The CEO of Compete Intelligence, Tony Nash, was interviewed on BFM to discuss the current state of the US markets.
The S&P fell 1.6%, the worst decline in a month, and the tech-heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Nash suggests that this may be due to bad economic data, specifically PPI and retail sales falling, but also notes that consumer is still strong. Nash explains that the US economy is built on services, so people may be trying to confirm their downward bias in things, and when bad news is reported, a sell-off day occurs. Nash also mentions that if PPI falls, that should mean inflation is slowing, which should mean the Fed would ease a little and slow down on rate rises.
He also mentions that markets may be spooked by all the announcements regarding job cuts, such as Microsoft announcing they plan to cut 10,000 jobs and Bank of America telling their executives to pause hiring. Nash suggests that these job cuts are small in terms of the gap that we see in the US workforce, which is still missing millions of jobs in terms of the openings versus the available people.
Nash also mentions the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. He suggests that the BOJ is managing the yield curve to suppress borrowing costs and wants to keep it below 0.5%. Nash also mentions that Japan’s central bank is getting pressure from other central banks to keep their rates low, this means that if Japan lets their rates rise, then that would have a knock-on effect around the world and cause a repricing of government debt all around the world.
Nash concludes by saying that he expects a weaker yen, but doesn’t think we would necessarily hit those lows.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station. BFM 89.9. It’s 7:06, Thursday, the 19 January, and you’re listening to the Morning Run with Chong Tjen San and I’m Wong Shou Ning. And earlier on, we did ask our listeners how traffic is like and Roberto said traffic today really smooth and super low compared to just yesterday. He loves Chinese New Year in KL. And so do we. I just love Chinese New York because I like the feasting and I like the ang bao collecting.
BFM
I get the hint.
BFM
Yes, we’re all looking at you, Tjen San. But in 30 minutes, we will be speaking to Angela Hahn of Bloomberg Intelligence on the impact of China’s reopening to Markhouse gaming and hospitality sector. But in the meantime, let’s recap how global markets closed yesterday.
BFM
After a good run, all key US. Markets ended down yesterday. The Dow was down 1.8%, S&P 500 down 1.6%. The Nasdaq was down 1.2%. In terms of Asian markets, the Nikkei was up by 2.5%, Hang Seng up by 0.5%. The Shanghai Composite Index, it was unchanged, the Straits Times Index, it was up by 0.3%, and the FBMKLCI it was down by 0.3%.
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BFM
Why are we always again and again there’s a trend here for sure. But to tell us where international markets are heading, we have on the line with us Tony Nash, CEO of Compete Intelligence. Good morning, Tony. Help us understand what’s happening in US markets. Because the S&P fell 1.6% is the worst decline in a month. Tech heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Is this just really due to bad economic data?
Tony
Yeah, we saw PPI and retail sales fall today. The weird part is consumer is still strong. The US economy is really built on services, so I think people are trying to confirm their downward bias in things. And whenever we see bad news, we see a sell off day. So I’m not necessarily sure I would read that much into it, aside from just there was really nothing else going on. So people saw some bad PPI news and they were negative. So if we see downward PPI, that should mean inflation is slowing, which should mean the Fed would ease a little. Not ease, but would slow down on rate rises a bit. So that should have been positive news for markets. So it’s just kind of a weird read of some of that data.
BFM
Do you think markets are also spooked by all these announcements with regards to job cuts? Because Microsoft says they plan to cut 10,000 jobs. Amazon of course, made announcements last week, and even Bank of America is it telling their executives to pause hiring. Not great for the mood on Wall Street?
Tony
Well, maybe, but I think those job cuts are actually kind of small in terms of the gap that we see. So the US is still missing millions of jobs in terms of the openings versus the available people so I think there’s something like 7 million jobs open. We also had a million people post COVID not come back to work. So we have a gap in the workforce, just a status quo workforce of a million people, but we have something like 7 million open positions. So when Microsoft lays off 10,000 people or Goldman lays off 4000 people, sure, it’s tragic. It’s definitely tragic for those individuals. But in terms of the overall health of the economy, it really doesn’t make that much of a difference.
BFM
And Tony, the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. What possible reasons would the central bank have for keeping this status quo?
Tony
Yes, so the BOJ is managing the yield curve to suppress borrowing costs and they want to keep it below kind of 0.5%. There have been some hedge funds and some big investors who’ve been betting that they would tighten it. And the BOJ is just bigger. I mean, when they came back and they said, we’re going to hold the line at 0.5, they spent about $100 billion so far this month to defend that and they have plenty of resources to hold that. So the release issue is this is if Japan lets their interest rates rise, then Japanese, say, banks and pension funds and other investors would consider selling debt from other parts in the world and buying Japanese debt. Okay, so if Japan lets their rates rise, then that would have a knock on effect around the world and that would cause a repricing of government debt all around the world. So it’s not just the BOJ wanting to keep this for Japanese domestic reasons. They’re getting pressure from other central banks to keep their rates low.
BFM
Okay, Tony, but what does this then all mean for the yen? I mean, at its worst point, the yen was trading 150 against the US dollar. Today it’s 128. That’s a very wide range in just a few months. So what are your expectations?
Tony
It is yeah, certainly I would look for a weaker yen. I don’t know that we would necessarily hit those lows. But the BOJ has made their stance clear. The BOJ has a new head coming in in a few months. I would say they’re unlikely to dramatically change policy with a new head because they don’t want to make people nervous. So I think they’re going to aggressively defend the status quo. So I don’t necessarily think you see a yen appreciating dramatically from here. I think the bias is really toward the downside.
BFM
Okay, staying on the topic of currencies then, what’s your view on US dollar? We’re just looking at the Bloomberg Dollar Spot Index this morning. It’s already down 1.5% on a year to date basis. The era of King dollar, is it over?
Tony
Well, I think not necessarily. If you’re looking at the DXY, it’s really heavy on the euro. And so we’ve seen Europe do better than many people thought through the winter because we haven’t had a cold winter there and energy prices haven’t bitten as hard as many people thought they would. So I think Europe is doing better and the Euro is doing better than many people thought. And everything in Currencies is relative. China is opening, although it’s gradually. China is opening. And so that’s good for CNY. Again, in a relative basis, I think there is downward pressure on the dollar, but I don’t necessarily think we’re over on that. I don’t think we’re heading straight down to, say, 95. I think we’re going to see some back and forth over the next couple of months as we figure out what the forward trajectory of the dollar is. And a lot of that really has to do with what direction will the Fed take in terms of their rate hikes and their quantitative tightening. And it has to do with treasury activity from the US. Treasury. How will they spend, what will they do, how will they fund the US government?
BFM
Tony, some analysts are saying that without a recovery in the Chinese economy, a global recession is all but assured. But what are your thoughts on this?
Tony
I don’t necessarily think that’s the case. I think China will do okay this year, and I think regardless, Europe will likely dip into recession this year, although fairly moderate. In the US, you see a very strong employment environment. And so employment is one of the key considerations for recession. So I don’t believe the US. Will dip into recession really on the back of employment news more than anything else. And so once we see some of these layoffs with larger companies and we get through this as, say, equity valuations stabilize, I think we’ll start to see a renormalization in the US economy as the Fed kind of takes the foot off the brake of the US economy. Of course, the Fed will continue to raise rates, but they’ll do it at a much slower pace, and that will make people much more comfortable in doing things like investing capital and so on and so forth, that will help the US to grow.
BFM
All right, thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his outlook for the world economies and also markets in the coming weeks. I think very much the question everyone has on their mind is Fed rates. What is the terminal rate? Will they basically raise rates too much and then cause the US. Tip into a recession? But I see increasingly our guests, our commentators sounding a little bit less pessimistic, hinting that perhaps we’re going to have a soft landing rather than a hard landing.
BFM
Yeah, I think it’s really on the back of the really still strong employment in the US. I mean, he did mention there’s still 7 million jobs available in the US. And there are one million people post COVID that didn’t come back to work. And I think that really is his key point, that the US may not slip into recession, but it looks like EU will and China, it looks like they are really on track to a better recovery this year. I’ve seen some economists say that GDP growth could be like five to 6% as well.
BFM
I see that consensus figure that range is around there for China’s GDP for 2023. Now, turning our attention to corporate that released results they reported, which is Alcoa excuse me, which is aluminium company. They reported fourth quarter results earlier today, which saw losses narrow to $374,000,000. Loss per share as a result was $2.12. The loss included a 270 million charge related to tax expense. Revenue did decline 20% to $2.66 billion.
BFM
And Alcoa attributed the decline in revenue to lower prices for both Alumina and aluminium. Additionally, Alcoa will see some executive leadership changes effective February 1, including CFO William Oplinger reassignment to chief operations officer, in addition to his executive vice president role.
BFM
Okay, the street doesn’t really like this stock when you look at Bloomberg. Five buys, only seven holes, no sells. Consensus target price for the stock, $52.18. During regular market hours, the stock was already down one dollars. And now I think we need to talk about one of the world’s biggest companies, Apple. They are expanding their smart home lineup, taking on Amazon and Google. Are you surprised by this move?
BFM
Jensen not surprised at all. I think Apple is really the leader in terms of innovation, and we’ve seen it over the years, so no surprises there. So I think they’re launching some new devices. There’s a smart display tablet, there’s a HomePod. There’s a TV box and a MacBook and Mac mini using their cutting edge new processor, which is the M Two chip.
BFM
Are you going to buy any of these gadgets? You don’t even use an Apple phone. You haven’t joined a cult. You’re about the only one on the morning run. You and Philip sees that hanging on.
BFM
The iPad at home, but they’re quite old.
BFM
Okay, but will this make a dent to Apple’s earnings? Perhaps. I think they are trying to diversify their product range, because the iPhone, I think, hasn’t done as well as expected. If you look at Apple or Cost, still a darling on Wall Street. 36 buys, eight holes, two sells. Consensus target price for this to $169.24. At regular market hours, it was down seventy three cents to one hundred and thirty five dollars and twenty one cents. I, for one, will be curious as to what these products will be or how they’ll fare. Up next, of course, we’ll cover the top stories in the newspapers and portal. Stay tuned for that. BFM 89.9 you have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
We had a big week, with a lot going on globally. The president’s got COVID. Europe raised rates to zero, and so on and so forth.
First, we talked about Europe. It’s a mess, everyone knows that, but we talked through some opportunities there.
Next, we talked about aluminum. Industrial metals have been really interesting on the downside of late, but Tracy found something around aluminum that is really interesting.
And then we talked about tech, about Snap’s earnings, and what that could mean for other tech earnings coming up.
Key themes:
Europe is a mess. What’s next?
Aluminum supply shock
Tech SNA(P)FU
What’s ahead for next week?
This is the 27th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 0:50 95% on markets forecasts using CI Futures 1:44 Key themes for the week 2:34 What’s happening in Europe and what are some opportunities there? 6:37 Why did the European equity indices in the wake of the ECB meeting? 8:32 What can the ECB do moving forward? 9:40 Metals: what’s going to happen in the aluminum markets? 13:14 Will we switch back to goods in September? 16:50 Snapchat’s earnings and other earnings of tech equities. 21:06 Ad inventory element to tech earnings 23:16 Is there an opportunity for Meta to buy something like Snapchat. 24:21 The week ahead: Fed meeting next week
Listen to the podcast version on Spotify here:
Transcript
TN: Hi, everybody. Welcome to The Week Ahead. My name is Tony Nash. Today we have Albert, Tracy, and we have Sam doing a remote from his car because the Texas power grid can’t handle his house. So thanks, guys, for joining us. Before we get started, if you could please like and subscribe to the channel. When we’re done, and while we’re talking, please make comments, ask us questions. We get back to you during the week, and we really want to hear from you.
Also, I want to let you know about a promotion we’re having for our subscription product, CI Futures, which is a forecast platform for equity indices, currencies, and commodities. We are offering a $50 a month promotion for CI Futures. That is a short term promotion. So please check it out on the link right now and take advantage of that promotion. Okay?
We had a big week, a lot going on globally. The president’s got COVID. Europe raised rates to zero, and so on and so forth. First, we’re going to talk about Europe. It’s a mess, everyone knows that, but we want to try to find some opportunities there. Next, we want to talk about aluminum. Industrial metals have been really interesting, I guess, on the downside of late, but Tracy found something around aluminum that is really interesting. And then we’re going to talk about tech, about Snap’s earnings and what that could mean for other tech earnings coming up.
So first, let’s talk about Europe. Albert, you retweeted this tweet from HedgeEye earlier this week, talking about the 50 basis point rise by the ECB, and we’ve talked about it for months about the problems that Europe has if they raise. The problems they have if they don’t raise. And it was kind of a middle ground that they did. What are your thoughts on what’s happening in Europe, and are there opportunities there?
AM: Are there opportunities? Yeah, of course there are opportunities everywhere, Tony. You just got to be able to sit there and sift through the wreckage of what Europe is at the moment. Their economy is struggling. The 50 basis point rate hike, I kind of like, shrug it off. Surprise they actually did 50, but I kind of shrug it off. Their biggest problem is the dollar being elevated at the moment. It kind of helps them in the manufacturing sector for exports. But realistically, without China importing their products, what are they going to accomplish in the coming, like, two, three months? Probably nothing.
Aside from Europe speaking about the dollar being up, I’m kind of looking at Brazil and India’s next problem places.
TN: Okay.
SR: Yeah. And to that point, Albert, it’s a really interesting one, given it really doesn’t matter if you have great export markets if you can’t actually make anything.
AM: Yeah, I mean, the Europeans right now can’t make anything. They’ve got a labor problem worse than the United States at the moment. They have kind of COVID crazy policies still lingering. As soon as the tourist industry dies down a little bit for tourist season, they’ll probably come back in full force. So, I mean, it’s kind of a gloomy outlook for the Europeans at the moment.
SR: Power prices for the manufacturing engine in Germany.
AM: Yeah.
SR: If you’re not manufacturing anything, good luck selling something.
AM: Yes. I mean, even the stuff that they are manufacturing is going to be an inflated price that the world is not going to be able to even buy at the moment. They got food prices to deal with, not let alone energy prices. But didn’t European?
TS: It was a mixed message. No. Right. Yes. On one hand, they said, we’re raising rates to zero, meaning they’re not going to charge you anymore.
TN: Right.
TS: They don’t have negative rates. But on the other hand, they’re talking about bond buying program that they don’t want. They actually said, this is going to be kind of untransparent bond buying, which is fine.
SR: But that’s important and actually kind of a good thing, if you think about it.
TN: But the BOJ did right. The BOJ did that in 2014, 15, 16, where they bought up all the government debt and it just disappeared. And so is this a way for the ECB to disappear a bunch of government debt within the Eurozone?
