Tag: Canada

The Week Ahead – 25 Apr 2022

Post author By admin
Post date April 23, 2022

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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.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Mike: https://twitter.com/profplum99

Albert: https://twitter.com/amlivemon

Listen to the podcast on Spotify:

Transcript

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.

AM: All right. Thanks, Tony.

MG: Thank you very much.

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Podcasts

Business and Market Discussion

Post author By admin
Post date April 13, 2022

This podcast was originally published in https://www.rthk.hk/radio/radio3/programme/money_talk/episode/810164.

Surging energy and food prices in the United States have sent inflation to a 40-year high. Consumer prices rose 8.5% in March, the fastest annual gain since December 1981. The monthly rise was 1.2%, the fastest jump since September 2005 and a sharp acceleration from February’s 0.8% increase.

Russian President Vladimir Putin says peace talks with Ukraine have reached a “dead-end” and he accused Ukraine of deviating from agreements reached in Turkey. He said Russia’s “military operation” will continue, blaming Ukraine for “inconsistency in key issues” from talks and “fake claims” about war crimes.

The World Trade Organisation said that global trade could be cut almost in half and is expected to grow by 2.4% – 3% in 2022, lower than its previous estimate of 4.7% in October due to the ongoing conflict between Russia and Ukraine. The WTO said the war could lower global GDP growth by 0.7-1.3 percentage points to somewhere between 3.1% and 3.7%.

Sri Lanka said yesterday it will temporarily default on its foreign debts amid its worst economic crisis in over 70 years. The country was due to pay a US$1bn international sovereign bond in July, part of a total of US$7bn of debt payments due this year. Sri Lanka’s foreign reserves stood at US$1.93bn at the end of March.

Shanghai saw a drop in new Covid cases on Tuesday after ten straight days of record highs. The financial hub reported 23,342 new local cases for the day, compared with just over 26,000 the day before. However, it was being reported on Tuesday that authorities were backing away from lifting restrictions in several thousand low-risk areas. Residents can move around within their compounds but are still barred from venturing out onto the streets if their surroundings belong to higher-risk areas. Officials ordered another round of mass testing, at least the seventh in 10 days, in the highest lockdown zones.

On today’s Money Talk we’re joined by Dickie Wong from Kingston Securities, Carlos Casanova of UBP and Tony Nash, Founder & CEO & Chief Economist at Complete Intelligence.

Show Notes

PL: This is Radio Three Money Talk. Good morning. It’s eight in Hong Kong. Welcome to Money Talk on Radio Three. From me, Peter Lewis. Here are the top business and finance headlines for Wednesday, 13 April. Surging energy and food prices in the United States have sent inflation to a 40 year high. Consumer prices rose 8.5% in March, the fastest annual gain since December 1981. The monthly rise was 1.2%, the fastest jump since September 2005 and a sharp acceleration from February’s zero 8% increase. Russian President Vladimir Putin says peace talks with Ukraine have reached a dead end, and he accused Ukraine of deviating from agreements reached in talks in Turkey. He said Russia’s military operation will continue, blaming Ukraine for inconsistency in key issues and fake claims about war crimes. The World Trade Organization said that global trade could be cut almost in half and is expected to grow by 2.4% to 3% in 2022, lower than its previous estimate of 4.7% in October due to the ongoing conflict between Russia and Ukraine. Wto said the war could lower global GDP growth by zero 7% to 1.3 percentage points. Sri Lanka said yesterday will temporarily default on its foreign debts amid its worst economic crisis in over 70 years.

The country was due to pay a $1 billion international sovereign bond in July, part of a total of $7 billion of debt payments due this year. Sri Lanka’s foreign reserves stood at just under 2 billion at the end of March, and Shanghai saw a drop in new covert cases on Thursday after ten straight days of record highs. The financial Hub reported 23,342 new local cases for the day, compared with just over 26,000 the day before. However, it was being reported yesterday that authorities are backing away from lifting restrictions in several thousand low risk areas. On today’s Money Talk, we’re joined by Dicky Wong from Kingston Securities, Carlos Casanova of UBP, and Tony Nash, founder and CEO at Complete Intelligence. The moderation in core CPI initially prompted a rally in stocks on Wall Street and sent US Treasuries higher. But stocks then gave up their gains as the session wore on, with the S Amp P 500 and Nasdaq falling for a third day. The S Amp P 500, which was up 1.3% at the high of the day, closed a third of a percent lower at 4397. The Dow relinquished a gain of over 360 points to close 88 points lower at 34,220, and as the composite index, which was up 2%, declined zero 3%, ending at 13,372.

In Europe, the regional Stock 600 index fell a third of a percent. Deutsche bank and Commerce Bank led losses for the index, with both falling more than 8% after an undisclosed shareholder unloaded roughly 5% stakes in both German banks. London’s footsy 100 dropped null. .6% and it was a volatile day for mainland China and Hong Kong stocks, which opened higher before plunging late morning and then staging a drastic rebound in the afternoon session with reports that the China National team was actively supporting the market. The rebound came amid calls from China’s market regulator that firms buy back shares and ask major shareholders to support stock prices amid a sluggish stock market. The Hangsting index had slipped half a percent by lunchtime to a four week low before rebounding to close 111 points, or half a percent higher at 21,319. Tech index was up two and a half percent in the morning session before dropping zero 8% at lunchtime and then rebounding to close 1.4% higher. The Shanghai Composite recovered from losses of 0.8% to close one and a half percent higher at 3213. $0.10 advanced 3.6% added 4.2% after China approved new online gaming titles for the first time since July.

In the commodities markets, brewing crude oil rose almost 6% to $104.87 a bowel. Gold is up close to 1% at $1,966 an ounce. The yield on the benchmark ten year treasury notes fell five basis points to two point 73% after hitting two point 83% early in the session. And in the currency markets, the US dollar is stronger this morning. The Euro is trading at $1.08 and a quarter cents. The Bucks at 125.5 Japanese yen Sterling is worth one point $0.30 and Hk$10.19, and the Chinese yuan is at six point 38, versus the dollar in offshore markets. Bitcoin this morning is about 1% firmer at $40,100. Around Asian stock markets this morning. In Australia, the SX 200 up about zero. 1%. Stocks in Japan have now opened the nicate 225, about three quarters of a percent higher. The Cosby in South Korea is half a percent higher, but futures markets pointing to a loss of about 70 points for the Hang Sein at the open this morning. Fine. Let’s welcome our guests. We have with us Dicky Wong, head of research at Kingston Security this morning, Dickie

DW: Good morning, Peter. How are you?

PL: I’m well, thank you. And also with us, Carlos Cassanova, senior Asia economist at UBP. Morning to you, Carlos.

CC: Good morning, Peter.

PL: And over in Texas, in the USA, we have Tony Nash, founder and CEO and chief economist at Complete Intelligence. Thanks for joining us again, Tony.

TN: Thank you, Peter.

PL: Let’s start in the US with those inflation numbers. Surging energy and food prices in the United States have sent inflation to 40 year high. Consumer prices rose eight and a half percent last month. That’s the fastest annual gain since December 1 981. The monthly rise was 1.2%, the fastest gain since September 2005. Excluding food and energy, core CPI increased 6.5% on an annualized basis in line with expectations, core inflation rose zero. 3% for the month energy prices, they were up 32% year on year food prices, they jumped 8.8%. And shelter costs, which make up about a third of the CPI, rose by 5%. Tony, you’re over there in the US, so let’s start with you. It’s hard to find very much good news in this data. But who do workers blame for this?

TN: I think a lot of Americans really do see inflation rising as Joe Biden has been in office. It’s accelerated during his tenure. So whether it’s his fault or not, he’s sitting in the seat while it’s happening. There is a lot of resource from the White House going into saying that this is Putin’s inflation responsibility, claiming that inflation didn’t really accelerate until the war started. But again, if we look back to the rapid acceleration of inflation, it really started, I guess you could say maybe October. But we’ve been at this for a year or so. I think Americans working level, Americans, whether they’re working class, blue collarly workers, they’re obviously the hardest hit by this. And for workers at those levels, it’s really looking at the political issues, not something that’s happening on the other side of the world.

PL: So what can Joe Biden do to try and bring inflation under control? What are people expecting to do?

TN: Well, I think one of the really easy things that he could do, which I’m in Texas. So this is a very biased view, but since Joe Biden has come to office, he’s put a lot of restriction on the drilling and transport of oil and gas. And so there could be a lot of alleviation of energy prices if the White House would remove the regulations that they put in place on the drilling and transport of oil and gas. The White House also killed a pipeline of Canadian crew or a pipeline from Canada that would transport heavy crude to American refineries, which is what’s needed for petrol or gasoline here. And Americans actually don’t necessarily use the light sweet crude that’s refined or drilled, say in Texas. They use the heavy sour crew that say from Canada and from Venezuela. So the pipeline from Canada would have been very helpful to keep prices stable in the US, energy prices stable in the US, but that was killed literally on the first day of the Biden administration.

PL: Vicki, what is the impact for markets and particularly out here, US markets? They rallied initially because they took some optimism for the fact that the core CPI had declined slightly from last month, but they lost those gains. How do you think markets are going to respond to this?

DW: Well, in terms of inflation, I guess it’s an overall problem not only in US but basically everywhere else, also in China. And you may say, like Russia invasion of Ukraine intensified the situation of inflation in US, but inflation is already there. It’s already a problem in US. So in terms of the market expectation, I would expect first of all will probably have another rate cut for even 50 basis points in May and continue to high interest rate until the year end. At the year end, maybe the sets and target rates will be like two point 75 even at this really high level compared to one year ago. So in terms of the year car still going on, keep going up there’s no question ask but already probably the market already digest this kind of situation like you asked me have to continue to high interest rate. But in terms of in mainland China is another thing. Even though China official CPI rose by 1.5% in March, still below US CPI or everywhere else in Europe. So expecting that PVoC may have some kind of room to have an outer round of rate card or triple archives.

But in terms of the situation now in mainland China it’s pretty dilemma because if they really want to have another round of fresh cut of interest rate or even triple R may intensify the situation now because the ten year value of the US Treasury is slightly higher than the same period treasury in mainland China. Now it may be some kind of money outflow from mainland.

PL: Is the window of opportunity for the PPO to go and cut rates? Is it closing the worst this inflation data gets? It doesn’t leave them much opportunity, does it?

DW: Exactly. So I don’t really expect a rate cut in the near term but maybe I expect Arrr cut instead of a rate cut because rate cut create a high pressure of capital outflow. We have already seen in March no matter in the bond market, also in the Asia market from the stock connect. So people actually getting money out from mainland China. So this is also another reason why recently the Asian market underperformed even the US market because the capital outflow. So it’s not a good timing for China but then you still have to think about it, what they can do because capital outflow and intensified the situation in Russia and Ukraine. So also create another round serious pressure. The CPI future growth is mainland June.

PL: Let me bring Carlos in. Carlos, this is not an easy situation for central banks to deal with, is it’s? Because this is not demand led, this is a supply shock, correct?

CC: I think what we saw in the market this week was some investors pricing in the probability that inflation was peaking within the next few months. We think it’s a little bit early to say we are expecting around eight to 9% inflation in the US in the coming months and of course then a gradual descent, but it will nonetheless remain significantly higher than expected in 2022. And as Tony was mentioning, this will be front and center with Biden facing elections in the fall. So I do think that central banks around the world are going to be very focused in trying to address the demand side factors or drivers of inflation even as they have very little control over the supply side factors. And on that note, just keep in mind that we have this conflict in Ukraine that’s leading to supply chain disruptions. But we are already seeing disruptions to global shipments through the Port of Shanghai following from the lockdown there. So it is likely that these supply factors will continue to exert pressures in the coming months. So in my opinion, I think central banks will unfortunately remain in this very hawkish trajectory even though they don’t have 100% control.

PL: And what does the PPOC do? That’s probably the one major central bank in the world that would like to ease monetary policy to cope with the slowdown there on the mainland. It’s in a difficult position as well, isn’t it?

CC: Ppoc is in a very difficult position because we’ve seen authorities voice their concerns about the lack of easing quite a few times since the middle of March, and yet PPOC has an east the risk of outflows is real. We saw that China’s premium over the US in terms of its ten year yield is completely gone. So any form of eating will exacerbate potential capital risks. But you have inflation creeping up potentially above the 3% target set by the beginning of the year. So the conditions could turn less accommodative very quickly. So PPO has a narrow window of opportunity in my opinion to deliver stimulus and a triple our card won’t be enough given what is happening in Shanghai, given that we have -40% sales in the housing sector and that accounts for a third of the economy is not going to be enough to get us from where we are now to 5.5% growth by the end of the year. So unfortunately, they should be doing a rate cut even if that exacerbates capital outflows and even if the impact of a rate cut might be more muted as most people remain in some form of lockdown.

So it’s less easy to go out and spend money. I think that is something that PVC has been discussing, but it doesn’t matter. They need all hands on deck in order to reach the fact growth target by the end of the year and really running out of time given that inflation is rising.

PL: Tony, you mentioned energy prices, but of course, food prices are also jumping as well. They were up 8.8% over the period. We’re seeing global trade slow quite dramatically now. And the UN saying that the war in Ukraine is causing a huge leap in food prices. The UN food prices index is at a record high. It was up 13% in March are on consumers feeling that as well. Over in the United States, this rise in food prices?

TN: Yeah, for sure. Americans are feeling the rise in food prices. I think, however, the most acute food price rises will be in places like Lebanon and Egypt and other places that are more directly affected by the Ukraine and Russia war. Here in the US, we do have pressure on wheat and corn prices, corn prices or maize prices. There’s upward pressure on those prices partly because the White House just said they want to add corn to fuel here to in their minds, reduce fuel prices. So there’s pressure on corn both to feed people and for fuel now and of course, with proteins, those prices are up as well double digits. So Americans are feeling it really all around, but not as acutely as some of the people in Europe and the Middle East will as the pressures from, say, Ukrainian and Russian exports hit those markets.

