In this BFM 89.9 podcast, CEO of Complete Intelligence, Tony Nash, discusses the February US equities market and gives his predictions for March. Nash predicts another down month for US markets, albeit not as much as February, with China also being down markedly. He also expects Malaysia to do well and increase by about 1%. Nash also comments on US earnings season, stating that the quality of earnings reported so far is not great and that only $0.88 was matched by cash flows for every dollar of profit, with some companies passing along price hikes successfully but for how long can they keep it up. Nash also discusses interest rates and a more hawkish Fed, which could lead to the dollar rising. He also comments on a newly formed House committee aimed at examining economic competition between the US and China.
Transcript
BFM: BFM 89.9. Good morning. You’re listening to the Morning Run at 7:07 on Thursday the 2nd of March. I’m Shazana Mokhtar with Chong Tjen San and Wong Shou Ning. Now, in half an hour, we’re going to discuss Malaysia’s bilateral ties with the Philippines in light of our Prime Minister currently on a visit there. But as always, we’re going to kick-start this morning with a recap on how global markets closed.
Overnight, US markets were mixed. The Dow was up marginally by 0.2%, the S&P 500 down 0.5%, NASDAQ down 0.7%. Asian markets were also mixed. The Nikkei was up by 0.3%, Hang Seng popped it up and was up by 4.2%, Shanghai Composite up by 1%, Straits Times Index down by 0.2% and the FBMKLCI was down by 0.3%.
It’s everywhere.
That’s right. Well, we’re going to try and kind of peel some trends with Tony Nash, CEO of Complete Intelligence. Tony, good morning. Let’s review what happened back in February. It wasn’t such a great month for US equities. We did see the Dow and SP 500 both lose 4% and 2.6%, respectively. Where do you see the stock market heading in March? Is it going to be more volatility or perhaps brighter skies on the horizon?
Tony: Oh, yeah, it’s going to be pretty choppy. Generally, we expect US markets to have a down month, not down as much as it had been in Feb, but we do expect another down month. Obviously, if the Fed comes in with a very hawkish meeting, then we could see more chop there. We do expect China to be down this month as well. That kind of goes against what we’ve seen in News early this month, but we are seeing China down markedly, say more than 2% this month as well. Good news is we expect Birth of Malaysia to be up about 1%. So while we see chop in others, we may see Malaysia do squeak out a good positive month.
BFM: And Tony, as the US earnings season starts to taper off, what is your assessment of the results that have been released so far? In particular, the most cyclical consumer-facing companies?
Tony: Yes, so the quality of earnings reported so far is not great. So for every dollar of profits, only about $0.88 was matched by cash flows. That’s the largest discrepancy since at least 1990. So that means 12% are from kind of non-cash earnings. So it’s really accounting and other things. So what we’re seeing, especially on the consumer side, is some companies are passing along price hikes, and we see some of them doing that really successfully. I think we’ve talked about that here before, where they’ll hike between eight and say 15% and their sales volume will be down maybe 5%, something like that. That’s really helped the top line and margin expansion. But the real question is for how long can they keep raising those prices and kind of sacrificing transaction volume. So there’s a real question there. But many of those companies have said they’re going to continue to raise prices into later in ’23. The problem is when we run into a company like Coals, which is a retailer here in the US that reported today, and it was all bad, they’re losing customers they’re not able to keep with their costs and other things.
For those companies that cannot pass along price hikes, for whatever reason, it’s really bad news for them. The inflation they’re importing from their vendors is just squeezing their margins, and in some cases, they’re losing money. So, I don’t think the quality of earnings improves from here for at least two quarters. That’s just something to think about as we go into the next Q1 and Q2 earnings.
BFM: Okay, I want to come back to interest rates, Tony, because I’m reading Bloomberg and it seems like the Street is now expecting a terminal rate of 5.6%. Honestly, this changes every day. It was 5.4% not too long ago. But what does this mean for the US dollar? Are we back to the reign of King Dollar again?
Tony: Well, if we see a more hawkish Fed, then I would say yes, that’s probably the case. So, what we would likely see are things like 25 basis points, at least for the next three meetings, if not longer. If we continue to see hot inflation, as we have over the past couple of days, they could do a surprise 50. I don’t think that’s what they’re going to do, but we can’t rule it out. We could also see quantitative tightening, meaning the Fed could unload more mortgage-backed securities or other things, accelerating that from their balance sheet. Because housing is still pretty hot, actually. Prices aren’t moving that much, so we could see the Fed move on MBS or some other things to accelerate that off of their balance sheet. I don’t think that’s highly likely, but it’s a possibility. All of those bode well for the dollar and dollar strength. If that happens, we would definitely see the dollar rise generally.
BFM: Can we take a look at what’s happening over in the US Congress, Tony? There’s a newly formed House committee aimed at examining economic competition between the US and China. I think they held their first hearing earlier this week. What was the outcome? And do you think, as a result, we’re just going to see more trade conflicts between these two superpowers?
Tony: Yeah, so there’s a lot of focus on decoupling from China. There will never be a full decoupling from China. I don’t think we’ll even have a majority decoupling from China. But there are some key industries, like semiconductors and pharmaceuticals, some healthcare aspects that people really do want to decouple from China because we saw through the pandemic that supply chains are very, very dependent on China. Americans want many of those core things closer to home. They’re focused on decoupling. For some reason, people in Congress are just becoming aware that the CCP is in charge of everything in China. So they’ve underestimated the influence of the CCP and they’re waking up to the fact that they’re central in China. We had a couple of former national security advisors suggesting things like accelerating the arming of Taiwan and helping Chinese circumvent the Great Firewall, those sorts of things. And then, of course, human rights. They talked about CCP police outposts that are in US cities where there are actually these CCP outposts that will pursue Chinese nationals within the US, among other things. It’s taking a pretty tough stance on China. I’m not sure to what extreme that will go and what policies will be adopted yet, but I think it’s definitely trying to at least uncover some of the things that Americans haven’t been aware of.
Keep in mind, a little bit of this is theater, right? It’s people in Congress holding hearings to publicize some of their agenda. So, I think it’s a little bit of that so that they can then move into legislation and move the needle just a little bit. I don’t think we’ll see anything extreme, but you will certainly hear some extreme talk over the next couple of months.
BFM: Yeah, but does this change the way fund managers invest? You’ve got this continuing geopolitical tension between the US and China. Is it going to stop, for example, American fund managers from buying Chinese stocks?
Tony: I think it definitely puts China as a higher risk for US portfolio managers. And certainly over the past couple of years, more US portfolio managers have become aware of the risks of investing in China as supply chains close down, among other things. So, I think you will see more of a tighter risk calibration and more weighting of risk for Chinese equities. So, it could potentially not be good for American money investing in Chinese exchanges. Absolutely.
BFM: Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. As he was talking about how March is possibly going to be down, although not as down as February, I couldn’t help but think, ‘Oh, beware the eyes of March.’ But, yes, it’s still choppy out there, especially as the FOMC will be having their meeting this month. I think everyone’s going to wait and see how much they’re going to hike those rates.
Yeah, he gave some predictions on Malaysia as well. He thinks the market will possibly be up by about 1% in March, but the market has been quite disappointing in Malaysia. And he also expects the China market to be down in March by about 2%. And we spoke about the geopolitical risk which may impact US fund managers as well.
The BBC’s Business Matters podcast covers a range of topics, including the positive economic signs in the US, the Russian tech brain drain, and the potential for a new plug to be the secret to a green transition.
Guests Emily Eng, NPR’s Beijing correspondent, and Tony Nash, founder and CEO of the financial forecasting platform Complete Intelligence in Houston, provide their insights on these topics.
They discuss the impact of economic sanctions on Russia and how the country is responding to them, including increasing exports to China and reducing its crude oil supplies by 500,000 barrels per day to push up prices.
The conversation also touches on a controversial proposal by the European Commission to seize Russian assets to help rebuild Ukraine.
Additionally, the podcast covers the announcement by the US federal government that all new garages and four courts built in the country will have to include charging points for electric vehicles and its potential impact on accelerating EV adoption.
Transcript
BBC
Hi there. Welcome to Business Matters. My name is Ed Butler, and today, despite all the political rows we’ve been hearing about a potential debt default, there are more positive economic signs from the United States. This week, we read the tea leaves with a former presidential economic adviser and hear about the new incumbent in that job. Also, we consider the Russian tech brain drain, and why a new plug could be the secret to a green transition.
Emily
This will definitely help accelerate EV adoption. Charging is one of the things that really does stand in the way of someone’s decision about going electric.
BBC
All the latest on electric vehicles in the States coming up in the show, and I’m going to be joined throughout the program by two guests on opposite sides of the world. Emily eng is NPR’s Beijing correspondent, although she is based in Taiwan at the moment. Hi, Emily, can you hear us?
Emily
Yes, I can. Good morning.
BBC
Great to have you on the show. Tony Nash. He’s the founder and CEO of the financial forecasting platform Complete Intelligence in Houston, Texas. Hi, Tony.
Tony
Hi, Ed. Thank you.
BBC
Great to have you both with us. Tony Nash this is obviously a function of, to some extent of the economic sanctions that we’ve been talking about, those applied against Russia. I mean, the funny thing about this is to some extent Russia hasn’t done that badly in the last twelve months, at least initially. I mean, that’s what the headline data is telling us. You look further into the future, I mean, are you seeing a kind of more serious decline potentially with Russia now because of what’s been applied against it?
Tony
Sure, there are a couple of things to look at. First, in the four weeks in January, Russia exported more crude oil than during any four-week period in 2021. So they are recovering their export capacity to places like India, China, parts of Africa, and other places. So, you know, it really hasn’t necessarily hurt their crude exports. When you look at imports, they’ve really substituted, say, the west for China. Their imports from China have grown by, I think, $8 billion a month. It’s got to be more than that, but I saw some numbers recently, but they’ve substituted imports from China. So in terms of trade, they’ve really turned eastward and southward instead of westward, which is just a natural response to sanctions. So where they’ve hurt is domestically in terms of things like industrial production of, say, machinery and domestic goods outside of, say, coal and oil and gas.
BBC
What the west, of course, has tried to do most recently is apply these caps on Russian crude exports. Now you’re saying that they’re getting around those or are they simply selling a larger amount of crude but at a lower price?
Tony
They’re getting around them. They haven’t hit the price cap yet. The crude is trading, or what has been trading at, I think, a $20 discount to the price cap. So they’re not even hitting the price cap. There’s a $20 discount to Euros crude. What Russia on its own, announced last week is that they’ll reduce their supplies by 500,000 barrels per day. So Russia is, on its own, taking barrels off the market as a way to push up crude prices. So the volume and the price caps really aren’t having an impact necessarily on crude itself. Of course, the Russian economy is being hit. Of course the isolation, of course other things are impacting Russia. I’m not trying to say that there are no impacts at all, but in terms of that natural resources, trade, and some of the import substitution, they’re actually doing okay.
BBC
Yeah, import substitution. This is the thing, and it’s a fascinating subject, actually. I was suddenly trying to dig into this, and it’s really complicated. But Tony, one last tantalizing thought on this. An element we understand, what Bloomberg is reporting that may be part of these new sanctions from the EU is to force banks to report more information on what Russian central bank assets they are actually holding. Because of course, the EU and other countries want to know how much has been frozen in Western bank accounts that used to belong to the Russian state budget. Now, this is seen possibly as a first step towards a controversial move touted by the European Commission, not just to freeze Russian assets, but to actually seize them, to use them to start rebuilding Ukraine or to at least pay Ukraine back for the damage that’s been caused. I mean, gosh. Do you think that that could be something we’ll be looking at in the next few weeks?
Tony
I think as a threat, I guess useful as a threat, but as an actual policy, I think it would be very difficult to execute and justify. Usually, these things are seized for years or decades. Sorry, frozen for years or decades, not necessarily seized. So I think that could be a very problematic policy to carry out.
BBC
Because it would set precedents.
Tony
Yes, that’s right.
BBC
For western countries, I suppose. Okay.
Tony
And the banking system that supports Russian assets or sovereign assets, would be dangerous for people like Russia going forward.
