As markets tumble, users are left unable to withdraw from some exchanges, and a leading hedge fund prepares to enter liquidation. Is crypto in terminal decline? Scott Chipolina, correspondent for the Financial Times, says investors are well used to challenging conditions.
Sri Lanka is among the countries to be worst hit by inflation, and living standards are falling. Joseph Stalin of the Ceylon Teachers’ Union, and Steve Hanke from Johns Hopkins University, tell us why a solution may be some way off.
It’s a host’s worst nightmare: an out-of-control party in your Airbnb. As the platform cracks down on gatherings, we hear the story of a rental gone wrong in the Bahamas.
Also on the programme, a boss at H&M explains why leaving Russia was a tough decision; and it’s happy 15th birthday to Apple’s iPhone.
We’re joined throughout Business Matters by financial consultant Jessica Khine in Malaysia, and economist Tony Nash in Texas.
Show Notes
BBC: Tony Nash, the CEO at the finance forecasting platform, complete intelligence in the US. State of Texas. How’s your day been, Tony?
TN: Great, thanks very much.
BBC: Good to hear. All right, well, thank you for joining us too. Tony Nash in Texas. I wonder what’s your overview of all this? I mean, it’s obviously bad news for crypto investors, but is it also a warning for other people who might have been entertaining the idea of getting into the crypto market?
TN: Yes, it is. The whole kind of crypto fallout that’s happening right now, it’s not the funds that I worry about. It’s the individual investors who have been investing in crypto that really worry me. And that’s the really kind of sad part of this crypto kind of drama is you have crypto assets that have fallen by 70%. People have put their savings and their hard earned money into crypto. And so I do worry about those guys because there are a lot of people, individuals who have lost a lot of money because they believed the narrative about crypto.
BBC: And I think during the pandemic, we saw a lot of people sitting at home starting to think, oh, maybe I’ll give this a go. They’re the most recent entrance into the market. I guess they’re the biggest losers.
TN: They are. So I did have a crypto journey where I invested in something called dogecoin, and I bought it at like four cents, and I ended up selling it at like 68 or $0.70, something like that. So it was just a small amount of money I didn’t want to put very much at risk, but I did, I wanted to understand what that was like, so I put like $50 into it or something like that and then just saw it go up to $70 or something and then sold it. But I think a lot of people thought that it would continue going up not just dogecoin, but a lot of the cryptos. So it’s not like your guest said, I don’t think this is the end of crypto. It is what they call crypto winter, and it’s probably going to last a couple of years. I don’t think we’re going to see crypto bouncing back immediately.
BBC: Presumably that experiment was enough for you. You’re not tempted to get back in, given the latest news?
TN: I don’t like volatility that much. At least with those assets, like your guests said, there’s nothing underlying those assets. There’s not a company, there’s not a physical commodity. There’s nothing underlying them. It’s just trust. And so I can sell sales in my excel workbook and have the same amount of assets underlying as any crypto asset does.
BBC: Listening to that in Texas, do you agree? Did governments like the US. Government make a mistake with all those support programs?
TN: I think they did, but I respect Steve. Thank you a lot. I follow him on twitter. I think they did make a mistake, but I honestly think that governments at the time were just afraid. I don’t think it was necessarily intentional that they overstimulated. I think they were not aware of what was going to happen around the corner, and I think they panicked. They were just afraid. It’s easy to look back from this point in time and say what they did was wrong and other stuff, but I actually think giving them the benefit of the doubt and saying they just panic, they were afraid and they didn’t want people to starve or suffer or lose jobs or whatever, and they stimulated way too much in hindsight.
BBC: Tony is this enforceable from Airbnb, do you think? Can they really stop people having parties? What if they just clean up really well the next day?
TN: Well, I think part of what happened through the pandemic is a lot of Airbnb hosts started charging exorbitant cleaning fees. And no matter how clean or dirty you left the place, the cleaning fee was applied to your Airbnb fee. I stay in Airbnb, or did stay in Airbnbs pretty regularly, but the cleaning fees became so large that I won’t stay in them anymore.
BBC: I didn’t realize the cleaning fee was at the prerogative of the host. I imagine it was like a blanket 10% or something.
TN: No, they’re huge. And so I have no issue with Airbnb enforcing a no party’s rule, but they really have to have a trade off and put a cap on the cleaning fee for Airbnb hosts because they in some cases are as much as the nightly rental.
BBC: Oh, wow.
TN: And these are things that you don’t see when you do a search in Airbnb and you see a nightly price, it does not include the cleaning fee. So if Airbnb is to put on this ban on parties, they really need to put some pressure on their hosts to reduce the cleaning fees.
BBC: It is a kind of fine line, though, isn’t it? I mean, I’ve had friends rent Airbnb and there’s been a few of us and there’s been drinking, but I guess what they’re talking about is when you invite strangers, or not necessarily strangers, but people who are not staying the night or booked in to stay, that’s when it becomes a party. Is that how they’re going to define it, do you think? Tony
TN: Yeah, I don’t know. If I’m staying in an Airbnb and I want to have some people over for dinner, is that a party if I want to cook for some friends and have them over? I don’t know. I think it could be, obviously loud music, drunk people, that sort of thing. Of course that’s a party, right? So they have to define it. I’m not a lawyer. I’m sure they can find a way to define it legally so that fees can be kept or whatever.
BBC: Tony you’re in Texas, not far from California. Have you heard of this issue before of land being seized from African American owners? I must admit it’s the first time I’ve heard of it.
TN: I’ve probably seen it in movies. I’ve seen it elsewhere. I think I’ve run across it, but I don’t remember it. But when I read this story today, it was great. It was great to hear and really interesting to dig into the story. And it was terrible that people had to suffer with that for 80 years.
BBC: It does say a lot, though, doesn’t it? If neither you nor I, you’re there in the States, have heard of this issue, I mean, from what Alison was saying, this wasn’t the only case. Has it been underreported, do you think?
TN: I don’t know. I don’t know how much property African Americans were allowed to hold before a certain point in time. I’m just not really sure. My family that settled in New Amsterdam when the Dutch still ruled America, had some property that was seized by the British in 1671. So it happened.
BBC: How did you find that out?
TN: We know our family history pretty well, but this was land in lower Manhattan, right around where Wall Street is, and so it was seized. These things happen. I’m not in any way trying to take away from the racial injustice that was done in California, not at all. But these things happen occasionally, and I’m just glad that these guys could get their land back and benefit from it eventually.
BBC: Tony, you’ve been looking at hmmm. We’ve been hearing there about its planned expansion into Latin America, but at the moment you’ve been looking at where their product is sourced. And we were just speaking about Myanmar. It’s Myanmar, sure.
TN: Yeah. Asian sources quite a lot in Myanmar. And part of the problem they’re facing is a lot of the manufacturers in Myanmar are being driven to insolvency because of energy prices. And so H and M doesn’t only have a problem generating revenue to replace Russia, but they do have a supply chain sustainability problem with matching the costs they can get in Myanmar, but also replacing that manufacturing pretty quickly as those manufacturers are driven to insolvency.
BBC: Tony, listening to that, how much has the iPhone changed your life, do you think?
TN: I have never owned an iPhone.
BBC: Smartphone. Do you own a smartphone?
TN: I do. Yeah. Of course I do.
BBC: So do you think iPhone opened the door to that?
TN: Of course it did. But I just never got into the Apple ecosystem. And I just haven’t owned an iPhone anti Apple. I just haven’t been I’m just waiting for it to get a little better. But of course, it’s influenced phones and it’s influenced the way we engage with technology. And it was a great product at the time. It was revolutionary. I remember I was using a Nokia phone at the time. Keep in mind, this is 2007, and you could play your music on that phone and have conversations, and I thought that was pretty cool. But that was before the iPhone came out. The navigation the interface. Everything just really changed the way people interact with phones. It’s great.
BBC: I think that’s all we have time for on this edition of business matters. Thank you so much to Tony in Texas and Jessica in Malaysia. And thanks to Joanna Stern from the Wall Street journal, who brought us up to date on iPhone’s 15th birthday as well. This has been business matters with me, Vivian Nunes. Thanks for listening. Bye.
Millions of Australians decide whether or not to vote back in the Conservatives after nine years under the party’s rule. BBC’s Katie Silver and Australian economist Tim Harcourt tell us more. Rising fuel prices have led food delivery drivers to strike for days in the United Arab Emirates, where industrial action is banned. BBC’s Sameer Hashmi explains their struggle from Dubai. Adi Imsirovic from the Oxford Institute for Energy Studies gives us his views on the former German chancellor Gerhard Schroeder’s recent resignation from the board of directors of Russia’s state-owned oil company, Rosneft. In Korea, president Joe Biden begins his five-day Asia trip with a visit to a Samsung semiconductor plant. We talked to Carolina Milanesi, president of analyst and market research firm Creative Strategies, about this. Vivienne Nunis is joined throughout the programme by guests Tony Nash, Chief Economist at Complete Intelligence in Houston, Texas, and Karen Percy, Senior freelance reporter in Melbourne.
Show Notes
VN: Tony Nash, who’s the chief economist at Complete Intelligence in Houston, Texas, is one of them. Welcome back to the program, Tony.
TN: Hi, Vivian. Thank you.
VN: Thanks for joining us again, Tony Nash. Listening to that. It’s interesting, isn’t it? It doesn’t matter where you are in in the world. The energy crisis triggered by the war in Ukraine is forcing drivers to fill the pinch wherever they are.
TN: Yes. I live in Texas, and we produce a lot of oil here.
VN: What’s the situation there?
TN: Oil is rising pretty quickly. The price of gasoline is rising pretty quickly. So both regard to the UAE. I spent a bit of time in the region, and the prices are always lower. They’re very cheap. But what’s interesting about the delivery business is if the cost of petrol is impacting the delivery business, that could be a real issue for that business model. I think we’ve been in an era of relatively low petrol prices, and if those prices remain high, it could be a real challenge for that business model at some point.
VN: So you’re saying that fuel prices are already cheaper compared to, say, global averages in the US, and I guess they are in the US as well. They’re heavily subsidized, aren’t they? I guess the question is, should governments be stepping in where they can to ease that pressure on drivers and everyone facing various cost of living pressures?
TN: Well, with UAE, actually, the prices in May for fuel are lower than they were in April. They’re still elevated, but they have come down a small amount, like 2% or something. But I think if the government is to help people, all that will do is I think we’ll only have higher crew prices or higher sorry, fuel prices. So it’s a hard thing to say, but I think more money toward it will only make those prices higher as more people consume kind of at the same levels, but with the subsidies. So it’s a very hard time. And I think it’s something that maybe the companies should help their drivers with, not necessarily the governments. These people are working on behalf of the company. And so perhaps the company should help their drivers a little bit with fuel.
VN: Tony, this story is moving all the time, isn’t it? We’ll get to some of that in a moment. But firstly, it was rather extraordinary, wasn’t it, that Gerhard Schroeder didn’t resign from that position on the board of Rosneft until today?
TN: Yeah. It’s weird that he took up the position in the first place. I remember when it happened 20 or so years ago, and it just seemed like a strange appointment at the time. But it took him 20 years to make the decision. So, yeah, it’s well overdue and it seemed fishy from the start. And I think Germans have been extraordinarily patient in putting their pressure on him to get it done.
VN: Well, we don’t know there was anything fishy, of course. I mean, perhaps the pressure only really came on to him since this invasion by Russia into Ukraine, given that before that, Russia and German energy relations were pretty tight.
TN: Sure. Yeah. But Germany had at some point looked at, say, taking LNG from other parts of the world, Qatar, US, other places, and they chose not to do that and really have Russia as their only source, I believe, largely because of lobbying that Schroeder participated in. So had Schroeder not worked with Gasprom, there’s a feasible scenario that Germany would have multiple sources of natural gas and oil and not really just looking at Russia.
VN: I mean, Tony, I guess what is fairly obvious that it was a very lucrative position there, and that’s probably one of the reasons why he stayed so long.
TN: Sure. And as a former Prime Minister, it is awkward for him to lobby to single source energy from one country. I get it. Of course, it’s lucrative and everybody has to pay the bills somehow. But this was particularly odd.
VN: Okay. Let’s leave it there. Thank you both for your thoughts on that. Tony. It was interesting, wasn’t it, how President Biden almost made a beeline to that Samsung plant straight off the plane after he landed in South Korea, obviously underlining that relationship with South Korea, but also the importance of semiconductors in today’s economy.
TN: Sure. So I live in Texas, and Samsung last year announced a $17 billion chip Fab investment just north of Austin, Texas. And Texas Instruments is also building a new chip Fab in North Texas. So there are three new chip fabs that have been announced or major new chip fabs that have been announced in the US over the past couple of years. And two of them are in Texas. And so that $17 billion of investment that Samsung is making is really the reason for the trip. So that chip Fab that’s in Texas, there’s got to be a lot of thank yous to Samsung for making that investment in the US.
VN: So it’s not a wider move then by the US to really try and encourage that kind of thing in its own shores. We talk about onshoring we’ve seen so many delays in global supply chains throughout the pandemic. We’ve seen shipping crises. Is this an idea to try and prevent any of that from happening in the past and get those made in the country closer to some of those big companies like Apple and intel, for instance.
TN: That has been underway for probably five years. The movement to getting technology firms, particularly semiconductor and defense related technology firms, building more either in the US or in the NAFTA or the North American Trade Agreement area. So that started particularly after the 2016 election, and it’s continued in the Biden administration trying to get more of that technology development and technology manufacturing in the US.
VN: And right where you are in Texas. Well, not exactly where you are, but somewhere in Texas we’re hearing not just about these semiconductor plants, but also, of course, Tesla moving a Gigafactory there as well, out of California and into Texas.
TN: Right. Tesla, Oracle, HP, many firms have decided to relocate to Texas. It’s a great workforce. I’m here. I run an artificial intelligence company here, and people here like to work. And so it’s a really good location for technology companies.
VN: It’s not just the hard work, though, isn’t it? Also about tax rates, if I recall.
TN: It’s about tax rates. It’s about research dollars. So the universities here get a massive amount of research dollars and spend a lot of money on research. And it’s the quality of education that’s here. So all of those things combined, of course, Samsung got subsidies for building its Fab and Taylor, but I think they could probably get subsidies from anybody. They’re kind of really looking at the whole environment that they plant their business in.
VN: It’s interesting because we always think, well, originally we thought about California dominating the tech industry. Now we’re hearing about Texas, as you’ve just mentioned. I spoke to Carolina, who we heard from earlier. She’s actually moved out of California into Atlanta. And she told me that’s a growing tech hub, too, used to be a kind of base for telecoms companies, but now it’s attracting some of those tech firms, too.
TN: Yeah, I think there are a lot of kind of mini tech hubs around the US, and you can find them in different clusters around the US. And so it’s really just a matter of what critical mass can you get and what specialization can you get, and then how do you build around those specializations? So, for example, Tesla moves to Austin, and their vendors are then required to move to Austin as well. Right. And that creates a cluster around what Tesla does. So really getting those bigger fish to move their vendors and build that whole system is pretty critical. And the Texas governor, Greg Abbott, has actually done a really good job of recruiting those firms here because it’s only the last four or five years that a lot of that’s happened.
VN: Okay, well, thank you, Tony, for all of that insight from Texas. Do you take ketchup and mustard on your hot dogs?
TN: You’re supposed to only eat mustard on hot dogs. I’m sorry, but this is the law of the land.
KP: It’s an abomination. I have a Canadian Hudson who does the same thing.
VN: Okay, so just mustard, you said. Okay, Tony asking you in watching along in the US. I mean, Boeing getting into this private space race. Now, Boeing has been in the news for all the wrong reasons over the last few years. Those two very serious fatal crashes. There’s a lot riding on this venture, Tony. Have I still got you there?
TN: Yeah, I’m here. Can you hear me?
VN: Yeah. So just talking about Boeing, they’ve had a pretty rough ride, given those two facial crashes. A lot riding on this venture into space.
TN: Absolutely. And they need some good news stories. And if this is a good news story for for them, that’s great. I hope it ends up well.
VN: Okay. Thank you, Karen Percy in Melbourne and Tony Nash in Texas. You’ve been listening to business matters with me, Vivian Nunes. Thanks for the team in Manchester here as well. Bye for now.
Fed Chairman Powell was out this week all but assuring a 50bp hike in May, also implying we may see a burst of quick hikes. Then everyone who said “it’s all priced in” two weeks ago panicked on Thursday and Friday. Mike Green shares what’s new here and why are we seeing the reactions now?
