at 95%, it could potentially be a real shock for refiners, right?

Tracy

Well, absolutely. If we look at the actual EIA numbers, and we’ve been at 92%-94.7% for the last few weeks, and we’re still seeing product draws. We’re still seeing gas lead draws throughout excessive utilization rates. That’s something that I think about as well, is that we’re consuming as much as they can put out.

Tony Nash

Yeah. Does this conversation make you even more bullish on energy?

Tony Greer

Yeah. Tracy makes a lot of really good points about refinery capacity, etc, when you consider that gas demand globally has been record-strong, regardless of what the economy has done. That’s one thing you got to keep in mind. Even when people were expecting the recession, the economy didn’t look so good, we were still setting records for gas demand locally and globally. If the consumer has got to get their gas from somewhere, God forbid there’s an outage, what will happen is the crack spreads will widen out even further. Refiners will rally even further until that’s buttoned up because the same thing is going to happen. There’s only so much capacity. If there’s only so much capacity and one less refiner, the spreads are probably going to widen out. We’re in a situation now where last year we had a lot of diesel tightness. This year we’ve got a lot of gasoline tightness. As Tracy said, that has propped up the prices of the products more towards the price of crude oil. Now that’s why the crack spreads are so wide and the refiners are doing so well. Yeah, it is a pretty sensitive cocktail right now in oil where disruption should be bullish in price.

Tony Nash

I’m also hearing, and maybe this is a minor consideration, but I know of a handful of publicly traded companies that are starting to require their employees to be back in office four days a week as of September first. We’re already at record demand, but as we start having larger companies require their employees to be back in office, that pulls the demand along even further, right?

Tracy

Well, absolutely. You’re talking about this going into refinery, maintenance season, where you’re going to have capacity even down the floor because the fall is refinery, maintenance season. If we see these companies asking people to come back for more and say they’re not in a city that has public transportation to get them there, then we’ll probably see increased demand going into refinery, maintenance season could make for a vicious cocktail then.

Albert

The only thing I see that’s I don’t want to use the word bearish for oil at the moment, but a little bit of a dip is China slowing down. I think they’re hinting at it at the moment, but I think it’s another week or so until September WTI closes and then you’ll really see what the market is doing in terms of Chinese demand. But I think a slowdown in China would hopefully bring it down to the mid-70s so I can buy.

Tracy

What’s really interesting is that for November delivery into Asia, and I think we had that week, but we have 40 million barrels for November delivery to Asia. Now that is not all by any stretch of the imagination and in fact, less from China. But it’s very interesting that we’re seeing increased demand for other PAC-Asian nations where we haven’t seen before. That’s almost at an all-time high.

Albert

What about Canada, Tracy? Should they be like a litmus test of what’s going on with demand and production?

Tracy

And they’re doing really well, too. It’s hard to use Canada only because they don’t were their main import. They don’t really export anywhere else but the United States. But we’re pretty much gobbling up everything that they have to give us at this point in the day. Okay.

Tony Nash

One thing since you mentioned China, Albert, they do have mid-autumn festival and National Day Festival coming up in China, which means the last week of September, first week of October is dead. Not fully dead, but dead. They will have a little bit of a respite there in terms of, say, crew demand. Well, at least they’ll have jet fuel and that thing. But in terms of normal activity, they’ll have a little bit of a respite there.

Albert

Okay. Great. Yeah, just curious.

Tony Nash

Guys, thank you so much. This is really interesting. I love weeks like this where we can talk to guys like you, Tony, who just have this massively broad view on things, and you boil it down to precise views. And that’s really, really amazing. So we’re really grateful to have you here. Albert, Tracy, as always, you guys are invaluable. Thank you so much. So have a great weekend, and have a great weekend. Thank you.

Tony Greer

Thanks for having us, Tony. Thank you. Great job.

In this episode of The Week Ahead, we have Joseph Wang, Tracy Shuchart, and Ralph Shoellhammer.

Joseph kicks off by talking about inflation, the Fed, and banks. He looks at the recent CPI numbers and asks whether they suggest inflation or not. The conversation revolves around the Fed’s plans and a survey indicating two more interest rate hikes this year. We’re also examining changes in the money supply and whether it’s going back to normal levels.

Tracy gives us an OPEC update. The latest report forecasts oil demand growth for this year and the next. She gets into the impact of OPEC’s supply cuts, particularly Saudi Arabia’s extended cuts, and how they shape the supply situation this quarter.

Lastly, Ralph presents the case for why Europe needs nuclear energy. He shares insights from his report on the topic. Ralph explains the importance of energy density and its link to nuclear power. Safety concerns about nuclear energy and European perspectives on restarting nuclear plants are also discussed. We’re also looking at Germany’s energy mix and recent shifts in energy prices.

Key themes:
1. CPI. Fed. Banks.
2. OPEC Supply Deficit
3. Why Europe Needs Nuclear

This is the 75th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Joseph: https://twitter.com/fedguy12
Tracy: https://twitter.com/chigrl
Ralph: https://twitter.com/Raphfel

Transcript

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Tony

Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. Today, we’re joined by Joseph Wang, by Tracy Schuchart, and by Ralph Shoellhammer. I’m really excited to have the view on Central Banks and some of the macro stuff that we’re looking at with Joseph. He’ll help us look at CPI, PPI, Fed, banks, and the health of what’s happening in the US banking system. Tracy is going to help us look at OPEC. We’ve had some really interesting monthly report come through from OPEC, and we’ll look at the impact on crude prices. Then Ralph is going to help us look at nuclear in Europe. There’s some history there since Fukushima and nuclear plants closed down. We’re just going to look at some of the economics and impacts of why Europe needs nuclear now based on a report that Ralph just published.

Tony

Guys, thanks for joining. I really appreciate it. I know this has been a super busy week, and I always appreciate you guys coming to talk to us on Friday. Joseph, if you don’t mind, let’s start with you. We just had a CPI print and, of course, PPI this week. Obviously, everyone sees it. We’re in that phase where everyone sees it through their own prism.

Tony

Some people are saying it’s great, inflation is over. Some people are saying, We’re going to see a resurgence of inflation, and Core doesn’t reflect a weakening of inflation, all this other stuff. Do you see these prints as inflationary or disinflationary or neutral? How do you see these prints?

Joseph

Well, first off, thanks for inviting me. It’s a pleasure to be here. Thank you. Yeah, it’s great to meet everyone. This week’s CPR print, as we know, was unambiguously pretty good. We’ve had two good CPI prints over consecutively, and that very much shows that inflation is decelerating. Right now you can think of it in two ways. If you’re a team, and inflation is over, you can look at this, and then you can look at some model of where shelter inflation will be for the coming months. You can think, Well, there’s probably going to be more disinflation coming down the pipeline. Maybe inflation is really over. We’ll go back to the world wherethe world the way it was before. There are other people, of course, who would point to what happened in the 1970s. In the 1970s, you saw inflation rocket higher and then go back down. When it looked like it was going to go back down and stay down, it just did a 180 and rocketed higher. Those people would point towards things like, well, you have commodity prices rising, again, oil has been steadily rising over the past few weeks, and you also have wages that seem to be stuck at around, say, 4 or 5%, which is not consistent with 2% inflation.

Joseph

You have these two caps right now, and that actually is being mirrored in the Fed as well. This past weekend, Governor Bowman gave a speech where she basically strongly suggested that she’s not just open to another hike, but more than one hike since they used the term hikes, so in plural. That’s one faction. I suspect that let’s say, Governor Waller, and maybe Chair Powell would be partial to that. But on the other hand, you also have, let’s say, John Williams, who is President of the New York Fed, one of the top three people in the Fed, give an interview within New York Times where he’s setting up the groundwork for rate cuts next year. I actually think that overall, if you look at the evidence, I think it makes sense for there to be rate cuts going forward next year, but definitely not going back to, let’s say, zero, probably just going back a little bit with an acknowledgment that inflation is definitely decelerating, but probably going to decelerate towards a rate that’s going to be higher than pre-pandemic. In a sense, what I’m trying to say that there’s some truth to both those camps.

Joseph

Now, we could have a situation where inflation slows down but doesn’t go back to where it was before, and that’s still consistent with a higher for longer framework. The Fed looks at interest rates through the lens of real interest rates. So real interest rates are nominal interest rates minus inflation. If you look back over the past several months, inflation peaked at about 9% year-over-year rates. Now it’s come down to about, say, four-something %. That’s normal. At the same time, Fed raised interest rates from zero to over 5%, and maybe they’ll go a little bit more. As inflation has come down, if you want to keep real interest rates constant, it makes sense to cut nominal interest rates a bit. I think that’s what they’re setting up to do next year. It doesn’t mean that we’re just going to go back to a low interest rate world. I suspect that we probably hold around 4%, 4.5% if we cut rates there for some time. I think that’s the… I think that that’s how I read this inflation print, showing deceleration, but not towards a world that it was before.

Tony

Yeah, it’s weird that we had been at low interest rates for so long. In the US and Europe and obviously Japan. There is this expectation, I think, that we’re going to snap back at something. We’re going to wake up from this dream, and it’s all going to be over with, and we’re going to be back at very, very low interest rates, very, very low mortgage rates. I think on some level, we’re arguing about the details about whether we are inflationary or disinflationary or whatever, because I think what you said about hire for longer is true regardless. We are at least for a period of time, it seems like we’re at a higher level. Now, we took a survey last week and my Twitter followers are fairly educated people. Most of them view, I think, I can’t remember the percentage, I’ll put it up on the screen when we publish this, but the majority had two or more hikes before the end of 2023.

That was before this week’s CPI print. What’s your view of that? Do you think it’s possible that there are two hikes before the end of 2023?

Joseph

Two sounds like a lot to me. When I think back to the last dot plot, Fed FOMC members overwhelmingly suggested two more hikes this year. The data has broadly come in line with their expectations. I think if we have another hike, we could have one more hike. But two, that doesn’t seem reasonable to me in line with the data and in line with what the FOMC members guided towards last time they released their dot plot. I think we could have one more. But right now, not next meeting, we’d really have to see, again, inflation reaccelerate, maybe wages go higher again. Basically, we’d have to see stronger than expected data. Right now, I think the doves on the committee have more political power simply because we’ve had two pretty benign inflation prints.

Tony

Okay.

AI

Heads up. It’s time for a Week Ahead break.

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AI

Thank you. Now back to the show.

Tony

Great. I want to talk a minute about money supply and potential for QT. I’ve got a chart on the M2 money supply.

This is month-on-month growth rates for M2. Now, I did some work, I think it was last week, looking at the trend growth rate for M2. If we had kept the trajectory we had been on in 2019, we’re still about $2.1 trillion above that. I know in ’22 and in the first, say, four months of ’23, we actually saw M2 contraction, and then we saw a little bit of expansion in May and June. What’s your expectation in light of where rate hikes are going? Do you think the Fed will continue to gradually rein in the money supply, or do you think we’ll resume on this incremental, slow growth of M2?

Joseph

I’d be cautious when trying to map M2 to other economic variables. In the past, there was a school of thought, monetarism, that placed a high emphasis on money supply, so much so that the Fed, actually for a period of time, actually tried to implement monetary policy by changing the money supply. That experiment was not successful. If you look at what happened over the past decade, say, Japan, must have really increased their money supply, but did not seem to get inflation upwards. I don’t really focus on money supply when I think about the world. I think in the past, you could have made an argument where banks are making loans, creating credit, increasing money supply, and so we want to focus on that. But post financial crises, money supply is strongly influenced by Fed actions. When the Fed does QE, for example, that increases M2, and when the Fed does QT, that decreases M2. What you’re seeing right now, I think, is largely just the impact of quantitative tightening. The Fed is shrinking their balance sheet, and that mechanically has been shrinking M2. At the same time, we’ve been having very good growth, and financial assets have been going to the moon.

Joseph

I’m cautious when I think about money supply in the modern economy. Going forward, as the Fed continues to tie in their balance sheet, I would expect M2 to continue to decline, especially since the banks have significantly cut back on their lending. When you look at loans and leases from banks, you know that they’ve basically been relatively static for about since the end of last year.