PL: We’ve already had an energy shock in many parts of the world. Do you think we’re heading for a food crisis that we’re going to see shortages, we’re going to see prices soaring, and maybe, as unfortunately always happens in this case, it affects the poorest parts of the world the most?

TN: Yes, it does. And sadly, I think that is the case because places like Ukraine and Russia do provide so much mostly Ukraine provide so much weed and maize and cooking oil to some of these markets. So, yes, I definitely think that that is.

PL: Our Americans questioning President Biden’s support for Ukraine. When you start to see the costs of this mounting. They’ve banned American. They banned Russian oil and gas imports. That’s helping fuel price rises. They’re seeing the price rises in food. Are they starting to question whether or not the US is on the right track supporting Ukraine?

TN: I don’t know. I know that a number of Americans have questioned it from the start, not that they don’t support Ukraine, but Americans are worried about being directly involved, meaning sending troops to Ukraine. I think Americans generally are comfortable sending weapons and supporting with that aid, but not necessarily with the troops.

PL: Okay, Dickie, let’s talk about the lockdowns up on the mainland. There was a slight decrease in COVID cases yesterday, but we’ve had ten days now of record cases in Shanghai. Guangdong, Guangzhou has gone into a partial lockdown as well. Now, what sort of impact is this having on the economy?

DW: Well, that’s so obvious. The big lockdown in Shanghai may give some kind of pressure to not only the first quarter GDP, but indeed the 5.5% annual gain of the GDP. It’s probably not that easy to achieve. So I do see some kind of civil linings because China’s government recently added some of the approval of the online and cellphone gaming. And also when we talk about the first quarter lending also hits record to 1.3 trillion before PVC take any action in the first quarter because last year PPOC cut LPR rate triple R, but not this quarter. So I would expect definitely I do agree that PPOC has to take some kind of action like seriously to treat the problem, especially the lockdown in Shanghai. And 5.5% is not something easy. So they have to no matter fiscal policy, monetary policy, and et cetera regulations has to be used, especially some of the tech companies.

PL: Let me ask you also because I want to ask you about the markets as well. We’re seeing a lot of calls now from Premier Leakage, the State Council to take steps to support the economy and also from the regulators now to support the market the China Securities Regulatory Commission wants shareholders to buy back stock. It wants Social Security funds, pension funds, trusts, insurance companies to increase their investment in the markets. What are your thoughts on this? Isn’t this the regulator going way over their skis here? It’s not the job of the regulator, is it to tell companies to buy back more shares and to put public money into the stock market? Surely this is way, way beyond what the regulator should be doing.

DW: Well but in terms of the mainland market, the HR market, this is probably the regulator will regularly do I know they do it but it’s wrong isn’t it wrong that the regulator should do that?

PL: It’s sort of almost an outrageous abuse, isn’t it? The regulator should be there to make sure the market operates fairly and efficiently to crack down on abuses but not do this?

DW: You may say so but the regulator to mainland because you can see intensifying the tension between China and US never gone and also like recently no recently just yesterday the holding foreign companies accountable action called Hscaa a fresh round of addiction of a lot of Chinese companies like more than twelve companies this is the fourth round already it gives some kind of pressure to the ADR market yesterday in US and definitely some of the ADR may open slightly lower today although the pressure may not be as high as the previous one or the first round of the addiction of the Hscaa but because of the tension of these two countries China may have to do their own thing so in terms of like Green Valley always comment about the stock market and try to interfere with the stock market I will not say good or bad but at least it would be some kind of support to the local Hong Kong stock market so I believe we find support at 21,000 because investors may expect or they will expect like PPOC will take action very soon so it may help to stabilize the overall sentiment in Hong Kong as well as in Asia Carlos.

PL: We’Ve heard Premier Leakage now has issued his third warning about economic growth in under a week what can they do?

CC: Well, we do expect to see weaker growth in March, April and May so those will be the three weakest months I think that in addition to doing more monetary policy and fiscal policy support the big question Mark is will they announce some easing of restrictions or at least provide some degree of regulatory clarity for global investors? On the housing and also tech front there’s a whole debate around this. Recent regulations surrounding dual circulation in China points to some additional regulatory headwinds for some of these companies but I think that the issue is not so much regulation it’s more the lack of visibility so they are likely going to at least provide that in the coming weeks. And of course, if this contraction is bigger than expected in the first half, and I did use the word contraction because I do think that GDP has a chance of actually declining in Q two, then the measure of last resort in order to achieve that growth target would be to effectively inflate the housing sector again in Q four. But we should be back to square one. So I think they will try as much as possible to use more Australian and other channels to try to prop up the economy so that growth doesn’t follow the cliff.

But they are running out of time and we do hope that they will announce something big in April.

PL: Okay, Tony, final word to you. I know all sorts of things go on on the mainland that perhaps wouldn’t go on elsewhere, but when you see the regulator trying to arm twist companies into buying back their own stock and get public funds to get the market back up, what do you make of that, Peter?

TN: It reminds me of June of 2015, if you remember, when markets on the mainland really fell pretty hard. There is pressure domestically in China for people to buy shares for a patriotic reason. Even within the Chinese bureaucracy. There was pressure for Chinese bureaucrats to buy shares. So I think they’re just doing it out loud now and they’re doing it for the companies themselves. But to me, when I first saw this news, it really was an Echo of June of 2015 when markets fell and there was real pressure on Chinese retail investors to buy the dips and to support the market. And a lot of them lost. I knew people there who lost 2030, 40% of their wealth because they were buying patriotically.

PL: Yeah. Okay. Well, that’s a fair warning. Thanks very much. That’s Tony Nash, founder and CEO and chief economist at Complete Intelligence. Dickie Wong, head of research at Kingston Securities, Carlos Casanova, senior Asia economist at UBP. You’re listening to Money Talk on RTHK Radio Three. Let’s take a final look at the markets for today. In Australia, the SX 200 up zero 2%, the Nico two five in Japan rallying as well, up zero 8%. The Cosby is up. A third of the cent in South Korea does look like, though the hangsting is going to fall slightly, about 50 points or so at the Open later on this morning. Thank you very much for listening this morning. Please join me again for the final time this week in a holiday shortened week at 08:00 tomorrow. Stay tuned for covered updates after the news with Jim Gold and Anna Fenton. The weather forecast, mainly cloudy, few showers going to be hot with sunny intervals during the day. Maximum temperature of 29 degrees, mainly fine and hot during the day tomorrow. And on Friday, the temperature right now 25 degrees, 82%. Relative humidity 32 here’s Andy Shawski with the half hour news.

AS: Thank you, Peter. The head of the Government’s policy innovation and coordination office says the authorities have expanded it’s $10,000 subsidy for people who have recently lost their jobs Due to covet. Officials say they have received 470,000 applications for the subsidy. In February. They expected only 300,000 Would apply. Doris Hoe said that’s because more people have lost their jobs.

DH: This is partly because more people were out of employment in March When the unemployment situation was in February and partly because we expanded our scheme subsequently to cover employees working in closed app premises such as affinity centers and beauty salons and who were forced out of work about their employers.

AS: Medical Association President Choi keen says the government initiative giving private doctors access to oralcobid drugs will definitely be effective in preventing severe cobalt infections. Authorities on Monday said that private doctors could request antivirals through a dedicated electronic platform. Doctor choice said this is a sensible arrangement.

DH: The patients usually see the GP first before they go to the emergency Department before they get very ill, so it’s the first stage that the antivirus are infected. So if they are seen at the first stage and given the medication, they will not proceed to a very ill stage so it is effective and useful.

AS: Police in New York are searching for a man who shot ten people at a Brooklyn subway station during the morning rush hour. Six others were also hurt, Mostly through smoke inhalation. None of the injuries are life threatening. The New York city police Commissioner, Ketchen Sewell, gave details of the incident just before 824 this morning.

KS: As a Manhattan bound and train waited to enter the 36th street station, an individual on that train donned what appeared to be a gas mask. He then took a canister out of his bag and opened it. The train at that time began to fill with smoke. He then opened fire, Striking multiple people on the subway and in the platform. He is being reported as a male black, approximately 5ft five inches tall with a heavy build.

AS: The city of Guangzhou has reported 13 new COVID cases. Health officials in the city say the new infections were linked to previous cases, but they warned that transmissions might have been taking place for some time before the new cases were found. And the next few days will be critical. To contain the outbreak, local authorities have been conducting mass testing to screen out patients primary and secondary schools of suspended face to face class.

Week Ahead

The Week Ahead – 14 Mar 2022

Post author By admin
Post date March 12, 2022

This week, we saw commodities skyrocket then drop off. We saw crude oil hit levels not seen since 2008, with gasoline and home heating prices on everyone’s minds. The nickel market broke the LME. Chinese tech and real estate bloodbath. And – despite all of this – Janet Yellen assured us there will be no recession in the US. Quite a week.

As we said last week:

– Tracy called for commodity price volatility – across sectors

– Downside bias in equities with high volatility. Albert predicted 4200-4250 and pretty much nailed it.

– Sam said a Fed rate rise would become boring and talk of QT would disappear.

This episode we talked about mostly the energy commodities with the continuing Russia-Ukraine conflict. Can the US use other alternatives like the West African oil to replace Russian oil? What are the politics around Venezuelan oil and why is it the same as getting Russian oil?How about uranium — and can the US produce it and will the conflict affect rare earths? Is this war the reason for the US’s inflation? How will inflation actually play with voters in this year’s US election? Lastly, what’s happening in Chinese tech and real estate and why there’s a bloodbath and for how long will this continue?

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

For those who want to listen on Spotify:

https://open.spotify.com/episode/35aHRd7oVfj7zPvgZjyQXg?si=d74bba8f8d094e29

Follow The Week Ahead experts on Twitter:

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

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I appreciate if you could like and subscribe to our YouTube channel. And also please know that we have a special offer for Week Ahead viewers for CI Futures, which is our market data and forecast platform. CI Futures has about 800 assets across commodities, currencies and equity indices and a couple thousand economic variables. We track our error. We have very low error rates. So we’re offering CI Futures to Week Ahead viewers at a $50 a month promotion. You can see the URL right now. It’s completeintel.com/weekaheadpromo. That’s a 90% off of our usual price. So thanks for that.

So these week, guys, we saw commodities skyrocket and then drop off. We saw crude oil hit levels not seen since 2008. With gasoline and home heating prices really on everyone’s minds. The nickel market broke the LME, Chinese tech and real estate. We saw a blood bath there. And despite all of this, Janet yelling assured of us that there will be no recession in the US. So it was quite a week.

So let’s look at last week. Tracy called for commodity price volatility across sectors. So it wasn’t just an oil call, it was across sectors. And we saw that in spades. We talked about a downside bias in equities and high volatility. Albert predicted a 4242 50 range, and he pretty much nailed that. And then Sam said that a Fed rate rise would become pretty boring and talk of QT would kind of disappear. And we’ve really seen that happen over the past week. So, well done, guys. I think we need to really focus on inflation this week. Inflation and quantity prices are on everyone’s mind. Energy is the first kind of priority, but it’s really come across, like we said, nickel and other things.

So, Tracy, let’s start there. We have a viewer question from At Anton Fernandez, Russian oil, if you don’t mind helping us understand the environment for Russian oil and what’s happening there and some of the alternatives, which we’ve covered a little bit before, but also West Africa. Is West Africa viable within that? So if you don’t mind talking to us a little bit about what’s happening in the crude market and also help us with a little bit of understanding of the context of West Africa.

TS: Yeah. So if we look at the crude market in general, what we have been seeing, we’ve seen sanctions from Canada, which is basically political. They haven’t bought anything since 2019. We also saw Australia sanctioned oil, but they had only bought a million barrels over the last year. It’s nothing. The US only 600,000 bpd. That is nothing. And UK is going to take a year to get off oil because it’s 11% of their imports as opposed to 2% of our imports. That said, what we are seeing in this market is a lot of self sanctioning. Right.

So we’re saying we have nine Afromax Russian oil tankers basically sitting aisle because they can’t get insurance and nobody wants to pick up oil right from them. Actually, what is most surprising right now, I have to say, is that looking at Asian buyers, everybody thought that Asian buyers because it would be offered at such a discount, they would be buying this stuff up like crazy. But there was just an auction for SoKo, which is a very popular grade with South Korea, China, Singapore and Hawaii, and there was literally zero bids.

TN: Really? Wow.

TS: The next auction that we need to be looking for is ESPO, which is the most popular grade for China refiners. But if we see a zero bid there, that would be indicative of saying that we’re taking a lot of brush and barrels.

TN: Chinese we’re not seeing any interest there, at least so far.

TS: Right. Which is quite incredible because the Chinese have always decided to be apolitical. Right. And they don’t recognize Unilateral sanctions and they have stressed that. So whatever sanctions that the west has, China says we don’t care about that. We saw that with Iran as well.

TN: Right.

TS: But it’s pretty incredible to see this particular auction go at zero bid. Right. In regards to looking at West Africa, I’ve been talking about this since 2020. Niama is a very interesting place. There’s been a lot of offshore activity there. And so I think that is a place to be looking for. The problem is that looking at offshore projects, they take it’s a seven to ten year timeline, as opposed to something like Shell, which is six months to 18 months. But yes, there’s definitely opportunity.

TN: So is West African crew substitutional with Russian crude?

TS: No, it is not.

TN: Okay. So is it lighter, that sort of thing?

TS: It’s lighter. It’s lighter crude oil, what we’re looking at right now. And this is exactly why the US went to Venezuela and said, we’ll be willing to lift sanctions with you as long as you only sell us oil.

TN: Right.

TS: And the funny thing is that they have a very good relationship with Russia. The problem with this sort of relationship is that we could inadvertently be buying from Venezuela that is actually Russian oil.

TN: Sure. Exactly. So it’s an interesting point on Venezuela. Albert, what are the politics around that we just pick up the phone. Does Lincoln just have a conversation with Venezuela? We send a deputy sect down there, do a deal. How does that work? And is that palatable?