We’ve spoken before about Q2 earnings, expecting them to generally be weaker, partly on inflation, which every company is blaming for shortfalls.
– Snapchat missed earnings but it reported 64% revenue growth, with daily active users up 20%.
– Netflix lost subscribers. They’re now the tech cautionary tale.
– FB is falling in anticipation of an earnings shortfall next week.
– Tesla reported a 42% earnings surprise and they’re about even on week
We keep hearing about commodities getting smoked this week. What happened this week and what should we be thinking about right now? We’ve got a bunch of housing metrics out on Tuesday (Case-Shiller, etc). Do the guys expect to see an impact on house prices already or will it take a couple of months/another rate rise to have a noticeable impact?
Key themes from last week:
1. Powell’s Wrecking Ball (Dollar Wrecking Ball)
2. Tech Earnings
3. Commodities getting smoked?
Key themes for the Week Ahead
1. Housing
2. France election
3. Geopolitical lightning round
This is the 15th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
TN: Hi and welcome to The Week Ahead. My name is Tony Nash. Today we’re with Albert Marko and Mike Green. Before we get started, I’d like to ask you to like and subscribe to our YouTube channel. Thanks for doing that. I also want to let you know our CI Futures promo ends on April 30th. This is CI Futures, about 3000 assets forecast every month for $50 a month. That promo will end on April 30th. So if you’re interested, please go to completeintel.com/promo and check it out.
So this week we’ve got some key things from the past week. First of all, Powell’s wrecking ball and rate rises and the dollar wrecking ball that comes with that very important item. Tech earnings. We’ve seen a collapse in tech equities over the past couple of days. Not a collapse, but some really interesting activity. We’re going to talk through that. And then commodities. We’ve seen commodities, heard some people say commodities are getting smoked late this week. So let’s talk through that.
So Mike, first let’s look at Fed Chair Powell is out this week, all but assuring a 50 basis point hike in May. And a lot of people think it may be stronger for a longer period of time, maybe June and July even. I hear a lot of people saying a few weeks ago, it’s all been priced in yet we’ve seen kind of some panicking markets on Thursday and Friday. So we’ve got the 10-year on screen right now. So what is new here from your perspective and why are we seeing the reactions now?
MG: So the point that I would argue on this is that we’re in a feedback loop effectively where the market tries to price the Fed’s indications the Fed is in turn responding to the market. And so it’s leading to a dynamic where the Fed is saying, well, look how interest rates are rising, particularly at the back end. Clearly, we’re behind the curve. Therefore, we need to hike more and we need to convey to the market that we’re going to hike more. The market mechanically has to respond to that because you just can’t ignore it. Right.
You have to effectively think of it in a binomial tree type framework. The Fed has told you they’re going to hike more aggressively. Therefore, you need to shift the whole system up. Right. And that feedback loop, I would argue, is what we’re kind of captured in right now. And it’s part of the reason why the market is forced to respond to it in a risk off fashion, et cetera. We just don’t know if the Fed really actually knows what the underlying signal is and how much of it is us and how much of it is their insights onto the economy.
The second thing that I would just highlight is that the Fed has put themselves into the very uncomfortable position of last year, arguing that inflation was transitory. And this has been one of these really frustrating things for those of us that actually agreed with them that it is largely transitory in inflation rate. Right. So the rate of inflation is transitory, but the price level, I don’t expect oil to go back to negative $37 a barrel. That would be absurd. Right, right. So when you talk about the transitory dynamic, it’s typically thought of as the rate. But I think the perception had broadly been the prices themselves were going to somehow come back down and not adjust to the realities of accommodating the difference.
So I think that is sitting at kind of the core of the issue is that the Fed is now in the same way they were trapped in that transitory framework that people began to increasingly malign and make fun of. Now they feel this overwhelming need to come out and tighten and show that they’re actually serious about inflation and reestablish credibility, even as it’s very clear that the economy is starting to slow. And they’re then forced into the mantra of now saying, well, we see no signs of the economy slowing. And so they’re going to have to maintain that for a period of time or they sound like fickle policymakers.
TN: Right.
MG: I think the market is understandably concerned and scared at how far they’re going to have to go to prove to us that they’re really serious.
TN: Right. And Yellen was out saying there will be no recession this year, which I mean, I hope she’s right.
MG: There’s a recession. Yeah.
TN: Exactly. So I was roasting coffee yesterday, and my coffee guy was telling me that coffee prices will stay elevated because of the buying cycle from the farms and so up and down the commodity supply chain, across, it seems, across metals, across crude, across ags. That timing has a real impact on the change in levels. The rate may not change much from here, but it seems like the level will remain elevated, as you’re saying.
MG: I think that’s right. And again, that’s why the transitory, I think, was so toxic and confusing to people because they were thinking, oh, we’re going back to $1.75 gasoline as compared to the $6 in chains that we’re currently paying in California. Right?
TN: Right.
MG: That’s very hard to accomplish under the current framework. And the coffee example is a really good one. It’s not so much the level. The adjustment to the level is painful. Once that level has been reached, all sorts of changes in relative purchasing activity can occur. Right. You can decide you’re going to roast your own beans because it’s cheaper than somebody else’s beans. You can decide that you’re not going to go to Starbucks, you’re going to do your coffee at home and put it into a travel mug to save money.
Whereas the Wall Street Journal highlighted you can reduce your consumption of beef and chicken and increase your consumption of lentils. And yet another example that just pisses people off because it feels completely disconnected from the reality that they’re in. But those are all true statements, right. Those are adjustments that people make once the level settles down. Where the real problem occurs is the uncertainty about the level.
Is it going to be 20% higher next year? Is going to be 20% lower next year? That makes it very hard for me to plan. And that’s really what we’ve experienced. And now what your feedback, what your contacts are telling you is no, prices are going to stabilize at a higher level because that’s what’s required to induce the supply response.
TN: Right.
MG: Okay. It sucks. Coffee is more expensive now, but at least it will be in the stores.
TN: Right. So going down the path of, say, your Wall Street Journal saying you need to eat lentils instead of beef. With interest rates rising, it seems like consumers would utilize more credit during that adjustment period. With rates rising, it seems like it would make things much more difficult. So there’s a double whammy on consumers. Are we seeing that impact right now?
MG: I don’t think we’re yet at the point that the higher interest rates are feeding through in a way that matters. Right. So the vast majority, something like 95% of outstanding mortgages are no longer adjustable rate. They’re fixed rate. And so that is going to be very slow to adjust. We’ll see that the marginal purchasing behavior. And we are absolutely seeing that. We’ve seen a dramatic reduction in refinancing and purchase applications. We’re starting to see traffic deteriorate. We’re starting to see new orders roll over. We’re starting to see consumer spending intentions begin to plummet.
And there’s two reasons why people can use credit cards. Right. You can use credit cards to smooth over effectively saying, hey, guess what? I’m getting paid my bonus next week. Therefore, I’m going to make the purchase now and I’m going to repay it. Or you can see people start to tap credit because they are so strained that they can’t do anything else.
And unfortunately, the evidence that I’m seeing suggests it’s the latter, that it’s the lower income households who are now taking advantage of high cost financing choices in order to sustain a level of consumption that they’re having difficulty retreating from.
If your rent goes up and you don’t want to be homeless and their coffee prices have gone up, at some point, you need to expand your purchasing capacity. And that means using credit.
TN: In basic terms, what we’ve been talking about on this show is demand destruction. The Fed is aimed at demand destruction. And that means that demand curve actually moves in, right?
MG: Yeah.
TN: So people are going to have to rein in their behaviors because we’re likely at new pricing levels for many things. And so that consumption is going to have to decline a bit to adjust to the new environment. Albert, you had a comment?
AM: Yeah, two comments, actually. The thing about the demand destruction and the supply, from the Fed’s point of view, they think that getting rid of demand involves eliminating supply. Right. So that a little bit has to do with the rates, but also what Mike said about doom loop. I mean, that’s very interesting because that’s exactly what we were talking about in multiple areas, not just for bonds, but Yellen herself, she’s had her minions go out in the bond market and just straight up lie to bondholders, saying, oh, they’ll recover, they’ll recover while everyone keeps buying, and they just keep butchering the long bond.
The 30 years just been 3.1 today or 3.5. It’s crazy. She did this in 2013 where she had this little ploy where she has preventing capital flight, leaving the United States in order to prop up the US equity markets. And that’s what we’re seeing today. And this doom loop between the Fed and the treasury, because they’re not on the same page. They’ve got different policies, different ideas of how to keep the market, and it’s causing problems.
MG: I would actually add to that and just highlight that this is, of course, the downside to not having people who actually have ever traded or negotiated a swap or done anything else along those lines in positions of decision making. You don’t want to put a fox in charge of the hen house. But the reality is it is somewhat useful in terms of understanding what’s actually transpiring. It doesn’t surprise me at all that Janet Yellen says something along the lines of, well, there’s no sign of a recession because they’re working very first order, first derivative type dynamics. It’s that second and even potentially third derivative that ultimately conveys the dynamics of what’s really happening.
And the second part is that the Fed operates under a model in which negative real interest rates, which is basically a function of inflation expectations and the current level of yield. Some people roughly approximate it with trailing inflation and current yield, which is completely insane. But at least if you’re doing it in a structural fashion, they tend to presume that the only reason why markets move is due to information.
The market has some insight, and this has been one of the huge policy innovations. And I use “innovations” over the last 20 years has been this dynamic of, okay, well, if we’re trying to figure out market expectations, let’s use market inputs. But those market inputs in turn respond to the policy makers. Right?
TN: Right.
MG: And there’s all sorts of structural features to markets. If I happen to short a pay or swap shop, for example, and my risk manager is forcing me to cover that risk, it has no economic signal to it. It’s simply a market feature that they are then trying to interpret as indicative of underlying demand. That’s just wrong.
TN: Right.
AM: On top of that, you have a political component where Yellen tied to a certain party or not just Yellen but others tied to a certain party are going to do things beneficial to that party.
I know economists and financial guys don’t like to hear that, but that’s just the reality of it.
TN: That’s the reality of national accounts. We also mentioned the dollar wrecking ball. We’ve seen over the past week, Yen devaluation or Yen depreciation. We’ve seen CNY devaluation. CNY has gone from, I think, 6.34 to 6.49, which is a dramatic deval of CNY. How much of an impact does the dollar have on those markets, particularly because we’ve heard about the dollar losing influence for the past, I don’t know, 50 years. But talk to us, Albert, what’s going on there?
AM: Like I said, Yellen wants to restrict capital flight, and a strong dollar does that. It’s killing the emerging markets. They gave Japan the go ahead to devalue the yen in order to offset anything that China does asymmetrically against the United States, because they have been. They’ve been in a little bit of a tit for tat for quite some time now.
So the dollar at 110 just absolutely annihilates emerging markets, except for the markets that are commodity based, like Canada. I’ve been in Canada. I love the Canadian economy right now. It’s strong oil based, gold based. So that’s where I’m coming from on the dollar right now.
TN: Great. Okay.
MG: I would just broadly highlight but by the way, I don’t know if you saw the CNY today, but it moved huge again today. So it’s actually now 6.50. Well, fantastic in the same way that like a root canal is fantastic. Right. But yes, it’s a wonderful technology. Nobody wants to experience it.
But just to put this in context, this is a move now that is equivalent in terms of devaluation of what we saw in August of 2015, in terms of the much-heralded… Right. And I would just highlight that I think this is an important move. I think it’s telling you that there’s all sorts of stuff that’s going on. I tend to fall into the category of terms of trade dynamics, more so than interest rates or even anything, those dynamics.
Japan allowing its currency depreciate, leading to depreciation for the Chinese currency or contributing to depreciation for the Chinese currency. They want a competitive in global export markets. Right. So there’s an element of China needing to respond and maintaining competitiveness versus a significant devaluation that’s occurred in the Japanese yen, which is basically, if you think about it from an American perspective, means I can buy 30% more of what a Japanese worker produces today than I could a year ago. Not quite exactly. Right. But somewhere in that range.
The second part of it, though, is that the terms of trade have just turned so ugly for these countries where the things that they need to import, they have incredible food insecurity, they have incredible energy insecurity, and those are the things that are rising in price. And we’re seeing no signs that those are going to retreat, whether it’s LNG that Japan now has to compete with China in Europe or from the United States and elsewhere or whether it’s wheat or rice or corn.
I believe, Albert you may know this better than I do but I believe Malaysia just announced export restrictions on palm oil, worried about their own food security. This is the way the system breaks down. And the irony of course is the US, are we going to get unlimited palm oil imports? Of course not. But can we use soybean oil or canola oil in lieu of palm oil for frying our Twinkies and our food? Of course. Right. We can do that. The US can survive almost anything from a food or energy shortage standpoint. It’s the rest of the world.
Albert referenced the emerging markets. I mean man, if you are a cash crop producing emerging market that is now struggling with issues around food and energy security, this is going to get bad. It’s really bad.
AM: It’s really bad. It’s causing political uncertainty in many regions of the world. And again use the phrase doom loop because politicians over Covid policies have created a doom loop in trade.
TN: But let me ask you and we need to wrap up this topic but I want to take this full circle because it’s fascinating. With the currency devaluation depreciation in China, Japan and the food issues could that potentially push, say, North Asia to put more pressure on Russia to wrap up the conflict so that the commodities out of Russia and Ukraine can alleviate some of this price pressure on emerging markets. Is that a possibility?
AM: It’s a possibility, but I think it’s a small possibility. Things have changed because of the Ukrainians sinking that battleship. They got bears at that point.
But Interestingly though, now that you mentioned, I just thought of it. Japan and China have always competed for the fishing rights and then sea Japan. So you could see a future. Want to say naval skirmish but a couple of boats taking some live firearounds.
TN: Sure. Yeah. Or a mistake. Right. You could have a mistake that results in something like that. Okay, let’s move on to tech. I think we can talk about this issue for hours.
AM: Yeah.
TN: Let’s move on to tech. Robert, we’ve spoken about key to earnings for a while, expecting them generally weaker, partly on inflation and other pressures. But this week we saw Snapchat miss earnings, but they reported 64% revenue growth and their active users were up 20%. So their business seems to be going well. Netflix lost subscribers and we saw them kind of as the tech cautionary tale. Facebook is falling in anticipation of their earnings for next week. On the bright side, Tesla saw a 42% earnings surprise, but their stock, after moving up a bit, really hasn’t moved much.
So on screen, we’ve got Facebook and Snapchat kind of showing their downward trajectory over the past month. So can you talk us through kind of what’s happening with tech earnings? Is that a rotation? Is tech really out of gas? What’s going on there?
AM: I believe tech is out of gas. A lot of it has to do with inflation and rates and whatnot. But I think tech earnings had gone into the stratosphere when Covid was just blazing because of the lockdown. People stayed at home, got on Snapchat, got on Facebook, got on Google and whatnot. Right.
The Tesla earnings. Those are a joke. It sounded like Tesla is the most efficient automaker in the world, which is absolutely a joke when they’re making cars intense. And it took the market up like 70 points. And then as soon as some of the better analysts started digging through the information, immediately sold off again. And then that actually triggered, I think that triggered the market to sell-off a little bit because people are worried about tech earning. I think Google’s going to miss big because their brick and mortar advertising scheme is hurting. Last month and this month it doesn’t look pretty.
But I want to take some caution here because everyone’s going to get beared up on these tech earnings as everyone’s seen the Huawei, big puts coming out there and whatnot. But we’ve seen time and again these tech earnings missed on revenue. And then the guidance is fantastic and the market rips 200 points in a week. I don’t want to be short tech at this level right now.
TN: Right. Mike, what are your thoughts?
MG: The obvious component is that we’ve got extraordinarily difficult compares for most of the tech companies. Right. So you go into a pandemic and every kid needs a computer, every kid needs a cell phone, every kid needs that. And I’m speaking to you over a microphone that was purchased during the pandemic and a computer that was purchased during the pandemic and a video camera that was purchased during the pandemic. Right. And I upgraded my software and my kids got new phones and all this sort of stuff that all occurred. Well, guess what? It’s not happening now. That’s harder.
And when I think about the reinvestment that needs to occur as we talk about going back into the office and into work, et cetera, it’s much less on the soft side. It’s much more on the simple dynamics of how do we restock a pantry at a company cafeteria. Right. Which hasn’t had to happen for a while.
TN: Right.
