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Crude Oil Supply: The Week Ahead – 29 Aug 2022

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Crude and energy are on everybody’s minds, and we spent a lot of the Week Ahead parsing the details. Saudi Arabia came out with some comments about restricting their crude supplies to global markets, and we also have a detailed discussion on the SPR release in the US – when will it end, how will that impact crude prices, etc. 

We also discussed Jackson Hole drama and the conclusions of Powell’s latest speech. Powell really didn’t say anything new, so why are equity markets reacting so dramatically?

And will we finally get some stimulus from China’s government? We’ve seen movement in tech stocks and some talks of the stimulus release, but we expect more after the US election. 

Key themes

1. Crude oil supply: Saudi/UAE cuts vs SPR

2. Jackson Hole Drama

3. China Stimulus (Finally?)

4. What’s ahead for next week?

This is the 31st 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

Josh: https://twitter.com/Josh_Young_1

Listen on Spotify:

Transcript

Tony Nash: Hi, and welcome to The Week Ahead. I’m Tony Nash. This week, we’re joined by Josh Young for the first time. So I want to thank Josh a lot for taking the time to join us. We’ve got Albert Marko and Samuel Rines. We’re lucky to have these three really valuable guests.

Before we get started, I’d like to ask you to like and subscribe to this YouTube channel. You’ll get reminded every week. Give us comments on the show. We always look at the comments. We always respond to the comments. So thanks for taking the time to do that.

We also have a promo for our product, CI Futures. That product is $50 a month right now. You can go month to month with it, try it out. We cover about 900 assets with weekly forecasts, and we do about 2000 economic variables with monthly forecasts. So check it out. We’re transparent. We disclose our error rates for every month. So it’s good information.

We have a couple of key items this week. First is the crude oil supply. We had Saudi Arabia come out with some comments about restricting their supply. We also have some information on the SPR release in the US. So we’re going to ask Josh to leave the discussion on that. 

Obviously, Jackson Hole drama. We’re probably the only people not leading the Jackson Hole today. But there are some meaningful things happening. There are some things happening that are not meaningful, and Sam will talk us through that. 

And then when we finally get some China stimulus, I think that’s a real question and Albert will lead us on that.

So Josh, thanks again for joining us. You put out a tweet earlier today about the UAE supporting the Saudi comments on supply restrictions.

Can you talk us through that and help us understand why did that happen and why is that important?

Josh Young: So the UAE is supporting what the Saudis and other OPEC members are doing in terms

of threatening to cut production based on the combination of lower price, as well as their observation that there may be some paper market price manipulation and disconnect from what they’re seeing as the largest sort of combined suppliers in the oil market. And it’s particularly important that the UAE did this because what we saw at Bison was that most of the OPEC members were actually producing their maximum production capacity. And when you produce that maximum, the fields aren’t designed for that. It’s sort of like driving with your foot all the way down on the gas 100% of the time. You’ll break your car and you’ll crash.

And so a lot of these fields and their processing facilities, they’re just not designed to run at this. It’s a theoretical capacity that’s supposed to run for a week, a month, three months, not how they’ve been running it. And so there’s a lot of pressure on a lot of fields in many of the OPEC countries to actually reduce production slightly, so it’s not a surprise.

And we forecast that there would be some discussion of this given the high run rate versus their spare capacity. UAE in particular does have some remaining spare capacity, so what we’re seeing is cohesion within OPEC along with supply exhaustion of the other OPEC members. So it’s actually a pretty big thing, and I don’t think people are really picking up on it too much. Although maybe it’s why oils flat up a little.

TN: With the market down a lot today. Is this something that will start small incrementally and then it will accelerate? Meaning will they cut off a little bit of supply and then over time, maybe they take some fields down for maintenance or something like that, and then you start to see bigger chunks? Is that a possible scenario?

JY: Yeah. Honestly, I don’t know exactly what the path will be. I just know that they see it. We were joking before the show that, hey, maybe they’re following my Twitter feed and a few other people’s been observing these problems with the oil market and sort of weird trading patterns versus very strong physical demand and sort of very strong indicators.

And you see Saudi has a very high price relative to their benchmarks. Right. Their poster price, especially Asia, has been very high and usually that’s associated with price strength, and instead we’ve seen price weakness. So I think they’re very frustrated by that, but they may wait for some other things. So oil prices to fall a little more or some other sort of signal, maybe some small amount of demand destruction to the extent that happens. I think it’s a little hard, just given the Saudi relationship  with the US and their sort of hope to maintain a lot of their alliance and their alignment with the west. 

So I think they need sort of an additional catalyst. That being said, once they do it, they might… I don’t know if they start small and then go big, or they might just go big. They might just say, hey, we’re cutting by a million barrels a day. We increased by four over the last year and a half, and we’re fully supportive of the market. We might go a lot bigger if necessary, and there’s a disconnect and we’re going to support it.

TN: Okay, so how much of this is related to the SPR release? Is the SPR release having such an impact on prices that the Saudis are kind of fed up with it, or are there other factors?

JY: I actually don’t think it’s related to the SPR release almost at all. It does look like it’s a little related to some of the job owning around a potential agreement with Iran. And there’s a lot of disagreement in terms of how much oil production could come on if Iran came to an agreement with the west and sort of restarted. JCPOA. I’m in the camp that there’s not a lot left to produce and to export. You can see the amount is getting exported to India and various other countries. It’s up a lot from the last time this was floated, six or seven months ago. So whatever that capacity was for Iran to export, it’s less.

But I think it’s partly tied to that because Iran is a regional foe of Saudi Arabia and UAE and several other OPEC countries. So I think it’s a little bit of that. And I think it’s a lot related to the paper market trading patterns and just this really big weird disconnect where you see consumption fine and you see price down and it’s probably messing up your CI Futures forecasting a little because you’re probably tracking the consumption and the consumption is fine and the price is down. And it’s like. Okay. The inventories are down. This is weird. Again, excluding SPR, when the SPR stops releasing, obviously you’d expect price to recover substantially absent a million barrels a day of demand structure.

TN: Is that what you expect when the SPR release is done, that’s late October or something, right, do you expect prices to rise notably? 

JY: Yeah. And I think like, the EIA forecast for shale production growth and sort of overall US oil production is just totally off base. They haven’t reset it, even though I think they had like a million barrels a day or something forecast for growth. And I think we’re at sort of 300,000 barrels a day so far this year and pretty flat. And the rig count is not up that much, and the frac stack count is definitely not up enough. So I think there’s sort of this disconnect. 

There also in terms of this mark to model from a production perspective versus what’s actually happening in the field.  And then you look at it’s not hard to see who the big producers are on the public side and then which ones had forecast growth and how much they’re actually achieving. 

It’s really hard to reconcile their forecast for production growth versus what’s actually happening. And we’re really well situated for this because we spend most of our time we talk a lot about macro, we spend most of our time just like looking at individual companies and evaluating them and evaluating their securities. And so I think it’s part of why we’ve had such a powerful voice from a macro perspective, because we’re spending most of our time talking to these companies, looking at the rigs, looking at other services, figuring out the bottlenecks, and looking at some of the local stuff.

And when you do that and you step back and say, these numbers don’t make sense, and the companies are not tracking anywhere close to that. So back to SPR, that matters a lot because we’re not achieving the production that is being forecast. And it seems like a lot of market participants, or at least prognosticators, are just accepting as a given. That means that at whatever point… I’m not saying that the SPR release stops in October. They may continue it, but at whatever point, there is a finite amount of oil there. And we’re hitting tank bottom on some of those caverns that are releasing oil. At some point we just run out or we stop releasing and whatever that point is, absent significant demand destruction in a very deep recession, I think we see a lot higher oil prices.

TN: So in terms of the SPR release, you said, you talk about being empty, this sort of thing. How much do you think are you still thinking kind of October? Are you thinking they’re going to continue, but it would kind of have to trickle out, not at the same rate they had been releasing to date. Right? Because they are short on supply in the SPR.

JY: Yeah, I don’t think it has to trickle out. I think they could produce pretty hard for another month or so, and then it starts becoming more of an issue. But as you get down to it, looks like the numbers around 20% or so for any of the individual storage facilities, and for some of them, it might be a little higher, some of it might be a little lower. You start having issues with contamination as well as just physical deliverability, actually extracting it out. 

And I think people take the numbers a little too seriously. And it’s very weird because no one trusts the government about certain things and then other things they just blindly say, oh yeah, it’s right. It’s from, okay, try to reconcile that.

And I think when you talk to engineers and some of the people that have worked on these facilities, their observation is that it’s reasonable to expect less deliverability. But there are enough of the facilities that aren’t drawn down enough that they should be able to supply. I don’t think we’re really hitting deliverability issues yet, but I think we’re likely to start to hit them, let’s say over the next month or so.

TN: Okay. So kind of when we take what you’re talking about and we look at, say, the potential impact of crude prices and refined product prices on inflation and energy prices generally on inflation, seems to me that you’re implying that towards the end of the year we could see those prices rise fairly quickly. Is that fair to say?

JY: It is. But at the same time, gasoline prices are still down a lot. These will start to tick back up the gasoline, which is a big consumer factor, as well as it gets felt through a number of different aspects of the economy. So at least for now, that’s not so much of a risk. But yeah, definitely. Sort of later on in the year, one could expect that. 

And one other way to look at that is there’s been a divergence, and I’ve ignored these historically, to my detriment. There’s been a divergence in between the oil price and oil and gas equity prices and oil and gas equities have done a lot better over the last, let’s say, month and a half than oil prices have. And it looks like the equity market is telling us that the companies… 

I mean, one, the companies are just very cheap, so I would think naturally they should rise. But the degree of divergence is so much that it seems like the equity market is making a forward looking bet on higher than strip prices in the future. And the forward market and the oil paper market is making the bet that it will be lower.

So there does seem to be a noteworthy divergence that could mean much higher inflation, like you’re saying, but it might also be that shelter matters a lot more and some other stuff matters a lot more, and it might really take diesel rising a lot and gasoline rising a lot to actually shift back into high inflation.

TN: Okay, is that divergence between only upstream companies or is it upstream midstream? Is it the whole stack? What is that divergence? What does that include?

JY: So I’m most focused on upstream. I don’t actually remember whether it also included the pipelines and services. But on the upstream, definitely both the large cap, the XLE ETF that includes Exxon and Chevron and stuff, as well as XOP, which includes sort of independence.

TN: Fantastic. Okay, Josh, that is excellent. Thank you so much for that. On that inflation topic,

let’s move to Jackson Hole. Of course, there’s a lot of breathy analysis of Jackson Hole over the last couple of days, and there will be over the weekend. But Sam Rines, who has the most valuable newsletter that I know of that’s available in America today, covered this week, and there’s a chart that he has in there looking at the meeting probabilities and also looking at the headlines that may or may not come out of Jackson Hole.

Sam, can you talk us through that? And what do you expect some of the conclusions to be?

Sam Rines: Yeah, so I thought it was really interesting. The Fed said nothing all that interesting today. I mean, it might have been a shock to people who weren’t paying attention, but the Fed just reiterated about, I don’t know, 99% of what it’s already said and set it in different words. And Powell said it basically eight and a half minutes. Right. That was the big change. All he did was take a bunch of time out of the speech, condense it and say, we’re not pivoting. They were never pivoting. The pivot was out of the picture at the last meeting. He made that pretty clear during that press conference. 

So it’s really interesting to me that there was an actual equity reaction to it. It’s also really interesting

that there was relatively little reaction out of Currencies, relatively little reaction out of global interest rates and only a reaction on the equity front. It was like it was a shock to the equity guys, and everybody else was like, yeah, we need that. So I think that was really the big takeaway was it was a shock to the equity

markets, but everyone who had to be paying attention for the last six months was like, yeah, no big deal.

So Jackson Hole I think one of the things that I had said about it in the newsletter was, you’re not going

to learn anything new. And the only thing that we learned was that Paul was going to say absolutely nothing new and absolutely nothing interesting, and equity markets would still react to it in a pretty meaningful way. The idea that we were going to go to 4% and then stay at 4% was already priced in to Fed fund futures through the end of ’23.

So this whole idea that Powell somehow shocked the market. It’s one of the more entertaining things

today, in my opinion, is just that equity markets were so taken aback by it while you had three or four basis point moves in interest rates across the US curve. And just a big shrug. 

To me, the big news today was probably out of Europe where people were potentially discussing 75 basis

point hike from the ECB. The Czech Republic doing an emergency meeting on energy.

There were some more interesting things that happened in the market today, but I think I overlooked in favor of an eight and a half minute speech by somebody just re iterating what he had already said 900 times.

TN: So let’s talk about Europe a little bit, because that’s interesting. I mean, Europe is in a world of hurt, right? We’ve talked about that several times. So what do you think the path for the ECB is from here? Do you think they’re going to hike 75?

SR: No, I think they hike 50. I think 75 is probably a little too aggressive for them. I mean, we were talking about ten basis points three months ago as being something that we thought would be interesting. And now the idea of floating 75, I think that was mostly to defend the currency, right. They knew that there was a known that you were going into Jackson Hole and if you front ran that with the leak that you might go 75, you’re going to defend your currency somewhat against a potentially hawkish Powell. It’s pretty straightforward in terms of defending a Euro at one. So I think that was basically the case. Call 50, maybe 75, I don’t really care. They’re going to hike, and they’re going to hike in a pretty meaningful way, particularly for a place that is already screwed. Right into the recession, right? Yeah.

I think it’s a pretty interesting opportunity to go long the long-end booned and short the Euro. Yeah, we’ve talked about that a few times here and that’s great.

