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In this episode of “The Week Ahead,” Tony Nash hosts guests Doomberg and Albert Marko to discuss two key topics: stagflation in 2024 and the ongoing clash between Binance and the SEC.

Tony highlights the survey results showing significant concern among respondents regarding stagflation. Albert discusses the impact of economic and political policies on persistent inflation and believes that the stagflation argument may be more of a “stagflation light” scenario due to the resilience of the service industry and ongoing market rallies. Tony adds additional points, including the IBD economic optimism index remaining below expectations and signs of cracks in the middle-class economy. They acknowledge that inflationary pressures, rising prices, and elevated interest rates contribute to declining optimism and a challenging economic landscape.

Doomberg provides insights into the counterintuitive inflationary effects of rapid interest rate hikes and discusses potential impacts on oil prices due to changes in the US shale industry and rising housing costs. He suggests that global stagflation in regions like China and Europe could have a spill-over effect on the US economy.

The conversation also covers arguments against deflation, with Albert highlighting wage inflation as a factor preventing deflation. They discuss the challenges of US debt, the impact of inflation on household costs, and potential signs of deflation in the commercial real estate sector.

Shifting to the energy sector, they discuss the potential impact of stagflation on energy, mentioning challenges faced by the oil industry if prices fall below $65. They highlight the tight supply of oil and gasoline, contradicting claims of low demand, and discuss the role of electric vehicles and the divergence between physical and paper markets.

In the cryptocurrency industry segment, Tony and Doomberg address the legal issues surrounding Binance and Coinbase. They discuss accusations of unregistered securities and criminal activities by these platforms. They emphasize the potential consequences of disregarding rules in the cryptocurrency industry and the need for stronger regulatory action.

The discussion concludes with a focus on the recent actions of the SEC in relation to the cryptocurrency market. They discuss the challenges of regulation, the susceptibility of the regulatory apparatus to corruption and political forces, and the erosion of trust in the SEC. They also highlight the need to address pump-and-dump schemes and the potential expansion of investigations into the venture capital space.

Key themes:

1. Stagflation in 2024
2. Binance & the SEC

This is the 68th 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
Albert: https://twitter.com/amlivemon
Doomberg: https://twitter.com/DoombergT

Transcript

Tony

Hi, everyone. Thank you for joining us on the Week Ahead. Today, we’ve got a couple of great guests. Today, we’ve got Doomberg. We’re going to talk in detail about crypto and Binance and a lot of the crackdown from the SEC. We’ve got Albert Marko. We’re going to talk about Stagflation and expectations for 2024.

Tony

So, guys, thanks for joining us. I think we’re going to go a little deeper into these two areas than we normally do on our topics.

Tony

So, Albert, let’s start with you for Stagflation in 2024. I ran a quick survey last week and I know this isn’t super scientific and whatever, but I was really surprised that Stagflation had such a large showing in the responses.

Can you just help us understand why people are thinking that? And what is your view on Stagflation inflation deflation in, say, late 2023, going into 2024?

Albert

Well, I’ve been a proponent of inflation being sticky and staying elevated for quite a long time. I mean, the political policies, economic policies, have not fixed anything in the past two years. So, in my view, inflation just will stay elevated for quite probably next two, three years. The problem with the Stagflation argument I have, it’s more like Stagflation light, in my opinion, that we’re going into late 2023 and into 2024. The issue is unemployment. Sure, we can discuss the BLS manipulation of unemployment and job numbers and so on and so forth. However, the service industry is just banging hot still. It’s not coming down. It’s partly affecting inflation. Dewensberg is also going to throw in there some inflation comments, but the problem is now we have the treasury and the Fed shifting from tech stocks to growth stocks and pushing that up. And they’re pushing inflation and they’re pushing the market to rally. It’s hard to have a full Stagflation argument going forward when just unemployment is just not anywhere where we need it to be to see an actual recession.

Tony

Yeah, those are good points. Let me throw a couple of other things at you. We have this IBD economic optimism index that came out this week, showing the optimism is well below expectation. It’s at 41.7. Of course, that’s an arbitrary index, right? But on a relative basis, it’s not picking up.

So we’re seeing employment officially looking pretty good, but we’re seeing optimism kind of flatline, even as other things kind of we see interest rates come up, we see the banking crisis hopefully getting resolved, all this other stuff, but we don’t really see optimism picking up, even as wages have continued to rise at least slightly. We also see Cracker Barrel, which we’ve talked about several times here.

And Albert, I just want to acknowledge you’ve been very persistent on your view of inflation, even when it really wasn’t popular. You’ve been very persistent on that. But Cracker Barrel is a pretty good bellwether for what’s happening in the heartland of the US. So for people not in the US. This is kind of working class, middle class place that people go to eat and cracker. Bell had a lot of pricing power over the past, say, 18 months, when wage pressure, when when direct cost pressure and other things would really hit them, they would add that to their costs and they had double digit price rises in 2022 and it really didn’t impact their volume.

Tony

But now, based on their most recent quarterly report, they’re saying they’re seeing a meaningful traffic decline which negatively impacted their sales and profits. And they talk about their traffic being down as well. I hear what you’re saying about jobs, but I do think we’re starting to see some cracks in the middle of America where we just didn’t see that before. Say two months ago, the middle of America appeared to be super strong and we’re seeing some of these telltale signs that there are some cracks.

Albert

Yeah, of course. Inflation is such a headwind right now for normal people, you’re still paying 20, 30% more for items. On top of that, wage inflation is forcing companies to increase prices on products continuously. And let’s be real, once you increase product prices, you’re not bringing them down. You might bring them down 5% to be competitive, but they’re never coming back down to pre COVID levels. That’s just the fantasy. It’s simply not going to happen. So that’s most likely why we’re looking at this optimism trending down and on top of that is like the rate, the rate staying elevated, which I still think we’re going to go to 6%. Fed fund rate is also inflationary.

Tony

Yeah. Doomberg, what’s your thought on this?

Doomberg

Yeah, I think if you think about counterintuitively, and I should say in full disclosure, I first came across this concept reading Luke Roman’s work, great stuff at Force for the Trees. And he, of course, was quoting others. And that’s the way content works. You consume a bunch of it and distill it and create your own thoughts. But there are actually three reasons why the speed and heights with which interest rates have been risen to are actually counterintuitively pretty inflationary. One, we’ve never raised rates at this speed with this much debt before, and so the interest payments are actually just a different form of fiscal stimulus. Now. That stimulus goes to a different audience, wealthy investors, upper middle class and beyond. But still, with $32 trillion in debt and another couple of tens of trillions to be added in the next few years, a post debt ceiling deal, when you are at 5% interest, that becomes a pretty big slug of fiscal dollars going out the door into the economy. And that in and of itself is pretty inflationary, especially if you don’t trigger sort of the economic slowdown that you would want in order to beat back the forces of inflation.

Doomberg

The second reason why elevated inflation interest rates is actually pro inflation is the oil patch. So we all know that easy money and low interest rates caused a lot of sort of uneconomic projects to be funded in the US shale and shale has been responsible for 90% of the world’s growth in supply in the past decade and a half, and that’s coming to an end. And if we see production, particularly in the Permian Basin, begin to roll over as the best fields get exploited and there’s not as much cheap easy money to fund the incremental drilling project, we could see upward pressure in oil prices despite a potentially slowing economy. And then the third is actually this impact on housing. So you have all these people sitting on mortgages that are really attractive and so they’re not going to sell their home. If you’re sitting in Florida and you have a 3% 30 year fixed mortgage, you’re not putting that house on the market with mortgage rates at 7%, which means the incremental supply of housing is just not there. And so home builders and new housing costs are just skyrocketing. And that’s a big measurement into inflation as well.

Doomberg

And the only other thing I would add is this talk about whether the economy is slowing. Is this sort of the US. Participates in a global market and and the US. Might be doing well because of its relative energy advantages. But if you look at places like China and Europe, we are seeing pretty significant slides of stagflation on the global scale. And at least some of that will leak back into the US. As well. So that’s the only thing I would add to the great points that Albert was making.

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Tony

Okay, so guys, why are we not hearing more? Like, why do you think deflation is not going to happen? Help me understand the arguments against deflation.

Albert

I go right back to wage inflation. I just can’t see as long as wages are coming down and unemployment isn’t really skyrocketing, I don’t think we even have a chance of disinflation or deflation or whatever, any kind of negative inflation. To go back to what I’ve said previously before, it’s like, hey, to get back to pre COVID levels, we need negative CPI prints.

Doomberg

That is simply not happening.

Albert

We’re nowhere near such a thing. So, I mean, all these CPI perks that are ongoing, just like Doomberg said about the housing market. And as I was pointing out towards unemployment, where do we see deflation even coming here. I can’t even make an argument for it.

Doomberg

Yeah. The only thing I would add is you would need a real substantial slowdown in the economy and perhaps even a popping of the everything bubble. But even then, imagine a world where the Fed has to monetize all the incremental debt. Like, we just look at the spending and the interest payments on the debt and the entitlements alone. We’re getting to the point where if we weren’t the reserve currency, you’d be sort of staring in the face of a typical emerging economy debt spiral. At some point, when you’re spending hundreds of billions of dollars a year just in interest payments, and then you have all these programmed entitlement increases that are tied to inflation, a lot of these promises aren’t monetary. They’re actually like the physical delivery of goods, these entitlement spending. And so it’s a real I don’t know how we get out of it.

Albert

Yeah. The benefit that we have being a reserve currency, there’s absolutely no competition in the world to hold us accountable for our misgivings. They can do whatever they want. It’s bad in the long run, but I don’t think that any of us will be alive to see it. But at some point, just like you said, the chickens have to come home to roost.

Tony

Okay. And again, I’m sorry to push on this, but if we take that from the national, say, accounting and monetary level down to, say, a household, okay, we have inflation that’s really risen, what, 20% over the past two years. Right. Things are generally is that fair to say, Albert? Say 20% higher over the last two years?

Albert

Yeah, absolutely.

Tony

Some cases more, but on average, probably 20% higher than two years ago. We haven’t really seen 20% pay rises across the board, necessarily, although we’ve seen some decent pay rises in pockets. We have household costs. Like the cost of buying a house is at. These interest rates are pretty expensive for, say, middle class and entry level people buying their first house. I hear the argument many times that people who are locked into a low interest rate, so they’re not going to move unless they have to. Right. But if people are so leveraged up, will we not see people refinance in order to tap that equity and that will cycle into higher interest rates or higher mortgage rates for those people? Do we see that as happening as a way for people to tap more equity to alleviate some of the short term credit?

Albert

No, I don’t think we’re going to see that only because I think the Fed and the treasury made it explicitly clear to a lot of the banks to stop doing stop lending. The credit tightening cycle is certainly upon us, and they’re really wise to that little game.

Tony

Okay. And then I saw an interview with somebody, I can’t remember who it was, saying that, really, housing has a lot of room to run given where interest rates are. Is that realistic or is that a silly argument? I mean, I just you know, I live in Texas where housing is doing continuing to do really, really well. I know on the coasts housing has taken a significant hit, but it’s relatively small in terms of the run up that it’s taken over the past couple of years. So is there room to run in housing in the center of the US or maybe in Florida?

Albert

I don’t think so. I live in Florida myself and the cash buyers are starting to disappear. Without cash buyers, I don’t think this housing market really has too much more run on. Just the interest rates are astronomical. I mean, I went to go buy a lot close to my house and they were asking for like 9.2% interest rate and I just simply not going to do that.

Tony

Right. What do you see?

Doomberg

Well, back to this. Where could we potentially see signs of deflation as long as we’re talking about real estate? I think if we look into the commercial real estate sector, it’s a completely different story. And as people are working from home and they’re not going back to the office, there’s a wave, and I mean a wave trillions of commercial real estate loans that need to be rolled over that are basically underwater. The equity tranche is effectively wiped out even if they haven’t marked it yet. And this is going to put a lot of stress on regional banks in particular because they do most of the heavy lifting in this sector. And so if you’re looking for the seeds of a potential deflationary crisis, once we get through this pulse of inflation, I think a good place to start would not be in the housing market, but in the commercial real estate market. And this has obviously been on everybody’s radar for a long time. And so then one wonders, maybe it won’t be that bad because if everybody knows it, it can’t be important. But at the same time, it does sort of have that feel of between Bear Stearns and Lehman Brothers back in the day.

Doomberg

That was an awfully long time in hindsight, and it feels like it was a week when you look back a decade plus later. But the pin on this CRE grenade has been pulled and one wonders whether that grenade is a daughter alive.

Tony

Yeah, so let’s talk that through. So, CRE, you say regional banks will be hit, but who does most of the investing in commercial real estate?

Doomberg

Well, I mean, where does the potato end up? Right? And so a lot of these things are securitized and so on, but people are chasing yields. So it’s pensions, it’s the Blackstones Fund, which has obviously been gating, was a real sign. It’s been gating outflows for several quarters now. And the trot on the bank, as one would say, it doesn’t seem to be abating anytime soon, the whole consequences of Zerp has to be manifested somewhere. And when you take Zerp plus COVID lockdown, plus a complete reorientation in the way the vast majority of America works, then you have because this is a really big part of the sector. And so I think something like 55% of all CRE loans in the country are underwritten by regional and community banks. And this is really the role they were meant to play in our society. We wrote a piece on this several months ago called Regional Fallout. And if we lose the regional banks, which is why this little mini crisis that we’ve gone through was so brought with peril, in our view, for the US economy and potential source of sort of a deflationary type recession.

Doomberg

If small banks stop lending, the economy stops working. It’s just that simple. Like, JPMorgan Chase is not doing the hard work underwriting risk assessment that small businesses need. We have a banker for the Doomberg Project. This person exists. They’ve come to our office before we launched. They understand the timing, the flow, and the size of the cash that’s coming in from our business. They’ve done their personal know your customer AML. We would never get that with JPMorgan Chase. We would be sent to a call center or an algorithm would randomly shut our account down without any appeal. And if you take away, like, the local car wash, the construction company, the plumber, the electrician that needs to finance some working capital, they’re not going to get the attention from a JPMorgan Chase that they will get from their local community credit union, for example. And if all of these smaller regional banks are on the hook for these loans that the old expression I first heard from Kyle Bass was a rolling loan collects no loss. If they can’t roll these loans, they can’t refinance these buildings, these construction projects, and they have to take the hit.

Doomberg

These leveraged regional and community banks could be in a world of hurt.

Tony

Okay, so that’s what happens then potentially is a credit crunch based on community banks, right? And then that hits small businesses and they’re the major employers and then correct, have to reduce headcount. And that’s the fall on of the CRE debacle right now, just to add.

Albert

A little bit to the regional bank issues, a lot of them issued out SBA loans for COVID, and those loans are now starting to start to get paid back. But these small businesses can’t pay those back because I mean, they’re talking about up to $2 million piece. Those come as a wave and start defaulting. The community banks even have a bigger problem to deal with.

Tony

Okay, so that’s interesting. So the impact on small businesses could actually be CRE to regional banks, to small businesses could actually be a trigger that could start the stagflation wave.

Doomberg

This is why we keep a close eye on the Blackstone B REIT or whatever they call it. We wrote a piece on that a while ago and Blackstone came out and made all the typical sort of denials that you would see, of course. And we have great properties and the market just doesn’t understand us. And yada yada. I think the market understands exactly what’s embedded in that portfolio. And they did again, they marketed this retail with and it has pretty severe lockup and people see the losses coming and are trying to get out. And so quarter after quarter you’re seeing these redemptions. This feels like two Bear Stearns hedge funds has a certain feel pattern repeating itself in eight here and we shall see. I don’t know what the solution to that is. I mean, there’s an awful lot of dead money walking in that space, an awful lot of hesitancy to mark to market the true value of the underlying cash flows corrected for probability of default. Big city politics. Not to get political, but a lot of people just aren’t going to San Francisco offices anymore. They don’t want to run the gauntlet of homelessness and mental health issues that you have to see every day when you go from your home to the office.

Doomberg

And why would you when you could do all your work from home? And so this is a real sea change and we’ve not yet swallowed that pill and we don’t really have a good recent history of taking the L at the national level. We extend and pretend everything. We just keep sticking fingers and holes in the dike and trying to keep all the water back and at some point something’s going to break.

Albert

Yeah, speaking of that, one of my base cases is another economic back coming in the fall. So I would look to probably see Congress address this issue before it gets out of control.

Tony

So you think there could be another package in the fall?

Albert

Oh, yeah.

Tony

So commercial real estate hits regional banks hits small businesses, and then there’s another commercial package in the fall to alleviate some of that problem, which then becomes.

Doomberg

Really inflationary because it’s very clear to the market then that we will just print our way through everything and we will basically go through the self default route of inflating away our debts.

Tony

So we have the Stagflation blueprint. To me that sounds like the Stagflation blueprint right there.

Doomberg

Yeah. So the counter is we had 40 year epic bull run in bonds. Right. And that was pretty deflationary. We went around the world and found cheap labor and we financialized everything and we hollowed out US manufacturing and the US military has decided that that’s probably not good for national security. And so if that 40 year run is over and we are going to do a lot of reshoring or safe shoring or moving things to allies out of the sort of cheaper labor, that in itself is both inflationary but not necessarily sort of feeding the recession narrative. And so you have to sort of balance the flows here, like the different forces and the flows. And I do think that you could see significant inflation without necessarily a strong US recession if the forces of reshoring outweigh any sort of crises that we might be able to paper over in the regional banking sector. And so this is sort of the ultimate challenge with trying to analyze these things. Which of these forces will, when you square them all up, which one will be the sort of determining one? Because we are if you just look at the reshoring of manufacturing, the numbers are pretty strong in the US in the past 18 months, and that offsets some of the sort of the declining forces that might traditionally signal a recession.

Doomberg

A lot of these indicators that we’re looking at that we’re used to seeing, of course, were born and worked in a different regime. And if that 40 year regime truly is over, then some of these indicators might not work.

Tony

Yeah. So I would recommend, if you guys haven’t read it, and if yours haven’t read it, there’s a book called The Price of Time by Edward Chancellor. It was recommended to me by somebody who is really knowledgeable. I’m about two thirds of the way through it. It is a fascinating book, and this time is never different, and that’s the main lesson. And we see central banks go in, try to intervene, try to alleviate things, and there’s always some sort of fallout. So, Dubric, as you say, if this is the end of the 40 year cycle, there’s going to be pain. And if CRE is acute enough so let’s say 30% of the value has fallen out of CRE, that’s acute enough to cause some real pain, right?

Doomberg

Yeah, just to give that chance for a plug. Actually, I heard him on the Grant Williams podcast discussing that book. It was a really great episode. And I agree wholeheartedly. It’s a fantastic book to read.

