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Systemic Risk: Silicon Valley Bank(ruptcy) & America’s Feckless Energy Policy

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In this episode of The Week Ahead, the hosts discuss three key themes: Silicon Valley Bankruptcy, the Federal Reserve’s Quantitative Tightening (QT) and systemic risks, and America’s energy policy.

The discussion begins with a focus on Silicon Valley Bank (SIVB), which had a major issue raising capital and faced a bank run on Thursday. On Friday, the California bank regulator shut the bank down. SIVB had $175 billion in deposits, $151 billion of which were uninsured. One of the discussions surrounding the SIVB collapse is how venture capitalists have been affected.

The hosts then move on to discuss the Federal Reserve’s QT and systemic risks. They note that the US has been experiencing strong data and inflation, and Fed Chairman Powell hinted at a 50 basis point increase this month. The hosts discuss whether the Fed will accelerate QT in this environment, what that could look like, and what risks it would pose to the US financial system.

The third theme discussed is America’s energy policy. Host Tracy Shuchart mentions a speech given by US Energy Secretary Jennifer Granholm, which didn’t seem to give her more confidence in Granholm’s competence as an energy secretary. The discussion touches on the problems with America’s energy policy and how it affects the country’s overall economic outlook.

Finally, the hosts share their expectations for the week ahead.

Overall, this episode offers a comprehensive analysis of current events and trends in finance and policy, with a particular focus on the implications of SIVB’s bankruptcy and the Federal Reserve’s actions. The hosts provide insightful commentary and thought-provoking questions that will be of interest to anyone following these issues.

Key themes:
1. Silicon Valley Bank(ruptcy)
2. Fed’s QT & systemic risks
3. America’s feckless energy policy

This is the 56th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Joseph: https://twitter.com/FedGuy12
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

Tony

Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. Today we’re joined by Joseph Wang. You may know him as @FedGuy12 on Twitter. He’s a CIO at Monetary Macro and a former senior trader at the New York Fed. Joseph, we’re really happy to have you here. Thanks so much for joining us. We also have Albert Marko and Tracy Shuchart will be joining us during the show. There are some key things we want to talk about. First is a hawkish Fed of course we can’t talk about that without the Silicon Valley Bank things, events that happened today. So we’ll cover that a bit. We’ll get into the systemic risk of quantitative tightening and the likelihood of that happening, as well as America’s rudderless energy policy. And we’ll talk to Tracy about that in detail.

So guys, thanks very much. There’s been a lot going on this week. Albert, I know you’ve been on the road. Joseph, it’s your first time here, so I’m really glad we can have this conversation. Guys, let’s start out with Silicon Valley Bank. I mean, this is something that just kind of happened yesterday. It actually happened with a communications announcement on Wednesday coming in the wake of another bank failure.

And it was really bad timing, it was really bad advice for them to do this. And we’ve just seen a bank explode right, or implode. So can you help us walk through what actually happened from your perspective?

Joseph

Yeah, well, first of all, thanks for having me on the show, guys. I love your show and I do listen to it. So it’s real honor to be here today.

Silicon Valley Bank. So as of recording today, it looks like they’ve been taken into receivership by the FDIC. So basically it’s bankrupt. Now, Silicon Valley Bank over the past couple of years, if you look at their equity prices, they soared really high, especially during the crypto boom. They were known as a bank that would lend a lot to the financial tech sector. And as the financial tech sector imploded, it seemed like that kind of hurt them as well. These past few days you saw it stock price steadily decrease. So if you’re a bank, you have two big concerns. The one is solvency. Are your assets worth more than your liabilities? And the second is liquidity. Do you have enough cash on hand to meet investor withdrawals. When I put money in a bank, so I am an investor in that bank, right. So I eventually lent money to local bank and local bank bought from me and I can go and get that money back anytime I want. And that is part of the problem of a bank. Your liabilities, they are short term, so they can disappear anytime you want. But your assets tend to be longer dated, things like loans, let’s say a five year, ten year loan.

So I can’t really comment on the solvency situation of Silicon Valley Bank. I suspect that they are insolvent simply because I read that they’ve been making a lot of loans to these fintech companies and we all know how that turned out. But you can actually get pretty good insight on their liquidity situation by looking at their regulatory filings. If you want to study a bank and I study bank, so you want to look at something like this.

That’s all this is a call report. A call report is a financial report that banks file. It’s literally 100 page reporting form, and it comes with instruction manual that’s 800 pages in leads. So that’s why I can actually keep a reference here. So if you look at Silicon Valley’s financials, you’ll see that it’s a bank that is vulnerable to liquidity runs. It might not seem so on the surface, but so just for the audience, Silicon Valley Bank has about $210 billion worth of assets. It’s largely funded by deposits. Now let’s look at their asset side first. Now if you’re a bank, you got to keep liquidity on hand because what if everyone starts to ask for their money back? You want to have some liquidity on hand to meet those redemptions. So Silicon Valley Bank has actually a pretty good portfolio of liquid assets. Of the 210 billion in assets, about 120 billion are securities. Securities are good because you can sell them. That’s what a security is. If you have a loan to local company, you can sell them. That’s illiquid. Of the 120 billion, 80 billion are high quality liquid assets. So in the banking world, you want to have high quality liquid assets because you can sell them easily to raise cash.

These are Treasuries and Agency MBS. So so far, $80 billion of high quality liquid assets. Sounds like a great liquid bank. You dig down a little bit more, you find out they’ve already pledged about 50 billion of those away. So they’re already using that to either to secure borrowings. For example, let’s say you are a huge investor. You’re putting money into Silicon Valley Bank, but you don’t really know if you want to take that risk. So you could ask for some collateral. So that could be a possibility as well. So the bottom line is they don’t actually have that much liquid assets, even though they look like they do. Now let’s look at their liabilities. It doesn’t look good either. So normally if you and I okay, I don’t know about you guys, but when I put money in a bank, I have less than 250,000. So it’s within secured by the FDIC. But if you have a lot of money more than 250,000, then it’s not secured by the FDIC. Then you have credit risk. When you look at the depositor profile of Silicon Valley Bank, you can see that they have $150 billion unsecured deposits.

So those are institutional investors who basically lent maybe unsecured, maybe definitely uninsured to Silicon Valley Bank and they could lose everything. If Silicon Valley Bank goes bad, down really badly, they probably will, they’ll get something back. But it’s not good to lose money when we put it in the bank. So they have liabilities that are runnable and they began to run. Now I’ve been hearing anecdotally that everyone was like, get your money out of Silicon Valley Bank. So I’m sure they were. Now you have if you’re a Silicon Valley Bank, that’s a huge, huge problem. You have no liquidity. Everyone is asking for their money back. Your last lifeline is to borrow from, let’s say, the Fed or a Federal Home Loan Bank. It looks like they’re already borrowing from the Federal Home Loan Banks and I don’t know if they can borrow even more. A Federal Home Loan Bank is basically a government sponsored agency whose job is to provide cheap loans to the commercial banks they’re already lending to to the Silicon Valley Bank. In theory they could lend more, but they have a lot of exposure to Silicon Valley Bank. So the Federal Reserve Bank of San Francisco, which is the bank that’s lending to Silicon Valley Bank, 20% of their loan book is to Silicon Valley Bank.

So if you’re a CFO there, do you want to increase your exposure to this bank that’s probably going bankrupt? So yeah, it’s over for them, which is why the FDIC souped in.

Tony

Those are amazing details and it’s exactly what I wanted to hear. Now what I had read earlier was that there are $171 billion of deposits at Silicon Valley Bank and 175 billion but 151 billion of that is uninsured. So basically $24 billion people can pull $24 billion out, but there’s $151 billion that they may or may not get back. Right. So for a lot of these VCs, early stage tech companies and so on, I don’t know if private equity firms or investment funds bank there, but certainly it seems to me to be a systemic risk, especially in the venture capital community. Is that a fair assumption to make?

Joseph

I don’t think it’s systemic to the banking sector and we can talk about that. But these guys who in that community for sure, Tony, I imagine that a lot of people in that community are banking with Silicon Valley Bank. And if Silicon Valley Bank goes under, they’re going to have to have haircuts and maybe it’s a lengthy process. Maybe they get tied up in bankruptcy court or something. So that’s a liquidity problem for them. And so for that community, yeah, I agree, it could be a big problem.

Tony

So if I’m a limited partner in a venture fund today, I’m checking with that venture fund to make sure that my cash is okay. Is that the process that people would be doing? For people who don’t know, limited partners are the investors who put money into a venture capital fund. And my assumption is a venture capital fund would likely store that money in Silicon Valley Bank. And if they can’t access all of well, they could take the first $150,000 of that. But if they can’t get beyond that, then it’s not just the VC that’s hurt, it’s that limited partner. Is that correct?

Joseph

Yeah. So that losses, like you mentioned, partnership losses flow through from the entity to the partnership. That’s what being a partner is about. I imagine there are some rules depending on your general partner, limited partner, things like that, but yeah, it’s investors that get hurt.

Tony

And so the allocation just both of you guys probably know more about this than I do, but the allocation of, say, venture capital from, say, a pension fund is a relatively small allocation of all of the allocations of, say, a pension fund. So I would suspect that this probably isn’t a systemic risk back to, say, pension funds and other investment funds like we had maybe in 2007-8. Right. It’s probably less of a systemic risk than that was.

Joseph

Yeah, I totally agree. I don’t view this as a systemic risk.

Albert

I agree with that. Tony. I don’t think anything systemic is going to happen because SVB Bank goes under. I mean, SVB Bank is the FTX of the fintech banking world. I mean, everything on there, everything that they invested in, is based on trust, and not very much for the fundamentals at A. So it’s not a surprise that it went under as the Fed has been raising rates. Everyone knows that if the rates rise, the tech sector is one that gets hit the most. So it’s not really a surprise that this happened now.

Joseph

Yeah, I totally agree. When the Fed is raising rates, it’s trying to slow down the economy through sectors that are interest rate sensitive. I think the great irony here is that we all expected that to be real estate, right? But real estate is fine, but we miss the fact that the other really interest rate sensitive sectors is tech. And we see big layoffs in tech. So it’s actually all the well paid people who complete on Twitter who are having a bad problem, but the more blue collar industries seem to be doing fine.

Albert

Yeah. Housing got a boost because there’s a lot of cash buyers. People were cashing out at the behest of bloodstone, buying everything, but they were cashing out three and four times the value of the homes that they had a mortgage on. So they go and buy other homes, pure cash. There’s no mortgage risk in the system for the rate. Just like you were saying, the housing sector is not really affected by rates at the moment. You can see that because the houses are still going up and still a little bit of a shortage. But the tech sector was always the biggest loser of the hawks.

Joseph

One of the things that I hear is that there’s the fiscal stimulus from all the construction stuff, like is flowing into the state and local governments. And so that kind of construction spending seems to be supportive of employment, at least in the construction sector. So the guys who, if they’re building residential houses, maybe they can go and do something that’s benefiting from fiscal stimulus.

Tony

Sure. Here in Texas and probably in Florida, where Albert lives, there is construction all over the place, and it’s helping the tax base, it’s helping the overall impact of related jobs and other things. So it is still very strong, at least in the south.

Albert

Well, look at the layoffs. It’s all been tech and no construction. Construction has a shortage of workers at the moment, that’s the best indicator that you can have at the moment.

Tony

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Tony

Right. Okay, in talking about that strength, let’s talk about the Fed a little bit. Okay. If we were talking two days ago, there would probably be a bias toward the Fed becoming more hawkish. Right.

All the buzz two days ago was, well, we’re going 50. Fed is going to be more hawkish. It’s going to be tough. But over the last 24 hours, things have really started to lean away from that. So what do you see as drivers of the Fed being hawkish and drivers of the Fed being less? So we can’t say that they’re dovish. Right. But it’s more the degree of the rate rise. So what do you see in the calculus that they’re thinking through?

Joseph

Yeah, so let’s level that a little bit. So at the last FOMC conference, Chair Powell basically said that from now on, we’re going to do 25 basis points. He said that through his statement. So the language was that rather than talk about the pace of the hikes, we’re going to talk about the extent. So that’s kind of a that would seem like a done deal. And from my experience with the Fed, very slow, very conservative organization. 75-50-25-25-25, you know, you don’t go from 25 to 50. Now, that’s what everyone assumed. And also corroborated by, let’s say, President Mester. And then Chair Powell kind of threw that whole thing upside down this past week when he was testifying before the House and Senate. He was basically suggesting that, you know, if the data is still strong, we’re going to do 50 until the market began to price that in. So the question ultimately is, is data strong? And that has to do with what happened today with the non farm payrolls and what happens with the CPI report next week. Now, when you’re looking at market pricing, like you suggested, Tony, they seem to be taking out that 50 basis point hike today, Friday, and that could be in part because of fear contagion in the banking sector, I don’t know.

Now, looking at the non farm payroll itself, it looks like the jobs number over 300,000 was comfortably above Bloomberg expectations of about 200 some thousand dollars. But there was a little bit of a mix in it as well because of the unemployment rate increased. I think the pace of a wage increase is also moderated as well. So it seems to be on the stronger side, but not unambiguously. So my perception from this is if the Chair Powell is basically upending everyone’s expectations and putting 50 on the table, the presumption is 50. And this was not clearly weak. We got to watch CPI next week as well. As long as CPI is not like super, like a big disaster, I think the presumption should be about 50 basis points for the March hike.

Tony

So you think the presumption is 50 now?

Joseph

I think today’s headline employment was pretty strong. It’s not something that is weak enough, I think, to take away the presumption. Again. Everything could change with CPI next week, but we’ll see.

Tony

Thank you very much. That’s okay. We know you’re busy, so thank you so much. So Joseph, with the jobs data, there were 50,000 department store jobs in that jobs data. And to me that seems like a statistical extrapolation from an old model or something. I mean, I don’t know of any department store that’s hiring. So when these things come out, what are we supposed to think about that type of data?

Joseph

Yeah, so a lot of people get into the guts of the report and the Fed actually, internally, they have their own model for stuff like this. I would be hesitant to be looking into too much into these adjustments. As you mentioned, they matter. But then you can look at every single job report and say, oh, it’s actually not as strong as it is, or not as weak as it is. For all these little idiosyncratic reasons. I would just take it as it’s presented and knowing of full well, of course, that it is a statistical abstraction of what reality is.

Tony

So is it fair to say you see it more as a kind of a direction than something that’s more specific?

Joseph

Yes. And also if you just average this one with the past few months, it does seem like the labor market not slowing, has decent momentum and there could be revisions going forward. I mean, January was revised slightly, slightly weaker. So it’s just not obvious evidence that data is weak from my reading.

Albert

Tony, for a long time I’ve been saying the Fed should have been doing 50 basis points months ago, but here we are now talking about 50 after doing 25 a few times. I don’t think that they’re going to do 50. I think more that what they’re going to end up doing is talking about QT and doing QT for longer rather than rates at the moment, just because I think Powell and Yellen and the entire crew over there is a little bit worried about the economy, especially after the bank failed. And looking at the jobs numbers, I just can’t see more than that’s. I just think that things will start breaking. If we go 50, we’ll be down 200 points on the S&P, and things will start breaking. And you start wandering down to 3500 on the S&P, you actually make it a financial crisis.

Tony

Isn’t that kind of what they like? They kind of want some things to start breaking. Right. Not that they don’t bankrupt people, but they do want some things to start breaking.

Albert

They keep talking about a soft landing, and that’s the plan at the moment.