AM: No, it’s not palatable. It’s an absolute joke. Like Tracy said, the Russians have their tentacles all over Venezuelan oil, that you would be self sanctioning yourself from Russian oil globally, but then buying from Venezuela, which is going to be mixed because everybody in the industry knows that if you want to mix oil, you do it in the Caribbean, especially from sanctioned oil from overseas. So it’s not palatable. It’s a joke. I don’t understand what they’re trying to do. It’s just a Wally world at this point.

TN: I guess the thing that I’m continually astounded by is the diplomatic actions of the US administration from Anchorage through this week with Venezuela. They just seem to be tripping all over themselves. What am I missing? Like they just seem to be eroding credibility by the day. Is that fair to say?

AM: It’s more than fair. They’re throwing spaghetti at the wall and seeing what sticks based only upon their little echo chamber of ideology. And it’s extremely naive ideology when it comes to geopolitics or what they’re doing right now.

You can try to erase Russia and go play and then think that you can go to Iran and cut a deal with Iran, not understanding that Russia is going to sabotage that deal. Right. Like they did just today.

TN: Tight diplomatically. While we’re on this this week, the headline said that the UAE and Saudi declined having talks with Joe Biden this week. Is that true? Is the headline the reality of it? And from the time Biden came into office, he was not friendly to Saudi Arabia. So is this payback from that?

TS: No, I don’t think so. Sorry.

AM: Actually, I think it is that it is payback because you have the Saudis and the UAE that have security concerns with the Houthis and the Iranians. And if you’re sitting there approaching the Iranians playing all nice with them, what do you think MBS is going to do?

TS: I agree with Albert on that respect. I just want to interject that the OPEC + Alliance has mainly tried to stay apolitical. Right. So just because the United States says OPEC produce this much more, Saudi Arabia and UAE, which are both the producers that can produce more than the rest, had come out this week and said no, we’re in this alliance and this is how it is, which is totally understandable.

AM: Yeah, but Tracy, but the problem is OPEC saying that is one thing but not taking his call.

TS: No, I agree with you. I agree with you that we have burned bridges. I’m not disagreeing with you here whatsoever. I’m just taking a different kind of look at this.

TN: Sam, what’s your view on that? I’m not hearing you.

SR: Can you hear me now?

TN: Yes, sir.

SR: I would say the naivety of believing that you’re going to have a JCPOA deal or you’re going to be able to have some sort of comeback in terms of Venezuela. So you add the two of those together and who cares relative to what you need to replace Richmond Oil? I mean, it would be great and fine, whatever, but it’s nowhere near enough simply. Right. But it’s also a political naivety to believe that you’re going to have that type of dialogue and you’re going to have it quickly.

TN: Right.

SR: On the front of Saudi and UAE, I would say it is both an OPEC Plus. We’re not going to blow this up before it blows up on its own from the call it the allies of OPEC. Plus.

It’s also the UAE and Saudi is saying, remember, you want to be friends with us, US.

TN: Yeah.

SR: Don’t pretend you don’t want to be.

TN: Right.

SR: So I would say it’s politics in the best possible way on that front. And on Iran, JCPOA, and Venezuela, it was wishful thinking to think that the Russians were going to say no on both fronts.

TN: Well, and the Chinese. Right. I think there are a number of Venezuela has relationships with both Russia and China.

TS: That’s all I was saying is that OPEC is not going to give up that plus alliance. They’re going to try to stay apolitical. Right. Whatsoever. Do I think that the United States is pushing OPEC to Russia and China? Absolutely. Do you see the huge deal that Saudi Arabia made today? Absolutely. Right.

So they’re looking at investing further into China because they are being pushed away from the United States. So agree on that aspect. But I’m just trying to say that they do try to stay apolitical. If you look at the history of OPEC, Iran and Saudi Arabia have been able to subsist cohesively in the OPEC alliance, regardless of the years of them being enemies and having proxy wars against each other. That’s all I’m saying.

TN: Okay. Let’s move on to the next thing. There are a couple of questions about commodities, Tracy, and let’s just cover these really quickly. We have a question about uranium from @JSchwarz91. Will the US ban or will Russia restrict its uranium and could the US actually start producing uranium on its own? Is that a possibility?

TS: The US won’t restrict uranium. It hasn’t restricted uranium because we actually buy a significant amount of uranium from them. It’s easy to say we can skip 600 barrels per day of oil, but not as easy to do with uranium. We’ve stayed away from that.

Will Russia decide to not sell to us? Again, it’s about money, so probably not unless we really push a button in there. Can we produce that amount of uranium in the United States? Absolutely not.

TN: Interesting. Okay. Let’s also move on to rare Earth. So we have a question from @snyderkr0822. He’s asking about the impact of Russia and Ukraine on the availability of rare earths. Is that a factor or is rare Earth more of a China thing?

TS: That’s more of a China thing. We all have to watch to see if China sides with Russia and see how that market ends up. But really, they’re the largest producer in the world, and that’s who we are largely dependent on for rare earths.

TN: Okay, great. Thanks for that.

Now let’s move on to kind of this war driven inflation narrative that we’ve seen over the past a couple of weeks. We had February inflation come out today, and I feel almost as if we’re being tested as a trial balloon for an inflation narrative that inflation is kind of Russia’s fault.

So, Sam, can you talk us through some of the economics of this? Is inflation a new thing like did it just happened two weeks ago?

SR: No. So the inflation narrative going forward, there’s some validity to Russia being the reasoning behind an increase over a base case. Whatever you want to decide that base case is. But in February, January. December and November, those are not in any way related to Russia generally.

What’s interesting to me is how many people are kind of forgetting that, we kind of had a little bit of a log jam breakup in supply chains beginning to occur. It looks like we were going to get a little bit of respite from that narrative. But now if you looked at what’s going on in the neon market, if you look kind of six to twelve to 18 months down the road, it looks a lot less like we’re going to have that log jam broken up and a lot more like we’re going to have somewhat persistent inflation that there is no way for the Fed to solve. There’s no way for the ECB to solve BOJ, et cetera. You’re just going to have to continue to have this hawkish language to try to tamp down those longer term expectations.

TN: Demand destruction.

SR: Demand destruction. But it’s really hard to destroy demand for semiconductors when they’re in everything from my daughter’s doll to my laptop. It is very difficult to destroy that much demand and create an inflationary environment that is less toxic to the Fed or to the ECB without breaking something.

So if the Fed isn’t willing to break something in the next call it six months. They’re not going to break inflation. And if you print out six months from now, you’re breaking something into a midterm election.

TN: Right.

SR: So I’m so much skeptical on the Fed’s ability to do anything at this point.

TN: Right. That’s a great transition to Albert. So how is inflation playing with voters?

AM: Oh, it’s absolutely nuclear football. Allowing inflation to go this high is just going to be devastating to the Democratic Party and Joe Biden. But I want to go back because I have a couple of contentious things to say. Right.

TN: Please do.

SR: Oh, God! Right.

AM: So everyone is pricing in five, six, seven hikes at the moment. Right. But inflation at the moment has probably taken three of them out of the equation because the money’s gone. It’s erasing money left and right at the moment, from the federal point of view, it’s like, why really get rid of it all? That why really attack it when it’s doing our job for us where we only now have to hike three times. Right.

And on top of that, something even more contentious is everyone knows that once the VIX gets to a certain price, somebody sells it off. Right. Somebody industry. Right. But everybody knows that. And when everyone knows that, the house casino usually moves to a different area. What about oil? What if somebody with a big account has bought oil futures and every time it gets to the 120s or 130s, they just crush it for $1015 and the market rallies again.

So this artificial inflation that obviously we have real inflation just because of wage inflation and supply chain. But there’s a little bit of artificial, artificial aspect to it that I think the Fed has been using. Politically, it’s going to be extremely damaging. But for their point of view is if they can get over it and then get the rate hikes out of the way and then maybe probably start QE later in the summer, They could suck their voters at the beginning of the economy back on track again. I don’t think it’s going to work.

TN: Let’s say a month or so ago there was suspicion that we would be doing QT in say June, July. That’s off the table now because of the money that inflation is taken out of the market, right?

AM: Absolutely.

TN: But we’ll do rate hikes and have QE potentially?

AM: That’s right. That’s my point.

TN: You’re in an insane phase of economic history.

AM: It’s just look around, Tony. What’s not insane at the moment?

TN: Undoing this.

TS: That’s 100% fact.

TN: Undoing this is going to be insane. Okay, speaking of undoing crazy stuff, the Chinese techs and real estate stocks really have some problems this week.

So Albert, Sam, can you guys talk a little bit about that? And we have a tweet showing some stocks from Tencent, Alibaba, JD, other ones down 50, 60, 80%. So what’s happening with the tech blood bath in China?

SR: I’ll just do a quick start. Did you see the numbers coming out of JD? They were horrible. I mean, they were absolutely atrocious. So, yeah, you’re going to get a sell off in tech broadly across the board in China. When your numbers are horrible, then you’re going to have additional pressure put on the potential for delisting in the US and the general call it risk off move in markets. So you’ve got the trifecta of horrible for Chinese tech in a nutshell.

But the JD numbers were absolutely atrocious on a revenue growth line. And there’s no way to save Chinese tech if you’re going to have numbers like that. If you continue to have numbers like that, guess what? Look out, because the bottom is not in.

On the Chinese real estate front, I think Albert has a much better view on this than I do. But I would say if you’re going to have a risk off in tech, good luck having a risk on in real estate.

TN: Sorry. Let me stop you before I move on to real estate. So the tech story, what I’m pulling away from there is that it’s potentially disposable income story at the retail level, at the consumer level, and tells me that China is way overdue with its stimulus. Is that fair to say?

SR: That’s harder to say.

TN: Okay.

SR: I would be very careful in saying that the Chinese consumer is not there. China is coming with stimulus. If you’re trying to hit 5.5 by the end of this year and you’re going into a plum, guess what? You got to hit the pedal.

TN: Well, they better hurry up.

SR: They’ve got time, but they’re going to hit the pedal. And the question is how do they hit the pedal? And it’s got to be the consumer because they’re not going to hit it on real estate.

TN: No, they’re not. Going through some of the real estate.

AM: Yeah, well, I have a couple of points to make on. I have a couple of points about the tech. China tech. What was interesting is Sam is right. JD numbers were horrible. Right. This SEC Delisting thing pointed out five companies. Right. Just five. And the big ones. Gamble is a big one. And whatnot. But why only five? It happened to be the only five that actually did their accounting and submitted their accounting numbers. Right. And would that actually let a snowball effect out to say, Holy crap, they will take down every single Chinese number, Chinese company in the market. That’s why a lot of this actually sold off harder than you think it would sell off.

Going to the real estate market. I mean, 75% of China’s fault is real estate. So unless Xi wants pitchforks and torches coming after him, he’s going to have to stimulate the economy, something to support the real estate market.

TN: Yeah. It seems like it’s going to have to come hard and fast. I could be wrong. But, you know, with.

AM: I think by June. I think by June he’s got to do something. He has to.

SR: Hit through the middle.

AM: Absolutely.

TN: Good. And do you guys have any ideas on what exact forms that’s going to take? I mean, of course they’re new triple R, of course, taking a new infrastructure spending. They do the stuff. They announce it every other year. Are there other forms that you have in mind that will take that?

AM: I don’t, to be honest with you, that is $64 million question. To be honest. That’s a big question. That’s very complex.

SR: Yeah. And if I had the answer to that question, I probably wouldn’t be on this call.

TN: Come on, Sam. We know you would.

SR: I would be on a yacht somewhere.

TN: Yeah, that’s right.

TS: It’s interesting about that. If you look at the energy perspective, they just had a meeting and they totally decided that they’re going back to coal other than anything else. So that to me that signifies we have stress in other markets. Right. We cannot spend the money in other places. So we’re going to go back to what we do best, what we know best. And they also offered, if you look at internal documents that are offering huge discounts for going back into the coal industry or whatever. I just like to.

TN: So there’s still 73% coal for their power generation, something like that?

TS: Yes. So for them, they backtracked on COP. They need the money right now, in other words.

TN: Right. So the whole Paris agreement is a convenient agreement, is that what you’re saying?

TS: Correct.

TN: Okay, very good. It’s good to know that we’re all committed to the future. Okay. So guys, speaking of the future, finally, what do you view for the week ahead? Albert, let’s start with you. Maybe with China. Do you think there’s more to come with the blood bath in China?

AM: I think there’s another week or two to come with China blood bath. And I think that’s going to obviously lean on our equities going into Fed week.

TN: Right.

AM: So yeah, I think we’ll be another down week.

TN: Okay. And guys, what about US equities? Are we on a steady decline down to some number 4300 whatever it is, or are we kind of about there? What do you feel is going to happen over the next week?

AM: I think we’ll be sub 4000 by the end of the week at some point.

TN: Okay.

SR: Yeah. I wouldn’t be anything other than market neutral until immediately following the Fed meeting and then you just rip it to the upside.

TN: Okay.

AM: Yeah. The only thing that I have a concern about is we still have this Ukraine war going on which is giving outrageous headlines and then if the Fed hikes 25 basis points and then extremely hawkish tones while Putin is shelling Kiev.

TN: Right.

AM: It’s hard to rip until after that’s all settled.

TN: So sorry, Sam, in your scenario, are you saying the first half up until say Wednesday we have a pretty quiet market, then Thursday and Friday, things are pretty active to the?

SR: Oh no, I am not saying that you have a quiet market until the Fed. I’m saying you don’t want to take a position period until the Fed and then you either want to grip it or rip it one or the other.

AM: I agree with that one wholeheartedly.

TS: These markets will continue to be volatile until we have some resolution with this Ukraine Russia situation just because of all every day we’re seeing new sanctions against Russia and against commodities within Russia, at least for the commodity sector. I think we’ll continue to see volatility, but over the long term I’m still very bullish commodity.