Tony

Okay. You think we’ll see incremental QT on the Fed balance sheet?

Joseph

Incremental time? Absolutely. In fact, I think it’s going to go on for a couple of years. There is a discussion. There is some thought as to what would happen with QT when the Fed eventually cut rates. Like I mentioned before, Fed is laying down the groundwork to cut rates sometime next year. Now, traditionally, when you look at the Fed, the thinking is that you don’t want to step on the brakes and the acceleration at the same time, so it would not make sense to both be cutting rates and to shrieking your balance sheet. But Chair Powell, at his recent press conference, was pointedly asked about that, and he seemed open to be letting QT continue even if they were to cut rates next year. I think that that’s just a strong suggestion that the Fed really wants to get back to a smaller balance sheet. I think they have everything in place to make that happen over the, let’s say, another two years.

Tony

Okay. Now, you said they may cut next year or they’re likely to cut next year. Just because they say next year, I think there’s this belief that it’s going to happen, boom, it’s going to happen in January, it’s going to happen in February. We’re going to see rate cuts right away. That’s not what you’re saying, right? You’re saying sometime next year.

Joseph

Absolutely not. I think the common thinking is that the Fed is hiking, there’s going to be a recession, everything’s going to implode, and so they’re going to have to do emergency cuts to save the economy. What I’m seeing, what I’m thinking is that we actually just gradually, inflation comes down, growth slows a bit, or maybe not, I don’t know, but definitely inflation is going to be lower than, let’s say, the 9% annual rate we had in the past. In order to keep real interest rates in line at where the Fed feels is restraining, they’re just going to cut nominal rates a bit. Maybe just a little bit of an adjustment next year as inflation comes down. Now, inflation, I don’t think it’s going to come down to 2%, but it’s going to be lower than it was in the past. But then it was in the past several months. Yeah, sorry.

Tony

Right, past, say, 18 months or whatever, right? Yeah. That would be a nice, fresh relief for a lot of people. Hey, let’s move on to bank health, Joseph, because I know since March, there’s been a lot of interest with the BTFP, the Program for Regional Banks to borrow from. I know that that’s really a lot of your expertise is there. We saw the BTFP hit $106 billion, I think, last week. I’ve got the chart up on the screen.

It seems like banks are going more and more to bar from the BTFP. Can you help us understand what is going on with regional banks and what is the health of regional banks look like given the continued expansion of the BTFP?

Joseph

Yeah, the BTFP is an emergency lending facility that the Fed offered around March when we had a panic in the regional banking sector. The BTFP is really a sweetheart deal because you’re able to borrow basically borrow at one very advantageous rates, but you’re also being able to borrow at par value rather than market value. For example, if you had a treasury security and because the rates went up, it was now trading at $0.80 to the dollar. You can actually take that treasury and borrow $0.100 of the dollar against it from the BTFP facility. It’s a sweetheart deal, and I think it’s expected that banks would take advantage of that. I wouldn’t read that as stress in the banking system. What I think is more telling about liquidity stress in the banking system is federal home loan bank borrowing. When banks have stress, what they usually do is not go to the Fed discount window because there’s a stigma there. What they do is they go to the lender of second to last resort, which are the federal home loan banks, and they did that in size in March and April. When we look at federal home loan bank data, we’ll see that their loans are actually shrinking significantly.

Joseph

Banks are not borrowing as much from the federal home loan banks. They’ve cutbacks significantly, and that tells me that the liquidity situation is improving significantly. Now, I’ve also been following bank earnings reports over the past couple of months, and by and large, banks are doing fine. What I think is happening now is that a lot of the regional banks are having their profit margins, their net interest margins squeezed a little bit because they’re having to pay a little bit more to retain depositors. Even as interest rates go higher on their assets, they’re also going higher on their deposit liabilities, and that’s causing their net interest rate margins to contract a bit. They still remain historically healthy. They’re just not as fat as they used to be. I don’t think that’s a reason for concern, especially, again, we don’t expect the Fed to just keep hiking rates or whatever. Eventually, the Fed is going to cut rates even by a little bit and maybe not to the low levels before, but they’re going to cut rates a little bit and that’s going to give these banks a bit of a breathing room. Now, I would also take a step back and look at what happened with the regional banking sector over the past few months.

Joseph

Now, back then in March, it would seem like the system was imploding. There’s a lot of doom and gloom, but that was never my view. Another way to look at it, which is how I look at it, is at the end of the day, Fed hiked rates. A lot of the more speculative industries in tech imploded, and all the banks that built their business models around those sectors also went down. You saw Silicon Valley Bank, obviously, First Republic, obviously, you have the Crypto Banks. Crypto Banks also got taken down as well. I really think of that as more of an idiosyncratic thing rather than a sector thing. I’m not really worried about the bank system.

Tony

Great. Okay, so that’s good. From your perspective, the US banking system seems okay, if not good. Yes. Inflation seems to be okay if not it’s trending in the right direction. It seems to me from that perspective, the Fed banking system perspective, the US seems to be okay. That’s what you’re telling us.

Joseph

I think the US is doing well. I mean, if you look at, let’s say, first quarter GDP, it was growing above trend. If you look at second quarter GDP, it actually accelerated. If you look at GDP now, which is the forecast for this current quarter, which is very volatile and will get revised, it actually points towards further acceleration. What we’re seeing is that inflation coming down, wages continue to be strong, and of course, credit conditions that everything seems to be not very concerning. Now, if you look at credit spreads, for example, they’re very benign. They’ve gone up from their lows, but they’re still within historical ranges. From my read, the US economy is doing well.

Tony

Great. Fantastic. That’s so good to hear because, again, we see all these polarized views, everyone trying to make their market, and so it’s really good to hear that refreshing perspective. Thank you, Joseph. Thank you very much. Hey, Tracy, let’s talk about oil and gas markets a little bit. You were telling me this week about the OPEC update that came out, and the report says that demand will grow by 2.4 million barrels per day this year and 2.2 million next year.

With OPEC supply cuts that are still underway in Saudi Arabia just extended—we talked about this last week—how big do you expect the supply deficit to be this quarter?

Tracy

Well, I personally think that it’s going to be about 2.1 million barrels a day. We did have IAEA come out. They think it’s going to be about 1.7, which is actually huge for them because they become the anti-oil and gas group. They’ve been on that trajectory of we only need renewables. To them say that they expect a deficit as well as they also are expecting an increase in demand is quite impressive for that particular organization. But if we look, we have demand at 103 million barrels a day. That’s literally all time highs well above 2019. We’re not seeing demand diminishing at any time and both groups because the IAA report just came out this morning. Both groups expect an increase in demand at 2024, although IAEA has pared back their initial estimation from the last report that came out. It does come in a bit lower than the OPEC report, but that generally is the case. They’ve been very conservative on their demand estimates.

Tony

Where is that demand coming from?

Tracy

Well, particularly in Asia. We’re seeing a lot of flows in Asia. Obviously, we’re not really seeing a lot of that demand come from Europe as we see manufacturing slowing down. But we are seeing demand growth in the United States. It’s coming in month after month. We’ve had upward revisions from the EIA. Demand continues to be very strong and to increase every month in the United States. Really, the areas that we’re looking at where we’re seeing the softness in demand is really just coming from Europe at this point.

Tracy

I think that going forward, I just wanted to bring China into this a little bit because we just had China’s seaborne import numbers come in. They slump below 10 million barrels a day, which is down toward July, which is down about 13%, month-over-month from June three-year highs, which is very high. Meanwhile, their onshore crude stocks have climbed at a rate of about a million barrels per day for three straight months. Not surprising, China likes cheap oil and gas. That means that-.

Tony

I do too.

Tracy

They also had refinery throughputs were very low during the spring turnaround season. We’ve also seen a slow recovery in domestic demand, particularly from the manufacturing sector. I think that we should be prepared to see a little bit of slowdown going into the fall of Chinese imports as prices rise because they’ve already built up that socket. Although I don’t think their teapot refineries and their state-owned refineries still have quotas that they have to keep up with and export quotas are coming out in a couple of weeks here. We’ll find out how much if their export quotas for diesel increase, that means they’re going to likely have to buy more crude. Now that depends and where are they going to get it. Because right now what we’re seeing with lower Russian crude supplies, the tea pot refiners are basically leaning deeply into discounted gray market, uranium oil right now. Just that’s the general picture of what’s going on in China right now. Again, I would expect to see imports from China soften for the rest of H2.

Tony

Okay. The demand is coming from the US and from Asia. Is China back to 2019 levels? They’ve exceeded it?

Tracy

No, not yet.

Tony

Okay. How far are they? Are they still a long way or?

Tracy

No, they’re not a long way, but they’re definitely a couple of million barrels a day below what we’re seeing. Again, because the manufacturing sector, again, because we’re not really seeing that recovery, they’re doing a lot to stimulate some demand. They just took off the airport, the airline travel restrictions for international flights and things of that nature. But you know what’s going on with China right now with the property sector still in the shambles.

Tony

We’re at 103 million barrels and China is not up to… That’s a record and China is not up to 2019 yet. Is most of that growth the US?

Tracy

A lot of it is going to the US and a lot of it is coming from other PACAC Asia nations.

Tony

India, other places?

Tracy

India, Vietnam, Thailand, Malaysia. We’re all seeing growth in those areas.

Tony

Very good. Okay. With this growth, how do you expect that to impact… With the supply deficit, how do you expect that to impact crude prices? Of course, there will be upward pressure, but how much upward pressure are you expecting?

Tracy

It depends. Again, I think we talked about this last week. Nobody wants oil prices to spike over 100. It’s bad for everybody. It’s a bad for economy. Price, and it’s bad for OPEC because nobody wants their product and can’t afford it. I think they’re going to do their best to regulate the market. But I think that we’re in a era of higher for longer right now. I would not be surprised if we stayed again in that $80, $90 range for Brent, which OPEC is very comfortable there.

Tony

Okay, great. Can I ask you a question about EIA report? Because you put stuff out on this every week and it looks like US production is rising. Why is that happening?

Tracy

It’s not.

Tony

Oh, it’s not.

Tracy

Okay. It’s the weekly reports. It has been rising. It has been rising for the first half of this year. But I would pay attention to the monthly reports and not the weekly reports, even though they’re lagging by two months because it’s pretty much just a guesstimate. What we are seeing right now, and from what I’m hearing within the industry, is that all those rigs that have been coming offline all of this year are starting to impact production. That is not surprising. I think that we’ll probably see decline starting in August.

Tony

Okay.

Tracy

Headed into the fall as far as US production is concerned.

Tony

So less US crude output.

Tracy

I believe so for the second half of this year.

Tony

Second half of this year. Okay, very interesting. Thank you for that. Thanks very much for that.

Tony

Stay on energy, Ralph. You put out a report, I think it was this week, looking at why Europe needs nuclear. We’re really interested. You did it through this organization, MCC Brussels. It’s an amazing read, very interesting. I’d like you to make the case for us of why Europe needs nuclear. I’ve got a couple of charts to look at.

The first one is looking at energy density of nuclear versus other stuff. Why is energy density important? I know maybe that sounds a bit stupid, but what does it mean and why is that important?

Ralph

Actually, it’s a fantastic question to start this conversation. Just to give you a number that I think really highlights this. If we take uranium as the most commonly used main resource for nuclear power plants, pound by pound, they produce 16,000 times more electricity than, for example, coal does. I think this just gives you a little bit of an impression of the tremendous energy that is contained in the potentially nuclear power plants. There’s a famous letter that Niel Sboar wrote to Winston Churchill in 1944 where he informed him about the Manhattan project. He basically talks in the entire letter about the energy content that can be released via nuclear fission. This is, on the one hand, which many critics correctly point out, a fairly, quote-unquote, old technology, the first fission took place in Germany in Berlin in 1938, and only seven years later, devastatingly. But the time frame, it was actually very tense. We had the first two detonations of nuclear bombs, of course, in Japan by the US military. But that shows you that we had the technology for a significant amount of time. The reason why I’m mentioning this is because very often that is used as an argument against nuclear.

