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Week Ahead

Preparing for Economic Turbulence: The Fed’s Q2 Danger Zone and Russian Oil Cuts

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In this episode of “The Week Ahead,” host Tony Nash is joined by Brent Johnson, CEO of Santiago Capital, and Tracy Shuchart, a commodities trader at Hilltower Resource Advisors, to discuss the most pressing economic themes for the upcoming week.

One of the key topics of discussion is the Federal Reserve’s “Q2 Danger Zone,” which Brent believes could be a potentially scary time for the economy. He notes that we are still less than a year away from the first rate hike, and it often takes 12-18 months for rate hikes to show up in the economy. By the summer of 2022, we will be right in the heart of that time period, coinciding with YoY inflation numbers that should come down due to the crazy comparisons from the previous year. Brent warns that even if inflation remains somewhat sticky, we could see a bunch of disinflationary prints at the same time, which will make it challenging for the Fed. Moreover, by that time, Owner Equivalent Rents are expected to fall, adding to the Fed’s challenges.

Tracy then delves into the topic of oil production and cuts, specifically Russia’s decision to cut 500k barrels. She explains what this means for the market, how it could impact crude prices, and who will be hurt the most – Asia or the West. Tracy also raises an interesting point about Russia’s decision to smuggle oil through Albania despite the cuts, leaving us with questions about their motivations.

Finally, the discussion turns to commercial and industrial loan growth, which saw a sharp rise after rate hikes started. Tracy explores why this is happening, and what it means for the economy. She believes that companies are taking out loans to fund capital expenditures, which is good news for the economy as it indicates that businesses are investing in themselves and their future growth.

Key themes:
1. The Fed’s Q2 Danger Zone
2. Capex & C&I Loan Growth
3. 500k fewer Russian barrels

This is the 55th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

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Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Brent Johnson and Tracy Shuchart. We may be joined by Albert Marko at some time, but we’re just going to focus on Brent and Tracy right now. Guys, thanks so much for taking the time to join us. I really appreciate it.

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We’ve got a few key things, themes we’re going to cover today. First is the Fed’s second quarter danger zone. There’s a lot setting up for Q2, and Brent’s going to talk us through that. Then we’re going to get into Capex and CNI, commercial and industrial loan growth. And then finally, we’re going to talk about those Russian barrels that are coming off the market this month, and Tracy will talk us through the impact there.

Okay. Guys, thanks a lot for taking the time. Brent, when I asked you what you want to talk about, you really want to talk about this kind of Q2, potentially Q3, these issues that we may see in markets in that time. Can you help me understand or help us understand what are you looking for there? Because there’s a lot going on, of course, and you can talk us through a number of items. But I have a tweet from Daniel Lacalle, who’s joined us a few times talking about the ECB under pressure for faster rate hikes.

We’re seeing similar stuff in the US. But markets keep going up. What are you thinking?


Well, I think there’s a couple of very, I guess, poignant and competing narratives fighting each other right now. And they’ve been fighting each other for a while. And I’ll explain why I think they’re fighting each other. But I’ll also explain a little bit about why I think Q2 and Q3 have the potential, again, there’s no guarantee. We’re all speculating here. But has the potential for one of these narratives to kind of come to the fore or something to change dramatically in Q2 or Q3. So I think the first narrative that has been around for a year now, so we’re almost still not yet, but very close to now, the one year anniversary from the first rate hike. And I think a lot of people forget that it hasn’t even been a year yet since they started raising rates. And typically when you raise rates, it doesn’t have an immediate impact in the economy. Sometimes it takes nine months, twelve months, 18 months for those rate hikes actually kind of work there through the economy and have the full effect of them show up. So we’re not even to a year yet, but in another three or four months we’ll be in the 12- to 18-month range when they typically start to show up.

Now, in the meantime, we continue to have inflationary prints that are stickier than some people have expected. Again, part of the reason markets have been pretty favorable for the last two, three, four months is the expectation that rate hikes would slow and potentially even reverse and maybe we even get to a cutting cycle. And as a result, the markets are front running that. But now in the last couple of weeks and so at the beginning of the year, we had a big rush up in bond prices as rate hike expectations came down, and stock prices and commodity prices. But for the last month, let’s call it since the, to the last week of January, 1 week of February, I’ve kind of turned it violently sideways. We’ve gone up and down and up and down and up and down, but kind of just treaded water. And actually if you look back two years, we’re kind of where we were a couple of years ago. We’ve gone up and we’ve gone down, but we’re kind of where we were two years ago. But because of the stickiness, the relative stickiness of the inflationary prints, this idea that rate hikes are now going to go the other way is starting to get a little queasy.

And maybe they’re going to have to go back to 50, maybe they’re going to have to go longer, maybe they’re going to have to go higher for longer. And so now markets are trying to figure this all out. And so the reason I think once we get into Q2 and Q3, it gets very important is for two reasons. One, if things stay sticky in the meantime, the Fed may have to either keep hiking or continue to message higher for longer. And then if at the same time all of the previous interest rate hikes start to show up in the economy and then at that point we are going to be in the heart of the year-over-year inflationary prints. And those will most likely show negative. Even if inflation is still high, it’s probably, you know, I think was it last June or last July we had the 9% print in inflation. So even if this year it comes in at 7%, it’s going to show a negative two year-over-year. And so that puts the Fed in the position, okay, inflation is starting to come down, we’re making progress. But you still have high inflation.

So does that mean that they stop or do they start? And it’s going to be at the same time where all the previous rate hikes are going to be showing up in the economy. Right.


Sorry, go ahead.


No, but my point is we’re getting to the point where a lot of the decisions that have already been made would naturally start showing up in the economy, but we’re not quite there yet. In the meantime, the Fed is in a tough spot as to whether to continue rate hikes or to slow them down because we are seeing some disinflationary pressures. Right. And so they’re in a tough spot right now.


Yeah. When Powell spoke, gosh, I think it was in the last meeting, he talked about the lag effects of Fed policy, and it was almost in a defensive way, saying, hey, it may not look like much is going on, but there are serious lag effects to our policies and you better watch out. And I think that’s when they rolled out the 25s or they started rolling out the 25s.

I’m not sure that at this point I see an end to 25s. Sam Rine’s on the show talks several times about how it’s at least 25s until mid-summer. Right.


I think so.


And I think we’re starting to get some nervousness from the pace of inflation in Europe. And I think that’s kind of bleeding over here a little bit because people are seeing the prints in Europe and saying, gosh, is that coming our way too? The ECB is going to have to hike faster. And so what’s that going to do to say, the dollar and other things as well? And when we have a relatively strong dollar, the impact that’s having on commodity prices, it mutes them. Right?


So now you just touched on something else that’s very important to understand. Okay. So if Europe is pressured to keep hiking, or at least hiking more than expected, that has the potential, again, no guarantee. Not everything trades on rates, but it has the potential for the dollar to fall more. That’s why the dollar has fallen for the last four months, is the pace of rate hike expectations. So if we already have sticky inflationary data and then the dollar starts to fall in price again, that can actually provide a tailwind for the inflation that the Fed is trying to counteract. Right. So again, it puts them in this tough spot. The other part that you just mentioned is, and this is where it gets tricky as well, is if you look over the last year, but not just last year, if you look over the last ten years, oil is about where it was a year ago and about where it was ten years ago. Natural gas is below where it was a year a you go. Huge drop off in about where it was ten years ago. Corn is about where it was ten years ago.

Wheat’s about where it would… Copper? You look at all these commodities, they’ve actually come down quite a bit from a year ago. But what has remained the stickiest is the wage data or sorry, wage inflation. Those costs, I know we’re going to talk about that at some point as well. And that could be more to do with a structural issue that the Fed has really no control over. Right. If people have, they’re retiring, they’re moving out of the workplace and they’re just not coming back. And so you have a demographic issue where there’s just not enough supply of labor. It pushes up the price of labor. That is something the Fed could influence, but not as easily as they can influence asset prices. And so, again, you get into this situation where I think everybody knows the further down the road we go, the higher the likelihood we have some kind of an event, right? Whether that’s a crash or just a volatility explosion or whatever it is, I think everybody knows that something down the road is not going to be good. Now, whether that’s six days or six months or six years from now, that’s the debate.

But I think we all know that there’s the potential for this great event. And again, if we get into Q2 or Q3 and it hasn’t happened yet, and you have this confluence of all these events that I’m talking about and in the meantime, asset prices have gone higher or at least held where they’re at, you have the potential for this bursting of this bubble, for lack of a better word.


Right? Go ahead, Tracy.


Sorry, I had a question. So we’re seeing that two-year and five-year inflation expectations start to rise again. So what do you make of that? And what does that mean for the Fed and the Fed’s decision? Right?


Yeah. Well, I think this gets to everything we’ve just been taught it puts them in a tough spot because they’ve already… They have very clearly started to slow, right? Now, they have said we’re going to maintain and we’re not cutting and we could be higher for longer. But there’s no question that they have, at least for the last four months, have not been hiking at the same pace that they were last summer. But the worst thing for the Fed is if they’re back at 25 basis points now, or if they were to indicate that maybe we’ll have one more hike of 25 and then we’ll be done. But then you get inflation starting to rise again. I mean, that’s horrible for that. That’s the worst possible thing for the Fed and it throws their whole object not objectivity. It’s not that their repu… Not that their reputation is great anyway, right? But after getting the last couple of years so wrong, for their credibility to be challenged again is a really tough thing. And I’ve mentioned this before, you cannot underestimate, in my opinion, you cannot underestimate the influence of getting it wrong would have on Powell’s legacy. And I think he’s been very clear that he doesn’t mind having asset prices lower.

In fact, I think he wants asset prices lower. And so while I completely understand the argument for they’re going to have to cut, I don’t think he can personally take the risk of stopping hikes too soon because the risk of stopping too soon is extremely high for him personally.


I want to go back to your wages point for a minute. So, you know, when we have a company like Walmart make their minimum wage $15 and then that cascades through the economy because it doesn’t hit everyone immediately, you know, there’s a lag to that hitting the economy too, right. What you talk about? And it doesn’t just hit people making below $15. Those people who are making $15 are like, wait, I was making 15. Now everyone’s making $15. So it cascades up a little bit, right. And it cascades out. And so that takes months to hit also. Right. So that just happened in January, this impact on wages, at least for the next couple of months, right, or do you think it happens?


I think so. And again, when we get to an event, let’s call it either a credit event or a contraction in the money supply or a bursting of an asset, whatever, when we get to an event and things turn the other way quickly, then that stuff can change quickly. But until that happens, there is a tailwind for them to get worse or for the structural wage inflation for them to work themselves through the economy. And the other thing that I think many people forget this is that and I got to be careful how I say this because… I don’t want to confuse people and I don’t want people to think that I’m just absolutely bullish, because I’m not. I do think we’re going to have one of these credit events, and I do think disinflation is more likely than runaway inflation. But until we get that event, there is an inflationary tailwind, not just because of the things we’ve already talked about, but because of the higher rates. And what I mean by that is, as long as the banking system doesn’t contract and there’s not a deflationary crash, the higher rates are actually pumping more money into the economy.

Right. It wasn’t that long ago you had to go out ten years on the yield curve to get anywhere close to 4% return on your money. Now you can put your money in the closest thing to cash and get 4% on your money. So the people who have the money in their accounts are getting more money pushed into it because the Treasury has to pay higher rates. And that’s just now, kind of, again, the federal funds rate has been slowly ticking up, but some of those rates that people receive are just now resetting higher or have just started to reset higher in the last couple of months. And the further we go along without this “event”, more money gets put into their account in the form of interest payments. And that’s a tailwind because now you have more money to spend.

Right. No, the point that I just want to make is that I believe that we’re going to have this event and I think we’re going to have it sometime this year. But until we have it, there’s a tailwind. So it’s almost like it’s going to be speeding up into the wall.


How much of that tailwind, Brent, is… People have put on pretty easy trades for the past few years? And how much of that tailwind is people who have a little extra money in their account who just want to make that one last trade, right?


I think there’s a lot of that. I think there’s a lot of that. And that’s typically why it ends badly, right. If you think about an exponential curve, it goes up and up and up and up and up and up, and then it crashes and it’s because those last people are trying to get that last little trade in. And the other thing that I’ll say is I think this is really important to understand and we were talking about it a little bit before, so it’s repetitive but for the people on the show. It was last summer Q3 of last year where the yield curve inverted. Actually, it inverted just slightly in Q2 of last year. But then the real inversion took place in Q3. And at the end of Q3, we had a point where the stocks were at their lowest level in two years. The VIX was at its highest level in two years. The dollar was at its highest level in two years. And I actually at that point, I even sent out a tweet that said to probably do for the dollar to pull back. And I bought, I took off all my equity hedges and I actually bought equity calls and people were like, why the hell are you doing this?

And I said, Because the yield curve is inverted. And they said, that means there’s going to be a recession. And I said, yeah, but usually that takes twelve to 24 months to show up. And historically in that twelve to 24 months, between the time the inversion happens and the recession arrives, you typically get a run in equities. And so that it kind of goes counter. Everybody thinks higher rates, you don’t want to own equities that’s bad for growth, but in actuality it ends up that way. But in the short term it’s actually typically, historically good for stocks. And so to be honest, and I fully admit it, that trade worked, but I sold it way too soon. I chickened out because I see this wall coming, right? But had I held it for this last six months. It would have been a monster trade, but I sold it after, like, one month because I chickened out on it, to be quite honest. But that’s something that’s very important to understand. And here’s the other thing, and I’ll give you some historical context and it’ll explain two things. It’ll explain the magnitude of the run that can happen, and it’ll also explain the horrendous result that can come up afterwards.

And that is it. From 1926 to 1929… Let’s call it, from 1920 to 1926, you had seen stock prices run very high. It was like the Roaring 20s, right? And then in 1926, the yield curve inverted and it stayed inverted until 1929. And in that time period, from 1926 to 1929, the long-term US Treasury fell 30%. So if you were invested in bonds during that yield curve inversion, you lost a lot of money, just like last year, right? But guess what stocks did over that three-year period? They more than doubled. They went up 150% with the yield curve inverted for three years. And now we all know what came after 1929, right? After that last trade, to your point, pushing that last trade into the market, then you had the huge fall. We could very easily have something like that again. Now, I personally am not in the camp that we’re going to go into another Great Depression. I don’t think it’s going to play out that way, but I can’t rule it out. But it’s all of these cross currents.

It’s because I understand the tailwinds and it’s because I see this massive wall that we’re racing towards that I think right now is the hardest environment I’ve ever seen to be an investor, or at least to be an investor with conviction, I think it’s very hard. The good news, and I would encourage people to think about this, the good news is that in the last ten years, if you didn’t have conviction, it was very hard to sit on the sidelines because you got no return in your account. Interest rates were zero, but you can now sit on the sidelines, wait for clarity and get paid 4 to 5%. That’s not a horrible idea. Right. So, anyway, that’s kind of my soapbox moment.


These are all great points for it. I guess it’s just time for people to be careful. I don’t think you’re saying the sky is falling today. I think you’re saying, just don’t hold the bag. Yeah.


And I’m not saying you can’t make money. I’ve used this analogy with clients a few times to explain what I mean, because I said, Couldn’t stocks run another 15 or 20%? And I say, yeah, absolutely they can. I said, It’s like when Evel Knievel jumps over the fountains at Caesars Palace and then his son does the same thing. Well, Evel Knievel  crashed and broke every bone in his body. Robbie Knievel landed the jump and was fine. Got a lot huge glory, but they did the same jump. So whether you landed well or land poorly, if you took the same amount of risk. So I’m not saying you can’t make money over the next six months by being in the stock market. I’m just saying you’re taking a lot of risk in order to do it. And if you don’t want to take that level of risk, you can sit in T bills and get 4.5%. That’s not a horrible that’s not a horrible sideshow. Right?


Right. Yeah. And just for people who aren’t familiar with Brent, I don’t know who isn’t? But he’s not a total doomer. Right. You’re not this, you know, permabear.


And I try not to be.


I just don’t want people to think you’re kind of a permabear coming on and try to spread kind of the permabear gospel. You do change your views as markets change, and this is just kind of a sober view on kind of where we are.


I own a lot of equities for my clients right now. We have participated in the run, but we have not been levered on it. And I’m not all in on that trade, but we own stocks in our portfolio. We think it’s time to be careful. We think you should have some hedges, we think you should have some cash. But we’re not sitting in our bunker just waiting for the sky to fall.


Great. Okay, that’s all good to know. Time to be very, very sober about things. You mentioned loans and interest rates, and Brent, you were mentioning some things about commercial and industrial loans. And Tracy, you’ve talked about capex, especially in energy, pretty regularly. And Brent, you were saying something about the CNI loans have risen over the past year, even as interest rates have gone up. Can you talk us through that?