BBC
Tony Nash, thank you for now but stay tuned to this because this is big news. If you’re a car owner who wants to buy an electric vehicle, maybe you’ve got an electric vehicle already, especially if you’re in the US. The Us federal government has said that from now on, all charges that are used in the garages and the four courts around the states must be American made and have to be usable for all-electric vehicles. That means that Tesla, which has had most of the existing charging points, they have to carry, adapters, allowing other cars to use them. I spoke earlier about this with Alexis and John of Business Insider in Detroit. Well, Tony Nash, there you are in the big oil state, famously, there Texas. How is EV adoption going in the States?
Tony
It’s great. I’m sorry. It’s great. A lot of my neighbors have EVs, and I think it’s probably not as dense as, say, San Francisco or something. But we do have a lot of EVs here in Texas.
BBC
You’ve got a lot of territories to cover, though, don’t you? I mean, if you’re a driver. We do, and I have an electric vehicle. Every time I’ve gone 100 miles down the road, of course, I’m starting to sweat at the thought that, you know, at some point I’m going to have to refuel, otherwise I’m going to stop on the highway. Tony Nash are you confident that the move to electric vehicles is going to move as fast as some politicians, I suppose particularly politicians in Europe, are saying that we can sort of phase out the internal combustion engine in the next few years and rely entirely on electric vehicles? It’s going to require an awful lot of infrastructure. An awful lot of rare earth. Exactly, that’s right.
Tony
A lot of infrastructure. I mean, I understand the aggressive plans, but I just don’t think it can happen on that time scale. So it seems to me that maybe add ten years to it and sure, that makes sense. And to be honest, ten years in terms of adoption, in terms of building this stuff is really just the blink of an eye. So sure, I think it’ll happen, but I think it’s going to take a bit longer than people right now believe.
BBC
Right, it’s going to take longer, but that’s going to leave, I guess, a lot of politicians with egg on their faces, isn’t it?
Tony
That won’t be the first time. Quite true. Especially American politicians. Won’t be the first time.
BBC
Quite true. evelyn professor Jason Furman. Tony Nash, obviously he’s speaking in an upbeat way. He’s a supporter of the Democratic cause. Are you sensing a slightly kind of warmer, more positive mood in the US right now over its economic performance?
Tony
I think the mood is tentative because inflation is affecting everything. So if we look at that retail sales number, if you look at it in inflation-adjusted terms, we actually saw a decline of retail sales by 2.3%, and it was the fifth consecutive year-on-year decline. So five months in a row we’ve seen negative retail sales if we adjust for inflation. So I think inflation really covers everything. One of the things that the professor said that I’m not really sure is right is he says the White House can’t do anything about inflation. So we have Janet Yellen, who is a Treasury Secretary reporting to the White House, who is spending $140,000,000,000 a month from the treasury general account, and it’s offsetting all of the work that the Fed is doing. So the treasury is actually putting $140,000,000,000 into markets every month to keep markets booming. When the Fed is raising interest rates and selling off its balance sheet. So the US Treasury is actually and literally offsetting all of the good that the Fed is trying to do.
BBC
It’s interesting because we got Lyle Brainer coming from the Fed right this week to the White House as an economic advisor. You’re seeing that the political executive and the Fed are basically in conflict.
Tony
Absolutely. And Lail Brainerd is very smart. She’s fantastic. But she is very much a dove. She’s very much a loose monetary policy believer. And so what Janet Yellen is doing at the Fed in terms of pumping money in through the treasury general account, Lail Brainerd would be an absolute supporter of. And so we have to be very, very careful of inflation. All of these stimulatory activities really hurt your average worker. So there’s a concept called core inflation which really takes out everything energy, food, and so on and so forth. And really all it’s reflective of is service industry wages. Okay? So what we like to see is a headline number which will say 6% or something and what we’ll talk about is a core number which may be 1.2%. All that really means is that your hourly workers are being squeezed by inflation. So when the headline exceeds the super core inflation rate it just means that your hourly workers are being squeezed. And so it’s a really tough environment for wage workers.
BBC
Okay? It’s a tough environment. The bigger issue perhaps. Meanwhile, Tony, we still have this debt default issue, don’t we? We’ve been hearing about it in the headlines. Yet another cliff edge approaching in the United States. The wearyingly inevitable to some people kind of confrontation between Republicans and Democrats in Congress.
Tony
Yeah, I think what’s happened is the US has not actually had a budget for years and my understanding is what is trying to be negotiated is for the US to actually start doing an annual budget again that gets approved by Congress which is their constitutional role. One of the other items that I know are under discussion is this Treasury general account issue. Kind of profligate spending from the treasury to support markets. So there are some issues. It’s not just about the full faith and credit of the US. Of course, nobody wants the US to default but we’ve had some pretty ugly spending patterns for the past well as far as I can remember and I think some of that is just being discussed to come under control. So the US won’t default but it’s going to take some time to come to an agreement.
BBC
Yeah, indeed it will. We’re probably just going to be talking about it for weeks and weeks and weeks.
Tony
Well, I don’t think people realize there are thousands of protests in China every year. It’s not rare to have protests in China. Some of them are local workplace protests. Some of them are bigger. There was a protest east of Wuhan a few years ago about the location of I think a plastics factory or something like that. And there was one in Guangdong about, I think, an incineration plant or something, probably four or five years ago. But there are thousands of protests in China. It’s good that this is happening, and it’s a good discussion to have, and it’s good that Western media are able to view it. So every society has protested and every society has disagreements, and China is no different. Yeah, but there are older people, and even during the COVID lockdowns, the aunties in the buildings were yelling at the people, bringing food to them, and yelling at the police. So there is a difference in the age population in China. So I just don’t find any of this surprising, whether it’s a protest or a deference to old people.
BBC
What are they yelling down at the government? I mean, is this an escalation in the sense of the language, perhaps the boldness of some of the protesting and the way it’s being put?
Tony
They’re not saying, down with the CCP. Right? So if Beijing will let local governments take the flak for local issues, that’s not all that abnormal. It’s not a daily occurrence, but it’s not all that abnormal. If they were shouting down at the CCP, of course, that protest would have been squashed, but local governments and local government officials always take the hit for these types of issues. That’s normal in China.
BBC
Okay, Tony and Emily and Tony Nash, I suppose workers, you know, if they did kick up a fuss, for example, at a handful of Starbucks stores, they are still, particularly they’re still potentially vulnerable to just being fired, aren’t they? I mean, how protected are they from that kind of retaliatory action if they were to try and organize just on a shop-by-shop basis?
Tony
Yeah, I honestly don’t know. I think that would have to do with the contracts they negotiate. As your guest said, unionizing is one thing, but getting a contract is a whole different level. So I think her interview is very interesting. And what’s really interesting to me is what is leading to this desire to unionize. People obviously don’t feel like they’re getting fair pay and fair benefits, and that’s something that really needs to be looked at across companies.
BBC
Yes. And that is what seems to be a legacy of the pandemic, partly, wasn’t it? People went home, they were kind of laid off or furloughed for often long periods, they reflected, and there is a kind of militancy that seems to have left as a legacy.
Tony
What’s interesting to me is Starbucks is supportive of this, but they’re also the company that people want to unionize under. Right? And so they have the orientation toward doing that, but they’re not providing on their own the benefits and the pay that would keep people from unionizing. So I just think it’s an interesting circular discussion. Tesla is a different story. They’re an auto company in different parts of the country, automakers are highly unionized. So I don’t think it should be any surprise to Musk that that’s happening in Taiwan.
BBC
Thank you so much for all your thoughts, your words, and your wisdom. And to Tony nash there at Complete Intelligence in Houston, Texas. My name is Ed Butler.
The Morning Run podcast by BFM 89.9 featured Tony Nash, CEO of Complete Intelligence, discussing the state of the US economy, market movements, and supply chains. The podcast began with a brief overview of the previous day’s market performances. The key US markets had ended in the green, while all Asian markets were in the red, except for the FBMKLCI, which was up by 0.3%.
The podcast host then discussed with Tony the state of the US economy. The US retail sales in January increased the most in two years, and the home builder sentiment rose in February by the most since 2020. Meanwhile, US inflation rose by 0.5% in January. According to Tony, these indicators suggest that there is still demand, and consumers are still willing to spend. Companies are able to raise prices pretty dramatically, resulting in more revenue and faster growth, even if the volume of sales is slightly lower. Tony believed that the Federal Reserve will continue to raise interest rates. He felt that the Fed should have kept the foot on the brake a little more in the last meeting when they hiked by 50. He thinks that the interest rate will remain at 25 for the next three meetings, but the question is how much beyond that will they raise it.
The podcast then moved on to discuss company performance, particularly in the tech industry. Cisco delivered strong results and beat street expectations, suggesting that companies still have money for capex. Tony believed that companies are having to build out more robust technology infrastructure for their existing operations, which is good for tech infrastructure companies like Cisco. However, there is a divergence in the tech industry, with old tech like HP Enterprise and Cisco doing better than new tech like Apple and Amazon. Companies like Apple, Amazon, and Meta suffer on the ad side because there is a growing supply of ad space, but there are not as many ad dollars, and companies have generally less to allocate to marketing on a proportional basis.
Finally, the podcast touched on supply chains. Tony believed that supply chains have generally recovered, partly due to the falling demand. However, there are still challenges, particularly with logistics and labor shortages. Companies are looking at how to reduce supply chain risks and increase resilience, including reshoring and nearshoring. Tony believed that the current supply chain challenges could last up to two years, and he recommended that companies should develop more robust supply chain strategies.
In summary, Tony Nash shared his insights into the state of the US economy, the tech industry, and supply chains during The Morning Run podcast. He believes that there is still demand in the US economy, with consumers willing to spend and companies able to raise prices. The tech industry is experiencing a divergence between old and new tech, with old tech companies doing better. The supply chains have recovered, but there are still challenges, particularly with logistics and labor shortages. Companies should develop more robust supply chain strategies to increase resilience and reduce supply chain risks.
BFM
This is a podcast from BFM 89.9, The Business Station.
BFM 89.9, 7:05 A.m. On Thursday, the 16 February you are listening to The Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen. Now, in half an hour, we’re going to move the proposal for Petronas to be publicly listed in order to pare down national debt. But we are going to kickstart the morning as we always do, and it looks like it’s going to be a glorious morning with a look at how global markets closed overnight.
So all key US markets ended in the green. The Dow was up 0.1%, S&P 500 up 0.3%, NASDAQ up 0.9%. In Asian markets, they were all in the red, except for our very own FBMKLCI. The Nikkei was down 0.4%. Hang eng down 1.4%. Shanghai Composite down 0.4%. The Straits Times Index down 1.1%. But the FBMKLCI, it was up by 0.3%.
So for some thoughts on what’s moving markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now, US retail sales in January jumped at the most in two years, and home builder sentiment rose in February by the most since 2020. While US inflation rose by 0.5% in January. What do all these indicators tell us about the state of the US economy?
Tony
It says that there’s still demand. It says that consumers are still willing to spend and that people really aren’t slowing down. We’re seeing things like price over volume. Meaning as we see more companies report, their earnings reports, they’re able to raise prices pretty dramatically, say, eight to say 12%, generally with a volume decline of, say, one to 3%, meaning the number of sales. Okay, so these companies are choosing to raise their prices and have fewer sales, but it results in more revenue and faster growth. So consumers are willing to pay more. They’re just buying slightly less of things.
BFM
And Tony, taking all this into account, what do you think the Federal Reserve will likely do next?
Tony
Yeah, they’re going to continue to raise. I do think that Powell missed a trick in hiking 50 in the last meeting. I do think they probably should have kept the foot on the brake a little bit more as a transition from 75 to 25. But I think for 25, it’s kind of as far as the I can see right now, at least while the current pace of the economy holds up. So, you know, we’ll certainly see 25 for the next three meetings. The question is, how much beyond that will we see it?
BFM
And Tony, are you in the camp where I have seen more economists raising their forecast for US GDP growth? I see numbers jumping from 1% to 2% for the first quarter. Are you in that camp?
Tony
Our view has been 1.4 this year, so it really hasn’t changed.
BFM
Okay.