MG: So I am generally skeptical of it. I’m particularly concerned about the consumer side of it. One of my friends many years ago had highlighted that the emergence of cell phones as a consumer good had by and large, replace lots of other types of spending. So it reduced clothes, reduced spending on everything else. People are now tapped out on buying those phones. Right? They’re out of money and they’re using their credit in one form or another. So I’m skeptical on particularly Apple.
I agree with Albert, by the way, on Google. I think people are underestimating the importance of the bricks and mortar, and they’re also underestimating. I think this is one of the challenges for the Netflix. I’ll be 100% straight with you in terms of my household’s reaction to it. I mentioned it to my wife. She’s like, well, we’re obviously switching to the advertising supported model as soon as that becomes available because, candidly, I don’t even like watching Netflix to begin with. I could care less. If I have to watch ads and get it for $10 as compared to $20, then I would argue that this is happening broadly.
As we move back to an advertising supported model, the inventory of advertising space is about to explode at the exact same time that demand is relatively weak. So who thinks we’re going to get premium prices for advertising anymore? These models are screwy in terms of how badly they could deteriorate. If you simultaneously have a boom in advertising space at the exact same time that demand is relatively short.
TN: But lucky us, we get more campaign ads until November.
Okay, great, guys. Moving on to commodities. We saw commodities pretty much get smoked in the last half of this week. We’ve got one month history of WTI and copper up on the screen. So what happened this week, and what should we be thinking about right now with respect to commodities?
AM: I think that in terms of commodities, I think the biggest component right now is to see what happens in the Ukraine war, whether Russia stops because the Europeans and the Biden administration is using that as like the Putin price hike and whatever. But that’s what they’re blaming it all on. And a lot of people are worried about this being an extended war. I don’t think it’s going to last more than another month or two.
But for commodities, especially wheat and fertilizer, the moment that Ukraine comes back online, those things are just nosedived. And the Fed wants that to nose dive because they’re trying to kill supply in order to tackle inflation. So that’s from my perspective, there.
TN: So a lot of this at this point, you think depends on Russia, Ukraine.
AM: Yeah. That and the dollar. That and the dollar. So the dollar goes up, prices will come down.
TN: Okay. So appreciated dollar, did that hurt commodity prices this week?
AM: I think so. Go ahead, Michael.
MG: Yeah. So they’re not quite inverse. But remember, when we see prices, we’re seeing our prices, we’re not seeing the rest of the world’s prices. And exactly to the point that we were raising before with Japan and everything else on a year to day basis, as much as you may think, oil prices are up in the United States, they’re up maybe 50% in the United States. They’re up 100% if you’re in Japan. Oil prices 100% on a year to day basis.
AM: Wow. Right.
MG: I mean, that’s just an extraordinary outcome. You’re looking at these kind of underlying characteristics, and you have to say to yourself, the rest of the world is going to start to experience significant declines in aggregate demand.
Forget the supply component that Albert is highlighting. Focus much more on the demand. And when we think about commodities, developed world demand is extraordinarily efficient. We don’t throw copper on the ground. We don’t discard it into landfills. We recycle copper. Right. We recycle aluminum. We clean up the sludge off of our factory floors. That doesn’t happen in most places around the world. Right. Scrap found out in the open is still a significant fraction of aggregate supply. So we just use it more efficiently.
As things shift back here, we’re going to become more efficient at it. And I got a lot of heat earlier this week for posting a chart that said, look, I’m not seeing this commodity super cycle. I’ll say I’m not seeing this commodity super cycle. I don’t see the underlying outward shift in aggregate demand in almost any commodity that says we’re going to have truly sustained high levels of inflation and need for significant additional production other than effectively the disaggregating of supply chains. And you’ll hear things like huge copper demand because of electric vehicles. Right. That is selling human innovation so short, it’s just ridiculous.
If copper prices go higher, we’ll figure out how to use less copper wiring. That’s the history of the world.
TN: Right.
AM: That’s absolutely correct. That’s when they started using, like, gold flakes and sprays and different types of adhesive made out of whatever.
TN: But it generally takes a big demographic change to enter a commodity super-cycle or some sort of supply cut-off, right?
AM: Yeah. I can see a super-cycle within one or two commodities peaking and then coming back down and another one peaking and coming back down. But this insane super cycle that people were expecting, I don’t think it can happen. I agree with Mike.
TN: Okay, great. Let’s switch gears and look at the week ahead. Guys, we talked a little bit about housing, but we’ve got a bunch of housing metrics coming out next week with Case Shiller and a few other things. Because of rate rises, do you guys expect to see a near term impact on house prices? Are we kind of in a wait and see mode? What do you think is happening there.
AM: Politically? The Democrats want housing to come down. Right. And I think some of this bond action is meant to do that to be honest with you. I think they want houses down in the 30 year up. These prices, these housing prices are insane. It just stuns me to see some of these homes going for 150% of what they were two years ago.
And at some point the buyers are going to dry up. I mean, these cash buyers are going to dry up. And the credit now, I think in Tampa, it’s like over 6% for a 30-year mortgage. It’s going to make it even more unaffordable.
TN: But how much does that have to do with housing supply? Are we seeing more supplies coming on the market?
MG: Well, we are seeing more supply of new homes because the delays in completion means that homes that were ordered 18 months ago are finally starting to show up on the market. And that’s been one of the challenges. Unlike what we saw in 2005, 2006. This is not a function of massive amounts of new housing being built in areas that previously did not have housing.
So the character of 2004, 5, 6 was effectively converting farms and semi rural environments into subdivisions of endless numbers of homes that look identical so that people could have a home and then drive an hour to their work or an hour and a half. I mean, that was just crazy.And that was killed by the spike in oil prices that occurred with Hurricane Katrina and Ivan.
This time around, you just have a shortage of supply in terms of people willing to move. And unfortunately, the increase in interest rates, paradoxically, can exacerbate that. Right. Because I don’t want to leave my house and buy a new house because I have to enter into a new mortgage. Right. Of the mortgage. So, perversely, this could end up preventing supply from coming onto the market because when I go to look to replace my home, I can’t do it. And so it’s not clear to me that prices are going to take the hit that people are looking for.
I think at the low end, you’ll see certainly some pressure on new homes. You’ll see some pressure. But perversely, that just exacerbates the problem. Right. If new homes get hit more than existing homes, guess what? We’ll get less new homes.
TN: Okay, great. So far, it’s a very positive show, which is fantastic. End of a rough week into a rough show.
Let’s talk a minute about the French election, guys. It’s next week, what do you expect to happen in markets, say, with the Euro and French equities.
AM: Yeah, actually, we ended up buying the Euro today, looking for Macron to win reelection. Everyone that sees my Twitter feed knows I’m a conservative. Le Pen is a disaster for France, for Europe, transatlantic relations with the United States. She just can’t win and she won’t win. But the thing is, a lot of people think that she’s going to win.
So I think the Euro is going to probably pop half percent, maybe even percent, come Sunday into Monday. And then the dollar might actually come down and the market might actually rally a little bit crazy.
MG: I’m certainly sympathetic to that. I mean, the degree of sell off that we have seen, everything ranging from the yen to the Euro, et cetera, it’s hard to sustain this type of momentum. Ultimately, I’m exceptionally bearish on Europe. I’m exceptionally bearish on Japan for reasons that are largely unrelated to the immediacy of it.
I agree with Albert, and I actually would highlight something that he said that is really important for people to understand. When you describe yourself as a conservative, most people would say, okay, Marine Le Pen is a conservative. Right. Because she represents anti immigration and she represents behave more like French people. Right. But the reality is conservatism is all about let’s not break the system and try to replace it with some utopian vision. Right. Let’s try to work within the existing system to make it better.
When you enter into periods of uncertainty like what we’re experiencing, there’s a reason why the incumbent almost always wins, because people don’t want radical change in their lives. It makes it far more difficult. And so I just am not seeing any evidence that Le Pen has the chance that she’s claimed to and not that I want to join Albert on the potential tinfoil hat conspiracy standpoint, but I agree with them. I don’t think she’d be allowed to win.
TN: Okay, interesting. So a little bit of stability in Europe, which is great.
Guys, let’s have a quick geopolitical lightning round. I know there’s a lot going on in Russia, China, Ukraine, elsewhere. What’s on your mind, Albert, when you talk to your politics, what are you talking about the most?
AM: Honestly, China. The civil unrest in Shanghai, that’s actually looking like it’s spreading is kind of really concerning. For years, Xi’s been holed up in bunkers and can’t go.
You know, China, Tony. I mean, you have 1.3 billion people mad at you. You just don’t go out. Xi has this problem at the moment. So for me, it’s the civil unrest in Shanghai spreading to Guangdong and even outwards.
MG: Wait a second. So XI has 1.3 billion people mad at him? Did he say something against Bitcoin? Sorry.
AM: That would be 2.3 billion people because all of India is there too.
MG: 1.4 billion people. But yeah, exactly. You get really mad about that, as I’ve discovered.
Now, listen, I completely agree with Albert that, and this is again, part of the great irony of everything that’s been going on and I’m somewhat guilty of this myself looking at the dynamics of Russia and the moves that they were making and I think both Albert and I would still come to the conclusion says they’re going to take Ukraine and they’re going to take it in a much more violent fashion because now they’re really pissed.
TN: Yes.
MG: But the simple reality is that I think most people had described a degree of competence to Putin and Russia that has now become very clear that the authoritarian and central planning tendencies associated with that style of governance has its flaws. People are slowly waking up to this.
They’re now beginning to see this in China where it’s like well, wait a second. Maybe Xi’s not planning for the next 100 years. Maybe XI’s planning for the next two days to figure out where… without getting killed.
TN: That’s exactly it, Mike and I’ve been saying that to people for years. China does not think in centuries these guys are making it up as they go along. I’ve been inside the bureaucracy. I know it. They’re making it up as they go along.
So you hit it right on the head. They’re planning for the next two days or two months. They’re not planning for the next 200 years.
AM: Yeah. And the Chinese, they’re quite practical but it’s just too big of a country. I mean, there’s so many different regions and dialect. How do you keep something that big cohesive manner? You don’t.
TN: It’s hard. It’s a collection. It’s like the EU or four of the EU. But it’s very complex for one guy to manage. So guys, thanks very much for that. I really appreciate it and have a great weekend. Thank you very much.
As a start, we looked at the Friday’s trading session and what it means. Is this a bullish market?
We’ve made a few recommendations over the past couple of months. We hope you’ve been paying attention specially on $IPI (Intrepit Potash) and $NTR (Nutrien).
We’ve talked about the tumbling lumber markets in recent weeks. What are Sam and Albert’s current thinking on lumber as we’re looking at $LB lumber futures. Sam talked about housing last month. We looked at $XHB, the home builders ETF. How about the rates and housing? We’ve seen that homebuilders are getting hit with expected rate rises. What is the impact of this on the mortgage market, housing inventory, etc?
Shanghai has been closed for a few weeks now and the largest port in the world won’t open for about another week. How can the second largest economy continue to close when the West has already accepted Covid as endemic? How can manufacturers rely on China as a manufacturing center if they’re unreliable?
For the week ahead, we talked about the earnings season, their portfolios, and Albert talked about Chinese equities for months, etc. Is now the time to look at KWEB, which he discussed for some time?
We’ve got CPI out on Tuesday and is expected at around 7.9% and Retail sales on Friday, which is expected at around 0.3%. Inflation seems unstoppable and consumers seem to be getting tired of spending. Sam explains on this.
Key themes from last week
Friday trading session
Don’t say we didn’t warn you
Rates and housing (Tuna & Caviar)
China’s shutdown
Key themes for the Week Ahead
Earnings season expectations
Near-term equity portfolios
CPI (Tuesday), expected 7.9%
This is the 14th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
TN: Hi, guys, and welcome to The Week Ahead. My name is Tony Nash. I’ve got Albert Marco and Sam Rines with us. Tracy is not able to join us today. Before we get started, if you don’t mind, could you please like and subscribe. That would help us out. And we’ll let you know every time a new episode is up and running.
This past week we saw a lot, but I think the most interesting thing or one of the most recent interesting things is Friday’s trading. We’re going to start talking about the market action on Friday, and then we’re going to get into a couple of things that we told you about trades that if you were paying attention, you would have seen. We’re actually going to go into rates and housing, and Sam’s going to talk a little bit about tuna and Caviar, that discussion from the Fed speech earlier this week. And then we’re going to talk about China’s shutdown, which seems to be getting worse by the hour. So first let’s get into the Friday trading session, guys. What are some of the things you saw on Friday?
AM: Well, from my perspective, the market is acting like crypto. I mean, we’re seeing interday moves on some of these equities, like 5% up and down. It’s a little bit silly. And you wonder if it’s like light volume, if it’s market manipulation by the Fed. It’s just uncanny. I’ve never seen anything like this before. And obviously the market is weak and we’ve talked about black clouds coming over the market and what’s going on. But I don’t see anything any catalyst that would say that this is the bullish market at all. So we’re waiting for multiple numbers of CPI, retail and whatnot. But for me, it’s just like everybody is on pause waiting to see which way this market goes before they take action.
TN: So a couple of weeks ago, we saw a lot of money move into equities. Right? So that money moved in. It’s just parking and waiting. Is that what’s happening?
AM: Yeah, I assume so. The Fed, as it just ups the rates, forces more money to move into the US market, which is actually a brilliant move. You know, this is what we’re seeing. A lot of money here, not knowing what to do at the moment.
SR: To Albert’s point, there’s a lot of money that’s moved in here, but it’s moved into some pretty passive areas that it’s just not moving much in terms of the overall market. You look at fixed income, right? Lots of money moving in there, short into the curb, et cetera, et cetera. I think that’s some of the more interesting stuff as well. But there’s also this weird thing going on where equal weight is outperforming the market cap weight. And has been for some time now, particularly over the last week. If you look yesterday, S&P closed in the red, but if you were equal weighted, close green and it closed green on a non trivial basis, and it was 35 basis points, something like that.
That deviation between market that was led by predominantly tech and only tech, to a market that’s led by other sectors in general is something I think under the surface that paying attention to it can be something that at least can make some money in the near term.
TN: Including Crypto Walmart, which we’ve seen over the past week as well. So we’ll talk about retail later in the show.
Okay. So we had as a group talked about some calls over the past couple of months. Some of those were calls earlier, but let’s get into those just to walk through. Albert, you and Tracy had talked about Intrepid Potash. She talked about Nutrien. We’ve got those on the screen right now. Can you walk us through those and kind of what you’re thinking was on those and what’s happened? What do you expect for those to happen in the near term?
AM: Well, speaking about IPI, Intrepit. It’s like a leveraged ETF in the fertilizer market. That thing swings 5-10, 11% in a week, no problem. That call was basically on the premise that the Ukraine war is going to go on. Russia is cutting off the fertilizer supply. Belarus has a big fertilizer supply. OCP in Morocco has shifted from actual fertilizers to more like phosphate batteries for EVs.
So it only made sense that besides Mosaic, which is the 800 pound gorilla, IPI and Nutrien were just the logical choices for investments.
TN: And is there room to run on fertilizers like there was a target put on Nutrient by one of the banks of like 126 or something? Do you think we could keep running on those trades?
AM: We can, right? Certainly we can. It just really depends on what goes on with the Russians and whatnot. My only risk for running too far is that the Dixie could go to 105, 110 and then we have significant problems across the market, not just fertilizer prices.
TN: Okay. So even if dollar does go to 110, we’re planting now in the US, right. And now and for the next couple of months. And the fertilizer demand is right now and it has been for the past couple of months. But it’s especially right now, is all of that, say planting demand, is that all priced in already, or do you feel like some of that is to come?
AM: I think it’s pretty much priced in. And let’s just be careful because some of the farms that are planting crops are using nitrogen and also fertilizer derived from nat gas. So it really depends on which way the farming community wants to go, what they see the most profitable crops.
TN: Okay, great. That’s good to know. We also talked about lumber, as I remember a conversation probably three or four weeks ago where I think, Sam, you brought up lumber and how lumber was coming off. Can you walk us through that trade, as we have it on the screen?
SR: Yeah, sure. I mean, it’s a Fed trade, right. It’s a Fed tightening quickly, mortgage rates going up and housing demand coming down. The idea that a Fed going this quickly and having the market priced in, there’s a difference. Right. The Fed has only moved 25 basis points.
TN: Right.
SR: The market has done the rest of the tightening for it across the curve. It’s been pretty spectacular. Housing, housing related stocks, those in general, are going to be the first thing that the Fed affects and they’re going to be the first thing that the Fed affects on the margin very quickly. And you’ve seen mortgage rates go to five plus percent.
