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How low will gasoline go? Recession worries & Japan hits 2% – The Week Ahead – 12 Dec 2022

Explore your CI Futures options: http://completeintel.com/inflationbuster

This Week Ahead is a special episode because it was recorded live, with guests Albert Marko, Sam Rines, and Mike Smith, together with host Tony Nash in a face-to-face conversation. It’s also the first time that we had a Twitter Spaces, joined by a few people and taking their questions.

Gasoline prices have continued to decline here in the US. Since June, RBOB has been pretty much one way, sliding from ~$4.30 to $2.16. That’s half. Of course, lower crude prices are a huge factor, but over the summer we were hearing all about refinery capacity. Is there more to it than the oil price? XLE vs crude – XOM closing in on 100, etc. How much of an impact is this having to help affordability given the broader inflationary environment?

Inflation is proceeding unabated, as we saw in Sam’s newsletter this week. Some Goldman guy was out this week saying there may be a recession in 2023. Sam looked at the terminal rate in his newsletter this week. How would accelerated inflation or steepening of recession worries affect the Fed’s actions?

We had BOJ head Kuroda (who has been in the job for a decade) begin talking about Japan hitting its 2% inflation target. If that were to happen, how likely would the BOJ be to scale back its ultra-loose monetary policy? Impact on Japan’s equity market, govt bonds, etc.

Key themes
1. How low will gasoline go?
2. Inflation/Recession worries
3. The day after Japan hits 2%

This is the 45th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

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

Transcript

Tony

I just want to say hi and welcome to The Week Ahead. I’m Tony Nash. We’ve got a couple of special items for this show today. First, Albert Marko is in Houston, Texas. So we’re doing a live in-person Week Ahead with Sam. Tracy will be on Spaces eventually. We also have a special guest, Mike Smith, who’s a partner at Avidian Wealth here in Houston. Second, this is our first Twitter Spaces, so this may be a little clunky and we may make some mistakes, so just bear with us, if you don’t mind.

So Mike, Sam and Tracy eventually, and Albert, thanks for joining us. I really appreciate the fact that you guys have come today.

We have a couple of key themes today. The first is how low will gasoline go? Gasoline prices I think nationally are around $2.99 are approaching that in the US. So we want to take a little bit of a look at that to understand what’s happening there. We also want to talk about inflation and recession worries. Sam will go into that quite a lot and we’ll try to figure out what’s happening with inflation.

And then we’ll talk about Japan post 2% inflation. So there have been some comments from Abe at the BOJ about Japan hitting 2% inflation, and we’ll talk about that a little bit.

Okay, so Albert just joined us. So let’s get started on gasoline prices. Guys, since June, RBOB has really come down from 430 to about 216. So it’s about 50% or 49 point something percent.

Of course, lower crude prices are a huge factor. We’ve seen crude prices come down in that time as well. So is there more to go on crude prices? On gasoline prices? Like I said, we’re waiting for Tracy, but she’s not joining. So I’m just going to throw it open to you guys. What’s your thought on gasoline? Because we’re entering the holiday season, it’s going to be a lot of driving. There’s a lot of inflationary pressures, which we’ll talk about in the next segment. But I’m just curious what your thoughts are on room for gasoline prices to fall.

Albert

Well, I think they guess some prices are going to fall because price of oil just keeps on going down. I think at the moment, whatever brokers, government entities or whatever we want to talk about is starting to drive down the price of oil because it’s beneficial to the political situation. So I think that oil, as it drifts down towards 60s, mid sixty s, the price of gasoline will also come down.

Tony

What are you hearing? We’re in Houston, energy capital of the world.

Sam

What are you going to yeah, it’s hard to make a call on the energy price kind of in its relation to gasoline for a couple of reasons. One, we really don’t know where any spare capacity can come from in terms of the ability to refine at this point.

You’re running at 96% utilization rates for refinery capacity, that’s pretty much peak. So if you have any sort of hiccup there, you’re going to have a problem on the gasoline front.

Tony

So hurricane season is over. Do you see any reasonable hiccups coming? Obviously may be unexpected, but when you’re.

Sam

Running at 96% capacity, it doesn’t take much to have a small problem. Right. And if you go from 96% to call it 90% because of an accidental outage, that could be something rather significant for the gasoline market. So while oil prices, you know, appear to be fairly volatile right now, it’s, it’s hard to translate that back into a gasoline price.

Mike

I know if 86 degrees here in Houston, but unpredictable winter can happen. I know it’s a little bit of a delay, but we don’t know. These weather patterns can happen. We could have a colder than expected winter and that could probably trigger as well.

Albert

Rail strikes is another issue. Talking about any kind of strikes in the transport industry, diesel prices making truckers, you know, trucking more. It’s not anything.

Tony

Right. I just saw Tracy pop in and then she popped out. So once she comes in, we’ll come back to her on this. Thank you. Okay, that’s great. And we’re seeing, we’ve seen XLE, the energy companies, the energy operators, we’ve seen XLE stay pretty elevated as crude prices have come down. There’s typically kind of a four to six month lead between crude prices coming down and XLE coming down. So when we look at some of these major operators, is there an expectation that those prices will come down? Or are we kind of I’m just inviting Tracy to co host. Okay. Hi, Tracy. Are you there? Sorry. Just back to XLE. Do we expect XLE, the traded operators like, say, ExxonMobil, those sorts of guys? ExxonMobile is about to break 100. They’re headed back down after topping out like 115, something like that. So do we expect their share price to follow the crude price directionally?

Albert

I would say no. Really? It’s tough. It’s a tough call, to be honest with you, because we just don’t know which way the markets are going to go. Crude prices is acting like bitcoin at the moment, just being up and down 10% per week. I can’t even give you an honest answer on that.

Sam

I mean, it’s certainly not going to be the same data that you would expect in a decade ago, but you’re likely to have the sentiment at least have some effect on XLE or XOP, whatever it might be. But the issue now is that you’re not going to have the same sort of capital expenditure catch up and overshoot that you did in previous cycles simply because investors have already said, we will punish you for that. And producers don’t want to be punished.

Sam

They’re making a lot of money at 50, 60, $70 barrel oil. I don’t think you’re going to see the level of beta to the underlying that you would normally expect.

Tony

Okay, great. So basically they’re using your old equipment at the current energy prices and they’re maxing it out. But when the capex cycle does come on, will it come on with huge force or will that trickle out? Like when will invest? Will investors decide at some point that they won’t punish these operators for capex?

Sam

No, they won’t. No. Okay. Why spend for something that has a five to seven year time rise? We’ve been told that the oil companies aren’t supposed to exist in a decade. So as a shareholder you want that return of capital. You don’t want that capital put back to the ground. And if you begin to see any sort of significant uptick in capital expenditures, you’re going to have it absolutely crushed from a stock perspective. Right. If Exxon announced that they were going to begin a significant capital expenditure program, that stock would get absolutely hammered and you can just go through any of the companies. It’s all about what are you doing for my dividend? How much stock are you buying back and maintaining output, not expanding because you talked about it.

Mike

We’ll be short or fast. I think it’ll be going to take a long time for that to happen unless some major catalyst happens that actually sparks that in.

Tony

When you think about how long it.

Mike

Is to legislate get permits, it’s a decade.

Sam

Yeah, absolutely.

Mike

So it’s got to be some major catalysts.

Tony

Tracy, are you there? I see you as a co host but I’m not sure if you can speak. Okay. Once you’re in Tracy, just speak up and I’d love to get you involved in this discussion. Sam, how much of an impact is having is say lower gasoline prices having on the affordability in broader inflationary environment? So basically are gas prices helping the inflation discussion much or is it just a relatively small thing since a lot of people are working from homes?

Sam

There’s kind of two ways to think about that. There’s the inflation dynamics, the actual inflation dynamics that lower gasoline does have that headline CPI narrative.

Tony

It’s a tax cut. I’m kidding.

Sam

The problem is that over time gasoline has become a much smaller portion of the wallet. The average person does not spend anywhere near as much on gasoline as they used to and that’s just a fact. So is it really helping people on the margin? Yes. Gasoline and groceries are the two things that you can kind of see and one you see in a big bull sign, the other you see every week when you go buy groceries. So gasoline, grocery prices coming down, it’s good for the consumer mentality. Is it good for the action and spending levels?

Tony

Okay, great. Okay guys, just so you know, this is a live spaces. We are recording this and we’ll upload on the YouTube channel probably tomorrow. Tracy has joined us. Tracy, if you’re there and you want to chime in please join. Okay, let’s move on to the next topic for inflation and recession worries. So inflation is proceeding pretty much unabated salmon, and we saw this in your newsletter this week and I’d love to talk more about that. We also had some Goldman guy, I can’t remember who it was yesterday, saying there’s probably going to be a recession in 2023. And all these people are coming out saying maybe back half of 2023 there’s a recession, which it’s a convenient time to say that right? Right now to say something’s going to happen in the back half of 23. So you look at the terminal rate in your newsletter.

So how would, say accelerated inflation, if that’s actually coming or the steeping of recession worries affect the terminal rate from the Fed?

Sam

I think you have to divide that into the first part. That is, what would inflation call it a deceleration in inflation pressures mean for the Fed? Unless it’s significant? Not much. Does a recession matter for the Fed? Not if it doesn’t come with disinflation. Does the Fed care if we have real GDP decline? No. I mean we have real GDP decline, q One, q Two. They got their mandate, they did not care. Right. You currently have north of 7% CPI and you have an unemployment rate of 3.8, maybe percent. It’s really hard for me to see which one of those metrics is comforting to the Fed at this point. So does it affect the Fed’s trajectory? Maybe it’ll take a 25 out of the terminal rate, but that’s about it. You’re simply not going to have this type of immediate Fed pivot with inflation at north of 6% and this type of unemployment rate, it’s just not going to happen.

Tony

Okay, great. Now for you guys on spaces, if you have a question or want to put up your hand, put a question in the channel or put up your hand. We’ll take some questions later on in the podcast.

Albert

That inflation is just so sticky right now. We spoke about it earlier for podcast about wage inflation just sitting there, you know, just rising every single month. Politically, it’s a great thing for people to wait 40 years to get wage inflation, but I just, I can’t see how all these consumer prices are going to come down and talk about this inflation or wage inflation is just going to stay elevated for the next 1015 years.

Tony

Yeah, that’s a good point. So I get that there’s this expectation out there where people expect prices to come down to say, 2019 levels at some point. And, you know, we were talking about this, Sam, that do you expect prices to go back down to 2019 levels? We’ve seen a dramatic rise in a lot of different areas. So do you expect that to fall back down to what it was two, three years ago?

Sam

No, I don’t even think that in the best of all possible worlds, that’s not one of the worlds.

Albert

The only people talking about that are the political people that are trying to sit there and trying to gain votes because people are struggling at the moment. But the economic guys exactly. It’s only what you want to hear, but the economic guys are looking at the numbers and, like, we have never seen I mean, why would why would companies bring the prices back down that much when they know they can get away with it?

Sam

I mean, Cracker Barrel expects wages in the coming year to be up five, 6%, right?

Tony

Those of you who aren’t in the US.

Sam

Year, right?

Tony

For those of you who aren’t in the US. Cracker Barrel is a very kind of middle America restaurant comfort food, right? It’s biscuits and gravy. It’s fried chicken, that sort of thing. And so this is not the high end yet. It’s not McDonald’s. It’s very much the middle market in the US. And so Sam’s done a very good job in his newsletter over the last couple of years covering price hikes at Pepsi, at Home Depot, at Cracker Barrel, at other places. So many of these companies have raised prices by, like, 8% to 10%, generally, or more. Who’s raised more?

Sam

So Campbell Soup this morning came out with earnings, and they divide them into two categories. They divide it into soup and kind of prepared meals type deals and then snacks.

So think Snyder’s Pretzels is one of the brands. The prepared meals, which include soup, they increased pricing, 15% from last year, and they increased on snacks, 18. And that was price that they pushed. Volumes were slightly negative, but negative 1% and 2%. Okay, you’re talking almost no budge on volume and a huge move in pricing, and that is for the most boring of all commodities. This is soup we’re talking about.

Tony

And I want you guys to understand what Sam is saying. Campbell Soup has raised their prices between 15 and 20%, and their volume declined 1%. So do we ever expect Campbell Soup to reduce their prices by 18%?

Sam

No. That’s the beautiful part if you were corporate America right now, is you get a free pass to really find the elasticity in the market for your product by raising prices until you begin to see pushback from consumers, and you just haven’t seen a significant pushback from consumers. And to the narrative of inflation peaking. Inflation is peaking. If you look at the last four quarters of price increases from Campbell Soup, it was something like 6%, 11%, 11%, 16. Right? So maybe the second derivative is negative, but the first derivative isn’t.

Tony

And it’s positive in not a small way.

Sam

Correct.

Tony

We’re not talking about 2% price rises. We’re talking about 18% price rises, which.

Mike

Is we’re seeing that for consumers, the biggest increase. But, I mean, I guess in future years, that probably somewhat levels off. And then on top of raising prices, I’m sure all of you have noticed the shrinkflation, the items have less in it and we’re paying more for it on top of everything else.

Sam

Well, that is part of the pricing element. Right. So when they take packaging down a couple of ounces that shows up in the pricing mechanism.

Albert

It’s incredible that Campbell Soup and all these other companies raised their prices by 16% to 19% because that is actually the true inflationary number. When you go back to what they used to do it in the 1990s, it’s 18 19%, not the 7% that the Fed tells you. CPI.

And on top of that, these inflationary numbers give you a tailwind for earnings. So all these companies that surprise earning beats, if you look at them, what inflation has done into their products, it’s not a surprise that they beat.

Sam

Yeah, right. And it’s somewhat stunning because if you think about it from a 23 24 perspective, if you have your input costs begin to move lower, or at least decelerate, and you’re holding your prices at these current levels, or even increasing slightly from here, or increasing from here, all of a sudden you begin to think about what that does to a bottom line. That is an extremely attractive thing for a business. As we begin to move into the latter part of the margin expansion that everybody kind of thought was over after COVID, that really might return to some of these boring, staid old stocks.

Tony

Right. So guys, just, just to be clear, what we’re saying here is prices are not going to go down or they’re highly unlikely to go down to what they were two or three years ago. We’ve hit an inflation level, it’s a stairstep. And companies are comfortable seeing reduced volumes, but they’ve compensated that with higher price and consumers are generally accepting higher price. Right. So as an aside, I’ll be shameless here and say complete intelligence does cost and revenue forecasting. If you guys need any help with that, let us know. Okay? So, terminal rate, you’re still looking at five to five to five somewhere in there.

Sam

Well, I think it’s probably closer to five and a half to somewhere between, I would say five and a half to six because you have the stickiness in wages, right? And the stickiness in remember this is important, that Powell, week ago at the Brookings Talk pointed out one thing, and that was Core Services Ex shelter. In other words, they, they are already throwing shelter out. Even when shelter decelerates, they’re not going to pay attention to it. And he also made it very clear that Core Services X Shelter, the main input cost for many of these businesses is wages and personnel. So while you have these wage pressures, building the Fed is not your friend in any meaningful way. So I’m much more on the give it five and a half to six. There’s this idea maybe we get 50 50 25 then done. Or 50 50 done. It’s more like 50 50. 25 and 25 and 25. It’s just slower.

Tony

You said this a month or so ago. It’s a matter of the number of 25 that we get.

Sam

Yes, it’s 25 delays.

Tony

Okay. So it’s not over, guys. We’re going to continue to see the Fed take action, and they haven’t even really started QT yet. And we’ve talked about that for some time. And when they start QT is really when markets feel is that fair to say? Yeah, depends on the market, of course.

Sam

Yeah, they’ve started QT It’s just a small 200 billion or something that’s still QT. They’re not going to sell them.

Mike

I think one of the things he said is the Fed is not your friend. And just think about that statement for a minute. For two decades, all investors we’ve all come to known as the Fed is our friend. Anytime the market was down, they’re out there doing press conferences. But I think it’s critical for people to understand we’re not going to see a return of that for a significant amount of time.

Tony

Right. You’re not public servants. Right. Exactly. They don’t like you.

Albert

It’s important that as Sam mentioned, that 50 50 and then the repetitive 25s correlates with their rhetoric of soft landing that they keep talking about whether they can actually achieve a soft landing. Well, that’s another debate that we talk about. But that’s exactly what their intentions are. Those are 25 US to the end of their they get to where they want to be.

Tony

Right. Okay, very good. Let’s move on to Japan. Bank of Japan Chairman Corona was on the wires this week talking about Japan hitting the 2% inflation rate, which they’ve been trying to hit for 30 years or something. And then they made a policy with Avionics in 2012, and they still have been able to hit it. And now that we have crazy inflation globally, they’re going to claim the win. Right. And they’re going to say, we hit it and abe nomics. Although Avi is not empowering where it was ultimately successful. So, Albert and Sam, I’m just curious, what does that mean if Japan hits 2% inflation and they tail off their quantitative easing, their kind of QE infinity and they stop buying government bonds, all this stuff. First of all, do you think that’s going to happen? Okay. And second, if that does happen, what did Japanese markets look like? And then what does the yen look like? I realize they just threw a bunch of stuff out there, so just take it away. So you might like jump in here. Sure.

Albert

The fiscal monetary setup is quite favorable, right. If they do whatever they’re going to say they’re going to do quite favorable. There are only headwinds that I can see is the US. Stock market equities. If the US equities fall, without a doubt it will affect the Asian market, specifically Japan. It’s a tall order for them to sit there and get their 2% inflation target. So I don’t even know if that’s even a valid discussion, but I guess we’ll sit there.

As much as a set up as favorable for Japan, they’re combating China. And I still think that China, because they don’t have as much connection to the US. Equity market, is a little bit more favorable. I would go China over Japan right.

Tony

Now, yes, but I’m tired of talking about it.

Albert

I know not to talk about China when Japan is so interconnected with China, so everything is interconnected in that region. But I do think that the fiscal monetary set up for Japan is favorable.

Tony

Okay, sam, what do you think?

Sam

Like Albert said, theoretically, it’s really interesting. It’s intriguing. The one thing that I think is important to remember about Japan is that every time they seem to have the monetary policy setting correct and they were heading to actually hit their 2% target, they always seem to raise taxes or do something to make sure that they missed it. Was MMT on steroids? Very good example of MMT actually working. Right. You can do as much monetary policy as you want as long as every time you’re close to an inflation target, you just race to that or taxes. So I think that’s something that I’m always somewhat skeptical of Japan doing. If they begin to lift yield curve control on Japanese government bond yields, I think it’ll do two things. One, it will make for an interesting market in Japanese bonds. The BOJ owns such a large amount of that market that is almost difficult to fathom that it actually has a functioning market. It doesn’t really have a functioning yield market. So that’s kind of the first thing is we’ll finally get a feel for how that market actually functions. The second one is that you’ve had a 2% inflation win with the yen sitting between 130 and 150, a very weak yen.

That’s a tailwind to inflationary pressures. If they do lift YCC, it doesn’t matter what else they do. If they raise interest rates, whatever it might be, the yen going back to 120 is going to undo a lot of that inflation pressure in and of itself. You’re going to really bring that in. It’s also probably a positive. Having a stronger yen in this environment when you’re at an energy shortage globally is a positive for the Japanese economy because they import so much energy. Having that stronger yen makes it cheaper in domestic terms from that perspective. So I think there’s a number of things that could line up pretty well, and there’s always the opportunity for the Japanese government to mess it up somehow. Of course, I do think that it’s a very interesting market, particularly if you can do it on a call it an outright basis investing and get some of that currency dynamics mixed in with your investment, that could be a very interesting opportunity going.

Albert

You know, what’s interesting is what you’re saying about MMT on steroids. It’s like, you know, you’re making all these descriptions of what’s going on in Japan, and I just look at the fed, and I’m just like, well, oh, my God. We’re starting to be on the verge of Japanification at the moment right now, because the 30 year bond from who I talked to the 30 year is.

Sam

Completely controlled by the federal government.

Albert

And at the moment, it’s completely controlled. And if they can sit there and pump those bonds and pump the markets, you got Japan right here in the United States with MMT and Leil Bernard and yelling, doing whatever they want to do.

Sam

You just have to raise taxes.

Albert

Yeah. So so masters at that. Yeah.

Tony

So I used to go to Japan a lot, and in the late, say, 2010, 2011, when the yen was at, like, 75, when I would go to Tokyo and I would go down to breakfast in the hotel, I was the only one there. And I remember when Abe was elected and even pre election, the yen started to weaken him taking office. The yen started to weaken. Right. And I remember the first time I went down to the hotel lobby and there was a line to get to breakfast rather than just it being wide open for me. So a devalued yen means a huge amount of power for the Japanese economy. So when you say JPY going back to 120, I remember in 2010 eleven. When people would say, gosh, if we just had a yen at 95, we’d be happy. Right. And now it’s at 145, or whatever it is.

Sam

I haven’t 130 yet.

Tony

136. So, you know, it’s you know, it’s a completely different environment and puts the Japanese economy in completely different context. But you have nationalization of bond markets, you have nationalization of ETF markets. Is it really an open, competitive economy? It’s certainly a highly centralized economy. Right. And that’s really dangerous. But they love to use demographics as the justification to intervene in markets, right?

Albert

Yes.

Tony

Okay, guys, if anybody has a question, raise your hand. Or I’m not exactly how this works. Again, this is our first time to do a spaces. So put something in the messages or raise your hand or do whatever, and we could potentially have you come on and ask your question. I’ll be very honest. If you have an anonymous Twitter handle and we don’t know you, I’m not going to let you speak. So don’t waste your time. But if you’re someone we know, then we’re glad to have you on. So I guess while we wait for people to come in with questions, we’re pre Christmas holidays here in the US. We’ve got a Fed meeting coming up, the expectations for a 50 basis point hike. What do you guys expect? We’re seeing equity markets really kind of gradually move lower. What do you guys expect for the next week? Or so in the US before the Christmas holiday.

Albert

I think the CPI is actually going to be a little bit less than consensus and probably get a rally going to the end of the year, to be honest with you. I think everybody knows it’s going to be 50 basis points. The question is what’s the guidance after that? What do they say? If it’s a good CPI number, well, then you can have this dough stock for another month.

Mike

Sentiment has been so low and kind of got your seasonality right now. I think that probably prevails here.

Sam

If you think about it, a few.

Mike

Months ago everybody was kind of in this panic, Seymour. People kind of there’s this nice little calm right now everybody’s just kind of floating around waiting to see what’s next. And what’s your point? I think everyone expects to raise another.

Albert

50 basis point, which is amazing, because 50 basis points is not dovish. I guess everyone’s expecting 75 or 100 about a month ago, you know, their.

Mike

Condition as to.

Sam

No, I would say there’s there’s a couple of interesting things about the Fed meeting it into the back half of the year. One is what does the dollar actually do here? Because if you begin to actually have a significant move in CNY stronger right lower on this chart. But if you get a significant move back towards the 650 area on CNY, that is going to have a spillover effect. To a stronger Euro continued strength in the British pound you could begin to have a number of dynamics that are somewhat negative dollar and therefore pretty bullish on the risk asset front that I think could catch some people off guard simply because of the spillover effects. But the Fed, the one thing to remember about this meeting is it’s not just a 50 basis point height. It’s also that stupid dot plot that they do that actually has some pretty serious potential consequences because if 23 comes out with higher than expected dots and 24 dots move higher, the terminal and the long term rate begins to creep a little bit higher. If you begin to have that hawkishness, I kind of want to say this, so going to, if you begin to have the hawkishness become less transitory in the dot plot, that could become somewhat problematic for markets that could take some of the sales out of what we’ve seen to be a moderating dollar effect.

So I think, I think it’s worth being a little careful until we see that dot plot and begin to hear how Powell is approaching 2023 because I think they’re somewhat aggravated about the way that the Brookings Institution, the Brookings speech was received by markets they did not want a significant asset rally going out of that right. That was counterproductive to what they want. So I think they’re going to be very careful about the rhetoric into the.

Tony

Back half of the year because they would just. Not be so jerky in their communication. They’re super bearish. They’re bullish. They’re super bearish. They’re bullish have a consistent message.

Albert

Yeah, but it depends on what’s going on behind the scenes, what data they see. All this data, they see all the CPI and the jobs numbers a week or two heading for anybody else. Don’t kill yourselves.

So I guess it comes down to what is going on behind the scenes and what they don’t want to break. I mean, Blackstone came from what I heard, blackstone was $80 billion in the hole and having problems, and they went to the Fed, and that’s what triggered Powell to be slightly dovish.

Tony

And I thought they were the fed.

Albert

Well, whenever you guys Powell’s portfolio sitting there in your grasp, you are the.

Tony

Fan of that one.

Albert

But I guess it goes down to what is happening behind the scenes and what could potentially break is why they’re coming on this roller coaster ride of rhetoric.

Tony

Yeah. Okay, I’m going to see if Valena wants to come in she’s attending. And see if she wants to come in to see what? Invite her to speak and see if she wants to Valena, are you there? If you want to come in and let us know what you’re thinking is going into the end of the year and 2023, you have an invite to speak. You’re welcome to.

Albert

Molina is sitting there in Austria, vienna, Austria. And I know the European markets are now looking quite interesting to me. A little luxury market in Europe is absolutely exploding, and it’s just unreal that. It’s just so resilient. I mean, there’s two brands that I personally liked, laura Piano and Brunello Cucinalli, which I have a tremendous amount of polls. Brunello Cucinalli didn’t care anything about the Russian sanctions or anything. Just kept on selling, and they just blew out earnings yesterday or as of today, they were up like 7% this month. Really, the luxury retail market, luxury jewelry market is just it doesn’t stop great. And it’s counter to what everybody is saying. Recession this, recession that. You go to gucci stores, lines out the door, Louis. The time you need an appointment, it’s just resilient. It’s just actually quite amazing.

Sam

It is really similar to if you look at our markets, right, particularly the masters plotted against the price of oil. If you do a six month delay, guess what? It’s almost it’s a really interesting kind of windfall type chart. You can kind of see the oil money flowing in there. And you even had China relatively shut down, and that was a huge driver, a tremendous driver of European luxury, particularly for LVMH. Even with China shut down and not really having the tourism, you had a lot of tourists from Middle East, et cetera, really put in some of the South American countries that are doing fairly well, particularly at the higher end. A lot of that is driving this kind of underneath the surface. You had tech, then you had energy. And the question is, now you have the China reopening. Is that the next leg for a lot of these lectures?

Tony

Okay. So let’s talk China.

Albert

I wasn’t going to do that.

Sam

Tracy.