Ralph

It’s like yesterday’s technology. I think it’s actually making the case for nuclear because the point is we actually know how to do it and we have been pretty good at it. Just to give you two examples. The Canadians in the 1970s, they basically built a new reactor every year. The French in the ’70s did the same thing. The French had one of the least carbonized or one of the most decarbonized electricity grids in the world that really was a nuclear success story. We see the same now in the province of Ontario. I don’t know how many of you viewers and listeners are following Canadian politics. Usually, that doesn’t sound super exciting. I guess for Americans, the idea of Canadian revolutionaries is something like an oxymoron. But there was something…

Tony

They see like a Canadian expert.

Ralph

Well, there you go. At least we have won on our side. In Ontario, that basically was something like a small energy revolution with the new government by the, in my opinion, hilariously named progressive Conservatives of Doug Ford now pretty much abandoning, actually deliberately repealing the so-called Green Energy Act the province has adopted. In 2009, they have now repealed it and they want to go back all into nuclear. Sweden has now announced they want to build 10 new additional reactors. Pretty much the only outlier here is always Germany. But of course, since Germany is Europe’s most important economy, it matters what they do. But just very quickly, for one second, go back to the tech logic part. I’m a political scientist. I’m not a nuclear physicist. People say, Oh, how can you talk about this? That’s a fair criticism. This was my biggest fear when I wrote and when the report was published and when I was reaching out to get input that I will get huge pushback from people who really know the technicalities of it. But they pretty much all agree. You will not find a nuclear physicist who will tell you that, for example, producing electricity via nuclear power is a bad thing.

Ralph

They will say there is regulation that makes it uneconomical. They will say that the political conditions are against it. But nobody will say, Oh, no, we actually have better means of producing electricity because we really don’t. When it comes to this one thing, it is the best available. Yes.

Tony

No, that’s the case, Ralph. I know Germany and Italy and other places closed nuclear plants after Fukushima in Japan. Why did they do that? Was it just such a bad investment or return? Or was it just political sentiment? Why did they do that?

Ralph

Now, I usually refrain from hyperbolic statements because I think it embodies the debates. But if we take Fukushima and Chornobyl, those are the two examples. Fukushima, and this is factual, this is from the Japanese authorities. One person allegedly, supposedly died seven years after the incident after cancer that developed potentially because of radiation. They really had to get to a huge stretch to find one casualty of after what happened in Fukushima, which really was a once-in-a-millennium tsunami. Again, you could say Fukushima tells you stop nuclear, but I think you can make the opposite case, that nuclear power plants, their quality has gotten so good that they pretty much survived a tsunami with barely anybody dying. Just to give another example, in the 1970s, I can’t speak Chinese, so I’m not saying the name of the dam because I’m probably going to ruin it, but a dam broke in China that killed between 26,000 and 240,000 people. Again, the numbers were let’s take the lower end. Let’s try to be very conservative in our estimates. Twenty-six thousand people died. We have millions of people today living in areas close to hydroelectric plants to dams. Nobody is terrified of it, but they are theoretically, or by body count, if we want to use that crude measure, they are much more dangerous than a nuclear power plant. What I’m trying to say is…

Ralph

Let’s take a look at that.

Tony

Yeah, let’s take a look at that, actually. You had a good chart looking at the death rates per unit of electricity production. It seems a little bit grim, but it’s very interesting looking at coal, oil, biomass, gas, hydropower, and so on. And so… Obviously, nuclear is very, very low. There are more deaths by wind than there is through nuclear.

And so I asked the question about why did Europe, or at least Germany, Italy, and some other places closed down some nuclear plants? It looks like polling is showing that people in Europe are more open to reopening or restarting nuclear plants.

Ralph

Yes, that’s true. I think the main reason is that this was a hyperbolic part because people were, for lack of a better term, I would say they have been lied to or they have been brainwashed. Let me give you another example just recently. All of you American listeners probably know Tulsae Gebert, the one—and I don’t know, she’s still a Democrat, she’s not a Republican—but the little bit of a firebrand and she’s very entertaining. But she had this massive tweet where she said, President Biden must do something because Japan is releasing former cooling water in Fukushima back into the Pacific Ocean and this will have a huge impact on the food supply in the Pacific is going to be radiated and everybody is going to die. The one good thing that Elon Musk did with X, formerly Twitter, are the community notes because the water that the Japanese are releasing is better than the drinking water quality in most European cities. A banana and a beer, if this is your diet of choice, will expose you to more radiation and that water. But people are just saying it. It’s just this comment, days, nuclear was involved, it must be deadly.

Ralph

This is really the mentality that most Europeans have imbibed. But what last year, of course, did with the energy crisis is that all of a sudden people realized, Wait, give me a moment, if my electricity bill, my heating bill doubles or triples, if all of a sudden I cannot simply rely on a plug in my gimmicks and they work? Then you take a second look at this and you say, Well, but okay, like microbial, which by the way, just as a quick add-on, was a fact of mostly producing plutonium for the Russian military. It was a sidekick, was the electricity production, at least in the reactor in question. People say, But does that really also apply to German reactors? Does that apply to Swedish reactors? Does this apply to French or Canadian reactors? And people, good for them, they are taking a second look and just as a last point. It’s good that they do because we need, and I think also what Tracy said, really dovetails with this or actually precedes this, the world remains hungry for energy. The International Energy Agency pretty much, I think what did they say? They said peak is going to be in 2019, and by 2030 it’s going to be at 75 million barrels a day or something.

Ralph

Now it’s like, “Oh, it’s probably going to be 105 million barrels per day. I’m sure that in four years they’re going to say it’s going to be 120,000,000 barrels per day.” The world needs that energy. The last point, the argument that, Oh, forget about nuclear, wind and solar can do it. I’m an agnostic when it comes to energy. If we get the solar energy to really harness the power of sun, radiation, I’m all for it. But currently the capacity factor, basically the factor that says what is the percentage of the ideal conditions under which an electricity producer produces electricity? For wind, onshore and offshore, depending where you are, it can be up to 30% to 40% and the ideal conditions. But for example, solar in Europe is 11 or 12%.

Tony

Let’s talk about that. While you’re on that, let’s talk about the German energy mix. Since Germany is the manufacturing driver of Europe, you have some charts in on the German energy mix and energy prices. It was really great to have those side by side.

Can you talk a little bit about how renewables came in in Germany and then what happened to energy prices in Germany?

Ralph

Yeah, this is another one of those stories. I think Tracy recently posted a picture of, I think, a new Ford electric vehicle that cost $150,000. The reason why I mentioned this is because what they do, for example, in the EV sector is very often they never tell you how many EVs they sell. They only tell you their percentage change. They sell one EV this year, they sell two next year, and the headline is EV sales increased by 100%. This is the same thing they did in the German electricity market. Everybody now says, Ralph, what you’re talking about nuclear? Look at it. Now, 65% of electricity in Germany is produced by wind and solar. Yes, of course it is. If you take everything else that’s not wind and solar, you’re going to end up with 100% wind and solar. It’s just going to be hugely expensive. This is the other trick they say, they only look at electricity produced. They don’t look at electricity consumed because they don’t tell you that Germany is now buying energy or electricity, to be precise, from the Czech Republic, from French, and from other states. This is a game with numbers in defense of particularly wind and solar, which I believe, and as I said, I’m an agnostic.

Ralph

If they improve these technologies or if we finally get these miraculous batteries that we’ve been promised now for 20 years, that’s the game changer. If the technology changes, I’m the first one to say let’s look at this again. But at the moment, it’s statistical tricks that try to basically justify one inferior form of electricity production to a superior one. It’s the same thing. I always get down these emails that says, Well, we modeled. We have this model that says that Germany can run 100% on renewables. But I think they are running the experiment right now. I don’t need your model. They are trying it while we speak and it’s not working. It’s the same. You have some guy who is in reality and then the other one waves to study at him and says, But your reality is wrong. It’s very Hegelian, it’s very German in a sense. This idea that reality has to adapt to theory and not the other way around. This is a little bit. Yeah.

Tony

Do you know how much governments in Europe have put toward renewable energy in the last 20 years? I’m just curious if you know that number. It’s got to be hundreds of billions or trillions, I would think.

Ralph

There are different estimates. In the last 12 years, I think overall we’ve spent worldwide four trillion. The bulk of this was spent in Europe and China. I can’t give you the precise numbers. Again, because a lot of this is done, let’s say, directly and indirect financing than the whole subsidy scheme. It’s very tricky to get the real numbers. I think they are much higher than we think. It shows you another thing. I know that you know much more about China than I do, so I hope that we can have a conversation about this one day as well. But this is another thing. I say, Look at China. Look how massively they expand their renewables. Which is true. But if you look at the numbers, I think Dr. Anesh, recently in a podcast said that I have very much faith in the things that he says—he says if the Chinese would keep up expanding their renewables as they do at the moment, and if we assume that they don’t have to be replaced, which is of course a huge assumption that is unrealistic, as he himself says, it would take them 211 years to go fully renewable.

Ralph

Even the world’s leading spender on renewables, and they know this, this is why the Chinese still invest in coal and still invest in nuclear. Europe is a little bit in the energy sector. The shift is happening. It’s like an ocean minor that tries to turn around. But as a concluding remark, without energy, de-industrialisation is a fact. Again, we can turn and twist the numbers. We have the statistics, we have the numbers, we know what the companies are doing. We know where BASF is going, we know where other companies are going. This is a very harsh reality. So far, again, if this is possible one day, I’m the first one to be for it. But so far, the favored sources of electricity and energy have not delivered what they were promised to be capable of.

Tony

It looks to me, based on your charts, that as renewables have taken over more of the fuel source in Germany, prices have risen by 70, 80%, something like that. Given the subsidy that’s gone in from European governments, it just seems odd that that’s the return. The 90% rise in energy prices.

Ralph

Just as a quick thing on this. As I always say, I’m an agnostic on this, but it’s frustrating in the sense, particularly for consumers. We constantly hear with this border fraudulent way of calculating it, the so-called level cost of energy. We are constantly taught that wind is the cheapest of all forms, followed by solar. But every statistic we look at, Germany, Denmark, Great Britain, everywhere, cost of electricity increased proportionately with the share of renewable. Again, as an agnostic here, but somebody needs to explain this to people. They see the large electricity bills and people on TVs, they’ll tell them, Oh, this is also cheap. It’s amazing. Well, okay, then where is the cheap electricity? This is, I think, the frustrating thing.

Tony

I live in Texas, so I’m shamelessly pro-oil and gas, but we have, I think, the largest wind energy field in the US. That started, I think, in 1995 under a guy, an obscure guy we used to have as governor called George Bush. He started that program for the Texas government. We have one of the largest wind fields in the US, but we still struggle every year to get it to take over an increasing proportion of the grid here. Increasingly, natural gas is becoming the no-brainer solution for us, although we spend more on alternatives here in Texas, but the reliability is in things like net gas. Look, my bias is out there on the table. If something’s better, I’ll take it. But it sounds like Europe’s gone to the point where alternatives have hit a wall for now and they really need to do look at a different energy mix. I think your report, I’d encourage everyone to check it out. I think it’s very, very interesting. I think every nuclear investor, which I know there are a ton of really aggressive nuclear investors out there, they should read your report and they should just throw it out to everyone that they know so they can all read it.

Tony

So very good. Guys, this has been fantastic. Thank you so much for taking your time. I know we’ve covered a lot, and I really appreciate your time, guys. Have a great weekend and have a great weekend. Thank you so much.

AI-powered market forecasts with CI Markets: https://completeintel.com/markets

In this Week Ahead episode, Tony Nash, Michael Belkin, Tracy Shuchart, and Albert Marko discuss various investment opportunities and market trends.

Michael emphasizes the importance of sentiment and positioning in the market, predicting a sentiment reversal and a potential liquidation squeeze out of tech stocks and into energy, financials, and China. He also highlights the under-owned nature of the energy sector and suggests investment opportunities in energy stocks, particularly at the point of maximum pessimism.