Yeah. So this is kind of another part of the narrative. The combating narratives that I think people forget is many people didn’t think the Fed would ever be able to raise rates. But not only did they raise once, they’ve been raising them for a year now, and they’ve raised them aggressively. And the markets have not collapsed, to many people’s chagrin and many people said, well, as soon as the Fed starts raising rates, they’re no longer going to be increasing the money supply. Okay, that’s fair. And I know a lot of people think that the central banks just print money and flood the market with money. But where the real printing of money comes from, where the real creation of money comes from is when banks loan money. When you go down to your bank and you take out a loan, they don’t and let’s say you take out a million dollar loan, they don’t take somebody else’s million dollars and give it to you. They create it out of thin air. That’s rational.


Million dollars?


That’s right. That that’s a new million dollars that’s now in the economy that wasn’t there before. And so a year ago, loans had been coming down aggressively since COVID so they’ve been ramping up, I want to say, like in 2020, it was around $2.4 trillion. And then after COVID, they did all these PPP loans and it spiked to like $3 trillion. And then since the PPP loans, it’s just been steadily every month down, down, down. But I think it was last March or April, it stopped going down and it actually started to tick up. And now it’s been going up for a year, and so it’s up about 10% or 15% from the bottom. So that’s the creation of new money. And despite the fact that the higher rates have not yet caused anybody to go bankrupt, it’s starting to happen. And BlackRock had this happen to them with one of their funds recently. But despite the raising rates, you haven’t seen mass bankruptcies yet. And not only that, you see new loans being taken out. The existing supply of money is still there because we’re not getting the big credit contraction, and new money is being created through new loans.

And so again, you have this tailwind that’s actually speeding things up towards this wall that I believe we’re heading towards. It’s kind of part of the same thing we’ve already been talking about, but it’s just another facet of it.


No, it’s good. Some economists are going to ride in and say “that’s not technically new money.” But it is new money, right, because it’s circulating in the system and people are using it. Okay, so what drives that? I mean, it seems to me that when you have interest rates kind of steady for a long period of time, people tend to say, well, I can always put that investment off until tomorrow. But then when you see interest rates start to rise, people wake up and go, whoa, wait a minute, I better make that investment before it rises even more. Is that what’s happening?


I’m actually not an expert on this, and I don’t know for sure, but here’s my theory on it. And so I’m sure we’ll get a lot of people that tell me I’m wrong, but this is kind of how I think about it. I’ve been on record in the past as saying low rates are deflationary for the reason you just explained. If the market condition is so bad that the Federal Reserve has to resort to these extraordinary measures and pull interest rates to zero, is that really an environment where you want to go borrow a million bucks? Maybe, but that’s kind of scary, right? And so I kind of feel like low rates keep people from borrowing money and keep people and it’s borne out, if you look at these reports, that’s typically what’s happened. But if you are in an industry and you are competitive in that industry, and you want to remain in that industry, and you have not taken out that loan. But then let’s pretend as an example, you own a shoe store in Dallas, right? And you compete with a couple of the malls and a couple of the other independent sellers.

And a year ago, they took out a loan and bought more inventory and increased the size of their showroom or whatever it is. And you didn’t. But now we’re a year ahead. Market is holding up. Everybody’s going to those new stores to buy shoes. They’re not coming into your store as much. And in order for you to compete with them, you need to build a bigger showroom. You need to buy more, whatever it is. Well, now your loan costs two or 3% more than it did a year ago. And so now your question is, if I want to remain in this business and the crash doesn’t come in the next two months, if I wait another three or four months, our rate is going to be 2% higher? And so they’re kind of behind the eight ball. And so what I think happens is, as interest rates start to rise, if you need the money, you will borrow it. And we get into…


A friend who is doing a restaurant franchise who’s going who went through that exact process in terms of deciding when to take out money. It was extremely low. Interest rates started to rise and he felt urgency to get his loan locked in and got it locked in because of the change of rate, right? And the perception of the future change of rate made him so those expectations play.


I did the same thing. I bought a place in Puerto Rico last summer, and I think our mortgage is around 5%. It had been like 3%. If I’d have done it three years ago, we did it at five, and now I think they’re at six or seven. But that was part of my calendar calculation. It’s possible that rates will go higher. Now, it’s also possible that they’ll crash the three, in which case I refinance and I’ll be fine. But the point is, as money gets more expensive, if you’re going to stay in business, you need money. And so we get into this other theoretical thing where money is a gift. And I say money is a gift and good. And a gift and good is something that typically when something rises in price, the demand falls. But not with a gift and good, with a gift and good is as demand rises, price rises. Or as price rises, demand rises as well. And it’s because you just need it. It’s like this drug you just have to have. And as interest rates start to rise, you will pay more and more and more. And people say, well, if it gets too high, they won’t pay.

And I always say, okay, maybe but if high interest rates keep people from borrowing, then explain to me why Visa is in business and why loan sharks exist. They exist because even though they have rates, people need money and they will borrow at high rates. And so I think that’s kind of what we’ve seen as well. Again, I think this is all going to end, but all of this contributes to where we see markets at today.


Yeah, I think you’re exactly right. Tracy, can we change this focus of capex to energy? Because it’s pretty well known and you’ve talked about several times that energy hasn’t invested in the upstream since 2014 or something, right? So do you think that rising interest rates and there is some change in the tone of ESG speak in the US over the past couple of months? Do you think the rising interest rates may push some of these companies to start investing in the upstream, or is that just completely ridiculous?


I’d be hesitant to say, yeah, I think oil companies are going to jump on board with this because we still have this rhetoric in the west saying that we’re phasing you out in ten years. We want you gone. And so oil companies are therefore they just don’t want to spend the money. And it doesn’t really matter what rate it is at. It’s good news. We’ve seen Vanguard leave the Zero Alliance, and we’ve kind of seen a lot of these banks kind of push back and a lot of these investment funds kind of push back on this ESG narrative. But I just don’t think that’s quite enough until we see governments really focus more on ESG. And even though, say, for example, and it seems hypocritical, we’ve seen Germany, for example, their coal usage skyrocketed in 2022 as they’re closing nuclear plants. Meanwhile, they’re pushing this green initiative. The problem is that since natural gas prices have come back down to prices that they were pre-summer of 2022, I think that they’ve become very complacent. This is how natural gas prices will stay, and natural gas prices are going to stay low.

But that’s looking at the European economy, on the other hand, the damage has already been done. We’re already seeing some deindustrialization in Germany. You have BASF leaving forever. You have a lot of smelters across the whole of EU that are just not going to come back online when they had to. In fact, a lot of them started shutting down in fall of 2021 before the Ukraine invasion. And the thing is, you can’t just reignite those glass furnaces. It takes a lot of money. You have to keep them running 24 hours, 24/7. You know, we’re just not seeing that industry come back, unfortunately. And the ironic thing is if we go back to BASF in particular, they are moving to China, who is buying cheap Russian oil.


Crazy, right?


Because it’s cheaper to do business over there in general. But so I think at this point and we’ve also at one of that, we’re also seeing companies, oil and gas companies, in the UK, sort of because of their windfall taxes. That’s affecting business as well. And so they have decided to either leave the UK altogether we just had Suncor in Canada sell all their assets in their joint venture to BP. And we heard from Shell, Equinor, and BP all said that whatever we wanted to invest in UK, we’re not going to do that anymore because of these windfall taxes. I think that we’re running up against a lot of problems here that are more government-oriented, bureaucratic-oriented than our state central bank oriented, rates oriented.


We have had some state governments in the US push back on ESG. Right. And we did have a bill in Congress that passed that was pushing back on ESG, but there’s a veto coming or something on that bill, is that right? Governments are getting involved to some level.


Absolutely. We have 20 states right now, basically, that are pushing back on the ESG narrative, saying, we do not want our pension funds investing based on ESG. We want our pension fund, our state pension funds, investing on what we think is going to make us money.


That’s going to make money. Imagine that. Right?


That would be a good focus.


So there are 20 states involved in that. Texas is one of them. Florida is one of them. So that’s still kind of going through the court system at this point. And as far as this new, the amazing thing is this ESG legislation that will likely get vetoed was that it passed the House and the Senate. That’s huge. That’s a huge shift, right? Not by a small margin, I mean, relatively speaking, when we’re talking about other pieces of legislation. So the narrative is shifting in the US. So I think it’s too early to say where this is going to go, but it is definitely something worth keeping your eye on.


Great. Okay. All right, that’s good. Let’s talk about the Russian supply cuts going into this month. They’re going into this month, Tracy, what does that mean? Can you kind of put that in perspective of their overall supplies?


Yeah, I think in general, what people expected was when they announced this and they announced this in a month ago, that oil prices were going to skyrocket. But I don’t think they were doing that to raise oil prices and stick it to the west, right. And raise oil prices that they wanted to see. What they wanted to do is narrow that spread between urals and ESPO, which are their two main crude grades with respect to Brent, because that’s how the prices quoted, European oil prices are quoted in Brent minus whatever the spread is. Right. So what they wanted to do is they wanted, after the price caps and all of the sanctions, et cetera, they wanted to, we saw those prices, those front month prices in those particular grades fall dramatically. And so I think what they want to do is narrow the spreads. And so really, that’s what I think that whole thing, that whole decision was aired for.

And then you also have to understand that Russia includes condensates, which is those lighter oils within their total oil production, whereas the rest of the world does not. And so we don’t really know exactly where that 500K is coming from. Are they those like NAFTA, or is it pure crude? And where that really remains, just so people kind of understand the market over there.


I think Tracy and I might be wrong, but you’re the expert here, but I think another contributing reason that they cut production is, to your point, in order to get that spread closer, right? Because the discount was pretty significant. Right. And a month ago, I think they announced the production cuts, and a month ago, they announced that tax revenues were falling and as a result, they were going to have a budget deficit this year. But what I didn’t see until kind of a couple of weeks ago was that as a result of the production cuts and as a result of the tax revenues falling so severely in Russia that they are changing the way taxes are calculated on Russian producers.


Exactly. Exactly.


And they are doing and this is not going to be in favor of the Russian producers, they’re going to increase the taxes on the Russian producers to try to alleviate that budget deficit. So I don’t know that they were 100% correlated, but I don’t think that they’re unrelated. Right? In other words, if they’re going to tax Russian producers at a higher rate, and it is taxed on the difference of the spread between the west and Europe, they not only want to get the spread closer or the price higher, the discounted price higher, and then tax at a higher rate. So it’s kind of a double whammy on the producers.


It’s a double whammy on the producers, but it’s income for the government.


Right, exactly. No, exactly.


You know what I mean? And this is the same thing I was kind of talking about earlier on another podcast. What is interesting is that Russia is suddenly buying this huge fleet of vessels, right? So they own the vessels and they’re now insuring themselves. So the government’s making money no matter what. They’re just paying themselves. So Russia is not really losing money on this, even with the price cap and with that spread being lower. Now, if you look at and moving on to that, there was just an independent study done that assessed the international sanctions impact on Russian oil imports. And I think it was researchers from Columbia University, University of California, and the International Institute of Finance. And what they discovered is really that Russian crude oil is really selling for $74 right now, all is said and done, which is well above the $60 price cap. All we hear from mainstream media is they’re losing money, they’re losing money. But in reality and I read this paper, and I’ll post it on Twitter later if anybody wants to read this paper. It’s very interesting and it’s very well done. They essentially are selling oil above the price cap, and there’s no way to stop. There’s no way to stop.


Yeah, sanctions are great, but if there’s no enforcement mechanism, they don’t mean anything. And the Russians know that. Russia, Iran, China, they all know how to circumvent.


Iran is the most sanctioned country in the entire world as far as the oil industry is concerned, and they’re still making money, and they’re still able to export, so.


Shows you how powerful oil is.


Right, exactly. So, Tracy, who does the 500,000 cut hurt? Is it hurting Asia more, or does it hurt markets generally, globally, just because it’s crude oil?


Well, I think, again, it’s very hard to decipher because we don’t know what 100% is being cut. Is it all oil, or is it just these light condensates? And so I think in general, I don’t think it hurts anybody in particular, because if the markets were that worried about it, well, it would be at $100 right now, easy. Right? And so I don’t think markets are that worried about it. I also think markets are kind of let’s wait and see what this actually is. And that brings to a second point, is that right now what’s happening is that we’re having a bifurcated market, right? So the oil market, which did its thing for 30 years, 40, 30 years very nicely, trade routes were settled. We were in this crew. Now we have literally a gray market. I mean, we always had a black market in the gray market, but, I mean, now we’re talking 10 million barrels a day in the gray market, not a few million barrels wherever else. So we’re talking about a large 10 million barrels, which is approximately Russia. And this is a gray market right now, right, because they have their own vessels again, their own insurance. They’re doing ship-to-ship transfers. They’re doing all these shady stuff offline to kind of mitigate and get around Western sanctions in any way possible. And so we really are seeing this market where it’s going to be harder and harder if you’re a barrel comes here, it’s going to be harder and harder to actually track these barrels because that gray market has exploded in volume.


Interesting, you tweeted a story about some Russian crude being seized in Albania. So that’s one of the, I guess, paths to circumvent. Can you talk us through that and why that’s important?


Well, I think that it was interesting because this is not something that, you know, again, there are offshore ship-to-ship transfers going everywhere. You know, particularly if you look off, Spain is a very big on ship-to-ship transfers, right, in Greece. I just thought that was interesting because my first thought was five minutes later, it’s going to be on the black market via the Albanians.




But yeah, I mean, they just happened to get caught and too bad that Albert’s not here. He could probably better explain the Albanian relationship.


It was probably him.


Okay. I guess the message that I’m getting pretty consistently and tell me if I’m wrong, these are sanctions put on by Europeans, but through Albania, through Greece, through Spain and other places, they’re circumventing the sanctions. When I say “they”, I mean people in Europe are circumventing the sanctions that their own governments put on. Have I misread that?


No. I mean, I think that everybody’s trying to kind of find a way around the sanctions right now. And you have to remember, this only applies to seaborne Russian crude. I mean, we still have gas pipes into Europe and we still have oil pipes into Europe right now. So it’s really only seaborne crude.


So when it’s piped, it’s fine.




That’s amazing. Really amazing. Okay, great. Hey, guys, listen, let’s just take a quick look at what you guys are expecting in the near term. What are you guys looking for, say, for the next week? What’s ahead? Tracy it sounds like energy markets are kind of sideways for a while.


I think we’re kind of stuck in this $70-80 range right now in WTI. OPEC is very comfortable at $80-90 range for right now in Brent. And so, you know, I think that as we move closer to, say, high demand season and we get more clarity on China and what their domestic demand is going to really look like, I think we could definitely see a push to the upside. But for right now, I think markets are very comfortable where they are, and I think OPEC is very satisfied where markets are right now.


Okay, great. That’s what events happen, though, right?


When everyone’s coming, right? Exactly. You never know what could happen. You had what the story this morning from The Wall Street Journal say EU is leaving. I was like, what? No, they’re not. And they retracted the statement.


You leaving OPEC and all that stuff? Yeah. Crazy. Brent, what are you looking for in the next week or so?


I kind of think we’re going to continually have this violent sideways. I think markets are going to go up one day and they’re going to go down the next. And I think in general, I don’t think we’re going to get real clarity in one direction or the other until at least the Fed meeting. Possibly. We do have CPI that comes out a week before the Fed, so that will have a big impact, no doubt, unless it comes in right on the number, which in which case it will be violent sideways again. But I’m trying to just be nimble right now. Again, I don’t have any huge convictions either way right now. I kind of have my long term view while I understand the short term tailwinds, but I think it’s a time to be prudent rather than a time to try to be brave. So that’s kind of a cop out answer, but that’s kind of the truth right now.


No, I think that’s a great way to put it. Time to be prudent rather than time to be brave. I love it. Okay, guys, thank you so much for your time. I really appreciate it. This is great, great insights. So I appreciate it. Have a great weekend. And have a great weekend. Thank you, thank you.


Thank you.

Week Ahead

Fed “moderation”, windfall OAG taxes in UK, and building an exchange: The Week Ahead – 5 Dec 2022

Explore your CI Futures options:

On Wednesday, Jay Powell talked and said “The time for moderating the pace of rate increases may come as soon as the December meeting.” The JOLTs data that came from Wednesday showed a slowing in job openings and the employment data from Friday was still strong but moderated a bit. With China announcing some changes to lockdowns, how worried should we be about commodity prices, given the “moderating” Fed? Albert Marko leads the discussion on this.