Tony
We do reforecast each month.
CI Futures covers 50+ economies around the world. You can see historical data and forecasted data in an instant, like the US GDP here. Learn more about CI Futures: https://www.completeintel.com/futures
BFM
All right. And then looking at some results right. Old tech, Cisco delivered really good numbers, beating street expectations with strong spending on tech infrastructure, suggesting that companies still have money for capex. Is this indicative that actually companies are doing better than we expected?
Tony
Well, I’m not sure it means companies are doing better because earnings generally are on a slowing trend. But I think what it means is that companies are having to build out more robust technology infrastructure for their existing operations. And that’s good for the tech infrastructure companies like Cisco. So we are at the emergence of a new tech cycle with generative AI, there’s a ChatGPT and so on. So companies are going to need more robust infrastructure to deal with that.
BFM
But then we also notice there’s a divergence right when it comes to results. So old tech like HP Enterprise and Cisco doing better versus new tech like you see results being soft from the likes of Apple, Amazon. Will this divergence continue?
Tony
Well, I think when you look at things like Apple, Amazon, Meta, these sorts of guys, part of their revenues are ad revenues. And what’s happening on the ad side is we have a growing, say, supply of ad space with different companies coming on, like Netflix offering ad models. So there’s more ad supply. There are not as many ad dollars out there, or even if you assume the same ad dollars. With inflation, people are having to make trade offs. Companies are having to make trade offs, so they have generally less to allocate to marketing on a proportional basis. But there’s more ad supply out there. So many of those tech companies where ads are a part of their revenue mix, they’re suffering on the ad side.
BFM
Turning our attention to supply chains. During the Pandemic, the world faced a series of supply chain stresses made worse by the Ukraine conflict and China’s sporadic lockdowns. Do you think that global supply chains have recovered? Are they functioning better now? Or do you still see some kind of rocky road ahead?
Tony
I’d say generally supply chains have recovered. Part of that is demand falling. So we had in the port of Long Beach, we had the volume declined by about 28% in January. So the volume of imports have have actually gone down year on year on the west coast of the US. So the demand there is slowing. We’ve seen one of the indicators is headcount cuts. Guys like Federal Express or FedEx and UPS are cutting headcount. FedEx has announced about a 10% workforce cut, which tells me those are usually the guys who see the supply chain issues first and the guys who see the slowdowns first as well. So if they’re cutting staff, it tells me that some of these things are really slowing down.
When we look at delays at Chinese port, for example, they’re about half the time of what they were about a year and a half ago. So they’re not really bad at all. And then when we look at, say, freight that’s waiting on ships that’s down dramatically to, say, Q1 of 2020 levels before all of the COVID stuff set in. There’s a great just for your listeners, keel. The Kiel, K-I-E-L, I think in Germany has a great indicators on supply chain delays. So I would recommend you guys to check that out.
BFM
And Tony, ASEAN is a key player in this global supply chain. Which countries in this region are likely to be major outperformers in that regard?
Tony
Well, you guys know Malaysia is seeing more inward investment, especially around electronics, so I wouldn’t be surprised if we saw some upside in Malaysia. I know the expectations for Malaysia aren’t as aggressive as, say, Indonesia or Vietnam, but it’s possible that Malaysia overperforms those expectations. Indonesia, I think there are a lot of expectations on indonesia’s outperformance partly on AG prices, but also partly on movement of some manufacturing to Indonesia, which has a pretty low base. And then Vietnam, of course, you know, we’ve seen blistering growth in Vietnam. We expect that to continue as people look for a substitute for Chinese supply chains.
BFM
And Tony, are you still a bull on energy stocks? Because if you look at the sector, it’s the worst performing in the S&P 500 today and also for the month so far. We see energy stocks all coming under pressure, I think in part due to all prices stagnating and weak earnings from some of these companies. Is it time to buy or is it time to just step back and say, hey, maybe I should cash in my chips?
Tony
Yeah, I think you have to look at the different segments of energy. So, for example, oilfield service providers, we’re starting to see upstream, meaning people who take oil and gas out of the ground starting to spend on development outside of the US. So some of these oil and gas services providers, it’s a very interesting space to look at right now because we haven’t had CapEx in so long in oil and gas. And as we get that, we could see some of these service providers do really well. In terms of oil price. I do think that we do see upward pressure. I don’t think anybody really expected that to hit in Q1, but as we end Q1 and go into Q2, we do start to see that. And I think we do see I don’t think we see two or $300 crude oil this year, but I think low 100s, 110s, high 90s. I think those are definitely within possibility and likelihood.
BFM
Tony, thanks very much for speaking with us today. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Ending the conversation there with just a projection on how oil prices could be trending later on this year.
Yeah, so I think we’ll have to watch this space. But I want to focus on one of the names that I mentioned earlier on, which is Cisco. Right. So their results came out. In fact, it went up 8% after market hours trading because the street was really impressed with the numbers. Apparently the earnings, the last time we saw this kind of level earnings was in 2013, and that’s like a long time ago. So a lot of attention on Wall Street has been on what I call the new tech. So Amazon, meta, Apple, Microsoft, even on some level. But there’s a little bit of a shift. And I think what these names are showing is that, hey, there is still spending out there.
Yeah, I think the CEO actually said that the public sector business performed stronger than expected as compared to historically. While in the service provider category, some customers are adjusting to better delivery of the company’s products into the environment. In terms of the guidance for the next quarter, Cisco is guiding adjusted earnings of 96 to 98 cents to share and revenue of roughly about 14.25 to 14.5 billion dollars.
So currently the street doesn’t really like this name that much because there’s only 14 buys, 15 holds, and one sell. Consensus target price for the stock is $53.83. Like we say, it was already up 8% after market hours, right. I won’t be surprised. After these set of numbers, we will see quite a number of upgrades on this name because the company is already suggesting on giving guidance a more positive one.
That’s right. Their guidance is more positive for the next quarter. But turning our attention to other earnings report we have, the Canadian ecommerce platform Shopify. Shopify, in contrast to Cisco, didn’t have such a great report. They reported a loss of $623.7 million in the fourth quarter after adjusting for stock based compensation, gains on investments and other costs. The company reported earnings of 7 cents a share, down from adjusted earnings of 14 cents per share in the holiday quarter.
And revenue came in at about $1.73 billion, up from $1.38 billion. And the analysts on average expected an adjusted loss of a penny a share on sales of about $1.65 billion. The company said Black Friday sales rose close to 20% last year from 2021. And this year is working to recover from a misplaced bet that the Pandemic Field search in online shopping would become more permanent. Although he’s cut jobs, raised prices, and expanded offerings to merchants.
19 buys, 25 holes, five sells. Consensus target price for the stock, $46.48. Actually, the current share price is already above that, to $53.39 year to date. Actually, the stock is up 53%, but I think came from a very low base because 2022 was very painful for them.
All right, 07:17 A.m.. We’re going to take a quick break, but we’ll come back and cover more top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9 you have.
Been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
In this video, our first-time guest Jim Iuorio leads the discussion on the topic of whether markets are too good for the Fed. With speculation around CPI, layoffs, and interest rates, the question of the Fed’s direction and potential pivots later in the year is raised.
Jim also delves into the recent success of the metals market and offers insight into where the market may go in the future. He also offers his thoughts on the potential impact on equities if the S&P hits his target of 4060.
Next, Tracy takes the lead in discussing cracks and Freeport. She explains the significance of rising crack spreads and its impact on the market. She also shares her insights on the recent opening of the Freeport facility and its effect on US natural gas prices.
Albert then discusses the risks associated with Ukraine’s new hardware. He addresses the classification of “direct involvement” and its potential impact on European countries. He also offers insight into what actions Russia may take to further complicate the situation and the potential impact on markets such as wheat.
Finally, the team gives their expectations for the upcoming Fed meeting and what to look for in the week ahead.
This is the 51st episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, and welcome to the Week Ahead. I’m Tony Nash and today we’re joined by Jim Urio. Jim is at TJM Institutional and he’s with the Futuresedge podcast. Or is it on the Futuresddge podcast, right? Yes. Also with Albert Marko and Tracy Shuchart with Hightower Resources Advisors.
We’ve got a couple of key themes. Obviously, it’s the week before the Fed and we’ve had a really good week in markets. So one of our key themes is our market is too good for the Fed. Second I think Tracy is going to talk about crack spreads and Freeport and what’s happening there. And then we’re going to look at the risk with Ukraine’s new hardware. There’s been a lot of talk about tanks going to Ukraine this week, so we’re going to talk about some geopolitical risks with Albert.
So Jim, first, thanks again for joining us and watching some of your comments through the week with markets breaking through some of the key levels that you were looking at, the Fed’s direction is obviously a big factor in markets and there’s a lot of conjecture around CPI, layoffs, rates going lower or pause or pivot or whatever you want to call it, and people saying the Fed may do 25 and then pause.
What’s your view on that? You’ve been obviously speaking about this several times this week. So I’m curious, what’s your view after seeing a whole week, where do you think we go from here?
Jim
Well, I’ve been somewhat more of a bull, I think, than most over the last few months. And I’m not trying to take a victory lap or anything, it’s just a fact. And my reasoning was that every one of us knows that these Fed rate hikes have a huge lag period before we feel the efficacy. Fed knows that too. As stupid as the Fed is, this is something that’s so fundamental, but I think they genuinely do know that. So now we’re starting to see things happen. We saw a pretty good PCE report today. CPI has been trending lower too. The only things in CPI that are stubbornly high, consistently, are food and energy, which are the two things that are least rate sensitive. The yield curve is still wildly inverted, signaling to them that they still are in a financially tight market. I believe that the Fed is getting close to having some sort of gentler language. Now, whether they go 25 basis points this time and then 25 basis points again, that’s fine to me. Now, the one thing I do have a problem with is that the Fed Funds futures curve says 50 basis points over the next two meetings.
And then toward the end of ’23, there’s going to be an ease. But they say it’s only going to be a quarter, two and a half point ease. And that I say “no way.” If they’re ever going to actually pivot and start easing, it’s only going to be as if something is burning and something is falling down and then it’s not going to be a quarter point ease. That being said, I still like risk assets. And I have because I think we are nearing the end of the Fed tightening cycle. I believed, I’ve been doing my podcast for the last hour. I wanted the market to settle above 4070. It certainly did, right? We went into the closed pretty strong, I thought. And I think that that green lights the next move higher. I particularly like the metals market, and I’ll shut up in 1 second, I swear to God. I particularly like the metals market because I think that… I don’t mean to talk for so long. I thought copper was being held down by China news, by the Fed, by the strength of the dollar, and all those things have seemed disappeared. And I’ve made good money on that so far, and I plan on keeping those lumps.
Tony
So it’s a good question about metals. What are you looking at? You said China and you said China reopening other things. What are you looking at in metals? Are you looking at industrial metals, copper and so on? Are you looking at precious metals or kind of all of the above?
Jim
Copper is number one and that’s my biggest position. Silver and then go down from base industrial all the way to just gold being pressured. And the gold thesis for me is different than the copper one in that I believed at the time when I started buying more gold, that Bitcoin and Etherium in the crypto market and all that dollar safety hedge or whatever the hell it is, if that was disappearing, then money would go back into gold. Well, that didn’t disappear. Bitcoin is butting up against new cycle highs now, but gold is still doing well. So in that I was kind of wrong on the thesis. The thesis was also the dollar weakening, which happened as well. Once the Pound of the Euro started really bouncing off those October lows, I thought, okay, the green light is on for all these metals. So I’ve done okay in gold, even though my thesis about crypto was wrong.
Tony
Okay, but was your thesis wrong? Do you see crypto and gold as substitutional somewhat at the margin still?
Jim
I don’t know. I was going to ask you that same question. I always did. And I thought that the $3 trillion crypto market was sucking away some of the gold. And I thought that that was a big deal. But then it doesn’t seem to be now, so I guess I can’t answer that. I’m confused, I guess.
Tony
Yeah. I’m curious. What do you think about that, Tracy, in terms of crypto and gold? Do you think there’s a trade off there?
Tracy
This is not really my… Crypto market, is not really my market.
Tony
Internet, say whatever you want.