Michael draws parallels to Sir John Templeton’s advice on buying at the point of maximum pessimism and selling at the point of maximum optimism. The conversation also touches on the Federal Reserve’s interest rate decisions and inflation concerns.

Albert agrees with Michael’s assessment on tech stocks being overvalued and predicts a potential resurgent US dollar, albeit remaining range-bound. He discusses the impact of a stronger dollar on Europe and emerging markets.

Albert also expects a trend of contraction in money supply for another month or two, followed by an expansion. The discussion further explores potential investment opportunities in China’s large-cap sector, driven by efforts to ignite optimism among Chinese investors, while acknowledging the risk of the Taiwan-China conflict.

The speakers also touch on the potential for a rally in small caps, driven by rotation and the consensus being long on large-cap tech stocks.

Additionally, the episode highlights the impact of the dollar on commodities, particularly crude oil. Albert predicts a range-bound crude oil price between 75 and 85, unless a geopolitical issue arises.

Tracy discusses refinery margins and the strength of crack spreads, noting the strengthening diesel prices and the focus on refining diesel for better margins. She also emphasizes the importance of considering fundamentals in commodity prices and highlights the current high demand for oil, surpassing pre-pandemic levels.

Lastly, the conversation mentions OPEC’s voluntary cuts and their preference for a stable market with a price range of $80 to $90 for Brent crude. The group is seen as cohesive and unlikely to deviate from the cuts. The episode also briefly touches on the impact of Rhine River levels on manufacturing in Northern Europe, noting a recent return to normal levels that will take time to alleviate the backlog of products.

Key themes:
1. Forget AI. Real Equity Opportunities
2. Inflation, Fed & Treasury
3. More Crude Supply Cuts

This is the 74th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Michael: https://twitter.com/BelkinReport
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

Tony

Hi and welcome to the Week Ahead. I’m Tony Nash and today we’re joined by Michael Belkin. Michael runs the Belkin Report, which is the hedge fund advisory service. We’re also joined by Tracy Shuchart and Albert Marko. We’ve got a few key themes today. The first is a report that Michael just put out talking about forgetting AI and looking at some real equity opportunities. And we’ll go through some of those opportunities in detail. We’re also going to get some information from Albert on inflation, the Fed and treasury. So what direction are those going and what can we expect there? And finally, Tracy is going to round us out with some discussion about crude supply cuts and a few other issues there.

Tony

Before we get started, I’d like to let you know about a promotion we’re doing for CI Markets, our forecasting platform for stocks, ETFs, indices, commodities, currencies, Forex, and economics. For the next two weeks, we’ll buy the first month of CI Markets for you. Go to the link to find out more. At checkout, use the code 25OFF. That’s the number 2, the number two number 5, and the letters O, F, F. This will give you the first month free when you subscribe to our $20 or $25 a month plans. Get fresh market forecasts every week, accountable forecasts where CI discloses our error rates and a growing set of capabilities. We’ve just launched the top 50 US ETFs Nasdaq 100, Nikkei 100, FTSE 100, and so on. Check out CI Markets today and use the promo code 25off. Thank you.

Tony

Guys, thanks so much for joining us. I know you guys are busy all week long and I always appreciate this recap at the end of the week and the look forward. Michael, thanks for joining us for the first time. Last week you issued a report titled Forget AI, the Real Opportunity is in Energy and China. So as an AI company, I won’t take offense, that’s totally okay. But we’re going to dig into this. Before we get into some of your predictions, can you walk us through your set up? What are you seeing in recent months that have really brought you to some of these predictive conclusions?

Michael

Okay, thanks for having me. My background, I came out of UC Berkeley Business School and I studied statistics there. My main drive is forecasting. I use a form of time series analysis, proprietary algorithm that I developed based on my studies. It’s similar to foray or box Jenkins ARIMA models. I was in proprietary trading at Solomon Brothers and my model gives a 12 period forecast weekly data that’s the next three months. My time horizon is three months, most of the time, can be longer or shorter. But the model gives direction, position, intensity, direction, up, down, or neutral position, beginning, middle, end, and intensity or confidence interval. I’m looking for the strongest signals and try to get in at the beginning. And most of the time, the model will be buying stuff that’s down and selling stuff that’s up. Buy low, sell high is what you’re supposed to do, right? But that can be relative. That’s not just the market indexes. So the indexes are obviously high up here after this big rally. But okay, that’s what I do now. It’s really effective on sector rotation. And just to give you a little bit of background, I was really bullish on tech and the market starting last October, October 17th.

Michael

So October through March, really bullish on tech. I was totally wrong in Q2. It overshot to the upside. My favorite stocks were the FAang stocks, and then they overshot and went three months higher. But that didn’t change the forecast, so it’s really gotten stronger. So right now, the model forecast direction for tech down, direction for energy up. That’s relative in absolute terms. So just to flesh that out, in July, the USO crude oil ETF was up 15 %, OIH Energy Service was up 20 %. The model has a similar forecast for China, by the way. M y strongest long ideas are energy and China. In terms of the position, remember, the model gives direction, position. I think of it in terms of innings, we’re probably like second, third inning of a relative and absolute move up in energy and China, both relatively depressed. Turn that around on tech. Tech just looks terrible to me, really overowned. Direction down, intensity strong, position early, just starting. And to flesh that out, just to finish up on this little idea. This week, the tech sector is down 3 %, XLK, and the energy sector, XLE, is up 3 %.

Michael

So I ran that chart a few weeks ago in the report. Long energy, short tech, that’s the trade. That’s what hedge funds do. You’re supposed to be market neutral, have longs and shorts. That spread is up 6 % this week.

Tony

Fantastic. Very good. Can you walk us through, Michael, some specifics? Let’s look first at tech. You have this chart on the New York Fang to S&P 500 ratio.

I know you give us a little bit of background on what’s happened in July, but can you talk us through your forecast and what you’re expecting in the coming months there?

Michael

Okay. So as far as the black box forecasting thing, which I do, I also wear investment strategist hat. The investment strategist hat is how do the pieces of the puzzle fit together, what’s going on out there. And I’ve been doing the Bellcon Report. I left Solomon 1992, so I’ve been doing this for what, 31 years now? Egads. Anyways, sentiment is really important. Sentiment and positioning. And this is one of those times where people have just been squeezed into this stuff. One of one of my clients is a alpha capture fund. They run my stuff, have 50 positions. And I talked to the guy yesterday and he told me everybody has long fang stocks. I mean, that’s just anecdotal, but they have 180 contributors sell side by side. And he said something like, well, you got to tell your investors at the end of the quarter. If you’re not invested in the video, they’re going to want to know why. So all these people, there’s this huge squeeze. People are over positioned. They’ve been squeezed into this stuff because it’s work, but it’s yesterday’s story. I think we’re set up for a sentiment reversal. Nobody likes energy.

Michael

By the way, tech is 29 % of the S&P 500. Communication services, 9 %. So both tech. That’s 38 % of the index. I’m not particularly bullish on the indexes. S&p, Nasdaq, there’s too much tech in it. Energy sector is only 4 % of the index. Financials, I’m also bullish on financials. Financials are 12 %, so that only amounts to 16 % %. So you’ve got 38 % that wants to go down and only 16 % that wants to go up. So it’s not particularly bullish scenario, but mainly it’s sentiment. So I think there’s a huge pain trade ahead. People got squeezed into these stocks Now they’re rolling over. They’re not going up anymore. Look at Apple, it was down. I mean, it was only up 1 % in July. It’s down on the day. Amazon’s up. But these things are turning into a big pain trade, basically. So I think there’ll be liquidation squeeze out of tech, out of Fang, into this other stuff, energy and financials and China.

Tony

Michael, I’m hearing more about unannounced layoffs in tech coming. So what I’m hearing would me hear what you’re expecting. So it feels like there is some pain in those companies that really isn’t being talked about, or at least some expected pain.

Michael

Yeah, true. So you’ve got AI now. I’m not a Luddite, right? I use Kwan. I use this stuff. I mess around with these chat things, but they give me hallucinatory answers, some of these. But if you go down beyond Fung, a lot of tech stocks… So the Bellcon Report covers all the different groups, computers, software, communications services, cybersecurity, all these things. And I run the groups relative the index and the sector, and then the stocks relative to the groups. And there’s a lot of stocks that have been acting like crap, even while the Fung stocks have held up. So AMD is supposed to be one of the leaders, right? They came out with okay earnings, and then they opened up on the high and reverse sharply yesterday. So I think that’s a pattern. And as you suggest, a lot of the stocks that are not the headline super large cap ones, they’re not doing so great. And it’s not like a tech collapse yet, but again, second, third ending. It reminds me a little bit of the height of the TMT bubble, 2000, if you were around back then. A lot of stocks acted better after that.

Michael

In 2000, March 2000 was the top. Tech stocks started trading down big time. The internet was a thing then. It wasn’t going away. But a lot of the companies turned out to be not frauds, but they just didn’t last. The stocks went down 90 %, they just didn’t hang up.

Tony

They didn’t survive. Is a thing, but a lot of these companies are… We’ve talked about this before with Albert, a lot of these companies, AI may not necessarily be the main thing, but it’s a thing. It’s a real thing. Ai is not going away, like you said, the internet is not going away.

Michael

Right. Microsoft back then was the headline stock, and that certainly survived. But the stock went down 80 % or something over the next couple of three years from the high end. I’m not predicting anything that dramatic. I don’t know. I only look three months through here at the moment. But generally, it just makes me nervous on the market. I’m bullish. We’re going to talk in a minute about the Russell. Russell 2000, no tech stocks in it, no FAang. I mean, it’s got some smaller tech stocks, but it doesn’t have the weight of the FAQ stocks. So that looks like it wants to outperform, even though a lot of the companies there, they’re not doing so great. But just in terms of flows and what happens, it’s like there’s a squeeze out of big tech into other stuff.

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Tony

Let’s speak about other stuff. Let’s talk about energy. You have a chart of XOP oil and gas ETF. Can we talk about that? Energy is pretty unloved or has been pretty unloved. Let’s talk through that a little bit here. I’ll look on XOP. Okay.

Michael

By the way, so I talked to my Alpha capture guy. By the way, I’m ranked number two in that out of 180. I’m up 15 % market neutral in Q3. So that’s after a month. And the point is, I talked to him and I said, Is anybody… He doesn’t tell you what other people are doing exactly, but he just gives you an overall view. So it’s a good picture of how people are positioned. I said, Is anybody long energy stocks? He said.

Michael

Long tech stocks. I think people are not in this ESG. You’re not supposed to own this thing. It’s not green. It’s carbon capture. It’s the end of the world. We know we’re all going to be living on windmills and solar. I’m into this. I have a geothermal heating system in my house. Again, I’m not a Luddite. But just in terms of investment opportunities, it’s underowned XOP. Again, second, third inning. It’s been definitely quiet on my end. I’ve been pushing this for a couple of months. It’s been working. Do I get calls about it? No. So I think people are still like… A lot of my clients have been with me for a long time. They don’t call me. I know they pay attention to what I say. But in general, I just think… Remember Sir John Templeton, right? He said the time to buy is at the point of maximum pessimism and the time to sell is at the point of maximum optimism. And that really holds true. I think energy point of maximum pessimism, maybe we’re a little bit past that. We’re only a couple of innings past that. Tech, if you get a point of maximum optimism. So from Sir John Templeton’s perspective, it’s time to buy energy and sell tech.

Tony

That’s great. I can hear. Yeah. Tracy has been saying this for a while, and we just continue to see headwinds there. But like you say, the performance over the past couple of months has been really good. Let’s also talk about another unloved sector is China large caps. For political reasons, for economic reasons, for failure to launch reasons after COVID, China equities remain unloved. So can you talk us through why do you see some upside in China?