TN: Sure. Before we get on to housing, I just have a couple of questions about lumber and other commodities. So the downside we’ve seen come in lumber over the past week or so. Do we expect that to come to other commodities as well? I mean, things like weed and corn, there’s still pressure upward pressure on those. But do we expect other commodities to react the way lumber has?
SR: Oh, no, I would not expect the foodstuffs to react in anywhere near the same manner as lumber. Right. Lumber is a fairly… Lumber, you cut it up, you put it in inventory, you sell it, and then you use it for something.
TN: Right.
SR: It doesn’t last forever in good condition either.
TN: Great. Okay, good. Thank you. Now moving on to home builders, which is where you are going. You also talked about XHB, I think two or three weeks ago, and we’re flashing some warning signs about that. We’ve seen obviously rates rise. I was speaking to a mortgage broker earlier this week. He’s doing mortgage at almost 6% right now and expects them to go up kind of close to 8%.
We’re starting to see the resurgence of ARMs. People are already getting back into adjustable rate mortgages because 5.99% is high. Just as a bit of background, less than 10% of US mortgages over the past few years have been adjustable rates. So can you talk us through XHB? And maybe you had mentioned earlier kind of Home Depot and some of the other home makers. Can you talk us through what kind of… Home Depot was a leading indicator on that? Is that fair to say?
SR: It’s fair to say Home Depot and Lowe’s this kind of ties into the lumber conversation. Home Depot and Lowe’s were two of the best at ordering and trying to actually keep inventory on the shelves, even when during the first tremendous spike in lumber. Right. So they kept a lot of lumber on the shelves. They currently have a lot of lumber inventory on the shelves. And it’s part of the reason that you’re seeing what could be described as almost an over inventory of lumber, not just at those two entities, but across the board, because everybody had to buy lumber in order to keep it in stock.
So, yeah, Home Depot and Lowe’s are the tip of the spear in terms of both home building and in terms of home remodeling. Those are both fairly significant drivers of the business there. There’s a little bit of weekend contractor type deals, but very little.
So overall, I would say they are a leading indicator and they have not been acting very well. But when you have mortgage rates to your point at 6%, that creates a problem for the marginal buyer. It’s not a problem for somebody who owns a home. Right. You have your mortgage rate locked in, et cetera, et cetera. It’s not going to destroy you. It might set off being able to put a new deck and redo a pool or something like that. But it’s not going to hurt you in any meaningful way.
TN: Right.
SR: It does hurt the marginal buyer. It hurts the first time buyer, et cetera. So you begin to have slower turns in housing and you begin to have problems with where does that incremental inventory of homes go? And that’s the real problem with higher invetories.
TN: Right. Before we move on to officially talking about rates and housing, I’ll share a story about a friend who is building a house and their lumber broker who should be able to get the best pricing actually has worse pricing right now than Home Depot. Okay. So they can actually go to Home Depot and get better pricing than their lumber broker. And that’s how messed up the lumber market is right now. They’re arbitraging their lumber broker versus retail any given week in their bulk buying to make sure that they can get their house built. So that market both on the lumber side and on the housing side is just a mess.
So let’s officially go to housing and rates. We’ve done a lot of the discussion, but there was a CNBC story about rising mortgage rates are causing more home sellers to lower their asking prices.
And Sam, you talked about that marginal buyer, which is great, and that new buyer. When I talk to people who are doing mortgages, they tell me that even with the rate rises we’ve seen over the past couple of weeks, there is still not a lot of inventory on the market. That’s a big issue. And they’re not seeing a fall in demand for new houses. So is this kind of a last minute rush for people to get a house before rates rise even more? Is that plausible?
SR: There’s some plausibility to that. Yeah, 100%. The other thing is that we’re in Texas. Right. The demand for housing in Texas, the demand for housing in Florida does not tend to be, I would say, as tied to mortgage rates as everywhere else. The rest of the country is much more sensitive to what’s going on. Texas and Florida and a couple of other spots simply have too much inbound demand from higher priced areas. So California, New York, et cetera. There’s still an arbitrage when you sell a place in California or sell a place in New York and move to Texas, Florida, some of the Sunbelt States.
So it’s tough to take Texas as an example, particularly Houston. We’re actually the fourth largest city in the country, and yet we do not get counted in the S&P Schiller because of how different the housing market is here. Dallas gets kind of for whatever reason, but Houston does not.
TN: We’re not jealous at all about that.
SR: No, we’re not.
AM: Go ahead, Sam. Sorry.
SR: But just to wrap that up, I do think that there’s a nuance to Florida and Texas that should almost be ignored. When I look at the data, I’ll be taking out the Southeast region just because it’s one of those that is a little special at the moment.
AM: Yeah, that’s a key point that I always made is like, because of the migration patterns in blue to red States, things are just really wacky. Florida and Texas, Arizona will be red hot. Meanwhile, Seattle, Chicago, parts of New York are just dead spots at the moment. So until that all gets weeded out, people stop moving. Then we’ll actually see the housing market starting to cool off.
TN: Right? Yeah. I was just up in Dallas yesterday, and things are just as hot up there. And the immigration from the coast to Dallas, especially around financial services and tech, it’s just mind blowing. It is not stopping. It has been going on for probably five years, and it’s just not stopping. Those counties just north of Dallas are exploding and they continue to explode.
Okay, so our next topic is China and China’s slowdown. Shanghai has been closed for a couple of weeks with kind of a renewed round of Covid. And obviously the largest Port in the world, which is in Shanghai, is closed. And that kind of exacerbates our supply chain issues, especially around manufactured goods that we’ve been seeing globally. We’ve seen overnight that. Well, not just overnight, but over the last, say, five days. Food has become really scarce in Shanghai. We’ve seen people on social media talking about how it’s difficult to get food. We’ve started to see little mini protests around Shanghai, around food. And things are seem to be becoming pretty dire.
Overnight, we saw that parts of Guangzhou that the government is considering closing, parts of Guangzhou, which Guangzhou is the world’s second largest port. So the two largest ports in the world, there is a potential that those are closed. There is also gossip about parts of Beijing being closed as well. So I’m curious, what do you guys think about that? I can talk about China for days, but I’m curious, kind of, what alarm bells does that raise for you? Not just for China, but globally.
AM: Well, Tony, you recall, you Balding, and I discussing China’s attempt to attack Taiwan and what had happened. And I had pointed out that closing those ports would cause food insecurity and here we are. Although it’s not a Taiwan invasion, it’s a zero Covid policy that shut down the ports and now we have food stress in China causing all sorts of problems.
Most China observers, especially yourself, know that Shanghai has always been the epicenter of uprising for the CCP. It’s a problem for them. They’ve always tried to wash it. Maybe that’s why they’ve come down hard on Zero Covid Policy. That’s something that I’d have to ask you. But from there, this was very predictable. I mean, you shut down ports, China has a food security problem.
TN: On a good day, China has a food security problem. It is an issue that the Chinese authorities worry about day in, day out, not just when there’s a pandemic. Okay. So one of the things that I was talking to some people about yesterday is why is China closing down? Why are they closing down these big cities? There’s a lot of gossip. You can find a lot of theories around social media saying there’s some sinister plan, honestly and for people that don’t know. I’ve done work with Chinese officials over years. And the economic planners I was seconded to economic planner for almost two years. I believe that they’re closing because they’re worried about how the China virus looks, meaning they don’t want Covid to be seen as the China virus. And they worry about the world’s perception if there’s another outbreak that comes from China.
And so I think the leadership believes that they have to be seen to be disproportionately countering COVID so that there isn’t more wording and dialogue about the kind of, “China virus.” And so, again, I don’t think there’s something sinister going on. There’s a lot of gossip about China intentionally trying to stop supply chains to bring the west to its knees and all the stuff. I don’t believe that at all. I think it’s real sensitivity to how they look globally.
Of course, there’s the public health issues domestically. That goes without saying. But I think a big part of it is how do they look globally.
AM: Yeah, but doesn’t shutting down these ports is going to cause even a bigger spike in inflation within China and actually globally?
TN: Oh, absolutely. This is the one thing that I think they didn’t plan on is they’re about to embark on a whole lot of fiscal, a whole lot of monetary stimulants because they have major government meetings in November of this year. So they absolutely cannot go into recession.
But here’s what I have been thinking about. Okay. We’re looking at a Russia-Ukraine war that could potentially bring down Russia and destabilize Russia domestically. We’re now over the past couple of weeks, looking at a China that is starting to self destruct domestically. And I don’t know of anybody who had the domestic issues of both China and Russia as systemic risks in 2022. These things are just coming out of nowhere. And those two risks can be destabilizing for the whole world. And I’ve said for some time, Western governments have to sit the Chinese leadership down and say, look, you guys are systemically important globally. You need to get your act together around COVID, and you have to normalize your economy because it’s hurting everybody.
AM: Great points. Now, going back to Guangdong, there are some really elite families in China out of that area, really wealthy ones, that actually basically gives Xi the support he needs in the CCP. If he loses those families, there’s real trouble for Xi going forward.
TN: I think there’s trouble for him anyway. I think he is not a one man show. Contrary to the popular Western opinion, Xi Jinping is not a one man show. He is not a single Emperor, kind of claiming things from on high. There is a group of people who run China. It’s just too big for a single individual to run.
So I think Xi has been, I wouldn’t necessarily say on thin ice, but I think things have been risky for him for some time. And as you say, it’s pretty delicate for him right now. And if he doesn’t handle this deftly, I think, again, there could be some real destabilizing factors in China. So this is something again, they didn’t plan for. They were talking about major infrastructure stimulus. They were talking about monetary stimulus, getting ready for this big party in November to nominate Xi for more power and all this other stuff. But it’s possible that these events could really hurt him and really hurt his relationships, meaning the key people around him and then the other factions.
Because as much as people say that China is a one party state, sure, it’s a one party state. But there are factions within that one party. And it should be alarming for China and destabilizing China should be alarming for other people around the world.
AM: Yeah. Same thing as Putin. Like their factions behind them that keep them in power. Same thing as Xi. Most autocratic rulers have a circle of trust behind them that keep them in there. If Xi falls and China starts to, I don’t want to say crumble, but at least wobble, if we think we have serious supply chain issues now, wait till that happens.
TN: Oh, yeah. So Russia is important on energy and a couple of other things, but it’s not globally systemically important on a lot. Okay. I would say maybe it’s regionally important, especially to Europe, but China is globally important. And if they can’t figure this out, it will destabilize everybody.
And so I think Western governments need to not lecture to China, but they need to go forward with real concern about China. How can we help you guys out? Right? How can we help you out? Can we get you vaccine? Can we get you support? Is there anything logistically we can do? That is a way that Western governments can come to the legitimate aid of China. They’ll act like they have it all together, but they don’t. It’s obvious. We see it every day on social media. They don’t.
So Western governments really need to offer genuine aid to China in terms of intelligence, in terms of vaccines, in terms of capabilities, and so on and so forth.
Good. Anything else on that?
AM: No, we covered that.
TN: Okay. Looking at the week ahead. Guys, we’ve got earnings season coming up. Can you talk us through your expectations for earnings season?
SR: Sure. I’ll jump in here quickly. I think there’s a few things to watch. One, the consumer sentiment has been dismal. Right. For the last six months. It’s falling off a cliff. Where the US University of Michigan survey, well below where it was at peak of Covid. But we haven’t necessarily seen retail sales. We haven’t seen corporate earnings and corporate announcements follow that sentiment lower whatsoever.
For anybody paying attention this past week, you had Costco with absolute blow out numbers in terms of its same store sales. Take out gasoline, take out anything, and you still have 7% foot traffic. That was stunning. And that’s not a cheap place to shop.
TN: Right.
SR: So that’s indicative of the higher end consumer that’s still holding in there, at least fairly well through March. That’s pretty important. So then there was Carnival with its best week ever in terms of bookings. Those two things are pretty important when it comes to what is the consumer actually doing versus what is the consumer actually saying, which I think is very interesting.
This week we’ll have Delta Airlines. It’ll be interesting to kind of listen to them and see what their bookings have looked like, see what their outlook is for the summer. And then I’ll be paying really close attention to the consumer side of the earnings reports, not necessarily as much the banks. I don’t really care what Jamie Dimon has to say about Fed policy, but I will say…
TN: I think she do.
SR: Nobody does. But I’ll say the quiet thing out loud. But I will be paying very close attention to what the earnings reports are saying about the consumer, because the consumer drives not just the US economy, but the global economy generally, both on the goods side, services side and really trying to parse through what’s happening, not what the US consumer keeps telling us is happening.
TN: Go ahead.
AM: Sam, really quick. How much of these earnings because I’m a little bit suspicious of how much is it inflationary, prices of everything are higher and remnants of stimulus PvP, whatever the people have been getting for the past year. How much is that calculated?
SR: Yes, which is one of the reasons why it’s a great point, one of the reasons why I pointed out Costco. Costco much less on the stimulus side, much less on the saving side, much more on the high-end kind of consistent consumer. And with foot traffic up 7%, inflation was I think it was about 8%, give or take. So they’re passing on the inflation and they’re still getting the foot traffic. So I think that’s an important one.
On the CCL side, it was after the bookings were after the significant stimulus had already run out or run off. You just weren’t getting checks. I think that was also an indication that maybe there’s a shift from the goods to the services side. The one thing that was somewhat disconcerting, if you’re paying attention to the higher end consumer, was Restoration Hardware. They ran down their book to about 200 million in backlog and don’t really appear to be bullish about this year. They guided well below what some were expecting. I think we’re going to hear a lot more about that, partially because they just can’t get enough inventory in time and they’re kind of in trouble on that front.
AM: Yeah.
SR: To your point, it’s a lot of inflation, but some of these guys are seeing some pretty good traffic, too.
AM: Yeah, actually, funny, you mentioned Restoration Hardware because that was one of the things I was looking at specifically for the housing market, like who’s buying a $30,000 at the moment right now. You know what I mean? It’s just silly.
TN: Yeah, that is silly. Okay, great. Thanks for that. And I’m interested to see how the earnings from Q1 also translate to Q2. I’m expecting a real turn in Q2, and I’m wondering how much that is on investors minds as they look at Q1 earnings.
Albert, as we move into the next point around kind of short term or near term equity portfolios. You’ve talked about KWEB for some time, and I’d like you to, if you don’t mind talking about KWEB a little bit, but also if you and Sam can help us understand what is your thinking right now on your term portfolio.
AM: I mean, KWEB is one of my favorite little stocks because it’s a China technology index and it’s been beaten down to a pulp by the Fed. They have absolutely annihilated not just China, but pretty much all foreign equities. And from my perspective, you’re looking at China stimulating in the fall of the shore of Xi. So it’s like it’s a no brainer to me. I think KWEB at 28 is a fantastic deal. Start piling into that.
One of my other ones I was looking at was FXI, which is basically all the China’s big wig companies. So that’s another one I was looking at right now. In terms of the US equities and portfolios, I mean, we’re so overvalued right now. Where do you put your money into? One of my favorite stocks was TWY a tightened tire. It makes 85% of the world’s agriculture tires. Right. I mean, this thing ran up from $1.45 to $14 at the moment. You know what I mean?
How do you put more money into equities at this stage without some sort of correction or something happening with the Fed to show us which way they’re going to go? Are they going to go 50 basis points in the next meeting and then another 50 and another 50, or they’re just going to use a long bond to actually what Sam said earlier and I forgot to bring it out is they’re using the long bonds also to kill the market. So it’s just like,what do you do?
TN: Yeah. The change to valuations we’ll see over the next three months seem to be really astounding.
AM: They’re just silly. Everything is so inflated at the moment. I can’t in good conscience, say get into this stock or get into that stock, because I know how is it going to run right?
TN: Exactly. Sam, anything to add on that?
SR: I love Albert’s point on KWEB. Think about what’s built into the risk there. You have the risk of the SEC delistings. You have the risk that appears to, at least on the margin, be waning. You have the threat of sanctions on China from them helping Russia. You have a lack of stimulus. You have shutdowns. There’s a lot weighing on that index on top of Fed, et cetera. There’s a lot weighing there on that. And you begin to have some of these calls, the geopolitical onion risks begin to be pulled back a little bit. And that to me is a spectacular risk reward in a market that is generally pretty low on the reward.
TN: Okay.
AM: I had one of my biggest clients from the golden guy. I mean, it’s gold and KWEB is what he’s seeing right now. That’s the only thing he wants to even touch, which is fascinating.