Joseph

I agree with Albert. I think the right policy would just be emphasized QT a bit more. It makes perfect sense. I guess we’ll talk about QT in a bit, but it’s a good policy from my perspective, because when you do QT, you’re putting upward pressure on the rates that actually matter to the economy. You hike the Fed funds up and down. Nobody really cares about the overnight rate. When you’re talking about economically sensitive rates, like mortgage rates or like your auto loan rates, those are like the five year, ten year sector, and that can be influenced by QT. So you want to slow the economy down, you want those rates to go higher. But I think the Fed is pretty stubborn when it comes to QT, in part because they don’t really understand they don’t feel like they understand it well. They feel that they understand the overnight rate a bit better.

Tony

Okay, so let’s talk about that. QT is on our agenda, so let’s move to that. So in terms of rates, Joseph, you’re the 50 camp. Albert, you’re the 25 camp. Let’s move to QT. We have been undertaking QT for, what, ten months now or something, and it’s been gradual. Albert, you smile when I say that. What’s your thought?

Albert

Well, I mean, we’ve been doing QT, but then it’s been offset by Yellen’s TGA activity.

Tony

Yeah. Now what are you hearing about the TGA? Has that slowed down?

Albert

It slowed down now, but once the tax revenue comes in late April, she’ll have that again in May.

Tony

Okay. So if we have quantitative tightening, which means the Fed is selling things from their balance sheet into the market, probably at a discounted rate, which takes money out of the out of circulation and it tightens the money supply. Right, but if we have the Treasury issuing funds from the general account, it’s offsetting those QT efforts. Right?

Albert

Yeah, that’s exactly what it’s doing. She’s actually, right now, as we speak, being questioned by the TGA from the House Ways and Means Committee. That’s exactly what she’s been doing, and I think it’s more like why she’s doing it politically rather than anything with economic policy in mind.

Tony

Okay, so what are the politicians generally asking her about, Albert?

Albert

Well, they’re asking her about her sterilization of QT by using the TGA and the effects of inflation because of it at the moment. I have a list of the questions that I can definitely give you guys for afterwards if you want to post them up here. But that’s what they’re asking her about. Why is her action why is she talking about rates when she is a CFO of the country? She is the Treasury Secretary. She’s not the Fed chair. She should be talking about rates one day after Powell comes out being hawkish.

Tony

Right. It’s hard to quit the Fed, I guess. Okay, moving on.

Joseph

I have a question, Albert. Do you have any views on who might be the next vice chair? I mean, right now the frontrunner seems to be Janet Everley, this academic in Northwestern, but I watched the hearings and everyone there was like, from the Democratic side was like, “”oh, we got to have an Hispanic vice chair. We got to have an Hispanic vice chair. And Janet Everley, maybe she has distant relatives or maybe she’s going to write a cookbook about tacos or something like that, but she doesn’t appear to be Hispanic to me.

Albert

Yeah, I don’t know. That decision is going to be made by Brainard who they want is the vice chair. That goes with their liberal policies and enacting and using the Fed to push those political agendas. That’s what they’re looking for. I mean, it could be Hispanic or black or white or whatever, but the base case is that they need someone with a liberal slant in their view to help them out.

Joseph

Yeah. Janet Everly definitely has a liberal slant. For you guys who are not aware, she thought it was a good idea to have a higher inflation target. Maybe that will be in the future, not with Jay Powell, but maybe in the future, maybe like 3%, maybe 4%. Who knows?

Albert

I think 3% is definitely coming no matter what. I don’t think it’s realistic for us to get back down to 2%, especially with the Fed members being former liberal than they were a few years ago.

Tony

Okay, let’s talk about the three 4% rate at some point.

Tony

But let’s get back to QT. Joseph, can you talk us through some of the if the Fed were to accelerate QT, which seems to be something that you’d like to see them do, more of what forms would that take?

Joseph

They could just simply raise the cap for Treasury. So right now the Treasuries can match. The QT pays for Treasuries is a maximum $60 billion a month. They could raise that. So what happens mechanically is that you can think of it as the private sector having to hold more Treasuries. You’re increasing the supply of Treasury debt that must be held by the private sector. So basic supply and demand, increasing supply prices for Treasuries decline and so yields go higher. So that’s a way that they could try to tighten policy by making, let’s say, longer dated interest rates higher. And I think it’s helpful, especially in today’s context. So investors look at the world, look at the future based on their experience in the past. And our experience over the past decade was a Fed who would just cut rates at the drop of a hat. And so because the investor community believes that you have a very, very deeply inverted curve and that’s a big problem because as the Fed is hiking rates on the front end, you don’t see that as much in the ten year. And so you can see, for example, mortgage rates continue to go down as they did in January, thus essentially undoing all the hiking the Fed is doing in the frontend.

Joseph

So you really need the market to either believe that the Fed is higher for longer, or you could have the Fed engineer it by just boosting the supply of longer dated Treasuries. And it’s hard to convince the market of something and the market has a reason to believe that JPowell and his committee of largely dovish committee is just going to cut rates. So it’d be easier to just boost the supply of Treasuries through QT.

Albert

Okay, that’s something that nobody talks about, is durational liquidity. Nobody speaks about that right now with the Fed and the Treasury. I haven’t seen one analyst talk about duration liquidity.

Tony

Okay, so can you guys talk about that? How would they change? Well, first of all, if we focus more on QT, would that potentially pose a threat to, say, banking systems or there are other potential systemic threats that QT could pose for the US.

Joseph

Yeah, it could blow up the Treasury market.

Tony

Okay, tell us how that wouldn’t tell us.

Joseph

So I think there’s huge the great systemic risk today is not in the banks or the private sector. It’s in the public sector. It’s in the Treasury market. And we saw kind of a prelude to that with what happened with the gilt market in the Bank of England last year. For those of you who don’t remember, last year we saw gilt yields basically 30 year long good data gilt yields basically explode higher late last year, and in part because, one, the Bank of England announced that they were doing quantitative tightening and also because the government announced that they were going to issue a whole bunch of gilts. Now there are some levered players in that market who basically blew up. Now if you recall throughout late last year, okay, the summer of last year, there’s a lot of articles about Treasury market liquidity. This is something that I’ve been writing about since last January. And Treasury market liquidity is not really strong, in part because the size of the Treasury market is just growing so quickly. It’s not growing in proportion to the underlying market. So I think about this as like a stadium that gets bigger and bigger, but the exits don’t get any bigger.

Joseph

So 20 years ago we had about $7 trillion in Treasuries outstanding. Today we got about 25. And Biden is going to promise that he’s going to issue even more through his spending. And the underlying market liquidity in the market hasn’t scaled in the same way. 20 years ago we were doing $400 billion a day in cash transactions. Today it’s 600. So again, there is some potential for fragility. Now the market got was looking pretty dicey in the summer last summer, but it got bailed out when recession fears predominated and people began to think that Fed is going to cut rates. Recession, you got to buy Treasuries. But in the event that those recession concerns go away or inflation stays persistent, you can have, I think, some real discontinuous event there where yields spike higher like they did in the UK, which of course wouldn’t lead the Fed to respond. Yeah. So that’s what I view as I’m not really worried about banking or anything like that. So one thing that people have to be aware of is that the banking system has really changed a lot over this past decade. So an easy way to look at that is just Fed QE, right?

Joseph

So now banks have $3 trillion of basically liquidity from QE on their balance sheet. They didn’t have that preg. There’s also a lot more regulation. Now banks are really, really boring businesses. Back then it was exciting. Everyone is making huge bonuses and so forth. But now that’s all in the tech sector.

Tony

Okay, so you say that the gilt blow up happened because of long dated yields. Is there anything, if we move into QT, is there anything the Treasuries could do? Could they move that to the shorter end of the curve to avoid that?

Joseph

I think that would be a great idea. So one of the things that they floated is a buyback operation. So what they would do is they would issue bonds and use that proceeds to buy old bonds. Now I think it would be a good idea to issue shorter dated bonds and buy longer dated bonds. They basically change the duration profile. I don’t think that’s what they want to do. So far they’ve been pretty adamant that they want to make it a maturity bond. Now I’ll give you an example. Let’s say you issued a 30 year bond and. After ten years, it rolls down to a 20 year bond. Now it’s an off the run bond. So an off the run is something that was issued, not recent, and that off the run market is very, very illiquid. So what you could do is you could issue a new on the run 20 year on the runs are very liquid because they’re the recent vintage. Take that money and buy back the old 30 year, which became a 20 year. So you don’t really change the duration of the debt outstanding, just the liquidity profile. That’s what they’re floating.

And maybe that’s something they’ll do. I suspect that it’s not going to be enough. If they want to do something like that, they probably will need to rely well, it’s not going to work, so they’re going to have to rely on the Fed. Just like in the UK, they relied on the Bank of England.

Tony

In Japan. What they’ve been doing particularly kind of seven to ten years ago, the Ministry of Finance was issuing shorter duration debt to buy longer duration debt, and the BOJ was buying that shorter duration debt and letting it expire at maturity. Is that something that we could do here? Where the Treasury would issue shorter duration debt, the Fed would buy it, they would pay off the longer duration debt, and then it would just go into nowhere?

Joseph

They could totally change the maturity structure of Treasury debt. It’d be a really good idea if they did that. They don’t actually need the Fed to buy it. There’s a ton of demand for cash at the front end in the US financial system right now. There’s so much demand that people are putting it into the Fed’s reverse repo facility, which is about $2 trillion. So that means that the Treasury could issue $2 trillion worth of Treasury bills, and the market would just lap it up like that. So they don’t need the Fed to buy it.

Tony

Okay, while we’re here, while we’re talking about people buying Treasuries, I saw some notes over the past week or so where people are saying China is selling their Treasuries, everyone needs to worry. Can you talk to us about that? Joseph Albert, can you talk to us about that? To me, that seems laughable, but it is laughable.

Albert

They need dollars to keep even if you look at if you look at over the long run, I think over the last, like, five years, yeah, sure, they had bought a lot of Treasuries and now they’re selling Treasuries. But it’s pretty even at the moment, if you look going back five years, I don’t even take that kind of argument seriously. When people say that China is going to sell Treasuries and dollars going to crash and blah, blah, blah, buy my crypto, buy my gold, it’s what it usually is. So I personally don’t see it as a big deal. I mean, you know, that’s just the way I think about it, so pretty pretty explicit about it.

Tony

Joseph, what do you think?

Joseph

Yeah, it’s hard for China to find a substitute for Treasuries. So Brad sets there at the Council of Foreign Relations, he’s an expert on this and he has done some pretty interesting detective work. And one of the things that seems interesting is that the China foreign reserves actually hasn’t changed all that much over the past several years. So based on their publicly disclosed data, it stayed around, let’s say three, three and a half trillion over the past few years. But if you recall, China has been making a lot of money through exports. During COVID for example, they were exporting like trades to the US trade deficit with China between US exploded higher. Right. So where is all that money going? It’s not going to the sovereign fund. It must be going somewhere else. I think part of it is going to the commercial banks, but I don’t really know how their data works out. I think they definitely have a huge problem in that they have a lot of exposure to the US. That kind of gives the US political power over them, just like the US could seize Russia’s sovereign reserves. It’s a problem for them.

I don’t know how they can solve it. I’m sure they want to solve it, but so far it seems like they’re stuck, at least for the moment, in Treasury.

Albert

It is a big problem for China because when Yelling calls them up and said, you got to help us out in inflation and crush commodities, you’re going to have to do what Yellen and the Fed say just because of how much they’re held off. I absolutely agree with you on that one.

Tony

Let me bring Tracy in here because I don’t like it when she’s quiet. So, Tracy, what do you think about the issue about Chinese selling US treasuries? Do you see that as an issue from your perspective? Does China have other options? What do you think they’re doing with the money they’re making on US. Export, on exports to the US?

Tracy

Well, I think if we look at the big picture, right, we have seen increased central banks buying gold and selling US treasuries, but we have to look at the bigger picture. More people own US debt than any other country in the entire world, so that’s not going away soon. So I hate to cater to these people and say, yeah, central banks are wearing a lot of gold, but that means that they’re shutting us right? Because it’s simply not true. You still look at the highest countries that own US debt still continue to be the same one china, Japan, et cetera. That’s not going away anytime soon. It is notable in the fact that looking at the gold market, which has been particularly lagging, I think it’s very interesting if we’re looking at the commodity side of things because we’ve seen last year particularly we saw outflows of gold flows, people investing in gold, whether it’s physical, ETF, et cetera, literally for eight months straight. I think that kind of makes this market interesting. But again, I don’t want to conflate that with central banks are buying gold, digging US. Treasuries. That means nobody likes us.

Tracy

Debt anymore.

Albert

That’s an important fact that, yeah, whenever they sell gold or Treasuries, they’re just raising my opinion. They’re just arbitraging for dollars later on. It’s nothing systemic that’s a threat to the US dollar by any means.

Tracy

That was my point. Let’s not make this a bigger issue than it needs to be that we have often seen, yeah, central banks can.

Tony

Walk and chew gum and spin plates and all that stuff at the same time. I think they’re capable. They’re very smart people are capable of doing all this stuff. So okay, just before we move on from QT, albert, is there anything else on QT that you wanted to bring up that you’re watching?

Albert

No, Joseph pretty much talked about it extensively, and there’s not really much I can add. I just think that the proper thing for power to do right now is to accelerate QT and keep rates as they are at the moment.

Tony

Okay, so with housing remaining relatively strong, do you think that they’ll sell off more MBS as a part of their QT portfolio, or do you think they’ll just keep it in the same proportion that it’s been now?

Albert

I think they’ll just keep it in the same proportion right now. I mean, housing at the moment is a big political problem because homes are unaffordable at 70% mortgage rate. So they’re going to have to do something they’re keeping an eye on. That I can guarantee.

Joseph

Yeah. I also note that Powell has been asked his point, Blake, and just said no. He can always change his mind. Powell has a reputation for being a pivotal like he just did. But to Albert’s point, mortgage rates are 7%. That’s kind of already a big drag on housing. If it went to 8%, would that really make that much of a difference? It’s already very high, and you’ve already.

Tracy

Seen housing prices come down extensively, right? Redfin just came out and said 45% decrease in luxury homes and 37.5% decrease. So I think what we’re seeing is housing prices decrease in response to the increase in mortgage rates.

Tony

Okay, very good. Okay, let’s move on. Since we’ve been talking about the US. Government for the first two segments, let’s move on to the US. Government for the third segment and talk about America’s rudderless energy policy. So, Tracy, you were tweeting about a speech that Jennifer Granholm, U. S. Energy Secretary, made earlier this week, and I want to kind of parse that through with you because she is the spokesperson for US. Government’s energy policy.

And there just seems to be a lot of mixed messages. And I’ve got a tweet on the screen about the grand home speech where you said she said, we’ll still need fossil fuels in 30 to 40 years, then to send it into how the Inflation Reduction Act makes the US. Irresistible for new energy. So can you talk us through kind of what were you thinking of as you heard her, and what were your big takeaways?

Tracy

Well, the first thing I want to note in that speech is that for the last two years, this administration has been pushing on the energy industry, right. And has been talking about how they have all these profits and they’re not.

Tony

Producing greeny energy companies. Greedy.

Tracy

That’s been the mo, right. For the last two years. And then in this speech, she did like, 180 when asked the question.

Tony

How.

Tracy

Do you think oil companies, oil and gas companies are responding? She said, we’re very happy how oil and gas companies are responding to our request for like, she gave them props, which is literally 180 degree. So to me that I was like, what? Because really our production has not really increased at all. But suddenly she’s at Fair a week giving props to the energy companies because.

Tony

The CEOs were there.

