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The Week Ahead – 23 May 2022

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The SPX was down 4%, WTI was up 2.8%, and the 10-year yield was down 2.9%. Intraday vol has been an issue all week. What’s going thru an institutional trader’s mind in this market? Sam Rines explains.

On the commodities market, wheat was down 6% this week. Corn ended this week down about 1%. We’ll help you understand ag and fertilizer markets with Tracy Shuchart.

The dollar (DXY) is down a bit this week, about half a percent. Are global central bankers worried about a rising dollar and is there anything they can do about it? Albert Marko gives his insights on this.

Key themes:

1. How are institutions trading the intraday vol?

2. Ags and fertilizer: Demand Destruction vs Supply Shortages

3. $USD 💪 – 🙂 or ☹️

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This is the 19th 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 experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Sam: https://twitter.com/SamuelRines

Albert: https://twitter.com/amlivemon

Tracy: https://twitter.com/chigrl

Listen on Spotify:

Transcript

TN: Hi everyone, and welcome to The Week Ahead. I’m Tony Nash, joined as always by Sam Rines,

Albert Marko, and Tracy Shuchart. Before we get into it, please, please like and subscribe. Please like and subscribe.

Also, we just started our new CI Futures promo. You get your first three months free. Get global markets, currencies commodities economics with CI Futures. Check it out at completeintel.com/2022Promo 

So guys, this week S&P was down 4%. So I think some people are relieved it wasn’t down more. WTI was up almost 3% and the 10-year yield was down 2.9%. So I think it was a little more tame, at least by the end of the week than some people thought it might be, which probably not helpful to everybody, but I think it helped people a little bit, just kind of get a grip on things.

So our key themes this week, first, how are institutions trading this market and more specifically kind of Intraday Vol?

For AGS and Fertilizer. Is it demand destruction or supply shortages or both? How are those playing out?

And for the US dollar strength? Are global central banks happy about it or sad about it?

So today for our first segment, Sam, if you can help us understand this. Intraday vol has been an issue all week and for the past couple of weeks. What’s going through an institutional traders mind in this market We’ve got a tweet and there was a great thread from Kris Sidial. I definitely recommend reading it. So can you walk us through that a little bit, Sam, what they’re thinking about and what institutional traders are doing?

SR: Sure. I would say what they’re thinking about is not losing money, particularly after you had the target earnings, Walmart earnings. There were some landmines out there in individual retail land. That brought up some call it concerns about the consumer. It brought volatility into places you hadn’t really seen volatility recently. So staples began to really get a little more volatile. In particular, they were more volatile than the S&P500 for the back half of the week. So you began to see call it the volatility spread on underlying issuer basis, but not necessarily really spiking at the headline index level.

TN: So traders are trying to keep it flat, right?

SR: They’re keeping their risk very tight. There’s quite a bit of blood in the streets, so to speak, particularly those trading rates and individual equity names. So yeah, I would say it didn’t look like it was that volatile, but the intraday vol was incredible and it took a lot of the risk out of the system. It’s worth noting that a lot of the risk managers out there aren’t looking at day to day vol. They’re looking at Intraday Vols, PNLs. So you’re likely to get a shoulder tap Intraday if you’re playing these markets with too much leverage.

TN: You tap out at like 2:00 PM or something because of your positions? Is that what happens?

SR: Or you just have to unwind one that you like. Right. If you put on a S&P future trade early in the morning and you get 100 point move Intraday in the S&P, you’re going to get blown out of that position pretty quickly. Right. You have to have really tight stop loss limits. That’s it.

TN: Albert, what are you seeing?

AM: Well, the Fed has done a marvelous job of erasing excess wealth out there, excess money. Not just from retail. Retail is dead in the water right now. But even institutional wise, a lot of funds just been obliterated for the past month and a half now? The problem becomes liquidity. And where is it? I’m looking at the order book on the e-minis, and it’s just there’s nothing there. There’s nothing on the buy side,

nothing on the… Nothing. So these massive 100 point moves, I mean, of course, we’ve never seen anything like this, but if you look at the problem with liquidity there, it makes perfect sense.

TN: So, Albert, from a hedge fund world perspective, do you think we’re going to see some hedge funds cleaned out? Obviously, Melvin, we know that story. But are we going to see some issues there with some funds?

AM: Without question, you’ll see a lot of them unwinding by the end of the year. I know a few personally that have closed up shop or in the process of closing up shop. And I can’t imagine there’s at least 25% more that’s out there that are in some serious trouble. I mean, redemptions will start taking off clients that were sold, big tech names in a zero rate economy, they’re gonna be calling every single day what’s

going on for returns, and there’s none to be found right now.

TN: Yeah.It’s tough to get things out right now. Okay, good. Thanks for that. Let’s move on to our second topic.

Tracy, wheat was down 6% this week. Corn ended down about 1%. We got an interesting viewer question from Thomas Sieckmann, who’s a regular viewer. Can you help us understand AG and fertilizer markets. Thomas is saying, “love to hearyour thoughts on AG commodities. Demand destruction versus supply shortages, fertilizer prices and shortages, drought, lots of cross currents.” Can you help us understand kind of those markets a bit better?

TS: Sure. Well, first, I don’t think you’re going to see demand destruction even at higher prices,

because people need to eat. Right.

TN: Eating is good. Yeah, right. We can agree on that.

TS: The thing is what I think we’re going to see a structural shift in the market, whereas you’re going to see different crops being produced over other crops. In other words, if we look at, say, wheat, for example, what’s happening right now is that wheat crops are being produced more because it’s easier to do, less energy intensive, and that’s going to make a problem on the corn market. Not necessarily in the United States. I would single out the United States as it is kind of a different market altogether?

But if we look at the global markets, where I think this is headed. We’re going to see shortages in areas where you didn’t think so. Right.

We’re all scared about wheat because of obviously Ukraine and Russia and then being major producers, et cetera. But that is going to, in turn, affect the corn market, global production and what those crops are, what crops are being produced globally, if that makes sense. I think that’s what we need to be on a lookout for.

And things like rough rice. Rice. Rice is going to, because nobody wants to put wheat and corn into, say, animal food anymore. Right. Rice is much cheaper. So I would look for rice to go much higher because

they’re going to use that to replace something like animal feed.

TN: Interesting. Okay.

So we’ve seen political instability in Sri Lanka, especially over the past couple of weeks, and part of that is just terrible government. Part of that is weak currency and food affordability. How far do you think this goes? Does it get extended to a lot of other countries, or is there a few other countries that this gets exposed to? Both you and maybe Albert, if you guys can both jump in on this.

TS: Yes, I think it extends. We’re already seeing that name around. Right. We’re already seeing protests in Iran, and I think that this is going to continue, especially in emerging markets. Right. So I think this is nothing new. I think we should expect more of this and be reminded of when we saw the Arab Spring. It all started because of food. Right. So that’s something that we need to pay attention to, in my opinion.

AM: Yeah, I agree with Tracy. Some of the emerging markets are going to be the most hardest hit. It’s funny, because four or five months ago when my client and I were sitting there discussing what countries to look at to invest in, and one of the key components is which ones are stable in their food supply.

I mean, the United States. But France is actually quite stable. I think that they can actually make quite a play for the European Union’s leadership over Germany going forward, specifically because they’ve got enough food to sustain themselves.

As for the other countries…

TN: That’s a good point, Albert. I hadn’t thought about that. But that’s a really good point about France.

AM: Yeah. Well, I mean, they got their own food. They have a big agricultural industry, they’re

top in the world, and they’re self sufficient. And they have water from the Alps, too. So they have everything they need for themselves. So they’re pretty isolated from this.

But you look at Spain, they’re in trouble. North Africa, they’re in significant trouble. Sri Lanka won’t be the first looking for at least a dozen more instances of that happening around the world.

TN: So we have a summer of new government.

TS: I’m looking towards Brazil and Argentina, even though everybody kind of hates those markets right now, is if we look at their agriculture? Their agriculture is robust. And so I think that in the end, that will serve them from an investment standpoint if you’re looking to invest in.

AM: But the only problem with Argentina is so I mean, their government is just absolutely atrocious. And then the Brazilian. High risk. And Brazilians have a big election coming up, and that’s going to be extremely contentious. So I would stay away from those two until after those elections happen and whatnot. 

But yeah, I mean, Brazil, they have fertilizer, they have fruits, they have sugar cane, a lot

of chicken, a lot of soybeans, a lot of meat.

TN: Okay, perfect. Let’s move on to the next topic. Albert, we got a question from Gary

Haubold, who’s a regular viewer. He’s talking about the dollar and how central banks. There’s gossip that central banks are getting nervous about a strong dollar. So dollars up or down, sorry, a little bit this week, but how worried are global central banks about the dollar?

Of course, you have, say, the North African or Brazilian or other kind of fairly shaky monetary markets. But if you look to, say, European or developed Asia or some of those other markets, how worried are those central bankers about a strong dollar?

AM: Well, I just want to isolate this between just the United States and Europe right now, because that’s only really what matters to the market back in the United States. A strong dollar for the Europeans is not good. It’s just absolutely not good. It would be good if the Euro was falling. They had exports to send to China, but they don’t have that anymore. So now they have dollar liabilities that are getting out of control. And I think that the Europeans, I’ve heard whispers inside the Fed and treasury that they’re worried about a European financial crisis. And it makes perfect sense. If they want to get the markets down, blow up Europe, that’s the best way to do it.

TN: But I thought we’ve had a financial crisis in Europe since about 2012.

AM: Yes, but we have it every five or ten years because Europe is a welfare state. It’s a welfare state that lives on Fed swaps. Right. That’s all it is. And I don’t want to insult the Europeans on here, but let’s just get real here. Without Chinese exports, they’ve got nothing.

TN: Sam, what do you think about that?

SR: Yeah. If China doesn’t open up soon, it is going to be extremely problematic for Europe. That would be the saving grace in a lot of ways to Europe for a strong dollar. Other than that, there’s going to have to be some sort of interesting talk down to the dollar, either from treasury or some hawkish comments coming out of the ECB. And you’d begun to hear the ECB be a little bit more hawkish recently. If they really want the dollar to abate, they’re going to have to get more hawkish.

TN: Yes, for sure. And on your China point, I saw a story this week that the Shanghai Port was at about a 90% capacity at some point this week. Whether that’s true or not, I don’t know. But I saw it in a legitimate newspaper so let’s see how long that lasts.

TS: I was going to ask you, Tony. From a China perspective, how do you look at this opening? Do you think Shanghai is really opening like they say it is or is this hearsay or, can you give us a little bit of insight on kind of the China situation right now because that makes a huge difference in demand for energy and materials?

TN: Sure. Absolutely. So I sure want it to open because I want both China and the rest of the world to thrive but because of a lot of domestic considerations, COVID or monkey pox or whatever it is. I don’t know. They’re just lifting it slowly. 

But we talked about this in detail on last week’s show but I really don’t think they’re going to open to any interesting degree until mid summer. Maybe later. I wish they would open tomorrow but they won’t. I think for a lot of reasons they’re kind of getting in their own way and I’ve said this many times China needs to be saved from China. It’s just such terrible management of the country and has been for 50 or more years

and they’re potentially going back into the great famine type of environment which I worry about a lot and that would be detrimental to everybody around the world.

TS: That makes sense.

TN: So on that happy note, thanks so much for taking time for the show, guys. Really appreciate that. Have a great week ahead. Thank you very much.

Categories
Week Ahead

The Week Ahead – 16 May 2022

The number one issue for Americans is inflation. As long as this is a top consideration, the pressure will be on the Fed to bring it down. Sam has been pretty consistent with 3 x 50 rate hikes in May, June, and July. What changed in trading today? Is everyone still bearish? Samuel Rines explains.

Also, what’s next for crypto? Luna fell from $90 last Thursday to $0.00005952 on Friday. Their circulation went from 4 billion yesterday to 6.5 trillion today. Watching the crypto fallout is terrible – lots of people have lost lots of money in this supposedly immutable “currency”. Albert Marko explains what happens next.

Lastly, is China really falling apart? We’ve seen some unsettling posts over the past several weeks out of China. From lockdowns to port closures to gossip that Xi Jinping has been sidelined.

Key themes:

  1. Is everyone a bear now?
  2. What’s next for crypto?
  3. Is China really falling apart?

This is the 18th 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 experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon

Listen to this episode on Spotify:

Transcript

TN: Hi and welcome to the Week Ahead. I’m Tony Nash, and as usual, we have our team, Sam Rines and Albert Marko. Tracy, who’s not with us today.

Before we get started, I’d like to ask you to subscribe to our YouTube channel. It helps us a lot get visibility, and it really helps you get reminded when a new episode is out so you don’t miss anything.

Gosh. Big week for everyone. I wish I had fallen asleep a week ago and just woken up now after Friday’s trading. But it’s been a big week all around for everyone.

Guys, we really have a lot to talk about this week. We’re covering the markets. Is everyone a bear now? That’s one of our big topics that we’ll have Sam lean on. Next is what’s next for crypto? A lot of action on crypto, a lot of scary things happening with crypto and then some news out of China or speculation out of China. We’re asking, is China falling apart?

So Sam, let’s start with you first. I guess one of the most relevant items I’ve seen circulating and it was in your newsletter today is the top issues for Americans on the screen right now.

It’s clearly inflation. As long as that’s a top consideration. The pressure on the Fed to bring inflation down is huge. So you’ve been pretty consistent with three times 50 basis point hikes for May, June and July. What’s really changed in trading today? And is everyone still bearish?

SR: Yeah. I mean, everyone still seems to kind of be floating a little bearish, but I kind of like to go back to the number one concern is inflation. We shot ourselves in the foot and then the second one is getting shot in the head, right. It’s violent crime and crime. You add those two together and it’s even larger portion of inflation. So it’s safety and food. Right.

People like to eat and they want to be able to eat and they want to feel safe. I think it’s that simple. Those should be the top two concerns in this type of environment when you have the data pointing towards continuing higher inflation numbers and continuing crime.

On the is everyone a bear front? I think it’s a little complicated, right.

Because if you look at the flows into and out of indices and into and out of fixed income, and when you look at the flows, it’s easy to kind of say everyone’s a bear. Right. Pouring money into Treasuries, taking money out of indices. But at the same time, underneath the surface, you really want to be careful on what you’re a bear on and what you’re not.

There’s a lot of things that can still make money in this environment, oil, food, etc. can still make money. And there’s a lot of things that are probably still going to get torched. Anything that’s a little high beta is probably not the place you want to be for the whole time. Tradable but unlikely to be a long-term type trade.

TN: Like, I noticed some of the techs coming back today, and that’s great. And I hope people don’t lose more there. But is that something that you would consider kind of be careful if you’re going back in type of trade?

SR: Some of it. Not all of it. There’s a lot of tech that actually looks fairly attractive here, whether it’s from a valuation perspective or whether it’s from a very long term perspective.

A lot of stuff re-rated, re-rated fast, and it looks attractive. And there’s a lot of stuff that looks like it’s probably going bankrupt. Right. I wouldn’t be trying to bottom tick Carvana.

AM: Actually to expand on that, Sam, about who’s a bear and bears or Bulls or whatnot. I kind of think that we have to separate the higher great institutions versus the retail dip buyers that are just looking for that get rich, quick return. Many of the institutions, the ones I’ve talked to, are absolutely still bearish. They don’t see real value in this economy until the market until 3700.

Coincidentally, one of the hedge fund guys told me at 3500, you have an actual financial crisis in the United States just because everything’s leveraged up. So I don’t think that the Fed was even going to want to afford or going down past the 38, 3700, in my opinion.

SR: In 100% of that, Albert. Right. You have to separate those two teams of people. Right. The dip buyers are going to try every single time to get rich quick. Real long term allocators are going to take their time here. They’re not going to rush and, those are very large positions they have to take. And they don’t get to move in and call it for two or three weeks. They have to move in for very long periods of time.

So it’s Albert’s point. I don’t think that should be underrated, period.

AM: You can just look at the valuations of some of these companies that are still out in the stratosphere, like one of the ones I’ve recommended, Mosaic, Tight and Tire. They’re just ten fold of what they were in 2020. How do you buy these things? You can’t buy these things.