TN: Okay, guys, what else do you have on the, Albert, Josh? Are you guys hearing anything else on US economy or Jackson Hole? 

Albert Marko: Sam mentioned about the equity reaction. How much of that is really because

of the low liquidity right now? There’s no traders really out there, no volume out there really, at the moment. 

SR: But liquidity works both ways, right? If you have low liquidity, you can rip it. It can get ripped either way. And I think what you saw immediately following his speech was you saw a leg down, then you saw 1% leg down, 1% leg back up, and then a two to 3% leg down, depending on what industry you want to look at. Right. So liquidity works.

AM: But you’re right, nothing was new. That rally that they launched for the weeks prior to that, you expected them to go hawkish after that, what are they going to do? Go dovish and go to 4400, 4500 and look ridiculous? Nothing new came out of this. He’s right about that. 

SR: I think there was an opportunity for them to potentially begin to say, hey, we’re going 50s and then 25s, and then we’re going to pause at 4% and we’re going to see how much we’ve ruined everything. There was the potential for that.

But then when you get STIs, you get financial conditions ripping higher, you have meme stocks

coming back into the news. Yeah. The Fed is not going to consider that type policy. If anything, they’re going to look at that and say, hey, it looks like short term neutral is a little bit higher than we thought it was. We need to move a little further and then begin to pause.

So if anything, the equity rally going into Jackson Hole was more problematic for equity markets than people thought. 

TN: So do you think some of those 25 expected 25s could be 50s in say, Q4?

SR: I don’t care if they’re going to get to four and then they’re going to stop and they’re going to get to four before they’re going to get to four around December and then they’re going to see what kind of carnage they’ve done. If they haven’t done enough carnage, they go higher. Pause there.

TN: That makes sense.

SR: The pace is probably I would say the pace kind of matters for shock and all purposes,

but in general the pace is kind of meh.

The end is really important and the length of staying at the peak is what is truly the most important thing here. If they’re there for a year and a half and they don’t care about a recession, that’s one thing. If they’re there for six months and cut by 75 because we’re in a recession, then go back, that’s a different thing. But I really don’t care how quickly they get there.

TN: Okay. And the run up to the midterms has no bearing on what the Fed is going to do, is that? 

SR: None.

TN: None. Okay. I just hear that from time to time. Well, the midterms are coming, so the Fed

is going to just relax for a few months.

AM: You hear that mainly from me. From my perspective, it’s always been like when I say Fed, I want to say Treasury and Fed together because of Yellen.  But sometimes they have those concerns. Like they don’t want the current administration looking bad. I had a midterm. Yeah.

SR: That should sail.

AM: Well, that should sail because just because of the ridiculous antics that they pulled recently with inflation, it’s being ridiculous. So you’re right, that ship has sailed.

TN: Well, I mean, are they ridiculous or not? I mean, inflation has definitely risen and they’ve definitely taken action to offset inflation.

AM: Yeah, they’ve done that in a vacuum because China is not online yet and Europe is a complete disaster at the moment. Right. And we haven’t had a real event to drive oil up into like the 130s, 140s again. God forbid we have a hurricane in like a week that goes into the Gulf of Mexico while Grandhome is sending out letters to all the refiners saying you can’t export anything anymore. There’s plenty of room. 

TN: She’s encouraging them. She’s not requiring them. Right?

AM: Yeah. Okay, well, we’ll see about that.

JY: She’s making them an offer that they can’t refuse. So my general take was just like, I’m not a Fed watcher. My general take was kind of stagflation coming out of this. Right? It’s like policy that can’t get too extreme to really like they’re going to try to torch the economy, but they’re also not going to go to a 15 interest rate or anything like that. They’re going to go to a four or whatever, and maybe they’ll go slower or faster.

I think there’s some political motivation there. So maybe they go slower and then they turn on higher after the election. Maybe not. Unclear. Kind of doesn’t matter from my perspective.

What does matter is, like Albert was saying, I think there’s a decent shot that we end up with higher oil prices. We end up with other factors. So, like, there are various drivers that are pushing, especially in the rental market, shelter higher, not lower. And so with persistent inflation in the biggest household bucket, and then with a likely move higher this winter in oil and diesel and probably also gasoline, it’s going to look pretty ugly. And if you have them stopping kind of at four, maybe going to let’s say five or something, but inflation is at ten or nine or whatever, right? Some directionally, really high number. At some point, you just start ticking in where you have negative real and positive nominal, and that’s just hard to break unless they go a lot higher. But if the economy is sucking, that makes it really hard. So that was my sort of general take from what they were saying.

AM: I wanted to come back and ask you about the SPR just real quick about the oil in it. Some of it has got to have degradation, and there’s a lot less barrels there that they can actually release. They might have to stop in end of September. You might start seeing oil rise even before October.

JY: Yes. My base case is not that. My base case is there’s a little bit of contamination, but they’ve managed to reduce that either by not pulling from the caverns that have had contamination historically or by treating the oil or something. My base case is that the oil there is extractable, except they can’t get the last barrel because there’s a certain percentage that needs to be there for the caverns to continue to be

functional, and they’re not going to destroy the storage caverns just to get the last oil. That’s my base case.

But I think there’s a reasonable expectation that there’s less oil there, given the history of contamination and the issues. And they did have a big draw this past week, but prior to that, they had multiple smaller draws. There’s also the crude quality thing, which I’m not really in the crude quality matters camp. I think there’s sort of this bizarre notion that crude, which is mostly fungible, really matters. It did to some extent before you could export oil and before various changes in US refineries.

At this point, it matters a little in terms of getting a couple of dollars, more or less per barrel, depending on transport cost. But I don’t think that’s really affecting the global balance. And I think it’s sort of like

a magic trick, right? It’s like focus on this and not like the thing that actually matters.

And so I’m glad you didn’t bring it up. I guess I brought it up and I just don’t think it matters, though.

TN: Great. Thanks for that, guys. Okay, let’s move on to China. Albert, over the past a week or so, we’ve seen a number of stories saying that China fiscal stimulus may finally be coming.

And we’ve seen some movements, say, in China, tech stocks, these sorts of things. So can you talk us through what you’re seeing with China in the stimulus camping? And why now? They’ve waited so long. Why would it be coming now?

AM: Well, it’s coming out because the policy and the dollar is so high, the Chinese economy is struggling at the moment and they come out with these mini stimulus announcements and there were shots across the bow. I mean, the worst thing right now that the Fed can happen is China stimulating commodities ripping at the moment, that would be absolutely atrocious. Inflation will start going higher and we seen like Josh said a 10% CPI prints coming out and they’re going to be forced to do 75 basis points again. It would throw a wrench in a lot of things and it’s not good if they stimulate it right now. 

But after the election, after the US election, they can do what they want to do because they have their own interests at heart at the moment. They cannot let the Chinese economy fall to a point where they can’t recover in the near future.

TN: So what do you see coming out in the near term? This $229 billion bond sale? That was a start, right? So do you see more than that or dramatically more than that coming out? And how quickly do you expect? 

AM: Yeah, I expect by January that will have a significant stimulus package coming out. This little SEC audit deal was basically a gift to delay it as much as long as they can.

TN: Okay, very good. And then so you don’t expect a significant amount of Chinese stimulus before, say, December or something like that?

AM: Yeah, before December. 

TN: Okay. Sam, what do you think about that? Do you think China stimulus hurts the US? 

SR: I really don’t think that the Fed would care or go 75. I mean, it’s commodities, right? And the Fed tries to ignore commodities as much as possible. So yeah, you’re going to get a rip in oil because there’s not enough oil to go around, there’s not enough oil for China and it’s going to coincide with the end of the SPR release. So you’re kind of screwed there. 

Copper, all that stuff goes higher. I don’t think the Fed cares. The Fed is going to try to cut that out. Then they’ll pivot core and you’re going to have a really weak Renminbi and you’re going to have probably at least a little bit of a pass through to US consumers on the goods front as you get goods to flow back. 

So you could actually see kind of an interesting offset where core goods kind of begins to decline on a Chinese reopen. Commodities rip and you get the, hey look, it looks like core is moving back towards two. We’re not going to have to raise rates as much because we don’t really care about headline, we can’t control oil, we can’t pump more oil. 

So I think it’s a weird kind of catch 22 where the Fed is going to have to pivot from talking about headline to talking about core. But I think they’re happy to do it as long as that core is really moving lower because I think they know they’re screwed on energy. They’re in so much trouble in energy, commodities, et cetera, that there’s nothing they can do.

TN: I think you’re right and we’ve needed a weaker CNY for about six, seven months now. So I think it’s about time and we’ve started to see it move, but I think we’ll start to see it move more dramatically soon.

Okay, guys, let’s start looking at the week ahead. Just a quick kind of round the horn of what do you think, Albert, what are you looking for for the coming week?

AM: I’m looking for a little bit of a rally back off these loads here, try to bring it back to 4200. I just personally think that the economy is in trouble, they’re delaying a recession as long as they possibly can, but it’s coming. So I think a little bit of a pump next week and then probably heading back down into September.

TN: Okay, Sam? 

SR: Oh, I agree with Albert there. I think the knee jerk reaction today to the Fed is going to be unloud as people begin to look at what really went on in rates. What’s going on in FX. The concentration should be on what’s going on in Europe. And the flow versus the stock problem that nobody seems to be able to figure out. Which is you can stock as much gas as you want in a bunch of caverns in Europe. If you don’t have flow over the winter, your stocks really don’t matter. I think there’s going to be a little bit of a realization that stock versus flow matter more than stocks and at some point you’ve got to figure that one out. So that’s what I’m watching.

TN: Interesting. Okay, Josh, what are you looking for in the week ahead?

JY: Just more information on oil demand. So we’re starting to see reports of surprise, higher oil demand than people would have thought, which coincide with actual reports of oil demand when you look at the raw data. So that should be interesting to see sort of how that gets processed and then sort of how oil price may or may not get suppressed. Again, just as we get more good data points, price should go higher, but it doesn’t seem to want you for now.

TN: Very good. From the energy capital of the Universe in Houston, Texas, Josh Young, Sam Rines.

Guys. Thanks very much. Albert, thanks. Have a great day, have a great weekend and a great week ahead.

Categories
Week Ahead

The Week Ahead – 07 Feb 2022

The Week Ahead - 07 Feb 2022

In this episode, we talked about some really interesting tech earnings like of Facebook and Amazon, crude and natgas prices, and the bond market. How does the NFP data affect the bond market? Also discussed central bank’s reaction to inflation and why you should be keeping your eyes on the CPI?

This is the fifth 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.

For those who prefer to listen to this episode, here’s the podcast version for you.

https://open.spotify.com/episode/3DmO9AkU7cHG3MP1wEjuej?si=b9cd41abf47f422d

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Tracy: https://twitter.com/chigrl
Nick: https://twitter.com/nglinsman/
Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Tracy Shuchart, Nick Glinsman, and Albert Marko. Before we get started, I’d like to ask you to subscribe to our YouTube channel. It helps us a lot get visibility, and it really helps you get reminded when a new episode is out so you don’t miss anything.

We had a lot this week. We had tech earnings, some really interesting tech earnings and market activity as a result. We had crude really ripping this week. And we had bonds raging at the end of the week. So really a lot happening across sectors, NASA classes.

So let’s start with the bond market, Nick. We seem to have gotten pretty much what you mentioned on last week’s show. So can you go into kind of what’s happened and what’s happening in the bond market right now?

NG: Yeah, we’ve basically been ambushed by inflation. That’s what’s happened. You saw yesterday out of the ECB, which was a hawkish twist, possibly one of the worst press conference performances I’ve ever seen in my life. But the facts of the matter are you’ve got five, six, 7% inflation in various countries of the EU. In Lithuania, you’ve got 12%. Okay. So they are failing at their predominant original mandate, which was inflation per the Bundes back from what I’ve been told, there were several members of the MPC.

TN: Sorry. When you say she, you mean Christine Lagarde?

NG: Christine Lagarde. Several members of the NPC wanted to get moved yesterday. Not going to happen but it’s reasonable to think perhaps two hikes this year, but that will still take us to -20 basis points. It will still be negative. Okay. And then that upset the European bond markets.

You have the Bank of England go first with 25 basis points, four dissenters wanting half a point. That started to rock the bond markets a little bit. Then the press conference out of the ECB, and you basically had, goodness how many Sigma move it was in two-year bubbles, two-year German government bonds. But they basically went up over 20 basis points in a couple of hours, terminating early this morning, and they’ve stayed elevated.

And then you had this non farm payroll data. Everybody got it wrong. And the thing is, if you think this month’s figures are nonsense, well, look at the revision.

TN: Sorry, when you mentioned the NFP data, what’s important about the NFP data? Because I think some people looked at the headline employment numbers, some people looked at the wage rate. So can you tell us what’s important there?

NG: Two things. One is nobody was expecting a non farm payroll at like this. Some people will say, well, it’s always going to be revised. Well, okay, then look at the near $400,000 upward revision for December. It’s. All their data. The way it’s coming out. The BLS isn’t necessarily the best, but everything that they look at is strong labor market.

The thing that really upset the bond market was the average hourly earnings. 5.7%. To Albert’s point last week. Wage inflation is here to stay. So having been inundated with calls this morning, that really affects what the Fed… The Fed actually are fighting for their credibility.

TN: When you say wage inflation is here to stay, but it’s really, is the Fed trying to break the back of wage inflation?

NG: Well, that’s something they could impact. Right. By increasing the demand side of the market. We’ll have another idea on inflation next week. The CPI. And the lowest forecast is 7%. The highest is 7.6%. They’re not getting the favorable comparisons because oil has continued to move up. Energies continue to move up. Right.

