Complete Intelligence

Login

Tag: Brazil

Categories
Week Ahead

Growing out of stagflation, Fed operating impact & Brazil Risk: The Week Ahead – 7 Nov 2022

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

In this episode, we are joined by two special guests – Mary Kissel and Travis Kimmel – as well as our regular co-host Albert Marko. Mary is the EVP and senior policy advisor at Stephens. She was the senior-most aide to Secretary of State Mike Pompeo and was on the editorial board for Wall Street Journal. Travis Kimmel is a technology entrepreneur, market philosopher, and spicy tweeter.

First, we dig into the approach to getting out of the  current stagflationary model. The Bank of England, the ECB, the Fed, and the BOJ are starting a managed decline. And the real question is, is that really necessary? Mary Kissel walks us through how the Fed may actually be making things worse.

We all know the Fed raised by 75bps and is expected to continue with at least 50bps in December. Raising rates has decimated tech names and made operations significantly more challenging. Travis Kimmel discusses the impact of the whiplash in interest rates on operators, on the people who run companies, and how they run those companies in this type of environment.

And then finally, with Albert, we talk about Brazil. We saw a big election result in Brazil this week with Lula declared the winner. Many Brazilians are not happy.

Also, note that Brazil is one of the largest emerging economies and a huge trade partner for China. Lula has already made comments in support of Russia in the war with Ukraine. What does this mean? Is Brazil a risk for US power in the western hemisphere, given China’s inroads in Venezuela, etc?

Key themes
1. Can we grow out of this stagflationary muddle?
2. Impact of Fed rates whiplash on operators
3. How big of a risk is Brazil?

This is the 40th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Mary: https://twitter.com/marykissel
Albert: https://twitter.com/amlivemon
Travis: https://twitter.com/coloradotravis

Transcript

Tony Nash: Hi, and welcome to the week ahead. I’m Tony Nash, and I’m joined this week by Mary Kissel, Travis Kimmel and Albert Marko. You all know Albert well. 

Mary Kissel is the EVP and senior policy advisor at Stevens. She was the senior-most aide to Secretary of State, Mike Pompeo. She was editorial board for Wall Street Journal. Mary is extremely well known. She doesn’t need an introduction.

Travis Kimmel is a technology entrepreneur, market philosopher and a spicy tweeter. So really glad to have you both today. I really appreciate it.

Before we get started, I’m going to take 30 seconds on CI Futures, our core subscription product. CI Futures is a machine learning platform where we forecast market and economic variables.

We forecast currencies, commodities, equity indices. Every week markets closed, we automatically download that data, have trillions of calculations, have new forecasts up for you Monday morning we show you our error. You understand the risk associated with using our data. I don’t know if anybody else in the market who shows you their forecast error. We also forecast about 2000 economic variables for the top 50 economies globally and that is reforecast every month.

Let’s move on. Thanks guys. Thanks very much.

So this week we’re going to move on to some key themes. First, there’s a really interesting concept that Mary brought up. Can we grow out of this Stagflationary muddle? And I really look forward to getting into that a little deeper. 

We’re going to also with Travis talk about the impact of the whiplash in interest rates on operators, on the people who run companies and how they run those companies in this type of environment.

And then finally with Albert we’re going to talk about Brazil. We’ve had a big political change in Brazil and it seems more meaningful than we’re being kind of told. So I want to dig a little bit into that.

Mary, first let’s dig into kind of the approach to getting out of this Stagflationary model. So the UK, the Bank of England, the ECB, the Fed, the BOJ, they all seem to be, as you said, starting a managed decline. And the real question is, is that really necessary? 

And I’ve got on the screen the balance sheets for the ECB, BOJ and BoE and the Fed of course.

And then we also have a graphic for the CPI versus the money supply. Looking at CPI change and what that is related to the money supply.

Do we in fact need to manage this? Decline I think is a real question and I guess who is growing out of this? I think it’s possible that China grows out of it. I think that’s the only card they have right now. But I’m really curious to hear

your thoughts on this.

Mary Kissel: Well, it’s great to be with you Tony, Albert, Travis, thanks for inviting me today.

Of course growing is the best option. It doesn’t necessarily mean that it’s the most politically salable option. But obviously it’s preferable to inflating away your debt and effectively ruining the savings of seniors and putting an enormous burden, particularly on the poorest and in our various economies. Do they developed or developing economies? 

I hate to talk politics because I think it’s always easier for the street to say, “well, you know, we’ve got these neat models and economic forecasts and if you just pulled this lever or that lever, we could achieve X amount of growth.” But the reality is that you have to take politics into account and it’s just very difficult to take the kind of measures that we need to take to grow. And I think you saw that you mentioned the UK and your introduction. You saw that most clearly recently in the UK, where former Prime Minister Liz Truss and her chancellor Kwasi Khortang came out with really what was the only plan outside of Greece?

Greece is the only country that is focusing on growth. They’re looking to hit investment grade next year. But beyond that, the UK was the only country that had really put forth that formula that we know works, which is it’s not just about tax cuts and reducing that burden, it was about stimulating the supply side, opening up Britain’s energy reserves, fracking, going back to the North Sea, encouraging investment.

I mean, if you look at the UK and their economic statistics, it’s pretty shocking. I mean, the two decades prior to the Pandemic, they had growth less than 2% real wages were stagnant for 15 years. Their investment was terrible, even lagging behind their OECD peers. And yet you’ve had twelve years of Conservative governance there and they haven’t really turned the corner. Why? Because politically it’s just simply easier to tax and spend. And once you get on that track, it’s really hard to get off of it. So maybe I’m talking too long, you just one more time.

TN: No, this is a great point. But in talking about managed growth and you brought up politics, I feel like there’s this kind of fate accompli in most Western governments around. Well, we’re really on the downside of our opportunity and we’re a declining country, so we’re just going to manage ourselves that way. And when I think about things like the semiconductor investments and other things coming into the US.

I live in Texas, I don’t know what it’s like in other parts of the country, but it is really booming here. We have a lot of tech companies coming in, we have a lot of investment coming in. It’s a good investment climate. I mean, for anybody in New York or California, it’s terrible here, a lot of rattlesnakes and scorpions. But in terms of the economy, really great. 

And so I want to talk about that a little bit in terms of kind of the fake company around. Well, we’re kind of past our prime. Is that kind of a baby boomer thing? I mean, millennials are as big as baby boomers. So is there this demographic assumption baked into that? 

MK: Well, look, I mean, democracies get the leadership that they elect, period. And so, you know, I may not like what’s happening in Britain. I may think that they’re on the road to looking like France in terms of their, you know, permanently high double digit unemployment and lousy investment and lousy growth, lousy prospects for their young people. If they’re voting for that, that’s what they’re going to get. 

I think that from an investment community. When I’m talking to Stephen’s clients, they’re saying, all right, well, where is there the opportunity for a political process to move us in the other direction? And that’s really just the United States over the next couple of years. I mean, that’s kind of it. Not going to happen in Japan, it’s definitely not happening in Australia, it’s not going to happen in continental Europe.

But the danger here is that the population, particularly the young people, get so mad that they realize that they have no opportunities left, that you see popular protests and you see a push to political extremes. So, look, protests are still going on in France. You’ve got protests starting to erupt in Britain. I wouldn’t be surprised if you saw that in more places across the continent as this energy inflation starts to hurt and as voters realize that this formula of price caps on energy, which isn’t going to solve any of the underlying supply problems of taxing and spending.

So it’s just a huge burden if you want to kind of start a business and get something going. No real move towards less red tape or the ability to kind of start a business and innovate. People are going to get upset at that. Again, I don’t think Populism is dead on the continent, and I think that the US, as these countries kind of go down, I think the US looks more and more attractive.

Albert Marko: No, I mean, Mary is absolutely correct. I’ve always been a proponent of looking at politics in terms of investing, just because things have been shifting so much, being in the United States, emerging markets, which is the rest of the world at the moment, like Mary said. Yeah, I mean, Populism

is absolutely not dead. With layoffs looming in the United States, we’re probably going to see more protests here in the United States gearing up to 2024.

But just like Mary said, I don’t see anywhere else in the world right now that you can actually invest in except for the United States. And I think it’s a little bit by design, by Yellen in them to force money to come out of those countries and into the United States. Although it’s a good thing for the United States in the short term, it’s destructive long term for the global markets.

MK: Sorry, just one more point. In order to get political change and to get back to that growth idea, you have to have real differences between the left and the right in democracies. And I think a lesson that came out of a place like, say, France, where Macron just sat himself in the middle, he destroyed the choice. 

And you know, the Conservatives have done the same thing in the UK. They’ve sat themselves in the middle. They took a lot of the center left platform. So what are you going to do if you’re sitting in Manchester, right? Like, who do you like? Labor light in Rishi Sunak or do you just vote for labor? I mean, it doesn’t really matter, does it? You’re going to get the same outcome, right?

TN: So we’re going to do a little bit of what Tom Keen talked about regular. We’re going to kind of rip up the script here and I’m going to ask about you talk about inflation, talk about the leadership in places like Europe. And is it at all possible I know this is kind of a silly question, but is it all possible that in places like the UK or continental Europe that it’s possible to start fracking? That we start getting some of that upstream activity to ease the burden of energy crisis?

MK: No, you’re going to need a war.

TN: Okay? So the dirty upstream stuff, according to Europe, is other people’s problem. They just want cheap energy.

MK: Look, it took Putin slaughtering thousands of people in Ukraine for them to realize that, hey, maybe Russia isn’t a secure supplier and yet they’re still not welcoming fracking. They’re still not coming to the United States and saying, hey, how do we open up more LNG? What are you guys doing?

Right? I mean, this is unbelievable. What is it going to take?

TN: Something like Larry Tankers sitting off of Europe right now, waiting to unload because there’s not enough capacity?

AM: What it’s going to take is exactly what you said, political people, to the point where it just starts dripping over governments. And right now there’s been a push for Blinken to push leftist governments throughout the world right now that it’s just like the status quo everywhere. They’re not going to open up the franking. We’re not going to touch any kind of environmental issues over in Europe right now.

MK: Look at Rishi Sunak doing a U-turn and going to the COP conference. I mean, this has to be the most ridiculous grouping I’ve ever heard of. I mean, at a time when you’ve got like ten plus inflation and people can barely pay their bills or buy eggs or the rest of it, or fill up their car, they’re going to talk about climate change. Are you kidding me?

TN: China’s tripling down on coal.

MK: Yeah, I’m also clean climate too. I don’t care what kind of energy we use, as long as the market’s figuring it out and we’re letting innovation happen, period.

AM: Well, they’re going to start blaming Brexit. Even the Tories are going to be like, oh, maybe we should stay into the EU.

MK: Could Britain go back to the EU?

AM: Maybe? Yeah, they could.

Travis Kimmel: I think the thing that’s really challenging here is we just need coherent and stable frameworks for a lot of the stuff, whether it’s energy policy, monetary policy, like if you think about what the purpose of markets are, to take a really simple example, take a CSA. What is that? It’s a futures market. It’s done in a really small scale. You got a farmer who’s basically short forward produce, right, and you’re buying futures and then you’re taking delivery of whatever lettuce and cabbage and. 

If you think about that as it’s a very simple example of what a market is designed to do, it’s designed to allow operators to derisk their business. A large futures market is no different. I mean, I work in tech. We’re sort of like extreme beta, right? And what we just went through here is we went through this period where everyone was looking at a massive boom as a result of policy. And so we all started hiring and there was the time we’re all trying to hire the same time. Staff up handles the influx of business and then in the middle of that staffing motion, your reverse course. So now you have these companies that are… You heard Stripe come out, they’re cutting 14% and just owning it. Like we missed-staff for the environment. 

There was almost no way to navigate that properly for operators. And so what you have is you have this destructive policy impulse that is sort of like ruining the whole reason we have markets in the first place.

The reason we have markets is to allow for derisking. And speculators come in there and they provide liquidity and it’s awesome. Markets are awesome. But we’re removing the value that markets once had for operators. And if you’re out here in the economy running a business, it’s extremely hard to navigate that.

TN: Yeah, Travis, that’s a great segue. And let me put up your tweet that you put up earlier this week. Talking about Powell saying some of you losing your job is like little rays of sunlight to me and I think that’s great.