TN: Okay. So Tracy, Sunday night, futures open, crude traded very high. Do you think there’s a possibility of us seeing another dramatic spike like that in the next week or two?

TS: I think that mostly been priced out of the market. I think that was priced in right. We saw a lot of that risk premium come out of the market, which I was very glad to see. I would personally be happy if we saw it traded in the 90s again before going into high demand season because I do think that we will trade higher on fundamentals. But it scares me when we have these big kick ups due to headlines and geopolitical risk.

So for me right now I would like to see this market come down a little bit. I’d like to see it pull back some and hopefully things will resolve quicker than sooner with this situation. But still going forward, I’m still very bullish this market.

TN: Okay. We didn’t talk at all about nickel and metal’s markets, but we saw the LME close today because of a nickel trade supposedly. Will we see those markets reopen and will we see nickel trade? Is it scheduled to trade again on Monday and is there the potential for commodity specific disruption and markets closing over the next week or two because of the volatility.

TS: There’s been a very high contention discussion right now, especially within the commodities industry. I would just say that it was kind of unprecedented what we saw there and the fact that they canceled all the trades. I would say that hedge funds are kind of backing away from that market right now because they’re skeptical of that market right now. But again, it’s not like I don’t want to say this is going to be the norm or anything like that.

TN: Okay.

TS: I think this was a one off crazy thing. It happened in the aluminum market years ago and you can even look it up on Wikipedia, right.

TN: Okay. Last thing week ahead with bonds. Sam, what are you thinking about bonds? We’ve seen the ten year go back up to about two. Are we going to see that continue to take up?

SR: I don’t know. I think the ten year is a little less interesting than the five year and the seven year.

TN: Okay.

SR: The five year and the seven year are really what you want to watch because if the fed goes 25 and goes really hawkish, it’s the five and the seven that you’re going to get the juice from and the ten and the 30 you’re going to get a little less so watch the five and seven. I think the five and seven are really interesting here. If you want to take a bet on a really hawkish Fed.

TN: Fantastic. Okay, guys. Thanks very much. Really appreciated. Have a great week ahead. Thank you very much.

AM: Okay. Bye.

SR: Thank you. Bye.

Tags Alibaba, boj, Canada, ci futures, ESPO, Fed, JCPOA, LME, MBS, opec, qt, Russia, Russian, saudi arabia, Tencent, UAE, United States, US, Venezuela, week ahead

Week Ahead

The Week Ahead – 7 Mar 2022

Post author By admin
Post date March 5, 2022

Everyone’s eyes are on the Ukraine-Russia conflict in the past couple of weeks. How do traders make smart decisions in a geopolitically risky environment like this? Tracy Shuchart also explains why the fertilizer market is up 23% last week, what commodities are mostly impacted by the conflict, and how’s China’s energy relationship with Russia? Sam explains the effects on the emerging marketing of the different sanctions on Russia and why China’s exporting deflation is good for the US. Albert elaborates why the conflict is actually a “boom” for China.

This is the ninth 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.

For those who prefer to listen to this episode, here’s the podcast version for you.

https://open.spotify.com/episode/4SIvGPktSKT7ezaVPEUNPf?si=fcb635574d0047ba

Follow The Week Ahead experts on Twitter:

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

Transcript

TN: Hi and welcome to The Week Ahead. I’m Tony Nash and I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Thanks for joining us. Before we get started, I’d like to ask you to subscribe to our YouTube channel. And like this video helps us out to get visibility, helps you get notifications when we have a new video. So if you wouldn’t mind doing that right now, we would be grateful.

Also, we’re having a flash sale for CI Futures which is Complete Intelligence subscription product. We forecast about 800 markets assets, currencies, commodities, equity indices, and a couple of thousand economic variables with a very low error rate. We’re doing a flash sale right now for about $50 a month and you can see the URL right now, completintel.com/promo It’s a limited time flash sale so please get on that. That’s a 90% off rate on our usual price. So thanks for that.

So this week, guys, we saw commodities mooning. We saw exposure to Russia sovereign. Really a lot of sensitivity to that. Exposure to Russia commercial risk. A lot of sensitivity to that. Obviously the war in Ukraine is on the top of everyone’s mind. But we also had the removal of COVID restrictions in some key US States like New York. We had Joe Biden speak give the State of the Union address without a mask on. All this stuff, easing of national guidelines. So the risk aspect of COVID has gone in the US, but it’s largely gone unnnoticed. So while the war ranges on overseas, at home, we do have some regulation getting out of the way.

A few things we said last week. First, we said that Ukraine would get bloodier and the markets would be choppier. That’s happened. We said that equities would be marginally down. That’s happened and we said commodity prices would be higher and that’s really happened.

So in all of this, guys, the S&P 500 is only down about 15 points over the past week. So when you guys said it would be down marginally with a lot of volatility, you were bang on there. So very good job there.

So our first question today is really a basic one and I’d really like to get all of your different views on this. When we have geopolitical events like we have now, how do you guys make trading decisions? What do you pay attention to? Albert, do you want to get us started?

AM: Yes. Personally I view the market as we’re stuck on repeat right now, especially with the Ukraine and everything fundamentals to me right now. I mean, honestly don’t really mean much. And when we had the jobs number come out and then it was everyone just yawned about it because the nuclear power plants were getting firebound.

So for me I’m looking for the Fed to support the market to a certain degree and looking for geopolitical news events to come out and just scare the bejesus out of people.

TN: Okay. Tracy, what are you looking at? Sorry, Sam. What are you looking at?

SR: Yeah, I’ll jump in there 100% agree with Albert. It’s very difficult to trade when the market is just trading on headlines. It is a straight headline market. And does oil look great here? Yeah, but you get one good headline saying that it looks like tensions with Russia are declining and you’re going to have a $5 gap down in oil and probably get stopped out of your position.

To me, it’s one of those very scary moments for anyone who’s trying to trade in that you never know which way the headline is going to come in next. If you’re playing headlines, you’re going to get in trouble and you’re going to get in trouble pretty fast, unless you’re just getting lucky. So for me, headline driven markets are mostly about selling ball and spikes and getting out of the way on everything else.

TN: Tracy?

TS: Well, being that I mostly look at the commodity markets rather than obviously I look at broader markets. But for what I’m looking at, when I see this sort of volatility in the market, I think that you have to have a fundamental grasp of what is going on and what the trade differences are between countries so that you can kind of position yourself for a market change that is not subject to volatility, meaning that you have to know that the oil market is obviously going to be affected, for example. Right. No matter what dips are going to be bought in this market. So you have to have a conviction that this is going to be affected until something else changes, right?

TN: Yes. Tracy, let me dig in on that a little bit. You said something about Fertilizers. We don’t necessarily didn’t mention a specific company here, but you said something about Fertilizers earlier on Twitter today. Could you use that as an example of the type of analysis that you’re talking about?

TS: Yeah, absolutely. I mean, we saw the Fertilizer market rise 23% today. Russia is the second largest producer of Ammonium, Urea and potash, and the fifth largest producer of processed phosphates. And that country accounts for 23% of the global Ammonium export market. So what we saw in the Fertilizer market was an increase of 23% this week across the globe, not just in the United States, I mean, literally across the globe.

TN: I just wanted to cover this little bit because especially in social media, everyone’s an expert, right. So everyone’s a new political expert. Everyone overnight became a nuclear power expert, all this other stuff. And I just don’t want our viewers to fool themselves into believing that they can play these markets with certainty. But I like what you guys all said about you have to have a conviction. You have to have your stops in place. You have to understand when things are going. And headlines could go either way. So there’s a huge amount of risk out there. Right.

Is there anything else on this? Albert, what are you watching on the ground? How do you get information on the ground if you don’t have people? Are there reliable sources that you look at without having first hand research on the ground?

AM: No. Unfortunately, I don’t. I mean, we’ve come to this point where the nuclear plant attack and all of a sudden people are talking about radiation spikes and so on and so forth. And I actually had to get on Twitter and I’m just like, everybody, relax. Those things can withstand airplanes being hit.

A few bullets isn’t going to do the job. So for me, I personally have context in the region on the ground, both in Ukraine and Georgia. So for me, I get almost on the ground intelligence in real time. So that’s how I’m trading. That’s just the reality of it at the moment. The public is not going to be able to get that information. Right.

TN: Okay. This is great. I really appreciate this, guys. I think this is wisdom that comes from years of trading, but it’s also the reality that comes with dealing with geopolitics on a very intimate level. So thanks for that.

Let’s move on to commodities. We’ve seen commodities, wheat, especially skyrocket this week and last week. So a couple of questions here. Tracy, if you don’t mind starting us off. It seems like every commodity was green this week. I know there are a few that weren’t, but what commodities are impacted most by Russia, Ukraine?

TS: Well, so fertilizer, which I brought up earlier. And then you have aluminum, which was up 14.7% today, or this week. Pardon me. We have copper, 9.34%, neon gas, which is something that most people don’t look at. But Ukraine supplies 90% of the neon gas market for the chip making markets. Then we had Palladium up 37%. Not surprising, Russia supply 43% up that market.

TN: You’ve been talking about Palladium for weeks, though. So anybody listening to you wouldn’t be surprised by this, right?

TS: Right. Not at all. I’ve been talking about this for a very long time. And actually we’re seeing platinum get a little bit of a bid because if you look at the automotive markets, Palladium is a huge thing in a catalytic converter. Right. And so we’re starting to see because prices have been so elevated for the last few years, we’re seeing automakers finally start to retool a bit. And so that’s going to give a little bit of a lift to the platinum markets.

Natural gas obviously is up. Right. We all know about that. Oil obviously up. We have nickel up 9%. The other interesting thing is coal. Russia is a material coal supplier at 15% of the global market. And Europe gets 30% of their imports from the met coal market from Russia and 60% from the thermal coal market. So they’re going to be looking elsewhere for other supplies because they don’t want to have all their eggs in one basket. Where you can have everything in coal and that gas and depend on Russia.

I do want to know on the natural gas market, although there have been rumors Yamal was shut down or whatever. But overall, Jamal is only one pipeline into Europe. Gas supplies have still been consistent and steady this whole time into Europe via different pipelines through Russia.

TN: So weird.

TS: So nobody’s caught off of gas. Right. That’s just weird. They’re on other sides of the war, but one is still supplying the other side energy. I just think that whole thing is very.

AM: Yeah, Tony, you know what concerns me, actually, this is a question for Tracy, too, is like the super spikes in commodities are starting to concern me specifically because of wheat, because obviously that’s food. And once people start getting stressed on food supplies, political problems can happen. I think even today, Hungary decided that they cut off all exports of foods, of wheat and grains because of the concern of spiking prices.

Tracy, where do we see wheat possibly even topping off at this point, especially if Ukraine and Russia go at it for an extended period of time, like, say, three to four weeks?

TS: Yeah. I mean, hopefully they won’t. But as far as that’s concerned, we’re looking at the Black Sea right now because exports are halted, because there’s conflict going on, this is what I think European wheat and US wheat has been limited up literally every day this week. Right.

So that’s going to be a problem that’s going to cause inflation, food inflation elsewhere. And let’s not forget that’s how the Arab Spring started as well. Right. So this is very much a concern globally on a macro sense, on food prices, energy prices, especially when we’re looking at kind of a global downturn in the market. And that’s a whole another discussion we can get in another week, but definitely it’s a concern right now.

TN: Let’s dig a little bit deeper into that. We have a viewer question from @Ramrulez. And Sam, can you take a look at this? The impact of sanctions on Russia, on emerging economies. So where are we seeing impacts of, say, wheat prices? I know Albert brought up Hungary, but what are we seeing in, say, emerging markets and other places that this is already hitting them?

SR: I don’t know that there are places that it’s already hitting, mostly because you’re going to have imported wheat. Wheat right now is being harvested in Ukraine, Hungary, Russia, etc. And that’s going to be more of a late spring summer story when you begin to actually have to import your additional food supplies.

So where would you see it? You’d see it in Egypt. Egypt is a significant importer of both Russian and Ukrainian wheat. You’re going to see it on the cornside, too. It’s worth remembering that Ukraine is a significant exporter of corn. You’re going to see it in Semple our way up, which is going to spill over into other markets because you’re going to have to, if there is no resolution or planting season, you’re going to have to replace some flour, oil with something else. So you’re going to have that issue to deal with as well.

So I don’t know that you’ve seen the spillovers yet. You will see spillovers particularly in North Africa, other significant importers of foodstuffs. The other thing to remember is it could potentially be a marginal benefit to some emerging markets. As you see, net exporters of coal, et cetera, become incremental sources for replacement for both Ukraine and Russia. So I think it’s something to keep an eye on both on the food price front, but also on the front of it’s going to be good for some. It’s going to be very bad for others.

TN: Okay. Thanks for that. Hey, before we move on from commodities, Tracy, I want to roll back to this viewer question we have from @YoungerBolling. Yes. What are the other sources of crude, grade wise, that can replace Russian crude for US refineries? This is a common question, and I’m sure you can answer it very quickly. So where else can people look to get Russian grade crude?

TS: We get kind of the sludgy stuff from them. Right. So the best, most convenient, easiest place to get it from is Canada. Right. We can get some heavier crude grades from Mexico, but they’re having some political problems there and it’s coming up. So really the easiest place we can look to is to Canada. So opening import lines from Canada is really our best option since they’re on our border.

TN: Didn’t the US cancel a pipeline from Canada about a year ago?

TS: Something decided. Yeah.

TN: Okay. Thanks for that. And then moving to another question, we spoke a bit about China last week, and I’m curious for any further thoughts that the panel has on China in light of last week’s, of this past week events. We do have a viewer question to get us started off. It’s from @HJCdarkhorse1. He says perspectives on Chinese Yuan. But before we get into that, Tracy, let’s talk a little bit about China’s energy relationship with Russia. What do you see happening on that front?