Tony

Great. Maybe I’ll see if he’ll come on our little podcast. That would be amazing. Albert, can you talk us through a little bit of the impact on energy? If we’re in a stagflationary US economy, what do we see with energy?

Albert

Energy is complex, Tony. It’s really complex. I mean, under $65 becomes problematic for the oil industry in the United States. They’re not going to produce. And that, again puts the oil back, parts of oil back up over $80, which is where the Saudis want it. But of course, the United States, the Biden administration, certainly doesn’t want to see that because it’s inflationary. It’s really a tough call with the energy sector in this. It really is. I mean, I could see this going to stay in here at 60, $70 for six months, or I could see it going to $100 pretty quickly.

Tony

Yeah. And what’s also interesting is the refining activity in the US. Refineries that are almost 96% capacity utilization tracy talked about that this week earlier. And so we have some of these refineries down for maintenance, but going into potentially hurricane season at 96% utilization, there’s really not a lot of movement or flexibility there for gasoline and other distillates. Right. So we had our first tropical storm of the season off of Florida this week. So if that turns into a hurricane, or if something soon turns into a hurricane hits Louisiana and Texas, we could have some real spikes in gasoline in the US. That could really aggravate at least the perceptions of inflation, if not inflation itself.

Albert

Yeah, the oil and gasoline supply is so tight. I have an oil brokerage firm, and we’ve been running around the globe to try to find supply, and it’s tight. Forget about what people are trying to tell you about the Saudis or the OPEC is hurting because demand is not there. That is absolutely not the case. The demand is extremely high and the supply is very tight.

Tony

Yeah. Jimberg, what are your thoughts on energy and stagflation?

Doomberg

Yeah, I would say the world was saved from an energy catastrophe with the unusually warm winter in the Northern Hemisphere, and in particular in Western Europe. And I don’t know how the weather patterns with Al Nino foretell what the next winter will be like, but it does seem like our leaders, especially in Europe, are learning all the wrong lessons. They’re confusing good fortune with good strategy. Prices are really low right now. The wind is at their sails, pun intended. They certainly seem to be heading into this winter with far more confidence than we think the facts on the ground would warrant. To the question about refiners, we wrote a piece one of the big ironies, of course, is that a lot of this Russian oil is flowing to India, which then gets refined into gasoline and distillates and finds its way to the US. And relieve much of the diesel crisis in the Northeast, for example, that was beginning to break out. US. Refining capacity at 96% is mostly testimony to the fact that we’ve not built a new major one in 40 years. You just can’t get them done anymore. And so we’re going to rely more and more on imports.

Doomberg

I would say just back to this whole concept of electric vehicles putting oil out of business and such nonsense. I mean, that gasoline is just one important cut of a barrel of oil. But we’re still going to need diesel, we’re still going to need jet fuel. And ultimately, this is byproduct economics. And so if the price of diesel skyrockets, and that makes the price of gasoline cheap because refiners have to keep operating, then somebody will pick up that gasoline in a developing world. It’s a global market. It trades, and it’ll all be used. And so every drop of oil needs to be used. That’s why our roads are paved with asphalt. That’s all byproduct economics, and ultimately we’re not going to be kicking our oil habit anytime soon. So as it pertains to Stagflation, I think the move by the Saudis was interesting. Proactively cutting a million barrels a day of production. One wonders whether their fields just don’t need a rest anyway. A lot of OPEC has been stretched to their main capacity here, and they’ve never really been able to operate at their allocated production levels anyway. But I do think there is a big divergence growing between the tightness in the physical markets that Albert’s referring to and then the complete pessimism in the paper markets.

Doomberg

Gold investors are rolling their eyes and seeing this play out again. And now you have to be careful that you don’t need to look for conspiracies everywhere in the market. But the Saudis are certainly convinced that the price of oil needs to be higher. Well, they needed to be higher for their own internal domestic needs. And in fact, I would say the equilibrium price that keeps the shale patch doing well and Saudis and OPEC happy is around $85. Brent 82, $83. WTI we’re about $10 below that today. Again, as I would say, the shale patch has gotten more disciplined. They’re not chasing growth for growth sake, they’re focused on cash. And so I do think that there’s sort of a natural range bound sort of sweet spot for oil in that with, with a median around 80. And that’s probably where we’ll end up.

Tony

Very good. Okay. Still higher than today. So it doesn’t help that stagflationary discussion. Okay, good to know, guys. Thank you very much. Let’s move on to Binance. I know there was a lot of movement in crypto this week with, you know, Binance and Coinbase and, and other things happening from the SEC Doomberg, you put out an intentionally seemingly nonspecific tweet about Binance, and I’m curious what your thought is about Binance, about the CEO, Zhao Chungpeng or CZ. Can you tell us kind of what’s happened there?

Doomberg

Sure.

Tony

Dig a little bit more into Binance and Coinbase. It doesn’t really seem like they’re exactly the same issue. I want to understand some of the accusations that they’re operating as an illegal exchange, this sort of thing. Let’s really dig into that and figure out what’s really happening there.

Doomberg

Sure. Let’s partition the discussion into sort of two categories. One, the whole question around whether crypto tokens are in fact unregistered securities. And then two, beyond that, Binance and FTX are being accused of basically running what amount to criminal enterprises where they’re commingling customer funds, enriching themselves, lying about their internal controls, and so on and so on. I would say Coinbase is not accused of doing any of those things. Right. Coinbase is a US based exchange that trades in the public stock market. We have no position in Coinbase, just FYI, but they do stand accused of trafficking in unregistered securities. And we’re putting out a piece on this on Friday. It’s pretty. Clear cut if you read the filings and so I wouldn’t commingle the fraud. The Sam Bankman freed CZ accusations of fraud which make the accusations of them trafficking and unregistered securities almost quaint in comparison. But the unregistered securities question is a life or death situation for Coinbase. And I do think when you read the filings these things don’t. How we test would indicate that Salona is a security like money was raised in exchange for tokens. The value of those tokens depends on the work of others.

Doomberg

It’s a common enterprise. They illegally, I think, listed them on these exchanges both domestically at Coinbase and offshore on FTX and Binance and pick your favorite. And these coins were picked up by venture capitalists for twelve cents and twenty five cents and they sold them out at $250 to unsuspecting retail. When it comes to the SEC, the brightest of their red lines is you do not sell unregistered securities to unaccredited investors. They stand at the gateway between the private and the public markets. And anybody who spend any time in venture capital knows that you don’t get to monetize on the back of retail without running the gauntlet of the registration process of the SEC. And they cleverly figured out that they thought that they’d invented the cheat code. We’ll call it a token even though it acts an awful lot like a stock and we’ll have a lockup period, but it’ll be a year. It’ll be this simple agreement for future tokens. Matt Levine put out a great column on Wednesday. These are stocks. They’re essentially very much analogous to the equity tranche in a company and a bunch of vents of capital, including a bunch of very high profile ones, not only dumped these tokens for thousandfold returns on the backs of retails, they went and filmed themselves on podcasts bragging about it and laughing about it.

Doomberg

It’s really amazing to me and I do think the thrust of our piece is venture capitalists should know better, they should have known better, they knew what they were doing. The SEC has been paying very careful attention and now that look, you have a motivated enforcement agency that is being openly disrespected all over FinTwit, all over YouTube, all over social media. They have the power of the subpoena. Sure, maybe there’s a few Republicans have been bought off to sing for the industry and even a commissioner or two, but Gary Gensler knows the crypto space well and we have, so we call it the Doomberg test. Is the underlying activity legally dubious? Check. Are you making a stupid amount of money off it? Check. And is the government therefore going to be paying attention to you? Of course, like you don’t get to cross that red line. In my mind the how we test is definitive and Bitcoin is not a security ether. Different story. But the rest of these tokens that basically found lawyers to advise them on how they could technically not make it the same as an initial Coin offering, but in reality, they really didn’t change that much.

Doomberg

They invested in a common enterprise in the hopes of making a profit on the work of others. That is a security. All of these tokens are securities. Coinbase for listing them, I believe, is in big trouble. There’s also another thing here. It’s not just a question of securities itself. These exchanges were actually operating as exchanges, custodians and clearing houses all at the same time. And that’s a big no no in the US. And so there’s far more legal jeopardy here than the market is pricing. And it’s shocking to me. The most shocking price on my screen today on my Bloomberg, is Coinbase bonds. I can understand equity, I can understand the reddit crowd and trying to generate a short squeeze. Coinbase is the most highly shorted stock on interactive brokers. That’s all fine. If AMC can go to where it went, then Coinbase can stay here. Even though their entire business model has been effectively declared illegal by the SEC. Why the bonds aren’t acting is a real mystery to me. These things are still priced at a pretty reasonable 15% yield is distressed, but you would think that the bond market would be sniffing out that the SEC is serious about this.

Doomberg

People just don’t read the complaints. Like, if you read the Binance complaint, it’s not like it’s 130 pages. It’s a bit of a heavy ask in today’s hyper short attention span environment. But just go and find the Binance complaint and read pages 88 to 92, four pages on why Salona is a security. It’s just so clearly a security. And they listed them knowing that the SEC was basically telling them, hey, guys, you got to clean this up. These things are securities. And so it is a real mess. And I think it’s going to become political, it’s going to become ugly. But again, the bifurcation here between the question of what’s the security and the question of fraud, I want to be very clear. There are serious accusations, compelling accusations of fraud at Binance that don’t exist at Coinbase. But Coinbase’s entire business model has effectively been declared illegal by the SEC. And to us, that should matter.

Tony

Yes. So everything you’re saying, I think both Albert and I, probably through different processes, but have been very vocal about this for the past couple of years. My biggest question or biggest statement has been, this is not a currency. These things are called currencies. They’re assets and they’re securities. Right. And so I haven’t understood it from the I feel like I’ve understood it, but I haven’t really understood how people could call them currencies or tokens when in fact they really are Securitized assets. Right. And so that seems very simple to me and I’m just surprised how long it’s taken the SEC to get here. But they’re a bureaucracy. It takes some time. This all makes sense. I don’t understand how they got securities lawyers to sign off on this.

Doomberg

Well, it’s a funny thing about lawyers. So in my corporate experience, we come at this from the corporate side, not the finance side. And I had a couple of decades in corporate America in various roles and a couple of expressions that were always near and dear to me, to my heart. Lawyers advise and leaders decide. But the second is there’s a vast difference between having a case and having an argument. And the lawyer will tell you you have a case right up until trial, at which point it magically becomes, oh, we have a pretty good argument. And look, lawyers are in the billing business and so they will give you advice and they’re fully protected by their own sort of insurance and they’re just doing their best as professionals. But if you could find a lawyer to basically tell you just about anything and it’s amazing to me, it’s just again, the Doomberg test is it probably illegal and are you making a ton of money at it? You got a problem to brag about making a billion dollars like who did on what podcast? It’s just really amazing to me that people would be so and just.

Doomberg

Even the CEO, brian Armstrong. Let’s circle back to Coinbase here. Their stance towards the SEC boggles the mind. They’re going to walk into the SEC and dictate to them how they need to change their regulatory framework to make Coinbase work. When the SEC again, I’m old enough to remember when people were afraid of the SEC, like getting a subpoena from the SEC was a BFD. If the SEC doesn’t drop the full hammer and looks like they are on these people, we need to see DOJ raids at this point in my mind, or else people are just not going to respect the SEC and we’re going to basically have a free for all.

Albert

Why should they respect them when Elon Musk is out there?

Doomberg

Ridiculous. It all starts with SEC middle words, Elon. In my view, that was the moment Jay Clayton really said all this in action and Gary Genzler is trying to sort of close the barn door. But yeah, like pumping dogecoin. Everybody knows what’s going on when he changes the Twitter to the doge. Right. The Winklevoss twins. Like all this mania that we saw, we all know what we’ve all been around. We’ve been around market cycles. And the reason we can avoid such traps is because there’s nothing of economic value occurring at the center of these things that would justify anywhere near the types of prices that we saw on the screen. And people should know better, right? And look at this. It matters. The reason why the US has deeply liquid really well functioning markets is because the world assumes the rules will be enforced. If we’re going to dissolve into a casino where how much money you spend coinbase literally threatened the SEC in a response by saying, if you sue us, you will face a well resourced adversary that will fight you all the way to the Supreme Court. Can you imagine the stones it would take?

Doomberg

And by the way, when Coinbase became public, they didn’t do an IPO in the traditional sense. They did a direct listing. And it was basically insiders selling in to create the float. And Brian Armstrong owns $130,000,000 home. Like, he’s not a sympathetic defendant here. And why the government took so long and why they don’t take the steamroller out and just make examples of some of these people is baffling to me. Maybe it’s coming, but, man, like, when I was in corporate America, you got a note from the SEC, the hair on your back stood up. Everybody stood at attention. You stood in line and you did what they told you because the two otherwise was the end of your career. And you could look at jail time. I mean, selling unregistered securities to millions of US investors is the brightest of red lines at the SEC. Everybody knows it could be. It should be. And we’ll see if Gary Genzle has the political wherewithal to see this through. If he doesn’t, the other side of it is going to be pretty ugly.

Tony

Doom do you think the SEC is just trying to give people time to get out? I’m baffled by why this took so long, but do you think they’re just trying to signal to markets, hey, you really need to get out of this. You really need to get out of.

Doomberg

This, or is the market’s not listening? Right? I would say let’s put this in the proper political context. The amount of money that FTX and others in the industry have spread around Washington, DC, is really one of the challenges with our political system. Like, you can become too big to regulate who’s going to step up to Elon Musk in this environment. One of the reasons he bought Twitter, I believe, is to become politically unregulable. He can’t regulate the man. He’s got the giant megaphone and he’s doing some things well. It’s not a conversation about elon, but the regulatory apparatus in the US is susceptible to corruption, is susceptible to political forces.

Tony

This is new information.

Doomberg

Doom this is, yes, breaking news, the more corrupt Washington becomes. But there’s a cost to that. Again, the US markets are the US markets for a reason, which is compared to all the others. The SEC was a cop on the beat that people trusted. And if that erodes away, imagine a world where the definition of security is so stretched and abused that something like a crypto token is not a security man. All bets are off, right? I don’t know. The investor protections are a key part of the efficiency of the US capital markets. The US capital markets are a key part of the reason why the US economy was as strong as it was for many decades. We are really eroding the core here. If we let huxters and fraudsters take over the reins and run the show.

Tony

Yeah. So I remember running around China in the late, early teens, 2000s, early teens, and I’d go into all the brokerage houses. They would say, hey, we want you to teach us about financial innovation. And it was just shocking to me. Like, they weren’t even trying to build credible markets. They wanted to incorporate some of the things that the US was doing before the financial crisis and then even after. And what it makes me think of, and I’m curious of your thoughts on this anybody who talks about, say, doing an ICO or something related to, say, finance like activity, they immediately start talking about Singapore, and they immediately talk about the regime in Singapore and the financial innovation in Singapore, these sorts of things. What do you think about those types of jurisdictions where this stuff is really encouraged and they’re trying to cultivate these types of securities?

Doomberg

There are no financial innovations. First of all, every scam is as old as history. And look, financial innovation is a euphemism for “let me launder money.”

Tony

Absolutely, yes.

Doomberg

That’s basically what it comes down to. Kycaml exists. And look, we’ve been critical of the US Treasury and the if Soren and Ben Hunt’s model on that, and they do go too far sometimes. But you’re talking about places like Dubai. Okay, what’s going on in Dubai? I wonder? Why is Dubai suddenly the headquarters of crypto Singapore? The amount of money, illicit money, flowing around the world is huge. It’s staggering. And our friend Markahotis would say the rise of these offshore crypto exchanges came in the aftermath of the collapse of wirecard, which was facilitating an awful lot of money laundering. He would say crypto is a money laundering scandal with a crypto wrapper. And we would tend to agree. It’s just undeniable that trillions of dollars of illicit money flow around the economy today. And crypto was a convenient way for a lot of that money to be moved instantaneously. I mean, there is no real innovation in trying to hide money from governments. You might use a bit of technology and put a technical wrapper on it to add fuel to the pump and dump fire, but money is money. Money laundering is money laundering.

Doomberg

I could create a really fast-growing financial services company, just give away easy terms. There is no new tricks in the finance world. There is no such thing as financial innovation. They’re just new tools and tricks to circumvent the rules that everybody knows and should be playing by.

Albert

This is all music to my ears as I’ve been screaming at the top of my lungs for years about these pump-and-dump. I have taken so much flak from people with the “stay poor” comments. This is just absurd. I mean, everything that’s happening in the crypto space is absolutely absurd. Newsroom is right. It’s like the SEC has to drop the hammer here. They got to really hammer some people and throw them in jail. Take their money, throw them in jail, just take their firms, collapse their firms. Something’s got to happen.

Tony

That’s a good point. Albert, how far do you think this goes? I mean, do you have high-profile billionaires who get ensnared in this without naming names? No, you don’t get high profile billionaire. So do you get celebrities who’ve been ensnared in this? I think that’s already happened a bit. But does that become more widespread?

Doomberg

Yeah, sure.

Albert

You’re going to have some scapegoats out there, a couple of middle management guys, some Shaquille O’Neill and whoever else is in trouble with the FTX pumping and dumping advertisements. Yeah, you’re going to have those people. But the guy sitting at the top lined Washington’s pocketbooks and campaign finances, and they’re not going anywhere. Simple as that, right. They get tipped off. They get protection from the DOJ, Biden’s DOJ. The Democratic donors are fine. It’s as simple as it is. The Republican donors just didn’t play this game at the moment, so they really don’t have that much to worry about. But everybody else, they’ll be fine in Santrope and San Barts and whatever.

Tony

So, as usual, it’s the second 3rd, 4th tier of people. Of course you go to jail.

Albert

Of course.

Tony

And if you’re not American, it helps to facilitate that as well.

Albert

Of course. Living in Singapore, Dubai, Monaco, all these other areas. Gibraltar. Name your small little enclave of financial services providers.

Tony

Doomberg, what do you think about that? How far does this go?

Doomberg

I don’t know. We’ll see. That’s the piece we’re putting out. I think it’s very possible that it goes into venture capital.

Tony

I hope so.

Doomberg

And there’s some big names and some big firms. They all knew what they were doing. They did. And if that money wasn’t coming in from VC, none of this would have grown to this level. And so I think exchanges are just the first domino. It depends on the politics of it. Venture Capital. Silicon Valley bank collapsed. A lot of their behavior over that weekend is also being scrutinized, I think. And of course they’re trying to blame it all on short sellers. But in reality, we all know what really happened. And so it’s no coincidence in our mind that Silicon Valley Bank was among the early failures here because they were, of course, knee-deep in all of this crypto financing on the venture capital side, signature and silvergate coming thereafter too. So we shall see that the piece we’re putting out is sort of planting a flag that this could spread to the VC space. And if I was in the VC space and had participated in these, I’d be lowering up.

