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BBC Business Matters: US Budget Row

BBC Business Matters is joined by our founder Tony Nash for this episode to talk about US’s $3.5 trillion spending plans. Will it get approved before the G20 meeting in Glasgow? Also discussed are the energy crisis with very high gas prices and Russia’s use of energy as a political weapon against Europe. Has Houston changed because of the pandemic and discussion on climate change?

 

This podcast was published on October 28, 2021 and the original source can be found at https://www.bbc.co.uk/sounds/play/w172xvqltqn8n2y.

 

BBC Business Matters Description:

There are intensive discussions on Capitol Hill to try and break the deadlock over his proposed $3.5 trillion spending plans. Those plans have lead to deep divisions in his own Democratic Party. So how close to a deal are we? We get analysis from Natalie Andrews, Congress Reporter for the Wall Street Journal. And is Russia using energy as a political weapon? The question is frequently asked in Europe and it’s now being asked in Moldova, a former Soviet Republic that’s been trying to move away from Russia’s orbit and develop closer ties to the EU. It follows the decision by the Russian state-owned gas company Gazprom to reduce supplies to Moldova and to threaten to suspend them completely. Moscow correspondent Steve Rosenberg has been to Moldova to find out what’s behind the latest gas crisis. Also in the programme, we look at why has the iconic French fashion house Jean Paul Gaultier – known for cone-shaped corsets worn by Madonna for example – decided to allow people to rent some of its most iconic pieces? And Fergus Nicoll investigates what efforts are some cities making to combat climate change. And we’re joined throughout the programme by Tony Nash Tony Nash of Complete Intelligence in Houston, Texas and Jeanette Rodrigues, South Asia Managing Editor of Bloomberg in Dubai.

 

Show Notes

 

RT: Tony Nash, founder of the Complete Intelligence, is based in Houston in Texas. And I would imagine, Tony, that you’ve been watching a bit of baseball over the last few days.

 

TN: Just a little bit Rahul. Thank you.

 

RT: And if it’s been good for you so far.

 

TN: Well, up until last night, it was pretty good. It’s the World Series Baseball Championship. The Houston Astros are in the final two teams playing for the Championship.

 

RT: And the reason they didn’t go so well because I don’t think they won their first game that we may have talked to Tony a little bit more about that in the program.

 

Tony, can I come to you here first? Because we heard from the Moldova and government Minister. They’re saying, “Look, I can’t predict where gas prices are going to be in two months time.” As much as of the Northern Hemisphere goes into winter. Gone. Has the guest for us. Where do you think gas prices are going to be higher or lower than where they are now? Because they are very high, aren’t they?

 

TN: Gas prices continue to rise for at least the next two months, if not into, say, February. So we have tight gas supplies now. We have growing demand now. We have people, a lot of whom are in their house all day, so they have to heat their house where they would normally be in an office, those sorts of things. So it’s an issue that we haven’t really had to face for quite some time. At the same time, we’re seeing inflation in other areas hitting people’s pocketbooks. So I think it’s sensitive in a way that many, many people could not have seen.

 

RT: President Biden is leaving for the G20 summit in Rome. Then, of course, he’s coming to Glasgow. The COP26. Will you have a deal? Do you think, Tony before he departs American shores?

 

TN: I don’t think so. There’s a problem with paying for it. And it’s really strange to hear someone say that Democrats are saying they’ll literally vote for anything that goes to the floor, which tells me they’re pretty desperate for something. They’ve tried things like what they’re calling a billionaire tax, which is actually a tax on income of even things that are in your retirement account portfolio.

 

RT: But is that not a bad idea maybe to try and generate some money? A lot of our listeners will be thinking it’s quite surprising that America doesn’t have paid family leave already?

 

TN: Well, companies do offer people time off and paid time off when they have a child or something like that, or when there’s a sick family member or something like that. So it’s not something that doesn’t happen here in America. I think somehow it’s being portrayed that Americans don’t do that. It’s not 8 to 12 weeks or something like it is in Europe. But there is time off for that sort of thing. So we’re just in a different place in our social development and we prioritize different things thanEurope. So I think the US is not Europe. The US will never be Europe, or it’ll be a long, long time before it’s Europe. And American taxpayers aren’t willing to pay for that. So they have to find a way to pay for it. And the problem is they can’t find a way to pay for the programs that they want in the bill.

 

RT: So what’s the soultion going to be here because there will have to be that always is.

 

TN: A smaller bill. That’s it. I mean, it’s going to be a smaller bill. It’s going to be a trillion, maybe slightly more, something like that, which… I just want to repeat that and say it slowly, a trillion dollars. Okay. So let that sink in. This is not small money. Okay. And it’s a very political tactic to aim very high and then act like you’re disappointed when it comes in at a third of that. But it’s still a TRILLION dollars. Okay. That’s less than the entire bailout of the global financial crisis in the US economy, which was 860 billion or something like that. So it’s less than that entire bailout. So it’s huge money.

 

RT: It is a lot of money. Let’s look at where you are, Tony, because you’re in Texas, a region synonymous, really, with oil and with gas. As we see these prices increasing so dramatically, do you think that people within those industries, then look at it and think maybe they have a longer shelf life then some people thought they were going to do with that movement to renewables?

 

TN: Oh, yeah, I think they do. I don’t think hydrocarbons are going away, partly because every plastic that you use is made from hydrocarbons. When Greenpeace protested a vessel, they used a plastic boat to protest. Plastics aren’t going away. I think that the bigger issue that you raised is energy as a political weapon. And I think Russia using energy as a political weapon toward Maldova, toward Europe, toward China, toward other places, I think is a reality that we face when you face tight supplies.

 

RT: Do you think Europe was naive here in some respects, because if you look at it now, with so much of Europe and Europe dependent on Russian gas supplies, this was always going to be a possibility, if not a probability.

 

TN: Absolutely. Yes. So, look, I live in Texas. We sell oil and gas to the world. If we had a captive market, we would be tempted to charge higher prices. But we sell to markets all over the world in a competitive system. Europe locked itself into the agreement with Russia, and we could have a long discussion about this. But Europe locked itself in, and so they’re captive. And that’s a huge problem for Europe. And that’s one that Angela Merkel’s and others got Europe into. And conveniently, they’re not going to be around to get them out because they’re out of office. So it’s a really convenient agreement that they came to just in time for them to go out of office.

 

RT: Let’s go to Houston, Texas. And, Tony, are you seeing Houston change very much, whether that’s a consequence of the pandemic, whether that’s because of a debate about the climate?

 

TN: So we have obviously a lot of very large oil and gas firms here. And there is a lot of investment in alternative energy sources by those players. So you could argue that it’s just an ESG play for the equity markets. But I think there is sincerity within the companies to be the sources of energy, not necessarily just to be the source of oil and gas.

 

RT: What if they put in? Do you have no car zones in Houston? How would that go down with the public there?

 

TN: Houston is a pretty spread out town. So there are some streets that are no car streets, but it’s not large areas, and it’s in very small kind of old-ish parts of town. But other towns? Yeah, absolutely. Up in Dallas, other places, Austin, definitely. There are no car zones in those towns as well. Houston is just a very spread out town. And so it’s very hard to do here.

 

RT: Tony, let’s come to you first. Let’s ask you, what are you wearing at the moment, Tony, are you wearing a smoking tuxedo jacket? I hope you’re wearing something.

 

TN: I am head to toe couture. I mean, everything I wear every day is couture. I’m kidding. I’m just in a light blue shirt and jeans. Just came straight from work. But when I think about this business, your guest described negotiate Close as rich and sexy. That describes me perfectly. So of course, I’m going to be a customer.

 

RT: Okay, let’s get a bit more personal if you are married, if you don’t mind me asking, of course. What did you wear on your wedding day?

 

TN: Well, this was in the 90s. I wore a Hugo Boss tuxedo. My wife wore a custom dress. So we were married in Sausalito, California. It was a wonderful day.

 

RT: I’m sure it was. And I suppose you could afford to do that. But if you couldn’t have afforded that, would you now, if you’re going to get married again? Clearly, hopefully not. But would you consider renting something expensive that you couldn’t be able to afford?

 

TN: Yeah. Why not? Sure if I wanted to. I would absolutely do it.

 

RT: Tony, next time you’re on Business Matters, we expect you to be in your wedding suit and we expect pictures to be posted as well. Do you think it does? I know what you’re talking about, Jean Paul Gaultier. Do you think it does diminish the brand if they’re renting some of those close out? Does it lose a little bit?

 

TN: I think right now with kind of the borrowing culture that we have the renting culture, I really don’t think it loses anything. I think people want the experience of doing something nice, wearing something nice, eating something nice and I don’t think it diminishes at all. I think when I was in my 20s, owning it was necessary. Now I think people are happy to rent.

 

RT: That’s is a very good point. Thank you, Tony. Thank you, Jeanette. If you want to listen to something nice tune into Business Matters, we’ll be back. Same time. Same place tomorrow. Bye.

 

Categories
QuickHit

EM Meltdown: China, Turkey & Russia (Part 2)

EM Meltdown: China, Turkey, Russia (Part 2)

In this second part, emerging markets expert Michael Nicoletos discussed Turkey and Russia. What are the major issues that Turkey is facing, specially around its FX reserves? They have an energy problem as well, and will soon need to choose between the US and Russia. And how about Russia’s love-hate relationship with Europe? How does Nicoletos see it will end up?

 

Please watch Part 1 first, if you have not already. Michael talked about China’s household debt and how much is that? Can they ever recover from the Evergrande disaster? And how they got into it in the first place? Is CNY still valuable? How do the Chinese get dollars now with their very limited FX reserve? Should you use the digital Yuan? How much is China spending right now to up its GDP?

 

Michael Nicoletos have spent most of his life around markets, and I used to run a hedge fund for more than 10 years on emerging markets. He shut it down in 2019 to take a sabbatical and Covid 19 hit the world. Now, he is doing a lot of research on emerging markets and trying to see what the next steps will be in terms of the investment world. But in the meantime, he is also advising a few firms on their investment.