We also saw the UK announce windfall oil & gas taxes last week. We’ve seen a slew of announcements to halt investment. This is something that Tracy called out well before the windfall tax was announced. What will the impact be and how did the UK government think this would go over? Tracy explains this in more detail.

Given the LME nickel issues, FTX, etc., credibility is a concern at times. Why do these systems fail? What should people who trade know about exchanges that nobody tells them? Josh shares his expertise on what it’s like to build an exchange.

Key themes:
1. Fed “moderating the pace…”
2. Windfall oil and gas taxes in the UK
3. What’s it like to build an exchange?

This is the 44th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:



Hi, everyone, and welcome to the Week ahead. My name is Tony Nash. Today we are joined by Josh Crumb. Josh is the CEO of Abaxx Technologies, a former Goldman Sachs, and just a really smart guy who I’ve watched on Twitter for probably eight years. We’re also joined by Tracy Shuchart, of course, and Albert Marko. So thank you guys so much for joining. I really appreciate your time this week.

We’ve got a few key themes to go through. The first is the Fed talking about, “moderating the pace.” We’ll get into that a little bit. Albert will lead on that. Then we’ll get into windfall taxes, windfall oil and gas taxes in the UK. And finally, we’ll look at exchanges. Josh’s started an exchange. I’m interested in that, but I’m also interested in that within the context of, say, the LME and other things that have happened.

So, again, really looking forward to this discussion, guys.

Albert, this week on Wednesday, Chair Powell spoke and he talked about moderating, the pace of rate rises. He said the time for moderating the pace of rate increases may come as soon as the December meeting. Of course, it’s a conditional statement, right?

But with China announcing some of the changes and lockdowns with things like the jobs number out today, I’m really curious about your thoughts on that moderation. So if we look at the Jolts numbers, the job openings numbers from Wednesday we showed that really come off the highs, which is good. It’s moving in the direction the Fed wants.

If we look at the employment data out today, again, it shows a little bit of moderation, but it’s still relatively strong.

So what does all of this mean in the context of what Chair Powell was talking about Wednesday?


Well, I mean, the Federal Reserve and the Treasury have been really precise in the wording of using soft landing over and over and over again. And let’s make no, let’s not have some kind of like, a fantasy where they don’t see the data a week ahead of time. And all the words and all the phrases and whatever they leak out to the media, like the Wall Street Journal are tailored to try to get a soft landing.

Powell knew what these job numbers were. So for him to come out uber hawkish, which he has to do because the economy is still red hot at the moment, if he came out uber hawkish Wednesday and knowing what these job numbers are and knowing what the CPI is possibly going to be next week, we’d be sitting there at 3800 or 3700. And they don’t want a catastrophic crash, specifically before Christmas. And also the mutual funds and ETFs and rebalancing of this past week.

So from my perspective, they’re going to keep the soft landing ideology. The only thing that could throw in a wrench to this whole thing is retail sales. And if I think the retail sales start becoming hotter than they really want to see then obviously 75 basis points and maybe even 100 is on the docket for the next two months.


For the next two months? So 50 December, 50 Jan?


That’s the game plan at the moment, 50-50. If CPI or retail sales start getting a little bit out of hand, they might have to do 75 and 50 or 75 and 25. But again, this is all like all these leaks to the media about softening or slowing down the pace. It’s just another way for them to “do the pivot talk” and try to rally the markets again. So that’s all it is.


Okay, Josh, what are you seeing? What’s your point of view on this?


Yeah, so I’m probably not in the market day to day the same as the rest of you from a trading perspective. We’re obviously looking very closely at commodity markets and the interplay between particularly what’s going on in Europe and how that affects energy markets, which I know Tracy and yourself have spoken a lot about.

Yeah, look, I think the last OPEC meeting, I think the Saudis in particular caught a lot of flack for the supply cuts. But now, looking in hindsight, I think they were exactly right. And so I think there really is a softness, particularly that part of the crude markets and of course, in a very different situation downstream in refining. I think that it would be consistent with a softening economy. But I agree with Albert that the Fed, I think, can’t really afford to change their stance, even though even today’s employment report was a very, very sort of lagging indicator, late-cycle indicator.

So I feel, personally, particularly just coming back from Europe, that we’re really already in recession and I think that’s going to be more obvious next year. But I don’t think they can really change their tune for the reasons that Albert laid out.


Tracy, we had a revision to Q3 GDP this week, and I was looking at those numbers, and exports were a big contributor to that. And crude was a huge portion of those exports in a revision of Q3 to GDP, it was revised up slightly, I think, to 2.9% or something. Now, a large portion of those exports are SPR, and that SPR release is contributing to, say, lower oil prices and lower gasoline prices here in the US, right?

So SPR release theoretically stops this month in December, right? So it tells me that we’re not going to be able to have crude exports that are that large of a contributor to GDP expansion. First. It also tells me that we’ll likely see crude and gasoline prices rise on the back of that if OPEC holds their output or even slightly tightens it. Is that fair to say?


Yeah, absolutely. I mean, I think that everybody’s pretty much looking at they’re going to hold a stance. I mean, they’ve already said this over and over again over the last month. After that Wall Street Journal article came out and said they were thinking about increasing production for the bank. You had all of them come back and say, “no, we’ve had, this is what we have in play to the end of 2023. We can change this, obviously, with an emergency meeting, et cetera, et cetera.” But I think at this meeting, I think they’re probably going to be on a wait and see, or, again, like you said, slight and tightening. Maybe $500.


I stole that idea from you, by the way.


Maybe $500,000. It really depends on what they’re looking forward to, is what they have to contend with right now is the oil embargo in Russia on December 5, and then the product embargo comes in on February 2023. For the EU, also, everything is a lot. It’s predicated on China coming back because that’s another 700 to 800,000 barrels per day in demand that could possibly come back. But I think we all agree, as we’ve talked about many times before, that’s probably not until after Chinese New Year, which would be, you know, March, April.

But those are all the things, along with the slowdown, with all the yield curve inversions, not only here, but also in Europe, everybody’s expecting this huge recession coming on. And so that also has a lot to do with sort of sentiment in the crude market. And we’ve seen this in open interest because what we’ve seen in looking at COT (Commitment of Traders), CFTC data, is that we’ve had a lot of longs liquidating, but we haven’t really seen shorts initiating. It’s really just trying to get out of this market. And so that’s what the current futures market is kind of struggling with right now.


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Okay, so you mentioned the China issue, and earlier this week we did a special kind of show on what will likely happen in China. Albert was a part of that. We had two journalists as a part of that, long-standing China journalist as a part of that. So we’ll put a link to that in this show. But if China opens at an accelerated pace, Albert, we all expect that to impact inflation, right? And we all expect that to impact crude prices.


Not any prices across the board, actually, you’re going to be in especially industrial metal.


Exactly. So how much of Powell’s kind of “moderation” is predicated upon China staying closed through, say, Feb-March?


Oh, it’s all of it right now. All of its predicated on it. I mean, right now they’re under the impression that China won’t open until April. But I push back on that, and I think at this point, they might even announce an opening in February. Once they announce it, the market looks ahead for three to six months. So things will start taking off at that point.

I do have a question for Tracy, though, for the Russian price cap, right? I know you know the answer, Tracy, but a lot of followers of mine have always asked me about this in DMs is like, why does it make the price of oil go up? Because from my understanding, is because it limits the supply globally. And then as demand comes back, the supply sector actually shrinks. And I wonder what your opinion was on that.


Yeah, absolutely. I mean, I think what you’re going to see with the price cap is that people are going to in Russia already said we’re not going to sell to people that adhere to the oil price cap. Now, again, if it ends up being $60, that’s not really under what they’re selling it for currently at the current discount to Brent. So that’s not that big of a deal. If it’s lower than that, then obviously, yes, that will make a big deal. But they also said that if we have an oil price cap, then we’re going to stop producing, right? Not entirely, but they’ll curb back production, which will in turn make oil prices higher globally, even if that price cap in place. And so that’s kind of their hit back.

But that said, again, I don’t think as much oil is going to be taken off the market with a price cap, particularly at $60. And Russia has already figured out a way around secondary sanctions, obviously, in June as far as shipping, insurance, and certification is concerned. And you have to think, realistically speaking, you’re going to have a lot of shippers, especially Greek shippers, that this is their major business that is going to say, yes, we’re shipping this oil at the “price cap.”

Right. So you just have to keep in mind the games that are played in the industry. But, yeah, some oil will definitely be taken off the market. And Russia also could decide to pull back on production in order to hurt the west to make oil prices rise in the west.


Europeans love to violate their own sanctions anyway, right? They’ll just buy through India or something, right? And they’ll know full well that it’s coming forward.


They’re buying Russian LNG. It’s not piped in right now. Right, but they’re still buying LNG. They’re having it shifting, and they’re paying massively.


Let’s turn off the pipeline and raise prices on ourselves. Okay.


They learned from Bible in the keystone, right?


Maybe I’ll add one more perspective here. You have to remember that oil is Russia’s economic lever and gas is their political lever. And so I actually believe that Russia is actually trying to maximize, we haven’t lost a lot of Russian barrels since the beginning in March, but I think they’re actually trying to maximize revenues right now because not that I want this to happen, but I could see much more extreme gas measures coming from Russia through perhaps some of the gas that’s still coming through the Ukraine as soon as January. You know they want to maximize those political levers, and they’ve already been sort of playing every game they can to contractually even break contracts and minimize gas even since end of last year. So, again, oil is the… They’re always going to want to maximize their oil exports for revenue and maximize their political power with gas.


Yeah, they do that often, especially in North Africa, where they try to limit the gas that comes in there using Wagner and whatever little pressure they can to stop it. They’ve done that so many times.


Great. Okay, let’s move on from this and let’s move on to the windfall oil and gas taxes in the UK, Tracy. We saw the UK announced this last week or two weeks ago.


November 17, they announced the increase. Yeah.


Okay, so we’ve seen a slew of announcements, and I’ve got on screen one of your Tweet threads about Shell pulling out their energy investment and Ecuador doing the same and Total doing the same.

So can you talk us through kind of your current thinking on this and what the impact will be? And how on earth did the UK think this would go over well?


Well, I mean, that is a very good question. How did they think this would possibly go? I mean, we know that if you’re going to place the windfall tax, they raised it from 25% to 35%, which is very large. And that’s in addition to the taxes that companies are already paying, which in that particular country is some of the highest in the world. Right. And so this is just an added on. So, of course, you have Shell and Ecuador now rethinking what they’re going to do with huge projects going on there. And Total literally just said, we’re cutting investment by 25% entirely in that country.

And so what happens is what’s interesting is that this whole thing occurred after COP27. And what we saw is kind of a change in the language at COP27, where countries were more interested in energy security rather than green energy. Of course, that was part of the discussion, but we did see sort of a language change and people start worrying about countries start worrying about energy security, which makes sense after the Russian invasion of Ukraine and everything that has happened.

So for the UK to kind of do this on the back of that without realizing the implications of what’s going to happen. What’s going to happen is that they’re going to see less investment. Obviously, we already have majors coming out saying we’re just not going to invest here. Right. And that’s going to raise prices in particular for electricity in that country. We’re not just talking about oil and gas, but everything attached to oil and gas, you know, the secondary and tertiary things that are attached to oil prices and gas prices within that country. And so that, you know, that’s going to keep inflation high in their country and, you know, and it’s a very dangerous territory if you’re talking about energy security. Right.

Because UK is an island and they have assets right there. So everything else that they cannot produce there, they have to import. And that’s not cheap either. So you have to think about that. And this all comes at a time where Capex is already dangerously low since 2014 in this particular industry. So it seems like it’s self inflicted harm not only on the citizens that are going to have to pay for this via inflation higher, right. But also their energy security is compromised. Yeah.


I love the irony of a French company telling the British that they’re taxed are too high.


Yeah, it’s actually amazing because, like, the Swiss today has stalled all electric vehicles from being registered or imported to secure their grid from blackouts.




Yeah, that was just maybe like an hour or two ago.


And they said that they’re prepared to have like a four tier energy system and basically if you have on your third tier, they’re cutting you off of like you can’t charge a car in third tier.


Like Tracy was saying, nobody thinks about the second and third order of things, like the electrical grid going out and industrial sector having to buy diesel generators so the power doesn’t fluctuate and ruin their machinery. Nobody thinks about these things, they only think about the marketing material out of Tesla.




Probably maybe add one more lens to look at this through. And that’s the geopolitical and political lens. I think we’ve had enough three decades of sort of Laissez-faire economics that any politician knows the effects of announcement like that. So I don’t think this was a naive approach, particularly as Tracy mentioned, that this was coming on the back of COP.

I think this was something to sort of give to a sort of a populist base around inflation and we’re going to go after big energy. But at the end of the day, I totally agree with Tracy that everything’s pivoted to energy security and almost wartime footing. And so I think we’re not used to looking at policy announcements or sort of economic policy announcements in that lens the last 30 years. But increasingly we’re going to have to look at all of this through almost a wartime footing way of thinking. So what are they likely doing there? In my view, again, I think they’re kind of giving a, you know, buying some goodwill on the populist front and maybe environmental front while at the same time realizing that they’re going to start having to maneuver all they can to secure hydrocarbon supply. So that’s the way I might read something like that.


Yeah, I could have said it better myself. Josh I mean, the thing I try to stress to people when you’re looking at foreign affairs and foreign politics is you need to see what’s happening domestically in the country first because that’s what writes the script for what their international needs are.


And it’s interesting that you both say that populism drove this, it seems in the UK, although it’s impacting the electricity prices, we see populist movements in China, we see it in Pakistan, here in the US. I think a lot of people thought populism died when Trump lost in 2020 and it’s just not true. There is just so much of a populist drive globally. People are tired of the current structures and they want more. So it’s interesting to see and it will be interesting to see the fallout. Tracy do you see other companies moving in that direction of a windfall tax?


We did see India, they enacted a windfall tax as well. They’re kind of pulling back on that right now. We have Germany talking about a windfall tax, but at the same time they’re giving subsidies out like candy. But then again, that country is like an enigma right, as far as energy policy is concerned. But I think that’s… What’s interesting about the UK is now they’re also talking about a windfall tax on green energy.


Oh, good. Interesting.


So they are talking about that too, and they’re talking about almost a 90% tax because of all the subsidies they’ve been receiving that will be end up. So we’ll see if that comes to fruition or not. But that would really I mean…


They going to have to give them loopholes because everyone is going to look at what’s going on in Germany and then spending tens of billions of dollars to bail out the energy company that supplies all their consumers. It’s just silliness. They’re just playing through the populous voice at the moment.


The US talked about a windfall tax too, over the last year, but it has just not found footing yet.


Don’t do it.


I don’t think it’ll pass. I didn’t even think it’ll pass with if you had even with like a Democrat-controlled Senate, I still don’t think that’s going to pass because you have too many of those senators in Hydrocarbon that represent Hydrocarbons states.


Okay, great. Let’s move on to the last segment, which is really looking at exchanges. And Josh, your company has built an exchange, continues to build an exchange. We’ve seen some real issues around exchanges. Well, for a long time, but really most recently with say, the LME and the Nickel issue. And we’ve seen FTX kind of called an exchange and we’ve seen FTX fall apart. I’m really curious first of all, can you help us define what is an exchange and then why do these problems emerge?


It’s a great question and thanks for that. So I think maybe I’ll step back and just mention kind of how Abaxx have been thinking about because we went out and set off to build a regulated exchange and the first physical commodity focused clearinghouse in Asia about four years ago. And for us, we looked at an upcoming commodity cycle. I had a view that we really bottomed in the energy cycle around 2015, 2016, but we still had to wear off a lot of excess inventories. And probably ten years ago, the market was spending almost $2 trillion a year in energy infrastructure. That number has fallen down to something like one and a half trillion a year. So even though population is increasing and wealth is increasing, we’re actually spending less and less on our infrastructure. So it was only a matter of time until we kind of wore off any excess capacity from the last commodity cycle. So for me, I looked back at you go through these cycles, but the market inevitably is always changing.


So if you think back to, you think back to sort of 2007, 2008, and that part of the commodity cycle. We were still mostly focused on WTI. Brent wasn’t even a huge price marker. It was really only 2010, 2011, 2012, when you started increasingly see the markets changing. So our view is that this commodity cycle, for all of the reasons and the green energy transition, the focus on net zero, we thought a whole new set of commodity benchmarks was going to be needed because different commodities were going to be featured more prominently this cycle. So that’s why we set out to build the exchange. And I will answer your question. I just wanted to kind of walk through this history.