So assuming we’ve got a seven big handle and heaven help us if we haven’t hit the 8 handle at all, this Fed has no choice. Because as you can see with the bond market, the bond market is going to do the Fed’s job if they don’t do, it.

So every time we get to what you had over the last couple of days with a bit of pullback before the ECB had a bit of pullback by some of the Fed members, the FMC members, and the yoke of, steepened.

AM: I got a question for you, Nick. Can you buy bonds if oil goes vertical? Because I think we both think that oil is going 120 north.

NG: Yeah. Well, no. I think that’s another reason why you can’t be long bonds at the moment and the bond market will adjust to it.

Everybody said the bond vigilantes are dead. When you look at the percentage moves and the price of the bonds, they’re not these are big moves going on.

TS: Nick, can you address a little bit about what will happen to the credit markets as far as the bond movement?

NG: High yield seem to do okay today, which investment grade, fine. Historically, in rising rates, you should see investment grade is somewhat better. High yield, no. High yield. I mean, if these rates are going to start moving up and some of the stuff I heard today tells me “one and done” is not going to happen. It’s going to be more and they’re not going to have a choice.

And the central banks have been basically what you had in the last seven or eight days is the central banks admitting they made a policy error or two last year. And now they’re fearful of making further policy errors. So they’ve got to be seen to do.

And again, to Albert’s point last week, clearly the Biden administration is, had their backs on the inflation front. And I suspect from what I was being told, we’re going to be quite surprised at potentially how aggressive this Fed could be. Not 50 basis points in March. That will be too quick. Too much, too quick. But May, June could well be in play because these numbers aren’t coming down. They’re just not coming down.

TN: Okay. So regardless Q2 is when things start to happen on the interest rate front, on the rates front, right?

NG: Yeah. In terms of QT, I was told the second half, beginning of the second half. Second half.

TN: So does that mean July or November?

NG: Probably means July. Okay.

AM: I honestly think it’s a possibility we do that beforehand just because fiscal cliff is coming in March.

TN: How do they go from QE to QT? Just like that? They shouldn’t be doing QE right now anyway. That’s true. It’s still doing QE. So they missed a beat there.

AM: How do you taper if you’re doing QE still? Why doesn’t anybody ask that question or answer?

TN: I ask it every week.

AM: Tony, I was on this thing with Andreas and “we’re going to taper.” I’m like, “okay, sure.” On paper. But the reality is you’re not because the QE is continuous.

TN: I don’t know. It seems to me from what Nick is saying, it may not be continuous. It seems like that has to stop because the policy position is going to stop in March. Right?

NG: Exactly. Which is why I think 25 basis points, not 50. However, I think right now, until they’ve caught up somewhat forward guidance is not going to be with clarity.

They want to get back to normal so they can be forward guiding according to what we were used to in the deflationary times. Pre-Covid. Okay.

TN: Okay. So when you say pre-Covid, you mean pre-Covid in terms of interest rate and balance sheet?

NG: Yeah. I think it’s exactly what I’ve been told this morning. They want to get back to the interest rate level that was prevalent then. They want their balance sheet back at that level.

TN: Okay.

NG: And I think that what’s happened is not only have they been shocked by inflation, they shouldn’t be shocked by the false-ty of their forecast, but I think they were shocked by the fact that we’ve got a lot of bubbles going on.

Equity market value, housing market, NFT, crude oil. Crude oil’s not a bubble. Bonds have been a bubble. So I think we’ve got some surprise. And of course, that will then feed it.

Remember I said originally, there’s either a riot in the bond market or riot in equity market.

TN: That’s right.

NG: One or the other. It started with bonds, and then we got a bit of an equity riot yesterday, which was more earnings related. But the thing about it is if you look at interest rates as gravity, zero interest rates with basically zero gravity. So you’re on the moon. Equity starts have been up here. If they’re raising rates, they’re increasing the level of gravity. News and law means that something starts to fall.

I was also told if it’s not a cascade, if it’s orderly, sort of down 20% from here, they’re okay with it.

TN: Okay. That puts us at what, 36?

NG: 35, 36,000, which is still above where we were before Covid. Right?

TN: Right.

NG: Fed will be happy with it. This put, is not, there’s no clarity on the put anymore.

TN: Okay. Is it safe to say that your view by the end of the year is sometime between now and the end of the year will hit 35, $3600?

NG: Look, the Fed. These rate markets will carry on. Any mistake by the Fed, any hesitation, it’s going to be punished by rates. And you’ve seen what’s happening, and it happens. It crosses over. You saw what happened in the European bond market as well this Thursday. Bank of England. You saw Gilts market also adjust, and that flowed through to the US market and it continued today.

TN: So do you think the ten-year crosses 2% next month?

NG: Oh, yeah. My target on the ten-year for this year is 260.

TN: Okay, great. So let’s take that and a central bank’s reaction, inflation. Tracy, we’re seeing crude prices just kind of a rocket ship. So can you talk us through that and let us know how does that contribute to next week’s CPI? And Nick mentioned CPI, but what do you expect for that as well?

TS: Well, I mean, I expect CPI to be high. However, the Fed doesn’t really include energy and housing in there and food in their metrics. So that doesn’t necessarily play into that.

That said, I think what we saw today was a lot of shorts being squeezed out of the market. That said, still expecting higher crude prices later this year into Q3.

The reason being because the global oil inventories just drew another 8 million. We have OPEC that just announced another 400K increase for next month this week. Right. And they haven’t even been able to keep up with their production increases. I mean, their compliance is over 132% right now. They just don’t have the spare capacity to move forward. US products consumed last week hit 21.6 million barrels. That’s over 2019 levels.

So globally, we’re seeing higher demand with lower supplies. So this market is likely to continue higher just because of actual supply and demand issues, which I’ve been talking about week over week.

What’s also interesting today is that nobody’s really talking about is that Saudi Aramco just announced that they’re mulling another 50 billion equity stake sale. Right. And so it would be a good thing to keep kind of oil prices higher and inventory is kind of lower. Right?

TN: Sure.

TS: There’s a lot going on in the market right now.

TN: Okay. And as we see this cold front come through different parts of the US, of course, it’s winter. But do you expect, say, Nat gas to continue to rally or say, for the next couple of weeks or next couple of months, or do you expect that we’re kind of in the zone where we’re going to be through the winter?

TS: I mean, I think we’re kind of in the zone. US nat gas prices are not as subject to the volatility or the constraints that say European nat gas prices are concerned. I mean, we have an overabundance of Nat gas, we tend to flare it.

We’re going to be this year the world’s largest exporter. Right. But that’s not necessarily going to bring I mean, you have to look at our gas prices trading at four or $5 compared to nat gas prices in Europe trading at $40. So I think we’re at a sideways market right now just because of the oversupply that we have.

What we are saying is depending on what area you live in, then natural gas prices tend to vary. So we’re looking at the North East, for example, where we have this cold front. Nat gas prices are at $11. Right. But Henry Hub, which is what everybody’s trading is still at 4 to 5. We’re going to see not gas prices rise in Texas right now because we have a cold front coming through. But again, that’s a regional market.

TN: I was just complaining about gasoline prices being $3 here in Texas earlier today, so I just can’t deal with it. Where is it where you guys are?

AM: $4.25 in Tampa.

TN: $4.25?! Holy cow. What about you, Tracy?

TS: $3.99 in the Northeast.

TN: We’re right at $3, and I can barely stand it.

Okay, let’s move along with the geopolitical stuff. So, of course, Ukraine is on everyone’s mind. And we’ll put a link to this in the show description, the video from the State Department spokesman and the AP diplomacy reporter. Albert, can you talk us through a little bit of that kind of what’s happening there and what is that doing to the situation to find a diplomatic solution?

AM: Well, simplistically, I mean, you have the Biden administration trying to amp up the rhetoric and make it more dramatic, basically to distract from what’s going on domestically in the United States from inflation and social issues, and SCOTUS picks down the list of the problems that are facing the Biden administration. That exchange was unbelievable.

You had an AP reporter just taking him to task and saying “where’s the declassified information? And his response was, “I’m telling you verbally right now, and that’s the declassified information.” That’s unbelievable. You’re not going to get away with that.

This is just more of a symptom of the ineptitude of Anthony Blinken as Secretary of State. He shouldn’t even be called “Secretary of State” anymore. It should be “Secretary of statements,” because that’s all he does. He doesn’t do anything else. And when it’s concerning with Ukraine and his method for, “diplomacy”, he’s a non factor. The United States is a non factor, right now.

They’re behind the eight ball where they keep talking up this rhetoric and putting their allies in Europe behind the black ball here. What do we do here? We need support from the United States to show strength, but realistically, we can’t stop them going into Ukraine.

TN: Okay. Yeah. So let’s just go onto a viewer question here from @SachinKunger. He says, what will happen if there is an actual escalation between Russia and Ukraine? What’s the likelihood of actual escalation and what do you think would happen? Both you and Tracy? Part of it is commodity prices. Is there an impact on commodity supply chains, meaning wheat and gas and other stuff to Europe or other places, or is that not necessarily a huge issue?

AM: Well, I believe we’re about 75% that they’re going to have some sort of incursion into Ukraine. I mean, you don’t mobilize that many people and create supply chain logistics to not do anything. That question really depends on the level of incursion. Right. Because if it’s just ten, 20,000.

TN: It goes back to Biden’s minor incursion.

AM: That’s the Pentagon’s working model. And that’s my working model. 10, 20 thousand, you go in the same place as you were before, you loot the countryside, cause a little disturbance. The west looks weak. You leave after a month or so. Right. That’s the likelihood situation.

Of course, the markets are going to freak out in day one.

TS: That’s exactly what I was going to say. I mean, obviously you’re going to see a reaction in the commodities markets just because we’ve had four years of really not much geopolitical risk factored into a lot of these markets, the agricultural markets, the energy market. Right. Pretty much after Libya had a ceasefire in 2020, all that risk premium kind of came out of at least the energy markets and the agricultural markets, we haven’t really seen a lot of geopolitical risks.

So of course, the markets will freak out. I totally agree with Albert on this point. Whether that’s going to last or not, that’s a totally different story.

TN: Yeah. I also think that we’ve had so much money supply that that cushions geopolitical risk on some level. And interest rates have been so low that that cushions geopolitical risk as well. So as we’re in this interest rate cycle and this balance sheet cycle, geopolitical risk counts for more. It’s more costly for companies, it’s more costly for countries and investors.

NG: I would add one other thing. These markets are not trading liquidly. So these moves on geopolitical risk could be exaggerated. Right?

TS: Exactly. My point is that geopolitical risk will be exaggerated at this point.

NG: You can see there’s no liquidity, right?

AM: Yeah. To be fair, any kind of event right now just makes the markets look like it’s a crypto exchange. 30% up, 30% down 300 points on the ES. That’s insane.

TN: On that, Albert, let’s move to some tech earnings and let’s talk about Facebook and Amazon. So if we want to talk about big moves, everyone kind of knows this, but can you talk us through a little bit of that? But I’m more interested in why it’s happening. Why is everyone negative on Meta and why are they positive on Amazon?

AM: Well, from my perspective, the Fed and their cohorts use maybe a dozen companies to pump the markets. Right. They’re mainly tech. Right. They’ve expanded out into a few other things, but it’s mainly tech, Facebook being one of them, Amazon being another. AMD and Google and all these guys. Right. All these big tech names.

Now when you see Facebook miss and a couple of other miss, and the markets start to get weak, there’s a point to where… This goes back to what Nick says about different levels in the markets and whatnot. He always stresses that with me. There’s a point to where if they break this level, we’re going down to 4100 or 4000 or God forbid, 3900. Right. So that lined up right when Amazon’s earnings were coming up. And I’m looking at the market and I’m looking at these levels and I’m like, there is absolutely no way they’re going to allow Amazon to miss. Whether they let them look the books or say something in guidance or whatnot. And lo and behold, what happened? Amazon beat. Did they really beat? Probably not. You know what I mean? Yeah. And then Pinterest that nobody cares about beats and then Snapchat. I don’t even know what the hell why they’re a company. They beat unbelievably. I think they were up like 50, 60% and after hours. Right.

So now they have their juice to pump the markets back up to 45, 30 or even maybe 4600 next week before the fiscal cliff becomes a problem.

TN: Okay.

TS: You also have to look at the bond market. Right? I mean, the more the ten-year tanks, the more that’s going to drag on tech.

TN: Right. So what does that tell us about the next couple of weeks, specifically next week? But the next couple of weeks? As we’ve seen, say Meta come down, Facebook come down. But we’ve seen these other things really rally. Where is tech as a sector?

AM: It’s a pump sector. That’s all it is right now. There’s nothing really behind it. It’s built on zero rates. Well, we know we’re going to get rate heights. So what are you betting on at the moment?

TN: Right. And that’s the basis of my question. If tech is a deflation play and we’re in inflationary environment and we’re going to have rate rises, what does that mean for tech in the near term? So are we at the kind of tail end of tech? That’s my real question.

NG: We’re at the tail end whilst we have to see these interest rate rises come through. And actually, you don’t necessarily have to see the central banks officially raise because if they don’t, the bond markets are… And then there’ll be a catch up. This is the problem. If they Underperform in their credibility catch up because they’ve already implicitly admitted their errors of policy, bond market will adjust and they have to catch up again.