TS: Right. First of all, if we’re looking at the oil industry, China is Russia’s largest importer. Right. I think that anything that comes off the market wise via the west, that China will gladly scoop up at a $28 discount that they’re currently offering. Right. That is interesting in that respect.

There are still 1.5 million barrels kind of off the market. I want to stress nobody has sanctioned oil or energy at all so far. UK, EU, US. That said that people are hesitant and anticipating, and it’s hard to get banknotes right now to get those deals going through. But China is definitely their largest trading partner. China definitely loves cheap oil. So we’re going to continue buying from them no matter what.

TN: Are their pipelines between Russia and China?

TS: There are, but not like not enough. Not enough.

TN: Okay.

AM: Did they just cut a deal for a new pipeline that’s going to pretty much be equal. Sorry. That’s for net gas, that equals North Korean, too.

TN: Did they also come to some agreement recently about buying crude in CNY? Did that happen in the past?

TS: No, that was buying jet fuel.

TN: Okay.

TS: What they said is if we’re in your airport, we’ll buy in your currency. If you’re in our airport, you’ll buy in our currency, which is not that big. Literally.

TN: To some people’s dismay, the US dollar is still the currency for energy.

TS: Since we’re talking about currencies, you and I have talked about CNY for a long time. So can you give us kind of some perspectives on that? I know we had a question about that as well.

TN: Sure. So CNY. Chinese Yuan is a controlled currency. It’s not a freely floating currency. There is an offshore currency called CNH that is, we’ll say marginally floating currency that is linked to the CNY. But the CNY is strictly managed by the PBOC. And when you have a managed currency, it’s devalued. Okay. It’s appreciated and it’s devalued.

And so what’s happened over the last two years is the CNY has appreciated dramatically. And a big part of that is so that they can buy commodities, knowing that commodities would spike starting in the second quarter of 2020, China’s appreciated CNY so they could hoard those commodities, which they’ve done. Okay.

What’s happened? Well, Chinese exporters have suffered a bit because of the appreciated CNY. On a relative basis, they’re paying higher prices, but their experts have been up, too. So they’re not hurt too much. But we have a lot of things happening in China with a big political meeting in November to where they’re starting to spend in a big way, fiscal spending. We’ve also expected since probably August of ’21, we’ve been talking about China starting to devalue the CNY at the end of first quarter or early second quarter of this year.

So what that will do is it will make things a lot easier for exporters. And so exporters will be happy. There’ll be a lot of fiscal stimulus, a lot of monetary stimulus. So that just in time for this political meeting, everyone domestically in China is pretty happy. So we expect a lot of stimulus and a devalued CNY is a big part of that.

SR: And just to kind of jump on that really fast, that’s a positive on the US inflation fighting front. It’s significant positive. We are going to get.

TS: If you’re exporting deflation, that’s fantastic.

SR: Exactly. So when China goes back to to exporting deflation instead of exporting inflation, that’s going to be a completely different ballgame from what we’ve seen for the past year and a half.

TN: That’s a very good thing. Okay, guys, anything else on China, Albert? Do you have any anything on China that you want to add?

AM: Honestly for China? I don’t really see people talking about the fact that this entire Ukraine and Russia war has been a boom for China. They’re getting cheaper commodities. They’re getting a tighter relationship with Russia, although it’s going to be debatable that Russia is going to be a shell of what it was after all this. But still for China, they’re sitting pretty at the moment. I mean, any other place in the world where the Russians had their hands in the domestic economies of countries that China also did is now going to have to take a step back and allow the Chinese to get their banks financing different countries projects. It’s going to be unbelievable for China in the next couple of years.

TN: Yeah. I wonder if the Belt and Road is going to rebuild Ukraine. It’s a cynical question, but I think it’s an opportunity for China to do something like that on infrastructure.

AM: They’re going to have to because Russia is going to have nothing left economically. Right.

SR: And to begin with, there was a $1.58 trillion economy.

TN: Right. But it’s a very detailed answer to that simple question. But yeah, I think it is a medium term opportunity for China as well, not just in getting cheap commodities now or discounted commodities, we’ll say now, but also long term for their financial system, for their infrastructure system and other things. Right.

AM: Got you.

TN: Okay. So what guys are we looking forward to in the week ahead? Tracy, what do you see over the next week?

TS: Again, I’m going to say volatility. I think markets are going to be very volatile, just like we saw this last week. We had eight to ten dollar moves in crude oil like the blink of an eye. I think it’s going to continue to kind of see that in the commodities markets until there’s some sort of resolution to this Ukraine-Russia crisis because there’s too many commodity sectors involved in this.

TN: Right. Sam, same for you, but you talk about the kind of twos and ten years a couple of weeks ago, and I’m curious what your observation is there in addition to other things?

SR: Yeah. The front end of the US curve has been nuts this week, and I think you can kind of attribute that back to two reasons. One, we sucked out all of the Russian reserves from being able to participate in the market, period, full stop. You probably have a significant amount of hoarding on the front end from Russian banks. Call it the zero to three year type timeframe. That’s where they typically play. So I think you continue to see volatility there. That’s going to be absolutely insane.

The Fed. I don’t think the Fed is going to be all that surprising. The Fed was really interesting three weeks ago, and now it’s kind of boring. You’re going to get 25 bps. You’re going to get some gangs on QT. Nobody cares. We’ve kind of moved on from that.

TN: That’s interesting, though, right? Two months ago, 25 basis points was catastrophic. Kind of.

SR: Yes.

TN: And now it’s a faded company and nobody cares.

SR: Nobody cares. You had almost 700 jobs. 700,000 jobs created in February. We didn’t even talk about that. Nobody cares. Cool. 700k consecration up, whatever.

To Tracy’s point, I think it’s kind of a moss, right? More of the same. And just until you get some sort of resolution and some sort of clarity on how long we’re going to have these sanctions, this market is this market. It’s going to continue to be highly volatile and there’s no end of it in sight.

TN: Okay. Very good. And then, Albert, I’m going to ask you specifically about equities. So if we’re getting more of the same but we have upward pressure on commodities, what do you think is going to happen domestically with US equities? Do you think we’re going to see more of the same volatility? Do we have a downside bias? Do we have an upside bias? Where do you see things over the next week?

AM: Well, I mean, it’s hard to say that we have an upside bias at the moment with so much volatility. But from all my indications, I think Putin’s going to up the war rhetoric and surgeons in Ukraine, I think equities are going to have to come down to, I don’t know, 4200 4250. Right. And then we start talking to the start talking about the fed like Sam was talking 25 basis points is now the consensus. But I will have to say Jerome Powell said he was hoping that inflation is not a big problem when those meetings come. So don’t be surprised if it’s a 50 basis point hike.

TN: I think as an outlier, you could be right. I think it’s a possibility. I think it’s greater than 0%.

AM: If we’re talking about commodity supersight commodity surging, with all this volatility in this war, how is inflation going to come down in the next couple of weeks?

TN: Well, just ask a very direct question. A 50 basis point hike is intended to kill demand, right?

AM: Yes.

TN: That’s all it’s intended to do is kill demand.

AM: Of course. But from their perspective, you killed demand, you killed inflation. I don’t know if that’s going to, I doubt it’s going to work, but that’s their narrative.

TN: Right. Okay. Very good, guys. Thank you very much. Good luck in the next week and forgot for anybody viewing. Don’t forget about our CIF futures flash sale at completeintel.com/promo and see you next week. Thank you.

TS: Thank you.

AM: Thanks, Tony.

SR: Thank you.

Week Ahead

The Week Ahead 09 Jan 2022

Post author By admin
Post date January 9, 2022

This is the first 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.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Tracy: https://twitter.com/chigrl

Nick: https://twitter.com/nglinsman/

Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone. Thanks for joining us for the week ahead. My name is Tony Nash. We’re joined today with Tracy Shuchart, Nick Glinsman and Albert Marco to talk about the markets for this past week and what’s going to happen this next week.

Guys, we saw a really dramatic market this week, a lot happening around the Fed announcements around inflation in Europe. We saw some real action around bonds. So can we talk about some of those things as well as what’s happening in energy markets? So, Tracy, could you actually get us started with what you’re seeing in energy markets?

TS: Well, obviously, we had big bounce this week in the energy markets, and a lot of that had to do with we had problems in Libya with some production offline 500,000 barrels. We also saw some big drop in Ecuador production and then Nigeria ongoing problems. And of course, we had Kazakstan, which these protests put potentially 1.6 million barrels at risk. So that was another geopolitical risk factor.

And then what we were seeing at home is because of weather, because of the cold snap we were seeing. We had Keystone down for about a day. And that brings Canadian crew to the United States. And then we’re also seeing production problems in the back end. So there were a lot of things going on in this market that propelled it higher.

TN: Okay. And what about the geopolitical problems with Europe and Russia? Is that still tightening? Do we see that still affecting gas prices in Europe?

TS: I think actually, we’ve actually seen a pullback ever since the US Calgary came with the initial 46 vessels. And then we’ve also seen countries such as the Netherlands come and say that they’re going to provide more gas, so the market is going to be volatile. It’s definitely going to remain volatile. But we have definitely seen it pull back off the highs.

TN: Good. Okay. Very good. Nick and Albert, can you talk to me a little bit about the Fed? What’s your view on the Fed remarks? And will they actually raise three times in 22?

NG: Well, actually, might be on the Fed remarks. Is it was nothing new. We knew absolutely everything. December the 15th, it was statement and then the press conference. It was very clear people just wanted to ignore it. So it’s come home to Roost. What was interesting that treasury market was already acting first day of trading and had a really good sell off. And it’s just carried on.

Now I’m wary of this Fed. Have they got the guts to actually take inflation on, or are they worried about the stock market? And there is obviously that correlation between the stock market and the economy. However, at this high level on the stock market, one wonders whether that correlation is a bit little bit looser because we have from a data point of view, whether it’s reality or not, it’s a booming economy.

And I actually had a conversation with a very well known economist on the street. It’s his own shop. And he said a couple of people he respects are talking about unemployment going sub 3% by their measure.

TN: But, Nick, that’s just a denominator function.

NG: I understand. We all know it’s not really less than 3%. But we all know that inflation is a 7.2% the forecast for next week. Okay. So I mean, this data has issues, and I’m very much aware of this issue. But the point is, if this carries on going that way and the seasonal adjustments accentuate the situation.

Plus, you’ve got to, you know, Albert mentioned this last year. There is a huge number of people retiring. So there’s a supply shortage of the labor side. It’s not just supply chains causing inflation, that labor has a supply shortage.

TN: We’ve been waiting for this for about a decade, right? For the baby to start. Really?

NG: They wanted a bit more inflation. They wanted a moving economy. They got it. Now the Fed has to show whether if the Fed goes all in on it to fight inflation, 170 is not the terminal rate on Fed funds. I think it’s going to be between two and a half or three and a half. Clearly, I’m just concerned about this Fed. In that respect, they’ve shown no willingness.

TN: Sure.

AM: I just want to add a real quick thing about that. Tony, I agree with what Nick is saying pretty much being clear on that. But from my perspective, the story is, are they going to go with inflation or are they going to have a recession? This is zero rates or rake hikes.

This market is realistically built on zero rates. Everybody knows this for them to hike. They would need some sort of stimulus program. And even then, you need lower job reports, which I think probably are coming. But even then, we have a physical flip coming in March that we have to address.

TN: Right. But, Albert, we would need a stimulus program with hikes just to stay neutral.

AM: Of course.

TN: Here’s what I don’t understand. Okay. And maybe you guys can fill me in. But the Fed has a massive balance sheet. Why even mention rates when there’s so much they can do with the balance sheet in terms of tapering being neutral and then tightening that on its own is a massive task. It seems to me that interest rates were kind of premature for that.

NG: I think they’re fearful of tantrums. My view on the tantrum side of things is either the Fed does deal with inflation. So you get then risk assets like equities will have a tantrum. It’s quite possible. And people wouldn’t expect that the bond market will have a tantrum, but it will be an inflation tantrum.

You’re right on QT quantitative tightening. I mean, they’ve got so much in the short end if they just let it roll off that’s $3 trillion in two years off the balance sheet. But then that would cause problems in the short end of the market.

TN: Yes. Previously, they didn’t start tightening for four years, right. QT didn’t start until four years after 2011 or whatever. So it was a long time, and I wouldn’t expect them to start selling off the balance sheet for an extended period of time. It’s just a matter of stopping the flow onto the balance sheet.

NG: This is the biggest hedge fund leveraged in the world.

TN: Yeah, it is. Okay. Speaking of funds, we’ve seen a little bit of rotation start in the market this week. So can you talk to us a little bit about that? And, Tracy, can you guys both talk a little bit about the rotation that’s underway in markets and how far will it go?

AM: It’s pretty clear that we’re rotating out of the US markets and out of tech going into China, possibly even Indonesia. The US market is nearing almost 60% of the entire global market. And that’s simply absurd. And just can’t go on.

Some are talking about disinflation, but the wage inflation continues to rise and the supply chain stress isn’t really getting any better. So where does the money go? Really, in my opinion, it goes to China right now. The European Union is a mess. Can’t go there. Indonesia is a likely candidate. But unless the Fed, they can’t hike rates, they need massive stimulus, everything’s rotating out of the United States and out of tech for the time being. I don’t know how long it’s going to last. I mean, I think the tech sales are maybe a couple of weeks.

The Fed needs that to pump the markets via Nasdaq. So I give it a couple of weeks, Max.

TN: Okay. Tracy?

TS: I’m looking at the rotation within just the US market and not the global markets. But we are kind of seeing a rotation from the tech sector from growth to sort of more value real assets. Right. So all week, we’ve seen the Nasdaq pull back. But oil and banking have remained very strong all week.

So I think that’s kind of where just internally where we are seeing the markets, the commodity markets have done really well this week. Metal is included.

TN: And how long does that last? Is that something that’s just a couple of weeks, or is that something that we see happening through Q1?