Tracy
Albert knows way more about this than I do, to be honest, because I’ve never traded crypto, and he’s traded a lot in the past. So I’m going to defer this to Albert.
Albert
Before I do think that there was a correlation between how much money was flying into crypto versus taken away from gold, I think there is no doubt that gold suffered because of that. I don’t think that as the case right now, simply because there’s been too many blow ups in the crypto world at the moment. I don’t really know how liquid it really is. There’s certainly no retail left in the crypto market, so it looks like it’s all institutional. So I don’t know. You can’t really make a fundamental call on crypto at the moment.
Tony
Could you ever make a fundamental call on crypto?
Albert
You could at some point, because institutional money was flying in there because their clients were forcing them to get into the space. So you could make a little bit of a fundamental case for crypto, but as all these ponzi schemes blew up, like FTX and everything, that’s just gone completely out the window at the moment.
Jim
Sure, Tony, I can make a slight fundamental argument of it. When they were adding an additional $7 trillion, throwing it into the money supply, and really being poor stewards of the dollar, that was somewhat of a fundamental argument for crypto, I guess, right?
Tony
Yeah. Okay. Are markets too good for the Fed. As we’re going into next week, are these levels too good for the fed? Is Powell going to come out and really, you know, say, look, this is irrational or whatever, and it’s too much, and is he going to pour out, say, 50 basis points and disappoint a lot of people?
Jim
Just to punish me a rug pull? I mean, I think he’s capable of that. He certainly did at the Jackson Hole meeting a while back. So you have identified, I think, the major risk, and it’ll probably go into that somewhat hedged. And again, hedging is probably going to be expensive going into it because people realize that that’s where the risk is. So on balance, I will say, no, I don’t believe he is. I think he believes that going too far this way. And again, I think he thinks going not far enough in this direction is the worst possible thing. But I also think he’s starting to realize going too far and what that looks like. He sits around and talks about creating slack in the job market, and to him, it’s just an equation on a whiteboard where the reality is talking about people losing their jobs. I think he balances a lot of realities. I think he’s incompetent. His entire tenure has been mostly incompetent, but I think he’s done a pretty good job trying to clean up the mess that he made over the last year and a half, and I don’t think he’s going to do something stupid like that. But, yes, to your point, it is a risk.
Albert
I actually disagree with Jim on this.
I think it’s going to really matter about what the market does. If we start flying into the 4200 before Tuesday on the SPX and whatnot. I think that Powell will come out. I don’t know if he’ll do 50. I don’t think he’ll do 50, but he might come out with a 25 basis point rate hike and then start talking extremely hawkish and dismiss all the rate cuts that everybody’s been talking about, which would be essentially the same thing as doing 50 to the market. If the market says that. If the market here is that we’re not getting rate cuts till 2024, I don’t see that as positive whatsoever.
Jim
I certainly hope you’re right in the near term, too, because I’m short some of those 4200 calls, like, too many. That’s the position I keep checking in my bold position was like, oh, sh*t, they’re getting too expensive. So I actually like what you’re saying a little bit in the short term.
Albert
Yeah, I have a problem because of this is falling liquidity right now and tightness at the same time. I look at the market and I’m like, well, money is starting to fly out into Asia, which we talked about Tony, repetitively for months now. Where are we going to get that $5 trillion incremental money coming into the market to keep this thing afloat? For me, it’s like I don’t see the math adding up to 4300 on the S&P and anytime soon. And on top of that, if you calculate rate hikes and everything you’re looking at the market, 4150 or 4200 is more expensive than 4800 was. It’s technically even higher valuation. So for these things, I’m just like I think we’re probably going to retrace the 3850 on some kind of ridiculous Powell talk. And on top of that, Brainard is talking about leaving. She’s not leaving if Powell is talking about being dovish. She wouldn’t be doing that, in my opinion.
Tracy
I asked a question. I was just saying and that’s for both of you. I mean, considering that the Fed has hiked so quickly, do we even think, and the data has remained pretty good, considering right, so do we think that the rate hikes have actually even been able to filter down into the economy at?
Jim
I don’t, Tracy. I think that that’s the point. I think when you look, just take the real estate market. How in the world is it not going to be a major hurdle for the real estate market to take mortgage rates from 2.8% to 7%? I think that it’s silly to think that if they just left things the way it is, I believe that we would certainly go in recession at some point in time with money being restrictive as it is compared to… I’ve argued for 30 years that rates had to be inorganically low to make up for the fact that we have all these crappy regulations and punitive taxes on companies. They need low rates to function. I think rates are to point now where eventually they would drag on us too much. Albert, do you agree with that?
Albert
I do. But the flip side of that is, like, if Powell doesn’t stay the course, Yellen is using the TGA, in my opinion, from what I heard, to offset quantitative tightening. This could set off another round of inflation if China comes on too fast, or even Europe starts to gear up a little bit and reset their manufacturing sectors with stimulus. The fear I have is a second half inflationary run again, and then we’re going to be talking no more pauses, but another round of 50-75 basis point rate hikes.
Tony
Second half of Q2. I don’t think it’s a second half inflation run. I think it’s Q2. I think it happens a little bit sooner than that.
Albert
Yeah, it could. I mean, you could have any kind of geopolitical event like Russia re-invading Ukraine with some gusto this time.
Tony
Okay, guys, here’s my question, though. We’re talking all this potential dovishness, but all we’ve seen is the rate of inflation slow. We haven’t seen prices come down. Okay, so why would he go to zero? Or why would he just do 25? I’m not seeing it. When you look at the job market, sure, you’ve lost 70,000 tech jobs, but they hired 2 million since 2020 or something like that, right? So it’s nothing. It’s dropping the bucket.
Tracy
Chipotle hiring 15,000 so those people can get a job.
Tony
Exactly. What is it that would tell us that he’s going to go 25 or pivot or whatever? I’m just not seeing that thing because the job market is still really strong.
Jim
So here’s what I would say to that, is that the job market is going to be strong and tighten. It’s a weird kind of anomaly that happened with 3 million boomers leaving the job market prematurely over the last three years. To your point about why would he not stay the course if prices aren’t coming down? Because, remember, ultimately, the end of the day, the inflation was intentional and it was done because of this wild indebtedness all over the board. But I always focus on the five states that could not possibly have paid their bills under any possible scenario. And that’s why for ten years, they kept telling us that they needed inflation. So I think in Powell’s mind, he tells us 2%. I think he’d be perfectly happy with three and a half.
Albert
And they’ll get three and a half because they’re starting to change the way CPI has waited starting 2023.
Jim
Just like when Nixon changed the definition of unemployment back in the 70s.
Albert
The BLS have done that in the past. They changed the way unemployment is calculated. Now they changed the way the CPI is calculated.
Tracy
They changed the way inflation is calculated.
Albert
Perception is reality in the market. We can sit there and b*tch about fake data from China and fake data from the Europe and the US. But perception is reality in the markets.
Tony
Yes. So we’re going to change the rules to win.
Albert
Well, yeah, of course.
Tony
And the CPAC calculation changes this month, right?
Albert
Yeah, January 2023.
Tony
Fantastic. Okay, so you guys are in the 25 basis point camp for next week, right? 25 and very hawkish. 25 and very hawkish.
Jim
Okay, I don’t I like what Albert saying. I say 25 and mildly hawkish.
Tony
All right, we’ll see. I think it might be a little harder than that. So we’ll see. That’s good, though. I appreciate that.
Tony
Okay, Tracy, I want to talk a little bit about refineries and crack spread. You sent out a tweet on Monday about diesel prices.
Can you help us, help us understand what’s happening at refineries and what’s happening with diesel and gasoline and other refined products prices?
Tracy
Well, this is actually the perfect segue because I tweeted out a chart of ULSD, which is diesel, basically. And so we’re seeing those refinery margins explode again. And most people say, well, that’s anticipation of the diesel embargo in Russia and refineries across the world that are not part of Russia are seeing these increases. But that’s not just happening in the diesel market, that’s also happening in gasoline cracks. And so higher refining, basically the long and short, higher refining margins mean higher prices for consumers. Right. So Tuesday we just hit a three month high of $42. And when oil was at its highest price, those crack spreads were at $60. So this should start ringing alarm bells a little bit about inflation. This is why it kind of correlates to what we were just talking about. And so CBs, even though they don’t count energy in the CPI as part of inflation, they should be keeping an eye on these indicators because it kind of indicates that we’re going to see higher gasoline, diesel costs, jet fuel, et cetera. And that could add to inflationary pressures across the board, not only for just the consumer, you and I, but for companies that are heavily dependent on these products.
Tony
And when there’s inflation in energy, there’s inflation in everything.
Tracy
Right, right.
Tony
Second or two tier impacts.
Tracy
Exactly, yeah.
Albert
One of my oil friends was telling me that normally January, February, they’re running at minimum rates, trying not to lose money. But this has been like absolutely insane, where they’re just making money hand over fist right now because the demand is so high.
Jim
Tracy, I have a quick question for tracy, by the way. Is that okay?
Tony
Yes.
Jim
So, Tracy, just last week, I don’t know if it was Chevron or Conical Phillips, where they announced raising the dividend or whatever, paying bonuses and not investing in it. Was that an indication that they still feel that the government is not smiling upon fossil fuel companies expanding their operation?
Tracy
Oh, 100%. Right. For over a year now, we’ve seen elevated energy prices in that seventy dollars to eighty dollars range. Negating, the spikes that we saw from the Ukraine invasion. But so after a year of pretty much stable higher energy prices, we are still not seeing anybody want to invest in this sector. Right. They still want to cater to the investor. They still want to pay down debts. They still want to do higher dividends. They still want to engage in stock buybacks. All to placate the investor. And so that is very telling that after a year, they’re still not willing to reinvest into capex, particularly in shale.
Tony
It’s nothing but downside to invest, right?
Jim
No doubt.
Tracy
Yeah, absolutely.
Jim
It’s maddening when you think about it. Everything seems like it’s such a self inflicted wound. And this is the kind of thing that keeps me up at night. It seems like a government that’s working against us. And I’m not trying to be that guy. I’m not political. I just see policies and they’re asinine.
Tracy
Who wants to invest when they say, we want to phase you out, we want to kill you?
Jim
Right? Yeah.
Albert
Well, this is the problem when politics gets mixed up in economic policy, it starts muddying things up and mistakes become exponential at this point.
Tony
But politics is always mixed up in economic policy everywhere. You know that. I’m not telling you you don’t know, but it’s always there. When I hear you talk about refineries, and it’s been how many decades since we built refineries in the US, Tracy? The 70s was the last time we built refinery?
Tracy
70s was the last major. We’ve had a lot of brown projects, which means we’ve added refinery capacity to already existing refineries, but we haven’t had any new green projects, which means building new refineries. And we were talking about, I think, last week or the week before the expansion that we’re having in Texas. But the problem is that the amount of refining that is coming offline is more than the refining capacity that is coming online.
Tony
Right. So what’s our capacity utilization right now in refineries?
Tracy
Well, we’re down right now because we’re in the middle of maintenance. And we also had Elliot storm, which some refineries, for instance, Baytown, is just coming back up this week from the storm in December. So utilization rates right now at about 89.5%. But, you know, you have to realize that, you know, we’ve been over, well over 90%.
Tony
Yeah, 94 or something like that. Right?
Tracy
Yeah. And we have aging refineries. And so what does that mean? Those refineries are more prone to breakdown because we’re running them at, like, ridiculous max capacity. Right, exactly.
Tony
Okay, so since you mentioned Texas, let’s look at this tweet that you put out a couple of days ago saying that Freeport gets approval.
So USLNG, the Freeport terminal has been approved and reopened. So can you talk us through what that means for European nat gas and what that means for US nat gas prices?
Tracy
Well, for US natural prices, that is positive. And I know that all nat gas prices have tumbled 35% to 45%. Regardless, we’re back into that two area that is pretty much where we’ve been for several years. But it is a good thing. I think the market, I think, spiked 15% or 15% $0.15 sorry, on that move. And they kind of retraced it. I think the market is a very Freeport is an export place. So what that means is that if Freeport being closed basically landlocks US nat gas, which is obviously a negative because we have a lot of it. But I think that the market in general is a little bit skeptical. But as soon as we actually start seeing export capacity increase from that facility, then I think that the markets will be more enthusiastic about the success of that because it’s really been since August since that facility is shut down.