TN: Right. We’ve seen a lot of chatter about margin calls over the past week and a half. Obviously, that’s been scary for the first wave of kind of people going in. But when that second wave hits, when does that start to hit that second wave? Once we go 3800 or lower? So is that when things get really scary?

AM: Actually, I think part of the margin calls happened this week, today, actually Friday. I think a lot of guys had a liquidate positions and cover shorts and whatnot. And we got a little bit of a squeeze of a rally. I didn’t really feel like a Fed was pumping just thought like people short covers and people trying to get stuff off the board.

TN: Right.

SR: 100%. That’s where I think. I don’t think you want to be in front of a wave of liquidation for let’s call it sun and Ark, right? You do not want to be in front of either one of those two right now, period.

TN: Yeah, it was nice to have a Green Day, but it didn’t necessarily feel like a strong Green Day.

Okay, guys, let’s move on to crypto. Albert, I think you’re the man here. You’ve talked about crypto for a long time. It’s bad. This week is bad. And we’ve got a chart for Luna.

Luna fell from $90 last Thursday to 5, 10 thousand of a cent today, I think. Their circulation went from 4 billion yesterday to 6.5 trillion today. So it doesn’t sound very immutable to me. So the watching crypto fallout, it’s been pretty terrible. Lots of people have lost lots of money and people are questioning and cynical about words like immutable now.

This is something that I think experienced people have expected. But what happens next? Do we have a clearing out of some of these currencies? Do people just hold at 5, 10 thousand of a cents? Do we see some of these actually become currencies or is it all just going to get regulated and kind of thrown out the window?

AM: Well, are they going to be currencies? No, they’ll never be currencies. The dollar is going to be the currency of the world status for trade for the remainder of our lifetimes, whoever is alive today. That’s just the basic fundamental fact that you have to come to grips with.

This is like part one of the closing call for cryptos in my opinion. They got a good dose of the reality that when things need to get liquidated, you’re not liquidating residential towers in Miami on your portfolio. You’re liquidating some Ponzi scheme cryptos that are in your pocket that your clients really made you get into to begin with.

From the retail side, as much as I want to gloat, because I’ve been saying that this was going to happen for years, it’s really not that funny because you had guys out there pushing these crypto things and saying the dollar is dying, gold is dying, digital future, blah, blah, blah. Look at this chart, look at that chart. But the reality is there are nothing but pump and dump schemes. And people lost a lot of money.

I had a friend that goes to school, his daughter goes to school with my daughter. And he told me months ago I put everything to Litecoin for the College fund. I tried to reason with this guy.

TN: Please don’t do that.

AM: Yeah, well, community college for that kid.

TN: Albert, they’re following the lead of some, analysts are credible. They have a credible history and they’ve really started pushing this stuff. Now they’ve dialed it back. But some people who had previously been credible analysts were pushing this stuff.

AM: They’re liars. They’re all liars.

SR: Had been.

AM: They’re trying to get services sold and people to watch their YouTube channels and get subscriptions up. So of course you’re going to go and sit there and try to pump crypto to the retail crowd because they don’t know any better, right?

SR: And anyone who looked if you really dug into the Luna situation, you could understand very quickly how that could unwind in a way that was dramatic. This wasn’t even constructed as well as a pre 2008 money market fund. At least you knew what the money market fund held behind it and how it was going to actually return money to you.

With Tether, it’s supposed to be a crypto ish money market fund. We still don’t know what that actually holds. The whole thing to me is regrettable to Albert’s point, right. The two of us kind of got picked on when we giggled off paying for oil in crypto earlier this year. But the two of us have been kind of like, “no, not so much.” So while it’s tempting to kind of have that little bit of a cocky grin.

It’s a really sad situation and there’s a lot of money that got shredded very quickly there.

TN: Very quickly in less than a week. It’s insane how much money. If anybody who follows me on Twitter knows that I invest in some Doge last year, stuck with it for a few months, got out I did it because it was a joke of a coin. Everyone knew it was a joke of a coin. I wanted to be on part of the joke, and I made some money at it. And that’s it, right? That’s it. You can’t necessarily think of this stuff as a serious investment because it’s so highly unregulated and people engage in this pump and dump stuff.

AM: Yeah. We can have a conversation on this for hours. This is actually at the heart of the problem of the US economy at the moment. All these gig employee, all these gig employees service industry and jobs and whatnot, they left work got into crypto. Got stimulus checks, sat at home, kept getting unemployment, not going to work, and now we’re stuck with the labor shortage in reality. I don’t care what the Fed says and what Yellen says about the market. The labor market is good. The labor market is absolute trash right now. We have no workers anywhere right now. And because. Yeah, this is part of it.

TN: So that’s a good question. With crypto, kind of at least temporarily, maybe permanently dying, does that help the employment picture? Does that help people come back to market even a little bit?

AM: People had tens of thousands of dollars in a Coinbase account that are now $500. They’re going to have to go back to their jobs. And that’s just the reality of it. If you want me to go even a step further, this is probably the intent of the Fed and the treasury is to start eliminating this excess money, forcing people back to work.

SR: Yeah. Oh, 100%. In one of my notes this week that Tony, I think you saw, I sent out the video from SNL of Jimmy Carter saying, hey, get 8% of your money out of your account and light on fire. Guess what? The Fed just did that for millennials.

TN: Yeah.

SR: It’s that simple. The Fed just lit at least 8% of millennial money on fire, generally. Right. And it’s unlikely to come back that quickly. And I think if it wasn’t a direct policy, it was a side effect that the Fed sitting there going, oh, well, that works.

AM: I guarantee I talk to a lot of people. It was a direct policy. I don’t care. I’ll throw the Fed under the bus. They deserve to be thrown under the bus anyways.

TN: Well, yeah, it is where it is. And I would assume more regulations coming at some point because people will scream, especially with Coinbase.

I think it’s Coinbase or one of the exchanges saying that they’re going to undo a lot of the trades over the last two or three days.

AM: Okay.

TN: There are no regulations at all.

SR: Just call them the LME.

TN: Yeah, exactly. So crypto is the LME now, and it’s insane. So a lot of consumer protections are going to be talked about. A lot of regulations going to come in. I think that party is pretty much over.

AM: Yeah. Once the regulations started coming in from Congress and different governments in the world, they’re going to see how false their idea of decentralization really was.

TN: Yeah. Okay, guys, let’s move on to China. We’ve seen a lot over the past few weeks and really gossipy stuff about China. But today I saw a note from Mike Green on Twitter, which is on screen talking about Xi Jinping and Li Kaqiang, and Xi basically being sidelined on May 4.

I also saw another tweet yesterday, a guy going through Shanghai during the lockdown. If you haven’t seen it, the first of the thread is on the screen now. Check it out. It’s really interesting.

China is empty and it’s really sad.

So we’ve seen these really unsettling posts over the past several weeks out of China, from lockdowns to port closures to gossiping Xi as sidelined. So to you guys, what does that all mean? Is it something you’re taking seriously? Do you think it’s something that will have immediate effects? What does that look like to you?

AM: China. China is a big quagmire in itself. It’s such a large country. You’re going to have all sorts of rumors of Xi being sidelined and unrest in different cities like Shanghai and whatnot. But the Chinese are pretty pragmatic. They know that things are not going really well. So they’re going to have to lift off they’re going to have to lift off some of these just draconian policies with locking down people because it’s going to really hurt their economy. And part of it’s probably because they’re fighting inflation, too. They’re trying to cut down demand until supplies catch up. I mean, they got problems over there with inflationary issues.

TN: Also with the deval, with the port closures, with a lot of other stuff that’s happening there, their economy is already host. Right. They’re definitely not hitting 5.5, which is their target this year. And I think they’ll be lucky to have a zero growth year.

But I think Albert, on the political side, a lot of this kind of theater that we’re seeing play out on Weibo and Twitter and other things. Do you think this is plausible?

AM: Of course it’s plausible. I mean, you have the vultures circuit around Xi right now. They want him out. You have one elite group keeping him in power. But most likely have three or four other elite groups within the CCP that want him out. There’s no question about that. He can’t even go out in public.

TN: That’s an important thing that many people don’t think about is there are parties within the party. The CCP is not a unified party. There are factions within the party. Many Westerners don’t understand that. There are definitely factions within the party, and they’ll stab each other in the back in a second.

AM: There’s factions everywhere you go. People try to, China as a one rule or one party, one system, but even the United States, you have the Tea Party, the Freedom Caucus, the Progressive, so on and so forth. I mean, it’s all fragmented no matter what you do.

TN: Yeah, Sam. So China is second largest economy, ports closed, people in their houses, all of that stuff. So how long can they do this before it affects everybody or has it already started doing?

SR: Oh, it’s already affecting everything. The supply chains are already completely ruined because of it. There’s no question about that. I think the real question is what happens when they reopen, right?

We’ve got oil sitting at $109 and half a China is shut down. That is something that doesn’t, I mean, it’s kind of scary, right? You have a bunch of people that aren’t using as much as they should be right now. You begin to spin that back up. That could be a really interesting scenario overall. I don’t know.

AM: You know, Sam, that actually loops back to what you were talking about the Fed trying to fight inflation. No matter what policy they come up with, there’s still supply chain shortages and labor and everything that no matter what they do, they can’t fix.

SR: Their host. It’s an amazing world where you have half the Chinese, let’s just click through. Half the Chinese economy is shut down. You have the US dollar sitting at 105, 106 somewhere in there, and you have oil sitting at 110. Anybody who’s saying oil prices look a little toppy here might want to look at what happens when the dollar falls and China’s going.

AM: That’s what we’re going to have inflation in the five to 7% range for the next 18 months. I can’t say lower than that.

TN: 18 months, you say?

AM: 18 months. How are they going to get it lowered? China opens and then what? You know what I mean? And then you still have shortages everywhere. I mean, go to some of the stores. They have baby formula shortages.

On any given day, you have small materials you need from the home short. Everywhere. That’s going to create artificial inflation. On top of that, you have wage inflation. How do you get that down?

SR: The only way you get it down is having less employees. Look at Silicon Valley. Silicon Valley has started laying people off, and that’s not getting enough. It’s more than just Carvana.

AM: And then that’s the thing. Later in this year, Democrats and Joe Biden can have a real big problem unemployment numbers, starting to creep up. They can’t hide that forever with the BLS manipulation.

SR: Look at the household number. The household number is already not looking great. And that’s the one that they choose not to hide for a reason. Yeah, sure, the establishment is up, but you look at that household number and it’s printing negative already, guys.

TN: Yeah. One more thing I want to cover is this has to do with China shut down and it has to do with the possibility of political instability in China. So there are two separate issues. The newsletter today talked about reshoring.

So these things seem to provide more instability and a lack of reliability of Chinese sourcing. So what are you seeing to support the reshoring argument?

SR: Oh, lots of things. I mean, you have Hyundai. That’s likely to announce a pretty big factory next week in Georgia. You have everyone from Micron to a bunch of other call it higher tech firms beginning to announce that they’re moving back here. They’re building here and they’re going to manufacture here or they’re going to manufacture in Mexico. One of the other.

If you want to have China like characteristics without supply chain issues, you go to Mexico and that re regionalization trend. That’s the theme of mine. Is beginning to pick up steam and it’s going to pick up much more steam, in my opinion.

North America is going to be basically, in my opinion is going back to being the world’s, not manufacturing hub, but the world’s high end manufacturing hub. If you want something that it’ll be like big Germany.

AM: Yeah, I mean that’s just the most logical thing to do is to start putting your supply chains closer to your luxury consumers and you have to do that. But I’ve been high on the Canadian economy and the North American economy.

I think Europe absolutely they’re in deep trouble at the moment. So is Asia. But Europe especially.

TN: On the reshoring note, guys, if Germany can’t get power, will we start to see some German manufacturing firms potentially moving to the US?

SR: You already make AMGs here. Mercedez Ben’s AMGs.

TN: Yeah.

SR: They’re made in Alabama. But they’re made in Alabama.

AM: Yes. But Tony to your question, actually, I do have a colleague that works for Austrian driven outfit and they have been buying factories in the United States specifically for this reason. It’s the only place that people are going to be buying things or has money at the moment. Their entire export industry in China is dead and they’ve sat there and been lackadaisical and never sat there and tried to put their networks back into Africa where the real emerging market should be focused on Africa. It’s going to be bigger than Asia anyway.

SR: Let’s also be honest, they just got done pulling out of Africa in some ways. A couple of decades ago. They missed that boat.

TN: They did. And so did the Americans. So. Hey guys, thank you very much. Really appreciate this. If you’re watching please like and subscribe have a great weekend and have a great week ahead. Thank you.

AM: Thanks, Tony.

SR: Thanks, Tony.

Categories
Week Ahead

The Week Ahead – 28 Mar 2022

‼️SPECIAL OFFER FOR THE WEEK AHEAD VIEWERS: $50/MO ON CI FUTURES SUBSCRIPTION. ‼️

We’ve seen so much about oil for rubles, gas for bitcoin, etc this week. Does it represent a fundamental shift for energy markets? And is the dollar dead? The yen fell pretty hard versus the dollar this week. Why is that happening, especially if the dollar is dead?  Bonds spike pretty hard this week, especially the 5-year. What’s going on there and what does it mean?

Key themes from last week:

  1. Oil for rubles (death of the Dollar?)
  2. Rapidly depreciating JPY
  3. Hawkish Fed and the soaring 5-year


Key themes for The Week Ahead:

  1. New stimulus coming to help pay for energy. Inflationary?
  2. How hawkish can the Fed go?
  3. What’s ahead for equity markets?


This is the 12th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week. 

Listen on Spotify:

https://open.spotify.com/episode/0twcBeGGELUrzdyMS0o37U?si=4dab69b94c3e4ec9


Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon


Time Stamps

0:00 Start
0:34 CI Futures
1:22 Key themes this week
1:48 Oil for rubles (death of the Dollar?)
3:15 Acceptance of cryptocurrency?
5:34 Petrodollar Petroyuan?
7:32 Rapidly depreciating JPY
10:12 Hawkish Fed and the soaring 5-year
11:58 Housing is done?
13:10 Stimulus for energy
15:53 How hawkish can the Fed go?
17:34 What’s ahead for equity markets?

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m here with Albert Marko, Sam Rines, and Tracy Shuchart. Before we get started, please, if you can like and subscribe to our YouTube channel, we would really appreciate it.

Also, before we get started, I want to talk a little bit about Complete Intelligence. Complete Intelligence, automates budgeting processes and improves forecasting results for companies globally. CI Futures is our market data and forecast platform. CI Futures forecasts approximately 900 assets across commodities, currencies and equity indices, and a couple of thousand economic variables for the top 50 economies. CI Futures tracks forecast error for accountable performance. Users can see exactly how CI Futures have performed historically with one and three month forward intervals. We’re now offering a special promotion of CI Futures for $50 a month. You can find out more at completeintel.com/promo.

Okay, this week we had a couple of key themes. The first is oil for rubles and somewhat cynically, the death of the dollar. Next is the rapidly depreciating Japanese yen, which is somewhat related to the first. But it’s a big, big story, at least in Asia. We also have the hawkish Fed and the soaring five-year bond. So let’s just jump right into it. Tracy, we’ve seen so much about oil for rubles and Bitcoin and other things over the past week. Can you walk us through it? And is this a fundamental shift in energy markets? Is it desperation on Russia’s behalf? Is the dollar dead? Can you just walk us through those?

TS: All right, so no, the dollar is not dead. First, what people have to realize is that there’s a difference. Oil is still priced in USD. It doesn’t matter the currency that you choose to trade in because you see, in markets, local markets trade gasoline in all currencies. Different partners have traded oil in different currencies. But what it comes down to is it doesn’t matter because oil is still priced in dollars. And even if you trade it in, say, the ruble or the yuan, those are all pegged to the dollar. Right. And so you have to take dollar pricing, transfer it to that currency. And so it really doesn’t matter.