Tony

Oh, absolutely. And donating.

Doomberg

Yeah, well.

Albert

Throw some money around, right?

Tony

Exactly. Protect yourself. Albert, thank you so much for this. This has been really informative, guys. Please look out for Dunberg’s piece. And there’s a lot more to come on this, so thanks, guys. Thanks so much for your time, and have a great weekend and a great week ahead. Thank you.

Doomberg

Thank you.

Be a smarter trader and investor with CI Markets. Learn more: https://completeintel.com/markets

In the latest episode of The Week Ahead, Tony Nash leads an insightful discussion with industry experts Tracy Shuchart, Markets & Mayhem, and Albert Marko.

One of the key themes explored in the episode is the low crude prices and the upcoming OPEC meeting. Tracy Shuchart analyzes the factors contributing to the downward pressure on crude prices, despite expectations of a seasonal increase. She highlights recession fears and limited market participation as major factors hampering the rise in prices. The OPEC meeting, scheduled for June 4th, becomes a focal point of discussion, particularly in light of Russian overproduction. The experts discuss the potential outcomes of the meeting, including the possibility of production cuts and their impact on countries like India that heavily rely on affordable Russian crude.

Mayhem delves into the issue of U.S. Treasury debt issuance and its implications for market liquidity and financial conditions. The recent passage of the debt ceiling prompts an exploration of the upcoming $1.2 trillion of U.S. Treasury issuance. Mayhem provides insights into the expected timing of the issuance and its potential impact on the markets. The experts also touch upon the decline in investor home purchases, questioning whether the rise in interest rates is the sole cause or if other factors are at play. They contemplate the extent of this trend and its potential future implications.

Albert Marko leads the discussion on the changing dynamics of the Middle East and the implications for the United States. The UAE’s withdrawal from a maritime agreement with the U.S. serves as a catalyst for analyzing the broader challenges in the region. Tensions with Saudi Arabia, Qatar, and Turkey, coupled with evolving U.S. policies, shape the geopolitical landscape. The experts emphasize the need for the U.S. to build strong relationships with important countries like Turkey and Indonesia without excluding other global powers. They acknowledge the complexities of navigating the Middle East and stress the importance of long-term efforts in rebuilding relationships.

As the episode concludes, the participants share their expectations for the week ahead. They look ahead to the OPEC meeting and its potential outcomes, considering the impact on global energy markets. Additionally, they discuss the upcoming Federal Reserve meeting and the decision on interest rates, offering diverse perspectives on whether a rate hike is imminent or if the Fed will adopt a more dovish approach.

Overall, this episode of The Week Ahead provides listeners with a comprehensive overview of crucial economic and geopolitical developments. The insightful analysis and diverse viewpoints offered by the experts shed light on the intricacies of global markets and highlight the challenges and opportunities that lie ahead.

Key themes:

1. Why is crude so low? (and OPEC)
2. UST Tsunami
3. Middle East (UAE)

This is the 67th 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
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon
Mayhem: https://twitter.com/Mayhem4Markets

Transcript

Tony 

Everyone, and welcome to The Week Ahead. I’m Tony Nash. Today we are joined by Markets inMayhem, Use, macro analyst and trader, of course. We’re also joined by Albert Marko and TracyShuchart. We’ve got a wide variety of items to cover this week. The first is why is crude so low?I’ve been talking with Tracy about that all week and trying to understand those mechanics a littlebit better. And obviously we have an OPEC meeting coming up, so we want to talk throughwhat’s going to happen there. I want to talk about the UST, US Treasury tsunami that’s coming.We’ll talk to Mayhem about that and understand some of the implications of this tighteningactivity that we see, particularly on things like real estate. And then we want to talk about theUAE and I guess the broader Middle East with Albert, some of those relationships seem to bespoiling a bit with the US. And so we want to understand, is this kind of finally the Middle Eastpivot to Asia or is there something different going on? So guys, thanks so much for joining us. Ireally appreciate your time. I know it’s very valuable. 

Tony 

Tracy, let’s start off with you. With crude. Why is it so low? We saw things really head down fora couple of weeks. We saw things start to perk up on Thursday and so far they’re doing well onFriday. So what’s happening with it? You hit the 60s, it’s back up above 70, I believe, right now. So what factors are keeping crude down at a time when we’d think seasonal factors would reallystart to push crude prices up a little bit? 

Tracy 

Yeah, absolutely. I mean, really, it’s the broader macro environment. What you have here is thatglobal supplies are tightening, right? We are draining global supplies. Iran’s done dumping theirfloating storage. So markets should really tighten up here this summer, particularly with the newOPEC cuts, the voluntary cuts that went into effect this month. But there’s still these broaderrecession fears. You wouldn’t think at that looking at the market right now, but there’soverwhelming thoughts of there’s still these recessionary fears. We had terrible manufacturingdata come out of the EU this week. We had terrible manufacturing data, one of the data sets inChina that really set the tone at the very beginning of the week when we saw that dive down into67. US. Manufacturing also contracting a bit as well. And so I think that traders are looking atthose numbers and spooking the market. We also have the participation in this market is done.There is no participation in this market. 

Tony 

Basically, you say participation, you’re talking about trading volume. 

Tracy 

So open interest. 

Tony 

Open interest. Okay. 

Tracy 

Right. So open interest. There’s just not really a lot of open interest. Most longs have exited themarket. And it’s not that really shorts are adding. It’s that nobody’s engaging in the market. Andso there’s just really a lack of interest right now in this. Even though fundamentals are still tight,it’s just this economic macro backdrop that’s really kind of pushing people away from. 

Tony 

Okay, so I’ve seen some people talk about like a bull whip effect. We saw things fall so far withthings like the unemployment data coming out on Friday being above expectation. Could westart to potentially see some sort of bull whip whip effect where we see crude rally on a notablebasis? Or will it take a lot more than something like that? 

Tracy 

No, I think we absolutely could. First of all, we just started having these OPEC cuts right, inMay, even though we haven’t really seen Russian exports up until this month. I think I imaginethat it would take like a month or two really, for those cuts really to filter into the fundamentalanalysis. I mean, OPEC is looking at by the end of June, we’re looking at a 2.3 million barreldeficit keeping these cuts online. So I think that as these markets tighten, people will not be ableto kind of ignore that any longer. 

Tony 

Okay, very interesting. 

Albert 

Real quick, what about a cap on Russian seaborne exports or existing cuts going mandatory forOPEC meetings? Is that possible? Either one of them? 

Tracy 

Yeah, absolutely. I mean, I think there’s a lot up for the discussion in the OPEC meeting. I thinkthey’ll focus on compliance. So anybody that’s been over producing will have to stopimmediately. I’m not sure that they’re going to make additional cuts just because those cuts arejust now starting to filter in again, it’s only been a month, and so really, that hasn’t really filteredinto really into the supply side situation. I’m sure that Russia will get a talking to because I thinkthat even though they have cut some production, they said 500K, it’s about 300K. Their exportsstill have not really gone down. That said, over the last couple of weeks, according to Bortexadata, we are starting to see those exports come down a bit. 

Tracy 

That again, I’m sure they’ll get a talking too, but I think it’s too early to really to make additionalcuts. That said, OPEC is known for surprises, and so you don’t really know 100%. I wouldn’tcount it out 100%, but I would lean towards probably no change. 

Tony 

So they’re meeting on the fourth. You don’t think there’s going to be a change. But you do thinkthey’re going to focus on compliance by Russia. So OPEC is pretty patient with their memberstates, right, generally. And it sounds like Russia has really had its run. They’ve overproduced. Alot of the stuff is going to places like India. So once that Stern talking to happens, and if Russiadecides to comply, what happens to places like India? And Saudi has been importing Russianbarrels too, right? 

Tracy 

Yeah, they’ve been importing Russian diesel and then selling their higher priced diesel to Europe.Obviously, if oil prices go up, obviously that’ll put some pressure on, say, India and China buyingreally cheap barrels. But Russian oil is still trading at a large discount to Brent as it is, and OPECreally wants to see at least Brent in that range. And so I think they’re going to try to manipulatethe market, but oversee the market so that they can get those prices that they need. If you look atkind of the OPEC nation’s break even, fiscal break evens, they’re all in that $70 to $80 range. Soreally they want that $80 to $90 range. 

Tony 

I love that you said OPEC isn’t manipulating the market. I think that’s great. What do you say?I’ve seen a lot of people over the past couple of weeks say, look, OPEC only controls 30% ofglobal markets, so they don’t really have control over crude prices. What’s your response to that?Is that true? Are they immaterial? 

Tracy 

It’s OPEC and OPEC plus, right? Between US. Russia and Saudi Arabia, we’re the top threeproducers in the world. And so that is quite significant because a lot of these other countries,there’s a lot of countries producing oil, but in much smaller amounts, by far, those are the threelargest producers. And so they can with the plus part of OPEC, it is easier to manage the market,especially when shale is not really a threat to them anymore, because our production isn’t reallygrowing at this point. They don’t have to worry about Shell going crazy overproducing andbringing oil prices down. 

Tony 

And we know there’s a floor to shale, right? We know there’s a floor of 65, 60, whatever to shale.Right. So if they can be prepared for that, which we’ve seen over the past couple of weeks, thenit’s not really as far as it goes, but it’s kind of as far as it goes on a sustainable basis. 

Tracy 

Right. 

Mayhem 

Tracy, does it seem like the oil markets, if there was a pretty meaningful disruption to supply, orif the Chinese reopening story really does start to take shape, that this tightness could lead to apretty significant rebound in price? If there’s any catalyst on either side, a disruption in supply oran increase in demand, it kind of seems like we’re priming the pump, so to speak. 

Tracy 

Oh, absolutely. 100% agree with that. And what’s interesting is, though, we have seen theproperty sector and manufacturing in China is still horrible. Right? Or manufacturing lesshorrible. But we did see them come out overnight and talk about how they want to try torevitalize the property sector. That did give oil a little boost. But also interesting, China has beenimporting a lot of crude. In fact, our all time high was just in April at 16 million barrels a day,which is huge. And so even though their imports keep increasing, there’s still this overwhelmingsentiment that’s weighing on the markets, particularly with what is going on economically withinChina. 

Tony 

Very interesting. Okay. It seems to me that tell me if I’m wrong here, but we’ve kind of seen Iwouldn’t say the absolute floor, but at least temporarily, we’ve hit where we’re going to hit andthings may muddle around for a while, but generally there’s an upside expectation for crudethrough the summer. 

Tracy 

Yeah, I think that we will see that. I think, yes. Again, those cuts filter in. We’re going to seemarkets significantly tighten over this summer. 

Tony 

Great. Okay. Very interesting. Thank you for that. And so speaking of tightening mayhem, let’stalk about US. Treasuries. You put out a piece, I think, a week ago or so, maybe less than thatabout no, a few days ago, I’m sorry. About now that the debt ceiling has moved forward, we’regoing to see $1.2 trillion of treasury debt issuance. So can you talk us through that and help usunderstand how that will impact markets, what’s the timing of that expected and so on? 

Mayhem 

Sure. So the first thing is going into this year, treasury Secretary Yellen issued a warning in midJanuary saying that they were reaching the statutory limit to what the US. Could borrow withouta change in the debt ceiling. And so at that point, issuance of debt for new debt was suspended.And it was only debt that was being refinanced that continued to be auctioned off in the market.So we still saw treasury auctions, but they weren’t nearly the same size. And with TGA accountspending into bank reserves that helped to add some fast moving liquidity. We also had positiveboosts from central banks like the People’s Bank of China and the bank of Japan, adding inaggregate a pretty significant amount of liquidity, more than offset QT by the Fed and later bythe European Central Bank that started in March of this year. So now we’re getting to the sort ofother side of this where the treasury general account is essentially drained. There’s less than, Ithink at this point, $30 billion in the account. So it’s very crucial that they do pass the increasessigned in and that they move forward with everything. 

Mayhem 

I never thought a default was a risk, but there’s a lot of kabuki theater that happens around here.And the one thing I just wanted to say as I get into the next part is that when people start saying adefault is imminent or if we reach this date, a default is going to happen and it’s just sort of cutand dry. That’s never been true because the executive branch has the authority to delegate whichpayments are going to be prioritized, and they can continue to do that with debt repayments oninterest in maturing bills and otherwise. But on the other side of it, they can shut down thegovernment furlough workers, defer payments. The whole idea that we were ever going to have adefault was a bunch of noise. And it was really more about what potentially happens at the otherside of the resolution of the debt ceiling, which is all but inevitable. Right. And it’s good wedidn’t have it shut down because that would have been a drag on the economy if it lasted a while.Government spending has been pretty important to GDP the last two quarters. And so avertingthat shutdown is constructive. 

Mayhem 

But what it means is that over the next, say, five weeks or so, there is about 700 billion of billissuance that needs to happen before we end out the second to last quarter for this governmentbudget. And then we also have by the end of the fiscal year, which is September 30 for the USgovernment. There’s a total, including that 700 billion of 1.2 trillion that needs to be issued. Now,it sounds like a lot because it is, but it really wouldn’t have been as much if we were issuing itstarting in the beginning of the year, right when we started to run into that ceiling. 

Tony 

Okay, so let me just stop you there. So 1.2 trillion by September, what is the typical run rate over,say, a four month period? Is it close to that? Is it 1.2 trillion? Is it 500 billion? What is the debtissuance on a normal run rate? 

Mayhem 

There’s nothing normal about the times we’re in. So there are a lot of good historical analogues tolook at. We can look at last year and say for the last quarter of the year there was about a halftrillion dollars of issuance, I believe. But at the same time, that was when a lot of spending wasbeing kicked up significantly, right? This was when there was funding necessities for the Chipsand Science Act and the Inflation Reduction Act, whether it’s ironically named or not. And a lotof that stuff started to come online and then interest expenses are coming up too, because the Fedis doing QT. And that means that the interest free kind of borrowing that the treasury was able todo, where the Fed would buy at auction, they were the biggest buyer. And when they did, theypay back the interest at the end of the year minus any Fed expenses that’s over while interestrates are also rising. So interest rate expense is set to hit over a trillion dollars. That’s anotherreason that debt issuance is increasing, to be able to offset that. We’re essentially paying off theinterest on our debt by issuing more debt in an environment where rates seem set to stay high forsome time. 

Mayhem 

So I think that all that being said, on a typical four month basis, it would be much more, I wouldsay, average to see 100 and 5200 billion, maybe 250 if it’s heavy spending. But we’ve also seenthat over time, all and this kind of goes back to the debt ceiling. Should we even have one? Allthat we’ve ever seen with our debt is that it goes up. And the debt ceiling, if you look at it overtime, especially the last, say, 25 years, it’s more like a debt elevator doesn’t really stop any of thefrivolity or any of the excess or any of the pork barrel spending. So I would say that there’s noreal normalcy we’re in this post COVID era. There was helicopter money, there was so muchspending. They’re continuing down that path. It takes $1 of you get one dollars of GDP growthout of every $4.5 of government debt incurred. Right. So it’s not a very efficient way. But back toyour question, what does it do to the market? What does it do to the economy? So this ispotentially a liquidity sponge. It really depends on how the plumbing of the markets handles it. 

Mayhem 

There is some chance that if the rates on the bills are high enough, that it could tempt somemoney out of other sources. So it’s not as big of a liquidity sponge. Maybe if we see rates onthose bills getting closer to six, six and a half percent, you start to see some money coming out ofreverse repos. You start to see some money coming out of some of the equity accounts as peopleare looking for that sort of ongoing great rotation into fixed income and out of equities that we’veseen as a bit of a theme. But I think if it’s not as tempting, it does have the potential to start topull liquidity out of bank reserves. Either way, it’s going to have that impact. It’s a question as toscale of impact. 

Tony 

This is interesting. So you mentioned the liquidity sponge, and you also talked earlier about howthe TGA activity was kind of offsetting the QT activity that the Fed was doing, right? 

Mayhem 

Yeah. 

Tony 

So if this debt issuance is acting as a liquidity sponge, it’s almost an acceleration of tighteningbecause you don’t have the TGA necessarily offsetting QT anymore. Right. You’ve got thisliquidity sponge that’s taking dollars out of the market unless the US government can acceleratetheir spending. Is that fair to say? 

Mayhem 

I would say that even if they do accelerate, the net impact is likely to offset. And I don’t thinkthat the way things are lined up now, that we’re not going to see too much acceleration. But Icould of course, be very wrong about that. But the main takeaway here that I have is like yousaid, really from October of last year until present we’ve had a lot of flows from TGA, PBOCand BOJ. Now the BOJ and PBOC are probably going to continue being aggregate adders ofliquidity. They have to, yeah, I think so. And they’re trying to kind of decouple their credit cyclethe best they can from credit cycles that in the west are being ended intentionally by centralbanks to try to offset this inflation wave that we’re experiencing which is now concentrated morein services. I think that that vacation is kind of coming to an end and what we’re seeing now isthe inverse that not only is the TGA not going to be spending as much in all likelihood, but alsothat that issuance combined with QT by the ECB, by the Fed and to some extent by the bank ofEngland. 

Mayhem 

That is more of getting back to what monetary policy had intended for, which is to tightenfinancial conditions. And then the other additive to that is also that credit conditions aretightening. Right. Banks are lending less and to whom they’re lending, they’re lending at higherinterest rates. And so there’s aggregate impacts, there are cumulative impacts to what’s happeningwith rates rising as much as they have because more and more people have debt that they have torefinance. There’s also small mid sized businesses and a fair amount of consumer debt that arerevolvers that as rates rise, the compounding effects of those higher rates are starting to reallyhurt. So I think that when you put that all together, it does suggest that there is some potentialfattening of the left tail going into the back half of this year in terms of how risk assets and ratesmight behave in an environment where liquidity goes from being rather abundant to rather scarceduring a time where seasonality has a similar effect. 

Tony 

Right. So in terms of the impact of say, the credit crunch that’s coming, whatever normal is, arewe returning to kind of a normal balance or is it extraordinarily tight? Do you think things willget extraordinarily tight? I know that no matter what happens it will feel extraordinarily tightcompared to where we’ve been for the last few years. But are we returning to a normal or will itbe tighter than normal? 