Now, if they do something surprising on the rate side. So yesterday was an ECB shock, right? Today, there was nothing to do with the Fed. It was the data. Well, we’ve got that CPI date next week. Right. That’s going to be very interesting because I agree with Tracy. Core is at a certain level which is still too high. But it’s the full Monty, the full CPI that labor uses when they’re discussing their wage claims. Practically, that’s the behavior of economy.

TN: CPI is the single biggest event next week. Is that fair to say?

TS, AM, NG: Yes.

TN: Okay, so let’s look at that. What if it is, say seven, which is kind of the expectation, I guess the lower bound of expectation kind of. Right? So let’s say it’s seven or let’s say it’s even five. What does that mean for us? Does that mean continued, easy Fed? Or does that mean you have the same assumptions and that’s just kind of a milestone or something that we’re passing along the way to higher rates anyway?

NG: We’re on the way to higher rates anyway.

TN: Okay.

TS: I mean, if it’s five, the market, temporarily if it’s five, the market temporarily will probably rally because that lessens the effect that Fed is going to raise. Right. That percentage will probably go down. But that’s a temporary. If we’re just talking about market reaction on the data release, I don’t really see that happening. I don’t see 5% coming in. I don’t see that a possibility.

TN: But then let’s look at the other side. What if it’s eight and a half? What happens then?

NG: Well, then in the old days, it would have been an inter meeting rate hike.

TN: Okay. Right.

NG: And the bond market will just, it’ll be another riot. Even if the core is steady. Big figure eight on the full CPI? that would shock a few people. Like people were shocked today with the non- farm payroll data.

Literally, if you could watch Bloomberg TV, it was like. They couldn’t believe what was going on.

TN: So we’re in that place in the market where the porridge has to be just right. Is that fair to say?

TS: I think we’re in for volatility. Right? I mean, we’ve been experiencing volatility for the last month or so. I think this will continue until March, until we have some resolution of whether the Fed is going to raise rates or not.

In between, it’s going to be volatile because everybody’s looking at intermittent data saying, does this mean the Fed is going to raise rates? Does this mean the Fed is going to look do you know what I mean? So I think we’re in that pushbull thing, and I think that volatility will continue into next week. I think that volatility will continue until actually the March meeting, until we get some resolution on whether the Fed is going to raise rates and by how much.

TN: Okay. So if I just a couple of things for you to agree or disagree with, just short yes, no. Next week volatility in equities with downside bias, you agree or disagree?

AM: Disagree.

TN: Disagree. Nick, you agree or disagree? Downside bias, you agree. Tracy, equities, agree or disagree?

TS: I think it depends on the sector. Okay. Give me one or two. I think we’ll see, my downside bias is in tech and then obviously, yes, because it’s heavy tech. Right. And so I think we see sideways markets in the Dow and the Russell.

TN: Okay, then let’s do the same exercise for commodities. I know there’s a lot of companies out there, but generally commodities. Choppy with an upside bias. Agree or disagree?

TS, AM: Agreed.

NG: That’s a dollar call.

TN: Okay. Explain that.

NG: Yesterday because of the dollar’s weakness against the Euro and the Dixie, I tend to agree with you. I think it’s going to be choppy until we see the color of the CPI number.

TN: Okay. Very good. Anything else to add for the week ahead?

NG: Just keep your eyes on the bond market. My mantra.

TN: Very good. Okay.

TS: Keep your eyes on B come.

TN: Thanks guys. Thanks very much. Have a great weekend. And have a great week ahead.

TS: Thank you.

TN: I don’t know the left side of my screen is the pineapple people.

AM: We’re going to call Nick Luke for the episode today.

NG: The professional version of Luke.

AM: Okay. Anyways, I’m done joking. Let’s get this thing on the road. Okay.

TN: Good. Alright.

Categories
Podcasts

Expectations Of Higher Rate Are Crushing Markets

Expectations Of Higher Rate Are Crushing Markets

Markets are tanking on concerns that rate hikes might occur sooner than expected, hence the possibility that heightened volatility and a flight to value havens could be in store for 2022, according to Tony Nash, CEO, Complete Intelligence.

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/expectations-of-higher-rate-are-crushing-markets on January 5, 2021.

Show Notes

KHC: Good morning. This is BFM 89 nine, five minutes past seven in the morning, 6 January 2022. I’m Khoo Hsu Chuang and I’m joined by Philip See. Okay, let’s also recap how global markets closer today, Phil.

PS: Yeah. Markets in the US really didn’t enjoy the fair minutes. So the Dow is down 1% SMP 500 down 1.9% Nasdaq also down 3.2% across over in Asia mixed the Nikkei was up zero 1% Hang Sing down 1.6% Shanghai Composite down 1% Singapore STI down 6%. But back home as FBMKLCI was up zero 4%.

KHC: Of course, markets are being rented all over the world because of the Fed minutes, which disclose that JPowell might introduce higher rates as early as March. So for some thoughts on what’s moving these markets, we now talk to Complete Intelligence Chief Executive Tony Nash. Tony, good morning. Now we are talking about how financial markets are being crushed everywhere, including in the US by the Fed minutes, which is just faster and higher rate hikes. Maybe as early as March. Do you share the same sentiment?

TN: Yeah. I think it’s a little bit weird. So it makes sense for the Fed to stop buying things. So they buy, like mortgage backed securities so that they can put money into the market. So those are things that go onto their balance sheet. So they’ve acquired trillions of dollars worth of assets in order to support markets and get money into the system. So it makes sense to taper off the things they buy. But it doesn’t make sense to raise interest rates because people are complaining about inflation.

Right. And so if people can’t afford stuff, the major issue is stop putting money into the market don’t necessarily raise the cost of money, which is what interest rates are. So the markets feel like Powell has things a little bit out of order and that he needs to just stop putting money in the market before he raises rates. It may be appropriate to raise rates later in the year, but not just yet. So people think this is a little bit preemptive. So I would expect to see statements to walk back this Fed meeting over the next couple of days or week.

KHC: Well, the thing, Mr. Tony, according to the Bloomberg and markets being the forward indicators, that they are the Bloomberg, that there’s going to be a 71% chance that there’s going to be a rate hike as early as the March 16 meeting for the FOMC. What do you make of that?

TN: I see that. But that’s a forecast by economists. So I’d love to see the error rates of the economists. So I think that the real expectation is around the market welcoming of that. So is it possible they raised by March? Yeah, it’s possible. I think they need to start the paper first to see how likely it is, because again, the major issue is inflation and raising interest rates is a very old school way of fighting inflation before we had the tools that we have right now brand QE QE and other things.

PS: So getting a perspective. Clearly, what we saw in the nest was 3% down. I think interest rate sensitive stocks like tech stocks, I think were biggest hit. Is it time to take some money off the table after a good run?

TN: Sure. Yeah. That’s definitely part of the calculation. Absolutely.

PS: And then the question is, do you rotate it into value?

TN: Well, I think what we’re expecting probably sooner rather than later. We saw some big moves today, but yeah, there is expected irritation out of tech. We’ve seen people load up on tech and durable goods over the past two years. They’re way overstretched. So we do expect tech to see some serious downside over the next quarter, two quarters. And we do expect a rotation more into traditional industries, what people would consider boring industry. So people who make stuff like actually make stuff, even things like tourism and those sorts of things.

So we expect to do some rotation there.

KHC: Yeah. Tony, the other spectre is obviously the covered variants. IHU and of course Florona as well. Assuming that you are right in the possibility of the Fed walking back comments about the March rate hike or the possibility of a March rate hike. Right. What would the smart money be doing now in terms of possibly buying to the dip and getting a nice bounce from a short term trading perspective?

TN: Well, I think you have to look at things like energy, which has gotten a lot of attention over the past week. I think you have to look at what opportunities will there be if the variant slows down and money remains cheap. Okay. So if we’re not going to see a dramatic rise in interest rates from the Fed, then you may have some legs on some things like real estate. I’m not sure. But you may I’d have to do some research there, but I think you really need to look at things like tourism and people getting out Airlines.

Those sorts of things really have to think about when people start to get out in force, what kind of difference can be made in markets?

KHC: I think you quite rightly pointed out that increasing interest rates is a very old fashioned way of dealing with inflation. What, in your opinion, are possibly alternative solutions to addressing higher costs, which is definitely a reality today.

TN: Look, a lot of the issue is on the supply side. So you raise interest rates when the issues are on the demand side and the demand side peaked in 2020 after the Fed just released a huge amount of money on to US citizens. So a lot of the issues are supply chain issues, and they’re on the supply side. So better to reduce or taper off the supply of money going into the system and focus on building out supply chain so if there were an infrastructure bill that came and said, we’re going to focus on these supply chains and make them more robust.

And we’re going to focus on near shoring manufacturing to reduce the length of the sophistication of those supply chains. I think that’s really all that they can do right now to focus on that supply side. So in short, interest rates aren’t going to help. There has to be a more medium and long term investment in Shoring up the supply side. Yeah. I agree with you.

PS: I think that’s a very medium long term outlook. And I just wondering how earnings will look like this year.

TN: Well, certainly not going to look like 20 or 21. A lot of the 21 interest earnings were up until, say Q3, there were effects based on expenses that were cut in 20. There was a lot of headcount reduction and real estate reduction in 20 because of work from home and staff reduction, those sorts of things. So 22 is going to be harder. It’s going to be a much more disciplined old school efficiency, automation and top line growth type of environment.

KHC: Well, Tony, given that we are only six years, six days into the new year, how should asset allocation strategies look like for the conservative investor in 2022?

TN: You know, you’ve got to really be careful of volatility and you’ve got to be careful of risk, even things like political risk, which is what’s happening in Kazakhstan today. We really have to be careful of political risk in market. So with the events in Kazakhstan, then I think you’ll start to see people really take another look at Em and try to figure out how much risk are in those investments. You may see people steer away from em because of that risk. So I think you’re going to see more consideration for developed markets.

You may even see more consideration for Europe. I think Europe may have a good year this year.

PS: And I wonder if there’s a consideration for traditional safe havens like gold, US dollar and treasury spend.

TN: Yeah. Well, that certainly supports the dollar, Treasuries and so on. Gold. I’m not so sure about gold may have some upside, but the focus on developed markets may will definitely support the US dollar and Treasuries.

KHC: All right, Tony, thank you so much for your time. And that was Tony Nash, the chief executive of Complete Intelligence, talking about the Fed minutes, which I have perturbed markets in a significant way.

PS: I think markets are factored in the tapering, but not the interest rate moving earlier.

KHC: Yeah.

PS: That’s why you saw the tech heavy Nasdaq really hit quite badly with 3.2% decline.

KHC: Yes. And of course, we saw the Bloomberg indicators surveying economists a 71% chance that there’s going to be a rate hike at the March 16 meeting.

PS: Incredible.

TN: Right.

PS: You know, you talk about just four or five months ago, we were talking about only two hikes at best, in June. And now we’re seeing things shift very fast.

Categories
News Articles

Benchmark repo rate drops first time since October amid cash glut, collateral shortage

Benchmark repo rate drops first time since October amid cash glut, collateral shortage

This article first appeared and originally published at https://seekingalpha.com/news/3782474-benchmark-repo-rate-drops-first-time-since-october-amid-cash-glut-collateral-shortage.

  • In the wake of the financial system’s cash glut and collateral shortage from the Fed’s quantitative easing program, the Secured Overnight Financing Rate drops to 0.04% from 0.05% on Monday, the first decline since October.
  • Even with asset purchase tapering underway, “it’s largely the same set of circumstances as in October,” TD Securities Strategist Gennadiy Goldberg told Bloomberg. “Lots of cash in the system and not a lot of collateral and that’s weighing down repo.”
  • Meanwhile, U.S. commercial banks park yet another record $1.75T at the Fed’s overnight repo facility, implying the banks are drowning in excess reserves, while searching for yield – which is scarce as most of the Treasury yield curve trades in net negative territory on an inflation-adjusted basis.
  • There’s an “incredibly large amount of cash sloshing the market,” said Complete Intelligence Founder Tony Nash via Twitter.
  • In August, the Fed’s overnight repo facility took up more than $1T.
Categories
QuickHit

What signals are markets missing right now?

What signals are markets missing right now?

In this QuickHit episode, our guest Julian Brigden answers “What signals are markets missing right now?” How important is the equity market right now in the current economic cycle? Most importantly, how long before we can see directional change in the market, and what you should do before then?

 

Julian Brigden is based in Colorado and started in the markets in the very late 80s, trading precious metals. He moved into trading FX, then switched into sales for various investment banks. He also worked for a policy consultancy group called Medley Global Advisors in the very late 90s to early 2000s and fell in love with the research space. Just over ten years ago, he set up MI2. MI2 was grown organically. Julian can be seen together with Raul from Real Vision where he does Macro Insider.

 

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This QuickHit episode was recorded on November 3, 2021.

 

The views and opinions expressed in this What signals are markets missing right now? Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Julian, I’ve watched a lot of your videos, and I love a lot of the thoughts you’ve talked about recently about velocity, about the yield curve, about central banks. It’s all great stuff. I guess one of the things that I’m really wondering right now, especially, is what is the market missing? What are market participants missing? Because this is something that I don’t hear a lot of talk about. We hear a lot of the Fed should do this or this asset is going that way or whatever. But what is the market missing right now?

 

JB: Right. So we’ve been on this inflation gig since, actually, March of 2020. Sorry. Apologies. So at the depths kind of the pandemic. It’s a very long thesis. I’ve probably been in the inflation court really since the end of 2016. But in this sort of current phase, and we’ve been in and out of them, you have to. That’s what markets are about. We have been on this inflation kick since March of 2020. And initially it was just a trade breakevens, which are a metric of inflation in the bond market had got crushed because they were held by the risk parity boys as their inflation hedge in their portfolios. And they delevered like everyone else did in the spring of 2020. And those things dropped to like, five-year inflation was priced at 50 basis points.