Tony

You’Re as a speaker as well. So if you want to come in, you can come in any time. Okay, so let’s talk about China, even though I didn’t want to COVID that. So let’s talk China. What’s happening, Albert, with the reopening? Like, what do you see the next two months happening with the China?

Albert

Just as we spoke about a week ago on China, those riots and the reason the Chinese even let you see these riots happen on the social media was a signal that they were going to reopen, and in fact, they did. Days later, we’re reopening in stages. And that’s just it. And get your house in order, everybody, because inflation is going to happen. I think I think copper was up, like, two and a half percent this morning. And this is this is it just barely reopened right now, manufacturing, because the odors were down I think Western odors were down 40%.

Tony

But kind of everyone told me on Twitter that democracy came to China.

Albert

Yeah.

Tony

Okay.

Albert

Those are people that have never been to China or stayed at five star hotels or actually step foot outside of Beijing.

Tony

So let’s go there a little deeper. And Xi Jinping is in the Middle East either today or over the weekend at an Arab China summit. Right. And so, first of all, him leaving China right after there were protests, what does that say to you, Albert?

Albert

Safeguard, he’s done any kind of opposition that was pushing against Xi’s Party congress moves eroded, and then these street protests are just street protests. I get it, people are upset and their livelihoods and check down the list of whatever you want to say, but realistically, they never work unless they get violent. And they never got violent.

Tony

Right. So you kind of have to let the steam come out of that valve, I think is probably what you’re saying. Right? The CGP is saying that now with CGP going to the Middle East, sam, they are the premier buyer. China is the premier buyer from OPEC clubs now. Right. It’s not the US. And this isn’t new for people who have been paying attention. The Saudis and other people in the Middle East have been spending a lot more time in Beijing for probably six, seven years. And so and and it’s been longer, but it’s been really, really visible for the last six or seven years. So what does what does that tell you about, let’s say, OPEC’s desire to, please say, a US president going to the Middle East to try to bully them, to pump more? Is that effective anymore?

Sam

No, not at all.

Tony

Hi, Tracy.

Speaker 5

Hi. Sorry, I was having technical difficulties, and for some reason I couldn’t all gone earlier.

Tony

Welcome. No apology necessary. We’re just talking about China and with Xi Jinping in the Middle East for a summit with the Saudis and the GCC members and what that means for the ability of say, a US president to kind of bully OPEC into reducing oil prices going forward. Is there really any strength there? Do you see.

Speaker 5

That’S? Absolutely done. What I would expect she landed in China today. I would expect him to get the full lavish welcome. Right. And we want to be looking at who he brought with him as far as national heads of corporations. And I would expect this to be completely opposite of what we saw the Biden meeting with and more akin to what we saw the Trump meeting with, where they I would expect that.

Tony

So they’ll touch the crystal ball.

Speaker 5

Maybe they might bring out the ball. Yes. And I expect billions and billions in new deals as far as economic, military, energy in particular, et cetera going on at this point. Again, they’re having a conference where they’re going to have multiple leaders in the Gulf nations in Saudi Arabia. So I mean they’re really going to try to rue China on this trip big time.

Tony

Right. So when you talk about military deals, what do you think about that? Albert?

Albert

I’m not really sure Saudi Arabia will.

Tony

Do major military deals with China.

Albert

I mean maybe a few just for show up for optics theatrics but the US military hardware is the best in the world and realistically Saudi Arabia is under the US defense umbrella. Whether the left or the right likes it or not, that’s just the reality of it. And as long as Iran is not poking or poking trouble from the east and Yemen not from the south, southern regions have an easy ride. So their military deals aren’t really they’re not at the forefront at the moment. But anytime that Russia wants to string that relationship, they can certainly call up Tehran and say lob a few missiles over and things go right to elegant.

Sam

To Albert’s point, I don’t think Saudi is going to work. KSA is going to become the next India where they split their arms deals among the three major powers of arms anytime soon. I mean that’s just not going to happen.

Albert

No, there will be a little bit, yeah. India is a completely different ballgame. India has got counterbalance, they need to counterbalance Russia with China and Pakistan and it’s the old mess over there and they need to do what they’re doing.

Sam

Well Nksa is also trying to hold together their market share in a world of Russia really having to begin sending almost all their stuff to call it China India.

Tony

Right.

Sam

So if you had were the two largest pieces of growing market share for Saudi Arabia over the past decade, that was India and China. And now you have the other major energy player in the region coming after your market share. There’s got to be a little handshaking here to keep everybody happy and selling at $55 a barrel.

Tony

You don’t hate that, right?

Sam

If you’re trying to. I mean, it’s the perfect time to reopen. You’re getting cheap energy. You have supply chains that have fixed in the rest of the world. So I think this is very much a visit to make sure that they can continue reopening, get those long term energy deals in place, and then move forward.

Tony

Right. Okay, so we do have a question for Tracy, and you guys jump in. So, Tracy, there’s a listener named Rasul, and he’s asking, when China opens up, is it possibility that it could use its own SPR, like in November 21, to reduce its oil cost? Is that something they would consider doing?

Speaker 5

I think not at this juncture, right now, because, first of all, they’ve already drawn it down. Right. And they’re still worried about long term energy security, as is everybody right now. In addition, they’re also getting really cheap Russian oil, so I don’t think that would be something that they would do right now.

Tony

Okay.

Albert

No, they wouldn’t do that.

Tony

Right.

Albert

There’s no absolutely no need to do that. The US. Only did that because of Midterm economics, and that’s just that China had no intention of doing that.

Tony

Great. Okay, good. All right. Well, guys, I think we’ve covered it. We’ve been here for about 40 minutes, and the hotel we’re in has threatened to call the police if we don’t leave. So I want to thank you all for joining us for this week ahead, and we’ll get this posted on our YouTube channel within a day or so, okay? So thanks for joining us, and look forward to seeing you on the next one. Thank you.

Categories
Week Ahead

FTX, crude & crypto, CPI & inflation: The Week Ahead – 14 Nov 2022

Emma Muhleman, Boris Ryvkin, and Albert Marko join us for this Week Ahead episode. We talk about FTX and why it happened. FTX transferred about $8 billion of customer deposits to a trading arm called Alameda, and they lost it. FTX was assumed to be a regulated institution. It wasn’t. So customer deposits evaporated. There was a desperate attempt to merge with Binance. That didn’t happen. FTX filed Chapter 11 on Friday, and then Sam Bankman-Fried apologized as if that just absolves him and makes everything better.


Albert, Emma, and Boris help us understand what happened here and what it means not just for FTX executives, but for markets in the week ahead.

We also saw some selling in crude markets as FTX collapsed. Emma talks us through that and tells us how long the crypto unwinds will impact commodity markets.

Based on the market reaction to Thursday’s CPI print, you may think inflation is solved. CPI seemed to override FTX worries and there was this huge sigh of relief in markets. Not so fast. Boris, Emma, and Albert talk us through the CPI print and where we’re seeing persistent inflation (diesel, food, etc). Will the Feds raise by 50 in December followed by some 25s? How will this affect layoffs across the economy?

This is the 41st episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Albert: https://twitter.com/amlivemon
Emma: https://twitter.com/EmmaCFA1
Boris: https://twitter.com/BRyvkin

Transcript

Tony Nash: Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. Today we’re joined by Emma Muhleman. She’s a macro strategist and if you don’t know her, you’re not on social media. We’re also joined by Boris Ryvkin. He’s with Montefly Holdings. He’s also a former M&A attorney with Skadden and a bunch of law firms, and he was National Security Advisor in Capitol Hill. And Boris has an amazing perspective on macro, on history, on markets. It’s really great to have both of you guys. And we have Albert Marko. You guys know Albert. So it’s just great to have you guys. Thanks so much for being here.

Before we get started, I’m going to take 30 seconds on CI Futures. Our core subscription product. CI Futures is a machine learning platform where we forecast market and economic variables. We forecast currencies, commodities, equity indices. Every week markets closed, we automatically download that data, have trillions of calculations, have new forecasts up for you Monday morning. We show you our error. You understand the risk associated with using our data. I don’t know if anybody else in the market who shows you their forecast there. We also forecast about 2000 economic variables for the top 50 economies globally, and that is reforecast every month.

So we had a lot going on this week, particularly kind of in the second half of the week with FTX. Unless you’ve been kind of on vacation or away, you probably know about this already, but I’ll recap a little bit. 

FTX transferred, I think, something like $8 billion of customer deposits to a trading arm, Cart Alameda, and they lost it. FTX was assumed to be a regulated institution. It wasn’t. So the customer deposits evaporated. 

There was a desperate attempt to merge with Binance. That didn’t happen. FTX filed Chapter 11 on Friday, and then Sam Bankman-Fried apologized. We’ve got his tweet from Thursday on the screen. He sent another apology out today. And if that just absolves him and makes everything better. 

So, Albert, I know you’re a huge fan of crypto, so can you help us understand kind of what happened here? And really, what does it mean not just for Sam, but what does it mean kind of for markets going into next week?

Albert Marko: Well, for Sam, you can look at my shirt. That’s I purpose wore stripes, because that’s where he needs to go to. He needs to go to prison. The crypto space has been just littered with fraud. I mean, just incredible fraud. This guy had the nerve to go up into Congress and talk about transparency and central banks are illiquid and there’s no transparency.

Meanwhile, he’s taking customer deposits, not only just setting it to Alameda, right. But then now there’s a political component of it because he was spreading it around to super PACs for the Democratic, for Democrats.

This is a bigger story than people are alluding onto. On top of that, you had a bunch of Republicans come out and say, why was Gary Gesler helping him get through loopholes in the system?

TN: Was that actually happening? Because I saw that gossip on Twitter, but I’m just not sure if that was actually happening.

AM: Well, yeah, this is political season, so I’m not sure if it actually happened. But you don’t just come say something like that, right? You don’t just make those kind of accusations out of nowhere.

So there’s definitely going to be congressional hearings on this. SBF could be in jail at some point in time.

Concerns of where the customer’s money is. This is not funny. As much as I just absolutely despise crypto, this is not funny when you take people’s hard earned money and put it into different outfits without

any transparency whatsoever.

TN: I hear a lot of comparisons of this to Corzine from, like, 15 years ago. Are there similarities between what Jon Corzine did and what Sam did?

AM: That’s a really good question. I don’t think I can really answer that because we know exactly what FTX actually did with all these funds, where they’re at. Because there are stories that there’s penthouses and condos all over the Bahamas and the Caribbean that they can’t even touch yet. We’d have to find out a little bit more detail of what went on, what transpired into FTX.

Emma Muhleman: Because a lot of the deposits don’t invest in them in illiquid private equity investments, including VC funds that were invested in FTX.

AM: Like Sequoia put in a little bit of money and then they get 500 million back.

EM: Sequoia put in like $420 million that they wrote down to zero.

TN: And they got 500 back? It’s a great deal.

Boris Ryvkin: What was interesting was that Kevin O’Leary, he had a Jim Cramer moment with FTX. He said, if there’s one place where I could feel totally safe and fine, it’s FTX, apparently, because he was confident in their compliance capabilities. Because apparently the CEO was like his parents were like compliance lawyers or something. And he’s probably that’s not one of Mr. Wonderful’s more wonderful calls, I think.

AM: Well, when your parents are compliance lawyers, it just means that they’re going to teach them how not to be compliant and not get caught. That’s what happens when that occurs.

TN: Okay, so what does this mean for crypto generally? I know you’ve been not been a crypto fan for a long, long time. So is this an FTX issue or is this a crypto issue?

AM: This is a crypto issue. This ruins the credibility of any crypto that’s even valid in people’s eyes at the moment. Even Bitcoin is the 800 pound gorilla. There’s other cryptos that are trying to be stable and compliant and everything, and it kills. 

TN: Do you know how many crypto pages we’re going to get in the comments to this?

AM: I bring it on because I’ve been telling these people for years that the space has been just a positive scheme after another.

TN: So does this permanently kind of impair crypto, or do you think there’s a time that two or three months from now, everyone forgets about it and people are back in and crypto is back on?

I just think that the crypto excitement is so persistent that I’m just not sure that this hurts it for the long time. They haven’t had that moment yet.

AM: No, not yet. It doesn’t hurt it. Actually, I want to say it actually kind of makes it better because it is weeding out the real problems and showing the problems that are in the space. 

But the bigger problem that they have now is one side of credibility is getting retail money into the space. Retail money is just not going to get into the space, and even institutional money is going to have to think ten times more about getting an investment in the future.

TN: So what was it, thanksgiving of 2019, I think, when all the retail money went into the space Something like that, right? We got Thanksgiving coming up here in the States, and we’re probably not going to have the same effect this year.

AM: Oh, God, no.

TN: Are there any other players, do you think, that are likely to fail as spectacularly as FTX has failed?

AM: I don’t think so. At this point, I think that the FCC is going to have to really crack down on the entire crypto space and really force these guys to be compliant with, your know your customer rules and whatnot. So that’s something, actually, Boris could talk about, but I think they’re going to have to do something drastic here with the whole space.

TN: Boris, I guess from a legal perspective, how much do these guys have to worry? Do you think Sam can get away with this?

BR: I just don’t. No, I don’t. I think that, you know, the issue, of course, is just going to be the chain of ownership, first of all, of all, these shell companies. Where’s the money? Where did the money go? Because the money’s gone. I think it was something I know that there were a lot of jokes. He went from 16 billion net worth to a dollar, and he can’t afford his verification badge on Twitter now.

I think there was specifically because he’s now requesting, what, 94 billion as a rescue package. Once you’re already, and today he officially announced today was that they were filing for Chapter Eleven. So that was the official name today after requesting 94 billion, which was already I mean, when you’re already at that point, it means that nobody’s keeping the book.

So first of all, just in terms of any kind of account, whoever the accountant is, if there even was an accountant tied to this, whoever was signing off on this needs to worry a great deal. It’s not just Sarbanes Oxley and everything related to that, but it’s just simply who are these accountants and who was actually keeping these books? Because these numbers that were being thrown out, putting aside that it was impossible for him to get any kind of rescue package that quickly. But that number, it’s a number that is simply not credible.

TN: I’m going to get really boring on you for a second. Most companies have a DOA delegation of authority, right? And so I would think that to transfer $8 billion, the delegation of authority would go up to the board level. Is that fair to say?

BR: Well, I mean, it should, because again, it depends how these companies are actually managed, right? Because these could be not under US law managed, board managed, or there could be LLCs involved here which are member managed or have separate managers or what have you. It should go to the board level. 

And in any event, you should have the senior management sign off on the accounts, not just the account. Even though that’s the position with public companies now since Starbucks and everything else. But even when it comes to private companies, to have for sufficient transparency, to really have investors comfort, you would need to have that chain of control.

So the DOA would have to come depending on who actually the board would have to authorize the management to give the DOA either broadly upfront or specifically for a specific transaction as it would happen. 

TN: Because of $8 million, that’s still a fair bit of money, right?

EM: There were several acquisitions that he made that were private companies with the tune of over a billion each. So I guess you got like two $1.5 billion private investment, 500 million here. So I guess that’s how that all works out.

TN: You would guess that those have to have board approval at some point, I would think.

BR: I’ve done in the past very discreet deals where it’s sort of like, we’ve already transferred 100 million for this property. Please paper all of that over retroactively.

I’m sure that that’s what happened here. In other words, there was a lot of money moving around, nobody papered over what they needed to paper over. And I would be surprised if there’s  actually a chain where all of the documentation that was needed at each stage of the transfer was actually put in place.

I’m certain that money just moved around all over the place, which makes it now very hard to track because there’s going to be a very limited paper trail to find,  which is going to be a problem for him and everybody who’s authorized per the corporate documents of these companies for having to move the money around. So it’s going to be multiple levels of potential liability.

TN: Okay, so I would guess also that everyone in every crypto company is probably also coming up with their policies, if they didn’t have them already.

BR: So what are the investors are going to start calling to talk major policies. But I think the bigger issue, and Albert sort of touched on this, is the fact that this is an exchange, fundamentally. 

So the issue isn’t we’re talking about Bitcoin as a currency, but if you can’t trust one of the largest exchanges and I forgot that was it, it wasn’t Coinbase, it was one of the others that pulled out of an attempt to that’s a last minute shotgun. Binance. And that has a second and third order effect. So not only did this huge exchange fail, it was such a disaster that the Binance, which is one of the more credible exchanges like Coinbase and what have you, just simply said, you know, this is beyond saving.

So it could really have a cascade effect. I know some are calling it the Lehman moment for crypto, although Albert would say there have already been five or six of those. 

TN: Right, well, and before we get too critical of FTX as an exchange, let’s look at the LME and the credibility of kind of traditional exchanges. So, I mean, it’s easy to point the finger at crypto exchanges, but the LME has done some pretty screwy stuff over the years. So I think we need to be really careful

of just saying, well, I know you didn’t say this Boris, but crypto exchanges do screw things. Other exchanges do screw things as well.

EM: might I mention, though, with the LME, they are now under the control of the Communist Party of China via HVX. Great. Who is running the show? Real competent folks at the CCP. Binance is even shiftier if you ask me, but we’ll see.

TN: Speaking of markets and crypto, Emma, can we talk a little bit about kind of markets and correlations? How are we seeing this crypto activity and how do we expect this crypto activity to kind of flow through into other markets, equities, commodities, other things? Obviously it didn’t hit equities yesterday and today, but it seemed to be hitting earlier in the week. 

EM: Yeah, just as it was all falling apart, we saw a big risk off move in equities. We saw the Nasdaq coming down, we saw some weakness in oil that may have not had anything to do with the

fundamentals in the oil market. I would venture to guess or argue that it had more to do with the FTX sell off because there were several companies, including pension funds, that had significant exposures in FTX. So that oil related selling around the time that FTX all this broke. It may not have to do with the report, this actual EA report.

TN: So I’ve got a graphic from Tracy’s newsletter earlier this week where she talks about the funds and the investors that were deleveraging in oil because of FTX. BlackRock, Ontario Pension Fund, Sequoia, Tiger Global, et cetera, et cetera.

So there were some big players impacted by this and I can’t believe that it just impacted oil. I also have a hard time believing that it was a one time, say, 48 hours event.

EM: Yeah, I would think that. Not having done any diligence for a pension fund, Ontario Pension Fund,

like for BlackRock. I mean, I don’t want to call out too many names. We all know what SoftBank is about. They were intimately involved. There’s going to be a lot of problems and a lot of spillover that we’ll just have to wait.

TN: At the end of the day, I hate to say “only”, but in terms of global fund flows, it’s only $8 billion of retail money that was lost. It’s I say “only”, but, you know, it’s not a huge amount in terms of flows, but I just don’t know how much is in these funds themselves.

AM: Yeah, you don’t know how much the funds have lost and what they’re trying to make up and like yeah, sure, 8 billion doesn’t sound a lot, but in a market that’s so illiquid with a lot of these funds blowing up right now, it can be a lot. You don’t know what they’ve leveraged off of it.

EM: And what they might be being forced to sell as a result.

TN: So we probably haven’t seen the end of that. Fair to say?

EM: We’ll see a long restructuring or not restructuring Chapter Eleven. Not a restructuring, but a liquidation. 

TN: Yeah, it’ll be liquidation.

AM: Discovery will be fun. See where all this money went to.

TN: Great, that’d be great. Okay, perfect. Anything else on markets and FTX and crypto? Are we looking at is this impacting, say, European markets or Asian markets? Since crypto has been so big in Asia, are we seeing impacts in Asian markets, like in China?

AM: I don’t think so. I think that’s really Binance’s territory at the moment. Right now, I think FTX was solely the US and Western Europe.

EM: I would think you would see an impact on Japanese investors as well, who own a lot. But just like, not the kind that puts out life insurance companies or puts you a lot of business, but more like retail investors getting screwed.

AM: retail investors have just been taking it on the chin for the last 18 months. It doesn’t stop. 30 years.

BR: Except for Warren Buffett and those who invest with him because yet again, everyone’s underwater, he’s up like 2.3%.

TN: Boris, say, can you talk us through the CPI print this week? Because it seems like CPI, the rate of rise of CPI slowed. CPI didn’t slow, but the rate of rise of CPI slowed. And so it feels like it kind of overrode the FTX worries and there was this huge cyber relief in markets for the past couple of days that we’ve kind of conquered inflation. And the Feds only going to raise by 50 in December, and then after

that we have some 25s. What’s your sense of that? Do you feel like kind of inflation is conquered? Is that base effects? Is that kind of core inflation coming down? What does that seem like to you?

BR: Yeah, I don’t think that it’s conquered. I mean, what’s interesting to me is sort of the degree to which all that matters is what the Fed may or may not do and trying to price in factional differences within the Fed. That’s how granular it’s now become. Because I think the markets were waiting for any reason, anything, to cling onto for Powell to reverse course and to after his very hawkish last meeting, where he said, ignore all of the pivot talk.

Essentially, you know, we’re going to continue to do this as effectively as long as it takes to see a sustained reduction in inflation over that’s defined. So he essentially was very angry and Albert and I were talking about this as well, that he was very angry by some of the Pivot talk from brainer than some other people yelling, was saying certain things. It looked like some of the more devastated member. And then Powell comes out and basically says, I don’t know what you’ve heard about any Pivot talk, we’re going to stay the course until we see more evidence of multi quarter reductions and declines in inflation. 

But it looked like the market really was desperate to find a reason to not believe them and to hope that anything that might persuade him to in other words, the market is looking for anything to latch onto to have a pivot, even if we don’t actually get one.

So initially it was the official position, if you were even to read the kind of the superficial financial media was they were worried if we focused on the red wave, that was what was going to get the relief rally. Then we forgot about what was happening with the midterms. And now we have this softer inflation report that as you said, to slowed the rate while most of the slowdown was because of on energy, used cars and a couple of these other, in my view, short term fluctuations which are, I mean, to the extent that CPI has already been massaged to death. 

Obviously the listeners of this podcast of course know that very well. If we measure inflation how it used to be measured from the 1970s on, we’d be in double digits. I mean, that’s just a fact. So taking even to the extent that they were able to massage it, what I saw here was the market latching onto the top line figure, hoping that this would block the Fed into doing what the markets want the Fed to do, rather than actually looking at what’s happening to the core and actually looking below the hood and the underlying trend.

That’s what I’m seeing. You also can’t have to take into account biden’s political depletion of strategic petroleum reserve. You have to take into account the unseasonably milder sort of late fall that we’ve been having, I think that’s been having an impact on natural gas prices which have this very sharp decline and now have rebounded a little bit. 

Certainly that’s coming out of Europe as well, but I’m not seeing anything fundamental that would actually allow us to conclude peak inflation and sustained reduction inflation has been achieved. So I’m not saying that when it comes to energy, I’m not seeing that when it comes to food, I’m not saying that. I mean, the housing market is not doing well. I’m not seeing any fundamental changes in the housing market. Really. This to me seems like a short term story and the market overreact, in.

TN: My view at least, this is that’s great. So I’ve got on screen Sam’s from Sam Rines newsletter, the core CPI and all CPI items, just showing a bit of turnover there. So it could be encouraging to people who like lines. Right.

But if we look at the target rate probabilities for the Fed, which is the second item on the screen, it does look like we have from a 4.5 almost to a 5.5 target rate.

So that shows there may be ongoing tightening, say maybe into Q one, if we don’t see a dramatic continued decline in the rate of rise of inflation. Is that fair to say?

BR: Yeah, I think so. I think that it seems that the growing chorus is shifting from do what continue as long as it takes to fear of overtightening, at least outside of Powell and maybe one or two other people. And Albert really, I think, is the resident expert on FOMC, inside of baseball on that and sort of thinking, et cetera. 

But once that rhetoric shifts to fear of overtightening, that tells me that they’re looking for any excuse to stop and to begin moving back. And that will just bring the inflation genie back out. Because again, these policies are being set by people who don’t fundamentally understand what inflation is and isn’t and what’s causing the inflation. So they’re looking at the wrong things still, in my opinion. 

So none of the fundamentals that I’m seeing, as I said, that would really drive a sustained reduction in inflation have changed in that direction. And once if they do decide, as you said, Tony, if they do continue to tighten into the first quarter and then decide to do a sharp 180, that’s going to just bring everything back, if not make the situation even worse. 

So they’re in a very difficult position and I think, as I said, there’s a lot of political pressure for them to move back, especially given what’s happening with these midterms, certainly on the part of Yellen and the bike administration. But I think maybe Albert can also chime in.

TN: Let’s talk about the Yellen Fed factor and also since she’s a labor economist, Albert, let’s wrap some of these layoffs that happened this week into that discussion.

AM: How coincidental that these layoffs come right after Midterms and after Yellen has done everything in her power to keep equities up so they don’t have to have layoffs until now. Well, now all the layoffs are coming. Like we’ve talked before, they’ll do this right before Christmas. 

But also on the CPI and the inflation front, there are two glaring problems that they’re staring at the moment right now. How’s y’all going to deal with the Chinese reopening in March? Because that’s going to be really announced in February. They did a little bit about real estate today. They talked a little bit about real estate supporting the real estate market. And every Chinese name that was on my screen was up by 7%.

And then you talk about oil and then we have a big diesel shortage in New England at the moment and it’s leaking down all the way into the Southeast. And those are just going to add to costs across the board. And I don’t think that they understand how bad inflation can really get. They can only suppress it for so long with SPR releases and whatnot. But it’s coming to a head and I don’t think that Paul is going to be able to release. I think he’s going to have to do another 75 again.

EM: The thing that’s just disturbing to me about that is that, like, for instance, we are going to have a serious diesel shortage coming here currently and it’s only getting worse. Powell cannot fix that problem. So let’s just shoot the consumers even more like his policies. They’re not helping. Unless you want to completely destroy the economy and have a complete disaster blow up with Deleveraging and the whole shebang.

TN: Default rate in auto loans this week. Right. I can’t remember the percentage of people who were two months behind in auto loans.

AM: Skyrocketing wastelouses start kicking into that, too. Started kicking in. But just to touch on what Emo is saying about Powell trying to kick the teeth into the consumers from his perspective, he’s trying to do the right things, but he’s just not getting any help from yelling or other members coming out there talking about pivots.

TN: What would that look like? Help from Yellen. What would that look like?

AM: Well, she can drive the dollar down to Dixie. That rallies the markets pretty easily.

EM: Well, he doesn’t want a market rally, right? She can help.

AM: Powell does not want a market rally. Brainer and yelling did want to market rally for the midterms. So this is the problem that they have. There’s a civil war within the Fed and treasury that is just making these policies look even stupider than usual. And I know Powell is going to get the brunt of it because he’s the Fed chair, but he only has two other members that are on his side. The rest of them are against them. So he doesn’t really have much of a choice. He’s going to have to do 75 in December.