SR: That’s what QE is.
AM: Yeah, of course. That’s like a standard thing, especially specifically for the Europeans. They love to hide debt and reissue it elsewhere, longer dated and whatnot. They love to kick the can down the road because they know that the United States is going to bail them out anyways at some point.
TN: Sam?
SR: Yeah, it’s exactly what they’re going to do. In my opinion, it’s kind of brilliant because in a way, you don’t want everyone to know how much Italian debt you’re buying, and they’re going to buy Italian debt, they’re going to buy Greek debt. And then, believe it or not, if we continue to have these kind of problems in Germany, guess what? Germany is probably going to be a huge beneficiary of the debt buying program. So it might be the first time in a long time that we don’t hear Germany complaining about it.
TN: Right. So I just want to be clear, they’re not hiding that they’re actually buying it to retire it. Right.
AM: Tomato, tomato.
SR: They’re not necessarily directly retiring it. They’re just buying it and holding it to maturity.
TN: Exactly right. Which is exactly what the BOJ did in Japan five years ago and they continue to do, actually. Okay, very good. So one last question on that. Why did European equity indices rise in the wake of the ECB meeting? Was it because of this debt issuing?
AM: I think..
TN: was distracted by Tracy. Was it because of the debt program?
AM: Yeah, the non transparent bond buying, and seems like the ECB is going to try to keep the market at least elevated, but, I mean, it was crushed so much that bottom feeders just started to come in in my opinion.
The only companies in the European Union right now that I would even think about are the ones that have ADRs in the US that have more revenue based in the US than anything else.
TS: I think what got them excited is because you saw a spike up in the Euro temporarily, so people started buying into the equity market. However, that’s going to be very short lived, I think still we are going to see inflows to the US market from all of these other markets, but there’s really no other place to go right now.
TN: Right.
SR: There’s also the problem of markets are forward looking and it’s so bad in Europe and it’s all priced in that at some point you get a mechanism where it’s not as bad as it could have been. And that to a large degree, looks to be what’s going on right now.
You’ve got the Euro almost at par. You’ve got an economy that is absolutely in the toilet. Everyone knows that. And it’s all priced into the equities. So if you begin to see a bright light at the end of the tunnel, there’s the potential for a significant rally there that could be kind of face ripping.
TN: Oh, yeah, great. Yes. So the position that the ECB’s in, what can they do going forward? Do they continue raising at small increments or are they kind of one or two and done? What possibilities do they have?
AM: I think they’re only one and two and done. I don’t think they can really keep raising rates like the United States right now. That would decimate them.
TN: Okay.
SR: 100%. One or two and done. And by the way, that kind of lines up with where the US is probably going to be done.
TN: So let me ask you one final question on this. If you’re an American company and you have a vendor in Europe and you’re paying Euros, would you long those contracts, get them locked in and euro prices as long as you can right now, do you think the Euro at Parity is a short-term anomaly?
AM: I think it is, yeah.
SR: Yes. And by the way, you can’t no European companies that dumb. That’s worth doing busines.
TN: I think you overestimate. Okay, that’s good. That’s good. Okay, perfect. Great.
Let’s move on to metals. Tracy, you posted a great graphic on and had a great discussion about aluminum and some aluminum factories that are shutting down largely because of power prices. Can you help us understand that situation and help us understand what’s going to happen in aluminum markets?
TS: Yeah, I mean, if we sort of look at the aluminum markets right now, the big thing is that because of the power crisis in the EU, right, we’ve seen almost 50% of their smelter market come offline because they just can’t afford it anymore. We’ve also actually seen this drift to the United States. We just had Alcoa shut down one of their lines in Indiana. So this is a global phenomenon.
The problem is that we’re short of aluminum by a lot. Because if we look at this energy transition, and I think I stated, particularly if we were looking at because the drivetrains are so heavy, you need a lot more aluminum to produce these vehicles, we’re looking at a deficit.
We’re already in a deficit. We’ve seen a 30% pullback in this market. We’re in a deficit. We’re going to be headed to worst deficit in H2 of ’22 and into 2023. And actually, if we look forward all the way until 2025, what I’m thinking is this pullback in the market has been a little bit overextended, over recession fears. Right. Huge pullback in the metals markets. Huge pullback and slightly pullback in the energy markets. But really, if we’re looking at these based on industrial metals, especially ones that are particular to energy transition, I think this move is a little bit overdone right now. I think there are opportunities to be had because we are looking at structural supply deficits across many of these metals, aluminum in particular.
AM: You know it’s interesting. It’s interesting. That just came to my thought of Tracy talking is utilities have given up every gain that they’ve had for the year, come right back down. Even some of the wheat and commodities just came down. Unbelievable. Dollars surge, futures crushed. It’s stunning. But I believe, just like Tracy says, I believe it’s all oversold at the moment.
TS: It actually is. Even if we take in a scenario where DM markets go into somewhat of a recession, we’re still in a structural supply deficit. So even if we’re in a recession and that takes a particular amount of demand out of the market, we’re still at a deficit.
TN: Okay. So I want to be careful with recession and not to kind of push back on you, Tracy.
TS: I’m just saying because everybody’s throwing that word around right now.
TN: So we can have a slowdown without having a recession, right?
TS: Correct. Absolutely. And I wouldn’t say that we’re necessarily in a recession, but things could get a lot worse in Europe or whatever. But even with taking that demand out of the picture, if we look at it as in we do have a recession in the market. “If”. Right.
TN: Right. So Sam has written quite a bit about the kind of switch to services over the summer from goods and Sam, do you see us switching back to goods, say, in September, October, from service says is that kind of a pretty dramatic switch from one to the other?
SR: No.
TN: Okay, so what happens? We switched. Goes to services over the summer, does that end what happens there? Because I’m curious.
SR: Yeah. No, you continue to have services be the dominant factor, and the services tended precovid to be the dominant factor.
TS: We talked about this a few weeks ago.
SR: Exactly. It’s one of those where goods probably don’t fall off a cliff because at some point you do have to have a comeback outside of the US. In goods. So that’s somewhat of a tail end. You have a reopening in China, you have a reopening in Europe, you have some sort of resolution to the Ukrainian conflict. You begin to have some tailwinds for Goods, but it’s simply not what I would say is kind of back to the coveted, like, goods model that was goods driven, everything was great, blah, blah, blah. No, it really does look like it’s kind of a summer of party, summer of vacation, summer of get out there. We didn’t have vacations in 20 20, 20 21. We’re going to go in 2022, and we’re going to go back. That appears to be the case, and it appears to be playing out. The question is, does that continue as kids go back to school? Probably not. Does it continue as people go back to work in the office? Probably not.
In the fall, you get kind of the current trajectory in Goods, which is back to normal somewhere around a 1% growth rate, and in services back to normal one to 2% growth rate, maybe a little bit more. It’s not a bad thing, but it’s certainly not the boom in goods that we saw over the past year and a half and the boom that we’ve seen services over the last six months.
AM: No, I was thinking about what Sam is saying. There’s a risk here because if the Fed pivots a little bit too early, which everyone thinks they will, and then goods start coming back online and demand still elevated, we could have another inflationary event going into 2023.
It’s like you make policy mistakes and the economy is still red hot at the moment in all sectors. As much as they want to try.
TN: To cover, it’s not red hot because people use the recession word all the time.
AM: Why?
SR: The only pushback I’ll give there is that I would say the interesting thing is that goods come back online in a pretty big way, and if you just have steady state current consumption levels, it’s not a boom. Right. It’s still going to be deflationary or disinflationary on the margin. If you don’t have a surge in the demand for goods, and it’s hard to see where you’re going to have that demand surge for goods in an elevated services environment. Right. So that could actually be the fault signal that makes the Fed back off as we go into the back half of the year.
TN: Interesting. Fantastic. Okay, great. Speaking of signals, let’s look at tech for a minute. Sam, you have the most mysterious newsletter in the US. And newsletter today talk about snaps earnings. And I put a snapshot of your newsletter on the screen looking at average revenue per user for Snap. Can you talk us through some of that? Some of the earnings work for, say, Snap and Twitter? What does that mean for tech generally?
SR: Yeah, it’s interesting. We all kind of know that tech, particularly smaller tech, the startup VC type act companies have been struggling, right? You’ve seen Layoffs, you’ve even seen the big guys. Microsoft, you’ve seen Meta, you’ve seen parts of salesforce have hiring freezes. So we know that there’s been a little bit of underlying problems with the overall tech world in terms of employment.
There are only two ways that you can really solve the problem of slowing revenue growth if you want to drop money to the bottom line, whether it’s or earnings. And that is you can lay people off and you can cut advertising spent. And so Snap and Twitter are kind of, what?
TN: PG and E? Travel and expenditure as well. Travel expenses.
SR: Well, yeah, travel and expenditures. We’ll get there because I hit that later on the night. Perfect. As you know.\
TN: Yeah.
SR: The problem with Snap and Twitter is basically what you saw was great user growth, right? Better user growth than I think anybody really was anticipating. The only issue was that they didn’t monetize it. There was nobody really backing up on the advertising front. Right. We all know that Peloton and all those guys were cutting back on ad spend, carvana basically bankrupt crap company. These guys were cutting back on ad spend, and they were the big marginal drivers of growth for those platforms.
So when you cut back on people in ads, you begin to actually be able to drop something potentially to the bottom line, or at least survive a downturn in VC spent. That played through with Snap and Twitter in a marvelous way. But then to your point on travel and entertainment, you get to the earnings of American Express, which is a great way of getting kind of a peek at upper middle and upper class spending and business spend. And those could not have been better earnings. I mean, if you’re telling me that the consumer is in a recession, it is the bottom half of the spectrum that’s in a recession, if anyone is in a recession. Those were massive earnings numbers, massive spend numbers on a year over year basis. The chart that I sent out was of the spend by bracket of age, and millennials and Gen Z are the biggest spending boost.
AM: Luxury items still are unbelievably hot right now. All the earnings are just beating all estimates.
SR: But it’s the pivot. It’s the pivot, right. Peloton all that crap that we had in Silicon Valley that was overvalued, that everybody bought and everybody thought was cool, everybody bought it. They’re already done with it. You don’t need to buy three peloton bikes, right? It’s the problem with keurig. We all remember the whole Green Mountain coffee thing. It’s the same problem, right? Once you buy it, you don’t have to buy five Turks. You don’t have to buy five Pelotons.
The ability to monetize that over time is something that I think people kind of get a little iffy with. That’s really what I think is smacking right now, and it’s smacking in a pretty real way, and it’s not going anywhere anytime soon.
TN: Okay, so we also have new ad inventory coming online in a big way with Netflix, right. So can you talk about that side of the ad inventory element a little bit?
SR: Sure. You have a ton of ad inventory, right? If you want traditional media, you can go to traditional media. NBC, CBS, whatever. If you want online, you have Facebook, you have Instagram, all part of Meta. You have TikTok. You have snapchat. We can go down the list forever.
Netflix is basically trying to save their business with the greatest dumb quote in their earnings release where they said, our great content is going to have a premium CPM. The way that we measure advertising reps, they’re amazing content. Are you kidding me? No, I mean, they’re going to be competing with Twitter and Snapchat, which is the bottom of the barrel in terms of advertising revenue.
TS: Took that model and extrapolated on it. Right. So now you have maybe they were the first, but now you have everybody else doing it, especially very independent media. Right. That is starting to gain traction.
TN: Exactly. Things like plumbing and that sort of thing. And Hulu’s done that really well as well, inserted advertisements. So the only thing worse than new Netflix content is new Disney Plus content.
SR: Unless you have kids, it’s a lifesaver.
TN: Yeah, it may be a lifesaver, but the old content is good. The new content.
AM: I don’t know, the content on Disney nowadays is kid friendly. Okay.
SR: I didn’t say it was kid friendly. I said it was a lifesaver.
TN: Yeah, but you’re right. I mean, there’s a huge amount of ad inventory and they will be competing with Netflix. They are already competing with Hulu, those sorts of guys. Is there an opportunity for somebody like Meta to buy someone like Snapchat? Would they want to do that?
SR: They tried years ago to buy Snapchat. And why would you like…
TS: Why would you buy it?
SR: Yeah, I mean, that’s the key. And I think that it’s the reason why you can have a 30 plus percent down day and call it a company that has something interesting and something that nobody’s done before. Because I’m sorry, it’s only fans, but without subscription revenue.
TS: They have no real model to make money. That’s the problem. Without subscription, no solid revenue model.
AM: I’d buy an only fans IPO all day long.
TS: I wasn’t talking about only fans, I was talking about Snapchat. No idea about ole fans. Never been on there.
TN: All right, guys, very good. Now let’s just segue to the week ahead. What are you guys looking for in the week ahead? We’ve got the fed meeting next week, right? So that’s going to be all the talk all week long. So what’s going to happen there?
AM: I think they try to get us to the bull bear line of 40 20 or 40 30 in that range and linger us there until the Fed meeting. I think Jerome Powell is pretty much his last chance to be hawkish, because I don’t think there’s not another meeting until September at that point, like, the Fed already are talking about pivoting by then. So this is probably their last chance to be real orkish.
TN: Okay. No, go ahead. Sorry.
TS: I think as far as the energy market that’s concerned, we’ll probably see oil, gas pretty much sideways for the week, just as we have been seeing. And I think I’m very interested in the metals complex the first time in a very long time. So I think we might see a slow kind of interest in that market next week.
TN: Interesting.
SR: I think it’s going to be interesting to see how the market interprets the feds forward view, honestly. We all know they’re going 75. It’s already there. It’s already priced in. I think it’s going to be very interesting to see how the fed begins to look out to September and beyond, and the market is going to begin to really price that in. And so you could see some pretty big whipsaws in the dollar. You can see some pretty big whipsaws on the long end of the curve. And equities in general, I think equities could see the most volatile week, even though it’s the most predictable Fed raise in a couple of meetings, I think you could see some incredible volatility and some really interesting outcomes.
TN: Yes. Very good. I can’t wait to watch. Guys, thanks very much for your time. Have a great weekend. And have a great weekend. Thank you.
TS, AM: Bye. Thanks.
TN: Okay. I forgot to put you on mute. I apologize, Ready?
We’ve all seen many chops in the markets, especially on the energy side, with the fuel and oil shortages. That was a little bit unexpected to people. Equity markets are struggling and there are a lot of talks this week about recession and trying to move the Fed into being more accommodative, which is 180 degrees from where we were two weeks ago.
Copper is hurting and down 28% since March. What is this telling us about metals, generally, and drivers of metals demand? Is this telling us that China – the largest buyer of industrial metals – won’t really bounce back? Does the market doubt China’s stimulus announcements?