 

Well, Tony basically trades the cycle, right. So as the economy recovers, which you had to assume it would, they were going to come back. But as we’ve sort of taken a step back and from a bigger picture perspective, we’d always said that even as soon as Trump came in, when you start playing with just monetary, that’s one thing. But when you add that fiscal side into the equation, into the mix, it becomes totally and utterly different.

 

And we’ve actually always used the period from the mid 1960s to the late 1960s. That’s where I kind of think we are. So we’ve had these sort of pro-cyclical, unnecessary, excessively large fiscal stimulus. And they came to create this accelerative oscillation. Okay. So I’ve got a couple of very smart ones, way smarter than me.

 

Classic example of the A students working for the C student. And we were looking at inflation back in 2016, and I was just looking at the chart in the 60s, and my quant came up to me and went, Boss, that’s an accelerative oscillation. And I said, Steven, what the hell is that? And he goes, well, he was, by the way, he was a mining expert, specialized in explosives. And he said, kind of what you do when you model an explosive wave is it goes out in a wave until it hits something. And if it hits it at the wrong time, far from the wave decelerating because you expected to hit something and stop, it can actually accelerate the oscillation of the wave. And so essentially, from an inflation perspective is that the way that you think about this is you get something like the Trump stimulus, which was back in late 2016, totally unnecessary fiscal stimulus at the wrong point of the cycle, where we didn’t need it.

 

So far from sort of rolling over like a sine wave, which the economic cycles behave that way, too. And inflation cycles generally behave that way because of self limiting on the tops and the bottom, cycle actually picks up amplitude. And what you tend to do is you create policy error after policy error after policy error because you’re behind the curve all of a sudden, you know what it’s like in trading, right?

 

If you’re on your game and you’re short something or long something and it moves in your direction, you might take some profit. Look for the retracement, double up, whack it hard. You get caught the wrong way into the move and your head just becomes discombodulated. And that’s what happens from a policy perspective. So. When I look at this current situation, the first thing I would say is I think people are, they’ve finally woken up to this concept that maybe inflation is not transitory. I think they’re right. We’ve been on this gig for a long time, but the immediate risks, I think, are twofold.

 

The first one is they are not. And it’s not necessarily here in the US. I think it’s going to be a problem here in the US, but I think it could be a bigger problem, actually, in Europe and for the bond market that matters because all those bond markets are all fungible. Right. So if bonds blow out or your eyeboard, the front end contracts in Europe blow out, it’s all going to affect our markets over here. And. They’ve totally underestimated the price pressures in the pipeline.

 

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TN: In Australia, right?

 

JB: Yeah, we have. But not. I think we’ve got another maybe three months of numbers of I think could make people’s eyes bleed. You’ve got this price pressure in the system. Three possible outcomes. Price pressures dissipate. PPI pressures just dissipate. Okay?

 

Well, we just got the market survey this last week. Pressures are up. We just got the ISM services. Price pressures are back up to the previous highs. We just got the Swedish service thread bank PMI services yesterday. Price pressures at new highs. Okay.

 

TN: China’s PPI are like 14% or something year on year, right?

 

JB: Exactly. And their PMI price pressure number, which was dropping, just re accelerated. So option number one, that somehow price pressures just miraculously evaporate, doesn’t seem like an option. Option number two, the companies eat the price increases. They take them in margins. Well, if that’s the case. And this is one of the things the equity market hasn’t woken up to, then your assumptions on margin growth are. The good stuff that you can get here in Colorado, right.

 

Now thus far in the United States, it’s absolutely not the case, right? Companies are pushing through those price increases. Okay. Which brings you to option number three. Price inflation, given where these PPIs are, right? So US, even the final demand, the new sort of slightly adjusted, surprising how when they do adjust these things, Tony, they generally drop from the old metric?

 

Now it’s like, two and a half to 3% under the old PPI series. But anyway, it doesn’t matter. Eight and a half percent here in the US. I think we printed another 45 high in Sweden. And I’m picking Sweden because it’s a nice open economy. And you see the data come through very quickly. I think there’s one of those 17%. Spain, 23. Eurozone, 13 and a half. Okay. So higher than the US.

 

If companies can pass those price increases on, what makes people think for a nano second that CPI is going to stay here in Sweden at two and a half in the Eurozone at four. Why couldn’t Eurozone HICP, which is their CPI, which is max only ever had a 5% spread to PPI, right? At the moment, we have a nine plus spread. Why couldn’t HICP print somewhere, my guess is between eight and a half and eleven?

 

TN: So those are Chinese figures?

 

JB: Yeah. Exactly. What the hell does this? Do you think Lagarde is going to be able to say, like King Canute, “stop?”

 

TN: So in one of your interviews that I watched, you said central bank assets and inflation are effectively the same thing. And I think that’s really interesting. Can you explain that a little bit?

 

JB: So the balance sheet? Yeah. Essentially. Look, you print money, which is what it is. QE is printing money. Monetary 101. This is how the Roman Empire ended up falling apart. And you can inflate asset prices because I know this is not how central banks initially told you it worked actually. Having said that, I do love it. And we’ll come to this, I think the second point, the markets are missing in a second, and another central banker.

 

The only central banker who’s been truly honest was Richard Fisher, the old Dallas Fed central bank chairman. And I love the Texans from the Dallas Fed because they’re just straight shooters. They’re just bloody honest, right? I mean, he came out on CNBC, and I remember watching this interview because it was done on CNBC Europe, I think. And the guy always had one of the British guys on CNBC in the US. The guy nearly fell off his damn chair when Richard Fisher said, “of course, it was about the equity market. It was always about the equity market.” Right.

 

We just front load this stuff and they could boost asset prices. And you can look at the PA of the S&P. You can look at the S&P itself. You can look at the NYSE, you can look at the value line geometric index, which is a super broad metric of US Equities, and you can put them all against the Feds balance sheet. And it’s the same thing.

 

TN: Let me ask you this. And I hear you and I am aligned with what you’re saying. The question is, why does it have to do with the equity markets? And my understanding is that it has to do with equity markets because that’s where American 401Ks are. And there’s such a large baby Boomer cohort with their money in 401Ks that they can’t be losing their wealth. Is that the reason why it’s always about equity markets?

 

JB: Well, I mean, I say it’s housing as well, right. But they tend to try and deemphasize that one because politically, that can be a bit of a pain in the ass. Right. But look, this is true monetary debasement 101, right? I mean, we wrapped it up in this veneer that is G7 central banking or the sophisticated theories. But we’ve done this throughout history, right? We just debased the currency.

 

People forget in the Weimar Republic, the Reichsmark was imploding in value. Sorry, the pre-Reichsmark was imploding in value, and the stock market was going up thousands of percent today to keep phase with this because it’s a claim on a tangible asset, right? A cash flow or a piece of land or a factory or whatever, right? So this is not new. I think this is. No, I think it’s not so much about the 401Ks. The thing that I think is truly problematic in the US is what I refer to as the financialisation of the real economy.

 

Tony, that CEOs are not paid to produce a thing. There are actually numerous companies in the S&P that I’ll argue don’t produce anything, right? They are simply an utterly shepherds of an equity price. That’s how they’re compensated. We talk about perverse incentives. Okay. That’s how they’re compensated. They basically compensate to bubblish their stock as much as they possibly can.

 

And as a result, the minute that stock prices got going up, let alone fall. They look immediately to the bottom line as to how to address costs and keep those profits falling. So if you look at the correlations between, and it’s just frightening, the correlations between total US employment and the NYSE, broad metric of US Equities, Capex and NYC. They’re the same bloody chart.

 

TN: Sure.

 

JB: So literally, you can’t really allow stocks even to go sideways for an extended period of time. You’ve got to keep this game go.

 

TN: Sure, it’s not the flow, right? We’re in a flow game. We’re not in a stock game.

 

JB: Bond markets much more flow in terms of the shape of the curve is much more a flow thing. Equities are really about, they care when the flows turned off, but they’re really about the quantity.

 

TN: Overall stock. Okay. So what else are markets missing?

 

JB: The second thing is I just want to raise this. There’s a really important Bloomberg story out today by Bill Dudley, the ex New York Fed President, ex Goldman guy. And once again, I love the honesty of these retired US Fed guys. And he’s been talking at some length about policy error. But today is fundamentally the issue.

 

So let’s use that old storyline. If a tree falls in the woods and no one hears it, did it fall? Okay. So in the last few weeks, we’ve had a lot of pressure at the front end of these bond markets. We built in rate hikes. And that’s a market assumption on what the Fed or ECB or the Bank of England or the RBA or whatever is going to do with their policy, right?

 

But at the end of the day, Tony, do we care what banks here in the US earn in the overnight from Fed funds? No. There’s literally no relevance unless you’ve got some sort of liable based funding mortgage. But really, essentially, even then, has no relevance to the real world. Right? Policymakers raise policy rates to affect broad financial conditions. And broad financial conditions are essentially five metrics depending on the waiting in every single index. And they are short term rates, let’s say two years. Long term rates, let’s say ten years. Credit, tightness. Level, equity market. And the Dollar.

 

And what you can see in the US and most other places is despite the fact that we’ve seen these big moves at the front end of these bond markets, financial conditions haven’t budged. Ten-year yields, if anything, have fallen. It’s a bare flattener. It’s kind of what you would expect at this point in the cycle. But nonetheless, there is no tightening coming from the ten year sector. Because there is no tightening coming from the ten-year sector.

 

There is no tight, not much tightening going on in the mortgage market, okay? Because there is no tightening coming from the ten-year sector, the equity market where the Algos literally just trade ten-year treasuries is their metric and wouldn’t know what a Euro dollar was, in order to fund the interest rate contract if it bit them in the proverbial ass, okay? Have completely ignored what’s going on. The dollar is caught in the wash between these various central banks who are all behind the curve and has gone nowhere. And credit hasn’t moved, because he’s looking at the equity market.

 

So there has been no tightening of financial conditions. What Bill Dudley said is that’s all that bloody matters. And so until there is a tightening of financial conditions in an economy which at least the President, probably, I suspect well into the middle of next year could change quite dramatically in the middle of next year. But for the moment, and that’s a eight, seven, eight month trading horizon, until there is a tightening of financial conditions, which means stocks down, credit wider, dollar up, ten-year yields higher. Those two year yields have to go further and further and further and further.

 

And this concept that the market is currently pricing, that we’re going to try and raise a little bit. And the whole edifice is going to blow up because they have what they refer to as the terminal rate, kind of the highest projection of where rates are essentially going to go in the tightening cycle is that one six is wrong.

 

We may have to go way through that. And Bill Dudley actually talks about 2004, 2006, where the Fed started off way behind the curve and the economy just kept running. Demand was there and they had to go 225 basis points and they had to do all sorts of other stuff before the damn things slowed down.

 

TN: True. When we consider that. So you’re saying, really seven, eight months before we see a major directional change in markets. I don’t want to put words in your mouth.

 

JB: Well, look, I think there’s sufficient, I do not see this as a slowing economy. I see this as an economy where demand is utterly excessive because central banks and policy makers misread. I think it was a fair mistake to make. I’m not critical of that, misread Covid.

 

TN: Sure. Policy errors are all over the place.

 

JB: All over the shop. Right. So we have far too easy, excessive policy. Right. Look, today the Fed is going to taper, but let’s be honest, tapering isn’t tightening. Tapering is less easing. We are driving into the brick wall that is the output gap, right. The economy at full capacity, not at 120 billion a month. But let’s say from next month, 105. Right. If you drove into a brick wall in your car at 105 versus 120, I think it would make very little difference to the outcome.

 

TN: That’s a good point. But we all remember the taper tantrum. So will we see a bit of a breather in markets before things amp up again? Or do you think people are just going to take and stride this time?

 

JB: I don’t think we get a taper tantrum this time. I think the Fed has been pretty clear. You’re sort of getting a little bit of a taper tantrum at the front end of these bull markets. But because most of the world doesn’t look at wonks like me, care what EDZ3 is, right? Or LZ3 in the UK, right? Or Aussie two year swaps. But most people don’t, aren’t aware of them, and they should be. But I mean, that’s what policymakers have to watch.

 

And as I said, I think the bigger thing is how far the rates have to go in an economy where demand is literally off the charts, where we’re seeing wage growth in the private sector from the ECI at 4.6%, where John Deere factory workers just rejected a 10% wage increase this year with following subsequent increases that probably work out around six odd percent over the next five years where they just said, forget it. Not enough, right? Not enough.

 

TN: Look at retail sales. The stepwise rise in retail sales over the past six months is incredible how quickly.

 

JB: I’m looking at stuff and if you look at the senior loan, which is the banking where they ask the bank loan offices what they intend to lend and who they’re lending to, and are they tightening conditions or whatever. Lending, they’re falling over backwards to try to lend money. Now we know that people have got some cash on sidelines because of the stimulus.

 

We know that companies have still got PPP loans that they’re still working through. So demand is a little lower, but supply is literally off the chart. So lending bank willingness to lend to consumers, decade highs, right. Bank willingness to lend to companies all time survey highs, 30-year highs. Right. So even if we were to get and I don’t think this is the case, even if wages would not keep space with inflation next year in the US, people have got plenty of places to go and borrow money to keep consuming.

 

So I just think this is an economy which is in the middle of its cycle. I mean, most cycles are three years long, three plus years long, with 15 months 16 months into this thing. I mean, this is mid cycle stuff. It’s the easiest of easy money, right?