Tracy

Well, right. So it’s a huge mixed message. The other important thing, I think, to take away from that particular speech was that the US. Wants to move on to energy transition. We want to move away from China. We want to be able to mine our own metals and minerals in the US. For this energy transition. But she was quick to add that the permitting process is a nightmare. It takes ten years just to get a permit. And then if you get lawsuits on top of that, to get to an idea from, I want to build this mine in the US. To actual fruition is a ten year permitting process, and then it’s then plus however many lawsuits you have. I thought that was really interesting and that she actually admitted that the permitting process was completely horrible. Since her administration, or the administration that she works for, has said, what we want to do is streamline this permitting process. We’re going to give people all these incentives to build mines, et cetera. Basically, what she did I take away from the speech is basically what she said was completely opposite of what this administration has been telling us, and that is we have all these incentives.

Tracy

We can build all these mines, no problem. And we love the fact that the US. Oil and gas companies have responded to us and are producing more, which is outright not true. Sorry.

Tony

Okay.

Albert

These are political pipe dreams by the Biden administration. As long as the EPA is there and staff with environmental Nazis, there’s no way that manufacturing and mining is going to propel to the next level in the United States.

Tony

Biden budget proposes 17,000 more EPA staff.

Albert

Oh, yeah, that’s a great sign. That’s a great sign.

Tony

But what they’re saying, tracy, tell me if I’m wrong. They’ve already pushed all this money or they’re already planning to push all this money out into the market. Okay. And this week, the EU developed a proposal to kind of complement the US. And compete with the US. So there’s dump trucks of cash now out there to develop alternative energy. But both the US. And Europe have very restrictive policies on getting those mines together. So out of one side of the mouth, they’re saying they want alternative energy for a safe future. But the reality is they’re paying companies to have Congolese children mind cobalt. I mean, that’s the reality of the situation, right.

Tracy

Situation is it’s not in my backyard. Right, right. That’s the reality situation.

Tony

We want cars that plug in, and we don’t want people to know that Congolese children are mining cobalt. But that’s the crude, stark, horrific reality of these policies today.

Albert

Absolutely, yeah. If you want an American built iPhone or American built Tesla, from the battery on all the way up, it’s going to cost you $5,000 for an iPhone and $190,000 for a little smallest Tesla you can possibly buy.

Tracy

Yeah, it doesn’t matter because it’s never going to be enough, but it doesn’t matter. You think Yellen went to Africa, right? Her trick on Africa, all we heard was she went into Africa to join the renewable generator. That is not why she went. She went to go make deals for mining in Africa. It’s really the back of that situation.

Tony

Wow, that’s terrible. I mean, it’s just the rainbows and unicorns of the policy as it’s portrayed versus the reality, the ugly reality of this industry is pretty horrific. So, Tracy, as you watched Grand Home, what did you think about the oil and gas sector? Did you think, okay, everything’s fine, I don’t have to worry about all this restrictive stuff for 510 years, they’re just going to keep on with status quo?

Tracy

No, I think once you’re looking at the oil and gas sector and you have to look at what actual oil companies said. So you had Scott Sheffield, a pioneer, say there’s five good years left of the permian. That’s a scary thought. Right. And there’s no incentive to drill more because the government’s telling you that in ten years, we want you totally phase out. And so we are going to have a serious problem. And I have said repeatedly, I think that the 13.1 million barrels per day the US. Produced at the end of 2019 in December is probably the height of that’s. It that’s the height of shell, unless something drastically changes within policy.

Tony

Okay, so it sounds to me, since there’s five good years left to the permian, since the US. Government wants this phased out in ten years, there is no ability for oil and gas and money firms actually to have a capital planning cycle. Right. Anything that has longer than a five year payback just is not worth investing in, is that fair to say?

Tracy

I would say that’s fair to say in the United States. Now, if we look offshore, which is really interesting, and that’s where we’re seeing a lot of investment in, say, Guyana or Namibia or a lot of offshore sector kind of seems to be the focus right now in other countries because they just don’t have the same policy hurdles that the United States does.

Tony

Okay.

Albert

Yeah. All places where the EPA is not at.

Tony

Right. So the entire US energy policy and renewables policy is just a big Nimby policy, like you said, just not in my backyard.

Tracy

It is right now. We’ll see what happens. There’s a project going on in Alaska right now which people should be paying attention to their policymakers want this to go through. I sincerely doubt that it’s going to go through because no majors want to invest up there because they run into a bunch of lawsuits. Right. And so why would you knowingly, even if you bought the land rights or the leases, it’s a horrible place because you know that you’re going to be faced with a million lawsuits and give me a million hurdles and whatever. Even if you look at the recent Gom auction, now, you have environmentalists suing anybody that bought leases. It’s a lose lose situation if you’re really trying to explore more gas in the United States right now.

Tony

Okay, so when you say it’s a horrible place, do you mean specifically that Alaska is a horrible place? Because I think we have, like, three there.

Tracy

Alaska is amazing place. I have friends from Alaska.

Tony

Okay.

Tracy

I’m just saying the problem is that you run into a whole lot of regulatory issues, and then you run into a whole lot of lawsuits that are going to take place. And really, that’s a whole separate issue. Now, I really wrote about this in 2020 was the land that they auctioned off is part of a reserve?

Tony

That’s always a good idea.

Tracy

Probably should have never been. Right? And that’s why it really got no interest. It did get a bid from Chevron again, but I don’t see that project going forward ever.

Tony

Okay. Yeah, it’s crazy. And as I try to figure out the policy and I talk to you and I talk to other people, I just can’t figure out what we’re going to look like in five years. And if I was in charge of capex budgets with upstream, downstream, midstream, I honestly wouldn’t know what to do.

Tracy

Because there’s that’s why we continue to look at these companies, continue to focus on dividends, capital, discipline, and paying down debt. I mean, you have to remember, these studies were not making money for years.

Tony

That’s an important point. So when the President of the United States says that Chevron is a terrible company for giving large dividends and doing large share buybacks, they’re doing that because they cannot spend that money on capex. Because they don’t know what the environment is going to be like in five or ten years, is that correct?

Tracy

Yes, exactly. And that’s the point. And they’re trying to gain shareholders. You have to look, two decades ago the oil and gas sector was 20% of the SF 500 weighting wise. Right. And at the lowest in 2020 we were a little bit below 2%. We’re now at about 4%. But you can see where that market has fared fairly poorly.

Tony

Yeah, but Tracy, it’s all going to be AI software forward, so just complete intelligence.

Tracy

It’s going to be chevron AI.

Albert

Yeah, I’ll fund it by a new Silicon Valley bank.

Tracy

That’s right.

Tony

Okay guys, we have a big week ahead going into leading up to the Fed meeting. So what are you all expecting? Joseph, what do you expect to see next week with the various prints coming up?

Joseph

It’s all about the CPI. I mean, I want to know if it’s actually strong. If it’s strong, then we got 50 basis points blocked in right now. Like you mentioned, Tony, that’s been taken out of the market. It could be a violent repricing. So that’s what we want to focus. So I’m suspecting that a lot of people are pricing in rate cuts in part because of what they perceive to be some risk in the banking sector. I just don’t see that. And so when we see that come out of the market, we could have rates go back to expecting a more higher for longer stance by the Fed.

Tony

Okay, great. What is a high CPI to you?

Joseph

I haven’t checked this expectations yet, but whatever is higher than expectations.

Tony

Okay, so literally higher than expectations, if it’s higher than the consensus, then that’s a high CPI.

Joseph

Yeah. If you think back a couple of months, we’re seeing CPI go down. Right. Deceleration, I want to know if it really just did reaccelerate or if it just kind of gave back. What the increase from last month?

Tony

Okay, great. That’s perfect. Albert, what are you looking for next week?

Albert

Same thing CPI is to make a break for the Fed on 25 verse 50. I’m hoping somehow they’ve managed to manipulate the CPI number to make it somewhat in line with the consensus. Hoping for a nothing burger probably be the best option at the moment. Something meaning consensus. If core CPI is hot, like Joseph said, fifty S, fifty S locked in.

Tony

And if super core CPI is hot, that just reinforces wage expectations and it’s all this super circular situation. Right? Okay, so if we do see a 50, do you see an impact on equities? Like a negative impact on equities? Do you think it’d be sideways?

Albert

Without a doubt. Without a doubt. I think if they go out and do 50, I think we’re down 200 points in the S and P pretty quickly in a week. If they do 25, we might even rally 100 points. You know how it is, we’re in bitcoin world now in the S and P. Right?

Tony

Exactly. Okay, that’s good to know. Tracy. We’ve seen oil kind of move sideways. We see energy kind of move sideways lately. What’s happening and what do you expect to see?

Tracy

You know what? I think we talked about this the other week. I continue to think it’ll move sideways. I think we’re in a range. OPEC is very comfortable with that $80 to $90 range for Brent crude oil. And so I see no reason for much to change in that. I think as we head into high demand season right, june, July, August, we could see an uptick in prices. But for right now, the market is very comfortable.

Tony

Okay. And then this Saudi Iran peace agreement that was announced today, do you think that has an impact on crude supply? Do you think that could push crude prices down?

Tracy

I don’t think that, no. Because OPEC has existed for a very long time. Iran is an original member of OPEC.

Tony

They were the founding member. Right.

Tracy

So that relationship has existed cohesively beyond any of the other geopolitical problems that they have had. And Saudi Arabia has always said that this relationship will exist beyond whatever other problems we are having. So I don’t think within the oil market, it really changes any dynamic because that relationship was already solid.

Tony

That’s good to know. Okay. Thank you so much. Thanks for your time. Thanks for all your knowledge. Have a great weekend. And have a great weekend. Thank you.

Albert

Thanks, Tony.

Joseph

Bye, guys.

Albert

Thank you.

Categories
Week Ahead

Economic Warfare: What kills the US Dollar & Inflation’s hold on Europe

Learn more about the FRIENDSOFTONY promo on CI Futures: http://completeintel.com/pricing 👈

In the latest episode of “The Week Ahead”, Tony Nash, Michael Kao, Albert Marko, and Ralph Schoellhammer discussed the current market trends and key themes in the world of finance. The discussion revolved around three main topics – “What kills the US dollar?”, “DXY to 112? Turbulence Incoming”, and “Inflation’s hold on Europe”.

Mike started the discussion by talking about the symposium on the Great Power Competition with China and the US Dollar’s primacy in an era of economic warfare. He emphasized that the US dollar’s status as the world’s reserve currency is at risk due to the rise of other currencies such as the Chinese Yuan. Mike further elaborated on the factors that could potentially kill the US dollar, such as a shift towards a new reserve currency or the decline of the US economy.

Moving on to the next topic, Albert spoke about the DXY, which he expects to reach 112 in the near future. He explained that this is due to the strengthening of the US economy, coupled with rising interest rates and the anticipation of the Fed’s monetary tightening. However, he also cautioned that the markets are likely to experience turbulence due to the uncertainties surrounding the central bank policy and the geopolitical risks.

Ralph then focused on the impact of inflation on Europe. He pointed out that inflation in Europe has been rising at an alarming rate, with Austria’s inflation rate being 0.9% m/m and 11.2% on year. Ralph also tweeted about the rapid increase in bankruptcies, and how this could lead to a domino effect on the European economy. He predicted that the European Central Bank’s (ECB) decision to tighten monetary policy would lead to further economic challenges, especially in Q2 of this year.

Key themes:
1. What kills the US dollar?
2. DXY to 112? Turbulence Incoming
3. Inflation’s hold on Europe

This is the 54th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Michael: https://twitter.com/UrbanKaoboy
Albert: https://twitter.com/amlivemon
Ralph: https://twitter.com/Raphfel

Transcript

Tony

Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash and today we’re joined by Michael Kao. Michael is @urbankaoboy on Twitter. He’s an ex-hedge fund manager and now he’s a private investor. We’re also joined by Albert Marko, who you’re well familiar with, and Ralph Schoellhammer, who is at Webster University in Vienna and he’s a political economics expert.

Tony

So before we get started, I want to talk about our Friends of Tony promo. So I have more than one friend. So it’s plural. Friends of Tony Promo. So, CI Futures is our markets forecasting platform where we forecast about 800 items every month. We do currencies, commodities and equities every week, every Monday morning. And we do the top 50 economies economic variables once a month where we do show our error rates there. So that is what distinguishes us from other folks. There is accountability. And you don’t have to guess about our previous performance. We’re having a promo. The coupon code is friends of Tony. Plural friends. It’s $19.99 per month for a twelve-month subscription. It’s for new subscribers only. We’re only doing it for the first 25 people who come in. So please make sure you get on this right away. Please go to completeintel.com/pricing and we hope you subscribe.

So guys, thank you for joining us. We have a few key themes this week. First, Michael has written quite a bit about the dollar and about the kind of economic warfare happening now between the US. And China. So we’re going to take the other side of his typical argument and look at what kills the US dollar. We’re going to talk to Albert about dollar strength. He made a statement about the dollar going to 112 with some turbulence. So we’re going to dig into that. And then Ralph is going to talk us through inflation’s hold on Europe. So, should be a really broad macro conversation for us today, which I’m really looking forward to. Mike, you did recently attend this symposium on the Great Power competition with China, I think it was at West Point. And you spoke about US dollar primacy and an area of economic warfare, which must have been great. I missed my invite, but it must have been a great discussion and I think we’re all pretty jealous. I assume that much of the presumption or fears about the Chinese Yan, right.

Is that kind of what the basis was of this?

Michael

Yeah, I think generally when people are talking about threats to the US dollar system right. The most glaring contender is the Chinese Yuan, given all the scaffolding that they’re setting up with 60 plus odd bilateral swaps around the world and one belt, one road and all this stuff. Right. But anyways, if you want I can go. First of all, I love the fact that you’re forcing me to steal, man, the counter argument against my own thesis. Good. Which is great. Yes.

Tony

You’ve talked about the US dollar wrecking ball. Right. And you’ve really talked a lot about how the dollar has really kind of hurt some emerging markets. So I do have a chart of USD CNY, and we’ve seen the volatility of the CNY over the past really five years, ten years. And you know, part of my concern about the CNY is the PBOC.

And you know, we can talk about that in detail, but I’d really like to hear, what do you think? If the dollar was displaced, how would that happen? And we could spend days talking about this, but I guess in a summary conversation, how would that happen and what would be a potential other store of value that would be accepted globally?

Michael

Okay, so I was going to answer this question on different time scales, right? There’s short term and there’s longer term, but I believe where you’re going with this is a longer term time scale. Like what ultimately displaces the dollar as the global reserve currency. Right.

Tony

We can talk different timescales. I actually think that’s very interesting.

Michael

Right, well, look, let me dispense with the easy part first, which is the shorter time scale. I’ve been saying for a while now that I don’t necessarily think that we’ve seen the cyclical top in the US dollar in the short term just because I don’t think any of the competing regional blocks can outhawk the Fed. Or conversely, I don’t think the Fed is going to be in a position where it’s going to outdove the rest of the world either. Right. So either of those scenarios tell me that I think the US dollar is probably going to resurge. And so obviously the counter to that, what would have to happen for that not to happen? Well, I think that the US economy would have to suddenly take a turn for the worst and be in a much worse spot than the rest of the world. And the rest of the world would basically be able to become a much more hawkish visa vis the Fed. I see the exact opposite playing out in the short term. Okay, so now longer term and this is basically the topic of my paper, right? So I think the premise of my paper is that this notion that Breton Woods was basically this top down construct that it foisted a Trojan horse mechanism on the world where, hey, everybody, come use the US dollar because we’re going to be convertible to gold.

Michael

And then all of a sudden in 1971, nixon shocks the world and takes that gold tether away. But it’s too late. Everybody is stuck using a dollar. I call bullshit on that thesis because if you look at the Euro dollar, the rise of the Euro dollar banking system, it started happening probably 15 years before that.

Tony

And he was actually very popular when he did that.