And talking about how do operators work in areas in times of rates whiplash like this, I think bringing it back to risk is, is it? Right. And I run a tech firm. You run a tech firm and it’s not about high rates or low rates. It’s about the magnitude of change for planning. Right. So we can plan for a high rates environment if we know that’s going to happen.

We can plan for a low rates environment if we know that’s going to happen. But that stability is what economies like the US are built on. Right? Yes.

You mentioned one word, “coherence.” And I’m afraid that that’s a little bit too much to ask from policymakers right now, especially when we have the push pull going on with the Fed and the Treasury right now, right?

TK: Yeah. I think we’ve been overdriving this thing for years now. Basically, you saw this in, think about the events that we tried to respond to policy with. You have basically volmageddon. They were like, oh, and they used policy to address that. So your policy takes two freaking years to come through. I mean, how can you respond to a pandemic via policy? I know people get really upset about the SPVs where they short up private credit, but I would say that was probably the smartest thing they did.

So this pandemic and it was like, oh, it’s a few hundred million, right? And so they shore up private credit. Like we’ll backstop that. Arguably, that is the original intent of central banking, is that motion. Of course, you’re supposed to do a higher interest rate and all that badge itself, but whatever.

So that tiny motion was sort of interesting and maybe well played, but flooring rates, making money free and then just jamming liquidity into the economy at the same time, and we’re basically, they generated this boom that we’re now on the back of.

Now we’re reversing that super hard. I just don’t think you can respond to this kind of stuff with monetary or fiscal policy. I don’t think you can respond to emergent events. It’s not an emergency thing. What these are designed to do is to tune structural weirdness like you could tune a demographic change because demographics aren’t going to change that much in a short period of time. And so you can apply a policy to that and wait for the policy to translate through. I think what I would have liked to see when they realized their error here is just set rates at whatever, 3%, leave the balance sheet slowly until you’re back to where you want to be. And don’t do much. All these extreme action where the Fed comes in, they’re like, we get an event we don’t like, whether it’s the coronavirus or inflation or whatever. And they’re like, we’re on it. We’re going to respond swift and hard. That’s the mistake. You can’t do that. So we’re now going to get this…

What I expect to see here is eventually they will solve inflation. But that solution is by the time it translates through, it’s going to have its own momentum and it’s going to be very destructive.

TN: Oh, yeah. I think the real irony is you have publicly traded companies that are expected to give market kind of insight twelve months out to the penny on the share level, right. But then you have Powell standing in front of the world saying, we’re not really sure what we’re going to do next month. It may be whatever, and it’s data dependent. It’s like, really? Like, how many people do you have, analysts do you have? And you don’t know what you’re going to do in 30 days? That’s crazy. Right?

MK: I think Travis is raising such a good point. And the underlying theme here is that is to do something right and to juice the markets on the monetary and the fiscal side. That’s why I put in a plug. If you haven’t read it. James Grant’s book on the 1921 crash, like The Forgotten Depression, such a great book because essentially it’s like do nothing in the market. It will take pain, but then we’ll come back up.

TK: I love you mention that example. It looks like we are generating that exact same, it looks like we’re

generating a depression. Not like the depression that everyone remembers, but that little, very short, swift, extremely difficult period of time. It’s like a couple years in 1920. We’re teeing up the same thing here. It’s really weird.

MK: People make it worse. I don’t know, Travis.

TK: Look, I’m not going to fail that.

MK: I think you could be in the 30s because they’re not going to do nothing, right? They’re going to cap energy prices. They’re going to do more programs to help people.

TK: You have to let the market achieve homeostasis. And the bond market is like, it’s the spine of the economy, and we just keep whipping it back and forth. So everything else is going to be high data.

AM: Yeah, but why are they whipping it?  It’s because the political influences within the central banking system, whether they’re Treasury and the Fed. Right now, nobody is talking about the real civil war happening between conservative Powell and some of his members at the Fed, and Lail Brainard and Yellen, who are liberal that are trying to help Democrats by pumping these markets. They crush the bond market only to pump it up two points, like within minutes to pump the Nasdaq, and then the market starts running with it, and then they parade out all these liberal members of the Fed to counteract Powell’s speech yesterday.

So it’s like we can hope for stability, but until they depoliticize the Fed to the point where it’s actually acting properly, I think it’s just a pipe dream.

TN: Do you think Powell is overplaying because of the kind of politics inside the Fed?

AM: Oh, absolutely, because if you look at the Fed minutes in the FOMC releases, those are going to continue to be muted because it’s a cooperative process. Right. They have all the members talked about vote on issues and whatnot, and then Powell has to come out there and counteract that and say, listen, things aren’t working out like the minutes are reflecting, so I’m telling you we’re going to go 75 basis points next meeting. And then again today, they bring out another Fed member to say, oh, no, it might be 50, it might be 50, and then the market shoots up 100 points. This is absurd. Right? That’s an untradable market. It’s untradable market. Right? Yeah.

TN: Since we’re talking about policy fumbles, and Mary recommended a book. I don’t know if you’ve read, Ammonie Schlay’s The Forgotten Man, fantastic book about the 1930s, talking about policy error after policy error after policy error. FDR is proclaimed as this hero who got us out of the Great Depression, and he absolutely screwed up time and time and time again, and took what could have been a two-year recession and turn it into a twelve-year recession. Right? Yeah.

And so are we entering that again? That’s the real question. And it’s really easy for people to say, oh, we’re in the 30s again. I mean, I hear that so many times, it’s just tiring. Right. But we have to look at why the 30s happened. We have to look at why 1921 was so quick and then understanding what the implications for policy and the economy are.

Travis, what you brought up in terms of quick, sharp actions for specific events is exactly what we need. I think rate rises are stupid. Playing these stupid rate rise games, it freaks everyone out. It creates volatility, uncertainty, and nobody can plan. And then you get between now I think we talked about this two weeks ago, Albert, between now and the end of the year, we’re going to see so many layoffs in tech companies and they’re all going to get them just in time for Christmas, because that’s what happens all the time. Right?

TK: The thing that Albert highlights here is really interesting. It’s like, from a decision making perspective, we have the speed wobbles. You’re riding a bike and you get that thing, it’s like, you know you’re going down, you can’t pull out. We just have that right now. We’re whipping this thing back and forth. We’re being hyper reactive. And until we get to a place where we can just sort of chill for a while. Does anybody think that’s on the horizon? It doesn’t look like it. No.

AM: Not as long as politics and inflation are taking hold and there’s elections to be won. That just can’t happen.

MK: I think investors, they go back to basics. They say, OK, where do we have a stable rule of law Where do we have any kind of predictability in the political process? Or even, you know, as I said, the US like the opportunity to have a more attractive business environment. 

And where do we have resources? You know, human resource, mineral resources, you know, and so that’s essentially the Gulf in the United States.

TN: Don’t talk to Texas too much, Mary, please. Okay, perfect. Guys, thanks for that.

Let’s move on to Brazil. Brazil’s obviously a really big story this week, and Albert, we saw Lula declared the winner. This was very much a 50-50 election. Of course there were irregularities. There were irregularities in every election. We’ve seen five days of protest now. I’ve got a tweet up from Steve Hanke talking about tens of thousands of Brazilians out who are Bolsonaro supporters.

But what’s really interesting to me about this is not really who wins, but Brazil is a huge supplier of things like energy, frozen chicken, soybeans, these sorts of things to China. And so this type of disruption can hurt that type of trade. We’ve also had Lula already make supportive comments of Russia shortly after the results were announced. So, Albert, what does this mean? What do we need to be looking out for?

AM: Commodities, really. Soybeans, soybeans, corn, ethanol and everything tied into that. Now you’re looking at Brazil, which you’d mentioned is a big supplier to China for soybeans. And then he goes on and declares that Putin is right in Ukraine. It just smells so bad right now for the United States and the longterm interest in the region.

Like I mentioned before, these push for leftist governments, it’s just not wise. I mean, it’s shortsighted.

Long term, these leftist governments are really susceptible to Beijing and Russia at the moment. So, you know, you’re out there and Lula comes out and immediately declares, like, the World Economic Forum is correct, and we’re going to take on deforestation, which is obviously going to obviously going to depress the soybean crowd because it takes years.

How the soybean crops work is like, you clear land, and you got to let them sit there for two years, and then you start rotating in and out. So there will be a steady supply of soybeans that the Chinese eat up pretty much, I think, like 60% or 70% of their crop every year. So what are we looking at? Higher food prices across the board, everywhere in the United States is specifically a problem.

TN: So I’m interested in that regional political angle you mentioned. So if we look at Brazil, we look at Venezuela, we look at Colombia, the government’s coming into kind of our region, and the influence that China has on, say, Venezuela with the debt that’s owed to China Development Bank and then with Brazil on the trade side and so on, is that a regional political risk for the US?

AM: It’s an incredible risk. I mean, you’re looking at the Argentinians about to sell a naval base to the Chinese. So now they have Atlantic access. Bolivia was a problem with the lithium mines to the Chinese. Peru was starting to set up naval bases for the Chinese. I mean, it’s like, how do we overlook this? This is right in our backyard, and we’re sitting there overlooking leftist governments taking control and then flipping against us the very next minute. I don’t understand what Blinken and Jake Sullivan are looking at here. What plan do they have for US interests long term when these governments routinely act against us? Venezuela decided to go start talks with Colombia again. US friendly nation in any sense of the word. So it just boggles my mind at the moment.

TN: So, Mary, you’ve sat in the seat. What would you be thinking at this point?

MK: Well, the key to all of this is Cuba because none of these regimes, many of them, would not be in power were it not for the Cuban security services, which is not really talked about, but, you know, Maduro good examples, publicly available information. His private security officers are all Cubans. So I think Biden had a fantastic opportunity early in his term. All these Cuban people came out under the streets. We should have turned on the Internet and allowed them to determine their own fate.

But instead, where did that go? Nobody seems to care. I think Latin America today for the administration, is more about domestic political ends, and it is about thinking strategically about wait a second. Okay, we’ve got some pretty decently large markets, as Travis  pointed out, right?

In Brazil, in Argentina, and Mexico is going way far away from us. That’s another huge story nobody’s talking about. Canada. Right? There’s a lot of opportunity within the hemisphere to create market openings and growth for all of us, but they’re not thinking about it. They really don’t care. It’s about talking about democracy in Brazil so they can talk about the state of democracy in the United States.

AM: Yeah, it’s just because Colombia was such a great US ally and the government was solidly behind the United States and a focal point for Latin American aspirations, and then you go and push for a leftist government that’s favorable to Maduro. I don’t understand what goes through their heads at the moment.

TN: Great. Okay, thanks for that, guys. Just one last question for all of you. Kind of don’t have to necessarily come in individually, but we’ve had all these economic announcements this week. We’ve got the elections, the midterms, US midterms next week. What are you guys looking for in the week ahead Generally? I guess, Albert, you have some specific ideas, but for Travis and Mary, what do you guys expect in the week ahead?

AM: For the midterms, it’s pretty much set in stone as the Republicans are going to take control of the elite the House most likely to Senate by two seats. So you know how the market reacts. Whether we start dumping is really going to probably depend on CPI.  So that’s actually what I’m going to really watch, the CPI so we can solidify the 75 basis point rate hike in December.

TN: Okay, great. Travis, any thoughts.

TK: In the political sphere, I’m just kind of looking for individuals that make sense. I’m not really, I don’t really have team allegiances. I just want somebody who’s talking sense.

I think the CPI will be interesting. In terms of intraweek stuff, I try not to think of markets that way. I try to think of a little more defensively and where I want to end up. So if I had a position on, I want to be able to ignore it for a month or two while I just focus on doing my job. I’m a pretty defensive player here. Especially with all the whip.

MK: I think even if Albert is right, and I think he is, that Republicans take control of one or more houses, the regulatory state is going to grind on. So I’m really not looking so much at the federal level. I’m looking at governor’s races where like a Republican Lee Zeldin as Governor of New York could open up fracking in New York.

TN: Is that a real possibility, do you think?

MK: I think it could be, absolutely. Remember Cuomo shut it down himself, so why couldn’t Zeldin open it up?

TN: No, but do you think Zeldin being elected is a real possibility, do you think?

MK: Oh yeah. Really? Remember Giuliani, the pollsters went out and they were like, hey, you’re going to vote for Rudy? And everyone on the Upper West Side said, no, I’d never vote for that guy. Right. And then they looked at the crime in the mess, and then they went into the polling moves and they went yeah, exactly. Right.