We also discussed Europe, its slowing economy, rising unemployment, and gas shortages.
Lastly, is the Fed anchoring inflation?
Key themes:
Metals Meltdown
How badly is Europe hurting?
Fed inflation anchors
What’s ahead for next week?
This is the 24th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 1:45 Key themes for this episode 2:23 Metals meltdown – what are they telling us? 3:48 Will there be a comeback of automotive? 5:09 Does the market believe China’s promise of a stimulus? 7:25 How much is China’s manipulation be beneficial for China? 9:26 What about Japan? 12:00 Europe’s economy and inflation 15:21 Europe’s concentration risk on the sale side 19:42 Europe’s problems stem from this 20:32 Fed and anchoring inflation 25:50 What’s for the Week Ahead?
Listen to the podcast version on Spotify here:
Transcript
TN: Hi everybody, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Sam Rines and Albert Marko. Tracy is out for the long holiday weekend. Before we get started, please don’t forget to like and subscribe the video and please comment on the video. We look at them, we engage. We want to hear your feedback. Also, while you’re here, we have a promo for CI Futures. This is our markets forecasting tool. Our promotion is three months free on a twelve-month subscription. That promotion ends on July 7. So please take a look at it now and get our best promo ever.
So, key theme for this week. We’ve all seen the markets a lot of chop as we talked about. We saw a lot, especially on the energy side, kind of negative with the fuel shortages and oil shortages. I think that was probably a little bit unexpected to people. Equity markets are struggling and there’s a lot of talk this week about recession and trying to move the Fed into being more accommodative, which is 180 degrees from where we were two weeks ago. So a few things we’re talking about.
First is the metals meltdown. Second, Albert Marco, although he’s been in an undisclosed location, he has been in Europe. And we’re going to talk a little bit about how badly Europe is hurting right now. And then we’re going to look at inflation and how the Fed is potentially anchoring inflation.
So first, let’s look at the metals meltdown. If we look at copper. Copper has been a lot of buzz around copper over the last few days and copper is down 28% since March. But I think we could speak to metals more broadly. We’ve got the copper chart on the screen right now. So Albert, if you don’t mind, what are metals telling us generally about markets and the drivers of demand?
AM: Well, I mean, it’s pretty clear that the manufacturing sector across multiple industries is hurting at the moment and has taken a toll in the metals market. There just simply isn’t any demand for consumer products. There’s not going to be any demand for metals probably until the Chinese really start to stimulate.
It’s pretty clear. And then on top of that, they have pressure from the dollar that just keep on charging along trajectory to 110. So those things are really weighing on the metal market. I mean, copper specifically, like you mentioned, aluminum taken some hits just across the board.
TN: Right. So if we look at things like automotive, automotive is held up because of semiconductor supply chain issues which are working out, but automotive manufacturing slowed pretty dramatically. If we see, say, the chip issues get worked out for, say, automotive, do you expect to see more like a comeback of automotive, of car manufacturing, which will pull metal prices along?
AM: No, I don’t. And I don’t think that’s even going to be the case for the next 18 to 24 months. I mean, the auto sector is actually in a really bad shape, And it’s not specifically just because of the chips, like everyone assumes, but you have rubber shortages, you have polyurethane shortages, you have shortages across the board for the entire auto sector, for the manufacturing process. So until all of those supply chain issues get settled, there’s just no hope at the moment, which is interesting because there hasn’t been really any layoffs yet.
I know they’re artificially keeping these people on payroll and doing whatever they want to do with the shifts and manipulating that. But at some point and i’ve been arguing about this specifically the auto sector, there will be layoffs because of all this.
TN: Just for the people who don’t know. Albert is from Detroit, so he pays attention to the auto sector pretty closely, and he knows he has pretty close relationships there. So we’re talking to a man who really does kind of pay attention to what’s going on. Sam, as we see metals prices fall, we’re also seeing china become more aggressive in making statements about economic stimulus and other things. Are the metals prices right now telling us that the market doesn’t believe that china is going to put in the stimulus that they claim to be?
SR: I would say it’s a show me game with China. There’s been way too many people that have been burned way too badly, listening to the rhetoric and trying to get ahead of things on the ground, and then nothing actually happens, or they do something a little different than what they said they were going to do, and you end up with an investment profile that’s completely different.
I think that’s one of the big things to keep in mind is, yes, China is probably going to have to do something into or around the party congress this fall in terms of stimulus. They have to look at going into it. So there’s going to be some stimulus. The question is, what is it and when does it hit and what does it look like? Is it a tax cut? Because in that case, who cares, right?
It’s not going to be that big of a deal for picking up the manufacturing side in a meaningful manner. Is it going to be reopening? Right. Because if they’re sending out checks but not reopening, that’s not going to allow their manufacturing sector to get back to work, which is going to Albert’s point, going to continue to clog the supply chains for autos and auto manufacturing significantly, whether you’re us. Based manufacturer or your South Korean manufacturer, et cetera.
This is a longer term problem where I think you’re not necessarily going to have the pop and metals until people actually see the real data from either Australia or the us. Or even in Mexico. But that’s a significant amount of the auto sector assembly. You’re going to actually have to see the data before people.
TN: Right. And so what I hear about metals in China and I’ve mentioned this before, but what I’m told by people, especially in the copper sector, is that the warehouses in China are actually full, although we’re told that they’re not. They are. And words that warehouses empty out from time to time is simply to manipulate the market up. But there’s ample, say, copper and other industrial metals in warehouses in China, given the demand that the world has.
AM: Let me ask you both little question here. How much is China’s manipulation of their stimulus on and off due to them trying to force the Fed into lowering the rate hikes or putting them into a position where it’s beneficial for China overall?
TN: Sam, what do you think?
SR: I would say they definitely have a calculus instead of the ECB, instead of a certain extent the BOJ when they.. they all have to take that into account and they all have to either front run or attempt to talk their markets one way or the other. That’s why I’m saying it’s definitely part of the calculus. I don’t know how much of the fiscal side is directly related to counteracting with that and how much is directly related to keeping the people happy. I would say those are the two primary catalysts.
TN: Yeah, I think that’s right. I think any Chinese stimulus that’s going to be effective in the short term has to be cash in, say, local government accounts, people’s accounts, company’s accounts. As Sam said, that tax cuts not going to cut it, indirect payments are not going to cut it. Announcing a new rail stimulus, which they do every other year, is not going to cut it. They actually have to just churn cash out in markets. But with the US dollar and rates, I think they’re really careful right now about how quickly they devalue CNY. And I think that is one of the things that they’re being careful of. They don’t want to devalue it too quickly because Chinese exports have surged over the past six weeks. And so if they can continue to make money at the rate they have, they’ll put off the DeVal as long as they have to. But if the dollar continues to appreciate, they may have to accelerate the evaluation and they’re in a tough spot. China is not the all seeing, all knowing planner that many people think, well.
AM: Part two of that would be what about Japan? Because they devalued the Yen and they’re kind of combating whatever China is trying to try and propose and stimulus. So how does that all come into the equation?
SR: And I’ll just pop out that one of the interesting pieces to kind of throw into the puzzle is not copper sending one signal that China is maybe not going to stimulate, et cetera. But you look at Chinese Equities X, the state owned entities, and guess what? You had a plus almost 7% second quarter for those equities. So the market is sniffing something out there. There might be a little bit of a hedge of, well, if you’re not going to build a bunch of stuff, you might hand out checks, like you said. And if you hand out check, it’s going to benefit the Internet and Chinese tech companies more than it’s going to benefit the metals industry.
TN: Right. And if they want to stimulate the top echelon of Chinese society, they could just goose equities and focus on a trickle down theory, which is very anticommunist, but it’s something that they can do pretty quickly. They did it in 2015, they’ve done it at other times, and they can do that. But going back to your Japan question, Albert, it’s an interesting one because China is such a supply chain risk going forward, the uncertainty there, that Japan is selling itself as a secure alternative to China. And that’s why one of the reasons why they’re devaluing so strongly is so that it’s just a no brainer to get stuff done in Japan. Right?
AM: Yeah, of course. That’s a great explanation. It’s very concise and simplistic, and I had known this, but I wanted you guys to explain this to the viewers because it’s a critical thing that most people don’t really take into account. They always see China. China. And they ignore Japan and South Korea.
TN: Yeah, Japan and South Korea have been devaluing. It’s more depreciating than devaluing. I know there’s a nerdy difference between those two, but they’ve been pushing depreciation because they wanted to be seen as a safe alternative to China. But then you also look at Southeast Asia, places like Vietnam, other places, things in Vietnam, all those exports are done in dollars, not in dong, so they can’t really play the currency card to do values.
SR: It’s also worth remembering that Japan exports a lot of machinery to China, and so if they don’t, if they strengthen their currency while China is devaluing, that puts them in there.
TN: That’s right. Great questions, Albert. Thank you for that. Okay, let’s move on to Europe. Albert, so you’ve been there. Let’s start by looking at inflation. So we’ve got on the screen right now a comparison of inflation rates in, say, the US. Europe and China. And PPI, especially in Europe, is blistering hot. It’s 40%. And CPI, of course, is accelerated as well. It’s ten plus percent, if you believe that. I think it’s higher than that. But as you’ve been there, can you walk through some of your observations of what’s happening in Europe right now and how it’s affecting companies and the way people spend and so on?
AM: Well, from the bottom up, for the general public, that’s just pure desperation. The media just doesn’t want to cover it because it’s just bad news for every single political party out there. Inflation is running rampant. Food, it’s running rampant. And every single product they have, they’re used to high gas prices to begin with, but like the United States, there’s a certain amount where the strain is just too much for families.
I believe the UK. One out of four people were skipping meals because of food inflation prices. One out of four? That’s stunning. And that will have long term health effects down the road. But we’re talking about the year now. Europe’s manufacturing sector is an absolute shambles. Their export engine into China is just nonexistent. They haven’t built out any overseas networks into Africa or other emerging markets to be able to compete. They have no military to sit there and actually push the trade issues their way. They’re secondary. Not secondary. They’re behind Russia and China in that aspect, not to Mention The United States. So, I mean, I complain about the auto sector in the United States. The manufacturing and the auto sector in Germany is absolutely dead.
TN: Okay, I want to pull that Apart a little bit. Okay, so the manufacturing in Germany is dead or dying, largely because of concentration risk in Russian gas as a feed fuel, right, for electricity.
AM: The energy prices have skyrocketed. Corporations And Private businesses are struggling to keep up with margins to cover their costs. And the governments are just like. They’re just making things worse in Germany, I believe they’re handing out money to every single person, refugee or youth person, that think that will vote for them in the future. That makes inflation worse. I can go down the list of different things that they’re doing an error, but I don’t see how Europe pulls out of this specifically in the fall and going into 2023. I mean, their gas shortages are such a problem here right now that I can’t even fathom what the problems are going to be in Germany and Italy and France going forward.
Actually, in Germany and Austria, they’re running out of wood to heat their homes because people are stockpiling that already, and this is July. So I mean, there’s going to be some serious repercussions of Europe. And this is why I targeted Europe to be a problem, possibly for financial crisis and contagion leading back into the United States. It’s just a big problem across the board.
TN: That PPI chart is just so stunning. Now we talk about concentration risk on the supply side. Let’s look at concentration risk on the sales side. Right. Europe has really over concentrated a lot of its sales requirements in China. China has been the market for a lot of European companies. Right. And outsource manufacturing. So they’re as concentrated in China or more concentrated in China than many US companies are, first of all.
AM: By far.
TN: And they’re more dependent on China as a sales market in many cases, than many US companies are, right?
AM: Yeah. This is the problem that I’ve had with Germany specifically. I want to pick on Germany because they are economic. That’s just the fact of the matter. But the Germans, they go out and they see China as a huge market, and they start pushing out their high tech trains and their windmill technology and so on and so forth. Well, the Chinese, all they did was order that stuff, buy it, piece it apart, copy it, and then they sell that to the Africans for one fourth of the cost of the Germans could possibly sell it to the Africans.
So not only is Germany losing out long term with Chinese trade in the market, because that’s stagnating, but now they have no chance to go into the African market because it’s flooded with Chinese parts.
TN: Sure.
AM: They made such critical errors for the years, and they were just so drunk on cheap money out of China that now for the next decade or two, they’re going to have problems.
TN: Yeah, but my overarching points are that Europe is over concentrated on the energy side with Russia, and they’re over concentrated on the manufacturing and then market side with China. And aside from that, they’re kind of out of bullets. They don’t have a lot. And I think that is a lot of the basis for the reason we’re seeing PPI just explode in Europe.
AM: Yes, of course. The only country that even has the only country… The French are smart. I don’t want to hear anything from the Americans be like, Oh, the French are weak and put up the white flag on the Eiffel Tower, whatever these jokes are. But the French have nuclear power and they have food security for their entire nation.
Two of the biggest problems right now in Europe, France has a grasp on. The rest of Europe is total chaos. But those two issues in France are absolutely secure, and the French are smart and they’re looking for long term gains to push the Germans out of the way and take over the EU, and that will actually end up happening. But in the near term, inflation is almost worse there than it is here. Their housing market is mainly cash based, so it’s not as bad of a bubble, but everything else.
TN: So you don’t see much let up in Europe for the rest of 22. You think it continues to be pretty dire in Europe for the rest of 22?
AM: Oh, absolutely. I think the only reason that it’s even somewhat stable at the moment is the tour season has kicked up, and then that’s created other problems where you’re going to cancel flights and overbooked hotels.
TN: Right. Sam, do you have a similar view on Europe at least for the remainder of the year? It continues to be really difficult for the remainder of the year.
SR: Oh, yeah. And the only other place that I would point out is Italy. I mean, Italy is in a pretty rough spot here too. Even with Mario Draghi at the helm, they’re still in a pretty tight spot, and part of it is natural gas and pretty tight there. But the other part is that when it took Legarde about 35 seconds of saying, we’re going to tighten up a little bit here, from negative rates to maybe zero to almost blow up the bond market in the BBB market, it was insane what was going on, and it was a very small move, and you still had yields blow out across the Italian government deck. It’s one of those situations where things move very quickly, things break very quickly, and it doesn’t have a whole lot of bullets in the site.
TN: It’s not like they can go to their version of the permian and drill again. Just to bring this back to something really basic. A lot of Europe’s problem stems from the fact that it has a very old population. So they don’t have young, productive people to keep up with the commitments to very old people in very simple sense. Does that make sense? Is that right?
AM: Oh, absolutely. Looking at just the Italian demographic, all those young Italian guys have bolted for the UK, London, and New York and Miami. They’re gone.
TN: So until they either have a lot of babies, automate, or have a lot of new immigrants, Europe continues to have the same issue?
AM: 100%.
TN: Okay, good.