Michael

Right? Yeah, well, it’s started happening by the way. It started happening the real catalyst to it first it was the failure of the tripartite agreement after World War II, which tried to stabilize the frank and the pound and the dollar exchange rates. But then in 1957, when Britain basically in a domestic flight against inflation, surprise, surprise, they they basically instituted capital controls. So there was a there was a tremendous global need for a liquid reserve alternative. And so the world actors on the world stage organically flocked to the US. Dollar. So the premise of my paper delves into what are if trust in the dollar already went well beyond its gold backing back then, right? What lent that trust? And so our paper posits that it rests upon national power. It’s a bedrock of national power. And I focus on three economic pillars of national power geography, which informs everything. But then geography also informs a country’s access to its natural resources and its industrial capacity. So in our paper, we talk about how, look, the US. It’s well known that the US. Is very, very naturally bowed with geographic assets that are really unparalleled in many ways.

Michael

And China is short a lot of those assets. However, because we have a federalist capitalist system, china is using essentially economic warfare to target that as a vulnerability, right? So they have unfairly competed and stolen IP in the world of semiconductors. Right. They’re trying very hard to replicate Taiwan success with TSMC. Fortunately the US. Controls critical choke points in that industry still. But yet, in that area at least, the US. Is finally starting to come around and make some very specific targeted export controls as well as changes to its industrial policy. The point here is that in that area alone, the US. Is starting to recognize the importance of reshoring and defending our flank from an industrial policy perspective. But when you compare and contrast that to oil and gas, which is the other critical supply chain where the US. Is currently the leading oil supplier in the world, and we are naturally long that natural resource, but because of blind devotion to ESG adoption and this erroneous assumption that an energy transition is going to follow Moore’s Law dynamic when it won’t right. Is going to leave us in a very dangerous lurch. I point out that there’s a real inconsistency there where we’re kind of shooting ourselves in our own foot when it comes to energy policy.

Michael

To answer your question, what has to happen for the US. To really lose its status? I started thinking. I said, well, number one, okay. Oh, the other thing is much ado has been made of the US. Weaponization and the criminal west seizure of Russian reserve assets and whatnot. Okay, well, look, I also point out in my paper that, yes, that should be a shot across the bow for US. Policymakers because, like the situation in the 1950s, right, it certainly creates an incentive for our adversaries to look for an alternative. But what are the alternatives? Because if you look at the eurozone, the yen, the pound. The euro is, frankly, the most successful challenger to the dollar to date. And yet, since its inception in 1999, us share of FX reserves has stayed constant 60%. It’s the euro that’s actually lost share. Now, the Chinese yuan. Here’s the problem. What has to happen for the yuan to supplant? The US number one, china would have to prove that it will be a better benefactor and more trustworthy sort of steward of the global commons than the US. I don’t see that happening in almost any circumstance.

Tony

So let me ask you just in that what allies does China have? Like, if China were to say, okay, boys, we’re going to war. Line up and let’s form a coalition, who would China’s allies be?

Tony

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Michael

Well, that’s that’s a really good question, because right now right now well, yeah, those those are the those are the two, right? And perhaps, perhaps Iran. Right? But, like, Russia is interesting because China’s relationship with Russia over decades and centuries and even centuries, certainly, right. Has been kind of a storied one. Right. I wouldn’t say that this dragon bear romance is necessarily that chummy, because, look, China is really happy that it’s getting big discounts to Russian euros, right. And that’s directly countered to Russia’s interest, I think this whole notion that right now they share a common interest in wanting to counter the US’s. Hegemony, but that is a very fragile bromance, to say the least. The other thing I was going to say is that the other thing that would have to happen for the US. To see dominance, I think, would be that the US. Willingly essentially becomes a vassal state to China and allows China to roll over. Basically, our interest in the Indopacific, that the US. Allows China to take over Taiwan and we just roll over and do nothing. I guess in a parallel universe, that could happen. I’m not seeing that happening.

Michael

I think that China’s significance alone, not just as an unthinkable aircraft carrier, potentially for China if seized, given its geostrategic position in the first island chain, but obviously Taiwan semiconductor alone is of critical significance.

Tony

Just to take the other side of that for a minute, you know, let’s also be very aware that, you know, the wars that the US. Has lost over the last 80 years have really been to China in Korea, to China in Vietnam. Right.

Albert

We didn’t lose those wars, Tony. Our military objectives were all met. We’re confusing the political opponent.

Tony

We lost those two wars. I mean, we had to negotiate the settlement, and the US lost those two wars. So the only people the US has really lost to over the last, you know, hundred years is the Chinese. And so, you know, I do sit with you and with Albert in terms of if things were to happen, you know, with the US prevail, I actually think they would I don’t think it would be a cakewalk, and I do think there are some scars there in Asia. Right.

Michael

I think you have to compare and contrast that to where the US. Was in World War II, like when Britain lost its hegemony, where the pound lost its hegemony is because the UK was in a very tough spot. It had essentially bankrupted itself after World War II and was completely beholden to the US. The US’s lend Lease program. Right. So the US essentially had all the cards. Now, here the two wars that you talk about. I agree with Albert. It’s not even close to the same thing. We withdrew, and it wasn’t a great withdrawal, but it wasn’t a situation where we had essentially bankrupted ourselves and we were completely dependent on the largess of somebody else. Right.

Albert

If I can interject Michael, we can.

Michael

Go on and on.

Albert

About to go back to Tony’s question, what would come next? I mean, theoretically, the United States would have to have some sort of societal breakdown. Our rule of law would have to break down, and we’d have to become a nonintervationalist nation. We wouldn’t be able to protect our interests globally at that point. Something could come along to dethrone the dollar. But even if we’re at that point, I think the next logical step of removing the dollar as a reserve currency would be an Anglosphere plus Japan digital currency, where regional players would secure their own interests in those regions and have a collective I mean, this is just theoretical and way out of our lifetimes, in my opinion. But I think it would be a step down to that first where our allies and the US. Would jointly have a currency block yeah. Running through all the scenarios, in my opinion, that would be the only thing that would take the dollar. That would be I mean, the dollar would still be a part of it, but it wouldn’t be the main part of it. It would be the sole unit polar one. But you could have an angle sphere plus Japan digital currency for just for trade settlement.

Michael

Now, you know what I think the highest probability sort of gray rhino would be out of all this. It would be that if China made overtures toward Taiwan and Taiwan willingly just say, Here, take me. Because I think last year, or maybe two years ago, I wrote a thread about this, how some of the older guard in Taiwan and you know this, Tony some of the older guards that are with the KMT, they really don’t like the DPP because the DPP wants to get away from the Chinese ancestral roots of the Taiwanese. So the old God doesn’t like that. And so what if China says, hey, we’re going to take you? And then what if Taiwan says, Here, take me to me? That is much more worrisome than an amphibious takeover of Taiwan, which I see is very low probability.

Albert

Yeah, exactly.

Tony

Yeah. I think that is the most likely scenario of the scenarios of China taking over Taiwan. Right. It’s a mutual but with the DPP in power and with DPP as a sizable political party there, it’s a north versus south issue for people don’t really understand. KMT is largely North, DPP is largely south, and DPP comes to power when their policies really align with people in the north from time to time. Right. And so that’s how the DPP gets into power. The DPP is much more nationalistic and independent than the KMT.

Albert

That would be pretty risky, I mean, for the United States if it didn’t intervene in some which way, because then you could talk about North Korea and South Korea unification and siding with the Chinese at some point, which is not out of the realm of possibility, in my opinion.

Tony

Right, okay. Can we agree? Is it eliminated for the next probably 2030 years?

Albert

Yes.

Tony

Do you think it’s eliminated, Michael?

Michael

I think so. I think so as well. I was on a different podcast earlier this week, and I keep alluding to this interesting podcast that Andrew Hunt out of the UK did, where he did analysis on 36 Chinese private banks. And his assessment is that there’s four there’s a $4 trillion liability gap that’s not captured in the in the balance of payments. China is much china is much, much more levered than the US.

Tony

Absolutely.

Michael

But but it’s but it’s hidden. It’s just pin behind the Opacity curtain. That’s exactly right.

Tony

Doesn’t look good. So if we if we push China out, say, 30, 40 years before they’re a contender, and they may not even be they may be too old by that time, because there really isn’t immigration to China right. Except for from North Korea and maybe a couple of other places. So we pushed China out. What about Europe? Will we have European decide for morale in 30 years? Will we have the demographic age of people who can actually work and contribute to the economy?

Albert

They don’t have a functioning military and solely reliant. Their banks are solely reliant on the US. At the moment. They’re insolvent, in my opinion.

Tony

So, yeah, that’s a good point. If you can’t defend yourself and if the demographics continue to get worse, they won’t have people that will defend the area. So if you can’t defend yourself, you can’t have a functional currency. Right.

Ralph

I guess that was a little bit an unintended consequence. And this is something Europeans hate to admit, but of course a lot of EU policy was kind of this dirty secret. The United States were constraining China and Russia, and the Europeans were trying to make deals with them. If you think back them in the entire Russian pipeline network to Europe, and I think with all of it also mentioned, kind of psychological effect was a certain form of infantilization. Right. This idea that military conflicts simply are a thing of the past in many ways, I see the biggest security risk for the United States. I don’t want to over dramatize it, but I see it almost more in Europe than in China or elsewhere, but not because of an actual military conflict, but the commitments to Europe for cultural and historical reasons that this is going to drag down American capacities. This is going to work out. But the European idea and we hear it again europe will now rearment the Titan vendors. They talked about the Germany. If you look at what’s actually happening, it’s just not happening because they know that the populations don’t really have an interest in that.

Tony

Yeah. Okay, so it’s not CNY. It’s not Euro. What else is a viable it’s not Japan.

Michael

Right.

Albert

This is what’s making me allude to the fact that I think that anglosphered plus Japan digital currency would be the only logical step. Next logical step. Just in my opinion. I just can’t see anything else out there. The Swiss francs is not big enough. The pound is not a relic of what it was without any actual alternatives that we can discuss. What’s out there? Nothing’s out there.

Michael

And by the way, all these, like, newfangled ideas of having some sort of pan global currency backed by commodities. But you know what? John made her. Cain’s backed the Bancorp during the battle for Bretton Woods. Harry Dexter White backed the unit. The SDR was tried and failed. The US. Dollar. Is that pan global currency?

Tony

Sure.

Albert

Yeah, it is. I keep arguing with these gold back currency people, and I’m like, what would stop me being the dictator of Albania, of spray paying some lead and saying, there’s my gold? But you can’t really look at it. You know what I mean? No nation gives you a transparent audit. So how could you even have a currency based on such a thing? It’s just silly to me, in my opinion.

Tony

Ralph, jump in.

Michael

Yeah.

Ralph

And I think one of the things this is what Mike did so well, I think in his paper that he presented at Westbourne, I think we have to look at kind of the structural conditions. And in many ways the United States has the occasional incompetent administration, but their structural is still more sound than any potential competitor, definitely more than Europe. And I think if one takes a closer look, they’re all structurally, at the moment, more sound than China. And in the case of a real conflict, I mean, these things really, really matter. And besides the rhetoric in America, we.

Tony

Expect our politicians to be dumb, and we just work around that.

Albert

Yeah, I mean, in a perfect world, the Pentagon would be working with the treasury to weaponize the dollar. I guess in the adversaries, I mean, that’s something the Pentagon has never really understood or really looked at, is like, you can place your adversaries in a certain position, being short commodities, short food, and you can really strain bingo, bingo.

Michael

By the way, that is the premise of our paper. Our paper is literally saying is literally saying that rather than rely on overt sanctions, that basically cause everybody to look for alternatives to the dollar. We’re at this really interesting macroeconomic window where a strong dollar policy inflicts asymmetric pain in our largest geopolitical adversary.

Albert

Yeah, it’s an absolute logical thing to do. And on top of that, not only can you use the dollar, but you can now use derivatives of the dollars, specifically grains. I mean, there’s only five companies in America that control the world’s grain. You can call them up and cause problems for the world or for China, for Russia, for any nation you really want to target if you really want to get down to that level.

Michael

And by the way, it also kills two birds with 1 st, right. Because it basically export our inflation problem because we are in a domestic fight against inflation.

Tony

Okay, that’s a great idea. Let’s do that. Great. Okay, so let’s just call this new currency TBD. How about that? Because I’m not really sure what to put in there. There are a lot of cheerleaders, as you guys have pointed out, trying to push other things forward, but I just don’t see the case for them. And outside of just suspending reality, I just don’t see the case for something else right now. I don’t say that as an American. I like, I’m not necessarily trying to kind of represent for the dollar. I just don’t see the viability of other options right now.

Michael

Yep.

Albert

I would be I would be the first one waving the red flags if there was an actual alternative out there.

Michael

Oh, there was one thing I was going to riff on. Albert, what what you were saying, or Tony, what you were saying in terms of, you know, our politicians being idiots and whatnot. So so my my view on that is that it’s because of the geographic endowments that the US. Has that’s enabled our federalist free market system to arrive and to survive. Because if you think about it, right, if you’re China or Russia with unbelievably shitty geography, it takes an autocratic system to try to hold that bucket of bolts together. To paraphrase Han Solo, why would you.

Tony

Want to own all that land if you’re Russia, why do you want to own the east? I don’t get it. It’s just hard to keep it all together. So that’s a great point, Mike. Okay, great. Hey, let’s go from talking to the dollar to talking about the dollar. Okay. You put a Tweet up earlier this week saying when the dollar started breaking upward, you talked about expecting Dxy to hit 112.

So it’s kind of we’re, we’re heading back to where we were last year, I guess. So can you walk us through that reasoning? And you talked about turbulence. Incoming. Can you, can you talk about what that turbulence is?

Albert

Inflation. It’s back again. And as much as the Fed doesn’t want to admit a mistake, they’ve absolutely created policies of mistakes and allowed inflation to rear its ugly head. I don’t want to leave it all on, all on the Fed. A lot of it has to do with Yellen’s actions and what she’s done with the dollar and then bringing it up and bringing it down. I mean, this goes to Michael’s point of the weaponization of the dollar is, you know, Yellen takes the TGA and she’s in charge of dollar policy. She can take the dollar up. And what she did, and it drove all the liquidity in Europe, back in Asia, back into the United States, which kept our markets propped up.

Tony

For people who haven’t watched this word, can you talk about what the TGA is?

Albert

And then if the treasury general account, she can use it in many ways, but basically it’s injecting liquidity into the economy.

Tony

And how much at what scale has she done over the past, say, nine months or something?

Albert

Prior to the midterms, she was doing about 160,000,000,000 a month.

Michael

Wow.

Tony

Okay, that’s a lot. When you say injecting, where was that going?

Albert

Well, I don’t know exactly where it was going. That’s not really clear. But she was absolutely using it and I’m sure it’s been dispersed throughout the economy and whatever sectors that she needed to send it out to to rally the markets. And she did a good job. I mean, the markets have stayed up here over 4000 for quite a long time and we don’t really deserve to be here at the moment. The problem that we’re having here now is as you rally the markets now, commodities start to rally. I mean, Europe was in a zombie status. China has been in lockdown for the most part. Yeah, I mean, they’re doing this, but as they reopen, inevitably inflation is going to come back. Wage inflation has been persistent. That’s not going to wave. I mean, I mean, honestly, the workers probably deserve wage inflation after 40 years of getting nothing. So, you know, I can’t really blame them on that aspect. But again, we’re, we’re sitting here with a hot PC PCE number today. You know, it looks like CPI is probably going to be sticky again next, next time around. And the Fed is going to be talking about 50 basis points when they, you know, previously the markets were calculating that we’re going to do a pause or a pivot in a later in the year.

Tony

That’s just not happening. A couple of meetings.

Michael

No. So I mean, this honestly feels like Q one of 22 to me. The whole setup right now feels like Q one of 22.

Albert

We’re right back where we started, Michael. Right back where we started. Because of Fed policies, they’ve done nothing to correct the situation with inflation.