 

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This QuickHit episode was recorded on October 20, 2021.

 

The views and opinions expressed in this EM Meltdown: China, Turkey and Russia (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: Talking about EMs, and we talked about reserves, and you mentioned Turkey. Let’s talk about Turkey for a minute because you’ve made some really interesting statements about Turkey, and I’d like to really understand your perspective.

 

MN: Turkey faces some other issues. Turkey faces high inflation. More than 20% rates are around 19% of negative yields. The Lira has fallen more than 50% in the past few years. So you might see nominal GDP in Turkish Lira going up. But if you put it in dollar terms, it’s actually flat for the last ten years. It’s not flat, it’s flat-ish. So in Turkish Lira, the last ten years, the Turkish GDP has gone up 350%, which is a wow. But if you put it in dollars, it’s not flat, but it’s not something meaningful.

 

Turkey GDP in Lira and USD

Now, if you look at Turkey and the devaluation, the President of Turkey, Tayyip Erdoğan, has tried to stop the Lira from falling. Right now, it’s I think at its all-time lows around 920 versus a dollar. But if you look at the FX reserve, which is very tricky and this is very interesting for Turkey, you’ll see that, okay, the number is ambiguous because depending on what source you see, you’re going to see another number. But let’s say it’s around $18 billion. Now, this is the gross number. If we deduct gold and all the other stuff and we also deduct the swap lines, and I will explain what the swap line is, this number falls around to $20 billion. And this could be negative according to some sources because the dollars are not there.

 

What has Turkey done? Instead of using its dollars to protect the Lira from falling, I’m not an advocate that you should do that, but that’s what they’ve been doing. They went to the banks and did swap lines with the banks. And the banks are using depositors dollars to buy back the Lira. So depositors right now don’t actually have those dollars in their account.

 

Turkey FX Reserves

 

MN: Because the Turkish banks have made agreements with the central bank with swap lines, which okay, when your central bank gives you a swap line, it’s a guarantee if you’re a bank. And instead of, if you go and you see the headline number of the Turkey central bank, you won’t see it falling. But if you understand that they’ve been using depositors’ dollars to cover for it, you need to subtract that. So the number could be close to 20, maybe there are some allegations that it could even be negative. So if it’s negative, imagine. FX reserves in Turkey are pretty horrible.

 

You have, let’s say, $18 billion of gross FX reserve, and you have $130 billion of short term liabilities, within the next twelve months, Turkey has 130 billion of foreign claims. So again, this metric is not really good. Now, Turkey is estimated to grow around 8 or 9% this year. Again in Turkish Lira.

 

MN: If we take the Lira is down 25% this year. So this is an issue. Another issue is in Turkey, 60% of its current account is energy. They don’t have domestic energy, so they need to import energy and we know what’s been going on with the energy crisis and natural gas and oil going higher. So all these are main problems for Turkey right now, which I think will be forced to find a drastic way to… They don’t want to go to the IMF or the World Bank, but I think at some point they’ll have to go. And again here geopolitics come to play why they say geopolitics is because Turkey is in NATO. It’s the second biggest force in NATO. The US wants to keep it in NATO because wherever US doesn’t send military, Turkey does. Not many NATO allies send military forces wherever they go.

 

So Turkey is trying to play both sides right now. Trying to be the good guy with Russia, good guy with NATO. Trying to get the most out of both sides. But I think time is ticking and they will be forced to take some form of decision on what they want to do in the future because they’re running out of time in terms of their FX reserves.

 

TN: Yeah, it sounds like it’s pretty short time. Wow. Okay. So looking at the energy issues, not just what Turkey faces, but that Europe faces, I want to spend a little bit of time talking about the Russia-Europe relationship and what you’re seeing there. Will Russia provide sufficient gas to Europe this winter? And, from a financial perspective, how much will Russia benefit from that? Just generally.

 

MN: Yeah. Okay. But the thing is here the following: Europe trying to transition to a more green related economy. The planning was pretty horrible. I would say they wanted to do it fast and they wanted to say “blackmail” corporations to go to more green energy. What did they do then? They created the CO2 emissions credits. So if you were polluting above a level, you were forced to buy CO2 credits in order to cover for that. And that was like an indirect tax, making it less efficient for corporations to use that form of energy so they would be forced to go to other forms of energy.

 

Now, from going to coal to, let’s say, totally green. It takes some time to create the wind turbines and the sun. And actually Germany shut down all its nuclear reactors because of Fukushima.

 

TN: They have a lot of low-end Taiwanese fabs transition to photovoltaics with all of the incentives they were providing. I mean, for a long time, low-end fabs across Asia were just doing a very quick transition to a PV, and it was just a kind of back up the truck moment where they were just taking all the dollars they earned or Euros or whatever currency they could because Germany and all these other places were incentivizing them to do it. And they were low-end PVs. They weren’t high-end. They were just bog standard photovoltaics.

 

MN: No, no. Okay, but besides that, what did the European Commission do? There are auctions every now and then of CO2 credits. But the auctions are arbitrary. So the Commission, whenever it wanted the prices to go up, they did not do the auctions. So then the supply of credits was less and less. CO2 credit emissions went through the roof. So suddenly, if you use natural gas as an energy, it went even higher. And this created the viscious loop, creating the natural gas prices to go even higher.

 

In the meantime, Europe was negotiating with Russia about Nordstream, too. So Russia, which is a pretty good strategic and geopolitical player, realized that Europe was going back as being back in the corner and said, unless you sign whatever I want, let me put it in layman’s terms. I’m not going to pump anymore natural gas. Europe says, no, we have to sit down. We have to discuss. Okay, I’m not pumping. So one brings to another. And every time that Europe trying to play hardball, Russia says, okay, there’s no such a problem. I’m not going to be pumping and prices go higher and higher.

 

So I guess that at some point Europe will need to sign anything Russia wants at this moment. And will try to negotiate some form of an agreement which will be obviously not, it won’t be good. But it will be much better than the current prices that we’re seeing now. And because of the energy prices going higher, Russia is benefiting on a macro level, benefiting on a geopolitical level, and it’s gaining a lot of strength in the region.

 

TN: Hugely. Yeah. Hugely.

 

MN: So the two are interconnected. It’s not one or the other. So the energy crisis has helped Russia, and Russia has exploited Europe’s inability to act smoothly and fast.

 

TN: It’s very interesting. Okay. Just to close this out because I know we’ve been going on for a while. I’m just curious about Russia’s position with Europe, say, over the medium term. Do you see Russia and Europe growing closer? Do you see that relationship becoming tighter, or do you see that eventually becoming an antagonistic relationship? Are there substitutional energy sources that Europe can utilize and that eventually becomes an antagonistic relationship again? Just in general terms. I don’t necessarily political specifics. But how do you think that plays out?

 

MN: Well, I’ll use Henry Kissinger’s famous quote that was back, like 40 years ago. He said, “When I called Europe, who do I call?” So right now, you have, in Germany you just had elections. They haven’t formed the government. It might take months before they form a government.

 

In France, there are elections in April. It seems that the right could be a threat to Macron. And we don’t know what the “right’ means in France. It could be Le Pen or it could be someone else, but it could be anything right now. So right now, I don’t see a leader. If Macron wins, he could be the next leader of Europe. But right now, there’s a leadership problem within Europe.

 

So as long as there’s a leadership problem within Europe, in my view, there’s a vacuum. And I think Russia will exploit it to gate as much influence as it can. And I cannot foresee the future. But in the next six to eight months, I think Russia will try and get as much influence as it can and try to exploit that vacuum.

 

TN: I think you’re right. They’re very smart. They’re very smart political players.

Categories
QuickHit

EM Meltdown: China, Turkey & Russia (Part 1)

EM Meltdown: China, Turkey & Russia (Part 1)

The emerging markets expert Michael Nicoletos shares his insights into the Chinese economy and why it’s in a very big trouble?

 

This is the first part of the discussion. Subscribe to our channel to get notified when Part 2 is out.

 

In this first part, Michael talked about China’s household debt and how much is that? Can they ever recover from the Evergrande disaster? And how they got into it in the first place? Is CNY still valuable? How do the Chinese get dollars now with their very limited FX reserve? Should you use the digital Yuan? How much is China spending right now to up its GDP?

 

Michael Nicoletos have spent most of his life around markets, and I used to run a hedge fund for more than 10 years on emerging markets. He shut it down in 2019 to take a sabbatical and Covid 19 hit the world. Now, he is doing a lot of research on emerging markets and trying to see what the next steps will be in terms of the investment world. But in the meantime, he is also advising a few firms on their investment.

 

Tony Nash met Michael at a Real Vision event in 2019, when he was giving a presentation on China, and he had a chart in there that was actually Michael’s chart. They had a conversation after that and have stayed in touch occasionally since then.

 

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This QuickHit episode was recorded on October 20, 2021.

 

The views and opinions expressed in this EM Meltdown: China, Turkey and Russia (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: So on China. Michael, I wanted to ask you, you sent out a tweet. I think it was last week talking about China’s household debt and it’s on the screen now. So it’s talking about how China’s household debt is at $10 trillion and looking at the ratio of China’s household debt to say, Hong Kong and the US. So can you talk to us a little bit about China’s household debt loads and what that really means for the Chinese economy?

 

Banking bubble in China and Hong Kong

 

MN: Well, as we all know, it’s been in the news lately. The Evergrande imminent. I don’t know if it’s going to be a default because there are some discussions right now to find a solution. But either way, it’s very hard for it to be repaid at its face value.

 

Now, the problem here is twofold. One problem is that China is highly levered as a whole, approximately more than 270% of GDP. The other thing is that real estate is approximately 62 trillion, I’d say the property market, which includes also home prices and everything. It’s about 62 trillion, of which around 10 trillion around sold properties. So it’s a very big backlog. The real estate crisis has started with Evergrande, and we’ve seen actually bond yield spiking in China real estate bond prices. And the big issue here is that banks are the ones who lend obviously to the real estates. So right now, banking assets in China are around 400% of GDP. And in Hong Kong, which is a proxy to China is around 900% of GDP. Just to put it in perspective.