TN: So it could be New York, could be Michigan, some of these other places that have had some polarizing governors kind of move more to the right or to the middle.

TK: Do you think that policy at a state level is sufficient to justify capex for energy companies?

MK: No. I mean, really, only the Feds can make a meaningful difference at the margin. I talk a lot to clients about the regulatory state, because we don’t talk about it a lot. But that really is what depresses investment.

Categories
Podcasts

Tech giants reveal algorithm secrets to Beijing

This podcast is originally published in BBC Business Matters with the link here: https://www.bbc.co.uk/programmes/w172ydpzfk05ps8

Roger Hearing is joined by writer and journalist Karen Percy in Melbourne, and the Founder of AI firm Complete Intelligence, Tony Nash, in Houston. 

They discuss the tech giants in China that have shared details of their algorithms with Beijing for the first time. 

The first day of campaigning is getting under way in Brazil’s presidential elections, due to take place on the Second of October. What is the impact on the economy? 

The Prime Minister of Australia, Anthony Albanese, has confirmed his predecessor secretly held five parliamentary roles undertaken in the two years before losing power in May earlier this year. Meanwhile, in the US voters in Wyoming are expected to oust Liz Cheney from her seat in Congress in Republican primary elections taking place on Tuesday.

Transcript

BBC: Also say hello to Tony Nash, founder of AI firm Complete Intelligence, who’s joining us from Houston. So, Tony, very good evening to you.

TN: Hi, Roger. Good evening.

BBC: Good to have you with us. And we’re going to talk let me come to you coming. You’re involved in the AI world, which I guess is in that zone, too. I mean, our algorithms really the great bugbear that we think they are, as Ken was saying, leading us in places we perhaps don’t want to go but are unable to resist, or is it just a very simple way of selling us stuff?

TN: Sometimes they are, sometimes they’re not. These things are trade secrets, whether or not they are, say, patents or excuse me or something like that, these are trade secrets. And companies have spent a lot of time and a lot of money developing them. And so in China, you can expect to have these things demanded to be revealed because there really isn’t personal property in China as much as we think there is, there isn’t in the west and the US. We like to think that we have personal property and company owned property. And so if a government were to command a company to release an algorithm or a trade secret or a business process, then that would effectively be nationalization of property, and it’s just not right.

BBC: Yeah. Some members of Congress certainly want that, as we heard from Facebook and others.

TN: All they do is talk for a living. They’ve never built a business. They don’t know what it’s like to actually value something. And so if something were commanded to be opened, unless it was for a national security reason, which everyone understands, but if things were commanded to be opened, it would be a long fight. But property rights, intellectual property rights are a really big deal, especially over the last 30, 40 years, as we’ve had a software led world. So, again, you can get this in China, where there really are not individual property rights. And for one to expect to have individual property rights in China is silly. But in the west, one would hope that we would have property rights, especially intellectual property rights, and this would not be something that would happen.

BBC: Yeah, but I suppose there’s always compromise in that. That’s a fair point, Tony, in the sense that these are mega companies with enormous power and they are trading in our data. So it isn’t a normal commercial relationship, is it?

TN: No, Roger. What governments have to do and what citizens have to do, if there is objectionable behavior, then they have to legislate and regulate that objectionable behavior. If people are being discriminated against, if people are being threatened, if one political party or another is being favored, those things need to be regulated and legislated. But seizing intellectual property is not the way to do it because the precedent there is devastating. And in the US. Where you have an IP based economy, it would take down valuations of massive companies very quickly.

BBC: But we’ve heard, Tony, that Twitter has effectively open source on this. I mean, maybe they’re not doing brilliantly, but they’re doing okay.

TN: That Twitter API.

TN: Has been available for years, and it kind of tells you what’s going on, but it really doesn’t. And so it’s not a credible example, really, because they kind of let you know a little bit of things. And sure, you can download the data, and that’s a business that Twitter has had for a long, long time, where you can download the data to detect patterns and these sorts of things, but it’s not really letting go of their trade secrets, and that’s where the value is.

KP: That one of the concerns I would have is that politicians, though, rarely want to regulate or legislate. There’s this whole kind of mantra like, oh, no, we’ll let you do your thing, whether it’s the market or whatever. Politicians don’t like to regulate, they don’t like to legislate, and they’re in the rub for me.

BBC: Well, I think there are politicians and politicians, if I can anticipate what I.

TN: Mean, I live in America. Politicians here love to regulate.

BBC: Maybe economics. Tell me there’s a funny aspect of this that Brazil almost seems to be shadowing the US. In a funny sort of way. A similar kind of president, perhaps, in Bolsonaro to what we saw with Trump and some of the same economic issues.

TN: Yeah, I really don’t follow Bolsonaro all that closely, although I know he’s populist and he’s had some new economic measures go out recently that were very populous. So from that respect, you may be right. I think Brazilians have seen Lula before, and they’ve seen Bolsonaro before, so they know what to expect from each president. So at least they’re voting with their eyes open because they know how each performed in previous administrations.

BBC: Yeah, which may of course, be what’s informing the polling, if we believe the polling at the moment. Exactly. And tell you, one of the aspects always seems to me is this is the classic sleeping giant. I mean, it’s an enormous country with enormous resources, and one always bumps into Brazilians. Almost everyone goes, you still about China in a way. It’s a sleeping giant of this. It’s odd that a country like this hasn’t risen to its proper position in the global economy.

TN: Well, but it’s getting there. If you look at, for example, the AG exports that Brazil provides to China, it is a major supplier of the Chinese economy with AG and metals. So Brazil is getting there, and it’s gradually building up. Of course, there’s still a lot of poverty there, and I don’t know of administration in Brazil, and maybe I’m overstepping here, but I don’t know of an administration in Brazil that hasn’t been accused of corruption. Lula was, Temerer was.

BBC: They all are. I think it seems to be a regular thing. True or not, it seems to be there.

TN: Right the time I was absolved. So I just want to make that clear. But they were accused of that coming out of office.

BBC: Of course, one of her key issues is what happened on January 6. She’s on the Congressional committee investigating that at the moment. So meanwhile, Mr. Trump has backed a candidate rivaling her, Harriet Huggerman, who opinion polls suggests will easily win the Republican nomination for the seat. Miss Cheney earlier urged Democrats to register as Republicans in order to boost her slim prospect. I mean, Tony, this is an extraordinary sort of development in a way, because this change is close. It comes really to Republican royalty, isn’t she?

TN: Unfortunately, yes. So we don’t really like royalty in American politics. And so I think part of the problem here is that Lynn Cheney is in the House of Representatives and she represents a state that, whether she likes it or not, is very pro Trump. And so she is not representing her constituents. And at the end of the day, that’s really what this story comes down to, is when a representative is elected by a state, the people expect that representative to actually represent their views in Washington, DC. That’s how the US legislature works. And what’s happened is Liz Cheney has decided that she doesn’t want to represent the people of Wyoming and she wants to have her own views and do things that they don’t want her to do. And that’s really what this comes down to.

BBC: Isn’t there an issue here, though, to do with you delegate and representative? I mean, many people who represent an area in the legislature aren’t necessarily going to transmit the views of the people who elected them because they were elected to have their views heard in the parliament or wherever it is.

TN: In the US Congress. In the House of Representatives. They have two year tenure and they have to be elected every two years. And that’s to ensure that we have a diversity of opinion in Washington, DC. Whether or not one likes Trump or doesn’t like Trump doesn’t matter. I think the issue here is that Liz Cheney is not representing the views of her constituents and they have every prerogative to vote her out. And that’s really what this is about. The people of Wyoming, I haven’t seen the results. I don’t think polls are closed yet.

BBC: But no, I think they’re still open. This Cheney represents the people of Wyoming, not just it is predominantly a Republican, as you say, but not just the Republican Party. She represents the people who voted for it.

TN: But there is one representative from Wyoming. And so, yes, she represents the people of Wyoming. But if she’s a representative of a political party and she’s elected by that political party and the voters in that, so the Republican Party of Wyoming has actually censored her. So they’ve told her that the actions she’s taking are not endorsed by the republican Party of Wyoming. She’s known for over a year. So shortly after the 2020 election, they censored her. And so she’s been way out of bounds for almost two years because it’s the party, she has to go through the party system at the state level to get on the ballot for the primary, so she can win the primary to win the election. And so she really does report to the people and to the party in Wyoming. So it’s kind of the ugly side of democracy, but there is accountability in representation.

BBC: Well, clearly, but I suppose the other thing is that I’ve heard reported is that Liz Cheney, in terms of her views, apart from on the subject of Donald Trump, her views aligned pretty perfectly with most of the Republican voters of Wyoming. Very conservative on most issues. It does seem to be Trump. That’s the issue. Which seems strange to hear that this man still has so much influence over almost everything that happens in US politics.

TN: I don’t know that that’s the case. I think, to be very honest, I think Trump is good for US media and I think US media love covering Trump. Trump has very little to do with a lot that goes on. But if you watch US media, every day has a story about Trump and that story gets the most clicks and the most views. So whether or not Trump has something to do with the story, us media love to make the story about Trump because they know they will get traffic on that story.

BBC: But the reason they get traffic on the story is because people are interested in them. It’s a circle, isn’t it?

TN: Well, I don’t know. I think most people would like to understand what the actual issues are exclusive of Trump, but with the obsession that US media have on Trump, people just can’t get away from it because you have a kind of a splintered media environment in the US. And a lot of that is partisan to the left and to the right. So people can get partisan news really anywhere. But it’s the main US media that really seemed to have this obsession with Trump that they just can’t quit because he gets views and he gets airtime and people watch their shows when he’s on it.

BBC: That would be true in Texas as well as Wyoming, where you are.

TN: Anywhere in the US.

If a story is about Trump, some people intensively hate him, some people intensively love him, and people are in the middle and you just cannot avoid it. You just can’t avoid it.

BBC: Penny I mean, your neck of the woods, I guess that might be where the William Mammoth ends up if colossal get their way. How do you feel about all this, Penny?

TN: Well, it’s a Texas company that did it exactly. Maybe they just wanted more things to hunt, right? We like to hunt in Texas.

BBC: Everything is big. Of course, in Texas. So that makes some sense.

TN: Yeah. So if we do make woolly mammoths, great. And I think I’m kidding about the hunting, but I think it’s really interesting as different species are, say, overhunted or whatever, I’m curious how they’ll be accepted once they’re reintroduced. So let’s say someone is the first farmer to find this to be a pest and shoots it. So how will that person be treated if this marsupial is reintroduced?

BBC: That’s a really key question.

Categories
Week Ahead

The Week Ahead – 25 Jul 2022: Europe is a mess. What’s next?

Get 95% accuracy on your markets forecasts with CI Futures. Learn more here: https://cipromo.wpcompleteintel.com

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:

  1. Europe is a mess. What’s next?
  2. Aluminum supply shock
  3. Tech SNA(P)FU
  4. 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.

Follow The Week Ahead experts on Twitter:

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

Time Stamps

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?

Categories
Week Ahead

The Week Ahead – 09 May 2022

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

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

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

Key themes:

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

This is the 17th episode of The Week Ahead in collaboration with Complete Intelligence and Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

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

Listen to the podcast on Spotify:

Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: An attorney should know words.

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

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

TN: Right.

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

TN: Sam?

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

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

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

SR: Yes.

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

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

TS: Middle ground, too, I would say.

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

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

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

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

TN: Normal economic people do stuff.

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

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

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

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

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

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

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

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

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

TN: Okay.

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

SR: That was insane.

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

TN: Fascinating.

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

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

SR: I haven’t seen a single genius.

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

TN: Okay.

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

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

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

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

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

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

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

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

TN: Okay.

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

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

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

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

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

TS: They want to be able to do it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: Okay.

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

TN: Yeah.

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

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

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

AM: Yeah.

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

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

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

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

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

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

TN: Okay, Sam, what’s on your mind?

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

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

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

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

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

TN: Supposed Fed your eyes on China.

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

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

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

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

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

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

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

AM: Thanks, Tony.

SR: Thank you, Tony.

Categories
Podcasts

Tech Crumbles as Spigots Close

TECH CRUMBLES AS SPIGOTS CLOSE

Tech stocks on Nasdaq and NYSE are being pummelled as momentum behind the Fed’s unwinding policy continues. Tony Nash, CEO, Complete Intelligence, discusses.