Tony

Okay, so what’s going to happen to drive the dollar up? Yellen stops spending out of the TGA or doesn’t spend as much, or Fed policy, all the above. What happens to contribute to that?

Albert

I think it’s going to be a combination of Fed policy and then the ECB, the Europeans being hawkish themselves. But I think that we’re looking at 75 basis points, probably going up to five and 5.75 on the Fed funds rate by the end of the year, maybe even six. I don’t think they can go over that. But I mean, that alone should take the dollar up to 112. I’m sure they can, but taking the dollar over 115 to 120, you’re going to start causing massive problems. Rest of the world, you just start breaking things.

Michael

Can I ask Ralph a question?

Tony

Absolutely, sure.

Michael

So Ralph, I’m curious. I agree with Albert’s thesis. When I look at the inflation prints in Europe and in the UK, still so high, that gives me a little bit of pause right again on betting on the dollar continuing to rise, except when you look at the state of the economy. And so I’m curious how you see that, because I believe the last UK GDP print was very close to skirting the zero bound. So how much more can the BoE or the ECB really do?

Tony

Sorry, before we do that, let’s move into rough section, which is inflation hold on Europe, right? Which is exactly what you’re talking about. And so we saw Austrian CPI committed 11.2% year on year. When was the last time that happened, Ralph? I mean, what we’ve seen over the past few months maybe, I don’t know, 40 years ago or something.

Ralph

Oh, yeah, before I was born. And so this has been significantly long time ago. The problem is, despite what the ECB does for European politicians, it’s always the 1930s. So the answer, the economic problem is that it must be a demand side problem. So every time the ECB hikes rates, the government comes in with fiscal expansion. And Australia is the best example for this. Pretty much everything that would have been caused by higher rates has been softened by government spending and now expected government spending to happen in the future, which is they very slowly or not at all changed their behavior. So the, the idea to. Kind of, you know, pull money out of the system due to high interest rates is not working as as expected. I mean, we we saw it in Germany. It was when we met the last time, right? They said that there was actually slow growth in Germany in Q four 2022. Then they said that was a slight contraction of 0.2. Today we got the second revision. That actually it’s a contraction of 0.4. And that’s mostly because there was government spending. Otherwise it would have been significantly worse.

Ralph

And I think this is really the problem we are running into. So every time the ECB tries to high grade, governments will jump in with their own fiscal policies, trying to soften it. And what, of course, happens as a consequence, europe is losing its industrial base. So supply side politics, which would be necessary, they become more and more difficult. I mean, Tracy on the last weekend did a great job in kind of just listing all the aluminum smelters and all the heavy industry that has been closed down. We heard today that Germany’s chemical giant BASF is shrinking operations all over Europe. So at some point, you cannot just turn this back on again. So I’m very worried about the structural health of Europe, or even if we look at R and D and spending, right out of the top ten R and D spenders, there is one European company, which is Volkswagen, but all the other companies, most of them are American and some of them are Asian. But Europe is losing kind of connection to all of this just as a challenge to you guys. I mean, name one groundbreaking innovation or one groundbreaking area, and let’s say the high tech area where Europe or European nation was on the forefront in the last 20 years.

Ralph

Nothing comes to my mind.

Michael

Well, ASM Lithography.

Albert

Ralph brings up a great point, and one I usually harp on a lot is whenever you have political policies intermixing with economic policies, you have a problem because politicians want to get elected and their terms are a lot shorter than economic policies need. You know what I mean? That’s just the reality of it. I mean, the Germans, they say they’re tightening things up, but then they give 80% of their population, 80% of their paycheck to stay home. That’s not going to help.

Michael

And by the way, all this, right, all the slowdown in BASF and all that that you’re talking about, Ralph, this is with an extremely benign weather backdrop this year that enabled Ttf and NBP to collapse.

Tony

So huge benefit.

Ralph

I think there are two other very important issues that particular European politicians don’t get and that you and Mike had also talked a lot about, which is there is this weird idea that if Europeans and Americans stop drilling and supplying the world with fossil fuels, that somehow the prices will go down. But exactly the opposite is going to happen because we’re still going to consume it, we just no longer produce it, which is great for all the non European and non American producers. And the second part, what I think Europeans still don’t understand, is there is still this idea that the world will go back to as it was, let’s say ten years ago, like very early on. But even if there were, new should stop. Right? It’s obvious that there is a new kind of industrial policy happening that French showing that reassuring is going to happen and that will push upwards pressure on prices. And Europeans, at some point, they’re going to feel this. I mean, we see. With Germany, Europe is increasingly becoming a continent that has to import more and more, but everything we can export is becoming less and less.

Ralph

That is not a sustainable model unless we say we just become the world’s biggest retirement home tourist destination. But other than that, it’s really problematic.

Albert

That’s interesting because I remember Belina and I were talking about what Europe should do and it was definitely bring black your supply chains to Eastern Europe, north Africa, closer to home, something Europe can drive in investments and actually hold it close to close to their hand there. But they just have not done anything. They want to rely back on the old guard of let’s go to China and grab their market share. Meanwhile, Africa is sitting right there. That’s going to have a bigger population in the next 25 years than China and Younger and Hungary for innovation and products, but they haven’t capitalized on that.

Ralph

It’s like an inversion of the 19th century, right, when there was once a time where Europeans looked at the map and so everything is a potential part of the empire, not like they barely looked at the map at all. And I think it shows in their economic policies.

Tony

Yeah. Just going back over to what you were saying about the short termism of governments, and we see this, at least in the west, the bureaucracy is supposed to be the part of government that helps the office holders to see the longer term. But the quality of our bureaucracy has deteriorated so much over the last 2030 years that they just don’t care.

Albert

They don’t care. I put a lot of blame on social media right now. I mean, all these politicians get on social media and do catch phrases and this and that, and everything is in the real and now and immediate and so on and so forth, six months down the road. They don’t care. Simply, they don’t care.

Tony

Yeah. Ralph, one of the things that you tweeted out earlier, and I know Michael found this really interesting, was the bankruptcies in Europe. This was a Eurostat chart that came out looking at the rate of acceleration of bankruptcies across industries. Can you talk to us about that a little bit?

Ralph

Yeah, I mean, there’s a couple of factors not work. I mean, one is that a lot of these companies it’s kind of what happened in the financial sector during the Great Recession where you had these zombie banks. I think a lot of this is now also happening in the real economy and the industrial economy where many companies have been propped up during Cobit, they have been propped up by very low interest rates and this is now coming to an end. I can only speak for Austria, but there are many companies, of course, also have loans, some of them with not fixed interest rates. And of course they are squeezed now, so they have huge problems in refinancing themselves. And I think this is just the beginning. I don’t share the optimist. I’m kind of a little bit Albert here. Everybody who says that either inflation is going to be over, there’s no trustworthy indicator for me that inflation is ending anytime soon. And the second one is this idea and you mentioned this also, Tony, one of your tweets. I think the IMF forecast for growth in the Eurozone are too optimistic. I think that factors that are not yet calculated.

Ralph

Absolutely. And of course the big elephant in the room comes and go to mike, did you mention, is of course, energy. Like, everybody is like, oh, the energy crisis is over. But that’s only because elasticities in the energy sector are very low. So yes, if there is a lot available right now, it immediately affects the price. But there is no guarantee that it’s going to stay like this in the medium and long term. And if I look at European policy, I think that it’s going to get worse before it gets better seems more likely. And you see gradually signals like this coming from the International Energy Agency and from Goldman Sachs. So all of a sudden the optimists of two months ago say, well, it might be more problematic than we anticipated it to be. And one part of the story is something that also Mike mentioned. At some point, I think we have to say this also openly is this obsession with ESG and an energy transition that makes the promise that by 2030, 2035 the European economy is going to run entirely on renewables, which is an unrealistic. And we want to be more outspoken about it, which I think is a ludicrous proposal that cannot be fulfilled.

Michael

I call that the grativerse.

Tony

Yeah, we’ll all be driving.

Ralph

As a quick last point if we want to put real numbers on it. I mean, the German government alone, the Europeans spent almost a trillion dollars on energy last year. The Germans spent about $465,000,000,000 only on energy and all it got them was the declining economy by 0.4% in the first quarter. So what is their strategy if they want to do this again next year and we see it in the spread? At some point markets are going to look at Germany and say, listen, your reputation has been great for the last 40 years, but can you really still.

Tony

Deliver what what you germany’s got a lot of they’ve got a lot of capacity for fiscal spending. I just think they haven’t opened up as much as they need to yet. I mean, I think that’s part of.

Albert

Their they can’t they go into a doom loop of inflation.

Michael

What happens when Mother Nature doesn’t cooperate next time around?

Albert

Right?

Ralph

I think all of you are right. Tony’s right. I think there is still wiggle room. But what are they doing with the money? Right? Instead of making capital investment and saying, okay, we solve the problem, to do something they pretty much put it all into welfare checks, energy subsidies, but exactly. Encourage people to spend more and more products that are less and less available. So what’s the only thing you get? It’s inflation. I don’t know what the politicians are looking at.

Tony

Speaking of that, let’s talk about everyone’s favorite central banker, Madam Lagarde, and the choice that she has at the next meeting. She said earlier this week that they’re likely to raise by 50 basis points at the next meeting.

So what we’ve seen, the last two rate hikes were 50. We saw a couple of 75s in September and October. So there had been a hope like there was in the US. That things would not loosen or ease, but at least slow down on the rate hiking front in Europe. But with the pace of inflation, it almost seems like they don’t really have a choice, right?

Ralph

I would agree. Yeah, I think they don’t have a choice.

Tony

Okay, well, that’s it.

Michael

Well, I think they’re going to try. But what I really think reading between the lines of all the tough talk with all the world central bankers what I think everybody if you look through to their actions so far, I think everybody has been holding their breath, hoping that the Fed is going to engineer a global recession so that they don’t need to be the ones to have to administer the medicine. But the problem is, and I alluded to this in a thread a couple of months ago called geopolitical mosh pits, right? We’re in this every man for himself world where everybody’s got a domestic inflation problem. And so what the Fed does needs to sorry, the United States interests need to take precedence over necessarily worrying about other central banking interests and vice versa. But the problem is that right now the US economy is still humming along whereas the rest of the world’s economies are faltering pretty badly already. Your guess is as good as mine. I just think that Lagarde’s job is really tough because there’s no panned global bond market. Really. So she’s got this ridiculous Tpi mechanism where she’s trying to hold together sovereign spreads and the ECB’s sort of bond purchases as a percentage of GDP already at like 60% compared to the Fed at like 34% compared to japan at 120%.

Tony

Right.

Albert

I’m glad you mentioned that Michael, about nation states interest because it’s one of the things I harp on, especially when I talk to younger people and they ask me about geopolitics. The first thing you have to look at is a nation’s self interest and there’s no better time than right now to prove that example and you’re seeing it firsthand. All these nations, they have to have their own self interest that are before anything else at the moment.

Tony

And that’s normal, right?

Michael

That’s healthy.

Tony

I think that it’s so silly when we have to consider other people. Of course there’s a time for that, but it’s not right now. You have to really look after your own country, whether it’s India, Germany, US, China, whatever, it doesn’t matter. You have to look after your country first. Rough.

Ralph

But that’s the thing. Exactly what Albert just said and this I think makes it an even bigger ticking time bomb for Europe. You have notice absurd situation that politicians of member states of the EU, they want to continue to do populist economic policies while when they fail they can put blame on the Europe, on the ECB. So technically what probably should do before the next and out sort of a rate hike is to go out and say listen, cannot clean up the mess that you guys make in the domestic economic policies. And of course that’s not something that she’s probably going to say, but that’s really the dilemma. Data us almost have an advantage with the somewhat something that Albert is criticizing all the time, justifiably so with the kind of the chummy relationship between the Fed and the government. But at least it all happens within one state, right? It all happens within one country. And also going back to what Mike said about the federal structure. But in Europe, it’s kind of the worst of two worlds because the ECB tries to fine tune the economic problems via interest rates and the politicians that just go out and say, oh, I know you have to pay more on your loan, but here is an extra check for you.

Ralph

So you could almost say it’s like the nation states are mocking in the sense what DCP is trying to do.

Tony

Yeah, Mike, you said that Lagarde has a very hard job. I actually think it’s very hard because it’s very easy. There really isn’t a lot of choice there. It’s hard having the wherewithal I guess to go through with these things that are probably going to end up being.

Michael

Pretty painful, by the way, to steal man the other side a little bit. Okay, there are some that say that okay, well the Fed, because we have all these bilateral currency swaps, the Fed is going to take care of all its friends. Right. And so we actually saw a little bit about that. I wrote a thread last year about how, when the Yen, for instance, started its first approach towards 145 ish 140 ish I got some talk from a very well placed source that basically the Fed, in conjunction with the DOJ was allowing the BOJ to essentially buy us ten years to basically kind of paint a picture to stymie the depreciation and the yen. Okay? So then we saw this big risk rally. Remember when that happened and the yen corrected back? Well, then I get a call from the same source saying, you know what my people are telling me? My people at the Fed are telling me that, you know what? They can’t hold the line anymore. They’re going to basically stop. That’s when you saw the yen go to 150. Right now we’re in this sort of everybody calls it the transitory boldilocks, where things kind of came down and you’ve got Yellen’s games with the TGA, et cetera.

Michael

But I really think, and I think I agree with everybody on on this call, that all hell is going to break loose again when the dollar starts approaching 110 again. And this time maybe there won’t be that sort of bilateral help.

Albert

Yeah, michael is absolutely right. I heard the same thing about the Fed and the BOJ on top of that.

Tony

I thought you were a source, Albert.

Albert

Right, because I talked to you about.

Ralph

It a couple of times.

Albert

But they do the same thing with the Aussies and New Zealand and Canada. They give them marching orders, say, hey, we’re going to paint a picture over here, so gives us room to do something over here, so on and so forth. But like I said, that’s the Anglosphere and plus Japan. That’s why one of the things that led me to believe is like, next thing for a currency would probably be them. But they already work together as it is, whether the market knows it or not, they talk and they work together. Yeah.

Ralph

I think it very often comes back to this very point that this is something that Michael’s and I said before it’s that, of course, what underwrites the dollar as the global reserve currency and the most powerful currency is because the United States have the most powerful economy. Whatever problems they have otherwise, their economy in many ways is still the most dynamic and the most innovative. And this is what I interfere about. The European situation is we can criticize politics, we can criticize the ECB, but I think we also have to criticize European industry itself. Because like in Germany with heavy industry, they never say anything. Right? They could get together and say this. You hear occasionally a voice there and occasionally a voice there, but there is no concerted actions by representatives of the industry to do something about it. And my suspicion is because they kind of made it comfortable for themselves because they know they get government subsidies, they might have to produce less, but I’d rather depend on the biggest monopoly there is. The state than on those pesky customers or those potentially unsecured international markets. But that’s a very short time perspective.

Ralph

I mean, this is not something it can do forever. And again, the only reason why Europe could do what it did was because they could rely on the United States to provide with the bluewater navy to everything else. They provided the framework in which Europe could do what it did. But as this framework is changing, because Albert would never talk to me again, I’m not going to move all multipolar because you would because I don’t agree with that idea either. But it’s definitely changing, I think. I think Americans are becoming more sensitive to listen, guys, you have been pre writing for 60 years. It’s time to do something yourself.

Tony

Yeah, go ahead, Mike.