 

In 2007, the relevant numbers for the US was 230%. And Ireland where the crisis started was like 700%. So we’re past both those levels. So we see that there’s a very big debt problem within China. Now, because China has capital controls in place, money cannot leave the country. So the bubble grows, grows, grows. But the money stays in the system.

 

So people now are starting to be afraid. And it’s the first month after six years that retail prices started falling in China. So this is creating a vicious loop. That fear that the contractor will not deliver your house. It means that you’re not going to purchase a new house. So you’re afraid. People in China have stopped buying, which creates a negative, vicious look.

 

So China has tried to avert this at least three or four times in the past ten years. Every time China is trying to stem back from giving you debt, we see such a small crisis, and then China is forced to reverse immediately because it cannot afford. It’s too big of an economy. Real estate is approximately 29% of China’s GDP. So you understand that something like that is very hard to control.

 

Now, China has been a rock in a hard place because I’ve been trying to shift from an investment, let’s say, investment intensive economy to a more consumption driven economy.

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TN: This has been a 20-year transition, right? It’s not something they started two years ago. They’ve been trying to do this for, like, 20 years, right?

 

MN: They’ve been trying to do this, say ten years. But let’s see, consumption as a percentage of GDP is around 38%. When in the US, it’s around 70%. It’s very hard to get that number higher. And given that all the wealth or most of the wealth by Chinese people, is linked directly or indirectly to real estate, you understand that this is a chicken and egg problem. If you try to stop one problem, you’ll create the other problem.

 

TN: Sure.

 

MN: So there are these problems right now in China. I think China will be forced to reverse course again. I don’t think you can afford to create a real estate crisis. I don’t think there would be a world contagion, by the way. But I think it could create a spillover effect with other real estate entities. Evergrande, the size was around 300 billion. It’s actually the biggest one. So we’ve seen the biggest one. And the thing is this could spill over to the whole industry.

 

Now, what’s the problem here, besides that? The problem is that China has been trying to convince banks and actually all the regions to stop giving loans, which are unproductive. Now, because GDP in China is an input number and not an output number like it’s in the Western countries, whatever the number the government sets, that’s what everyone tries to achieve and they can achieve it by giving more money.

 

TN: I just want to stop you there because I don’t think that point is well understood. When you say GDP is an input number in China and it’s an output number everywhere else. I’ve been trying to make this point for years to people, and you say… Help me understand, when you say it’s an input number. What do you mean in simple terms?

 

MN: In simple terms is the government wants 7% growth, so everyone will do the best they can to achieve that 7% growth, no matter what. So it means if I’m a bank or if I’m a region in China and I need to do more, I need to produce more growth. I’ll give out loans, which could be unproductive.

 

What do I mean? If I build a bridge, this is the most common example. If I build a bridge, when I build a bridge, this is counted in the GDP growth. Now, if I destroy the bridge, that is not deducted by the GDP. Right? If I rebuild the bridge, it’s added again. So in theory, you could make one bridge, build it, destroy it, build it, destroy it. And you would only have growth. So when China wants an input number, it will create bridges. The bridges could be, as we say, the usual “bridges to nowhere.” The famous quote. Or it could be bridges, which are useful. So all these unproductive debt went mostly to properties. And that’s why we see all these vacancies and all these ghost towns around China which actually were built and this was added in the GDP growth numbers. But then no one went to live there and the towns are there, and now they have to bring them down.

 

TN: Right. Now, you’re famous for kind of calculating for every say CNY spent by the Chinese government, it results in X amount of GDP, right? There used to be a multiplier effect to CNY spent and GDP. But you started seeing as that was diluted. So when you last calculated that, what was that number? For every say Chinese Yuan spent how much GDP was created?

China credit to GDP ratio

 

MN: So your viewers can understand because it’s a bit technical. So let’s assume you’re an economy and you create debt. You want that debt to create more GDP than the debt you’re giving. So if you’re giving one unit of debt, you want that one unit of debt to create one point, something of GDP.

 

So in theory, you would want it to be two, three, four. Okay, that’s not very easy. But if it’s a plus, it means that your debt was accredited. So it helped the economy. The problem here is, since 2008, China from using approximately let’s say, two units of debt to create one unit of GDP. So we’re already negative, because when you have two units of debt to create one unit of GDP, it means that that one unit will end up as a bad debt at some point. It’s not imminent, but at some point it will add up. So we went from 1 to 2.2 units of debt to create one unit of GDP. And right now we’re approximately between eight and nine units of debt to create that same one unit of GDP. So China needs more and more debt to sustain the same rate of growth.

 

TN: Right. So instead of a multiplier effect, which is what kind of economic impacts people usually talk about, there’s almost a divisor effect in China.

 

MN: You could say that. But because it’s a closed economy, that money can’t leave the system. So in theory, if you had a free account or if you had an open capital account, the Chinese will say, oh, my God, my currency is overvalued. Or let me take some money out of China and make a dollar. Now, this is not possible because Chinese have, I think, a quota of $50,000 a year they can take out? Something like that. Now, obviously, there are ways to take money out, but it’s not the easiest thing, and it’s not for everyone.

 

TN: I guess. It’s jewelry and watches the latest.

 

MN: Right. Okay. It was also Bitcoin. They try to be creative. Well, there’s a good ratio here, which is pretty interesting, and people forget. Now, if you devise the M2, the FX reserves to M2, why do I do that? Because let’s assume money is the money supply within the system. The ratio goes to 9%. Now, the Tiger countries in the Asia crisis in ’97 had the same ratio of approximately 25% to 30%. When it dropped below the 25%, you had the big devaluation.

 

Now, China doesn’t have a big external debt. So since it doesn’t have a big external debt, there is no trigger from that side of the equation for China to be forced to liquidate that fixed reserves to cover for it. But even though they have approximately $3.2 trillion of FX reserves and maybe another trillion from the banks and everything. I’d say 4 trillion. The M2 is approximately around $36 trillion right now. So these numbers… Imagine a hot balloon that you put air. At some point it’s going to blow. We don’t know what that level is. Okay. It could be like ten years before that happened. Or we could see, in my view, the Japan-like model where for ten years, you have an anemic growth. But you don’t see anything really, not a substantial bust. Because one thing.

 

TN: You also just destroyed the idea of China becoming a global currency, of the CNY becoming a global currency. Right. Because if they do have to trade on an open basis, then it’s way overvalued. Right. It’s like monopoly money.

 

MN: Well, China tried or is trying, at least. And it appears through Alipay and WeChat to create a digital Yuan. Why does he want to create a digital Yuan. It’s pretty simple. If the world is using a digital Yuan outside China, it means that the CNY or Yuan or Renminbi or whatever you want to call it, will be used abroad. So this means that it’s usage outside China will increase.

 

We’ve seen, however, that during the last two years, and I’m sure you have the guests, which are better to talk about this, know this subject a bit better than me. The dollar usage has gone up. The dollar is around 87% of global transactions. It actually went up. So there’s a discussion where everyone says the dollar is dying. The dollar is dying, the dollar is dying. Okay. And I understand where it’s coming from because of the policies. But monetary policies are relative. They’re not absolute. Maybe US is doing something bad, but the rest of the world is not doing something better.

 

So right now, the US dollar dominance increases. Now. I’m pretty sure I understand that this cannot stay at current levels. But going from 87% to being to 5%, it’s not something that’s going to happen in the next 2 years.

 

TN: I think the dollar had been down to like 82% six to seven years ago. And seeing it go up to 87%, that’s not a small amount. But the Fed does not want to be the World Central Bank. The US Treasury does not want to be the world’s treasury. So there’s this belief that the US wants to be the dominant global currency. I don’t necessarily believe that’s true. I think there are advantages to having a large portion of global currency usage, but I think 87% is just way too much. It’s way too much concentration of risk, actually, for the Fed and for US monetary officials. Go ahead. Sorry.

 

MN: No, you’re absolutely right. I think you’re right. However, the US, I think would like to remain the number one. Now, I don’t know what the percentage, the optimal percentage would be. But I’m pretty sure they prefer being the dominant than not being the dominant.

 

TN: Oh, yeah, absolutely. They want to say number one, but 87% is just too much.

 

MN: Since we’re talking about the dollar. The important thing about the dollar is that if the dollar strengthens, okay. And I don’t have a strong view here, I think it’s going to strengthen, but I understand if it doesn’t. If the dollar strengthened, this puts the pressure on emerging markets as a whole, because usually emerging markets tend to borrow in foreign currency because the foreign currency interest rate is much lower than the local currency.

 

For example, in Turkey, it’s 20%. The dollar is 0%. So if there’s a Turkish corporate wants to launch a bond, it will borrow on dollars at five 6% instead of borrowing at 20%. So they try to do that.

 

Now, as the dollar strengthens, especially for emerging markets, this puts pressure to repay the debt and it becomes harder and harder. So if the dollar were to strengthen, that would create a very, very big problem. I think the Goldman Sachs issued a report where it showed that the growth divergence between emerging markets and developed markets is at its lowest point. If you look at the cycles and it leaves that it could expand and right now, I think it discounts like a 4% growth for EM as a total.

 

So if the dollar strengthens, I don’t think we’ll see these numbers. I think you’ll see pressure on EM. Huge.

 

TN: Talking about EMs, and we talked about reserves and you mention Turkey. Let’s talk about Turkey Turkey for a minute because you’ve made some really interesting statements about Turkey. And I’d like to really understand your perspective.

Categories
Podcasts

Inflation Stares Down A Reflating US Economy

BFM 89.9 The Morning Run talks to Tony Nash for his insights on the US economy. Why the tech industry is performing better than other industries? Is it the new inflation theme? And how about the reflation narrative? How will that affect price pressures for corporates in Q4 of 2021? Why is China importing less from the US while exporting a whole lot more? What’s the status of the supply chain issues amidst the coming holiday season?