SR: Demographics don’t change quickly.
TN: No, they don’t.
SR: It’s about 18 years.
TN: That’s right. Okay, so let’s move on to the Fed and inflation anchoring. Sam, you had a great piece in your newsletter, which I’ve referenced many times, and people always ask me how they get their hands on it. So it’s one of the most exclusive newsletters you can get in America. But you had a great piece on Fed Anchoring. Now, I put a chart up on five year inflation expectations. The only reason I put this up is because they really peaked back in late February. Okay? And after that, the five year inflation has really broken down a lot, almost to normal ranges. Okay. So I know you’re looking shorter term, but can you walk us through a little bit about the Fed Anchoring inflation and what you expect? Kind of the near term impact?
SR: Sure. So kind of the point of what I was trying to get across. There’s really two things that you needed anchored for markets to begin to find some footing in the US. At least. And that was you needed to have inflation expectations begin to become anchored. And I think we’ve seen that. Right. You see that chart and it peaked in March, give or take, and has fallen back towards call it normal ranges, if not slightly below what you would expect in this type of environment. That makes sense, right?
In five years, we’re not going to have this type of solution. I’ll be willing to accept that no problem unless we have another flare up somewhere. But I think that’s a fairly reasonable thing to do. But also you have to have the expectations for the Fed anchored as well, because you had two unanchorings that were really happening side by side that was highly problematic for markets.
One, you had inflation unanchoring very quickly, and that’s problematic for markets generally. But you also have the Fed expectations becoming unanchored, and the market was pushing, pushing, pushing for whatever it could get in terms of hikes. Right. It was 75-75-50-50-50. Adding an item to somewhere around four and a quarter percent at the peak. And as of today, you’re back to having the terminal rates or where the Fed raises interest rates to happen by December of this year, and it’s 3.25% 3.5%, and then it cuts next year, is the expectation.
So you’ve begun to have, call it a pricing that’s similar to 1994 hike and then cut style of Fed. That is pretty interesting. That’s a pretty anchored expectation for the Fed. It’s a reasonable expectation of the towards neutral. You’re probably somewhat towards real rates at that point being somewhat positive just because you have inflation of about 3.2 and you have a Fed funds rate a little bit above that. nThat’s why I think that’s a fairly reasonable place for it on the inflation expectations front, that’s largely specifically going to call it close in inflation expectations under a year.
Those are largely call it oil and gasolated and groceries.
TN: Very much energy.
SR: Yeah, this is US. This is not Europe. But as long as in the US, you don’t continue to have those rise in a dramatic fashion, people tend to stop extrapolating. Those forward in their inflation expectations either stabilized or declined back to what they call it normality. And that normality would be somewhere between two and a half and two so that we could spot.
TN: So if gas prices, gasoline prices in the US stopped at, say, 490 or whatever they’re selling at now as a national average, let’s say we plateaued there for three or four months, people would adjust and it would be livable?
SR: It would be livable, yeah, it would be livable. So long as the not accelerating higher.
TN: As long as what, sorry?
SR: As long as they’re not accelerating higher.
AM: Yeah, Sam is right. The risk is as long as they stabilize, I completely agree with Sam. We have one hurricane in the Gulf of Mexico. We have a problem, like a real problem, looking at like $5.50 to $6 gas, and then inflation becomes absolutely just insane.
Going back to the inflation number that they printed out last time, they’re using this ridiculous 5% for housing and shelter and the CPI equation. It’s a little bit hard for me to swallow, but if they can do some kind of magic and keep inflation somewhat steady over the next few months I agree with Sam.
TN: It’s kind of a short at that point.
SR: The interesting part about that is you create an interesting duality in calling risk markets, where the US risk market looks very attractive. If you’ve peaked on Fed pricing, if you peaked on the PE killing. PEs are down 35% year over year. That’s a bigger drop than we’ve seen for several corrections.
You can have a really interesting US risk market going into the back half of the year across markets. The curve, on the other hand, that could be two spends to get very interested very quickly.
TN: Very good. Okay, good guys. What are we looking for for the week ahead? We’ve got a holiday here on Monday. We’ve started to see, say, gasoline prices perk back up in markets on Friday. Are we going to start to see potentially in the near term gas prices rise post July 4?
AM: I think so. One of the things that’s not being said, I don’t think we touched upon, I think last time we did, but the Saudis come in with lower than expected barrels per day, lower capacity, and this must have been stemmed from McCrone and Biden trying to price cap them. Come on, you do that to us, we’re going to do this to you. It’s a game at this point. And the Russians are certainly pulling strings of the Saudis and the Iranians to make this a little bit more chaotic for the US. So I think gas does go does start to trend a little bit higher over the next two weeks.
You’re certainly going to hear noise from people with July 4 prices for barbecues coming up. So that’s going to be all over the news.
TN: Okay, interesting. Sam, what are you looking for during the week ahead?
SR: To build on what Albert was talking about? I think it’s really interesting that spare capacity from OPEC just doesn’t appear to be there whatsoever. But at the same time, you’re also probably going to have at least somewhat of a call, a permanent impairment of Russian oil fields if you continue to have sanctions, that puts a floor long term in global energy prices, period. And if you don’t have US service firms keeping those fields going, we’ve seen what happens when you send Chinese and Russian oil services firms to Venezuela just before you destroy the oil industry.
So look forward to that. On the other side, I’m really looking forward to the conversations that a bunch of millennials have to have with their parents, the crypto markets this July 4.
TN: You are a millennial.
SR: But I am looking forward to some glorious Twitter cons that Tuesday.
TN: Fantastic. Okay, guys, thanks very much. Have a great holiday weekend and have a great weekend.
With inflation being the main concern in global markets, are central banks reacting quick enough to hike rates to contain inflation? And how will tech stocks perform amidst the volatility that we have seen year to date so far? Tony Nash, CEO of Complete Intelligence shares his insights with us.
Show Notes
KSC: Good morning. This is BFM 89, five minutes past seven in the morning on 28th April, 2022. I am Khoo Hsu Chuang with Wong Shou Ning and Tan Chen Li. In the meantime, let’s recap how global markets and the It yesterday.
WSN: US Market down 0.2%, SMP 500 up .2% Nasdaq close flat Asian Market Nikay down 1.3%, Hong Kong up .6% Shanghai Composite up 2.5%, SDI closed flat FBM KLCI down .7% pretty interesting trend over there. You can see I think the Shanghai site went up a bit because of the possibility of maybe cases eating in China.
KSC: Yes, foreclosures and more openings. So to join us on the line for some analysis on what’s moving markets, we now turn to Tony Nash, the chief executive of Complete Intelligence. Tony, good morning. Now, let’s start with tech stocks, and they’ve had a bit of a bumpy ride the first quarter and into the second quarter. What’s the situation report in terms of where that risk on asset class is concerned?
TN: Well, check so far in the earnings season hasn’t performed well except in the last few hours when Facebook announced their earnings. So Tech’s really disappointed. Up until about two or 3 hours ago, Facebook announced that ads to their users, their earnings were up and so on and so forth. So after hours, they’ve popped by $30 a share or something like that. And Qualcomm also after hours reported really good earnings. So what we saw early in the earnings season with tech down, hopefully Facebook and Qualcomm have changed things a little bit. But that’s not to say we’re out of this. Just because we’ve had a couple, it doesn’t necessarily mean that we’re out of the woods with tech. So Pinterest reported and they were negative. And so we’re really separating the kind of the viable tech businesses from those that really aren’t viable and who are really struggling. Part of the problem with tech also is that we have a lot of ad space coming online now with Twitter now sorting themselves out and with other tech firms having new ad space like Netflix is adding ad space and ad based subscriptions. So we’re going to see a glut of ad space going forward, which will challenge some of these technology guys in, say, two to four quarters time.
TCL: So, Tony, how do we know what is good and what is not such a good tech stock? What differentiates it? Is it going to be margins? Is it going to be market share? What is it management?
TN: Yeah, I think people are looking at earnings. People are looking for, say, online companies. They’re looking at users. So let’s compare, say, Netflix and Facebook. Netflix had a net loss of users. Facebook had a net out of users. Netflix’s earnings went down. Facebook earnings went up. Netflix versus Facebook, their earnings went up. People are really looking at what is the core business of that tech firm. And are they succeeding at that. So you can’t necessarily make a broad sectoral play. Right now, markets are really in flux as interest rates rise and money supply is kind of reined in. So you really have to understand the companies and you have to understand what the advantages and how they’ll play, at least over the next quarter, if not more kind of medium term.
KSC: Yeah. Tony talked about earnings. Right. What’s earnings season been like so far? It appears to be a mixed bike. Bad at Boeing. Okay. At Visa. Robin Hood is laying off people. What’s your take on earning season so far?
TN: It’s very mixed. And I think you’re seeing the companies that are well run versus the companies that have been just kind of posting. So during the Pandemic, we saw the Fed buying a lot of these Fang names and Tesla and other tech names. So it was pretty easy for tech firms to just kind of move along with that wave and not really get their management in place and not actually manage the business and the operations. These ones like Qualcomm and Facebook that are reporting well, they’re getting their operations in place regardless of what’s happening in the external environment. The guys like Pinterest and some of these other guys, they’re not managing well and it’s showing in their earnings.
WSN: Let’s talk about inflation. As we know, this is the key concern of the global markets. So are central banks around the world a little too late? Too late already in trying to hike rates?
TN: Yes. Central banks are always too late because nobody he wants them to be the buzzkill on a Bull market. And so if they had come in earlier, although it would have been appropriate, they would have been blamed for killing the Bull market. So the pressure on a central banker is such that they really don’t want to be blamed for killing it. Now they have to come in for a lot of different reasons and raise rates. So I would say they’re definitely too late. They’re always too late. Is it too little? That remains to be seen. We expect a 50 basis point hike in May and another 50 basis point hike in June. That would really recalibrate some expectations. And we’ll have to see what happens in markets there. When you look at the ECB, they can’t raise at that rate. They’re stuck in a really bad place with energy and food prices. So they’ll move much more slowly.
TCL: And I guess the same for the bank of Japan that’s supposed to be meeting in the next two days. You don’t expect them to move? I mean, look at the yen. It’s like two decades low. Do you think this will continue?
TN: Yeah. BOJ and ECB have a lot of similar issues, and they’re really kind of pedging into a corner. They can either support their bond markets or they can support their currencies. They’re in that bad of a position. They can’t do both so both of them have to support their bond markets right now. They can’t mind their currencies. Now, when we look at the PBOC really has to just drop helicopter cash across China right now. They have to get incredibly aggressive to support the Chinese economy. If they don’t and if China doesn’t open soon, there are major problems in China. So the PVoC has to be very aggressive going forward.
KSC: Yeah. Just think of the PVC. Tony, do you expect that the Chinese government maintains its very strict zero covered policy, especially since in the context of a rapidly declining local economy.
TN: think China cannot stay closed. Okay. The rest of the world has come to a position where COVID is endemic. That’s the view of the governments. People realize that they have to have an active economy to feed their people. China is making these very active, say, policy changes for a number of reasons. But what’s happening is it’s starting to really bite. They’re starting to impoverish their people because of food prices, because of fuel prices, because there are no exports and so on and so forth. So the Chinese government is in a really sticky position. And if they don’t change policies soon, there will be major difficulties both politically and economically in China.
KSC: Yeah. And lastly, Tony, just want to get your view in terms of rushes and systems are being paid in rubles with its energy supplies. How do you read that move in the context of it being taken off the Swift financial system? It’s freezing of dollar assets in the context of the US dollars utility in the global economy.
TN: Yeah. I think look, Russia, this is a negotiating position for them, and it’s something that they’re insistent on. They know that countries like Germany are way too dependent on Russian oil and gas. So they know that Germany will pay in rubles if they’re pushed to do it. They don’t have a choice. So Russia is right now showing Europe who is boss, and Europe has unfortunately put themselves in this position. Poland hasn’t worked on diversifying their energy of late, and a lot of their energy mix comes from domestically mined coal. But for oil and gas, they’ve been working feverishly on getting alternate supplies, but other parts of Europe have not. And also they’re much more dependent on Russian oil and gas. So Putin is flexing. They have to kind of count out to him and they have to do what he says because he’s their main source.
KSC: Absolutely. Okay. Tony, thank you so much for your time. That was fantastic, as always. That was Tony Nash, complete intelligence chief executive, talking to us about markets. And just in the context of China’s insistence on staying closed, I think if the Chinese government doesn’t about turn even in the slightest, it might just be the biggest fill up for capital markets going forward.
TCL: Well, we’ll find out later at 730. Right. Because you’re going to be talking to Gary, he’s an economist and he’s going to be telling us what’s the situation like on the ground, whether the GDP target of 5.5% is going to be achievable at all, because it looks like the lockdown might even extend all the way to Beijing.
KSC: Yes. And of course, our Foxconn’s factory is bigger supply to Apple also is close in Kunshan, two of them. So global repercussions. Let’s turn to Facebook, now known as Meta, which did report earnings before they reported the shares actually did soon, considerably on the expectation that they would report a bad set of numbers. But actually, Facebook Meta surprised.
TCL: I think there was a lot of negative news even before this. And they were already receiving regulatory headwinds from the EU with regards to whether their dominance questions of their advertising, questions of how much are they involved in our daily lives. But I think the results were better than expected. Yeah.
WSN: So I think adding on to what Shannon was saying, there was also a concern about user base that’s not growing for the first time. The revenue that came out yesterday, it was reported their shares jumped 15% because their revenue jumped 6.6% to $27.9 billion. And this is the first time in Facebook’s ten year history as a public company that they landed in a single digit growth. And if you look at it, is that better?
TCL: Good.
WSN: Well, slower, but still growth.
KSC: Yeah. Because with this kind of platform, it’s all about Dows and Miles. Right. Daily active users and monthly active users now.
TCL: And what they found is that people have been spending a lot of time. So maybe the number of users hasn’t increased as much as they should, but the duration in which you spend on Facebook has increased. So you’re looking at maybe people spending as much as an hour versus other social media platforms where, yes, you might have an increase in users, but the duration is actually shorter. So that’s the justification as to why the share price has bounced today. And this is what Meta is telling the analyst community out there.
KSC: And we saw Snap also report a good set of numbers, surprisingly. Right. So actually doubling daily active users beat expectations, one point 96 billion versus one point 94. And Mouse monthly active use is two point 94 billion. Missed expectations of two point 95. So not a big mess. But actually they did also guide for revenue that was weak because of three things. Right. First of all, the military situation in the Ukraine. The second one, of course, the Apple Privacy changes, which made it more difficult to target ads. And of course, then the supply chain affecting advertisers now very quickly Spotify.