Mayhem 

That’s a really good question and I’m going to imagine that it will gradually become tighter thanwhat we’re used to. But what we’re used to was also a rather unprecedented time. It was severaldecades of disinflation of a really overall pretty strong economy, lower and lower interest ratesalong the way, very abundant liquidity and credit ever increasing over really the better part of thelast 14 years to unprecedented levels. So in comparison to what most people are used to, I wouldsay yeah, it’s likely to be tighter. The question is for how long? And the question is what otherunintended consequences will happen along the way. I think one of the most interestingdiscussions on the other side of this is that as rates go higher and stay higher for longer, it notonly helps to subdue demand, but it actually also starts to constrain supply. Because if you’re theCEO of an energy company or a metals company or an agricultural company and you’re hearing,okay, wages are going up and they’re high already, costs of capital are high and availability ofcapital is dwindling and business conditions aren’t so robust moving forward, am I going toexpand supply into that environment? 

Mayhem 

So then what do things look like as we approach and get into the next credit cycle when we startfrom a place of higher prices but less availability of supply, when demand comes back andthere’s not supply able to absorb that and credit still, it’ll loosen, but it’ll likely be tighter thanwhat we’re used to. It seems like there’s not the capability to address that in a timely manner, thatinflation has become a little bit more structural. And some of the irony of that is part of that’sdriven by the Fed’s policy. Now, to their credit, they can’t do much to offset the fact that thegovernment, not only at the federal level, but various state governments and other countriesgovernments are sort of providing this inflation relief right, checks to people to offset the impactof inflation. But that just in aggregate adds money to the system. 

Tony 

That’s like your 02:00 P.m. Sugar high, right? Like it just gets you through dinner. It doesn’treally keep you going. Right? I mean, that can’t be permanent. 

Mayhem 

No. And it’s just kind of extending some of the issues and making them a little more structural innature, I feel like. So for the first time since the 1930s, we’ve seen M two money supply fall yearover year. But then if we look at it just as a number rather than a year over year trend, we can seethat it’s just really reverting back to the trend that it’s had that money supply growth wasextraordinarily high. During COVID that they really flooded the system with money, helicoptermoney, liquidity for the financial system while simultaneously shutting everything down andthen kind of scratched their heads when prices of everything went up, when there wasn’t enoughsupply. But some of the supply constraints that we’re dealing with, and Tracy could speak to thismuch more than me, is a lack of investment. We haven’t been investing in so many of theseresources for such a long time. And that’s also created some structural potential for inflation tomove higher. And as we get into another credit cycle, I think we’ve probably seen the worst ofgoods inflation. This credit cycle barring any kind of meaningful disruption in supply. 

Mayhem 

But then services inflation is also quite sticky. And one of the recurring themes we see in ismdata and employment data is the services industry is very strong. Wages continue to rise there,and those wages are being passed on to consumers in the form of rising prices. 

Tony 

Yes, Albert’s talked a lot about the structural nature of inflation and expects it to rear its headagain. But what’s interesting, from what I’m hearing from both you and Tracy is tightness. Tracyis talking about tightness in crude. You’re talking about tightness in credit. And it just feels likewe’re on the precipice of this snap change where we’re transitioning from this world ofabundance for the last few years, setting aside the supply chain aspects of things world of kind ofrelative abundance into a world of scarcity. And that’s what happens when interest rates rise,right? That’s what happens when credit markets tighten, is you have scarcity, then you have realbidding for the price of things. Right. So that’s really interesting. So, Ma’am, let’s move on to realestate. You posted a really interesting chart about investor purchases of real estate. So you saynew home purchases by investors have fallen by the most ever. Is it BlackRock kind ofphenomenon where they stop buying homes, or is that real people stopping to buy investmenthomes as well? 

Mayhem 

It’s both. And I mean, it’s driven by some of the same factors that we’ve talked about becausehome prices are stubbornly high. There is a lack of supply from existing homes because whowants to move when mortgage rates have more than doubled from where they may have financedtheir mortgage at? So there’s a lack of supply there. Homebuilders are trying to keep up with thenew orders, but they’re struggling because they’re facing rising wages, rising capital costs, lessavailability of capital, lower in aggregate new homes pricing. So their orders have gone down,their backlogs have gone down. We’re starting to see that in some of the homes data, but I thinkthat it’s both sides of the coin because if you’re an individual home flipper or someone whoaspires to be a landlord or whatever else, banks are going to be more skeptical lending to thosesecond and third mortgages, right? Your initial mortgage, they’re still churning those out, butthey’re much tighter with their credit. But for the folks that are hopeful investors, most banks arenot willing to do that for a rate that is favorable. So you look at the disparity between rent andhome ownership in a lot of areas. 

Mayhem 

It’s hard for a new landlord to get in because with the mortgage cost and insurance, propertytaxes are all going to pay. They’re not going to be able to compete with some of the otherlandlords unless they’re in a really hot up and coming area. Like, you might be able to do it inNew York, you might be able to do it in Miami, you probably won’t be able to do it in a lot of theUS. But in terms of what’s going on in real estate, it’s an interesting dichotomy because then onthe other side, we’re seeing prolific weakness in office buildings. Right. There’s the lowestamount of utilization we’ve ever seen. So there’s at least one place in the market where there isn’tscarcity. 

Tony 

Yeah, I think a couple of things. I think Meta just announced that they want their staff back threedays a week or something soon, which it’s going to be really interesting to see how that playsout. But also in terms of people moving gosh, I was just in Austin last weekend, and I thinkprobably six to 8% of all the license plates I saw were California plates. So there are a lot ofpeople who are selling their places in California and moving to Austin. I don’t see that as muchwhere I live, but that seems to be one of those markets that seems to be defined gravity, which isjust crazy to see that as the rest of the US. Seems to be at least holding or maybe selling off.Okay, that’s great. Ma’am, thank you so much for that. Your stuff is great. I really appreciate yourfeed and all the stuff you always put out. It’s really balanced and really smart. So thank you forthat. Albert let’s move on to some geopolitical stuff. And there was an announcement this weekabout the UAE that you tweeted about where UAE is pulling out of a maritime coalition that theUS set up for security and Gulf waters. 

Tony 

And I know that the US and UAE have been partners in security for the region, very closepartners for a couple of decades, and it seems like that may be breaking up. But we’ve talkedabout this several times before. Like, the State Department in the US. Is very ineffectual. It’sactually DoD that conducts the more important diplomacy on behalf of the US. So when we seethese defense things break up, it’s significant. So can you help us understand that a bit more? 

Albert 

There’s two reasons for this. One is the Biden’s administration of continuing Obama’s theories oflead from behind in the Middle East, which is absolutely nonsensical. It just doesn’t work.Vacuums get filled. Turkey had to stabilize the region by looking towards other nations like theUAE, qatar and Oman and Saudi Arabia. And this is just a natural progression of the US.Stepping back. If you ask the Biden administration, they continue to say that they’re engaged, buttheir level of engagement and the way they go about it is questionable at best with the Saudis justwith lack of respect towards Biden and Blinken. This is nothing of a surprise to me. In fact, Iforesee Turkey being a much more regional player in the coming decade than the US will be. 

Tony 

It’s really interesting. About 20 years ago, a book came out called The Next Hundred Years, andGeorge Friedman wrote about how Turkey was going to be a regional power again. And at thetime, it. Seemed not intuitive. And I know Friedman has a lot of things that haven’t necessarilystuck, but to see Turkey reemerge as a regional power is very interesting for me. And to seeErdogan reelected, I don’t think it’s a complete surprise, but it’s interesting to see the leadershipthey’ve taken. So can you give a couple of examples of how Turkey is taking leadership in thatregion? 

Albert 

Well, they’ve been setting up military bases, I believe, in Qatar and the UAE. They’ve beenworking hand in hand with the Iranians, believe it or not, in Africa. And the Russians, they’vebeen pushing out their drones to pretty much anyone that was willing to buy them. 

Tony 

Including Ukraine. Right? 

Albert 

Of course, the Ukraine, everybody, they push it out to anybody they can buy. And they use thatas leverage for trade deals. And right now, a lot of Russian money goes through Turkey. Andthey don’t really care what the United States has to say because the United States still and theworld has to deal with Turkey as a geostrategic place in the world. Look at Map, for God’s sakes.They have the Prosphous, the Black Sea. They touch Europe, they touch the Middle East.They’re active in Africa. They’re everywhere. 

Tony 

And they have relationships with China, too, that are positive. Right? 

Albert 

Yeah. Well, of course, the Chinese need to push their materials through Turkey, the bots forstraits, and through train rail. And they’re a force that you just can’t get around, literally. Now,they do have big economic problems, and I have disagreements with them concerning the USdollar, but once that reality bites them, they turn back and actually build some reserves. Theireconomy should be fine and get away from this hyperinflation threat that they’re facing. 

Tony 

I see countries like Turkey, India, Indonesia that are pretty independent, diplomatically. Theyhave a foot in the US sphere. They have a foot in the Chinese sphere. Some of them, like India,turkey especially, have a foot in the Russian sphere. What does that mean? Can the US. Kind ofmend fences and build relationships with those guys? Because there are three very importantcountries. You don’t hear about Indonesia a lot in the US. But it’s one of the largest countries inthe world. Turkey is strategically placed, and India is the largest country in the world. So howcan the US. Build those relationships without having kind of a binary, say, bilateral partnershipwith them? Meaning it’s the US. And no China, no Russia? What’s the best approach for them? 

Albert 

Well, I think, first of all, we need to get an entire new administration, starting with the StateDepartment and the DoD. Without that changing. Nothing’s going to change. First Obama, andnow you have the Biden administration continues to push on the Indians and given themultimatums on dealing with Russia and whatnot. India is a billion people. They have their ownconcerns, economic concerns. They need that cheap oil, and they. 

Tony 

Have a long history with Russia, too. 

Albert 

And they use Russia as a counterbalance with the Chinese. Now Indonesia has the same oppositeeffect. I mean, Indonesia is food security. They have their own food security, so they don’t reallyneed that. They have a bustling manufacturing center just gaining more steam, and they interactwith the Chinese because they have to. That’s the regional power. So you can’t really expect Idon’t understand why people expect pick them or us. It’s never like that in the world. It justdoesn’t work like that. Like I said, things will change when we have a new administration, andit’s probably going to take a couple of decades to rebuild those relationships, but. 

Tony 

Couple of decades, you think, well, you can’t just. 

Albert 

Turn something around in one administration. Let’s just say, theoretically, DeSantis wins andcleans house, and it takes two years to be able to shift things around properly and see somethingstarting to materialize. And that’s not enough. Then you’re up for reelection after four. If he winsagain, you have eight. Maybe at the end of his second term, you have some kind of fruits thatwill be blossoming between those relations. But until then, this is just not good news. 

Tony 

And they’re just looking out for their own self interest, right? I mean, it’s not every nation does. 

Albert 

It’s national self interest. I made this argument about the EU for so many years. Everyone keptsaying, oh, the EU is unified and we’re this and we’re that. Well, when you add a little stress tothe situation, the rift between Berlin and Paris starts to show its ugly head and the NorthernEurope versus Southern Europe, and everybody’s in for themselves. It’s just the reality. 

Tony 

Go ahead, Mayhem. 

Mayhem 

I would just say that the issue that Albert mentioned about countries, governments, that you guyswere talking about them having their own self interest, always in mind, that’s also an issue withpoliticians individually, and that’s a huge problem as well. 

Tony 

Yes. Are you talking about America? Are you talking about everywhere? 

Mayhem 

I can only speak to America, but I’m going to say it’s likely everywhere. And one of the problemsthat we do face in America that’s a big challenge is that money has the rights of free speech, thatcorporations are treated as people, and unfortunately, that doesn’t necessarily bode well for theinterests of the citizenry being represented by the political elite. 

Tony 

Absolutely. I agree with you. And we could have a very long conversation on the voices that getheard in, say, the State Department, and the voices that get heard in DoD and the voices that getheard in these different departments. It’s, I believe, fully money backed 100%. 

Albert 

Just look at the Fed and the Treasury. Where do those guys go to work after they’re done withtheir wall? 

Mayhem 

Exactly. 

Albert 

You’re telling me that Yellen and Powell don’t take calls from market makers and brokerages onthe side? I mean, that’s just a joke. It’s literally a joke, right? 

Tony 

Let me just get back to Geopolitics for a minute in the Middle East. So the US relationship withSaudi Arabia has really started to change a bit over the past couple of years, and I think it reallystarted changing during the Khashoggi stuff and it’s kind of deteriorated since then. So Tracy,what are you seeing with in energy markets? I know this nuclear thing was just announced withSaudi, but with regard to energy, we’ve seen Biden go to Saudi and ask him to release more oilwhile restricting oil here. 

Tracy 

As far as energy is concerned, the US. Doesn’t have any pull there anymore. And again, that’sbecause shale is no longer a threat to them because it’s not growing for a lot of reasons, right?You have heroin acreage gone. You have no capex for the last seven years. You have oilcompanies beholden to shareholders at this point, buybacks dividends, capital, discipline, payingdown debt, et cetera. And so really, you’re not going to see shale go crazy anymore. So it’s not asbig of a threat as it once was. And so that factors in as well. And the current administration iscertainly not helping by any stretch of the imagination as far as trying to get these companies togrow whatsoever. He wants to shut it all down tomorrow. So I think that’s really this nuclearthing that came up, what they’re calling kind of the nuclear Aramco, I think that’s very interestingbecause it does point that I think Saudi relations with this particular administration are at the lowlevel, but they know that this current administration is not going to be here forever. We still needthose ties, and we’ve had tumultuous times with Saudi Arabia since we really started having thatalliance in the 1930s. 

Tracy 

But we’ve been longtime partners and have gone through bumps in the road. So I don’t think thatrelationship is I wouldn’t count on that being gone whatsoever. It’s just right now, this particularadministration particularly does not have any pull. 

Tony 

Albert, what are your thoughts on that? I do kind of actually worry about the US relationshipwith Saudi Arabia. Is that something where you think the Saudis are just kind of biting time untilthe administration? 

Albert 

Yeah, they’re buying time. They still listen. They still know that the US dollar is a reservecurrency and not changing in anybody’s lifetime. They know that they have to rely on the UnitedStates as a defense partner. They have these realities that they go through. Obviously, they haveissues with the current administration. There’s no question about that. They don’t like howrelations have been handled in public. So inevitably, the Saudis were going to push back a littlebit and at least give a little bit of tension towards DC to push back and say, hey, we’re not justpushovers. You just can’t use us as a punching bag for whatever political situation you have backhome. It doesn’t work like that. But until I don’t think anything really dramatic is going tohappen. Like, they’re just going to say the hell of the United States, we’re going to China, oranything like that. There’s too many other realities that play here. 

Tony 

Okay, guys, let’s wrap it up just really quick. The week ahead, we’ve got the Fed meeting comingup. We’ve got OPEC meeting on Sunday, this sort of thing. Tracy, let’s start with you. What doyou expect for the week ahead? Do you see strength continuing to come back to crude anddissolates, or what do you see happening? 

Tracy 

I think the OPEC meeting kind of set the tone for the week, right? If they do nothing, we may seea little bit of a pullback in oil. But again, this market is heading for tightness, and that’s just afact. So really my weekend is spent on OPEC, and that’s really what I am looking forward to,obviously, their macro events. 

Tony 

Albert, what do you see for the week ahead as we tee up for. 

Albert 

The Fed, definitely starting with OPEC, I want to see what they do. I actually think that they’regoing to probably announce some surprise cuts. I think markets run up based on that. I thinkthey’re trying to create a buffer because tension because of OPEC oil probably rising andprobably the Fed coming in there. And Jerome snap slapping 25 basis points on us again. I thinkthis might be the last one, but I’m not sure until the fall. 

Tony 

Okay. And Mayhem, you can come in here too. I think the 25 seems all but guaranteed, but whatdo you expect the tone will be? Do you think it will be a relatively hawkish tone given the jobsnumbers, or do you think it will be a relatively kind of dovish hike? 

Mayhem 

I’m going to be, I guess, a bit divergent versus what’s been expressed so far. I don’t think the Fedhikes in June. I don’t think they hike in June. I think that they’re going to go into more of a hikeskip, hike, skip pattern. If there are to be more hikes, I think the next hike is likely to come inJuly, and I think that they’re going to leave the door open to additional hikes, and they’re going tosay they’re continuing to monitor data. But one thing Powell specifically mentioned watching isjolts. And with the data that we’ve gotten recently, we can see that we still have something like1.71.8 jobs available for every person seeking work, and that’s a metric that displeases this Fed.So at the very least, whenever they are done hiking and it’s sooner than later, maybe they haveone, two, maybe three. I kind of doubt it, but I’m leaning pretty heavy on at least one hikes left intheir plan. But the bigger and I think more important question and this is something that Powellhas even expressed to the press, is that the bigger question is how long do they leave rates high? 

Mayhem 

How long do they run down their balance sheet? And I think that is a really important questionthat the market continues to misprice the answer to. The answer is generally thought of, oh,they’re going to start cutting as soon as September or November of this year and we’re going tojust automatically go back into a complete easing cycle when inflation has become much stickierthan I think anyone wanted to see. My thought is that and I saw Albert laugh, and I agree. Imean, it is laughable, but my thought is that it’s much more likely next year and probably in thesecond half of next year that the Fed considers really easing. And the caveat there is if they breaksomething big enough, because that’s been the classic Fed turnabout, their real dual mandate, Ilike to say, is creating and destroying bubbles. They haven’t yet destroyed this bubble and thelagged impacts of monetary policy. That hiking cycle having really just started early last year,they’re only starting to hit. The first hike was in March. The first bout of Junior QT was in Juneand then it went up to full throttle in September. 

Mayhem 

We haven’t yet felt the entire tightening, nor have we felt the tightening of credit conditions frombanks. So I still think there’s more to kind of go through and I think the Fed is going to strike ahawkish but balanced tone and say that don’t misinterpret this skip for an actual pause, a hawkishpause. 

Tony 

I like that. It’s not consensus and that’s why I like it. Very good. So we have a little bit of adifference here, so let’s see what happens. So, guys, thank you so much for your time. I reallyappreciate it, all your insight. Have a great weekend and have a great week ahead. Thank youvery much. 

Mayhem 

Thanks for having me. 

Explore your CI Futures options: https://completeintel.com/futures

In this episode of the Week Ahead, Tony Nash hosts a panel discussion with Albert Marko and Adem Tumerkan, covering the economics of electric vehicles (EVs), trading the debt ceiling, and China’s post-Covid opening.

Albert delves into the economics of EVs, highlighting Ford’s significant losses of $2.1 billion in their EV unit for FY 2022 and an additional $722 million loss in Q1 2023. Tony references insights from Robert Bryce, revealing that Ford incurs a hefty loss of $66,000 on each EV produced. The panel discusses the EV drive on Capitol Hill and among car manufacturers, linking it to influential donors invested in ESG and carbon credits. Tony raises questions about companies’ motives, while Adem expresses concerns about the saturated EV market, Ford’s losses, and Tesla’s price cuts. They explore strategies such as spinning off EV units and meeting emissions standards with carbon credits.