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/inflation-stares-down-a-reflating-us-economy on October 14, 2021.

 

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Show Notes

 

KHC: Okay, well, the Dow was unchanged. Basically, it just went side raced last night. The S&P was up by 0.3%. The Nasdaw was up by 0.7%. Preceding that, the Nikkei was down by 0.3%. The Hang Seng was actually closed due to the typhoon and also today for a public holiday. The Shanghai was up by nearly half a percentage point. The Sci by one and a half percent. Of course, FBM KCI yesterday up by 1%.

 

SM: And for some thoughts on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks for joining us today.

 

So last night Nasdaq did better than the other indices on the back of tech companies having better pricing power. Do you see this being the new theme as inflation rises?

 

TN: Sure. I mean, I think tech prices can be adjusted pretty quickly for the most part. And I think especially with tech hardware, people understand that supply chain issues are very real. So I think the ability to change prices in tech are pretty quick, especially around software and software services. I think whether it’s prices rising or even in the case of additional competition, prices falling, I think they can do it in tech much more quickly than they can in other industry sectors.

 

KHC: Yeah. And, Tony, most of the news has focused on the effects of the energy crisis on China and, of course, in Europe. But in what race does this crunch impact the US. Is American immune from it?

 

TN: Oh, no, not at all. I think there are some considerations in the US. First is how regulated are the markets. So when you look at markets like New York, Massachusetts, California, highly regulated markets. Also, they don’t really have energy. They don’t have natural gas and oil, or they don’t really actively drill for it there. So they’ll have a tougher time over the winter, I think. In places like Texas and the Gulf Coast in the south, where we drill oil and gas in Texas, we also drill offshore in the Gulf of Mexico. We have supply, we have the pipelines in place. They’re pretty unregulated markets. We’ll find it easier here because of the availability of the energy and the infrastructure that we have.

 

SM: And looking at the reflation narrative. It’s starting to get louder in markets. Do you think last quarters corporate earnings were affected by rising price pressures, or is that going to be felt more in the coming Q4?

 

TN: Yeah. I think they were a little bit, but not much. Don’t forget in really Q2 of 2020 and early Q3 is when companies really started shedding costs because of a COVID. So they reaped those year on year profit benefits. Those profit growth benefits through 2021, so far. But that base effect really comes to an end in Q3 of ’21. So we’ve expected. Well, since the end of Q2  earnings, we’ve been telling people Q3 earnings will be worth because those base effects are gone and also because inflation has intensified. So, yeah, it definitely gets worse than Q3.

 

KHC: Yeah. So we are on the cusp of earning seasons reporting. And of course, I think Delta reports later today. JP Morgan as well. What’s your sense of what corporate earnings will be in this coming quarter?

 

TN: Well, they’ll still be earnings, but the growth rate will definitely be slower this quarter. There are some areas where they’ll continue steady. But in things like travel, where we’ve seen with airlines where we’ve seen fuel prices rise, we could see some real issues there. Not major issues, but we would see that eating into profit margin.

 

KHC: Okay. Let’s talk about the China trade surplus then, of course, with the US rising record high in September. Tony, why is trying to import less from the US while exporting a whole lot more currently?

 

TN: Well, part of what we’ve seen, the US exports a lot of ag and energy to China. And so when commodities prices rise, China buys less. We saw things like corn and sorghum and soybeans rises in the middle and end of Q2, early Q3 rose pretty dramatically and trying to slow down its buys of those. Now we see natural gas rising pretty rapidly, actually. So a year and a half ago, it was, say, a 1.5 in the US. Natural gas is now $5 in the US. So it’s risen pretty dramatically. So trying to slowed the buys of, say, US natural gas. They’ve also slowed some buys of, say, natural gas and all from other parts of the world.

 

So they’re buying commodities. They can slow those buys. And we’ve seen that impact, for example, on their electricity markets. The US buys largely manufactured goods. And so because of supply chain issues, Americans have really been over buying what’s available so that they can ensure supplies for months ahead. So there’s still, say empty shelves in many cases in the US. There are still backlogs. But we’re over buying because people don’t want to see empty shelves here.

 

SM: And I guess one final question, Tony, before we let you go, taking a look at our region, the Asian region. The economic outlook seems more brilliant in Asia as countries reopen. Which economies do you see outperforming as border restrictions lesson in this part of the world?

 

TN: Yeah. We definitely hope to see Asia come back pretty strong. We expect India, China, Taiwan, Philippines, Australia to perform best in Q4. Australia, obviously on the back of commodity and energy price exports. China and Taiwan on the back of global manufacturing kind of supply chains. Of course, they won’t be totally cleared up in Q4, but we will see continued buying and over buying for those items. So we don’t necessarily see it as a border issue because travelers, for example, we’ll have to consider how long will they have to quarantine if they do travel, because we don’t necessarily expect that to go away soon. So we don’t expect the cross border restrictions lightning up to impact too much. It will impact a bit, but we don’t see too much upside in Q4 yet.

 

SM: Tony, thanks as always for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us a view of the economies in Asia that could improve as economies open up. But he says travel is still not going to be that lightning rod for growth or activity at this moment. Things are still going to be cautious on that front.

 

KHC: Yeah. The aviation sector has really come into focus in the last few days. Air Asia has been top volume in the last few days, and I think it looks. Look at Southeast Asia’s region. I mean, travel is such a huge factor in the economies. We know that Indonesia is slowly opening up. Bali has talked about opening up. Thailand is opening up. No choice, right? Obviously, with tourism, such a systemic part of the economy. China is still locked up. China is actually arages biggest market, right? So many destinations.

 

India is still locked up. So it’s a mixed bag. Right? But the one thing that has really put a spanner in the works is this whole inflation thing. You know how the Fed talked about how it’s going to be transitory is gonna be here for the short term. It’s not the case. I mean, you’ve seen wages go through the roof, supply chain disruptions, which is send prices higher labor shortages, much more jobs than people get to apply for. In fact, people are leaving jobs like in F&B, restaurants, waiting jobs, low pay, long hours. They go into much better paying jobs. Energy price as I think Brent, this morning’s at $83. Global energy crunch so much this inflation is commit malicious. I don’t now what that’s going to do? The market. But it’s definitely something.

 

SM: Watch out for that’s. Right. And if we’re talking about supply chain bottlenecks that are contributing to inflation, we have a story here coming out of the US, where President Joe Biden wants to break a log jam at US ports and stave off a holiday season of shortages and delays. Tony was speaking earlier about empty shelves in the US and the fact that US customers are overbuying because there’s so much demand. But supply chain is blocking these products from getting to the shelves. And Joe Biden wants to solve this by making ports operate longer just to clear that backlog. But that isn’t really quite solving the problem because, as you pointed out, there are other trends, such as the labor issues that are finally coming to a head in this scenario. And it’s causing a lot of chaos in terms of supply chains.

 

KHC: Yeah. Because, you know, this part of California, in fact, part of Los Angeles, right. It’s one of the biggest basic choke points for supply into the US. And, I mean, that’s got, like something like 60 to 70 container ships waiting in the Bay just to get in and offload this stuff. It’s incredible. To supply chain shortages, I think that’s supposed to last until 2023. Right.

 

SM: Right.

 

KHC: And there’s this huge amount of capital going into the US in the semiconductor companies that are just building chips which are going to require less energy and smaller to just alleviate some of this choke point. This bottleneck is crazy. I mean, this is how capitalism world sometimes.

 

SM: The juxtaposition to what happened last year is so stark. Last year, there were enough containers. They couldn’t leave their forte because they just couldn’t get the containers to ship their products. And now they’re just too many of them, and they’re jamming up the Port. So it’s really curious how the pandemic has kind of shifted us from one extreme to the next term in the economy. Stay tuned to BFM 89 nine.

 

Categories
QuickHit

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

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
Visual (Videos)

Retail sales, jobless claims and the $3.5 trillion infrastructure bill

CEO Tony Nash joins CNA’s Asia First program to explain the logic behind the US market’s performance. Will the better-than-expected retail sales continue to the Christmas season? What is his outlook for Q3 and what’s hampering the economic recovery in the States? And what are at stake around the success of the $3.5T infrastructure bill?

 

This video segment was published on September 17, 2021 and is originally from Channel News Asia’s videos on demand, which can be found at https://www.channelnewsasia.com/watch/asia-first/fri-17-sep-2021-2186306

 

Show Notes

 

CNA: Well, Wall Street closed mixed in the State overnight as the major indices fail to build on Wednesday strong performance, while for the session, the blue chip Dow closed lower by two tenths of 1%, and the S&P 500 fell by a similar percentage.

 

However, the Nasdaq managed to eak out second consecutive day of gains. Well, this after investors digested mixed economic readings released before with the opening Bell when August retail sales surprised the market and rose 0.7% from the month prior, with analyst expecting a decline. But on the downside, jobless claims rose from last week’s pandemic low.

 

Of course, to help us understand the logic behind all the market movements were joined by Tony Nash, founder and CEO with Complete Intelligence, speaking to us from Houston, Texas. Very good evening to you, Tony.

 

So we’re looking at the better than expected retail sales number. And do you expect that momentum to continue given that we are 100 days away to Christmas in the State side and 99 days away from here in Singapore side.

 

TN: And we certainly hope that continues. But it’s really uncertain, given some of the corporate outlooks and given some of the other indicators that we’ve seen: purchasing managers indices and the regional Fed reports, Fed Manufacturing reports.

 

The port hold-ups in Long Beach are not helpful either. It’s really hurt supply chain. So we could see that spending tick up. But we do expect prices to continue to rise. And so there’s really a trade off there in terms of the volume that’s sold and the value that’s sold. And when we’re looking at, say a 1% rise in value of retail sales, that’s quite frankly, not even keeping up with inflation.