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/tech-crumbles-as-spigots-close on January 20, 2022.

Show Notes

KHC: BFM 89.9 20th of January 2022, 7:06 in the morning with me Khoo Hsu Chuang with Philip See. Now let’s look at how global markets closed yesterday.

PS: Oh, it was terrible. I think that was a lot of downward pressure in the US. Down S&P500 were down 1%, Nasdaq was down one 2%. Asian markets were relatively mixed. The Nikkei was down two 8%. Hung Seng up marginally zero 6%, Shanghai Composite down zero 3%, STI up zero 1%, and back home, FBM KLCI down zero 8%.

KHC: And to discuss what’s happening in global markets, we now welcome Tony Nash, the chief executive of Complete Intelligence. Tony, Nasdaq down 8.3% year to date. It’s been a bit of a bloodbath. How concerned should equity investors be at this point in time, especially those that are heavily into tech companies?

TN: Yeah, if they’re heavily invested in tech companies, they should be very concerned when interest rates rise. It’s a signal that there should be rotation out of technology. And that’s clearly what’s going on. So if we look at Apple, for example, Apple was down over 2% today. They’ve had a really hard time recovering the kind of $180 share peak they hit in early December. So people have known for a month and a half now. Well, definitely over a month that there’s been a rotation out of tech. So we expect headwind for several months until we get a clear indication of the path that the Fed’s going to undertake and how steeply they’re going to raise rates and start to tighten their balance sheet.

PS: Do you think the markets are priced in all the hikes planned?

TN: I think markets are trying to figure out what rates they’re going to do. I mean, there’s gossip right now that they’re going to raise 50 basis points in March, which would be probably an overshoot. But that’s part of the reason you’re seeing such volatility in equities right now is people aren’t really sure. And it’s a debate. It’s an ongoing debate. So where do you put your money? Well, you look at commodities, you look at commodity companies, energy companies, more traditional say manufacturing, not durable goods. People really stocked up on durable goods over the last two years, but other types of manufacturing companies could be interesting.

KHC: And Tony, we’ll talk about oil in just a second. But where do you think the funds are flowing? I know it’s a liquid activity, but where are the funds flowing away from tech into?

TN: Well, if you look at Walmart, there’s some very reliable, say, retail names that they’re going into. If you look at some of the resource plays, like Goldfields was up almost 13% today, volley was up 4.5%. So some of these commodity plays are really intercepting those games.

KHC: That’s right. And of course, talking about commodities, oil is on a tail 13% higher for Brent at $88. West Texas is up 15% to $87. What are the key drivers behind this upper trajectory beyond obviously this market driven flows, Tony?

TN: Yeah. I mean, part of it is the rotation in the market. There are some supply constraints that have been talked about and kind of been undertaken over the past week with some activities in Iraq between Iraq and Turkey, Libya. And there are some political risks, of course, Kazakhstan, Ukraine and other places. But our view is that oil is really kind of topped out for this run. There’s potentially a little more upside, but we don’t necessarily expect oil to take a run at, say $100 right now. We expect a little bit of a pullback certainly later in the year. We expect much higher crude prices.

PS: Do you think this will have any short term impact on the travel industry then and Airlines particularly?

TN: Yes, of course, it depends on what happens with jet fuel and the magnitude of the rise with jet fuel. But Gosh Airlines are contending with enough problems already as it is. So I think for them it’s just kind of another headwind to kind of throw in their pocket.

KHC: And Tony moving into China, and of course, they are pursuing a zero covet policy. They’ve locked down key shipping ports like Nimbo. Obviously, global supply chain problems have been exacerbated by that. So what measures can countries outside China do, for example, nausea, to alleviate these issues in the short, long term?

PS: I think that’s a technology issue.

TN: Sorry, guys. No, that’s my technology issue.

I apologize.

We’ve had these Covid issues for about two years now, and I think the real problem there is policy uncertainty, and some of these policies are becoming quite dangerous. They were very understandable early in the pandemic. But as we’ve started to recognize the issues, these things really need to be tightened down. So, for example, I think the best thing or we think the best thing countries outside of China could do is accept COVID as endemic and convince China that it’s now endemic. Why is that important? Well, we’ve really been in a bunker mentality, and we can’t really stay in that for another two, five or ten years. So if we look over the past day or so, the UK and Denmark have both announced normalization over the next week, and that’s ending things like work from home, ending vaccine requirements and passports, that sort of thing. The impact will be social, it will be economic, and of course, there will be political benefits. So the only reason these politicians are moving in that direction is because they’re getting such political pressure to unwind the requirements that they’re finally doing it because China is the center of global supply chains.

There has to be political pressure for China to normalize because supply chain constraints are affecting every country. And so this is something that really needs to happen. Now if China will not normalize, if they continue to close factories and ports, then companies just need to move their supply chains closer to their consumption countries. And I say just it’s a very complicated activity, but they’ve certainly had two years to start preparing to move those things. So they should accelerate those plans.

PS: And, you know, Tony keeping on the theme of unwinding and going back to normal, I guess many would say increasing interest rates would be kind of normalizing. But I wonder what their applications will be for countries like Brazil, Egypt, Argentina, South Africa and Turkey Who are potentially vulnerable to rising US rates. What’s your assessment on that?

TN: Yeah, it’s going to be hard for them. These are countries with weak and volatile currencies. Turkish Leira, Brazil riyal in Asia, I work particularly about the Tai Baht and the Rupia and Indonesia, I think they’re both vulnerable to rate hikes. I think part of what we’re witnessing is a transition from government led, say, planning. And for the last two years we’ve all looked to government for leadership on this stuff. And I think we’re starting to see a transition toward private sector leadership, at least in developed countries, at least in the west, those private sector companies will feel that currency volatility in their operations in countries like Indonesia, Thailand, Turkey and so on and so forth. So it’s not going to be painless for those governments, for the people in those countries or for the companies that operate there.

KHC: Tony, delightful to have you on again. Thank you so much for your time. That was Tony Nash, chief executive of Complete Intelligence. I don’t know if you’re an investor this year. I mean, what do you do? We’re just literally 20 days into the new year and it’s been tumultuous, right?

PS: It’s choppy waters. I mean, look at year to date, right? All down. I think S&P, Dow Jones, Nasdaq, Nasdaq down 8% year to date.

KHC: Yes, but then my dad a humongous last eleven years, right? So they’ve seen the market capital explode. A bit of correction isn’t bad for the soul sometimes, but you just wonder Where’s the end inside, right?

PS: Correct. I mean, the debate is I think earnings expect to be robust, but the issue is your evaluations.

Categories
QuickHit

The Death of Growth: Old & rich vs young & poor in 2030 & beyond (Part 2)

The world’s birth rate is changing. Clint Laurent from Global Demographics shares surprising discoveries that he believes will happen in the next 10 years and how this will shape the world?

 

This is the second part of this discussion. Go here for part one.

 

Clint started Global Demographics in 1996 and cover 117 countries throughout the world and China. They do that right down to county level of 2,248 counties. Clint believes that demographics are better than financial data from the point of view of forecasting  because they tend to be stable trends.

 

Global Demographics is able to come up with reliable forecasts at least 15 years out. After 15 years, reliability goes down and they are typically never more plus or minus 5% error in our long-term forecast. Their clients are mainly consumer goods companies, infrastructure backbones and things like that.

 

 

 

 

 

 

Subscribe to our Youtube Channel.

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on June 17, 2021.

 

The views and opinions expressed in this QuickHit Clint Demographics Part 2 QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: So Indonesia, India, Brazil and so on, so capital formation, capital investment is the real weakness there and it seems to me that’s a function of largely education. Is that fair to say?

 

CL: That’s exactly what it is. I mean, they you know, as they get the education right and, you know, they’re working on it, most of these countries that have been quite responsible in that area. And as they get that right, so the investment comes in, so the consumer gets more affluent and becomes a virtuous circle.

 

TN: OK, well, what timescale are we talking about for that consumption to come in a really notable way, for example, to take the place of, say, the under 40 Chinese consumption or the under 40, say, Western Europe or American consumption?

 

CL: Well, that’s the bad news. I mean, when you take India at least 15 years to get there. Because the education is only just coming right. And again to pick on India. India’s urbanization, 10 years ago, it was 30% of the population. Today, it’s 33% of the population.

 

TN: OK. So it’s not happening nearly fast enough.

 

CL: No. When you’re an uneducated girl in a village, why would you go to a slum somewhere of a big city? Your lifestyle would be actually worse, not better. And so they hadn’t been able to get that China effect of moving people from the low productivity agriculture into high productivity urban type of work.

 

TN: Yeah, but I think a lot of the, particularly the Westerners who are watching this would say, yeah, but I’ve been to Gurgaon and I’ve, you know, I’ve been to that kind of tech hubs in India. And I see, you know, a lot of women coming up in those hubs or have come up in those hubs over the last 10 or 20 years. But is not just such a small percentage that it matters, but it’s not making a huge difference?

 

CL: Exactly. It’s a small percentage. I mean, remember India is just behind China in terms of total population now. And by 2045, there’s 1.5 billion people. Because they’ve got the birthrate right under control as well. It’s dropping. But again, they’ve got an inertia of more women of childbearing age coming through. So total births keep going up. So they’ve got this problem of just too many people looking for jobs, which keeps the wage rates down. And that. And that’s what’s frustrating the education system, too, is they have to keep growing the number of school places to stand still, let alone expand. But they’re getting that right. So I don’t want to sound negative about that. All these countries are doing quite nicely on that, some positive.

 

And so but one important point to make is the demographic dividend hasn’t been collected. There’s was a lot of talk about India having a demographic dividend because there are always young people entering working age. But the trouble is they weren’t well enough educated, so they didn’t find jobs. In 2010, the propensity of a working age person to be in work was 58%. It’s now 50%. In other words, they couldn’t find the jobs for these people, so the dividend never paid off.

 

TN: OK, so jobs lead to consumption, of course.

 

CL: That’s right.

 

TN: But I guess. So it’s going to take these countries 10 to 15 years or more to get the quality of jobs that are needed.

 

CL: Yeah.

 

TN: So, you know, that growth that we’ve lazily relied on, say, China for the last 10 or 20 or 20 to 30 years, is there a gap between now and 10 to 15 years from now in terms of the rate of growth for, say, consumer goods and say, economic kind of new market entry, that sort of thing?

 

CL: Yeah, well, this is the crisis that’s coming. Because if we take, again, the kind of what I call the family stage countries, India, Brazil, etc, they actually need around about 250 million extra jobs in the next 25 years to get, to maintain their existing level of employment. Not lift it. Just maintain it. And that gives them a reasonable level of income. Not great, but hopefully with education situation, the earnings go up.

 

But let me put another layer on the cake, so to speak. This is fourth group of countries, which I call young and poor. I call them young because the median age of all of the countries in this group is 20 and some of them have a median age of 14. Mali and Niger, they both have a median age of 14.

 

That means half the population in those countries is under the age of 14 today. Yeah, and their birth rates are high. The average birth rate, an unweighted across these countries is 130 per thousand women. Most countries are at 40 elsewhere in the world. And the number of women of childbearing age, of course, are going up dramatically because of that as well. So even though the birthrate is starting to come down, it goes up dramatically. And it has a seismic effect.

 

First of all, is roughly a billion people in this part of the world at the moment. In 25 years time, there’s two billion of these people. In other words, in twenty five years, they add a billion people to their populations. And if I can just go on and to take Nigeria, for example, at the moment, has 45 million school age children, irrespective whether they are going to school, most of them are not. 45 million. It’s 90 million in 25 years time. Just to stand still on education, they have to double their education budget. And so, little own issues need improving.

 

TN: OK, so governments take, need tax revenue to grow their budgets. So will there will there be the incomes to allow them to grow those budgets just to keep up with where they are? And further, will they be able to accelerate the job growth to make sure they have those incomes, to keep their education, to improve their education like, say, India or Indonesia is doing well?

 

CL: Well, this is the crisis that’s coming because the answer simply is no. And it’s no for the simple reason that up until now, this is really what I was saying we were at a cusp. Up until now, the growth in consumption by the older affluent or the older countries generally, which includes China, has been such that it’s kept relatively full employment throughout the world.