 

TN: Okay. And so just kind of to end the three-point sermon, what else are markets missing? This is really interesting for me because I’m hearing a lot of different kinds of thesis out there every day, but very few about kind of what the market’s missing.

 

JB: Look. And I think it comes back to the final point, which we alluded to earlier. The equity market is making an assumption, of course, the equity market, I’m a bond guy and an FX guy. I hate the equity market. My glass is absolutely, defensively, half empty. Right. And ideally someone’s paid in it. But that’s the best day for it. That’s like the best market for me. Right. But the XG market is doing its classic thing where they’re just assuming the best of both worlds. So they’re assuming that margins are going to grow, so there is no cost pressure that could infringe on those. And we’re starting to see that.

 

I think Q4 numbers that we get in Q1 will start to get a little bit more interesting. Right. But we sure what wild wings or whatever the thing is called the Buffalo Wing place just got stumped because their wage costs were up and their input costs were up and they couldn’t pass it on. Right. But the equity market, as is classic, has taken the highest margins in 20 years, which is what we have now. And they’ve assumed that next year it grows even more. And in ’23, it grows yet again. Okay.

 

So as I said, if you’ve got this cost push and firms can’t pass it on, that doesn’t happen. Margins get crushed. Don’t think that’s a risk here in the US at the moment. Do think that’s a risk in Europe because these PPI increases are just so large. Right. And if you’re a Spanish company and your PPI went up 23.6%, you cannot pass on 23.6% increases to the consumer. In the US, if your prices went up eight and a half, you can wiggle a little bit through productivity, maybe a couple. You can probably get away with 5% price increases. Okay. So margin assumptions may be utterly wrong, but if they aren’t, what does that mean, Tony? It means that price inflation is rising, and in which case inflation is not transitory. And that’s the second big assumption. So they’ve assumed margins rise. Oh, and conveniently, inflation is transitory. And that in a cost push environment, you can’t square that circle. Right. One has to be wrong.

 

My gut is at the moment, it’s the latter in the US, not the former, more worried about the former in Europe in Q4. But that’s another thing, which I think the market has miraculously misread. But as I said, as those pricing pressures come through, I think policymakers and markets will have to adjust significantly. And I think it set us up for a policy error sometime next year. Probably huge. Probably.

 

TN: We’ll trip over ourselves with policy errors until we see this. And then when we do see some sort of reckoning, we’ll have even more policy errors.

 

JB: Correct. As Raul and I say constantly on Macro Insiders you just do buy the dip. You just got to figure out when the dip comes because you don’t want to be in when the dip comes and when you hold your nose and grab your bits and decide that you’re going to jump into the deep end and buy it by the seller.

 

TN: Great. Julian, thank you so much for your time. This has been fantastic for everyone watching. Please subscribe to our YouTube channel. It really helps us a lot to get those subscribers. And Julian, I hope we can revisit with you again sometime soon. Thanks very much.

 

JB: Thanks. Bye bye.

Categories
QuickHit

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

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

Part 2 of the Fed and ECB Playbooks discussion is here with Albert Marko and Nick Glinsman. In this second part, the housing and rent market in the US, UK, Australia, etc. was tackled. Also, do we really need a market collapse or correction right now? And discover the “sweet spot” for the Fed to “ping pong” the market. When can we see 95 again? What is the Fed trying to do with the dollar? And what currencies in the world will run pretty well in a time like this?

 

Go here for Part 1 of the discussion.

 

 

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This QuickHit episode was recorded on July 29, 2021.

 

The views and opinions expressed in this The Fed & ECB Playbooks: What are they thinking right now? (Part 2) QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Now, with all of that in mind, Nick, you did a piece recently about the Fed and housing and some of the trade offs that they’re looking at with regard to the housing market.

 

Now, housing is an issue in Australia. It’s an issue in the UK. It’s an issue in the U.S. and other places. Can you walk us through a little bit of your kind of reasoning and what you’re thinking about with regard to the Fed and housing?

 

NG: Well, I actually think, it was, I was watching Bloomberg TV as they ask after the Fed comments from me, well, you know, maybe the Fed’s right because the lumber has collapsed. Right. Lumber’s in an illiquid market, takes one player and you can move that price 5 to 10 percent. But that was an irrelevance.

 

I think there’s a couple of things that lead the Fed in the wrong direction. First of all, the mortgage backed securities QE, that really isn’t necessary. That they could definitely tap and that would perhaps quell some of the criticism on you letting inflation on. Know this criticism, by the way, the Fed and the other central banks is all coming from some of the former highest members of those central banks. It seems that once you leave the central bank, you get back to a normal DNA to Mervyn King and the be governor of the Bank of England, hugely critical.

 

And you have that House of Lords touching on QE. Bill Dudley ran, said New York. That is the second most important position at the Fed. And in fact, my thought process there is the repo problems that we’ve had is because his two market lieutenants of many years experience were let go when Williams took over. Big mistake.

 

Anyway. So back to the federal housing. I think they focused on cost of new housing. My view is the slowdown that we will get on new homes is purely a function of supply of goods used to make homes, where essential supply. Then tell me is or if it’s not essential supply, it’s become incredibly expensive. Copper wire and so on and so forth. But my fear is that focused on this and the thing that’s going to come and hit them really hard at some point in the future, which is why I think inflation is not going to be transitory. It’s going to be persistent. Rent. Going one way is… I mean, New York rents have picked up dramatically. New York being an exceptional example, but.

 

TN: Remember a year ago you couldn’t give away an apartment in New York?

 

NG: So I think in that respect, everybody’s talking about mortgage backed securities and QE. Why are you doing it? Housing market doesn’t need it. Look at the price action. Fine. All valid points. I think the Fed should be more worried ultimately about rent. And the rent.

 

AM: Rent is a problem. You’re right, Nick. The other thing I want to point out is there’s a disconnect because it’s not just one housing market in the United States. Because of covid, the migration from north to southern states has really jumbled up some of the figures and how they’re going to tackle that is something that it’s above my pay grade right now, but it’s just something I wanted to point out.

 

NG: Albert’s absolutely right. People have been incentivized to be in real estate. People have been incentivized effectively to be in related markets to the collective real hard assets in this environment. Absolutely.

 

I mean, I would argue that part of Bitcoin’s rise is because, in fact, it’s a collectible. Limited supply. It’s such a collectible. It’s got no intrinsic value. But it’s a collectible. But I would, I think that’s. Albert’s right to point out the demographic moves in the US. I think there’s a huge pressure. One policy doesn’t fit every market. And I think the red pressure will be reflected in the similar fashion. It’s a huge problem.

 

TN: So what can the Fed do about it? Is there anything they can do about it?

 

NG: Become a commercial banker in terms of policy. You know, we’ve I mean, in the U.K., there was certain lending criteria for corporates that were imposed during the crisis that actually did help. But I think also the other thing that seems to be problematic for the commercial banks is Basel III. So, even if the Fed wants to help, how much can they help within that framework? Of course, the US Fed can just say thank you Basel.

 

TN: Doesn’t apply to us.

 

AM: They can also raise rates if they want to be cheeky.

 

TN: Yeah, but then it’s not just real estate that collapses. It’s everything, right?

 

AM: Maybe it needs to be collapsed, Tony. Maybe it needs to correct a little bit because, what are we buying here? We’re buying stuff, we’re buying equities that are 30, 40 percent above what they were pre-Covid.

 

It’s just silly at this point. I was talking to one of my clients and this is like we have to look through, we have to sift through US equities, which are probably going to go down to like twenty seven hundred of them right after this shenanigans ends and trying to find a gem in there to invest in. Whereas we can go overseas in emerging markets and look through thirty four thousand of them. Right. So you know, we need a correction.

 

TN: Famous last words.

 

The last thing we’d really like to talk about is currencies. So, you know, we’ve seen a lot of interesting things happening with the dollar, with the euro, with the Chinese yen. And so I’d really like to understand the interplay of how you see the Fed and the ECB with the value of the dollar and the euro. Albert, you said, you know, the ECB really has no control or very little control over the euro because of what the Fed does. So what is the Fed trying to do with the dollar?

 

AM: You know, Tony, Nick and I had wrote a two-page piece on the dollar’s range of ninety one to ninety three. And that seems to be the sweet spot for them, where they can ping pong the markets and drop the Russel a little bit, promote the Nasdaq and then vice versa and go back and forth like that. That is where they’ve been keeping this thing for… How long has that been, Nick? For like six months now, that we keep it in that range?

 

NG: We wrote eighty nine to ninety three, but really ninety one midpoint should start to be the, the solid support. That’s played out exactly.

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AM: They’re a bunch of comic jokesters where they go to ninety three point one and three point one five and then they scare people and then they come back down and drop it back to ninety two. I mean it almost with the ninety one today, I believe. You know, so it’s just we’re stuck in that range, Tony, until they want to correct the market after the market corrects, they’ll probably go to ninety five, ninety six.

 

NG: Our view on that is partly because that the dollar is the ultimate economic weapon of destruction. Not to the US. For other countries. First of foremost emerging markets, but because it’s included in emerging market indices and ETFs as a result, I include China there. And you know, to be honest with you, I not only the geopolitics suggestive and Albert and I tweeted on some of the things that we believe are going to happen. How can the US authorities allow China to wipe out investors the next day after an IPO?

 

The people forget, it astounds me. Not more is made of this and no more commentary. We’re dealing with a Stalinist bunch of communists led by Xi. They will do anything to retain power, and they certainly don’t care about American and international investors. We’ve just seen that. You seen that with DiDi. You seen that with the education companies that are created in the US. We’ve even seen Tencent down. Tencent is one of the worst performing stocks in the world. It’s a tech stock in China, and look at tech in the US.

 

AM: Yeah. Let’s not deviate too far into the Chinese thing because we can do a whole hour just on China. When it comes to the currencies, Tony, the dollar being at ninety one, ninety two. The only other currencies that I do love are the Canadian dollar and the Aussie dollar, simply for the fact that they’re a commodity rich nations. And in a time of inflation, there’s no better place to be right now.

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AUDUSD Year-to-Date Forecast
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TN: Yeah, I think they’ll run pretty well.

 

NG: Yeah, I think as a macro trade in the next couple of years is commodities and it doesn’t necessitate economic reflation. You’ve got enough supply chain issues and supply issues and lack of capex and politics with regard to energy that restrict the supply. And the demand is there. Can you imagine, even if we don’t have a fully reflation story from the economy, if Jet Blue has a shortage of jet fuel in the in the US right now, imagine what happens to jet fuel when Europe starts to travel properly, which won’t happen this year, it will be next year.

 

In fact, the commodity minus the big ones? Have you seen their profits? Huge increase in dividends and share buybacks.

Categories
QuickHit

Inflation: Buckle up, it may get worse (Part 2)

Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation, part two, where we start looking into things like raw materials cost versus processing and manufacturing bottlenecks. Also discussed are the wage inflation and labor availability and how long these impacts will last. And finally, we start talking about central banks. What will the Fed do? Will it do anything? When will it do it?

 

For those who prefer to listen to a podcast, here’s the Spotify link for you: https://open.spotify.com/episode/3CK3SNwMK97oWLy1DMRQnD?si=uV1As8VsTxSVrQNE0iYuiA You can also find us in other podcast audio streaming services. Just search “QuickHit”. Thank you!

 

Part one covered a lot around specific commodity inflation and why it’s happening.

 

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This QuickHit episode was recorded on April 28, 2021.

 

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

 

Show Notes

 

TN: What the people in the middle. So the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things, or are they passing that directly along?

 

NG: Sorry, Sam. I’m jumping in here. The beauty of that question right now is there was a major headline, the Financial Times talking about margin compression of how US corporates are going to be increasing prices. It was today. You have the likes of Chipotle. We’ll go on to that. That’s a labor cost issue. But the other company, you know, J&J, various bare necessities manufacturers for nappies for kitchenware also they’re saying they’re going to have to put price pressure through to the consumer and as we were discussing just before we started, there’s the elasticity of price increases is very high.

 

The elasticity of price decreases is extremely low. And I would contend that this becomes a rolling, snowball effect as these prices get passed through to the consumer. There are other costs that will be passed through to which we can talk about later on labor side. But this clearly, one of the signals that our well worth watching, on the margins in the corporate reporting, and all of them are suggestive of higher prices to the consumer.

 

Then you look at the ISM prices paid. I have a chart, a model that looks at that versus the CPI. And if that sticks to what it’s done over the last couple of decades, it’s indicative of CPI, actually, the big figure having a getting up to somewhere around four, maybe even higher.

 

TN: Which was kind of a China 2011 scenario of four to six percent CPI.

 

NG: Correct. But also also the the process of decoupling, as long as it may be, that process has created a demand because of the supply shock.

 

There’s a supply shock in the system. The demand is adjusting there, too, so that work as additional demand to fill in the gaps, so if the decoupling replacement process is long standing, the demand is still there, it’s a matter and then catching up. There’s a price disparity caused by that.

 

TN: Yeah, we definitely have a mismatch, at least in the short term. And will those supply chains catch up? That’s a real question. Sam, what’s your view on that in terms of manufacturers being able to absorb these cost and margin pressures?

 

SR: So I’ll jump to the housing market as my example, which I think is one of the more interesting ones filtering, filtering through down into lumber.

 

A very close friend of mine in Houston is delaying the start of one hundred and ninety homes that were supposed to be going into, well… He has the pads laid. He won’t build those homes until lumber prices go down. It’s the largest backlog he’s ever had. And that got us talking and kind of working through the market. And when you look at the market for pine studs in the US, it’s an intriguing look into kind of where the cost pressures are coming through, where mills are making mills that make the two by fours are making an absolute fortune off of the disruption.