TN: Well you say he’s going to have to do 75 in December.

AM: He’s going to have to do 75 because we have a CPI print coming out December 14. It’s probably not going to be as nicely massaged as this one was. And on top of that he’s running out of time because the Chinese look like they’re going to stimulate in February, March.

TN: Yeah, you’re right. I agree with the timing on China opening and Chinese stimulus in the meantime is going to be really ugly in China. Do you think that it’s possible that there’s some sort of regulatory relief especially for energy that allows, eventually allows more US. Supply, this sort of thing? Or are we too far down that path with the current administration?

AM: Me and Boris are bred from DCP, the Beltway guys, we’ll just laugh at anyone with the notion that think that anything is going to get done legislatively in the next two years.

TN: Okay, but nothing getting done legislatively is not terrible, right? At least we know the rules of the game and their content.

AM: Yeah, it’s not if there wasn’t problems but there’s glaring problems everywhere and things need to get fixed. So you need something from progress.

TN: Okay, let me throw this out to you guys. We have seen a little bit of move on CPI, whether it manipulated or not. We all kind of know it’s always in there a little bit. But what’s the timing on inflation coming back into a reasonable area? Let’s say five to six, I don’t know. Are we a year, two, three years from that, six months from now? What do you guys think? Emma, what do you think?

EM: If we’re ignoring energy and then we’re ignoring fertilizer prices and food prices, we’re looking at goods, those we may see services come down and wait the wage issue come down a little bit. Just like we’ve seen with auto delinquencies, used cars, these sort of things. You see numbers starting to roll over as demand destruction and liquidity has been pulled. 

But I think you’re going to see the opposite in energy and you’re going to see diesel shortages which pushes goods prices up. Right. If every trucker in the nation has to spend a time for every time they fill up with diesel and they can’t even fill up enough, then there’s going to be not only a shortage of goods but goods prices will less go up. 

I don’t see how we fix that situation. We only have extra finding capacity. It takes like 30 years to build a new one so I don’t see how that gets fixed. So that’s something that really looks like it would push inflation upwards. So if we add all that together, I’d say we’re going to have a problem with inflation for good at least another year if we include energy and food.

TN: OK, let me ask this. That’s a great answer. Let me ask this divorce, because I know I’m going to get an answer that doesn’t agree with what I think is there pressure to broker a Russia Ukraine piece? And if that happened, would that alleviate some of these diesel price issues?

BR: I think that there is. I know that Orban, for example, and Erdogan met and basically said to Zelensky’s, time to use this window of opportunity to start negotiating. So they liberated Kirstan today, which was.

They liberated Kirsten today, which was the one major city that the Russians were able to occupy and they were offensive earlier the year. So this is kind of a huge move with the Russians on the back foot. And these are people who are everyone is playing all sides. 

And Orban, of course, is more kind of the one European leader that’s closest to Putin major leader. But I don’t think that the US is. I know that there was some discussion from the Biden administration about don’t be so categorical about Zelensky, about saying you’re not going to negotiate with Putin. It’s irritating African countries, South America, et cetera. 

You have to start taking advantage. I don’t think there’s any pressure and will be in the near term, and especially after these midterm results, I think that the risk of any major, immediate cutoffs in military economic aid from the US to Ukraine are going to be somewhat subdued now, given the kind of the risk from right and left. So I don’t think there’s going to be any nearterm pressure on the Ukrainians right now to start looking at essentially trading land for some kind of an intermediate piece.

But as a side issue, there was some in terms of alleviating the diesel and the gas problems, especially in Europe, there was some discussion about Erdogan purchasing Russian gas at a discount and essentially creating an alternative for the Europeans through that pipeline that was being built basically through the Black Sea, et cetera. 

And there was a lot of kind of talk in the US and some European capitals like Erdogan is going to save us because he’s playing everybody and he’s going to create a new gas hub in Turkey, as he declared with the Russian gas. What he’s actually going to do, and Albert and I were talking about this too, in my opinion, is because of Turkish elections next year, he’s going to keep the discounted gas, sell it at home, domestically cheaply, in order to drum up support for his reelection next year. He’s not going to resell that to the European. 

So that life raft is not going to be sailing. So therefore, I think that unless there is some relief from the weather, I’m not seeing any, because I know that at that moment, because the weather was unseasonably warm to a large extent, you have this natural gas flood in Europe now, which has driven down natural gas price, at least in the short term.

Dutch and et cetera, the benchmark. But I don’t think that’s necessarily going to sustain. I think we could have a colder winter and Erdaman is not going to provide that relief. I know the Ukrainians are looking at alternatives themselves, but the Ukrainian economy doesn’t exist anymore, really. 

Right now, we’re basically balancing their budget through direct cash transfers at the moment. I think it’s only going to be bad news and it will reinforce what Emma has said about her predictions about the diesel shortage and about just energy in general and how that would impact inflationary changes. So I’m not seeing any major improvement. 

And also, in terms of the broader discussion on inflation, I also agree that, again, kind of what I said before to dovetail off of that, like, none of the fundamentals to reduce inflation have improved, have changed markedly. So we could be, it’s really, to me, a risk tolerance for recession on the part of the Fed. 

When will the Fed decide that if they’ve given up on a soft landing, then we’re going to have one projection in terms of when inflation is going to start coming down dramatically. If they still are insisting on the fantasy of a soft landing, then there will come a point where they might decide.

Regardless of what happens with inflation, recession is a much bigger problem. And we’re going to have to, sooner than we had hoped, begin to pivot, which is probably not something that Powell would want to do, but that’s a recession versus a soft landing versus hard landing balancing act that they’re, I think, going to have to perform over the next couple of quarters. 

And I think that’s sort of their near term focus and to kind of close that point off. Right. I mean, I think that the layoffs and I mean, the fundamentals are cooling, the economy is slowing. We’re seeing that with the layoffs, the housing market is going to get worse, in my opinion. Oh, yeah, it’s a disaster.

TN: Look at the MBS holdings at the Fed. They’ve just started to tighten them. They’ve just started. Right.

BR: But then you also have to take we talked about you said auto defaults for auto loans. What about credit card debt, consumer credit card debt? And also, what about the leverage that’s on the books of these companies? Why is the tech, which is tech at the tip of the spear? Why are we seeing all of them down 70%, 60, 70% on the year? Why are we seeing the layoffs hit tech massively? First, because they grew too much too quickly and are over level.

EM: They did refinance in 2021 when they had a chance. So they’ve got like a couple of years.

BR: I don’t know who’s advising Zuckerberg here and his colleagues. I think what we’re going to do is we’re not going to refinance, we’re going to double down on Meta, which we don’t really know what to do with and we’re going to double up on the head count dealing with Meta, on the Metaverse thing, that isn’t getting adopted the way that we would want it adopted. It’s like everything, every mistake that could possibly have been made from the financing to the head count to the rollout, and that’s happening across the tech sector, but we’re financing.

TN: Would you have done differently? I would have taken on all that too, because it was fun. I’m kidding. But I actually think that there are more rounds of layoffs in tech coming. I don’t think this is the only round. I think that in the auto sector, tony and auto and other guys. 

So I think I was in Silicon Valley in 1998 to 2001. I know that’s ancient history, but my company went through six rounds of layoffs. I didn’t know when I say my company, the company I worked for, they went through six rounds of layoffs. 

So I think all these stories about people at Meta thinking they were going to dodge it and all this stuff, I don’t think that I don’t think this is the only one. I think they’re going to have to do more in three to four months. 

I think you’re going to see more companies bandwagon on top of this to say, hey, Meta is doing it and Stripes done it and all these other guys are doing it. So let’s use this opportunity to become more productive and we’re going to see a flood of these before the end of the year. Just a flood. I think the tech sector is going to be wrecked in terms of employment.

AM: Oh, yeah, without question. Even going back to your previous point about the Ukrainians and the Russians getting some kind of peace agreement, even if they did, that would solve the diesel problem overnight.

Even if they did that today, it would take a year, maybe 18 months until all that got rolling in again if they looked at the sanctions, because they still have to go through that whole process for all the countries.

EM: Russia doesn’t send us diesel heavy crude and then we have to process it at refineries, which are running at max capacity. Hence the crack spreads being so wide, we can only convert so much crude into distillates, which diesel of which is one of which jet fuel for planes is another, but both things that cost a lot of money when the prices of the input key input goes up.

TN: Okay, great. Let’s do just a really quick round the week ahead. What are you guys looking for for next week? Albert, you go first.

AM: I’m actually going to look at to see what the House majority and Senate majority makeup comprises of and whether the markets are going to react negatively towards it. Because if the Republicans, I know they’re going to take it, but when they get announced that they take the House, the stimulus packages all but die at that point for two years. So I’m very curious to see how the markets react to that.

EM: I’ll be continuing to watch what’s going on in Crypto to see if anything’s happening with Bitcoin ethereum, because we’ve already seen a lot of other tokens just literally, basically go to zero. So just see how that continues to play out.

TN: Great. My $20 a DOJ is still at, like, three times where I bought it at, so I’m just holding on to it just to see where it goes.

EM: And then I’ll also, obviously, as usual, be watching China and certainly the bank of Japan and just the end period.

BR: Yeah, like Albert, the makeup in Congress and also going to be looking at some of the emerging markets. I think maybe if we’re going to get more evidence out of China as to when they’re still pursuing COVID Zero, I think they’re now recording again, like, a record high number of cases from April. It’s not working yet. They’re continuing to double down and reward everybody who’s pursuing that. 

So I want to see if they’re going to continue with that and they’re going to be on track for what Albert said to reopen early next year or if it’s just going to get worse. So that’s what I’m going to be focused on.

TN: Yeah. You’ve heard of the great league forward, right? I mean, these don’t really take sound policy advice. When they get their mind on something, they just push it and push it and push it until it harms everybody they can.

EM: I often when you’re trying to when you have, like, the worst debt crisis ever and the population that’s, like, you know, put the equivalent of $50,000 down on apartments, like, millions of people have done that, and they’ve got nothing to show for it, and you want to keep them from acting out and protesting in the streets. It’s pretty convenient to have them all segregated where they’re not communicating. I wonder really what the motivation behind COVID Zero is. And so I don’t know if I buy that it’ll ever end until it’s convenient for it to end economy wise, where she feels no threat.

TN: I don’t necessarily disagree with you. I think things in China don’t necessarily end until they want them to end. Right. And if you look at exports from China to the US. They’re back up to preCOVID levels now. So in terms of that export machine in China, it’s humming, right? So there’s not feeling economic pain, at least in terms of trade. 

So if they’re comfortable feeling the domestic economic pain, then why would they stop? So I think what Albert talked about is Code Zero ending in March, and he and I’ve talked about that a couple of months ago as well. I think that’s the best case. So I think there’s a best case that they end it and they stimulate in March, but it’s quite possible it continues going on because there may be social reasons, there may be other reasons to not open up. 

So I don’t think, as westerners, we can look at the Chinese government necessarily and understand the perspective they have on policy and the reasons they have for policy. There is so much inside of Jungkonghai and all of the different things that happen that we just can’t look at it rationally and say they should do A, then B, then c, and very few Americans can look at that and understand why and how it’s happening. You may be exactly right.

EM: Yeah. It’s not a logical I mean, it’s more like if I’m she or if I’m trying to do this, it’s not really like what westerners typically associate as logical things to do economically. It’s more like it’s possible.

TN: Yeah. Anything’s possible. Guys, thank you so much. I really appreciate the time you took to talk through this. Have a great weekend. And have a great weekend. Thank you so much.

Categories
Podcasts

US midterms: An opportunity for voters to choose their economic future

This podcast was originally published by the BBC here: https://www.bbc.co.uk/sounds/play/w172ydq57tyy2z0

The midterms decide who controls Congress as well as state legislatures and governor’s offices. Rahul Tandon is joined by Dianne Brady, assistant managing editor of Forbes from New York and Tony Nash, the founder of Complete Intelligence in Texas.

Billions of US dollars are being spent on the election campaign adverts that voters will be seeing and hearing in the run-up to the elections – but is it worth the investment?

And has the economic situation in the US overshadowed the overturning of Roe v Wade?

Transcript

Rahul

Hello, and welcome to Business Matters here on the BBC World Service. I’m Rahul Tandonin-depth. On the program today, we’re taking an in depth look at the US midterms. As millions of Americans get ready to vote, we’re going to be looking at the economic factors that are going to have a huge impact on their decisions. I’ll be joined throughout the program, as always, by two guests on opposite sides of the world. We have Dianne Brady, assistant managing editor of Forbes, who’s in New York, was on the program just a couple of days ago, but she did so well, we decided to bring her back. Diane, is it exciting in New York? Are people gripped by election fever?

Dianne

Well, yes and no. Let’s just say New York is considered a flyover state by some, so I don’t think this would be considered a swing state. But yes, lots of excitement, of course, as we look around the country, and everything feels high stakes.

Rahul

It does indeed. The laugh you heard there was from Tony Nash, who is the founder of Complete Intelligence, who’s in Texas you need quite a lot of intelligence to understand the midterms. I think, Tony.

Tony

I’ve never heard of New York described as a fly overstate.

Dianne

All right, well, I’m a Canadian turned American citizen, so forgive me all listeners who think I’m being cavalier here, but I think it’s not inaccurate.

Rahul

But I don’t think there’s no need to ask for forgiveness so far in the program.

Dianne

The election is over.

Rahul

Yeah, maybe by the end of it you might need more than forgiveness, but who knows? Tony, for our listeners who will have heard of the midterms, can you try and explain what happens here? Because there’s lots of terms that we’re going to use. The Senate, the House, governors. I mean, what are people voting for?

Tony

Sure. So every four years we have a presidential election where you vote from the president on down to, say, local offices. Like in Texas, it’s people who run your waterboard and judges and your local commissioners. So it’s from the president on down. In between presidential elections, we have what are called the midterms.

Tony

So every two years so in the US. House of Representatives, those representatives have to campaign and be reelected every two years. Senators are reelected every six years. So not every senator is up for election in every election cycle. And then you have governors, and those governor’s terms change by state. They’re not always the same. In some cases, it’s four years. In some cases it’s five years. And I don’t know if there’s other places, but Americans are now voting on kind of everything except the president, and those, say, Senate seats and governorships that are not up for vote.

Rahul

Well, I tell you what. That was pretty impressive, actually. If you ever see a job as a sort of political correspondent, I think you might get one, Tony, I think we’re done here. Real quick.

Dianne

Tony, summer up beautifully.

Rahul

There we go. Should we all go? No. Oh, probably not, Dianne. And this is important, isn’t it? Because at the moment, the Democrats, which is the party of President Biden, they control the House and the Senate, there is a strong possibility that they may lose both, which will have huge implications for President Biden’s ability to pass legislation.

Rahul

I think Diane said there’s a lot to get through and we’re going to try and get through some of that. Let’s start by looking at the key economic issues.

Rahul

Cost of living, Tony, is something that people around the world want tackled. I’m sure that as people begin to cast their votes in a few hours time, when those polls do eventually open up on Tuesday for the midterms, that will be close to the top of the agenda. When we talk about the Democrats and the Republicans, the left and the right, what are the big economic differences between them and tackling this problem?

Tony

Well, I think there was a bill passed about a year ago, the Inflation Reduction Act. Diane, tell me if I’m wrong. I think it was $3 trillion in spending, and I think that was one that many Republicans didn’t want because there was a feeling that that was going to contribute to inflation. And so I think there was. The irony of it is just a year earlier, in the depths of COVID there was a massive stimulus package passed under the Republicans that everyone was happy about. So I think it’s easy to say, while the Democrats are the ones who spend and the Republicans are the ones who don’t, it’s not really the case. It really just depends on what they spend on. Republicans tend to spend on things like defense and security and law enforcement and these sorts of things. Democrats tend to spend on things like social programs. So I don’t know that one is necessarily more disciplined than the other. They just have different spending priorities.

Rahul

When we think of Texas, we think of gas, gas prices. We’ve seen President Biden releasing those strategic reserves of oil to try and bring down the price of gas. Is it that crucial a factor, do you think, in these elections? Will Americans just look at the cost of putting it in their vehicles and say, it’s too high, I don’t want to vote for this government?

Tony

Well, I think I saw a poll earlier today and I think it said that 65% of Americans believe that Biden is responsible for high gasoline prices. And I thought that was really surprising. I think it was from Pew. I can’t remember who it was from, but it was credible polling group. So Americans do see that and they do see that on Biden’s first day, he killed the pipeline, a potential pipeline from Canada, which would have brought heavy sour crude from Canada to fill US refinery.

Rahul

But these are global factors really, aren’t? I mean, of course, there are individual factors that will impact that.

Tony

No, they’re not global factors because the fact is, the sources of the crude that we need for American refineries is heavy sour. And there’s places like Venezuela or Saudi Arabia or other places where we could get it. But the most accessible is Canada. And so Americans do pay attention to that stuff, and they do pay attention to what is impacting gasoline prices because it’s such a huge portion of their budget. And so I think policy does lead to the cost of living, and I think it is a big factor. And I think people are looking at the way the different parties have reacted to this. And when that pipeline was canceled, republicans were very unhappy and voiced it. So I think that’s the case. And like I said, I think 60, 65% of Americans believe that Biden does have responsibility for the gasoline price in the US.

Rahul

Tony, one thing that often happens after midterm elections in the US is we begin to get an idea of who the presidential candidates are going to be. Do you think that we are likely to see in two years time a rerun of President Biden against Donald Trump, or do you think it will be other candidates for both parties?

Tony

To be honest, I think it’s too early to tell. I think even if Donald Trump starts campaigning Tuesday or Wednesday, I don’t necessarily think that it’s a done deal because people like Ronda Santos have taken a national profile.

Rahul

That’s the governor of Florida, isn’t it?

Tony

Governor of Florida. That’s right. And so I don’t think that Trump kind of as the Republican candidate is a done deal. I also don’t think that Biden as the Democrat candidate is a done deal. I think we’re very much things are very much in play, and really, anything could happen. I wouldn’t want to put money on, say, Trump or Biden right now because I think two years is a long time.

Rahul

Is it a bit harder for the Democrats? Because we know that with the Florida governor, there is, it seems, a candidate that the Republican Party can get behind if it isn’t President Biden, is there an obvious Democratic candidate at this moment in time? Tony.

Tony

I think there are a lot of people who believe they are, but I think maybe Gavin Newsom in California, but I think his politics are a little bit too far left for most of those independent votes that both Republicans and Democrats really try to get in order to get elected. So I think people like Gavin Newsom in terms of, like, political consultants do, because he looks good on television and all this other stuff, but I just don’t think he’s electable for a nationwide office.

Rahul

What we’re seeing here, Tony, and there’s a large Hispanic community, isn’t it, in Texas who play a significant role in elections there. Are we seeing these communities, whether it’s the Latino voter, whether it’s the black vote saying, don’t take my vote for granted, and that’s a message for all parties.

Tony

Sure, absolutely. If you look, say, on the border in the US. Part of my family lives in Del Rio, Texas, and they’ve never seen the quantity of people crossing the border that they’ve seen before, traditionally Democratic voters. And they’re really questioning their voting intentions because of the things that they’re seeing on the border. We’ve seen Texas border counties really start to swing right because of that. These communities that are small and safe and other things have really had an influx of people, and it’s really threatened, I guess, their way of life on the border. So some of these places that were very, very securely Democratic locations have started to move away from that.

Rahul

Tony, have you been flooded with lots of different political adverts as well across TV, across social media, across everything?

Tony

Yeah, I saw more during the World Series than I had seen in other places, but I just kind of ignore them, to be honest.

Tony

Yeah, I think it can I think a couple of dances on TikTok are probably worthwhile as well, but I think TV advertising is probably worth it.

Rahul

Are there any dancers of Tony Nash on TikTok, by any chance?

Tony

No, but I’ve seen some comments about different candidates kind of dancing on TikTok, and it was kind of silly. But it does get people talking about the candidate, and who knows if it works. I’m not 22 anymore, so it may work on me if I was 22.

Rahul

And when we’re looking at turnout here, we touched on it briefly before we heard John Sadworth saying to us that it was going to be a good turnout here. But the simple fact is, in the midterms, the majority of voters never vote, do they?

Dianne

That’s usually the case. I don’t think that will be the case this time. Tony, what do you think?

Tony

So I went to early vote last week, and I had to stand in line for quite a while to vote. So I think people are really, really engaged this time around, and I think it’s mostly because people’s pocketbooks are hurting and they’re just tired of it. So I think you’re hugely engaged because of the economy.

Rahul

That is interesting. Let us see what those numbers are. We will get them very, very shortly. Tony, if you believe the polls, and often that may not be a sensible thing to do nowadays when we talk about elections, they do seem to indicate that this is not going to be as important an issue. Clearly it’s a very difficult issue for many Americans, but it’s not going to sway voters as much as maybe people thought it was going to sway voters a few months ago.

Tony

It definitely won’t, I think. Look, all the Supreme Court said is that they’re leaving it up to the states, and so there’s no issue for mobility in the US. So people can go to another state to have an abortion if they want. So I think we had the initial emotion after the Supreme Court judgment, but I think when people really realized it’s a state issue and many of the things in the US. Constitution are really devolved to the states, and so this just takes that same issue and puts it up to the states unless the states decide. And so I think most adults, when they read it and they consider that if they really want to have an abortion, they can drive or get on a flight and go to another state, it’s really actually pretty simple.

Rahul

It’s a communicated economy, the US. Isn’t it? Because you look at it and we hear this talk of recession, we hear this talk about the incredible rises in inflation, cost of living, and at the same time, you sort of hear still about a very strong jobs market. Still.

Tony

Yes. But what we are starting to see there was an announcement yesterday, I think, that Meta, Facebook will soon be announcing major job cuts. And so job cuts are starting to hit the tech sector. Companies like Stripe laid off, I think, 18% of their workforce. Twitter had some big layoffs last week, and so tech is really starting to be hit hard with layoffs. So a lot of the discussion about job vacancies and unemployment, say, out of the Fed and the White House, that will start to even out. And the job market by the end of the year will likely be much less strong than it is right now.

Rahul

Yeah, I knew Twitter was going to make its way into the program at some particular point. Okay. Prediction diane. What is what’s going to happen?

Dianne

I think the House will go to the Republican. Senate, will hold Democrat, and Biden will have a tougher time the next two years.

Tony

Tony, Republicans get the House, they get 52 in the Senate, and they pick up a couple of governorships.

Rahul

Okay, well, thank you to both of you for your insights and thoughts on the American midterm elections. Americans will vote on Tuesday for the Senate, for the House, for governors as well. We’ll bring you all the results here on the BBC World Service. You.

Categories
Week Ahead

The Week Ahead – 08 Aug 2022: Low energy prices, China tech & stimulus, equity upside?

Learn more about CI Futures here: http://completeintel.com/2022Promo

Energy has taken a huge downside hit this week, in the wake of the OPEC+ announcement, US refining capacity utilization declining, etc. What’s happening? Why are we seeing differences between physical and paper crude markets?

Also, there was talk months ago about a new energy supercycle. Is that real? With China-Taiwan-US tensions tighter than they’ve been for years, we’re seeing Chinese tech stocks just muddle through. We haven’t seen a major hit – as if China tech will see major fallout from these tensions – but we also haven’t seen a major bump – as if China is expected to stimulate out of this to win domestic hearts and minds.

Also, could possible government intervention to solve China’s mortgage credit crunch be holding back the broad stimulus we’ve all expected for a couple of quarters?

Key themes:

1. Low energy (prices)

2. China tech & stimulus

3. Equity upside?

4. What’s ahead for next week?

This is the 29th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd

Albert: https://twitter.com/amlivemon/

Tracy: https://twitter.com/chigrl

Time Stamps

0:00 Start

0:30 Key themes for this Week Ahead episode

1:51 Moves we’re seeing in energy markets – why there’s a fall?

3:39 How much of the energy moves is seasonal?

6:58 EIA computer “glitch” problem

7:24 What happened in the refining capacity now at 91%?

8:30 Capacity utilization fall – is this a statement about the denominator or falling demand?

10:14 Is the commodities supercycle happening?

12:13 China and technology – KWEB is not falling or rising

14:00 Will the Chinese government help real estate developers? Will that take away from possible tech stimulus?

16:58 Viewer question: Is there still upside benefit to SPY?

22:18 How will be the start of the Fed pivot — 25 or 50 bps rise?

24:45 What’s for the week ahead? Listen to the podcast version on

Spotify here:

Transcript

TN: Hi everyone. Welcome to The Week Ahead. I’m Tony Nash, and today we have Tracy Shuchart and Albert Marko joining us.

We’re going to walk through a number of topics today. First is energy prices, low energy prices. We want to understand why that’s happening and what’s around the corner. Next, we’re looking at China tech and potentially the stimulus in China and how that will impact tech.

Finally, we want to look at equities. What remaining upside is there in equities right now, given the environment we’re in? Before we get started, I would like to ask you to like and subscribe to the channel. Also give us your comments. We’re very active and respond to comments, so please let us know what you’re thinking. If there’s something else we should be covering, let us know.

Also, we have a promo for our subscription product, CI futures, right now for $50 a month. With CI futures, you get equity indices, commodities and currencies reforecast every week. And you get all of those, plus about 2000 economic variables for the top 50 countries reforecast every month. So please check it out on the link below. $50 a month for CI Futures.

Okay, so guys, we’ve had a really weird week with the Pelosi visit to Taiwan, geopolitics and the risk associated with geopolitics is kind of back on. We’re not really sure exactly how that’s going to resolve, but I’m really interested in the moves we’re seeing in energy, Tracy, and we’ve seen energy really fall throughout the week and I’m curious why we’re seeing that, particularly with crude, as we’ve seen geopolitics dial up. I know there’s not a perfect correlation there, but we typically see crude prices rise a bit with geopolitics. 

TS: I think, it’s a combination of a lot of things. First of all, we’ve had which is ramped up to 200 million barrels being released to the SPR, which is fine initially, but we’re looking at the cummulative effect of this. In fact, we’re releasing so much so fast that now those barrels are actually finding their way overseas because we have nothing else to do with them. We can’t process that much right now.

And so we’re looking at that which is putting a damper kind of on the front end. We’re also looking at the fact that open interest is almost at the lowest in a decade, which means there’s nobody participating in this market. People are just not participating in this market.

In addition, we have physical traders that are completely nonexistent in this market anymore. They’re all trading via clear port on the OTC market as I’ve talked to actual physical traders, they don’t even want to be involved in this volatility.

And so that’s also taken a lot of open interest out of this contract. So this contract is easily pushed around because there’s just not of liquidity.

TN: How much of that is seasonal? How much of that is because it’s early August, late July, early August?