Tony
So you’re saying we should see US nat gas prices rise as we have more export volumes from Freeport?
Tracy
Absolutely. And even this week, Semper Energy announced that their new Port Arthur facility has already been booked. And that facility isn’t even all the way built yet. And that’s another export facility. So there’s a lot coming online and a lot being built out that we will be able to see. I think that just market participants have become a little bit placated because they look at European stocks and European stocks, of course they’re still full. They’ve had a mild winter, but everybody kind of forgets that last year 50% of their storage capacity came from cheap Russian pipeline. And that’s not going to happen this year.
Tony
Yeah. So all of those new roads that are being built in Texas, it may have been started with other money, but it’s going to be finished with European money. Right. So I just want to take this moment to thank our European friends for finishing our transportation.
Albert
About time they give back.
Tony
That’s right.
Jim
Finally, their currency has come back a little bit, so now they can actually buy stuff here.
Tony
Perfect. Okay, very good, Tracy. Anything else on nat gas? Are you still keeping eye on fertilizer for kind of late spring time period?
Tracy
Yes, absolutely. I think that’ll still come into play. I mean, nat gas prices are extremely low right now, which is great news for fertilizer prices. That will give farmers a break. This is all good news in that respect, but I still think we need to keep an eye on this going forward and keep an eye on that gas prices because obviously that’s going to affect fertilizer prices and farming in general.
Tony
Jim?
Jim
Tracy, you talked about diesel before, and I don’t trade diesel. Is the spread between diesel and regular WTI still blown out? And what could possibly get diesel back in line?
Tracy
Well, I think that there’s been a shortage for a very long time. That spreads come in a lot, comparatively speaking. But now it’s starting to blow out again because again, you have the EU embargo of diesel, and they got literally like 95% of their diesel came from Russia. Another dependent project. And I’m sure Russian diesel will go somewhere else. It’s not more about that, but it’s more about really boils down to refining capacity as well. Because even in the United States, we can’t refine. If Europe wants to buy from us, we can’t even refine enough. We’re sending what we have over there as well as our domestic needs. So really, diesel to me comes down to refining capacity altogether.
Jim
That’s an unfixable problem, right?
Tony
Until Russia’s solved, right?
Albert
What about the Jones Act waivers for sending diesel up to these coast cheaper?
Tracy
Yes, they could do that, but they haven’t done that. They’ve done that in the past for Puerto Rico after the hurricane and all of that, but they still haven’t given waivers. Even when prices were extremely high in the United States, when we were at the height back in June, July, when prices, gas prices were highest, diesel prices were highest, they still wouldn’t give Jones Act waivers. You have to understand that the Jones Act came into play into 1920 when we had a fleet of over 1000 vessels, and we now have under 100 vessels that can transport that. So, you know, it’s the government could do it. They’ve chosen not to. Why? I’m not sure, but…
Jim
We can come up with some guesses. They’re either stupid or they’re nefarious. I believe at some point in time you’re going to have to say some of it’s nefarious, where they keep making the wrong decision at every turn. And I apologize for that.
Tony
No, don’t apologize. Look, it’s making it more expensive for people on the East Coast to get diesel. It’s not good.
Tony
Okay, great. Speaking of Russia, Albert, we saw a lot of news over last week about tanks going to Ukraine. And there’s a tweet from Max Abrams, who’s a great geopolitical professor talking about Russia, says that tanks from the west count as, quote, “direct involvement in the war”.
So I wanted to get your… Jim said what would solve the diesel problem. Obviously, Russia coming back into the market would solve the diesel problem. Now with a lot of Western countries sending tanks to Ukraine, that doesn’t sound like we’re coming closer to a solution on that. So first of all, why are they sending them if they don’t have the people to operate them? Second, tanks are to take land. Right? So what do you think is being planned? And third, how risky is it? Do you think it really implicates these kind of donor countries as direct participants in the war?
Albert
I don’t really buy into the whole direct participants of the war. The rhetoric coming out of Russia is a little bit bombastic in that respect. Referring to those tanks, there’s only going to be about 100 of them, right? They’re not going to be able to push out the Russians with those tanks. On top of that, they’re going to be about six months out until they’re actually even deliver, and then you still have to train these guys and they need supplies, and the Ukrainians don’t really have all that. So the best guess that I have is that they’re forcing Russia to come into a ceasefire in about six to eight months time, which gives them a window now to try to take Dambus and have some kind of wind before these tanks get delivered. Listen, they’re no joke. The Leopard tanks and the Abrams are better than what the Russians have. But in terms of the Ukrainians using them to push Russians out of all Ukrainian territories, that’s just not happening.
Tony
Right. So are these just old tanks or is it a quality kit that they’re getting?
Albert
Well, I think they’re getting like the second tier tanks of what the west has, but that’s still better than what the Russians have or even willing to use for Ukraine. So, like I said, this is more of a measure to force the ceasefire later on in the year.
Tony
Okay. Yeah, Jim?
Jim
Albert, a couple of days ago, when this escalation started in Germany, we announced I immediately put on my screens, looked at oil, wheat, even the defense sector ETF, and nothing really budged. Do you think the market was looking at it like it wasn’t a big deal? Or do you think the market was looking at it as somewhat balanced, perhaps a quicker end of the war and not an escalation, or perhaps an escalation, the two things come around?
Albert
Oh, man, that’s a good one, Jim. I honestly think that the market’s probably in a wait and see position at the moment.
Jim
Numb to the shit kind of. Right?
Albert
Yeah. You got to wait and see what Moscow is going to do. I certainly think they’re going to use wheat and grains and other grains asymmetrical responses to the west to push inflation out over there, make it hurt. That’s the only thing they have. They don’t really have anything else to go after. I mean, the oil that they’re selling to India and China is enough to sustain their pocketbooks for a little while until this gets sorted out. But until there’s some sort of major upheaval in Ukraine, I don’t think the defense stocks will take off or wheat yet. But they will. I think they will. They haven’t moved.
Tony
The defense stocks haven’t moved for a while. If it is we and other AG stuff that is going to be their lever, that probably means the Turks will get more involved in the discussion because they’re the ones who arbitrated the discussion earlier. Is that right?
Albert
Well, they’re trying to get into the discussion. I actually have really good connections with the Turks and their main thing is to distract the West and the Russians into Ukraine while they push their trade deals out into Africa at the moment. You know, the Turks have a great drone, the TB Two, which they sell to pretty much everybody. So that’s as far as they’ll actually get into the war besides making media comments.
Tony
Right, okay. And so what risk do you think there is on wheat? Do you think we see more wheat risks, say, in Q2 – Q3 this year?
Albert
I absolutely do. The Ukrainians, they’re planting a lot less. I think 40% less is what they’re reporting, is probably even more than that.
Tony
Right.
Albert
And on top of that, if the Russians decide to blow up a port or blow up a few ships that are trying to get out with wheat, and all of a sudden, wheat, you know, takes off back to the 900 or $1,000 mark again. So I definitely see that happening in Q2 Q3.
Tony
Okay. That could be exciting. All right, guys, let’s close it up. We’re in that quiet period for the Fed. We have that Fed discussion next week. So what are you keeping an eye on next week aside from the Fed, of course, but what are you keeping an eye on in markets? Tracy, why don’t you get us started.
Tracy
Well, I know that most people are looking forward to OPEC is next week at the beginning of February. My personal stance on that is that I think they will keep everything as is. Right. They made that 2 million cut, even though it’s technically not 2 million, because they were under quota anyway. They said they were going to carry that through 2023 unless something came up that they really needed to address. And I just don’t see anything coming. I don’t see any reason they would need to change this policy stance right now. We have Russian barrels still on the market. We have China is still kind of an unknown because they haven’t really opened up yet. So that’s what I’m looking forward to, or at least that’s what my feeling is about the data.
Tony
Great. Okay. Albert, what are you looking at next week?
Albert
Well, obviously the Fed. I think, is in order with a hawkish tone, but honestly, I want to see how the dollar reacts to all this. And the VIX. The VIX at 17, start looking at some good old put options and call options with the 17 VIX is fantastic. But, yeah, basically what the dollar is going to do. I really want to see if the dollar breaks into the 90s with some kind of bull market talk.
Tony
Excellent. Okay. And Jim. Wrap us up. What are you looking at?
Jim
The unemployment numbers on Friday. Big deal. The last shooter drop is going to be the slack in the labor market that they want. Albert mentioned that level on the dollar. I call it like 101 to 100. As soon as it goes below that, as soon as we get a nine handle on the dollar, I think it greenlights a lot of risk assets. But the thing I’m mostly focused on is unemployment and then the week after that my trip to South Florida. Because every time I leave these damn markets, something crazy happened. So you guys can count on that. I’ll tell you when I’m on my flight. Something weird is going to happen.
Tony
When is that?
Jim
I don’t know. My wife makes the arrangements. I think it’s the next, like a week from next Thursday. I think we’re going on vacation.
Tony
Keep an eye on. Jim, thanks so much for joining us, Jim. Guys, this has been great. Thanks very much everyone have a great weekend. Thanks Jim.
In the current Week Ahead, Harris Kupperman (Kuppy) of Praetorian Capital discusses his hypothesis that crude oil prices may reach $300 per barrel due to a decrease in supply resulting from environmental regulations, a lack of investment, and government actions. Kuppy also argues that high demand for housing in the US, driven by population growth and migration, will lead to a positive outlook for the housing market. However, he notes that high mortgage rates could impact the market, but a pause on interest rates or an acceleration of inflation could lead to a more favorable outlook. Kuppy suggests that the US housing market may see a shift towards lower-priced homes with fewer amenities in order to accommodate growing families. He also highlights the attractiveness of housing markets in emerging markets due to high interest rates and positive real yields on property appreciation.
Next, Brent Johnson of Santiago Capital discusses recent policy changes by the Bank of Japan (BOJ) and the market’s reaction to them. Brent argues that the changes, which included increasing the amount of quantitative easing (QE) and widening the range within which the yield curve control operates, were not a real policy change and that the market misread the situation. He suggests that the BOJ is trying to avoid a repeat of earlier this year, when rising interest rates caused chaos in the Japanese banking system and the market had to be halted. He also discusses the challenges central banks face in balancing the bond market and the currency market, and the impact of these challenges on the yen.
Finally, Tracy Shuchart of High Tower Resource Advisors talks through the relationship between oil demand and household savings during economic recessions, stating that past recessions have not significantly impacted oil demand. She also covers the potential long-term effects of declining population rates on global energy consumption, then comments on the potential for energy consumption to increase in the short-term, citing data from the International Energy Agency and discussing the impact of economic stimulus on household savings and consumption.
Hi, everyone, and welcome to the Week Ahead. My name is Tony Nash. Today we’re joined by Harris Kupperman. You may know him as Kuppy on Twitter. We’ve also got Brent Johnson and Tracy Shuchart. Kuppy is with Praetorian Capital. Brent Johnson, of course, is with Santiago Capital. And Tracy Shuchart is with High Tower Resource Advisors. So, guys, thank you so much for joining us. I think this is going to be a great discussion.
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We have some key themes here. The first, really looking at some of Kuppy’s discussions lately, looking at $300 crude, and kind of still with a question mark, bullish housing? I think that’s the first thing we’re going to jump into.
Then we’re going to look at Japan’s normalization. We had some news this week with BOJ Chair, kind of starting to normalize the Japanese money supply environment. So we’ll jump into that with Brent. And then we’re going to look at recession on oil demand elasticity with Tracy.
So, guys, thanks again for joining us. I’m looking forward to just a great discussion today.
So, Kuppy, you know, you have posted quite a lot about $300 oil in your newsletter and online. And, you know, there are a lot of, we had a show last week that was full of oil bulls. I don’t know that anybody particularly said $300. So I’m really curious about your $300 call. Can you walk through your thesis and just help us understand what you’re thinking?