 

But if you own a pine stand of several thousand acres, the tree that you are cutting off of it is the exact same price that it was a year ago. You have seen none of the prices at all.

 

TN: So there’s not a supply, a raw materials supply issue. It’s a processed materials issue.

 

SR: Yes. Exactly. So it’s the supply chain breaking down. You didn’t have enough. You didn’t have the mills up and running for a couple of months. You had about 40 percent of the capacity offline. And that created a shock to the system that eventually will be sorted out at some point.

 

We didn’t destroy any capacity for two by fours. We’re building even at the current rate, we’re building one point seven million homes. That’s nowhere near what we were doing in 2005. And yet lumber is four times where it was. So, yeah.

 

NG: May I ask a question because you’re obviously in touch with that level on a micro basis? So one of the things that I’ve been told by several different sources is they don’t disagree with your number coming down eventually. The problem the homebuilders now have is labor shortage.

 

SR: That might be a problem in the northeast. That might be a problem in a kind of coastal problem in the US, where I have fewer contacts in construction. But in the south, there’s no labor shortage. Wages are still very strong. You have some projects that were delayed for large oil which created a supply of able bodied plumbers, electricians, where there’s a shortage elsewhere. So I would say that’s probably very true for parts of the country.

 

There’s anecdotally, Beth. Beth Iron Works? One of the major boat docks in the north, northeast is driving around an RV trying to recruit people to come, trying to recruit welders. That was a problem before Covid that was and will remain a problem. The trades will be a big issue. Common labor, particularly in the South, does not appear to be an issue. That is an issue in the north.

 

NG: I’ve heard it’s an issue in Florida, actually, which is back to you point about coasts. Sorry, I interrupt.

 

TN: We’re in Texas. It’s the Promised Land. I mean, I think you…

 

NG: Would agree with you on that one.

 

TN: OK, so we’ve gone long. I know these are very detailed issues, but I’m going to ask another question. I did ask for some questions over Twitter.

 

So one of them came in from Brent. This was around supply chain disruptions, which we’ve already talked about. There’s another from Jerrett Heath. He says, “Will it be velocity or magnitude that causes the Fed to react to inflationary pressures?”

 

So what do you guys think? Are we going to see kind of the magnitude inflation push the Fed to react or what’s going to push the Fed to react to start to taper a little bit, if they do at all?

 

NG: I would say both at the same time. My great fear is that there is, and this was actually covered by the Wall Street Journal, but I’ve written and spoken about this as well. I sit there looking at the Fed becoming reactive rather than proactive, and the punch bowl analogy is gone, and that worries me enormously because they have great confidence in something that they’re forecasting as transitory and we know what their forecast record is, and if you really want a bad forecast record, just go to Frankfurt and see what the ECB is all about.

 

Now, it’s interesting to me that the conventional wisdom, the consensus forecast is for tapering to the end of this year as opposed to next year. It seems like the more people talk about the inflation pressure, the greater it is. But I wonder whether we will get tapering. That’s what worries me about the Fed.

 

I’ve been really working hard on looking at what Claudia Sahm has written and said over the last couple of weeks. She wrote an op ed in The New York Times and Bloomberg. She’s said… She’s an ex-economist for the FOMC and the Board of Governors, actually. And you get the feeling that the priorities are unemployment with equity, racial equity as opposed to equality. Furthermore, you get the feeling that financial stability… Both of those more important than inflation.

 

Now, if that’s the case and we start to see any signs of a taper tantrum, I worry that this Fed is going to do a proactive. Either stop the idea of tapering or do a twist or something that eases this market. I think they’ve got themselves, we have a very political Fed that, if it’s reactive by nature, it could be procyclical by action. And that’s where I find I really worry about it.

 

Then, we’ve got Powells term expiry February. Well, Lail Brainard is one of Janet Yellen’s favorite people. And if she gets in, we’re going full MMT. So those are my concerns about the tapering, its focus on financial stability and the risk that reactive policy will be procyclical.

 

TN: Interesting. OK, that’s great. Thank you. Sam. Help me understand, what’s your point of view on this? What gets the Fed to react and how do they react?

 

SR: Yeah, so I would go with neither of those will get the Fed to react. It’s not a question of should they or, you know, what they think they should do. But it’s a question of will they. And they won’t react to inflation. They do not care about the magnitude. They do not care about the velocity. And they won’t care for at least another nine months because we know the combination that they’re going to look through, the combination of basic facts and supply chain disruptions, at least through the end of the third quarter. They do not care. And then they will start the clock on their four quarters of inflation above or at two percent, and they want full employment before they raise. That’s four percent at least on measured unemployment.

 

So I would say, it, whatever you want to look at for inflation numbers, they don’t care. And maybe they should, but they don’t.

 

TN: So they don’t care yet. Or they don’t care period?

 

SR: They don’t care, period, until it’s been until it’s been a year of around 2 percent in this summer and fall don’t matter to them.

 

NG: Let me add one or it’s too late.

 

SR: Yes.

 

NG: I’m with you. You and I seem to agree. I mean, that is exactly the impression I got from Claudia Sahm’s words. I mean it was just straight up. And that’s where I worry, you know, I have a huge respect for Lail Brainard. She is a very, very accomplished economist. But she’ll go full MMT is what Janet Yellen wants. It’s what the Democrats want and I really worry about that.

 

Plus, you combine this with here we go back to Larry Summers. You combine this with this fiscal effort and one thing that, so in American terminology, progressive policies typically have historically been inflationary. In English terminology, is what I am, these socialist policies have a history of inflation. More government intervention, more pushing against the string of inefficient allocation of resources. Labor restrictions, minimum wage, universal basic income. It all leads to in one direction.

 

So I agree with you, Sam. I think the Fed doesn’t care and I think, hence, the reactive. When they react, it’s going to be, in my view, potentially too late. It’s already started.

 

TN: So I just sent out on Twitter a chart that Sam published about three weeks ago from another source on the negative impact of fiscal stimulus, and as we end up ’21, like in Q3, Q4 of ’21, that fiscal stimulus starts to have a negative impact. And certainly in ’22, the US fiscal stimulus has a negative impact.

 

So, you know, there are a number of things to worry about, not just with inflation, but with the efficacy of some of this fiscal stimulus that’s going into the market.

 

So with that, I want to thank both of you guys. Honestly, we could talk about this for hours. I would love to have this discussion with you guys again, you know, even in a couple of weeks to talk about other issues. So let’s see where this goes. But thank you so much. Thank you very much for your time on this. I really appreciate it.

 

We’ll get this out as quickly as possible. Thanks to everyone who’s watching this. Thanks for everyone who submitted questions. For those who did submit questions, for the questions we used, we’ll give you guys a month of CI Futures and look forward to the next time. Thanks for joining us.

 

Categories
Podcasts

Could This Be The Tail End Of The Bull Run?

In this BFM The Morning Run episode, Tony Nash explains what’s happening in the US markets, particularly the tail end of the bull run. Will value stocks improve now as compared to the growth stocks? How about stay-at-home stocks VS cyclicals? Also discussed are currencies, USD against the Japanese Yen and Chinese Yuan, and the labor market.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/could-this-be-the-tail-end-of-the-bull-run on April 1, 2021.

 

❗️ Check out more of our insights in featured in the CI Newsletter and QuickHit interviews with experts.

❗️ Discover how Complete Intelligence can help your company be more profitable with AI and ML technologies. Book a demo here.

 

 

Show Notes

 

WSN: Good morning, Tony. Now, is it likely that the U.S. indices will run out of steam for the moment? I mean, pausing to take stock of the earnings, are equity markets gravitating to what’s stay at home stocks or cyclicals?

 

TN: The problem with where we are now is that all value was stretched. Monetary policy and stimulus have really pushed money into equity markets as the remaining stimulus checks are distributed, meaning a lot of those stimulus checks are in the mail right now in the post going to homes in the US. So there’s a lot of investment expected and pushing against maybe the downdraft in equity markets. So I don’t think it’s really a question of stay at home versus cyclicals. It’s really a question of where is that value?

 

I don’t think it’s a sector question. It’s really an individual stock picking question. And that’s the problem. It’s not a sector market. It’s not a market wide phenomenon. We really have to understand where there is value because we’re in the very tail end of a bull market.

 

PS: Previously, it was the long and now five year Treasury treasuries are inching up. What impact will an upward shift of the whole yield curve have on equities?

 

TN: I think we’re seeing equities try to climb higher, but we’re not quite getting. The five year is up over five percent today on an incremental basis was up five point six percent. The 10 year is up two point three percent today. So, you know, there are a lot of risks out there. Ongoing Covid risk. France just closed down again today. There are geopolitical risks with the US and China and other geopolitical risks, of course, Syria and so on.

 

Iran, business supply chain risks. So, you know, with yields rising and the pressure on equity markets to rise as well, we believe that there’s going to come a point where equity markets break and we’re going to start to see see a decline in equity markets. So yields will rise in the U.S. and equity markets will inevitably decline, and that will likely bring some other global markets with it.

 

WSN: OK, Tony, let’s shift the conversation to currencies, because the U.S. dollar has really made some strident gains against both the Chinese yen and the Japanese yen. I just want to know, why are these two currencies taking such a beating in particular?

 

TN: Well, both currencies strengthened quite a bit in Q3 of twenty twenty and stayed strong until recently. CNY had been below seven and a bit well actually just above seven and it climbed to almost six point four versus the US dollar. So there’s been a lot of strength in both, as you say, Chinese and Japanese currencies. What’s happened while we’ve had those depreciated currencies is an accumulation of inventories of commodities like industrial metals. We’ve seen the copper price rise dramatically, for example.

 

And so as we see treasuries rise in the US, and that brings dollar strength, we’re seeing those manufacturers and those guys who’ve been building their commodity inventories in East Asia really slow down on those purchases and their future commitments. So we’ll likely see a lot of those currencies stabilize and weaken a bit more we don’t expect. A dramatic weakening from here, we don’t expect the US dollar to appreciate dramatically more, say, for the next few months. So we’re kind of in a range, we believe, for both.

 

We do see the CNY, for example, devaluing to say six point six to six point seven. And then, you know, we’ll kind of stabilize in that range unless there’s a dramatic impact.

 

PS: So a correction is in inventory levels readjust. Can I just shift your attention to oil? Because oil prices are at levels near the break even point for US shale producers. Are you expecting to see a resumption of shale activity this year?

 

TN: Well, yeah, we you know, living in Texas, we see a lot of shale activity here. So we do expect it to start slowly. But that business runs in a way where if we’re chasing price, more of those shale firms will come online pretty quickly, actually. So, you know, with the ability for shale to turn off and turn on so quickly, we believe that the prices will be range bound if there’s upward price pressure, you know, all things held equal.

 

If there’s you know, if there isn’t a major geopolitical issue in the Middle East or isn’t a major geopolitical issue in Asia or something, we think that will be fairly wrage range bound as those as those guys come back online. The shale producers.

 

WSN: Meanwhile, Tony, U.S. numbers, job numbers excuse me, are out on Friday. Are they expected to show a robust recovery in labor markets, in your opinion? Like what sectors grew the fastest in terms of employment?

 

TN: Well, you know, we’re starting to see quite a lot more capacity in airlines, although we don’t expect a lot of hiring there. The services around, say, travel and hospitality, they were devastated in twenty twenty. And we expect some of those jobs to come back online. We expect to see some restaurant jobs, some of those services jobs to come back online. That’s where we typically see these things come back first, relatively kind of lower wage, but more flexible workforces.

 

And so we’ll see activity there first. Tourism in the US obviously still isn’t up to what it was, but we have started to see some impact back in tourism. So I would expect to see some some interesting numbers there.

 

WSN: OK, thank you for your time. That was Tony Nash, CEO of Complete Intelligence, sadly reminding us that this is maybe the tail end of the bull run that we had been enjoying.

 

It was a very short one, is that it honestly, in March 2020 when markets collapsed and then because of the concerted, synchronized monetary policies that we saw around the world, central banks really pushing rates to ultra low equity markets rallied and rallied till now.

 

So he thinks we’re in the tail end and we should stop beginning to look at value stocks as opposed to growth stocks.

 

PS: And I think specific sector specific stocks, in fact, actually.

 

WSN: Yeah.

 

PS: It’s kind of very good.

 

Go for the jugular on specific things.

 

WSN: Yeah. I think you really do need to take a very bottom up approach as opposed from the top down approach. If you’re talking about the tail end of a bull cycle, what is also worrying is that he does say that with increasing yields in the U.S. and even on the shotted to bonds, which is the five year bonds, lightly equity markets, those are going to face another round of correction. And it’s not just going to be the U.S. it’s going to be other global markets as a result, because let’s face it, we take the cue from the U.S., right?

 

PS: Yeah.

 

WSN: If there is a shock there, there’s a shock around the world.

 

But what does it mean for Malaysia markets? Because yesterday we had a really terrible, terrible day.

 

And when I look at Bloomberg now and I’m trying to understand what caused the decline, it was really very much glove driven. Topcliffe hoteling, super Max, all coming under selling pressure as a result, took the index along with it, saying it was also the case for the telco sector. Zaatar was also down. Maxi’s was also down. There was actually no stock among the IBM, Kilsyth, the three component stocks, none were in the green. So clearly bad day.

 

We were down two point to two percent. And on original, on a year to day basis, we are actually down more than three percent.

 

PS: It’s incredible. I think also the conversation about currency is going to play. So we were talking to Tony about Japan and China. You heard and we saw disconsolately in Turkish I now emerging market currencies are going to all kind of a fall out in the short term.