The other thing that I think happened over the last two decades is with the digitization of the trading space. Again, remember, it wasn’t that long ago that commodity trading was floor trading and people yelling and pushing each other in a pit, right? And so you always have to look at the evolution of markets that kind of evolved with the evolution of communication technology and software and really what’s happened since everything went electronic is we had a massive consolidation of the exchanges and the exchange groups across the world. There used to be like the Nymex itself, which is obviously the core of the Chicago Mercantile Exchanges energy business that had something like five contracts for like 100 years and now there’s thousands of contracts.

Right? So there’s always this evolution of markets. There was this consolidation in markets, but in our view, the exchanges themselves got away from specializing in the industry or the product they serve. And so we think it’s a little bit of a mistake of history that the two biggest energy markets in the world were acquired markets. They see me buying the Nymex and Ice buying the IPE, which was the Brent markets. And so in our view, we actually don’t think the physical market builders really exist in the big exchange groups anymore.

So we saw this sort of classic opportunity. This economy of scale or whatever to actually hyper focus on physical commodities and the physical commodity benchmarks that are going to be needed for the next commodity cycle. 

So getting back to your question. So what is an exchange? Again, this problem of the digitization of everything, we end up creating a lot of conflicts between what is a broker, what is an exchange, what is a clearing house, you know, different entities playing on both sides of the trade. And of course, I have my Goldman Sachs background, so that was always the big debate about Goldman in the 2000s. They’re on every part of the trade.

And really we used to be in this market infrastructure where you really separated all the conflicts in exchange itself for a long, long time as a nonprofit organization, almost like a utility. And you bought seats again to push each other in the pit. That’s where the private entities were, were in the exchange memberships.

So now what we have today is we have broker dealers like Coinbase calling themselves an exchange, even though they’re applying for an FCM license, a Futures Commission license, which again, it shows that they’re a broker, they’re not an exchange. So I think there’s a lot of confusion on what an exchange is. And what you really want to do is separate those conflicts of interest.

An exchange should never have a house position. Exchange is really just the place that matches trades. And a broker dealer is the one that’s someone that nets two clients and then puts that trade onto an exchange. So there’s been a lot of regulation, particularly after DoddFrank and after a lot of the problems in the financial system in 2008, to try to separate these conflicts out. But unfortunately, with crypto and other things, we’ve been starting to consolidate everything again into a conflicted model. So we’re trying to get away from that and focus very much on physical commodities and an unconflicted model.


Is it possible to separate those things out? I know it’s conceptually possible. But since we’ve gone beyond that separation, I know that’s what you’re trying to do as a company, but how hard is it to convince people that these aren’t the same things? Because obviously there’s conflicts if they’re combined. Right. There’s margin, I guess, in those conflicts, right?


Exactly. So we wrote a risk net article on this because FTX actually came to the CFTC proposing that they bring their highly centralized conflicted model into the CFTC. And to their credit, the CFTC and the Futures Industry Association, I think they recognized this problematic approach, that they wanted the exchange in the clearinghouse to be separated from the Futures Commission merchants. And at the end of the day, you know, the FCM’s, which is really the prime broker that connects to the clearing house, they do more than just handle administrative work and collect margin. 

At the end of the day, they’re the ones really looking and really knowing their customers’ overall position. So if you look at something like the LME problem, what it really was is you had this big OTC position in one of the brokers that was sort of Texas hedged or had a bad hedge into what was actually so it was a Ferro nickel. It looks like it was a Ferro nickel and sort of integrated stainless steel producer that was hedging against the deliverable contract in an LME nickel that they actually couldn’t deliver into. And there’s actually nothing new about that.

That’s actually how the Nymex really came to be the top energy market. You had the Idaho Potato King, hedging into a main potato that he couldn’t deliver into and cause an epic short squeeze. So this stuff is not, there’s nothing new in these markets. And the main thing is we want to maximize decentralization. We want to maximize the amount of FCMs involved in managing that delivery risk and knowing what their clients’ positions are, and the exchange having enough knowledge to know where the risk sits as well.

So it’s that check and balance. If you leave all of the risk to one entity or to one regulator, it becomes very problematic. That’s why we have the separation of all these pieces of market infrastructure, so that everybody is looking at the risk from their perspective, so that overall we can try to minimize the risk in a more resilient system.


Okay, Josh, I’m just curious, what should people know about exchanges that nobody tells them? I know that’s a really broad question, but it seems extraordinarily simple. But there’s got to be something that people should know that nobody ever tells them about what an exchange is.


Yeah, I think that an exchange should never have… We like to say that the exchange should be the scoreboard, not the referee. The exchange should really only be transparently, showing a price, showing that data, executing the price, but it should never have a position and it never should be telling the market what to do. The exchange is the scoreboard, not the referee.


That’s a great statement. Albert, what questions do you have?


As soon as he said that I was in absolute agreement. Everyone that knows me knows that I abhor crypto. Right. And what they’ve done. That’s an understatement, I know. But I’ve always said, if you want to do something with blockchain digitalization, you have contracts, whether it be real estate, whether it be commodities, something like that, to create transparency and trust in the system. 

Exactly what Josh is talking about, because I’ve seen and personally heard of manipulation in the oil futures and commodities market that is just outrageous. Absolutely outrageous. And it’s not fair to people like me that trade futures where for some reason I can’t buy a contract because the prices, like the price discrepancies, are just outrageous at the moment. And everyone knows the brokers are intermixed with the exchanges and so on and so forth. But something like this, where it’s digitalized and you’re just a scoreboard, is a great idea.


Yeah. And I think the other big problem is we look at every price for different assets and think all prices are fair. And if there’s anything the last two years has taught us, that efficient market hypothesis is not right. And so, you know, we look at these prices like they’re all the same. You see a WTI price, you see a nickel price, you see the price of Google, you see the price of a ten year, you see the price of a real estate bond. At the end of the day, it’s the market structure, and you can’t fundamentally change the liquidity or lack of liquidity in a market. Right? And so one of the other problems that we saw, again, this is why we exist, is we think that the commodity markets have gotten hyper financialised and digitized, where people have gotten away from what is the actual underlying price.

So LNG is where we’re focused. We think LNG is the most and this has been our view for five years before, most people didn’t know what LNG was before it was front page news, is that LNG was the most important commodity for probably two decades. And at the end of the day, what is the price of LNG? There is not a clean, transparent price of LNG. LNG is not the Dutch title transfer facility. LNG is not the five people that report on a voluntary basis to the JKM. Right. There really isn’t a price for LNG. And more importantly, right now, there’s not a buyer and seller of last resort market. You can’t go in and buy futures and go to delivery in LNG. That doesn’t exist.

And next year, I think it’s going to be absolutely critical because there’s going to be an all out bidding war for probably the next 30 months between Asia and Europe for that marginal cargo of LNG. We haven’t seen anything yet this year. Next year, and the summer of 2024 is when it gets really bad.

And we need a market that actually, as one of my former colleagues used to say it needs to be a knife fight in a phone booth. Right. You need absolute market discovery. And that physical price has to converge with that futures price. That’s the only fair price. It’s the only fair benchmark. And that’s what we’re doing is doing the hard, hard work to figure out what is a physical long form contract look like to go into delivery of these hard commodities like LNG.


And I just want to add on that because everybody’s talking about how European storage is full right now. This year was never going to be a problem. It’s next year there’s going to be a problem. Because you have to realize that they were 50% full. Russia got them 50% full on piped natural gas really cheap. Now that’s gone, right? And so they were paying higher spot prices just to get LNG shipped in. Right. Those cargoes are going to be, next year is where you’re going to see a real problem because a lot of other countries already have long term contracts. And as Qatar said, we have to service the people that we have long term contracts with first. You’re secondary sorry, Europe. Right?


In Europe, I think, also loses something like 8 million tons per annum capacity up from longterm contracts next year as well that roll off. So there’s actually more spot market bidding. And then on top of that, China is likely to be back in the market. And China last year became the largest LNG importer and they really weren’t even in the market this year. But the one thing that they did do is they’ve been buying all the long term contracts. So even though they’re not buying the spot cargoes this year, they’ve been the biggest player in buying new long term contracts so that they have the optionality. Look, at the end of the day, you know, heating is always going to demand, particularly residential heating in the winter is always going to demand the highest premium because there’s just no elasticity there. You can cut industrial demand. You can probably substitute and power substitution. But if I’m China, I really want the optionality of having that long term agreement. And if prices are high in Europe, I’ll just divert the cargo into Europe or I’ll divert for political reasons diverted to Pakistan or India.

So they’re buying all the optionality, whereas Europe is not buying the long-term offtake. And in fact, they’re buying very short term infrastructure because they’re very focused on, oh, it’s going to be a stranded asset under 2030. So we needed to convert it into hydrogen or something else, right. So there’s a lot they’re really handcuffing themselves, which is going to be again, we need better market infrastructure so the market can sort this stuff out.


It’s great. Guys, you never disappoint. Thank you so much for this. This has been fantastic. Josh, thanks for coming on. I know you’re a super busy guy. I really appreciate it. And thanks, Tracy and Albert really appreciate this. Have a great weekend. Have a great week ahead. Thank you very much.

Week Ahead

China risks, tech earnings, and crude stockpiling: The Week Ahead – 31 Oct 2022

Learn more about CI Futures

In this episode, we’re joined by Isaac Stone Fish, who is the CEO of Strategy Risks. He’s the author of a book called America Second, and he lived in China for seven years.

We talk about how are foreign companies dealing with the political changes in China? Or what should they be paying attention to? We’ve seen changes in Xi’s team that, to be honest, weren’t all that unexpected, but seems unexpected anyway. It’s certainly a hard turn to the CCP’s commie roots. This tweet really underscores how desperate Xi is to set an old school tone.

Markets have seemed a little spooked this week, so we saw orders from Beijing to prop up the CNY and Chinese equities, which didn’t work all that well. But with all the political and market backdrop, what does all of this mean for US and other foreign businesses? Are foreign employees at risk? Do we expect direct investment to slow down?

On the risk side, we look at tech earnings, which are super bad. Hiring is a huge issue and tech firms seem to have been hiring based on their valuation not based on their revenues. When will we see headcount reduction announcements? One of Meta’s investors was saying they should cut 20%. Albert shares his views on this.

And we’re also looking at crude oil inventories and refined product inventories. They’re way below averages. We saw another draw on global inventories this week. As OPEC supply is contracting ~1.2m bpd. Russian crude sanctions start soon. And US exported 5.12m bpd last week, making it the 3rd largest crude exporter. We know global inventories are low, but when will it start to bite? Tracy shares to us what’s going in.

Key themes

1. China risk for Western companies
2. Tech earnings & China
3. Crude inventories & Asia stockpiling

This is the 39th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:


Time Stamp:

0:00 Start
1:00 Key themes for this Week Ahead
2:52 What the news about China means to Western businesses
6:38 What has changed around the concept of Communist Party membership over the last ten or 15 years?
8:20 Anybody who’s overseeing a business in China has to understand modern Chinese history
9:31 Risks for foreign staff in China
12:34 Congress does not want US companies to do business with China
14:14 Danger of a rush to the exits in twelve months
17:58 Tech earnings are super bad – how bad will layoffs be?
21:10 Is it possible to cut 20% of Meta’s workforce?
22:44 China and US competition in India and other countries
24:52 Crude inventories – when will this start to bite?
28:31 Japan is stockpiling crude – is it because of geopolitical concerns?
29:47 China stimulus – will they do it in February?
31:55 What happens to the crude demand of Covid Zero ends?
34:27 Will oil prices raise by 30% before 2022 ends?


Tony Nash: Hi, everybody, and welcome to the Week Ahead. I’m Tony Nash. Today we’re joined by Isaac Stone Fish. Isaac is the CEO of Strategy Risks. He’s the author of a book called America Second, and he lived in China for seven years as the New York Times in New York Times bureau. So we’re really lucky to have Isaac with us. We have Albert Marko, of course. And Tracy Shuchart. We’re very fortunate to have them again today with us.

So, Isaac, welcome and we’re really happy to have you.

Our theme today that we’re going to talk through first is how are foreign companies dealing with the political changes in China? Or what should they be paying attention to? 

On the risk side, we’re looking at tech earnings and the impact that tech earnings will have on other earnings and headcount reductions and other things over the next few months. And we’re also looking at crude oil inventories and refined product inventories. They’re way below averages. 

And we want to hear from Tracy as to what’s going on. 

Please take a look at our product, CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon. Economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.

So, Isaac, welcome. Would you give us a quick overview of what Strategy Risks does?

Issac Stone Fish: Strategy Risks works with corporations and investors to help them manage and reduce their China risk. And with increased tensions between the United States and China, and growing awareness of the liabilities in both China and the United States of working with the People’s Liberation Army or the United Front or the Ministry of State Security or the Chinese Communist Party more broadly, it’s been a good couple of months for us.

And so excited to be joining you and chatting with you on these issues.

TN: You must be working 24 hours a day. I have no idea how you stay, how you get any rest right now with all the stuff that’s going on in China. 

ISF: Under drugs right here.

TN: Isaac, I’m curious, with all of the political changes announced this week, of course, that’s been way analyzed, a lot of different perspectives on things. I would warn people as they read through that analysis, just be careful of kind of some anti China bias, but we have to kind of read things for what they are too.

We saw changes in Xi’s team that, to be honest, weren’t all that unexpected. People have talked about this for months, but the fact that he actually carried through with it, I think made people feel like it was a little bit unexpected. 

But it’s certainly a hard turn to the CCP’s communist roots. I’m showing a Tweet right now looking at Xi taking his team to pilgrimage where the long march ended during the Communist revolution. And so he’s just the optics around the hard turn to the party’s communist roots are front and center.

So Isaac, markets were spooked this week. Of course, we saw orders from Beijing to prop up CNY and prop up Chinese equities. Obviously didn’t work very well. But with that backdrop, what does all this mean for US and other foreign businesses? I know it means a million things, but if you had some top level takeaways, what are the things that you’re seeing that it means for, say, US and other foreign businesses in China?

ISF: Have a really good understanding of leftist ideology. If you decide that you want to stay, which oftentimes we discourage, and if you decide that you don’t want to reduce your exposure, which we always discourage. Have a really good understanding of how Communism works, and read the tea leaves. Spend a lot of time on analysis. Understand that every Chinese company or every company in China that has at least three party members has to have a party cell. And for a long time people overlook that law.

But companies like Alibaba have tens of thousands of party members. So understanding that you’re partnering with the Chinese Communist Party and things that you used to be able to get away with, you can’t anymore. I think the other high level take away is with increased media, consumer and congressional scrutiny on China. 

What happens in China doesn’t stay in China. So the work that you do with a major Chinese charity which does say party building exercises in Chinese orphanages, aka Brainwashing Chinese Children on Party ideology, we can get that information here. Congressional staffers can read that, journalists can pick that up, and you’re going to have to start dealing with the liability of that from a PR perspective. The final highlevel takeaway, the more Xi marches to the left, the more draconian things get. And the more saber rattling we see with Taiwan, the more likely it is that the US and China go to war over Taiwan.

Right now, I would say that’s still not the base case. War is very avoidable. It probably won’t happen. But it’s a very concrete risk and investors and I would argue especially boards of major corporations, need to be discussing this risk. And perhaps the best thing to do with the risk is to say, okay, we know this, we’re not going to change. 

But I think if there is a war, companies are going to have to face some pretty serious shareholder lawsuits because it’s a viewable risk and you didn’t do anything about it.

TN: Right. So let me ask you, take two questions. First is, in 2010 or ’11, I spoke at the Central Party School in Beijing, and the person who drove. I was giving an economic update. I was working with the Economist at the time, and it was so surreal for me. The person who drove me to that event was a venture capitalist. And so I think the view that many people have of Communist Party members is, oh, you know, they’re these soft guys, they’re capitalists like us too, you know, that sort of thing. What has changed around the concept of Communist Party membership over the last ten or 15 years?

ISF: Think of the perception. So when Rupert Murdoch in early 2000s was going into business in China, he would downplay the importance of the Communist Party and say things like, oh, they’re just like us, there’s really no difference. And some people just join the party for opportunistic reasons, and some people do it because they believe, but they’re fairly soft spoken and gentle. And then there’s the very hard security element of the party. 

And I think people are realizing that for every venture capitalist, there’s also the PLA secret agent or the MSS agent or the public security agent in that these people are increasingly important in the Chinese system. 

And the other piece of it is that it used to be seen from a Western context, both PR and regulatory, relatively benign to be working with party members in the Communist Party. But after the genocide in Xinjiang, after Xi’s increasing authoritarianism, people are not getting the pass that they had before when you and I were out there.

TN: Right. And so I think it’s really critical. Anybody who’s overseeing a business in China has to understand modern Chinese history. You have to start from the great famine, really. I mean, start from the revolution, but really the great famine through the Cultural Revolution, through the 70s, through Deng Xiaoping, through… That era is really critical to understand what’s happening today. Right. Because that’s when Xi Jinping grew up and that’s when his ideologies were formed. Is that safe to say?