Kuppy
Yeah, sure. I mean, overall, oil is just like all the commodities. It’s supply and demand. And since 2014, no one’s really invested and the supply side is really constricted. You have ESG mandates. You have lack of capital from institutional investors. You have banks that won’t lend. You have governments around the world that are canceling pipelines and canceling permits. And now you have UK talking about excess profits, taxes. That’s not an environment for guys to go explore and drill. And the thing about oil is that if you’re not drilling new wells, they decline over time. And so the question keeps being, where does the oil come from? People just think that the US. Shale, you can flip a switch and barrels show up. And maybe that was the case a decade ago, but that’s not how it works anymore. We’ve really hit the best acreage.
And from here on out, not only are you working mostly at tier two locations, but you’ve seen massive inflation in terms of oilfield services and those wells that everyone used to lie about and say it had 100 IRRs at 60, what we learned is they don’t break even at 60. And now you have massive oilfield inflation. I don’t know if you have decent IRRs at 80 or maybe even 100 in a lot of these places.
And I mean, it’s no secret why no one’s drilling. The numbers don’t work. And then, you know, you flip it to the other side on the demand side. Look, 6 billion people want the same standard of living and the same energy per capita utilization that all of us have. And you could have said this decades ago, but what’s changed is that they’re all in that part of the S curve where their per capita consumption explodes. I mean, look what’s happened in India. We’re having, I guess, a global recession this year, but demand is up teens.
You look all around the world, Africa, LatAM and demand is up. Even in the US demand is up. And so demand grows one or 2 million barrels every year. And where is the supply going to come from? What we’ve seen, like I said, is the supply is restricted. And even if you try to add supply, it takes a couple of years.
And so I think you’re going to have a massive mismatch. And what’s hidden that for the last year is that China has been offline. That’s two or 3 million barrels. The SPR is globally of about a million, million five. So you’re really looking at, let’s call it four and a half million barrels. That that’s been kind of like subsidizing the balances.
And, you know, you could debate, you know, exactly what the number is, and it moves around some. But for the most part, you’ve had this weird subsidy to the oil price, and I don’t think that’s going to be there next year. China has been pretty clear they’re opening and the SPR is empty. Meanwhile, Russian production is in free to fall after the US firms left. That’s another million. And like I said, global demand grows a million or two a year.
And I don’t think we can see much growth on the supply side. I think you’re going to have a four to 5 million barrel deficit, and that’s one of the biggest deficits in 40 years. And it may even be as large as we saw in World War II as a percentage of total consumption. And I think the price is going to scream out of control. I don’t think 300 is the clearing price long term, but I think you could get there in a super spike, especially given how much structured products out there that’s synthetically short. So that’s how I see it, and that’s why I’m so bullish.
Tony
Okay, so is your time frame for ’23 for the $300 price, or is that just kind of a longer term target?
Kuppy
I think it’s like the next year or two.
Tony
Okay.
Kuppy
Like I said, we’re going to have massive supply demand mismatch next year, and I think it’s going to scream out of control. There’s some things we could still do. They’re going to jump some more SPR. Maybe there’s some things around the margin they can do. But in the end, if you’re structurally short oil and there’s no oil to be had, I think the price goes crazy. And you always have a geopolitical kind of upside there to whatever happens to the price of oil, because it’s never really the downside, but it’s usually the upside if something crazy happens.
Tony
Right. Okay. We just had Zelensky speak to US Congress this week here in the US. And it doesn’t really sound like the war there is slowing down. Maybe it is, maybe it isn’t. I don’t know that we get a clear picture anyway, but I think there are a lot of assumptions that that will calm down next year for some of these guys who aren’t seeing super high oil prices. If that war intensifies, does that speed up your $300 price target, or does it affect it at all?
Kuppy
I don’t think it affects it at all. I mean, Russian oil is still making its way to the market. But US technology for the Russian oil fields isn’t. And so Russia is going to be in slow motion decline in terms of production, and I don’t really see what would change in the Ukraine situation. I think it’s very likely that as soon as the ground freezes there, those half million conscripts will be set loose behind the Ukrainian army and kind of surround them all. The only reason that Ukraine is still in the war is really just because it’s been kind of warm there. I think it doesn’t look very good, but that’s like more of a personal view. But I don’t think it really matters who wins this war. In the end, Russian production is rolling over.
Tony
Right, okay. And is there a possibility of, let’s say, a load of investment going into Venezuela in the short term and that volume that supply, hitting markets to save markets? I’m just trying to kind of figure out, is there a near term supply side solution?
Kuppy
Not really. I mean, who wants to invest in Venezuela? You can get a bunch of pieces of paper with guarantees, but the history…
Tony
Chevron does, of course.
Tracy
No, but it’s absolutely true. I mean, it would take billions. And it’s still the problem is geology there? And what’s going on…
Tony
Explain that. When you say the problem is geology.
Tracy
It’s not only their infrastructure which is decrepid after, it’s also geology. Right. They have very sludgy oil. It’s very hard to get out of the ground. So even with investments, you’re facing an additional challenge of the geology there being very, very difficult. And so that’s just going to add. So anybody thinking that Venezuela oil is going to change this dynamic is off base, in my opinion.
Tony
Okay, and then Africa supplies other stuff. There’re Brazil. There isn’t really anything that can be accelerated on the supply side. I’m just trying to poke through this, guys, just to get a better view.
Kuppy
I think you’re going to see an increase in offshore oil production around the middle of this decade. Guiana, Suriname, West Africa, Brazil, it’s all coming online. But it doesn’t come online fast.
Tony
Right?
Kuppy
Well, you have a lot of places that are rolling over or really struggling just to stand in place. I think we should look at is what’s happening in Saudi, where they’re frantically procuring every jackup that could be had globally. They’re going off into the Gulf. I mean, if their oil production was stable or they thought they had more onshore, which is the cheap stuff, they’d just be drilling more onshore. The fact that they’re going into the Gulf, it’s an increase in complexity and cost means that their existing fields are now getting old. And it’s obvious they’re old. They’ve been going for 70 years, but they’re finally seeing that water cut really pick up and they’re starting to panic. No, I think you have a lot of problems everywhere. Plus you have some swing places. Iraq, Libya gets cut off again from exports. You have a bunch of places where you could lose a million barrels in a hurry.
Tony
Okay. No, it sounds pretty ominous, actually. So I’m trying to find ways to push back on that. But again, we have some really smart folks last week, including Tracy, who had a similar thesis, maybe not 300, but a similar thesis. And I think what you’re saying, Kuppy, makes a lot of sense.
Kuppy
I think the pushback is really that something could happen on the demand side where you have a global economic crisis. They lock us down for monkey pox or the next pox they invent. Something like that is what I’d be looking at in terms of the wild card where demand falls off. But all it really does is postpone things. I mean, look, it’s December. 2023 budgets are being set at all the majors, and they’re being set in the context of mid 70s WTI. Do you think board of directors are going to approve an increase in spending? Like, I think 2023, and as a result of ’24 production, at least onshore US, is kind of baking the cake based on @75 price today.
Brent
Hey, Tony, I typically would defer, and I will defer on all things oil to Kuppy and Tracy, but I would say that to be completely truthful, I actually shorted a little bit of oil this morning. And it’s just a tactical thing. It’s not a huge deal. If it goes against me, we’ll stop out and it’ll be fine. But what Kuppy just said, I think could happen. The interesting thing is I think it’s possible we do get this demand shock right, and we get some kind of a global slowdown in the first half, which could potentially push oil a little bit lower. But if that were to happen, I would then, well, I already do agree with Kuppy’s thesis kind of medium to longer term. I think he’s kind of nailed the overall structural issues and why it is. And I would just say that if we do get kind of a short term demand drop that pushes the price lower, that could actually help to cut supply even more because firms go bankrupt or they can’t invest or whatever it is, and then it constricts supply even more, and then you get a military action. And in my opinion, that’s how you get oil at $200 or $300. I tend to agree with the Kuppy’s overall position.
Kuppy
You’re just talking about the slingshop, right?
Brent
Yeah, that’s exactly right.
Tracy
Absolutely. And you have to realize that if we have the lower oil prices we have and gasoline prices we have, that increases demand in a supply side constricting environment. So that’s where you get your selling shot. So it really depends on, I think, how you’re trading this definitely depends on your time frame. If you’re longer term, that’s one thing. If you’re shorter term, I think oil is going to be volatile for the next few quarters.
Tony
So because we’re actually talking about $300 oil, I think it’s Citi who always does the extremes in crude. So now we’re going to have a Citi report that says $500 oil. Right. Thank you.
So, Kuppy, you also had a very interesting call on housing. And when I sent out the Tweet about this recording, I had some questions about your housing call, your bullish housing call. And I want to ask, are you still bullish housing? And can you go into that thesis a little bit either way? What’s your thinking on US housing now?
Kuppy
I’m bullish US housing. Structurally, you have a shortage of 5 million homes. This is population growth, especially people my age a little younger that are starting families and they need homes. And there’s been a lot of migration in the US. And so you need a lot of homes in Texas and Tennessee and Florida and not where these people are fleeing from. And so as a result, there’s just strong demand for homes. At the same time, if you take mortgages up to 7%, no one could afford a home.
And so we’re having a bit of a pause as the Federal Reserve kind of intercedes in the housing market. And it’s kind of like a Brent Slingshot in oil. All you’re going to do is make the problem worse if you’re not building enough homes for the demand. Because the demand keeps growing, the population keeps growing and so they’ve kind of postponed us a little. You’ve seen rent spike out of control, though. That’s kind of stabilizing a little just with the economy kind of slowering. But no, I think the housing market is going to do very well, but it’s going to need a pause on interest rates or an acceleration on inflation.
I mean, you could look at a lot of emerging markets where you can’t borrow for 30 years, you can’t maybe get five years and you’re going to pay 15% interest rate on that. But you know what? They’re having huge demand for housing because if inflation is 20 and you fund it at 15 and you get put a couple of terms of debt on that, well, you’re making 20 30% on your equity. That’s a good place to be as a 25 year old guy or 30 year old guy with a family trying to get a home.
Tony
Yeah. When people don’t understand why real estate is so attractive in Asia and why, say, Hong Kong homes or Chinese homes or whatever, why you always have this inflationary environment in real estate in Asia? What you talked about, Kuppy, is exactly why. I think it’s very hard for people in the US particularly to understand why real estate in Asia is so appealing. And it’s exactly for that reason.
Kuppy
Yeah, LatAm and Africa too, where interest rates are high, but you still have a positive real yield on owning your property because it’s appreciating.
I think the other thing I’d say in the US and I think people kind of lost the narrative here. Guys are complaining that when their parents, like my parents were buying homes, it used to cost two or three years of salary and now it’s eight years or ten years of salary. And they say homes are really expensive.
Yes, homes are really expensive. But the guys got buying a McMansion today. It’s like a 4000 square foot home in the suburbs. If you look at what the people were buying in the 70s and 80s, it was like 1200 square feet, it was a two bedroom with a little kitchen. Now the kitchen has $200,000 of appliances in it. Like right. The reason these things got really expensive and, and unaffordable.
I think you’ll see some reversion back to a lower price point home with, with less amenities because you got to put people into homes as they were to put them. And so, big picture, I’m super bullish you know, you, you can’t go indefinitely with, you know, having a family with three kids and they’re in a two bedroom that’s 1200 sqft.
They need space, but that’s going to take until rates come back and as soon as rates peak out and start dropping or when inflation accelerates again, I’m going to be all over housing.
Tony
Great. Okay, that’s good. Thanks for that clarification. I think that’s really interesting, but in the near term you’re not necessarily bullish on housing in the near term, while rates are rising?
Kuppy
I think housing is going to do just fine because the tailwind is so strong, but at the same time, I think there’s better stuff to own. I’d much rather be in things that are pro inflation. I really just want to stick with energy. Uranium. I think those are trends that do well really in either market environment, but just because of the supply demand imbalances of the next year or two, I think they just work idiosyncratically no matter what. And I don’t know, I just think it’s easier trades.
Tony
Great. Okay, we did have some questions actually about emerging markets, so I just want to ask you first Kuppy, but then the rest of you guys, what emerging markets are you looking at and why?