 

There’s been enough jobs for those who are looking for jobs. And that doesn’t sound a bit. But even the young, poor countries have been trotting along at about 55% of working age people employed, which seems to work out quite well. But suddenly that whole relationship changes. As I said, the countries that account for, well, the old affluent account for 63% of global consumption. The other old add another 14% say up to 77% or 80%, chuck in a bit of India, 80%, which is also flattening out. So the countries account for 80% of the money that’s spent by households now flatten out in growth in their demand.

 

Layer on top of that, there’s a continuous increase in productivity per worker. The amount of number of workers needed to meet the new additional demand over the next 25 years is 300 million. And as I told you earlier, this 740 million people that are going to be looking for an extra job.

 

It’s going to be roughly 400 million people, mainly in the poor countries, are in a little bit in need, family stage countries, who are at working age, would like to have a job, but can’t get a job. That’s 400 million.

 

TN: That’s astounding. OK, so that’s as big as, say, the EU, right?

 

CL: Yeah, well, bigger.

 

TN: So if everyone in the EU didn’t have a job but they wanted a job. Man, woman and child couldn’t get a job.

 

CL: That’s right.

 

TN: So that’s terrible. So what do you think those people will do? What do you think some of the effects will be of this? First of all, where is this, kind of generally, geographically? Is this the kind of Bangladesh, Nigeria, kind of those types of countries?

 

CL: It’s based of the African continent and what we call South India, but not including India or Sri Lanka, which will be in Tibet, out there.

 

TN: So Bangladesh, Pakistan, Central Asia generally.

 

CL: And there’s a few small countries, obviously, in South America or Central America that are falling into this category as well. So it’s reasonably concentrated geographically. And it’s a real worry. And I think of myself. If I was turning, well, let’s say 20 and I cannot get a job. I’m scrambling for food. I’m scrambling for water, in some places in the world. What do I do? I’ve got nothing to lose. And that’s what something dramatic, I would rot and just die miserable, which is terrible.

 

So I think the world has a fairly major migration problem coming. These people are going to walk north. I would. So I don’t blame them. But it’s a desperate situation. So much so that in my own mind, it’s all very well to donate money to buy mosquito nets and things like that. I actually think would be better to donate money for a TV and an Internet connection so we could educate the kids. Because we could deliver education quite cheaply using modern technology. And if you could educate them, then they could do more productive things and then and so on and so on. You get the part of that. But there’s no easy solution to this one.

 

These people are largely alive today, will be alive in the next 10 years. And the consumption trends, well, they’re there too. The people with the money are getting older and saving. So the drawbridges are coming up. So this is.

 

TN: So migration. The migration issues we’ve seen over the last, say, 5 to 10 years sounds to me that they only intensify over the next, say, 15 to 20 years.

 

CL: Oh, incredibly so.

 

TN: And Europe is really the focal point. Yes. The US has some issues and maybe India, China have some issues. But it really seems to me that Europe is the major focal point there.

 

CL: But it’s the easy one to get to.

 

TN: Sure. Yeah.

 

CL: But there’s some other dimensions of migration, too, which is starting to come under stress. And I mean, for example, let’s take the U.K. It has one nurse for every 440 people in the population. So if you get sick, your access to a nurse is pretty good. But the UK hires nurses who have been trained and educated in the Philippines where there’s one nurse for every 4000 people in the population. Is that morally correct? Should affluent countries take skilled workers, from developing countries?

 

TN: But can you blame that worker for wanting to go to UK?

 

CL: Not at all. If I was the nurse, I’d be on the plane. I mean, basically, you’ve got the individual motivation and you’ve got the moral issue, and you’ve got the need. And then even if you take a country like Greece, which everyone says, oh, that’s nice and comfortable.

 

Greece’s population has dropped by one million people in the last 10 years. And that one million that are gone are skilled workers who got on a train and went north to Germany because under the EU, they can move.

 

TN: What percentage of the population is that? One?

 

CL: About 10%.

 

TN: 10% of the population?

 

CL: Well, you know, it’s a big drop. And again, you don’t blame the skilled plumber or electrician or whatever because he or she can earn 2 to 3 times as much going to Germany or getting across to Britain, which they could do perfectly legally. And then in 5 years time, the wife is with them, the kids are going to school, that kids speak German now, they never go back.

 

TN: So does this change, does this, you know, let’s say the education deficit issues and the jobs deficit issues in Africa, does it change immigration policy in Europe, for example, in the way Australia has the checklist of skills and those sorts of things to to migrate?

 

Does Europe come more to that type of migration policy to where they incentivize people, let’s say, in parts of Africa before coming, meaning get educated, you know, these sorts of things. And you can definitely come in. I mean, it certainly sounds like something that would be really helpful for places like Greece.

 

CL: Yeah, but not too helpful for places like Nigeria.

 

TN: Right.

 

CL: They’re losing the skilled worker. And the ability to lift the Nigerian economy is going to be a function of having skilled people. And if Greece takes them, that’s actually not that great. Right. So, yeah, you sort of resolve the great problem, but you don’t resolve the core problem, which is the change so to speak. Yeah. So it’s interesting because Greece, with its drop in population, its household values are dropping because the number of households is going down. And that’s the core asset of many households. So it’s trying to create some economic problems as well because the asset they could borrow against is going down in value, not going up in value. But that’s not just Greece. It’s Italy, Spain. It’s Romania, it’s Poland. And that being, you know, some of the talents are being sucked out. And that’s not good.

 

TN: So in sum, let me try to sum this up, because this has been a great conversation and it’s really opened up a lot of things I haven’t really thought about before. So so global consumption generally for, let’s say, the next 10 years or so is relatively stable.

 

We won’t see the rapid expansion that we saw in places like China over the last 10 or 20 years. So let’s say the pull on commodities right now, the inflation we’re seeing, the, you know, this sort of thing, that stuff really tamps down pretty quickly and really stabilizes for maybe a decade or so.

 

CL: Exactly.

 

TN: Once that stabilizes, then we see real disparities as these kind of young, poor countries explode in population. But the wealthy countries are pretty stable and continue to be pretty rich. Right. So we kind of have a status quo for the next decade or so. But then after that, there’s a real danger that emerges from global disparity.

 

CL: That’s right. You start to have a major, what I’d call a population crisis.

 

TN: Wow. OK. It’s a little bit dire. But this is great. Before we go, can you talk about, I know you have a couple of books coming out. Can you tell us what they’re about? I know they’re a little bit from coming to press, but I think it would be really helpful for people to understand what you’re writing about.

 

CL: Right. Well, one of the two books is basically called 2045: The Growing Demographic Crisis. And it’s pretty much along the lines that I’ve just discussed, the difference is, all the data is there. And you’ve got the data, if you like, at the segment level, which also go to by country level. And you can see how the numbers play out. It’s not something that we’re making these numbers up. They’re actually there. They’re pretty solid. And the core source, of course, is the World Bank and the United Nations that you can’t really argue with that. And it’s all old numbers behind what I’ve just discussed.

 

And the second book coming out is called China: 2040. Similar sort of theme. And what I have done that is China is going through a lot of changes that I’ve explained and China will continue to be important economically and politically for the next 10 years at least, if not longer. We know that.

 

So it’s actually quite important that people have a better understanding of what China is like demographically. And it’s not one country, it’s at least thirty one countries. The differences in consumption within that, it’s quite diversified.

 

This book is, if you like, the primer for someone that’s either doing business, thinking of doing business, investing in, whatever, into China. If you haven’t read it and you don’t know China, then you’d be dealing somewhat riskilly. If you read this, it’ll help you focus where the opportunities potentially are. Thanks for the opportunity to mention.

 

TN: Of course. Thank you so much for your time. You’ve been very generous and I think we’ve taken it a lot. I think of it to watch this two or three times before I kind of fully take it in. So I really appreciate it.

 

Further watching, please. We’d really appreciate if you’d like the video. We’d love it if you’d subscribe to our YouTube channel. And we’ll see you next time. Thank. Thanks very much.

 

CL: Thank you.

Categories
QuickHit

The Death of Growth: Old & rich vs young & poor in 2030 & beyond (Part 1)

Our guest is Clint Laurent from Global Demographics, an amazing demographer, businessman and observer of global trends long before they really take hold. He shares surprising observations that he believes will happen in the next 5 to 10 years.

 

This is the first of a two-part discussion. Watch the second part here.

 

Clint started Global Demographics in 1996 and cover 117 countries throughout the world and China. They do that right down to county level of 2,248 counties. Clint believes that demographics are better than financial data from the point of view of forecasting  because they tend to be stable trends.

 

Global Demographics is able to come up with reliable forecasts at least 15 years out. After 15 years, reliability goes down and they are typically never more plus or minus 5% error in our long-term forecast. Their clients are mainly consumer goods companies, infrastructure backbones and things like that.

 

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📺 Subscribe to our Youtube Channel.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on June 17, 2021.

 

The views and opinions expressed in this QuickHit Clint Demographics 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: Over the last year or so, we’ve seen the pandemic. We’re now having this bullwhip effect with inflation and other things. But I guess this capping off in the last 20 years where we’ve seen China as the global growth market and the marginal consumer for almost everything. And it’s really forced me to think what’s next. You and I published a piece about a year and a half ago around China’s population topping out around 2023, 2024. And so I’m really curious, what do you see happening in the next 5 to 10 years that will really come as a surprise to people? What are some of your observations over the next decade?

 

CL: The world is actually as bizarrely almost on a bit of a cusp at the moment. The pandemic is almost irrelevant to what was going to happen. I mean, I know the pandemic caused a lot of economic disturbance, obviously affected some people’s lives quite significantly. But really, there was a lot of change that was about to start to happen anyhow, irrespective of whether or not the pandemic came along.

 

From a demographic point of view, the pandemic is not really very relevant. I’m currently based in the UK and the people who have unfortunately died from it, most of them would have died in the next two years anyhow because they had severe underlying health situations. And so, its effect on death rates has actually been very, very marginal.

 

Secondly, most deaths being over the age of 60, that means it doesn’t affect the labor force, it doesn’t affect the propensity to have children. So really, it will be a horrible little blip in the history of mankind. And hopefully we move on from it and the vaccines keep working. And so a little bit of hope there. But that aside, it was going to be a big change.

 

And if I can explain the change in the following ways.

 

Up to now, the world has perhaps been a little bit lucky in the sense to be, first of all, had what I call the Older-Affluent countries, and that’s Western Europe, North America and what I call affluent Asia — Japan, Taiwan, Australia. All of those countries, which are actually only 14% of the world’s population, account for a very significant proportion of the global consumption. As you know, it grew quite rapidly, which was really quite good. And that is really the first big change is going to  come into effect.

 

What’s already started to happen is people. The only growth in these countries is people over the age of 40. Every age group below that is in absolute decline. So even if they’re going up in affluence, the young affluent market is no longer a growth market. It’s more or less stable. Even if you add in increased incomes, which still occur, but at a slower rate. So you’re now looking at a 40+ age group, and in some countries, obviously, Japan is one, it’s 60+ that are the age group that’s growing.

 

So all of those societies, to some extent, are in a lot of trouble. They’re flattening out. They’ve moved from a pyramid population to a square, and that’s actually very good.

 

A lot of people say you should have a pyramid population with young people coming through and looking after the old. That’s actually the poverty trap. Because if young people come through, the dependance, first of all, will keep driving the society down. With a square, then the same number of people need education each year, the same number of people need health care each year. The capacity is there and it’s an improvement of quality rather than an increase of quantity.

 

TN: So you’re saying with these wealthy developed nations, Japan is an extreme example, consumption isn’t really the worry. It’s the growth that’s falling off. So the consumption is stable. It’s just not growing.

 

CL: Exactly. There’s one other big change to appreciate is what people say because they’re getting old, they’re going to run out of labor force. And here’s a statistic for you: In Japan, 25% of males, 70 to 74 are still in full-time employment. And you’re saying, “yeah, well, that’s Japan. It’s different everywhere else in the world.” You know, it’s exactly the same statistic in the United States.

 

The aged worker is a new phenomenon. In fact, the age worker is the fastest growing demographic. So these countries actually are not running out of workers. And the assumption that we all go decrepit and work after age 64 is just wrong. I am over 65, as you can probably guess. I don’t have a single friend who’s not in full-time employment at this point in time, enjoying it. It raises lots of issues.