 

CNA: In the meantime, we’re also seeing that the weekly jobless claims increased. And of course, before that, many economist with organizations like JP Morgan has downgraded their third quarter economic growth outlook. So what is your outlook there and what is hampering economic recovery over there in the State Side?

 

TN: Well, it’s really companies are not seeing great investment opportunities. So the demand for credit in the US, just like in China, and just like in Europe, the demand for credit is really declining.

 

So we’re not seeing companies spend on big ticket items. They’re not investing on new equipment, they’re not investing on new projects. And so that’s hurting everything downstream because there are impacts across the economic spectrum when companies decide to spend on big ticket items. This is hurting the US. It’s hurting China. It’s hurting Europe.

 

So between now and you mentioned the end of the year, we expect that corporate spending to have an impact, the damper in corporate spending. We expect the supply chain difficulties and inflation have impacts as well. And if unemployment continues to tick up like it did, we could have a very difficult Christmas season. And the Fed and city administration here in the US are really contending with that, because as they go into the last quarter of the year, they’d really like to see things tick up.

 

CNA: And talking about those spending of course, there’s one catalyst that investors are watching out would be the passage of the $3.5 trillion infrastructure bill. But given the situation that a Biden is facing now, do you think that this increasing likelihood that this bill can’t be get past?

 

TN: Yeah, I think you’re right. With the failed withdrawal from Afghanistan, Biden has really lost a lot of the support from Democratic moderates. And so he’s got the support of the extreme left Democrats. But a lot of the Democrats in the middle are really starting to say, “Hold on a minute. We need to be really careful about how much we support Biden,” because those guys have to be reelected in November of ’22. So from here on out, the voters in their respective districts will be paying a lot of attention to what they’re doing.

 

This 3.5 trillion infrastructure plan, only 1.2 trillion of it, I say “only” but 1.2 trillion of it is dedicated towards real hard infrastructure. The rest of it is a lot of social spending, a lot of pet projects, and that’s a lot of money. 2 trillion plus dollars.

 

So Americans are really tired of seeing big stimulus programs put out, and they’re really tired of seeing the pork going to people connected to politicians. So they’d much rather see the lower $1.2 trillion program. It’ll go direct to infrastructure. They’ll see it. It’ll be a very tangible spend.

 

One other thing to keep in mind is there is still $300 billion that haven’t been spent from the stimulus program that came out in Q1 of 2021. So a lot of Americans are asking, why do we need to green light another three plus trillion dollars in spending if we still have $300 billion that’s unspent?

 

CNA: All right, Tony, thank you so much indeed, for your analysis. Tony Nash, founder and CEO with Complete Intelligence.

Categories
Podcasts

BBC Business Matters: Vaccine mandates announced

Biden just announced that all Federal employees are required to be vaccinated. What does this mean to the US and especially the private sector? Tony Nash joins the BBC Business Matters for a discussion on this. Also discussed are the BRICS and how they are catching up to the world’s major economies and will the environment be a big priority in the next US election?

 

This podcast was published on September 10, 2021 and the original source can be found at https://www.bbc.co.uk/programmes/w172xvqj8vfxhr5.

 

BBC Business Matters Description:

US President, Joe Biden, has announced that all federal workers have to be vaccinated against Covid-19. He’s also instructing the Department of Labor to draft a rule mandating that all businesses with 100 or more employees require their workers to get vaccinated or face weekly testing. And as the BRICS leaders meet, is the loose alliance of Brazil, Russia, India, China and South Africa working? We hear from Professor Miles Kahler, a Senior Fellow at the Council on Foreign Relations in Washington DC. Facebook has been accused of breaking UK equality law in the way it handles job adverts. The campaign group Global Witness said the social network failed to prevent discriminatory targeting of ads, and its algorithm was biased in choosing who would see them, as Naomi Hirst from the organisation explains. Also in the programme, we find out why the issue of climate change has become such a dominant theme in the upcoming German federal elections. And the American car giant, Ford will stop production in India; we get analysis from Nikhil Chawla, a business journalist and proud Ford owner based in Delhi. We’re joined throughout the programme by Jyoti Malhotra, National & Strategic Affairs Editor at The Print; she’s with us from New Delhi. And Tony Nash, co-founder and Chief Economist at Complete Intelligence, is with us from Houston, Texas. (Photo of President Joe Biden by Kevin Dietsch/Getty Images).

 

Show Notes

 

FW: It’s good to hear you, Tony. Back last summer, when the vaccine was a fantasy, we didn’t know how far they were getting and how fast they were working. I remember an astute commentator on this show saying it answers the question, should the federal government get involved in forcing people to have it, if and when it becomes available said, “no way, no way, because it’ll polarize opinion. Leave it to business.” Is the President going too far with this?

 

TN: I do think he is. I think forcing this through the private sector as an enforcement vehicle is polarizing, will say that much. I think this will drive a political wedge, like very few other things, and I think it’s somewhat intentional. I’ll say I don’t necessarily believe that public health is the guideline. I’m looking right now at COVID figures for Texas, and the fatality rate is something like 40% lower than it was during the cycle we had in Q1 in February.

 

So I think people are looking at the data we’re accustomed to COVID, and we’re accustomed to these data, and I think he sounded quite a lot like he was lecturing and talking down to people. And the folks that have not been vaccinated wouldn’t really appreciate that. So it’s politically polarizing. There will be more States rights issues that come out of this than I think he had intended.

 

FW: Okay, that’s an interesting thing that we’ll be watching. Is it not the case or there are those who may disbelieve the figures, the assertion being that 97% or so of those in hospital with COVID have not been vaccinated, and that would suggest that the president’s got the message exactly right. These 80 million, whatever their reasons, they are the most vulnerable.

 

TN: So, I haven’t seen those data divided at the state level, and those data differ dramatically from what we see out of Israel, which is one of the only governments that’s got very transparent data on who is vaccinated, at what stage they’re vaccinated and so on. So the data from Israel tell us very differently than 97%. So whether I’m vaccinated or not isn’t necessarily a part of this discussion. I think what really matters is we have to look at data, and the American system is one where if you look at American health care, if you look at American public health, for the most part in our history, individuals have been able to decide on the course of their own treatment and what has happened with American government that’s happened under Trump. This is happening under Biden. This has happened at some state levels where governments are telling people how they have to manage health care, and it’s not left up to them. So, again, this is translated by a number of Americans, not as a public health policy. iIt’s translated as an individual and States rights policy. So we’ve already had a number of governors, Oklahoma, Georgia, Missouri, other places, Florida and Texas will come out soon, basically saying this will not be enforced in my state and this is a state rights issue.

 

FW: Very interesting. Let’s go a very quick one if you would have both of you about the corporate side. Seems to me we discussed this a bit on the show, Tony, that in America, a company has immense power to tell its employees and fire them. We talked to one instance about CNN firing three employees who haven’t had the jab. Is that something that the President can count on?

 

TN: Can you count on companies to do that? Yeah. I think you’ll have plenty of companies who will not do it. So it will likely come the Federal through OSHA, which is a health and safety Department in the US government, and they’ll issue mandates. The question is around enforcement mechanisms. I think the main problem with this is the forcing it on smaller companies. The expectation is that it would be on bigger companies, but it’s companies down to 100 staff. And you’ve got a lot of very independent, very willful heads of smaller companies who will outright refuse to do this. I think larger kind of corporate America folks, no problem. They’ll get it done

 

FW.  From a US perspective. Tony, thanks, Joy. From a US perspective, is this a kind disaster for Ford, or is he just a really hard nose business decision that has been made by Jim Farley and 2 billion for Ford? It’s affordable. Yeah.

 

TN: I think it’s just a business decision. I think Americans obviously want to expand overseas, but in markets where the difficult people understand. So I just think it’s seen as a business decision.

 

FW: And that moved to China. That Jose said that is the business decision.

 

TN: It is. Yeah. And for got some catching up to do with General Motors there as well. So I think that’s the bigger priority.

 

FW: Tony, react to that if you would, because there’s a suggestion and I might be taking this too far from what Jody was saying. But when we had the professor talking about these constant ideas of reforming the multilateral system and redefining a multipolar world, it sounds what Jet is suggesting is actually this is all a bit hypocritical because it’s going to be mono, polo or unipolar. It’s just going to be China, that’s all.

 

TN: Well, I think that’s possible. But I also think that if we look at the three most active participants in BRICS, Russia, India, China, they’re strategic competitors. Yes, they’re rising fast, but their strategic competitors and they’re neighbors. So I think BRICS is a really interesting organization, kind of to ensure that they don’t become competitors or aggressive competitors too quickly to be able to cooperate in finance, cooperate and kind of cross border things. Other social programs, investment, that sort of thing. I think I remember when BRICS was announced, and I think it was kind of a neat thing to have, but there wasn’t an understanding of how important these economies would actually be. Now that they’re there, of course, as Jose mentioned, Brazil in South Africa just haven’t kept up in terms of relevance and importance. But the Russia, India, China part of BRICS really has, it really has. And I think it’s necessary to keep the kind of temperature low between those countries. I think there’s a lot of friction between the or potential friction between those countries.

 

FW: So just to pick up on that. From a DC perspective, does the State Department watch a BRIC summit and think the three primarily, China, Russia, India, these are countries need to be following closely in what they do in their internal relationship because we have to watch them all for different reasons.

 

TN: Will the State Department watch the brick summit. I think they would. I am not sure what they would do with it, because I think the US has opportunities to apply diplomatic carrots and sticks in different ways outside of multilateral, because it’s one of the leading economies and one of the leading powers. It has opportunities outside of multilateral environments to do that. So what we have with BRICS is some countries that were, I guess, economically considered kind of small countries 15 years ago when it was formed. Now they’re actually big countries, and so they needed the multilateral environment in those days to get things done.

 

Now, they don’t necessarily need the multilateral environment as much. They can do more on their own. I would argue that any one of those top three BRICS countries potentially has more diplomatic ability than many countries in Europe. Whereas 1520 years ago, you couldn’t say that. So it’s really the countries themselves are a lot more powerful than they were. So I think it could potentially be an important organization to keep them somewhat aligned.