ISF: Good is safe to say. I think the other thing that we have to understand is we do have to be incredibly humble about our ability to understand what’s going on at the top of the party. We have very little idea. People are going to keep speculating about that crazy video with former Chairman Hujing Tao. We probably won’t know what happened there for decades, I would guess.

And I think when we talk about war with Taiwan, we talk about what’s going to happen between the US and China, we have a lot of insight into how Biden thinks and almost none into how Xi Jinping thinks. We just need to bake that into our predictions.

TN: Yeah, that’s absolutely right. And I cautioned on that earlier this week about the Hoojin Tao exit. It could be health, you don’t know. Right? It could be intrigue. You don’t know. So none of us know. 

So let me also ask you, when you talk about you had a tweet about potential China-Taiwan war earlier this week, and you talked about Chinese staff for American companies or Western companies, sorry, and you talked about Western staff in China. So can we talk about some of those risks, like the real people risks for multinational companies who hire Chinese employees. And none of this is intended to be Xenophobic.

This is intended to be purely practical in understanding really what the risks are. And also with those foreign staff in China. Can you help us understand some of those risks?

Tracy Shuchart: Yeah, I was going to ask something along that line, if I can just tag on my question to that one. We saw a bunch of people who are Americans pulling their staff from Chinese chip companies right, lately. So I was wondering if you saw that, see that trend continuing and bleeding into other sectors besides just the tech sector.

ISF: I very much do, and I think there’s two ways to think about this. One is the economic and regulatory so increasing difficulty doing business in China, desire for localization of staff, Biden regulations that restrict the ability of Americans to work at certain Chinese chip companies. And then you have the potential for war. 

And the idea is that if the US and China go to war, American staff in China and also Chinese staff for certain American companies could be seen as enemy combatants. And we saw this with Afghanistan, we saw this with Ukraine. There’s orders of magnitude, more staff for Western companies in China than in these places. I mean, it’s not even comparable, the numbers. 

And I think from an ethical perspective, I get really worried that people don’t talk about war because then war could just be on us. And the United States has a terrible history of interning Japanese during World War II and harassing Germans during World War I. I think with the dynamic with Chinese people here, we need to have a concrete conversation about it so that we can defend the rights of Chinese and Chinese Americans in America if we go to war. 

And from a corporate perspective and from a risk perspective, companies need to have exit plans for their staff in China because they’re going to be dealing with major, major ethical and insurance risk issues if this happens. And they can’t just take the foreign staff out to Hong Kong anymore. Because that’s not like a free zone anymore. And you hear stories of people being smuggled out now, and I think we’re going to hear a lot more of those, and that’s going to be more and more common.

TN: So, Isaac, what are we missing when you see the discussion about China right now and with American businesses, what are we missing? What’s not being discussed that you’re like, Gosh, I can’t believe people don’t see this.

ISF: Congress does not want American companies to do business in China. And with the UFLPA, the Uighur Forced Labor Prevention Act, we talked to a lot of corporates about that, and they don’t seem to understand how to comply with the law. And that’s the point. It’s a law that’s meant to deter behavior as opposed to shape behavior. 

So it’s okay, we can’t invest in Xinjiang, but this company that we work with, has a branch of Xinjiang. Well, don’t work with that company. And I think the American political calculus of this too. 

People don’t really get Pelosi’s trip, I think didn’t really bake into corporate behavior in the way that it should have because people think this is a Republican issue. They hear Marco Rubio, they hear Ted Cruz, they hear some of the awful remarks that Trump made, and they don’t realize that Nancy Pelosi and Chuck Schumer sound almost exactly like Rubio and Cruz on these issues. They think it’s a Republican issue. It’s not a Republican issue. There are holdouts on the progressive left, there are holdouts on the libertarian right. But the US is pretty united about this from a government perspective.

It’s just not from a business perspective. And that’s fine. You can have that discordance. But businesses need to understand main street and Congress feel very differently about these issues than they do.

TN: Yeah. So one last question on this. Unless Albert, Tracy, you guys were going to come in, but do you think we’ll see publicly traded American companies disposing of their China units with say a Hong Kong IPO? 

I mean, I know this is an old idea, but better than nationalization, at least they can get some value of it. And I think of like a GM or something like that, right? It’s a huge business for them. So they could potentially either have that nationalized or they could make it public on the Hong Kong stock exchange or something. 

So do you think we’ll see more of this? Young Brands is the one that everyone knows about from ten years ago or whatever, but do you think we’ll see more of this? And if people don’t do it now, is there a danger of a rush to the exits in say twelve months?

ISF: I think that’s an excellent point. Ping on, which is a major shareholder of HSBC, suggested HSBC break up into two different banks, one headquartered in Hong Kong to focus on China market and one of the rest of the world. 

And companies like Boeing, which has an airplane business that I think it’s something like 14% to 18%, goes to China, specifically the Chinese Communist Party and then has a very important government contracting business which is increasingly at odds with its relationship with the Chinese Communist Party and need to start considering these issues. 

I think you’re right also on the timing, these things take a lot of time and companies are very private with them for obvious reasons. So if they’re considering them now and we’re going to see announcements on it and it doesn’t require that much scrutiny from Cyphius or the Beijing’s regulatory Agency or other Beijing other Chinese agencies, I can see these things happening.

I think if companies are starting to think about it now, it’s probably too late. I think years process. But in the same way that nobody wants to talk about war, nobody wants to talk about spinning off their China assets.

TN: Right. But you either do it now or it gets nationalized. Or you do it for $0.10 on the dollar in a year or two years.

ISF: I think you’re exactly right. And Tony, we should write something on this, and I think this is a good time to talk about this issue.

Albert Marko: Okay. There are other issues. Capital flight out of China, even if you decide to list in Hong Kong, is like, where’s the money going to come from? It’s not going to come from the west. Even the Chinese are starting to take their money out into Singapore and Macau  and anywhere else they can get it out of at the moment.

But I agree with Isaac on 90% of what he’s saying. I don’t think that war, Taiwan is even a remote possibility in the next ten years, to be honest with you.  The pilot bureau, Xi is inspired politburo. It looks scary. There’s no question about that. And the Western companies need to take a look at that because it reminds me of the Nazis from the 1930s.

Now, I’m not talking about what the Nazi crimes were, but just the mobilization of the country and the nationalization of corporations and then starting to boost the economy internally. It’s most likely going to start happening, and they will nationalize companies that they see are instrumental for their vision going forward.

TN: Yes. I mean, honestly, I don’t know why anybody related to SAIC Shanghai automotive. Why would that not become the property of SAIC? If they’re really taking this nationalist bent, that’s a real risk, right? I think so. Any of these guys really need to pay attention and really start to evaluate what is their path going forward? What is their path for Chinese staff? What is their path for foreign staff there? What is their path for IP that’s shared between those units? These are real head scratcher questions. 

Okay, Isaac, thank you so much for that. This is so insightful. I’d love to spend 2 hours with you on this, but we’ve got to talk about tech earnings.

So, Albert, tech earnings are super bad, right? Super bad.

AM: Super bad is an understatement.

TN: Yeah. Horrific. It’s a tech wreck, all that stuff. So we can talk about what missed and kind of we all know what’s missed. That’s been analyzed over the last 24 hours or say a few days or whatever. But I guess what I’m most interested in tech is staffing. 

So the vacancies in the US. Workforce has been a big issue for the Fed. Okay. And I’m showing right now on the screen that the Meta’s stock price from $350 all the way down to I think it was $97 yesterday, just over one year. It’s incredible, right? 

So a lot of these tech firms have been over hiring. They’ve been putting out job wrecks for things that they where they just want to target one person and they don’t really want to target the job and all this stuff. They’ve almost been hiring based on their valuation rather than their revenues. So in terms of those productivity metrics, do you think we’ll start to see headcount reduction in tech? Or they’ve been saying, hey, we’re just going to slow down our hiring.

So do you think they’re going to stick to only slowing down their hiring? Or do you think we’re going to see this kind of tech halt and kind of shrink the tech workforce?

AM: Oh, absolutely. You got to shrink the tech workforce. But that’s not going to come till after midterms. I mean, nobody wants to be in the line of sight of Biden’s firing squad over firing 10 thousand people just before midterms happen. But afterwards you will. Probably after Christmas, you’ll actually start seeing quite the number of job layoffs in the tech industry.

TN: Every time I’ve worked with a tech related firm, the pink slips come literally the week before Christmas.

AM: Yeah, you know what I mean? I don’t think that people understand how bad these tech earnings are. Right. We can note Facebook and Amazon and whatnot, but they had tailwinds of inflation of an extra 10% because CPI, they say 8%. It’s really like 20%. So they had an extra 10% baked into their earnings that people don’t really catch. Right? And even with that, they’re down 30, 40%. 

Amazon lost 25% in two days. Amazon. These are just astronomical. Which is a solid company. I love Amazon. I don’t have any… Company. Yeah, it is a solid company. And I like Amazon, I like the tech, I like the delivery service. And everything they do is correct. But I mean, realistically, they were, them and along with another dozen tech names were so over inflated for the last two years because the market just kept pumping up to just the high heavens that this was just I mean, it was an easy call that tech had to come down.

And on top of that, tech is based on zero rates. We’re not going to see zero rates for years.

TN: Right, that’s fair. Okay, so, you know, one of the hedge funds, I can’t remember who, was pushing Meta or Facebook now, I guess, again, to cut 20% of their workforce. Do you think something like that is possible?

AM: And it sounds like a lot, but given what’s happened with their valuations, do you think a 20% cut is possible? Do you think more or less is possible? And 20% is a lot. Usually when you have over 12%, you start looking at a company as going into bankruptcy. That’s one of the signs that you look at. So 20% is way too much. I don’t think that’s going to happen. Maybe seven to 10% staggered over the next few years.

TN: Okay, that’s fair. But I mean, they hire a huge number of people. What that would do to wages in tech would be immediate, right? $300,000, 22-year-old dev, that would be gone.

AM: Well, yeah, that cuts into the state’s budgets also because they take those tax revenue and whatnot. The other thing that we should talk about is China’s mix with the tech industry. I mean, now that the US congress, like Isaac was saying, is actively trying to prevent companies to go over there, I don’t know where tech earnings are going to come from. I just don’t see it. They’re taking away massive market share. They’re taking away supply chains and semiconductors and everything. I don’t see any silver lining in tech for the next two, three years.

I think they need to run size their organizations and really focus. Plus there’s more competition in the ad market, so you’re not going to see ad rates necessarily rise from here for some time.

So, yeah, I think there’s a lot of headwinds. I actually have to get Isaac’s opinion on this one is no one is talking about the tech industry in China competition with American companies in countries like India. Right? Because you have Chin Data and a couple of other countries that are massive and makes generate a ton of cash out of there.

And nobody’s talking about the competition level in India between the two. And I don’t know if you’ve heard anything, Isaac, but like, that’s something that I wanted to start looking into.

ISF: I think that’s an excellent point, is it doesn’t get nearly enough attention. And the market for the rest of the world for most of these companies is larger than the market for the US and China combined. There are a lot of contested spaces, especially in countries like India, Brazil, Indonesia. 

And I think the lens through which we should see it is the political battle between the US and China because both countries are really pushing all of these third countries to be more sympathetic towards their way of view because so many of these tech companies can be hobbled by regulations. We see that with Huawei. We see that a lot in India where there’s a lot of distrust for Chinese tech companies, a lot of restrictions on the ability of Chinese tech companies to operate.

And so it’s protectionist, but it’s good political warfare for both sides to be making these arguments in countries around the world. And it is good business for these companies to be spending heavily on government affairs in all of these companies, in all of these countries and figuring out how they position their relationship with the government, whether it be the Chinese government or the US.

AM: Yeah, and that’s something I actually criticized the Biden administration that they’ve been so hard on India about using Russian tech and Russian oil. It’s like, come on, you guys got to be a little bit pragmatic here. You know what I mean? They’re stuck between a rock and a hard place with China and Pakistan.

TN: True.

ISF: I think that’s a great I mean, they buy huge amount of weapons from Russia, and they buy those in large part to defend against China.

TN: Yeah, very good. Okay, great. Thanks for that, Albert.

Now, Tracy, let’s move on to crude inventories. I’ve got a Tweet up where you talk about there was another draw this week.

And we saw a draw on global inventories. As we have inventory drawdowns, we have OPEC supply contracting by what, about 1.2 million barrels per day, something like that. Russian crude sanctions starting. We also have with the SPR, it was interesting to see the US became the third largest exporter of crude, I think last week or something, with over 5 million barrels per day because of the SPR draw. 

So we know global industries are low, but when does that start to bite? I feel like the easy answer is well, after the SPR stops, right? What more to the story is there?

TS: I mean, I think it really depends on where you are. I mean, we’re already seeing the SPR. Those draws are kind of dwindling down, right? We’ve gone from about seven, 8 million barrels per week to 3.5 million. Even though that’s still a lot. That’s been part of the reason why we’re exporting, because we kind of, first, we were drawing down sour crude because that’s really what US refiners need. But at some point, that’s almost gone, so we had to start releasing sweet crude, and we can’t do anything with those barrels. And so they are making their way to China, they are making their way overseas.

And that’s why our exports have increased over the last few months there. In particular, we’re kind of seeing an uneven balance where we’re seeing global inventories are drawing, still drawing, right? US inventories are drawing, by all intents and purposes. I mean, we had, what, a 2.8 million build, but we also had a 3.5 million SPR release and an adjustment factor of 15.8 million barrels. Technically, we are drawing. And really, if you include the SPR, we had a draw of 5.9 million barrels total crude plus products this week.

But we are seeing what’s interesting is we are seeing Japan. Their stocks are actually going up because they’re stockpiling mad right now. So they’re buying everything from everybody. It’s stockpiling, and they were giving subsidies for companies to buy that in their SPR. So Japan kind of had a different kind of way of looking at things and the rest worlds just dumping. But they’re literally stockpiling.

China did stockpile for a while, but really their SPR is down, obviously, from the 2020 highs. They’re not stockpiling as much. But with China, I know that there are many problems going on there, but if they increase those import quotas for the Teapots, then we’re going to start seeing them by a lot.

TN: By Teapots, you mean the small refinery?

TS: Is just correct, because they’re talking about possibly raising those import quotas. But we won’t really find that out until December, and that’ll be for into 2023.

TN: Okay, so just a question on both, well, in Japan, first of all. With the yen at these dramatic lows, they’re stockpiling and it’s hugely expensive for them. It’s not just kind of incidental decision, this is a really intentional decision for them to stockpile. So are they partly, do you know, are they partly stockpiling

on geopolitical concerns?

TS: Yes, absolutely. I believe so. And all around, because we really saw them that sort of started to kick off in March after Ukraine invasions. Same with LNG, right? They’ve always been huge importers of LNG, the world’s largest, but they’re importing even more because they’re kind of seeing what’s happening in Europe right now and they don’t want that to happen to them.

AM: I think it’s a little bit more than that. Also, I think that they see that we’re probably even got cues from the US that Japan is going to be a manufacturing hub to try to pick up the slack from China. So I think they’re preparing for that in 2023, 2024. And on top of that, the price of oil right now, that’s still discounting China not stimulating because once China stimulates, the demand is just going to skyrocket.

TN: Okay, all three of you guys want to ask about that China stimulus. So you guys all know China Beige Book, and they’ve been saying everyone’s really foolish for thinking China is going to stimulate, and they’ve been saying that for something like six months. Right? And I hear a lot of people say, oh, they’ll stimulate after the Party Congress. I said that too, and we still haven’t seen that. Do we think that we’re going to see stimulus in China, say, before Chinese New Year, which is what, February?

ISF: I would say absolutely not. I think the real stimulus for the Chinese economy, too, will be less a government led infusion of capital and more a relaxation of COVID concerns. 

And I think that’s going to be a lot more likely after Spring Festival than after the March Congress because, A, you have the appointment of the premiere, you have some important events there, but you also don’t have to worry about mass contagion with hundreds of millions of people wanting to travel.

So I think the base case for the opening of the economy and then potentially economic inflation is after the Congress, after Spring Festival. And who knows, it’s very hard to predict, but that would be my best guess for that.

TN: I think that’s really solid. What do you think about that?

AM: Yeah, I think COVID Zero policies are going to be still in place until March. There’s no question about that. I think stimulus happens around the same time that they think that inflation is under control. I think that’s pretty much their driver at the moment, because if they stimulate price of copper and oil and everything in the country is going to go to the moon and they know this. So I think it really depends on inflation. What the US can do to tame it.