TS: It is seasonal. I will give you that because this summer is the summer lag. We generally see more participants in getting in September, and we’ll have to see how that kind of plays out.

But in general, the market is, this whole dive started in, was this market was factoring, we’re going to have this huge recession. Right? It’s going to be low berry session. Demand is going to go up.

And then we have this EIA discrepancy. The discrepancy was on gasoline demand. Actual gasoline demand versus what the DOE is reporting. Right? And ever since they had that “glitch,” where we had two weeks of no reporting whatsoever, those numbers suddenly changed.

And now they’re putting gasoline demand at below 2020 numbers at the height of COVID, which is to me,

not to sound conspiratorial, but to me, there’s just no way that we are below 2020 numbers. Right. And if you look at Gas Buddy demand, which is they look at a kind of a different look. What they look at is how

many gallons are being sold per station across the nation. And that’s how they kind of factor in what demand is. DOE is at the midpoint, right? So it’s like the midstream level. But those numbers should

eventually correlate. That discrepancy should eventually get together.

TN: So Gas Buddy is showing demand still growing, and DOE has it kind of caving. Is that correct? You know what I’m saying?

TS: Okay, yes. First of all, I think we need to look at the 914 numbers, the monthly numbers, which are definitely lagging. They’re too much behind, but they have been correct on production. Right? So I think they have weekly production at 12.1 million. Last 914 monthly report was at 11.6 million. So it is lagging information. But we have to start really looking at these weekly numbers and what the DOE is reporting and what they’re not reporting.

TN: If anything, what I’m seeing just observationally traffic seems to continue to grow. Like, I’m seeing more people going back into the office. I’m seeing more people take drives where they wouldn’t have taken long drives before. So what we’re seeing out of DOE doesn’t really match with what I’m seeing observationally. I could have selection bias, but it just doesn’t seem to match what we saw in April, May

of 2020. 

AM: Tracy is absolutely spot on on that. I actually had a few people note that the EIA computer “glitch” problems set all this thing off in the DOE inventory shenanigans. It’s starting to gain more traction with everybody. It just doesn’t add up. When things don’t add up, bad data comes in, and it’s politically advantageous for the moment try to get gasoline down, going into midterms. I mean, Tracy is absolutely 1000% spot on that assessment.

TN: So, Tracy, I want to ask you a couple of questions. We’ve got a chart on refinery capacity utilization, and it shows capacity utilization at about 91%. So last month we were talking about being at 94%. Now it’s at 91%. What’s happened? Has the Denominator going? 

TS: Well, that’s not actually a bad thing. Let me tell you that. Refineries operating at 94% 95% leads to a lot of problems. You’re going to see problems with maintenance, you’re stretching that capacity. Personally, I love anything over 90, 91. I’m much more comfortable with than 94 95%, which we got to, which is very stressing to me because you’re stressing those refineries, right. And that’s going to lead

to problems down the road. So for that to come down, it’s not a big deal to me, to be honest. Anything above 90, great. We’re good.

TN: Okay, so we’ve seen gasoline prices fall as we’ve seen capacity utilization fall. And so is that a statement about the, say, the denominator meaning the available capacity, or is that a statement about falling demand?

TS: I don’t think it’s a statement about necessarily anything. Okay. To be honest. Is the expectations around say that the gasoline price falling, is it expectations maybe around recession, but given the job numbers we got? Expectations about being around recession right when we’re seeing these prices fall. And I think we have a lack of participants in this market, especially lack of participants in the physical markets. The physical guys, like guys that trade for BP and Shell, which is where they’re just not in this market anymore because it’s too volatile, it’s too pulled around, and they can’t deal with that right now. So there’s nothing structurally changed about the physical markets right now.

You have to understand, too, is that the paper markets far outweigh the physical markets, meaning that there’s far more paper barrels traded than there are actual available physical barrels on the market

to be traded.

And when we look at a contract like WTI, which is actually physically deliverable, and we look at the market participants that are involved in deliverability, that is shrinking, shrinking margin, and then you look at something like the Brent contract, is completely just a financial contract.

So there’s a lot of hanky panky goingon in that market.

TN: Okay, now one last question while we’re on crude. Months and months ago, we kept hearing about this emerging commodities super cycle. And as we’ve seen commodities fall over the past few months, there have been some questions about is that really happening? So where are you? Do you think we’re in the early stages of another super cycle or do you think we’re just kind of modelling through?

TS: I actually think we’re still in the early stages of a super cycle. I mean, I think we’re kind of like I think my best comparison sake would be like, let’s look at the 1970s, right? And everybody’s looking at that ’73, ’74 when the oil embargo happened. But I actually think we’re closer to the ’67, ’69 era where we saw inflation kind of hit. Right. They tried to hide us into a recession, and then we had another peak in ’73, ’74 because issues with the market and then we have a third wave. So I actually think we’re only in this first wave of an inflationary cycle as far as commodities are concerned, okay.

Because we’re still in a structural supply deficit across not just the energy sector, but base metals, agriculture, et cetera. but you have to think your input cost for metals and for agriculture, it’s all energy.

So if energy is high to see inflation in energy costs, then you’re going to see inflation across all

of these commodities. We’re at $90. We were at negative $37 two and a half years ago. So to think that we’re crashing? You know.

TN: Okay, let’s switch over to China and technology and kind of talk through a few things with Albert. Obviously. Albert, we spoke earlier about Pelosi’s visit to Taiwan and US. China Taiwan affairs, and I’d recommend anybody view that that we published on Tuesday night US time. But I’m curious, Albert, as we look at and we’ve got KWEB up on the screen, which is an ETF of Chinese technology companies, it’s kind of middling. It’s not really falling. It’s not really rising. It seems like people are a little bit uncertain about what’s happening with Chinese tech. We have the closures of different cities. We have one of the big manufacturing cities that’s going zero COVID now.

And we obviously have the China Taiwan issues. What are your thoughts on China tech right now? And what should we expect over the next, say, two to three months?

AM: Well, over the next two to three months, I think China is going to be forced to stimulate. Once they stimulate names like KWEB, Alibaba actually, I really like Alibaba. There’s some good things happening there. I mean, the delisting stuff is a risk and it’s always been a risk, mainly because Gensler and Yellen have been trying to suppress the Chinese to stop stimulus because it hurts the United States and their plans to fight inflation.

So, yeah, I’m really bullish on KWEB. I really like it at 25 26 level. It’s not that far from where we are right

now. For the Chinese tech, it’s like, I don’t really think domestically, there’s too many problems domestically for KWEB. For me, it’s just all the delisting risk and that shot, the warning shot across the bow from the US. 

TN: Okay, so when you talk about stimulus, I want to understand a little bit of the substitutionality of stimulus. So if we have this big mortgage crisis in China where owners aren’t paying their mortgages,

and that’s even worse on the property developers, and there are trillions of dollars at risk there, do you think the Chinese government will intervene  and help those property developers? And if they do, will that take away from stimulus that could help technology companies?

AM: They will step in, but they’ll step in selectively for the most systemically important property developers. Not just the best connected, but the ones that touch the most debt and whatnot. So they don’t want things getting out of control. So for sure they will step in. I don’t think it will take away from the tech

sector at all. I think that the Chinese have been pretty pragmatic and diversifying how they get money into the system, whether it be other Asian countries, the US, Europe and whatnot. But they’re definitely in line right now to stimulate the economy going into the fall.

TN: Okay, great. If you’re trying right now and you’re talking about stimulus, that is to make up for kind of the COVID Zero close downs, but it’s also, I would assume, kind of winning some of those hearts and minds going into the big political meetings in November. Right, so you’ve whipped up nationalism with the Taiwan thing over the last couple of weeks and now you need bridge to get you to November. So you’re going to put out a bunch of stimulus to keep people fairly nationalistic and obedient. Is that fair to say?

AM: Yeah, that’s definitely fair to say. I think going even a little bit further than that is keeping the circle around Xi happy. That nexus of connected families that make money off the tech sector manufacturers. They need to be able to solidify it economically and stimulus will be targeted like that. And so when you say keep those families happy. You’re talking about skimming, you’re talking about sweet deals on contracts and that sort of thing.

TN: And I just want to make clear that doesn’t only happen in China. That happens in every country, right?

AM: Oh, every country you can imagine that happens. How politically connected with the donors, the political parties and so on and so forth. I just want to make clear to viewers. Like everybody. 

TN: Yeah, I just want to clear to viewers, we’re not just picking on China. This happens everywhere. 

AM: No, this is nothing negative towards China whatsoever. This literally happens in every country in every single country. Yeah.

TN: We had a question come in from a regular viewer talking about one of Sam’s calls. He’s not here, so he can talk behind his back today. The question was, Sam had talked about risks being to the upside a while ago for SPY, for the S&P 500. Now that we have had a mini rally, does he still see higher as the path of least resistance or is the risk reward fairly balanced here? I mean, we’ve seen a really nice uptick in the S&P and equities generally. Do you think there’s still upside benefit, or would you be a little bit hesitant in terms of the broad market?

AM: I’m bullish for a week, basically going a week, maybe two. I think that the CPI number is probably going a little bit lower than people think. And then all the peak inflation people are going to come out the woodwork and then they’re going to talk about Fed pivot, whether it’s real or not. I don’t think the Fed actually pivots. I think they just build a narrative of a pivot, if that makes sense, to rally the market.

But going forward, the economy is not a good footing. The job numbers are just not accurate. It’s a purely political headline for Biden going into the midterms. CPI is going to follow the same suit. They’ll probably have a 50 basis point rate hike in September and say that they’re slowing down. And whether it’s real or not. 

TN: I want to question you just to push back a little bit. When you say the economy is not on a good footing, what do you mean? Help me understand how it’s done on a good footing? 

AM: Well, the whole jobs? Listen, 20% of people don’t have a job. 19% of people have two jobs or more. You’re sitting there making this glorified headlines thatBiden is great for the job market and the economy, but it’s just not accurate. We have people that are struggling paycheck to paycheck more than any time in the last 20 or 30 years. So the underlying economy, forget about the top half that are millionaires that are buying whatever, the bottom half of the country is an absolute recession. So that’s what I’m saying the economy is not good.

TS: I mean, I totally agree with Albert. I mean, I’ll make a case for the bullish side. Let’s put it this way. So not a single trades work this year. Average hedge fund scrambling on how to salvage this year. There’s no other choice, really, but to get long. I mean, we have long going girlfriends been shell shocked. Font, shitty year. Value guys waiting to buy the dip in cyclicals. So I think that until when November comes and we have redemptions and these guys are faced with losing money from clients, I think that right now they have no other choice than to buy the dip, which is really interesting because that coincides with midterms. But not to put on my tinfoil hat there. So that’s my case for we may see a little bit higher than people that anticipate.

Even though I agree we’re still in a bear market. Albert makes a ton of good points, totally agree with

him 100% on that. But for the next few months, we may be looking at different kinds of things, especially because we also have the CTAs that are still super short.

So we have the possibility that we could see a short squeeze now if hedgies start

eating up the market and… This is exactly what the administration wants to see, because they want to see the S&P higher going into Midterm electric if it makes them look great. Of course.

AM: And Tracy is right. And this goes back into the oil numbers from the DOE and the EIA Shenanigans. They lower gas, they try to get inflation lower. They rally the market going into Midterms. It’s just the way it is. Now, going back to the economy, real quick, Tony, I see across the street the US consumer credit was $40 billion. I mean, people are spending and collecting debt like it’s going out of stock.

TN: That’s not a good number. You saw my tweet this last week about the $15 grapes. I mean, that sounds ridiculous, but people are having to. I talked to people about their electricity bills and they’re doubling and tripling over the last few months. And so people are having to do this. Rents are doubling in New York and so on and so forth. So it’s hitting everybody. And people are having to tap into consumer credit just to make ends meet.

AM: Just for the viewers, Tony, the forecast was 27 billion. It came in at 40.

TN: Wow. That’s a slightly overestimate, I would say. Let me ask you a quick question about the Fed pivot. Okay. You say the Fed is going to kind of act like they pivot but not actually pivot. So would that mean and I know everyone’s been on Twitter today or on social media saying, oh, the job’s number puts 75 basis points in focus again, all this stuff. But would the start of a pivot be 50 or 25 basis point rise?

AM: The start of a narrative of a pivot would be 50. But let’s just be honest. Inflation is not going away. They can fake a CPI number, maybe one, maybe two months. But come October, December, January, and inflation is raging, nine point whatever, 9.5%, 10%. They are going to have to keep going 75 basis points. 

TN: So when you talk about a pivot, you’re talking about the beginning of a pivot, maybe a 50 basis point rise in September or something just to kind of ease nerves off a little bit?

AM: Yeah, that’s exactly what it is. It’s just the beginning of a narrative to move the market. It’s all it is. 

TS: Okay, if we went 50 instead of or even 25 instead of 75, which the market is expecting, the barn market would freak out. 

TN: Now what happens to commodities in that case, Tracy, if we’re in September and we go 50? You’re

going higher.

AM: Okay, this is the problem I keep telling screaming people and why I didn’t think that’s why I didn’t think this rally was a good idea is because all of a sudden now you’re going to create this stupid pivot narrative and do 25 or 50 basis points. But then, like Tracy just mentioned, commodities are going to rip. What’s that going to happen then? We’re going to have stage two of inflation coming around in 2023. That’s going to make this like nothing.

TN: Yeah, but as long as it happens after November, I think. Everything’s fine. Right. No, seriously, we have to think we’re in that. We’re in those closures.

TS: You have to think everything is political right now. So every decision is political right now and you have to factor that into kind of your investment thesis right now.

AM: Tracy’s absolutely right. I was just talking to a client. I said I don’t want to hear anything after November of this year. This era is this era right now. After November is a different era. We’ll talk about that accordingly in the next month. But until now it’s just a pure political game.

TN: What are you guys watching in particular for the week ahead?

AM: CPI. I think the CPI comes in a little bit lower than people expect and will rally the market for another 100 points. Like a seven handle or something? I think it’ll be a seven handle.

TS: I mean, everybody is watching CPI, I agree. I’m watching CPI as well. I think what’s really interesting going into this next week is I would start looking at Basin Industrial Metals and miners at this point because I think that they are lagging crude, they have been lagging crude oil. But we’re kind of starting to see a little bit of turnaround. So my focus really is going to be on base and industrial metals.

Categories
Week Ahead

The Week Ahead – 03 Aug 2022: Pelosi, China, & Taiwan

Learn more about CI Futures here: http://completeintel.com/2022Promo

There’s all this buzz around Nancy Pelosi’s visit to Taiwan. What is she doing there? Why all the stress? Why is China upset?

Also, Yellen got China to stop the stimulus. If China starts the stimulus, will that be a really good thing for Chinese equities? And what does that do for the CNY?

We also discussed the likelihood now with Pelosi’s visit that China will start stimulating. And what does that mean for oil and gas imports and Europe?

Will China try to hurt US companies that are in China? Do you think they could push against ex-pats in China and make life difficult for them? What are possible aggressive moves that China could take? Like cyberattacks?

There have been some potential whispers of China taking over some of Taiwan’s small islands to make a statement. Is that possible? And will they take it on other countries like India? What is the likelihood of China and the US in direct warfare engagement in the next twelve months?

Listen to Spotify here:

This is the 28th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd

Albert: https://twitter.com/amlivemon/

Chris: https://twitter.com/BaldingsWorld

Transcript

TN: Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash, and we’ve got a special Week Ahead right now. We’re joined by Albert Marko and Dr. Christopher Balding to talk about the Taiwan-China issues around Nancy Pelosi’s visit. 

Before we get started, I want to let you know about a special we’re having for CI Futures. We’re doing CI Futures for $50 a month. With CI Futures, we forecast about 2000 economic variables every month and about 900 market variables (currencies, commodities, equities) every week. That $50 deal is for the next couple of weeks. And you don’t even have to take a year-long commitment. For the next couple of weeks, you do it a month at a time, and it’s $50 a month. 

So let’s get onto the show, guys. Thanks again for joining. I appreciate it. 

I want to get into there’s all this buzz around Nancy Pelosi’s visit to Taiwan, and I want to take a step back and go, why all the stress? Why is China upset? Because I think there are a lot of loaded assumptions in the discussions that are happening. So can you guys talk us through a little bit, maybe? Chris, if you want to start, why is China so upset about this?

CB: So there’s the full history of the claim of Taiwan as Chinese territory. They refer to it as a Chinese province. That’s the general background. I’m going to assume that most of your listeners or watchers already know that.

However, if we jump ahead to this specific visit, to be honest, I’m a little bit mystified as to why this

specific visit has turned into this small crisis. Trump was sending a cabinet secretary and undersecretaries. There’s been a steady stream of Congresspeople to Taiwan. So why this specific visit? I think there’s very reasonable speculation we can go through those. But why this specific visit has turned into what it has, I think there are probably only a couple of people that could answer that question. 

TN: Okay, Albert?

AM: Well, to expand on that, I can understand why the Chinese have a little bit more drama involved in this visit simply because the economic situation in China at the moment is so dire for Xi that they need a little bit of a distraction just to get the headlines out of the way at the moment.

TN: Yeah, I think that’s a good point. And when I think about this, it’s, yes, you can go back into all the history and the UNC, the 1971 and all of this stuff, but I think my view is democrats need a distraction for the midterms. You have the Afghanistan anniversary coming up, all of these things coming up. A bill was just passed that either does or doesn’t raise taxes on a lot of the population. There’s a lot of discussion around that. 

Are we in a recession? Not a recession. I think this is a convenient foreign policy issue for Democrats to grab onto before the Midterms to raise some external issues that are a little bit more mysterious for people, a little more exciting. Will there be a war? That sort of thing. 

And I think, Albert, you’re exactly right. With the November meeting coming up in Beijing, where Xi is supposed to be this golden boy and a lot more power and all this stuff, the new Mao or whatever, I think China’s economy is in a horrific state. I think the provinces and cities are not falling in line with Beijing, and I think politics in China is terrible. So I think this helps galvanize people in China, it helps galvanize people in the US. And I think it’s more of a convenient event than anything.

AM: It is a convenient event. Other issues are going on within China with the actual US.

Fed and Yellen are Yellen got them to capitulate to stop stimulus to fight inflation. So from the Chinese perspective, they’re a little bit they feel a little bit betrayed here. Seeing Nancy Pelosi

nude sunbathing on Taiwanese beaches, it’s like, what are you doing?

TN: Yellen got them to capitulate, to stop safely. So you’re saying Yellen got China to stop stimulus? 

AM: Yeah. I don’t know if it was direct or indirect, but Xi warned them to don’t stimulate while we’re trying to combat inflation. Look what happened to the Russians. And from the Chinese elite perspective, looking at the oligarchs in Russia, being completely isolated from the rest of the world, that’s just something that a pill that they didn’t want to swallow, and they were glad to hold off stimulus up until this event. Now, I don’t know, after this event, the Chinese might renege on that gentleman’s deal, but we’ll see at this point.

TN: Okay, let me pursue that in a minute because that’s interesting. So if you’re saying that the Chinese were holding back stimulus because of a quiet bargain, and they reverse on that and they start, as I’ve been expecting them to do for the last six months, just dump truckloads of cash on the squares in Chinese cities, if they start doing that, that could potentially actually be a perfect thing for Chinese equities, right? 

AM: Well, of course, but it’s negative for the US inflation and the commodities will start ripping. It’s an asymmetric shot against the US. So it’s something that they have in their toolbox and they haven’t used yet, but they certainly could after this.

TN: Okay, and so what does that do for the CNY, guys? If China starts stimulus, if it’s fiscal that appreciates CNY, at least from a textbook perspective, right? 

AM: Yeah, from the textbook perspective, sure. They control whatever they want to set the CNY at, so, I mean, I can’t see them allowing it to shoot up too far just because they are an export-dependent economy. 

TN: Okay, Chris.

CB: I just wanted to circle back to what we were talking about before jumping back to the CNY issue because this has been a real puzzle about they’ve been pretty restrained, and there are all kinds of questions as to why that is. 

And again, I wish we could provide good, solid answers about that. I think a lot of the issues, like with Taiwan and stuff like that, I think there’s like, Tony, you mentioned the economy. I think that’s distinctly possible. I think it’s also one of those issues. If you go back right after the first of the year, they changed the language about reunification and how they were going to solve that problem for the new era. 

What’s the new era? It’s Xi getting the third term. So is it possible that the economy is, like, pushing this along, egging it forward, so to speak? Yeah, I think that’s possible. I also think there’s much more like Xi has staked his credibility on, I’m making China great again, come hell or high water, if I have to drive it off a cliff to do it. That’s part of what you’re seeing.

AM: Yeah, I agree with Balding on that one. The only caveat that I would throw in there is that would be exactly the case up until the Ukraine situation where Russia got their butts handed to them. 30,000 troops lost, flagship battleship gone, sunk.

From the PLA perspective, it’s like, hey, what happens if we lose? Because it’s not a 0% chance, right? What happens if we get decimated? Our military could be set back 50 years, 100 years. And I think that at this point, it’s too much of a cost for them to take an adventure in Taiwan.

CB: Yeah. I will say you and I disagreed on this previously. Like, what were the risks? Let’s assume Ukraine had never happened. I would say there’s probably a not immaterial chance of something

happening with China and Taiwan in the next, let’s say six to 18 months.

At this point, I definitely would push that back a little bit. If something’s going to happen, I think, within the next few years. But absolutely. I think they’re going back to the drawing board because they see what’s happening to Russia in Ukraine, and they’re like, there’s absolutely no way in hell this can happen to us. 

AM: Yeah, they saw Afghanistan as a point where they could probably take some territory away from the US sphere of influence. But then again, Ukraine happened, and that threw everything through, wrenching all the plans. 

TN: Okay, so let’s talk about that a little bit. The Russia-Ukraine angle is interesting. So when sanctions were put on Russia, Russia can do okay without sanctions, not thrive, but can survive. But China is so intermingled in global trade that if sanctions are put on China, it could be very difficult for them. Right. Or what am I missing? 

AM: It could, but they’re the world’s manufacturing base, so it’s like, you put sanctions on them, they’ll put sanctions, they’ll do something asymmetric, and it’ll hurt the West more than the West can hurt China, to be honest. I mean, The US can handle it. The Europeans can’t. They’re already in dire rates. 

CB: The other thing that I would add to that is people make the sanctions argument. I don’t buy the sanctions argument for two specific reasons. One is basically what they import. The bulk of what they import from the rest of the world is raw materials. And that’s not coming from Western Europe, Japan, or other places like that.

Then the high-tech products that they do import, let’s say very high-grade chips, are going into things like iPhones and then being re-exported right away. Okay, so they’re not on an import basis highly dependent on the rest of the world. 

They’ve made two bets with that in mind. Number one is that they can convince people not to block their exports, meaning Chinese exports to their country. Number one. And then also that other countries are so dependent upon them that they can’t. Okay?

What would happen to Walmart during the Christmas season if they couldn’t buy from China? Okay.

It’s a simple example, but it does throw a monkey wrench in there. 

AM: Caterpillar is another one. The Chinese have done a marvelous job of using US agricultural companies against the US political system. So they’ve got a noose around them. Buick also. GM, Buick, Caterpillar. I can name half a dozen companies. Yeah.

TN: My main focus in terms of sanctions was food. These other things, of course, they’re importing goods, really, largely to be transformed and re-exported. Food is the main issue that I would think would be damaging to China, potentially. 

AM: Yeah, that was always one of my main points of contention about a war starting with Taiwan is those ports being shut down in the eastern part of China, it would be devastating. They would have food and security problems. The Chinese middle class has been growing. They don’t want rice anymore. They want noodles and dumplings. So they have a persistent food issue that just gets worse and worse every year.

TN: Right. Okay, so let’s go into this. I saw Pelosi kind of pull up into that. I think it was the Grand Hyatt she’s staying at in Taipei. And really, what is she doing there? Like official, non Official. What do you think she’s doing there?

AM: That’s a pure distraction from the midterms in the economy in the US at the moment. It’s an easy distraction. They know China is not going to do anything outlandish. They’re a pretty pragmatic country when everything is said and done anyway. So it’s like, what negative is there for them, for Pelosi and the Democrats at the moment?

CB: Here’s the only reason I’m going to disagree with you, and you said something very similar earlier, Tony. Here’s. The only reason I’m going to disagree with you is that this assumes a level of evil genius out of the White House and maniacal thinking that I just don’t think they’re capable of, okay? Okay. Again, I could be wrong.

AM: I just don’t see these guys as the evil genius that says, hey, we need a distraction, what can we do?

I don’t think it’s an evil genius. I think that’s a little bit too strong. The game of scapegoating and distractions in the beltway is as old as time itself. The professionals at it. They can see what they want to do to pull people’s eyes away from one issue onto another and they have the media under their grips so they can do anything. They want to distract people. So the evil genius part comes in what are, steps 2, 3, 4, and 5 after this? Because now the Chinese can retaliate and I don’t think the US is prepared for that.

TN: In what ways? 

AM: Well, I mean if the Chinese decide to start simulating next week and commodities start ripping, inflation in, the US is going to have a ten print, 10% print on CPI come October, November, then what? You’re in the smack middle of the midterms looking at 10% inflation and you’re losing 50, 60 seats in the House and you’re losing the Senate and then you have the Republican take over and start throwing out hearings against Joe Biden every week like they did Trump. It’s chaotic. 

TN: Okay, so that’s an interesting scenario. Okay, I want to ask about that and then I want to ask another question about a potential reason for visiting. But you’ve mentioned that a couple of times. So what’s the likelihood, since they’ve said that they’ll undertake serious pushback, is there a likelihood that they’ll do that? Do you put that at a 50, 60, or 70% likelihood or do you think they’ll continue to hold?

AM: I think after this visit by Nancy Pelosi, it’s a greater than 50% chance that the Chinese start stimulating a little bit earlier than scheduled with commodities ripping.

TN: Okay, so that means more oil and gas imports, more pressure on gas prices, and diesel prices. All this would hurt Europe too? 

AM: Oh, of course. Europe has got massive energy issues going forward and they’re unsolvable within six months. 

TN: Okay, so so far I’m hearing potentially bullish Chinese equities and potentially bullish commodities, particularly energy, commodities, and industrial metals, right?

AM: Oh, absolutely, yeah. Full discretion, I’m going into KWEB. I have Baba at this low with this Pelosi landing. So for me, it’s just like Chinese equities have been battered with no stimulus. We’re down to the point. Yeah.

TN: Okay, so on tech, you mentioned tech. Is it possible that with the chips act just passing in the US, this is the one that supports semiconductor companies for putting operations in the US? Is it possible that there is a message being passed to TSMC or any of the strategic industry guys in Taiwan by Pelosi and her staff? Is that a possibility? And if so, what do you think it would be? 