 

FW: Equipped Tony to you. Cop 26, just coming up in November. I guess that’s a full year ahead of the next midterms in the US. Would the environment play at all in the campaign?

 

TN: I think it will. I think it will be marginal. I think things like COVID and some social issues and the business cycle, to be honest, will be bigger issues than the environment. But of course, it’ll hit certain cities and certain demographics, but I don’t think it will be a major issue.

 

FW: Well, thank you both. It’s great having you with us. We’re off for now. Bye bye.

Categories
Podcasts

Blame the Hot Money

US markets continue their bullish trend. BFM 89.9 asks Tony Nash if this is due to better than expected corporate earnings in the coming quarters or the Fed monetary policy. Also discussed are the OPEC+ oil production and how oil will be affected by hurricane Ida, and what’s the status of supply chain specially around semiconductors?

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/blame-the-hot-money on September 2, 2021.

 

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Show Notes

 

WSN: We speak to Tony Nash, CEO of Complete Intelligence. Now, US markets, I think it’s a bit of a choppy day, but still, nonetheless, the trend is bullish one. And what is that based on, though, is it expectations of stronger corporate earnings this quarter or just driven by ample liquidity flooding financial markets?

 

TN: I think more the latter than the former. We saw really good corporate earnings in the previous quarter, but in the current quarter, we’re hearing more rumblings of trouble with earnings. And that’s part of the base effect in the previous quarters, in 2020, companies had cut a lot of costs late in the year, so they’re reaping the benefits now. We’re starting to see the base effects come in where they had already cut a lot of those expenses in Q3 of 2020. So now we’ll see that going forward, we won’t see as much kind of profitability.

 

So what’s the baked into the market right now? It’s the Fed, it’s stimulus. It’s an expectation of a $3 trillion fiscal stimulus bill. So if we start to hear that this $3 trillion fiscal infrastructure bill won’t happen, we’ll see some disappointment if we see the jobs numbers on Friday come in disappointing, we’ll see some dampened momentum. And if we hear any more talk about tapering, which I don’t think we will for at least six months. But if we do, we’ll see some downward pressure in the market.

 

So all of those things are possible. But in the meantime, the Fed is injecting $120 billion into the market every month to keep everyone happy. And markets seem to be taking it well.

 

WSN: And I want to stay on corporate earnings, because I just wonder whether the recent inflationary pressures on the economy will be reflected in perhaps lower margins for corporate’s incoming quarters.

 

TN: Sure, companies are feeling pressure not just with raw materials and input factors, but also with salaries. Wage inflation in the US is pretty high right now. Companies are feeling it from all sides. So I think those margins are much thinner, both on those base effects I mentioned earlier. Also inflationary effects, both in terms of input goods and wages.

 

PS: And you say you paint a bit more cloudy picture for the US, but if you compare the US economy and financial markets versus Europe and China, they really have outperformed global peer strike. Could you explain it disparities there?

 

TN: When you look at China, I think it really has a lot to do with stimulus. China is really late to the game in terms of providing stimulus. They spent quite a long time in 2020 and 2021 deleveraging their economy. So getting rid of debt. Very procyclical. China was shrinking and they were delivering, which is maybe healthy for the balance sheet, but not necessarily the best thing to do to grow the economy.

 

In Europe, the ECB is really nervous with inflation. And so they may take more aggressive action against inflation instead of continuing to loosen to accelerate the economy. So the US is outperformed because nobody thinks the Fed is going to take aggressive action year, certainly. And probably not at least until Q two of 2022.

 

WSN: And how do you think the US dollar will react against the Euro and the yen in light of all these recent FED announcements on the timing of the tapering and also the rate hikes?

 

TN: We have the dollar continuing to weaken through, say, November. And we’re starting to see some expectations of dollar strength, not a lot of strength, but marginal dollar strength starting in, say, November. And that could be on, say, ECB deciding to continue to loosen. It could be on China. Adding stimulus. Currency is a relative game. As central banks get more active globally relative to the US, it could really help weaken their currencies on a relative basis.

 

PS: And let’s talk about oil because I want to get your views on yesterday’s OPEC+ meeting. They are sticking to next month’s  oil production increases. What impact will that have on prices in view? There also Hurricane Ida has also hit US or production?

 

TN: Yeah. Well, he can. It has fit some under sea production, but it’s really hit more refining capacity than really production. So the bigger issue in the US is around gasoline prices and refining, than it is around kind of supply of oil with OPEC+, it’s kind of a status quo. Let’s move ahead as we had expected, which is a really good sign. Look, oil is trading between what, 67 and $75 generally, and that’s kind of their happy. So as long as it stays in that zone, OPEC will continue to move ahead and stay within the agreement. If it goes higher, then they may accelerate the production. If it goes lower, they may pull back a little bit.

 

WSN: And let’s stay on supply side disruptions. Right. We talked about that just a few minutes ago. But do you think that there are still concerns over this, especially for things like semiconductors and certain commodities?

 

TN: Oh, yeah. Absolutely. So the supply chain issues, we hear a lot about Chinese ports and backups to Chinese ports and these sorts of things. But the Port in Long Beach in the US is backed up, hugely backed up. So the supply chain shocks are not only in China. US ports have their own issues. So when I hear, say, American companies complain about supply chain issues in China, that’s not the only factor. It’s US ports catching up. It’s US ports that are delayed and so on and so forth.

 

So I don’t think we’re done with this. In fact, it may get a little bit worse because the holiday season is coming up in a few months. And if we think supply chains are backed up now, they may get even worse going into, say, October and November, especially to import into the US.

 

PS: I mean, some are even saying that this could even go on to, quarter 1, ’22 or even the likes of semi cons.

 

TN: Oh, absolutely. Semiconductor supply chains are incredibly complex. So for them to get out of these issues, there are multiple layers of issues that have to be reconciled, and it could easily be Q1 ’22 by the time we’re out of this.

 

WSN: All right. Thank you for your time. There was Tony Nash. CEO of Complete Intelligence, giving us his views on where world markets are hitting. And I think the interesting point is that, look, the bullish trend is here to stay as long as the Feds just keep rates where they are. Plus, of course, there are expectations with regards to the US stimulus plan on the infrastructure bill. Right. Which I think is now going through the House. And apparently there’s something like 700 amendments that the Republicans want this document through the Max.

 

PS: I know, but I think they are optimistic. I hope to prove this call in October, but Tony does point relatively bleak picture for the short term. September. October is also seasonally weak in the US and also the stimulus packages or end or swim September. Very interesting. What he’s saying about the Fed is not likely to say much about tapering for the next six months as well.

 

WSN: Yeah.

I mean, if you look at where markets are right. The S&P 500 is up 20%. The Nasdaq are almost close to 19%. The Dow Jones is 16%. If I was a fund manager, I would do nothing. In fact, I might be tempted to lock in my games. Right. Because the year is almost coming to a close. Do I want to take on more risk for the potential return of two? 3%, maybe not. So we might be heading into quieter months for at least one or two, maybe towards year end, and then we might see some book closing.

 

But till now, maybe everyone’s just taking a bit of a breather. Look at markets, at what kind of corporate earnings will be coming out, and let’s see where the politicians are up to.

 

PS: And I wonder whether there’s an opportunity to reallocate to other markets in Europe where you see some value and even Southeast Asia as well in the midterm long term as well, for sure.

 

WSN: I’m sure Financiers already considering the Strategic allocation for 2022 Actually and rotating into markets that perhaps did not do as well this year. Stay tuned. BFM 89.9.

Categories
QuickHit

QuickHit: What China is thinking right now?

What China is thinking right now?

China expert Chris Balding joins us this week for #QuickHit to discuss “What China is thinking right now?” What is the state of the Chinese economy? Are they really doing well in Covid? How about the deleveraging process, is that even real? And what’s happening to CNY? Also talked about are the politics around China especially how it relates to Afghanistan.

 

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This QuickHit episode was recorded on August 24, 2021.

 

The views and opinions expressed in this Sentiment has soured: How will governments and companies respond? (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: Hi, everyone. Thanks for joining us for another QuickHit. My name is Tony Nash with Complete Intelligence. Today we’re talking with Christopher Balding about what is China thinking now.

 

Chris, thanks for joining us. Can you let us know a few things about yourself? Give us a little background?

 

CB: Sure. I was a professor at Peking University in China for nine years and then two years in Vietnam at the Fulbright University Vietnam. And today I am a super genius in the United States.

 

TN: Yes, you are. Thanks for taking the time, Chris. You’re one of the very few people I know who’ve actually had on the ground experience in China with a Chinese government organization.

 

So I think it’s really important to go to people like you, who had experience like you to understand what kind of China or the Chinese government is thinking now. Of course, it’s not monolithic. There are a lot of different opinions, but it’s good to have that insider’s view.

 

So I want to start off as we look at where we are in COVID, we’re a year and a half into it, depending on the school of thought, maybe it did or didn’t start in China, but we hear that Chinese economy is doing great and they’ve come out of COVID really well, all these other things. I’m really curious your view on the state of the Chinese economy right now. And what are Chinese economic planners thinking right now as they kind of potentially go into year two of Covid.

 

CB: So I think there is a couple of highlights out of the Chinese economy. First of all is that they’ve resorted to the pretty similar playbook that they go back to every year, which is pump credit, pump construction and infrastructure type spending.

 

In the early part of this year, we saw a significant amounts of credit growth. That’s softened as we’ve moved into summertime. That’s primarily due to because there’s a very clear summer and fall building season that allows builders in China to do things because the weather becomes inclement in significant parts of the year. And then if you add in the Corona backlog, that kind of is essentially almost trying to put two years of expected growth into one year.