TCL: How many of us have subscriptions? Me, yes, me, I. But the share price fell more than 12% despite reporting first quarter earnings that beat both top and bottom line. Looks like markets still not happy with that number. I think exiting Russian market led to a loss of 1.5 million subscribers. Although monthly active users went up by 19% year on year to 422,000,000 users I think ad supported revenue did also grow 31% but I think basically ending subscriber subscriber base like Netflix seems to have come under pressure in the last few months.
KSC: Yeah sign of the Malays affecting streaming sites. Stay tuned. BFM 89 nine
US bond prices are pointing to an oncoming recession, raising the question of whether the Fed stays the course on its path to rate normalcy. Tony Nash, CEO, Complete Intelligence, discusses.
SM: BFM 89 Nine. Good morning. You’re listening to the Morning Run. It’s 7:05 A.M. On Thursday, the 31 March, looking rather cloudy outside our Studios this morning. If you’re heading on your way to work, make sure to drive safe. First, let’s recap how global markets closed yesterday.
KHC: US markets down was down. .2% S&P 500 down .6% Nasdaq down 1.2%. Asian markets, Nikkei down zero 8%. Hong Kong’s up 1.4%. Shanghai Composite up 2%. STI up 3%. Fbm KLCI close flat.
SM: So fairly red on the board today. And for some thoughts on where international markets are headed, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Always good to have you. Now markets are speculating that the brief inversion of the two over ten year US Treasury yields this week is a sign of an oncoming recession. So do you agree with this? And if not, what might explain these brief periods of inverting or inversion?
TN: It could be a sign. Shazana, I think we have to see a more consistent and meaningful inversion to say that we’re definitely headed into a recession. So what this means is that what a yield curve inversion means is that people have to pay more for shorter duration money. So right now, if you look at, say, the five year treasury, the yield is 2.4% and the ten year is around two point 35%. So it’s cheaper to borrow longer term money, which is really weird. It could have a lot of reasons. Maybe companies need money more. They’re short on cash and they’re more willing to pay for it. So that would be a sign of a recession. So if we see a more consistent yield driven version, we see the two and the five years continue to be higher rates, then we need to be more concerned. For now, there’s a lot of speculation, but we just don’t necessarily see the certainty of it yet.
TCL: Tony, markets are wondering whether the Fed is going to push ahead with this rate policy on tightening because this volatility both in share markets and bond markets is a bit muddling for the analysts and the fund managers to make sense of. What’s your point of view?
TN: Yeah, I think at least for the last few months the Fed has been fairly consistent. But of course, we’ve had exogenous type of events, the war between Russia and Ukraine being the biggest, and that has had an impact on raw materials costs. So food in the case of Ukraine with wheat and sunflower oil and all this other stuff and energy with Russia. So it doesn’t matter what a central bank does necessarily. They can’t push down the price of oil through monetary policy. What they can do is demand destruction. And this is why we think that they’re going to lead with some fairly sizable 50 basis point rises, say in May for sure, and possibly in June. I don’t know if you saw that today. JPmorgan was out with a note saying that there will be 50 basis point rises in both May and June, which would be a pretty sharp rise in interest rates. The good news is we see a sharp rise initially, but then they’ll only do that for a short period of time to cut off demand pretty quickly and hopefully cut down on some of the demand for petrol and oil and some of these other materials.
TCL: Okay. So your sense is that the Fed and JPowell will stay the cost and increase rates, but what’s happening in Japan is quite the opposite. They’re actually showing quite discernible decoupling because they’re staying with zero interest rates. I think the ten year yield on the JGBs is about zero point 25%. What does that spell? Because the Japanese yen is now down at a six minute seven year low. Obviously, there’s a big sense of what’s going on here. What’s your point of view?
TN: J I think yesterday announced that they would have unlimited purchases of Japanese government bonds. So what they’re doing through that is it’s an open door for them to insert currency. It’s kind of a backdoor to growing their money supply, which leads to evaluation of the yen. And so Japan is in a place right now where they want to grow their export sector. They do that through yen evaluation. The competition between, say, Japan, China, Korea is there. China’s exports keep growing despite a strong Chinese Yuan Japan. There are other central banks. It’s partly that reason, meaning the ECB tightening and the Fed tightening, but it’s also competitiveness of Japan of their exports. So there are a number of reasons at play there.
KHC: So you were saying that earlier that maybe we will see 50 basis points increase in May or June. How do you think the share prices of US banks and financial institutions typically would do in this kind of environment, and would they be ultimate winners?
TN: They could be, I guess the only dilemma there would be the impact on mortgage. So if the Fed raises rates really quickly and it has an impact on mortgage demand and mortgage defaults, then that could be a real problem for banks. But short of that, I think they’re probably in a decent place to do fairly well. Of course, that’s company specific and all that sort of thing. But I think financial services in general should do fairly well on a relative basis.
TCL: Yeah. Tony, if it goes ahead as follows. Right. And Japan does not increase rates like the US is, it just extends its debt to GDP ratio. I think Japan is now 255% to GDP. I think the US is well above 100%. That’s quite disconcerting. What happens? How does it all end? Because it’s quite clear that Japan cannot raise rates because it just cannot fall into recession.
TN: Well, the problem with Japan raising rates is their population. And you all know this story, but they can’t necessarily raise productivity without automation. So they have to automate to be able to raise their productivity, to be able to raise their rate of growth. So that’s the foundational problem Japan have now with the BOJ buying with their JGB purchases, they’re actually buying the debt that the Japanese Treasury creates. Okay. So it’s this circular environment where the Japanese Treasury is creating debt to fund their government, and the BOJ is buying that debt basically out of thin air. They’re retiring. Okay. So Japan is in a really strange situation where it’s creating debt and then it’s buying it and retiring it. And this is a little bit of modern monetary theory, which is a long, long discussion. But Japan is in a very strange place right now.
SM: Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that are moving markets at the moment. And in the conversation there with a look at Japan and just the curious situation that it finds itself in amid all these economic and geopolitical pressures happening in the world.
TCL: Yeah, it’s really weird, right? The Japanese are so much in debt and they can’t get out of it. They’re creating these debts and they’re buying back this debt. It’s quite insane. But America does the same thing with their bond buying program until this year. Right. And that they haven’t even significantly cut that program. It’s really weird because what happens then for the US dollar? What happens to the Japanese yen down the line when your paper currency is near as meaningless? Right. It’s not banked by anything. It’s just being printed every day Willy nilly. It’s really weird.
SM: So all eyes are, of course, on the Fed, I guess, the most powerful central bank in the world, and how much it’s going to raise rates when it’s actually going to start or stop its QE in since quantitative easing, opposite of that. Somebody tell me what it means. Qt. There we go. And when they start reducing, that’s something that everyone’s watching very closely. Let’s take a look at some of the international headlines that have caught our eye. We see something coming out of Shanghai. Volkswagen said yesterday that it would partly shut down production at its factory in Shanghai because the lack of key components indicating further how a resurgence of the Omikan variant has disrupted the Chinese economy and global supply chains. The Shanghai factory operated in a joint venture with SAIC of China, and it’s one of Volkswagen’s largest facilities. It shut down for two days in mid March, but reopened now. It looks like it’s going to have to shut down again.
KHC: Yes. And the company also gave indication they didn’t give actually any indication on when normal production will resume. But China is booked Vegas largest market in the essential source of sales and profit. So the country is in the midst of the worst outbreak since 2020. And so that should prompt the government to impose lockdowns and restrictions. And even car maker like Tesla is also having a large factory in Shanghai also have to suspend production because of this strict covet policies. And so voice mechanics, they’re actually having a lot of shortages and slowdowns in other markets as well.
SM: So it’s really the twin it’s the twin issues, right? It’s the pandemic on one hand and then it’s also the geopolitical events in Ukraine that’s really affecting it’s, leading to a shortage of auto parts. So all this comes together and it’s not great for car makers in Shanghai at the moment. Turning our attention to another headline, if we look over at Russia, Russia is going to lift the short selling ban on local equities later today. And this is actually removing one of the measures that helped limit the declines in the stock market. After a long, record long shutdown, the bank of Russia also said equities trading hours will be expanded from a shortened four hour session to the regular schedule of 950 to 650 P. M. Moscow time. So I guess they’re trying to get back to normal but how we see that impact the stock market is still, I think, an open question. Yeah.
KHC: And since the stock market has since that stock actually gained 1.7% and the daily move also has been limited. Prior to the resumption of trading, the Russian government actually took measures including preventing foreigners from exiting local equities and banning short selling and to avoid the repeat of 33% slump scene in the first day of the Ukraine invasion last month.
TCL: Yeah, this whole Russia Ukraine invasion is set off a domino effect of domino effect quite catastrophic. Or repercussions manufacturing in capital markets in currencies. How does it all end?
SM: We don’t know. We don’t know the end to that story. And how long 717 in the morning. Stay tuned to BFM 89.9%.
This week, we saw commodities skyrocket then drop off. We saw crude oil hit levels not seen since 2008, with gasoline and home heating prices on everyone’s minds. The nickel market broke the LME. Chinese tech and real estate bloodbath. And – despite all of this – Janet Yellen assured us there will be no recession in the US. Quite a week.
As we said last week:
– Tracy called for commodity price volatility – across sectors
– Downside bias in equities with high volatility. Albert predicted 4200-4250 and pretty much nailed it.
– Sam said a Fed rate rise would become boring and talk of QT would disappear.
This episode we talked about mostly the energy commodities with the continuing Russia-Ukraine conflict. Can the US use other alternatives like the West African oil to replace Russian oil? What are the politics around Venezuelan oil and why is it the same as getting Russian oil?How about uranium — and can the US produce it and will the conflict affect rare earths? Is this war the reason for the US’s inflation? How will inflation actually play with voters in this year’s US election? Lastly, what’s happening in Chinese tech and real estate and why there’s a bloodbath and for how long will this continue?
This is the tenth 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.
TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I appreciate if you could like and subscribe to our YouTube channel. And also please know that we have a special offer for Week Ahead viewers for CI Futures, which is our market data and forecast platform. CI Futures has about 800 assets across commodities, currencies and equity indices and a couple thousand economic variables. We track our error. We have very low error rates. So we’re offering CI Futures to Week Ahead viewers at a $50 a month promotion. You can see the URL right now. It’s completeintel.com/weekaheadpromo. That’s a 90% off of our usual price. So thanks for that.
So these week, guys, we saw commodities skyrocket and then drop off. We saw crude oil hit levels not seen since 2008. With gasoline and home heating prices really on everyone’s minds. The nickel market broke the LME, Chinese tech and real estate. We saw a blood bath there. And despite all of this, Janet yelling assured of us that there will be no recession in the US. So it was quite a week.
So let’s look at last week. Tracy called for commodity price volatility across sectors. So it wasn’t just an oil call, it was across sectors. And we saw that in spades. We talked about a downside bias in equities and high volatility. Albert predicted a 4242 50 range, and he pretty much nailed that. And then Sam said that a Fed rate rise would become pretty boring and talk of QT would kind of disappear. And we’ve really seen that happen over the past week. So, well done, guys. I think we need to really focus on inflation this week. Inflation and quantity prices are on everyone’s mind. Energy is the first kind of priority, but it’s really come across, like we said, nickel and other things.
So, Tracy, let’s start there. We have a viewer question from At Anton Fernandez, Russian oil, if you don’t mind helping us understand the environment for Russian oil and what’s happening there and some of the alternatives, which we’ve covered a little bit before, but also West Africa. Is West Africa viable within that? So if you don’t mind talking to us a little bit about what’s happening in the crude market and also help us with a little bit of understanding of the context of West Africa.
TS: Yeah. So if we look at the crude market in general, what we have been seeing, we’ve seen sanctions from Canada, which is basically political. They haven’t bought anything since 2019. We also saw Australia sanctioned oil, but they had only bought a million barrels over the last year. It’s nothing. The US only 600,000 bpd. That is nothing. And UK is going to take a year to get off oil because it’s 11% of their imports as opposed to 2% of our imports. That said, what we are seeing in this market is a lot of self sanctioning. Right.
So we’re saying we have nine Afromax Russian oil tankers basically sitting aisle because they can’t get insurance and nobody wants to pick up oil right from them. Actually, what is most surprising right now, I have to say, is that looking at Asian buyers, everybody thought that Asian buyers because it would be offered at such a discount, they would be buying this stuff up like crazy. But there was just an auction for SoKo, which is a very popular grade with South Korea, China, Singapore and Hawaii, and there was literally zero bids.
TN: Really? Wow.
TS: The next auction that we need to be looking for is ESPO, which is the most popular grade for China refiners. But if we see a zero bid there, that would be indicative of saying that we’re taking a lot of brush and barrels.
TN: Chinese we’re not seeing any interest there, at least so far.
TS: Right. Which is quite incredible because the Chinese have always decided to be apolitical. Right. And they don’t recognize Unilateral sanctions and they have stressed that. So whatever sanctions that the west has, China says we don’t care about that. We saw that with Iran as well.
TN: Right.
TS: But it’s pretty incredible to see this particular auction go at zero bid. Right. In regards to looking at West Africa, I’ve been talking about this since 2020. Niama is a very interesting place. There’s been a lot of offshore activity there. And so I think that is a place to be looking for. The problem is that looking at offshore projects, they take it’s a seven to ten year timeline, as opposed to something like Shell, which is six months to 18 months. But yes, there’s definitely opportunity.
TN: So is West African crew substitutional with Russian crude?
TS: No, it is not.
TN: Okay. So is it lighter, that sort of thing?
TS: It’s lighter. It’s lighter crude oil, what we’re looking at right now. And this is exactly why the US went to Venezuela and said, we’ll be willing to lift sanctions with you as long as you only sell us oil.
TN: Right.
TS: And the funny thing is that they have a very good relationship with Russia. The problem with this sort of relationship is that we could inadvertently be buying from Venezuela that is actually Russian oil.
TN: Sure. Exactly. So it’s an interesting point on Venezuela. Albert, what are the politics around that we just pick up the phone. Does Lincoln just have a conversation with Venezuela? We send a deputy sect down there, do a deal. How does that work? And is that palatable?
AM: No, it’s not palatable. It’s an absolute joke. Like Tracy said, the Russians have their tentacles all over Venezuelan oil, that you would be self sanctioning yourself from Russian oil globally, but then buying from Venezuela, which is going to be mixed because everybody in the industry knows that if you want to mix oil, you do it in the Caribbean, especially from sanctioned oil from overseas. So it’s not palatable. It’s a joke. I don’t understand what they’re trying to do. It’s just a Wally world at this point.
TN: I guess the thing that I’m continually astounded by is the diplomatic actions of the US administration from Anchorage through this week with Venezuela. They just seem to be tripping all over themselves. What am I missing? Like they just seem to be eroding credibility by the day. Is that fair to say?