CB: Absolutely. I would say that that’s one of the things I don’t know if you caught this statement from the chairman of TSMC, but he gave an interview just a day or two ago and he said, “China, if you invade, like all of our plants on the island are dust, they’re worthless. There’s nothing there.” Because I can guarantee you that. I’m sure that the US Air Force would have the coordinates for every TSMC plant that it’s like, hey, we’re going to make sure that China doesn’t get them. I’m sure that TSMC, at this point, their reputation is being a pretty well-run company, very attuned to security issues. And so I’m sure that they have multiple redundancy plans and multiple security plans to address that if China is locked in. So you have to think that TSMC, all the way down to all their key suppliers and things like that, are in some type of meeting here with Nancy.

AM: Yeah. I’m not very keen on this chip sack bill. I think it’s just fireworks and stringers and ticker tape raid. But there are EPA issues to deal with when chip-making also. So no matter what, whatever they want to throw out for legislation, as long as the EPA is hampering manufacturing in the United States, manufacturing is going nowhere, at least for the next five to ten years in the United States. So this chip act, although it gives a little bit of pressure, don’t think it’s going to be that big of a driver in the next five to ten years. 

TN: Okay. I want to talk to you guys a little bit about the pushback that China may give to US companies. So China already blocked a $5 billion battery investment from a Chinese company in the US. That was just announced today, and those batteries were supposed to support Tesla and Ford, I believe. Do you think China may try to hurt US companies that are in China? Could they directly take action against, say, Tesla or GM or Ford or GE or any of the American companies that are sitting in China? Do you think they could push against, say, ex-pats in China, and US ex-pats in China and make life difficult for them? 

Because if we look, for example, at what happened in Russia, we have a lot of Western companies that have abandoned their operations in Russia over the last eight months. Right? Is it possible that American companies get pushback from the Chinese government? 

Because if I think of what the Chinese government did to Japanese companies in 2012 if you remember that. It was very aggressive. They were instigating protests against Japanese companies, Japanese expatriates, and Japanese government officials. Could they instigate that against the US? Companies? And could they push us Companies to just give up their operations in China? 

CB: Well, the only way I would rephrase that is how would that differ from normal standard operating practice? Even within the past couple of years, there’s been a massive flood of not just Americans, but all foreigners out of China. And these are everything from journalists to just basic school teachers, English teachers. Okay? So it doesn’t even matter if you’re a sensitive national or in the sensitive industry or what China deems is sensitive. 

This goes for businesses as well. You heard stories about companies saying, oh, well, I have 10 million, $50 million of profits I can repatriate. I’m going to close down my China plant and go to Vietnam. And basically what they do is they just freeze everything and said, oh, you have an unpaid tax bill, coincidentally, the same amount of money that you were going to repatriate. And so they just have to walk away from everything or sell it for one dollar or something like that. 

So when you talk about that, I think that’s entirely fair. I think that’s going to happen. I think the only people that are going to effectively remain there till the end are the Shells of the world that didn’t get out of Russia until the bombs and the missiles started flying. I think it’s going to be the same with China.

TN: Are you saying that you think some US companies will in the next, let’s say, two to three years, abandon their China operations? Do you think that’s feasible? 

CB: Oh, yeah.

TN: Okay. 

CB: I think it’s already been happening. It’s not announced. You see a couple of announcements here and there. You hear about many more talking to people that are still there. But yeah. 

TN: Albert, what do you think about that? 

AM: Yes, they will. There’ll be certain companies that they go after depending on whatever political calculations they can throw at the US, for sure, without question. They’ve done this. I mean, Christopher said they’ve done this in the past. Nothing new. 

TN: Right. So how would that start? Would they try to push aggressively to localize leadership? I know a lot of that leadership is already localized, but would they almost make it mandatory for leadership of, say, US companies to be Chinese and then kind of cascade that through? Or what would the early phases of that look like?

AM: I think the early phases would be phantom tax violations or some kind of fines or fees that just pop up out of Chinese mountains. Who knows? Do you know what I mean? So I think that’s the first thing you’d want to look at if they start doing it.

CB: Yeah. And again, what you’re talking about, I think, is basically what’s been happening for the past couple of years is whether it’s the phantom tax bill, whether it’s all senior leadership has to be Chinese or party members or all those kinds of things. I mean, when you’re asking about that in the future, it is like, well, how would that differ from the past two to three years?

TN: Right. It feels like we’re on the precipice of that. And some of us have been talking about kind of the end of the Asian century for probably the last five to eight to ten years. And China is what seems slow, but very rapid decline in terms of its ability to grow. Not the fact that it’s not already huge, but its ability to continue to accelerate growth. That’s gone. Those days are gone. Right.

And when growth stalls out, the opportunity becomes a zero-sum game. And it’s about market share. It’s about getting your piece of the pie. Not a growing pie, but a stagnant pie. And that’s when things get very difficult in authoritarian countries. Right?

CB: Well, I think to add upon that, they were following the Asian growth model of build, in simple terms, run large trade surpluses, controlled currency, build apartments. It’s a pretty tried, true path. But one of the things that are very different is if Malaysia runs a large fiscal surplus, nobody cares. If Taiwan runs a significant trade surplus, some people care, but whatever. 

For every percentage point of GDP in trade surpluses that China runs at this point when you’re the second largest economy in the world, that is a massive, massive number, not just against your economy, but against the global economy. And that’s going to create massive, massive dislocations elsewhere. 

And then the other thing is that when your only source of growth is basically building apartments, and now they’ve got like 20% to 25% of these apartments all over the country, empty and household debt that is significantly above the OECD average. It doesn’t make any sense, and this is what they’re running up against. Okay.

AM: To take that a step further, it’s like if you have low growth and your economy starts in the waiver, how do you fund a growing military to combat the United States on a global level? The math doesn’t add up. Very difficult.

TN: Okay, I want to move next on to things like cyberattacks. Chris, I know that you’re very focused on kind of the IT side of what the Chinese government is doing. Can you talk us through some of the potential, maybe aggressive moves that China could take in the wake of this?

CB: Sure. So there are all kinds of things. And one of the things, you saw today where they were looking at, they shut down the Taiwanese Prime Minister’s website. But that’s, to be honest, small potatoes. 

The type of thing that you would look at, and you’ve seen this a little bit in Ukraine is where they went after things like nuclear reactors and other things like that. So if you’re looking at this, one of the types of things that you would be looking at would be, for instance, Taiwan being an island, there’s a handful of spots where cables come ashore. So what would you be looking at? Because if you wanted to make it hard on Taiwan, that might be something that you would go after. 

If you had the capability, and they are very likely due to some capacity, you would be looking at putting bugs in the TSMC type of production capacity. So those would be the types of things to narrow it to Taiwan. But generally speaking, if you aren’t being hacked by China, that basically just renders your place in the universe irrelevant, almost, because they’ve pretty much gone after everybody.

TN: Right. Albert, what do you think? 

AM: Yeah, I mean, the Chinese are prevalent in the cyber terrorism space. They’re out there stealing trade secrets and corporate secrets all over the place, especially in the United States. And I don’t foresee that slowing down at all. If anything ramping up, and they’re good at it, and we have lacked security in the United States, and it needs to be tightened up.

TN: Right. And we intentionally, for the viewers, did not record this on Zoom. That’s an indication of some of the thoughts around there. 

Now, guys, there are some islands between Taiwan and China, and there have been some potential whispers of China taking over, say, some islands, some of Taiwan’s small islands to make a statement. Do you think that’s possible?

AM: It’s possible. I don’t understand why they would try even risking that. What if they lose a few ships?

What if they lose 1000 or 2000 troops? It’s like all of a sudden you look weak and then you’re going to be forced into a position to do something bigger. It would make no sense from my perspective.

CB: The only reason I kind of disagrees is that there’s a handful of some of these very small islands, so I doubt that they have any military hardware there. And some of them are literally, I think, as close as like 10 miles off the Chinese mainland like that. They’re just that close. And so just as a symbolic act, something like that wouldn’t surprise me at all.

AM: It won’t surprise me at all. I’m just saying anything closer to the Taiwanese actual island, I would be wary of seeing the Chinese try to take them. 

TN: I spent a week on one of those islands in 2009 waiting out of typhoon, and it was an experience, but I think it’s feasible. It’s an island off of Taidong, which is no, that’s on the southwest side. They wouldn’t do that. They would do it on the I was on the southeast side. They would do it on the southwest side or the northwest side. But there are lots of islands, very small islands off of Taiwan.

Okay, good. What else I think do we need to be thinking about here? There has been talking of the Biden administration removing trade tariffs and this sort of thing on China. Do you think that could be something that the administration aggressively goes after to kind of compensate China? Or do you think this would maybe solidify those tariffs? 

AM: I don’t think so. Honestly, I would rather see what the rhetoric is around the oil market price cap that they’ve been talking about with G7 and the China terrorists might fall into that realm in negotiations. I would want to see what China’s reaction is to the oil cap at the moment.

CB: I’d be very skeptical at this moment of some type of tariff rollback because for them to… The White House has very badly managed this entire situation where they created a situation where if she went or if she didn’t go, they were losers. They’re not looking bad. And so if they were to roll back tariffs at this point, I think they would get they would get slaughtered, even among the Democrats at this point. So I think that’s very unlikely. 

But look, Jake Sullivan is the guy that a decade ago was proposing, what do you say we walk up to China and give them back Taiwan in exchange for peace in our time? So with these guys, anything is possible.

AM: This is the worst foreign policy cabinet I have ever seen in my life. No one’s even close second at the moment. And that kind of commentary by Jake Sullivan is just unbelievable.

TN: Yeah. Okay, guys, so let me ask you kind of one final question, and you have to answer it with one of these two answers you can’t equivocate in between. Okay. The likelihood of China and the US in some sort of direct warfare engagement in the next, say, twelve months, is it closer to, say, 20% likelihood, or is it closer to 70% likelihood?

AM: 20% in my opinion. 

CB: 20%. 

TN: Oh, good. Okay, so do you think it’s greater than 20% or less than 20%?

AM: I’d say less than 20%. Okay. I would again say less than 20%,

CB: and I would say if you were to draw that out, 24, 36 months, I see it going up, probably steeper as time goes on.

TN: Okay, so that’s fair. So there’s a risk all around, right? We’ve got economic suffering globally. We’ve got inflation globally. We have whatever’s happening post-COVID trying to be figured out globally. We’ve got political uncertainty globally. So we’ve got risk and uncertainty everywhere. Adding a conflict to that mix would not be positive for anybody. 

CB: And the one thing I would say is, even though I say less than 20%, that’s not like a firmly, deeply held conviction. Because if you’re talking about risk, I would have what I would call wide error bands in a lot of these situations. Look, we talk about, like, what is Xi going to do? Xi could say, hey, America is distracted by Ukraine. They got extra troops there. They’re shipping all kinds of weapons. Now’s the time to go to Taiwan. I don’t think people do that. That’s also not crazy to speculate. Yeah,

AM: I would have to agree with that because I never thought that Putin would try to take Kyiv with so few troops, but here we are, him making a vital mistake. And sometimes leaders make bad mistakes because they have a bunch of yes men around them. Yeah. Let me ask you one very quick question.

TN: Do you think there’s a possibility that China kind of takes it out on somebody else? Do they have a dust-up maybe with India to show strength at home while avoiding it with the US? Or something like that? Do they lash out to somebody else so that they can kind of flex muscles at home? 

AM: Yeah, they could, but I mean, honestly, the Indians are not people to be trifled with, to be honest. They are itching to take on China if they show any kind of aggression. So I don’t see who they can pressure to say they’re big, bad China at the moment. I don’t even think they should be doing that. They should be figuring out their economic situation more than anything else. 

TN: Xi Jinping’s role model is Mao. And Mao ultimately was a failure and a pariah in his own country by the time he died. Right. So I don’t think Xi has the sense to understand that Mao was a pariah by the time he died. And so that’s his role model who killed 60 million people through starvation and other things. So this is a problem. We have a guy in the office in China whose role model killed 60 million people directly.

AM: Yes, I understand that, Tony. The problem is the difference is that the CCP has wealthy families now that have almost equal footing as Xi in terms of power, and they can of them if they wanted to. 

TN: Well, and that’s the reality, right? And that’s what nobody talks about. And that may be the backstop for a lot of this stuff.

CB: I’ll tell you this. The rumor mill among Chinese ex-pats, dissidents, et cetera, et cetera, are in hyperdrive this year. Look, it’s hard to know what to believe. It’s very hard to know what to believe. Okay? So I’m not about to push any theories, but there’s a lot of that discussion going around.

TN: Guys, this has been great. Thank you so much for doing this on such short notice. For anyone watching, please put comments below. We’ll take a look at them and we’ll watch them through the next week. If you have any additional thoughts, please let us know, and look forward to seeing how the next thanks a lot.

Categories
Week Ahead

The Week Ahead – 18 Jul 2022: Biden’s Saudi Arabia trip 🛢️

https://www.youtube.com/watch?v=HpcWVeE8mPY

Biden’s Saudi trip ended up being a disappointment and there really is no immediate spare capacity, which is a surprise to no one.

What does the appreciated USD mean? We’ve already seen a fall in Sri Lanka and other places which we’ve talked about for weeks, but where is that going and when will that end?

We also talked about the FOMC expectations. What will the Fed do, especially given CPI PPI data? We have to also keep in mind that we have an election coming up in November, so it’s really hard for the Fed to keep the heat on.

Key themes:

  1. Biden’s Saudi Arabia trip 🛢️
  2. USD🚀 rocket ship and fallout
  3. FOMC expectations (CPI/PPI)
  4. What’s ahead for next week?

This is the 26th 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/

Time Stamps

0:00 Start
0:49 Key themes for the episode
1:55 Biden’s trip to Saudi Arabia
3:23 PR game and disastrous foreign policies
5:00 The US President looks like he has no power?
6:17 US can be a marginal price setter for oil, but…
7:34 what happens to crude prices?
10:08 Why is USD pushing higher?
11:22 What’s happening in the Euro Dollar and why?
13:51 FOMC
19:00 What happened to the gasoline prices?
20:07 When will Yellen give up on the 2% inflation?
23:45 What’s for the week ahead?

Listen to the podcast version on Spotify here:

https://open.spotify.com/episode/4cvisj39soBnXdia0S9bXv?si=4c2c9ffb0f6f4717

Transcript

TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. I want to thank Albert and Sam for joining us to take a look at The Week Ahead. Before we get started, please, please like and subscribe on this channel and please comment, ask us questions, let us know additional information you think we should have. We get back to every single one of those and we want to make sure that you guys are happy with what we’re talking about today.

So today there’s a lot that’s happened over the past week and even over the weekend that we want to get into. We’ve got three topics here, but there’s going to be a lot of overlap in these. So I’m just going to introduce these and then we’re going to have a pretty open discussion.

The first is Biden’s Saudi trip, ended up being kind of a disappointment and there really is no immediate spare capacity, which is kind of a surprise to no one, but it happened and we’ll cover it. Next is the US dollar, and what does the appreciated US dollar mean? We’ve already seen a fall in Sri Lanka and other places which we’ve talked about for weeks, but where is that going and when will that end? Next is FOMC expectations. What will the Fed do? Especially given CPI PPI data? And we have to also keep in mind that we have an election coming up in November, so it’s really hard for the Fed to keep the heat on when we have an election coming in November or that would be a normal election year.

So Albert and Sam, thank you so much for taking your Sunday afternoon to talk through to us. Let’s first get into Biden’s trip. Albert, can you give us a little bit of a kind of geopolitical backdrop for us? Help us understand what were the expectations and what actually happened?

AM: Well, I mean, the expectations were that Biden goes into the Saudi Arabians in the Middle East and cuts a deal for them to increase production and capacity and name your whatever little policy that they’re talking about. The reality was Biden wanted to get away from the PPI number and the CPI. They’re just atrocious. So he decided it’s a normal thing that politicians leave and go overseas so they don’t have to deal with it.

So he went over to Saudi Arabia meets MBS, which was already a problem considering the comments that he had for the election. But his goal for upping production by the Middle East and OPEC, it was a fantasy. It was nothing more than a PR gimmick in my opinion, that the Fed has been playing in futures and crushing the price of oil. So it was one of these, look here, this is what I’m doing on the grand stage and oil prices are falling, but in reality they weren’t really connected.

TN: So were there really expectations in the administration that there would be additional immediate capacity? Do they really think that that would be on the table?

AM: I don’t think so to be honest with you, Tony. Like I said, this is a PR game that they’re playing now specifically because, like you mentioned, elections are coming up and their intent is to save the Democratic majority in the Senate. The House is lost, but the Senate is what they’re eyeing up. So in my opinion, this is all PR games.

TN: Okay. But the PR game that is really hard for me to understand is the President, regardless of who it is, okay. The President going to a place that is an ally. Saudi Arabia is pretty much an ally to the US. And coming away with nothing. One would think that the Secretary of State and the Nat Sec guys, other guys would have gone in first to make sure that we could announce something positive and nothing happened.

So it seems to me that there is foreign policy disaster after foreign policy disaster with this administration. I don’t want to be putting my own view on it, but is it that, too?

AM: Of course, we’ve had just multiple disasters and foreign policy. But even from the Saudi Arabian perspective, who’s their biggest client? At the moment, it’s China. Why do they have to listen to Biden, who’s made the Biden administration has made unbelievable mistakes in foreign policy and actually risk their security more than anything else. He’s taking the foot off of the Iranians. The Saudis have to deal with that. The Russians are in their own little world of adventures, but there’s no real stability in the Middle East, and the United States under Biden doesn’t really show that there is anyone stepping up to the plate.

TN: Right. And that’s kind of a leadership issue. Whether or not the US is their main customer, the US has been their main advocate in the Middle East and around the world. Or one of their main advocates. Right.

AM: Yeah.

TN: So that’s the big loss that I see is you have a president going in, not getting an agreement with a huge entourage for agreements that should have been done before they arrived, and it just makes them look like they have no power. Sam, is that how you read it?

SR: Yeah. There’s two things that I think the US. Generally gave to Saudi Arabia, and that was global clout and weapons, right? Yes. And the second part is probably very important to the Saudis going forward because there’s only so many places that manufacture weapons that are decent, and that’s the US, to a certain degree, Russia, China and basically Turkey. So you can kind of buy weapons from those places. Guess what? That was a tool that really wasn’t flexed at all.

And if you’re going to flex policy power, that probably should have been flexed a little bit. And honestly, it doesn’t appear to have been at all. So I would say to Albert’s point exactly, we’re not the largest customer when it comes to oil by a mile. Right, that’s just true. But we are the largest supplier for their national defense.

TN: Here’s the thing that I don’t understand is, with US production, we can be the marginal price setter for global oil prices, but we pull that card off of the table by disabling our domestic manufacturers. Is that a fair thing to say?

SR: Well, I would say that that’s the muscle that we’re kind of flexing right now, right? To a certain extent

TN: Okay, tell me more about that. How are we flexing that?

SR: Well, we’re flexing it. I’m not saying it’s good flex. Right. We’re flexing it by not doing anything. So we are basically the ones holding up global price of oil. OPEC honestly has pumped exactly what they said they would pump with a little variability, and they don’t have much marginal capacity.

The marginal capacity was passed to fracking a long time ago. This is not a shocking revelation. So when you’re the global incremental supply that can flip on in a relatively fast manner and you say, we are not going to do that, period, and we’re not going to in any way supplement the regulatory overhangs and the capital overhangs, and guess what? You’re going to end up with a global shortage of oil and distillates, etc.

TN: Right. So what happens to crude prices with the Saudis saying, okay, maybe capacity in 2027? What do we see in the short term with crude prices? I mean, with a recession looming, supposedly, whether that’s real or not remains to be seen. Right. And we had a good retail sales figure on Friday, pretty strong.

So what do we see happen with crude prices in the short term? Is there upward pressure on crude prices or are we kind of in this range?

AM: I think we’re in this range of 90 to 115. Just simply because of the reality. I want to differentiate pre election versus post election. Right. Pre election, we’re definitely in a range of 90 to 115. The Feds not going to let the price of oil gets to the point where people are paying six, $7 a gallon to the tank. So that’s first and foremost.

After that, hands up. Who knows what’s going to happen then? Because Europe’s going through an energy crisis with gas. The price of oil is probably going to go up just because the green deals that the Biden administration are intent on passing are going to ramp up right at the election and just afterwards. So after the election, I could see 130, 140.

TN: Okay. Sam, any near term change in crude prices because of this? No?

SR: Well, near term, Albert’s point, $90 a barrel seems to be kind of the low here. I don’t think we’re going to go much lower. And that’s a combination of DXY at 108, which DXY at 108 is atypical to oil remaining elevated.

So if you begin to have a dollar breaking into the back half the year, that’s kind of the post election story. I think Albert would back me up on that part. You begin to see that breaking. Guess what? The scaling, that makes 130, 140 is relatively reasonable. But you call it 90 to 115. Absolutely not a problem here. And you probably creep back towards the upper end of that 150 because you’ve seen two things.

You’ve seen gasoline prices come down, which means demand is going to remain resilient, if not pick up on the margins. And guess what? That flows downhill. So I would say oil prices, gasoline prices, they look good right now. I saw a free handle on gasoline close to my house. That’s not going to last. That’s not going to beat the system.

TN: Right. Okay. So, Sam, you mentioned the dollar at 108. We hit 109 last week. Why is the dollar pushing higher, guys?

AM: I can tell you why. I’ve been adamant about this. Yellen tell the European counterparts that she was going to drive the dollar up to 110 and above. She’s done this in 2013 before. There’s nothing new under the sun. It’s part of her playbook. She knows what she’s doing. She can even go up another 10%. Now, what that does to emerging markets? Oh, God help them at the moment. But still, the dollar is the most effective tool in their eyes for inflation busting, at least short term.

TN: So how far are we going?

AM: I think we go up to 112 to 115.

TN: Okay, over what time horizon? The next month? The next three months?

AM: Yeah, I think it’s in the next month. I think they want to get this over and done with so they can pivot starting September. Stop the rate hikes. And on top of that, this is something for Sam that could talk about the Fed is I think that Powell probably loses the majority of votes in the Fed for Fed members come October.

TN: Okay, hold on, hold on, hold on. I want to talk about that. But let’s finish up with the dollar first. Okay? This is good. Okay, so with the dollar, help me understand what’s happening in the Euro dollar markets right now. Okay. We’ve seen the Euro dollar fall as the dollar rises. What’s actually happening there, and why.

SR: Not me?

AM: Okay.

TN: Yes.

AM: I’ve been adamant about this. Also, as global trade slows down, the need and use of Euro dollars becomes less so. And a lot of people sit there mistake that as the dollar is dying and gold is coming back and whatever name your crypto, that’s supposed to be the next reserve currency. But that’s just the reality of the moment, is they are purposely trying to kill demand. When you kill demand, the Euro dollar starts to fall because there’s less need of it. That’s just the most simple basic explanation that I can give you at the moment.

TN: Okay, so, Sam, that is non US demand in US dollars, right?

SR: Yeah. Dollar denominated non US debt.

TN: Okay. And so the largest portion of the euro dollar market. Is that still in Europe?

SR: No, it still flows through Europe. Right, okay. But it’s a much larger market than simply Europe.

TN: Okay. It tells me outside of the US, there’s a slow down generally. Is that fair to say?

SR: Yeah.

TN: And we’ve talked about this before. Europe has big problems. We saw China’s numbers last week, which are obviously overreported anyway, so Japan is having problems. So all the major markets are having issues. So the Euro dollar is just a proxy for what’s actually happening, those markets through trade and through the demand for actually US dollar currency spent outside of the US.

SR: Correct.

AM: Yes. Very simplistic terms, yes, that’s exactly right.

TN: Good. Anything else for the viewers here? Like, anything else that you guys want to add on Euro dollars just so they can pay attention to things?

AM: Not really. It’s a very good just simplistic, basic understanding of Euro dollars. I mean, we can get into the whole mechanics of your dollars, but it’s so big it’ll take up an entire episode.

TN: Okay, good. Very good.

SR: Very into the weeds very quickly.

TN: Good.

AM: Yeah.

TN: So if anybody’s watching has questions about Euro dollars, let us know. We’ll get Sam and Albert in on this and help them answer the questions. All right?

Okay. Finally, FOMC, okay. We saw CPI hit to the high side. We saw PPI hit to the high side last week. A lot of talk about 100 basis point hike. Sam had a newsletter out that said could be 100, could be 75. And Albert obviously thinks that there’s going to be a pivot in September. So Sam, do you want to kick this one off?

SR: Yeah, sure. I do want to point out that I said there’s a difference between should and will in the newspaper, and the notion was, should the Fed go 100 now? Will they? Probably, unless the University of Michigan survey comes in light. And it came in light. So you’re 75 basis points now. It’s that simple.

TN: Okay.

SR: Very straightforward. The Fed probably wanted to have flexibility for 100, but when they tied themselves to something so stupid as the University of Michigan survey and it falls I mean…

AM: You know what, Sam, the funny thing is that you say that is, that is exactly what they look at, for making their policy decisions. The only thing they look at.

TN: University Of Michigan.

SR: I know they look at it. The problem was they said it out loud. Like, you don’t say that out loud. That’s the mysterious parts of it. It’s a survey of a very small subsection that is basically never been tied to reality at all across any time frame whatsoever. And like yeah..

TN: It’s like making policy based on Atlanta GDP now. Right. It’s like a lot of these things are proxies of small survey sizes of whatever.

SR: Error terms that interact with each other, yes.

TN: Right. I think a lot of people who watch markets see these indexes, like the University of Michigan index come out and they think that it means something, but it kind of does, but it kind of doesn’t. And so I always recommend people, you have to understand these indexes. You have to understand what these releases mean. You have to understand the methodology. If you’re going to make investment decisions based upon these things, you have to understand what they are.

And as you dig down beneath these things like University of Michigan was put out what 30 years ago initially. The methodology hasn’t changed much since then. So if you imagine the technology and the capabilities 30 years ago and they carried that forward, it’s pretty light. It’s pretty light. A lot of these things are pretty light.

AM: Yeah, but they want it like that though Tony. They don’t want to update their stuff because they don’t want transparency. Seriously.

TN: It’s true.

AM: If you want to massage the numbers, you go with what you know, what you know is flawed and that’s what you go with.

TN: Right.

