Get 40% OFF your CI Markets subscription: https://completeintel.com/save200/.
Welcome to “The Week Ahead” with your host Tony Nash. In this episode, we discussed three crucial topics:
1. Rates, market pricing & earnings quality: Bob Elliott discussed various topics including the Federal Reserve’s approach to controlling inflation, the impact of interest rates on the housing market, the challenges of small modular reactor (SMR) projects in the nuclear energy sector, and the outlook for crude oil prices.
He highlighted the potential for a soft landing in the economy going into an election year, the complexities of the housing market, the difficulties faced by SMR projects, and the favorable risk-return profile for investing in oil.
2. Dollar, commodities and elections: Albert Marko discussed various economic and financial topics, including the potential impact of fiscal and monetary policies, interest rates, inflation, and the outlook for the dollar and commodities. He also touched on the challenges and prospects of small modular reactors in the energy sector, as well as the implications of energy prices, particularly in relation to crude oil. Additionally, he shared insights on the housing market and the potential impact of political dynamics on the economy.
3. SMR: Death of nuclear power?: Albert and Bob discussed the potential death of new nuclear power in the US, citing increased costs and R&D as contributing factors. They also mentioned the challenges related to transporting small modular reactors and the regulatory restrictions associated with them. Additionally, they highlighted the difficulties in developing new green energy technologies and emphasized the need for incremental progress and realistic expectations.
Finally, the conversation shifted to the outlook for crude prices, with Bob Elliott and Albert Marko expressing a favorable view of oil as a growth asset, considering its current pricing and potential for a diversifying bet against economic weakness.
Join us for a clear and concise analysis of these important topics in plain language you can understand. Stay informed for the week ahead! Don’t forget to like, subscribe, and share for more valuable insights.
Transcript
Tony Nash
Hi, everyone, and welcome to the week ahead. I’m Tony Nash and today we’re joined by Bob Elliott, Tracy Shuchart and Albert Marco. We’ve got a few key things to cover today. First is rates, market pricing and earnings quality. We’ll go in deep with Bob on that. We’ll talk about small nuclear reactors with Tracy and the potentially death of new nuclear power in the US. And then with Albert, we’ll get into elections a bit and dollar and commodities prices through the election cycle.
AI
Want to take control of your investments and predict the stock market? CI Markets is the AIPowered platform that provides 94.7% accurate forecasts for over 1600 stocks, ETFs, forex, commodities market indices and economics. With CI Markets, you can manage your own investments with ease and supercharge your trading experience. Sign up for CI Markets today and get 40% off your annual subscription with the code SAVE200. CI Markets predict the stock market and supercharge your trading experience.
Tony Nash
So, Bob, thanks again. Really appreciate you joining us again. It’s always really educational. You’re one of my favorite Twitter followers, or Twitter follower.
Bob Elliott
Thank you. I appreciate.
Tony Nash
Always, always super detailed. I always learn something. So yesterday, Thursday, just poor Powell dropped a bunch of F bombs and killed the melt up. You put out a great tweet about two year rates. Two year is just up a bit, over 5% I believe, right now. And you tweeted this. So it’s come up a little bit. The yields come up a little bit. So can you walk us through the trajectories? Kind of, why are rates here? Where do you expect rates to go and what impact does that have on markets overall?
Bob Elliott
Well, I think the basic question that was actually at the center of Powell’s contentful commentary yesterday, rather than foul mouthed rants, was around the fact that inflation is still not durably at the Fed’s target. And it’s not just that it’s not there, it’s that the Fed, at least right now, doesn’t see a clear and convincing path to it, so they can start to ease off the tight monetary policy that they have in place. And so I think one of the things, what we’ve seen obviously, over the course of the last six months is a recognition that we’re going to need higher rates first in order to slow the economy, in order to kick off that moderating cycle, to slow wage growth, which should eventually slow nominal spending and then slow inflation. But that rise in interest rates essentially hasn’t been yet enough to get there in a convincing manner. And I think one of the issues was that the Fed basically said, as of a couple of meetings ago, they were really pointing to the fact that the short rate, or recognizing the short rate really wasn’t the thing that was going to get the job done.