Kuppy
I’m not really looking at any, so I can’t say. I will say I have a lot of friends that specialize in emerging markets, and they could show me a bunch of metrics that say emerging markets haven’t been this cheap in a very long time on cash flow, book value dividend. And there’s some reasons why maybe they deserve to be cheap. But those things come and go in terms of the why. But you buy cheap assets, things usually happen to you that are beneficial over time. I see Brent laughing, so explain.
Brent
Okay, to be clear, I’m not laughing at Kuppy’s answer. I tend to agree with, if his friends are telling him these things, I’m sure that’s true because they tell me the same thing. I just kind of laugh because I feel like every year for the last seven years, the trade of the year at the beginning of the year is to short the dollar and go long EM. It’s always the trade, it’s always the big idea, and to me it just never plays out. And I don’t think it’s going to play out right now.
I personally am not looking at any EM other than to stay away from it or perhaps to go on vacation to it. I don’t want anything to do with it from an investment perspective. Probably, not surprisingly, I don’t think the move in the dollar is over. And I think if we get a slowdown in the first half, which I think we will, I think that will play out in the Euro dollar market, and the emerging markets just as much, if not stronger than it will in the US markets. I don’t see an environment where EM outperforms the United States right now
Tony
In dollar terms.
Brent
In dollar terms. Yeah. Maybe in local terms. In local terms, that could easily happen. I mean, take a look at Turkey, right?
Tony
Right.
Brent
Turkey stock market has gone up two or 300% in the last 18 months, but they’ve got 80% inflation in local terms.
Tony
Right. So you have to.
Brent
So you have to yeah, right.
Tony
So Brent, can you talk us through you mentioned the dollar and you know, everyone always wants to know what your thoughts on the dollar? Can you walk us through what you’re looking for, say, over the next three to six months with the dollar?
Brent
Yeah, so, I mean, over the next three to six weeks or a couple of months, I don’t know, maybe it just goes sideways. But I think by, if not the end of Q1, beginning of Q1, kind of April-May time frame, I think the dollar is much higher than it is right now because I think that, you know, I sent out a tweet earlier today where because I, was kind of laughing.
I was talking to somebody and they said, well, rate hikes are over, so the dollar is done. And I was like, well the, the dollar can go up for reason other than rate hikes. And he was like, what are you talking about? And here’s the thing. From 2008 to 2019, the dollar went up 20% and there weren’t any rate hikes. I mean, there was a few in 2018. And in 2014, in 2014 and 2015, the DXY went up 25%. There were zero rate hikes. It’s because there was a global slowdown, right.
And when dollars aren’t circulating and the world needs dollars, there’s a dollar shortage. Supply, demand, it pushes the dollar higher. And so I feel like the move of the dollar in 2020, I’m sorry, in 2022 was all about rate hikes. Interest rate differentials, right. And maybe that is potentially over.
But the dollar can move for reasons other than interest rate differentials. And I think people have forgotten that if we go into a recession or if we go into a global slowdown, all that debt that is issued in dollar still needs to be serviced. And so I think perhaps the run in the dollar due to rate hike differentials is over. But I don’t think the run due to dollar shortage, due to a global slowdown and the need to service dollar debt is over.
Now, if I’m wrong, I don’t think that the Fed will come out and totally flip until they’re forced to do it. And the only reason they would be forced to do it is if the dollar was higher and all these asset prices were lower. So is it possible by the end of 2023 the dollar is lower? Sure. But I think at some point in 2023 we’re going to get another run in the dollar. And I think it’s probably in the kind of the March to April-May time frame.
Tony
Well, I think what people also forget is that the Fed has eight plus trillion dollars on its balance sheet, and if they start to sell it off in any sort of volume, that takes dollars out of circulation, right?
So that’s a big assumption because they’re shrinking it on a small basis now. But if they accelerated that, that would take dollars out of circulation. That’s bullish dollar as well, right.
Brent
Well, the other thing I want to make this point because I think this is a critical point. And I was speaking to, I went to a conference in October, and I’m not going to pick on this conference because it’s happened at every conference I’ve gone to. And I had so many people come up and me and say, what’s going to happen with the Fed? How’s the Fed going to get out of this? How’s the Fed going to get out of this? They’re trapped. Nobody has ever come up and asked me how the ECB is going to get out of it.
Nobody’s ever come up and asked me how the bank of Japan is going to get out of it. Nobody’s ever asked me how the Bank of England is going to get out of it. And the thing is, they’re in worse shape than we are. I hear you, and I understand all the problems associated with the dollar. Listen, it’s a horrible currency. It’s just better than the other three jokers.
Tony
Gold or CNY, Brent. Gold and CNY solves everything.
Brent
Exactly. So my views on the dollar are not just based on what the Fed is going to do. A lot of it’s based on what these other central banks are going to do. And I just don’t think their leaders are any smarter than ours.
Tony
Perfect.
Brent
And I think they’re trapped even more than we are. So anyway, not to go off on a whole tangent, but that’s why I don’t want to have anything to do with emerging markets.
Tony
That is not a tangent. In fact, that’s a segue to our Japan normalization discussion. Right.
So thanks for that. So we saw Kuruda come out, talk about changing policy a little bit, and markets reacted with a stronger yen and yada yada. Right.
So is this, do you see this as a real change? I see this tweet that you sent out earlier this week saying if you think happened to think today’s move in the BOJ is going to work out for Japan, it’s not.
So can you talk us through? Is it just preparing for the next BOJ chair to reduce risk if they change policy? Is it a real policy change? Is it going to work out? What do you see there?
Brent
I don’t really think it’s a policy change. And if you actually look at a lot of people, just see the headline and just react, and they don’t even think about what the headline means. And I think the market has got into a habit, and people in general have got into a habit of reading into it what they want to read into it. So I think very much the world wants Japan to get out of this, and they want the dollar to go down. And so anything that shows that another central bank is going to outperform the dollar, they ultimately want that to be true, whether it is or not.
If you read what they actually are doing, they’re actually increasing the amount of QE that they’re doing. So if you just read that sentence, you’d say, holy cow, the end is going to go even lower. Because not only did it have a horrible year this year, but now they’re going to increase QE. But at the same time, what they said is that we’re going to let the bond, the yield curve control, the band with which in yield curve control moves, we’re going to widen that.
So we could have interest rates in Japan go up to 50 basis points rather than 25 basis points. And so the market kind of interpreted that as, okay, they’re actually moving towards rate hikes. Now, they didn’t say they’re moving towards rate hikes. They didn’t do a rate hike. But everybody wants to believe that they’re going to raise rates.
But here’s the thing. Earlier this year, and I think it was March or April, interest rates in Japan, because of inflationary pressures, are now actually even hitting Japan. Long term rates in Japan moved up 25 basis points. And because the two to five to ten years prior to that, they were doing QE and negative rates. The banking system is chock full. And when I say the banking system, the banks, the hedge funds, the endowments, the all the institutions in Japan have all these zero yielding bonds, Japanese bonds on their banks, and because, and they’re long term bonds.
And so when yields even go up 25 basis points, the convexity makes the balance sheet of all these institutions go upside down. And so when interest rates went up 25 basis points in April, it caused all kinds of chaos in the Japanese banking system, and the market had to be halted, and the Bank of Japan had to come in and promise to do more yield curve control in order to keep it from blowing up.
And two days ago, or three days ago, whenever that announcement was, they made that announcement, the market took it as an interest rate hike. And guess what happened? They had to halt the Japanese bond market again. So I understand if they do raise rates, that would strengthen the yen.
But the problem is you cannot, and this is for every country, the US included, again, there’s a progression in how it’ll go, but you cannot save both the bond market and the currency market because they work at cross purposes. Whatever you do to save the bond market hurts the currency. Whatever you do to save the currency hurts the bond market. And every central bank in history has promised they won’t sacrifice the currency, and every central bank in history has ultimately sacrificed the currency.
And the reason they always choose the currency over the bond or the reason they always choose to sacrifice the currency over the bond market is two reasons. One, the currency affects the citizens more than the government, and the bond market affects the government more than citizens. So they’re going to bail themselves out before they bail the citizens out. And the second thing is, if the bond market blows up and the banking system blows up, there is no longer a distribution system for the government to raise money.
So they can’t let the bond market blow up because then they can’t get money anymore. And then if they can’t get money, they can’t operate. So this is a very long way of saying that I understand why the market moved the way it did. I think maybe in the short term it makes sense, but in the medium to long term, it doesn’t make any sense to me at all. Again, kind of watch what they do, not what they say. I think the yen is going much, much lower.
Tony
Okay, interesting. How long do you think it will take before markets call their bluff, is that?
Brent
Maybe a couple of months?
Tony
Really?
Brent
Again, I think we’re going to have a lot of problems by the end of Q1 all over the world, not just in Japan, not just in the US, not just in Europe, but everywhere. I think we’ve been slowly moving towards this crisis, and I think we’re almost there.
Kuppy
Brent, I think a lot of the move in the yen over the past couple of weeks is really just guys degrosing. That was the funding currency for all the risk assets, and risk assets went no bid, basically all year, and guys are finally getting redeemed from their hedge funds, and it’s year end redemptions. You got to pay it out. It’s got to unwind your yen to unwind your Tesla, which is also in free fall.
Brent
That plays into it as well. Yeah, I see your Tesla queue there. That’s a good timing.
Kuppy
I’ve had this, what, five years? Six years. It’s probably coming due today.
Tony
When is the Twitter Q month coming?
Kuppy
I don’t know.
Brent
Oh, they should have one of those, shouldn’t that’s a good idea. We should start selling those.
Kuppy
I’m a little conflicted here because I feel like Elon might be doing the right thing on the Twitter side, whereas Tesla is still like the evil empire. So I don’t know.
Tony
Okay, we’ll have another discussion about that at some point. Brent, you talk about things coming in Q1. Can you share a little bit of your thoughts there around markets, potential recession that might…
Brent
Well, yeah. I mean, in general, it’s kind of amazing. Now, let’s reverse ten days ago to the Fed meeting. At that time, the Fed had raised four and a half, almost 4% for the year, and markets were down, but they weren’t down that much. Now, since then, they’ve sold off another 5% or 10%. So now they’re getting close to the lows of September again.
But this is what I think. I think a lot of people are surprised that the market hasn’t crashed more than it has based on the four and a half percent or, or 4% rate hikes. And I think what sometimes people forget is that we may not even be feeling the effects of the very first rate hike yet, because oftentimes rate hikes take nine months to a year to actually.. The effects of the rate hike to show up in the economy and work their way through the economy.
Tony
Powell talked about that a lot in his last…
Brent
Well, no, exactly. And the first rate hike was nine months ago. It was in March. So it really wasn’t that long ago. Right. And now they’ve raised four times since then. So I just feel like by the time we get into February, March, that stuff is going to have started to show up, perhaps dramatically. And I think the Fed is going to continue raising until they just can’t raise anymore.
Now, whether they should or not, whether you believe Powell or not, again, that’s kind of a separate subject. I just think he’s going to do it because he wants to do it, and the last thing he wants is for inflation to reaccelerate on his watch. Right. And if he crashes the market, then everybody will be begging him to do QE and he can go do QE and be the hero. So I just kind of see that that’s how it’s playing. And I think that probably a lot of people agree with me on that. I don’t think that’s any kind of a crazy view right now. I think a lot of people think he’s going to hike until it crashes the economy, but I don’t see him slowing down until he has to.
Kuppy
Brent, I got a question. Lagarde has been super dovish for a very long time. Depending which country in the Eurozone you’re at teens, maybe even high teens inflation all of a sudden, last week, she just came out swinging.
Brent
She did.
Kuppy
And what do you think changed? Did someone just whisper in her ear? Did she look at a debt bad data point? Did a politician be like, hey, the peasants are upset about the price of bree? Like, what happened?
Brent
I think it’s a little bit of that latter. I’ve talked about this before. I think we all know that financial repression is the name of the game for governments. That’s how they get out of these big debt, these big debts that they, you know, they want to inflate it away over time. The problem, though, is what they would ultimately like to do is to get very steady rate of inflation at four or 5% a year for ten years right. And inflate away 50% of the debt. The problem, as we’ve kind of figured out and found out that it’s very hard to just get four for four or 5% inflation. It goes from 2% to 12% pretty quickly. They don’t have as much control as they think they do, right?