AM: I had a quick question for Sam. Like I said, I think that they’re going to pivot in September after 75 basis point rate hike now and whatever CPI coming in in August. But I don’t think this is the right decision for them to pivot this early because they’re expecting demand to come down and I see no demand coming down anywhere at the moment. So what happens if they sit there and try to pivot for September, October, November, election time and then January, December comes along and demand is sky high again? What does that do to inflation for 2023?

SR: I think it’s complicated, right? Because it’s kind of the goods versus services problem going into the back of the year. Right. We’ll have plenty of goods, print, crap on store shelves and Target for toys and whatnot because that part of the supply chain is solved.

What’s going to be persistent on the CPI price is going to be shelter, which we all know is six months lagged and is going to be a problem for the rest of the year. And there’s nothing they can do about that because their methodology is, again, stupid. So there’s nothing they can do on the prints from here out.

They’re going to have prints that are sitting at 30 basis points plus just because of shelter and it’s weight in core, that’s going to be a big problem for them on the CPI front. So if they pivot, they’re basically going to have to say that, you know, look at headline, it absolutely plummeted. Gasoline.

TN: Will we get a core rating, x Energy, Food and shelter? Will we start quoting that?

SR: Yeah. That’s what I started looking at for the exact reason of trying to find a pivot. Because eventually that will be the metric that they are forced to go to if they want to pivot. It’ll be SuperCore and guess what you call it supercore.

SuperCore doesn’t look that great right now, but it could look pretty interesting if you begin to have gasoline coming down 40% month over month with what the next one is going to say or 25% month over month. So you’re going to continue to have some volatility on the headline CPI front, which is basically what the Fed is going to have to look at in order to pivot.

TN: Okay, so can I ask what happened with gasoline prices? We still have 94% or whatever utilization. Crude prices haven’t come down that much. So why have we seen a 30% fall in gasoline prices over the past three to four weeks?

SR: Recession fears?

AM: Yeah.

TN: That’s it. Okay.

AM: Yeah, pretty much exactly. It’s just the narrative of recessions coming and trying to kill demand based on that. It’s just like I said, PR games, nothing more.

SR: The one thing that I want to point out that I think is really important to kind of consider for Albert’s point of a pivot is equities tend to move in a six month precursor. And what you’ve seen since July 1 is an absolute rip in home builders and a relative squashing of utilities.

And if people were betting on a longer recession in a longer Fed cycle, XLU would be the buy and homebuilders would be the short. And that has simply not been the case so far.

TN: Very interesting, Sam Rines.

AM: When do you think that Yellen this is for both of you, when do you think that Yellen gives up on the 2% inflation number and says 4% is the goldilocks level?

TN: Sam Rines you first. It’s a great question.

SR: I don’t think they go 4%, but I think they say, and they’ve begun to do this, if you go back over the last six months of speeches that 2 to 2.5 is fine.

AM: Still it’s going to be higher.

SR: They’re creeping it up. Right. I don’t think it’ll be 4%. I think between two and 3% is a reasonable target, blah, blah, blah, given and they’ll go into things like because of the way that we measure CPI, 2 to 3%, blah, blah, blah. There’ll be some.

AM: Fun times.

TN: I think if they did that, Albert, I think it would be after the election.

AM: Oh, of course. They’re not doing anything that’s going to trip up Operation Save the Democratic Senate, you know what I mean? They’re just not going to do that. Right?

TN: Yeah. I think people are already really upset about inflation. Companies are starting to report or expected report numbers down, their earnings down, and so it’s hurting everybody.

AM: Yeah, but everything they’re doing is just going to make inflation worse in 2023. But it’s going to come back with a vengeance because unemployment is still unemployment is going to start ticking up, because…

TN: It’s not an election year. Nobody cares because it’s not an election year.

AM: Stimulus checks will flow again. It’ll be fun.

SR: The one thing, again this goes to Albert’s point on, will a potential September pivot be a mistake? Pepsi’s report this week showed a 1% organic volume growth and 12% pricing. They put 12% pricing and consumers and had volumes creep up 1%. Guess what? If companies can get away with that, they are going to all day long, and they will in fact, make a fortune on the back side of this.

AM: Of course.

SR: Paying attention to that demand destruction has not crept through yet. If you can push that kind of price and not have volumes fall, guess what?

TN: Well, the biggest thing, of course, and this is a no brainer, but prices are not going back to where they were. They are not going back to where they were. This is not a temporary inflation thing. And it may have started that way, but the way we responded to it was completely wrong. And it just baked in these supply side things that flowed all the way through to the retail side.

AM: Wage inflation alone. Wage inflation alone.

TN: Yeah. But I think we’re going to see more on the, say, low, medium side of wages. I think in order to keep up with a 12% price hike in Pepsi, you’re going to have to see more action on the wage side.

SR: Granted, that was mostly free online. That was mostly salty snacks. And it might have had something to do honestly, it might have had something to do with more frequent gasoline stops. You buy more chips. But I wouldn’t read too much into that. Right. I do think that their ability to push price is pretty good.

TN: Great.

SR: Yes. To your point, it’s a step function in pricing and therefore it’s a step function in inflation. Great. Okay, guys, 60 seconds. What do you see for the week ahead? Albert, go.

AM: Commodities. Rebounding commodities. I’m long wheat. I think there’s problematic globally for wheat. I want to see wheat prices start to track back up, to be honest with you. Same thing with oil.

TN: So soft and energy.

AM: Yeah.

TN: Okay. Sam?

SR: Yeah. Watching the inflation trade, honestly, and I think it’s very similar to Albert’s point on oil. And wheat, I’ll be watching the relative sector distribution pretty closely here, looking for those like XLU versus the housing guys versus some of the other trades to see what people actually putting money to work are really thinking, not just by them.

TN: Very good, guys, thank you so much. Thank you so much for taking your Monday afternoon. Thanks, everybody, for watching our late week ahead. And guys, thanks. Have a great week ahead.

AM: Thanks, guys.

Categories
Podcasts

No Let Up in Fed Rate Hikes

This podcast first appeared and was originally published at https://www.bfm.my/podcast/morning-run/market-watch/us-federal-reserve-interest-rates-hike on July 7, 2022.

Despite weaker economic data, will the Federal Reserve continue their hawkish stance? Do the FOMC minutes offer any hints of their stance? Our CEO and founder, Tony Nash tells us whilst telling us the impact of rising rates on the banking and property sector.

Show Notes

WSN: BFM 89.9. You’re listening to the morning run is seven o’ 7, Thursday, the 7th of July there and keeping you company till 10:00 a.m. Is Shazana Mokda in an undisclosed location far, far away. And I’m Wong shining in the studio now in half an hour, we’re speaking to Manpreet Gill on fixed income and commodity the investment strategy for 2022. But let’s recap how global markets closed yesterday.

SM: So if you take a look over in the US, markets actually closed up despite Fed meeting minutes coming out signaling a more hawkish stance. The Dow was up 0.2%, the SP 500 and the Nasdaq was also up 0.4%. Looking over in Asia though, it’s mostly red. No, it’s all red really. The Naked and Hansi were both down 1.2%, the STI was down marginally by 0.01%, and the Shanghai Composite and FBM KLCI were both down 1.4%.

WSN: So for more on where international markets are hitting, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now so far the economic data coming out of the US shows a slight deceleration of the economy. So do you think that the Fed will then hold back on their hawkish pace of rate hikes despite June’s FYMC minutes indicating that they intend to keep raising rates?

TN: I think they’re definitely going to keep raising rates, I think until we see a marked slowdown in particularly commodity price inflation, but also other things like wage inflation. I think they’re going to keep accelerating. So it’s unlikely they’ll continue with a 75 basis point hike, but they will almost certainly have a 50 basis point hike and continue for the next couple of meetings at least.

WSN: I have another question though, Tony, in that when do you think interest rates will peak or when is the peak of the tightening cycle? Will it be early 2023 or you’re looking maybe later in 2023.

TN: Well, some people are saying that it’s possible they continue to hike until the end of the year, and then in 23 they have some rate cuts similar to what happened in the early 90s. That’s possible. I think it all depends on where the economy is at the time. But I think for now they’re just worried about inflation and the downsides of inflation and they’re looking at asset prices and where asset prices are, and it’s really troubling for them given yeah, the economy has definitely slowed down, but we still have wages rising, we still have very high commodity prices, and we also have an appreciating dollar at the same time. So anything imported should be cheaper on a relative basis, but those prices keep going up as well. So Fed continues to be worried, although they’re getting pressure from the outside because it is an election year and the party in power does not want there to be a recession going into the election. And so they’re getting huge pressure from the treasury and from other people to moderate their stance so that there is not a recession going into the election.

SM: Well, what do you think then, Tony? We know that economists at Goldman Sachs have put the risk of a recessionary slump in the US. In the next year at 30%. So they’re still looking at next year. Some consumers feel it’s already here, I guess. Where are you standing in this debate?

TN: Yeah, I think we have unemployment still falling in the US. So you don’t usually have a recession at a time when unemployment is still falling. We also have high inflation. So on a real GDP basis, you may have a negative real GDP number. Well, you have a positive nominal GDP number. And I know that’s a little bit confusing, but what that basically means is that the rate of inflation pulls the economic growth into a negative number simply because of inflation. So we’re in a place where it’s kind of hard to identify a recession because of the real and nominal difference. But when we still have jobs growing, when we still have investments and other things happening, it’s really hard for us to hand on heart say that we are in or entering a recession.

WSN: Okay, let’s get into the weeds then, with regards to the recent set rate hikes and how that might play out in certain sectors. And I want to look at the US. Banks. So how do you think they perform this quarter? Are you a bull or bear?

TN: Well, it’s a tough time for banks. They had mixed results in Q2, and I think higher interest rates obviously help their net interest margin. But borrowing cools off, and it’s things like mortgages. Other things have cooled off dramatically over the last same month or so. Banks will likely have a very tough Q3, and then when things stabilize, they’ll be better. But I think Q3 is going to be rough for them. I wouldn’t say I’m necessarily bearish on banks, but I would say I’m neutral on banks.

WSN: What about the property sector, Tony? I mean, we’ve heard, of course, a few months ago that whatever you put up in the market, it gets snapped up within the day. But is that trend continuing? Are you a bull or bear for property?

TN: You know what? It depends on where you are in the US. Where I am in Texas, things are really strong. But a lot of other places in the US. Things have slowed down dramatically, and mortgage applications nationally have come to a standstill as interest rates have risen. So I think a couple of weeks ago we may have talked about how a house that was purchased in January, the median price house purchased in January, if it were purchased today, it would cost $800 a month extra. And so the interest rates just had a dramatic impact on house prices. So mortgages have really slowed down.

SM: And can we turn to oil, Tony, because oil prices have dropped below $100 per barrel for West Texas. Does this level accurately reflect supply and demand for crude? And does this then invalidate the bullish forecast of $150 and above that analysts were predicting not too long ago?

TN: Yeah, I think we’re in a really strange place for oil right now. And if you look at the later months of crude oil futures that are being traded, they’re actually trading higher than the current month. So there’s something happening in the current month, like maybe somebody’s books blown up or something. But there’s something happening in the July future that rolls off in a couple of weeks. And I expect that we’ll see higher crude prices going into August and the rest of Q three, early Q four. So it’s going to be pretty choppy for the next few months in energy and commodities generally.

WSN: One last question for me, and it’s more long term economic question, and that’s about Biden’s infrastructure bill that was passed in November last year, but it’s gone really silent. Do you know what’s happening on that front?

TN: Nobody does. There’s been very little news about it. What’s happened partly is inflation has taken a bite out of it and it’s really caused a lot of projects to stall. So the problem with federal appropriations is the longer the money sits, the less money that gets spent, which is good for taxpayers. Right, but I think inflation is really forcing local and state governments to pause on their investment plans because they do have budget, but they don’t have enough budget to get the projects done that they want. So can they appropriate can the US. Congress appropriate more for the next fiscal year? It’s possible. It depends on who’s in power. So if the Republicans come into power in November, then they may not raise the appropriations level and we’ll be stuck with the level that we have, which it’s $500 billion, a massive amount of money. I don’t want anybody to mislead anybody, but the Democrats will likely want to raise that level if they remain in power after the November election. But to date, not a lot has happened. There has not been a lot of movements. We haven’t seen a lot of major announcements of new projects, these sorts of things.


And if it was successful, we would see a lot of major announcements of new projects.

WSN: All right, thank you for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his views on global markets, in particular the US. And whether the Fed will continue to raise rates until 2023. He says maybe, and then maybe they might even cut rates like they did in $2,000.

SM: That’s right. I guess one thing to note is the question is whether we’re going to see a recession sooner rather than later. Yeah, and Tony did point out the fact that labor unemployment is still at really low levels. Unemployment is decreasing so that’s really at odds with a recession and that’s what everyone is looking to see. I think if we start to see unemployment go up, that heralds that a recession is either here or coming.

WSN: I suppose we are living in really weird economic times. None of the normal correlations that we see are making any sense. I think that’s a lot to do with the fact that during COVID-19, governments basically just took the let’s do whatever it takes attitude. There was so much money pumping into the system by every major central bank and the recession was extremely V shaped, sharp recovery. But then that also caused supply chain disruptions and we had the war in Ukraine. It was like the perfect storm of Black Swan events which has resulted in this current situation that we are in now. Very quickly, we’re looking at the Fed minutes that just came out now. Indications are that they are signaling another rate increase of between 50 to 75 basis points lightly in the July meeting. And this is the interesting part, they are willing to accept the price of a slower economy in order to tame inflation.

SM: And this is sort of a change from their soft landing rhetoric, right? So earlier they were trying to say oh, it’s not inevitable that there will be a recession, we can still avoid it, we want to get that sweet spot. But I think now they’re trying to navigate those expectations to go like hey, I think we need to kind of expect pain. There is going to be pain, but it’s better to have this short pay now rather than long term pain later. So I think the Fed is really trying it’s got itself in a pickle essentially in terms of trying to prime expectations of the public.

WSN: I think that’s on the back of the fact that they spend the whole of 2021 telling everyone that inflation is transitory, hey, no problem. And it didn’t turn out to be transitory, so there’s a need to rebuild back that credibility. But up next we’ll be speaking to Carmelo for little on malicious overnight policy rate. Stay tuned for that.

Categories
Week Ahead

The Week Ahead – 09 May 2022

The Fed just announced the 50 basis point hike this week. Albert and Sam explain what this means for markets in the near term. Also, how badly does JPow need media training (he said “a normal economic person probably doesn’t have that much extra to spend”)?

We also discussed what’s happening with TLT? And then, what will the Fed do next? Why is everyone talking about a 75bp move?

Tracy explains what’s happening in natural gas and the crude oil markets. Why does energy seem range-bound?

Key themes:

  1. What the F just happened? (F for Fed)
  2. What the F is next? (F for Fed)
  3. Why does energy seem range-bound?

This is the 17th episode of The Week Ahead in collaboration with Complete Intelligence and Intelligence Quarterly, 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
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon

Listen to the podcast on Spotify:

Transcript

TN: Hi. Welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Tracy Shuchart, Sam Rines and Albert Marco. We’re always joined by those guys. Before we get started, I’d like to ask you to like and subscribe. Really appreciate it if you subscribe to our YouTube channel.

It’s been a very interesting week, guys. We have a few key themes. First of all, what the F just happened F is for Fed. Then we’re looking at what the F is next. So that F also is for Fed. And then we really want to look at some energy stuff. Why does energy seem to be range bound? And I think that’ll be a really interesting discussion.

So Sam and Albert, kind of talk us through what the F just happened? We said this would be the most dovish 50 basis point move in the history of the Fed and it was. And here we are at the end of the week and things don’t look so good. So what happened?

AM: Well, was it a Dovish Fed? Not really. I mean it was pretty hawkish but it was already priced in. Everyone knows it was going to be 50 basis points and everyone knows they were going to talk about all these hawkish words. But then Powell comes out and throws in a little sprinkle of dovishness in there and then the market took off with it. I think it rallied at 3%? Crazy.

However, from what my guys told me, a lot of that was because traders were loading up on spy calls and ES futures and just gamma squeezed it. It was really easy. The market is kind of liquid right now. That actually agitated the Fed because they didn’t want this thing to rally and they came back and just torched everybody the next day. It was like 4% down? Just stunning. Absolutely stunning price action that we’re seeing right now.

It’s just not tradable. I mean you’re in this market and you’re swinging 100 points up and down each way every couple of hours. It’s just not tradable right now.

TS: Albert made a very good point. The thing is these swings that we’re seeing in energy and also in equities, these swings are untradable. Right. So that is very cognizant point that you have brought up.

SR: I mean the interesting thing to me with the whole thing was how quickly you went up, how quickly you went down to follow it up. Not just in ES and S&P, but the dollar got trounced following the Fed and finished flat basically to pre-Fed to finish up the week. You had the two-year absolutely plummet and make a little bit of a comeback. But it generally actually stayed lower following the Fed minutes. But these were huge moves across the board.

It didn’t matter what asset class you were trying to hide in, besides maybe energy. It didn’t matter where you were hiding it. You were just getting whipped. And there was very little tradability across the board in that period.

So it was pretty interesting also to hear several Fed speakers today. I think there were five or six of them come out and were generally hawkish across the board. I mean, you had one non-voter, Barkin, talking about putting 75 back on the table. I mean, it’s ridiculous. Powell just absolutely said no to 75. And then you have beneficials coming back with maybe I haven’t taken 75 off the table. I mean, not that Barkin matters, but he tried to put it back on the table. Their communications are a mess.

TN: The interesting part for me about Wednesday was Yellen came out first saying, “no, it’s all good. Nothing to see here. There’s going to be no recession. Fed is going to be able to manage it.” Everything else. To me, that was the real tell, right, that he was going to be fairly gentle. Of course, it was a 50 basis point hike, but it was a fairly gentle 50 basis point hike. And he was going to stave off the 75 basis point talk.

But then today we see these guys come out being fairly hawkish. So we’ll get into kind of what’s next in a couple of minutes. But I want to ask about a couple of things. Powell, he talks, man. He is not the Greenspan kind of mysterious guy. And his talking seems to get him in trouble.

So one of the things that he said on Wednesday that really caught me, which he said, I’m looking at my notes, he said “a normal economic person probably doesn’t have that much to spend” when he was talking about inflation, that much extra to spend. Sorry, but he actually let the words “normal economic person” pass his lips. And words like that, language like that makes American people feel like it’s the government, this gilded government employee who inflation doesn’t touch versus the American people. What’s wrong with those guys? Why are they using that language?

AM: In my opinion, they want to crush excess money and they’re doing just that. These wild swings in a week that’s meant to just erase money from the system. And Powell is an attorney. He’s not really an economic guy.

TN: An attorney should know words.

AM: Yeah, well, he doesn’t. He’s flustered. He’s flustered. There’s so much stuff going on behind the scenes that he’s flustered. And really, I don’t really even think that Jerome Powell is even in control of things. I think more align on to Auntie Yellen. I think she’s the mastermind behind this dollar rise. I know she is, in fact. I had discussions about it.

She’s the mastermind of pushing this thing past 110. She’s the mastermind of getting capital to force it back into the US equities. She’s the one doing all this.

TN: Right.

AM: Powell might be fighting it, but I’ve talked about this many times. You have this disjointed policy between what the Fed wants to do and Powell and what Yellen is doing. So this is what I see is going on.

TN: Sam?

SR: And to your point. I think their communications generally are a nightmare. They’re not doing a phenomenal job of telling people anything. Right.

It was such a disastrous week. You had quarrels out early in the week talking about how because Biden hadn’t nominated Powell to come back to the Fed. That was one of the reasons why they were behind the curve. Sorry, Randy, but that’s a ridiculous statement. Everybody knew, the betting odds never really broke through 70 that Powell was going to be renominated. Let’s be honest. He was always going to be renominated.

AM: You bring up an interesting point, Sam, and kind of a signal is will Powell actually get confirmed and is Randy and those guys, because Randy deserve this, I believe.

SR: Yes.

AM: So are they trying to defend or trying to upstage Biden and possibly not getting Powell confirmed?

SR: Well, it’s interesting because you would think that Corals would want Powell confirmed because Powell he’s fairly conservative in mindset relative to some of the other people. That could be dominated.

TS: Middle ground, too, I would say.

SR: Yeah, a decent middle ground. And most likely after that, it’s going to be Brainard. Right. I don’t think Corals wants to mastermind getting Brainard in there.

AM: No, I’m saying that Corals are trying to get ahead of the game here, thinking that Powell might be ousted.

SR: Oh, yeah, maybe. I also think that there’s an awful lot of people once they get out of the Fed and they see that they’re part of the decision making that got us to the current inflationary environment and current problems. There’s a little bit of face save when it comes to, hey, look, we wouldn’t actually be here if they had done their job. It wasn’t really us. It was this lack of nomination.

So generally, then you get into the FOMC meeting, the after presser, call it the kerfuffles that he makes constantly during it. Then you get to the Fed speakers after it. The worst part about the FOMC meeting is not the FOMC meeting. It’s just the blackout ends. Let’s be honest. Then we have to listen to them for another three weeks before the blackout comes.

TN: Normal economic people do stuff.

SR: Yeah. Like buy stuff and actually contribute to the economy instead of just blustering about 75 basis points.

TN: Right? Exactly. Okay. Before you get 75 basis points, Sam, can you walk us through what’s happening in the TLT market because it’s falling off a cliff a month ago. Is it like 140. Now, it’s like 118. So what’s happening there? Because I’m hearing a lot of chatter about that.

SR: Yeah. I mean, it’s the tracker for the 20-plus year US Treasury note. When yields rise, the thing is going to get trounced. Right? I mean, that’s pretty easy.

The easiest way to underperform the S&P this year has been to buy TLT. That’s just been that bad. I think it’s down 21% or 22% as of the close today. That’s a pretty devastating bond move right, for portfolios when bonds were supposed to be the safe asset. But generally it’s liquid. Right? You can buy and sell TLT all day long and you can short it. You can do some stuff.

So it’s a fairly easy way for particularly investment advisors and other smaller players that are running separately managed accounts to get in and out of fixed income exposure quickly and be able to move their portfolio duration pretty dramatically, pretty quickly. So it’s a trading tool.

And so when you need liquidity and you’re not going to sell individual bonds, that’s going to be generally fairly liquid and you get some pretty big spreads there. You’re not going to sell those bonds, you’re going to sell TLT instead.

TN: So are TLT markets telling us that they expect tightening to accelerate? Is that what’s being communicated to us?

SR: No, I would actually take the other side of that. And I think it kind of goes to Albert’s point last week is long end yields don’t rise if the markets are expecting a tighter, faster Fed. Right. That would be a recipe for disaster.

Recession being pulled in towards us, not pushed out. So the Fed is expected to do 50 basis point hikes instead of potentially 75. QT was a little bit, QT was basically what was thought even a little slower to phase in. Yields could be telling us a number of things, but one of them is not that the Fed is tightening faster.

TN: Okay.

AM: This is the problem. This is the problem. Right. This is something that nobody’s really talking about is the Fed is trying to create this narrative with long bond and whatnot that? We’re going to tighten. We’re going to tighten, we’re going to tighten. However, the market is still red hot. I mean, even the consumer credit today was outrageous. Did you see that?

SR: That was insane.

AM: I was talking to my client today and we’re looking at shorting retail and whatnot? And I said we cannot show retail. And he was why? I just walked into Gucci and it was a velvet rope with a line of 100 people trying to get in there. And none of them make more than $50,000 a year. Just buying stuff left and right. It’s like, well, the Fed is trying to say we’re tightening, but the market is red hot right now.

TN: Fascinating.

SR: I have no push back to that whatsoever. The consumer numbers today were stupid. 50 plus billion. That was a silly number. That was a silly, silly number.

TN: That’s a great segue to what the F is next. Right. What’s the Fed going to do next? Because if consumer credit is still expanding it’s really fast, how do they slow it down? Is 75 basis points are realistic? I know he said no. But then why do we keep hearing about it? Then why are all these geniuses saying 75?

SR: I haven’t seen a single genius.

TS: That doesn’t mean that it’s necessarily going to come to fruition.

TN: Okay.

SR: Yeah, I mean it’s, James Bullard basically planting that seed. Yeah, one fed and then Barkin picked up on it and said I wouldn’t rule it out. I mean, it’s two people that if you still listen to Bullard and Barkin, I’m sorry, but you’re going to lose money.

TN: Bullard was great like ten years ago, right?

AM: Yeah, but they’re trying to sway less than intelligent traders to believe that it’s coming. Maybe sway some money that way.

TN: The only reason I’m saying it is because I want everyone watching to know that.

AM: They are lying to you. Okay? They are lying.

TN: So the expectation is that what the F is next is kind of staying disciplined. 50 basis points in the next meeting and maybe QT accelerates slightly. Is that kind of what we expect to happen next?

SR: Yeah, I would say 50 bps, but I don’t think you even have to accelerate QT. It’s very difficult to accelerate.

TS: This mark is going to scare them. And what is going to happen is they’re going to be another 50 for sure. But they’re going to be even more dovish than they were last time.

TN: Okay.

AM: I actually want to take a train. I think they’re going to do 50 bips for sure, without question. But I think they’re going to have to accelerate tightening just to scare the market a little bit, for God’s sake, because especially if they want to…

TS: Acceleration timeline, I mean, you could barely take a magnifying glass to it. Right. So you’re talking about almost $9 trillion going down to maybe 8.5. I mean, can you really see that?

AM: No, but they’re also going to be using the dollar. They might even take a dollar to 115 or 120. It breaks everything.

TS: Any QT that they have, it has the exact opposite effect. So they’re not stupid. They know that monetary policy that they’re doing right now may break the market, but they’re going to ensure that…

AM: Yeah, but they want to do QE later in the year.

TS: They want to be able to do it.

TN: I saw an interesting discussion on social media this week about what’s the worst central bank to be a part of right now. And I think it was easily the Hong Kong Monetary authority. Right.

With everything terrible happening in China, but they have to match what the US is doing. It’s just a very difficult place to be in. So I think even as we talk about what is the Fed going to do next, there are some central banks out there that are just in a terrible place. And raising the dollar at 110, 115, 120 would absolutely break some of these central banks and put in a very terrible position.

AM: Yeah, but Tony, the Chinese, they’re very pragmatic with that respect. They’re waiting to see what the Fed does and they’ll react. They are for sure going to stimulate their economy.

TS: They’ve already announced so much stimulus. It’s ridiculous. The market hasn’t particularly reacted at this point as far as the commodities sector is concerned. But literally they have so much if you look at what they have said, they have so much stimulus on the line as far as infrastructure. They do not want, they want, they’re determined to have their 5.5% GDP by the end of year ’22. Right.

TN: Yeah. Well, they’ll hit that no matter.