Bob Elliott
They really needed that long end to move up. And they got some of that. Until, of course, Janet Yellen wrestled away the tightening that they needed through the shift in the QRA composition, bringing bond yields down.
Tony Nash
Yeah, we don’t have a team, right? I mean, they wrestle each other all the time.
Bob Elliott
Of course, what I would emphasize is, from a roles perspective, if you actually go back and read about fiscal monetary policy in the. This is not unusual, I would say, particularly in heightened inflationary environments, or in environments where there’s a desire to engage in fiscal expansion and populism, as well as global conflict, to fund global conflict. And so it’s not like this is a shocking move on the Treasury’s part. But I do think it’s an important move because the treasury has been a technocratic institution basically for the last 30 years, and now what we’re seeing is indications that it’s going to be a policy making institution rather than a technocratic implementation institution. That’s a big shift, and you’d be surprised at how much flexibility Janet Yellen has actually to shift the composition of duration before running into any meaningful sort of outliers in terms of the overall debt composition in the US.
Tony Nash
Right. And I think we’re all old enough to remember when Janet Yellen was the Fed chair and she was banging on the table saying, hey, we’ve done all this monetary policy stuff, but there’s no fiscal right. So now that she’s know, leading the treasury, she’s doing all this fiscal, but it’s offsetting the monetary policy stuff. So they’re just not on the same page at all.
Bob Elliott
Absolutely. I think one of the things that was super interesting about the market action coming out of QRA was that there’s basically a bid on all bonds, right? But what that ended up doing is it created a bid on twos and tens, and that didn’t make any sense, because if these two levers are going to work in opposition to each other, which I think I’d say probably over the next year, we’re going to see opposition between them. What that should indicate is that the Fed needs to be tighter than expected before the QRA, and given that the treasury is going to be essentially easier than expected before the QRA, but instead, the exact opposite happened in the market action, which was Powell got priced in to ease more in 24 as a function of the QRA. And that’s the thing that I think makes no sense, to be honest with you. If we’re in this new world, Powell is going to have to do more in response to the easier long end policy. And so those 75 to 100 basis point cuts that are priced into 24 certainly look vulnerable in that context.
Albert Marko
Yes.
Tony Nash
Albert, come on in on that.
Albert Marko
All right. No, I agree with Bob. We’re certainly in uncharted territory right now. Late 60s style maneuvers by the Fed and the Treasury. There’s no question about that. I think the bigger debate in the near term, six months, really, is whether a soft landing is possible or not. Now, I know Bob’s going to be on the opposite end of me on this one, I get it. But all fundamental guys are. Bob’s a top notch guy and fundamentals and whatnot. But for me, going into an election year and knowing how much power the Fed and the treasury have of working the long bonds and everything, I do think that they’re going to get a soft landing just for this election cycle, after the election tans off at that point. But I think that’s where I really want to discuss is soft landing versus hard landing, if it’s possible in 2024.
Tony Nash
What does that look like to you, Albert? A soft landing. Can you paint that picture for us a little bit?
Albert Marko
Fake breakdown, the 3800, 3900, and then rally for the election? That would be my soft landing. I mean, obviously, inflation is a persistent problem, and this is a manifestation of the treasury and the Fed with conflicting policies that I just don’t see alleviating. So that’s a wild card in there.
Tony Nash
Okay, Bob, what do you think on that?
Bob Elliott
I think it’s one of those things where, let’s say from a longer term perspective, I think the core question about sort of soft landing and the durability of a soft landing is, can the Fed bring inflation to its mandate without a meaningful weakening of economic activity? And I think there’s pretty compelling evidence over history that the answer to that is no. The way we will get inflation back to that target is through a meaningful rise in the unemployment rate. So there will be a landing, and it will be hard because that’s what’s necessary to achieve the Fed’s goals. Now, let me pause on that point and say, but that doesn’t mean tomorrow there’s going to be a soft landing. And if anything, tomorrow there’s going to be a hard landing. Like a year ago I felt like a man in the wilderness saying that we weren’t going to have an immediate recession. Right. And the reason why that is, is two, I think, important points. One, macroeconomic cycles, if left to their own devices, not in a crisis mode, but in left to their own devices, frankly, are like slow moving. It’s like molasses, like go back to the 60s cycles go back to the late 80, 90 cycle.