TN: Yes, I can see that. Okay. Next, this week ahead, we’ve got CPI out on Tuesday, which is expected to be about 7.9%. Sorry. And then retail sales on Friday, which is 0.3%. So it doesn’t feel like inflation is abating. But, Sam, you talked about, say, Restoration Hardware and other folks earlier. What concerns you guys have about inflation eating into retail sales, do we expect serious difficulty with retail going forward?
SR: Probably not this month. We’ve going to get the release and it’s going to be for March. And I haven’t seen what I would describe as a poor number coming from any of the major retail facing guys for March. I don’t think that number is going to be distressing at all. I think it’s much more of a . May-June story in terms of the economic numbers lag with a hard L. That’s somewhat problematic.
So I would say you’re not going to see the bad official numbers for a month or two. And on the CPI front, I’ll just throw this out there. And Albert can make fun of me for it, but I don’t really care where the inflation readings come in as long as it’s above 5% the Fed still going and it’s still going with its previous plan, and it really doesn’t care, quite frankly.
TN: That’s good to know.
SR: I just think it’s one of those it’s going to be a no. It’s going to be a no reaction type deal. Unless you get a huge break, then you might get a little bit of a come down on twos through sevens or something. But that’s about it.
AM: Yeah. I mean, as much as I want to make fun of Sam on that one. Yeah. Nobody cares about the inflation. Nobody cares about the inflation number right now until the election season starts really ramping up in about June, July. That’s when I agree with Sam with the retail sales are probably crater or starting to lag significantly in May and June. But yeah, prefer inflation. It’s just like everyone is expecting a 7.9 to eight point whatever, you know, so it won’t be a surprise.
TN: Great. Okay, guys, thank you very much for this. This is really helpful and I appreciate it. Have a great week ahead.
We’ve seen so much about oil for rubles, gas for bitcoin, etc this week. Does it represent a fundamental shift for energy markets? And is the dollar dead? The yen fell pretty hard versus the dollar this week. Why is that happening, especially if the dollar is dead? Bonds spike pretty hard this week, especially the 5-year. What’s going on there and what does it mean?
Key themes from last week:
Oil for rubles (death of the Dollar?)
Rapidly depreciating JPY
Hawkish Fed and the soaring 5-year
Key themes for The Week Ahead:
New stimulus coming to help pay for energy. Inflationary?
How hawkish can the Fed go?
What’s ahead for equity markets?
This is the 12th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 0:34 CI Futures 1:22 Key themes this week 1:48 Oil for rubles (death of the Dollar?) 3:15 Acceptance of cryptocurrency? 5:34 Petrodollar Petroyuan? 7:32 Rapidly depreciating JPY 10:12 Hawkish Fed and the soaring 5-year 11:58 Housing is done? 13:10 Stimulus for energy 15:53 How hawkish can the Fed go? 17:34 What’s ahead for equity markets?
Transcript
TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m here with Albert Marko, Sam Rines, and Tracy Shuchart. Before we get started, please, if you can like and subscribe to our YouTube channel, we would really appreciate it.
Also, before we get started, I want to talk a little bit about Complete Intelligence. Complete Intelligence, automates budgeting processes and improves forecasting results for companies globally. CI Futures is our market data and forecast platform. CI Futures forecasts approximately 900 assets across commodities, currencies and equity indices, and a couple of thousand economic variables for the top 50 economies. CI Futures tracks forecast error for accountable performance. Users can see exactly how CI Futures have performed historically with one and three month forward intervals. We’re now offering a special promotion of CI Futures for $50 a month. You can find out more at completeintel.com/promo.
Okay, this week we had a couple of key themes. The first is oil for rubles and somewhat cynically, the death of the dollar. Next is the rapidly depreciating Japanese yen, which is somewhat related to the first. But it’s a big, big story, at least in Asia. We also have the hawkish Fed and the soaring five-year bond. So let’s just jump right into it. Tracy, we’ve seen so much about oil for rubles and Bitcoin and other things over the past week. Can you walk us through it? And is this a fundamental shift in energy markets? Is it desperation on Russia’s behalf? Is the dollar dead? Can you just walk us through those?
TS: All right, so no, the dollar is not dead. First, what people have to realize is that there’s a difference. Oil is still priced in USD. It doesn’t matter the currency that you choose to trade in because you see, in markets, local markets trade gasoline in all currencies. Different partners have traded oil in different currencies. But what it comes down to is it doesn’t matter because oil is still priced in dollars. And even if you trade it in, say, the ruble or the yuan, those are all pegged to the dollar. Right. And so you have to take dollar pricing, transfer it to that currency. And so it really doesn’t matter.
And the currency is used to price oil needs three main factors, liquidity, relative stability, and global acceptability. And right now, USD is the only one that possesses all three characteristics.
TN: Okay, so two different questions here. One is on the acceptance of cryptocurrency. Okay. I think they specifically said Bitcoin. Is that real? Is that happening? And second, if that is happening and maybe, Albert, you can comment on this a little bit, too. Is that simply a way to get the PLA in China to spend their cryptocurrency to fuel their army for cheap? Is that possibly what’s happening there?
TS: It could be. Russia came out and said, we’ll accept Bitcoin from friendly countries. Mostly, they were referring to Hungary and to China. Right. And I don’t think that is a replacement for USD no matter what because not every country except for perhaps China really accepts or El Salvador really accepts Bitcoin or would actually trade in Bitcoin. Right.
TN: In Venezuela, by the way. I think. Right. So on a sovereign basis. Okay. So Sam and Albert, do you guys have anything on there in terms of Bitcoin traded for energy? Do you have any observations there?
AM: No, this is a little bit of… This is even a serious conversation they’re having? With El Salvador going to be like the global hub for Russian oil now because they can use Bitcoin?
TN: That would be really interesting.
AM: But this is just silly talk. Every time there’s some kind of problem geopolitically and they start talking about gold for oil or wine or whatever you want to throw out, they start talking about the US dollar dying and whatnot.
I mean, like Tracy, I don’t want to reiterate what Tracy said, but her three points were correct. On top of that, we’re the only global superpower.
TN: Okay.
AM: That’s it.
SR: Yeah. My two cent is whatever on Bitcoin for a while.
TN: Right.
SR: Cool.
TN: I think that all makes sense now since we’re here because we’re already here because we all hear about the death of the petrodollar and the rise of the petroyuan and all this stuff. So can we go there a little bit? Does this mean that the petrodollar is dead? I know that what you said earlier is all oil is priced in dollars. So that would seem to be at odds with the death of the petrodollar.
AM: Well, Tony, in my perspective, the petrodollar is a relic of the 1970s. Right. Okay. Today it’s the Euro dollar. It’s not the petrodollar that makes the American economy run like God on Earth at the moment. It’s the Euro dollar. Forget about Petro dollar. Right. Because it’s not simply just oil that’s priced in it in dollars. It’s every single piece of commodity globally that’s priced in dollars.
TN: And Albert, just for viewers who may not understand what a Euro dollar is, can you quickly help them understand what a Euro dollar is?
AM: They’re just dollars deposited in overseas banks outside the United States system. That’s all it is.
TN: Okay with that. Very good.
SR: And the global economy runs on them. Full stop.
AM: It’s the blood of the global economy.
TN: So the death of the petrodollar, rise of the petroyuan and all that stuff, we can kind of brush that aside. Is that fair?
TS: Yeah. I mean, even if you look at say, you know, China started their own Yuan contract rights, oil contract and Yuan futures contract. But that still pegged to the price of the Dubai contracts. Right. That are priced in dollars.
TN: Let’s be clear, the CNY and crude are both relative to dollars. Right?
TS: Right.
TN: You have two things that are relative to dollars trying to circumvent dollars to buy that thing. The whole thing is silly.
TS: Exactly.
AM: Yeah, of course. Because Tony, the thing is, if China decides to sell all their dollars and all their trade or whatever, everything they’ve got, they risk hyperinflation. What happens to the Renminbi and then what happens in the world? Contracts trying to get priced right.
TN: Exactly. It’s a good point. Okay. This is a great discussion.
Now, Albert, while we’re on currencies, The Japanese yuan fell pretty hard versus the dollar this week. Do you mind talking through that a little bit and helping us understand what’s going on there?
AM: Yeah, I got a real simple explanation. The Federal Reserve most likely green light in Japan To devalue their yen to be able to show up the manufacturing sector in case China decides to get into a bigger global geopolitical spat with the United States. Simple as that.
TN: Great. Okay. So that’s good. This is really good. And I want people to understand that currencies are very relevant to geopolitics or the other way around. Right. Whenever you see currency movements, there’s typically a geopolitical connection there.
AM: Of course. And on top of that, if it was any other time and they started to devalue the currency like this, the Federal Reserve where the President would start calling the currency manipulators. And there’d be page headlines on the financial times.
TN: Right.
AM: And because that didn’t happen, It’s an automatic signal to me that this is what’s happening at the moment. Right.
What’s also interesting to me, Albert, is we’ve seen last week we saw Japan approach the Saudis and the Emiratis about oil contracts. We saw Japan call. There’s a meeting in Japan next week, I think, with China. So Japan is becoming this kind of foreign policy arm, whether we want to admit it or not, they’re kind of becoming foreign policy arm for the US. Because the US is not well respected right now. Is that fair to say?
AM: It’s more than fair to say, I believe Biden’s conference with South Asian leaders was just canceled on top of everything else.
TS: Sorry. And we saw this week Japan and India just signed, like, a $42 billion trade deal. So it kind of seems like they’re smoothing over the rough edges because the United States kind of came after India a little bit earlier about two weeks ago.
TN: Yeah, that’s a good call, Tracy. I think Japan and India have had a long, positive relationship. It’s especially intensified over the past, say, seven or eight years as China has tried to invest in India and the Japanese have kind of countered them and giving the Indians very favorable terms for investment and for loans. And so this is kind of a second part of that investment that was, I think, announced in, say, 2014 or 2015, something like that. And again, as we talked about it’s, Japan intervening to help the US out and obviously help Japan out at the same time. Thanks for that.
Now, Sam. We saw bonds spike pretty hard this week, especially the five year. I’ve got a Trading View source up there on the five year up on the screen right now. So can you walk us through what’s happening with US bonds right now, especially the five year?
SR: Sure. I mean, it’s pretty straightforward. The Fed is getting very hawkish and the market is adopting it rather quickly. And I don’t know how forcefully to say this. The current assumption coming from city is four straight 50 basis point hikes and then ending the year with just a couple of 25. That is a pretty incredibly fast off zero move time, some quantitative tightening, and you’re somewhere around three and a half percent to 4% worth of tightening in a year. That’s a pretty fast move.
So the two year to five years reflecting that the Fed is moving very quickly, you’re likely having the long end of the curve is lagging a little bit. You saw flattening, not steepening this week. The long end of the curve is telling you that the terminal rate may, in fact, actually be at least somewhat sticky around two and a half and might actually be moving a little bit higher. And that terminal rate is really important because that is how high the Fed can go and then stay there. It is also how fast the Fed can get there and how much above it the Fed is willing to go. So I think there’s a lot of things that happened on the curve this week.
TN: Okay. Albert, what’s in on those? Yes, go ahead, Albert.
AM: Oh, I’ve heard whispers that the long bond is going to 2.8% and maybe even 3%. That’s what the whispers have been telling me about that, which is going to absolutely devastate housing.
TN: But that was my actual idea.
SR: Oh, yeah. Housing is done. I mean, you saw pending home sales were supposed to be up a point and down 4%. That’s the first signal. The next signal will be when lumber goes back to $300.
TN: Okay. It seems to me you’re saying by say Q3 of this year we’re going to see real downside in the housing market. Is that fair to say?
SR: Oh, in Q2, you’re going to see real downside in the housing market. Yeah.
TN: Wow.
SR: Pending sales are, I think, one of the most important indicators of how the housing market is going. Right. It’s a semi forward looking indicator. If you begin to see a whole bunch of these homes in the ground stay as homes that are not being built. Right. So if you begin to see just a bunch of pads out there, it’s going to become a significant problem considering a lot of people have already bought the materials to build it off. And you’re going to begin to have some really interesting spirals that go back into some of the commodity markets that have been on fire on the housing front.
TN: Wow. Okay. That’s a big call. I love this discussion. Okay, good. Okay. So let’s move on to the week ahead. Tracy, we’ve had some stimulus announced to help pay for energy. Can you help us understand? Do you expect we’ve seen California and some other things come out? Are more States going to do this or more countries going to do this, and what does that do to the inflation picture?
TS: Well, absolutely. We saw California, Delaware, Germany, Italy talking about it. Japan already. They’re coming out of the woodwork right now. There’s actually too many to list. It’s just that we’re just now this week just starting to see the US kind of joining this on a state to state basis. The problem is that this is not going to help inflation whatsoever. You’re literally creating more demand and we still do not have the supply online. So all of these policies are going to have the opposite of the intended effect that they are doing. Right. It’s just more stimulus in the market.
TN: Do we think there’s going to be some federal energy stimulus coming?
TS: They’ve talked about different options. I mean, really, the only thing that they could do right now is get rid of the federal excise tax, but that’s only really a few cents. And they kind of don’t want to do that because that goes towards repairing roads, et cetera. That doesn’t fit into their plan that they just passed back in the fall. Right. We had infrastructure plan, so they need to pay for that. That’s already passed. So they probably won’t do that.
The other options that they have that they’re weighing are more SPR release, which is ridiculous at this point because they could release it all and it would still not have a long lasting effect on the market. And that’s our national security. It’s a national security issue. And we’re experiencing all these geopolitical events right now. We have bombs in Saudi Arabia. We’ve got Russia, Ukraine. So I think that’s like a poor move altogether.
TN: So if more States are going to come in, is it suspects like Massachusetts, New York, Illinois, those types of places?
TS: Yes.
TN: Okay. So all inflationary, it’s going in the wrong direction.
TS: It’s going to create demand, which is going to drive oil prices higher because we still don’t have the supply on the market.
TN: Okay. Wow. Thanks for that. Sam. As we look forward, you mentioned a little bit about how hawkish the Fed would be. But what are you looking at say in the bond market for the next week or so? Do we expect more activity there, or do you think we’re kind of stabilizing for now?
SR: We’re going into month end. So I would doubt that we’re going to stabilize in any meaningful way as portfolios either head towards rebalancing or begin to rebalance into quarter end. So I don’t think you’re going to see stabilization. And I think some of the signals might be a little suspect. But I do think back to the housing front. I’m going to be watching how housing stocks react, how the dialogue there really reacts, probably watching lumber very closely, a fairly good indicator of how tight things are or aren’t on the housing front.
And then paying a little bit of attention to what the market is telling us about that terminal rate. If the terminal rate keeps moving higher, to Albert’s point, that’s going to be a big problem for housing, but it’s going to be a big problem for a number of things as we begin to kind of spiral through, what the consequences of that are. It will be for the first time in a very long time.
TN: Okay. So it’s interesting. We have, say, energy commodities rising. We have, say, housing related commodities potentially falling, and we have food commodities rising. Right. It seems like something’s off. Some of it’s shortages based, and some of it is really demand push based. So energy stuff seems to be stimulus based or potentially so some interesting divergence in some of those sectors.
Okay. And then, Albert, what’s ahead for equity markets? We’ve seen equity markets continue to push higher. How much further can they go?
AM: Last week they eliminated, I think, up to about $9 trillion inputs, short squeeze, VIX crush. I mean, they went all out these last two weeks. It’s absolutely stunning. From my calculations, I think they expanded the balance sheet another $150 billion. Forget about this tapering talk. There’s no tapering. They just keep on going. How high can they go? That’s anybody’s guess right now. I think we’re like 6% off all time highs. On no news.
TN: So potentially another 6% higher?
AM: Honestly, I know that there’s hedge funds waiting, salivating at 4650. Just salivating to short it there. So I don’t think they can even get close to that, to be honest with you. So I don’t know, maybe 4590 early in the week before they start coming down.
TN: Okay. Interesting. So you think early next week we’ll see a change in direction?
AM: Yeah, we’re going to have to this has been an epic run, like I said, 90% short squeeze, 10% fixed crush. You don’t see this very often. Okay, Sam, what do you think, Sam? Similar?
SR: On equities, I like going into the rip higher. I’m kind of with Albert, but a little less bearish. I think you chop sideways from here looking for a catalyst in either direction. Bonds ripping higher today, yields ripping higher today. Bond prices plummeting. That I thought was going to be a catalyst for equities to move lower. It wasn’t. That kind of gives me a little bit of pause on being too bearish here, but it’s hard for me to get bullish.