Michael

Okay. Again, direction, position, intensity, the model just turned me on to China about a month or two ago. Really looked bottomy, had a few zigs and zags. Then it started to go up. It’s not up this week. It’s underperform. Fxi is the ETF down 2 % this week. But again, it looks very similar to energy in the forecast. Second, third ending up. And then investment strategist hat looking for a catalyst. What’s going to make… Let’s talk about catalyst for a second. One for China. So all of a sudden it’s stimulus, stimulus, stimulus, and they’re not running out the baz, right? It’s like little… But it’s something every day. The authorities in China are talking to the brokers saying, What do we need to do to make people more optimistic on the market? By the way, Chinese investors, the Chinese, the CSI 300 and Chinesex, they’ve been dogs. And the Chinese investors have lost hope in their market, which to me, from a sentiment perspective, is positive because then you get squeezed into it. So they’re trying to ignite optimism among Chinese investors. Foreign investors, Tiger Global blew up on Chinese stocks. Now they came out with a news story.

Michael

Tiger Global’s Long Apollo. They’ve turned away from Chinese tech stocks and they’re into financials, which is okay. But I’m just saying anecdotally, there’s room for people to get squeezed back into China. Of course, the risk there is the Taiwan Chinese conflict. I watch that very closely. You never know if something’s going to come out of left field. I’m sure that makes people little nervous. But by the way, I want to mention one other thing about catalyst for energy. The Biden administration Energy Department was selling the Strategic Petroleum Reserve, SPR. They’ve been draining it by like, forget how much, 20 million barrels a week, I think on average over the last three months. That ended about three or four weeks ago. They were using it for a cookie jar to depress gasoline prices for political reasons. I don’t want to go there, but that’s not what it’s for. If you go to the ESPR, it says it’s for severe disruptions in energy supply, of which there hasn’t been any. So anyways, they emptied the thing as far as they can take it. And now that was an artificial depressant on the crude oil price that kept crude oil.

Michael

The model was short previously earlier in the year, but that’s over. So there’s a catalyst now. So now they’re in an arm wrestle with OPEC, OPEX, and Russia’s cutting production. So I think there’s a a catalyst for energy in terms of the end of the SPR drain, and there’s a catalyst for China in terms of fiscal stimulus coming out of the Chinese Politburo. Everything over there.

Tony

Great. So all of this talk about fiscal stimulus that we saw in the first six months of the year post opening that was hollow, we’re starting to see some traction there from the NDRC in China, from the PBOC. What are your thoughts on a DVal? Do you look at C&Y? Do you have any thoughts on whether we’ll see a C&Y DVal?

Michael

Yeah. So I’m neutral on the dollar at the moment. The direction, position, intensity, remember, sometimes position, direction is neutral. So I don’t have a strong opinion on the dollar at the moment. So that could be coming up, but I don’t have a firm answer from the model for you. I’m just standing aside in the currencies. So that doesn’t factor into my China view at the moment.

Tony

Okay, good. Yeah, neither do we. We’re not seeing strong either way in the dollar. So I definitely agree with you there. Let’s close out with small caps.

You mentioned some things about the Russell 2000, but I want to go into that a little bit more detail. So you’re showing small caps out performing and forecasting a rally. And so help us understand why. Is that just on a relative rotation basis or what does that look like?

Michael

Yeah, it’s a rotation thing. So again, squeezed. So like I said, I’ve been doing this for 30 something years now, right? My original clients were what I call the hedge fund mafia, the tigers and steinhearts of the world. I have clients all over the world. And by the way, if you have international viewers, there’s nine innings in a US baseball game. I get questions about this when I say you’re in the second or third inning, they say, Well, how many innings are there? But anyways, I’ve seen over the years, I’ve seen this consensus get squeezed into stuff short at the bottom and long at the top. I’ve seen it over and over and over. And it’s them reversing that causes these major inflections in sector and index rotation. So right now, I think unequivocally, these guys are long, large cap tech stocks. I don’t want to mention any names, but I shudder some of my clients who are, again, just household names, big guys. I see them saying, Oh, yeah, we’re long fang stocks. We’re long in the video. And I just shudder because I know I’ve seen this before. I’ve seen this movie. It’s just like play the movie over again.

Michael

What happens, it turns into a dump. So it starts going down. They’re overloaded. Loaded on it. They have to sell and they say, What do I buy? So getting back to the Russell 2000, they’re not in that. You know what I mean? It’s not a thing for them. So just from a rotation perspective, again, I’m not a bubble person. I don’t think this lasts forever. So where are we now? Beginning of August, right? So I’ve got the indexes look like they’re a long hold, barely. S&p, again, they’ve got so much tech in them, going up into maybe late September, sometime September, October. That’s when I start getting nervous. The Russell looks fine. And by the way, one little observation on that. So I run all these groups and stocks. That’s why I spend my weekend doing 12 hours a day, Friday through Monday. And I still see a lot of stocks that want to go up. Cyclical stocks stocks, chemical stocks, basic resources stocks. In Europe, there’s a lot of China plays. So basic resource sector in Europe. I do sector rotation in Europe. It’s really depressed, it looks like. And these are stocks that are related to Chinese demand, base metals, things like that, want to rally based on the China recovery.

Michael

And it’s not like a complete… I wouldn’t say it’s not like one of the previous huge stimulus packages in China. It’s more like a mini bubble. But we’re setting up for China rally that could feed into energy small caps in the US for another couple of three months. That’s as far as my forecast runs right now.

Tony

Great. That’s great, Michael. I appreciate your openness on, Hey, this is a rotation thing. It’s not necessarily a long term rotation. And to Russell, I appreciate your openness on that because I think that really helps people understand the basis of why you’re looking at these things. So thank you so much for that. Albert, can you help us look at a little bit more the macro situation? You’ve been saying for months that the Fed will likely raise to 6 %. So I put up a little survey this week to see what people thought. It’s interesting to see that 80 % of people see at least one more hike, and 50 % see at least two more hikes this year in 2023. So do you still think we’ll be at 6 %?

Albert

At 6 % or just below it. I mean, what does it matter at that point if we’re at 5.75 % or 6 %? And I would like to say that Michael is pretty much exactly right on the whole tech thing being overvalued at the moment. I’ve been saying that for quite a while now. As they pump this market using those magnificent seventh tech stocks that the liquidity just pours into commodities now and rallying the market just is an inflationary problem. And for the past few months, you can look at the headline of inflation at 4 % and 3 % handle. But you look at core, it’s not going anywhere but staying steady in the 5 % range. And I think that the next CPI report is probably going to surprise to the upside. I mean, we continue with the wage inflationary. We continue with the TGA being used by treasury for liquidity inflationary. I mean, we look at these policies going into an election year and all of it looks inflationary to me. I don’t see anything where the Fed or the treasury is acting where they really want to combat inflation. And I have to question why at the moment.

Albert

The only thing that we can look at is the US dollar at this point because they’re not going to go over 6, 7 %, 8 % or some people saying double digit rates right now. That’s just silly. I mean, that would be catastrophic for the US economy in the market overall. So from that point, I want to see what the US dollar is going to do in the next three months.

Tony

Okay. So in terms of inflation, we had the services PMI coming on Thursday. And I think a lot of people want to believe that we’ve defeated inflation. And we saw the ISM services prices paid at 56.8 %, which is relatively higher than it was in the previous month. So you’ve been on this persistent inflation message for over a year. So this doesn’t surprise you.

Will we see a resurgent US dollar, or are we in the ballpark rk? And what factors would play into that?

Albert

I think that the US dollar is probably going to be the range bound between 100 and 110 on the tick seat, only because starting to get over the 110 range into 115 is problematic for Europe. I mean, they’re already having problems as it is. I mean, you talk about a 115 dollar, 120 dollar and emerging markets, which Europe is in reality is going to be problematic.

Tony

Especially as they’re buying so much net gas from the US, right?

Albert

Yeah, of course. Course, because they’re not allowed to buy from Russia. We won’t talk about those tankers going in the Rotterdam, but that’s for a different conversation.

Tony

Right, exactly. What’s your view on money supply? I was doing some calculations earlier this week. We’re still $2.1 trillion dollars over what our, say, Feb 2020 money supply growth rate was. We grew at 5 % a month for, I think, four months in 2020, and then it’s ratcheted down bit by bit. But we’re still 2.1 trillion dollars over where we would have been had that not happened. So I know what’s happening with the TGA, but do you believe we’re going to see a continued drawdown of M2? Obviously, we’ve seen negative, we’ve seen a contraction of money supply for several months. We’ve had the odd positive month, but do you think we’re going to see a focus on M 2 contraction from the Fed as interest rates are, say, continue to be elevated?

Albert

No. I think it’ll trend down for another month or two. But coming into 2024, I think that they’ll just expand it once again.

Tony

Okay. So rather than lower rates, you think they’ll just continue expanding money supply?

Albert

Absolutely.

Tony

Okay.

Albert

And lower rates is a problem. Lower rates is going to be a problem for inflation, for their inflation fight. They start lowering rates and cutting rates back to 3 % or 2 %. You’re talking about CPIs again in the 7 8 9 handles.

Tony

Right. So this higher for longer narrative, you think rates will stay pretty consistent through ’24?

Albert

Oh, yes. It’s certainly gearing up for higher for longer. I think Andy Koston or Bob Woodward was talking about higher for longer forever now. The pivot and the pause crowd have been so loud over the past 12 months that it’s drowned out guys like that. But they’re absolutely right. It’s certainly higher for longer at the moment.

Tony

Okay. And so going back to Michael’s talk about outlook on tech, obviously, elevated rates, say, contracting money supply for the next few months, that definitely is not bullish tech. That’s not a bullish tech environment, right?

Albert

No, it’s not a bullish tech environment. We should even be here in the first place. It’s only because the S&P, like Michael pointed out, is heavy with tech names, and that’s what they’ve used to rally this market and rally the S&P. It’s absolutely silly that we’re even here. At some point, physics takes over and the numbers and fundamentals take over, and I think we’re close to that point at the moment.

Tony

Okay. Then with your dollar outlook, how do you think that impacts commodities? We ve seen commodities really up and down over the past couple of weeks as the dollars figured out where it wants to be. If we see the dollar trading in your range, do we see crude where it is now or what happens with things like crude and base metals?

Albert

Well, the crude, with the range that I pointed out of 100 to 110 on the Dixie, I think crude sticks in the 75 to 85, maybe 90 range at the moment. I don’t think that they even want… They won’t let it go up higher. They’ll just get into the futures market and start selling it down with brokers.

Tony

Okay. So we may be touching on 90.

Albert

In the next three months.

Albert

Maybe touching on 90. Obviously, it can’t count. Can’t sit there and speculate what geopolitical problem pops up out of the Middle East or the Black Sea or so on and so forth. But just on a numbers basis, I think we’re still going to stick between 75 and 85.

Tony

Okay. And that flows through Tracy to refiners and expiration companies and oil and gas companies along with Michael’s XOP thesis, right?

Tracy

Yeah, absolutely.

Tony

Okay. So do you expect refinery margins to start coming back more or are they good where they are? They just need some stability and higher base prices for a while.

Tracy

Is this question for me?

Tony

Yes, ma’am. Yeah.

Tracy

I mean, we are seeing those crack spreads start to gain strength once again. And so things are looking good for refiners. What I’m seeing is we’re seeing diesel prices strengthen not only in Asia, but in Europe and in the United States. So what I think will be happening is when we start to get to, say, the fall, where gasoline demand teters off as a seasonality thing, you’re going to have refiners go and start refining diesel because there’s just better margins on it.

Tony

Okay. And then what’s your view? If Albert’s dollar thesis remains and we see, say, over $100 between, say, 105 or so, how much does that impact dollar based crude prices and commodity’s prices? Well, it.

Tracy

Does and it doesn’t. I mean, everybody, there’s not a one to one correlation with crude oil and a dollar. If you look at it over the long term, it’s just not a one to one correlation. We have seen, for instance, last summer where we had USD prices completely divorced from crude prices, and they both went up together. And that’s happened often in the past before. And so it really depends on, for me, for the fundamentals. And then if we start to talk about the fundamentals, let’s talk about some demand numbers here for a little bit.