And the problem with four or 5% inflation, you can kind of get away with it because it’s annoying and it is frustrating, but it’s not totally ruining your life. But with 8, 9, 10, 12, 15, 80% inflation, that starts to ruin the pledge life, as you mentioned. And that’s when they start to push back from a political perspective. And that’s what central banks and governments don’t want. They don’t want the populace revolting. But when you’re cold and you’re hungry, that’s when you revolt. Nobody revolts when they’re full and warm and have a great job and going on vacation. Why would you revolt in that environment? But when things are going against you and they start pushing back politically. And so I think that the pressures in Europe are a little bit just too much for them to not at least acknowledge it publicly. Now, whether they actually do anything and follow through on it, that will be interesting to see because, again, ultimately, I think they will save the currency rather than save the bond market, or I’m sorry, they will save the bond markets rather than save the currency. But I do think it’s a little bit of why Lagarde came out as strong as she did.
Kuppy
Do you think she follows through or?
Brent
No, she’ll try again. And it’s like Powell. Powell will keep trying it. Well, eventually the markets will push back on them and won’t let them, but I think she might try. But I think Europe is just screwed for lack of a better word.
Tony
So let me ask you guys and Europe, are we in a position where we have to approach what Japan is doing, where eventually the central bank will come in and buy up equities and they’ll buy their debt? And this is a cycle that just can’t stop? Is that what’s going to happen in the US and Europe as these central bankers are put in a quarter? And are we getting closer and closer to kind of D Day?
Brent
I think we probably are. Now, and I think there’s many people who believe that there’s nothing that central banks can do to squash inflation. I actually think that’s wrong. I think they could cause a depression which would have put a damper on inflation. Now, I don’t think that they can engineer a soft landing, but I think that’s what could happen at the end of kind of Q again, Q1, Q2. I think we could get some deflationary pressures coming through the markets due to the rate hikes that central banks have been trying and we’ll force them to U turn.
The biggest question I have, to be really honest, I’m not sure how this plays off, is whether or not we can get one more cycle of QE of risk on before they have to kind of reset the whole system. I could see a thing where we just have a couple maybe things just go down from here and a year from now they have to reset everything. But I could also see a scenario where we again have a bad first half of 2023. They reverse everything, we get another QE cycle that takes us into 2023 through the election five.
Yeah, exactly. And I don’t really know how that one plays out. I could see it kind of going either way. But ultimately to your point, Tony, I think the central banks will have to reverse.
It was funny. For several years, we were in a currency war where everybody was cutting rates to weaken their currency. Now, in the last couple of call a year, they’ve been raising rates to kind of strengthen their currency to try to fight against the inflationary pressure. So now the currency wars, who can outhawk the other one? It’s all going to end in tears.
Tony
Sadly. I think you’re right. Speaking of tears, Tracy.
Brent
No. Are you going to cry?
Tony
As we talk about difficulties
Tracy
every day?
Tony
…Recession and consumption and Kuppy started talking about oil at the start and oil demand. You posted a chart about looking at oil demand elasticity and household savings as central banks take different actions. Of course, that changes as stimulus have stopped. If it doesn’t come back on, there are changes to household savings, these sorts of things. So you posted a really interesting chart about household savings and can you talk us through a little bit of that and a little bit around oil demand elasticity?
Tracy
Yeah. What I think, I think there is a misconception that when there is a recession, that oil demand suddenly falls off a cliff. Right. Everybody has a very short memory and they look at COVID when we literally shut down the planet, but that’s not the reality. So if you look at past recessions in general, 2008, the most recent one, great financial crisis.
Now, we did see a dip in demand, but it was only about 2%, and it was only about 2% for two quarters. And then by the third quarter, demand increased over what it was before the great financial crisis. And so when I talk about the fact that everybody talks about savings, rates are going down, credit card rates are going up, nobody’s going to be able to afford oil, everything’s going to shut down, there’s a lot of fears running around. We’re going to have this global recession and nobody’s going to use oil anymore. And that’s kind of been the prevailing narrative. And we’ve seen this in open interest.
We’ve seen many funds sort of lose interest over oil. That’s been a great year for them. They shed their positions. But this prevailing narrative that we keep hearing in the media, “oh, it’s a global recession. Nobody’s going to use oil again.”
It’s just not a fact. We look at the data, we look at every recession. Recessionary pressures really have not taken much demand off the market. And every time that demand has been taken off the market within a very relatively short period of time, we’ve seen demand increase over that prior level. And so to use this kind of as a narrative, I think is not correct if you actually look at the data.
Tony
Okay, so we had this weird kind of almost recalibration of expectations with COVID where really everything came to a stop, right? So demand just cratered compared to, say, 2008, 2009 crisis. And so kind of the base effect of demand coming back has been really impressive, kind of year on year growth each time, right? And then we’ll continue to see that as China comes back.
But there are some real concerns for example. China’s population peaks out, peaked out in 2022 or ’23 or something like that, right? So their population is peaked out, and it’s all downside from here, right? Unless there’s real growth in their consumption. Europe’s pretty peaked out. Japan’s peaked out. The US hasn’t peaked out.
But we have some of those long term trends, and we have a recession. I’m just trying to play a little bit of devil’s advocate here. How much of an impact do you think those have on consumption, on the consumption dynamics, particularly with regard to savings and how, if people don’t have rising incomes and their saving rates decline just to make ends meet, which wasn’t necessarily the case in say, 2010 eleven. Can all of those things come together to really impact kind of the overall consumption trend or is that just not really a concern?
Tracy
I think there’s two separate things. If we’re talking about declining population rates, that’s sort of a long term view. We’re looking 20-50 years out, does that trend continue? And of course, at that point, you’re talking about global energy consumption decelerating, obviously.
Tony
And we’ll have nuclear powered flying cars right by then. So.
Tracy
Absolutely. But if we talk about, you know, shorter term things or near term things, things that we’re looking at, you know, over the next, say, you know, year to five years to ten years, I mean, there are still, regardless of a recession, we still are seeing year to year global consumption increasing. And in fact, we just had IEA, which I know is a WEF show, but we just had them completely revised their whole global oil growth demand system going back to 2014. They redid their entire numbers and added millions of barrels. And the media really likes to use that IEA data. They just repackage it and whatever. And they’ve been completely wrong at that point.
This goes back to when we had missing barrels and everybody was talking about that back in 2014. But the fact is that by any measure, global consumption is rising, right? Because you still have emerging markets that are trying to get out of the darkness. You look at countries like India, which they’ve had the strongest global demand increases so far this year. So there is always demand coming from somewhere, and the problem always goes back to supply.
In fact, we just don’t have the supply catching up with the demand. So even if we look at the Western world and even perhaps China years out, I mean, you still have to understand they’re still increasing demand, even though they’re absolutely even if their population is elderly and declining, their consumption energy wise is still on the uptrend.
So we still have these huge markets that are still on an uptrend. We’re going to see this in emerging markets. We’re going to see this in India, we’re going to see this in South America. We’re going to see this in Africa in particular, because BRI, suddenly they got a lot of money from China. They can build out this infrastructure, and they need, there is more demand there. So even though the west may be looking towards this green energy transition, we have to realize that that green energy transition also has not been working out. We just saw the biggest increase in coal demand in the EU in ten years this year.
Tony
Yes.
Tracy
Incredible that energy policy is not.
Tony
Reporters on sarcasm. Green energy transition. It’s on sarcasm.
Tracy
Really what we have to boil this all down to, long and short of I know I always talk in, like, broad picture, but really it all boils down to the data. What is the supply coming online? What is the demand going forward? And so far, demand outstrips supply. There is no way around that right now.
Tony
Okay. And it’s fairly inelastic it sounds like.
Tracy
It is fairly inelastic, even if you have, you know, again, look at the data. Anytime we’ve had a recession, demand is bounced back very quickly, and we’ve only seen a 1 to 2% pullback in demand. It’s not like COVID where everything crashed.
Tony
Okay, so we started and ended with crude. And I usually finish up guys with kind of, what do you see for the week ahead? But I’m going to change it up a little bit. As we go into 2023, with regard to markets, what keeps you up at night? What is that thing that you think about and you’re like, well, Account Odd sees this, and it’s obvious to me. What is that thing that keeps you up at night, Kuppy? I know you’ve got some amazing things in there. So what is that thing? And I know none of us see what you see.
Brent
You can’t say bourbon. That’s not a legitimate answer.
Kuppy
I think next year is the year that oil matters. We’ve lived in this world where oil has been sort of range bound, really for eight years. And people just got used to energy being cheap. I mean, we had a little bit of an energy scare in Europe, and I say “little” because that should have been the wake up call. And instead, I think you’re about to see the big one and you’re going to see energy as a percentage of GDP go to some crazy level like in the 1970s. And I think as a result, most of the Q sips on my screen are going to get smashed and everyone’s worried about JPowell. But in the end, JPowell is not the world central banker, oil is. And JPowell is going to chase oil higher on the screen for a while. He effectively has been chasing oil higher on the screen. And when oil rolled over from the summer onwards, that’s what cooled off the inflation. It’s not Fed funds rate that kind of helps. It’s really just oil. And as oil reaccelerates, JPowell is going to chase it higher on the screen and it’s going to get to a price where he’s going to have a dilemma.
He could either keep chasing oil higher or he could bail out the real economy with the rest of the economy. And I think he’s going to bail out the rest of the economy by cutting rates and sending oil parabolic. I think that’s how you get to my 300 number. And I don’t think people realize that oil at 90. Who cares? Oil got to 120 for a couple of weeks this summer. Who cares? What if oil is consistently in the high 100 and it just stays there? I think it just dramatically changes the arithmetic for every other QSIP on the screen. Absolutely. Aren’t plugging that in.
Tony
Okay, good. Thank you. Tracy, what keeps you up at night?
Tracy
I actually think that looking at 2024, I think that the metals markets are going to make a huge comeback. I’m not talking precious metals, I’m talking basin industrial metals only because I think that oil plays a part in that. If we have higher oil prices, we’re going to have higher metals prices. And because the west, in particular the EU, does not seem to want to be giving up on this green energy policy. We’re going to need a lot of metals, we’re going to need a lot of copper, we’re going to cobalt, nickel, whatever, if they want to continue down this path.
Tony
Sorry, you’re saying you need more industrial metals for batteries and other infrastructure for the green transition?
Tracy
More than we’re currently. In fact, we don’t even have the known reserves to get to the 2030 goals right now. If we were talking about copper. And certainly the mining industry has suffered the same problem as the oil industry has a lack of capex for the last seven years. And so we simply just don’t have that. So what I’m looking at, I think that oil is a big story and will continue to be a big story in 2021, 2022, but I think metals are going to start to come into play in 2023 and ’24. And what I’m worried about is we literally, again, no capex, and we don’t even have proven reserves anywhere. So that’s what I worry about. The metals based in industrial metals.
Tony
Okay, so so far it’s commodities keeping you guys up at night. Brent, wrap us up. What keeps you up?
Brent
It’s kind of interesting. I think that the underappreciated risk, even though the dollar made a hell of a run this year, is that we could have a funding market problem in the euro dollar market. And to be honest, it doesn’t keep me up at night because I’m kind of ready for it. I’m expecting it.
You know what keeps me up at night is these guys in Washington and Frankfurt and DC, and Tokyo and Beijing figuring out how to extend this game because they’re masters at keeping the plate spinning. And I’m always trying to figure out what are they going to do next to keep this whole house of cards going. And to me, that’s the wild card. I feel like I can kind of figure out markets. If markets are just left alone, I can kind of figure them out. The wild card is when the masters of the universe are the powers that be, however you want to describe them, come in and start messing with things, because that can change things, at least for a day or a week or a month, and sometimes that’s enough to wipe you out.
Tony
Yeah. Okay, guys, thank you so much. This has been really enlightening. I really appreciate the thought we put into this. Want to wish you all the best for the holidays and a fantastic 2023. Thank you so much.
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