Shifting the focus to trading the debt ceiling, Tony highlights a sense of optimism and hope despite previous negative news. Reuters suggests a debt ceiling rally is on the horizon. The panel anticipates an agreement unlikely before mid-June and assures that a default is not expected. They interpret Janet Yellen’s varying statements as a strategy to create market turmoil and pressure Republicans for a better debt ceiling deal. The influx of California’s income taxes in mid-June may affect the Republicans’ stance. The panel predicts market volatility and suggests a potential stimulus package later in the year to appease voters during the election season. Adem analyzes the impact of the debt ceiling on bank reserves and liquidity, predicting potential fragility in the system. He recommends focusing on the longer end of the yield curve and discusses the possibility of a credit crunch and its consequences.

Adem sheds light on China’s disappointing post-Covid opening, highlighting structural issues, high debt levels, defaults on infrastructure projects, and a weak consumer base. Tony emphasizes Adem’s recent tweets revealing the reasons behind China’s weak reopening. Adam elaborates on China’s weak reopening, explaining the negative impact of its current account surplus on consumer demand. Tony contrasts Asian economies with high savings due to historical volatility to credit in the West, which is based on stability. Adem highlights the Chinese government’s repression of consumption, leading individuals to save, which funds state-owned enterprises and infrastructure projects.

Looking ahead, Albert focuses on the debt ceiling while also mentioning the importance of monitoring oil prices and the potential for a secondary inflation event. Adam emphasizes the significance of China’s retail sales and current account data, as well as the crowded trades in the tech and regional bank sectors. He expresses contrarian views on shorting tech and recommends investing in longer-term bonds.

Key themes:
1. Economics of EVs
2. How to trade the Debt Ceiling
3. Anemic China

This is the 66th 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
Albert: https://twitter.com/amlivemon
Adem: https://twitter.com/RadicalAdem

Transcript

Tony

Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. This week we’re joined by Albert Marko and Adam Tumerkan. There’s a lot going on with debt ceiling and Fed, and obviously we’ve seen markets late in the week start to it really accelerated a bit. And we have a few things to talk about this week. First, we’re going to start with EVs. We saw some numbers come out with Ford over the last couple of weeks, and I wanted to cover this. So we’re going to go to EVs a little bit, the economics of EVs. We’re also going to talk about how to trade the debt ceiling. We’re getting into that part of the debt ceiling discussion where it’s kind of on and off again, and so this is where it gets really fun. So we’re going to talk a little bit about that, what’s going on in Capitol Hill, and kind of how to trade it. And then we’re going to talk about China. We’re going to talk about kind of anemic China, and Adam’s going to go into that a fair bit. So, guys, thanks so much for taking your time today. I always appreciate this.

Tony

Albert, I wanted to talk to you about EVs. We saw that Ford reported a $2.1 billion loss for their EV unit in fiscal 22. And then with their Q1 earnings, they reported another $722,000,000 loss. So if they keep that up, that’s almost a $4 billion loss for this fiscal year. If they keep that up we’ve got some Tweets up from a guy named Robert Bryce. I don’t know him, but it’s a really good thread. So I wanted to put it up, and I’m sure he’s a great guy. So if you guys want to follow him, that’s fine. But what he’s saying is that Ford loses $66,000 on every EV it sells, which just seems crazy to me.

So we see the reality of Ford’s P and L, and then we hear kind of the unicorns and rainbows of EVs. And I’m just curious, can you walk us through some of the economics of EVs? And we see Tesla making a profit now, but we see Ford kind of having a tough time with it. So how does this work out?

Albert

It doesn’t work out. They’re all lost. They don’t make any money. I mean, Tesla doesn’t make they can report that they’re making money, but they’re not really making money on the cars. They might be making a little bit of money with tax manipulation or services subsidies. Yeah, that’s one of the things. The costs are so high that without government rebates, no one can afford EVs. Porsche, I believe, was they said that their cars are about 140,000 for the base model take on EVs. If you were to buy them right off for them making no money, that’s what it would cost. But a lot of these companies, they need government rebates to be able to be in this game long term. And that’s where this little drive or the EV push out of manufacturers is coming. The reality is that manufacturers need government subsidies, government help, stimulus bills, so on and so forth. So they have to play ball. Politically, the material that is needed for EVs is much higher than normal combustion engines. So there’s just no value add, there’s less jobs that will be produced. So that’s a little bit of savings on the manufacturers.

Albert

Now, the big one that absolutely nobody is talking about is recalls, depending because of the fire risk to the manufacturers once fires start popping up. I mean, you saw a couple of Tesla, but once they start happening because of certain defects in the materials or the engineering, those costs are unknown right now to manufacturers. Nobody wants to talk about that yet.

Tony

Yeah. In the neighborhood next to mine last year, we had a Tesla autopilot crash and it burned and the fire was so hot that it melted the pavement below the car. Both people in the car died, and the fire department could really do nothing but wait for it to burn out.

Albert

Yeah, I mean, you even have instances of spontaneous combustion of Teslas and other EVs in the garages as they’re charging overnight. And they’re just this is really an unknown thing that manufacturers are going to have to struggle with, and investors are going to have to try to figure out how to price in when they’re talking about going long. EV companies or GM, Ford and Tesla.

Tony

Yeah. I guess one of the questions I have in terms of the economics is on some level it’s a little bit more like a laptop manufacturing process than a traditional car manufacturing process. I mean, when I talk about EVs and people, I say, look, it’s a laptop with wheels. And I know that’s a huge oversimplification, but you’re sourcing a lot more electronics, you’re sourcing batteries, there’s a lot of code, there’s software updates, all of this stuff. Right. So I’ve always wondered, for the traditional automakers like the Fords and the GMs and the Porsches and these sorts of guys, I don’t really know that it’s necessarily something that they have an advantage for. Maybe they have an advantage on the distribution. I have no idea. But the manufacturing process is very different. And Ford even now has three different business units, one for commercial, one for consumer, and then one for EVs, because the entire process is so different from the traditional auto manufacturing process.

Albert

Yeah. And the costs associated with retooling factories and opening up new factories really still hasn’t been factored in, in my opinion. I think in the future you’ll start seeing some massive drawdowns in finances from these companies.

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Tony

Yeah, and so a couple of things. So Inflation Reduction Act. Without the Inflation Reduction Act, would the earnings of guys like Ford look a lot worse?

Albert

Oh, absolutely. Without those rebates kicking in and all these other inflation tailwinds, it’d be a lot worse. It’d probably be a third of what they’re reporting being just wiped away.

Tony

Okay, and so what is the drive on Capitol Hill for this? I mean, I know we have the AOCs in that group who are pushing the Green New Deal. I understand that, but say, you’re generic politician, why are they pushing for this? Because EVs are typically bought by people who make $150,000 a year or more. Okay? And so it’s not a broad base of the population who can actually use this stuff right now. So why are politicians angling for this? And as I asked that question, I live in Texas, and this week, Texas has started discussing putting a tax on EVs because EVs don’t pay gasoline tax, so they’re not paying for any road care. Right? Gasoline tax? Part of what gasoline tax goes for is road maintenance and new roads and that sort of thing. So Texas is looking at, I think it’s $300 a year for EV owners, and that will go for maintenance and upgrades of roads. But on Capitol Hill, why is there such a push for this?

Albert

Mainly because the donors behind the politicians are so heavily invested in ESG and carbon con, I mean, carbon credits programs and whatnot. So that’s where the push comes from. It comes from Wall Street.

Tony

Okay? And then the companies like Ford and these other publicly traded companies, are they just trying to get kind of the valuation uplift in the short term? I mean, that’s kind of what I assume is they’re getting a valuation uplift because they’re kind of doing EVs, and then by the time, say, the downside comes, that CEO will be out of the seat. Is that kind of the game they’re playing? Or is there something more and I know this sounds really cynical, I know there are people watching who really support EVs. So give us some comments or whatever, but I’m just curious, are they true believers that we have to have electric automobiles? Or are they more focused on kind of shareholder value, value creation short termism, and then they’ll worry about all the details later on?

Albert

That’s exactly right. They’re sitting there just to boost their stock price and then satisfy their investors. I mean, anything EV was just flying in the stock market, and they’re just playing it. I don’t blame them. I mean, I’d probably do the same thing if I was the CEO and sit there and raise money off of the stock valuations afterwards, there’s no question. I mean, if they really wanted to do something for the end for clean air and whatnot, they would have had bi fuel with natural gas like the Saudis and the Germans used to have, it’s clean burning.

Tony

I lived in Asia for a long, long time. Every single well, probably not now, but up until a few years ago, every single taxi in Hong Kong was natural gas powered. And so very clean, right?

Albert

Very clean. And there’s no cheap. Yeah. There’s no adjusting the factories. I mean, it’s just a couple of bolts, couple tanks and whatnot. It’s a kit that can bolt right on.

Tony

Right? Yeah. Adam, what do you think about this on the EV front?

Adem

Yeah. So I agree. I think the EV market is getting kind of saturated, especially at a pretty bad time, like you said, Ford, they reported huge losses on every EV they made. We saw the price I’m sorry. Yeah, the Tesla price cuts recently. And I think that there’s just going to be a glut of cars manufacturers trying to get sales going at a time where you have auto loans increasing pretty significantly. Negative equity is increasing on cars. These car prices are falling not as much, but in year over year terms they have so we’ve seen negative equity build. We’ve seen. Like Capital One, I believe. Wells Fargo. They already started closing and divesting their auto loan underwriting area. So I just think it’s going to be there’s only really two options you would have as a car manufacturer if they were able to restrict inventory the last couple of years to keep prices higher. But when you’re having others cut prices like Tesla, I think it’s just going to start leading to potentially a price war, which will be good for the consumer, but it’s not going to help these companies.

Tony

Right. So do you think we’ll see, and I know this may be a little bit early in the game, but would we see a company like Ford maybe spin off their EV unit and let it accept those losses and let the shareholders kind of hold it until it becomes profitable? Or do you think it’s so core to their business that they’ve got to hold onto it?

Adem

I think if it keeps losing money like this, they might have to do something like that. But I do think every car company kind of won’t. They’re banking on EVs for the future with probably more government subsidies. They’re going to do more infrastructure. So I’d imagine they want to keep those things. But yeah, it’s definitely a possibility.

Tony

And they help to balance out their overall emissions standards. Requirements, right. All the cafe standards. So I guess they have to keep it for that.

Adem

Some kind of net neutrality, like carbon credits or something. Yeah, they would need something. So them using EVs I think it can net out for them.

Tony

Yeah, okay. And you make a good point about auto loans. I mean, with that happening, and especially with the price point that EVs are at and with interest rates rising, I think that’s a huge factor that we see coming as people start to look at their spend every month and how to allocate it and what to do. I think it’s going to be a really interesting trade off that we see, and I hope these guys can figure it out. I hate to see the subsidies continue to pile on, but let’s see what happens there’s.

Let’s talk about the debt ceiling. Obviously, we’ve got things going between, say, US. House of Representatives leader Kevin McCarthy and the White House with Joe Biden, and Biden has delegated a couple people to negotiate on his behalf.

All that’s great. There was a lot of excitement this week that we may have an agreement by this weekend, which seemed really kind of silly when people got excited about it. But this debt ceiling debate comes up almost every year. Not every year, but almost every year. I think we saw back in 2011 and even more recently than that, where national parks people and other federal government employees were kind of furloughed and all this sort of thing.

Tony

I haven’t expected it to. We also hear Yellen say that the US. Government will be out of money by June 1. I’ve never expected a debt ceiling agreement by June 1. We’ve always expected volatility toward going into the end of May and in early June. Most of the people who I see who’ve been around the block a little bit expect the same thing, although we hear a lot of kind of hand wringing in a lot of the financial media, which it’s serious. If there really is a default, that’s serious, but default really isn’t on the table. So, Albert, you know Capitol Hill a lot better than I do. Can you kind of give us an idea of what’s happening on the ground and what some of the implications are of the discussions that are happening right now?

Albert

I’ve tweeted this and said this many times, but both sides are let me put it in a way that one of the GOP guys told me. Both sides are in World War II and entrenched in their positions, just waiting the other one out. Normally, I would say the debt ceiling thing, it’ll get done, bunch of grandstanding, so on and so forth. The problem this time around is that the majorities in the Congressional, in the House and the Senate are so thin that it’s a problem, right? It’s a problem from actually finding a deal because you could always get 1012 House members to defect just because they got elections coming up and it wouldn’t be a problem. But the numbers don’t work this time around for that. And the failsafe for some of the hardcore Republicans in the House is that they can call a vote for McCarthy’s leadership, which would stall any kind of legislation from going through. On the flip side, in the Senate, you don’t really have the Democrats unified to get the debt ceiling done because of some of the because some of the details involved of workers worker rights, I think it was like, that requirement to find work for unemployment.

Albert

Some of the EV stuff, some of the cuts, and a couple of programs that the Democrats were actually venmo against. So, like I said, I don’t think the deal is going to be done until probably mid June. The whole June 1 deadline is complete nonsense. Just ignore that. The US. Will be able to pay their bills up until late August or early September in any case, but they’ll have a deal done well before that. It might cause some turmoil in the market, which you guys can talk about trading. It probably setting up stimulus or economic deal coming in September or October of this year.

Tony

Okay, so there’s a lot there. So I want to ask we can talk about the White House and we can talk about Capitol Hill, but Yellen is a key player here. And depending on the day, either the treasury finds money we found $10 billion that we didn’t know we had or it’s super urgent and they don’t know where they’re going to get the money. Depending on the news flow and the day and the time of week and how negotiations are going, that sort of thing, how do you think Yellen will play this, and why does she continue to come with messages that differ by the day or every other day?

Albert

Well, I mean, things are fluid both economically and politically at the moment. They want a scapegoat for a little bit of market turmoil because of political PR narratives that they need to push out for the election. So Yellen wants the market to sell off a little bit and have the Republicans take blame for it so she can get a better debt ceiling deal done and a stimulus bill or an economic package in the fall. She wants to recharge her TGA account and use it at will.

Adem

Right.

Tony

Now, California also had a three month delay on their income taxes for whatever reason, cold winter or something like that. So that money will start coming into the treasury in mid June, right. Or should be in the treasury by mid June. So could that potentially be a reason for the Republicans to drag their feet knowing that more money will be in the treasury in mid June?

Albert

Well, listen, I wouldn’t give the Republicans or anyone in Congress that sort of competence when it comes to those things. I mean, I’m seriously, like, I talked to a lot of them, and it’s mostly deer and headlights when you start bringing this subject up. Disbelief in deer and headlights. This is really reserved for the financial guys that see what the political side is doing.

Tony

So do the financial guys know what they’re doing?

Albert

I mean, a certain upper echelon certainly does. The guys throwing out zero day trade, zero day equity call options to rally the market, they sure know what goes on.

Tony

Right, okay. And then you talked about stimulus package in kind of late Q Three or early Q four. What do you have in mind there? Why would that happen?

Albert

It’s election season. They got to pay off the voters mainly. I mean, I say this all the time, and I’ve given this free advice to people. Look at corn and wheat and farmers in the election time when Senate when the Senate has a lot of races going up, that they always give them a big deal in 2020. Was it they gave them huge ethanol waivers to boost corn prices, pay off for voters.

Tony

Okay. Potentially. And tell me if I’m wrong here. Okay.

Adem

So.

Tony

The debt ceiling plays out. The Fed raises another one or two times, people get freaked out about a potential recession. We do see growth slow in Q Two, q two and Q Three. And so there’s such a feeling that we may have some recession or that certain sectors are hurting. So then that justifies some sort of rescue package. Is that generally what you’re thinking?

Albert

Pretty much. That’s the political script I’m going off.

Tony

Okay. Wow. Okay. So we could see Volatility over the next month or so, but then I guess going into August, September, as this stuff starts being talked about, no politician will vote down a package like that in election season. Right? Of course. Not likely to go through. Okay. Adam, can you talk to us a little bit on the tactical side? How are you looking at the debt ceiling as a potential trade? What are you keeping in mind and what are you looking at in terms of trading the debt ceiling?

Adem

Yeah, so I actually was writing about this yesterday. I think the debt ceiling negotiations right now happening, are happening at probably one of the worst times, because when the debt ceiling lifts and the TGA refills, let’s say they refill it by 500 billion, that’s a transfer of bank reserves from the primary banks to the TGA. So you’re essentially draining their reserves. And then over time, these primary banks who are pretty much forced to buy the Treasury’s bonds, they sell them out to foreign entities, institutions, whoever else wants the bonds. Because you don’t just sell 500 billion right off the bat. Right. I mean, the liquidity would be crazy. So they do it, like, slowly. Well, the problem to me that’s interesting is, one, the TJS, they’re expecting, the Treasury Department and some estimates shows they’re probably going to have to raise the debt ceiling by about a trillion dollars by the year end. It’s a big cash grab. They said about 550,000,000,000 in this debt ceiling raise alone. Problem is bank reserves, while still elevated compared to pre COVID, they’re down 25, 23, 25% over the last year. They’re down about a trillion dollars already because of the deposit flight into money market funds.

Adem

Fed’s quantitative tightening. Then on the other side you have global liquidity has plunged over the last year, mainly on the back of the G Seven tightening, doing their own tightening programs. I don’t know, it reminds me of so in 2019. Remember the September squeeze? The treasury had issued a lot of deadly suspended debt ceiling and then you had corporations do early tax filing. Bank reserves were down to like 1.5 trillion back then. And then the repo rate blew through the roof and the Fed lost control, essentially had to essentially restart QE and keep the repo market open indefinitely. So I don’t know if that’ll happen today. It could be nothing. But I find it interesting. I was reading a paper by the Fed and they’ve admitted that’s why they do QT so slowly monthly and they build it up because they don’t actually know what the right amount of reserves should be for stability. They’re like, it could be 1.5 trillion, it could be 3 trillion. They don’t actually know until in hindsight. So I don’t know, it could be nothing. But I do think they’re going to be doing the treasury is going to be doing a huge cash grab at a time where liquidity and bank stress, especially we’ve already had three of the largest US bank failures, credit Suisse went under.