 

So the labor force keeps going in these countries as well. So they don’t even need migrant workers to sustain these countries. So they are nice, comfortable niche. Growing steadily, not phenomenally. You’re talking about 1%, less than 1% growth in total consumer spending. Households are getting a little more affluent. Number of households is flattened out, which would have implications for the housing market. But it’s not going down, so it’s actually not too bad.

 

TN: So you say GDP is pretty stable, but what’s happening to GDP per capita in those countries? Does it continue to grow?

 

CL: It does, but just at a much slower rate. You’re talking 1% or even less than 1%, but it’s positive. And do remember, 1% of a hundred thousand US dollars is more money than the total income of households at the other end of the spectrum. Much of their spending power is quite significant. But a really important point to keep in your mind right now is that consumption expenditure will start to level out. It won’t hit that high growth rate anymore. It drops back to about 1% or even slightly lower.

 

Then the other big change you’ve got is what I call the next group of countries, which is older but not so affluent. And that obviously includes China. Now, let’s just put China to one side for the moment and look at the other countries in that group. You’re talking about Russia and the Eastern European countries. All of which have huge potential because like the previous group that I just talked about, they score really well on education.

 

And countries that score well on education, with the right capital investment, can lift the productivity. The countries that have weak education, it doesn’t matter how much capital you throw into them, they don’t lift their productivity. And there’s plenty of statistics to prove that. So these countries actually have a resource. I mean, Latvia, Romania. It doesn’t really matter. And that actually got the one thing that’s really hard to do. Good education.

 

Why is it hard to do? India has been really bad on education up to now. It finally has universal education. Every kid, 5 to 12 is now supposed to be in school. But it takes another 10 years before some of those kids come out of school and get into work. And it takes another 10 years before the workforce has become sufficiently skilled that the capital investment comes and lifts the productivity.

 

So these Eastern European countries and Russia are actually interesting from the QuickHit point of view. They start getting the fixed capital investment right, got the education right. They could actually be the next growth area. Only warning to you is they also are relatively old. So it’s a growth area of 40 pluses and 60 pluses. That is going to happen because they’re under earning at the moment. They can lift their incomes, obviously, buy bit of car, bit of clothing, all of those sort of things. But it’s a growth area of an older population, not a young population.

 

TN: And it’s something that nobody’s watching, Clint. Like, I don’t think anybody is really looking for that even as a possibility. A lot of people have written Russia off, see it as a petro state or whatever, and central and Eastern Europe is kind of just kind of a no man’s land in many cases. So some manufacturing there. There’s some services there in terms of globalization. But I don’t think there’s a lot of expectation to see rapid growth there and high productivity there. So I think that’s a really interesting question mark that most people aren’t even thinking about.

 

CL: That’s right. And if you go into these countries physically, you start to see some of the big brands starting to look at them. And you come across someone from XYZ Corporation there. We just have a little look. So some people are starting to see that it’s there. It’s just as you say, it’s not visible yet.

 

Let’s switch to China briefly. China slightly different and also very similar. First of all, remember 1989, China introduced the one child policy. That came under a huge amount of criticism. But ignoring how you feel about that, is one very simple thing it achieved. It levelled off the number of young kids needed to be educated. And subsequently started, it was 1979, they introduced. Such that by 1984, when they introduced compulsory education for all six to 12 year olds, they were talking of a relatively stable number of kids. So they could focus on the quality of education. And so every kid’s been going to school in such when you go to the year 2000, you’ve got this population still living in the rural areas. But who could read, write and do sums and all of those sort of things. Could get on their bike, go into town and get a job in a factory or an office or whatever.

And the differential between an urban worker and rural worker in China is 3.6. And that’s actually how China drove its growth and its productivity per worker and its influence. What it did is, it said, take all these people who are nice people, but not well-educated, not earning very much money, educate them, put them into job, let them earn lots of money, and have a good lifestyle. And that drove up the productivity and the whole success story of China.

 

 

TN: So urbanization and wage arbitrage, productivity gain for China. But is that running out in the next ten years or does that continue over that period?

 

CL: We’ve got it going through actually. It’s 20 million a year at the moment, which is a phenomenal number. That’s Australia, every year. It’s 20 million at the moment. We have it dropping down to about 11 million by 2040 because it’s still a lot of people moving there.

 

Now, this is the other big trick. Because some people have been saying, China’s population’s leveling out. And, you know, we thought it was 2023, where even the Chinese government agrees with us. Now, it’s 2023, and it’s leveling out. The working age population is starting to shrink. Oh, dear. That can have a decline in the workforce. No. They’re having a decline in the rural workforce. The rural workforce have in the next 20 years.

 

The urban workforce keeps growing for the next 10 years to 2030. The number of people working in urban jobs, which are highly productive, keeps going up. So for the next 10 years, China’s GDP growth still chugs along reasonably well. After 2030, the growth rate drops away and we have it down to about 1.3% by 2045, because it just isn’t the extra workers to keep growing the total GDP. So that’s the story there.

 

But again, coming back to the consumption side, China in the last 10 years in the urban area had this huge group of people, 220 million of them urban, aged 40 to 64 years of age, educated, earning quite good money by turning a stand and spending money on holidays and trips and things like that. And between 2010 and 2020, that went up to 100 million people. Think about it, a 100 million extra people with disposable income. It was no surprise that the retail side of China took off and tourism and all of that. It was those people. They’ve got a house. They’ve got a fridge, they’ve got a refrigerator. Let’s have some fun. That’s really what’s happening right now.

 

Now, the bad news is that now it flattens out. Every age group under 40 in China is already declining and will continue to decline in size. So don’t go after the kid market in China except on the wealthy and those sort of areas for education. The 40 to 64 age, what I call the working age optimist, it grows for a little bit, and then it flattens out. And it’s named the 65 plus, which in China is not like the other countries. The 65 plus at the moment doesn’t have great health, doesn’t have a great life expectancy. You get some extension of the workforce, but not a lot.

 

So China’s consumption is healthy as well. It’ll chugging along quite nicely. And to digress slightly, but I think we need to recover quickly here. The one child policy, it’s moved to three now. That’s totally and absolutely irrelevant.

 

TN: Yeah, it doesn’t seem like it’s going to do much. They’re too rich to want to have more kids, right?

 

CL: Exactly. And actually, it’s the birth rate that’s not the important point. It’s the number of women of childbearing age. And that goes down by a third. It drops 330 million now to about 220 million in 20 years time. And the birth rate can’t give up fast enough to compensate there. So births in 2019 are 14 million. It dropped to 10 million last year because of the pandemic, waiting to come back up a bit about to 14. It’ll be down to 11 million by 2030. And they can’t change that even with the three child policy. That won’t change.

 

TN: It’s not the three child policy, it’s the fact that there are not enough women to have babies. And those women are wealthy enough that they don’t want to have three kids.

 

CL: That’s really basically it. Just look at Singapore. They tried everything to get the birth rate up.

 

TN: I was there. They were paying people to have babies and it still didn’t work.

 

CL: Even send them on cruises. I mean, I volunteered.

 

And then you have, so that’s the second group. And the key point by the first group is nice and stable now, chugging along nicely, but no longer super growth in consumption. Nice growth in consumption is how I call it.

 

The third group, what we call the family stage. And that’s obviously dominated by India, Brazil, Indonesia all there. The bulk of populations is in that 25 through to 39, having children, at work, that sort of stage. So the working age population is still growing a bit, but not a lot. Education’s improving. It varies quite a lot across this group. India is at the weaker end. Indonesia is probably one of the better ends.

 

So, you’ve got a bit of a dichotomy there. But they’re generally in a position to be able to attract capital and generally in a position to be lifting their total consumption, but not dramatically. We’re still talking of relatively low incomes under 10 thousand USD for the average family per annum. So the growth is there.

 

TN: So Indonesia, India, Brazil and so on, the capital formation, capital investment is the real weakness there. And it seems to me that’s a function of, largely, education. Is that fair to say?

 

CL: That’s exactly what it is. As they get the education right and they’re working on it, most of these countries have been quite responsible in that area. And as they get that right, so the investment comes in, so the consumer gets more affluent and becomes a virtuous circle.

 

TN: And what time scale are we talking about for that consumption to come in a really notable way to take the place of the under 40 Chinese consumption or the under 40 Western Europe or American consumption?

 

CL: Well, that’s the bad news.

Categories
QuickHit

Ag’s Perfect Storm: Tight Supply, Strong Demand and Weather Uncertainty

Joining QuickHit for the first time is the commodities expert Kevin Van Trump of The Van Trump Report, helping us understand ag’s supply, demand, and clarifying uncertainties. Why are we seeing so much attention to agriculture right now? What’s contributing to the tightness in the ag market? How long will the corn rally last? How about wheat? What can we expect for the foreseeable future? And protein, how delicate is this with all that’s happening with ASF, cyber attacks, etc.?

 

The Van Trump Report, a very large agricultural newsletter and analysis service. Kevin Van Trump started trading in the 90s in Chicago. Switched over, traded Notes, 10 years, five years. And then really got more heavily into ag. He’s from a small rural town outside of Kansas City and I was really interested in corn, beans, wheat, cattle, livestock. They started putting together a newsletter 10, 15 years ago when ethanol started to become more prominent and it started to travel around the circuits with some of the bigger hedge funds and some of the bigger money managers.

 

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📺 Subscribe to our Youtube Channel.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on June 2, 2021.

 

The views and opinions expressed in this Ag’s Perfect Storm: Tight Supply, Strong Demand and Weather Uncertainty 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: There’s a lot of attention on ag right now. And can you just kind of give us a little bit of a set up of what’s happening in the ag markets, everything from the volatility of corn to, you know, what’s happening in wheat, a little bit of kind of protein, a little bit of beef activity. And that sort of thing. Can you tell us just generally why are we seeing so much attention on ag right now?

 

KVT: Well, I think you see the funds take a more proactive risk on approach. You know, just in commodities in general, we’re seeing location from Covid and things of that nature. And most people thought as we ramp back up, we’re going to have a pretty strong demand for, like you said, proteins bring in some of the livestock back on, just demand in general.

 

So we’ve seen more fund interest and more money flow into the space. Like you’ve seen the rebound in crude. You’ve also seen this rebound and in the ag and the commodity world. So China’s got a big appetite. They’ve been a huge, huge buyer of corn and have led the way. Beans as well on the protein side, as you and I will discuss here in a little bit. But yeah, basically, you know, we’ve we’ve gone from a oversupplied market for the last four, five years to all of a sudden we’ve got tight supplies. We’ve got record strong demand and some uncertainty into weather. So, you know, everything all said ripe for a possible rally.

 

TN: And is that tightness? Is that on, say, processing? I know with some of the protein, it’s processing concerns. But what is that tightness? Is it say, weather, drought in Brazil, that sort of thing, too much weather, too much rain, in the Midwest or what’s contributing to that tightness in the market?

 

KVT: Yeah, I think you had, you know, we really rarely get good numbers out of China from a supply or demand, especially a supply standpoint. They were supposedly sitting on a ton of corn and a ton of supply. All of a sudden they come online as a big, big buyer, you know, whether it’s maybe lack of quality with the storage of their corn, maybe the numbers just weren’t there all along. Maybe the supply wasn’t there. But it feels like they want to import the corn down into the southern part of China, maybe get away from.

 

We think Covid really exposed the rail dislocation. And when they had that rail shut down and dislocate, it probably crimped a lot of movement of corn supply and the Chinese government is looking at that and saying, hey, we can’t have that happen again if we’re going to see more possible problems. So they want to be a big buyer of corn from the US. They want to buy as much beans as they can from South America. And so so here we sit trying to juggle that. I think the world wasn’t really prepared for the size of buying that they were going to step in and do.

 

TN: OK. And how long specifically with corn, how long do you think that buying lasts? Is that kind of a three month phenomenon or does that go, say, for years?

 

KVT: Well, Tony is kind of how it played out for us in the soybean market years ago. China was what we would call a price buyer of beans. They would buy beans on the breaks and then they became a quantity buyer of beans, where it didn’t matter if soybeans were traded in five or six dollars a bushel or sixteen or eighteen dollars a bushel. They were going to buy beans every month. And so we see China as a quantity buyer of soybeans.

 

And we’ve predicted… Now, I hate to say this because we’ve made this call before. It’s OK. Own it. That China was going to become a quantity buyer of corn eventually. And like I said, we’ve heard guys in the market say this for the last 20 years and it never really came to fruition. They’ve continued to be a price buyer of corn.