And the currency is used to price oil needs three main factors, liquidity, relative stability, and global acceptability. And right now, USD is the only one that possesses all three characteristics.

TN: Okay, so two different questions here. One is on the acceptance of cryptocurrency. Okay. I think they specifically said Bitcoin. Is that real? Is that happening? And second, if that is happening and maybe, Albert, you can comment on this a little bit, too. Is that simply a way to get the PLA in China to spend their cryptocurrency to fuel their army for cheap? Is that possibly what’s happening there?

TS: It could be. Russia came out and said, we’ll accept Bitcoin from friendly countries. Mostly, they were referring to Hungary and to China. Right. And I don’t think that is a replacement for USD no matter what because not every country except for perhaps China really accepts or El Salvador really accepts Bitcoin or would actually trade in Bitcoin. Right.

TN: In Venezuela, by the way. I think. Right. So on a sovereign basis. Okay. So Sam and Albert, do you guys have anything on there in terms of Bitcoin traded for energy? Do you have any observations there?

AM: No, this is a little bit of… This is even a serious conversation they’re having? With El Salvador going to be like the global hub for Russian oil now because they can use Bitcoin?

TN: That would be really interesting.

AM: But this is just silly talk. Every time there’s some kind of problem geopolitically and they start talking about gold for oil or wine or whatever you want to throw out, they start talking about the US dollar dying and whatnot.

I mean, like Tracy, I don’t want to reiterate what Tracy said, but her three points were correct. On top of that, we’re the only global superpower.

TN: Okay.

AM: That’s it.

SR: Yeah. My two cent is whatever on Bitcoin for a while.

TN: Right.

SR: Cool.

TN: I think that all makes sense now since we’re here because we’re already here because we all hear about the death of the petrodollar and the rise of the petroyuan and all this stuff. So can we go there a little bit? Does this mean that the petrodollar is dead? I know that what you said earlier is all oil is priced in dollars. So that would seem to be at odds with the death of the petrodollar.

AM: Well, Tony, in my perspective, the petrodollar is a relic of the 1970s. Right. Okay. Today it’s the Euro dollar. It’s not the petrodollar that makes the American economy run like God on Earth at the moment. It’s the Euro dollar. Forget about Petro dollar. Right. Because it’s not simply just oil that’s priced in it in dollars. It’s every single piece of commodity globally that’s priced in dollars.

TN: And Albert, just for viewers who may not understand what a Euro dollar is, can you quickly help them understand what a Euro dollar is?

AM: They’re just dollars deposited in overseas banks outside the United States system. That’s all it is.

TN: Okay with that. Very good.

SR: And the global economy runs on them. Full stop.

AM: It’s the blood of the global economy.

TN: So the death of the petrodollar, rise of the petroyuan and all that stuff, we can kind of brush that aside. Is that fair?

TS: Yeah. I mean, even if you look at say, you know, China started their own Yuan contract rights, oil contract and Yuan futures contract. But that still pegged to the price of the Dubai contracts. Right. That are priced in dollars.

TN: Let’s be clear, the CNY and crude are both relative to dollars. Right?

TS: Right.

TN: You have two things that are relative to dollars trying to circumvent dollars to buy that thing. The whole thing is silly.

TS: Exactly.

AM: Yeah, of course. Because Tony, the thing is, if China decides to sell all their dollars and all their trade or whatever, everything they’ve got, they risk hyperinflation. What happens to the Renminbi and then what happens in the world? Contracts trying to get priced right.

TN: Exactly. It’s a good point. Okay. This is a great discussion.

Now, Albert, while we’re on currencies, The Japanese yuan fell pretty hard versus the dollar this week. Do you mind talking through that a little bit and helping us understand what’s going on there?

AM: Yeah, I got a real simple explanation. The Federal Reserve most likely green light in Japan To devalue their yen to be able to show up the manufacturing sector in case China decides to get into a bigger global geopolitical spat with the United States. Simple as that.

TN: Great. Okay. So that’s good. This is really good. And I want people to understand that currencies are very relevant to geopolitics or the other way around. Right. Whenever you see currency movements, there’s typically a geopolitical connection there.

AM: Of course. And on top of that, if it was any other time and they started to devalue the currency like this, the Federal Reserve where the President would start calling the currency manipulators. And there’d be page headlines on the financial times.

TN: Right.

AM: And because that didn’t happen, It’s an automatic signal to me that this is what’s happening at the moment. Right.

What’s also interesting to me, Albert, is we’ve seen last week we saw Japan approach the Saudis and the Emiratis about oil contracts. We saw Japan call. There’s a meeting in Japan next week, I think, with China. So Japan is becoming this kind of foreign policy arm, whether we want to admit it or not, they’re kind of becoming foreign policy arm for the US. Because the US is not well respected right now. Is that fair to say?

AM: It’s more than fair to say, I believe Biden’s conference with South Asian leaders was just canceled on top of everything else.

TS: Sorry. And we saw this week Japan and India just signed, like, a $42 billion trade deal. So it kind of seems like they’re smoothing over the rough edges because the United States kind of came after India a little bit earlier about two weeks ago.

TN: Yeah, that’s a good call, Tracy. I think Japan and India have had a long, positive relationship. It’s especially intensified over the past, say, seven or eight years as China has tried to invest in India and the Japanese have kind of countered them and giving the Indians very favorable terms for investment and for loans. And so this is kind of a second part of that investment that was, I think, announced in, say, 2014 or 2015, something like that. And again, as we talked about it’s, Japan intervening to help the US out and obviously help Japan out at the same time. Thanks for that.

Now, Sam. We saw bonds spike pretty hard this week, especially the five year. I’ve got a Trading View source up there on the five year up on the screen right now. So can you walk us through what’s happening with US bonds right now, especially the five year?

SR: Sure. I mean, it’s pretty straightforward. The Fed is getting very hawkish and the market is adopting it rather quickly. And I don’t know how forcefully to say this. The current assumption coming from city is four straight 50 basis point hikes and then ending the year with just a couple of 25. That is a pretty incredibly fast off zero move time, some quantitative tightening, and you’re somewhere around three and a half percent to 4% worth of tightening in a year. That’s a pretty fast move.

So the two year to five years reflecting that the Fed is moving very quickly, you’re likely having the long end of the curve is lagging a little bit. You saw flattening, not steepening this week. The long end of the curve is telling you that the terminal rate may, in fact, actually be at least somewhat sticky around two and a half and might actually be moving a little bit higher. And that terminal rate is really important because that is how high the Fed can go and then stay there. It is also how fast the Fed can get there and how much above it the Fed is willing to go. So I think there’s a lot of things that happened on the curve this week.

TN: Okay. Albert, what’s in on those? Yes, go ahead, Albert.

AM: Oh, I’ve heard whispers that the long bond is going to 2.8% and maybe even 3%. That’s what the whispers have been telling me about that, which is going to absolutely devastate housing.

TN: But that was my actual idea.

SR: Oh, yeah. Housing is done. I mean, you saw pending home sales were supposed to be up a point and down 4%. That’s the first signal. The next signal will be when lumber goes back to $300.

TN: Okay. It seems to me you’re saying by say Q3 of this year we’re going to see real downside in the housing market. Is that fair to say?

SR: Oh, in Q2, you’re going to see real downside in the housing market. Yeah.

TN: Wow.

SR: Pending sales are, I think, one of the most important indicators of how the housing market is going. Right. It’s a semi forward looking indicator. If you begin to see a whole bunch of these homes in the ground stay as homes that are not being built. Right. So if you begin to see just a bunch of pads out there, it’s going to become a significant problem considering a lot of people have already bought the materials to build it off. And you’re going to begin to have some really interesting spirals that go back into some of the commodity markets that have been on fire on the housing front.

TN: Wow. Okay. That’s a big call. I love this discussion. Okay, good. Okay. So let’s move on to the week ahead. Tracy, we’ve had some stimulus announced to help pay for energy. Can you help us understand? Do you expect we’ve seen California and some other things come out? Are more States going to do this or more countries going to do this, and what does that do to the inflation picture?

TS: Well, absolutely. We saw California, Delaware, Germany, Italy talking about it. Japan already. They’re coming out of the woodwork right now. There’s actually too many to list. It’s just that we’re just now this week just starting to see the US kind of joining this on a state to state basis. The problem is that this is not going to help inflation whatsoever. You’re literally creating more demand and we still do not have the supply online. So all of these policies are going to have the opposite of the intended effect that they are doing. Right. It’s just more stimulus in the market.

TN: Do we think there’s going to be some federal energy stimulus coming?

TS: They’ve talked about different options. I mean, really, the only thing that they could do right now is get rid of the federal excise tax, but that’s only really a few cents. And they kind of don’t want to do that because that goes towards repairing roads, et cetera. That doesn’t fit into their plan that they just passed back in the fall. Right. We had infrastructure plan, so they need to pay for that. That’s already passed. So they probably won’t do that.

The other options that they have that they’re weighing are more SPR release, which is ridiculous at this point because they could release it all and it would still not have a long lasting effect on the market. And that’s our national security. It’s a national security issue. And we’re experiencing all these geopolitical events right now. We have bombs in Saudi Arabia. We’ve got Russia, Ukraine. So I think that’s like a poor move altogether.

TN: So if more States are going to come in, is it suspects like Massachusetts, New York, Illinois, those types of places?

TS: Yes.

TN: Okay. So all inflationary, it’s going in the wrong direction.

TS: It’s going to create demand, which is going to drive oil prices higher because we still don’t have the supply on the market.

TN: Okay. Wow. Thanks for that. Sam. As we look forward, you mentioned a little bit about how hawkish the Fed would be. But what are you looking at say in the bond market for the next week or so? Do we expect more activity there, or do you think we’re kind of stabilizing for now?

SR: We’re going into month end. So I would doubt that we’re going to stabilize in any meaningful way as portfolios either head towards rebalancing or begin to rebalance into quarter end. So I don’t think you’re going to see stabilization. And I think some of the signals might be a little suspect. But I do think back to the housing front. I’m going to be watching how housing stocks react, how the dialogue there really reacts, probably watching lumber very closely, a fairly good indicator of how tight things are or aren’t on the housing front.

And then paying a little bit of attention to what the market is telling us about that terminal rate. If the terminal rate keeps moving higher, to Albert’s point, that’s going to be a big problem for housing, but it’s going to be a big problem for a number of things as we begin to kind of spiral through, what the consequences of that are. It will be for the first time in a very long time.

TN: Okay. So it’s interesting. We have, say, energy commodities rising. We have, say, housing related commodities potentially falling, and we have food commodities rising. Right. It seems like something’s off. Some of it’s shortages based, and some of it is really demand push based. So energy stuff seems to be stimulus based or potentially so some interesting divergence in some of those sectors.

Okay. And then, Albert, what’s ahead for equity markets? We’ve seen equity markets continue to push higher. How much further can they go?

AM: Last week they eliminated, I think, up to about $9 trillion inputs, short squeeze, VIX crush. I mean, they went all out these last two weeks. It’s absolutely stunning. From my calculations, I think they expanded the balance sheet another $150 billion. Forget about this tapering talk. There’s no tapering. They just keep on going. How high can they go? That’s anybody’s guess right now. I think we’re like 6% off all time highs. On no news.

TN: So potentially another 6% higher?

AM: Honestly, I know that there’s hedge funds waiting, salivating at 4650. Just salivating to short it there. So I don’t think they can even get close to that, to be honest with you. So I don’t know, maybe 4590 early in the week before they start coming down.

TN: Okay. Interesting. So you think early next week we’ll see a change in direction?

AM: Yeah, we’re going to have to this has been an epic run, like I said, 90% short squeeze, 10% fixed crush. You don’t see this very often. Okay, Sam, what do you think, Sam? Similar?

SR: On equities, I like going into the rip higher. I’m kind of with Albert, but a little less bearish. I think you chop sideways from here looking for a catalyst in either direction. Bonds ripping higher today, yields ripping higher today. Bond prices plummeting. That I thought was going to be a catalyst for equities to move lower. It wasn’t. That kind of gives me a little bit of pause on being too bearish here, but it’s hard for me to get bullish.

TN: Okay.

TS: What’s interesting? I’ll just throw in like, Bama, weekly flows. We actually saw an outflow from equities for the first time in weeks. It wasn’t a lot 1.9 billion. But that says to me people are getting a little nervous up here. Profit taking, as they say on CNBC.

TN: All right, guys. Hey, thank you very much. Really appreciate the insight. Have a great week ahead.

AM, TS: Thanks.

SR: You too, Tony.

TN: Fabulous. Look. I’m married. I’m a man. I don’t notice anything. I noticed the other guys laughed at that. Uncomfortably. That’s great. Okay. I’m just going to start that over, guys. And we’re going to end it.

Categories
Week Ahead

The Week Ahead – 28 Feb 2022

Last week’s big news is Ukraine and Russia. So in this episode, we want to talk you through some context and what this means for markets in the near term. First, the guys talked about the most surprising thing that happened and then we moved on to answer a few viewer questions like what’s the implication of Russia being disconnected from SWIFT? Will anything change between Europe and China? Will the Russia-Ukraine inspire China to actually invade Taiwan? How disrupted the energy markets will be? And finally, what happens to the world economy – Fed, QE, QT, consumers, etc.?

Listen to this episode on Spotify

https://open.spotify.com/episode/6ynTFaOtWF6rl1xNKX1Cnq?si=439f4977cb3743fd

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

TN: Hello. Welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I’d like to ask you to subscribe to our YouTube channel. And like this video. It helps us with visibility and you get reminded when a new episode is out. So thanks for doing that right now.

We had a lot on this week, especially around Ukraine. So today we’re really focused on Ukraine. We want you to understand the context around Ukraine. We want you to understand what it means for markets. And we’re going to take a lot of your questions that we’ve been gathering off of Twitter.

So just a quick recap of what we said last week. Coming out of last week’s episode, we said it’s not a time to make big decisions. We said to keep risk tight and be careful of volatility. And we said that crude markets would move sideways. So we did kind of come into this assuming risk would be there this week. And obviously, we saw that.

So first, guys, can you walk us through some of your observations of the past week? What are you seeing directly in and around Ukraine or Ukraine, and how is that affecting markets? And as each one of you talk, Albert, I want to start with you, but name something that surprised you most in the past week in markets. Okay. Can you give us a quick overview? I know you’ve got deep networks in that region. So can you talk to us a little bit about what you’re hearing and seeing there?

AM: Well, I mean, concerning Ukraine and the markets. What I was most surprised and a little bit taken aback by was the amount of mainstream media just decorations of World War Three and whatnot then how much it affected the markets? So much so that you have to look at the markets and say what is going on?

Because this is just not normal behavior for markets to respond to a situation in the Ukraine that’s really kind of not really attached to the United States market at the moment. I mean, it isn’t commodities and that’s something Tracy will get into. But it was an overabundance of bad news, just an overdrive. And that’s what actually really took me aback.

TN: Good opportunities out there.

AM: There is absolutely good opportunities. But the problem is the volatility goes way up higher. The VIX exploded. You can’t get into options because they’re just far too expensive. You’re going to get burned doing that. And what do you do? Maybe sitting on your hands is the proper thing to do until things stabilize. But yes, there were actually great opportunities.

TN: What are you hearing on the ground, Albert? I know you’re really close to that part of the world. So what are you hearing on the ground?

AM: Well, the situation is really fluid and really tense at the moment. I think the Russians were taken aback. I know that the Russians were taken aback about the actual veracity of defense by the Ukrainians. Their main objective is to take Mariupol and then take Odessa. That is their number one and number two objective. Their next objective is to take not really to take you because I don’t think they can actually do it unless they want to do some kind of redo of the Chech and guerrilla warfare and just start massacring people. They’re not in that business at the moment. The world’s eyes are on it.

So I think political change, maybe snap elections is what they’re probably going for in Kiev just to surround it, stress the city, stress the residents, force a change where Western governments can’t get a bigger say in the matter on a nation that’s right on the doorstep.

TN: Okay, so I’m seeing on say on social media like TikTok videos of burned out Russian tanks and all these things, and I think it seems to me that Russia is losing the PR war right now and that’s really important in the early days and with different demographics even within Russia. Do you think Russia or Putin kind of underappreciated the impact that social media would have, at least on the early days of this?