Bob Elliott
Even the 2000 cycle took three years to play out. Three or four years to play out. So I think we have a very slow moving economic environment. And you see that, like with payrolls, which are slowing at the pace of molasses. Right. Nothing too exciting. And the issue is that the ability that particularly the treasury has, but also the Fed, has to run inappropriately easy. Monetary policy is absolutely there. They absolutely have the capacity to be able to do that. Right. Even if Janet Yellen actually reduced the amount of coupon issuance over the course of the next year, reduced, we would still only see a bill share in terms of the total treasury debt stock that’s still under 30%. So that’s okay. That’s not prudent. It’s not a good idea. It’s not good to keep stoking these inflationary pressures, but it’s certainly possible, particularly if they’re politically motivated. And so when I’m looking at this overall picture, what I’m saying is I’d rather not bet necessarily so directly on hard landing versus soft landing. I’d much rather bet on where are there opportunities in the market that are underpriced in that context. Right. So for instance, assets like gold and oil don’t look to be particularly priced, that we’re going to have continued inflationary pressures or continued if I’m going to buy a growth asset.
Bob Elliott
Oil is the cheap December 24 oil is like the cheapest growth asset that’s out there in the world today. And similarly, if we’re going to have this stimulation, these policymakers extending this cycle, then those December 24 sofers, they’re looking like those rates are probably going to have to rise relative to what’s priced in.
Albert Marko
Yeah, I certainly agree on the rates rising. I think that Powell will probably have another two or three hikes going into 2024. In my opinion, the only issue, two or three. Yeah. If they can’t get inflation down going into an election cycle, what are they going to mean? What are they possibly going to know? The issue I have is that both Powell and Yellen has White House and the Senate on their side going in for fiscal stimulus, farm bill that’s going to be coming up, God knows what other juicy little stimulus projects that they’re going to pump in into 2024 and just artificially keep the markets up. For me, knowing how DC works intimately, I can certainly see them keeping this pig up at least through the election cycle.
Bob Elliott
And I think that’s one of the questions. In that context, where’s the best way to express that view if you think that that’s, or essentially, where is that possibility underpriced? And that’s where I think it’s a bit underpriced. I mean, I think it’s definitely underpriced in the short rate market. I think it’s moderately underpriced in the long rate market, though, Janet Yellen will probably be responsive if rates were to rise 50 basis points again, she’ll just be a little like even easier in the next announcement. It’s underpriced in commodities, I think. And then if you go over and look at stocks, that’s the place where it looks a little overpriced, where we have earnings growth expectations from analysts bottom up to be almost 12% next year. That’s not like a great, that’s going to be tough even if things work out perfectly. Right.
Tony Nash
Let’s get into that in just a minute. The earnings stuff.
AI
Heads up for a short break.
Tony Nash
Hi, everyone. I want to tell you about a quick promo we’re having for CI markets. This is our forecasting platform for stocks, Equity indices, commodities, currencies, ETFs and economics. We’re having a sale for $200 off the yearly subscription so it brings it down from $500 for the yearly subscription to $300. Go to completeintel.com/save200, and then when you click through, hit the coupon, SAVE200, and you’ll get our annual subscription for $300. Thanks very much.
AI
Thank you. And now back to the show.
Tony Nash
I want to ask you about some of your earnings tweets. But before we get into that, we had a viewer question, Bob, and they said, what importance should investors place on long term bond auctions? Can an auction actually fail? As in having a bid to call ratio of less than one.