Tony

Let’s do that. And then let’s get into supply cuts as well.

Tracy

Right. So what we’ve seen, right, so we’ve had from China, India, and the United States, which are basically the biggest buyers this year. In H 1, we’ve seen about a 3 million barrel a day increase in demand from those three countries combined. Now, H 2 is forecast to see an additional 2 million barrels a day from just China and India alone. I think we’re over 20 million barrels a day. That’s pretty much I think where we’re going to stay for the rest of the year. And so although 2022 demand was not completely all the way up to 2019 demand, we have this year surpassed 2019 demand. Now, we’ve had a lot of negative sentiment on oil because everybody’s scared of this recession that’s just not here yet. And so there was a lot of negativity on that. That said, we haven’t seen demand can’t calm down at all. And I could argue also that demand is relatively inelastic. Even when you had, say, 2008, and 2020 is a different story because the whole global economy shut down. But you look at 2008, the last recession we had, global oil demand came back fairly quickly compared to everything else.

Tracy

But going back to where we’re at right now. So that’s where we’re at as far as demand numbers are. We’re over 2019 levels. We’re at literally all time highs in demand. And then you still have OPEC with their voluntary cuts. And as we just saw earlier this week that Saudi Arabia decided to extend their million dollar voluntary cut to September, which is not really a big surprise.

If you have studied Saudi Arabia, they like to do things in three months. So that’s their M. O. So going into the fall, we could have a serious problem with the market. Now, will OPEC react? Yeah, they can. But you have to realize that once they react, it takes a couple of months for that to actually filter into the market. In fact, we’re only just now seeing, as far as exports and things of that nature, the May cuts come in, not even the June and July cuts. Those haven’t even factored in. Even if they respond and we see oil prices kick up because the fundamentals actually kick in and people care about the market again and actually care about fundamentals, then they can react and I do think they will.

Tracy

They don’t want a spike in oil prices either. They would rather have oil prices steady and manage the market. They don’t really want to see the 130 spike that we saw February of 2022 after the invasion of Ukraine. That’s not really a stabilized market because then it becomes an issue for emerging markets and it hurts other economies. Then they stop buying your product. I think that $80 to $90 range for OPEC, for Brent is a good place for them to be right now.

Tony

Will we see other OPEC or OPEC countries follow suit with Saudi Arabia?

Tracy

It’s a very cohesive group. I’ve been saying this since the 2020 debacle that out of that catastrophe emerged a very strong cohesive group where we were used to seeing a lot of infighting, a lot of cheating, and things of that nature. And everybody just assumed that’s going to be the way that it’s going to be. But since 2020, we haven’t seen that.

Tony

Okay. So Saudi is the only one that will continue cutting. Everyone else will stay based.

Tracy

On the black and white. Yeah. There are cuts between… It’s not Saudi Arabia. Saudi Arabia is shouldering the burden of the cuts, but there are other six other countries that have the voluntary cuts to the end of the year. So we still have that 2.5 million cuts. And then this extra million was Saudi Arabia’s alone decision to do this. And it was just supposed to be for the month of July and August, and they now put that out for one more month. So it will include September as well.

Tony

Interesting. Okay, very good. Now, Tracy, I want to go back to something we talked about a couple of months ago, and I think we covered it again last month is Rhine River levels. And we talked about how there was drought in Northern Europe, and the Rhine River had fallen to levels where manufacturers upstream couldn’t receive the commodities they need to manufacture and so on. Can you walk us through some of the impact that’s had? And then you had this tweet earlier this week talking about how Rhine River levels are back to normal levels. Will we see an immediate impact or will that take some time for, say, German manufacturing to get back to normal?

Tracy

Yeah, that’ll definitely take some time just because of the backup that has happened because what was happening is what you have to do is you have to split your load because your vessel is too heavy to transverse the river. So you have to split your loads, which obviously takes a lot of time. So there’s a lot of product backed up still that needs to be shipped out. So it’s going to be a few weeks before I think we will really start seeing some allevi there. But it’s good, obviously, it’s very good news. And you can see the prices of some of these commodities that were very affected start to come down, particularly the softs and things of that nature.

Tony

Very good. So that’s good news for Northern Europe. So guys, thank you so much. This has been a great overview. Thank you, Michael, for your outlooks. Please check out the Belkin Report, guys. Michael’s got a lot more forecasting there and really solid. Michael, thank you. Albert, Tracy, thank you so much and have a great weekend.

Welcome to “The Week Ahead” with Tony Nash, where we discuss the latest market trends and forecasts for the upcoming week with a panel of experts including Blake Morrow, Tracy Shuchart, and Albert Marko.

They begin with Blake by examining the strength of the dollar in relation to the euro, Japanese yen, and the resurgence of commodities. The conversation highlights the Fed’s indication of keeping rates high, the dovish stance of the European Central Bank, and the inflationary environment in Europe and the United States.

The focus then shifts to the Bank of Japan and the potential changes in their yield curve control policy. The speakers discuss the challenges the BOJ faces in moving away from ultra-loose policy, and the impact it may have on the Japanese yen’s depreciation and potential future appreciation.

The episode also covers China’s economy and the challenges it faces in shifting towards a consumer-based model. The speakers mention the potential devaluation of the yuan to boost exports, as well as the appreciation of the Mexican peso and the rally in commodities driven by a weak US dollar and China’s stimulus.

Tracy touches on the energy sector and the United States’ oil demand. The conversation explores the implications of rising energy costs on inflation and the global economy, as well as the slowing growth in margins for S&P 500 companies. They discuss the impact on luxury brands and high-end consumers, as well as the current status of AI in the tech industry, mainly with Albert.

Lastly, the experts discuss the role of large language models in improving search efficiency and potentially replacing low-level analyst jobs. They acknowledge the transformative effect of AI advancements in search capabilities, but caution about the accuracy of information provided by AI, especially in legal contexts.

Key themes:

1. Dollah! (& EUR, JPY, CNY)
2. Commodity Resurgence
3. Earnings

This is the 73rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Blake: https://twitter.com/PipCzar
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript:

Tony

Hi. And welcome to the Week Ahead. I’m Tony Nash, and today we’re joined by Blake Morrow, Tracy Shuchart, and Albert Marko. Thanks, guys, for joining us. Today, we’ve got a few key themes. The first is the dollar, and we’re going to talk about the dollar in relation to the euro, Japanese Yen, CY. We’re also talking about commodity resurgence and earnings.

Tony

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Tony

Guys, thanks so much for being here. I really appreciate the time as always. Blake, it’s your first time here. Thank you so much. I appreciate it. I’ve heard great things about you and I follow you on Twitter. I want to start by talking about the dollar. We do see another, of course, another 25 basis point move by the Fed and the ECB this week. And after a couple of months of hearing about the dollar’s demise, which Albert and Tracy and I have laughed at every time we hear it, yesterday on Wednesday, we’re looking for strength to return the dollar. And we saw that Thursday this morning after the ECB meeting. Can you walk us through your case for dollar strength?

Blake

Yeah, sure thing. And by the way, thanks for having me here. It’s first time and hopefully not the last time. It’s really an honor to be here with you guys. This week was a unique week because we had the Fed, ECB, and the B2B OJ is happening tonight. And we just had some headlines come out less than an hour ago that’s really moving the markets. But it’s rare when you can get these central banks, you have a good understanding from a macro micro point of view, fundamental point of view, what to expect. And in this case, we had the Fed that… I think we’re all coming to the realization that the Fed, even though they’ve said this many a time for months and months and months, rates are going to stay high for probably a long period of time. And something they said yesterday that really caught my eye or caught my ear, rather, was that their internal economists aren’t even forecasting a recession, which means that if you were thinking thinking when we get in a recession, the Fed is going to eventually cut rates, they’re not going to. So that automatically, I was assuming that they would message that they were going to keep rates higher for longer and try to drill that in.

Blake

I didn’t think it would come out in that way. However, I also figured the ECB, which came out this morning, and if you saw Christine Le Gard, I almost thought her shoulders were really slumped over. She looked really not so optimistic, and she was very dovish, more so than I’ve ever seen her in over the last 12 months. I figured that was going to be the case because the European data has been really deteriorating. And so I figured that she would be somewhat dovish and maybe not lead us down the path that we’re going to get another rate hike, which I think that was the case today. So it just so happened that it worked out the way that I anticipated. But let me be the first to say, Tony, that doesn’t always happen by no stretch of the means. It did really work out according to the way I planned it this week.

Tony

Hey, take the win.

Blake

I’ll take it this time. I take plenty of losses, so I’ll take the win.

Tony

With Powell yesterday, one of the things that I noted that he said is he said policy is not restrictive enough or for long enough to have its full intended effect. And so that the hire for longer is just all baked into that sentence, right? And surely after that, he said, we have a long way to go. And so I think there were some people who walked away from that press conference thinking it was Dovish, and I just didn’t hear that at all. Did you hear Dovish comments out of the press conference?

Blake

No, I think it was pretty well balanced, but the higher for longer, I think it’s starting to resonate with the markets. But between that and between the ECB and now the BOJ, I think the markets are starting to understand, and really you’re taking the Bank of Japan, which is the last G10 central bank that has ultra loose policy, that might actually get removed or start the other direction as of tonight or tomorrow morning in Asia. And I think the markets might be getting the hint now. And I think we’re starting to see signs of it actually today would be the first day that we are.

Tony

And then ECB made comments about end of cycle. So she really wanted wants to be at the end of her rate rise cycle, right?

Blake

She does. And I think she’s probably feeling a lot of pressure from Germany. If you’ve looked at the German, especially the manufacturing PMIs just earlier this week, they’re horrendous. And when Germany is the growth engine, if you will, of the Eurozone, if you will, and they have plenty of seats in the ECB Board of Governors, she’s probably feeling a lot of pressure from Germany specifically. And so, yeah, I think she wants this cycle to be over. I think everybody does. But the problem that we’re all facing, and I think the best case or I shouldn’t say the best case, the best example of a stagflationary environment is what’s happening in the UK with persistently high inflation. But now you have growth that may actually go negative and then they’ve got a real big problem. I think Europe is facing that as well.

Tony

Europe, I think we’re hitting up against some energy derived base effects over the next few months where I think people may be declaring victory over inflation and the battle may not be over. But we saw, especially gas, really rise Q3 Q4 of last year. And so they’ll be measuring inflation against that. I’m not sure that is going to be the battle is won type of environment for Europe.

Blake

I want to defer to Tracy and Albert as well. But Tracy, you follow a lot of these commodities. I was really, really carefully watching cotton over the course of the last couple of weeks. It had been basing since I want to say, the fall of last year of 2022. And it just broke out of a base, literally this week. And when you see these commodities percolate, that’s going to make life a little tough, especially when you have certain financial conditions are looser than they should be with equities where they’re at with the trickle down effect. You got people feeling a little wealthier. Their housing their houses or their multiple homes haven’t really lost a lot in value yet. And then you throw that type of spending on top of commodities staying very perky. I think this last leg of getting inflation from 3 % to 2 % is like running the 22nd to 26th mile of a marathon. And that’s where they’re at. It’s not going to be the easiest part.

Albert

Yeah. What we really should look at is the core CPI. That’s still raging hot. All the points that you made were absolutely correct. We’ve discussed this for many months now, Tony and with Tracy that Europe is just a zombie economy. And the moment they start taking up in any which way, inflation starts to rage again. And then energy inflation is gaining steam, not only there, but also in the United States. And we have a problem. I mean, the chairleaders of… We’ve solved inflation because they have a three handle, which is a little bit silly and way premature in my opinion.

Tony

Let’s circle back, Blake, for just a minute to talk about BOJ. I know we’re going to talk about a lot of the commodity stuff in the next section with Tracy, but let’s circle back to BOJ. There are some stories out today on Thursday about the BoJ tweaking yield curve control to cap it by 0.5 %. So that is a pretty massive change.

I know they just changed their BoJ chair about three or four months ago, so he didn’t want to make any changes right away. But it sounds like he’s really starting to talk about some incremental changes. This is a pretty small change, but it’s actually a pretty big change. Can you talk to us about that a little bit?