 

We actually saw a lot of that. And that front loaded a lot of the credit and demand for things like commodities. This is why you’ve seen such demand for things like coal and steel, which were quite high. We’ve seen that soften as firms built their inventory and really ramped up during the summer building season as the demand for credit has softened and some of the building has actually been undertaken. You’ve seen a softening of that which has caused you’ve already seen talk of maybe there’s going to be unleashing or the economy is a little bit softer than the planners would like. So there’s talk of unleashing some additional credit growth trying to stimulate different parts of the economy. We’ll have to wait and see if that happens.

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Generally speaking, the rule is, if there’s a debate about whether or not they’re going to unleash credit growth, I would definitely take the over.

 

TN: By about three times. Right. So one of the interesting things you mentioned is that you said that they expended credit in the early part of this year. But what I read from investment banks and what I’ve read from other people who look at China is that China just underwent this big deleveraging process. Is that real? I’m just not sure, because I see on one side that there’s this talk about deleveraging, but my gut tells me it may not necessarily be happening. Is it happening, or is it something that’s just happening on paper or what’s your view?

 

CB: It’s tough to understand the Chinese National Bureau of Statistics and PBOC’s math as to how they arrived at that, because if you’re just running more generalized numbers, it’s very clear that debt at all levels has continued to outpace GDP. So it’s very difficult to understand how they’re estimating a leveraging. And it’s important to note that we did not see, let’s say, the rapid, rapid expansion of economic growth that you saw, for instance, in the United States.

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And what I mean by that is, whereas any United States, maybe growth went from two or three to 5% relative, almost doubling, you know. You probably saw Chinese growth go for maybe like 5% last year to seven or 8% with the Corona boost where you have that base effect. And so you didn’t see it go to, like, 10, 12, 15% that you might have seen if it had really in relative terms, they doubled from the previous year.

 

And so it’s very difficult to understand how they arrive at those deleveraging numbers. And as we all know, China is famous for fudging their numbers. So it’s very difficult to understand how they’re arriving at those numbers.

 

TN: Right. No, I agree. I haven’t believed it when I’ve heard it, but I kind of nod along as if it’s real. But I think, you know, the Chinese economic data a lot more intimately than I do, but I just don’t see where it’s happening, where it’s actually materializing instead of just being debt transfers.

 

Okay. So earlier you said that Chinese economy is slowing. Now, from my perspective, that’s worrisome partly because you’re going into a big export season, and we’ve got some ports that are stopped up. We’ve also got an election next year with Xi Jinping being reelected, whether that’s in square quotes or not, but Xi Jinping being reelected next year.

 

In terms of the resources put towards stimulus this time around, do you expect that to be more intensive than normal?

 

CB: Typically, what you see. And you saw this the first time Xi was elected, you saw this second time Xi was elected. What you typically see is a pretty significant boost to fiscal outlays. And so I think if history is any guide, I think you’re probably going to see going in the fall and the first of year, it’s very, very likely you’re going to see some type of significant boost to fiscal outlays. And this pattern goes back many, many years well before Xi that when there are these elections. And I’m not sure if it’s a scare quotes or air quotes, but both seem to…

 

TN: Yeah.

 

CB: So I think it is very, very likely that you’re likely to see that. And one of the things I think that a lot of people have missed out on is yes, there were absolutely corporate, let’s say, bailouts or corporate funds for Corona. But one of the things is that in the United States, there were the large amounts of transfers directly to households. China has not enjoyed those transfers directly to households.

 

And so actually, consumer spending in China is actually pretty soft. And those are buying inflated data standards. And so I think that is something that is very important to note when we’re talking about the health of the Chinese consumer.

 

TN: Yep. That’s great. Okay. So I also want to talk about the supply chain issues. And I was just reading a story today about how Pudong Airport has been shut down. Cargo on Pudong Airport is going to be much slower for a period of time because of anothe Covid outbreak. This sort of thing. Do you see ongoing port capacity issues related to COVID? Is that something that you’re kind of concerned about?

 

CB: I think that is something that you’re going to be seeing for definitely the foreseeable future. And I should say it’s not just China. You’re seeing a lot of this in other parts of the world that I know, specifically Vietnam, the Middle East. I’ve heard of similar things in Europe where they are just straining at capacity. Sometimes it’s due to COVID shut down. Sometimes it’s due to other issues. But absolutely, these are issues that I think are not going away anytime soon.

 

And it is, I mean one of the debates in the United States right now is transitory or structural inflation. And I think, not to be capping out on the issue, but I do think it is kind of a mix of both. And I think the supply chain issues don’t be surprised if we’re looking at very likely two years before all these issues are really worked through, because when people went to, let’s say, just in time or contract manufacturing, what that did is that gave you less wiggle room. So you did not just have a massive warehouse of supply that you inventory, and then you could draw down as necessary where it would give you three months to make a mistake. Now people were essentially saying, I got one week of inventory, and if that one week gets shot, I’m in deep trouble.

 

So the chips are, there’s chips, there’s car, there’s Corona shutdowns, there’s capacity issues at some ports. And so it’s going to take a couple of years, probably to work through all these issues to return to what we think of as some degree of normalcy.

 

TN: Right. What’s interesting to me about that is the previous administration of the US tried to bring manufacturing businesses back to the US.

 

Now, with COVID because of the global supply chain issues and the intermittent supply issues, there’s more of a move to bring things back, at least to North America. I know lots going into Mexico right now. Some’s going into the US to minimize the disruption of things, especially in electronic supply chain.

 

So it seems like regardless of the kind of official policy, whether it’s trade policy or just say public health policy, it looks like more of this regionalization is happening. Does that make sense to you?

 

CB: Yeah, absolutely. I mean, look, nobody is going to announce that they’re leaving China for many reasons. But nobody’s going to announce that they’re leaving China. But you do absolutely see a spread of manufacturing capabilities.

 

Whether that is because they want to have multiple manufacturing bases, they want to be more diversified, whether it’s because of IT issues, whether it’s because of Corona risks, tariffs, all of these issues, there is absolutely increasing diversification of manufacturing capabilities, whether it’s Mexico, India, Malaysia, all of these different places. You’ve even seen Africa doing relatively well in certain areas. So it has absolutely happened.

 

TN: Okay. One last question on the economy then we’ll move to kind of politics and China’s place in the world. What’s the thought behind the elevated CNY? We’re trading much higher than we have for a long time, and it stayed there, right? It’s pegged right around 6.4 something, and it’s been there since Q1, I think. Why the persistent strength in CNY?

 

CB: Well, I mean, I think first of all, they have been running during Corona pretty significant surpluses. The United States has exports to China and other parts of the world have declined, not insignificantly or remained flat as we’re importing a lot more. That’s number one.

 

I think also the dollar has gone into a specific range. And the way that I think of the CNY is it’s basically just a reverse USB tracker, which I think explains most of what we’re seeing. I think what they’re trying to do and the reason that China has been buying some dollars, not in major amounts, but I think they kind of have, like, ICBC and CCB, those types of banks acting as dollar cushions for lack of a better term, is that they don’t want it to appreciate too much for a number of reasons, because they know they’ve become more expensive and that would just make it that much more expensive. So in a way, I think they’re trying to manage that, manage that flow. But I think it’s still generally within a range where it’s like you can say they’re within spitting distance of what their index say they should be. Okay, that’s fair.

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TN: Okay. Now let’s move on to politics. Let’s move on to kind of China’s big, long term, multi hundred year plan to rule the world, which I think is not real.

 

So let’s talk about Afghanistan. This just happened over the last couple of weeks, and there’s a few that China is going to be the master winner of the US withdrawal from Afghanistan. I think there are multiple perspectives on that, but the consensus view seems to be that the US really did had to job on the withdrawal. And the ultimate winner of this is China. Can you kind of walk me through some of your views on that? What are some of the possibilities there with China and Afghanistan?

 

CB: Sure. So I think it is very fair to say that the United States has pretty badly bungled the withdrawal. You know, why, you know, we should have waited until we’d already evacuated all the army to say we’re going to start evacuating US citizens and Afghani translators and people like that.

 

One of the things I do think is absolutely happening. And this is not just China. And you’ve heard this from country after country. Taiwan, Germany, UK on down is they are saying we need to go back to the drawing board and re evaluate everything we think we know.

 

Okay. And somebody that I was talking to, I think, expressed it very well is the United States still has credibility because we can move large amounts of assets, whether it’s military, governmental, other private sector, we can bring significant assets and influence to the table. What, this has really changed in a lot of people’s minds is confidence.

 

TN: Yes. That’s fair.

 

CB: That has changed a lot of people’s mind. So you have a lot of people going back to the drawing board. One of the things I’m going to be a little bit hesitant to do is start pronouncing winners, losers, and this is what XYZ country is going to do in ABC country is going to do. And the reason I say that is it’s very, very plausible to construct a scenario where the Taliban and the CCP become BFFs. Okay?

 

TN: Sure.

 

CB: I mean, if China is shipping large amounts of fentanyl out of northeast China, it’s not a crazy scenario to say they partner with the Taliban to start shipping large amounts of opium into the United States at the same time.

 

TN: Sure.

 

CB: Not a crazy scenario. It’s also not a crazy scenario for the Taliban to start bombing China within a year or two. Okay. You could very easily construct those types of scenarios that lead to that. Okay. So it’s very, very difficult to construct those types of scenarios with any what I would consider a degree of certainty. Okay?

 

TN: Sure. So what about the, the China-Pakistan relationship? $46 billion of investment, supposedly, supposedly a tight relationship there. That’s arguable. Do you think that pays dividends in Afghanistan, or is that kind of something that’s a little bit, I wouldn’t say irrelevant, but a little bit less directly connected.

 

CB: So I think Pakistan is actually very pretty directly involved in all of this. But again, it’s very difficult to say with a high degree of certainty what’s happening there because Pakistan has very direct connections into both the Taliban, Al Qaeda. Some would even say that they were a Pakistani security service creation. At the same time, it’s well known that there are blood feuds between groups within each of those organizations.

 

So it’s very difficult to get to say exactly who the winner, loser there. With regards to China and Pakistan, one of the things that you’ve seen very clearly is that pretty much the Pakistani government and the Pakistani elites are effectively compromised by China. They will say nothing about wingers and other issues.