AM: It’s more than fair. They’re throwing spaghetti at the wall and seeing what sticks based only upon their little echo chamber of ideology. And it’s extremely naive ideology when it comes to geopolitics or what they’re doing right now.
You can try to erase Russia and go play and then think that you can go to Iran and cut a deal with Iran, not understanding that Russia is going to sabotage that deal. Right. Like they did just today.
TN: Tight diplomatically. While we’re on this this week, the headline said that the UAE and Saudi declined having talks with Joe Biden this week. Is that true? Is the headline the reality of it? And from the time Biden came into office, he was not friendly to Saudi Arabia. So is this payback from that?
TS: No, I don’t think so. Sorry.
AM: Actually, I think it is that it is payback because you have the Saudis and the UAE that have security concerns with the Houthis and the Iranians. And if you’re sitting there approaching the Iranians playing all nice with them, what do you think MBS is going to do?
TS: I agree with Albert on that respect. I just want to interject that the OPEC + Alliance has mainly tried to stay apolitical. Right. So just because the United States says OPEC produce this much more, Saudi Arabia and UAE, which are both the producers that can produce more than the rest, had come out this week and said no, we’re in this alliance and this is how it is, which is totally understandable.
AM: Yeah, but Tracy, but the problem is OPEC saying that is one thing but not taking his call.
TS: No, I agree with you. I agree with you that we have burned bridges. I’m not disagreeing with you here whatsoever. I’m just taking a different kind of look at this.
TN: Sam, what’s your view on that? I’m not hearing you.
SR: Can you hear me now?
TN: Yes, sir.
SR: I would say the naivety of believing that you’re going to have a JCPOA deal or you’re going to be able to have some sort of comeback in terms of Venezuela. So you add the two of those together and who cares relative to what you need to replace Richmond Oil? I mean, it would be great and fine, whatever, but it’s nowhere near enough simply. Right. But it’s also a political naivety to believe that you’re going to have that type of dialogue and you’re going to have it quickly.
TN: Right.
SR: On the front of Saudi and UAE, I would say it is both an OPEC Plus. We’re not going to blow this up before it blows up on its own from the call it the allies of OPEC. Plus.
It’s also the UAE and Saudi is saying, remember, you want to be friends with us, US.
TN: Yeah.
SR: Don’t pretend you don’t want to be.
TN: Right.
SR: So I would say it’s politics in the best possible way on that front. And on Iran, JCPOA, and Venezuela, it was wishful thinking to think that the Russians were going to say no on both fronts.
TN: Well, and the Chinese. Right. I think there are a number of Venezuela has relationships with both Russia and China.
TS: That’s all I was saying is that OPEC is not going to give up that plus alliance. They’re going to try to stay apolitical. Right. Whatsoever. Do I think that the United States is pushing OPEC to Russia and China? Absolutely. Do you see the huge deal that Saudi Arabia made today? Absolutely. Right.
So they’re looking at investing further into China because they are being pushed away from the United States. So agree on that aspect. But I’m just trying to say that they do try to stay apolitical. If you look at the history of OPEC, Iran and Saudi Arabia have been able to subsist cohesively in the OPEC alliance, regardless of the years of them being enemies and having proxy wars against each other. That’s all I’m saying.
TN: Okay. Let’s move on to the next thing. There are a couple of questions about commodities, Tracy, and let’s just cover these really quickly. We have a question about uranium from @JSchwarz91. Will the US ban or will Russia restrict its uranium and could the US actually start producing uranium on its own? Is that a possibility?
TS: The US won’t restrict uranium. It hasn’t restricted uranium because we actually buy a significant amount of uranium from them. It’s easy to say we can skip 600 barrels per day of oil, but not as easy to do with uranium. We’ve stayed away from that.
Will Russia decide to not sell to us? Again, it’s about money, so probably not unless we really push a button in there. Can we produce that amount of uranium in the United States? Absolutely not.
TN: Interesting. Okay. Let’s also move on to rare Earth. So we have a question from @snyderkr0822. He’s asking about the impact of Russia and Ukraine on the availability of rare earths. Is that a factor or is rare Earth more of a China thing?
TS: That’s more of a China thing. We all have to watch to see if China sides with Russia and see how that market ends up. But really, they’re the largest producer in the world, and that’s who we are largely dependent on for rare earths.
TN: Okay, great. Thanks for that.
Now let’s move on to kind of this war driven inflation narrative that we’ve seen over the past a couple of weeks. We had February inflation come out today, and I feel almost as if we’re being tested as a trial balloon for an inflation narrative that inflation is kind of Russia’s fault.
So, Sam, can you talk us through some of the economics of this? Is inflation a new thing like did it just happened two weeks ago?
SR: No. So the inflation narrative going forward, there’s some validity to Russia being the reasoning behind an increase over a base case. Whatever you want to decide that base case is. But in February, January. December and November, those are not in any way related to Russia generally.
What’s interesting to me is how many people are kind of forgetting that, we kind of had a little bit of a log jam breakup in supply chains beginning to occur. It looks like we were going to get a little bit of respite from that narrative. But now if you looked at what’s going on in the neon market, if you look kind of six to twelve to 18 months down the road, it looks a lot less like we’re going to have that log jam broken up and a lot more like we’re going to have somewhat persistent inflation that there is no way for the Fed to solve. There’s no way for the ECB to solve BOJ, et cetera. You’re just going to have to continue to have this hawkish language to try to tamp down those longer term expectations.
TN: Demand destruction.
SR: Demand destruction. But it’s really hard to destroy demand for semiconductors when they’re in everything from my daughter’s doll to my laptop. It is very difficult to destroy that much demand and create an inflationary environment that is less toxic to the Fed or to the ECB without breaking something.
So if the Fed isn’t willing to break something in the next call it six months. They’re not going to break inflation. And if you print out six months from now, you’re breaking something into a midterm election.
TN: Right.
SR: So I’m so much skeptical on the Fed’s ability to do anything at this point.
TN: Right. That’s a great transition to Albert. So how is inflation playing with voters?
AM: Oh, it’s absolutely nuclear football. Allowing inflation to go this high is just going to be devastating to the Democratic Party and Joe Biden. But I want to go back because I have a couple of contentious things to say. Right.
TN: Please do.
SR: Oh, God! Right.
AM: So everyone is pricing in five, six, seven hikes at the moment. Right. But inflation at the moment has probably taken three of them out of the equation because the money’s gone. It’s erasing money left and right at the moment, from the federal point of view, it’s like, why really get rid of it all? That why really attack it when it’s doing our job for us where we only now have to hike three times. Right.
And on top of that, something even more contentious is everyone knows that once the VIX gets to a certain price, somebody sells it off. Right. Somebody industry. Right. But everybody knows that. And when everyone knows that, the house casino usually moves to a different area. What about oil? What if somebody with a big account has bought oil futures and every time it gets to the 120s or 130s, they just crush it for $1015 and the market rallies again.
So this artificial inflation that obviously we have real inflation just because of wage inflation and supply chain. But there’s a little bit of artificial, artificial aspect to it that I think the Fed has been using. Politically, it’s going to be extremely damaging. But for their point of view is if they can get over it and then get the rate hikes out of the way and then maybe probably start QE later in the summer, They could suck their voters at the beginning of the economy back on track again. I don’t think it’s going to work.
TN: Let’s say a month or so ago there was suspicion that we would be doing QT in say June, July. That’s off the table now because of the money that inflation is taken out of the market, right?
AM: Absolutely.
TN: But we’ll do rate hikes and have QE potentially?
AM: That’s right. That’s my point.
TN: You’re in an insane phase of economic history.
AM: It’s just look around, Tony. What’s not insane at the moment?
TN: Undoing this.
TS: That’s 100% fact.
TN: Undoing this is going to be insane. Okay, speaking of undoing crazy stuff, the Chinese techs and real estate stocks really have some problems this week.
So Albert, Sam, can you guys talk a little bit about that? And we have a tweet showing some stocks from Tencent, Alibaba, JD, other ones down 50, 60, 80%. So what’s happening with the tech blood bath in China?
SR: I’ll just do a quick start. Did you see the numbers coming out of JD? They were horrible. I mean, they were absolutely atrocious. So, yeah, you’re going to get a sell off in tech broadly across the board in China. When your numbers are horrible, then you’re going to have additional pressure put on the potential for delisting in the US and the general call it risk off move in markets. So you’ve got the trifecta of horrible for Chinese tech in a nutshell.
But the JD numbers were absolutely atrocious on a revenue growth line. And there’s no way to save Chinese tech if you’re going to have numbers like that. If you continue to have numbers like that, guess what? Look out, because the bottom is not in.
On the Chinese real estate front, I think Albert has a much better view on this than I do. But I would say if you’re going to have a risk off in tech, good luck having a risk on in real estate.
TN: Sorry. Let me stop you before I move on to real estate. So the tech story, what I’m pulling away from there is that it’s potentially disposable income story at the retail level, at the consumer level, and tells me that China is way overdue with its stimulus. Is that fair to say?
SR: That’s harder to say.
TN: Okay.
SR: I would be very careful in saying that the Chinese consumer is not there. China is coming with stimulus. If you’re trying to hit 5.5 by the end of this year and you’re going into a plum, guess what? You got to hit the pedal.
TN: Well, they better hurry up.
SR: They’ve got time, but they’re going to hit the pedal. And the question is how do they hit the pedal? And it’s got to be the consumer because they’re not going to hit it on real estate.
TN: No, they’re not. Going through some of the real estate.
AM: Yeah, well, I have a couple of points to make on. I have a couple of points about the tech. China tech. What was interesting is Sam is right. JD numbers were horrible. Right. This SEC Delisting thing pointed out five companies. Right. Just five. And the big ones. Gamble is a big one. And whatnot. But why only five? It happened to be the only five that actually did their accounting and submitted their accounting numbers. Right. And would that actually let a snowball effect out to say, Holy crap, they will take down every single Chinese number, Chinese company in the market. That’s why a lot of this actually sold off harder than you think it would sell off.
Going to the real estate market. I mean, 75% of China’s fault is real estate. So unless Xi wants pitchforks and torches coming after him, he’s going to have to stimulate the economy, something to support the real estate market.
TN: Yeah. It seems like it’s going to have to come hard and fast. I could be wrong. But, you know, with.
AM: I think by June. I think by June he’s got to do something. He has to.
SR: Hit through the middle.
AM: Absolutely.
TN: Good. And do you guys have any ideas on what exact forms that’s going to take? I mean, of course they’re new triple R, of course, taking a new infrastructure spending. They do the stuff. They announce it every other year. Are there other forms that you have in mind that will take that?
AM: I don’t, to be honest with you, that is $64 million question. To be honest. That’s a big question. That’s very complex.
SR: Yeah. And if I had the answer to that question, I probably wouldn’t be on this call.
TN: Come on, Sam. We know you would.
SR: I would be on a yacht somewhere.
TN: Yeah, that’s right.
TS: It’s interesting about that. If you look at the energy perspective, they just had a meeting and they totally decided that they’re going back to coal other than anything else. So that to me that signifies we have stress in other markets. Right. We cannot spend the money in other places. So we’re going to go back to what we do best, what we know best. And they also offered, if you look at internal documents that are offering huge discounts for going back into the coal industry or whatever. I just like to.
TN: So there’s still 73% coal for their power generation, something like that?
TS: Yes. So for them, they backtracked on COP. They need the money right now, in other words.
TN: Right. So the whole Paris agreement is a convenient agreement, is that what you’re saying?
TS: Correct.
TN: Okay, very good. It’s good to know that we’re all committed to the future. Okay. So guys, speaking of the future, finally, what do you view for the week ahead? Albert, let’s start with you. Maybe with China. Do you think there’s more to come with the blood bath in China?
AM: I think there’s another week or two to come with China blood bath. And I think that’s going to obviously lean on our equities going into Fed week.
TN: Right.
AM: So yeah, I think we’ll be another down week.
TN: Okay. And guys, what about US equities? Are we on a steady decline down to some number 4300 whatever it is, or are we kind of about there? What do you feel is going to happen over the next week?
AM: I think we’ll be sub 4000 by the end of the week at some point.
TN: Okay.
SR: Yeah. I wouldn’t be anything other than market neutral until immediately following the Fed meeting and then you just rip it to the upside.
TN: Okay.
AM: Yeah. The only thing that I have a concern about is we still have this Ukraine war going on which is giving outrageous headlines and then if the Fed hikes 25 basis points and then extremely hawkish tones while Putin is shelling Kiev.
TN: Right.
AM: It’s hard to rip until after that’s all settled.
TN: So sorry, Sam, in your scenario, are you saying the first half up until say Wednesday we have a pretty quiet market, then Thursday and Friday, things are pretty active to the?
SR: Oh no, I am not saying that you have a quiet market until the Fed. I’m saying you don’t want to take a position period until the Fed and then you either want to grip it or rip it one or the other.
AM: I agree with that one wholeheartedly.
TS: These markets will continue to be volatile until we have some resolution with this Ukraine Russia situation just because of all every day we’re seeing new sanctions against Russia and against commodities within Russia, at least for the commodity sector. I think we’ll continue to see volatility, but over the long term I’m still very bullish commodity.
TN: Okay. So Tracy, Sunday night, futures open, crude traded very high. Do you think there’s a possibility of us seeing another dramatic spike like that in the next week or two?
TS: I think that mostly been priced out of the market. I think that was priced in right. We saw a lot of that risk premium come out of the market, which I was very glad to see. I would personally be happy if we saw it traded in the 90s again before going into high demand season because I do think that we will trade higher on fundamentals. But it scares me when we have these big kick ups due to headlines and geopolitical risk.
So for me right now I would like to see this market come down a little bit. I’d like to see it pull back some and hopefully things will resolve quicker than sooner with this situation. But still going forward, I’m still very bullish this market.
TN: Okay. We didn’t talk at all about nickel and metal’s markets, but we saw the LME close today because of a nickel trade supposedly. Will we see those markets reopen and will we see nickel trade? Is it scheduled to trade again on Monday and is there the potential for commodity specific disruption and markets closing over the next week or two because of the volatility.
TS: There’s been a very high contention discussion right now, especially within the commodities industry. I would just say that it was kind of unprecedented what we saw there and the fact that they canceled all the trades. I would say that hedge funds are kind of backing away from that market right now because they’re skeptical of that market right now. But again, it’s not like I don’t want to say this is going to be the norm or anything like that.
TN: Okay.
TS: I think this was a one off crazy thing. It happened in the aluminum market years ago and you can even look it up on Wikipedia, right.
