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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.