Bob Elliott
Auctions? The US treasury market is like the deepest, most liquid market in the world. And so can auctions fail? I mean, maybe technically the auctions could fail. I don’t think. That’s not really the big deal thing. I think when you scan across, this is the challenge in the bond market, particularly the US government bond market, which is, will someone buy the bonds? Yes, someone will buy the bonds. That’s going to happen. The question is, at what price will they buy the bonds, and what are the elasticities of all the different players in the market? Now, I went out when bond yields were moving swiftly to five. I was looking at the composition of the bond buyers and I said, look, actually, we’re seeing a lot of yield sensitive buyers coming in and starting to man.
Bob Elliott
I mean, there’s a reason why it’s kind of like peaked literally at five, right? It almost looked like there were a bunch of orders in place at five at a 5% yield. They’re just like, buy, buy at 5% yield. Now, look, maybe it has to go higher than that in order to clear all the duration supply. Or maybe Janet Yellen is going to just increase the bill issuance until we get a turn in economic activity, until there’s enough supply demand for duration, because the economy is deteriorating in order to fill the duration supply gap. And so I think a lot of folks are looking at the bond market like when it was at 2% and not thinking about it at 5%. The bond market at 5% is totally different than the bond market at 2%. Totally different supply demand composition, and particularly a reactive treasury. What would I say? Anyone who’s drawing a line to yields to 13, which, to be clear, I was asked, like, a serious person on CNBC asked me whether bond yields are going to go to 13, and I was like, no, that’s not going to happen. You got to be kidding me.
Bob Elliott
I almost laughed about it. That claim, are we in the ballpark of what’s going to clear the market at these levels, this amount of duration, supply. Look, we’re in the ballpark. Maybe it’s got to go up 30 basis points or 50 basis points, but it’s not 500 basis points.
Tony Nash
Right. And Bob, that’s a good call, not laughing at the CNBC people before, because I’ve done that and they don’t ask me on anymore, so good.
Albert Marko
I personally have PTSD dealing with the bond market. The long bond market for me is just like, it’s the size of Apple’s market share, the 10, 20, 30, and tips all combined. So I have a suspicious feeling whenever the market’s about to break down that bonds pump two points and all of a sudden we’re back on the rally terms again. So I personally don’t like to play the long bond.
Bob Elliott
I think most of the easy money has just been made in the long bond.
Albert Marko
Yeah.
Bob Elliott
When yields were in the mid three s and the economy is growing at six to 8%, you looked at it and said it doesn’t make any sense. Right. Okay, so now we’re in the ballpark of five. Like, should it be five and a quarter? Should it be 475? It’s not the business I’m in in terms. There’s a lot more interesting opportunities that are out there. And remember, as a trader, you don’t have to trade every market, right. You don’t have to even have a view in any market. You just say long end bonds like in the ballpark and move on.
Albert Marko
Yes, exactly.
Tony Nash
Yap, Bob, you had started getting a little bit into earnings, and earlier this week you wrote a tweet about Q three earnings within the context of 8% nominal GDP. So kind of dumb question. You talked about 6% earnings growth within the context of 8% nominal GDP. Can you help us understand why that matters?
Bob Elliott
Well, I think the basic question for the equity market is thinking about what’s priced in. And I know at some point sometimes I start talking about what’s priced in and people are like, that’s so boring. Why are we talking about what’s priced in? But when you’re trading the market, you got to trade it against what’s priced in. That’s all there is to it. Analysts are expecting twelve. We’ve had pretty mediocre earnings growth, like at the S&P 500 level. Quarterly earnings has been from a macro guys perspective. You look at the numbers, it’s kind of been flat for two years, basically, right. It means up a little bit this quarter. It kind of wiggled up and down, but basically flat. I’m sitting there thinking, well, my God, GDP growth, nominal GDP growth has been about as good as it will ever be in the rest of our lifetimes in the United States. And earnings are totally flat. And it’s like, okay, well, what happens when things get worse? How are they going to meet that earnings growth expectation that sits in the market in the event that even in the good times, these companies are struggling to generate this type of nominal earnings that would get aligned with the types of expectations that are priced into the market?