Adem

So liquidity is not looking great and they’re about to just suck a lot of more liquidity out while the Fed is also doing their QT, rolling up bonds. So on the trade side, I would say it’s probably going to create some fragility in the system. I like the longer end of the curve. I just think that the inverted yield curve right now is just not sustainable. It’s killing banks funding costs, it’s causing deposit flight. With the Fed’s overnight, the overnight reverse repo is still above 2.3 trillion, which is what’s interesting because bank reserves have been leaving, but money market funds and the overnight reverse repo hasn’t dropped below 2 trillion. So it’s showing that the QT, which was supposed to take away from money market funds and overnight reverse repo, it’s actually just taken away from bank reserves. So I assume that the treasury will be the same thing when they do the cash grab. It’s just going to pull out reserves instead of cash. Overnight cash. For anyone who doesn’t know, the overnight reverse repo is a place where banks and institutions park money, like idle money or that’s something they need to invest in short term, high quality assets, basically treasury bills.

Adem

So they’re borrowing the bill from the Fed and then they’re collecting yields, selling it back at a little bit of a higher price because there’s a dearth of bills. So I don’t know. I mean, the short end might go up when they raise the debt ceiling because of the new supply, but I think the long end is going to just keep going down. I just think growth anemic the consumers tapped out, student loans coming back online one way or another. Mortgage forbearances are ending. I think they’re just starting to end. And household debt is already at 17.5 trillion. Banks are tightening loan demands down like every the last quarter. So in a credit based economy, it’s hard to see any momentum.

Albert

Go ahead. All reasons for an economic package in the fall.

Tony

Yeah, it sounds like it. And we talked about a credit crunch a couple of weeks ago on the week ahead and it sounds like a lot of that is headed our way. Probably late summer, right? I mean, we’ve already got it in the making, right?

Adem

Yeah. I was like arguing with people on a Twitter space in December. I was like, yeah, I think the Feds are going to be done by halfway through summer. Because the higher you keep the rates, even if they pause here, the unrealized losses on the bank balance sheets don’t go away or their NIMS are going to keep getting crushed. Because now you have money flooding out into money market funds. So you have to raise the short term deposit rates. Like I was looking at ally Banks quarters recently. Their NIMS are down, their profit guidance was down and they raised the cost for basically subprime auto loans, which basically the B’s through ease rating on the subprime ratings, it went up like 700 plus bips over the last year. It’s hard to see the consumers at this point who are pretty much getting tapped out. And you can’t refinance a car, you have to roll it into a new car. I fail to see what the momentum will be going forward without any kind of government cut. I mean, the only way that the Fed can fix the banking thing is by cutting interest rates, letting their assets appreciate, take pressure off the unrealized loss, let their share prices go back up so they can do some equity capital raises.

Adem

I mean, otherwise they’re just going to dilute themselves out here. Yeah, I don’t know if you guys have any different view all over again. Yeah. And on the credit crunch, actually, we already know US. Banks have tightened dramatically, especially commercial real estate. Commercial real estate? That’s not an if, it’s a when at this point.

Tony

Oh, yeah, we talked about that four weeks ago on the weekend ahead. We are on stuff.

Adem

Yeah. Yeah. You guys did a great job. I mean that thing, it’s a ticking time bomb. Not to mention there’s 125,000,000 sqft still under construction right now and there was another 200 million planned, but we can assume those will be cut. But the thing that’s really interesting to me is if you look at Europe, so they do their own bank lending like surveys and the recent moment, the ECB sorry, my cat jumped in my lap.

Tony

All right.

Albert

I got two of them. Trust me, they’re all right.

Adem

Yeah.

Albert

They just know not to go on my lap.

Adem

I’m sorry. The bank lending survey for Europe, it was terrible. I mean, it was absolutely terrible. The banks were tightening, but the loan demand, especially in the property market, the enterprise market, the consumer market, all of them, is down 80% in the property market. And it was one of them. I mean, they did it on the top four. Spain, France, Italy, Germany. And it’s just if you have no credit, right, credit drives consumption at this point. If you have negative or flat real wages, which technically the US real wage has barely budged in 40 years, you have to subsidize to achieve credit. That’s the only way you can get the consumer or the spending. If the house is too expensive or the car is too expensive and your wages can’t justify it, credit makes up the difference. And I just think credit, I mean, we learned from Jaime Minsky, right? Private debt can’t go up forever, and I think we’re starting to see that at this point now.

Tony

And it’s painful when we hit that. Very painful.

Adem

It’s a big deleveraging cycle. I mean, look at Japan, europe, 1929, after 2008, after every time you have a deleveraging cycle, it’s pretty painful. And I think that’s what to them, the Fed, that’s the plague scenario for the Fed, right? You can’t have any deflation. Yeah. So they’re going to probably do big stimuluses. I don’t think they’re done. I think COVID was like the new playbook.

Tony

Yeah. I spent a lot of time in Japan through that deleveraging cycle and would go there probably every couple of months. And I don’t really think people, especially in the US, understand what that’s like, to be pretty stagnant for decades. And I think if that’s what happens here, it’s going to be a shock to many, many people.

Adem

Yeah, I agree. Japan, what’s interesting is, if you look at, like, Japan and Germany, South Korea, China, and I know we’re going to talk about China, they all run these massive current account surpluses. They have no demand in their own economies. They have to export that rest to get their growth. Otherwise you’re going to have unemployment and deflation because you’re going to demographic nightmares.

Tony

Right.

Adem

Demographics on top. Japan has like a 30% net savings rate. China’s is like, what, over 40? Germany 30. Saudi Arabia 30. If you’re not consuming, you’re saving. Right? And I think America is low in the UK, too, have very low personal savings rate. And it’s like, well, yeah, because they’re buying everything. They’re absorbing all these countries Gluts, right?

Tony

And the retail investors save because where are they going to get return, right? So they just got in the habit of not getting a lot of return for a couple of decades and. That’s a hard habit to break. It’s a very hard habit to break.

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Okay, since you brought it up, Adam, let’s move to China. Okay, you had some really good charts on China that you published earlier this week around structural issues in China. And I want to look at the soft. We’ll say that kindly, kind of the soft opening that China had.

Tony

I don’t know that the word soft really fully captures it. So can you walk us through kind of these charts and why China’s reopening has been so weak so far?

Adem

Yeah. For context for anyone. Yeah. Basically, China was under COVID lockdowns. They reopened all the mainstream pundits. Everybody was saying it was going to be like unleash inflation across the world, and it was going to be like this huge thing. But I remember I just thought, like, since 2018, China has been deleveraging. If you look at their household debt to GDP, it’s been flat. And it’s almost as high as the US is actually. Their governments are pretty much tapped out. They’re in debt up to their neck. The BRI, the Silk Road, basically initiative, brick, whatever it was when they were their loans are defaulting like crazy. Yeah, Bellen Road. Thank you. I’ve heard, like, multiple names for that thing. But yeah, I mean, they have they’re dealing with defaults from these countries. And I see a lot of people, they’re like, oh, doesn’t China want to get their properties? And I’m like, well, but they defaulted for a reason. None of these infrastructure projects generate profit. They don’t generate returns. So you’re just transferring it from one country. Now China has to deal with it. I just think China’s consumer is very anemic. I mean, their current account surplus.

Adem

So for anyone who doesn’t know, a current account surplus basically, is when you export capital and goods relative to import. So the US. Is a big deficit nation. China is a big surplus current account surplus nation. But it also means weak consumer demand, because if you’re not importing and you’re exporting the rest, that means that you can’t fulfill your own demand at home. Like we just talked about, Europe, Germany, especially Japan, South Korea, all these countries have massive, chronic current account surpluses because they have no demand economy. They don’t have purchasing power for their consumer, so they find it abroad.

Tony

One of the other things that I’m sorry, just to interrupt you, that I think it’s really hard for people in the west to understand is there is huge savings in Asia, particularly because those economies historically have been very volatile. And credit is credit. There is implied trust in credit when you take out credit. And so Americans particularly are used to a very stable market, which is why we’re so levered up, because we trust the market to be pretty stable, right. In Asia, those markets have been so volatile for so long that you look at what is the crisis of this five years in, say, South Korea, right, going back 20 years, the LG crisis, all this stuff. There’s always something going on, right? And so this is part of the reason savings is so high. Of course they’re net surplus countries, but they also don’t really trust their policymakers and they don’t really trust their markets. So they always have to have something in the mattress to make sure that they can make ends meet when the next crisis comes.

Adem

Yeah, that’s actually a really good point because Michael Pettis wrote a really good book called The Great Rebalancing and recently, Trade Wars or Class Wars. But he basically was saying that these countries, like you were just saying, they have to have a high net saving. The government effectively steals productivity from its consumers, and it has no social safety nets. Like, in America, you have like, what, the 30 year fixed mortgage? You have Social Security, right? You have unemployment insurance. You have all these things that just always promote consumption. Like, they’re always there to just keep liquidity going. But in China, they don’t do any of those things. A lot of these countries don’t. So they depend on having a higher personal savings. But it’s also more insidious because the governments, like in China, the state owned enterprises, they take the money that the individuals are saving because they have a closed capital account. It’s not like America’s banking system. So they depend on their people. They force them to kind of save, meaning they’ve repressed their consumption so they save more, and then they use that money to fund infrastructure projects for the SOEs they’ve been doing it, though, for 20 years.

Adem

And that’s the kind of thing we’ve been hearing about China. Like, oh, China is going to take over the world. They’re going to grow, they’re going to become a demand driven economy. But we saw with Japan after their crisis in 91, they tried that. That’s actually what blew their economy up. They had trade tensions with America. They were running chronic current account surpluses. Their demographics started looking shady. They had asset bubbles, especially in property eerily similar to China today. And then America did the Plaza Accord. They basically said, hey, you and Germany, you guys are running mass chronic account surpluses, meaning we’re absorbing it. We’re running the deficits here, and you’re pricing out US. Manufacturing. You need to let your currencies appreciate. You need to allow more imports and less exports.

Tony

The end was, I think, at 220 or something then, or 240. I can’t remember the number.

Adem

Yeah, it had like a 40% appreciation between 86 after the Plaza Court and 91. And in the same time they started importing, their exports to GDP dropped, but it popped their asset bubble. And two, their household debt to GDP, because when you have a stronger currency, you’re promoting more imports. Their household debt to GDP went from like 52% to 70 in five years. It’s insane. So China, I just see these countries, and they don’t want to have their currency appreciate. They don’t want an open capital account.

Tony

Look at China this week. They devalued to over seven. Yeah.

Adem

Seven. Yeah, they went back to seven. To put it in context, I always see people say, like, oh, the BRICS currencies. But the US has run massive fiscal deficits. Huge. Right. 31 trillion in debt, massive bet easing, $9 trillion balance sheet, whatever, 89 trillion. But the DXY, the US dollar relative to foreign currencies is up 30% in that same time period. Meanwhile, China, which has run massive current account surpluses, which is supposed to be good because of the inflows, their currency, is actually down since in the same period, it’s been like flat. If you look at every bricks currency, they all run chronic current account surpluses. Brazil didn’t, but now it does. It’s actually becoming a huge one. All their currencies, they’re down dramatically since 2008. So it just shows you that these people, they don’t have the consumer to have the imports, and they want to promote the exports at all cost. And they do it by China. They maintain their currency. They keep it cheap on purpose. Cheaper on purpose. It’s like a currency mechanism.

Tony

Yeah. To goose their exports. Right. They need a little bit more exports. They see the value added manufacturing moving away to, say, Vietnam or Thailand or Malaysia or Mexico or something like that. And so you can still get really good basic stuff in China, but the value added stuff is going to be somewhere else because labor isn’t as cheap as it once was. Right.

Adem

And that was with those three charts I was talking about. But I want to hear if Albert had any insight on this or anything.

Tony

Yeah. Albert, what’s your thought on China?

Albert

Everything you said was absolutely correct. From China cash economy to the dollar and how it works in the world. There’s not really much, to be honest, that I could really add. I mean, the only thing I can add is I know that China had staggered their reopening on purpose to help out on inflation and with yelling. And domestically, they’re not stupid. They know the problems that they have. They know the problems that they face and what they could face repeating what Japan had made mistakes in the future. They’re not dumb but I don’t really like when people make assumptions where China is like, oh, China’s peaked and it’s just going to be the end of China and so on and so forth. Let’s just take a step back here because China still can stimulate their economy on a short term basis to the moon. What happens is long term is a different story, but it’s short term. They can do whatever they want. They’re just pragmatic and they’re not going to do something silly like that. Everything you said I agree with everything about it, especially the dollar stuff. It’s like everyone wants to dismiss the fundamental details of economies and their currencies and just say, oh, well, it’s going to happen because of political A, B, and C.

Albert

It’s just not the case.

Tony

And as you said, the Chinese bureaucrats and policymakers, they are not stupid. They’re actually very smart. But within the bureaucracy, there are just things that they can’t mention. There are policy directions they’re not allowed to go, all sorts of things. So we sit on this side of it going, why aren’t they doing X? Why aren’t they doing y don’t they know it’s because they can’t even mention these things or their career is over.

Albert

Yeah, they have a different dynamic. We can have congressional members say all sorts of stupid things like Bernie Sanders does all day long, right. Or whatever Republican you want to throw out there. Also, they just say dumb things all day long. Right. You cannot do that in China. There’s political repercussions. You will end up in jail if you do. You mentioned some things, right?

Tony

While we’re here, I want to ask you guys about this with China. We had this for a couple of years. We had this kind of China wolf warrior diplomacy, right, where they were very aggressive, diplomatically. They would say really abrupt things and China was the ascendant power and they really needed to assert themselves in diplomatic circles. Right before the COVID reopening, they switched on a dime and they became much more accommodative, much more collaborative. There are still moments of wolf warrior statements, but for the most part they’ve become much more, I guess, softer than they did than they were before. What are your thoughts on that in terms of kind of the political economy, I guess? How does that reflect China’s view of its economy? Albert that’s a good question, Tony.

Albert

Put me on the spot on that one. I mean, a lot of China’s rhetoric and political economics is twofold, in my opinion. One, to stabilize their domestic economy for whatever sectors they’re targeting, but also has aspect of how they’re going to be dealing with trade negotiations going forward with the European Union, in my view. So they do a balancing act of what rhetoric they can throw out there.

Tony

Yes, I think that’s right. Adam, what do you think about that?

Adem

Yeah, I agree. I think the Chinese government, they must know that they’re kind of in a little bit stuck right now. And I agree with Albert. They could, if they wanted to come out and say, hey, you know what, we’re going to completely rebalance our economy. We’re going to be demand driven here’s. Massive vouchers, massive subsidies, open the capital account, let the wand appreciate, go out and spend, import, blah, blah, blah. But yeah, they don’t want to do that. They’re doubling down on the supply side. We’ve seen I mean, look at, we were talking about EVs earlier. Look at China’s auto to exports to GDP. It already took over Germany. It’s about to surpass Japan in just the last three years. I mean, they really are subsidizing the export sector. And I think it’s a problem because if the rest of the world can’t absorb it, like we saw with Vietnam recently, they laid off 6000 workers. Vietnam is one of the largest textile countries producers, exporters. They laid off 6000 factory workers because they said demand is drying up for Nike and shoes abroad. And it just makes it interesting because they can’t consume that stuff at home.

Adem

They don’t have the purchasing power to buy Nike in their own country. So they depend on the exports. So now they have to deal with unemployment. And I just think China’s worried about that because you’ve got official youth unemployment.

Tony

Of over 20% official youth youth.

Adem

And the problem with the youth one is that I was reading there’s another 11 million Chinese graduating college this end of May or in this cycle. So you already have 20.4% youth unemployment and now you have a tidal wave of new graduates coming in. Yeah, it’s just a problem. I just think it just shows there’s a lot of mismatches in the Chinese economy. And I was actually looking at data from Kaikeson Cakes in Global and they were showing how the state owned enterprises wages growth has far outpaced the private sector’s wage growth in China. And it just shows they’re both sinking. Right? I mean, wages aren’t rising in that country over the years they have, but the growth of that wage increase isn’t going up that much at this point. They have a negative CPI, so they’re having deflation basically at this point, their PPI, their producer inflation, which is like wholesale prices, which is important for China because China is an export economy. So they’re essentially exporting that deflation that’s been negative over the last year and even in month over month terms. So yeah, I don’t know, I think that their leaders are aware of it because the CCP has like a social contract with people, right?

Adem

It’s like, hey, we’ll give you jobs, we’ll take care of you, security, and you keep us in power, we’ll take.

Tony

Care of you or we’ll kill a few million of you.

Adem

Yeah, it’s worth watching, right? China has always been really sensitive about civil unrest because I think if I remember China’s throughout history, each time their empires kind of fell. It was because of internal, like, strife, as most do. Yes, most do. And I think that when you have an economy or not economy that too. But a population that large, you really got to be careful. Half of them get the pitchforks out or something. It’s quite a lot.

Tony

So, Adam, you mentioned a really important phrase, and I wonder if it could be helpful for the world economy. You talked about China exporting deflation. Okay. So typically you export deflation when you overproduce something. And so could China exporting deflation help us get over the inflationary hump in the world economy right now?

Adem

Oh, absolutely.

Tony

Accelerate us getting over that hump.

Adem

Yeah, that was like my thesis back in December when everyone said China was going to unleash inflation. I was like, no, because their domestic economy is weak. I think even with the Reopening, they were going to have deflation on the CPI side six months later. That’s what happened. And then on the producer side, you had their supply chains reopen, not to mention internal demand week. And since their exports, I mean, their current account surplus in the first quarter, 2023, it was the highest ever in the same period. You would have thought that they would have seen soaring imports right, from reopening, but they haven’t had it. Their consumers, just anemic whatever the reason is, probably because of property prices, or like you guys said, they’re skittish. They’re wanting to save the money at this point. But if you’re saving, you’re not consuming. And the Chinese banks, the Chinese economy, you have to export that capital. You have to find some use for it because it can’t just sit in there. You owe interest on the deposits, right. So you need to make an asset to be able to pay it. Otherwise you’re losing money. And I think that’s why we’ve seen them very happily start buying US.

Adem

Bonds again. Same with Japan. I just don’t see how that trend will change. And which with them exporting the capital to America, I do think it’s going to push weight down on the long end of the curve, which is also somewhat deflationary in the long run. And also, like you said, with their manufacturing capacity, you said they’re overproducing compared to what they make. And perfect examples, cars like EVs. They’re just dumping EVs and autos, like.

Tony

All over all across Southeast Asia.

Adem

Yeah, and this is the problem. I was talking with someone, they’re like, oh, but the production side, it’s good, they’re importing stuff. And I’m like, yeah, but there’s always like another side of the coin. Right? And I don’t think Southeast Asia, Russia, especially now, they’re even getting nervous about it. You’re crowding out their manufacturing capacity. Right. Like, how do you compete when you’re subsidizing the hell out of your manufacturing export sectors, and then it’s flooding into these economies, and it’s pricing their own manufacturing out. And the ASEAN, the Southeast Asian economies in Russia, they’re all big exporters, too, so it’s hard to see them not doing some kind of trade barriers or then they’re going to start subsidizing their own manufacturing.