Michael

So, Ralph, you touch upon another theme that we raised in our paper, which was, again, it goes back to geography, right. Because the US has had these geographical advantages. It’s allowed its military strategy to focus outward on force projection and develop that blue water navy. Right? So when you compare that and compare and contrast that to China, right, where you could argue that they’ve got greenwater superiority within the first island chain by virtue of 350 vessels versus our 270, but the gross tonnage is one third that of the US. Navy. They cannot force project. And so if you talk about real force projection and geopolitical power right. Again, to steal man the other side, what would cause the US. To see the T hegemony? Well, it would be that scenario where China somehow decides that, hey, you know what? We are going to subsidize global maritime security for the good of the global commons. Do you see China doing that? I sure don’t.

Albert

Not for all of us to century. And it takes a lot of money to build up a navy. And then you need combat experience. And then on top of that, any kind of conflict in Taiwan or the South China Seas shuts down their ports. China cannot afford to shut down their ports. I was going back and forth with Elbridge Colby about this. He’s a military guy, and I love the guy. Right. But when you have to look at the economic aspects of it concerning the dollar and China’s food insecurity problems and their economy in general, if they invaded Taiwan and shut down those ports and their economy collapsed, she would be dead in 30 days.

Michael

There’s a little issue of China having to import 80% to 90% of its crude, all of which pretty much come through the Strait of Malacca.

Tony

Yeah.

Albert

I mean, so but this is this is something that it’s really important for you to talk to the military and get that USD thing out there and talk about commodities and talk about the economic ramifications and say this is a significant deterrence for China to invade. This is a significant deterrence for any nation to really go after because there’s just no money around. The economies are really weak. So it’s a great thing that you’ve done.

Michael

Thank you. I hope you guys enjoy the paper. Yeah, sorry.

Tony

Just going back to what you said, Mike, about China not having the blue water navy, really, to protect trade and waterways. They have tried that with the Belt and Road. It’s been less than a decade, but it’s kind of been a failure since the start of it.

Michael

The thing with belt and road, right? If you think about what it is, they are expending tremendous amounts of national treasure to recreate what the US. Is naturally endowed with.

Tony

Right. Yeah. It’s very inefficient.

Michael

It’s very corrupt, and they’re failing at that.

Tony

I start with those. When I was trying to put in a tendering system for the Belt and Road transparency, I asked them, how much are you comfortable losing to corruption? 20%, 30%, 50%? People just shrug shoulders. Nobody wants to even look at those basic transparency issues, much less understand that that spending is incredibly wasteful just for some sort of desperately seeking some sort of relevance with third tier countries. Right. I mean, no offense, they’re great people and all that stuff, but they are not necessarily economic powerhouses, and they’re not necessarily strategically placed. So it’s a big problem, and corruption is a big problem in those places. So not only are they going to have to buy off Chinese industry to go in these places to build, they’re going to have to buy off the officials in those countries to get the infrastructure done. Okay, guys, let’s bring this back to Europe. Since Europe is kind of our last group. Ralph, I get the sad sense that when Mike talks about dollar resurgence and Albert talk about dollar resurgence and inflation is pushed on the rest of the world and these sorts of things, europe and European industries show this as well.

Tony

Europe isn’t really a growth engine, of course. Right. So is Europe the worst place of the regions in the world generally, when we see a dollar resurgence and inflation and kind of these coming headwinds? Probably not.

Ralph

I mean, I remember I asked all about this, I think almost a year ago, once on Twitter. I think that the ties between the US. And Europe are still so strong that I could imagine that the US. Would be willing to adapt their policies in a way to protect Europeans from the fallout that will find some ways to support them. Okay, I think that, again, maybe I’m putting too much hope in the US. Maybe this is wishful thinking on my part, but I think that these ties are still strong. I think this is the US. I think they still view Europe as part of the national interest. But spoke to be very clear, I’m glad of I mean, something that bothers me, really, is I think the best thing Europe could do would be to place itself as Athens to America’s wrong kind of place I can feel to the strongest player on the block. But don’t try to be as again, Albert, we’ve discussed it many times to participate in this fantasy of the new multipolar world where you will balance the US in a quasi agreement with India and China. This is all fantasy.

Ralph

None of this is real. When push comes to Sharp, I think the US are still the best bet for the Europeans. But to be kind of a psychological problem in Western Europe, I think this is another thing.

Tony

Of course.

Ralph

I think the Eastern Europeans, particularly Poland and others I think are much more willing to attach themselves or kind of align themselves with the US. I think Western Europe and it’s mostly cultural, psychological that they still wish to be kind of a counterweight potentially to the rude Americans and the alcohol.

Tony

We’re definitely rude. We’ll take that. Okay, guys, we’ve been an hour, so I appreciate all of the thought you put into today. For everyone watching, please don’t forget about the promo. The Friends of Tony for promo promo 1st 25 subscribers. Guys, I really appreciate your time. Time. Have a great weekend. Have a great weekend. Thank you very much.

Michael

Thank you for doing this.

Ralph

Thank you.

Categories
Podcasts

BBC: How are sanctions affecting Russia?

This podcast is owned and originally published by BBC here: https://www.bbc.co.uk/sounds/play/w172ydqbbld0z8y

The BBC’s Business Matters podcast covers a range of topics, including the positive economic signs in the US, the Russian tech brain drain, and the potential for a new plug to be the secret to a green transition.

Guests Emily Eng, NPR’s Beijing correspondent, and Tony Nash, founder and CEO of the financial forecasting platform Complete Intelligence in Houston, provide their insights on these topics.

They discuss the impact of economic sanctions on Russia and how the country is responding to them, including increasing exports to China and reducing its crude oil supplies by 500,000 barrels per day to push up prices.

The conversation also touches on a controversial proposal by the European Commission to seize Russian assets to help rebuild Ukraine.

Additionally, the podcast covers the announcement by the US federal government that all new garages and four courts built in the country will have to include charging points for electric vehicles and its potential impact on accelerating EV adoption.

Transcript

BBC

Hi there. Welcome to Business Matters. My name is Ed Butler, and today, despite all the political rows we’ve been hearing about a potential debt default, there are more positive economic signs from the United States. This week, we read the tea leaves with a former presidential economic adviser and hear about the new incumbent in that job. Also, we consider the Russian tech brain drain, and why a new plug could be the secret to a green transition.

Emily

This will definitely help accelerate EV adoption. Charging is one of the things that really does stand in the way of someone’s decision about going electric.

BBC

All the latest on electric vehicles in the States coming up in the show, and I’m going to be joined throughout the program by two guests on opposite sides of the world. Emily eng is NPR’s Beijing correspondent, although she is based in Taiwan at the moment. Hi, Emily, can you hear us?

Emily

Yes, I can. Good morning.

BBC

Great to have you on the show. Tony Nash. He’s the founder and CEO of the financial forecasting platform Complete Intelligence in Houston, Texas. Hi, Tony.

Tony

Hi, Ed. Thank you.

BBC

Great to have you both with us. Tony Nash this is obviously a function of, to some extent of the economic sanctions that we’ve been talking about, those applied against Russia. I mean, the funny thing about this is to some extent Russia hasn’t done that badly in the last twelve months, at least initially. I mean, that’s what the headline data is telling us. You look further into the future, I mean, are you seeing a kind of more serious decline potentially with Russia now because of what’s been applied against it?

Tony

Sure, there are a couple of things to look at. First, in the four weeks in January, Russia exported more crude oil than during any four-week period in 2021. So they are recovering their export capacity to places like India, China, parts of Africa, and other places. So, you know, it really hasn’t necessarily hurt their crude exports. When you look at imports, they’ve really substituted, say, the west for China. Their imports from China have grown by, I think, $8 billion a month. It’s got to be more than that, but I saw some numbers recently, but they’ve substituted imports from China. So in terms of trade, they’ve really turned eastward and southward instead of westward, which is just a natural response to sanctions. So where they’ve hurt is domestically in terms of things like industrial production of, say, machinery and domestic goods outside of, say, coal and oil and gas.

BBC

What the west, of course, has tried to do most recently is apply these caps on Russian crude exports. Now you’re saying that they’re getting around those or are they simply selling a larger amount of crude but at a lower price?

Tony

They’re getting around them. They haven’t hit the price cap yet. The crude is trading, or what has been trading at, I think, a $20 discount to the price cap. So they’re not even hitting the price cap. There’s a $20 discount to Euros crude. What Russia on its own, announced last week is that they’ll reduce their supplies by 500,000 barrels per day. So Russia is, on its own, taking barrels off the market as a way to push up crude prices. So the volume and the price caps really aren’t having an impact necessarily on crude itself. Of course, the Russian economy is being hit. Of course the isolation, of course other things are impacting Russia. I’m not trying to say that there are no impacts at all, but in terms of that natural resources, trade, and some of the import substitution, they’re actually doing okay.

BBC

Yeah, import substitution. This is the thing, and it’s a fascinating subject, actually. I was suddenly trying to dig into this, and it’s really complicated. But Tony, one last tantalizing thought on this. An element we understand, what Bloomberg is reporting that may be part of these new sanctions from the EU is to force banks to report more information on what Russian central bank assets they are actually holding. Because of course, the EU and other countries want to know how much has been frozen in Western bank accounts that used to belong to the Russian state budget. Now, this is seen possibly as a first step towards a controversial move touted by the European Commission, not just to freeze Russian assets, but to actually seize them, to use them to start rebuilding Ukraine or to at least pay Ukraine back for the damage that’s been caused. I mean, gosh. Do you think that that could be something we’ll be looking at in the next few weeks?

Tony

I think as a threat, I guess useful as a threat, but as an actual policy, I think it would be very difficult to execute and justify. Usually, these things are seized for years or decades. Sorry, frozen for years or decades, not necessarily seized. So I think that could be a very problematic policy to carry out.

BBC

Because it would set precedents.

Tony

Yes, that’s right.

BBC

For western countries, I suppose. Okay.

Tony

And the banking system that supports Russian assets or sovereign assets, would be dangerous for people like Russia going forward.

BBC

Tony Nash, thank you for now but stay tuned to this because this is big news. If you’re a car owner who wants to buy an electric vehicle, maybe you’ve got an electric vehicle already, especially if you’re in the US. The Us federal government has said that from now on, all charges that are used in the garages and the four courts around the states must be American made and have to be usable for all-electric vehicles. That means that Tesla, which has had most of the existing charging points, they have to carry, adapters, allowing other cars to use them. I spoke earlier about this with Alexis and John of Business Insider in Detroit. Well, Tony Nash, there you are in the big oil state, famously, there Texas. How is EV adoption going in the States?

Tony

It’s great. I’m sorry. It’s great. A lot of my neighbors have EVs, and I think it’s probably not as dense as, say, San Francisco or something. But we do have a lot of EVs here in Texas.

BBC

You’ve got a lot of territories to cover, though, don’t you? I mean, if you’re a driver. We do, and I have an electric vehicle. Every time I’ve gone 100 miles down the road, of course, I’m starting to sweat at the thought that, you know, at some point I’m going to have to refuel, otherwise I’m going to stop on the highway. Tony Nash are you confident that the move to electric vehicles is going to move as fast as some politicians, I suppose particularly politicians in Europe, are saying that we can sort of phase out the internal combustion engine in the next few years and rely entirely on electric vehicles? It’s going to require an awful lot of infrastructure. An awful lot of rare earth. Exactly, that’s right.

Tony

A lot of infrastructure. I mean, I understand the aggressive plans, but I just don’t think it can happen on that time scale. So it seems to me that maybe add ten years to it and sure, that makes sense. And to be honest, ten years in terms of adoption, in terms of building this stuff is really just the blink of an eye. So sure, I think it’ll happen, but I think it’s going to take a bit longer than people right now believe.

BBC

Right, it’s going to take longer, but that’s going to leave, I guess, a lot of politicians with egg on their faces, isn’t it?

Tony

That won’t be the first time. Quite true. Especially American politicians. Won’t be the first time.

BBC

Quite true. evelyn professor Jason Furman. Tony Nash, obviously he’s speaking in an upbeat way. He’s a supporter of the Democratic cause. Are you sensing a slightly kind of warmer, more positive mood in the US right now over its economic performance?

Tony

I think the mood is tentative because inflation is affecting everything. So if we look at that retail sales number, if you look at it in inflation-adjusted terms, we actually saw a decline of retail sales by 2.3%, and it was the fifth consecutive year-on-year decline. So five months in a row we’ve seen negative retail sales if we adjust for inflation. So I think inflation really covers everything. One of the things that the professor said that I’m not really sure is right is he says the White House can’t do anything about inflation. So we have Janet Yellen, who is a Treasury Secretary reporting to the White House, who is spending $140,000,000,000 a month from the treasury general account, and it’s offsetting all of the work that the Fed is doing. So the treasury is actually putting $140,000,000,000 into markets every month to keep markets booming. When the Fed is raising interest rates and selling off its balance sheet. So the US Treasury is actually and literally offsetting all of the good that the Fed is trying to do.

BBC

It’s interesting because we got Lyle Brainer coming from the Fed right this week to the White House as an economic advisor. You’re seeing that the political executive and the Fed are basically in conflict.

Tony

Absolutely. And Lail Brainerd is very smart. She’s fantastic. But she is very much a dove. She’s very much a loose monetary policy believer. And so what Janet Yellen is doing at the Fed in terms of pumping money in through the treasury general account, Lail Brainerd would be an absolute supporter of. And so we have to be very, very careful of inflation. All of these stimulatory activities really hurt your average worker. So there’s a concept called core inflation which really takes out everything energy, food, and so on and so forth. And really all it’s reflective of is service industry wages. Okay? So what we like to see is a headline number which will say 6% or something and what we’ll talk about is a core number which may be 1.2%. All that really means is that your hourly workers are being squeezed by inflation. So when the headline exceeds the super core inflation rate it just means that your hourly workers are being squeezed. And so it’s a really tough environment for wage workers.

BBC

Okay? It’s a tough environment. The bigger issue perhaps. Meanwhile, Tony, we still have this debt default issue, don’t we? We’ve been hearing about it in the headlines. Yet another cliff edge approaching in the United States. The wearyingly inevitable to some people kind of confrontation between Republicans and Democrats in Congress.

Tony

Yeah, I think what’s happened is the US has not actually had a budget for years and my understanding is what is trying to be negotiated is for the US to actually start doing an annual budget again that gets approved by Congress which is their constitutional role. One of the other items that I know are under discussion is this Treasury general account issue. Kind of profligate spending from the treasury to support markets. So there are some issues. It’s not just about the full faith and credit of the US. Of course, nobody wants the US to default but we’ve had some pretty ugly spending patterns for the past well as far as I can remember and I think some of that is just being discussed to come under control. So the US won’t default but it’s going to take some time to come to an agreement.

BBC

Yeah, indeed it will. We’re probably just going to be talking about it for weeks and weeks and weeks.

Tony

Well, I don’t think people realize there are thousands of protests in China every year. It’s not rare to have protests in China. Some of them are local workplace protests. Some of them are bigger. There was a protest east of Wuhan a few years ago about the location of I think a plastics factory or something like that. And there was one in Guangdong about, I think, an incineration plant or something, probably four or five years ago. But there are thousands of protests in China. It’s good that this is happening, and it’s a good discussion to have, and it’s good that Western media are able to view it. So every society has protested and every society has disagreements, and China is no different. Yeah, but there are older people, and even during the COVID lockdowns, the aunties in the buildings were yelling at the people, bringing food to them, and yelling at the police. So there is a difference in the age population in China. So I just don’t find any of this surprising, whether it’s a protest or a deference to old people.

BBC

What are they yelling down at the government? I mean, is this an escalation in the sense of the language, perhaps the boldness of some of the protesting and the way it’s being put?

Tony

They’re not saying, down with the CCP. Right? So if Beijing will let local governments take the flak for local issues, that’s not all that abnormal. It’s not a daily occurrence, but it’s not all that abnormal. If they were shouting down at the CCP, of course, that protest would have been squashed, but local governments and local government officials always take the hit for these types of issues. That’s normal in China.