Bob Elliott
So that’s the gap. That’s the gap that I see. And also, to be clear, from that time we’ve had interest rates rise a few hundred basis points. We’ve had on the short end, on the long end, we’ve had the global economy, Europe and the UK slowing down. It’s not like there’s a boom out there. And the impact on US companies is likely ahead rather than behind related to those issues as well.
Tony Nash
Right. So we’ve talked about this before about the margin expansion that companies had over the last two years. That opportunity, that window is closing. It just seems to me that there are a lot of headwinds in terms of earnings growth going forward. Is that kind of what you’re seeing? This nominal GDP you say is as good as it’s going to get? Does it just seem like that window is closing for those companies and we’re in for some difficult quarters ahead?
Bob Elliott
Again, from a macro perspective, when you look at it, how do companies make money? Either the top line sales have to grow really well or they have to have margin expansion. And the way that you have margin expansion typically is through borrowing, household in particular, borrowing and spending. Or really what’s happening is their incomes aren’t keeping up with the top line sales growth. And when you look at that picture today on a forward looking basis, it certainly looks like you’ve got a circumstance where nominal GDP growth will be lower in the future than it has been over the last two years because we’ve tightened, because global economy is slowing, et cetera. And then you look at the margin picture and it’s like, well, I mean, the labor markets are pretty tight, wage growth is a lagging indicator. The big reason why those companies were able to get such good margin improvement during essentially like coming right out of the COVID crisis is because it just takes a while to negotiate the wages up. But now we’re in a circumstance where some people say, well, real wage growth is a good thing and I think it’s a good thing for the individual spender, but it’s actually a terrible thing for a company like companies don’t want real wage growth.
Bob Elliott
Companies want negative real wage growth. They want their prices of their goods to rise a lot faster than what they’re paying their workers because that’s when their margins expand. So real wage growth from a company perspective, which is driven by the tight labor markets and the flow through of the previous inflation to wages eventually coming through, that’s a bad outlook. So I don’t know. From a macro perspective, it’s not looking good.
Tony Nash
Yes.
Albert Marko
No, certainly not. Without question that inflation has masked a few of the earnings and boosted quite a few companies earnings as the relative volume has gone down. But it’s going to come back to bite them in the ass sooner or later.
Tony Nash
Yep, probably sooner. Okay. Hey, Albert, let’s jump to a little bit of discussion about the dollar, commodities and elections. So there were some elections in the US this week and a Republican presidential debate, which really nobody seemed to care about. Then Joe Manchin out of West Virginia announced that he won’t run for re-election for the Senate in 2024. And you tweeted about this on Thursday. So why is that important? And what could that mean for things like congressional support for, say, Ukraine, for fiscal, for appointments in the next administration, that sort of thing?
Albert Marko
Well, assuming that Biden still wins in 2024 and Manchin because he’s not going to run. Jim Justice, a lot of question is going to win that seat for the Republicans and the Senate majority is so thin at the moment that this could pretty much spell that the GOP takes over the majority in both the House and the Senate with a possible Biden second term. It’s not going to be good for any kind of fiscal spending. It’s not going to be good for very many bills out there because there’ll just be roadblocks left and right all over the place. Even today, the margin for the majority is so slim that they have problems passing things that are normally easy to pass, like the farm bill. That’s a bipartisan thing that usually every five years gets rubber stamped and shipped off. But even that is looking months down the road before that happens, which going back to commodities is great if you want to buy corn early 2024 because I love corn going into Senate races and presidential elections.
AI
40% off our AIpowered forecasting platform for a limited time only. Imagine being able to create and forecast your investment portfolios with access to highly accurate forecasts for over 1600 stocks, ETFs, forex, commodities, market indices and economics. CI Markets can help you make better investment decisions and save money with its personalized dashboards, favorites page, customizable charts, and economic data analysis features. Sign up today and use the promo code SAVE200 at checkout. This offer ends on November 30th, so don’t miss out.
Tony Nash
Right. Okay. So with Republicans in charge, it’s unlikely that we’d see like an inflation Reduction act part two or something like that, which could help. Sorry, go ahead.