Blake

Well, I think it is a big change because it would be a step in the direction that the markets don’t want to see. The last time Bank of Japan tried to move off the zero bound was just pre GFC, the financial crisis in 2008. So here they are again trying to move off the zero bound first starting with yield curve control tweaks. Now the BOJ, we have a new governor, BOJ Ueta, which is really interesting is he had been so in his academic papers that he’s written over the last couple of decades, how critical he’s been of the BOJ and where they’re at. He jumps into the BOJ driver’s seat and he ends up being just pretty much the same as Kuroda. Probably from a political standpoint, not wanting to rock the boat too much.

Blake

However, he also pulled a very similar move to Kuroda this last week where they leaked out from official sources to Reuters, probably every journalist from Vogue to who knows what, The Economist, saying that they weren’t going to tweak yield curve control. We saw move in the Yen move lower. So people like myself that were pre positioned waiting for this yield curve control leak, we got stopped out. I took some losses last week because of it. And then here goes today from the Nikkei paper suggesting that tonight or tomorrow morning in Japan, they’re actually going to make the tweak and move the band so they can allow it to trade up to 0.5 %. Now, that in itself is that tweak of that yield curve controller allowing it to move is basically step one of probably many steps of trying to normalize their monetary policy. But if you think about that, that’s the last central bank that we have that really is keeping ultra loose policy. And that’s I think the takeaway that the markets need to start looking at, especially equity markets globally.

Tony

Right. Very hard for them to continue importing inflation, but also very hard for them to fight against demographics in terms of the productivity value add in their economy. So they’re in a really rough place. So can we look at a number of currencies? I have a chart up now on several currencies. I want to just walk through some things with you as we look at where we are. First, on the top and blue, we’ve got Japanese Yen, which we’ve seen real depreciation since 2022. Can we talk about within the context of the dollar, if this BOJ policy really does go through, do we expect marginal appreciation in JPY or do you think it’ll really come back down to say 120 or something like that?

Blake

That’s a great question. I think over time, depending on how aggressive the BOJ has to be, I think 120 would be probably a realistic expectation from a technical point of view because you’d be looking at an equal leg move from the highs down to the lows that we put in in January of this year. So that would probably take us in the range of 120. And it’s not going to happen overnight, but it’s baby steps for the Bank of Japan. And I think that the first real key is going to be what I saw as channel support, which it would be around the 136 level. We start trading below 136, 135. I think a lot of longer term yen shorts might be looking to exit those positions at that point.

Tony

Okay. And then looking at CNY, China’s economy is in a really bad real tough spot and we’ve seen some devaluation there. What’s your expectation with CNY, CNH? Do you expect to see continued devaluation there, or are we in that zone where the monetary guys in China are comfortable?

Blake

Well, I don’t think they’re comfortable at all. And that’s a great question. And it’s a really, as you pointed out, it’s a really complex situation that China is dealing with. They thought their opening would be great. The issue that China has, and if you’ve watched China over the last 20 to 30 years, trying to shift their economy to a consumer based economy, hasn’t They’ve made a lot of billionaires and millionaires as you could imagine, but still a majority of their country is not in that situation yet. Yes, I get to eat five bowls of rice today versus 10 years ago, and they had three bowls of rice. Maybe that’s the difference for a lot of their population. But the fact of the matter is, is they’re really trying to rely on domestic demand, and they just said it in the Politburo meetings this week that they are struggling with that particular issue. So they have a few levers that they can pull, stimulus levers, reserve ratio requirements. They can try to spur domestic loan demand, but the real estate markets are a little iffie at best because a lot of Chinese, they have multiple properties that they own.

Blake

So trying to get them to leverage up and borrow a little bit more. It’s a hard or a tough ask for the Chinese people. So China’s got a few levers left and one of them happens to be with the C&H. And the C&H and the C&Y. Trying to get the Wan or the Renminbi lower to spur more demand from Europe, from the US, make their goods cheaper. But it’s hard for the the PBOC to pull that lever without looking too obvious, right? Because we know they have the lever, we know they can pull the lever, but we know politically it’ll be frowned upon. So I eventually expect the US dollar C&H to break above 730 and maybe even go towards 750. And that would be signaling to us as investors in capital markets globally that China is really feeling the heat. So can the US dollar C&H continue to dip, maybe down towards the 200 day moving average around 7? Sure. Do I think it’s probably a buy down there? I don’t trade it, but I think people that do are probably looking at that level as an attractive level to be on the long side.

Tony

Okay, yeah. I think one of the key things that I look at when I look, especially at Northeast Asian currency is you have this movement with the BOJ, which will likely appreciate JPY.

You have the Korean won that’s appreciating. China’s domestic economy is a mess and they really need to goose exports so they can use that industry to further develop domest. Given all the troubles they have at home, that might be an easy decision for them to make to devalue just a bit to goose some exports, especially as more industries move off of the Chinese mainland for a lot of political reasons. In terms of moving industries, I want to also talk about the Mexican Pesso. We had a viewer question about the Mexican Pesso, and we’ve seen the Mexican Pesso appreciate pretty nicely against US dollar over the last, say, nine months or something. Can you help us talk through and understand why the Mexican Pesso is moving in that direction?

Blake

Yeah, you bet. This has been the darling of the FX market. By the way, going back to China, I just want to say I’m not the best China expert. I have some European members in the forex analytics team that trade the US dollar C&Y and C&H quite aggressively. So they’re better. I just take from them what I can. But as far as the Mexican Peso, it is something that I trade quite actively and aggressively at that. It’s been the darling of the FX market as a carry trade. When you can carry the Mexico’s higher rates over anything else, especially the euro, the yen, the Mexican, M XN, JPY, the euro, M XN, dollar and Mexican Peso. The Mexican Peso has been the star. And the reason why is because the rates are extremely high and FX institutions will park their money in Pesos and they’ll sell other currencies. And that’s great in a market where stocks are rising, we see that volatility is low. Those we call carry trades. That is the carry trade. It’s like the yin of the mid 2004 to 2005 era. The Mexican Pesso is in that situation. The risk at this point is that we’re starting to see other LATAM currencies l ike…

Blake

Oh, I always forget the central bank. The Chilean Central Bank, BCCH, is that what it is? Anyway, they’re about ready to embark on a rate cut campaign. Now, Chile is not Mexico, but it is a La Tène currency, and you’re starting to see some of these emerging market currencies, banks go stop raising rates as well. Will they start cutting rates? If they do, that the margin that you’re going to get on that carries a little bit less. Then if you start to see equity markets really come under pressure, like let’s say the and P trades from 40, it’s trading around 4,500, 4550 right now. We trade down to 4400 or 4,300, you’re going to see the air come out of the Mexican pay zone. You’re going to start to see the dollar outperform, the yen outperform as the BOJ adjusts their policies. Even the EuroMexican Peso is probably going to recover after having such a big slide. So I’d be careful with the Mexican Peso as it trades below 17. I think if it trades back above 17, 1705, especially 1750, we’re probably looking at a squeeze well over 18 again.

Tony

Okay, great. Thanks. We don’t talk about Mexico a lot, so this is really interesting.

Albert

I like the Mexican pace, though, simply because the trade has increased tremendously between Mexico and the United States.

Blake

I cannot disagree with that. And I think Mexico is the US is China. And specifically when I played a couple of rounds of golf with a gentleman that he has a chip company that he’s actually migrated his employees from China to Mexico over the last three, four years because of cost, labor cost. And so I am actually a Mexican pesos bowl. People that know me know that I believe the dollar Mexican pesos is eventually going to be trading in the lower teens over the course of the next couple of years. But right now, the specific risk is that we trade back to 18 before 15. How about that? Maybe that makes sense.

Albert

Yeah, I’ll leave the forex stuff in the levels of the U.

Tracy

And that was the exact question I was going to ask. I was going to say, does it have to do with trade with the United States as we’re seeing a lot of manufacturing, which was big in, say, the 80s in Mexico, now returning to Mexico with trade to the United States or say US companies moving their manufacturing to Mexico rather than China per se.

Blake

Yeah. And Tracy, I gave you that one example. It’s anecdotal evidence, right? It’s not like something I’d hang my hat on. But I think that is a trend that we will see in the years ahead is as China’s labor force shrinks and it costs more to produce in China, the rest of the world is going to search for alternatives. Most of them, like a lot of Europe, is going to go to India. We’ll go to India. But Mexico is our next door neighbor and labor is still cheap there. So we will find alternatives and I think the rest of the world will away from China. That’s one of the issues that Tony, you brought up about China. They got issues. You try to change your whole demographic of your entire ginormous country, there will be repercussions. And this is one of them, I think.

Tony

And it’ll happen. It’ll start slowly and then people will realize it and it’ll hit heart pretty quickly at some point. So I think looking at CNY, CNH right now is really important because I think we’re in the early days of something larger happening over the next few years.

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Tony

So Tracy, let’s talk about resources for a minute, I know that’s where you live every day. So we’ve seen strength in commodities over the last three months. I’ve got a chart up on copper, WTI and net gas up on the screen right now.

So why are we seeing a rally in commodities now? Is this really on the back of a week or dollar or is there something more to it?

Tracy

Well, I think we need to look at each one of these separately, to be honest. Just for example, Blake brought up the cotton issue and why is cotton starting to rally off the lows now. And that’s a China stimulus story right now because they have a lot of manufacturing to make a lot of cotton T shirts, etc. I think it’s really hard to lump all of the commodities together. So I would like to look at… I think we should look at oil or the energy sector in particular separately from, say, the metal sector, separately from, say, the softs.

Tracy

I think if you’re looking at the energy sector in particular, you are looking at a week or dollar. That always helps. And that all ends suddenly signs of life from China, meaning people are starting to believe China’s stimulus matters. Whether it’s come true or not, we really haven’t seen them say a whole lot until the last couple of weeks. You can even look at the hang saying on this in which we’re down 5 % on the year. And over the last weeks, it’s surging right away. Goldman just put out a note on Wednesday that said funds are piling back into China at the fastest pace in nine months over the last week, which is huge based on what they have said over the last week. It happened.

Tracy

Whether you believe them or not, the markets believe them at this point. And then as far as energy is concerned, we still have that supply demand issue. We have Russian S exports down. We have voluntary cuts filtering into global markets right now. And we are also seeing recession fears seeming to subside a bit because markets are seeming to starting to believe in this soft landing, or at least the commodities markets are.

Tracy

The equities markets, that’s a whole another story. And then if you look at the metals, again, I think if you look at the metals, this is again a China story. Suddenly, everybody’s believing China stimulus at this point. Again, I don’t know what exactly changed and what exactly changed the market’s mind, but I think it was helping a little bit of the property sector, which is definitely not enough, in my opinion, as well as the tech sector, the couple of announcements that they put out over the last two weeks. And so I think that’s really what we’re looking at right now. And again, a lot of it is the China story.

Tony

Right. So we’ve got Europe dead. We’ve got China dead with some commitment to them to maybe get stimulus, and we’ve got the US slowing down into the end of the year.

Tracy

Well, if we’re talking about the energy sector in particular with the United States, we have implied demand over the last several weeks has risen from 19 million barrels a day to 21.7 million barrels a day, which is huge. That’s over 2019 levels. And so we’re not really seeing And implied demand, you can take in different ways, but that is what product supply is implied demand. That’s what everybody takes it to be. So we’re not really seeing demand being lowered in the United States. We are also looking at a place in August where we’re going to see a lot of exports to China because Russian oil is getting to be more expensive right now. We’re above that price cap. And so we’re seeing China has put a lot of orders in for the United States, for WTI, Midland, for August deliveries. So we will see a reans here in the United States as far as inventories are concerned. And we still haven’t seen China overall. I mean, over this whole period that everybody’s thinking China is imploding, which they may or may not be. They’ve been buying oil hand over fist. And perhaps, yes, that’s a lot of it is going into storage.

Tracy

They can build storage out. But a lot of it, if you look at the refinery runs, are also huge.