AM: Of course, Russia has a vast network globally of PR campaigns in the west. So for him, it’s definitely a concern where you have negative images of Russia, Russia’s military trying to enact power projection. It’s a little bit daunting for him at the moment.

However, from a military strategic point of view, we don’t know exactly what their exact strategy is. Whereas they’re just trying to expand Ukrainian defenses, trying to get the best of their defenses out already. So they have a shortage of supply later on. That’s what most professionals would say is happening.

So we really have to see over the weekend to see what kind of resources have been expended by the Russians trying to take back Mariupol and Odessa.

TN: Do you think the Ukrainians can get stuff resupplied? Do you think they would have any difficulty getting stuff resupplied from the west?

AM: It’s totally up to the west and what they’re going to supply them and how they’re going to supply them. I’m sure that the west have Special Forces sprinkled without inside of Kiev assisting as advisers to the defense forces there. So it just depends on the will of the Europeans at the moment.

TN: Okay, Sam, what have you seen this week in markets that’s kind of gotten your attention or surprise you?

SR: I would say what really caught my attention were two things. One, how quickly Wheat went up and how far it went up and then how quickly Wheat went down and how far it went down.

There were two days where Wheat was just skyrocketing. I think it was 5.5% day followed by negative. I forget where it closed, but a significant negative day in the six to range at a minimum. That really caught my attention.

Ukraine is incredibly important on the wheat front. That’s a pretty important one. And then I would say how quickly and how far gold went. Right. Gold was almost $2,000, and now it’s below where it was prior to the invasion, and it did that all in a day. I mean, that was an incredible move in my book and somewhat shocking. And I think it was kind of interesting when people caught on that if you cut off Russia from being able to really sell, call it dollars, Euros, et cetera, on the market openly, it’s going to potentially have to sell gold if this thing drags out.

So you have an overhang of gold in a war scenario. Not necessarily, I call it a tailwind. I thought that was a really interesting call it knee jerk reaction up in gold, and then kind of a realization of, oh, crap, this might not be the thing to own here.

And then the final thing and I’ll make this one quick is crypto and how war was supposed to be great for crypto. And as the war started, you saw crypto sell off pretty hard. I think it’s interesting on two fronts. One, there’s a significant amount of crypto activity in Ukraine and Russia.

Russia is the second largest country when it comes to providing hash rate to the market for Bitcoin. And if there’s any sort of disruption there, all of a sudden the US could become 50% of the hash rate awfully quickly, which could become an interesting scenario there.

TN: How does the hash rate for people who aren’t crypto experts? How does the hash rate equate to say, the crypto price?

SR: It makes it, call it’s basically an efficiency mechanism where you can either do transactions more quickly, more efficiently, and somewhat of a lower cost. That’s basically what you do.

So if you lower the hash rate, you increase the cost of doing transactions and slow the general system down.

TN: Okay, great.

AM: This is interesting, Tony, because this actually leads into a lot of my arguments against crypto being decentralized, saying, hey, when push comes to shove, governments have control of the networks and the financial system. You can’t get away from that.

TN: Yeah. And if you cut off the electricity supply, it becomes even more difficult.

AM: Nearly impossible. Puerto Rico.

TS: And if you’re Russia that has control of the entire Internet, you can cut off whatever sites that you want. Right?

TN: Right.

SR: Yeah, that’s right. Yeah. It was interesting. There was something floating around yesterday where it appeared that Russia was at least partially geofencing their country from the rest of the world. And if it does that, that could become problematic if it does it in a meaningful way for crypto.

TN: Sure. And taking down the RT site doesn’t help their paranoia there. Right. Tracy, what happened for you over the week? What’s one of your observations that really kind of surprised you?

TS: Well, I mean, to be honest, because I’m focused on the commodity side of everything, pretty much how I saw the markets going or how I pretty much thought how the markets were going to go. Right. I posted a bunch of stuff on Twitter.

TN: You saw all this coming?

TS: No. Well, I didn’t do this. I don’t want to sound like arrogant. I focus on energy, metals, materials, agriculture. And because Ukraine and Russia are such large hubs for all of these commodities, wasn’t really surprising to me that we saw a jump in all of these.

TN: Yeah. Were you surprised the magnitude of the jump?

TS: Yes. And in some respects, I actually expected Palladium to have a bigger jump than it did because Rush is 43% of that global markets and wheat went far beyond bonkers that I thought it was going to go.

Was I surprised about oil? No. On the upside and on the downside today.

TN: Great. Okay, very good. Let’s jump into some of these viewer questions. You guys know that we saw a lot of viewer questions at the start of this.

So the first one I’m going to read out is from Keith Snyder. It’s @snyderkr0822. He says, what would the implications be of disconnecting Russia from SWIFT?

I’ve inspired your knowledge and have to be informed. So there’s been a lot of talk about SWIFT over the past few days. Sam, do you have some insight there on what would happen if Russia was taken out of the SWIFT network?

SR: It would be less bad than it would have been call it three years ago. Russia has somewhat insulated themselves from SWIFT, but not entirely by no means. Right. The SWIFT system can cut you off from dollar denominated, at least dollar denominated transactions.

That’s a pretty important thing, particularly when you’re selling a lot of things that are denominated in dollars. Right. Oil, et cetera. That becomes somewhat problematic. I would say that would be a very significant hit to Russia.

And it would also be a significant hit. And by significant hit, I mean that’s putting you on par with Iran and Cuba. Right. That’s basically putting you at Code E country without saying it. That’s Iran, your Cuba, see you later, bye.

I think that what I would be paying very close attention to is the reaction of European banks. That’s $330 billion worth of Russian liabilities assets on their books. So you’ve got to figure something out there pretty quickly because those books are going to get smacked if you can’t actually get on the SWIFT system.

TN: Okay. And Tracy, if they were taken off a SWIFT on Friday, Germany said that they would be okay with imposing that sanction, how would Germany pay for its electricity?

TS: I mean, Germany said that with a caveat, let’s say, because they did say we’re going to look at this, but we need to look at the implications of this. So obviously the problem there in lies that if you take a Rush off SWIFT, then Europe is screwed energy wise. Right? Unless they choose to scramble and make long term contracts with, say, the United States.

They could go through the United States. They could go through Azerbaijan on the Tap pipeline. They could go through Israel and Egypt if they wanted to, through the Southern gas quarter. I mean, there are options for them.

The problem is that they should have been looking at long term contracts this summer when we already knew that Nordstream Two was going to be delayed.

TN: Four, three, four years ago. I mean, they’ve had this optionality on the table for a long time.

TS: But those options are still on the table for them. But by delaying SWIFT, if you cut Rush off SWIFT, the big problem Europe has to decide is do we cut off SWIFT and hurt ourselves or do we hurt Russia more? And I could argue that both ways. Anybody could argue that both ways. But that’s a big decision that they have to make.

TN: Well, everybody hurts, right? That would not be a sanction that would be pain free for anybody.

TS: Right. Except maybe the US.

AM: Well, Tony, despite the rogue status of Russia, it’s still well attached to the Western financial system. It’s not seen as able or even as aggressive as the Chinese are and detach it from the financial system.

There would be a lot of problems if they were banned from SWIFT. But it’s certainly a valid deterrent if the west wants to actually use it. They keep a lot of their bank and central bank money in the Euro dollar market. So no SWIFT would mean no more Treasuries, but they’d just move into the Euro dollars itself.

Maybe that’s why they were buying gold because of this tension that they saw coming. It’s a risk to their global market.

TN: Sure. Okay, let’s move to China now. We’ve got a few questions on China. We’ve got one from @NathanDallon. He says, does anything in Europe change the situation with China?

There’s another one from Ritesh @chorSipahi, he says question for Samuel Rines and Albert, Ritesh. I’m not taking offense at this. What is the deterrence for China not to invade Taiwan or now to invade Taiwan?

And then we’ve got another one from Rich @rm_ua09. How could China benefit the most out of the Russia Ukraine situation? A, supporting Ukraine in some manner, B, remaining neutral, or C, taking measures to whether Putin.

So there’s a broad spectrum of questions there, guys.

TS: Take the first one, I think, Tony.

TN: Okay, let’s go for it. What happens in Europe?

AM: Well, Europe. I think that the Europeans are going to be actually more dependent on China trade after this because they’re seeing a problem with the Russians politically.

You can’t sit there and tell me that they’re going to be able to support the Russians like they were in trade, whether it’s commodities or whatnot on steel. I mean, name your commodity. Name your.

TN: Chinese already own like 70% of the global steel market. So is it going to make that much of a difference?

AM: It’s, well, I mean, they still diversify. They’re still going to have to play ball in the global trade. So I think at this point, politically, Russia’s poisonous, and then you’re going to have to steer even more towards China.

TN: Right. So, yeah, it seems to me that China could actually use this as an opportunity to distance itself from Russia. Right. If it goes bad, China is very silent right now. And if it goes bad, they could distance themselves from Russia and make some really tight allies in Europe at Russia’s expense. Does that make sense to you guys?

AM: It does to me.

SR: 100%. I think that would be the spare play from China in a lot of ways, because you get two things. You’re going to get tighter ties to Europe, which diversifies you somewhat away from the US even more. It gives you call it a barrier to the United States and whatever the US wants to do, and it also, to a certain extent, raises your profile on the international stage. Right.

TN: That’s key. China really wants to be seen as a credible diplomatic player and I think there’s still a bit of a chip on their shoulder about not being seen as an equal with a lot of the larger Western Nations. So I think your last point is really important.

There seems to be a view that Russia invading Ukraine somehow enables China to invade Taiwan. What are your thoughts on that?

AM: I absolutely disagree with that wholeheartedly. I think the two situations are nothing alike at the moment. I mean, Ukraine is in Russia’s eyes, it’s own territory. Same as is China views Taiwan.

However, Taiwan has a much more active defense military force and more of a backing from not only the US, but Australia, Japan, India. That’s a problem for the Chinese, too. So I think the two. I don’t like to draw a comparison between the two. I don’t think there is anything related to it.

TN: Sam?

SR: I have almost nothing to add beyond that. And I think the one country that’s really interesting in there is India, because India did not step up on the Ukrainian front and India would step up on the Taiwan front.

AM: Yeah. And on top of that, on top of that, let’s just be realistic here. We know that the Chinese probably have military observers inside of Ukraine watching and taking notes.

TN: Sure. How to conduct right now. If you’re a Chinese PLA officer and you’re looking at what’s happening in Russia versus what the United States did in Iraq, what would be your assessment? Russia gives us nothing against the United States.

The United States is a juggernaut. That’s what I think nobody’s even talking about.

TN: Yeah. If Russia didn’t just roll into Ukraine and take it over in 24 hours, what kind of model are they for China?

AM: And that’s on their border, Tony, that’s on their border.

TN: Exactly. No, exactly. So logistically, Russia’s logistic supply chain for their military, it seems like it’s pretty horrific. Their intelligence, like everything. It just seems like a mishmash of let’s just go get them.

AM: They are a professional military force. They have budget problems. That’s what. If they really wanted to go into Ukraine and just smash the place, they could. But the problem is you’d have to kill many civilians in the meantime, which they can’t do that.

So the Chinese are sitting there probably looking at like, what do we do here? Who is this military partner that we’re actually partnering up against the United States? It’s not sufficient.

TN: Yeah. It seems to me that on some level, going back to the social media comment I made, Russia is kind of embarrassing itself. China doesn’t want to be seen allied with someone who’s embarrassing themselves. Right. They’re happy to.

TS: That’s why they’ve been so quiet. They haven’t said nothing.

TN: Yes. And I think China is always looking also looking at how unified is the world’s response against Ukraine. Right. So if they were to go after Taiwan, how unified would the response be?

So going back to what I said earlier, I think China has a real opportunity here to distance itself from Russia, to play nice on Taiwan and really benefit from trade and finance and diplomatic relationships.

AM: 100%.

TN: Tracy, do you have anything else on that on China? Any other thoughts?

TS: No. I think you guys…

TN: Awesome. Okay, very good. Let’s go to the next ones. Okay. Tracy, these are all energy related. So primarily, if we look at this @DaveRubin15, he says, what are the energy implications if Ukraine has no choice but to make this a war of attrition rather than surrender, bleeding Russia out from exposure and can this catalyze an energy super cycle? Okay.

And then we’ve got another one from Giovanni Ponzetto asking, assuming that gas from Russia is kept flowing at the same rate of the past couple of months, will the EU be able to restock gas reserve? So, Tracy, you’re the expert here. Take it away.

TS: All right. So for the first one, there are two extreme scenarios that could happen. Either somebody blows up a pipeline by accident or somebody blows it up on purpose and blames the other side. And if you look at the chart that’s on the screen right now, you can see the choke points where this could easily happen to really hurt gas flows into Europe.

That said, if we look at the role of Ukraine in the gas markets, they’re much smaller today than they were in the 1990s. Right. There was a time when 90% of gas that came from Russia to Europe went through Ukraine. And now it’s about less than a quarter percent.

The other extreme is that Russia just cuts off gas flows entirely. Right. And that hurts EU way more than it hurts Russia because they don’t really actually make that much money selling gas. They make way more money selling oil. They have $640 billion in reserves. They could live without the gas for a few months. And that’s kind of why the US has had problems getting the Europeans on board with sanctions against existing flows from Europe.

In addition, Europe also has other options. They can go again to the United States, Azerbaijan or Israel and Europe.

Now there are about 2.9 million barrels at risk of oil exports that are exported from Russia to the United States and Europe, which is about 30% of their exports. And that would be much more catastrophic than, say, natural gas in the oil markets. But as far as oil flows through Ukraine, it’s very limited. Again, you can see the map.

TN: Okay.

TS: The second question.

AM: Sorry about that. I had a related question for you. How possible is it or how necessary do you think it would be for the Italians to take the initiative and become Europe’s energy hub?

TS: Actually, they really could with Greece. Right. And I’ve been talking about the Southern gas border for a very long time, which branches off, you could go Cypress into Greece and then you could go straight into Italy from the Southern gas corridor.

I think that region is really something you really want to keep an eye on right now. And I’ve kind of been talking about this for a couple of years right now because there’s just so much supply. And although people say that region is geopolitically unstable, so is everywhere. But that’s never really stopped oil and gas flows.

Personally, I think as an investor, I would be looking at that particular area of the world because they really have a lot of gas supply. And now we have pipelines built, and I think it’s more stable than, say, Ukraine, Azerbaijan, that have had a lot.

AM: You know what’s funny, though, Tracy, is every time the Libyans or Egyptians or whoever try to export gas and oil and whatnot, the Russian Wagner conveniently shows up.

TS: Conveniently shows up. Right. Exactly.

AM: Here we are, guys.

TS: Exactly. For the second question, as far as, I think that you were asking about gas flows, if Europe could restock. Absolutely. They can restock because of the things that, because of the alternative sources that I mentioned before, and we’re headed into a season that we don’t need as much. So I think that as we head into summer, it will not be as dire as the dead of winter.

TN: Very good. Okay. Thanks for that.

Sam, let’s look at some economic questions now. We’re looking at from @_0001337 probability of rate hikes and tightening now. We just let inflation run amok. When we see price controls. That’s one question. There’s another one, wondering how North America will go about continuing to grow consumerism, things like cuts on gas taxes, that sort of thing.

And there was another question about gold, which you covered a little bit at first from @Mercerandgrand looking at gold prices. So if you don’t mind, let’s talk a little bit about kind of Fed options now. Are we still expecting given the volatility, are still expecting the Fed to act in March? Are they going to continue to are they going to stop QE? Will they hike? Is QT still on the table for June?

SR: Yes, 25 is going to happen. They will end QE, and QT is still on the table, at least a runoff, not a sale. They’re not going to go over their skis here and start selling mortgage backs or do anything along those lines.

TN: Okay.

SR: But they will continue with their tightening path. I think the broader question here is just how far they actually can go this year. I do think that the limiting factor of highly volatile energy prices at the pump, which is something that monetary policy just can’t solve. Right.