Albert Marko
No, you’re right. We’re not going to see that unless we have some sort of market or economic breakdown where the GOP is getting scapegoated daily in the media, where they’re going to be forced to pass something into an election year.
Tony Nash
Right. So that could, I would think, conceptually help to avoid kind of a re, or re-reacceleration of inflation in 2025 maybe. Right. I mean, I don’t necessarily believe the fairy tale that Republicans are fiscally responsible, but I think it would potentially help to avoid kind of a secondary or tertiary kind of reignition of know. And Powell has said that he wants to focus on controlling inflation. So can you help us really think through what that means in terms of obviously the fiscal environment but also the dollar?
Albert Marko
Well, I think that the dollar is one of the key tools they’re using right now versus inflation. I do see it going up in 2024. I mean, there’s weaknesses just all over the world. Bob mentioned slow down in Asia, slow down in Europe. The problem is that the dollar.
Tony Nash
Japan can’t get itself –
Albert Marko
Japan, yeah, Korea, you name it. But the problem I see with the dollar surging over 110, 113, 115 is you start breaking things globally to the point where it transcends back to the United States market. And I don’t think they want to see that. I think it was at 115 like a year ago, and Europe almost broke Europe down below parity. So it’s certainly a problem for the dollar being up that high with the Republicans being roadblocks or in a majority. Everyone wants to say that they’re conservative, fiscal conscious people, but realistically, they have jobs, they have to be reelected and their constituents want to get paid. So I expect more stimulus packages going into the next two years.
Tony Nash
Okay. And we’ve got the dollar today. We’ve got the dollar at about 106, up from earlier in the week, last couple of weeks. So it does seem like they are setting some expectations for a stronger dollar already based on.
Albert Marko
I mean, it’s crazy.
Albert Marko
We’re at 106, 107, 104, 105 for extended period of time, and it’s done anything to our economy. It’s actually quite interesting to see, like Bob was saying 1960, 819, 69. We’re sitting here with all sorts of problems globally and the dollar is strong as ever.
Tony Nash
Right. So what would you expect? I mean, we’ve got oil that’s pretty weak. We’ve got commodities that are pretty weak. What other impacts would you expect it to have?
Albert Marko
Oh, man. Housing. Housing would be a big issue going into 2024. I mean, the White House and a lot of Democrats want to see housing come down and make it more affordable. I don’t see how you do that. DC wants it, but boomers and other investors certainly don’t want to see that break. So I don’t know how that’s going to pan out. I’m actually quite perplexed about the housing market.
Tony Nash
Yeah, it’s pretty sticky. Right. Bob, what are you seeing in housing?
Bob Elliott
I think the most important thing on housing to recognize is that the composition of the housing market at a peak or a boom is just like totally different than a freeze. And we’re at a freeze and we’re at like a traditional standoff. Both sides are staring at each other, that being the buyers who want lower prices and the sellers who don’t want to sell. And they’re just kind of staring at each other. And usually what you need in order, you usually need a catalyst in the housing market to start to create that price change. And in 607 we had a catalyst which was, there were a lot of floaters and iOs that basically reset and totally hammered people. Right. And so that was the catalyst back then in this case. And if you go back in previous cycles before that, the catalyst is unemployment. And so the basic question is like, what’s the catalyst today? Well, as long as incomes are okay and unemployment isn’t deteriorating, we can just stand and look at each other and basically have no transactions and have elevated levels of prices until you get to the point where in particular I think, employment starts to deteriorate.
Bob Elliott
And then what we’re going to see is it’s going to be a bloodbath, a fast moving bloodbath where the folks who are trying to dump their house onto the market are going to have absolutely no luck. So if you have a house to sell, today’s the day to do it, because tomorrow may be a lot more challenging.
Tony Nash
Yeah. And I hear people say it’s kind of Airbnb is going to people selling Airbnb residences, all this sort of stuff that may or may not happen. I think what you’re saying is, well, maybe not what you’re saying, but one way of interpreting that is if we start to see mass layoffs and people have to sell their houses to get cash, then we could really see prices drop pretty quickly.