TN: So when do you think they’ll think that inflation is under control?

AM: I think close around March after the US. And also the end of quantitative tightening and whatnot. So it’ll probably be a coordinated effort.

TN: Okay, so Tracy, if they just let go of the lockdowns, what does that do to crude demand?

TS: Well, definitely we obviously start to see that rise because they’re locking down millions of people at a time, you know what I’m saying? An entire city, and not for a couple of days. We’ve seen some cities lock down as long as two months. 

So I think as soon as they start relaxing that we’re definitely going to see demand come flooding into the market. 

And again, China hasn’t really been stockpiling this whole time during this, which they have a little bit from their lows, if you look at their SPR, but not a lot. Not as much as everybody thinks they are. Everybody thinks they are because oil prices are lower and they like lower oil prices. But really, comparatively speaking to how they purchased in the past, the SPR hasn’t been as much as most people think. 

AM: Okay, do you think that they could be? First of all, I don’t trust the data of China. I don’t have anything.

TS: Well, what we can see from satellite systems, right? We have no idea what their underground storage looks like or anything of that nature. But what we can tell and what we can track, what’s actually going into the country. 

AM: Do you think that they can hide that in tankers on the sea for a while?

TS: Yeah, absolutely. I mean, they’ve been known to do that before. Absolutely. They’ve used Myanmar,

AM: Singapore also, I believe.

TS: Well, Singapore is a little bit harder to hide just because it’s so huge and so many people are tracking vessels there. So they kind of like to kind of stay away from there when they’re kind of trying to hide stuff.

But definitely, I mean, they’ve, you know, hidden purchases from Venezuela through Singapore, through other ports in that area. From what you can see from the best guess. From the best guess, what you can see, what you can tell what satellite services have picked up, like Kepler or whatever.

TN: OK, let me kind of close up with this question. So I just filled up with gas in the US last night and I posted this price in Texas is $2.95. So I’m sure you’re all jealous. I said, will this be 30% higher by the end of the year? Because post election, SPR releases stop, other things? Do you expect gasoline to rise, say, as much as 30% before the end of the year since SPR release and other things are stopping? Or do you think we’re kind of in this zone that we’re going to be in for a little while?

TS: Well, I think that generally this is kind of lower demand season anyway, right? I mean, usually typically we don’t see prices really start to rise again until about mid December, just seasonally speaking, right before the holidays. Christmas in particular, and everybody goes on vacation, et cetera, et cetera.

But I think, I don’t know. 30% might be a lot for this year, but definitely for next year we’re going to have some problems because they took that last 10-15 million barrels and they pushed that out for December, so we’ll still have some releases then.

So I think they did that it was actually 14 million barrels that are left and so they did push those out until December. So they’re kind of going to triple it out in order to kind of control prices.

TN: Okay, so the selection bias for people telling me that I was right is wrong.

TS: I think it’ll probably depend on where you are in the country, you know, depending on the state. Yeah, absolutely. I mean, if you’re in the Northeast, you’re going to have a huge problem, right, because they have the same issues going on that Europe. They don’t have any pipelines, they don’t have any storage, and they don’t have any refining capacity.

So this winter, especially with the diesel shortage, you’ll probably see the highest gasoline prices, obviously in California and then the Northeast will be the next higher.

TN: And I just want to say to everybody, I’m not promoting the gasoline price as a reason to move to Texas. I mean, it’s all scorpions and rattlesnakes and really terrible bagels here, so please don’t move here. It’s just an incidental benefit of living in a place that’s a pretty rough place to survive.

So anyway, guys, thank you so much. Isaac, really invaluable. I don’t think we’re going to gotten this perspective from anybody else on earth, so I really appreciate the time that you spent with us.

Albert. Tracy. Thank you, guys. I always appreciate your point of view. So thanks very much. Have a great weekend. Thank you.

Week Ahead

US Policy for Small Businesses: The Week Ahead – 17 Oct 2022

Learn more about CI Futures here.

We’ve had several policies that have hurt small businesses, especially since the advent of Covid. The US administration just implemented a policy to move gig/independent workers to employee status. How does this hurt small businesses? Carol Roth, our special guest for this episode, discussed that in this Week Ahead.

Also, we’ve seen a lot of negative news this week with producer prices, wages, consumer prices rising. One Twitter user asked what would Carol do if she was in charge? What would she do and how does she think it’d help?

Albert helped us look at the Fed and is the dovish Fed dead? We’ve known this for some time, and there were hopes for a pivot, but that seems to be over.

Tracy also talked about diesel inventories, which she talked about for a very long time. She helped us dig into that in this episode.

Key themes
1. US policy punishing small businesses
2. The dovish Fed is dead
3. Diesel inventories
4. The Week Ahead

This is the 38th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Time Stamp:
0:48 Key themes for this week ahead
2:43 US policy on gig workers
7:48 Is this to slow down job creation?
10:00 What other things will make things uncompetitive for small businesses?
12:07 What adjustments would Carol Roth do if she’s with the Fed?
16:47 Debt buying and the Fed
19:00 Forecasts for some currencies
20:00 Does the Fed understand that this is a supply-induced inflation?
23:50 They’re not thinking through the political fallout
25:25 Is diesel priced in dollars globally? And what’s the impact?
28:00 How long does the diesel shortage last?
31:34 What’s for the week ahead?


Tony Nash: Hi, everybody, and welcome to the week Ahead. I’m Tony Nash. Today we are joined by Carol Roth. Carol is from Chicago. She’s the author of the War on small business. She’s got an amazing Twitter following an amazing Twitter presence. Carol, thanks so much for joining us. Really looking forward to getting your perspectives today. 

We also have Albert and Tracy and I’m looking forward to getting their views on the Fed and on energy today as well. The key themes today we’re looking first at US policies punishing small business. Carol has a really unique perspective, obviously a book on the broader implications of this, but there are some recent policies that she’s been focusing on that will talk about some of those things. 

Next. Albert will help us dig into the Fed. And are we looking at the end of the Dovish Fed? I think we’ve known this for some time, but there’s always kind of been some hope that there’s going to be some sort of pivot and that seems to be over. 

Next we’ll look at diesel inventories. Tracy has been talking about this for a long, long time, but it really seems to be coming to a head. So we’ll dig into that today as well. Please take a look at our product CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.

Before we move on, please like this video, please subscribe to this video. You’ll be able to see all of them and we really want you to be able to see us every week as we bring these in.

So Carol, thank you very much for joining us. I know you’re busy, really demanding schedule. It means a lot to us that you could join us. So thank you very much.

Carol Roth: This is an amazing crew and I can’t believe you left out recovering investment banker out of my introduction because that’s really the most important part,

TN: Right, exactly. And a Raiders fan as we learned last week over Twitter as well. So we’ll forgive you for that. Anyway, thanks very much. I love the work you do on small business. And you’ve been talking about a recent policy and we’ve got a tweet of yours on the screen talking about the Bind regime pushing gig employees to be full time employee status with companies. Can you talk us through what that means for small businesses and why is that a competitive disadvantage?

CR: Yeah, I think the first thing that people really need to understand is how important small business is to the economy. Because I think a lot of people think, oh, it’s small, it’s just a little piece. Before COVID, small business was about half the GDP and about half the jobs. And at this point we have about 32 6 million small businesses in the US.

So if you’re somebody who believes in the concept of decentralization and that being important to economic freedom, this is the decentralized portion of the economy. This is very independent. It’s very spread out geographically via industries backgrounds. Whatnot by the way which is why big business, big governments and big special interests don’t like small businesses because they’re very hard to corral. If you look at the other half of the economy, it’s in the hands of 20 plus thousand big businesses. So it really is that sort of David versus Goliath battle but also this battle between decentralization and centralization. And we have seen all of these efforts over a long period of time to destabilize small businesses and to make competitive advantages to really tip the free market in favor of those big businesses.

And certainly the policies around COVID right, were the biggest example of that ever. It was an epic wealth transfer from Main Street to Wall Street done not based on data and science but based on political cloud and connections. So now that we kind of know what the story is in terms of this unholy triumvirate, if you will, the big business, the big special interest, big government attacking small businesses, you then look as to what else they can do to really make it harder for small businesses to compete.

So there’s this Department of labor ruling that’s come out. It’s followed something called AB Five in California. If anybody has heard or followed what was going on in California and then it has been and passed the House on a federal basis under the Pro Act. But basically the idea is they want to take gig workers and independent contractors which by the way the estimates, they number around 53 million people in the United States. 

So again, this is not a small number of people who are being affected and they want to say you can no longer have the freedom to decide how you work. We don’t want you to be able to enter into a contract in a way that works for you. We don’t want you to have that flexibility. You have to be an employee. Now this may sound like, oh well, that sounds great for people.

Why would they not want to be an employee? Well, there are a lot of reasons why you don’t want to be an employee. The first is you might not have that opportunity. And that’s the biggest issue because it is very difficult. And the government are the ones who have made this very difficult for a company to hire their first employee and also to keep them on an ongoing basis. 

If you hire somebody as an employee versus a contractor, you have to pay in a portion to Social Security. It affects interest. It can affect your 401K or step plans. It just kind of reverberates throughout your business and so it becomes very challenging and difficult. So if you are a small business who maybe gets busy during a certain season or need help just in certain areas, you tend to bring on independent contractors. Or if you’re creative, if you’re running a movie, you’re obviously not bringing everybody unnecessarily as an employee. You might have a caterer who comes in and feeds people, or if you’re a hairdresser, you may want to rent out a chair in a salon. And the salon doesn’t have the wherewithal to make these employees.

So they’re framing this as we’re trying to help the employees. This is going to really stick it to big business. But there are literally hundreds and hundreds of different categories of employees. Anybody who’s a 1099 employee and doesn’t have a business entity that this will threaten not only their economic freedom, the ability to work the way that they want to be flexible, but literally their livelihoods.

So if you believe in choice, it should be your work, your choice. And now the Department of labor wants to give another giveaway to all of those big special interests.

TN: So, Kara, when we’re in an environment right now where the Fed is trying to slow down job

creation, our small company is the largest portion of job creation as well. So is that another tool potentially, maybe unintended or not, I don’t know to slow down job creation? 

CR: Yeah, I mean, certainly if you think of the small companies, they’re the ones that don’t have the financial wherewithal or the fortress balance sheets. They have not been loading up on the cheap debt because they have to personally guarantee it and don’t have the same scale as the big companies. So it’s a challenge for them to survive an environment where the Fed is going, we’re going to destroy demand. It’s basically we’re going to destroy the little guys who can’t endure this pain. So that’s small business. And you’re right. Having the ability to be flexible going, well, maybe I can’t hire an employee, but maybe I can hire somebody as a contractor parttime, and when things get better, I can bring them on as an employee. Or maybe this is just a flexible way that we can work in the future so we can have different people and they can also work with different companies in a way that suits them.

Absolutely. This is going to be on the shoulders of small business. And as they always do, they say, oh, this is an attack on Uber and Lyft. When this happened in California, Uber and Lyft went out and they put it on the ballot. They got an exemption, but they didn’t take everybody else with them. They just got it for a handful of big industries. And all of the other small guys were basically screwed.

So the idea that this is somehow in an attack in the front against the big guys and the small guys are going to come out smelling like a rose is a joke. If you believe that. I’ve got a bridge to sell.

TN: You right. Okay. So we have small businesses that just barely made it through COVID. So that was really a regulatory way to suffocate small business. And my company is one of them that scraped through and now we have these full time employee regulations coming in from the Department of labor. Are there other things on the horizon that you’re seeing that could make it even more uncompetitive for small businesses?

CR: I mean, everything that they’ve done is making it noncompetitive for small business, whether it’s regulation. You think about all of these minimum wage regulations and how these big companies like Amazon and Walmart have shifted their position and decided to lobby for them. Well, why do you think that is? That’s because they know they’re going to pay that level anyway and they don’t want to have the flexibility for the smaller companies to be able to maneuver around.

That certainly a higher interest rate environment messing with the labor force in general, let alone having a rule like this. The supply chains, the decisions that were made, whether it was a direct you have to close your business down or these indirect issues that affected labor supply, whatnot they killed by mandate around seven figures worth of small businesses. And unfortunately, Tony, as you’ve shared personal stories, there are many others that are just scraping by to survive.

And it’s just this like, you know, you get knocked down, you get up again and then they just keep knocking you down and you keep knocking you down. If you wanted people to succeed, if you wanted people to pursue the American dream, if you wanted economic freedom, you would be working to remove

barriers, make it easier for people to work, make it easier for companies to hire in the way that makes sense for both parties, and make it easier to be a small business. And every single thing that comes out

of government at all levels, by the way, it’s not just federal, but state and local is doing the exact opposite.

TN: Yeah, it’s overwhelming. We could talk about just that alone for hours. Let’s move on to former investment banker Warden Grad. You know your way around the economy. There is a tweet put out a few days ago asking you, if you had the big chair, what adjustments would you make to the economy, monetary policy, whatever, to change the environment today to make things better? What are a few things that you would do if you were Chair Powell or Janet Yellen or something like that?

CR: Burn the fed down. I burned down the Federal Reserve. The very first order of business, I put myself out of a job. And I say that kind of jokingly, but I like to clarify. I would take away the Fed’s powers because as I’ve said to many people before, the only thing worse than the Fed making monetary policy decisions and meddling in the markets and doing things like printing money and whatnot would be Congress doing that? So you don’t want to have those if you get rid of the Fed, you don’t want to have somebody else take away the powers. We’re really getting at, you know, getting rid of those powers to interfere. So that would be the first thing I would do.

But obviously that would not solve what is going on. Now. This is not going to be a surprise to any of you, but what we’re dealing with right now is a supply side imbalance. And it has been. They stimulated demand, but they stimulated it into a supply constrained economy. And so we are under supplied, as I know Tracy tweets about all the time in energy, certainly in labor, as we’re talking about food, housing, other commodities. So I personally don’t believe that the Fed has the tools to solve this problem and attack it. And frankly, I think that they’re going to just cause a massive amount of destruction not only here in the US. But reverberating through the global economy, which then swings back and has an impact on the US.

So what needs to be done, again, are policies that remove barriers to supply. What we’ve been talking about, certainly on the energy front, anything that we could do to stimulate supply of energy, which again, do it here, where we do it more cleanly, and not let China and Venezuela and all these countries that don’t do it cleanly be the ones to do that. Because the last time I checked, we all share the same air. It’s not like you believe in a smoking section, right? Like, oh well, they’re just smoking over there, we’re great over here in the same restaurant. Like, that’s so stupid.

So we would obviously do a 180 on energy policy. The same thing with labor. All the things we’re talking about make it easier for companies to hire people to go to work in the way that they want to work and then we close that gap in the labor market, which is insane. 

The same thing in housing. The National Association of Home Builders did a study last year. $94,000 in regulatory costs are added to the cost of every new home from the government. I mean, that’s insane. The average house is almost 4000. So like 25% of the cost is in regulation. And I’m not saying we don’t need anything, but that’s certainly excessive and it’s gone up by something like 30% to 50% over a very short period of time. So it’s those kinds of things that the policies need to be focused on stimulating the supply and shrinking that supply, demand and balance by increasing supply, not by trying to kill the demand. And that’s just where I land on it.

Albert Marko: That’s exactly what I was tweeting last few months now. And actually on the show is they are trying to create demand destruction, but the problem is the supply disruption that they’re creating and they put themselves in a doom loop to where when demand comes back, there’s no supply. So you get a cycle of inflationary situations happening, and it’s bad here, it’s worse in Europe and it’s even worse in Asia. So we’re going to be stuck in this until the policies start changing, not just from the Fed, but it’s got to be political also because the governments are doing this COVID zero in Asia and the energy crisis in Europe, and they’re just making it worse. So until those policies change, we’re going to be stuck in this cycle.

TN: Yeah. So I respect both of you, but the Fed doesn’t. So they’re going to do whatever the hell they want. What’s really interesting to me is you guys may have seen today. The treasury was asking investment banks. Hey. Do we need to buy some of the debt off of you so that we can create some liquidity in debt markets. Just basically transfer some cash to you so we can take some of those assets off your balance sheet.

Whether it’s the Fed or the treasury or whatever is done. It just seems like the benefit is for the small circle of people. And when you talk about whether it’s interest rates or QT or whatever, it seems like interest rates are the bluntest instrument that hit the biggest number of people. Right. And it’s hard for me to understand why that’s absolutely necessary.

And Albert, we’re going to segue into your section on the death of the Davis Fed. If we look at interest rates, we’re looking at a terminal rate about around 5% now. Right. And so help me understand what is happening with the Fed, what you’re hearing, what you’re seeing and what you’re expecting for the next couple of months.