TS: What they are doing is they’ve already announced so much stimulus. Markets not looking at right now. Right. Or the North American market shows looking at it right now, I promise you.

AM: Yeah, but Tracy, also, you got to remember that the SEC started coming out with delisting threats all over the place. They added 80 more companies to the delisting threat. That’s actually toned down.

TS: I’m not saying I would invest in Chinese companies. What I’m saying is I would invest in commodities.

AM: I know. But when you say that the market hasn’t reacted, that’s a lot to do with it. These delisting things have really scared investors away from them.

TN: What China needs is dump truck and helicopter loads of cash on the boon like tomorrow. And I think to hit 5.5, they’re going to have to do that in every major town. They’re going to have to unleash dump truckloads of cash. The infrastructure they’ve announced is close to what they need to hit that. Sorry? And they have a share… t

TS: hey’re made up number. But in order to. Yes. Hit that, you’re completely correct.

TN: Yeah. They’ve got to do it and they’ll end up canceling unofficially. They’ll give dead jubilees, all that kind of stuff. Like they’ll do all of this unofficially. But it’s to let people reload so they can spend more money. They’ll do all of this stuff starting as soon as they rip the Band Aid off of the lockdown.

TS: That’s why we’re seeing a deval in the currency right now.

TN: Right, right. Which we talked about for months and months. And I’m so glad that it happened. Let’s move to energy, guys. And Tracy, we were talking about this a little bit earlier about energy being kind of range bound.

I’ve got Nat Gas and WTI on screen. We’ve seen Nat Gas really come down hard over the past couple of days. Can you tell us what’s going on there? Because it’s performed really well over the past month, except for that little period. So what’s going on with Nat Gas and what’s going on with WTI? Is it really range-bound?

TS: I mean, it is range bound. What we’re seeing is we’re saying although it’s a larger range, right, like we’re seeing $10-15 ranges in WTI. What we are seeing is that if you look at a daily or weekly chart, you’re seeing that range is coming down. Right.

TN: Okay.

TS: And that’s to be expected. One thing that the market did was that they increased margins. Thank you.

TN: Yeah.

TS: They increased margins. That put a lot of retail traders out of the market. That said, if we look at the recent OI? OI has actually increased daily all this week. So it looks like and we can’t tell at this point whether it’s retail traders or institutional traders. But OI has increased this week in that sector across gasoline.

AM: Yes. Speaking of gasoline, I’m looking at diesel and gasoline crack. I think you’re looking at shortages coming in the summertime. Those things look to get explosive.

TS: You know, texted you two months ago and said, get long diesel.

AM: Yeah.

TS: It lies in the EU. Right. And they are going to see shortages. This is going to affect their overall GDP. We’re going to see less transportation we’re going to see less manufacturing. We’re going to see because they can’t handle these prices. That said, if you’re an investor, you’re going to look at the refiners right now that are refining these because the crack spreads are increasing exponentially.

So if you want to invest in this sector, I think you would be looking at refiners right now that specifically are involved in distillates. Interesting.

TN: Great. Perfect. All right, great. So, guys, what are we looking at for the week ahead? What’s on your mind, Albert? Definitely not shorting retail.

AM: Definitely not shorting retail. I just can’t take that out for at least June. But honestly, the Roe versus weighed the political atmosphere right now and how that’s going to affect the congressional races, not so much the House, because the House is set for the GOP, but possibly the Senate. And why I bring that up is because now those economic bills going through Congress, they start getting affected. And investors started calling me to try to figure out what’s the makeup of Congress.

And I think that’s what I’m going to actually start paying attention to because the beginning of next year we’re going to need stimulus the way that this economy is going. So I’m taking a look at what the makeup of the committees are going to be, what possible stimulus packages will be materializing.

The auto sector, for God’s sake, it’s completely trashed. I think that’s on life support and definitely going to need some help. I’m actually looking for auto sector plays for the long term, 24 months out.

TN: Okay, Sam, what’s on your mind?

SR: I’ll be paying pretty close attention to where the dollar heads, particularly based on our earlier conversation on the Renminbi. And in the end, following the Fed this week and then listening to how other central banks begin to form a narrative around their next moves based on the Fed in particular, Latin America is going to be very interesting given some of the inflation pressures down there and the push and pull of someplace like Brazil, where commodities are both good and bad for an economy, or Argentina, good and bad for an economy, export a lot of food, but import a lot of energy, even though you have the black maritime, psychotic, that’s pretty poorly run.

Anyway, that to me is going to be one of the really interesting stories of the next couple of weeks, given the Fed. The Fed moving quickly, beginning to do some quantitative tightening.

Generally, that would be your number one method of affecting markets is through the dollar. So I just want to see what the dollar does and follow the dollar and not fight that tape.

TN: Yeah, very good. Tracy, what’s on your mind for next week?

TS: I’m going to be concentrating actually on the yuan at this strength. I want to see how much are they going to actually devalue their currency, because I think that’s the sign of how desperate they are to bolster the domestic economy. That’s where my main focus is right.

TN: Supposed Fed your eyes on China.

TS: But you have to realize what happens is that people don’t really talk about why does China devalue the currency? They devalue the currency so that exports become cheaper and more competitive. In turn, that makes imports more expensive. Why does that help the domestic economy? That means that people in China are not buying imports. They’d rather buy from domestic businesses which bolsters their economy.

So right now I think that’s one of the most important things to be looking at right now is to see how much are they going like, how desperate are they?

TN: That’s a great observation and something that I watch every day and I’ll tell you, they’re very desperate. I don’t mean to laugh at it. I feel really empathetic for the people in China but they’re very desperate. So I would watch for some moves that are I would say that tried to appear disciplined because they don’t want to look desperate. But in fact, they’re desperate to get their economy moving because of these lockdowns.

So I think the first sign of that would have to be starting to see a lifting of the lockdown like a legitimate lifting of the lockdowns and not moving into more towns like they did in Beijing over the past couple of weeks. But really legitimately taking these lockdowns off and free movement.

Looking at things like the port zone in Shanghai and how many people are allowed to work in those bonded warehouses, those sorts of things to get that port activity moving. As we look at those indicators, we’ll know how serious the Chinese government is about getting back to work. If they don’t do it, they’re not serious. And if they’re not serious, they’re going to have some real trouble.

I’m not a gloom and doom kind of China is going to have a coup or anything type of guy. But I do think that they’re going to have some real trouble. They want everyone to be happy and harmonious going into the national party meeting in November and there’s going to be some runway needed to get everybody happy. And by everybody being happy, I mean all of those CCP guys in Guangzhou and all the different provinces, they have to be happy coming into that Congress because if they’re not, then Xi Jinping has several problems. Serious problems.

Okay, guys? Hey, thanks very much. I really appreciate this. Have a great week ahead and have a great weekend. Thank you.

AM: Thanks, Tony.

SR: Thank you, Tony.

Categories
Week Ahead

The Week Ahead – 25 Apr 2022

Subscribe to CI Futures special promo here: https://www.completeintel.com/promo Only until April 30th.

Fed Chairman Powell was out this week all but assuring a 50bp hike in May, also implying we may see a burst of quick hikes. Then everyone who said “it’s all priced in” two weeks ago panicked on Thursday and Friday. Mike Green shares what’s new here and why are we seeing the reactions now?

We’ve spoken before about Q2 earnings, expecting them to generally be weaker, partly on inflation, which every company is blaming for shortfalls.

– Snapchat missed earnings but it reported 64% revenue growth, with daily active users up 20%.

– Netflix lost subscribers. They’re now the tech cautionary tale.

– FB is falling in anticipation of an earnings shortfall next week.

– Tesla reported a 42% earnings surprise and they’re about even on week

We keep hearing about commodities getting smoked this week. What happened this week and what should we be thinking about right now? We’ve got a bunch of housing metrics out on Tuesday (Case-Shiller, etc). Do the guys expect to see an impact on house prices already or will it take a couple of months/another rate rise to have a noticeable impact?

Key themes from last week:

1. Powell’s Wrecking Ball (Dollar Wrecking Ball)

2. Tech Earnings

3. Commodities getting smoked?

Key themes for the Week Ahead

1. Housing

2. France election

3. Geopolitical lightning round


This is the 15th 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.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Mike: https://twitter.com/profplum99

Albert: https://twitter.com/amlivemon

Listen to the podcast on Spotify:

Transcript

TN: Hi and welcome to The Week Ahead. My name is Tony Nash. Today we’re with Albert Marko and Mike Green. Before we get started, I’d like to ask you to like and subscribe to our YouTube channel. Thanks for doing that. I also want to let you know our CI Futures promo ends on April 30th. This is CI Futures, about 3000 assets forecast every month for $50 a month. That promo will end on April 30th. So if you’re interested, please go to completeintel.com/promo and check it out.

So this week we’ve got some key things from the past week. First of all, Powell’s wrecking ball and rate rises and the dollar wrecking ball that comes with that very important item. Tech earnings. We’ve seen a collapse in tech equities over the past couple of days. Not a collapse, but some really interesting activity. We’re going to talk through that. And then commodities. We’ve seen commodities, heard some people say commodities are getting smoked late this week. So let’s talk through that.

So Mike, first let’s look at Fed Chair Powell is out this week, all but assuring a 50 basis point hike in May. And a lot of people think it may be stronger for a longer period of time, maybe June and July even. I hear a lot of people saying a few weeks ago, it’s all been priced in yet we’ve seen kind of some panicking markets on Thursday and Friday. So we’ve got the 10-year on screen right now. So what is new here from your perspective and why are we seeing the reactions now?

MG: So the point that I would argue on this is that we’re in a feedback loop effectively where the market tries to price the Fed’s indications the Fed is in turn responding to the market. And so it’s leading to a dynamic where the Fed is saying, well, look how interest rates are rising, particularly at the back end. Clearly, we’re behind the curve. Therefore, we need to hike more and we need to convey to the market that we’re going to hike more. The market mechanically has to respond to that because you just can’t ignore it. Right.

You have to effectively think of it in a binomial tree type framework. The Fed has told you they’re going to hike more aggressively. Therefore, you need to shift the whole system up. Right. And that feedback loop, I would argue, is what we’re kind of captured in right now. And it’s part of the reason why the market is forced to respond to it in a risk off fashion, et cetera. We just don’t know if the Fed really actually knows what the underlying signal is and how much of it is us and how much of it is their insights onto the economy.

The second thing that I would just highlight is that the Fed has put themselves into the very uncomfortable position of last year, arguing that inflation was transitory. And this has been one of these really frustrating things for those of us that actually agreed with them that it is largely transitory in inflation rate. Right. So the rate of inflation is transitory, but the price level, I don’t expect oil to go back to negative $37 a barrel. That would be absurd. Right, right. So when you talk about the transitory dynamic, it’s typically thought of as the rate. But I think the perception had broadly been the prices themselves were going to somehow come back down and not adjust to the realities of accommodating the difference.

So I think that is sitting at kind of the core of the issue is that the Fed is now in the same way they were trapped in that transitory framework that people began to increasingly malign and make fun of. Now they feel this overwhelming need to come out and tighten and show that they’re actually serious about inflation and reestablish credibility, even as it’s very clear that the economy is starting to slow. And they’re then forced into the mantra of now saying, well, we see no signs of the economy slowing. And so they’re going to have to maintain that for a period of time or they sound like fickle policymakers.

TN: Right.

MG: I think the market is understandably concerned and scared at how far they’re going to have to go to prove to us that they’re really serious.

TN: Right. And Yellen was out saying there will be no recession this year, which I mean, I hope she’s right.

MG: There’s a recession. Yeah.

TN: Exactly. So I was roasting coffee yesterday, and my coffee guy was telling me that coffee prices will stay elevated because of the buying cycle from the farms and so up and down the commodity supply chain, across, it seems, across metals, across crude, across ags. That timing has a real impact on the change in levels. The rate may not change much from here, but it seems like the level will remain elevated, as you’re saying.

MG: I think that’s right. And again, that’s why the transitory, I think, was so toxic and confusing to people because they were thinking, oh, we’re going back to $1.75 gasoline as compared to the $6 in chains that we’re currently paying in California. Right?

TN: Right.

MG: That’s very hard to accomplish under the current framework. And the coffee example is a really good one. It’s not so much the level. The adjustment to the level is painful. Once that level has been reached, all sorts of changes in relative purchasing activity can occur. Right. You can decide you’re going to roast your own beans because it’s cheaper than somebody else’s beans. You can decide that you’re not going to go to Starbucks, you’re going to do your coffee at home and put it into a travel mug to save money.

Whereas the Wall Street Journal highlighted you can reduce your consumption of beef and chicken and increase your consumption of lentils. And yet another example that just pisses people off because it feels completely disconnected from the reality that they’re in. But those are all true statements, right. Those are adjustments that people make once the level settles down. Where the real problem occurs is the uncertainty about the level.

Is it going to be 20% higher next year? Is going to be 20% lower next year? That makes it very hard for me to plan. And that’s really what we’ve experienced. And now what your feedback, what your contacts are telling you is no, prices are going to stabilize at a higher level because that’s what’s required to induce the supply response.

TN: Right.

MG: Okay. It sucks. Coffee is more expensive now, but at least it will be in the stores.

TN: Right. So going down the path of, say, your Wall Street Journal saying you need to eat lentils instead of beef. With interest rates rising, it seems like consumers would utilize more credit during that adjustment period. With rates rising, it seems like it would make things much more difficult. So there’s a double whammy on consumers. Are we seeing that impact right now?

MG: I don’t think we’re yet at the point that the higher interest rates are feeding through in a way that matters. Right. So the vast majority, something like 95% of outstanding mortgages are no longer adjustable rate. They’re fixed rate. And so that is going to be very slow to adjust. We’ll see that the marginal purchasing behavior. And we are absolutely seeing that. We’ve seen a dramatic reduction in refinancing and purchase applications. We’re starting to see traffic deteriorate. We’re starting to see new orders roll over. We’re starting to see consumer spending intentions begin to plummet.

And there’s two reasons why people can use credit cards. Right. You can use credit cards to smooth over effectively saying, hey, guess what? I’m getting paid my bonus next week. Therefore, I’m going to make the purchase now and I’m going to repay it. Or you can see people start to tap credit because they are so strained that they can’t do anything else.

And unfortunately, the evidence that I’m seeing suggests it’s the latter, that it’s the lower income households who are now taking advantage of high cost financing choices in order to sustain a level of consumption that they’re having difficulty retreating from.

If your rent goes up and you don’t want to be homeless and their coffee prices have gone up, at some point, you need to expand your purchasing capacity. And that means using credit.

TN: In basic terms, what we’ve been talking about on this show is demand destruction. The Fed is aimed at demand destruction. And that means that demand curve actually moves in, right?

MG: Yeah.

TN: So people are going to have to rein in their behaviors because we’re likely at new pricing levels for many things. And so that consumption is going to have to decline a bit to adjust to the new environment. Albert, you had a comment?

AM: Yeah, two comments, actually. The thing about the demand destruction and the supply, from the Fed’s point of view, they think that getting rid of demand involves eliminating supply. Right. So that a little bit has to do with the rates, but also what Mike said about doom loop. I mean, that’s very interesting because that’s exactly what we were talking about in multiple areas, not just for bonds, but Yellen herself, she’s had her minions go out in the bond market and just straight up lie to bondholders, saying, oh, they’ll recover, they’ll recover while everyone keeps buying, and they just keep butchering the long bond.

The 30 years just been 3.1 today or 3.5. It’s crazy. She did this in 2013 where she had this little ploy where she has preventing capital flight, leaving the United States in order to prop up the US equity markets. And that’s what we’re seeing today. And this doom loop between the Fed and the treasury, because they’re not on the same page. They’ve got different policies, different ideas of how to keep the market, and it’s causing problems.

MG: I would actually add to that and just highlight that this is, of course, the downside to not having people who actually have ever traded or negotiated a swap or done anything else along those lines in positions of decision making. You don’t want to put a fox in charge of the hen house. But the reality is it is somewhat useful in terms of understanding what’s actually transpiring. It doesn’t surprise me at all that Janet Yellen says something along the lines of, well, there’s no sign of a recession because they’re working very first order, first derivative type dynamics. It’s that second and even potentially third derivative that ultimately conveys the dynamics of what’s really happening.

And the second part is that the Fed operates under a model in which negative real interest rates, which is basically a function of inflation expectations and the current level of yield. Some people roughly approximate it with trailing inflation and current yield, which is completely insane. But at least if you’re doing it in a structural fashion, they tend to presume that the only reason why markets move is due to information.

The market has some insight, and this has been one of the huge policy innovations. And I use “innovations” over the last 20 years has been this dynamic of, okay, well, if we’re trying to figure out market expectations, let’s use market inputs. But those market inputs in turn respond to the policy makers. Right?

TN: Right.

MG: And there’s all sorts of structural features to markets. If I happen to short a pay or swap shop, for example, and my risk manager is forcing me to cover that risk, it has no economic signal to it. It’s simply a market feature that they are then trying to interpret as indicative of underlying demand. That’s just wrong.

TN: Right.

AM: On top of that, you have a political component where Yellen tied to a certain party or not just Yellen but others tied to a certain party are going to do things beneficial to that party.

I know economists and financial guys don’t like to hear that, but that’s just the reality of it.

TN: That’s the reality of national accounts. We also mentioned the dollar wrecking ball. We’ve seen over the past week, Yen devaluation or Yen depreciation. We’ve seen CNY devaluation. CNY has gone from, I think, 6.34 to 6.49, which is a dramatic deval of CNY. How much of an impact does the dollar have on those markets, particularly because we’ve heard about the dollar losing influence for the past, I don’t know, 50 years. But talk to us, Albert, what’s going on there?

AM: Like I said, Yellen wants to restrict capital flight, and a strong dollar does that. It’s killing the emerging markets. They gave Japan the go ahead to devalue the yen in order to offset anything that China does asymmetrically against the United States, because they have been. They’ve been in a little bit of a tit for tat for quite some time now.

So the dollar at 110 just absolutely annihilates emerging markets, except for the markets that are commodity based, like Canada. I’ve been in Canada. I love the Canadian economy right now. It’s strong oil based, gold based. So that’s where I’m coming from on the dollar right now.

TN: Great. Okay.

MG: I would just broadly highlight but by the way, I don’t know if you saw the CNY today, but it moved huge again today. So it’s actually now 6.50. Well, fantastic in the same way that like a root canal is fantastic. Right. But yes, it’s a wonderful technology. Nobody wants to experience it.

But just to put this in context, this is a move now that is equivalent in terms of devaluation of what we saw in August of 2015, in terms of the much-heralded… Right. And I would just highlight that I think this is an important move. I think it’s telling you that there’s all sorts of stuff that’s going on. I tend to fall into the category of terms of trade dynamics, more so than interest rates or even anything, those dynamics.

Japan allowing its currency depreciate, leading to depreciation for the Chinese currency or contributing to depreciation for the Chinese currency. They want a competitive in global export markets. Right. So there’s an element of China needing to respond and maintaining competitiveness versus a significant devaluation that’s occurred in the Japanese yen, which is basically, if you think about it from an American perspective, means I can buy 30% more of what a Japanese worker produces today than I could a year ago. Not quite exactly. Right. But somewhere in that range.

The second part of it, though, is that the terms of trade have just turned so ugly for these countries where the things that they need to import, they have incredible food insecurity, they have incredible energy insecurity, and those are the things that are rising in price. And we’re seeing no signs that those are going to retreat, whether it’s LNG that Japan now has to compete with China in Europe or from the United States and elsewhere or whether it’s wheat or rice or corn.

I believe, Albert you may know this better than I do but I believe Malaysia just announced export restrictions on palm oil, worried about their own food security. This is the way the system breaks down. And the irony of course is the US, are we going to get unlimited palm oil imports? Of course not. But can we use soybean oil or canola oil in lieu of palm oil for frying our Twinkies and our food? Of course. Right. We can do that. The US can survive almost anything from a food or energy shortage standpoint. It’s the rest of the world.

Albert referenced the emerging markets. I mean man, if you are a cash crop producing emerging market that is now struggling with issues around food and energy security, this is going to get bad. It’s really bad.

AM: It’s really bad. It’s causing political uncertainty in many regions of the world. And again use the phrase doom loop because politicians over Covid policies have created a doom loop in trade.

TN: But let me ask you and we need to wrap up this topic but I want to take this full circle because it’s fascinating. With the currency devaluation depreciation in China, Japan and the food issues could that potentially push, say, North Asia to put more pressure on Russia to wrap up the conflict so that the commodities out of Russia and Ukraine can alleviate some of this price pressure on emerging markets. Is that a possibility?

AM: It’s a possibility, but I think it’s a small possibility. Things have changed because of the Ukrainians sinking that battleship. They got bears at that point.

But Interestingly though, now that you mentioned, I just thought of it. Japan and China have always competed for the fishing rights and then sea Japan. So you could see a future. Want to say naval skirmish but a couple of boats taking some live firearounds.

TN: Sure. Yeah. Or a mistake. Right. You could have a mistake that results in something like that. Okay, let’s move on to tech. I think we can talk about this issue for hours.

AM: Yeah.

TN: Let’s move on to tech. Robert, we’ve spoken about key to earnings for a while, expecting them generally weaker, partly on inflation and other pressures. But this week we saw Snapchat miss earnings, but they reported 64% revenue growth and their active users were up 20%. So their business seems to be going well. Netflix lost subscribers and we saw them kind of as the tech cautionary tale. Facebook is falling in anticipation of their earnings for next week. On the bright side, Tesla saw a 42% earnings surprise, but their stock, after moving up a bit, really hasn’t moved much.

So on screen, we’ve got Facebook and Snapchat kind of showing their downward trajectory over the past month. So can you talk us through kind of what’s happening with tech earnings? Is that a rotation? Is tech really out of gas? What’s going on there?

AM: I believe tech is out of gas. A lot of it has to do with inflation and rates and whatnot. But I think tech earnings had gone into the stratosphere when Covid was just blazing because of the lockdown. People stayed at home, got on Snapchat, got on Facebook, got on Google and whatnot. Right.

The Tesla earnings. Those are a joke. It sounded like Tesla is the most efficient automaker in the world, which is absolutely a joke when they’re making cars intense. And it took the market up like 70 points. And then as soon as some of the better analysts started digging through the information, immediately sold off again. And then that actually triggered, I think that triggered the market to sell-off a little bit because people are worried about tech earning. I think Google’s going to miss big because their brick and mortar advertising scheme is hurting. Last month and this month it doesn’t look pretty.

But I want to take some caution here because everyone’s going to get beared up on these tech earnings as everyone’s seen the Huawei, big puts coming out there and whatnot. But we’ve seen time and again these tech earnings missed on revenue. And then the guidance is fantastic and the market rips 200 points in a week. I don’t want to be short tech at this level right now.

TN: Right. Mike, what are your thoughts?

MG: The obvious component is that we’ve got extraordinarily difficult compares for most of the tech companies. Right. So you go into a pandemic and every kid needs a computer, every kid needs a cell phone, every kid needs that. And I’m speaking to you over a microphone that was purchased during the pandemic and a computer that was purchased during the pandemic and a video camera that was purchased during the pandemic. Right. And I upgraded my software and my kids got new phones and all this sort of stuff that all occurred. Well, guess what? It’s not happening now. That’s harder.

And when I think about the reinvestment that needs to occur as we talk about going back into the office and into work, et cetera, it’s much less on the soft side. It’s much more on the simple dynamics of how do we restock a pantry at a company cafeteria. Right. Which hasn’t had to happen for a while.

TN: Right.

MG: So I am generally skeptical of it. I’m particularly concerned about the consumer side of it. One of my friends many years ago had highlighted that the emergence of cell phones as a consumer good had by and large, replace lots of other types of spending. So it reduced clothes, reduced spending on everything else. People are now tapped out on buying those phones. Right? They’re out of money and they’re using their credit in one form or another. So I’m skeptical on particularly Apple.

I agree with Albert, by the way, on Google. I think people are underestimating the importance of the bricks and mortar, and they’re also underestimating. I think this is one of the challenges for the Netflix. I’ll be 100% straight with you in terms of my household’s reaction to it. I mentioned it to my wife. She’s like, well, we’re obviously switching to the advertising supported model as soon as that becomes available because, candidly, I don’t even like watching Netflix to begin with. I could care less. If I have to watch ads and get it for $10 as compared to $20, then I would argue that this is happening broadly.

As we move back to an advertising supported model, the inventory of advertising space is about to explode at the exact same time that demand is relatively weak. So who thinks we’re going to get premium prices for advertising anymore? These models are screwy in terms of how badly they could deteriorate. If you simultaneously have a boom in advertising space at the exact same time that demand is relatively short.

TN: But lucky us, we get more campaign ads until November.

Okay, great, guys. Moving on to commodities. We saw commodities pretty much get smoked in the last half of this week. We’ve got one month history of WTI and copper up on the screen. So what happened this week, and what should we be thinking about right now with respect to commodities?

AM: I think that in terms of commodities, I think the biggest component right now is to see what happens in the Ukraine war, whether Russia stops because the Europeans and the Biden administration is using that as like the Putin price hike and whatever. But that’s what they’re blaming it all on. And a lot of people are worried about this being an extended war. I don’t think it’s going to last more than another month or two.

But for commodities, especially wheat and fertilizer, the moment that Ukraine comes back online, those things are just nosedived. And the Fed wants that to nose dive because they’re trying to kill supply in order to tackle inflation. So that’s from my perspective, there.

TN: So a lot of this at this point, you think depends on Russia, Ukraine.

AM: Yeah. That and the dollar. That and the dollar. So the dollar goes up, prices will come down.

TN: Okay. So appreciated dollar, did that hurt commodity prices this week?

AM: I think so. Go ahead, Michael.

MG: Yeah. So they’re not quite inverse. But remember, when we see prices, we’re seeing our prices, we’re not seeing the rest of the world’s prices. And exactly to the point that we were raising before with Japan and everything else on a year to day basis, as much as you may think, oil prices are up in the United States, they’re up maybe 50% in the United States. They’re up 100% if you’re in Japan. Oil prices 100% on a year to day basis.

AM: Wow. Right.

MG: I mean, that’s just an extraordinary outcome. You’re looking at these kind of underlying characteristics, and you have to say to yourself, the rest of the world is going to start to experience significant declines in aggregate demand.

Forget the supply component that Albert is highlighting. Focus much more on the demand. And when we think about commodities, developed world demand is extraordinarily efficient. We don’t throw copper on the ground. We don’t discard it into landfills. We recycle copper. Right. We recycle aluminum. We clean up the sludge off of our factory floors. That doesn’t happen in most places around the world. Right. Scrap found out in the open is still a significant fraction of aggregate supply. So we just use it more efficiently.