Bob Elliott
Right. And the Airbnb thing, there are a million Airbnb listings in the US. And like. Okay, so what are you talking. Know, most of the people who list their house on Airbnb live in their house or it’s their vacation house or whatever. The number of people who are buying like twelve apartments in Miami on South beach in order to lay it out for an Airbnb is pretty tiny in the scope of 100 million units that are out there in the market. Airbnb will not be the catalyst. Unemployment, that could be a catalyst.
Tony Nash
Right. Yeah.
Albert Marko
And you don’t even see slowdown in hiring and construction, which would tell you that maybe the housing market is getting soft. I mean, there’s no layoffs in the construction sector.
Bob Elliott
Yeah, that’s right. Part of that is the multifamily. There’s also these secular dynamics, which is basically the household formation has been considerably elevated, making us millions of units short relative to household formation over the course of the last 15 years coming out of the financial crisis. And so in some ways, a few Airbnb owners puking out their Airbnbs would actually be good because there’s some young couples who would love to live in those apartments at a slightly lower price than they can right now.
Albert Marko
Yeah, well, there might be a microcasm that’s actually watched because New York just banned Airbnb. So I’d like to see what the rental market does there in the next six months, see if there’s some kind of lowering of it.
Tony Nash
That’s great. So Albert’s already said that he likes corn going into an election era. We’ve already talked a little bit about energy prices. Bob, you’ve already said commodities are probably a little bit undervalued right now. So let’s talk a little bit about energy. Tracy talked earlier this week. Tracy, one of our guests talked a little bit earlier this week about nuclear power. And last week we talked about wind and solar power projects being pulled because of higher interest rates and higher costs. So we had what’s called an SMR project pulled and I had to look that up. It’s a small modular reactor. These are small nuclear reactors that are apparently much easier to deploy and maintain and this sort of stuff. So I’m not an expert here, but Albert really knows this stuff. And so there’s a company called New Scale that shut down the first SMR project in the US because of costs I think the cost rose something like 50, 60%. And again, this sounds similar to the wind story and the solar story that we talked about last week. So, Albert, why are we seeing these costs elevated in nuclear? And also, is the option to pull these?
Tony Nash
Is it partly because of interest rates, but partly because we’re seeing other energy prices, like crude and Nat gas, continue to drift lower?
Albert Marko
Well, I’m sure it’s a combination of it. I mean, I’ve known about these SMRs for like 20 years. These aren’t new, by the way. Mitsubishi had prototypes out there years and years ago. The problem that they have is R and D, debt, cost, interest rates, wage inflation. Even being able to hire qualified people to put these projects into motion is very difficult. I mean, the biggest problem with those SMRs is like, okay, you build them, but how do you transport them? I mean, transporting a small nuclear device is not like putting in the back of a semi and hauling it across to Abilene, Texas. It doesn’t work like that. There’s big problems and there’s actual federal restrictions on with the EPA and whatnot. How do you put that thing 100ft down and how do you regulate it? And who’s going to come out and monitor? There’s so many headwinds for SMRs that I don’t think that’s even a consideration for the next 50 years, in my opinion.
Tony Nash
Okay. You can’t just put it in the back of a cyber truck and get the kind of green revolution perfection.
Albert Marko
Please don’t give Elon any more fuel to go on Twitter and do any more tweets about cyber trucks being nuclear powered. Definitely don’t.
Tony Nash
Okay. Last week we talked about wind and solar. This week we talked about nuclear. It almost feels like with the rise of interest rates, we’re going to have to kind of double down on these old hydrocarbon generation feedstocks. Is that where we are? Is that the end game? We’ve seen all this to green over the last 15 years. And is all that just resulting us going back to coal and oil and nat gas?