Tightening 5100 basis points isn’t going to push the cost of oil down unless you somehow spark a recession or something. So I think it’s going to be interesting to see how their language evolves around future hikes. I think we kind of know that it’s 25 basis points. 50 is simply not priced in enough for them to do that.

And how we see and how they see monetary policy evolving, call it in the September and onward is going to be really important with the midterms coming up, et cetera. So I think that’s important.

On the consumer front, maybe you see call it a gas tax holiday or something along those lines to lower gas prices at the pump. That could happen. But generally the consumer is not in horrible shape. The consumer is not great, but it’s not in horrible shape. So I don’t really think they have to do much there. And I don’t see any point in buying gold here with the type of move you’ve seen over the past week. I think that if you had narratives that went from invasion of Ukraine to World War Three and you only got it to $2,000 and you couldn’t hold, I think that’s a little bit of a problem for the gold narrative.

TN: Sure. Okay, great. So let’s wrap it up and let’s start looking at the week ahead. What do you guys expect to see the week ahead? Albert, I guess we’ll start with you. Part of it is what do you expect to see on the ground in the week ahead in Ukraine? I expect that to impact markets.

AM: I think that we’re going to get a little bit more bloody, a little bit more daunting headlines. It’s going to affect the markets. I think we probably start shooting a little bit lower depending on how low we go. I think that’s going to make a big impact of what the fed does. I agree with Sam. I think it’s going to be 25 basis points. If the news is okay out of Ukraine, I think they even go 50 basis points.

TN: Wow. Okay. Tracy, what do you expect to see in the week ahead?

TS: I’m looking at the equity markets in particular. So just came out and global flows despite the fact that equities are coming off globally, we’re still seeing people pile into equities, right. We’re still seeing flows into equity markets.

So that to me says that the current situation with Ukraine in Russia is likely to be temporary and that perhaps the big funds and managers are thinking that we’re going to see less of a rate hike in March than most anticipate because they’re still selling bonds and they’re still buying equities.

TN: Okay. Interesting. Sam?

SR: I think you’re looking at a lot of chop here as we transition from as pointed out a moment ago, as you transition from Ukraine grabbing all the headlines to the Fed getting back in the headlines that’s going to be a choppy hand off. When the fed was in the headlines. It wasn’t exactly great for markets and a little bit of a relief rally here off of world war three going into.

TS: Sorry to interrupt. I think that’s a bit of a little bit of end of month rebalancing too, right? What we’re seeing right now.

TN: It could be. Yes, that’s right.

SR: Yeah. Definitely. But I think the hand off from Ukraine headlines back to the Fed headlines creates a lot of chop and probably some downside bias across asset classes or at least we’re assessing.

TN: Sounds like a very interesting week ahead, guys. Thank you. You so much. I really appreciate this. Have a great week ahead. Thank you.

SR, AM, TS: Thank you.

Categories
QuickHit

QuickHit Cage Match: Time to Taper?

QuickHit Cage Match: Time to Taper?

This is a special QuickHit Cage Match edition with returning guest Albert Marko, and joining us for the very first time Andreas Steno Larsen to talk about tapering. Will the Fed taper this year? If yes, when, how, and why? If no, why not? Also discussed are the housing market, China GDP, and corporate earnings.

 

Andreas is the chief global strategist at Nordea Bank, which is mostly a Nordic bank, but has a presence in large parts of Europe, but also in the US. He speaks on behalf of the bank on topics surrounding global markets and in particular bond markets.

 

Albert Marko is a consultant for financial firms and high net worth individuals trying to navigate Washington, DC and what the Fed and Congress are up to.

 


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This QuickHit episode was recorded on August 16, 2021.

 

The views and opinions expressed in this QuickHit Cage Match: Time to Taper? QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: So Andreas, I noticed you guys, you and Albert kind of in a Twitter fight last week about tapering, and that’s what really drew me to this discussion. I wanted to give you guys a platform to talk through this. So help me understand, you know. So what is your position? Why do you think it’s going to happen? When do you think it’s going to happen?

 

ASL:  Well, I think tapering is right around the corner, and the basic reason is that I expect marked sequential improvements in the labor market in the US over the coming two or three quarters. If you look at it, very simply speaking, right now, there are more job openings than unemployed in the US. I know I disagree with Albert on this as well. But in the old world, that would at least have let the Fed to turn very, very hawkish when they can see such a rate between job openings and unemployed as we have right now.

 

I basically have a case that once these extraordinary benefits, they will end across the US during September. Then we will have an explosion in a positive sense in the US Labor market. And that is exactly what is needed to convince the Fed of tapering.

 

So my base case is a decision taken in September and then an implementation starting already in December this year. And I expect them to be done already during the first half of next year with the tapering process. So it’s fairly aggressive compared to the scenarios I’ve seen painted by by other analysts.

 

TN: That’s really interesting. I just want to clarify one thing. When you say explosion the labor market, you mean more people coming into the market?

 

ASL: Yeah. And they come into the market and fill these job openings right now, we have a low labor market mobility due to a lot of temporary factors. And once they’re gone, then we should expect employment to be almost running at full speed before New Years.

 

TN: Okay. Okay. Very interesting. Albert, take it away. Help me understand what you’re thinking.

 

AM: Well, I mean, I would agree with him in the old days. Right. But we are in a situation where these tapering assumptions are based on Fed rhetoric and the public comments that they’ve been making specifically addressing his unemployment, unemployment boost or surge.

 

You know, we still have COVID lockdown patchwork across the world happening at the moment. Australia, Japan, Taiwan, and most importantly, China, because no one’s looking right now in China, but China’s GDP looks like it’s not going to surpass two or 3% for the next four or five quarters. With that in mind, where the United States going to get inventory for the holiday season and have this boost in employment surge that we usually get on holiday season.

 

It’s just, to me, there’s so many negatives, so many variables with negative connotations towards it. I can’t see the Fed tapering and just absolutely obliterating the market right before mid term season coming up in 2022. It’s just for me, it’s just inconceivable for them to do such a thing like that.

 

TN: Okay. Understood. So, Andreas, what do you think? Let’s say it doesn’t happen in September. What is the Fed thinking through and what mechanisms do they have to use, say, instead of a taper? Are there other things they can do aside from taper that will basically bring about the same intended outcome?

 

ASL: Well, I want to first of all, address what Albert said on China. I perfectly agree with the view on China right now. China is slowing massively. But I actually find it very interesting that the Federal Reserve is now even more behind the curve when it comes to its reaction function compared to earlier cycles, given that they want to see realized progress in labor markets and not forecasted progress.

 

And we know that labor markets, they lack the actual economic development. So it’s almost a given in my view, that we have a surge in employment over the coming couple of quarters as a consequence of what happened during the first half of the year. So that’s one thing.

 

And the second thing is that what we see right now in China is another wave of restrictions that will lead to renewed supply chains disruptions across the globe. And again, we will have a wave of supply side inflation, which is the exact kind of inflation that we are faced with right now. And given how the Fed communicated just three months back, you have to be amazed by how scared they are of the supply side inflation, even though it’s not the kind of inflation that they like.

 

So I still think that they will react to this, even though it’s supply side driven. What they have in sort of the toolbox ahead of September is obviously that they could hint that the interest rate path further out could be hiked. But otherwise, I think the most obvious tool is to look at the purchases of mortgages. Since we currently have a situation where most US consumers, they are very worried or even scared of buying a house. Timing wise right now, as a consequence of the rapid rise we’ve seen in the house prices. And I guess that’s directly linked to what the Fed is done on mortgages.

 

TN: Yeah. I can tell you just from my observation here in Texas where we have a lot of people moving in. House prices have taken a pause for probably the last two or three months where things even two, three months ago wouldn’t stay on the market for, like, three days. We’ve started to see things on the market for longer.

 

And so, I’m seeing what you’re saying, Andreas, about the housing market. And the question is, can that stuff pick up again, and is it justified? Albert, what’s your response to Andreas statement?

 

AM: The best comparison that we have is the 2013 economy to today’s economy. No one can sit there and argue that today’s economy is stronger than 2013. And look what Tapering Tantrum did to 2013 market. It was an absolute debacle. Yellen was so put off by Bernanke’s Tapering that she refused to do it in 2015. And in 2017, when they even mentioned it again, the market took a leg down. So, with that, right? And especially with Andres mentioning the word inflation, which is an absolute bad word to talk about in DC, tapering would have to have the Fed admit wrongdoing on sticking inflation.

 

When have we ever seen the US Federal Reserve ever take blame for something that’s negative in the markets? They just simply don’t do that. In fact, what I think they’re going to end up doing is allowing a market correction late into the fall and then unleash another $3 trillion of QE with Yellen and Powell to support the markets. So which would be completely opposite of tapering.

 

TN: Yeah, that’s interesting. You have completely opposite views. And what’s your view on the possibility of QE? I mean, is it possible?

 

ASL: Well, I don’t think Albert and I disagree a whole lot on the structural view or outlook, since that QE is a permanent instrument and it’s needed to fund the debt load of the US Treasury. There is no doubt about it. The point being here that the Federal Reserve needs a positive excuse to start tapering. I agree with that as well. And that exact positive excuse will be another couple of very strong labor market reports.

 

That’s exactly what they’ve been telling us. That they want to see between 800K and 1 million jobs created a month would be enough for them to launch a Tapering decision in September. Whether they will succeed with the entire tapering process is whole different question, but I’m looking for that decision in September. And then I guess Albert and I will agree a lot on the market takeaways if they take such a decision.

 

AM: Let me ask you a question Andreas. What would happen if the United States Congress refuses to deal with the debt ceiling and have no fiscal at that point? What would happen then?

 

ASL: Well, in such case, there is a whole lot of issues that you need to take care of as a Fed Reserve. So first of all, I’m not too scared of that scenario. I consider very low probability. I’m interested if you have another opinion.

 

AM: I personally don’t think it happens until at the very earliest November.

 

ASL: Yeah, but, I mean, obviously, every time there’s a debt ceiling deadline, we know that the true deadline is not the suspension deadline, its the deadline when the US Treasury is not able to run on fuels any longer, right? And that would be sometime during late October, there about I agree with you on that. So we basically have a window right now without a whole lot of issuance due to the debt ceiling being in place. And I actually think that’s a decent window for the Federal Reserve to utilize if they want to start tapering, since there is a smaller issuance for the private sector to swallow in such case.

 

TN: Interesting. Okay. What are you guys seeing on the corporate side? Are you seeing strength on the corporate side? I know we just had earnings season and they were very strong, but are you seeing a justifiably strong corporate position to start to taper?

 

AM: Right now, I really don’t. I mean, the University of Michigan Consumer Confidence had collapse. I think today, New York’s Manufacturer Index came in at 18.3, which was an astounding collapses in itself. You know, I personally deal with a couple of hedge funds, and they have been well behind the curve in returns right now.

 

I think the best ones are sub 10% for the year, so they’re gonna have to move back into cyclicals, and they’re gonna have to move back into small caps to make up the difference before the year end. Simply just even discussing that option, it makes tapering, you know, even less of a likely outcome just because it would ruin the market.

 

ASL: Obviously, if you go long small caps right now into a tapering scenario, you will end up losing. I agree with that. That would be kind of the worst. Yeah, exactly. But otherwise, I have to agree that the corporate sector is more doubtful, I would say, than the US Treasury in terms of a tapering decision. I’m much more scared of the corporate debt load than I am of the US Treasury debt load.

 

The State’s currency issue is they can always get rid of such a scenario. But the corporate sector is bigger trouble than the US Treasury into this scenario that I depict.

 

AM: Yeah. I completely agree with that one.

 

TN: Wow. We end on agreement. Guys. Thank you so much for this. Thanks so much for your time. I really look forward to it. Andreas, I look forward to having you back. Albert, of course, we look forward to having you back. Have a great week ahead, guys. Thank you very much.

 

And for all you guys watching. Thanks for taking the time. Please subscribe to our channel. And we’ll see you next time. Thanks very much.

Categories
QuickHit

The Fed & ECB Playbooks: What are they thinking right now? (Part 1)

Fed & ECB Playbooks: What are they thinking right now? (Part 2)

Geopolitics experts Albert Marko and Nick Glinsman are back on QuickHit for a discussion on the Federal Reserve, the ECB, and central banks. What are they thinking right now?

 

Albert Marko advises financial firms and some high net worth individuals on how politics works in D.C.. He worked with congressional members and their staff for the past 15 to 20 years. In his words, Albert basically is a tour guide for them to figure out how to invest their money.

 

Nick Glinsman is the co-founder and CIO of EVO Capital LLC. He does a lot of writing and some portfolio management. He was a macro portfolio manager in one of the big micro funds in London for quite a few years. Prior to that, Nick was with Salomon Brothers. Now, he concentrates on providing key intel, both economics and politics on a global level to finance managers and politicos.

 

You can go here for Part 2 of the discussion.

 

 

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This QuickHit episode was recorded on July 29, 2021.

 

The views and opinions expressed in this The Fed & ECB Playbooks: What are they thinking right now? (Part 1) QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Today we’re talking about central banks and given where we are in “the cycle”, whatever that means at this point, post or late Covid, we’ve had waves of support coming from finance ministries and treasuries and central banks around the world. Central banks seem to be in a very weird position right now. So I’d really love to understand your point of view particularly what the Fed and the ECB thinking about right now and what are some of the biggest dilemmas they have? Nick, if you want to go first and frame that out a little bit and then Albert, will obviously go to you.

 

NG: Well, given how long I’ve been doing this, I’m more of a traditional, black coated central bank watcher. And I would say a couple of key comments to make right now is I think they’ve lost their independence to a large extent. Harder for the ECB to lose its independence. But with the commission, you have that loss.

 

I also think that we are, defective monetary financing. And again, I’ll go back to the ECB, who literally for the last month, for everything that was issued in Europe and this reluctance by the Fed to, even they admit talking about talking about tapering, but this reluctance to even consider a pullback on the mortgage-backed securities. The jest, pretty much the same, and it’s very clear with a lot of the actions that I’m in, my interpretation is, one, they’re working in cahoots with the political arm.

 

So treasury in the US, commission in Europe. Bank of England is a slight exception about to happen, but we can cover that later. So that’s clearly going on. And I think now Albert might do a lot of work together and I think this Albert came out with a comment a while back saying Yellen wants six trillion dollars fiscal. And the excuse that was given, aside from the political bias, was the Treasury market needs it.

 

And interesting enough, we saw the change to the Repos yesterday. This was after criticism by a committee that was published in the F.T. yesterday. And even Bill Dudley’s commented on Today suggesting that a lot more work needs to be done to ensure that the normal functioning of the plumbing behind the form of safe assets.

 

So it’s clear to me that things are being worked on in a politically coordinated way that impacts monetary policy. Now, I think they’ve got themselves into an economic or policy black hole. I think the mind set, and it’s been like this since probably ’08, which is they’re not prepared to accept the economic cycle anymore.

 

So back to one of my previous appearances on on your pod, the Fed not doing anything? Yeah, it seems to me that that’s an acceptable process, regardless of inflation is way above their forecast. And forecasting that’s a whole ‘nother bad area for the… Fed’s forecasts are terribly wrong. The ECB’s forecasts have been wrong for, you know, since time immemorial.

 

The ECB is more dangerous because they have a bias that keeps them on their policy’s wreck.

 

TN: So first on forecasts, if any central bankers are watching, I can help you with that. Second, when you say they don’t believe in the business cycle anymore, do you mean the central banks or do you mean the political folks?

 

NG: The central banks and government. I mean, funnily enough, I’m reading a biography on Jim Baker right now. And when you look at Reagan, when he came in and Volcker, economic data was pretty bad back at the beginning of the 80s. That. No way, no politician is prepared to accept that anymore. To be honest, I think the central bankers are prepared to accept that anymore. Any of the people leading the central banks being political appointees, of course.

 

TN: So this is kind of beyond a Keynesian point of view, because even Keynesians believed in a business cycle, right?

 

NG: It’s a traditional Keynesian point of view. The modern day, neo Keynesian, yes, you’re right. Way beyond what they’re thinking.