TN: Okay.
TS: What’s interesting? I’ll just throw in like, Bama, weekly flows. We actually saw an outflow from equities for the first time in weeks. It wasn’t a lot 1.9 billion. But that says to me people are getting a little nervous up here. Profit taking, as they say on CNBC.
TN: All right, guys. Hey, thank you very much. Really appreciate the insight. Have a great week ahead.
AM, TS: Thanks.
SR: You too, Tony.
TN: Fabulous. Look. I’m married. I’m a man. I don’t notice anything. I noticed the other guys laughed at that. Uncomfortably. That’s great. Okay. I’m just going to start that over, guys. And we’re going to end it.
Tony Nash joins the BBC Business Matters podcast for a discussion around what’s happening in the world right now: Malaysia’s working class, Tesla’s new branch in Germany, Biden’s recent visit to Europe, lifting of tariffs imposed by the Trump administration, energy crises in Europe, and so much more.
ST: Tony Nash, economist in Texas, CEO of Complete Intelligence and host of The Week Ahead, a weekly YouTube show on markets and geopolitics. Hello. Good evening, Tony.
TN: Hi. Good evening. Good morning.
ST: Tony, let me bring you in here on this one as well. I mean, you may be living in Austin, Texas, at the moment, but is there anything you want to pick up on because you grew up in this area?
TN: Sure. Yeah. I think what Jessica says about the migrant labor is a key issue because it prices a lot of Malaysians out of working class jobs. So if those minimum wages apply also to migrant workers, then it presents a fairer playing field for Malaysians. Without that, it’s a labor arbitrage and it’s a domestic labor arbitrage. So I think the Minister has a tough job ahead of him in that respect. I do think, though, as you mentioned in your interview, it’s a good time for energy. And I think if Malaysia can swing the current energy prices into investment and technology, I think they could look at some seriously interesting opportunities.
ST: Yeah, indeed. As he said, he was being helped by the price of oil at the moment. All right, Tony and Jessica, for the moment. Thank you both very much. Tony, let me come to you on this one. You’re based there in Austin, in Texas. So is Tesla. Now, when are they opening their big factory there?
TN: First, I want to say I love the statement that Germany is not known for risk affinity. I thought that was a highlight, but the Tesla factory in Austin started production in December of 21, and they have a grand opening on April 6 of this year. So they’ll start rolling cars off the factory line. It should be in April.
ST: Okay.
TN: So it’s a hugely optimistic statement by Tesla to do all of these openings. It’s fantastic.
ST: Yeah. We have to wait and see where the plans are for the next one then. Tony Nash in Austin, Texas, what do you make of this? How is this going to go down with American producers?
TN: I think when these restrictions were put in by the Trump administration, the sense that I always got was that the UK got caught up within some of its Brexit and immediately post Brexit issues. My understanding of that time, that era was that the tariffs were really focused on countering subsidies and nontariff barriers. And the UK steel industry is not as reliant on subsidies and nontariff barriers as the European steel industry is. Of course, there are some, but my understanding was that that wasn’t as big of an issue for UK steel. So I was always confused why the UK got caught up in this. So since it’s out, I don’t think specifically UK steel is the issue. I think Chinese steel is the bigger issue by American producers, and the dumping of Chinese steel on global markets is really the main focus.
ST: Just as a quick aside, the other items that got caught up in this. I don’t know whether they’re sort of like a little footnote and almost like an aside to this, the jeans, the whiskey and the Harley Davidsons.
TN: Look, the UK is suffering on that side of the deal, right? I mean, if you can’t get American. I’m sorry. I’m just kidding. So anyway, once it’s done, all that stuff will go through, which is great. So a little bit of bourbon next time I visit London would be great.
ST: Oh, no, we need to take you to enjoy some Scottish whisky, I’m sure. But that is the other question that’s always in the background now of this one now coming through to the forefront is now this is out the way. Could there be talks again, restarted again on that sort of full scale free trade deal with the US? Do you see that as happening anytime soon?
TN: I think Americans would welcome it. Absolutely. I think there is a warm spot in many Americans heart for the UK, and I think Americans would absolutely welcome it. There would be almost zero opposition to it.
ST: All right, Tony, for the moment. Thank you. Tony. Let me bring you in. Now, President Biden is traveling to Europe in the next few hours. He’s starting with a NATO meeting, also meeting with EU, European Union and G7 leaders. They’re now to Poland for discussions about the humanitarian response. What do you expect from this felt that this is more of a signal that he’s actually there. He’s made the trip or something more significant?
TN: Well, I think he has an opportunity to do something very significant when he speaks to the European Council. The EU right now is developing a defense plan and putting together plans for hundreds of billions of euros worth of spending on defense. And if Biden were to endorse that at the European Council, it would send the message that the US is very supportive. Unfortunately, within US government, within State and Department of Defense, there are career bureaucrats who are opposed to Europe defending itself. So if Biden were to make a very clear statement at the European Council that he supports Europe putting this debt package together to put its own very strong defense together, it could be a significant trip.
ST: How is this playing back at home for him? I was looking at his approval ratings earlier. He’s a new low of 40% as according to a poll conducted or in the last couple of days. Is that as a result of what he is saying or what he is doing at the moment or anything else?
TN: The biggest thing that’s dragging him down right now is inflation. And the White House has really tried to say that inflation started when Russia invaded Ukraine, and Americans know that it started much earlier. And so Americans have been very skeptical since the White House has tried to say that inflation lays at the feet of Russia. They’re very skeptical. His polling has really declined over the past, say, two months, partly because Americans feel like they’re being misled on that, and it hits people’s petrol tanks and it hits their pocketbooks and everything else. That’s the biggest issue that can make him unpopular.
ST: But I mean, just staying, though, with his stance on Russia and Ukraine, how is that particularly playing out at home? Would people like him to get more involved or less involved? And is it purely just domestic matters that they have on their minds at the moment?
TN: I think people see the news and hear the news on it and kind of the headline, Putin is a bad guy. It’s hard to disagree with that. But I think many Americans that I speak it to and many who I see say in social media and other forums, they just don’t want to get directly involved. Americans are happy for Europe and happy to support Europe to solve this problem. But Americans generally, from what I can tell, just don’t want to get involved. So we’re happy to send aid, we’re happy to send materials and so on and so forth. But most of the Americans, at least that I talk to, maybe I’m only talking to a minority of people, but they really don’t want to see American personnel on the ground there.
ST: Yeah. There are suggestions that he will announce measures to end European reliance on Russian energy, or at least some sort of plan or ideas or opinions on that. What could he possibly suggest? What could he put on the table, throw on the table for that?
TN: Texas where I’m living, we have a lot of gas in Texas, a lot. We flare a lot of it, which means we burn it at the well, that will require many more vessels to transport liquefied natural gas, sure. But we’re very happy in Texas to support the energy to Europe. So I would think that part of a plan has to include US energy going to Europe. It may not be all of it, but it surely should be part of it.
ST: Not just the tankers, but obviously the ports that are able to take that on board and then the infrastructure that would be needed there. Tony, it’s cost of living that’s dominating the headlines for you, isn’t it?
TN: It is, yeah. I’m really curious to see what Jessica is going to say after that. So we live in Texas for the energy capital of at least the Western Hemisphere, if not the world. So seeing, say, WTI and Brent at the prices they are is really helpful to my neighbors. It’s really helpful to the state government here and the taxes that we raise. Unfortunately, there has also been a massive influx of people into Texas over the past year or two years. So I have a friend who’s selling a house right now in Houston, and the price has risen by 30% in the past six months or something like that. So real estate inflation here. It’s not just petrol or gasoline, it’s not just energy, it’s real estate. It’s everything. As I said, we’re seeing an influx of people from outside California, New York, other places coming into Texas and they’re used to paying a lot more for things. So people moving here will find a house online without seeing it and buy it. And the prices are relatively cheap to what they’re paying in wherever they’re from. So Texans are facing what people in Idaho and Oregon and some of these other States where Californians have moved in the past.
We’re starting to face some of those issues and the cost of living is becoming a real issue here.
ST: Totally cutting out people who now can no longer afford to buy them where they’ve been born and grown up. Tony Nash. Joining us from Austin, Texas and you, wherever you are in the world, listening to us today on Business Matters. Thank you very much for your company. This is Business Matters here on the BBC. See World Service. Until next time, thanks for listening. Bye.
BBC Business Matters is joined by our founder Tony Nash for this episode to talk about US’s $3.5 trillion spending plans. Will it get approved before the G20 meeting in Glasgow? Also discussed are the energy crisis with very high gas prices and Russia’s use of energy as a political weapon against Europe. Has Houston changed because of the pandemic and discussion on climate change?
There are intensive discussions on Capitol Hill to try and break the deadlock over his proposed $3.5 trillion spending plans. Those plans have lead to deep divisions in his own Democratic Party. So how close to a deal are we? We get analysis from Natalie Andrews, Congress Reporter for the Wall Street Journal. And is Russia using energy as a political weapon? The question is frequently asked in Europe and it’s now being asked in Moldova, a former Soviet Republic that’s been trying to move away from Russia’s orbit and develop closer ties to the EU. It follows the decision by the Russian state-owned gas company Gazprom to reduce supplies to Moldova and to threaten to suspend them completely. Moscow correspondent Steve Rosenberg has been to Moldova to find out what’s behind the latest gas crisis. Also in the programme, we look at why has the iconic French fashion house Jean Paul Gaultier – known for cone-shaped corsets worn by Madonna for example – decided to allow people to rent some of its most iconic pieces? And Fergus Nicoll investigates what efforts are some cities making to combat climate change. And we’re joined throughout the programme by Tony Nash Tony Nash of Complete Intelligence in Houston, Texas and Jeanette Rodrigues, South Asia Managing Editor of Bloomberg in Dubai.
Show Notes
RT: Tony Nash, founder of the Complete Intelligence, is based in Houston in Texas. And I would imagine, Tony, that you’ve been watching a bit of baseball over the last few days.
TN: Just a little bit Rahul. Thank you.
RT: And if it’s been good for you so far.
TN: Well, up until last night, it was pretty good. It’s the World Series Baseball Championship. The Houston Astros are in the final two teams playing for the Championship.
RT: And the reason they didn’t go so well because I don’t think they won their first game that we may have talked to Tony a little bit more about that in the program.
Tony, can I come to you here first? Because we heard from the Moldova and government Minister. They’re saying, “Look, I can’t predict where gas prices are going to be in two months time.” As much as of the Northern Hemisphere goes into winter. Gone. Has the guest for us. Where do you think gas prices are going to be higher or lower than where they are now? Because they are very high, aren’t they?
TN: Gas prices continue to rise for at least the next two months, if not into, say, February. So we have tight gas supplies now. We have growing demand now. We have people, a lot of whom are in their house all day, so they have to heat their house where they would normally be in an office, those sorts of things. So it’s an issue that we haven’t really had to face for quite some time. At the same time, we’re seeing inflation in other areas hitting people’s pocketbooks. So I think it’s sensitive in a way that many, many people could not have seen.
RT: President Biden is leaving for the G20 summit in Rome. Then, of course, he’s coming to Glasgow. The COP26. Will you have a deal? Do you think, Tony before he departs American shores?
TN: I don’t think so. There’s a problem with paying for it. And it’s really strange to hear someone say that Democrats are saying they’ll literally vote for anything that goes to the floor, which tells me they’re pretty desperate for something. They’ve tried things like what they’re calling a billionaire tax, which is actually a tax on income of even things that are in your retirement account portfolio.
RT: But is that not a bad idea maybe to try and generate some money? A lot of our listeners will be thinking it’s quite surprising that America doesn’t have paid family leave already?
TN: Well, companies do offer people time off and paid time off when they have a child or something like that, or when there’s a sick family member or something like that. So it’s not something that doesn’t happen here in America. I think somehow it’s being portrayed that Americans don’t do that. It’s not 8 to 12 weeks or something like it is in Europe. But there is time off for that sort of thing. So we’re just in a different place in our social development and we prioritize different things thanEurope. So I think the US is not Europe. The US will never be Europe, or it’ll be a long, long time before it’s Europe. And American taxpayers aren’t willing to pay for that. So they have to find a way to pay for it. And the problem is they can’t find a way to pay for the programs that they want in the bill.
RT: So what’s the soultion going to be here because there will have to be that always is.
TN: A smaller bill. That’s it. I mean, it’s going to be a smaller bill. It’s going to be a trillion, maybe slightly more, something like that, which… I just want to repeat that and say it slowly, a trillion dollars. Okay. So let that sink in. This is not small money. Okay. And it’s a very political tactic to aim very high and then act like you’re disappointed when it comes in at a third of that. But it’s still a TRILLION dollars. Okay. That’s less than the entire bailout of the global financial crisis in the US economy, which was 860 billion or something like that. So it’s less than that entire bailout. So it’s huge money.
RT: It is a lot of money. Let’s look at where you are, Tony, because you’re in Texas, a region synonymous, really, with oil and with gas. As we see these prices increasing so dramatically, do you think that people within those industries, then look at it and think maybe they have a longer shelf life then some people thought they were going to do with that movement to renewables?
TN: Oh, yeah, I think they do. I don’t think hydrocarbons are going away, partly because every plastic that you use is made from hydrocarbons. When Greenpeace protested a vessel, they used a plastic boat to protest. Plastics aren’t going away. I think that the bigger issue that you raised is energy as a political weapon. And I think Russia using energy as a political weapon toward Maldova, toward Europe, toward China, toward other places, I think is a reality that we face when you face tight supplies.
RT: Do you think Europe was naive here in some respects, because if you look at it now, with so much of Europe and Europe dependent on Russian gas supplies, this was always going to be a possibility, if not a probability.
TN: Absolutely. Yes. So, look, I live in Texas. We sell oil and gas to the world. If we had a captive market, we would be tempted to charge higher prices. But we sell to markets all over the world in a competitive system. Europe locked itself into the agreement with Russia, and we could have a long discussion about this. But Europe locked itself in, and so they’re captive. And that’s a huge problem for Europe. And that’s one that Angela Merkel’s and others got Europe into. And conveniently, they’re not going to be around to get them out because they’re out of office. So it’s a really convenient agreement that they came to just in time for them to go out of office.
RT: Let’s go to Houston, Texas. And, Tony, are you seeing Houston change very much, whether that’s a consequence of the pandemic, whether that’s because of a debate about the climate?
TN: So we have obviously a lot of very large oil and gas firms here. And there is a lot of investment in alternative energy sources by those players. So you could argue that it’s just an ESG play for the equity markets. But I think there is sincerity within the companies to be the sources of energy, not necessarily just to be the source of oil and gas.
RT: What if they put in? Do you have no car zones in Houston? How would that go down with the public there?
TN: Houston is a pretty spread out town. So there are some streets that are no car streets, but it’s not large areas, and it’s in very small kind of old-ish parts of town. But other towns? Yeah, absolutely. Up in Dallas, other places, Austin, definitely. There are no car zones in those towns as well. Houston is just a very spread out town. And so it’s very hard to do here.
RT: Tony, let’s come to you first. Let’s ask you, what are you wearing at the moment, Tony, are you wearing a smoking tuxedo jacket? I hope you’re wearing something.
TN: I am head to toe couture. I mean, everything I wear every day is couture. I’m kidding. I’m just in a light blue shirt and jeans. Just came straight from work. But when I think about this business, your guest described negotiate Close as rich and sexy. That describes me perfectly. So of course, I’m going to be a customer.
RT: Okay, let’s get a bit more personal if you are married, if you don’t mind me asking, of course. What did you wear on your wedding day?
TN: Well, this was in the 90s. I wore a Hugo Boss tuxedo. My wife wore a custom dress. So we were married in Sausalito, California. It was a wonderful day.
RT: I’m sure it was. And I suppose you could afford to do that. But if you couldn’t have afforded that, would you now, if you’re going to get married again? Clearly, hopefully not. But would you consider renting something expensive that you couldn’t be able to afford?
TN: Yeah. Why not? Sure if I wanted to. I would absolutely do it.
RT: Tony, next time you’re on Business Matters, we expect you to be in your wedding suit and we expect pictures to be posted as well. Do you think it does? I know what you’re talking about, Jean Paul Gaultier. Do you think it does diminish the brand if they’re renting some of those close out? Does it lose a little bit?