Albert Marko
Well, of course, they’re the most cost efficient and most stable power supply that we have, aside from nuclear. I mean, nuclear is on a different level. But look at Europe. Europe’s an perfect example. They’ve tried wind, solar and whatnot. Germany’s industrial sector was decimated for a few years because the wind and solar was giving fluctuations in the energy grid and destroying equipment. So, I mean, these little calculations are not really thought of whenever people start spinning this stuff up. But it’s not as easy as turning on a switch as saying, oh look, wind and power is on, it’s carbon neutral or whatever catchphrase you want to put out there.
Tony Nash
Yeah, I don’t want people to think we’re anti green. I mean, we’ve talked.
Albert Marko
No, I’m not.
Tony Nash
It sounds almost like we’re antagonistic to green. That’s not the case at all. We’re just taking a very realistic view on, okay, this requires capital investment at the start, right? And without the subsidies, without low interest rates, without other things, we get situations like I think just today or yesterday it was announced that the German government has to bail out Siemens with their wind business. So there’s another green energy company that’s being bailed out by a government. And between the subsidies in China and the subsidies in Europe, and obviously with the IRA, the subsidies here in the US, it’s really hard for those businesses to get moving.
Albert Marko
You know, listen, I’m not anti green or anti environment by any stretch of the imagination, but people have to understand that things happen in increments. They don’t just leap forward into some brand new technology or brand new computing thing or whatever technology you want to throw out there. It doesn’t work like that. It takes R&D, it takes time, it takes money, it takes testing and so on and so forth. It’s a progression. And that’s what we should look for instead of jackpots.
Tony Nash
Okay, let’s move this back into, say, crude prices. We’ve seen crude prices fall pretty dramatically over the past few months. What’s the outlook through the winter? Do we expect crude to stay pretty weak during the winter? And gas, are we going to see a winter like we saw in Europe last year where things spike? I mean, we’re already in November and things already spiked by last November. But are we going to see that stuff rally back through the winter? Or do you think we’re kind of where we will be through the winter?
Bob Elliott
I think probably. If you think just generally what growth assets are priced cheaply versus more expensively, I think it’s pretty clear that oil is priced cheaply in the scheme of things. Is it possible that we could have weaker growth ahead? It’s certainly possible. Weaker global growth, but oil is basically pricing in a pretty bad outcome. And I think, of course, one of the things to recognize is that there is a price sensitive seller in this market who will just start withdrawing supply if we get anywhere close to, frankly much more than a drawdown that we’re seeing in the December 24 Brent Curve. It’s not going to take a ton more before the Middle Eastern folks are going to start bringing oil off the market in order to support prices. And so I think in that risk return profile standpoint.
Bob Elliott
Right.
Bob Elliott
You’ve got a pretty good profile. If I had to hold a growth asset over the course of the next six months, oil looks like a better growth asset given the range of plausible outcomes than does holding something like stocks.
Albert Marko
Yeah. From what I was told is $69 is problematic for US production. So that’s somewhere where I would probably go all in on at the moment. I’m long oil as it is at the moment anyways, but that’s what I’ve heard is 69,
Tony Nash
73 today. So like Bob said, there’s not a lot of downside.
Bob Elliott
Yeah. And look, it’s a classic example of a macro trade where, look, you trade these things down because there’s certainty that’s going to go one direction or the other.
Bob Elliott
Right.
Bob Elliott
You’re looking for skewed outcomes. You’re looking for good risk return profiles. You’re looking for a good range, particularly if you think, let’s say you’re a little more concerned about the economy.
Bob Elliott
Right.
Bob Elliott
You want a diversifying bet against economic weakness. That’s what you’re trying to do. Right. And I think the long oil trade right now, I’m particularly struck below in the something like that out in December 24 looks compelling to me.
Tony Nash
Interesting. Very good. So that’s good. Let’s keep it low while we can. Right, guys? Good. I really appreciate this. We’ve covered a lot of ground. Thank you very much for your time. Thanks for your thoughts and have a great weekend and a great week ahead. Thanks, guys.
Bob Elliott
Awesome. Thanks.
Albert Marko
Thanks.
AI
That’s it for this week’s episode of the Week ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.