Tony

I’m so glad you didn’t say China is talking up to go to war because I’m so tired of that.

Tracy

No, I don’t think China likes cheap oil, let’s be real. So they can get a huge discount from Russia, right? And get this price cap. And so at the time, it was $23, $20 below the price cap. Of course, who’s not going to stock up? India stocked up. Everybody’s going to stock up at that point, right? You’re going to buy high end over this. Actually, the best thing that the United States could are the best thing the West could hope for is that Russian oil is trading over that price cap because you know why? That doesn’t make it as desirable anymore. Nobody’s going to buy as much anymore. I think it’s short sighted thinking to say, Oh, my God. They’re trading over the price cap. Well, great. That means it’s not as desirable anymore. Why would I deal with the hassle of buying with them if it’s only a few dollars discount?

Blake

Do you mind if I interject and ask a question?

Tony

Yeah, absolutely, yes.

Blake

Okay. And Tracy, this is something I think about quite a bit just because we’re having this discussion or we’re having this discussion about crude oil and inflation, going back to the inflation question. It’s interesting. You watch crude oil rally and everybody cheers like, Oh, things must be getting better. But there’s always that inflection point, and I’m not sure where it is in crude or R Bob or whatever you’re looking at, but at what point do these higher energy costs really start to translate to, Oh, my God, that’s going to bite the consumer here in US globally, wherever you’re talking about. And crude going higher is not a good thing. There is that inflection point. I don’t know where it’s at. I don’t know if it’s at 80, 85 at 100. Do you have any thoughts on that?

Tracy

I think it really depends on the state of the economy and where we’re at. Our I think at $70, we’re still in that 70 to 80 range.

Blake

And I think that’s… Goldilocks, right? Goldilocks? That’s comfortable.

Tracy

It’s very comfortable, right? You’re not seeing $5 oil or gasoline prices at the pump. Not saying that’s a very comfortable position for oil to be in at this juncture. If we start to see oil prices spike higher than that, of course, that’s going to matter. And of course, this is all going to filter into energy runs the economy. You can’t do anything without energy. You can’t run a business because you have to keep the lights on. You can’t grow food because you need energy to grow food. So energy runs the economy. So at some point, yes, it’s going to matter. It’s going to filter in. It’s going to make prices higher. And I don’t think we’re going to see 2 % inflation anytime soon. In fact, even Powell doesn’t think we’re going to see 2 % inflation anytime soon. He said yesterday we’re not going to see this to 2025. I tend to think that ambitious goal because I think that no matter what we do at this point, if we’re looking at energy transition and we’re looking at all of these policies we want to put forward, we’re still lacking a lot of these materials, we’re still lacking a lot of energy for this.

Tracy

And this is going to be a huge problem that central banks just cannot counteract no matter… They may try. Actually, Peter Bookfire brought up a really good point yesterday when I was interviewing him. He said it’s easy to bring inflation down quickly with high rates. It’s harder to keep it down.

Albert

Tony, who told you that the more they rally this market, the more inflation is going to be a problem?

Tony

You did, Albert. You said it a long time ago. You said it.

Albert

Why people think that as they rally this market in silly, silly stratospheric levels, that they didn’t think that commodities in oil and wheat and cotton and every other thing is not going to run? Of course it is. Their problem is they’re running out of room now for rate hikes. So what they get, the only other option that I can see that they’re going to use is the US dollar. That’s the only thing they can do is take the dollar back up to the 108, 109 area just before you start breaking Europe and the rest of the world to try to team inflation because they don’t want to see 6, 7 % CPI prints going into an election year. That’s just ridiculous.

Blake

Isn’t it crazy, Albert, how the dollar can be weaponized? And it really can be, I believe.

Albert

Of course it’s going to be weaponized. It’s a reserve currency and Janet Yellen controls the policy. She’s going to do what she needs to do whenever she wants to do it. Unfortunately, that’s just the reality. It’s just the reality of the situation. And as I was saying, rate hike runway is pretty much ending. So the dollars is the only thing that they’re going to be able to use.

Tony

So your thesis is that US rates will top out at 6 %, and that’s going to crush China. Is that right?

Albert

Oh, yeah. China was never prepared for 6 % rates. Absolutely.

Tony

And again, tell us why? I want to make sure everyone understands.

Albert

Well, it’s just the debt level, the amount of debt that they had and the way they funded their debt. No one was, I don’t think anybody on Earth was thinking that 6 % % Fed Fund rate was coming. But here we are at 550 almost with probably another two hikes to go.

Tony

So we hit 6 % now. Now, China has been evergreening debt since 2009. They have all that debt for 20 years ago. They’ve continued to evergreen because they haven’t been able to pay it off and so on and so forth. Fed funds hit 6 % and the Chinese are practically begging the US not to raise anymore. Is that fair to say?

Albert

Oh, absolutely. And it’s funny because Yellen was just over there and then coincidentally, the dollar tanked underneath 100. As soon as she left for a day or two.

Tony

Total coincidence, Albert.

Albert

Total coincidence. Total coincidence.

Tracy

I tweeted that out. I tweeted that out. Absolutely.

Blake

Her getting psychedelics was total coincidence as well.

Tracy

That was the best part of the whole…

Albert

But I agree with Tracy wholeheartedly. I think 65 is the floor for oil, and I think probably 85 is probably a top for oil. It’s a comfortable zone that they’re willing to deal for the next whatever year or so.

Tony

Great. Let’s move on to earnings, Albert. I just want to cover a little bit on earnings here. What are your thoughts on future earnings? So far, we’ve seen S&P 500 companies report the slowest growth in margins since Q4 of 2020.

So over the last probably year, year and a half, we’ve talked about the pricing power that companies have had since about Q2 ’22 where they were able to continue to expand their margins and raise prices on customers and customers would just accept it. That seems to have come to an end at least a bit. So is that what’s driving this margin compression? I’ve got a chart from faxing on the screen showing the margins of companies coming down to right around 11 %.

Albert

It’s not just that. We talked about this maybe six months ago saying that this is probably going to end up happening where margins are going to start ticking down second half of the year. And that’s exactly what we’re seeing. The issue is, labor rates are still advancing. Their fake CPI is still a little bit of tailwind for earnings, but that’s slowing down too. So they don’t have that inflationary tailwind to jump up prices as demand is starting to take down. Consumers at this moment are a little bit more price sensitive. They don’t really need a Rolex watch or a secondary home or a third boat and whatnot. So as that money is starting to dry up, margins are starting to dry up too. I think that it’s going to be a bigger problem for Q4 However, if I’m right and inflation is ticking back up, there might be a little bit of earnings tailwind into mid 2024 again. Of course.

Blake

Albert, since you and I just met for the very first time today, it sounds like you’re obviously following earnings pretty closely. How do you feel about the Reishmont group last week and then Louis Vuitton this week? What does that tell you about the high end stuff and the high end global consumer consumer.

Albert

The high end global consumer, I’ve always watched to see when they start retracting spending is when I start to get nervous. Whenever the big homes in Naples, Florida stop selling and Louis Vuitton start getting worried about their demand, that’s always problematic. Now, I personally love Brunello Cucinelli. That’s my brand. I’ve watched them for years, seen their stock price go from 38 to 80. And as recently this last couple of weeks, I’ve been noticing their ticker trending downward. And I looked at their sales and their stores are not getting as many people in. Their online stuff is going more to outlet than it is into the stores and out to top consumers. So yeah, I think the top consumers are about to pause. If not paused already, they’re about to start pausing in Q4.

Blake

Yeah. The Reishmont group, I think last week they were down 10 % in European trade. And Tony, that goes back to your point about China and they decided to solve the Chinese high end consumer. They’re the problem.

Albert

Yeah, they say that. But that’s more than just that. The Chinese high end consumer is one component of it, probably a real big one. But the Middle East is probably showing the same little drawbacks. North America and Europe is obviously going to have falling sales in the luxury market. So they can blame China, but it’s a lot bigger than that.

Blake

Yeah, right. Cool.

Tony

I want to talk for a second about tech, Howard, because I know you love to beat on AI, even though I run an AI company. I don’t take it personally. So on tech, I thought it was really interesting that Microsoft’s growth for Azure hit 25 %, but AI was only about one and a half % of that growth. So I think some real questions have come. People have really started to think about AI. If Microsoft can’t get money out of AI because they’re effectively the owner of Open AI, right? So if they can’t make money out of AI, who can? We’ve seen for the past two, or at least earning calls, AI is mentioned dozens of times on so many earnings calls, right? So when do you think we’ll start to see that? Or do you think AI is just a feature in larger products that just help people retain and marginally grow?

Albert

Yeah, I think that’s correct. I think that’s just the feature and the larger products. The only AI that I would be excited about is whatever comes out of Apple.

Tony

And Complete Intelligence, of course.

Albert

Of course, Complete Intelligence. Truly dollar money maker right here.

Albert

But as a stock that’s actually traded, Apple would be my number one for AI. From what I hear, they have a working AI internally that’s just off the chain. But Apple is really smart. They wait years to perfect something before they start releasing things. So I just think that AI is a little bit too premature, and I don’t really like the marketing talk by some people. It just throwing AI around as if it’s some godlike feature on an app. It’s not. So I think we got a ways to go for that.

Tony

Yeah. My view is large language models like JMP and all the stuff that Microsoft is starting to do is really just a synthesized search engine. It makes your search a lot smarter. It’s all it does. It’ll take out some low level analyst jobs to write some papers for you. It’ll make your searches better, that thing. But we’re not to the point where those LLMs are real money makers right now. They make those applications more useful. Does that make sense?

Tracy

Anecdotally, wasn’t there just an article out that saying AI is getting dumber?

Albert

Well, it’s garbage in, garbage out. I think you’re talking about where chat GPT was answering 98 % of math problems correctly, and then just recently it dropped down to 2 %.

Tony

It answered 2 % correctly?

Albert

Yeah, 2 % correctly. It’s just garbage in, garbage out.

Tony

I’m going to look that up.

Albert

Yeah, I posted it.

Tracy

He posted it. I actually read it before he posted it. It’s true.

Tony

Because I don’t need AI to do those problems. I can get 98 % of them.

Albert

That’s the thing, Tony. I always tell people, whether it’s technological or political, social, things happen. Things happen incrementally. There’s never some jackpot trade or technology that comes out that changes the world like we’ve never seen before. It’s just things happen in stages.

Tony

But to OpenAI’s credit, AI, I think, was a really far off imaginary word to a lot of people until chat tipit e was brought to market. And then I think people went, Oh, my gosh, this really changes things. And I think it did. I think it’s the biggest change to search that we’ve seen in 20 years. I completely agree. It’s made it a lot easier.

Tracy

You just have to make sure it’s correct, right? Because you hear these stories, some lawyer used this for a brief and they brought in a whole bunch of…

Albert

Legal trouble. Yeah, you got.

Tracy

To say it. It didn’t really happen.

Blake

Yeah. It’s definitely like an assistant and you have to go back and double check the work. I look at AI as the Google Glass of today. Yes. I’m sure at some point we’ll all be wearing weird things on our heads. Whether it’s…

Tony

I hope not.

Blake

Not. Whatever. Well, just wake me up when Ex-Machina actually happens, and then I’m going to go run for the Hills.

Tony

Right, exactly. Just circling back to earnings for a minute, Albert, as we finish out this earnings season, are you looking for… Are we recapturing earnings momentum, say, later this quarter or into the next quarter, or do you see things continuing to gradually deteriorate?

Albert

I think we’re going to gradually deteriorate into the end of the year with probably earnings starting to tick back up Q1 Q2 of next year in the run up to the election. Obviously, tech earnings, it’s the fabulous five of Microsoft, Google, Apple, NVIDia, so on and so forth. Those are the ones driving the market. So that’s the ones that I would be watching.

Tony

Very good. Guys, thank you so much for your time. This has been excellent. Blake, thanks for joining us for the first time. Albert, Tracy, thank you your time as always. Have a great week ahead. Thank you. Thank you.

Tracy

Thank you.

Blake

Thank you all. Thank you.