TN: I think right now with kind of the borrowing culture that we have the renting culture, I really don’t think it loses anything. I think people want the experience of doing something nice, wearing something nice, eating something nice and I don’t think it diminishes at all. I think when I was in my 20s, owning it was necessary. Now I think people are happy to rent.
RT: That’s is a very good point. Thank you, Tony. Thank you, Jeanette. If you want to listen to something nice tune into Business Matters, we’ll be back. Same time. Same place tomorrow. Bye.
This is Part 2 of the inflation discussion with Steven van Metre and Peter Boockvar with your host Tracy Shuchart. In this second part, they talked about the possibility of the Fed tapering this year or early in 2022. How about the possible rate hike and what will possibly happen in other parts of the world like Bank of Japan and Bank of England if ever this happens? What is Powell doing exactly and why? Is there a possibility of a new Fed chair next year? And what do they think about stagflation?
Peter Boockvar is the Chief Investment Officer and portfolio manager at Bleakley Advisory Group. He has a daily macromarket economic newsletter called The Boock Report.
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This QuickHit episode was recorded on October 14, 2021.
The views and opinions expressed in this Quick Hit Cage Match: Van Metre vs Boockvar on Inflation Part 2 episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
Show Notes
TS: Do you see the Fed tapering? And if they do, how much is this going to affect inflation? And also, I know the market is saying the Fed is going to raise rates in ’22, 2023. But is this a reality at all?
But before we jump into that, I just wanted to remind you to please subscribe to our YouTube channel.
PB: I think the Fed will at least start the taper and see how it goes. The thing that is different with this taper is that it’s coinciding with central banks around the world that are also beginning to remove accommodation. However slow, however glacial that process is, they’re all outside of the BOJ. They’re all doing it at once.
So if the Fed starts to taper in December, which they basically told you that they will, well, the Bank of England could be raising rates in December. We recently got a rate hike from Norway a month or two ago from South Korea. We’ve had Canada and Australia trimmed QE. Even the ECB has trimmed QE. So there’s a global shift to tightening. And I do believe tapering is tightening to define that. Just as we saw last year, the past 18 months obviously massive global easing.
Now I can’t even discuss the rate hike situation because I’m not even sure that they’re going to be able to get through the tapering. If you look back to 2010, every single notable market correction in equities and also fixed income markets outside of Covid and the one evaluation in August 2015 coincided with the end of QE, where it was a hard stop QE1 and QE2. And then obviously you had the taper 2013 and then obviously around rate hikes. Every single one coincided with a tightening of policy. And even again, it was gradual. It still affected markets. And we’re going to have it again to think that we’re going to somehow get through tapering without any accidents, I think, is delusional. And you believe that there’s a free lunch and it’s a matter of what kind of accident occurs by this.
Now QE itself essentially, at the end of the day, it’s an asset swap. And yeah, does some of that money sort of filter into markets? Yeah, maybe, I guess. But a lot of it’s psychological, but it also does help to, at least on the short end, suppress interest rates to where they would be otherwise. That said, when QE has been on, you’ve been paid to steepen the curve when QE is off, it pays to flatten it. And I think we’ve seen some recent flattening in the yield curve. And I think that that has been the right trade to do when QE is about to turn off.
But to Steve’s point about the bottom 50%. Well, if you get a short equity market correction, well, the top 50% is going to feel that as well. And yeah, can that filter into how they spend for sure? But that doesn’t necessarily resolve the supply issues.
That’s how this inflation story is going to recalibrate. The supply side is going to take a couple of years, and it’s going to be less demand. That is going to recalibrate this inflation story. And I think that is. No central bank wants to preside over a declining economy. But unfortunately, you’re going to have to have a trade off. You want lower inflation and a slower economy or an economy, as is but fast inflation, that’s going to hurt the people that can least afford it.
SVM: Yeah, this balance sheet taper thing is really interesting because I will be on record. I’ll hold on record still, and I don’t think the Fed’s going to do it. Although, as Peter mentioned, you just said that you think that the Fed is going to start and then quit. I’ve had to come to your side of the fence on that deal, mainly because when Powell spoke at Jackson Hole, it seemed like he was saying, we can’t make this mistake. We got to keep easing because we could let off the gas too soon.
And then for whatever reason, there’s this massive pivot between that and the last meeting. And he’s going to have a disadvantage going into the November F-O-M-C. And not have the non farm payroll report because he concludes me on Wednesday. Nonfarm payroll is out on Friday. Maybe he’s got some early access, who knows? But it seems like all of a sudden he’s in a panic to start tapering.
Now, could this be because we know the treasury is going to reduce their issuance of notes and bonds as we borrow less money, and he doesn’t want to be over purchasing? Sure. Could it be, as Peter mentioned, that the other central banks are tapering and starting to raise hike rates. And that’s interesting, because the way I look at it is that would be a catalyst if the Fed doesn’t start tapering, that the dollar goes higher.
Well, there’s part of the inflation story that almost nobody is looking at. What if the dollar gets up into 96, 97, maybe even close to 100? I mean, we’re talking about destroying the inflation story just from the dollar alone. And is this one of those things where we had coordinated easing? So now we need to have coordinated tapering to keep the dollar from going up too much? I’m not sure what his motivation is, but I will say this. There’s no way that they get to the end of that taper. There’s a 0% chance they’re going to raise rates. And even if they did, it doesn’t matter. They’ve effectively given the banks a pass by saying, look, there’s no reserve requirement because, well, you’ve got all these QE reserves you don’t need anymore.
The whole idea that we’re going to get this balance sheet unwound. I think the bond market is telling us the Fed’s making a mistake. I think, Peter, you and I agree that we don’t know how many months they’re going to go? The only question is, at what point is there a payroll report or some data that comes out that the Fed goes, “Oh, my God, we made a big mistake.”
PB: I’ll tell you why he’s doing this. Well, first of all, the whole purpose of monetary policy, as we know, is to push the demand side. And if you look at what are the two most interest rate sensitive parts of the economy — it’s housing and autos. So is Powell with a straight face going to say, I need to pedal to the metal, continue to stimulate the demand for housing and autos, when you can’t find an auto and the price of the home is worth 20% more than last year? They need to take their foot off that demand pedal. And he does not want to be Arthur Burns. He does not want to be Arthur Burns. And right now he is headed towards being Arthur Burns.
And the Fed is going to reach a pivot point, where if inflation still remains sticky and persistent, but growth is really decelerating to a greater extent than it already is. And we know that the Atlanta Fed third quarter GDP number has one handle on it. He’s going to have to reach a point, do I try to come inflation, but then risk further weakness in the economy and a fall in asset prices, which JPowell obviously inflated. Where is he going to just not really respond quick enough. And being in Washington, we can be sure he probably leans towards trying to save the economy, but then that creates its own problems.
The one thing in the dollar, the dollar is going to get tied into this, too, because if he remains too easy for too long, well, that may sacrifice the dollar. If he is more aggressive at dealing with inflation, well, then you can see a faster move in the dollar. So he’s just been an absolutely no win situation here. But there is going to be a pivot point where he’s going to reach that we’ll have to see, does he go down the Paul Volcker route, or is he going to go continue down the Arthur Burns route?
SVM: See, Peter, you just said it best. He didn’t know what his situation. And all we’re debating is, at what point does he back off and quit because he realizes it’s not working? I mean, we can look at the velocity of money and see the monetary policy is not functioning properly.
I mean, there was a lot of people that predicted at the end of the last quarter that as economy reopen, velocity would pop. But it didn’t because of the fact that monetary policy is not transmitting into the economy. And so now the real issue is if he starts tapering and it does do what it’s supposed to do, does he inadvertently tighten financial conditions? I mean, this is such a mess of what he’s got to deal with. And I don’t know if you’ll agree with me honest, but I don’t think they have a clue what they’re doing.
I think they’re just betting that this is all going to work out, that Powell, as himself, is going to get renominated. And somehow, in the end, either he’s going to look like a superhero and say, look, see, I did it and go out as one of the most celebrated Fed chairs ever. Or he’s going to find someone else to blame this on when it doesn’t work.
PB: The Fed has been winging it for decades, and this all goes back to Greenspan. In 1994, he raised rates aggressively. We know he blew up Mexico, he blew up Orange County, California, and he took that at heart. He learned a lesson. And so you go into the late 90s when everything is on fire. Stock market bubble. We know he was very slow to raise interest rates because he didn’t want to repeat 1994.
And then, of course, you have the blow up. And he’s obviously quick to raise interest rates. But remember the mid 2000s, every single. When he started raising interest rates, he did it every single meeting, and in every single statement, it said, we are doing this at a measure pace, because he didn’t want to repeat 1994.
And then what we have, obviously, the housing bubble and so on and so on. And then now you take Powell. We know Janet Yellen was afraid to raise interest rates. Took them seven years to get off zero. And then after finally raising, took them another twelve months to finally raise rates again. And then Powell started to pick up the pace. And then he blew himself up in the fourth quarter of 2018. And then that helps to explain why they’re going so slow now.
Then you throw in, of course, the whole social justice. The Feds become the Ministry of Social Justice now and how they view monetary policy. But yeah, to your point, they are winging it. And they’ve been winging it for decades.
SVM: And you bring up an interesting point about 2018. I’m really glad you did, because a lot of people forgot that we started easy to the point that it didn’t really make a lot of sense from the outside look in it. And so now this whole notion, and I don’t know what your reaction was, but I remember hearing the press conference when he’s like, okay, when Powell said, “We’re going to gradually unwind the balance sheet by mid 2022.” I’m like, since when is “gradual” six months. There’s no way this is going to work for you, buddy, but good luck if you’re going to pull it off.
PB: Yeah. And the Fed got lucky for a period of time. They got lucky in 2017 because the markets rallied and ignored Fed rate hikes and the beginning of the shrinking of their balance sheet. They were double tightening and they got bailed out because everyone focused on the corporate income tax cut. That obviously happened at the end of 2017. But that entire year, the Vix got down to eight. Every dip was bought because everyone was pricing in that tax cut. But once that tax cut was in place, the Fed then raised interest rates again in January 2018. And then we immediately shift back to the Fed is double tightening here between the balance sheet and rates. And that obviously coincided with the fourth quarter of 2018.
So we know in the Fed tapering, the Fed tightens until they hit a wall. The Fed tightens until something breaks, and you can be sure something will break in 2022. It’s just a matter of how deep they get. And also one last point here is that having low inflation gives central banks that Wayne’s World Concert pass that all access to do anything they want for how long as they want, when there’s no inflation. But once you get inflation into the numbers, into the economy, their flexibility is greatly diminished. And that will be an interesting sort of tug of war as they get further into the tapering and something eventually breaks.
TS: One last question, a couple of last question. How do you feel about Stagflation? I kind of amend the Stagflation camp. Do you think that’s a cop out or how do you feel about that?
SVM: I think it’s temporary. I mean, we’re supposed to be rising unemployment. I mean, I guess with people coming off the ranks, I don’t know. Maybe it’ll go back up. I don’t think that’s likely to happen. And then you tend to get that with higher prices. But when we start looking at the bond market. The bond market is starting to tell us that, hey, this Stagflation is going to be transitory. And then the risk that I see is that we get into outright deflation from here.
PB: To me, I just look at stagflation as just slower growth and higher inflation. And in an economist textbook, they think that slow growth means lower prices. Faster growth means higher prices. I’m just looking at the Bank of Japan. The Bank of Japan said we need to get inflation at 2%, and somehow that will then generate faster growth. To me, they’ve got that backwards. You need stable prices in order to develop and sustain healthier growth.
So right now. But the Stagflation it’s sort of intertwined in the sense that it’s the inflation and what is driving it. So it’s the inflation itself that is beginning to impact consumer spending. And it’s the factors that are creating the inflation, like the supply bottlenecks that in itself, are also creating slower growth.
TS: Excellent. One last question, just for a thought experiment. I mean, say Powell does leave the Fed next year and we have find a Dove, right. So what does the Fed look like at that point if we have a dove as a Fed chair?
PB: Well, 2022 becomes completely politicized. The Fed’s already politicized, but it becomes Uber politicized in 2022 because of the elections in November. And if a Lael Brainard becomes the next Fed chair in February, 2022, you can be sure that Steve and I are right, that there’s no chance in hell they’re going to finish this taper because the second something breaks, you know, they’re going to back off and they’re going to do their best to, or at least the Democrats headed by the Lael Branard will do their best to maintain control of Congress.
SVM: Yeah. I’ll put that as a low probability chance that Powell is out. If he does, I’m 100% agree.
PB: I agree. I think he stays as well.
SVM: Yeah, 100% agree. I think it’s a big risk for the Biden administration to pull him. He hasn’t really done anything wrong. But if he does, again, I think Peter is spot on. I mean, now it becomes even more political than the Fed is supposed to be. And he’s right, as soon as something goes wrong, I mean, we’re going to 120 billion a month. Yeah, right. It’ll be multiples of that in a second.
TS: All right. Well, I want to thank you both again for everything you shared with us today. Can you each tell us where we can find you on social media or otherwise?
PB: Well, I just want to say thank you to Tracy and Steve. Thank you for having me in this debate and discuss this with you. It was definitely a fun time. If you want to read my daily readings, you can subscribe to boockreport.com. boockreport.com And our wealth management business is at bleakley.com.
TS: Excellent.
SVM: I want to thank you as well. Peter, you and I know this has been a long time coming for us to be on the same screen together. I had a blast. Totally looking forward to the next time. If you want to find more about me, you could go to my website. stevenvanmetre.com On Twitter @MetreSteven. On YouTube at @stevenvanmetrefinancial.
TS: Great. And for everyone watching, please don’t forget to subscribe to our YouTube channel and we look forward to seeing you on the next QuickHit.
BFM 89.9 The Morning Run talks to Tony Nash for his insights on the US economy. Why the tech industry is performing better than other industries? Is it the new inflation theme? And how about the reflation narrative? How will that affect price pressures for corporates in Q4 of 2021? Why is China importing less from the US while exporting a whole lot more? What’s the status of the supply chain issues amidst the coming holiday season?
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Show Notes
KHC: Okay, well, the Dow was unchanged. Basically, it just went side raced last night. The S&P was up by 0.3%. The Nasdaw was up by 0.7%. Preceding that, the Nikkei was down by 0.3%. The Hang Seng was actually closed due to the typhoon and also today for a public holiday. The Shanghai was up by nearly half a percentage point. The Sci by one and a half percent. Of course, FBM KCI yesterday up by 1%.
SM: And for some thoughts on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks for joining us today.
So last night Nasdaq did better than the other indices on the back of tech companies having better pricing power. Do you see this being the new theme as inflation rises?
TN: Sure. I mean, I think tech prices can be adjusted pretty quickly for the most part. And I think especially with tech hardware, people understand that supply chain issues are very real. So I think the ability to change prices in tech are pretty quick, especially around software and software services. I think whether it’s prices rising or even in the case of additional competition, prices falling, I think they can do it in tech much more quickly than they can in other industry sectors.
KHC: Yeah. And, Tony, most of the news has focused on the effects of the energy crisis on China and, of course, in Europe. But in what race does this crunch impact the US. Is American immune from it?
TN: Oh, no, not at all. I think there are some considerations in the US. First is how regulated are the markets. So when you look at markets like New York, Massachusetts, California, highly regulated markets. Also, they don’t really have energy. They don’t have natural gas and oil, or they don’t really actively drill for it there. So they’ll have a tougher time over the winter, I think. In places like Texas and the Gulf Coast in the south, where we drill oil and gas in Texas, we also drill offshore in the Gulf of Mexico. We have supply, we have the pipelines in place. They’re pretty unregulated markets. We’ll find it easier here because of the availability of the energy and the infrastructure that we have.
SM: And looking at the reflation narrative. It’s starting to get louder in markets. Do you think last quarters corporate earnings were affected by rising price pressures, or is that going to be felt more in the coming Q4?
TN: Yeah. I think they were a little bit, but not much. Don’t forget in really Q2 of 2020 and early Q3 is when companies really started shedding costs because of a COVID. So they reaped those year on year profit benefits. Those profit growth benefits through 2021, so far. But that base effect really comes to an end in Q3 of ’21. So we’ve expected. Well, since the end of Q2 earnings, we’ve been telling people Q3 earnings will be worth because those base effects are gone and also because inflation has intensified. So, yeah, it definitely gets worse than Q3.
KHC: Yeah. So we are on the cusp of earning seasons reporting. And of course, I think Delta reports later today. JP Morgan as well. What’s your sense of what corporate earnings will be in this coming quarter?