BBC

Okay, Tony and Emily and Tony Nash, I suppose workers, you know, if they did kick up a fuss, for example, at a handful of Starbucks stores, they are still, particularly they’re still potentially vulnerable to just being fired, aren’t they? I mean, how protected are they from that kind of retaliatory action if they were to try and organize just on a shop-by-shop basis?

Tony

Yeah, I honestly don’t know. I think that would have to do with the contracts they negotiate. As your guest said, unionizing is one thing, but getting a contract is a whole different level. So I think her interview is very interesting. And what’s really interesting to me is what is leading to this desire to unionize. People obviously don’t feel like they’re getting fair pay and fair benefits, and that’s something that really needs to be looked at across companies.

BBC

Yes. And that is what seems to be a legacy of the pandemic, partly, wasn’t it? People went home, they were kind of laid off or furloughed for often long periods, they reflected, and there is a kind of militancy that seems to have left as a legacy.

Tony

What’s interesting to me is Starbucks is supportive of this, but they’re also the company that people want to unionize under. Right? And so they have the orientation toward doing that, but they’re not providing on their own the benefits and the pay that would keep people from unionizing. So I just think it’s an interesting circular discussion. Tesla is a different story. They’re an auto company in different parts of the country, automakers are highly unionized. So I don’t think it should be any surprise to Musk that that’s happening in Taiwan.

BBC

Thank you so much for all your thoughts, your words, and your wisdom. And to Tony nash there at Complete Intelligence in Houston, Texas. My name is Ed Butler.

Categories
Podcasts

Slower US rate hikes could help ‘buy time’, allow businesses to plan better

This video interview is owned by Channel News Asia, and the original source can be found at https://youtu.be/U_Im05ClsN0

The United States Federal Reserve’s plan to ease its pace of interest rate hikes as soon as December would bring some relief for markets concerned about the central bank overtightening too quickly, Mr. Tony Nash, founder and chief executive of data analytics firm Complete Intelligence, told CNA’s Asia First.

Transcript

CNA: Federal Reserve chair Jerome Powell has signaled policymakers could slow interest rate increases starting this month. That sets the stage for a possible to downshift to a 50bps rate hike when Fed officials gather again in two weeks.

Powell: Monetary policy affects the economy and inflation with uncertain lags. And the full effects of our rapid tightening so far are yet to be felt.

Thus it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.

CNA: But it isn’t quite a dovish turn. The U.S Central Bank Chief also stressed that they have a long way to go in restoring price stability despite some promising developments.

Mr. Powell warns against reading too much into one month of inflation data saying that the FED has yet to see clear progress on that front. In order to gain control of inflation, the Fed chair says the American labor market also has to loosen up to reduce upward pressure on wages. Job gains in the country remain high at nearly 300,000 positions per month and borrowing costs are likely to remain restrictive for some time to tamp down rapid price surges.

This is where U.S interest rates stand after an unprecedented series of four 75 bps rate hikes. Policymakers projected earlier that this could go as high as 4.6 percent but Powell says they will likely need to keep lifting rates more and go beyond that level until the inflation fight is done.

The less hawkish tone from Powell Boyd U.S market stow and the S&P500 erased losses it searched three percent. The Dow gained two percent while the NASDAQ jumped more than 4.4 percent. the 10-year treasury yield also dipped as Bond Traders dialed back their expectations on how high the Fed may push interest rates while the U.S dollar retreated.

Tony Nash is founder and CEO of Complete Intelligence joining us from Houston, Texas for some analysis. Now Tony, just looking at Powell’s comments, the first differs in some way with what the Fed and its officials have been telling us earlier in the year and how we’ll get there fast to try to reach the terminal rate. But now it’s signaling that it will get there slower. What is this going to mean for businesses and consumers in the US?

Tony: I think what it means is we’re going to get to the same destination. It’s just going to take a little bit more time to get there. So the Fed has seen jobs turn around they’ve seen jobs aren’t necessarily slowing but the rate of rise in open jobs is slowing. We’ve seen mortgage rates go up. We’ve seen the rate of inflation rise slowly.

So the Fed is seeing some things that they want and they’re worried about over-tightening too quickly. Because what we’ve seen so far is really just interest rate rises. They really haven’t even started quantitative tightening yet. I mean they’ve done a little bit maybe a couple hundred billion dollars. But they have nine trillion dollars on their books give or take.

They haven’t even started QT yet. And they’re starting to see inflation and some of these pressures on markets at least slowed down a little bit. So I think they’re saying “hey guys we’re still going to get to a terminal rate of five percent or five and a half percent but we’re going gonna slow it down from here unless we see things accelerate again.”

CNA: When do you think we will actually see that five to five and a half percent?

Tony: You’ll see it in the first quarter. You know if we do say 50bps in December and maybe another 50 in January, we’ll see some 25bps hikes after that but I think what markets the cyber leaf that markets are giving right now is just saying. Okay, we’re not at 100 or 75 in December.

I think that’s a big size that you saw today and you know. It raising at 75bps per meeting just put some real planning challenges in front of operators people, who run companies. So if they slow down that pace and people know we’re still going to get to that 5 to 5.5%, it allows people to plan a little bit more thoughtfully, and a little bit more intelligently.

I think this does relieve some people of the worries of the Fed over-tightening too quickly and it also relieves worries that the Fed is only relying on monetary policy. They’re not relying on interest rates I’m sorry and they’re not relying on quantitative tightening. so the Federal balanced approach sometime in Q1.

CNA: Okay, you also mentioned before in our past conversations, the concern that the market has been having for this week especially since it’s China’s lockdowns and you see these restrictions ending gradually. What is that going to mean for Energy prices and inflation?

We see Energy prices say now they’re what high 70s low 80s somewhere in that range. We do see a rise of say crude oil prices by about 30 percent once China fully opens. We could easily be 110-120 a barrel once China fully opens. And so there will be pressure on global energy markets once China opens. Other commodity prices will see the same because we’re just not seeing the level of consumption in China that we expect.

What we also expect is for Equity markets to turn away from the U.S. and more toward Asia. So the US has attracted a lot of investment over the past year partly because of the strong dollar partly because of kind of a risk-off mentality consolidating in U.S markets. As China opens and there becomes more activity in Asia than we would expect, some of that money to draw down out of the US and go back to Asia.

CNA: Can you look at the jobs market in the US even as we expect this potential pivot towards Asia for stock market investors? The jobs market and the picture on wages there because the ADP data shows that there seems to be a cooling in demand for labor how soon do you think we can see a broadening out to the broader jobs market?

Tony: You would have broader cooling of demand in the jobs market I think, that’s definitely hidden tech. You’ve seen a lot of layoffs in technology over the past say three weeks. And that will cascade out. I don’t necessarily see think that you’ll see that in places like energy, but you will see that in maybe finance, some aspects of financial services. You’ve seen some of that and say mortgage brokers and this sort of thing so you’ll see that in some aspects of financial services. Some aspects of say manufacturing at the edges. but I do think there’s a lot of growth in U.S manufacturing as this reassuring narrative really takes uh gets momentum in North America. And so even though we may shed some manufacturing jobs in one area I think we’ll see growth in manufacturing jobs in other areas.

CNA: Okay, Tony. We’ll leave it there for today. Thanks for sharing your analysis with us. Tony Nash is founder and CEO of Complete Intelligence.

Categories
QuickHit

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

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?

 

Inflation, deflation tweet

 

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.

Categories
QuickHit

The Fed and ECB Playbooks: What are they thinking right now? (Part 2)

Part 2 of the Fed and ECB Playbooks discussion is here with Albert Marko and Nick Glinsman. In this second part, the housing and rent market in the US, UK, Australia, etc. was tackled. Also, do we really need a market collapse or correction right now? And discover the “sweet spot” for the Fed to “ping pong” the market. When can we see 95 again? What is the Fed trying to do with the dollar? And what currencies in the world will run pretty well in a time like this?

 

Go here for Part 1 of the discussion.

 

 

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This QuickHit episode was recorded on July 29, 2021.

 

The views and opinions expressed in this The Fed & ECB Playbooks: What are they thinking right now? (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: Now, with all of that in mind, Nick, you did a piece recently about the Fed and housing and some of the trade offs that they’re looking at with regard to the housing market.

 

Now, housing is an issue in Australia. It’s an issue in the UK. It’s an issue in the U.S. and other places. Can you walk us through a little bit of your kind of reasoning and what you’re thinking about with regard to the Fed and housing?

 

NG: Well, I actually think, it was, I was watching Bloomberg TV as they ask after the Fed comments from me, well, you know, maybe the Fed’s right because the lumber has collapsed. Right. Lumber’s in an illiquid market, takes one player and you can move that price 5 to 10 percent. But that was an irrelevance.

 

I think there’s a couple of things that lead the Fed in the wrong direction. First of all, the mortgage backed securities QE, that really isn’t necessary. That they could definitely tap and that would perhaps quell some of the criticism on you letting inflation on. Know this criticism, by the way, the Fed and the other central banks is all coming from some of the former highest members of those central banks. It seems that once you leave the central bank, you get back to a normal DNA to Mervyn King and the be governor of the Bank of England, hugely critical.

 

And you have that House of Lords touching on QE. Bill Dudley ran, said New York. That is the second most important position at the Fed. And in fact, my thought process there is the repo problems that we’ve had is because his two market lieutenants of many years experience were let go when Williams took over. Big mistake.

 

Anyway. So back to the federal housing. I think they focused on cost of new housing. My view is the slowdown that we will get on new homes is purely a function of supply of goods used to make homes, where essential supply. Then tell me is or if it’s not essential supply, it’s become incredibly expensive. Copper wire and so on and so forth. But my fear is that focused on this and the thing that’s going to come and hit them really hard at some point in the future, which is why I think inflation is not going to be transitory. It’s going to be persistent. Rent. Going one way is… I mean, New York rents have picked up dramatically. New York being an exceptional example, but.

 

TN: Remember a year ago you couldn’t give away an apartment in New York?

 

NG: So I think in that respect, everybody’s talking about mortgage backed securities and QE. Why are you doing it? Housing market doesn’t need it. Look at the price action. Fine. All valid points. I think the Fed should be more worried ultimately about rent. And the rent.

 

AM: Rent is a problem. You’re right, Nick. The other thing I want to point out is there’s a disconnect because it’s not just one housing market in the United States. Because of covid, the migration from north to southern states has really jumbled up some of the figures and how they’re going to tackle that is something that it’s above my pay grade right now, but it’s just something I wanted to point out.

 

NG: Albert’s absolutely right. People have been incentivized to be in real estate. People have been incentivized effectively to be in related markets to the collective real hard assets in this environment. Absolutely.

 

I mean, I would argue that part of Bitcoin’s rise is because, in fact, it’s a collectible. Limited supply. It’s such a collectible. It’s got no intrinsic value. But it’s a collectible. But I would, I think that’s. Albert’s right to point out the demographic moves in the US. I think there’s a huge pressure. One policy doesn’t fit every market. And I think the red pressure will be reflected in the similar fashion. It’s a huge problem.

 

TN: So what can the Fed do about it? Is there anything they can do about it?

 

NG: Become a commercial banker in terms of policy. You know, we’ve I mean, in the U.K., there was certain lending criteria for corporates that were imposed during the crisis that actually did help. But I think also the other thing that seems to be problematic for the commercial banks is Basel III. So, even if the Fed wants to help, how much can they help within that framework? Of course, the US Fed can just say thank you Basel.

 

TN: Doesn’t apply to us.

 

AM: They can also raise rates if they want to be cheeky.

 

TN: Yeah, but then it’s not just real estate that collapses. It’s everything, right?

 

AM: Maybe it needs to be collapsed, Tony. Maybe it needs to correct a little bit because, what are we buying here? We’re buying stuff, we’re buying equities that are 30, 40 percent above what they were pre-Covid.

 

It’s just silly at this point. I was talking to one of my clients and this is like we have to look through, we have to sift through US equities, which are probably going to go down to like twenty seven hundred of them right after this shenanigans ends and trying to find a gem in there to invest in. Whereas we can go overseas in emerging markets and look through thirty four thousand of them. Right. So you know, we need a correction.

 

TN: Famous last words.

 

The last thing we’d really like to talk about is currencies. So, you know, we’ve seen a lot of interesting things happening with the dollar, with the euro, with the Chinese yen. And so I’d really like to understand the interplay of how you see the Fed and the ECB with the value of the dollar and the euro. Albert, you said, you know, the ECB really has no control or very little control over the euro because of what the Fed does. So what is the Fed trying to do with the dollar?

 

AM: You know, Tony, Nick and I had wrote a two-page piece on the dollar’s range of ninety one to ninety three. And that seems to be the sweet spot for them, where they can ping pong the markets and drop the Russel a little bit, promote the Nasdaq and then vice versa and go back and forth like that. That is where they’ve been keeping this thing for… How long has that been, Nick? For like six months now, that we keep it in that range?

 

NG: We wrote eighty nine to ninety three, but really ninety one midpoint should start to be the, the solid support. That’s played out exactly.

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AM: They’re a bunch of comic jokesters where they go to ninety three point one and three point one five and then they scare people and then they come back down and drop it back to ninety two. I mean it almost with the ninety one today, I believe. You know, so it’s just we’re stuck in that range, Tony, until they want to correct the market after the market corrects, they’ll probably go to ninety five, ninety six.

 

NG: Our view on that is partly because that the dollar is the ultimate economic weapon of destruction. Not to the US. For other countries. First of foremost emerging markets, but because it’s included in emerging market indices and ETFs as a result, I include China there. And you know, to be honest with you, I not only the geopolitics suggestive and Albert and I tweeted on some of the things that we believe are going to happen. How can the US authorities allow China to wipe out investors the next day after an IPO?

 

The people forget, it astounds me. Not more is made of this and no more commentary. We’re dealing with a Stalinist bunch of communists led by Xi. They will do anything to retain power, and they certainly don’t care about American and international investors. We’ve just seen that. You seen that with DiDi. You seen that with the education companies that are created in the US. We’ve even seen Tencent down. Tencent is one of the worst performing stocks in the world. It’s a tech stock in China, and look at tech in the US.

 

AM: Yeah. Let’s not deviate too far into the Chinese thing because we can do a whole hour just on China. When it comes to the currencies, Tony, the dollar being at ninety one, ninety two. The only other currencies that I do love are the Canadian dollar and the Aussie dollar, simply for the fact that they’re a commodity rich nations. And in a time of inflation, there’s no better place to be right now.

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TN: Yeah, I think they’ll run pretty well.

 

NG: Yeah, I think as a macro trade in the next couple of years is commodities and it doesn’t necessitate economic reflation. You’ve got enough supply chain issues and supply issues and lack of capex and politics with regard to energy that restrict the supply. And the demand is there. Can you imagine, even if we don’t have a fully reflation story from the economy, if Jet Blue has a shortage of jet fuel in the in the US right now, imagine what happens to jet fuel when Europe starts to travel properly, which won’t happen this year, it will be next year.

 

In fact, the commodity minus the big ones? Have you seen their profits? Huge increase in dividends and share buybacks.

Categories
Podcasts

US Complete Lockdowns Unlikely

Corporate earnings are beating the Wall Street estimates — are these even accurate? For the exporting countries in Asia — will they be badly hit with further lockdowns? And why is WTI crude oil dropped all of a sudden? All these and more in this quick podcast interview with Tony Nash at the BFM 89.9 The Morning Run.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/us-complete-lockdowns-unlikely on August 5, 2021.

 

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Show Notes

 

SM: BFM 89.9. Good morning. You are listening to the Morning Run. I’m Shazana Mokhtar in studio today with Wong Shou Ning and Philip See. First, though, as always, we recap how global markets ended the trading day.