TN: Okay. Last thing week ahead with bonds. Sam, what are you thinking about bonds? We’ve seen the ten year go back up to about two. Are we going to see that continue to take up?
SR: I don’t know. I think the ten year is a little less interesting than the five year and the seven year.
TN: Okay.
SR: The five year and the seven year are really what you want to watch because if the fed goes 25 and goes really hawkish, it’s the five and the seven that you’re going to get the juice from and the ten and the 30 you’re going to get a little less so watch the five and seven. I think the five and seven are really interesting here. If you want to take a bet on a really hawkish Fed.
TN: Fantastic. Okay, guys. Thanks very much. Really appreciated. Have a great week ahead. Thank you very much.
We have a first-time QuickHit guest for this episode, Daniel Lacalle, a well-respected economist, author and commentator. Daniel shares his expertise on the eurozone and European Union. What is happening there in terms of Covid recovery? How does the region compare to other economies like Japan, China, or the USA? Will the ECB follow what the BOJ did? Will there be talks of deflation or inflation in Europe? How about the quantitative easing especially with a possibility of a more conservative ECB chair? Also, will Europe suffer the same power crisis as China and will Europeans be able to absorb inflation?
Daniel Lacalle started his career in the energy business and then moved on to investment banking and asset management. Right now, he’s into consulting and also macroeconomic analysis and teaches in two business schools.
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This QuickHit episode was recorded on November 18, 2021.
The views and opinions expressed in this Europe’s economic recovery: More like Japan, China or the US? 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: We spoke a few weeks ago on your podcast, and I’ve really been thinking about that since we spoke, and I wanted to circle back with you and talk about Europe. There’s a lot happening in Europe right now, and I think on some level, the US and China get a lot of the economic commentary. But really, Europe is where a lot of things are happening right now. And I’d like to generally talk about what is the near term future for Europe. But I guess more importantly, in the near term, what are some of Europe’s biggest economic impediments right now? I’m really curious about that. So what do you see as some of their biggest economic impediments.
DL: When we look at Europe, what we have to see from the positive side is that countries that have been at war with each other for centuries get along and they get along with lots of headlines. But they’re getting along sort of in a not too bad way. Good. Yeah, that’s agreed. But it is true that the eurozone is a very complex and a very unique proposition in terms of it’s, not the United States, and it’s not unified nation like China. It’s a group of countries that basically get together under the common denominator of a very strong welfare state. So unlike China or the United States, which were built from different perspectives. In the case of the eurozone, it’s all about the welfare state as the pillar.
DL: From there, obviously, productivity growth, job creation, enterprises, et cetera, are all, let’s say, second derivative of something that is a unique feature of the European Union. No, the European Union is about 20% of the world’s GDP, about 7% of the population, probably. And it’s about 55% of the social spending of the world. So that is the big driver, 7% of the population, 20% GDP, 55% of the government spending in social entitlements.
So that makes it a very different proposition economically than the United States or China. Where is the eurozone right now? The eurozone and the European Union in particular were not created for crisis. It’s a bull market concept. It’s a Bull market agreement. When things go swimmingly, there’s a lot of agreement. But we’ve lived now two crisis. And what we see is that the disparities between countries become wider when there is a crisis, because not everybody behaves in the same manner. Cultures are different. Fiscal views are different. So that is a big challenge. The situation now is a situation that is a bit of an experiment because the Euro has been an incredible success. When I started.
DL: When I started in the buy side, everybody said the Euro is not going to last. And there it is. And it’s the second world reserve currency in terms of utilization, significantly behind the United States. So it’s been a big success. But with that big success comes also a lot of hidden weaknesses. And the hidden weaknesses are fundamentally a very elevated level of debt, a very stubborn government spending environment that makes it very difficult for the European Union and the eurozone to grow as much as it probably could. And it also makes it very difficult to unify fiscal systems because we don’t have a federal system. We don’t have like the United States is.
The situation now is the eurozone is recovering. It’s recovering slowly. But some of those burdens to growth are obviously being very clear. Think about this. When Covid19 started, estimates from all global entities expected China to get out of the crisis first, the eurozone to get out of the crisis second, and the United States to be a distant third. It’s… the United States has surpassed its 2019 GDP levels. The eurozone is still behind. So it’s interesting to see how the expectations of recovery of the eurozone have been downgraded consistently all of the time. And therefore, what we find ourselves in is in a situation in which there’s almost a resignation to the fact that the eurozone in particular, but also the European Union. The eurozone is a small number of countries. The European Union is larger, for the people that are watching. It’s going to recover in a sort of almost L shape. It was going to recover with very low levels of growth, with much weaker levels of job creation and with a very significant and elevated level of debt. So that’s basically where we are right now.
Obviously, the positives remain. But it’s almost become custom to accept low growth, low job creation, low wage growth and low productivity.
TN: It seems to me that if we switch to say, looking at the ECB in that environment, how does the ECB deal with that in terms of higher inflation, lower growth, a weakening Euro? Now, I want to be careful about saying weakening Euro. I don’t necessarily think the bottom is going to fall out. I know there are people out there saying that’s going to happen. But we’ve seen over the past, particularly three weeks, we’ve seen some weakness in the Euro. What does that look like? Do we see kind of BOJ circuit 2012 type of activity happening? Or is there some other type of roadmap that the ECB has?
DL: It’s a very good comparison. The ECB is following the footsteps of the Bank of Japan. In my opinion, in an incorrect analysis of how the ECB the European Central Bank behaved in the 2008 crisis. There is a widespread of mainstream view that the ECB was too tight and too aggressive in its monetary policy. Aggressive in terms of hawkishness in the previous crisis. And if it had implemented the aggressive quantitative easing programs that the Federal Reserve implemented, everything would have gone much better. Unfortunately, I disagree. I completely disagree.
The problems of the eurozone have never been problems of liquidity and have never been problems of monetary policy. In fact, very loose monetary policy led to the crisis. Bringing interest rates from 5% to 1%. Massively increasing liquidity via the banking channel, but increasing liquidity nonetheless. And so the idea that a massive quantitative easing would have allowed the eurozone to get out of the crisis faster and better has been also denied by the reality of what has happened once quantitative easing has been implemented aggressively.
So now what the ECB is doing is pretty much what the Bank of Japan does, which is to monetize as much government debt as possible with a view that you need to have a little bit of inflation, but it cannot be high inflation because in the United States, with 4% unemployment, 4.6% unemployment, you may tolerate 6% inflation. For a while. But I can guarantee you that in the European Union, in the Eurozone with elevated levels of unemployment and with an aging population, very different from the United States. Very different in the European Union almost 20% of the population is going to be above 60 years of age pretty soon. Aging population and low wages with high unemployment or higher unemployment than in the United States. A very difficult combination for a very loose monetary policy.
The Bank of Japan can sort of get away with being massively doveish because it always has around 3% unemployment. So structural levels of unemployment. But that’s not the situation of the eurozone. So I think that the experiment that the ECB is undertaken right now is to be very aggressive despite the fact that the level of inflation is significantly higher than what European citizens are able to tolerate. Obviously, you say, well, it’s 4% inflation. That’s not that high. Well, 4% inflation means that electricity bills are up 20%, that gasoline bills are up another 20%, that food price are up 10% so we need to be careful about that.
So very dangerous experiment. We don’t know how it’s going to go. But they will continue to be extremely doveish with very low rates. That’s why the Euro is weaker, coming back to your point. Extremely dovish despite inflationary pressure.
TN: So it’s interesting central banks always act late and they always overcompensate because they act late. So do you think that maybe a year from now because of base effects, we’ll be talking about deflation instead of inflation like, is that plausible in Europe, in the US and other places, or is that just nonsensical?
DL: Well, we will not have deflation, but they will most certainly talk about the risk of deflation, because let’s start from the fact that the eurozone has had an average of 2% inflation. In any case, most of the time. There’s been a very small period of time in which there was sort of flat inflation. Right. So will they talk about the risk of deflation? Absolutely they will. I remember the first time I visited Japan. I remember talking to a Japanese asset manager and saying, “well, the problem of Japan is deflation, isn’t it?” And he said to me, you obviously don’t live in this country. So will they talk about deflationary pressures? Maybe. Yes.
Think about this. If you have 5% inflation in 2021 and you have 3% inflation in 2022, that is 8.1% inflation accumulative. But falling inflation.
TN: Right. Exactly. Yeah. And it could be a way to justify central banks continuing to ease and continuing to intervene. And so Japan’s found itself in a really awkward position after eight, nine years of really aggressive activity. It’s just really hard to get out once you stop, right? So I do worry, especially about the heritage of the ECB, with kind of the Dutch and German chairs being very conservative. This is a pretty dramatic change for them, right?
DL: Huge. Because you’ve mentioned the key part is that everybody says, well, the ECB will do this. The ECB will do that. But the problem is that the ECB cannot do most of what they would consider normalizing. Because Spain, Portugal, Greece, Italy, it would be an absolute train wreck if the ECB stops purchasing sovereign bonds of those countries. Because the ECB is… This is something that you don’t see in the United States. The ECB is purchasing 100% of net issuances of these countries.
So what’s the problem? Is that? Think about this. Who would buy Spanish or Portuguese government bonds at the current yields if the ECB wasn’t buying them? Nobody. Okay. Let’s think of where we would start to think of purchasing them. We would probably be thinking about a 300-400% increase in yields to start thinking whether we would purchase Portuguese, Greek, Italian, French bonds? Not just the Southern European, but also France, et cetera.
So I think that is a very dangerous situation for the ECB because it’s caught between a rock and a heart place. Very much so. On the one hand, if it normalizes policy, governments with huge deficit appetite are going to have very significant problems. And if it doesn’t normalize, sticky inflation in consumer goods and nonreplicable goods and services is going to generate because it already did in 2019, protests. Because we tend to forget that in 2018 and 2019, we had the gilets jaunes, you probably remember the Yellow Vests in France. You probably remember the protest in Germany about the rising cost of living. The protests in the north of Spain. So it’s not like everybody is living happily. It’s that there were already significant tensions.
TN: Right? Yeah. I think the pressure is, the inflationary pressures that say consumers are feeling here in the US and Europe and parts of Asia, definitely acute, and people are talking more and more about it.
If we move on to say specifically to energy, since that’s where you came out of, right? So we’re seeing some real energy issues globally and energy prices globally. But when we look at gas, natural gas, specifically in Europe, do you expect to see a crisis in Europe like we’ve seen in China over the last three months where there are power outages, brownouts, hurling blackouts, that sort of thing? Or do you think there’ll be a continuity of power across Europe?
DL: In my opinion, what has happened in China is very specific to China because it’s not just a problem of outages because of lack of supply. Most of the lack of supply problem comes from a shortage of dollars. So many companies in China have been unable to purchase the quantities of coal that they required in a rising demand environment because they had price controls and therefore they were losing money.
They would have to purchase at higher prices and generate at a loss. That is not the case in Europe. In Europe, the problem of gas prices is a problem of price definitely, obviously. It’s very high and it’s also feeding to our prices because of the merit order. But it’s not a problem of supply in the sense that getting into an agreement with Russia to increase 40% their supplies of natural gas into the European Union was extremely quick. From the 1st November to beginning of this week, gas form has increased exports to Europe by 40%.
Problem? Prices have not fallen as much as they went up before. For the south of Europe, it’s a problem fundamentally, of access to ships because LNG obviously is very tight. Vessels are not available as they used to be. There might be a certain tightness in terms of supplies, but I find it very difficult to see, let’s say, a Chinese type of shortage of supply because it’s a matter of price. Will we have to pay significantly more for natural gas and significantly more for power, but not necessarily feel the problem that the Chinese did because they had lost making generation in coal.
TN: Great. Okay, that’s very good. That’s what I’d hoped you say, but it’s great to hear that. Let’s switch just a little bit and talk about kind of European companies because we talked about rising prices, like energy. We talked about inflation and consumers say bearing inflationary pressures.
In European companies, we’ve seen that American companies have been able to raise prices in America quite a lot, actually. And consumers have borne that. Chinese companies haven’t really been able to do that. Their margins are really compressed because consumers there haven’t been able to bear the price rises. What are you seeing in Europe, and how do you think that impacts in general European companies, their ability to absorb price rises or pass them on to consumers? And how long can they continue to bear that?
DL: Yeah. One of the things that is very distinct about Europe is the concept of the so called, horrible name, “National Champions.” In power, in telecommunications, in banking, in oil and gas, etc. Etc. We tend to have each country a couple of dinosaurs, most of them, that are so called National Champions. These cannot pass increases of inputs to final prices because they receive a call from the red phone from the Minister in the country. And no my friend, the prices are not going up as they probably should.
So the automotive sector? Very difficult because there’s a lot of over capacity and at the same time, tremendous cost pressure that you cannot pass because of the lack of demand as well, or the lack of demand relative to supply. The airline sector? Cannot pass the entire increase of cost to consumers. The power sector? Very difficult, big companies, very close to governments. They’re suffering immensely from regulatory risk. So very difficult. So you have those.
However you would say, okay, so that sort of shields inflationary pressures out of consumers. Unfortunately, it doesn’t because those are very large companies, but they’re very small in terms of how much they mean, for example, the prices of food or the prices of delivered natural gas. Even though you purchase natural gas, there’s a strict pass through in those, for example. You might not increase your margins. You might lose a little bit, but the pass through happens. It goes with a delay. In the United States, everything happens quickly. In the United States, shut down the economy, unemployment goes to the roof, then it comes down dramatically like V shape, opposite V shape. In the Eurozone, things happen slower. And that’s why it’s a bigger risk, because the domino effect, instead of being very quick and painful and quickly absorbed is very slow.
TN: Interesting. Okay. Very good. Well, Daniel, thank you for your time. Before we go, I’d like to ask everyone watching. If you don’t mind, please follow us on our YouTube channel. That helps us a lot in terms of adding features to our podcast.
Daniel, thank you. As always, this has been fantastic, and I hope we can come back and speak to you sometime in the future. It will be a great pleasure. Always a fantastic chat. Thank you very much.
This is Part 2 of the inflation discussion with Steven van Metre and Peter Boockvar with your host Tracy Shuchart. In this second part, they talked about the possibility of the Fed tapering this year or early in 2022. How about the possible rate hike and what will possibly happen in other parts of the world like Bank of Japan and Bank of England if ever this happens? What is Powell doing exactly and why? Is there a possibility of a new Fed chair next year? And what do they think about stagflation?
Peter Boockvar is the Chief Investment Officer and portfolio manager at Bleakley Advisory Group. He has a daily macromarket economic newsletter called The Boock Report.
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This QuickHit episode was recorded on October 14, 2021.