 

TN: There’s a lot of detail in that, and I think we could spend an hour talking about every third thing you said there. So I really do appreciate that. Albert. Can you tell us both Fed and ECB, what are they thinking about right now? What are the trade offs? What are the fears they have?

 

AM: We’ll start with the ECB. The ECB is not even a junior player right now in the central bank world. I know people want to look at the EU and say, oh, it’s a massive trading bloc, so and so. But the fact is, that it’s completely insolvent. Besides the Germans and maybe the French in some sectors, there’s nothing else in Europe that’s even worth looking at at the moment.

 

As for the ECB’s standpoint, you know, they’re still powerless. I mean, the Federal Reserve makes all the policy. They first will talk to the Anglosphere banks that are on the dollar standard basically. I mean, the Pound and the Australian dollar and whatnot. They’re just Euro Dollar tentacles. But, for the ECB, they’re frustrated right now because they see that the Euro keeps going up and their export driving market is just taking a battering at the moment. But they can’t do anything because the Fed goes and buys Euros on the open market to drop the price of the Dollar to promote the equities in the United States. And that’s just happening right now.

 

When it comes to the Fed, we have to look at what is the Fed, right? Normally what everyone is taught in school is that they are an independent entity that looks over the market and so on and so forth. Right. But these guys are political appointees. These guys have money and donors. They play with both political parties. Right now, the Democrats have complete control of the Federal Reserve. And everyone wants to look at Jerome Powell as the Fed chair, but I’ve said this multiple times on Twitter, the real Fed chair is Larry Fink. He’s got Powell’s portfolio under management of BlackRock. He’s the one making all the moves on the market, with the market makers and coordinating things behind the scenes. He’s the guy to look at, not Jerome Powell.

 

I mean, have anyone even watched Jerome Powell’s speech yesterday? It was appalling. He was overly dovish. That’s the script that he was written. He’s not the smart guy in this playing field, in this battleground.

 

TN: He needs a media training, actually. I think.

 

AM: He’s being set up to be scapegoated for a crash. He’s just no one to show. He’s a Trump appointee. So next time there’s a crash, whether it’s one week from now or one month from now, it’s going to be pointed on him that, you know, he’s the Fed chair. Look at the Fed chair. Don’t look at everything else that the political guys have made and policies in the past four or five years that have absolutely just decimated the real economy.

 

TN: This time reminds me, and I’m not a huge historian of the Fed, but it really reminds me of the of the Nixon era Fed where Nixon and his Fed chair had differences and they were known, and then the Fed chair ended up capitulating to do whatever Nixon wanted to get back in his good graces. Does that sound about right?

 

AM: No, that’s a perfect example. I mean, this idea that’s floated around by economists that economics and politics are separate entities is absolute fantasy. And it just it doesn’t exist in the real world.

 

NG: Just to pop in on this one because actually there is a new book out which I started three days at Camp David. Because it’s coming up to 50 years since that decision of the gold standard. Now, it’s just interesting you brought it up, because if you think of one of the rationales for coming off the gold standard, there’s several, but one that struck me as I was reading actually the review, the back cover show Percy.

 

This enables the government to stop printing in terms of fiscal, fiscal, fiscal. That’s what it did in effect. First of all, that’s one of the biggest arguments against people who argue for a return to the gold standard because that would decimate things or cryptos being in a limited supply of crypto as the new reserve currency because the gain that would be pulling against the elastic and you wouldn’t get, the economy would just boom. Right.

 

So that’s where I think it’s just huge, you know. I’ve always said that actually what we have is what we’re going to ultimately see is exactly the same cost that came with Lyndon Johnson paying for the Vietnam War, Covid. And then the Great Society, which is Joe Biden’s what I call social infrastructure and green ghost plan. So. Going back to that, Nixon was paying part of the price for all of that. With Volcke right. So I actually sit there thinking, well. There are similarities right now, and we’re seeing effectively a central bank and the Treasury, wherever you want to look, untethered from what used to be, well before I started in this business, to be part of the discipline. But even when they came off the gold standard, there was discipline. As you referred earlier, to, traditional Keynesians believed in the economic cycle of boom, bust. You know, boom, you tap the brakes a little bit, take the punch all the way. That’s gone.

 

That is to me what’s gone on recently, I don’t know whether you would say since the 08 or more recently is the equivalent of that ’73 meeting where they came off the gold standard. People just said no more cycles. Tapping the brakes and now the central banks are in a hole and politicized, they’re not independent because there are no.

 

AM: Yeah, yeah, that that’s real quick, Tony. That’s exactly right. I mean, even like, you know, I was on Twitter saying we’re going to go to 4400. We’re going to go to 4400 and people are like “No way. We’re in a bear market. This thing’s going back down 37, whatever charts and whatever Bollinger bands they want to look at. But the fact is because of the politics has a necessity to pump the market and then crash it to pass more stimulus packages. The only way was to go up to 4400 plus, right.

 

TN: Right. OK, now, with all of that in mind, Nick, you did a piece recently about the Fed and housing and some of the trade offs that they’re looking out looking at with regard to the housing market. Now, housing is an issue in Australia. It’s an issue in the UK. It’s an issue in the US and other places. Can you walk us through a little bit of your kind of reasoning and what you were thinking about with regard to the Fed and housing?

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QuickHit

QuickHit: Will China Invade Taiwan? (Part 2)

This is Part 2 of the QuickHit episode on “Will China invade Taiwan?” with Chris Balding and Albert Marko. In this second part, the guys discussed Hong Kong, the semiconductor industry, and possible actions by the Biden administration. Tony Nash is hosting this show where the two experts discuss likely possibilities for China, Taiwan and other countries that may be affected by the conflict between the two countries like the US, Japan, and South Korea.

 

In Part 1, we looked at the plausibility of China invading Taiwan and what that might look like. In Part 2, we look at is Hong Kong a precedent for China potentially taking over Taiwan? We also look at the global semiconductor industry and firms like TSMC. What kind of impact would Chinese action on Taiwan have toward TSMC and also how would we expect the US to react and what would the different reactions do to US credibility in East Asia?

 

You can watch the Part 1 here: https://www.completeintel.com/2021/01/27/quickhit-will-china-invade-taiwan-1/

 

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This QuickHit episode was recorded on January 26, 2021.

 

The views and opinions expressed in this Chinese invasion of Taiwan QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

CB: What you’re saying about body bags makes perfect sense. Is Xi that directly rational? Because it would seem like there would be a better way to handle Hong Kong than what has taken place?

 

AM: Hong Kong was a little financial center with no military, no nothing. There’s just a bunch of woke millennials running around, thinking they can hold off the PLA. That doesn’t work like that in real life. You got to come at them with guns to earn your freedom. It was a circle by China. It was inevitable.

 

TN: Since ‘97, there hasn’t been a question as to whether Hong Kong is China. Hong Kong is China. And people have shrugged their shoulders since ‘97 and said look, it’s China. It’s a matter of time. It’s a special zone.

 

CB: Maybe my meaning was lost a little bit. The cost-benefit of what Xi has done in China or in Hong Kong, he clearly probably could have reaped more benefit by saying we’re gonna let Hong Kong continue to be Hong Kong for another 10 years or something. There wasn’t really a need for him to move. It’s probably going to create bigger problems internationally. There’s probably assets that are going to move out of Hong Kong and other places, Singapore. So what if we look at a strict cost-benefit, there wasn’t really a reason for Xi to do that.

 

TN: There was. The protests that would come, first every five years, then every two years, and so on, it was becoming increasingly embarrassing to Beijing. The official channel to as an inward or outbound investment lane through Hong Kong, it’s still there. But Beijing couldn’t take the embarrassment of this and what they didn’t want is to have some rogue police brigade kill a bunch of 25-year-olds on accident. I believe they had to pull the trigger and I think this has been planned and architected over years and it seems like something sudden that people are like “wait, what’s going on?” They’re rolling military and this has been planned for years.

 

CB: What you’re getting at is this was embarrassing domestically and he basically said to hell with the consequences internationally? If we apply that same basic line of thinking to Taiwan, the question would then become, well, they’re willing to deal with the international consequences. We know that in colossal range barriers. What other domestic issues are at play here about Taiwan?

 

TN: I think it’s backwards. It was more embarrassing internationally because the CCP plays international media like a fiddle. Xi Jinping goes into Davos or speaks at a WEF event. Everyone walks away, enlightened and they play international media like a fiddle. They were less worried about what international media would think and even less worried about what domestic populations would think over time.

 

They just needed to rip the band-aid off so that kind of righteous reporters in Hong Kong wouldn’t keep raising this story because it’s inconvenient. They knew that at some point, they were going to take over, and so they just did it and that it’s inevitable that’s going to happen. They just did it.

 

And global media? They’ve fallen in line over the last nine months. Nobody talks about Hong Kong anymore and the rights and being trampled upon and all that stuff. International media have fallen in line on this. They don’t care. They want to make China happy. Why? Because the CCP and their companies are going to buy supplements in their newspapers and in their online forums and they’re going to pay for their think tank pieces and all that stuff.

 

CB: There are specific media outlets that are decidedly less critical of China than they used to be as an editorial line.

 

AM: I agree and I love that analogy of like ripping the band-aid off because Hong Kong was ripping a band-aid off but Taiwan would be like ripping duct tape off a Greek guy’s chest. That’s the problem here, and that’s what we think we have to understand that not only is it economically damaging, it’s politically damaging internationally, militarily. The risks, just in my opinion, way outweigh the benefits of trying to take over Taiwan.

 

TN: Let’s say this happened. Let’s say six, nine months, something happens. What happens economically? I know there’s cross holdings with CCP princes and stuff but let’s look at say semiconductors, TSMC. The otherfoundries are disrupted for a period of time.

 

AM: I know where you’re going with this and this would actually make me flip my position if I was advising China. If they wanted to hit the West and create even a bigger semiconductor shortage, then you absolutely destroy Taiwan. This is where I’m going. You absolutely would do that.

 

TN: Right. So, does it make SMIC relevant and does it make the Chinese foundries relevant? What is in that gap? TSMC, all the execs are moving to Phoenix. What happens then?

 

CB: Taiwan and TSMC are in the very awkward space. At this point, they’re probably like THE manufacturing firm. The other places do the design and stuff like that. There’s a lot of firms that are in the mid and low end. But when it comes to your high-end stuff, it’s pretty much TSMC. I think you could make a case that Beijing says, “screw it!” Forget about Taiwan. If we can capture TSMC, we’ve got it all.

 

TN: We just invade Hsinchu, right?

 

AM: The Chinese, for all the negative things that I have to say about them, are really good asymmetrically combating the West especially the United States where they’ve weaponized Caterpillar, weaponized multiple American companies within China to hit the United States politically and economically. That would make perfect sense from the Chinese perspective to just cut off the semiconductors specifically because those semiconductors go to Apple, to the big three automobile sector, which is the only thing right now that’s going to be able to get unemployment back down to a decent level for the Biden administration.

 

TN: If that did happen, would that present an opportunity for Japanese, Korean firms to fill that void to circumvent Chinese control or has that ship sailed years ago and there’s no way they can recover that?

 

AM: I don’t think that they’d be able to recover especially in the near term. I think the chip shortage would be so, so damaging to the entire global economy that it would be pretty devastating for a while.

 

CB: And the people I talk to in chips basically say, when it comes to manufacturing of higher end chips, it’s basically TSMC. Not even Intel these days is manufacturing their own chips. So even if TSMC is Chinese tomorrow, it would probably take five years before Korean and Japanese firms at the earliest would be producing high-end chips that could compete with TSMC.

 

TN: If China threatens to invade Taiwan and the West is like “look, do whatever you want, we just want to make sure we have our chips.“ Is that really a plausible negotiating point?

 

AM: I don’t think the West could even trust China in that respect. Has the Chinese ever given us assurances and anything like that ever?

 

TN: Let’s act like this happens. Something happens in June, July whatever. What does the US Navy do? Will they protect Taiwan or will they distance and reevaluate?

 

AM: The US would probably let Taiwan defend itself for a certain period of time and float in a carrier strike group just to deter China at some point. They’d have to walk defense there. That’s not an easy solution. You’re talking about going up against China within proximity of their borders, which they would have an advantage of.

 

CB: They’re not going to do something like this just launching a couple volleys of low-grade missiles. This is moving all your chips to the center of the table. And so basically, the question that the US Navy would have to ask is are we going to move all our chips to the middle of the table otherwise, let China have it.

 

TN: If the US says, “fine, we’re not going gonna move our chip to the side of the table. Let China have it,” then does that destroy US credibility in East Asia because the obligation of the US to defend Japan, Korea and so on, those are gone then, because US has an obligation to defend Taiwan.

 

AM: The South Korea would be the biggest problem immediately after that.

 

CB: One of the first comments about by the administration foreign policy was the Japanese defense minister saying China is a real problem, you boys need to get your big boy pants on. That was a month ago or a couple weeks ago. That was pretty much the Japanese saying, “you know this isn’t 2008 boys. We’ve got to be ready.”

 

The other thing was, is over the past couple years, there’s been a shift in the US Military. Basically, all the US Military in Korea is now way far down the peninsula. And South Korea knows that. The US Military is in a position where if the North Korea decides to stream across the border, they can pretty much pack up their personnel and be gone in a couple of hours. If something happens, Tokyo and Seoul are absolutely going to be paranoid. Doesn’t stand right there and start firing back.

Categories
QuickHit

QuickHit: Will China Invade Taiwan? (Part 1)

Albert Marko and Christopher Balding are back for another #CageMatch special episode for QuickHit, where the two experts discuss the million dollar question: Will China invade Taiwan? Tony Nash is hosting this episode with Marko and Balding sharing what they think the two countries will do. Does China have the capability (and money) to invade Taiwan? If ever, will Taiwan ever retaliate? Can they afford to go to war? And how will the US fit in all these? Will this be another war waiting to happen?

 

This China and Taiwan conflict is Part 1 of 2 episodes. Subscribe to our Youtube Channel and signup to the CI Newsletter to be among the first to know when the second part is out.

 

The China-Taiwan relations was briefly discussed in the first ever #CageMatch episode. Watch the Part 1 here. 

 

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This QuickHit episode was recorded on January 26, 2021.

 

The views and opinions expressed in this Chinese invasion of Taiwan QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: We’ve seen some build up of China’s activity toward Taiwan especially over the last month and we wanted to have a deeper discussion about one of the big questions that is out there which is “Will China invade Taiwan?” and is that a viable likely possibility or is it just saber-rattling to shake things up a little bit. With the new Biden administration and the change over there, there is potentially an opportunity for China to take a more aggressive stance toward Taiwan, the region and, the U.S.

 

We’re joined by Chris Balding and Albert Marco to talk about this. Let’s go through your basic thesis. Chris, what’s your position China preparing to invade Taiwan? Do you think it’s something that is possible and or likely?

 

CB: I would put what we think of as a full-scale invasion, where there’s soldiers and rubber rafts storming the beaches of Taiwan. I think that is relatively unlikely as a scenario. But I do think what is much more likely, and I would put it above 50% is some type of escalated conflict either in the East or South China Sea over the next 18 months as distinctly possible.

 

And when I say that, let me emphasize, we’re talking a range of possibilities. This could be everything from a PLA navy boat ramming a Taiwanese fishing boat. It could mean blowing up a shoal or something like that they’re fighting with Vietnam about. There’s a range of possibilities, but some type of conflict within the next 18 months is distinctly possible.

 

The reason I say 18 months is Xi will be going up for election of his third term in about 18 months. That is a very important time period. And I guarantee you, Xi and those around him know what basically they’re looking to accomplish within those 18 months. You have a number of complicating factors. It’s not uncommon for Chinese leadership to say: “Hey there’s a changeover in the U.S. Let’s see what we can get away with”. That’s not why they would do it. The timing is fortuitous.

 

So, I do think some type of escalation in the East and South China over the next 18 months is likely.

 

TN: Okay. Albert, what do you think?