 

PS: Yes, the U.S. was relatively mixed. The Dow is down 0.9%. S&P 500 also -0.5%. Nasdaq was up 0.1%, crossing over to the Pacific and Asia. Also a mixed day. The Nikkei was down 1.2%. Shanghai Composite and Hang Seng were both up 0.9%, Singapore up 1.1%. And actually, not surprisingly, FBN, Kilcher was down 1.6%.

 

SM: And for some insights into what’s moving markets, we have on the line Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Always good to have you. So looking at corporate second quarter earnings, they’ve been beating Wall Street estimates, yet a prevailing bearishness seems to be creeping into U.S. markets. Is this an accurate reading driven by the rise of Covid-19 cases from the Delta variant?

 

TN: Yeah, earnings are up about 90% year on year, and a lot of that really has to do with companies cutting back staff and trimming expenses. This is a really nice, obviously not unexpected, but a really nice pop. But the cutbacks have come to a limit if we’re straddling a come back. Part of that is revenues are up 22% on quarter, which is great. But given the cutbacks, it looks extraordinarily good. So these things have a way of winding down. There’s only so much you can only get this good for so long. So we do expect this to to erode a little bit going into next quarter.

 

WSN: But does this mean that markets will find it hard to go to the next leg up in?

 

TN: It depends. It depends on company performance, but it also depends on things like central bank activity and fiscal spending. So if we look at Covid, it depends on which way it’s going. And if Delta variant gets worse and the fatality rate gets worse, which isn’t here in Texas, the fatality rate per case is half of what it was back in February. So just six months ago, the fatality rate here was twice per case of Covid.

 

So we’re hearing a lot about case counts. But the reality is the fatalities are declining pretty rapidly. So here we see that is a good thing. And and so we’re hopeful that things will you know, we’ll continue to move back to a normal situation. But there’s a lot of talk about, you know, closing things down. New York just put coded passports in for going to restaurants and going out in public, the sort of thing.

 

What that does is that really it really hurts small local businesses. It hurts chains for, say, restaurants and shopping. It helps companies like Amazon that do a lot of local deliveries. So so if New York is going to lock down, it helps to work from home type of company try it. But it seems to me in the US it’s going to be really hard to close the US down again because there’s a lot of push back in the US to closing down in some places, not so much New York, California, those those places, but other places. If there was an attempt to lock down again here in Texas, people would be pretty resistant.

 

PS: And you made a point on central bank activity. Fed Vice Chairman Richard Clarida confirmed that they are on track to raise rates in twenty twenty three, but jobs data is soft. So how should we make of all this?

 

TN: Yeah, I don’t see that happening. Look, you know, people talk about rates a lot, but the Fed has so many tools. I would expect the Fed to commence some sort of QE plan in the not too distant future before I would expect rates talk. I think we’re closer to QE than we are to rates much closer to QE than we are at a rate. So I don’t see rates changing certainly in obviously in twenty one. I don’t see them changing in twenty two. If it’s twenty three, maybe it’s the back half, but I just don’t see that happening simply because we’ve got to stop the flow of finance ministry and central bank activity going into economies globally first before we start to impose higher rates on borrowers. So we just need to get to a zero state or a semi normal state before we start imposing higher rates on borrowers.

 

SM: OK, and turning our attention closer to home, Tony. An economic upswing in Southeast Asia this year looks increasingly uncertain. And given that ASEAN is predominantly export dependent, how badly hit do you think countries in this region are going to be?

 

TN: Yeah, I think it’s hard. For those countries that have the benefit of, say, natural resources exports like Malaysia with palm oil and crude oil and other things, I think that helps. However, manufactured goods are difficult, partly on supply chain issues, partly on Covid, you know, restrictions and other things. So international transport is still in a very difficult situation. So I think it’s tough for Southeast Asia. I think there’s a big move in Europe and North America to have more manufacturing done nearby in regions.

 

So I think this, over a period that’s been protracted 18 months or longer. I think the more that happens, the more we see unwinding of global supply chains and the more we see the unwinding of Asia as the centralized manufacturing hub globally. I think we’ve seen more regional manufacturing. I don’t think that necessarily means that the manufacturing in China or other places are necessarily in danger. Unfortunately, a place that I think places that I think are more in danger of places like Malaysia, Thailand, the middle income, middle tier type of manufacturing countries. So the automation, competitiveness, these sorts of things are really much more important in places like Malaysia and Thailand.

 

WSN: And Tony, I want to switch to oil because when I look at the Bloomberg at the moment, WTI is showing at sixty eight U.S. dollars a barrel for delivery in September. What do you make of this sudden drop in prices? Is it due to demand decline?

 

TN: It’s on Covid fears. News all over the here in the U.S. It’s a lot of Covid fear mongering and you know, a lot of that. The media is based in New York and D.C. And so there’s a lot of chatter on the government side. And in New York, the New York media is trying to get the the focus away from Andrew Cuomo, the governor there, and really trying to focus on Covid and other things. So markets are reacting.

 

Business doesn’t want things closed down. Again, people in business don’t want to close down again. So I think, you know, you’re going to see a real push pull in markets over the next couple of weeks as that debate happens about two places closed down or not. And you’ll see some volatility in things like commodities and in other markets as that very active discussion continues.

 

SM: All right, Tony, thanks as always for your insights. That was Tony Nash, CEO of Complete Intelligence, talking to us about the situation of the economy in the US. And, you know, that push and pull between closing down, how do we deal with with the covid, but at the same time, you know, make sure the economy doesn’t suffer too much.

 

PS: You made a very interesting point that with closing down, who is affected the most. Right, with respect to businesses. He did say smaller businesses are more susceptible as result of a closure locked out. But the same is exactly the same thing you’re going to see across the board.

 

WSN: Yeah, yeah. I think he also brought up an interesting point about the fact that, yes, there is this decentralization of manufacturing hubs. Right. Because I think a lot of businesses are concerned that with covid-19 and they have really been proven that supply chains can be very easily disrupted. But ironically, Malaysia may not be a beneficiary. It might move to other countries. And it’s a question of whether we move up the value chain to provide that, you know, that that automation that we need do.

 

The things that we talk about are 4.0. I’ll be ready for it. Do we have to staff for it? Will they go to other countries? And he hinted that he might. So I’m just curious, in the longer term, what is our government’s plans, especially now 12 million, your plan confirmed to be in September and budget 2022 in October?

 

SM: That’s right. And we’re going to get a perspective on this later on in the show at seven forty five when we speak to the president of the Malaysian Semiconductor Industry Association. So stay tuned for that BFM eighty nine point nine.

 

Categories
QuickHit

The Fed & ECB Playbooks: What are they thinking right now? (Part 1)

Geopolitics experts Albert Marko and Nick Glinsman are back on QuickHit for a discussion on the Federal Reserve, the ECB, and central banks. What are they thinking right now?

 

Albert Marko advises financial firms and some high net worth individuals on how politics works in D.C.. He worked with congressional members and their staff for the past 15 to 20 years. In his words, Albert basically is a tour guide for them to figure out how to invest their money.

 

Nick Glinsman is the co-founder and CIO of EVO Capital LLC. He does a lot of writing and some portfolio management. He was a macro portfolio manager in one of the big micro funds in London for quite a few years. Prior to that, Nick was with Salomon Brothers. Now, he concentrates on providing key intel, both economics and politics on a global level to finance managers and politicos.

 

You can go here for Part 2 of the discussion.

 

 

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This QuickHit episode was recorded on July 29, 2021.

 

The views and opinions expressed in this The Fed & ECB Playbooks: What are they thinking right now? (Part 1) 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: Today we’re talking about central banks and given where we are in “the cycle”, whatever that means at this point, post or late Covid, we’ve had waves of support coming from finance ministries and treasuries and central banks around the world. Central banks seem to be in a very weird position right now. So I’d really love to understand your point of view particularly what the Fed and the ECB thinking about right now and what are some of the biggest dilemmas they have? Nick, if you want to go first and frame that out a little bit and then Albert, will obviously go to you.

 

NG: Well, given how long I’ve been doing this, I’m more of a traditional, black coated central bank watcher. And I would say a couple of key comments to make right now is I think they’ve lost their independence to a large extent. Harder for the ECB to lose its independence. But with the commission, you have that loss.

 

I also think that we are, defective monetary financing. And again, I’ll go back to the ECB, who literally for the last month, for everything that was issued in Europe and this reluctance by the Fed to, even they admit talking about talking about tapering, but this reluctance to even consider a pullback on the mortgage-backed securities. The jest, pretty much the same, and it’s very clear with a lot of the actions that I’m in, my interpretation is, one, they’re working in cahoots with the political arm.

 

So treasury in the US, commission in Europe. Bank of England is a slight exception about to happen, but we can cover that later. So that’s clearly going on. And I think now Albert might do a lot of work together and I think this Albert came out with a comment a while back saying Yellen wants six trillion dollars fiscal. And the excuse that was given, aside from the political bias, was the Treasury market needs it.

 

And interesting enough, we saw the change to the Repos yesterday. This was after criticism by a committee that was published in the F.T. yesterday. And even Bill Dudley’s commented on Today suggesting that a lot more work needs to be done to ensure that the normal functioning of the plumbing behind the form of safe assets.

 

So it’s clear to me that things are being worked on in a politically coordinated way that impacts monetary policy. Now, I think they’ve got themselves into an economic or policy black hole. I think the mind set, and it’s been like this since probably ’08, which is they’re not prepared to accept the economic cycle anymore.

 

So back to one of my previous appearances on on your pod, the Fed not doing anything? Yeah, it seems to me that that’s an acceptable process, regardless of inflation is way above their forecast. And forecasting that’s a whole ‘nother bad area for the… Fed’s forecasts are terribly wrong. The ECB’s forecasts have been wrong for, you know, since time immemorial.

 

The ECB is more dangerous because they have a bias that keeps them on their policy’s wreck.

 

TN: So first on forecasts, if any central bankers are watching, I can help you with that. Second, when you say they don’t believe in the business cycle anymore, do you mean the central banks or do you mean the political folks?

 

NG: The central banks and government. I mean, funnily enough, I’m reading a biography on Jim Baker right now. And when you look at Reagan, when he came in and Volcker, economic data was pretty bad back at the beginning of the 80s. That. No way, no politician is prepared to accept that anymore. To be honest, I think the central bankers are prepared to accept that anymore. Any of the people leading the central banks being political appointees, of course.

 

TN: So this is kind of beyond a Keynesian point of view, because even Keynesians believed in a business cycle, right?

 

NG: It’s a traditional Keynesian point of view. The modern day, neo Keynesian, yes, you’re right. Way beyond what they’re thinking.

 

TN: There’s a lot of detail in that, and I think we could spend an hour talking about every third thing you said there. So I really do appreciate that. Albert. Can you tell us both Fed and ECB, what are they thinking about right now? What are the trade offs? What are the fears they have?

 

AM: We’ll start with the ECB. The ECB is not even a junior player right now in the central bank world. I know people want to look at the EU and say, oh, it’s a massive trading bloc, so and so. But the fact is, that it’s completely insolvent. Besides the Germans and maybe the French in some sectors, there’s nothing else in Europe that’s even worth looking at at the moment.

 

As for the ECB’s standpoint, you know, they’re still powerless. I mean, the Federal Reserve makes all the policy. They first will talk to the Anglosphere banks that are on the dollar standard basically. I mean, the Pound and the Australian dollar and whatnot. They’re just Euro Dollar tentacles. But, for the ECB, they’re frustrated right now because they see that the Euro keeps going up and their export driving market is just taking a battering at the moment. But they can’t do anything because the Fed goes and buys Euros on the open market to drop the price of the Dollar to promote the equities in the United States. And that’s just happening right now.

 

When it comes to the Fed, we have to look at what is the Fed, right? Normally what everyone is taught in school is that they are an independent entity that looks over the market and so on and so forth. Right. But these guys are political appointees. These guys have money and donors. They play with both political parties. Right now, the Democrats have complete control of the Federal Reserve. And everyone wants to look at Jerome Powell as the Fed chair, but I’ve said this multiple times on Twitter, the real Fed chair is Larry Fink. He’s got Powell’s portfolio under management of BlackRock. He’s the one making all the moves on the market, with the market makers and coordinating things behind the scenes. He’s the guy to look at, not Jerome Powell.

 

I mean, have anyone even watched Jerome Powell’s speech yesterday? It was appalling. He was overly dovish. That’s the script that he was written. He’s not the smart guy in this playing field, in this battleground.

 

TN: He needs a media training, actually. I think.

 

AM: He’s being set up to be scapegoated for a crash. He’s just no one to show. He’s a Trump appointee. So next time there’s a crash, whether it’s one week from now or one month from now, it’s going to be pointed on him that, you know, he’s the Fed chair. Look at the Fed chair. Don’t look at everything else that the political guys have made and policies in the past four or five years that have absolutely just decimated the real economy.

 

TN: This time reminds me, and I’m not a huge historian of the Fed, but it really reminds me of the of the Nixon era Fed where Nixon and his Fed chair had differences and they were known, and then the Fed chair ended up capitulating to do whatever Nixon wanted to get back in his good graces. Does that sound about right?

 

AM: No, that’s a perfect example. I mean, this idea that’s floated around by economists that economics and politics are separate entities is absolute fantasy. And it just it doesn’t exist in the real world.

 

NG: Just to pop in on this one because actually there is a new book out which I started three days at Camp David. Because it’s coming up to 50 years since that decision of the gold standard. Now, it’s just interesting you brought it up, because if you think of one of the rationales for coming off the gold standard, there’s several, but one that struck me as I was reading actually the review, the back cover show Percy.

 

This enables the government to stop printing in terms of fiscal, fiscal, fiscal. That’s what it did in effect. First of all, that’s one of the biggest arguments against people who argue for a return to the gold standard because that would decimate things or cryptos being in a limited supply of crypto as the new reserve currency because the gain that would be pulling against the elastic and you wouldn’t get, the economy would just boom. Right.

 

So that’s where I think it’s just huge, you know. I’ve always said that actually what we have is what we’re going to ultimately see is exactly the same cost that came with Lyndon Johnson paying for the Vietnam War, Covid. And then the Great Society, which is Joe Biden’s what I call social infrastructure and green ghost plan. So. Going back to that, Nixon was paying part of the price for all of that. With Volcke right. So I actually sit there thinking, well. There are similarities right now, and we’re seeing effectively a central bank and the Treasury, wherever you want to look, untethered from what used to be, well before I started in this business, to be part of the discipline. But even when they came off the gold standard, there was discipline. As you referred earlier, to, traditional Keynesians believed in the economic cycle of boom, bust. You know, boom, you tap the brakes a little bit, take the punch all the way. That’s gone.

 

That is to me what’s gone on recently, I don’t know whether you would say since the 08 or more recently is the equivalent of that ’73 meeting where they came off the gold standard. People just said no more cycles. Tapping the brakes and now the central banks are in a hole and politicized, they’re not independent because there are no.

 

AM: Yeah, yeah, that that’s real quick, Tony. That’s exactly right. I mean, even like, you know, I was on Twitter saying we’re going to go to 4400. We’re going to go to 4400 and people are like “No way. We’re in a bear market. This thing’s going back down 37, whatever charts and whatever Bollinger bands they want to look at. But the fact is because of the politics has a necessity to pump the market and then crash it to pass more stimulus packages. The only way was to go up to 4400 plus, right.

 

TN: Right. OK, now, with all of that in mind, Nick, you did a piece recently about the Fed and housing and some of the trade offs that they’re looking out looking at with regard to the housing market. Now, housing is an issue in Australia. It’s an issue in the UK. It’s an issue in the US and other places. Can you walk us through a little bit of your kind of reasoning and what you were thinking about with regard to the Fed and housing?