TS: I mean, I think it really depends on what the Fed decides to do. So if they decide to raise rates, that’s going to kill the tech market. Right. So that’s why I am of the opinion it’s going to be a one and done, because what do you sacrifice? You sacrifice the market. Right.

And are you going to do that? Is the Biden administration going to allow that sort of to happen during an election year? Right.

AM: Tracy is absolutely correct. They’re not going to let that happen. I mean, right now, the entire perception of the economy is doing well is based on the market performance for them to raise rates or rotate. And right now they’re rotating into reflationary names. I mean, that helps now, but they need the market to act. It is solid.

NG: There is a dark with that view because, as I said, either you get a tantrum equities, particularly on growth, or you get a tantrum in bonds, which then feeds into account. Because if they don’t deal with inflation, everybody’s saying, well, January base effects are fantastic. They’re high, but we’re going to benefit from thereafter.

And I’ve got this and Tracy, but I think we will attest to this. And Alberto, there is this point that as things get normalized, crude oil is going to go up because jet fuel will be in huge demand and people are going to be out moving.

In Europe, there’s no normalization of energy prices. They’re already way above normalization. You’re looking at five to six times the price of energy from last year. So this is all going to feed through the system. It goes. Fee through manufacturing services and comes out as core CPI as opposed to full CPI.

AM: Yeah, but I mean, this week, Nick, we’ve seen a 4.5 wage gain causing issues in the market. There’s…

NG: Actually my fault on the date of the day was it was actually the unemployment. They have said the natural rate is 3.6%. If you look at what happened the last time we had unemployment here, we had inflation at I think it was 4% ten year yields with 270%.

AM: Yeah, I understand that, Nick, but everyone right now is talking about disinflation thinking that inflation is going to come down because the bet is going to help push it down. But how do you get rid of wage inflation? There is no way you can sit there and take…

TS: You’re not going to get rid of supply chain issues either.

NG: Push inflation. This is where it’s changed. And I don’t think these central bank staff has realized have accepted this that everything prior to the pandemic was demand poor cost push. So whole different ballgame. They’ve already said they can’t control price of commodities.

Actually, they can because they can. That’s the point. But the point I’m making is we’ve crossed the Rubicon from something that I’m not saying demand hall has gone away. But we’ve crossed the Rubicon from something that would be affected by monetary policy and financial tightening to something that is not going Redux is rough to charge.

TN: Okay. Before we go on there, there are two questions. First, Nick, you said either there’s an equity side tantrum or there’s a bondside tantrum, which is worse.

NG: Oh, the bondside tantrum. Okay. That will also be feed through to the equity market.

TN: Right. Okay. So the bondside tantrum is worse.

NG: For everybody that Feds behind the curve and London control.

TN: Right. And I think that’s well understood. The other question I have is Tracy mentioned one and done. Do we all think the Fed is kind of going to do a one and done? I mean, that’s my view. It sounds like it’s Tracy’s view, Albert, is that what you think?

AM: So I absolutely think so. They can’t let this thing melt down. They’ll bring it down to, like 4400, but that’s it.

TN: Okay. Nick, do you think it’s one and done?

NG: I’m putting my old hat on as a bond market person. Yeah, because they’ll then have to do QE because the bond market won’t sit there.

AM: They will do QE. They will absolutely do QE. They haven’t signed up and they control the bond market as it is anyway, so they can do whatever they want right now. There’s nobody else in the world that can hold us accountable for what they do.

TN: Are you saying QE and Q two? Do you expect QE and Q two?

AM: Absolutely.

TN: Okay. That’s very interesting. All right. I like that. I think that as a thesis is very interesting.

NG: By the way, the rest of the world may need it.

TN: Absolutely. I think they will.

AM: Of course they do.

NG: I’ve got a great piece of trade Union wage claim in Europe. This is hysterical. So the ECB says inflation is going to trend back to the forecast. 2%. It’s all transit free. The guard still on holiday, but she’ll never die by that.

Every person at the ACB by the governors is a member of the ECB trade Union. Do you know what their claim is right now for this year?

TN: They need wage acts.

NG: I think that’s a tell. Oh, yeah, it’s a tell, right. I think other countries may need the Fed’s help. That’s where I veered back towards Albert. In that respect, I don’t know my traditionalist central bank.

TN: Yes, I don’t doubt that at all. Okay, let’s start looking ahead to kind of next week. We’ve got wholesale inventories, NFL, small business, CPI. We’ve got retail sales coming on. What do you expect to happen next week?

Do we expect, say, retail sales to kind of be moderate or do we expect the CPI to moderate, or do we think things will continue as they have been?

NG: I’m an inflation. So I think CPI will be problematic and we’ve seen this inflation data. The estimates have been lower than the actual. So I’m sort of expecting that to occur.

Retail sales. I’ve not really got a view. To be honest.

AM: I think retail sales are going to come in a little bit higher than most people think. I think the luxury market right now is just absolutely on fire. A lot of free money has just been floating around the system and people have been buying things left and right.

I mean, even the credit card data show that consumers have just used more credit. It’s pretty clear.

NG: Okay, so we’re 2% ten year yield. It’s a possibility next week there.

TN: So also the small business survey, the small businesses that I know from auto manufacturers to other things. They’re having a really hard time. So do you think NFIB is going to continue to be positive, or do you think it’s going to trend out?

AM: I think we’re going to go down. I think the entire reason that they’ve been talking about a new business stimulus program in DC.

TS: Exactly 100%. I think we’re definitely going to go see that slowing down, slowing economy.

AM: They need it because they need stimulus anyways in March. So might as well start throwing money around everywhere.

TN: Right. So build back better. Is that dead, or are they going to try to take another run at it this month?

AM: They’ll take another run at it, but it’ll be toned down and probably separated into different pieces.

TN: Okay. Do you think it will ultimately pass and be one and a half trillion or something like that?

AM: I think it’ll be a part of a stimulus hybrid program of build back better with business stimulus program in mind. So it’ll probably be around two and a half trillion.

TN: Two and a half trillion. Okay. Anybody else have a view on that?

NG: With the emphasis on the stimulus as opposed to the build back better.

TN: I think you’re right now.

TS: Yeah, I personally don’t think build back better is going to pass anytime soon.

NG: Great question for Albert Finabaster won’t be broken with it.

AM: No, they’d be absolutely insane for them to try to do that. They know the GOP is going to have the House and the Senate for them to sit there and break the filibuster. It would just lead to absolute chaos for a lot of different policies.

TN: Bad news. That’s really bad news.

AM: If they get rid of the filibuster and they pass that voting law, the next thing that’s going to happen is the GOP is going to use the same method to have voter ID for the entire country and under the same reason and why they want to get rid of the filibuster. It’s a car bout. Really. It’s not an entirely.

NG: Voter ID in Europe is good to go. Everybody has it.

AM: Yes, I know. But this is the United States. I mean, nowhere in the world does about the United States. So we have to differentiate what happens in Europe.

TN: Yes, we do. All right. So what are you guys expecting to see next week? Are we expecting to see this rotation intensify. Nick, what are you expecting to see in say, bonds? Do you see further action in bonds or are we kind of at two for now?

NG: Well, look, I think think we ten years can go from. I always look at the ten year and in fact, many institutions is five. But the ten years gives you enough of the long bond and the inflation out of it. We’re at 176. 77 today close. If the data is strong, we go to two. Yeah. That becomes very interesting.

I mean, we travel a long way this week, right?

TN: Yes.

NG: And if you look at the CFTC data, the market is not short. A lot of blood was built for cause of last year people slowly stepping themselves in where I’m really interested. I mean, if that happens, we continue to see growth to that value.

What I’m interested in is I think the dollar rebounds on Monday. The dollar seems to have days with that lag to what the interest rate markets do. Albert and I have been speaking about this, but I’m interested to see, even with dollar strength, we’ve seen strength in the commodities market. And this is one of our thesis is China is going to be replaced by the Green Revolution.

We found a wonderful study in France that was reported in one of the French dailies that was talking about 60% of copper will be used up in about two or three years. And then he went through all the other key metals for the metal. I think actually, copper go quicker because of the new left winger in Chile.

TN: So you think dollar appreciation and commodities at least industrial metals appreciation for the, say foreseeable future.

NG: I think the whole complex crazy, and that’s where this time around will be rather like people’s disbelief in equities. How can we keep going this time around? We can have the whole commodity complex elevated.

TN: That’s really scary.

TS: I absolutely agree. Absolutely. Well, I mean, my three main themes in the commodities markets since last year and going into at least 2025 is metals, oil and gas and agriculture.

TN: Fantastic. Okay.

AM: I actually think the tech market is going to make a rebound next week just because the Fed is probably defending the 50 day moving average. I think we see a rebound up until the middle of the week next week.

TN: Wonderful guys. Thanks so much for this. Look forward to doing it again next week for everyone watching. Please, like our Twitter page or our YouTube page. Sorry. So you can get alarms for next week. All right.

Thanks, guys. And have a great week ahead.

TS , AM, NG: Thank you.

Tags biden, Canada, CFTC, Chile, complete intelligence, cpi, Ecuador, european union, Fed, Kazakstan, libya, NASDAQ, netherlands, NFIB, NFL, Nigeria, QE, The Week Ahead, United States, US, US Markets

QuickHit

QuickHit: What happens to markets if China invades Taiwan? (Part 2)

Post author By admin
Post date December 9, 2021

Get 94.7% accuracy on your markets forecasts with CI Futures. Subscribe for only $50/mo for a limited-time only: http://completeintel.com/2022Promo

In this second part, Mike Green explains what will happen to Europe if China invades Taiwan. Will the region be a mere audience? Will it be affected or not, and if so, how? How about the Euro — will it rise or fall with the invasion? Also, what will happen to China’s labor in that case, and will Chinese companies continue to go public in the West?

You can watch Part 1 of the discussion here.

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

This QuickHit episode was recorded on December 2, 2021.

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

Show Notes

TN: So we have a lot of risk in, say, Northeast Asian markets. We have a lot of risk to the electronics supply chain. I know that this may seem like a secondary consideration. Maybe it’s not.

What about Europe? Does Europe just kind of stand by and watch this happen, or are they any less, say, risky than any place else? Are they insulated? Somehow?

I want to thank everyone for joining us. And please, when you have a minute, please follow us on YouTube. We need those follows so that we can get to the right number to reach more people.

MG: No, Europe exists, I would argue, as basically two separate components. You have a massive export engine in the form of Germany, whose core business is dealing with China and to a lesser extent, the rest of the world. And then you have the rest of Europe, which effectively runs a massive trade deficit with Germany. I’m sorry. Germany is uniquely vulnerable in the same way that the corporate sector is vulnerable in the United States. That supply chain disruption basically means things go away.

They are also very vulnerable because of the Russian dynamic, as we discussed. In many ways, if I look at what’s happened to Germany over the past decade, their actions on climate change and moving away from nuclear, away from coal into solar, et cetera, has left them extraordinarily dependent upon Russian natural gas supplies. It’s shocking to me that they’ve allowed themselves to get into that place. Right.

So my guess is that their reaction is largely going to be determined by what happens with Russia rather than what happens with China. Right. In the same way that Jamie Diamond can’t say bad things about China. Germany very much understands that they can’t say bad things about China.

Europe, to me, is exceptionally vulnerable, potentially as vulnerable as it has ever been in its history. I agree. It has extraordinary… Terrible way to say it. I don’t know any other way to say it, but Europe basically has unresolved civil wars from 1810, the Napoleonic dynamics all the way through to today, right. And everybody keeps intervening, and it keeps getting shoved back down into a false equilibrium in which everyone pretends to get along, even as you don’t have the migratory patterns across language and physical geographic barriers that would actually lead to the type of integration that you have with the United States, right.

Now ironically, the United States are starting to see those dynamics dramatically reduce geographic mobility, particularly within the center of the country. People are becoming more and more set in their physical geographies, et cetera. Similar to the dynamics that you see in Europe, which has literally 100,000 more years worth of Western settlement and physical location, than does the United States. But they’ve never resolved these wars. Right.

And so the integration of Europe has happened at a political level, but not at a cultural level in any way, shape or form. That leaves them very vulnerable. Their demographics leaves them extraordinarily vulnerable, the rapid aging of the populations, the extraordinarily high cost of having children, even though they don’t bear the same characteristics of the United States, but effectively the lack of land space, et cetera, that has raised housing costs on an ownership basis, et cetera. Makes it very difficult for the Europeans, and they have nowhere else to go now. Right. So the great thing that Europe had was effectively an escape valve to the United States, to a lesser extent, Canada, Australia, et cetera, for give or take 200 or 300 years, and that’s largely going away. Right.

We are becoming so culturally distinct and so culturally unacceptable to many Europeans that with the exception of the cosmopolitan environments of New York City and potentially Los Angeles, nobody wants to move here anymore. Certainly not from a place like Europe. I think they’re extraordinarily vulnerable.

I also think, though, that they’ve lost sight of that because they’re so deeply enjoying the schadenfreude of seeing the unquestioned hegemony of the United States being challenged. Right. It’s fun to watch your overbearing neighbor be brought down a notch. Right. You tend not to focus on how that’s actually adversely affecting your property values in the process.

TN: Sure. Absolutely. So just staying on Europe, what does that do to the importance of the Euro as an international currency? Does the status of the Euro because of Germany’s trade status stay relatively consistent, or do we see the CNY chip away at the Euros, say, second place status?

MG: Well, I would broadly argue that the irony is that the Euro has already peaked and fallen. Right. So if I go back to 2005 2006, you could make a coherent argument that there was a legitimate challenge to the dollar right.

Over the past 15 years, you’ve seen continual degradation of the Euro’s role in international commerce, if I were to correctly calculate it, treating Europe as effectively these United States in the same manner that we have with the US, there’s really no international demand for the Euro. It’s all settlement between Germany, France, Italy, et cetera.

If I go a step further and say the same thing about the Chinese Yuan or the Hong Kong dollar, right. They really don’t exist in international transactions. To any meaningful degree. The dollar has resumed its historical gains on that front. Now that actually does open up a Contra trade.