 

AM: China likes the poke and they like the prod and they like to test the perimeters of defenses like most nations. When it comes to offensive capabilities, they want to test their adversary’s defensive capabilities.

 

Do I think that there’s going to be some kind of escalation? Well, I kind of agree with Chris there. Something might happen along those lines. But I don’t think it would be anything very serious. China would need an assurance of a quick and decisive victory if they were to attempt something like that. Obviously, a full-scale invasion is definitely not going to happen.

 

But even blowing up a shoal or taking out a couple fishing trawlers or whatnot, they certainly don’t want to sit there and affect their shipping lanes. Taiwan straits in that entire region, is the world’s biggest trading lanes for ships. You can’t have the United States running there with an armada just to protect Taiwan. It would adversely affect the Chinese economy. Xi at that point in 18 months, like he’s running up for election like Chris said, he can’t afford any kind of hiccups right now in the Chinese economy. And most of the CCPs elite are ingrained with Taiwanese companies. So, for them to sit there and disrupt that wealth, I just don’t see it happening.

 

TN: We saw over the last week where the Chinese government said that they can now defend itself in its claimed territorial waters. And with China expanding its claims, whether it’s with India, South China Sea, wherever it is, it seems to me that they’re telegraphing a more aggressive stance. Do we expect that as a warning? That is fairly hollow but they just want to put it out there or is that something that we believe they’ll act on against the Philippines, Vietnam, Taiwan, Japan or something like that. Could we see the claim over, maybe, the Senkaku Islands go hot at some point for some phosphorous hills or whatever?

 

CB: A lot of this follows a very similar pattern of what we call “salami slicing,” is over the course of a couple years, they just continue to slice away and slice away and slice away, until the last logical step in progression of some type of escalation. That’s a similar type of strategy. That’s part of why I say a full-scale invasion of Taiwan, likely no, I don’t think it is. I generally agree with Albert in that sense that I would put it as a very low probability type of event.

 

Are there other types of conflicts that may take place? Whether that is Taiwan or Chinese navy and fishing vessels circle islands and stuff like that. Absolutely. I think it’s relatively likely 50 percent over the next 18 months.

 

There’s been very under-the-radar moves in the sense that within the past year, maybe 18 months, Xi replaced key generals that oversaw the southern and eastern areas, which are very closely tied to Taiwan.

 

If there’s not some type of conflict, they’ve taken all the move that seemed to indicate signal that yes, they are at the very least they want to stick out their chest a lot more in these areas. And I think probably the one area where I would fundamentally disagree with Albert is that I think he’s perfectly right on “why would China do this this? This could mess up their shipping lanes they’re invested in Taiwan.?” And the reason I disagree is not that I think Albert is wrong. But I think, it’s the wrong type of rationale.

 

If we look at why is China picking a fight with India in a frozen ground on the Himalayas at 25,000 feet? It makes no sense. I mean there’s little logical reason. They’ve successfully turned India against. They’re kicking out in India. They’re kicking out Chinese apps as fast as they can find them. And they’re looking to start an Indian smartphone market. Very little action is proven has provoked a very large reaction from India. Albert’s rationality, in a way, is perfectly accurate. I don’t think that necessarily captures the reality of what I would call Chinese rationality of the logic that they’re using to make those decisions and the risks they’re willing to take.

 

TN: If we take the Hong Kong scenario and we talk about the salami slicing that Chris talked about. After the umbrella revolution in 2014, intel I was hearing out of China was that the decision was made in Beijing that Hong Kong would lose its status as a global financial center. And it was just a matter of time, right? And we’ve hit that point effectively. Okay? Hong Kong is not a place where you, unless you want risk, where you’re going to necessarily park your assets. It’s taken five years. They were patient and it seems to me they’re beyond the tipping point. It was that kind of salami-slicing approach to taking away the credibility of Hong Kong, but also injecting the inevitability of Chinese ownership. Is it possible that can happen with Taiwan?

 

AM: Well, of course, it is certainly possible. There’s no question about that. Do I think it’s possible in the next 18 months? Absolutely, like even Chris agrees. I don’t think that’s going to happen in 18 months.

 

There’s no Chinese build up militarily for Taiwan invasion. If you were to look at every single military offensive project has logistics involved. There’s just none piling up. The United States would see that in satellite images well in advance.

 

However, back to the Himalayas, which I think is something we should rather key on. If you want to talk about India’s slicing away stuff, there is a rationale for the Himalayan conflict. It’s the watershed. They need that water and they they’ve been piping that water into agricultural areas in China for years now and they haven’t done too much of it because it’s going to really upset India. You have a billion people in India versus a billion people in China that needs fresh water. It’s going to be a problem. They’ve built mountaintop bases. They have built up a military presence there. That’s where I would actually focus in the next 18 months as a real skirmish.

 

This Taiwan thing, I completely agree. It’s well within the Chinese game playbook to slice away and just wait for their time. But a Taiwanese invasion would be extremely costly for the Chinese. The risk-reward for the Chinese right now to even think about adventuring into Taiwan would cost them significant military losses, significant economic losses. It would ruin some BRI projects. It would ruin the perception of China as a growing superpower. There’s just so many negatives that I can’t see any real generals in the PLA telling Xi that this is a good idea. Now that’s not to say that Xi won’t do it anyways because…

 

CB: Tony, let me ask a question. So, Albert, 70 people I’ve talked to say they actually see the military risks increase significantly to Taiwan based upon hardware that’s getting onboarded in the PLA. They see the risks to Taiwan’s increase significantly post about 2022. Okay. Would you share a similar outlook?

 

AM: You have to understand, when it comes to offensive versus defensive capabilities, the defense always has a clear-cut advantage, right? Offensively, it takes seven dollars per one dollar of defense of offensive spending to actually take over. Now without a doubt, China would win over the long term. But at what cost will the PLA navy take? The Taiwanese defenses are no joke. They’re well equipped to at least hold them off for quite a long time and invading. Even the PLA. The PLA officers, that’s a social structure. That’s a social ladder realistically. How would it look like for Xi if the firstborn son of some of these elite families are coming home in body bags?

Categories
QuickHit

QuickHit: The Great Decoupling and the Future of US-China Relations (Part 2)

This is Part 2 of the first ever QuickHit #CageMatch with political-economic advisor Albert Marko and China expert Christopher Balding on the great decoupling of US and China. The second part of this is on the Belt And Road Initiative and the answer that the US may have to the BRI. We also talked about the corporate activities — are the US and China targeting corporates? How does that work and how would that play within the environment of decoupling.

 

For the first part, we’ve covered the US foreign policy, looking at Latin America, Africa, and parts of Asia. We looked at US-China trade and a number of other aspects around the US-China relationship. 

 

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This QuickHit episode was recorded on October 14, 2020.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

SHOW NOTES

 

TN: Now let’s let’s move along a little bit more into economics and talk about the Belt and Road Initiative, which something that I actually worked on for about a year and a half. There’s been some talk in the last few months about the anglosphere and will the West have an answer to the BRI. Does the US need a response to the BRI as a government initiative and if so, do you think they can do it? That question is from @Sw33tYams.

 

CB: Just as rappers get shown to the VIP room, if you’re a country and you are offering goodies, you’re gonna get shown to the VIP room in whatever country you go to. That doesn’t mean it has to be the Trump and air initiative. We do need to think about and we should absolutely put effort into how can the US provide positive things to countries.

 

Why don’t we set up an office that says, I have a company in China that makes XYZ product and they want to move out of China. We have a database of where to go. I know bankers in Vietnam that we’re like, “hey we’re just getting slammed. Why doesn’t the US have an office of infrastructure for emerging markets like Vietnam to help get migrating Chinese companies, those types of goodies, even in a lot of different forms it could take, are going to open a lot more doors than just saying it’s the right thing to do.

 

AM: I agree. But it’s also gonna need a little bit of help from our partners specifically Australia, the UK plus Japan. Basically five I’s plus Japan. It’s going to need shared cost. Supply chains have to move. It’s going to take a little while. It’s going to take a little bit effort from everybody.

 

TN: So it’s basically a government kind of somewhat directed but not necessarily directly involved. What you’re saying is Americans will take a a little easier hand than the Chinese kind of very direct hand in say
these multilateral or multi-country activities. Is that fair to say?

 

CB: I can give one example I was told about and this is something I’m surprised hasn’t gotten more attention. The Commerce Department apparently has a tariff waiver program where if you say, “look, we have this plant in China. It’s facing tariffs. Here’s our 180-day plan to get to move our production to Vietnam, Sri Lanka, Africa wherever.” The Commerce Department will give you a waiver for, whatever time period if you give them a plan. That’s the kind of stuff that should be more publicized and the US government is taking an active role to partner with business to say, “you take the lead and if you’re doing it, we’ll help you.”

 

TN: Let me throw you the next question, Albert. This is from @Ellis_Greenwood. How long will it take the US to decouple from China? So if we assume what Chris just talked about with some of the say Commerce Department activities, these other things, does the US really wanted to decouple from China fully and if so, how long will it take to get either to that level or to say a desired level that that US companies would want to?

 

AM: A desired level is the right term. We’re not going to fully decouple from China. That’s just absurd. When they’re talking about moving supply chains, I’ve heard all sorts of 15, 20 years to one year and it actually depends on each sector. It’s a lot easier to move a software gaming company rather than a pharmaceutical manufacturing company. It can take anywhere from one year to ten to fifteen years.

 

TN: What do you think about that, Chris?

 

CB: I think that’s generally accurate. A lot of the stuff that China was known for over the years, like let’s say low-wage manufacturing, assembly, that type of stuff… I mean Apple set up, a plant in India, which can make iPhones in about 18 months. As Albert pointed out, people think of decoupling as there’s not going to be trade between the US and China. I think what you’re really seeing is this move to bipolar supply chain worlds especially in tech. So there’s going to be a China-specific manufacturing world for tech stuff and a non-China because, you can already see the US government and other governments and even companies saying, “hey, your tech is not been touched by China.”

 

TN: Frankly, I believe that’s what China has wanted all along is their own Chinese ecosystem and then a rest of world ecosystem so they can control that technology and the messaging over that technology. That’s what they had 20 years ago, and there’s been the things overlapping for the last 10 years and I believe that deep down, they really want a separation of those things.

 

This is @candideXXI, “what will be the political and economic pressures outcomes produced by the ending of Chinese investment and the debt expansionary cycle,” which is an interesting question but maybe going to one or two things. Underlying that question is, is that expected to happen? A lot of people have this question on their brain but I don’t necessarily see that happening in the next three to five years. These things tend to go a lot longer than many people assume.

 

CB: Let’s assume that China went to 0% debt growth right now. Honestly, China would be in flames by the end of the day. It would explode. Xi would be lynched by the end of the day. The number that I saw and it’s a staggering number, is debt to GDP in China this year is going to increase by upwards of 30%. So it’s going to go from 300% to 330% in one year. That’s a staggering number. I don’t see they’re going to keep this going as long as possible. For them to get this under control is going to be at least a 10, 20 year cycle at best. And in all likelihood, they’re headed for North Korean financial system with Japanese debt. That’s the only logical outcome. Because if they were to open up the capital markets, the RMB would drop 50% easy.

 

TN: So what you’re saying is, there’s a possibility that CNY could be a global currency?

 

CB: That’s exactly what I’m saying, yes. Exactly what I’m saying.

 

AM: Yeah I agree with Chris here. China’s well within the Euro Dollar system. They need dollars. They can’t get away from Dollars. They need it for their debt. They multiply it out to issue more Renmimbis out to the emerging markets. They’re not leaving and they’re not getting out of the system.

 

TN: Let’s take it more into the corporate realm as well. When we look at like Huawei and Tiktok and some of the Chinese companies that have a large international presence, given the dynamics at home, if the US continues to cut off these companies and some of their crucial activities overseas, how does that bend back onto China? How dire is it? Is it not a big deal or is it pretty dire not just in terms of acquiring technology but in terms of actually making money and keeping the home markets floating?

 

AM: That’s the name of the game is making money for them. They need dollars from overseas desperately. Without that, their entire financial system implodes. They go out to Africa and then they loan out Renminbis and they expect money paid back in dollars at all times. So without the dollar, they’re just buying time.

 

CB: Especially in the tech sector, these are guys that maybe have been abroad for a fair amount of time. They want to emulate the Googles. They want to be international. They think of themselves as cosmopolitan even if they grew up in the system. And so, even though they might be pro-China, which is different than like pro-CCP, they want to be a part of that global tech scene. To have those limitations on them is a constraint that they don’t necessarily like. But that’s the reality of the system that they find themselves in.

 

TN: So will they change their behaviors to align with the constraints outlined by the US or will they remain true to what the CCP tells them to do and their business will suffer internationally?

 

CB: Business will suffer internationally because the reality is, as a Chinese business, you can’t get away from that. As soon as Jack Ma says I’m gonna obey the SEC and file this type of audit, they get blown up in China.

 

AM: They can walk a tight rope until they absolutely get pressured by the Chinese government and then they have to fall in line. There’s no other choice for them.

 

TN: We’ve seen more Chinese IPOs in the four years of Trump than we saw under the eight years of Obama. First of all, why is that? Are they just trying to cash in and get dollars into their companies or is there some other reason? Is it possible to continue that pace?

 

AM: I think they’re just taking advantage of the market and being able to cash in and cash out as fast as they possibly can. Do I think it’s sustainable? Absolutely not. This market’s overbought and eventually there’ll be a correction and on top of that I think that the US government needs to have some reasonable accounting standards for Chinese companies that refuse to open their books for transparency. It boggles my mind. At this point, why should I just go to China, buy a company and list it on the NASDAQ for some absurd amount of money. There’s nothing saying that I need to open my books. It’s absolutely crazy.

 

CB: This is one of the most frustrating arguments by the China apologists because when you make the same argument that Google, Goldman whoever is not subject to the SEC or US jurisdiction on US financial markets, you make that argument, then I will entertain your argument about Chinese companies. Until then, it’s nonsensical.

 

TN: Okay. So let me just sum this up. China is the biggest US foreign policy issue. China is in an untenable position of having their companies locked down or some of their companies locked down by the US. They have a shortage of dollars. They have unsustainable debt and if the current US policies continue, at least Albert thinks that Chinese leadership is in peril. So, what glass half full view am I not seeing?

 

CB: This is in a way very predictable in the sense that they sit down in November, December and they say, “Okay this is our target for 2021” whatever it is. And because you can see that those numbers are almost so stunningly predictable and what’s amazing is they have a very good idea of what their leakages are going to be. That money that gets leaked out in Macau gaming chips or Bitcoin and all that other good stuff, they know what they have to hit. My favorite thing of all this is that almost nobody knows that they’re already rationing US dollars. Most banks in China have the one-to-one rule that you have to bring in a dollar to send out a dollar. As long as they can continue to balance those books through, it can keep up for a while.

 

AM: I’m at a loss for words almost on that one. For the Chinese, you would hope that they understand how bipolar systems work and understanding the Apple versus Microsoft component as like let the one guy be big and you fill in the gaps and everybody be copacetic. I don’t know if I can buy that for very long. But
that’s my only hope is Xi, if Trump is elected, which I am speculating that he is, comes to this realization and says, “let’s tone down the pressure. Let’s fulfill the Phase One Deal, Phase Two Deal” whatever they want to go into. Make inroads and just ratchet down the tensions.

 

TN: Last question guys. Albert, I know you’ve done a lot of forecasting for the presidential election. What do you think is going to happen? You have some really interesting views and I’d love to hear why and Chris also as he’s talking, it’s your first time to be back here. What are some of your observations and expectations as well.

 

AM: I know we’re seeing all sorts of polling numbers that are just eye-popping and just I cannot believe publishers actually put this out to print. 15 points for Biden. 11 points for Biden.

 

CB: Just today, I actually saw this poll saying Biden up 17.

 

AM: It boggles my mind how these people just either they miss statistics class or just don’t know how to add. But for Biden to be up 17 points, you would have to assume the Democrats come out in some kind of record 80 turnout and on top of that have the republicans, 15 of them either not show up or vote for Biden.

 

TN: But even Reagan’s 84 blowout wasn’t a 17-point win, was it?