 

WSN: Is there going to be a question of, you know, shift from emerging markets into developed markets? That’s the big question. But in about a few minutes, in light of April Fool’s Day, we’ll be speaking to resolve. Then Gizzle, comedian and the co-founder of Crack House Comedy Club. Stay tuned for that BFM eighty nine point nine.

Categories
Podcasts

Cold Front on Oil Prices?

Tony Nash is back in the Morning Run, hosted by BFM 89.9, as he points out the crude oil price and how long to expect the rally, considering factors like weather, demand, and supply. Tony also mentioned about a potential pullback and snap and how you can better be prepared for it. Should you continue buying tech stocks or move elsewhere? Also, they discussed crops and where the prices are going this year.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/cold-front-on-oil-prices on February 18, 2021.

 

❗️ Check out more of our insights in featured in the CI Newsletter and QuickHit interviews with experts.

❗️ Discover how Complete Intelligence can help your company be more profitable with AI and ML technologies. Book a demo here.

 

BFM Description

 

Tony Nash from Complete Intelligence, from freezing Texas, shares with us the current supply constraints in the US impacting oil prices in the short- and medium-term.

 

Produced by: Mike Gong

 

Presented by: Philip See, Wong Shou Ning

 

 

Show Notes

 

WSN: For some color on where global markets are heading, we have in the line with us Tony Nash, CEO of Complete Intelligence. Tony, are you freezing out there in Texas?

 

TN: Yes, we are. We haven’t had it this cold air for decades. So it’s it’s been a really interesting week.

 

WSN: That has had an impact on oil prices. Bloomberg showing Brent crude at $64 per barrel, WTI at $61 per barrel. So how badly impacted our energy markets at the moment? Where do you think oil prices are going?

 

TN: A lot of this is very short term. What you’re not seeing that the traders really pay attention to right now is that a lot of refineries are closed because of weather and they’re starting to close for annual maintenance. There’s this presumption that there’s a demand pull, which we’re not really seeing from anywhere in the world right now, and that the winter storm issues will pull energy prices. But again, the fact is the refineries that would take this stuff are closed. We expect this to be short lived. This is an extension of a crude price rally that we saw that we expected to come in Jan, it’s lasted into February and we really don’t expect this to have a lot of legs to it.

 

PS: What do you think the outlook looks like then for the mid-term like quarter to quarter three?

 

TN: We would see 10 to 20 percent off of this price? We don’t necessarily think that this is a sustainable level short of some sort of supply cuts. But the weather in Texas, for example, we’re going to be kind of in normal weather ranges in two days. What we’ve seen this week and the close down, as we’ve seen this week, it’ll take people a couple of days, maybe a week at most to get things back on line. So this perceived supply shortage will be back on line fairly soon.

 

WSN: How about yields on U.S. 10 year bonds? Because they’ve hit a new high one year high. What what is that trying to tell this? What a market try to tell us?

 

TN: U.S. is trying to raise money and they’re willing to pay more for it. I think that is is really it. I think there is a growing fear that equity markets are as high as they’ll get. We’ve started to see more of that tension come in into chatter over the last few days. People are willing to pay to get out of markets, to park their money in debt.

 

So I’m sure it helps the U.S. as they’re raising more money for stimulus and for operations. But as we creep up to four thousand, that is just unimaginable for a lot of people. And it’s not as if we are doing better as an economy than we were in 2019 or the first quarter of 2020. This is built on stimulus, as we’ve talked about before. It’s built on central bank activity.

 

And you can only stretch that so far before things have to snap. We’ll see some of these things that are at double and triple and quadruple kind of the standard multiples. And P is the only way to measure this stuff. But we’ll see things that are really, really stretched, snap into a more reasonable region. But it’ll happen any time tomorrow, three weeks from now, a month from now, whatever. It’ll just happen. It’ll happen any time. And it’s best to be prepared for it.

 

PS: So are you expecting some pullback eventually? Right. What is the tipping point where investors will essentially do that exodus or flock to U.S. Treasuries then?

 

TN: One of the tipping points is going to be the resolution of stimulus. I’ve been saying for weeks that stimulus will not be what the administration wants it to be. There are such high expectations put on that stimulus right now and they’re not going to get it. They’ll get a lot of it, but they’re not going to get all of it. Expectations are sky high. And when it doesn’t hit, I think that will be one of the catalysts.

 

But there are other things like when the crude price starts to fall because this supply constraint isn’t there anymore. These sorts of things, these things add up and then they snowball and and then you start to see markets really, really take a dove. We’re not necessarily calling for a 2008 generational type of decline in markets. It’s just a bit of a pullback so that people can just say, “OK, wait a minute, let’s check, take stock how businesses are doing. Take a look at our investments and our allocation and then reallocate.” That’s really what it’s about.

 

WSN: Where would you relocate to and what are the safe haven assets? Because almost every asset class on a year to date basis is up. Right. And maybe except for Google, which is down six percent on the year today.

 

TN: What you’re likely going to see is a pretty serious rotation out of technology where people have focused on because of the work from home activities. This may not be immediate, but I think you’ll see a rotation out of a lot of the work from home stuff as people start real life again and you’ll see people move into. This is not really my the basis of our outlook. But you may see more of a regional move into things like tourism.

 

These things have just taken real hits. A lot of them have had speculative rises, some of the cruise lines. But some of them are still way down. All of this depends on gradual normalization. But I can tell you, Americans are really tired of being locked in, really tired of not socializing. And some of these things are going to have to start up again.

 

PS: What about not all out commodities then, like agriculture and precious metals?

 

TN: We had some real pressure. And part of the reason of that pressure was because there was a perception that a lot of the Chinese corn crop didn’t come in last year. But a lot of the drought was outside of that zone. Some of that pressure was alleviated.

 

But still, we’re seeing some pressure on wheat right now in the U.S. It really all depends on how much the current cold snap impacts the output later in the year or the ability to plant. Right now it’s not terrible.

 

Until we start seeing real demand come back in entertaining and in consumption and these sorts of things, we’re not going to see a major demand pull on food because people are already buying their standard cook at home type of things right now as they’ve rebuilt their behaviors over the last year. We’ll see that change. But unless we see a drought or unless we see an issue in a high consumption part of the world, we’re not necessarily going to see a boom in those places.

 

WSN: All right. Thank you for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his views on global markets and saying that, hey, oil prices are going to come under pressure probably in the next two to three months, because this is not really driven by real demand, is just probably weather patterns which are going to normalize anyway in Texas in a few days.

 

PS: He also made a point about oil, where this, I think, a slight surge in prices is actually a short term because supply is going to get back on quite soon.

 

WSN: Yeah, but other interesting news is actually the ongoing saga of big tech versus Australia, because it looks like Facebook has defied Australia’s push to make big pay for news by banning the sharing of content on its platform in the country. And this is the most far reaching restriction is ever placed on any publisher in any part of the world.

 

PS: So the extreme step to remove Australian news came as Google separately struck a global deal with Rupert Murdoch’s News Corp diffusing a long running dispute between the two companies. The dramatically different approaches could mark a pivotal moment for the media industry, which had hoped Australia’s tough regulatory approach would help reset its terms of trade with Google and Facebook worldwide.

 

WSN: So the moves by Google and Facebook came on the day Australia begin debating laws that would force big online platforms to license news. Now Facebook’s action will have a global impact. Under the provisions, news from Australian publishers will be blocked on the platform for all Facebook users, regardless of where they are based. The Australian government said it will continue to engage with Facebook. Press ahead with legislating the code, Canberra also warned that withdrawing news from Facebook’s platform in Australia could dent its credibility with users.

While this is quite big stuff. Actually, yes.

 

PS: Yes. I mean, Australia wasn’t the first country to, you know, get into this spat. I think you really was in having discussions. And France and Spain already had deals with a lot of with Google and Facebook with respect to media purchase. But it’s a question about publishers.

 

WSN: Yeah, I mean, at the end of the day, right. We do know media companies are suffering. Right. Álex has come under pressure. Subscriber growth has come down. How a media company is going to generate the revenue. So in the past, all these big tech companies, the argument was that they got to earn super normal above what is the what super normal profits without paying the likes of the media companies because they were using these media companies content to their benefit.

 

So some countries like Australia and even if you try to kind of diffuse the situation and have, I suppose maybe in their mind, a fairer playing field. But the Google deal nonetheless, if you look at it, the Google deal with News Corp announced on Wednesday goes beyond the Australian market, extending to Murdoch’s titles such as The Wall Street Journal and The New York Post in the U.S. and The Times and the Sun in the UK. No other news publisher has reached a single deal with Google across multiple countries.

 

Now, critics say the deal would benefit News Corp. rather than the rest of the news industry.

 

PS: Yes, well, we’ve been talking about the price. And since you looking at Google’s valuation, I suspect Google’s to be the winner because they have just really this unique access to this quality content. So. So why not?

 

WSN: Well, they’ve pledged so far to spend one billion over the years on buying news content and reach agreements with publishers in about a dozen countries.

 

But we’ll be watching this space because we do a media outlet.

 

But up next, we’ll be discussing the recently announced national unity blueprint. Stay tuned for that. BFM eighty nine point nine.

 

Thank you for listening to this podcast. To find full great interviews, go to PFM Goodbye or find us on iTunes, BFM eighty nine point nine. That is the station.

 

Categories
Podcasts

What’s Supporting This Risk-On Market?

In this discussion with BFM 89.9, Tony Nash speaks about the Dow breaking past 30,000 and what’s supporting this risk-on marketing? Also discussed are the stuttering economic recovery in the US, Janet Yellen as Biden’s Treasury Secretary and what that could mean to the world economy, and whether oil has more legs to rally right now.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/whats-supporting-this-risk-on-market on November 26, 2020.

 

 

Show Notes

 

 

WSN: To help us make sense of where international markets are heading, we have with this Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now, it’s a bit confusing when it comes to markets because yesterday the Dow broke 30,000. But there’s a bit of correction this morning. So do you think this rally has legs? Is it a risk on or risk off for equities at the moment?

 

TN: Well, I think people really just took a breather today. I don’t necessarily think we’re seeing a fundamental shift or risk off environment. Equities are definitely a risk on environment, especially if you look at certain techs like Palantir. They were up almost 20 percent today. But, you know, when you look at things like the stimulus, we’ve had and the vaccine environment, you almost have a double accelerator environment where you’ve got this windfall of vaccines and all the same monetary and fiscal stimulus and potential new packages coming out. So there’s a lot of hope in these numbers. Valuations are really extended, assuming best case all around, which is what people do in situations like this. So it’s risk on at the moment, but we don’t necessarily expect this to be sustainable over a long period.

 

WSN: We look at the data that’s come out just on the eve of Thanksgiving, and it’s not positive at all because you’ve got higher unemployment claims and also weak consumer sentiment suggesting that the actual economic recovery may take longer than anticipated. So how do you reconcile all this with the actual market performance?

 

TN: What’s happening is we’ve had some state and local governments who are starting to shut things down again, worried that Covid will spread over Thanksgiving. And so, we get these legs to recovery coming and then the local, state and local bureaucrats who have absolutely no consequences to the decisions, they really kill economies that start coming back. And so Americans are really starting to push back and really starting to complain. So I think this is probably the last round of hard Covid lockdowns you’re seeing in different jurisdictions in the US because Americans are just fed up.

 

Maybe there may be something going into Christmas, but I doubt it. But I just don’t see much patience for this, because just as we have some sort of recovery coming, local governments come in and just suffocate any sort of recovery. So the jobless claims rising again. It’s more and more of the same where we have legs to recovery and then local governments come in and kill it.

 

I guess on a good note, orders for kind of good nondefense good rose almost one percent, which is pretty good news. It’s not terrible. They’re our collapsing consumer spending rose half a percent. So, again, it’s nothing to shout out, but at least we have growth there. So there is still positive news, but it’s slowing dramatically. And if these local government officials continue to suffocate local economies, we’re going to see things get much, much worse.

 

WSN: And what do you think about Janet Yellen as possible appointment as Treasury secretary? Do you think it’ll be good for markets.

 

TN: Markets like it. Some of the legislators like it. I think when she was the Fed secretary, she talked about fiscal stimulus not happening at the rate that it needed to happen. So if she’s a Treasury secretary, I think we can expect a big push for fiscal stimulus. We’ll see. My worry is, will the US become Japan with this kind of endless loop of debt being issued that then gets bought by the central bank? And there’s this circular economy that happens at the level that really doesn’t do much aside from a wash from the Treasury to the central bank. If that’s the case, then it could be problematic and it could be somewhat inflationary. But I just don’t think we’re going to see inflation here for at least a few years.

 

WSN: Meanwhile, does all look overbought to you at current prices? I mean, this morning, when I look at this Bloomberg screen is 45 U.S. dollars for the WTI delivery in January next year. Do you see any short term resistance? And what are the support levels we’re looking at?

 

TN: Right now, I think it’s because we’re seeing a lot of airline travel going into this Thanksgiving weekend. Airports here are packed. It’s the first time we’ve seen that in a long time since Covid. So people are a bit excited. I think jet fuel has been one of the main missing components for refined products in terms of demand. So I think there’s hope that maybe air travel is back, but I think that’s a bit early.

 

We really do expect some acceleration in the crude price in late December. And Jan, this is a bit early, but I don’t think this will last. Support prices, low 40s, 40 to something like that, which is right around where we’ve expected and where we’ve seen it. So things are a little bit ahead at the moment, but it’s not too far. We’re not seeing a six at all price, which we’re well ahead of demand.