And I would suggest that in just the past couple of days, we’ve seen an example of this where weirdly, if the status quo is maintained, the dollar is showing elements of becoming a risk on currency as the rest of the world basically says some aspect of we’re much less concerned about the liquidity components of the dollar, and we’re much more interested in the opportunity to invest in a place that at least pretends to have growth left. Right. Because Europe does not have it. Japan does not have it. China, I would argue, does not have it. And the rest of the world, as Erdogan and others are beginning to show us, is becoming increasingly dysfunctional as a destination for capital. Right.

Brazil, perennially the story for the next 20 years and always will be right. Africa, almost no question anymore that it is not going to become a bastion for economic development going forward. And we’re broadly seeing emerging markets around the world begin to deteriorate sharply because the conflict between the United States and China creates conditions under which bad actors can be rewarded. Right.

If I sell out my people, we just saw this in the Congo, for example, if I sell out my people for political influence, I can suddenly put tons of money into a bank account somewhere. Right. China writing a check for $20 million. It’s an awful lot of money if I’m using it in Africa.

TN: For that specific example, and for many other things, the interesting part is China is writing a check for $20 million. Yeah, they’re writing a check for €20 million. They’re not writing a check for 20 million CNY. It’s $20 million. All the Belt and Road Initiative activities are nominated in dollars.

So I think there’s a very strange situation with China’s attempt to rise, although they have economic influence, they don’t have a currency that can match that influence. And I’m not aware, and you’re such a great historian. I’m not aware of an economic power that’s come up that hasn’t really had its own currency on an international basis. I’m sure there are. I just can’t think of many.

MG: Well, no. I mean, the quick answer is no. You cannot project power internationally unless effectively the tax receipts of your local population are accepted around the world. Right? Broadly speaking, I would just highlight that the way I think of currency is effectively the equity in a country right now. It’s not a perfect analog, but it’s a reasonable analog. And so, what you’re actually saying is the US remains a safe haven. It remains a place where people want to invest. It remains a place where people believe that the rule of law is largely in place. And as a result, anyone who trades with the United States is willing in one form or another to say, okay, you know what? I can actually exchange this with somebody who really needs it at some point in the future.

I think one of the reasons that we tend to think about the dollar as having fallen relative to the Euro or the CNY is we have a very false impression of what the dollar used to be. Right. So we tend to think about the dollar was the world’s reserve currency following World War Two and everything happened in dollars. Right.

People forget that half the world, certainly by population, never had access to dollars, never saw dollars. There was a dollar block. And then because of their refusal to participate in Bretton Woods, there was a Soviet ruble block and then ultimately far less impactful things like a Chinese Yuan, et cetera. But the Soviets, for a period of time, had that type of influence. They could actually offer raw materials. They could actually offer technology. They could offer things that had the equivalent of monetary value to places like Cuba, to places like Africa, to places like South America, et cetera. China right.\

That characterized the world from 1945 until 1990. Right. I mean, the real change that occurred and really in 1980 was that Russia basically ran out of things to sell to the rest of the world, particularly in the relative commodity abundance that emerged in the 1980s after the 70s, their influence around the globe collapsed.

And I think the interesting question for me is China setting up for something very similar. Right. It feels like we’re looking at a last gasp like Brisbanev going into Afghanistan, right. And oh, my gosh, they’re moving out and they’re taking over. Well, that was the end. They make a move on Taiwan. And I think a lot of people correctly point to this. It’s probably the end of China, not the beginning of China.

I just don’t know that China knows that it has an alternative because it’s probably the end of China, regardless.

TN: Sitting in Beijing, if you bring up any analogues to the Soviet Union to China in current history, they’ll do everything to avoid that conversation. They don’t want to be compared. Is Xi Jinping, Brezhnev or Andropov or. That’s a very interesting conversation to have outside of Beijing. But I think what you bring up is really interesting. And what does China bring to the world? Well, they bring labor, right. They’re a labor arbitrage vehicle. And so where the Soviet Union brought natural resources, China’s brought labor.

So with things like automation and other, say, technologies and resources that are coming to market, can that main resource that China supplied the world with for the last 30 years continue to be the base of their economic power? I don’t know. I don’t know how quickly that stuff will come to market. I have some ideas, but I think what you’re saying is if they do make a play for Taiwan, it will force people to question what China brings to the world. And with an abundance of or, let’s say, a growing influence of things like automation technologies, robotics, that sort of thing, it may force the growth of those things. Potentially. Is that fair to say?

MG: I think it’s totally fair. And I would use the tired adage from commodities. Right. The cure for high prices is high prices. If China withdraws its labor or is forced to withdraw its labor from the rest of the world, there’s two separate impacts to it.

One is that China’s role as the largest consumer of many goods and services in things like raw materials, et cetera. That has largely passed. Right. And so as we look at things like electrification, sure, you can create a bid for copper. But at the same time, you’re not seeing any building of the Three Gorges again. Right. You’re not seeing a reelectrification of China. You may see components of it in India. And I would look to areas like India as potential beneficiaries of this type of dynamic. But we’re a long way away from a world that looks like the 20th century. And you’ve heard me draw this analogy. Right. So people think about inflation.

The 20th century was somewhat uniquely inflationary in world history. The reason I think that happened is because of a massive explosion of global population. Right. So we started the 20th century with give or take a billion people in the global population. We finished the 20th century with give or take 7 billion people. So roughly seven X in terms of the total population. The labor force rose by about five and a half X.

If I look at the next 100 years, we’re actually approaching peak population very quickly. And if I use revised demographic numbers following the COVID dynamics, we could hit peak global population in the 2030s 2040s. Right. That’s an astonishing event that we haven’t seen basically since the 14th century, a decline in global population. And it tends to be hugely deflationary for things like raw materials. Right. People who aren’t there don’t need copper, people who aren’t there don’t need houses, people who aren’t there don’t need air conditioners, et cetera.

I think the scale of what’s transpiring in China continues to elude people. I would just highlight that we’ve all seen examples of this. Right. So go to any Nebraska town where the local farming community has been eviscerated with corporatization of farms, and the population has fallen from 3000 people to 1000 people. What’s happened to local home prices? What’s happened to the local schooling system? What’s happened to deaths of despair, et cetera. Right. They’ve exploded. China’s facing the exact same thing, except on a scale that people generally can’t imagine. The graduating high school classes are now down 50% versus where they were 25 years ago. That’s so mind blowing in terms of the impact of it.

TN: That’s pretty incredible. Hey, Mike, one of the things that I want to cover is from kind of the Chinese perspective. Okay. So we’ve had for the last 20-25 years, we’ve had Chinese companies going public on, say, Western exchanges and US exchanges. Okay. So if something happens with Taiwan, if China invades Taiwan, do you believe Chinese companies will still have access to, say, going public in the US? And if they don’t, how do they get the money to expand as companies?

Meaning, if they can’t go public in the west, they can’t raise a huge tranche of dollar resources to invest globally. So first of all, do you think it’s feasible that Chinese companies can continue to go public in the west?

MG: Yeah. Broadly speaking, I think that’s already over. Right. So the number of IPOs has collapsed, the number of shell company takeovers has collapsed. So the direct listing dynamics. I just had an exchange on Twitter with a mutual friend of ours, Brent Johnson, on this. Ironically, that would actually probably help us equities for the very simple reason that the domestic indices like the S&P 500 and the Russell 2000 do not include those companies. Right.

So if those companies fail to attract additional capital or those companies are delisted, it effectively reduces competition for the dollars to invest in US companies and US indices. Where those companies are listed and are natively traded, at least are in places like Hong Kong, China, et cetera, those are incorporated in emerging market indices. And I would anticipate, although it certainly has not happened yet. That on that type of action, you would see a very aggressive move from the US federal government to force divestiture and prohibit investment in countries like China.

I think that would very negatively affect their ability to raise dollars. Again, and I mean, no disrespect when I say this. I want to emphasize this, but we tend to think of Xi Jinping as this extraordinarily brilliant, super thoughtful, intelligent guy. The reality is he’s kind of Tony Soprano, right? I mean, it’s incredibly street smart, incredibly savvy, survived a system that would have taken you and I down in a heartbeat. Right. You and I would have been sitting there. Wow. Theoretically, someone would have shot. Congratulations. Welcome to the real world, right. He survived that system. But that leaves him in a position where I do not think that he’s actually playing third dimensional chess and projecting moves 17 moves off into the future. I think he very much is behaving in the “Ohh, that can only looks good.”

I think it’s really important for people to kind of take a step back and look at that in the same way that Japan wasn’t actually forecasting out the next 100 years. The Chinese are not doing that. It’s a wonderful psychological operation. One of the best things that people can do is go back and relisten to the descriptions of IBM’s Big Blue computer or Deep Blue. I’m sorry beating Gary Kasparov. Right. So one of the things that they programmed into that computer was random pauses. So the computer processed things and computed things at the exact same speed. But by giving Kasparov the illusion that he forced the machine to think, he started to second guess himself.

Well, what did I do there that made it think, right. He didn’t do anything. It was doing its own thing and designed to elicit a reaction from you. I think China’s done probably a pretty good job of getting a lot of people in the west and elsewhere. And I think Putin is even better at this, of second guessing our capabilities and genuinely believing that we’re second rate now.

It’s fascinating. There was just a piece that came out from the US Space Force where they’re talking about the rising capabilities of China. And if you read the public Press’s interpretation of this, China is moving ahead in leaps and bounds. And what actually he’s saying is, no, we’re way ahead. But they are catching up at an alarming rate.

TN: That’s what happens. Right.

MG: Of course, it is always easier to imitate than it is to innovate.

TN: Right. When I hear you say that it’s easier to imitate than innovate. I know you don’t mean it this way, but I think people hear it this way that the Chinese say IP creators are incapable of creating intellectual property. I don’t think that’s the case. I don’t think you mean that to be the case. They are very innovative. It’s just a matter of baselining yourself against existing technology. So it does take time to catch up. Right. And that takes years. Your TFP and all the other factors within your economy have to catch up. And it takes time. It takes time for anybody to do that.

MG: Well… And I think also it’s important to recognize that things like TFP, total factor productivity, tends to be overstated because we don’t do a great job of actually correctly defining it.

TN: It’s residual. I can tell you.

MG: Exactly right. And just to emphasize what that means, it means it’s the part that we can’t explain with the variables we’ve currently declared. Right.

TN: Right.

MG: And so when I look at TFP in the United States, I actually think TFP is quite a bit lower than the data sets would suggest, because I think that we are failing to consider the fact that we’ve introduced women into the labor force. We’ve introduced minorities into the labor force. Right. So the job matching characteristics or the average skill level of people has risen.

People live longer, so they get to work in different industries and careers for a longer period of time. The center of the distribution is now starting to shift too old, and that’s showing up as a negative impact. But we failed to consider that on the other side. And the last part is just again, remember going back to the start of the 20th century, the average American had three years worth of education at that point. Third grade education, where a year was defined as three months, basically during the non harvest season. Right.

TN: It’s the stock of productivity. Correct. We’re adding to that stock of productivity, and the incremental add is large compared.

MG: But small compared to the stock. Absolutely correct. Right.

TN: Okay. Just to sum up, since we wanted to talk about the impact on markets, I want to sum up a couple of things that you’ve said just to make sure that I have a correct understanding.

If China is to invade Taiwan, we would have in Northeast Asia a period of volatility and uncertainty. That would go across equity markets, across currencies, across cross border investments and so on and so forth. Okay. So we would have that in Northeast Asia.

MG: And I would just emphasize very quickly. So we’ve seen this rolling pattern of spikes in volatility. Right. So we saw it in 2018 in the equity markets. We saw it in late 2018 in the credit markets and commodity markets. We’ve now seen it in interest rate markets. What’s referred to as the Move index. The implied volatility around interest rates has reached relatively high levels of uncertainty.

The one kind of residual area where we just have seen no impact whatsoever has been in FX. That has been remarkably stable, remarkably managed. That’s kind of my pick for the breakout space.

TN: Okay. Great. Europe also appeared of volatility because of their exposure to both China and Russia. Since both China and Russia have a degree of kind of wiliness, especially Russia, I think almost a second derivative. Europe is volatile because of both of those factors. Is that fair to say? And that has to do with the Euro that has to do with their supply chains? That has to do with a number of factors.

MG: I would broadly argue that’s a reasonable way to think about it. I mean, almost think about it. Flip the image and imagine that the continents are ponds and the oceans are land. Right. What we’re describing is a scenario where a rock gets dropped into Asia or a rock gets dropped into Europe. You will see the waves spread across. There’s potential for sloshing over, and it’ll absolutely impact the United States. But in that scenario, we literally have two giant barriers in the form of the Pacific and the Atlantic Ocean that separate us.

And while our supply chains are integrated currently, in a weird way, COVID has been a bit of a blessing in starting to fracture those supply chains. We’ve diversified them significantly in the last couple of years.

TN: Okay. And then from what I understand from what you said about the US is supply chains will definitely be a major factor. Corporates will likely keep their investments in China until they can’t. They won’t necessarily come up with, say, dual supply chains or redundant supply chains.

US equity markets could actually be helped by the delisting of Chinese companies. Or we’ll say, US listed equities, meaning US companies listed could be helped by the delisting of Chinese equities, potentially.

MG: Certainly on a relative basis. I might not go so far as to say in an absolute simply again, because you do have people and strategies that run levered exposures. And so anytime asset values in one area of the world falls, you run the risk that the collateral has become impaired, and therefore there’s a deleveraging impact.

TN: Yes. Understood. And then the dollar continues to be kind of the preeminent currency just on a relative basis because there really isn’t in that volatile environment, there aren’t many other options. Is that fair to say?

MG: Well, again, I think there’s an element of complication. I would prefer to argue volatility. I think it is hard to argue that the dollar wouldn’t appreciate, but I also think it’s important, and this is why I go back and say we can’t actually stop Russia from taking Ukraine. We can’t stop China from taking Taiwan.