 

We feel we’re at a tipping point and we believe they’re going to continue to be a quantity buyer of US corn for the foreseeable future as they try to transition, open more ethanol facilities, try to transition to cleaner energy. And some of those types of place, I think they’re buying corn longer term.

 

TN: So we’ve hit. It sounds to me like we’ve hit almost a semi-permanent new price level. Is that, would that be fair to say?

 

KVT: Probably not, I would say, how would you say? The grain markets in general and farmers in general. They’re going to plant from fencerow to fencerow. They’ll be planting acres on their back patio if they can, and they’re going to roll out more acres in South America. And so you’re going to see a lot of supply really come on with technology changes that can come on fairly quick.

 

 Even though I think China, you know, is going to be a continued buyer and demand is going to remain strong. I bet we really start to increase some of this production and we’ll probably balance it back out here. So that’s you know, they’ve caught us a little offsides right now. You got the price of corn at seven, close to seven dollars. And then we, barring any weather incidents or craziness that would really upset production, we probably trade here well, and then we start to ramp up supply and balance or back out.

 

TN: Very good. OK, interesting. Can we move on to wheat for a little bit? There’s been you know, we saw wheat come on strong and then come off and there’s expectations of wheat prices rising again. And you’ve covered this in detail in your daily newsletter. Can you talk a little bit about the wheat market dynamics and kind of what you’re seeing there?

 

KVT: Yeah, you know, wheat has become a big follower of corn, so to speak. We’ve seen, especially in China, you’re seeing a lot more wheat substituted into feed rations. So you’re getting a, you’re getting a bigger demand for wheat as a feed ration, but of corn, more to fizzle out. We probably see wheat drop off as well just because its demand is kind of correlated right now to being substituted in for the higher prices and corn. There are some pockets where we have some weather stories.

 

Spring wheat seems to be in short order here in the US. Some of those acres didn’t get planted, probably were planted to corn. You’re seeing those conditions problematic in, say, North Dakota, which is our biggest spring wheat producing state. They’re having problems with the drought and dry conditions. You’re having some pockets of some concern in parts of Canada, Canadian prairies, southern prairies, where also big spring wheat producing areas. So that, you know, spring wheat, maybe a little hot right now. But we see wheat is mainly a follower to corn at the moment.

 

TN: Very interesting. OK, let’s move on to proteins, because I think that’s a really interesting story. We had this cyber attack on the largest beef or one of the largest beef processors in the US this week. And we already had some tightness in the beef market. The inventories, the frozen inventories, from what I learned from your newsletter, were already low, other things. So how delicate is that market and will we see that follow on effects come later into the market or will that be sooner?

 

KVT: No, I think, you know, there’s going to be, there’s massive dislocation right now across the board still, and I think you can see that and we could talk about. I’m sure your follow up into the hog space. But I mean, you’re seeing that with both cattle and hogs. If you recall, back early in Covid, they had to shut down a lot of processing plants because workers were getting sick and they had to take precautions.

 

Now, on the hog and poultry side, as I’m sure as we were going to discuss, those shutting of the plants, whether it be a Tyson or whoever it may have been at the time. I mean, that really backed up supply or the herd. Now, you had producers had to call the herd and they pulled back and reduced the size of the hog or quite a bit or with cattle or things of that nature. Well, then all of a sudden, corn prices and feed prices take off to the upside. And you have a producer or rancher who just really doesn’t want to expand his herd because he’s not certain about the processing plant if they’re going to stay in his local area because it Covid and now he sees corn take off and the feed take off to these extreme highs. You’ve got them caught where there were a little bit short supply and all of a sudden demand coming back like gangbusters.

 

All the restaurants, or people around the world are starting to try to get out and about more. And so, like you said, you guys, you got surging demand right here and you got the supply pipeline dislocated a little cut off size.

 

TN: And then when we see things like ASF, African Swine Flu in China and the calling of the even the breeder hogs, that sort of thing, how global is that dynamic? Does not present pressure on, say, US pork prices or or is that really just a regional Chinese pork price phenomenon?

 

KVT: No, we think it does. I mean, we’ve seen as it creates ripples in China and they try to get on top of it. I mean, it’s a crazy dynamic. They cut their hog order in half. But as they tried to get on top of it, they’ve had to be bigger buyers of importing of pork and the United States has been a beneficiary. And I think that could continue to be the case. You know, God forbid that we were to get a case here in the United States that’s always kind of the last few years, the big wild card in the mix.

 

If we were to spot something like that here in the US, know probably the knee jerk immediately as to the downside. Just because prices probably break because people are going to want to eat the hogs. You’re going to kill a lot. But I think longer term, that creates a supply shortage and we rebound back in the opposite direction. So it could be a double edged sword.

 

TN: OK, so we’ve seen a lot of volatility in these markets. What are you looking for kind of for the remainder of 2021. Do you see these prices elevated, say, until Q3? Do they come off in Q4 or do you see these, the kind of the volatility and elevated prices continuing through the end of the year?

 

KVT: You know, kind of like we talk in crude, we probably see demand outpace supply through Q3, Q4, maybe even a little later if you get some dislocation. In our sector, if you’re talking corn, beans, wheat, things like that, it’s really right now about US weather.

 

In Brazil, they’ve had some real rough patches of dry, dry and hot weather and we continue to see their corn crop get smaller in size. The USDA was talking they had lowered it down to one hundred and two million metric tons for corn. Now they’re talking some guys in the 95 to 90 million metric tons. And so that that’s going to take more corn out of the supply pipeline or are available for exports. And now here in the US, we’ve got the drought that’s lingering and could, it just sit, we’re just right here on this tipping point, Tony, where if it turns hot and dry within the next 60 days, corn, beans and we take off. I’m talking we’ll probably go all time record highs. If you see what I’m saying.

 

So and you remember back to the 2012 drought, the USDA had the crop rated about the same condition as it does right now. Things were similar, but all it takes, Tony, and corn, is for you to get really hot and dry right around the pollination period, which will be the end of June, first week of July somewhere in there. And boy, I tell you what, the market will add a ton of risk premium and, you know, a lot of fireworks take place.

 

So that’s kind of what we positioned ourself for. If we get that story, we take off to the upside because demand’s so strong. OK, so we’re looking for hot and dry potentially in late June, early July. And that would really set things on fire and in ag markets.

 

TN: Right. Very good. Kevin, thank you so much for your time. I really appreciate this. This is a real pleasure to have you here. You know this stuff inside and out and we’re really grateful for all of the insights you’ve given us today. Thanks so much. For everyone watching, please like the video, please subscribe. That helps us out a lot. And we’ll see you on the next one. Thanks very much.

 

KVT: Thanks, Tony. Appreciate it.

Categories
QuickHit

Inflation: Buckle up, it may get worse (Part 1)

Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation. Where are we in the inflation and what is the horizon? Both guests have different views and they explain exactly why they have such views. And what about China’s manipulation of CNY through hoarding metals and commodities? Is that a valid way of looking at inflation?

 

Part 2 of this discussion can be found here: https://www.completeintel.com/2021/05/06/quickhit-inflation-part-2/

 

Want the audio version? Play this on Spotify or find us in other podcast players. You can also find us in other podcast audio streaming services. Just search “QuickHit”.

 

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📺 Subscribe to our Youtube Channel.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on April 28, 2021.

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

 

Show Notes

 

TN: Today we’re talking about inflation. It’s been on everyone’s mind for the last couple months and we’ve got two macro geniuses to talk to us about it today. We’ve got Nick Glinsman from EVO Capital and we’ve got Sam Rines from Avalon.

 

We look at copper. We look at a lot of these indicators of inflation and it’s been on everyone’s mind over the last few months. A year ago, people were worried about deflation. Now the worry is inflation. Obviously we’ve seen a lot of monetary and fiscal policy in the interim.

 

So, Nick, can you give us your view on where we are with inflation and what that looks like over what horizon? Is it months? Is it five years? Is it, you know, how does this play out?

 

NG: The horizon is a little bit tougher. But my my thesis is based on looking back at historical precedence and I focused on the LBJ Vietnam War spending, combined with his great society fiscal spend, which ultimately led in the early 70s Paul Volcker’s fame containing huge inflation there was at that period.

 

And I’m sitting here having spent the last year but actually building this thesis up for a couple of years thinking that the equivalent of the Vietnam expenditure is Covid and the relief spending that’s been has combined Trump and now Biden, and then the great society equivalent would be Biden’s green infrastructure spending which, I slightly tongue-in-cheek called the green ghost plan, which is enormous. Amazing.

 

When I find myself agreeing with Larry Summers on inflation. I think his odds of a third in terms of this creating inflation, I would suggest a higher. In terms of timeline, it took five to seven years for the inflation to really kick in during the 60’s leading to Volcker. I think this time around, it will be much quicker due to the differences, a lot of globalization and supply chain management.

 

TN: Sam, can you kind of give us your view of where we are in inflation and what’s the duration that you kind of expect this to play out?

 

SR: I have a very different view. If you look at the lumber market, copper, et cetera, these are things that tend to sort themselves out rather rapidly. Being in Houston, the best cure for high prices and energy is high prices. We will pump more if oil ever goes to 80. It’s very similar with lumber and copper. Most of the mills are becoming much more efficient in lumber, for instance.

 

So we will see that begin to roll over and that will roll over in a very meaningful way as we begin to work through these supply chain issues that we know are coming in the summer and we know are probably going to persist in the fall. But as we get into the fall and we get into early 2022, even if we have a couple trillion dollars infrastructure, it’s going to be spread over the better part of 10 years infrastructure.

 

It’s not a fast spend and it will not save us from the fiscal cliff. It will not save us from the lower employment numbers that we’ve been seeing on an overall basis. Yes, unemployment is moving lower, but employment is not keeping up with the employment figures.

 

Once the economy begins to have to stand on its own two legs, even if it has a touch of a tailwind from the government, it’s still going to be very difficult to continue to see consumption going through the roof, continue to see the types of disruptions that we’ll see for the next six to nine months in terms of supply chain that will have one-off price implications.

 

But that to me says we’re probably getting towards the peak of the sugar high as we get into the summer and the other side of the sugar high is going to be very painful in terms of going back to a one and a half to two and a half percent growth rate in the US inflation that will be very difficult to get higher simply because it’s difficult to have sustained disruptions in supply and demographics that aren’t changing anytime soon. So we will continue to have a number of those headwinds. And I think that’s what the US 10-years is telling you, US tenure at 1.5 is telling you that the market’s looking through this summer and saying the next decade doesn’t look as good as the last decade in a lot of ways.

 

It’s something to at least keep in the back of our minds that the Fed doesn’t have great control over the 10-year. The fed has great control over zero to two-year timeframe. But nothing beyond that.

 

TN: Okay, so let’s look at common areas. It seems to me that both of you see inflation continuing to rise maybe not in terms of the rate of rise but certainly continue to rise until, let’s say say Q3 Q4? Do we at least have comic around there?

 

SR: Yeah.

 

NG: Yes, absolutely.

 

TN: When we look at some of the the pressures in inflation, part of my assertion has been, and I’m sure you’re both going to tell me I’m wrong, but as we’ve seen the CNY strengthen, my hypothesis has been with a strong CNY, Chinese manufacturers are stocking up on industrial metals, food, other things because it’s in dollar terms. They can get it pretty cheaply and they’re waiting for CNY to devalue again when their buying power will decline.

 

What I’m hearing is that a lot of these things are really going to China to be hoarded and as a play on a potentially devaluing CNY. What do you think of that hypothesis aligned with a lot of the central bank easing? Is that a valid way of looking at inflation? Meaning this is stockpiling more than it is demand pull?

 

NG: My view on China is that, if you look at food firstly, there is a food shortage crisis. And we all know what the CCP are most scared of, which is society unrest. And we can take the examples of the Arab Spring, food is the key. But I also wonder whether the Chinese are stockpiling in anticipation of decoupling? I think of rare earths, of which they have a large control of the refining thereof being problematic. Semiconductors, there is an issue there.

 

So if I extrapolate further, my view is I think the supply chain issues are much longer standing now because of various geopolitical forces creating a decoupling with China for sure. And we have this Anglosphere grouping that’s clearly beginning to take shape, which now looks like that will include India because of the health crisis there.

 

If we look at that, then the question is what happens with Europe? Again, I think that’s part of the supply chain problem whilst they decide which site they go to. Is it china-centric or is it anglers-centric?