AM: Well, I mean, everything at this point well, it should have been for a year now, but everything from this point on is strictly to combat inflation. They are getting screamed at by literally everybody to get the 5.5%. Not just five, they’re going to get the 5.5%. They’re going to do 75 again on this next meeting and then another 75 after that. And their intention is demand destruction. That’s what they’re going to do. And they’re not going to be dovish anymore. But they’re have to walk a tightrope here because Europe, they’ve destroyed so much in the global market, specifically Europe that lost 30 trillion in the bond market, that it could be a systemic problem.

And they can’t have that, so they’ll do 70. Five to 75. Talk guidance extremely hawkish. They’re intent on trying to get inflation down until November and December.

TN: November and December.

AM: They’re going to do 75 both. And they’re just going to have to because their time is out and they have

no more tools left to hit. Inflation at JPY at. Euro will be at 90.

TN: And JPY will be what?

AM: I don’t know the correlation on that one off hand, but the euro is definitely going to go to 90. 90 to 90 on this. But it’s all $30 trillion, Tony. That’s a lot of money. The only people in the money. Yeah, it’s still a lot of money. So when the treasury starts talking about, do we need to buy debt back from banks? Is that the US. Banks or is that European banks? Because I guarantee there’s going to be some European banks in there.

TN: Oh, they have to be. Yeah.

AM: Like I said, they’re causing systemic problems and they can’t have your completely blow up. I mean, they’ll use them for a scapegoat to stop QT announce QT stop. But that’s where we’re at it right now.

TN: Okay, so does the Fed understand that this is largely supply induced inflation?

AM: No, they don’t. They don’t? No, because people do what they know, right? If you go back and you look at what Yelen did, when I say Fed, I just toss in the treasury at the same time because they’re one of the same. They talk. They talk, and they have correlating policies and whatnot. And if you look back in 2013, this is what Yellen did last time. She drove the dollar up, crushed the markets, and drove all the money back into the United States. Yes, the United States market looks all beautiful at 3600 to 3700, and people talking about Fed pivots and 3900 in the es, but it’s not real.

CR: Okay, so first of all, can we just discuss the fact that between the time that Janet Yellen was Fed chair and Treasury Secretary, the woman pulled down over $7 million in economic speeches when she didn’t know how to handle, you know, coming out of quantitative easing. She didn’t see inflation. She said that I think this was actually from you, Tracy, but she said that everything looked great in the treasury markets and then the next day went, oh, yeah, I’m worried about liquidity. I mean, clearly, I’m not sure she knows anything. 

And I want to know how to get in on that gig in terms of making that money for speeches for something that you know nothing about. But I find it hard to believe since everybody and their brother has been talking about all of the issues that are going to happen here. 

And maybe it’s my wart and bias, but I go along with Jeremy Siegel, noted finance professor who’s been out there hammering the Fed, saying, look, first of all, you not only do you not necessarily have the tools we’ve seen some elements of demand destruction in small places, and it takes a while to work through the system.

So if you go too fast, kind of like you didn’t see it on the front side, you’re going to do the same thing and you’re going to overshoot. But the bigger issue alluding to what Albert said is the potential to drag down the global economy. I mean, that the fact that you can end up with currency crises, with a treasury market crises, the whole slew of risk assets could be a massive sale of risk assets so that they

could get their hands on dollars because the Fed wants to keep raising interest rates.

It just seems to me it’s not a question of do they not know this? It’s a question of what’s their intention are. They trying to drag down the global economy so there is a financial reset, so they can introduce some sort of a central bank digital currency and have an excuse for it. It just seems to me to go, oh, they’re ignorant of what’s going on. When every single one of us sees this, you’ve got the IMF talking about it, you’ve got professors talking about it.

The fact that this hasn’t crossed their mind with the people that are involved yelling aside, but the Powells of the world and other folks there, that just seems not very likely to me.

AM: No, it’s not. A lot of it is political right there’s. U.S. Midterms, they don’t want Trump back, so they start throwing in these economic numbers to make Biden Democrats look good. And that screws up Fed

policy going forward. I mean, Yellen takes a dollar up, the Fed gets stuck, and then they have to go back and create a new crisis in Europe or Ukraine or whatever crisis they want to create sometime in the future to blame for everything. Yeah, I think the Fed guys are smart. I think they do know these are not stupid people, although certain people, they. Know they just don’t care.

TN: I think you’re right. I think they don’t care. But what I think they’re not thinking through is the political fallout we saw that Chancellor or the exchequer in the UK kicked out today after about two weeks in office or something. And that’s relatively light compared to what happened in Sri Lanka a few months ago and what’s happening in Africa, what’s happening in, say, Pakistan, Bangladesh, what’s happening in Latin America.

So I think we’ll see political fallout here as a result of the Fed’s inability to understand the implications. Where it will really hurt is if it hits Japan and you get minority party in Japan back in power. They’ll pay attention then. And if you see powers in Europe that aren’t favorable to the US. But that’s already kind of starting to see Czech Republic and Hungary, certainly we’ve. Already started to see this, and it’s just getting started. 

We thought we saw populism in 2016. I don’t think we’ve seen anything yet. I think we’re going to see

this in a big way globally.

AM: Yeah, Tony, you’re right. I mean, the Europeans are absolutely screaming at yelling about this because she straight up lied to them about the bond market. She can’t even talk to the Norwegians

or the Swiss at the moment. This is how bad it’s become.

TN: Yes, I believe it. Okay, so let’s move on to energy. Tracy, you’ve talked a lot about distillates for a reason, warned us for months about diesel shortages and diesel prices, and it seems like it’s really coming back. And as you talk about this, I want to understand, is diesel priced in dollars globally? And so is that going to hit supply chains in other countries as well because of the pricing basis of diesel. Coming out of refineries

Tracy Shuchart: diesel’s price in local currencies and trade in local currencies. Products are crude, obviously, prices in dollars and traded that way globally, except for some instances. But products are generally like Nat gas, it’s traded in different currencies. But really, I mean, we were having a diesel problem. This started back in 2021, so this is nothing new. I was tweeting about it summer of 2021. I was really worried about distalates. I started tweeting about that then because I saw our inventory slow down. It’s even worse now. 

But what’s come to a head all of a sudden, and what’s making this obviously 10 million times worse, is that Europe, for instance, mostly bought diesel from Russia, and they’re trying to lean off of that, right? And so in the meantime, the US. Is trying to supply Europe with diesel. But now over the last week, we’ve had three weeks of ongoing refinery strikes with total. So France has 2500 gas stations that have at least one product that is completely gone, and 2000 of them are shut down entirely. And then we just had a malfunction in the Netherlands and Shells Curtis refinery, which is the largest diesel refinery in all of Europe. 

So right now we have a massive global problem that is just getting worse. And if you see the diesel crackspreads have been they’re ridiculously flowing out. And backwardation is flying right now, which is kind of obscene. In the meantime, we’re still drawing these distills. We had a 9 million build and a 4 million draw in distance, and we’re headed into winter. So we’re going to have major problems here already in the United States, particularly in the Northeast, because they don’t have the refinery capacity there to really supply that area.

TN: Okay, so what does that mean? How long does this last? Does it last into spring? Does it last beyond spring? I’m curious about the magnitude of the impact on price, but I’m also curious about the duration, how long this is going to last.

TS: Well, you know, I mean, this has pretty much been gone ongoing since 2021. We’ve had times where it’s worse and times where it’s not. But it’s been over a year now, over a year and a half now. I don’t see that going away anytime soon because we don’t have the supply. We don’t have enough heavy oil to, you know, to make these products globally, especially when you’re cutting off Russia, because that’s what they produce is heavy oil. You’ve got Venezuela that’s producing 700K bpd. They’re not producing anything. And most of that’s going to China to pay for debts. We don’t have them. We’ve got Canada, but we don’t want to build pipelines right. For that. We can import more for that. So, I mean, we have kind of a global shortage of heavier oils. And sure, we get some from the Middle East.

That’s fine. We get some from Saudi Arabia. They own motiva here in the United States. And certainly they do produce diesel, but it’s still it’s still not enough. And especially when you’re talking about the west, it’s talking about, you know, we’re talking about a complete oil embargo on December 5 of Russian

oil and oil products.

TN: So this isn’t something that’s done by January. This has legs for quite a while.

TS: Yeah, absolutely. We’re already seeing prices rise. We’re at 518 a gallon for diesel here in the United States on a national average, which is higher than gasoline prices, by lots higher than the average. And the gasoline people that I talked to at Opus basically say, man, this is not even a safe level. This is going much, much higher.

CR: I have a question for you, Tracy. So it seems to me everyone seems to be focused on getting through the winter in Europe and the immediate impacts, as if there’s, like, some magic solution waiting on the other side as more of a layperson in this area. It seems to me that this massive under investments, this supplied depression that we’ve been having, there’s nothing coming online to help with that. So doesn’t that suggest that this is something that doesn’t get sorted out even though there may be some volatility, but, like years and years and years that we’re going to be dealing with?

TS: Yes, absolutely. I mean, we’ve got a problem for the next eight to ten years. Really? And if you look at, you know I know if we look at the natural gas situation in Europe, everybody’s thinking, oh, we’re at 95% full before winter, we’re going to be fine. If we just make it through winter, that’ll be fine. That’s great and all, but if you are not replacing that, you’re going to need it in the summer. You need to keep refilling that. So it’s not like, you know, unless they decide to stop using natural gas in March, end of story, we still have a problem. Right. And the next winter is probably going to get even worse.

TN: Great. Just so you know. Awesome. Okay, so let’s move into kind of the week ahead section. Albert, you want to get us started. What are you looking at going into the week ahead? What’s on your mind?

AM: Continuation of the Feds 100 basis point rate hike. I mean, they’re not going to do 100, but they’ll tell the market that they might start thinking about it and the market might start pricing it in. So we’ll definitely have a lot of weakness in the market going ahead in the next week, but it’s midterms, so you never know,

 they could defend the quote unquote Trumpl ine of 35, 40 so they don’t look like complete idiots and give them Fodder for the midterms. Do you still think we’re going to hit maybe 3200 or something eventually? I can guarantee you that by the end of the year for sure. The economic indicators across multiple data sets is just atrocious right now.

TN: Okay, great. Carol, I know you’re not really kind of in Marcus, but what are you keeping your eye on for the week ahead?

CR: So I do actually commentate on markets from a sort of a macro perspective, and much like Albert, I’m sort of in the camp that until the Fed tells us what is their intention, is this really just about the midterms? Are they feeling the pressure that it’s risk off from my perspective until we know what’s happening with them. So that’s been sort of my perspective.

TN: Great. Okay. Thanks, Tracy.

TS: On China next week, party congress looking at China, I want to see what they’re going to do policy wise because that’s definitely going to affect the commodities market. We all know that they’re looking for a five 5% GDP by the end of the year, which they’re not going to get. They’ll say they got it, but we all know that they’re not going to get it. So I want to look, an economy is suffering right now and we’re starting to see stirrings of unrest in China. Right. 

There was just that article where they had the people on the bridge with the signs that got scrubbed from China Internet. But I think that she is going to have to do something to stimulate that economy. So I’m kind of looking to see what his focus is on that and if they have any plans going forward to simulate the time. Because again, that’s going to affect the commodity markets and to see if he has a plan for the housing market. Oh, he’s got a plan.

TN: Central planners always have plans, don’t they?  That’s right. So if you talk to any China economist

for the bank, they’ll tell you that China is going to hit five 5% or maybe they live on the edge and say five three. Right. So as you said, we know they’re going to make it issh somewhere in the ballpark, but we know in reality you can’t have a zero code environment and make a growth rate that high. So my worry, I was just talking about this with somebody earlier in the week, my worry is that China really has made that transition to a slower growth environment for starting with demographic reasons, but also some structural reasons that they put in place.

And I think what she’s going to talk through next week, although not directly, but someone indirectly, is much more control, which will lead people to the conclusion that it’s not a safe place for foreign investment anymore, which will lead them to a slower growth environment economically. Because he’s basically talking about leveling people out. Right. And everyone has the same maybe not opportunity, but the same outcome. And you can’t necessarily do that in China with some of the economic outperformers that you’ve had, like Jack Ma and other people. You have to bring people down instead of push people up. And that’s what I’m expecting. 

Again, he’s not going to say he’s going to bring people down, but that’s what I expect is the main message coming out of next week’s meeting.

AM: Yeah, he has already done that, Tony. And there is a little bit of a power struggle with Wang. Yang is actually slated to be power sharing with him. All they’re trying to get him to do that, but all my sources have said that they’re locking down for code with zero until at least March, so we’ll see what kind of fake numbers they come out with.

CR: I will add that this all ties into their social credit system, which is the most advanced one in the world right now. And they really started the social credit on the business front, which is notable for the reasons you were saying. You can’t have that capitalism that’s leaked in a little bit over the past several decades and have these outperformers. So it’s an easy way to sort of bring those folks down a peg and then let that bleed into sort of the individual social credit. And it’s something we should be paying very close attention to as the Fed keeps talking about things like Central Bank, Digital Currencies, and as we see these companies going after people for misinformation, what part of that could leak here as well.

TN: Yep, very worries. So okay, guys, thank you so much for your time. Carol, I’m so grateful that you can join us today. Please come back anytime. Really appreciate this, guys, and have a great week ahead.

Week Ahead

European Natgas: The Week Ahead – 5 Sep 2022

Learn more about CI Futures here:

This week we’ve seen a lot around dollar hitting almost 110. We’ve seen a lot in the US market downturn. There’s a lot of speculation around the Fed. But we’re really focusing on Europe this week.

Key themes:

1. European Natgas Stock vs Flow

2. Russian Oil Price Cap Fallout

3. Europe’s Food and Fertilizer Fallout

4. What’s ahead for next week?

This is the 32nd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:





Listen on Spotify

Time Stamps

0:00 Start

1:51 European natgas: stocks VS flows

8:26 What to expect in manufacturing in Europe

9:26 Difficult environment for the German Finance Ministry?

10:27 Fertilizer fallout and impacts on Europe’s food supply

14:19 Is Europe getting relief soon, or will this crisis continue to 2024?

15:33 Russian oil price cap: is it going to come about?

19:12 What’s to stop countries from indirectly buying Russian crude?

22:00 What’s for the week ahead?


Tony Nash: Hi, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Sam Rines, Tracy Shuchart and Albert Marko. We’re going through the events this week and looking toward next week.

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So this week we’ve seen a lot around dollar hitting almost 110. We’ve seen a lot in US market downturn. There’s, a lot of speculation around the Fed. But we’re really focusing on Europe this week.

The key themes this week are really around European natgas stock versus flows. Russian oil price caps and the fallout that has come with that. Food and fertilizer in Europe. And then we’ll look to the week ahead. So I think we’ll look at some non Europe activities for the week ahead.

First for European natgas, Sam Rines in his newsletter came out with some really interesting points around natural gas stocks and flows. You can see the chart on the screen. Sam, can you talk us through kind of what’s happening in storage for natural in Europe and what we should be looking for as winter approaches?

Sam Rines: Yeah, sure. So you get this really interesting dynamic where everybody talks about the stock but very few people talk about the flow. So talking about the stocks of that gas in Europe is a really interesting one. Yeah, you’ve got stocks building up pretty quickly, particularly in Germany, sitting north of 82% overall for European stocks in general, north of 80%.

So it’s good, right? Stocks seem to be well ahead of where you would anticipate. Germany has a 95 target for November. They might actually reach it even with the shutdown of Ms one, Nordstream One. It’s actually not that big of a deal incrementally to Germany in particular. You go from about call it a 3.2 kilowatt hour type pump into Germany to about a three.

You didn’t really lose that much. I mean, it was pretty much anticipated anyway. So if they keep it off

for longer, whatever. You don’t have significant usage coming through at the moment for natural gas.

It’s a time where you can actually afford to not have those significant closing. They’ll probably still have some stock bill that will just be slower.

So overall, I think it’s a lot of headlines that a lot of it’s already priced in. If you were looking at the expectations of complete and utter frozen winter, you’re pretty much not looking at that assuming that Norway and Belgium continue to put their flows through to Germany at the current rate.

So overall, you’re actually sitting on a decent call it stock level. Right? That’s fine. And as long as you continue to have the flows from call it Northern Europe, you should be okay for the winter. You’re not going to be great. It’s going to be expensive, and it’s going to suck. But relative to the expectation of Europe’s going to freeze this winter,

I think that might actually be a little bit of an overblown one, and you might begin to have a significant blowback on that. And you’ve seen significant declines in things like electricity pricing ahead, which is a ridiculous contract anyway. And Dutch TTF, the net gas contract you’ve seen collapse this week, even with the shutdown of Nordstream.