Tony

Well, that’s it.

Adem

That is it. And the problem is, though, you can’t and that’s why I don’t like the bricks argument, because if they’re all dependent on exports, they all run current account surpluses. Problem is, you can’t all run a surplus together at the same time. Right. Someone has to have a deficit. Yeah.

Tony

This is also where when people say China and Mexico are going to partner up on value chains or whatever, those guys are competitors. Those guys aren’t partners. Those guys are competitors.

Albert

Yeah, we’ve mentioned this so many times, especially the arguments that I’ve had where nation state interests take precedence over anything else. And you will see trade barriers pop up. Like Adam says, you will see trade wars happen in the next decade. It’s just the reality of it. As nations contract, they need to shore up their own domestic economy and domestic workers. And this is what you’ll happen.

Tony

Yeah, it’s the next wave of populism. It’s just survivalism, and that manifests itself in populism. Okay, guys, just real quick before we close up, what are we looking for in the next week or so? I mean, I know the debt ceiling, but say, Albert, you’re watching the debt ceiling. What else are you watching?

Albert

Oh, man, I was all about debt ceiling.

Tony

No, you can go into that, too.

Albert

Obviously, debt ceiling narratives are going to come out. They’re going to be up and down all week long. The only other things that I’d be watching is actually oil, to see what’s going on with oil at the moment. Because the debt ceiling narratives give a recessionary outlook or a bullish outlook, depending on what side you’re on. And oil is going topsy turvy. I honestly think at $65 of oil is probably the floor because under that, production issues come across. So I would love to see it at 68, 67. So I can go long, but I’m going to be watching oil because I also have a thesis of a secondary inflation event coming in the second half or late this year, early next year.

Tony

Great. Okay, Adam, what are you looking at with the next week?

Adem

Next week? I don’t think any big things I’m looking at over the next week, but things I am going to pay attention to. I think China’s retail sales and their current account data monthly. Japan’s as well. And Germany. Those are the three I like to follow globally. But I also think with the debt ceiling in the market right now, I think I was looking like tech has really bit up recently that trade has gotten really crowded. Yeah, US. Tech and then you have short regional banks has also become very crowded. And it’s hard because I don’t mind shorting tech. I don’t have anything right now. Into it, but like, Nvidia and these things, I mean, I think they’ve just gotten way out of control with the AI Hype.

Albert

With tech. Good luck. If the debt ceiling thing gets done, I’ll tell you.

Adem

No, I agree. And then the regional bank thing I do like as a contrarian that it’s so shorted and crowded. Same with bonds. The ten year bond right now is like near record shorts. So I like the longer end of the curve. I think yields are going to keep going lower. I just think there’s an incredible savings glut in the world overnight reverse. There’s just so much damn money deposits they pumped in. And now that the banks are starting to curb back lend loans, you got to do something with it. And the government is the last borrower at that point, right? That’s the idea. If businesses aren’t investing, if the consumer is tapped out, then the government steps in to borrow, and I think that’s what they’re going to keep doing, but it’s going to drain reserves. So I think even though regionals are extremely shorted at this point, I think looking at a few, I do think banks are going to have more trouble throughout the rest of the year.

Tony

Okay, very interesting, guys. Thank you so much. This has been huge. This has been such a great episode. So thank you very much. Have a great weekend. Have a great weekend. Thank you so much.

Adem

Thanks, everyone. I really appreciate it.

Explore your CI Futures options: https://completeintel.com/futures

In this episode of “The Week Ahead,” our guests discuss key themes affecting the markets. Tracy Shuchart, Anne-Marie Baiynd, and Amelia Bourdeau share their insights on oil equities, diamonds and gold, and tactics for navigating choppy markets.

Tracy starts the discussion by noting the decline in crude oil prices and the impact on oil equities. She expects crude prices to continue to fall, with institutions playing a crucial role in the market. Tracy highlights that investors should also keep an eye on geopolitical factors that could affect the oil market.

Amelia talks about the diamond market and her work at Diamond Standard. She explains that the diamond market is different from other commodities due to its unique characteristics, such as limited supply and high demand. Amelia also discusses the recent sell-off of gold by Palantir and whether it’s an indicator of things to come. She notes that while there may be short-term fluctuations, gold is a good hedge against uncertainty and inflation in the long run.

Anne-Marie shares her tactics for navigating choppy markets, pointing out that it’s essential to focus on the charts and technical indicators. She suggests looking at key levels and using them as a guide for trading decisions. Anne-Marie emphasizes the importance of risk management and encourages investors to have a plan for both bullish and bearish scenarios.

In conclusion, the panelists agree that uncertainty and volatility are part of the market, and investors should be prepared for them. They suggest having a long-term perspective, keeping an eye on geopolitical events, and using technical analysis to navigate choppy markets.

Key themes:
1. What’s ahead for oil equities?
2. Diamonds & gold!
3. Choppy markets

This is the 65th 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
Tracy: https://twitter.com/chigrl
Anne-Marie: https://twitter.com/AnneMarieTrades
Amelia: https://twitter.com/AmeliaBourdeau

Transcript

AI

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Tony

Hi, and welcome to The Week Ahead. I’m Tony Nash and today we’re joined by Tracy Shuchart, Anne-Marie Baiynd and Amelia Bourdeau. This week, we’ve got a few key themes. The first is oil equities. We’re going to talk to Tracy about what’s ahead for oil equities. We’re going to talk to Amelia about diamonds and gold, and we’re going to talk to Anne-Marie about choppy markets. We’ve seen quite a lot about that this week. So guys, thanks so much for joining us. I really appreciate your time on a Friday.

Tony

Tracy, let’s start off with oil. We’ve seen crude prices falling over the past month and with it we’ve seen share prices like Chevron, ExxonMobil.

So where do you think crude prices are going? And I guess more interestingly, how will they affect oil equities?

Tracy

Well, I think right now what we’re really seeing is we’re kind of seeing this shift because people are expecting a rate pause into tech. So we’ve seen a lot of volume going to tech, especially the mega cap in the tech sector. We’ve seen a lot of money come out of value stocks, and that obviously includes oil. So that’s partially the problem.

Tracy

Also, oil equities tend to follow oil prices. So oil prices have been very soft lately and those have proceeded to follow. The thing is that the fundamentals remain really strong in this market, right. And so it’s more of a thing of there’s just not a lot of participation in this market and we’ve seen that over the last six months or so. So this isn’t something new necessarily. I think it’s going to take a lot for people to really get into this market. We’ve seen more Russian barrels on the market. They never came off. They said they were going to cut 500,000 barrels. We haven’t really seen that translated into exports. Exports still remain high and then China is still lagging a little bit as far as their recovery is concerned, even though they are they did just buy 15 million barrels a day of oil, which is an all time high for them.

Tracy

But the markets really seem to be more worried about the recovery in other sectors, particularly like housing and building and things of that nature, and of course, recession fears.

Tony

But we see things like travel doing really well, right? How bad do they think housing is going to get?

Tracy

As far as China is concerned, or as far as China or US?

Tracy

Well, I think that the property sector is imploded. Right. There’s just not really a lot of interest there. In fact, there was an article that just came out this morning on how I think it was a Bloomberg article on how foreign investors are just really skittish to get back into the China market after the housing implosion. And because of the whole COVID issue.

Tony

And the fact that foreign executives are now monitored and travel restricted and all that stuff, and that’s a huge risk.

Tracy

Yeah, absolutely. And so I think that is part of it as well.

Tony

So you just posted a piece this morning, I think, about exports from the US. I think six and a half million barrels a day or something like that?

Tracy

Yeah, the exports are all-time high. It’s actually four and a half million barrels on average for the month of March, which was unfortunately the EIA data lags two months when they come out with their monthly. But those are all time highs. So that’s excellent news for the US. I expect that to continue. There’s no reason why it shouldn’t. And that’s especially good news, obviously, for Texas, because Permian is the best basin right now. That looks like it can actually increase a little bit in production, where all the other basins are falling in production.

Tony

Okay, and then what about OPEC? What what are your expectations for OPEC? Do you think they’re going to hold? Do you think they’re going to cut supply even more? What’s your outlook there?

Tracy

I think we’re going to have to see. It’s just May is when they really started initiating these voluntary cuts. Right. So we’re really going to have to give that a month or two, I think, to really see if that filters into the market. And does that translate again to exports? We did see UAE say they were cutting back on exports, 5% for the month of May. So, so far so good. I know there’s a lot of talk that, well, it looks like Russia isn’t keeping to their 500K. We don’t really know because they stopped reporting numbers. All we can do is trace it by exports and those haven’t come down. And so there was talk, chatter that OPEC might just forget it and turn on the tax and whatever. But I am of the opinion that’s definitely not going to happen, because if you look at all these countries, particularly Saudi Arabia, they have a lot of big plans, like they have neom, and they’re trying to expand and make it. A tourist hub in Salmon has just a lot of plans, and so they need the money. I don’t think they’ll flood the market knowing that the demand is not there and risk crushing oil prices because they’re not going to be able to sell more if the demand is not there.

Tony

Right. So how does that translate to oil companies know of stocks?

Tracy

Well, what’s really interesting is I had a Spaces this week and I was talking to Jeremy McCray, who is the institutional energy advisor for Raymond James, which is a big institutional banking and investing conglomerate. But what he said, what he’s seeing with his institutional buyers is that he’s seeing institutional buyers with large amounts of AUM start to get really get interested in the industry again. And these are players that tend to hold for a very long time, whereas the hedge funds, the hedges and the CTAs aren’t holding for that long. They have a high turnover yearly of their stocks. And so we’ve seen a lot of volatility, even though it’s been upwards since 2020. Definitely stocks are well up their low equities, but it’s been a very bumpy ride. We’ve had 30% drawdowns a lot. Right. As far as investors are concerned, that’s a really promising outlook, looking for maybe perhaps more stable prices and not so much turnover in these stocks.

Tony

Okay, great. Do you guys have any questions?

Anne-Marie

I have a couple of them, Tracy. In terms of these institutional investors, which I was going to talk to you about because that Spaces was just incredible. Do you think that their decision to move into that sector again is a combination of them just being beaten down or the ESG noise just getting a little bit more quiet as we see a lot of people saying, well, I just don’t know about these ESG things if we’re going to be able to do what we need to do. What do you think the reason is that they’re focusing there?

Tracy

I think we’ve seen a big turn when we saw Vanguard in January come out of the ESG banking sector group. I forgot what it’s called off the top of my head, but that was a big turn of events. And then you’re seeing a softer stance from even people like BlackRock right, that were very adamant against it. And then you have Jamie Dimon, who is very pro oil and gas. And so I think what people are starting to realize, or at least these big banks, big institutional banks are starting to realize that we still going to need oil and gas for a very long time and that it’s proven to be highly profitable where some of these renewables are very subsidized. Right.

Tracy

And those stocks, if you look at solar and wind stocks, they haven’t been performing that well at all. And so there’s an opportunity in the energy sector. It’s not going away soon. And I think that you’ll have individual investors start to hop on that train once they see these bigger banks kind of coming around to the sector more.

Anne-Marie

Thank you.

Amelia

I wanted to ask about this was kind of a lot of talk in the macro world when OPEC or Russia, when they make these production cuts and then is it usual that they don’t always obey them or there was like this real debate in the macro community?

Tracy

Well, it used to be that they didn’t. Right? Absolutely didn’t. And that was part of the big debacle in 2020. What happened is there was a falling out between Russia and Saudi Arabia, and they turned on the taps. Russia turned on the taps, Saudi Arabia turned on the taps, and then COVID hit, and then we got negative oil prices as a result. But I think since that kind of disaster, we’ve seen a complete turnaround in the cohesiveness of this group. And so people, I think that it’s the old OPEC plus when it’s really not anymore, and they really have said how dedicated they are to this group and to keeping production levels at what they say they’re going to be.

Amelia

Right. Okay.

Tony

And is part of that, Tracy? Obviously, it’s internal group dynamics. But is part of that also, say, Europe and say the US kind of pushing back against one of their members very aggressively in Russia? Has that driven those members closer together?

Tracy

Well, I think in some respects, yes. I also think that the US. Is not really a threat to OPEC anymore as far as production is concerned. The all time highs were in 2019, that was over 13 million barrels a day. We’re not there, and we’re probably not going to see those highs again. And you’re not seeing oil companies. They’re not going ho crazy. Let’s just fly by the cedar of our hands. We’re going to just drill, baby, drill. Right. They’re more focused on keeping shareholders and share buybacks and paying down debt, paying dividends. And so that mentality is kind of gone in almost an impossibility just because of a lot of the tier one wells are gone, right. Just not drilling for them anymore. I think that OPEC feels a little bit more in control now as well.

Tony

Okay, so you said, drill, baby, drill. So I’m going to ask about this. Trump had a town hall on CNN this week, and one of his answers around inflation was drill, baby drills. So how realistic or how feasible would that be as a policy if we had maybe not Trump, maybe Trump, somebody else who said, yes, we’re going to clear all of the, say, regulatory and other issues. We’re going to encourage American drillers to drill. How feasible is it to get back up above, say, 10 million barrels a day in the US?

Tracy

Well, I don’t think you’re going to see, well, we’re above 10 million barrels a day right now. We’re at 12.3. But that said, I think government can only go so far, right. You can permit all you want. You can make things easier. You can open up acreage in Alaska. There’s a lot of things the government can do as far as things on federal lands, can’t really do anything on private land. So that’s more kind of really the bulk of that, Alaska and New Mexico, but they can’t really make companies. You know what I mean, so they can make things easier for them absolutely. Right. And they can provide incentives. But again, I don’t think just because they do that necessarily means these oil companies are going to do that. We’ve had a boom and a bust, okay?

Tony

I’m spending way too much on oil. I’m sorry, ladies, but just how much of the pullback in drilling is regulatory and how much of it is interest rates and how much of it is other factors? I’m just curious from your just in terms of broad strokes.

Tracy

Yeah, I mean, broad strokes, really? There are a lot of supply chain issues. There still are some supply chain issues. We have a huge labor problem still because there just aren’t enough people to work in industry. Right. And there’s not people we’re not seeing that younger generation interested in oil anymore, right, because they’re of the ESG movement. So that’s really huge. Those are problems outside of anything the government can do and that are hurdles for the industry right now.

Tony

Okay, great. Thank you for that, Tracy. That was really good. I appreciate that.

Tony

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Tony

Amelia. Let’s move on to diamonds and gold. I think it’s a really fascinating time for both right now, and I’ll admit I know nothing about diamonds. So could you talk us through the diamond market a little bit and help us understand what you’re doing at Diamond Standard?

Amelia

Yes, for sure. I’m going to start opposite. Let me just show you our diamond standard commodity and then I’ll go into the diamond market because I kind of need a reference of the commodity. So what happened at Diamond Standard is our founder, Cormac Kenny, and he comes from a background of computer science and building trading systems for hedge funds. So he’s from the finance world and he made a diamond commodity. And how he did that is he figured out about 94% of all investment grade diamonds, gem quality, above ground. And diamonds are obviously different from one another in terms of color, cut, clarity, and carrat and the size of it. So he found a way to group diamonds into these commodities that are geologically equivalent to each other. So let me show you. They’re kind of held in resin, and I don’t know if anyone can see this, but here it is. Here’s a diamond commodity. This one is worth the the bar is worth about $51,000 today. And this is a coin and that’s $5,100 today. So a coin to another coin is fungible, meaning it’s geologically equivalent. So they’re not the same as each other, but they’re, as I said, the geological equivalents.

Amelia

And so that’s what makes them good for delivery, for the CME, for CoMax. So they’ve already been rated as good for delivery. Then on the back they’re on the blockchain. So that’s a blockchain token. And what that allows a person who holds them to do is normally if you’re in the United States, say, if you wanted to hold the physical, you’d store it at vault and brinks. And then if you wanted to trade it, we have a spot market, you would just trade the token so you don’t have to physically move the actual commodity. So that was the breakthrough that diamond standard, and that’s why it’s called diamond standard. They created a standard for diamonds that is fungible and now able to trade. And as we want to, we want to move into financializing diamonds. So we have a spot market. We’re going to have futures and options and eventually an ETF similar to when gold we think of ourselves like in the precious metals category when the GLD was launched back in 2004 and kind of that position, build that. Took place into it and subsequently. But let me just kind of talk to you quick about the diamond market, because it’s really a fascinating market.

Amelia

I mean, diamonds are a $1.2 trillion natural resource and they’re under allocated financially compared in investment world compared to other precious metals. So investors hold about 2% of diamonds and they hold anywhere from 15 to over 30% in the case of gold, of other precious metals. So this is definitely a commodity that hasn’t been financialized yet. And we get this question a lot because there’s the rise of lab grown diamonds. I wanted to kind of address that in two ways.

Amelia

Natural diamonds are rare, so they’re from a supply standpoint. So most mining analysts believe that diamond production peaked back in 2005 at 177 million carats. So by comparison, last year in 2022, 115 million carats were mined. So that’s 35% lower. And that’s expected to hold steady for a couple of years and then dip again around 2025, 2026, because these major mines that have been operating some for 70, 50, 40 years are running out, they’re coming offline. And so there is a real supply constraint. There hasn’t been a new mine, a large find, one that could operate for say, over 20 years, there hasn’t been a mine in decades that’s been found. Petra Diamonds, which is a major diamond mining company, has said that when they explore, less than 1% of things that they find are viable.

Amelia

So there isn’t a lot of hope, I guess, on the horizon that some big geological discovery is going to be made in terms of supply. And so you do have that dwindling of the natural diamond. And then on the other side, you kind of have I wanted to address the lab grown. You have this big rise, especially in China and India, these manufacturers of the lab grown diamonds, and these new companies are popping up all the time, so that lab grown diamonds are really expanding. It’s interesting because some are really beautiful. When you look at them, you can’t necessarily tell that they’re not a natural diamond. It’s just that when you put them under microscopes and you have the graders, because Gia and IGI, the graders, they will grade a lab ground, and they will tell you it’s lab ground. It’s pretty much immediately apparent because natural diamonds are formed over thousands of years, and lab growns are made very quickly. So their molecular structure, when you look at that, is quite different.

Tony

How do you tell the difference? Are lab grown almost too perfect or something like that? Again, I’m not a diamond expert. I don’t know anything about it. But I’m just curious, when they look at it under a microscope, what are the tells? Do you know?

Amelia

It’s really the molecular structure of it.