TN: Well, they’ll still be earnings, but the growth rate will definitely be slower this quarter. There are some areas where they’ll continue steady. But in things like travel, where we’ve seen with airlines where we’ve seen fuel prices rise, we could see some real issues there. Not major issues, but we would see that eating into profit margin.
KHC: Okay. Let’s talk about the China trade surplus then, of course, with the US rising record high in September. Tony, why is trying to import less from the US while exporting a whole lot more currently?
TN: Well, part of what we’ve seen, the US exports a lot of ag and energy to China. And so when commodities prices rise, China buys less. We saw things like corn and sorghum and soybeans rises in the middle and end of Q2, early Q3 rose pretty dramatically and trying to slow down its buys of those. Now we see natural gas rising pretty rapidly, actually. So a year and a half ago, it was, say, a 1.5 in the US. Natural gas is now $5 in the US. So it’s risen pretty dramatically. So trying to slowed the buys of, say, US natural gas. They’ve also slowed some buys of, say, natural gas and all from other parts of the world.
So they’re buying commodities. They can slow those buys. And we’ve seen that impact, for example, on their electricity markets. The US buys largely manufactured goods. And so because of supply chain issues, Americans have really been over buying what’s available so that they can ensure supplies for months ahead. So there’s still, say empty shelves in many cases in the US. There are still backlogs. But we’re over buying because people don’t want to see empty shelves here.
SM: And I guess one final question, Tony, before we let you go, taking a look at our region, the Asian region. The economic outlook seems more brilliant in Asia as countries reopen. Which economies do you see outperforming as border restrictions lesson in this part of the world?
TN: Yeah. We definitely hope to see Asia come back pretty strong. We expect India, China, Taiwan, Philippines, Australia to perform best in Q4. Australia, obviously on the back of commodity and energy price exports. China and Taiwan on the back of global manufacturing kind of supply chains. Of course, they won’t be totally cleared up in Q4, but we will see continued buying and over buying for those items. So we don’t necessarily see it as a border issue because travelers, for example, we’ll have to consider how long will they have to quarantine if they do travel, because we don’t necessarily expect that to go away soon. So we don’t expect the cross border restrictions lightning up to impact too much. It will impact a bit, but we don’t see too much upside in Q4 yet.
SM: Tony, thanks as always for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us a view of the economies in Asia that could improve as economies open up. But he says travel is still not going to be that lightning rod for growth or activity at this moment. Things are still going to be cautious on that front.
KHC: Yeah. The aviation sector has really come into focus in the last few days. Air Asia has been top volume in the last few days, and I think it looks. Look at Southeast Asia’s region. I mean, travel is such a huge factor in the economies. We know that Indonesia is slowly opening up. Bali has talked about opening up. Thailand is opening up. No choice, right? Obviously, with tourism, such a systemic part of the economy. China is still locked up. China is actually arages biggest market, right? So many destinations.
India is still locked up. So it’s a mixed bag. Right? But the one thing that has really put a spanner in the works is this whole inflation thing. You know how the Fed talked about how it’s going to be transitory is gonna be here for the short term. It’s not the case. I mean, you’ve seen wages go through the roof, supply chain disruptions, which is send prices higher labor shortages, much more jobs than people get to apply for. In fact, people are leaving jobs like in F&B, restaurants, waiting jobs, low pay, long hours. They go into much better paying jobs. Energy price as I think Brent, this morning’s at $83. Global energy crunch so much this inflation is commit malicious. I don’t now what that’s going to do? The market. But it’s definitely something.
SM: Watch out for that’s. Right. And if we’re talking about supply chain bottlenecks that are contributing to inflation, we have a story here coming out of the US, where President Joe Biden wants to break a log jam at US ports and stave off a holiday season of shortages and delays. Tony was speaking earlier about empty shelves in the US and the fact that US customers are overbuying because there’s so much demand. But supply chain is blocking these products from getting to the shelves. And Joe Biden wants to solve this by making ports operate longer just to clear that backlog. But that isn’t really quite solving the problem because, as you pointed out, there are other trends, such as the labor issues that are finally coming to a head in this scenario. And it’s causing a lot of chaos in terms of supply chains.
KHC: Yeah. Because, you know, this part of California, in fact, part of Los Angeles, right. It’s one of the biggest basic choke points for supply into the US. And, I mean, that’s got, like something like 60 to 70 container ships waiting in the Bay just to get in and offload this stuff. It’s incredible. To supply chain shortages, I think that’s supposed to last until 2023. Right.
SM: Right.
KHC: And there’s this huge amount of capital going into the US in the semiconductor companies that are just building chips which are going to require less energy and smaller to just alleviate some of this choke point. This bottleneck is crazy. I mean, this is how capitalism world sometimes.
SM: The juxtaposition to what happened last year is so stark. Last year, there were enough containers. They couldn’t leave their forte because they just couldn’t get the containers to ship their products. And now they’re just too many of them, and they’re jamming up the Port. So it’s really curious how the pandemic has kind of shifted us from one extreme to the next term in the economy. Stay tuned to BFM 89 nine.
Energy commodities experts Tracy Shuchart and Sam Madani joined forces in this special #QuickHit episode to talk about crude, OPEC+, JCPOA, and how lockdowns will affect the market this year. Most importantly, how investors should plan?
Tracy writes for a Hedge Fund Telemetry, where she is the energy and material strategist. She also manages an energy and materials portfolio for a family office. Meanwhile, Samir Madani is the co-founder of TankerTrackers.com. They’re an online service that keeps track of oil that’s being shipped around the world. His specialty is the tricky tankers, the ones that like to play according to the rules.
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This QuickHit episode was recorded on July 17, 2021.
The views and opinions expressed in this OPEC+, JCPOA & Delta Variant: Strength or weakness for oil & gas prices? QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
Show Notes
TN: We’ve seen kind of an uplifting crude prices. We’ve seen things like copper prices come down, natural gas prices really start to see some upward pressure recently. At the same time, we’re seeing talk about the JCPOA and some other Middle East type of changes with OPEC+ and UAE and Saudi. What’s your thoughts on the crude and natural gas markets? We can talk about commodities generally.I know that’s a big, wide open question. Tracy, do you want to give us generally your view and some of your positioning at the moment?
TS: Well, I’m very bullish on commodities, particularly industrial metals, base metals and minerals needed for this energy transition. So copper and things of that nature.
This is CI Futures July forecast for COMEX Copper this YTD.
Discover the forecasts for nearly 1,000 other assets.
We have seen a little bit of a pullback in a lot of commodities, which is not surprising. We had such a large move up. However, everybody’s looking at this as a group like the CRB index rate has pulled back. But if you look at individual commodities, you’re still seeing iron ore still at highs. So it’s not like a whole commodity collapse. You’re still seeing strength in a lot of different areas.
So my positioning is instead of index, I’m positioned in individual stocks and particularly on the minor side, because minors are going to have the same capex problem that oil is having.
TN: OK, that’s a great point. Sam, what’s your view like generally with with energy?
SM: I remain bullish when it comes to oil in particular, and I pat myself on the back for having gone long in at the end of March last year, when the the mutual funds were at the all time lowest in regards to oil. And that’s come up quite a lot since then.
I do believe that we will probably find a good footholding now in the 70s. And in order for that to remain, I think something drastic is going to have to happen on the upward probably scathe $100 and come back down so that the OPEC can look like the good guys in the mid 70s. So I think also because of the fact that there’s a capex shortage in the oil sector, they need this revenue to come in order to sustain production as well.
My original intended investment horizon was around three to four years. I’m going to be cutting that short until September of next year because the issue that we have now is that the lockdowns are still in effect in many areas, but also when it comes to Europe where I’m situated, most of the inoculations have only gone through the first phase. So we’re still waiting for the second shot and therefore this summer will be delayed. We’re not going to be traveling everywhere like we were in 2019. Instead, that will happen most likely next summer.
There’s still one big run up towards the three-digit oil price and that would be most likely to happen next year rather than now.
This is CI Futures July forecast for COMEX Copper this YTD.
Discover the forecasts for nearly 1,000 other assets.
TN: So you brought up OPEC. There’s been news this week around OPEC+ and a deal with Saudi and UAE and some other Middle East dynamics. What’s your view on that? How much downward pressure will that put on crude markets?
TS: Because of those factors in the Middle East, because I am of a belief we will see a deal and we will get some more barrels on the market, the market is actually very tight right now. But we’re also having lockdowns in some places in Asia. So right now, we already are seeing a pullback in crude. Until we get a little bit more certain that 65-75 range will probably hold us for a while, I see some consolidation there and after $115 move from the lows last year, it makes sense for oil to chill out, consolidate here a little bit.
TN: Sam, what’s your view on the kind of OPEC+, Saudi, UAE and other kind of OPEC countries wanting to tag along on the UAE?
SM: I think one issue that they themselves want to know is status of the JCPOA. They really want to know how much of an issue Iran would be if their balance come back to market. Now, that’s a big if.
But if we look at what happened during the Trump administration, the United States pulled out of the deal and that was not good optics for the U.S. side. But now what’s happened is that Iran is not complying with the deal. So the ball is now in their court instead. So the Biden administration is saying, yes, the United States wants to be part of the deal, even though it’s not a very popular deal in the US. I don’t see any popular support for it. It’s more of a let’s just get back in there so Iran can improve its compliance. But they’re not improving their compliance. Instead, what they’re doing is going the other direction and they’re increasing their enrichment. They’re becoming more brazen about how they move around the world with Navy vessels and so on.
And now, of course, there’s an Iranian president that’s going to take office in August. So I think the deal will play fall apart instead because of the fact that Iran is not complying.
TN: If the deal falls apart, does that chaos help oil prices, meaning rise or does it create the perception that there will be a dramatically larger supply in the market?
SM: I think the initial reaction will be that, “Oh, these barrels are not going to be reentering the market, therefore the price will go higher.” So that’s the first automated response. But then, you know, the dust will begin to settle after a while when there’s an understanding of what kind of barrels are not entering the market.
So in Iran’s case, they are shipping sour crude. Whether it’s light or heavy, it’s sour. In order for that oil to become sweet, which is more attractive, you have to de-sulfur the oil. And so Iran, what they do is they give you a discount if you want to buy light sweet oil, but then they’re buying like sour oil. Iran gives $10 discount, for instance, and then they just remove the sulfur at the refinery at their own expense. And that’s what’s causing, for instance, West Africa to lower their exports. So moving out a lot less oil now out of Africa than before on account of China buying more Iranian oil instead.
TS: I think what people forget, there’s already a lot of Iranian oil on the market. So even if they came back at production of 4 to 4.5 million, it’s not really a lot of extra added barrels that are not already on the market.
SM: Exactly. And it will be absorbed by the demand that’s coming of course.
TN: But it seems to me the kind of perception of legitimacy that would come through JCPOA may calm prices down a bit through the kind of perception of legitimacy of that supply?
TS: Yeah. I mean, if it came to fruition, which I don’t foresee it, I have to agree with Sam on this point. But yeah, the market would think, oh, OK, we have all these barrels coming on even though there isn’t, and that it would be a numbers game from there, then you’d have to see supply and demand numbers from the various agencies monthly reports.
SM: And the thing also does not happen overnight. So even if the process of JCPOA happens and Biden finally signs, for instance, initially a waiver, the whole process takes forever to reboot again. We saw it last time. Remember Tracy back in years ago, it took many months.
And also in the case of Iran, most of their domestic national fleet is tied up containing gas condensate. So they have around 70 million barrels of gas condensates floating. And that used up nearly all of the VLCC supertankers, the ones that can carry two million barrels. So what Iran has done is they put additional vessels, vintage VLCC. So now they have 200 vessels as opposed to 70. And those are the ones, the foreign flagged vessels that are moving the oil mostly to China.
TN: You both mentioned lockdowns earlier in the conversation. And I think the tone here is that we have a pretty strong basis for rising crude prices. But we’ve seen some moves over the last week in the Netherlands and California and other places for maybe not full lockdowns, but more severe compliance with masks and other things and that seems to be leading toward potentially some lockdowns. First of all, if there are lockdowns coming, what would be driving that? And we all know about the Delta variant and stuff. But are there political factors that would be driving that? Second of all, if there were, how would that impact the six to nine month view of crude markets for you guys?
TS: The United States is so big, I don’t believe that they’re going to lock down the whole country again. It just won’t happen. You would literally have riots on the streets in some places. So I don’t foresee that happening. I could see some of the states like California just reinstated their mask mandates. I’ve been watching those states that kind of had more severe lockdowns to begin with like Michigan. If they’d lockdown again in the fall, that would probably be more politically motivated, but we’ll have to see what the numbers are and whatnot.
As far as my crude view, I’m very bullish on crude. But that doesn’t mean like I’m expecting a $100 tomorrow. How I’m invested is longer term. So I’m invested for at least the next five years or so.
And I do believe that if we get through the fall and we don’t have lockdowns in the United States, Europe and Asia, then I definitely think six to nine months, we’re back in the swing of things, because that’ll put us right to basically next spring when oil demand really starts.
TN: Sam, what’s your view in Europe on lockdowns? Do you see that stuff coming back and how do you see that impacting consumption?
SM: I would think that it would be mostly in the countries with the high population density. Germany is obviously one of those countries and the UK is another. In other countries, not so much the case. I live here in Sweden. We never had lockdowns. So we had seniors living in retirement homes and so on. But then, we pretty much met the same statistic level as every other country — 10% population suffer through it, 1% or so perished as a result. But I don’t think that we’ll be seeing any big efforts on locking down countries again.
And what’s more interesting now is schools are coming up in a couple of months or at least a month and a half. Here in Sweden, life will pretty much continue as is. I have four kids and none of them missed more than a week of school, throughout the entire ordeal since 2020.
TN: So it sounds to me like you both see there may be some lockdowns at the edges, but it doesn’t sound like it’s something you expect to affect the mainstream. Maybe we see a slight dip in the rate of rise of demand. But it doesn’t sound like it’ll have a huge impact to the downside on energy prices generally, whether it’s crude or natgas or something like that. Is that fair to say?
SM: Yep.
TS: Absolutely.
TN: When it comes to natural gas, Tracy, I know you’ve been talking about that a lot lately. Can you tell us a little bit about your observations and your thesis and and what you’re seeing there?
TS: For natural gas, the reason I like it is it’s the great transition fuel especially for emerging markets, because it’s very inexpensive than to go straight into something like solar or wind just because the cost of those minerals and metals can make those are skyrocketing right now. So natural gas is abundant. It’s a great transition fuel. It’s cleaner burning than oil.
We just saw the EU green deal, they just stepped back and now are including that gas, whereas before there was no oil or gas, because I think they’re also realizing that it’s inexpensive, it’s a good transition fuel. If you look at Germany, there’s still a lot of coal going on in Germany. So for Europe, it’s not like fossil fuels are gone.
I think they realize also it’s an inexpensive transition fuel. In particular for the United States, what I like right now is we’re seeing European natgas ETF and JKM, which is the Asian natgas, are trading at significantly higher than the United States is right now. And so I think there is opportunity there because the US can export and still come in at a lower cost, even with the cost of transportation to Europe or to Asia.
TN: Interesting. Living in Texas, I have to say that I love that message. Sam, what about the tanker fleet? Is the global tanker fleet ready to to provide the capacity needed to power EMs with, say, American natgas or Middle Eastern natgas?
SM: So natgas, I haven’t checked too much. But tankers in general, the demand is not that great right now. When I say that, I mean that usually, they really step up to the plate whenever there’s a floating storage opportunity to talk about. So you had that case in Q2 of last year, and that really drove up the prices from the growing normal rate of 20,000 barrels a day to 500,000. That spike.
And it’s come down so much. Complete occupancy is far lower than what I normally see if I talk about the tonnage and it’s around under 40%, which is very little. We were looking at April of last year, it was around north of 55, close to 60%. So that’s a big swing. And that really crushed the prices for tanker rates. They’re even negative. Below zero. But when I look at the transfers of illicit oil, it’s around $38,000 a day. So there’s a lot lot of money to be made in those transfers, unfortunately. But for nat-G, I’m not entirely sure. So I can’t say for sure.
TN: OK, very good. Guys, thank you so much for your time. This has been really helpful. I’m really intrigued by kind of the long bull thesis for energy because we hope that we’re going to start recovering much quicker than we had been, which is fantastic. So thanks for your time. I really appreciate. Always, I really appreciate talking with you guys. Thanks very much.