So I think a little bit of the froth, a little bit of that angst is beginning to come out of the market, and you might actually have a positive surprise relative to expectations in Europe.

TN: So Dutch TTF peaked on Tuesday or something, right? It was early in the week, right?

SR: Correct.

TN: And Tracy, what are you seeing with that? Do you expect us to hit back up to those peaks, and do you think that was kind of a one time hit? And what Sam saying about storage is really kind of starting to take hold.

Tracy Shuchart: I think it really depends over the long run and how slow go. I totally agree with Sam here. Right now, for winter, Europe is pretty much okay, not great, as he said, but I think given if we don’t see increased flows, that storage would drain significantly by February. So we really have to keep an eye on flows from other countries, particularly in the United States, in the Middle East, and to see how those flows go. So I think it’s too early to be completely doom and gloom, but that is something we need to be cognizant of, because that storage can only last until February.

TN: Right. And for those people who aren’t in Northern Europe, northern European winter really stays cold, really until like, April, right. It’s not something that February comes and goes and it’s spring and everything’s great. You still have cold temperatures in Northern Europe until probably April or so. Is that about right?

TS: Yeah, absolutely. Anecdotally, if you’re been on Twitter, you see a lot of people starting to buy wood. The big thing on the European sites is to post how much wood you collected before this winter. So people are sourcing. People are expecting energy prices to be high and doing whatever they can personally, to kind of lower the prices. Because you have to understand, when you’re talking about European power prices, it’s not just your solid power price. They have that almost all of their taxes on top is on top of what they actually would be paying, which is outrageous carbon, et cetera.

TN: And so I just want to go back to one point in Sam’s chart as well. I think sam, you said the storage is about 82% full or something and they’re targeting 95%, but we’re ahead in 2022 from where we were in 2021, is that right?

SR: Yeah, that is correct.

TN: Okay, so the doom and gloom that we’re hearing again, we have inflation, we definitely have shortages, but in terms of storage, we’re ahead of where we were. And we don’t expect like a mass extinction event in northern Europe because of heating or whatever, right?

SR: Correct. I think that is a good base case. That’s good for everything. No mass extinction is low bar, but yes, that’s right. 

TN: Exactly. Okay, very good. Do you have anything to add on this?

Albert Marko: I’m on middle of the road here. I do agree with Sam that they’ll be okay so long as they’re okay with no manufacturing, no growth in their economy, and so on and so forth. I mean, if they tried to kick things up and the demand starts to rise, I don’t think it will be okay. I don’t think that the Russians are going to play ball, especially when they start talking about these price caps on Russian oil and gas. It’s one of those things where economically, I can understand where Sam is coming from.

Politically, I’m inclined to say that Europeans are going to screw up and just agitate the Russians. And then you start getting into this back and forth. That economic trade and price.

TN: Let’s set the price cap aside for a minute. But when you say no manufacturing, so we’ve seen some manufacturing dial back and some facilities slow down and shutter. Is that expected to continue or do we expect that to ramp back up?

AM: I expect it to completely be just stalled for the entire winter. I just think the energy prices are so astronomically high that it’s just not economical for companies to manufacture anything.

TN: Okay, so if you’re sourcing things in Germany, then you should expect supply chain issues for the next five or so months. Is that fair to say?

AM: At least six months. And this is why I keep saying that this inflation doom loop keeps recurring because as the demand rises, there’s not enough supply and then you get back into an inflationary event. What’s the inflation rate in the UK right now? Like 20% reported. 20%? And in Germany, I think it’s like 19% and rising. It doesn’t stop.

TN: And PPI is in the 30s or something. Just to play this out, I wouldn’t have a whole lot of time to cover this, but if private sector is shutting down, even parts of it, then government spending has to kick up. And if government spending is kicking up and we have an ECB that’s tightening, that’s a difficult environment for the German Finance Ministry, right? Or is it no big deal then?

SR: No, I would completely disagree. I mean, Germany is one of the few countries in the world that has they could basically print their GDP and they’d still be perfectly fine on an ability to pay basis. They spent, like, three years getting paid to have debt.

TN: So very good, because, look, nobody wants Germany to suffer, right? And if government spending

has to kick up, then great. If they’re not going to suffer as a government to be able to do that, then that’s even more fantastic, because with ECB tightening, it could create some difficult trade offs for some countries in the region, of course.

So let’s take this and park it and let’s move on to fertilizer, because, of course, that’s related to natural gas.

And we have some there’s a recent Bloomberg story about Europe’s deepening fertilizer crunch. 70% of fertilizer production is halted. And then we have a chart showing the price of nitrogen fertilizer in Germany. Obviously, it looks pretty extreme. Can we cover that, Albert, and look at the impacts of fertilizer and how that’s going to hit food going into spring or summer of next year?

AM: Oh, yeah, the fertilizer, specifically what you’re talking about, nitrogen based ones, are relying on natural gas. Natural gas prices just keep on spiking over there. And again, we can continue this whole discussion about inflationary, commodity prices, but food is a big problem. They shut down their potash.

On top of that, the farmers, they’re notorious penny pinchers, whether it’s the United States, whether it’s Europe, so on and so forth. But they’re going to have to make up the nutrients for the soil in the spring of 2023 and most likely into 2024, they can’t deprive the land of nutrients.

So, of course, they’re going to have to have another round of demand for fertilizer. I don’t know about the night gas based ones, but potash certainly will have a surge.

That’s why I’ve always on Twitter have been big on Mosaic being the 800 pound gorilla outside of Morocco’s. OCP, but OPC, I think it is. But that’s not a tradable stock mosaic fertilizer. I’m very bullish on that. That’s going to relate to bigger increases in food prices, specifically in the UK.

TN: What crops in Europe would be most impacted by this?

AM: Wheat. Most likely wheat.

TN: Yeah. Okay. And where does Germany traditionally, where does it source most of its fertilizer? Is it from Russia?

AM: I believe they get most of their stuff from Belarus originally. And I know that they have potash fertilizer plants inside of Germany itself, but I’m not sure how. I don’t know the exact numbers on the importance of what they do for a fertilizer, but it’s certainly a problem specifically for Germany. Of course it’s a problem for France. It’s even bigger problem because they’re a big food producer.

TN: Okay, Tracy, you’ve said a lot about fertilizer in the past. What are your thoughts on this? Does it just get even more intense or do we see some relief on the horizon?

TS: Well, I think it does get a little bit more intensive when we just saw And, Norway’s largest fertilizer company, all kind of curve back production in various countries wherever their plants are concerned. So it’s definitely a concern. 100% agree with Albert. Going into next year is going to be a very big problem. I mean, everybody’s harvesting right now. Everything’s fine. We’ve seen big pullback in those prices. But going forward, in particular next year, we’re going to have a problem.

AM: And a lot of that, Tracy, has to do with the national governments are going to look out for their national interests, their own farmers, so that although the imports will drop, so the exports will drop and they’ll just keep it closed within their own nation, so they can feed their own people.

TN: Fertilizer nationalism.

AM: Well, it’s just the same thing with oil. I mean, the countries are not export more than they can handle.


TN: Okay, so sounds pretty dire, but do we see any relief next year? Or, like you said, is it going to go into 24, or does it all depend on Russia?

AM: I think it depends on Russia whether the Europeans and the United States come to their senses and stop trying to put their foot on the throat of the Russians. You’re hampering your own economic growth, and they’re sitting there talking about, oh, we’re going to get away from fossil fuels and do this whole new climate thing. That’s just not realistic. And I don’t think they just haven’t come to grips with that yet.

TN: I think it’s a time frame thing. Right? I mean, it’s going to take some time, and I think there’s a hybrid mix in the interim that I think we’re trying to rush.

AM: Well, that’s the point. They’re trying to rush things. When you rush things, your own people are going to suffer economically and so on and so forth. It’s just not politically. They just can’t swallow it. Some of the voters don’t swallow that. Sort of stuff. 

TN: And things break. Like Californians can’t charge their electric cars. Right. These are weird times.

Okay, great. Thanks, guys.

And then on the oil price cap, we had about this week, former Russian President Good about this week, saying that Russia just won’t deal with people who subscribe to the price cap.

And then we had Xavier Blossom, Bloomberg tweet about it, saying that he and his friends are going to agree to a price cap on beer at their local pub and that the guys at the pub don’t agree with it, which is a nice analogy, I guess.

Tracy, what are you seeing on the price cap? Is it actually going to come about?

TS: First, they just announced that they’ve been talking about this for months. Let me give a little bit of background. And they just now say there’s going to be three different kind of price caps, one for crude and two for refined products.

However, if you look at the actual G7 statement that was out today, they were pretty vague on it. Basically, they said, we invite all countries to provide input on the price cap design and to implement this important measure. So in other words, they’ve decided they’re going to do this, but not exactly holiday.

TN: It’s going to be 2030 before they come to an agreement on.

TS: it’s because. They’Re asking all their stakeholders to join in this. And so what I see as the problems with this right now is that there are four specific problems. One, it’s not really enforceable outside of G Seven countries if people don’t sign up for this. Two, Russia already said, again repeating you, that they won’t sell to countries that enact price caps. Three, part of this is the maritime insurance on vessels carrying Russian oil India is already providing safety and notification through IRGC class.

So by Dubai, subsidiary of the Russian shipping group. So I hope I pronounced that right. But anyway, they’ve already kind of gotten their way around this. And four, they’re also thinking about creating their own benchmark.

So right now, Russian crude oil is expressed as a discount to Brent because rent is the benchmark price. They already have an oil trading platform in place via RTS and MYsix. So they could build out this platform, which they’ve been talking about, and go through near Mir, which is basically their version of Swift, and completely by past that and just let market forces work.

I think this price cap is still way off from seeing the light of day. But this actually could turn out much more bullish because this price cap overlooks how Russia could influence global markets.

If they wanted to, they could opt to cut off the EU and NATO, not just G7. G Seven members shut production and raise global crude oil prices through the roof because they would take barrels off the market there by hurting the G7 nation.

I’m not saying that would happen. I’m just saying that’s within the realm of two box. And it’s not surprising after we just saw today, as soon as an oil price cap was announced as a plan, suddenly we just saw gas problem with Nordstream one, therefore I’m off of national gas.

TN: So what’s to stop, let’s say, a European country that signs onto a price cap from buying, let’s say, Russian crude that is sent to Chinese, say ownership and then resold to say, I don’t know, Germany. I mean, that type of circumvention is already happening, right?

TS: No, you can definitely do that. What we’re really seeing now is that kind of circumvention is happening in the product market. So it’s very easy for, say, India to buy Russian crude oil, refine it until it’s anywhere else because it’s very hard to track where those barrels really came from. It’s easier to track a resale. Right, if that makes sense.

TN: Sure it does. But they put in a barrel of, say, Emirati crude with a million barrels of Russian crude and then they label it Emirati crude. Right? Something like that.

TS: Yeah. If they both have the same API level, depends. You could mix them. If they both were the same exact API level, then you could mix them. It’s kind of different than, say, the natural gas market. Yeah.

AM: The Iranians do this with the Iraqi oil and bozzar. Often they mix it and label it As Iraqi 

TS: because they share oil fields. I mean, Albert and I have been talking about this for years now.

AM: Years.

TN: Let’s be honest, the rules apply to the people who abide by the rules. Right. And so even if these price caps are put in place, there will be circumvention in a big way, of course, at least a refined product, if not crude product. And so a lot of it’s for sure. Is that fair to say?

AM: Of course, yeah. A lot of it is for show. This is a political thing right now for scapegoating Russia

for inflation problems. Now they’re just snowballing things and saying Russia’s gas is the problem

 for inflation, Russia’s oil is the inflation problem, and other caps. But like I said earlier, and even just Tracy reaffirmed it’s like the moment you mentioned price caps against Russia, Moscow finds an issue, whether it’s gas, prom leak or Belarus problems, or Algeria has problems with Wagner. They create these issues all the time.

TN: Of course, anytime there are sanctions on a country, right. These things happen. Okay, very good. Thank you, guys. We spent a lot of time talking about Europe. So let’s move on to the week ahead and

what we expect to happen the week ahead.

We saw some really interesting action in markets, and last week we talked about how Palo speech, we really should have been a surprise to no one, but markets seem to kind of take it on the chin this week, acting shocked that he repeated himself again. So what do we expect going into next week? Do we expect things to kind of moderate a little bit or do we at least in equity markets, do we still expect some downward movement and also, say energy markets? We saw crude down, I think at 86 or something.

Tracy, do you expect, say, energy markets to continue to fall next week?

TS: What I would really look at, and what I’m looking at more, instead of looking at just reprice, which seems highly manipulated right now, especially going into midterms, not suggesting anything, but I think what I would start looking at is in like second and third month spreads or fourth month spreads. Right. So you really want to be looking, I think, just a couple of months down that curve a little bit. And if you start seeing because those curves are still kind of telling us that the market is very tight and curves, you can’t really manipulate as much as you can somewhat of the front line. So I think that’s where you should be looking at.  I think we’ll really get a better grasp on these markets and to see what front market is next week is OPEC meeting, right. So they were talking about cuts, right, over the last couple of weeks. That’s right. That’s all. I will be on that. That’s on the fifth.

TN: And SPR keeps going until October. So we’re only looking at November,December before we’ll see some upward pressure on prices. At least a stand up pressure.

TS: Yeah, exactly. And depending on what OPEC says, we could see an initial pull back. The general consensus is they’re not going to do anything in September. However, OPEC has been known

to give us some surprises. So just keep that in mind.

TN: That’s good all right. Very good. Sam, what are you looking for for next week?

SR: Next week I’m looking at the ECB. I want to hear how hawkish they are and how quick they’re going to go and what type of language they’re using. They’re still in the QE boat, right? They’re still buying Italy, they’re still buying Spain, they’re still buying a bunch of the southern debt periphery type debt.

So I want to hear what they’re saying, how they’re saying it, and just how call it, quote, unquote, inflation-oriented. They are. They probably should be particularly versus the bank of England, who is very hawkish and likely to continue to, one, explore actually outright sales from their asset purchases to shrink their balance sheet and how quickly the relative moves are there.

I think that can create some fireworks, particularly called the Euro pound type crossed I think that could be really interesting and cross asset class could be.

TN: Do you think you should be able to surprise hawkish?

SR: Yes.

TN: You do? Okay, interesting. That would be very interesting to see. Wow. Okay. And so you think the Euro recovers a little bit on that?

SR: I think it knee jerks, yes. But the question is how long does that last? Right. That, I think, is a much more important question than the initial knee jerk. And I think over time, it would be a fade the news move.

TN: Okay, very interesting. Okay, very good. Thanks for that, Albert, close this out. What do you see for next week?

AM: The big boys come back to play from vacation. That’s right, they do. I think they’re going to start holding the market a little bit more accountable for all this bad data. And I think earnings were just atrocious when you look at what inflation was. I’m actually going to be watching though

China as we get closer to the CCP, the Party meeting, I think it’s October 16, I think XI might start announcing many stimulus packages in certain sectors. So I want to see if those materialize and what that does with commodities that are attached to them.

TN: Okay. I just want to say, with regard to the Party meeting in November, if anybody talks about reading tea leaves or any of that garbage, you’re banned immediately. Okay.

So we’re not going to imply, like, cultural mysteriousness on Chinese political processes. It’s just they’re a bureaucracy like everyone else. They make decisions like everyone else. They’re no more or less mysterious than anyone else. So I would say that for the people watching, because the people watching are going to see a lot of kind of China experts or whatever China watchers talked about how mysterious the CCP is and a lot of question marks. A lot of them are Fed talking points from the CCP spin machine. So they’re not mysterious, they’re a bureaucracy. They’re boring, just like every other country.

AM: Yeah. And the Party is I believe that Congress is October 16, not November. Yeah. So it’s closer than people realize. It’s only 30 days away, but China is going to have to probably stimulate some sectors associated with whoever is in line with the party leadership to keep them happy. So that’s what I’ll be watching next week.

TN: Yes. Very good, guys. Thank you so much. Looking forward to have a great holiday weekend, and I look forward to seeing you next week. Thank you very much.

Week Ahead

Crude Oil Supply: The Week Ahead – 29 Aug 2022

Learn more about CI Futures here:

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

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

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

Key themes

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

2. Jackson Hole Drama

3. China Stimulus (Finally?)

4. What’s ahead for next week?

This is the 31st episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:





Listen on Spotify:


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: That makes sense.

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

but in general the pace is kind of meh.

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

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

SR: None.

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

is going to just relax for a few months.

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

SR: That should sail.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AM: Yeah, before December. 

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

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

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

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

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

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

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

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

TN: Okay, Sam? 

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

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

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

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

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