As things shift back here, we’re going to become more efficient at it. And I got a lot of heat earlier this week for posting a chart that said, look, I’m not seeing this commodity super cycle. I’ll say I’m not seeing this commodity super cycle. I don’t see the underlying outward shift in aggregate demand in almost any commodity that says we’re going to have truly sustained high levels of inflation and need for significant additional production other than effectively the disaggregating of supply chains. And you’ll hear things like huge copper demand because of electric vehicles. Right. That is selling human innovation so short, it’s just ridiculous.

If copper prices go higher, we’ll figure out how to use less copper wiring. That’s the history of the world.

TN: Right.

AM: That’s absolutely correct. That’s when they started using, like, gold flakes and sprays and different types of adhesive made out of whatever.

TN: But it generally takes a big demographic change to enter a commodity super-cycle or some sort of supply cut-off, right?

AM: Yeah. I can see a super-cycle within one or two commodities peaking and then coming back down and another one peaking and coming back down. But this insane super cycle that people were expecting, I don’t think it can happen. I agree with Mike.

TN: Okay, great. Let’s switch gears and look at the week ahead. Guys, we talked a little bit about housing, but we’ve got a bunch of housing metrics coming out next week with Case Shiller and a few other things. Because of rate rises, do you guys expect to see a near term impact on house prices? Are we kind of in a wait and see mode? What do you think is happening there.

AM: Politically? The Democrats want housing to come down. Right. And I think some of this bond action is meant to do that to be honest with you. I think they want houses down in the 30 year up. These prices, these housing prices are insane. It just stuns me to see some of these homes going for 150% of what they were two years ago.

And at some point the buyers are going to dry up. I mean, these cash buyers are going to dry up. And the credit now, I think in Tampa, it’s like over 6% for a 30-year mortgage. It’s going to make it even more unaffordable.

TN: But how much does that have to do with housing supply? Are we seeing more supplies coming on the market?

MG: Well, we are seeing more supply of new homes because the delays in completion means that homes that were ordered 18 months ago are finally starting to show up on the market. And that’s been one of the challenges. Unlike what we saw in 2005, 2006. This is not a function of massive amounts of new housing being built in areas that previously did not have housing.

So the character of 2004, 5, 6 was effectively converting farms and semi rural environments into subdivisions of endless numbers of homes that look identical so that people could have a home and then drive an hour to their work or an hour and a half. I mean, that was just crazy.And that was killed by the spike in oil prices that occurred with Hurricane Katrina and Ivan.

This time around, you just have a shortage of supply in terms of people willing to move. And unfortunately, the increase in interest rates, paradoxically, can exacerbate that. Right. Because I don’t want to leave my house and buy a new house because I have to enter into a new mortgage. Right. Of the mortgage. So, perversely, this could end up preventing supply from coming onto the market because when I go to look to replace my home, I can’t do it. And so it’s not clear to me that prices are going to take the hit that people are looking for.

I think at the low end, you’ll see certainly some pressure on new homes. You’ll see some pressure. But perversely, that just exacerbates the problem. Right. If new homes get hit more than existing homes, guess what? We’ll get less new homes.

TN: Okay, great. So far, it’s a very positive show, which is fantastic. End of a rough week into a rough show.

Let’s talk a minute about the French election, guys. It’s next week, what do you expect to happen in markets, say, with the Euro and French equities.

AM: Yeah, actually, we ended up buying the Euro today, looking for Macron to win reelection. Everyone that sees my Twitter feed knows I’m a conservative. Le Pen is a disaster for France, for Europe, transatlantic relations with the United States. She just can’t win and she won’t win. But the thing is, a lot of people think that she’s going to win.

So I think the Euro is going to probably pop half percent, maybe even percent, come Sunday into Monday. And then the dollar might actually come down and the market might actually rally a little bit crazy.

MG: I’m certainly sympathetic to that. I mean, the degree of sell off that we have seen, everything ranging from the yen to the Euro, et cetera, it’s hard to sustain this type of momentum. Ultimately, I’m exceptionally bearish on Europe. I’m exceptionally bearish on Japan for reasons that are largely unrelated to the immediacy of it.

I agree with Albert, and I actually would highlight something that he said that is really important for people to understand. When you describe yourself as a conservative, most people would say, okay, Marine Le Pen is a conservative. Right. Because she represents anti immigration and she represents behave more like French people. Right. But the reality is conservatism is all about let’s not break the system and try to replace it with some utopian vision. Right. Let’s try to work within the existing system to make it better.

When you enter into periods of uncertainty like what we’re experiencing, there’s a reason why the incumbent almost always wins, because people don’t want radical change in their lives. It makes it far more difficult. And so I just am not seeing any evidence that Le Pen has the chance that she’s claimed to and not that I want to join Albert on the potential tinfoil hat conspiracy standpoint, but I agree with them. I don’t think she’d be allowed to win.

TN: Okay, interesting. So a little bit of stability in Europe, which is great.

Guys, let’s have a quick geopolitical lightning round. I know there’s a lot going on in Russia, China, Ukraine, elsewhere. What’s on your mind, Albert, when you talk to your politics, what are you talking about the most?

AM: Honestly, China. The civil unrest in Shanghai, that’s actually looking like it’s spreading is kind of really concerning. For years, Xi’s been holed up in bunkers and can’t go.

You know, China, Tony. I mean, you have 1.3 billion people mad at you. You just don’t go out. Xi has this problem at the moment. So for me, it’s the civil unrest in Shanghai spreading to Guangdong and even outwards.

MG: Wait a second. So XI has 1.3 billion people mad at him? Did he say something against Bitcoin? Sorry.

AM: That would be 2.3 billion people because all of India is there too.

MG: 1.4 billion people. But yeah, exactly. You get really mad about that, as I’ve discovered.

Now, listen, I completely agree with Albert that, and this is again, part of the great irony of everything that’s been going on and I’m somewhat guilty of this myself looking at the dynamics of Russia and the moves that they were making and I think both Albert and I would still come to the conclusion says they’re going to take Ukraine and they’re going to take it in a much more violent fashion because now they’re really pissed.

TN: Yes.

MG: But the simple reality is that I think most people had described a degree of competence to Putin and Russia that has now become very clear that the authoritarian and central planning tendencies associated with that style of governance has its flaws. People are slowly waking up to this.

They’re now beginning to see this in China where it’s like well, wait a second. Maybe Xi’s not planning for the next 100 years. Maybe XI’s planning for the next two days to figure out where… without getting killed.

TN: That’s exactly it, Mike and I’ve been saying that to people for years. China does not think in centuries these guys are making it up as they go along. I’ve been inside the bureaucracy. I know it. They’re making it up as they go along.

So you hit it right on the head. They’re planning for the next two days or two months. They’re not planning for the next 200 years.

AM: Yeah. And the Chinese, they’re quite practical but it’s just too big of a country. I mean, there’s so many different regions and dialect. How do you keep something that big cohesive manner? You don’t.

TN: It’s hard. It’s a collection. It’s like the EU or four of the EU. But it’s very complex for one guy to manage. So guys, thanks very much for that. I really appreciate it and have a great weekend. Thank you very much.

AM: All right. Thanks, Tony.

MG: Thank you very much.

Categories
Week Ahead

The Week Ahead – 04 Apr 2022

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Yield curve inversion is on everybody’s mind and it only seems to be intensifying. It’s happened 4 times over the last 22 years. What does it mean, how does it impact Fed policy and how will it impact markets more broadly?

Energy prices are still a big problem and the Biden administration this week announced a very large release from the strategic petroleum reserve. Will this really bring down prices on a sustained basis? And what are some of the unintended consequences of the SPR release?

We’ve seen tech names rally pretty hard since mid-March like Alphabet and Meta. What’s happening and how long will the tech rally last?

Key themes from last week

  1. Inverted yield curve and Fed policy
  2. SPR release and crude market impacts
  3. Tech’s comeback?

Key themes for the Week Ahead

  1. Rubles for O&G. When will Europe give in?
  2. Housing stocks and the housing market
  3. Mixed messages of simultaneous stimulus and tightening (rate hikes with energy stimulus)

This is the 13th 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.

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Intelligence Quarterly: https://intelligencequarterly.com

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
1:00 Key themes of last week
1:29 What the yield curve means and how it impacts the Fed policy
4:50 The Fed has to break something?
6:33 Large release from SPR, will this bring down the crude prices?
8:30 Viewer question: Will Biden’s threat to US drillers produce the desired results?
12:19 Tech rally?
14:16 Key themes for the week ahead.
14:44 How long before Europe pays ruble for oil and gas?
18:52 Home builders VS real estate
21:00 What do people read from tightening, easing, and all the stimulus?

https://open.spotify.com/episode/6lq8AQvU602RQWSPWi5bYz?si=698bb7d1e4f94b23

Transcript

TN: Hi and welcome to The Week Ahead. I’m Tony Nash. I’m joined by Albert Marko, Sam Rines and Tracy Shuchart. Thanks for joining us. Before we get started, I’d like to ask you to like and subscribe to our YouTube channel. Also, want to let you know about CI Futures, our subscription product. We cover thousands of assets and economic concepts on CI Futures. Our forecasts are refreshed every weekend. You come in Monday morning and have a brand new forecast each week. Right now we’re offering a special subscription price of $50 a month. Please go to completeintel.com/promo and find out more.

So this week we had a few key themes. First is the inverted yield curve curve and Fed policy. Second is the SPR release and crude market. And the third is around tech. Is there a comeback in tech?

Sam, you’re up first. Let’s talk about the yield curve. It’s on everyone’s mind and it only seems to be intensifying. It’s happened four times over the last 22 years. So Albert and Sam, can you help us understand what does it mean? How does it impact Fed policy? Are they going to be more cautious going forward and how will it import markets more broadly?

AM: Well, Tony, concerning the inverting the yield curve, Jerome Powell doesn’t really want to do that. However, Janet Yellen does want to invert the yield curve. This is the divide that’s been throwing off the market analyst for quite a long time, quite a while now, actually, myself and I just found out and realized where the divide was. And normally in a deep quad for to take something from hedgeeye’s commentary, the only things that you can buy are Treasuries and gold. And right now Powell will be fighting a tide because of the long dated treasure is the number one thing to own in that scenario. So trying to protect stocks while hurting housing, and then you have Yellen that’s trying to protect housing. It’s quite a mess. And it’s probably something like Sam can actually detail the inverted yield curve on.

TN: So why are there are two camps just to go into that down that trail for a second?

AM: Well, it’s a policy, it’s ideology, basically. Yellen did this before in 2013, 2014, I believe. And Powell is not really an economist. He’s a lawyer. So he’s probably hearing it from his little circle of miscreants. So that’s where that’s coming from.

TN: People, whoever is listening.

AM: I’m sure they’re fine people. I’m sure they are. I think Yellen is probably correct in this instance, but we’ll see how that plays out.

TN: Okay, Sam, what do you think?

SR: Yeah, in inverted yield curve, generally, everybody’s like, hey, recession on the horizon. In reality, yeah. I mean, there’s always a recession at some point on the horizon. And what the yield curve tells you is that there’s one coming in the future. No kidding. But it’s not good for one timing, a recession period.

TN: So we’ve got the 2/10 spread on the screen right now. So can you tell us what does that mean and how much importance does that hold with that two and ten yield spread going negative?

SR: I mean, it’s something to pay attention to. I mean, the market is telling you something with that. There is some signal, even if there’s noise in there as well, that the Fed is going to go very, very quickly and is likely to break housing or break something else or break housing and something else. And that’s going to probably cause inflation to come back down. Right.

The market does not believe that or at least fixed income market does not believe that inflation is going to be a problem in ten years, does not believe that the Fed is going to be able to hold interest rates very high for very long. And that’s why you get the 2/10s inverted. Right. The Fed is going to go above what the “natural rate or the stall rate” is for the US economy.

TN: Right. So we’ve been saying for several weeks the demand destruction is the only way that the Fed is going to solve supply side inflation. And the last couple of weeks you’ve talked about the Fed breaking something at this point, the Fed almost has to break something. Right? I mean, Volker broke something in the early 80s. Right. Something has to be broken.

SR: Yes. Something has to be broken or you’re not going to solve the inflation issue. And you have to do it. You have to do it in a pretty rapid manner of tightening in order to get the inflation levels that we have now back to something somewhat reasonable in a time frame that is adequate. But again, it doesn’t tell you what’s going to break. We talked about it last week. Housing looks sick. Housing equities look sick. It does not look great, but it doesn’t tell you much about the broader market. Right. It’s a lot of noise. You can say that it’s bad for equities, but generally it takes a while for it to be bad for equities.

TN: Okay, great. Now, JPMorgan put out a note this week. Everyone’s putting out notes about when rates are going to rise. They said 50 in May 50 in June. Are you thinking that or is that kind of on the edge of aggressive?

SR: I mean, it’s aggressive, but the Fed has very little choice but to be aggressive in this instance or it’s going to lose credibility further. And that’s an issue for it. Right. It doesn’t want to lose that little bit of credibility it has left to raising rates too slowly in an environment where it’s getting the green light to do so from markets. Markets have it priced in. Why not do it?

TN: Yeah. If someone said in January that we’d be raising 50 in May, 50 in June, I think you’d be laughed at. But now it’s taken seriously. So it’s just really interesting to see the iteration of that expectations.

Okay. Speaking of inflation, let’s move on to energy prices. Tracy, obviously, there’s still a big problem. And this week, the Biden administration announced a very large release from the Strategic Petroleum Reserve. You’ve been all over this, including the Tweet you sent out on Thursday, which is on our screen talking about logistical issues.

So the main question I think for most people is will this bring down oil prices on a sustainable basis? So can you talk to us about that and some of the unintended consequences of the SPR release?

TS: Yeah, absolutely. It’s not enough to keep oil prices sustainably lower. Right. It doesn’t fix the structural supply deficit that we have years to come. Also, this slows shale growth because it disincentivizes shale producers from drilling more, which actually needs to be done and also creates potential logistical bottlenecks because we’ve never released this much before. That could cause congestion on the Gulf Coast. And that Tweet is up I think, talking about the bottlenecks there.

And then there’s another issue that has not been discussed yet broadly. And that’s because the SPR is aging. Right. And so we’ve had releases before where we’ve seen degradation in oil. And in 2015, they approved the $2 billion upgrade to the SPR, which is not going to be done until 2025. That said, what they did is they did everything except for the distribution centers. So what will happen is we need to see if we can actually get a million barrels per day pushed through. So there’s a lot of obstacles here.

TN: So it’s a sentimental kind of downside for oil right now. Nothing’s really released yet. And it doesn’t seem all that feasible that it’ll come out soon. Right. So supply chain issues like we’re seeing everywhere else.

So we had a viewer question from @VandanaHari_SG. It says, to what extent will Biden’s threat to us drillers to drill or get off the lease, produce desired results? You mentioned Frackers earlier. Will we see much movement there?

TS: No. Biden did call for Congress to make this decision. Personally, I do not believe that this will actually get passed by Congress. That said, again, this disincentivizes oil companies from producing more because it’s not that easy to just turn on wells. They’re facing labor shortages. They’re facing supply chain shortages. It’s not that easy to do that.

So if you tell them we’re going to tax you on this, then if they abandon those wells, then it’s going to take that much longer to get them back online when they are ready to. So all in all, it’s a horrible idea. Again, I do not see Congress passing this whatsoever.

TN: It’s complicated. And I think that’s the thing that we live in a world that likes to simplify things a lot. Right. And we like to say we’re going to do X, we’re going to do Y, we’re going to do Z. And the implementation of this stuff seems to be a lot more complicated Than we hear from, say, these non experts that talk to us all day long on TV or social media.

TS: Exactly. I mean…

TN: We can’t just wave a wand fixed supply.

TS: And turn on oil wells. I mean, regardless, we run through our DUC supply. Right. And that’s why we’re seeing slower oil production. The monthly EIA monthly just came out yesterday. It was 11.37 million barrels instead of 11.6 million that they were estimating in the weekly. And so what happens is that you’re pulling down DUC wells, which are the ones that you can get up easily, and then you’re putting all these restraints on oil companies and threatening them with taxes and things of that nature.

To get a well online from start to finish is six to twelve months. People don’t realize it’s not let’s snap our fingers and tomorrow we’re spreading oil.

TN: It’s not exactly a nudge. Right? Remember, under the Obama administration, they really focused on condomin and the nudge and all that stuff. This is kind of the opposite of that. It’s like the bludgeon.

TN: Yeah, exactly.

TS: Doing what they want. Right. Sorry. Go ahead.

AM: No, this is just political rhetoric. I mean, they’re better off just jumping into the oil futures market and trying to drive it down. This is just talk by the Biden administration. There’s really no substance to it.

TN: Can they jump into the futures market and short it and drive the price down?

AM: Who says they haven’t? Okay. You’re looking at 127 price and all of a sudden it’s down in the 90s. Is this crypto crude? What are we doing here?

TN: Okay, that’s a good point. All right.

SR: Just one last point to that. I know Tracy actually think Tracy tweeted this out a couple of weeks ago. The latest Dallas Fed survey of oil companies made it pretty clear that a lot of them at no, they don’t care where the prices. They’re not increasing their output. They put that on paper and put that in the survey. I think that’s worth remembering is that this is a less price sensitive reaction than people are going to give credit for.

TS: 100%.

AM: Yes.

TN: Okay, great, guys. That’s fantastic. Let’s move on to equities. Albert, we’ve seen tech stocks rallied pretty hard for the last couple of weeks since about March 14th. We’ve got chart for Alphabet and Facebook on the screen right now. Sorry. Meta on the screen right now. What’s happening to tech? What’s happened over the last couple of weeks and how long do you expect them to rally?

AM: Well, they’ve used tech, maybe a dozen names to rally the market. This is well known. I mean, if you look at those names that you have listed along with AMD, Nvidia and Adobe, they can be up to 30, 40% of the call action on a given day. It’s kind of silly, but honestly, it’s like this is a zero rate economy at the moment. So as our rates go up. Yeah. So as our rates go up, I don’t see how tech is going to rally much further.

TN: Okay, Go ahead.

TS: I’ll just throw in that just because BAMO came out with their weekly flows that we’ve had, tech market was $3.1 billion, which is the highest in two months.

TN: Okay. Interesting. All right. So if we go with the note that came out that in May and June will see 50 basis point rises, and you’re saying tech can’t continue to rally into higher interest rates, are you saying we’re looking at that type of horizon for tech to not be as attractive?

AM: Yeah, unless they reverse course come June or July. I don’t see how tech can really rally to what their all time highs were a couple of months. I don’t see it.

TN: Sam, does that make sense to you?

SR: It does make sense to me. I think the only saving grace for tech thus far has been that the long end of the curve hasn’t done much, and it actually looks a little sick at the moment in terms of yield. And that’s been a little bit of a semi tailwind, at least prop them up.

TN: Great. Okay, perfect. Let’s look at the week ahead. Some things we have for the week ahead are rubles for oil and gas. When will Europe give in? Housing stocks and the housing market? Sam mentioned that earlier. We’ll dive a little deeper into that and then the mixed messages around simultaneous stimulus and tightening, which I think is confusing some people.

So first, let’s dive into rubles for oil and gas. I did a quick Twitter survey earlier, which is up on your screen asking people how long before Europe caves and pays for oil and gas and rubles. Something like 70% of people think they’ll do that within two weeks. It’s just a Twitter survey. Some of those guys are experts. Some of those aren’t. Tracy, what do you think? Is that realistic?

TS: Putin actually came out today and said this is the plan. There is no backing out. However, it doesn’t include what you pretty much already bought. That means. So deliveries until most delivery until April 15, and then really in May 1 is where that really starts, where Europe will really have to start paying in rubles.

TN: So May 1 is when you think the rubles?

TS: May 1 is really when the bulk of this situation will come in hand because it’s not for what has already been ordered. Right.

TN: Okay.

TS: Does that make sense?

TN: You think we could see a trickle in mid April?

TS: Yeah, exactly. But I think that they’re going to have to do that. They really have no other choice unless they kind of want to plunge into the dark ages. Right there’s just not the backup plan is forming, but it’s just not there yet. So I think that they will concede even though they have a little bit of a time. They have 15 to 30 days to really. But you can’t move that fast. It’s not that easy to change suppliers that quickly.

TN: But we’ve talked about this a little bit. But what happens to say industrial output? German manufacturing if they decide not to do this? To be honest, it sounds like a pretty trivial thing to me to pay in another currency. There is a transaction cost to it. But if you’ve got a major economy, it doesn’t sound like something that you can really stand by insisting to pay in dollars. So what happens to German manufacturing? What happens to industrial cost Europe.

TS: It’ll actually plummet. I mean, BASF already came out and said we’re going to have to cut production if this happens. The German plan is basically to shut down manufacturing and to give residential the leeway if they have to start rationing. So that means if manufacturing starts shutting down in Europe, you’re in recession territory immediately.

AM: Yeah. They’ll find a way. They’ll find some special vehicle to sort this out. They got a little bit of time, like Tracy said, they got about two months really to sort this out. And anyways, the weather is starting to get warmer, so the less gas will be used. Anyway, I don’t see this to be really of a big problem. It’s just a lot of noise and a little bit of leverage from Russia on the sanctions that they are getting hit by well.

TN: But conceivably because of the embargoes on some of the banks in Russia, it could be a real issue with having funds rubles in Russian banks. No?

AM: I don’t think so. They can go between the Swiss, London will do it. It’s the same thing as the Yuan, renminbi, it’s like when they trade it for oil, the Saudis sell it in renminbi and goes to London, gets converted instantly and it’s dollars almost immediately to the seller. So I don’t think it’s going to be a problem.

TS: I 100% agree that the currency doesn’t really matter because it’s still factored into what is the dollar value. Right. It doesn’t really matter or any in Europe’s case, what is Euro per megawatt hour?

Regardless, it’s not really the currency that matters so much. The fact is the currency is helping. What Russia is trying to do is that if you have to sell euros to buy rubles, that keeps the currency afloat.

TN: Right. Which we’ve seen it surge back this week to pre war levels. Okay, great. Let’s move on to homes and home builders. Sam, you mentioned the housing market and housing stocks earlier, and we’ve got on the screen a chart about US real estate and home builders and the divergence between those. And they’re usually pretty correlated. Can you talk us through your expectations for real estate relative to where homebuilders are trading right now?

SR: They’ll look like homebuilders pretty quickly here. It’s what the Fed is basically able to do in terms of the economy quickly. Right. If you’re going to tighten rates by two and a half percent in a year, plus quantitative tightening, that’s what you’re going to hit. You’re going to hit home builders and real estate. That’s generally what you’re going to hit and you’re going to hit it fast.

In particular, the shorter duration type real estate that’s benefited the most from zero rates. If the long end of the curve stays somewhat subdued, you’re probably fine if you have longer duration type retail or that type of lease. But the shorter term duration real estate type plays are going to be in some trouble here.

TN: Okay. And so you say it’s going to happen pretty quickly. Last week you said it’s going to happen in Q2. When I first heard that, I was a little bit surprised. But just seeing what’s happened over the past week, it’s been really surprising to me that things have moved so quickly. So I think you’re right. I’m really interested to see that happen.

Now. You also mentioned QT. So let’s talk a little bit about kind of the tightening and easing, the simultaneous tightening and easing that we have going on. And how do we expect that to move over the next week? So, Sam, you’ve been pretty insistent that QT is going to start in May, is that right?

SR: Oh, yes. Little doubt.

TN: Definitely going to start in May. Now we’ve got countries and States giving energy stimulus and other things happening. I wouldn’t be surprised if different forms of stimulus come out. So how does it work where we have really fairly significant stimulus coming out as we’re tightening? What do people read from that?

SR: I would say confusion. Right. If you’re trying to actually tackle if you’re trying to tackle inflation with monetary policy, that really has to break something in order to get it under control, and yet you’re giving people more leeway to not have something break more money in their pockets. It’s counterproductive. Right. So you begin to either have to tighten more or tighten quicker or both to get it under control or you have to stop it with the fence full fiscal.

TN: What are you hearing about that Albert out of DC?

AM: I was on this program. When was it? About a year ago, talking about tapering with Andreas, and I was against tapering. I never think it was going to happen, but because the fact that we just keep going on QE, how do you tighten when you have QE and the Fed balance sheet is still expanding by 100 billion plus a week. I mean, that’s not.

This is why there’s so much confusion in the market. Like Sam was saying, it’s just you talk about tightening. Meanwhile, you secretly spend $160 billion to pump the market. So which one is it? As an analyst, how do you even assess what you’re going to do over the next 30 days when the Fed’s confused? The Fed and Treasury is confused.

TN: So can we have that where we’re say doing tightening but helping equity markets continue to rise?

TS: I mean, is that just weird? Of course it does. It is weird. You can’t have monetary policy going head to head with fiscal policy. Right. So you’re having fiscal policy loosening. At least let’s look at the energy markets right now. You can’t have all of this stimulus and it’s not just from the United States. It’s from across the world is doing this and we’re going to see more of this every week of new countries come out and save money.

TN: Not in Japan. Japan is easing across the board.

TS: Yeah.

TN: Everyone else.

TS: True. But of course, I agree completely with the Sam said it’s confusion in the markets because you are literally having central banks butting heads with governments right now.

AM: Yeah. And that’s something people don’t really pay attention to. It’s not simply the US federal reserve with the US economy, but it’s the federal reserve with all of anglesphere. They can have the Canadians or the UK do tightening while we do expansion and vice versa. They can do it unending. It’s unbelievable.

TN: So when do we know the direction? When do we know whether we’re tightening or easing? Do we come to a point like is May the end point for easing?

AM: I don’t know, Tony. I can’t really tell you that because they can say that they’re doing that and then we find out two months later that they didn’t do it and they can use all sorts of weird little gimmicks that they have control over.

TN: Okay, Sam, what do you think?

SR: I think the comment about the Anglosphere was really interesting because it’s 100% true, right. If you look at a lot of the EMS, they’ve been talking lightning for a year or at least nine months. So I think that’s the really intriguing kind of comment for me is the US is probably so late to the game that EM is going to be easing by the time the Fed actually accomplishes any sort of tightening.

TS: They’ll have to, they will have to.

SR: Which sets something interesting up, by the way.

TN: Sorry.

SR: Which sets something interesting up for when that happens. But that’s down the road.

TN: It really does. Yeah. Remember synchronized easing and synchronized tightening a decade ago? I just feel we have so many mixed messages out there that it’s no wonder we have the volatility that we have in market. Okay. Thanks very much for this. I really appreciate it. Have a great week ahead.

AM: Thanks, son.

TS: Thanks.

SR: Thank you.