The views and opinions expressed in this Quick Hit Cage Match: Van Metre vs Boockvar on Inflation Part 2 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
TS: Do you see the Fed tapering? And if they do, how much is this going to affect inflation? And also, I know the market is saying the Fed is going to raise rates in ’22, 2023. But is this a reality at all?
But before we jump into that, I just wanted to remind you to please subscribe to our YouTube channel.
PB: I think the Fed will at least start the taper and see how it goes. The thing that is different with this taper is that it’s coinciding with central banks around the world that are also beginning to remove accommodation. However slow, however glacial that process is, they’re all outside of the BOJ. They’re all doing it at once.
So if the Fed starts to taper in December, which they basically told you that they will, well, the Bank of England could be raising rates in December. We recently got a rate hike from Norway a month or two ago from South Korea. We’ve had Canada and Australia trimmed QE. Even the ECB has trimmed QE. So there’s a global shift to tightening. And I do believe tapering is tightening to define that. Just as we saw last year, the past 18 months obviously massive global easing.
Now I can’t even discuss the rate hike situation because I’m not even sure that they’re going to be able to get through the tapering. If you look back to 2010, every single notable market correction in equities and also fixed income markets outside of Covid and the one evaluation in August 2015 coincided with the end of QE, where it was a hard stop QE1 and QE2. And then obviously you had the taper 2013 and then obviously around rate hikes. Every single one coincided with a tightening of policy. And even again, it was gradual. It still affected markets. And we’re going to have it again to think that we’re going to somehow get through tapering without any accidents, I think, is delusional. And you believe that there’s a free lunch and it’s a matter of what kind of accident occurs by this.
Now QE itself essentially, at the end of the day, it’s an asset swap. And yeah, does some of that money sort of filter into markets? Yeah, maybe, I guess. But a lot of it’s psychological, but it also does help to, at least on the short end, suppress interest rates to where they would be otherwise. That said, when QE has been on, you’ve been paid to steepen the curve when QE is off, it pays to flatten it. And I think we’ve seen some recent flattening in the yield curve. And I think that that has been the right trade to do when QE is about to turn off.
But to Steve’s point about the bottom 50%. Well, if you get a short equity market correction, well, the top 50% is going to feel that as well. And yeah, can that filter into how they spend for sure? But that doesn’t necessarily resolve the supply issues.
That’s how this inflation story is going to recalibrate. The supply side is going to take a couple of years, and it’s going to be less demand. That is going to recalibrate this inflation story. And I think that is. No central bank wants to preside over a declining economy. But unfortunately, you’re going to have to have a trade off. You want lower inflation and a slower economy or an economy, as is but fast inflation, that’s going to hurt the people that can least afford it.
SVM: Yeah, this balance sheet taper thing is really interesting because I will be on record. I’ll hold on record still, and I don’t think the Fed’s going to do it. Although, as Peter mentioned, you just said that you think that the Fed is going to start and then quit. I’ve had to come to your side of the fence on that deal, mainly because when Powell spoke at Jackson Hole, it seemed like he was saying, we can’t make this mistake. We got to keep easing because we could let off the gas too soon.
And then for whatever reason, there’s this massive pivot between that and the last meeting. And he’s going to have a disadvantage going into the November F-O-M-C. And not have the non farm payroll report because he concludes me on Wednesday. Nonfarm payroll is out on Friday. Maybe he’s got some early access, who knows? But it seems like all of a sudden he’s in a panic to start tapering.
Now, could this be because we know the treasury is going to reduce their issuance of notes and bonds as we borrow less money, and he doesn’t want to be over purchasing? Sure. Could it be, as Peter mentioned, that the other central banks are tapering and starting to raise hike rates. And that’s interesting, because the way I look at it is that would be a catalyst if the Fed doesn’t start tapering, that the dollar goes higher.
Well, there’s part of the inflation story that almost nobody is looking at. What if the dollar gets up into 96, 97, maybe even close to 100? I mean, we’re talking about destroying the inflation story just from the dollar alone. And is this one of those things where we had coordinated easing? So now we need to have coordinated tapering to keep the dollar from going up too much? I’m not sure what his motivation is, but I will say this. There’s no way that they get to the end of that taper. There’s a 0% chance they’re going to raise rates. And even if they did, it doesn’t matter. They’ve effectively given the banks a pass by saying, look, there’s no reserve requirement because, well, you’ve got all these QE reserves you don’t need anymore.
The whole idea that we’re going to get this balance sheet unwound. I think the bond market is telling us the Fed’s making a mistake. I think, Peter, you and I agree that we don’t know how many months they’re going to go? The only question is, at what point is there a payroll report or some data that comes out that the Fed goes, “Oh, my God, we made a big mistake.”
PB: I’ll tell you why he’s doing this. Well, first of all, the whole purpose of monetary policy, as we know, is to push the demand side. And if you look at what are the two most interest rate sensitive parts of the economy — it’s housing and autos. So is Powell with a straight face going to say, I need to pedal to the metal, continue to stimulate the demand for housing and autos, when you can’t find an auto and the price of the home is worth 20% more than last year? They need to take their foot off that demand pedal. And he does not want to be Arthur Burns. He does not want to be Arthur Burns. And right now he is headed towards being Arthur Burns.
And the Fed is going to reach a pivot point, where if inflation still remains sticky and persistent, but growth is really decelerating to a greater extent than it already is. And we know that the Atlanta Fed third quarter GDP number has one handle on it. He’s going to have to reach a point, do I try to come inflation, but then risk further weakness in the economy and a fall in asset prices, which JPowell obviously inflated. Where is he going to just not really respond quick enough. And being in Washington, we can be sure he probably leans towards trying to save the economy, but then that creates its own problems.
The one thing in the dollar, the dollar is going to get tied into this, too, because if he remains too easy for too long, well, that may sacrifice the dollar. If he is more aggressive at dealing with inflation, well, then you can see a faster move in the dollar. So he’s just been an absolutely no win situation here. But there is going to be a pivot point where he’s going to reach that we’ll have to see, does he go down the Paul Volcker route, or is he going to go continue down the Arthur Burns route?
SVM: See, Peter, you just said it best. He didn’t know what his situation. And all we’re debating is, at what point does he back off and quit because he realizes it’s not working? I mean, we can look at the velocity of money and see the monetary policy is not functioning properly.
I mean, there was a lot of people that predicted at the end of the last quarter that as economy reopen, velocity would pop. But it didn’t because of the fact that monetary policy is not transmitting into the economy. And so now the real issue is if he starts tapering and it does do what it’s supposed to do, does he inadvertently tighten financial conditions? I mean, this is such a mess of what he’s got to deal with. And I don’t know if you’ll agree with me honest, but I don’t think they have a clue what they’re doing.
I think they’re just betting that this is all going to work out, that Powell, as himself, is going to get renominated. And somehow, in the end, either he’s going to look like a superhero and say, look, see, I did it and go out as one of the most celebrated Fed chairs ever. Or he’s going to find someone else to blame this on when it doesn’t work.
PB: The Fed has been winging it for decades, and this all goes back to Greenspan. In 1994, he raised rates aggressively. We know he blew up Mexico, he blew up Orange County, California, and he took that at heart. He learned a lesson. And so you go into the late 90s when everything is on fire. Stock market bubble. We know he was very slow to raise interest rates because he didn’t want to repeat 1994.
And then, of course, you have the blow up. And he’s obviously quick to raise interest rates. But remember the mid 2000s, every single. When he started raising interest rates, he did it every single meeting, and in every single statement, it said, we are doing this at a measure pace, because he didn’t want to repeat 1994.
And then what we have, obviously, the housing bubble and so on and so on. And then now you take Powell. We know Janet Yellen was afraid to raise interest rates. Took them seven years to get off zero. And then after finally raising, took them another twelve months to finally raise rates again. And then Powell started to pick up the pace. And then he blew himself up in the fourth quarter of 2018. And then that helps to explain why they’re going so slow now.
Then you throw in, of course, the whole social justice. The Feds become the Ministry of Social Justice now and how they view monetary policy. But yeah, to your point, they are winging it. And they’ve been winging it for decades.
SVM: And you bring up an interesting point about 2018. I’m really glad you did, because a lot of people forgot that we started easy to the point that it didn’t really make a lot of sense from the outside look in it. And so now this whole notion, and I don’t know what your reaction was, but I remember hearing the press conference when he’s like, okay, when Powell said, “We’re going to gradually unwind the balance sheet by mid 2022.” I’m like, since when is “gradual” six months. There’s no way this is going to work for you, buddy, but good luck if you’re going to pull it off.
PB: Yeah. And the Fed got lucky for a period of time. They got lucky in 2017 because the markets rallied and ignored Fed rate hikes and the beginning of the shrinking of their balance sheet. They were double tightening and they got bailed out because everyone focused on the corporate income tax cut. That obviously happened at the end of 2017. But that entire year, the Vix got down to eight. Every dip was bought because everyone was pricing in that tax cut. But once that tax cut was in place, the Fed then raised interest rates again in January 2018. And then we immediately shift back to the Fed is double tightening here between the balance sheet and rates. And that obviously coincided with the fourth quarter of 2018.
So we know in the Fed tapering, the Fed tightens until they hit a wall. The Fed tightens until something breaks, and you can be sure something will break in 2022. It’s just a matter of how deep they get. And also one last point here is that having low inflation gives central banks that Wayne’s World Concert pass that all access to do anything they want for how long as they want, when there’s no inflation. But once you get inflation into the numbers, into the economy, their flexibility is greatly diminished. And that will be an interesting sort of tug of war as they get further into the tapering and something eventually breaks.
TS: One last question, a couple of last question. How do you feel about Stagflation? I kind of amend the Stagflation camp. Do you think that’s a cop out or how do you feel about that?
SVM: I think it’s temporary. I mean, we’re supposed to be rising unemployment. I mean, I guess with people coming off the ranks, I don’t know. Maybe it’ll go back up. I don’t think that’s likely to happen. And then you tend to get that with higher prices. But when we start looking at the bond market. The bond market is starting to tell us that, hey, this Stagflation is going to be transitory. And then the risk that I see is that we get into outright deflation from here.
PB: To me, I just look at stagflation as just slower growth and higher inflation. And in an economist textbook, they think that slow growth means lower prices. Faster growth means higher prices. I’m just looking at the Bank of Japan. The Bank of Japan said we need to get inflation at 2%, and somehow that will then generate faster growth. To me, they’ve got that backwards. You need stable prices in order to develop and sustain healthier growth.
So right now. But the Stagflation it’s sort of intertwined in the sense that it’s the inflation and what is driving it. So it’s the inflation itself that is beginning to impact consumer spending. And it’s the factors that are creating the inflation, like the supply bottlenecks that in itself, are also creating slower growth.
TS: Excellent. One last question, just for a thought experiment. I mean, say Powell does leave the Fed next year and we have find a Dove, right. So what does the Fed look like at that point if we have a dove as a Fed chair?
PB: Well, 2022 becomes completely politicized. The Fed’s already politicized, but it becomes Uber politicized in 2022 because of the elections in November. And if a Lael Brainard becomes the next Fed chair in February, 2022, you can be sure that Steve and I are right, that there’s no chance in hell they’re going to finish this taper because the second something breaks, you know, they’re going to back off and they’re going to do their best to, or at least the Democrats headed by the Lael Branard will do their best to maintain control of Congress.
SVM: Yeah. I’ll put that as a low probability chance that Powell is out. If he does, I’m 100% agree.
PB: I agree. I think he stays as well.
SVM: Yeah, 100% agree. I think it’s a big risk for the Biden administration to pull him. He hasn’t really done anything wrong. But if he does, again, I think Peter is spot on. I mean, now it becomes even more political than the Fed is supposed to be. And he’s right, as soon as something goes wrong, I mean, we’re going to 120 billion a month. Yeah, right. It’ll be multiples of that in a second.
TS: All right. Well, I want to thank you both again for everything you shared with us today. Can you each tell us where we can find you on social media or otherwise?
PB: Well, I just want to say thank you to Tracy and Steve. Thank you for having me in this debate and discuss this with you. It was definitely a fun time. If you want to read my daily readings, you can subscribe to boockreport.com. boockreport.com And our wealth management business is at bleakley.com.
TS: Excellent.
SVM: I want to thank you as well. Peter, you and I know this has been a long time coming for us to be on the same screen together. I had a blast. Totally looking forward to the next time. If you want to find more about me, you could go to my website. stevenvanmetre.com On Twitter @MetreSteven. On YouTube at @stevenvanmetrefinancial.
TS: Great. And for everyone watching, please don’t forget to subscribe to our YouTube channel and we look forward to seeing you on the next QuickHit.
Various central banks are implementing emergency rate cuts to respond to the coronavirus and as the bull market ends. Meanwhile, it remains to be seen whether peak infections in China and South Korea are a light at the end of the tunnel.
Presented by: Wong Shou Ning, Lyn Mak, Julian Ng
The UK has launched a stimulus plan. Do you think the ECB will be pressured to do the same?
I’m sure they will. I don’t think they have that much power into interest rate cutting area – the rates are already right around zero. What they’ll most likely do: buy more government bonds, ease up on the reserve ratio, loan incentives, etc.
Europe is in a pretty bad position partly because COVID really attacks older people more aggressively than younger people, and the demographic profile of Europe is pretty terrible. So the ECB has to do something to help the economy. What they’re trying to do is to make sure the consumers don’t totally close their wallets and the banks don’t totally close lending. They’re really trying to stimulate banks to keep money moving.
In China and South Korea, there are indications that the infections have peaked. Pres. Xi visited Wuhan. Is this the light at the end of the tunnel?
I think it’s a natural progression and it’s quite possible that things are dissipating in China and things are improving. We see road traffic congestion gradually building back. That’s good for everybody. 2/3 recovered. We’re getting there. There may still be quite a lot of bounce back in March. Hopefully, in Q2, we’re back to an almost normal level.
Japan’s economy seems to be bordering on the recession. Do you think even the Bank of Japan has assisted on the current downward cycle? Have they got any more policy options left?
Central banks can do for the ending bull market. The BOJ really has been focused since 2012 on Abenomics to try to raise the inflation rate to 2%. They never achieved that. But they have helped some other things to stimulate the economy.
Japan’s in a very tough place because it’s tied to the Northeast Asian supply chain and it has the same demographic problem that Europe has. They really need to start circulating money. They can use these tools on reserve rates and loans, but how much further can they push it?
The fall in crude prices has also negatively affected shale oil producers. What’s your near and long-term outlook for the industry?
Shale for the US is energy security. Americans are tired of the political issues that they face in the Middle East to secure their energy supply chain. The current administration help the shale producers to survive including backing up their loans, working with banks to extend the payback period, etc. Shale is seen as a national asset by the current administration as they work very hard to make sure that those companies continue to be competitive and have the resources.