 

So I think the supply chain issue is much longer standing, hence I suspect that we’ve got China positioning, because nothing goes on which in China without the government knowing about it, quite frankly. In terms of anticipating a supply chain issue, because all the commodities they’re importing they’re short off.

 

TN: Okay, Sam, first of all, what do you think about my hypothesis and then Nick’s qualification around the supply chain issues being much longer term on the back of decoupling?

 

SR: I would take the argument that decoupling isn’t an action. It’s a process, and the process takes a very, very long time. And that creates in my mind a much longer time frame for the United States to build out its portion of the supply chain, for instance semiconductors, et cetera. So I would say I don’t disagree that there is a decoupling underway. In my opinion or my argument would be that it will take much longer than a few years to really get that process to move and it’ll be particularly under this administration a much more diplomatic and less blunt force tools than we’ve seen in the past being used. So I don’t disagree with the supply chain eventually being at least somewhat disentangled from China. I would just argue that it will take quite a while to really begin to become an issue unto itself.

 

On your point that China stockpiling, that does appear to be happening. It does appear to be a hedge against a weaker CNY to come including with lumber. One of the reasons that lumber prices are spiking is because China’s buying a lot of lumber in the US. That is a significant problem. And I would point to, when they stop stockpiling, that tends to have a significant effect on the price of commodities in the opposite direction. We’ve seen that with copper a couple of times during their infrastructure builds.

 

The interesting thing right now is you’ve actually seen a pullback from infrastructure spending. From the peak in China, they’ve begun to do their form of policy tightening on that front already. Suspected will continue at least on the margin and that will be a significant headwind for those commodities that have been stockpiled when less of them are being used on the margin as well. So that that does play into a 2022 disinflationary type environment versus 2021.

 

TN: Given that we have all these different pressures, whether it’s supply chains, whether it’s stockpiling, whatever it is, what the people in the middle, so that the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people, when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things? Or are they passing that directly along?

Categories
QuickHit

QuickHit: The Anglosphere and the Multi-Speed Recovery

Macro specialist, geopolitics and history commentator Nick Glinsman joined us for the first time on QuickHit to discuss how the Anglosphere compares to the world in this multi-speed recovery in the wake of Covid.

 

Nick is based in Brazil and he brings decades of experience to macro, markets, and politics. His background is basically London and New York with a bit of Europe and, Australia and Hong Kong. He worked with the Salomon Brothers and Merrill Lynch. He’s doing a lot of advisory work and the ability to express views on the markets, geopolitics and macroeconomics in the market.

 

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📺 Subscribe to our Youtube Channel.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on April 8, 2021.

 

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

 

Show Notes

 

TN: Nick, for a while you’ve talked about this concept called the anglosphere. Can you help us understand what you mean by the anglosphere?

 

NG: I’ll dig into it. I like the fact that you’re talking about the link between geopolitics and economics because with Trump and Brexit, that’s where what was a very boring macro environment suddenly started to become differently exciting. The politics would start to drive some of the macro markets and actually what’s interesting is  Brexit and Trump, part of the anglosphere. Not the formative part of the anglosphere.

 

So what we mean by the anglosphere is looking at countries that are historically tied via culture but critically also via common law, legal system, because that defines how the economy and how commerce can run. If you go back in history, there is a big difference between common law countries and roman law countries. Common law countries think of European Union countries and that construct. So what we mean by the anglosphere is being, better start with the UK because it is the mother country, it’s still the mother country for where you are currently still. If the US were now part of the commonwealth. You’re looking at an anglosphere. Now typically when I refer to it, I’m talking about UK, US, Canada, Australia, New Zealand. Five Eyes.

 

You could loosely add two countries. One of which has an anglo-saxon common law — India. The other one works much closer as a defeated entity country in World War II — Japan. So you’re getting the quad, which I would maintain is part of an angular influence, at least, if not anglosphere entity.

 

Let’s stick with that grouping. You’re looking at countries that have a similar legal system, similar financial structure, they have banks, central banks that are lenders of last resort and traditional backups, concept. Remember the European Union doesn’t have banks.

 

Back to common law. Common law also in this environment. This is where it’s getting critical. So Five Eyes is I would posit it’s the ultimate defense alliance.

 

TN: Even New Zealand, still? Ah, you know. Long discussion. That’s so much sarcastically.

 

NG: I know what you’re saying. Although she has the relation in the State of Victoria in Australia, who is actually not known as Kim Yong Dan. But if you look at what they’ve just done with the central bank, there is still a similarity there. And of course the travel corridor that’s about to open on the 16th I think it is, is between Australian and New Zealand. So as much as she kowtows to the panda in Beijing, they are still part of that structure.

 

So back to the common law and the financial. So you’ve got countries with central banks that act as lenders of last resort with independent monetary policy, you have independent fiscal policy and I would include of course in both these, Bank of Japan, RBI in India and so on so you’ve got independent fiscal policy, independent monetary central bank, which you don’t have in Europe.

 

There’s been no Hamiltonian moment there. So you have that flexibility and you can see that flexibility. You also have much more, common law enables Schumpeter’s creative destruction and thus reconfiguration. Much easier chapter 11 in the US or bankruptcy and start again. Right. Not so easy to either stop or start on the roman law. So that when you think of where we are now, you’ve gone through a pandemic where inexplicably a lot of countries have remained closed, the reopening is going to need that reconfiguration.

 

You’ve also been the countries that are advancing with the vaccine quickest of those that took a very commercial view as governments in terms of getting them… so you had operation walk speed in the US and you had a vc person take over the procurement policy and the vaccine policy in the UK. Private Sector innovation. And in fact, in the UK, you have that triangle, Oxford, Cambridge, London, that’s without biotech and so on and so forth, very flexible. You even have a situation where the famous Astrazeneca factory in Holland was financed by the British. Not by the Dutch.

 

We can get into that on another episode of the great vaccine debacle. But I think that’s part of the precautionary Roman Law System that the EU runs versus the go get innovative system that comes with the anglo-ceric countries, the common law system and the structure of finance business so and so forth.

 

TN: Okay. So it sounds to me like when you talk about the anglosphere and you look at it kind of post pandemic or at least post first wave of disaster in the pandemic as we enter a recovery, it sounds like you see a widening divergence between those with say common law and relatively independent central banks versus the other law formed be it roman and in independent fiscal policy as well.

 

So help me understand the… so we just had this IMF report come out earlier this week about 5.1% growth or whatever this year and everything’s amazing and which we know, given, it’s all base effects and if you do a three-year average, it doesn’t look good at all. In Europe, the only one, over that three years, the only one with positive growth is The Netherlands. Not even the UK. But I would argue there, they lean toward you know more of a British style than other styles.

 

So if we’re having a two-speed or multi-speed recovery, would it be fair for me to say that you believe the anglosphere will recover faster than the other spheres?

 

NG: Absolutely. Absolutely. You’re better expert on sinosphere than I would be. But I think the growth is going to disappoint because they’ve pushed so hard on the string of debt. Okay.

 

In terms of the Euro, Europe, I think there’s a very simple way of looking at things. It’s extent of vaccination and compare those and what does that mean? It’s now being said out of UCL, University College of London. UK’s herd immunity on Monday, 73%.

 

You can see there’s data coming out of the UK that is explosive as there is in the US. People are looking at the European and thinking, okay let’s close until August or beyond because this vaccine debacle is even worse. Everybody’s going to take Astrazeneca in Europe even though for the young women of age below 30, the chance of getting a blood clot is 1 in 600,000. Where the child’s getting Covid is substantially greater.

 

Because Europe and the Roman legal system has this precautionary black bent. It’s clear that this whole debacle in Europe has delayed that coming out of meltdown. The European summer season as the Germans would say is kaput.

 

TN: If we have this kind of two-speed recovery or multi-speed recovery, and let’s say Japan is part of the anglosphere, would you say Japan would be leading Asia out instead of China? Now I’m talking about real data. I’m not talking about Chinese 8.1% growth numbers like fictional. I’m talking about actual real performance with actual real usable output and you know all this other stuff.

 

NG: I’ve got so that’s going to be the case actually. I really do have that sense and I also, given the belligerence of the Chinese regime right now. You’ve got vocal and slightly belligerent actions against Taiwan, of course, which I’m with Albert on that. They’d have already invaded if they were going to do it. And you’ve got what’s going on in the Philippine islands with all these ships tied together.

 

I remember a very famous situation where chief ancient China economist from HSBC came into the office and talking about China and then we asked coming into that particular office, name unmentioned, always an aggressive to and fro Q&A, and then we have one of us asked about China, how’s the recovery going after Fukushima. Blood was coming out of this chad’s mouth having to talk a bit about China.

 

And we know that there is a much more passionate… we have passion against Germany or France as a Brit or as an Englishman come soccer. But, we love each other.

 

TN: Maybe that’s a bit strong. But we’ll use that.

 

NG: Maybe strong for Germans but with the French, there is a deep passion there and somebody keeps reminding the agent. But in the Far East, there has been that, you see that tension with the South Koreans and Japanese. However, the Chinese are forcing people out away from some of this stuff.

 

Japan with Australia and India will enable a lot of these countries to look elsewhere. Isn’t it ironic going back to the anglo-sphere link and that publicly is United Arab Emirates who are being given credit for getting India, Pakistan talking together. I have no doubt behind the show, the English are very active there because you’ve got a cricketer in charge. She made this game… So there’s stuff going on that gives you signals as to what could be happening.

 

It was rather like a mutual friend of ours, we were discussing India in terms of trade and I was saying, the UK and India are going to have a free trade deal as soon as it’s possible once they’ve overcome some of the agricultural stuff. And that person said India will do a trade with the EU well before they do it with the UK. And I’m saying hold your horses. No way!

 

TN: It’s familiar.

 

NG: One, it’s familiar. Two, one of the problems that the EU’s have with trade deals with anglospheres countries is legal interpretation thereof. And you know, I think they’ve been discussing it for 8, 10 years, EU and India, they’ve got a sub agreement already in the UK after several months.

 

TN: Just coming back to this kind of overall topic of the anglosphere and the multi-speed recoveries, so it does sound like you almost have this triangulated recovery from your perspective from India, Japan and Australia that’s leading the way in Asia. You have the UK, which is leading the way for Europe and then you have the US that’s kind of leading the way for the Americas. Is that kind of how you see things?

 

NG: I tend to think that’s the case. But I wonder whether one can justify the idea of UK leading the way for Europe given the tensions between the UK and the EU.

 

TN: I think the EU will play through… The EU will feel pain until they get tired of it and then they’ll relent, I think.

 

NG: There’s one big problem and this came up yesterday there was a meeting of the EU commission about article 122 vaccine export ban. Belgium, Holland, Sweden and Ireland said no way. All the others were saying we’re okay with it. With Germany covering itself with a few conditions. The damage to Europe’s role in the global supply chain is irreparable. They will not be able to go back to this.

 

And there’s another little fact of it which makes me wonder what will happen with Ireland because there’s tension building up in Northern Ireland again. Article 122, that export ban is specifically aimed at UK, US, Canada, Australia. They’ve stopped shipping to Australia already. US, UK, they’re saying well you’re not exporting anything. Paid for everything but not exporting everything. Canada just gets lumped in with the US and the UK.  So I think that’s really shattered the role of Europe in the global supply chain.

 

You’ll have people producing goods for Europe from European input but how can you possibly? Now going to Ireland where the UK has already said we’ll give the Republic of Ireland 3.7 million vaccines because it’s secures Northern Ireland in the coming out of lockdown. That’s an interesting overthought process.

 

Because you have a situation where Ireland is under attack like the Netherlands and Switzerland from Joe Biden’s global tax. If they come out, I would not be funny.

 

TN: It seems to me that what you’re also saying is there’s likely some kind of regionalization or re-regionalization that may emerge from this. Am I putting words in your mouth or is that?

 

NG: I would go and say US and commonwealth EU for as long as it stays stable, which may be problematic and then as you say Asia.

 

TN: Okay. Yeah, I mean I think that we’re coming to a place and I’ve been talking about this since about 2015, where you have global supply chains for goods that are long-term commoditized goods and then you have regional supply chains for the higher value goods.

 

NG: And that’s consistent with the decoupling that’s got to take place against China. And then you have that floater which you and I touched on before we got online, which is Russia and I have a slightly different view of where I can go, which will be, you know.