If they were to actually do that, then there is kind of the secondary loss of phase dynamic associated with it that may you could see and you’ve already seen Myanmar. You could see Thailand. You could see Vietnam. Say, you know what? We got to switch. I’m skeptical, but I’m open to that possibility.

TN: Interesting. Okay. Very good. Mike, thank you so much for your time. I really appreciate how generous you’ve been with what you’ve shared. I’d love to spend another couple of hours going into this deeper, but you’ve been really generous with us.

I want to thank everyone for joining us. And please, when you have a minute, please follow us on YouTube. We need those follow so that we’ve we can get to the right number to reach more people.

So thanks again for watching. And Mike Green, thanks so much for your thoughts on China’s invasion of Taiwan.

MG: Tony, thank you for having me.

QuickHit

Cause and Effect: Are you a deflationist or an inflationist?

Post author By admin
Post date October 4, 2021

This QuickHit episode is joined by central bank and monetary policy expert Brent Johnson. He talks about inflationists versus deflationists and what makes these camps different in a time of a pandemic. What’s monetary velocity? And why banks are failing at their job, and why they’re not lending anymore money? Also discussed China and when supply chain issues will be resolved.

Brent Johnson is the CEO and founder of Santiago Capital, a wealth management firm. He works with about a dozen different families and individuals customizing wealth management solutions for them. He does that through a combination of separately managed accounts and private funds, also invest in outside deals, private deals, venture capital funds, and others. Brent have a focus on macro and loves the big picture.

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This QuickHit episode was recorded on September 28, 2021.

The views and opinions expressed in this Cause and Effect: Are you a deflationist or an inflationist? 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: Part of the reason we’re having this discussion. And is you posted something on Twitter a few weeks ago and I’m going to quote it and we’re going to put it up on screen. You said if you believe an additional QE is on the way, you are secretly a deflationist. If you believe in the taper, you are secretly in the inflation camp. Cause and effect. And I thought it was super interesting. Can you kind of talk through that with us and help us understand what you mean by that?

BJ: Sure. And before I get into that, I’m just going to take a step back because a lot of work I’ve done, a lot of the work I’ve done publicly and put out publicly over the last 10 to 12 years has really been about the design of the monetary system, how it works, how fund flows, you know, this currency versus that currency, what central banks do, etc. Etc.

And this is really a follow on from that and what I was, the point I was trying to get across in this particular tweet is that central banks are a reactive agency. They are not the cause. They are the effect. Now their policies can cause things to happen, but they are reacting to what they see in the market.

And so my point was if you think more QE is coming, then you believe they are going to be reacting to the deflationary forces that still exist in the economy. And so if they were to step back and do nothing, you would have massive deflation.

Now, the flip side of that is if you think that they’re going to taper and you think they’re going to pull away stimulus, then you’re actually an inflationist because you believe inflation is here, it’s going to remain. Prices are going to continue to rise. And the Fed is going to have to step back in reaction to those steadily higher prices.

And so I really get this across because I think there’s a huge battle between the people who believe deflation is next and the people who believe inflation is next. And I think it’s a fantastic debate because I’m not certain which one to come. I kind of get labeled into the deflationary camp, which I don’t mind for a few reasons. But I actually understand all the reasons that the inflationary arguments are being made. And I believe it was a few additional things happen. Then we could get into this sustained inflation. But until those things happen, I’m happy to be labeled into the deflationary camp. So I hope that makes sense.

TN: Yeah. So pull this apart for me. Inflation is ever and always a monetary function. Right. We hear that all the time. Of course, it’s hard to say something “always” is. But people love to quote that. And I think they misapply it in many cases. And I’ve seen that you’ve kind of pushed back on some people in some cases. So can you talk us through that and is this time different? Like, what are the considerations around inflation this time?

BJ: Yeah. So is this a perfect way to set this up because again, I understand the argument that those in the inflationary camp are making. And it would be hard to sit here and say we haven’t seen inflationary effects for the last twelve months. Prices have risen. Regardless of why or whatever prices have gone up. So I’m not going to sit here and deny that we’ve had inflationary pressures.

The question is what comes next. And I think what I would say with regard to the quote that you were just making, I think that was, I can’t remember who said it now, but it’s 50 or 60 years ago. And what I think was assumed in that quote was that monetary velocity is constant. And so you’ve seen these huge rises in the monetary base. But not just the United States, but Canada, Europe, South America, China and Japan.

And so the thought is that with that new money in the system, you’re naturally going to have inflation. But I think Lacy Hunt, who a fellow Texan of yours, does a fantastic job of showing, had the rate of monetary velocity stay the same. That is absolutely the case. But the reality is monetary velocity kind of took a nose dive starting about 20 years ago, and it just continued to lower and lower and lower.

TN: And it’s been negative, right, for the past couple years?

BJ: Yeah. It just continues to fall. And I think the rule is…

TN: Let me just stop you right there. “Negative velocity of money.” What does that mean?

BJ: What it essentially means is that new credit is not being created. And so the system is contracting. And this is really the key to it all. It’s the key to the way the monetary system is designed. It’s the key to the way it functions. And it’s the key to whether we’re going to have inflation or deflation next.

Because I do agree with the money, the inflation is always and everywhere, a monetary phenomenon, assuming that velocity is constant. But velocity isn’t constant. And it’s because of the way the monetary system is designed. And it’s because of the way that the Fed and other central banks have been providing stimulus.

Probably don’t have time to get into all the details of what a bank reserve is and whether it is or whether it isn’t money. But essentially what the central banks have been doing, especially the Fed, is re collateralizing the system. Now re collateralizing the system isn’t exactly the same thing as actually handing somebody else physical money. It sort of is, but it sort of isn’t. And it leads to this big debate on whether they’re actually printing money or not. It’s my argument that the Fed has been re collateralized the system and that has kept prices from continue to fall.

But in order to get this sustained inflation, I keep saying sustained inflation because I don’t want to deny, but we’ve had it. But to have it continue going higher, especially at the rate we’ve seen would require one of two things. Either the Congress has to come out and agree to spend another seven or $8 trillion, which this week is showing, it’s very hard to get them to agree to do that. They can’t even agree on 3.5 trillion and let alone another 6 to 7. Or the banks have to start lending. And the banks simply are not lending.

They lent last year because the loans that the banks made were guaranteed by the government. These were the PPP loans that everybody got.

TN: So. What you’re saying, it sounds to me, and correct me, what you’re essentially saying is that banks are failing as a transmission mechanism. So the government has had to become the transmission mechanism because banks aren’t doing what their job should be. Is that true?

BJ: That’s a very good way of putting it.

TN: Why? Why are banks not the transmission mechanism that they should be?

BJ: Well, they have the potential to be. And that’s what I say. The Fed has provided the banks all the kindling for lack of a better word, all the starter fuel to create this inflationary storm. But the banks haven’t done it. I would argue. Now there’s people to disagree with me. But I would argue that they don’t want to make a loan because believe it or not, banks don’t want to rely on getting bailed out, and they don’t want to make a loan where they are not going to get their money back.

Now, if you’re in an environment where businesses have been shut down either because of the pandemic or because of other laws or because of regulations that can’t afford all the regulations, whatever it is, you know, it’s hard to loan somebody a million dollars if you don’t know that their business is even going to be open the next day. Right.

So banks aren’t in the business of going out and making a loan and having and default on them. They want to get their money back. And I think that they would rather go out and buy a treasury bond that’s yielded one and a half percentage, than make a loan that pays them, three or four of them might go bad. Right.

TN: Okay.

BJ: So to me, that’s indicative of the deflationary forces that the banks who are closer to the money than anybody else, and typically the people that are close to money understand the money or benefit from the money the most, they are telling me from by their actions, maybe not their words, but their actions are telling me they don’t think this is a great investment.

TN: Yeah. I think we could talk about that point for, like, 20 minutes. So let’s switch to something else. So what you didn’t really mention is the supply side of the market in terms of inflation, meaning supply chain issues, these sorts of things. Right.

And so I want to focus a little bit on China. Now, there’s a lot happening in China, and I want to understand how that impacts your worldview.

In China, we’ve got the crypto regulation that’s come in. And the clampdown in crypto. We have a strong CNY, like an unusually strong CNY over the last six or nine months. We have the power supply issues. We have the supply chain issues. That’s a lot happening all at one time, at a time when a lot of people believe there’s kind of China has this clear path to ascendency, but I think they have a lot of headwinds, right. Of those kind of how are you thinking about those factors? The crypto factor, the supply chain factor, the power factor? How are you thinking about that stuff?

BJ: So I think about this a lot first of all. I mean, this is a probably, like it or not, for better force, the China-United States dynamic is probably one of the biggest macro drivers for the next ten or 20 years. It most likely will be. There’s nothing is guaranteed. But that’s probably a pretty safe bet that that’s going to be one of the main drivers. And so I think what you’re touching on as far as the supply chain, in my opinion, that is as big a driver as the “money printing” for the inflationary effects that we’ve seen for the last year.

You know, if you look at the efficiency with which the single global supply chain that Xi call it from 1990 to 2018 or 19, it’s pretty amazing, right. There’s one global supply chain, just in time inventory, you can predict with a very high level of certainty when you would get those things you ordered and at what price. But then with a combination of the US and Chinese antagonism and COVID, the supply chains are broke. And that makes it harder to get those supplies. And the timing of when you get them in the price, which you get to miss completely unknown or its delay, and the prices are higher.

And so I think that has led to a lot of the price pressure on commodities. Now, part of the reason that the decreasing supply push prices up was that demand stayed flat or went up it a little bit. And I think the reason it went up is a lot of people believe that the Fed would print enough money to cause demand to stay, solid and that China was growing and that they would continue. China has been the growth driver for the global economy for years and years. And I think a lot of people thought that China would continue to be that growth driver for these commodities and these other goods that were needed. And so if demand stays flat arise and supply gets cut, then price rises.

Now, I don’t think that China growing and ascending to economic hegemony or however you want to describe it is a given. I think they have more troubles internally than they would like to admit. And I think we’re starting to see that, with the Evergrande, real estate daisy chain of credit extension. You know, if you think that the US has a credit problem, take a look at China, they do as well. And it’s manifested itself nowhere more visibly than in the real estate market there and Evergrande.

Now, the problem is if they cannot send that credit contraction that is currently taking place in the Chinese market from a real estate perspective, then demand is not going to stay cloud. Demand is must start to fall, and demand starts to fall and some of those supply chain logistics start to get ironed out. Now, they’re not going to get fixed overnight. It’s not going to go back to the way it was 18 months ago. But if it even gets a little bit better and demand starts to fall, well, then you could have a move down in commodity prices and then move down in growth expectations.

And that is the way deflationary pressures could take whole. And as those prices start to come down, then you get more credit contraction. It becomes a vicious cycle both to the upside and to the downside. But based on the design of the monetary and I don’t need to keep harping on this. But based on the design of the monetary system, it is literally the stair step up in the elevator shut down. That’s just the way it’s designed. It’s an inherently inflationary system that it has to grow. Or if it doesn’t grow, then it crashes. And crash has always happened faster and steeper than the stairstep higher.

TN: They take longer, but steeper on the way up. Right.

BJ: That’s right. That’s right.

TN: Okay. So in terms of the supply chain issues, okay. I’m just curious, is this something that you think is going to resolve itself in three or six months? Do you think it’s something that’s with us for three years or what was I feeling out of this?

BJ: Some of it is gonna resolve itself in three or six months? And I think that will be a combination of just working out the kinks and demand falling. Right. I think that will help. But I don’t think it’s all going to get fixed in three to six months, and I think it might take three to six years to get the other part of it. And this is where I have to actually say that in the past, I’ve been somewhat critical of the people who called for stagflation because I kind of felt the top out, right? You couldn’t decide. So you just go down the middle.

But I actually think that that’s a very likely scenario. I think some things are going to inflate and some things are going to deflate and we’re going to have this kind of the stagflationary environment. I think the central banks are going to do everything they can to kind of offset those deflationary pressures. And in some cases, it will work. In some cases, they won’t. But the global debt, the amount of global debt and the global dollar… Is so big that deflationary scare, in my opinion, is always going to be there. And in my opinion, you can’t ignore it.

A lot of people just think, oh, don’t worry about it. Central banks, have you back. There’s a Fed put, don’t need to worry about it. I understand that argument, but I don’t think it’s correct. I think you do have to worry about it.

TN: Yes, I think that’s right. Brent, I would love to talk to you for another couple of hours. I think we could do it. And I’d love to revisit this in a few months. Thank you so much for your time for everyone watching. If you wouldn’t mind following us on YouTube and subscribing, we’d really appreciate that. That helps us get up to where we can promote more and other things. And, Brent, I really appreciate your time and really appreciate this conversation. Thank you very much.

QuickHit

OPEC+, JCPOA & Delta Variant: Strength or weakness for oil & gas prices?

Post author By admin
Post date July 19, 2021

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.

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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.

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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.

QuickHit

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

Post author By admin
Post date June 3, 2021

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

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

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This QuickHit episode was recorded on June 2, 2021.

The views and opinions expressed in this Ag’s Perfect Storm: Tight Supply, Strong Demand and Weather Uncertainty QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

TN: There’s a lot of attention on ag right now. And can you just kind of give us a little bit of a set up of what’s happening in the ag markets, everything from the volatility of corn to, you know, what’s happening in wheat, a little bit of kind of protein, a little bit of beef activity. And that sort of thing. Can you tell us just generally why are we seeing so much attention on ag right now?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

KVT: Thanks, Tony. Appreciate it.

QuickHit

QuickHit: The Anglosphere and the Multi-Speed Recovery

Post author By admin
Post date April 11, 2021

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

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

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This QuickHit episode was recorded on April 8, 2021.

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

Show Notes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: It’s familiar.

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

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

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

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

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

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

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

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

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

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

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

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

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