Anne-Marie

Yeah. The refraction is also significantly different between the natural and the this is very interesting that you’re talking about these, because I have all kinds of thoughts around the diamond industry. So I’m interested to come on. Well, how would you combat the group that says still the De Beers hold the foothold, really, for diamond distribution in the world? Still. And a great much of diamond supply is still held by De Beers. Right. They keep it underground in great big vaults. Yada, yada, yada. And so a lot of folks have posted over the years that De Beers is actually in charge of that mass marketing event that propagates the notion of the diamond industry being a good one to be in. And of course, for many years in I think it’s is, it Amsterdam where they literally… Antwerp. There we go. The other a one.

Anne-Marie

They actually have done business for years and years with a handshake. If you’re not completely honest with everything, they’ll snuff you out and kick you out. So it really is one of the rare industries where contracts aren’t used. They feel like if you have to sign a contract and your word is not your bond, then you don’t belong in our business. And so that community has been really closed because they keep all those very highest quality in very low distribution environments. And so is there anything, if someone like me that says, oh, the diamond ETF industry has been trying to gain traction for quite a bit of time. And I love the fact that you guys have tokenized it and it’s on the blockchain, so I assume it’s contract. It’s got a contract thing on there, on the back end of that blockchain business.

Amelia

If you can see you can kind of see purple dots, those purple dots are all the certificates that go with you. Look it up. And also you can find this meaning when it’s activated, if you want to know, it’s like sitting in the vault, and what position in the vault is in, this will tell you.

Anne-Marie

So I know that’s kind of a probing question since there seems to be an organization, a couple of organizations at the very top of the heap that have always tried to keep supply constricted. Does it ever concern you that they might one day say, hey, listen, we’re going to let some of these out because of XYZ? I don’t think they’re going to, because there’s no benefit to them. But have you had people ask those questions?

Amelia

Yeah, for sure. I mean, it’s interesting that you bring up De Beer. So, in general, the mining supply is definitely the supply of natural diamonds is definitely on a downtrend. The largest supplier, which is almost equal to De Beers and slightly depends on what year you look at it. Slightly larger than the beers in the market is, of course, Alrosa, the Russian partially state owned diamond company. And so they mine about 40% of the world’s diamonds, and De Beers is just underneath at maybe 35%. So it’s very interesting because, as we know, the G7 meeting is coming up in Japan next week. So there’s been a lot of talk about further sanctions on Alrosa, the problem. So that would further shrink the supply. So when you mentioned De Beers controls the market, well, Alrosa actually mines as much or more than De Beers. So there is a more diversified diamond mining industry than there was, say, 50 to 70 years ago, for sure. And so that’s another supply constraint that’s likely going to hit the market. There have been various sanctions, but Russian diamonds, in theory, can get through because of the substantial transformation language in imports, basically.

Amelia

So if they were mined in Russia somehow rough mining, then the rough diamonds are sold to one of the Polishing centers, Antwerp, India. India is a huge polishing. You mentioned Antwerp, but most of the diamonds are polished out of India now, and so a substantial transformation can take place. It’s really difficult to trace the provenance of a stone, meaning where the the mine is mined and the country it’s mined. And that’s that’s just been a problem for ages with the diamond mining industry. Maybe now with technology and blockchain, they can solve it. But there will probably be some sort of announcement in a week to ten days time from the G7 about further sanctions somehow on these Russian diamonds. They’ve definitely been talking to the diamond dealers, but it’s a problem where it’s just very difficult to solve how they would implement this sanction. There are some major jewelry companies that have self sanctioned meaning they have told their suppliers, which are the middlemen, the middle people, the polishers and cutters, that they’ve made them sign legal agreements that they won’t take Russian diamonds, that they must be separated. So that’s a little bit more of addressing as well your concern or the point you brought up, which is a good one, about things being done on a handshake.

Amelia

I don’t really think that’s the case anymore. I mean, there’s been such Tracy kind of mentioned it as well, with, I think, the younger generation and more concerned about ESG or things like that. They’ve really demanded where this diamond comes from, making sure it’s not a conflict diamond, which is Kimberly processes for the Kimberly process works with the US. Go out, and they’ve been doing that since 2003. But I think that there’s more paper, more legal agreements in place that say Russia in an Indian supplier. Those diamonds need to be separated, and there’ll be more diamonds going to Western states, which will be supply constrained, and those Russian diamonds most likely will go to, like, China and the Middle East.

Amelia

So it’s interesting, I think, that the diamond industry in one way is very traditional. In another way, it’s really evolved, I think, because the consumers have demanded that it evolve, and especially now with the two of lab grown diamonds, and they need to be graded and separated as well. And that’s obviously very important. And IGI and Gia work to do that. Huge diamond graders. And I just wanted to get back to the point originally about because we get to ask this question so much about our lab grown diamonds a threat, I think we think, especially if we’re continuing to buy natural diamonds into physically backed ETFs and for financial purposes, those will be natural diamonds.

Amelia

And we have a diamond exchange, actually, that we made that one of the first electronic diamond exchanges for price transparency. We have 185 manufacturers on it. Those are the cutters and Polishers who sell diamonds to us. So all that pricing is transparent. And just like anything else, we bid low and we bid until somebody we buy about 10,000 diamonds a week to separate into groups for our commodity. But eventually the diamond industry will need the lab grown diamonds, right? Because what are Zales what are Jared going to do when the natural diamonds become so exclusive or obsolete that it’s really partier using them? Only a graph that can kind of the mall jewelry stores will all convert most likely to lab grown diamonds so that they continue to have jewelry. So that’s kind of how we see it progressing.

Tony

That’s interesting. I didn’t think about the mall jewelers or whatever converting to lab grown diamonds.

Amelia

Or tiny ones like in watches, when you just have tiny accent stones as opposed to

Tony

Fantastic. Now this is really great. Like I said, I know nothing about diamonds aside from Luluzi’s diamond in his forehead. So it’s a little mysterious.

Amelia

I just wanted to make a point, too. It’s kind of interesting because obviously right now, diamonds haven’t been financialized. We’re in the process of doing that. So the majority, like 90 over 90% of above ground diamonds are used for gemstone. So that’s personal consumption spending. And obviously there’s varying degrees of people calling for recession in the US. So that will slow because the US is diamonds largest market, where over 50% of the world’s consumer diamonds come to the United States. The second largest market is in China. But we just had Q1 results for luxury goods houses LVMH and Rishma, Advanced Leaf and LVMH, who owns Tiffany’s and Bulgaris, and they had extraordinary sales in Q1 and it was driven, of course, by the reopening in China from the Pandemic restrictions. But that reopening in China. We can’t expect the big lift from reopening all year, but that kind of acts as a tailwind. So it’s interesting when people talk about slowdown in consumer spending, at least for diamonds, it’s very high end, has just no stoping it right now.

Tony

Yeah, okay, great. So let’s move on to gold, because I know it’s super polarizing and with worries about the dollar and the banking crisis and all that stuff, it’s really pushed up the price of gold over the past month. So I’m going to make some enemies here, but our Complete Intelligence forecast is going to say that gold will likely fall 5% off highs over the next month or so.

We also saw Palantir, who has nothing to do with gold, take $50 million of gold off of their balance sheet this month.

So is that an indicator of things to come? Are people trying to kind of dump some of their gold at these high prices because they’re seeing some derisking around, say, the dollar, which you’ve seen rise over the past couple of days?

Amelia

Yeah, I definitely think people are taking profit on gold when it got to the high, like 2050, whatever, last week, and then it’s still above that psychologically important level of 2000. I think it’s just been chopping around with, I think mostly the banking, the regional banking headlines, like, how that’s going? And I had a chart of the regional banking index versus gold, and they’ve been following each other pretty closely since the turmoil back in early March. But I think what we have to consider here is just the World Gold Council is obviously all over this is the central bank buying. So there’s been a strong buy by the Central Cank of China monetary authority there in Singapore and Turkey all through Q1. They’ve led that central bank buying. And I think a lot of the answer to the question you asked depends on will these central banks continue to buy throughout the year? Because that’s definitely providing like, a base.

Tony

So when a central bank buys gold, to me, I could be wrong. So tell me if I’m wrong. To me, that doesn’t necessarily say they have a huge amount of faith in their underlying fiat currency. That tells me they’re buying gold. To imply strength into their fiat currency. Am I wrong there?

Amelia

Yeah. The World Gold Council has done a lot of research and reports on this. They are claiming it’s for diversification purposes and that these countries are worried about inflation for their fiat currency. They’re kind of arming themselves against inflation. They’re arming themselves against a possible dip in the value of their other reserves.

Tony

Right. And so when I see people on certain social media platforms claim that China buying gold means we’re all going to be spending CNY in ten years, I take the opposite side and it tells me that they’re actually worried about the value of CNY and need to spend dollar reserves to get gold while they can do it.

Amelia

Yeah, I would agree with you there. And plus the IMF, I mean, there’s been this big de-dollarization debate, which is I formally worked before diamond standardized fancy data who really followed capital flows. And if you look out on Twitter especially, you follow like Brad Saster from he’s an expert on this. He tweets a lot about it. It’s kind of interesting. Yeah. Reserves are China Yuan were like 2.4% and then last year, and then the dollar was still like, well over 50% and Euro was 20%.

Tony

Right.

Amelia

They’ve moved up over the decade, but not by much. I mean, they only have like, what, about two and a half percent of global reserves.

Tony

Right. And when we see people like Argentina saying they’re going to pay for all their imports in CNY again, what that tells me is they’re out of dollars, so they.

Amelia

Need dollars. Yeah, Brad made that point as well on Twitter. He had some figures behind it, but yeah, they’re out of dollars.

Tony

Yeah. They need some other fund ticket to pay for their imports. Right. That’s basically what it is. It could be anything, but CNY, it’s got the most behind it right now in terms of enthusiasm, I guess.

Amelia

Right, right.

Tony

They import a lot from China.

Amelia

Yes, exactly. And what would you rather have on your balance sheet, like Indian rupees or China Yuan. Because you can buy manufactured goods from China with the currency at least. Russia and India in the diamond industry, we’re trying to figure out a payment system for diamonds between them. But the talks they announced like a couple of weeks ago, the talks just fell flat because I think Russia didn’t want all these Indian rupees, like, on their balance sheet, basically.

Tony

Right, exactly. All of that is just telegraphing people’s confidence in the central bank. Right. And I’ve said this several times. I don’t know of many people who research the credibility of the PBOC in China, but I would encourage everybody to research the PBOC. How do they make their policy decisions? How do they decide on the levels of their interest rates, these sorts of things. If you can find the research, you’ll be really shocked at what you find. So again, I’d encourage everybody to do that. So Amelia, thank you for that. I really appreciate that’s.

Tony

Annemarie, let’s talk about choppy markets. Okay, so you’re pretty brilliant market tactician, and we’ve seen chop in the last really a lot in the last month on the S&P. We’ve got a chart on screen.

So what are you looking at right now to make your way through the chop? Is it daily? Is it hourly? And what are you looking at to understand what the chop means?

Anne-Marie

So I like to look at the monthly charts, and what that ends up telling me mostly is that we’ve been caught in a fairly big range and every time we’ve tried to break out above it, when everybody goes, hey, it’s going to be a great long, everybody needs to buy, really? Even on a day like today, it ends up not happening. And so I think we’re in I like to look at the ES because I trade it every day. And so the ES futures, really, if we look at a composite monthly chart, we can see that we’re caught in a slog trying to break out. And so then my question becomes, all right, well, if we’re trying to break out and we can’t, where do I find the pervasive bid? And that really is what we are seeing. We’re seeing a pervasive bid. No matter how deep we go, somebody comes in and holds the floor. And so we can literally look at the last five or six months and see that we’ve got higher lows coming into the space. But if you’re holding on for a breakout, it’s just not the best thing to do.

Anne-Marie

So that makes me look at all trading very tactically right now. And I suspect there’s some kind of catalyst that’s happening here. And to me, because the macro voices are so negative and so loud, I mean, the bullhorns they have in the Twitter sphere, it’s incredible, right? And so what I believe is happening is that a lot of people are shorting and then as it comes into support, they have to buy to cover and it turns the market right around. And then people who are thinking about the breakout, they buy the breakout, they get slammed because there are more people, as soon as they get stopped out of their short, they’re looking for the next high to put on another short. Okay, go ahead.

Tony

How long does this last? And what are those things? You say you’re looking for some signs of a breakout. What are those things aside from a Fed saying, hey, we’re going to go completely dovish, right. But what are some of those things that you’re looking at?

Anne-Marie

So to be a contrarian, if the Fed were to say, hey, we’re going completely dovish, I’m looking for my blanket to hide under the bed, that’s something, right? And so I would suspect that if anything like that happens, it probably will turn the market on its heels and will get even the worse effect. So because I don’t have a good handle on how macro voices come together and make decisions, right? So somebody like Felix Zulov comes out and he says, well, I think DA DA DA DA DA. For me, being able to pull all those strings together and make a bow, it’s almost impossible because of our known unknowns and because of our unknown unknowns. We sit in such diametrically opposed environments with nothing that’s gravitating us into any kind of central sensibilities. To me, it seems like we’re just going to pull until the rubber band breaks. And whatever that rubber band is, maybe it’s war. Maybe it’s like Dr. Pippa was talking about, these Chinese and Russian guys are blowing their satellites up and creating these huge debris fields so that our ability to have satellite information really could be compacted because they just want to stop flow, right?

Anne-Marie

Just before the Ukraine war, they went down and tried to cut those Internet cables that were everything. Think about this. If we did not have great technologies that brought us together, the four of us could not be sitting here today. And so what I expect is that we slosh around and then we get up one morning and we’re limit down on everything because of some sort of whatever, and then the market tries to capture that bid and then we realize that we can’t break out again. And then something starts to unwind more dramatically. But I think there’s sort of a what is that? Is it William Faulkner that said, how do you go broke slowly and then all at once?

Tony

Oh, that was the guy who ran with the bulls. Yeah.

Anne-Marie

But anyways, my thought is what we have to see is some dramatic systemic jolt that makes things fade sharply and then people go in, oh, here’s my opportunity to buy. And they buy and we can’t recapture those levels and that gives us the unwind. And now, because I have this amazing faith in the human spirit, there’s also the thought that, hey, listen, we’ll just adapt, divide and conquer in a brand new space. And so we’re going to see that fourth turning, as it were, right where we have a lot of things break and then ashes come out and there’s a new Phoenix on the horizon.

Anne-Marie

And so to punt, I’m going to say I have no idea. But what I do know is as it sits, I must trade tactically. I must have my eyes completely focused on risk. And within that environment, although it puts me in a space where there are a lot of places I could make a ton of money, but I don’t because I’m not leveraged as strongly as I could be. I’m still seeing a lot of people looking at the fire doors, going, okay, do I have a clear exit just in case anything happens? So I’m not decimated for the next time. It’s a great buying opportunity.

Tony

Yeah. So it tells me you say you have no idea, but you’re kind of expecting for us to wake up one day to a big negative surprise and everything limit down, is that I would.

Anne-Marie

Say that the way things reset is usually by a floor giving way. I don’t think things reset with a continual drive to the north because then there’s no real desire to reset. Why should I reset if things are completely continuing upward? And so that’s where I think we are right now. I think that even though there are all these people that are short and all the volumes within the market continue to diminish because money is going to places that it’s being treated better and so with less risk. And so that grind up on that thinning volume is just a classic. It’s a classic pattern of that rising wedge under diminished volume. It’s going to have an air pocket that eventually fills in.

Tony

Interesting. Okay, so we keep seeing, say, supercore rise gradually. We keep seeing wages go up, and that continues to pressure the Fed. We saw a unanimous vote in the Fed this month. Right. And so that I hear a lot of people who want to be more dovish. But it’s really hard. It’d be really hard for the Fed to go from a unanimous rise towards some sort of pivot. They could potentially go into a pause if we saw some dramatic numbers, but I’m just not seeing dramatic numbers. We’re seeing some positive numbers, some negative numbers. If we look at, say, consumer expectations, they’re still expecting higher inflation, these sorts of things. Right. But do you have any idea of what that dramatic number could be for us to all wake up and go, oh my gosh, this is bad?

Anne-Marie

I don’t think it’s going to come from the central banks per se. We could have a sovereign crisis that makes something go bad. And so that is certainly key, particularly as interest rates rise and everybody has US. Debt and they need to pay back. It’s going to take more of their dollars than ours and so on and so forth. I don’t think it comes from the Fed. I don’t think it comes from the central banks in essence. I think we see something physically important to us happen. I think it might be caused by what’s going on. But again, my crystal ball is very dusty right here.

Tony

Okay? So if we saw a couple of countries pull a Sri Lanka right, where everything falls apart, the government loses credibility. They have to refinance everything. Let’s say a Turkey or Brazil or something like that, we’d probably see some dominoes fall there. And that could be the type of event it’s almost the regional banking crisis at a sovereign level.

Anne-Marie

Yes.

Tony

That’s a global level.

Anne-Marie

Yes.

Tony

Interesting. Okay.

Tony

Yeah. I’m going to keep an eye out for that. Okay, guys, given where we are in this kind of choppy land. What are you guys expecting? Tracy, let’s start with you. When you look at energy and commodities markets, what are you expecting in the next couple of weeks? Are you expecting any change of direction? Do we see some seasonal, say uplift in crude prices, something like that?

Tracy

I think that we’ll probably just be kind of chopping around in this area. OPEC is going to have their regularly scheduled meeting. They used to have monthly meetings, but their actual regularly scheduled meeting in June, 1 week of June. And so I think markets are kind of waiting on that, to be honest. Unless you see some huge catalyst to move this in either direction quickly or I think we’re in this chop zone and people are really traders are really waiting to see what they say at this meeting.

Tony

Okay, so we’re just looking for direction generally. Do all you guys agree? Amelia, do you see anything different or do you have kind of a strong, strong opinion? Either way?

Amelia

I agree with Tracy. I think we’re just going to be chopping around. I think Marcus need a catalyst, speaking to the other points we made here. But I mean, I’m a macro person, right? So I’m kind of like a doomsday prepper by nature. So with all of these risks out there, whether they’re geopolitical or a possible sovereign crisis or the US hitting the death ceiling or, I don’t know, inflation really turns around and goes down quickly, I’m not sure. But I feel like you do need to hedge. I feel like precious metals, you do need a safe haven component to your portfolio. Even like more regional banking banks fail here in the US. So I think the outlook is really unclear. And I just think, as you guys know, really smart people, whether from hedge funds, banks, central banks, like analysts, FinTwit, you see it everywhere. Smart and respectable people are really disagreeing with each other outlook and the timing of events. And so that just tells me, as a macro trader, use that uncertainty as an opportunity, right. And try to put your hedges on and be ready for that next break.

Tony

Great. Okay, guys, thank you so much. This has been really amazing. I really appreciate your time today and thanks so much. Have a great weekend. And have a great weekend. Thank you.