 

AM: No. This is what’s boggling to me. I just don’t understand it.

 

We know what California is going to do. We know what New York’s going to do. We just toss those aside. If you look at Florida, North Carolina, Pennsylvania, Michigan, Wisconsin and Arizona, those are the states that you really have to look at and in almost every single state, the Republicans have gained hundreds of thousands of new registrations. And even in the polling that’s done out there, there’s a few pieces of data that 96 or 94 of Republicans have an approval of Donald Trump. How do you get to 17 point lead, when 94% of Republicans support Donald Trump. That’s just unbelievable to me. The Economist has been my favorite lately of the 99.9% victory for Joe Biden over Donald Trump.

 

These are just silly numbers people throw out there. Coming out of lockdowns, they’re doing 100 phone polling so they have no opportunity to go out to the public and see who they’re talking to. And study after study has shown that Republican voters have been not just shy vote, but actually spiteful of the pollsters and purposely saying that they’re going to vote for Biden. That’s how you get to these 17 point numbers.

 

CB: I try to stay away from politics as much as possible especially on China and stuff like that because whether it is Trump or Biden, I see what we’re in with China as a 20 to 40-year type of challenge. So at some point, there’s going to be Republicans, at some point there’s going to be Democrats. Just from a social perspective and Tony I think you can identify with this. Man, America’s crazy.

 

TN: Democracy is messy, right?

 

CB: I’m a live and let live kind of guy. So if you’re a Democrat, if you’re a Republican, if you’re a Green or a Libertarian, I don’t really care. We can still sit down and smoke a cigar. And I think the thing that just amazes me is America just seems angry and it seemed really angry for a long time.

 

We can all talk about Trump, but both parties can point to things that the others have done that is unethical, that is abnormal. We need to be better citizens to each other. We need to accept losses that, it’s not going to be our time all the time. The political golden rule is don’t advocate a policy that you don’t want used against you.

 

AM: I attribute the hate that we’re seeing now, the polarization, squarely on the weaponization of social media. Completely. Because we can sit there and put out a viral post of someone, take a phrase taken out of context and making that person look like just a demonic figure and then dox the guy, show him his address and have 15 people show up to the house with pitchforks and and torches. It’s just insane. There’s got to be some kind of accountability on social media by either the government or social media standards themselves.

 

TN: Social media doesn’t have standards, Albert, because I know you’re both active on social media.

 

CB: The way I always think about it is, a country or a political party is like a family barbecue. We’ve all gone to those family barbecues and go, “who are these losers that are at this family barbecue?” And if you aren’t going to your own political party or your own country and going, “dang these are some losers I’m hanging out with,” okay I mean, you’re doing it all wrong.

Categories
QuickHit

QuickHit: The Great Decoupling and the Future of US-China Relations (Part 1)

This is the first ever QuickHit #CageMatch with a returning guest, political-economic advisor Albert Marko, and China expert Christopher Balding with us for the first time. This is Part 1 of a 2-part discussion. Visit this page for the second part.

 

Albert Marko helps a couple of financial firms, members of congress, and a couple governments  to manage and navigate their way through the beltway and the legislative issues and the politics and how the economic, how the federal reserve and all the economic policies filter down. Albert is also the co-founder and COO of Favore Media Group.

 

Christopher Balding spends most of his time on the phone talking to people about the data about China. He is a two-time winner of Lifetime Achievement awards and a Professor at Fulbright University Vietnam.

 

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Follow Tony on Twitter: https://twitter.com/TonyNashNerd

Follow Albert on Twitter: https://twitter.com/amlivemon

Follow Chris on Twitter: https://twitter.com/BaldingsWorld

 

This QuickHit episode was recorded on October 14, 2020.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: We’ve got a bunch of questions off of Twitter and the first one is from @AxeRendale: If you were in charge of U.S. foreign policy. What are the top things you would change from the status quo? They asked about five things. I don’t think we have that much time. So, what are a couple things? Let’s say two things in terms of U.S. foreign policy that you would change. Of course we have the election coming up but regardless of the individual. We’ve seen some status quo upheaval over the past few years but what would you really change not just the top line but the way the U.S. acts?

 

AM: I would immediately start looking at South America and Africa and identifying and eliminating or at least hampering Chinese and Russian interests there, specifically Venezuela would be my number one choice right now. The Chinese and the Russians, they have a field day there. There’s almost no U.S. intervention in there and the same goes for parts of Africa. I know we have troops in Mali and Niger and a couple places to deal with terrorism but just solidifying some of the countries out there like Morocco, Angola and preventing the Chinese from making inroads. I would put make that a priority.

 

CB: So I would agree with Albert in general terms but maybe take it in a slightly different direction. The Trump administration has done a good job shifting the focus to the larger problems and China and taking those policy steps that are well within their grasp.

 

What needs to be the next step, and whether this is under a Trump administration or Biden administration, is the reality is that you can’t handle these issues on the cheap. The Germans and Asian countries are not just going to be persuaded by the moral rightness of confronting China.

 

Just to give you two examples of where you might see something. If the U.S. was to offer even to European countries to fund 5G rollout at like 0% interest loans because that what China is doing. This the way they run the finances is basically giving away the 5G gear. If the U.S. made like 0% interest loans, you could fund that if it was in some type of like a levered development finance corporation structure, where with a couple billion dollars a year honestly, globally. You could do that entire project globally and on the U.S. budget, a couple billion dollars a year is almost couch cushion money.

 

TN: Right, and this is similar to how Japan is competing with China for infrastructure in parts of Asia, right? They’re giving no interest or extreme like 0.3% interest loans for infrastructure, right?

 

CB: Yeah, exactly. Like in Vietnam, where I can speak a little bit more authoritatively, they’re not fans of China. At the same time, they recognize they have to work with China. It’s a very pragmatic approach. At the same time, they we want to give the French certain pieces of the pie, also the Americans. Vietnam is actively trying to balance where their economic investment comes from so that they don’t become too dependent on any one source.

 

TN: Yep, it’s smart.

 

AM: The only issue I have with that is that you’re absolutely correct and that’s exactly what should be done  but it’s depending on the European partners to even come to play ball. Because, within the European Union themselves, there’s competing interests on all sides. And it’s difficult for the United States to try to compete with the Chinese who give 99-year loans for infrastructure in Africa to dictate which European Nation gets a slice of the pie when they’re all conflicting with themselves to begin with. So that’s the only thing I’d have to
say about that.

 

TN: That’s an interesting point. China is very successful in terms of foreign policy by peeling off one member of a block at a time and there’s no better example than the way they peeled off Cambodia from ASEAN in order to break the voting block that’s necessary to get anything through there. They’ve done the same with the E.U. with say Portugal or Greece, right? Do you see the U.S. being able to do that, go and interrupt a block by getting say a single or a couple of allies there? Because I haven’t seen the U.S. do that all that successfully say for 20 years. Do you think we can do that successfully again?

 

AM: I think that we absolutely can be that successful if we actually had the will to do it. The problem is the Chinese are just literally filling in the gaps. The vacuums that the United States have left, and this is something that the United States just needs to get over the dirty word of intervention and just get on with business and solidify U.S. interests abroad.

 

CB: I would actually slightly differ from Albert on this and I see it in a very structural in a very structural way. If you take the E.U. to basically take to move against Chinese interests in Europe, there’s an asymmetry here. The U.S. has to get everybody to agree. China only has to get one to disagree, okay?

 

TN: Why does the U.S. have to get everyone to agree?

 

CB: Because basically, if the E.U. for instance is going to pass a let’s say a regulation blocking Huawei gear, it’s a unanimous vote, okay? That’s the only way it gets through the E.U. is through a unanimous vote. So the U.S. has to get everybody to agree. China only has to get one to disagree.

 

If you look at like the U.N. with the human rights council, we can talk about the U.S. should do this or that with the human rights council. The reality is that China till the end of time is going to have enough votes to put Russia, Venezuela, Libya, etc. on the human rights council because of the the number of countries that there are in the number of countries that they can get to agree with them. So people talk about, “well, it’s a Trump issue.” No. That’s the reality that’s the systemic nature of the international system.

 

AM: And one of the things that the United States has absolutely not done is use the United States Dollar as a weapon to combat that. But that’s a whole different topic and we can get all sidetracked on that one but…

 

TN: Yeah, we can spend a lot of time on that. Here’s a question from @RemaniSrikanth: How much is China policy hinged on who wins the U.S. election? Do you believe that fundamentally the democrats and republicans would have different China policies?

 

CB: After the Russian debacle that they had in the Obama administration and the people that came out of that, I would be surprised if they did like a complete reset, okay? I don’t think democrats really have any real agreement about what they want to do with China. Even within people within the Biden administration or what would supposedly be a Biden administration. You have people that are people that honestly I think would be, if they weren’t democrats, would probably fit well within a Trump administration and you have people that would practically be German in their approach in that there’s no concession. You’ve heard things about well they want to focus on climate change and this 2060 promise is great. We have something to go with here. I don’t think anybody really has a good idea.

 

My own personal suspicion would be more than anything the Trump administration has actually been very deliberate in turning up continuing generally speaking across policy domains and turning up continuing to turn up the pressure slowly, like a pressure cooker. I don’t think you would see that under Biden administration. I don’t think necessarily you would see a rollback of most Trump policies.

 

TN: Albert, do you agree?

 

AM: Yeah, I agree with Chris wholeheartedly. Xi is at a do or die moment with Trump being re-elected. If trump is re-elected and the pressure’s maintained or even raised, I do not think he lasts two or three years in there. As for a Biden presidency, what it would look like? All we have to do is go back to the track record of the Obama presidency and see what they’ve done. They just ignore whatever China does and let them run around the world and do whatever they want. We sat there for two years in 2013 watching China militarize islands while there was absolutely no response. Having Samantha Power back, Valerie Jarrett, Susan Rice doesn’t give me any confidence whatsoever into dealing with dealing with the Chinese.

 

TN: I was in Asia during that time jumping up and down and was told that I was overly aggressive so I share your frustration. Here’s a question from @JamesRoberta7: What does a Xi Jinping and China situation look like if Trump is elected and Pompeo stays at state? What does that look like the first say 24 months of of that type of situation?

 

AM: It really depends on the actions of the Trump administration. Do they ramp up tariffs again? Do they start pressuring them in China? Do they pressure them in Vietnam, in the Philippines? I think they do.

 

The Chinese are going to have to respond to safeguard their own interests. What do they do? Maybe cause a skirmish with the Indians again. Threaten the Taiwanese a little bit more. They can’t really act militarily. They just don’t have the capacity to do that and they’d be completely embarrassed. That’s a whole different argument to itself but like I said, the days are numbered, if Trump is reelected, for Xi. I don’t think the elite families within the Guangdong province would put up with further losses of their wealth.

 

TN: I think that’s something that’s lost on a lot of the American analysts. There is not a monolithic kind of Chinese Communist Party. There are facts within the CCP. There are different power centers. A lot of even the think tankers in America act as if there is this single head at the CCP. He has definitely solidified some power but there are still some very powerful factions. Chris, what do you think about that if there’s a kind of a Trump-Pompeo, that partnership continues, what do you think that looks like for China and the CCP?

 

CB: So, I’m going to slightly diverge from from Albert here in that what we’ve basically seen in the first four years of Trump, especially in the past two years is that Trump is taking a lot of things that are well within the executive purview that he can do. Whether that’s sanctions of different kinds. Although you know in a way the amount of pain that he can cause China within that basket of tools is at this point, it’s increasingly limited. In different ways probably, the biggest thing that he could do is do something that really blocked like IPO or really crimped dollar access.

 

Crimp dollar access is an enormous weapon. But I think the next step is, and you’re actually seeing a lot of groundwork being laid is and you just saw for instance some comments out of India where the U.S. state department is talking about really ramping up its alliance with India. And you’re starting to see a lot of these very foundational type of stuff. So whether it’s increased congressional spending to military things, alliances, different stuff like that, that would be likely where you would see a lot of the focus, especially, legislatively to get authorization to do those types of activities.

 

TN: Okay, that’s a great point as you bring up India to ask this question from @dogthecynic: “How durable do you think the China-Russian alliance is?” And I bring that up because India and Russia traditionally have had a strong alliance post-war. If the U.S. and India continue to get closer at some point, will Russia have to choose between China and India as an ally? Is that even a choice? Let’s start with how strong is that China-Russia alliance? Is it just a resources for weapons type of alliance or is it really a tighter alliance?

 

AM: If you look at it historically, it’s nothing more than cyclical friends with benefits, if you want to call it that. It comes and goes. Their interests are aligned in one area, they conflict on another. Right now, they’re conflicting in Africa quite a lot more than people understand. The Indians, they’ve used Russia as a counter balance to the to the Chinese for decades. It’s quite clear.

 

I don’t think the Chinese and the Russians trust each other. They never will. The Chinese have been encroaching on their borders. Is it strong? No. Can India-U.S. alliance possibly tip it more in their favor? I really don’t think so. I don’t think the Indians are ignorant to the fact that they need Russia as a counterbalance just as much as they need the United States security blanket.

 

CB: The way I would phrase it is that there is what is the honor among thieves. They clearly are frenemies. The Russians know that China is stealing plane designs and engine designs and all this kind of good stuff at the same time, Huawei is working with Russia to hire local hackers and setting up things in Russia to engage in cyber warfare and whatnot because they have a very common enemy. As long as there’s a common enemy for them to focus on and it benefits them to fight that common enemy, I think absolutely that partnership is at least to a plausible degree is going to exist for the sake of the kids, for lack of a better term.

 

TN: Okay, I’ve got some very similar questions from @gabrielfox1 @jschwartz91 and @americacapitalone about Taiwan. So China, Taiwan, U.S. pretty delicate relationships and a lot of the questions are really about the kinetic conflict but also the business aspect of China-Taiwan relations and increasingly Taiwan-U.S. relations with some of the semiconductor activity that the U.S. has undertaken against China. So can you open that up a little bit for us?

 

First of all do you think a China-Taiwan conflict in the next say 24 months is more than say 30% possible? Which it’s just a hedge right? I mean is it realistically possible? That’s kind of a yes or no. But do you think there will be more difficult commercial relationships between China and Taiwan or do you think this is just something that is kind of window dressing and they need each other?

 

AM: Do I think there’s a conflict brewing in the next 24 months? Absolutely not. I don’t think the Chinese have the capabilities. I don’t think they want to be embarrassed furthermore. The Chinese elite, they have money wrapped up in Taiwan. They’re not going to sit there and cut off their their money supply just because Xi wants to prove a point that I don’t believe they can win a war quickly. It would hurt.

 

CB: I will disagree with with Albert here. My understanding of the military capabilities actually align with Albert and what the people I trust have basically said, it’s really going to be 2022, 2023 before they probably have the capabilities necessary.

 

Albert said something very interesting, which I think is worth repeating. They don’t want to be embarrassed. Well let’s look at how China’s behaved in the past year, okay? I don’t think you can project that level of rationality on Xi Jinping. Why the hell are they fighting over some frozen tundra in the Himalayas? It logically makes zero sense, right? I’m not saying that there’s going to be a war. It could be some type of low-level conflict. There’s a lot of different ways that it could be. This doesn’t necessarily mean full-scale invasion
but I would definitely put some type of event conflict distinctly higher.

 

TN: I think it’s unlikely but given my exposure to mid-levels of Chinese ministries they are not the rational, thoughtful, wise organizations that many Americans think and Xi Jinping as you say Chris, why are you fighting over some icy hills in northern India? It’s just stupid, right?

 

So I don’t believe the Chinese government is as thoughtful and wise as many westerners suspect. They make stupid mistakes like everyone else. I’m not saying they’re more stupid than anyone else. I think they’re just as they’re human beings.

 

Now let’s move along a little bit more into economics and talk about the Belt and Road initiative, which something that I actually worked on for about a year and a half. There’s been some talk in the last few months about the anglosphere and does the west have an answer to the BRI? This is really aN eight-year-old question, but my first question is, does the U.S. need a response to the BRI as a government initiative and if so do you think they can do it?