 

At the same time, everything, I think indicative on the ground and of the mass population is that there is maybe not extreme, but I would say broad discontent with the Pakistani relationship with China for many reasons.

 

TN: From who and Pakistan? Is it from the armed forces? Is it from other parts of the government, from regular folks who isn’t happy with that relationship?

 

CB: I think a lot of folks broadly. The business community. I think there’s a growing sense that they are effectively a Chinese colony. One Pakistani I know who described it as such. So I think there is very broad discontent. And as we all know, Pakistan has quite the lengthy history of governmental instability.

 

So similar to what you’ve seen in other countries in the region, it’s very easy to paint a picture, a scenario where the current government remains compromised and under the thumb of the CCP for years to come. I think it’s also plausible that a new government or some type of political instability happens in Pakistan. And all of a sudden, there’s an about face on how to manage relationships with China.

 

Generally speaking, though, I think there is going to be very tight coordination between Beijing, Islamabad and Kabul because those… Pakistan, I mean, almost anything that happens in Afghanistan is going to be maybe not controlled by Pakistan. I think that overstate it. But there’s going to be large amounts of information flows and influence back and forth happens over what happens in Afghanistan.

 

TN: Yeah. Okay. That’s all really interesting. I think we could spend a long time talking about China, Pakistan, Afghanistan, India, Russia, kind of where all those countries come together, Central Asia. But I want to end on this.

 

We’ve seen, a lot really changed with US standing in the world over the past couple of weeks over Afghanistan. We’ve seen a lot change in the US China relationship over the past year with the new administration. And so let’s talk for a minute about the overall US China relationship. What’s your thought there? Are they getting along? Is there a constructive dialogue? How do issues like Taiwan fit within that discussion? Can you just help me think about some of your thoughts there?

 

CB: So I was talking to someone, and I think they put succinctly the way that I would characterize the Biden administration’s record on China. You can’t criticize them for what they’ve done on China because they really haven’t done anything at all. Okay. Other than adding a couple of names to the Sanctiosn books, there really has not anything taken place.

 

They promised that they were going to get out their China strategy plan in June. Then there were rumblings that might happen in July, where now at almost rapidly approaching September 1. And now there’s not even talk of when it might be released. So really, nothing has been happened except for the Alaska meeting, which apparently went over like a lead balloon.

 

Everything right now just seems to be a stalemate. And the Biden administration is worrying, and that China is still moving forward, and the Biden administration is basically doing nothing.

 

The most telling point to me about the by administration approach, and I think this is something I think you should fault in. In fairness, Trump for is look, we can talk about values and do the right thing and all this kind of good stuff. But the United States, at some point has to actually put resources into this effort.

 

And the Trump administration, other than political capital with allies or other countries, never put any real hard resources or assets into these issues. And the point I would make is the Biden administration has made a point of spending literally trillions of dollars. And to the best of my knowledge, there has been almost zero spending passed that has really anything to do with China. Okay.

 

We cannot continue to talk to countries like Vietnam, Malaysia, South Korea, Japan. You cannot talk about the threat China poses and never spend any money on the issue.

 

TN: Sure.

 

CB: Okay. And look, this doesn’t have to mean we go out and increase military spending by 20%. This could simply mean we’re going to go into Vietnam and say, we want to have a development program and, you know, help solve issues. This can mean capitalizing the Development Finance Corporation to help countries like India and Malaysia and say, look, there is a real opportunity that does not involve the Belt and Road, where there’s going to be green standards or these non-corrupt standards and things like this to make sure that this money is really helping your country. You know, and it was probably something that was negotiated could be all the way back to the Obama administration.

 

There was some type of military center opened in, I believe, Jakarta with the Indonesian government that was supposed to have other governments. It’s a small center. Even those types of things. There’s simply not the resources being dedicated. And I think that’s indicative of where this ranks within the Biden administration priorities.

 

TN: I’ll be honest, Chris, it sounds like a mess. It sounds pretty bleak to me.

 

So great. I really appreciate this. I think if anybody knows has an idea of what China is thinking, I think you’re the guy. And I really, really appreciate your time.

 

Everyone watching. Please please subscribe to our YouTube channel. The more we have, the more we can bring to you as a part of our videos. And, Chris, thank you so much. And thanks to everyone. We’ll see you on the next interview. Thanks.

Categories
QuickHit

Sentiment has soured: How will governments and companies respond? (Part 2)

Sentiment has soured: How will governments and companies respond? (Part 2)

In this second part, Sam and Marko discussed possible tapering, what can the government do to help private companies, how the consumer sentiment is looking right now, what should you do with your investment in this Delta variant scare? Are vaccines really effective? And what is this thing that the Biden administration needs to do right or they’ll be dead?

 

Please go here for the first part. 

 

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This QuickHit episode was recorded on August 19, 2021.

 

The views and opinions expressed in this Sentiment has soured: How will governments and companies respond? (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: Sounds like both of you agree that China is going to do more stimulus. I think they’re late. I think they should have started five or six months ago. But better now than never. Right. So it sounds to me like you believe that there will be the beginning of a taper, maybe a small beginning of a taper late this year. Is that fair to say?

 

SR: Yeah, I think it’s fair to say that there will be some form of taper. Okay. I don’t know, even if it’s just rhetoric, as we move into 2022, at least with what we know right now, I don’t think they should. But what I think they should do and what they’re likely to do are two wildly different things.

 

TN: So even if it say 10 billion a month, which is nothing compared to the entire kind of stimulus, monetary stimulus are doing right now, that would have a dramatic sentimental chain. Is that your view?

 

SR: Yes. So it’s all about that incremental change in Cinnamon. It’s not about the incremental change in the addition to the portfolio.

 

TN: Right. Marko, are you the same? Do you think there’s a change in the sentiment of the Fed and there’s going to be a move toward tapering late in the year?

 

MP: I mean, I think tapering happened in June at the FRC meeting. And so that’s… Because that’s when the Fed incrementally turned hawkish. The DXY dropped quite significantly after the meeting. So I think that the risk in your view is that a lot of the things that we’re talking about right now have been slowly priced in over a period of time. And while oil prices and S&P 500 haven’t really corrected to this view reality. You know, so S&P 500 is reaching a new high, except for the last two days. Oil prices have started to come down finally.

 

 

 

 

Brent Crude Oil
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Now the 10-year has actually been pretty stable through the last couple of weeks worth of volatility. And that tells me a couple of things. I think the bottom market price, a lot of the things we’re talking about already. The second issue is that fiscal policy is really tricky when we talk about it.

CBOT 10-year US Treasury Note
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And here’s what I mean. 1953 we had a fiscal cliff recession after the Korean War. But that’s because the fiscal cliff was very clean, very simple. We spend a lot of money on bullet casings and tanks and airplanes during the Korean War, and then that fiscal spend stayed on the Korean Peninsula. We couldn’t take it back with us in 1953. In other words, we got a fiscal cliff recession.

 

This time around, the 1.9 trillion, you know, fiscal stimulus we had earlier this year, that actually, in a curial mathematical terms, shows up as a huge fiscal cliff next year. But that actually lives on on household balance sheets. And so that’s where I would say that like, let’s see how the Delta variant issue resolves itself, because in one month, here’s what I know.

 

I know the savings rate in the United States, the personal savings rate is still elevated at 9.6%. I know that revolving credit is going through the roof, and the households are re-leveraging themselves in a way that they have it for ten years. The US consumer is acting in the ways they acted in the 90s and 2000s.

 

If you look at household debt, percent of GDP, you got this long period of deleveraging for the past ten years. And now it’s coming back up. And so to me, that’s where I think the fiscal cliff of next year is overstated. And the reason that even a ten year fiscal package matters is because you’re talking about a ten-year bond. If I’m going to hold a ten-year bond, that on the back end of that 10-year, there is Trump tax cut level of unnecessary fiscal stimulus.

 

Let me say that again, what this fiscal spend right now is going to produce a similar procyclical fiscal thrust that we had during the Trump administrations in the last two years, through doc cuts, this time through infrastructure spending. That’s going to create a modest fiscal thrust, positive fiscal thrust for the duration of the asset that you’re holding. And I think that the market will still have to respond to that, even though next year there’s no way to avoid mathematical fiscal flip.

 

TN: Interesting. So. All of these things together, just going back to the reason I initially contacted you guys. I was hearing companies telling me that their Q3 revenues were really, they were downgrading them, and they’re really worried about their performance in Q3. And I think we’ve seen that or I’ve seen it anecdotally.

 

We saw tourism not necessarily be what we thought it would be. We’ve seen a lot of things happen that we didn’t really think would happen over the summer or not happen that we thought would happen. So how are you seeing these policies or how do you expect these policies to manifest at the company level? And when do you expect them to help companies to move forward?

 

MP: Well, I don’t think any policies will help companies. I think what will help companies is once Covid cases go down, and people kind of stop being afraid of the Delta wave.

 

Right now, if you look at hotel stocks. Hotel stocks are back through, like November 20th level, like they’re back to pre-Pfizer result levels. And I think that that’s a great investment opportunity. I would be long COVID place right now because, you know, the data from Israel, the data from Iceland, the data from a lot of different places that are fully, almost fully vaccinated are pretty clear, which is that vaccinated people can absolutely get Covid, and very few of them have adverse effects. The efficiency is actually at very high levels. A lot of people misinterpret, a lot of people… Sorry, the media is misinterpreting the data. And once you account for age disparities and so on, the efficiency here is like in the 90s.

 

TN: So it’s amazing.

 

MP: Yeah. Look, it’s a simple fact. Now that’s going to take some time as Sam said, I think that’s going to be articulating the data for the next month. I think that you have a great entry point into the Covid place right now. And I don’t think that any of the policies we’re really talking about are going to have much of an effect on earnings over the next quarter.

 

TN: I’ll give you a data point that I was looking at earlier today. Texas right now has the same number of cases that it had in Feb of ’21. Okay. But the daily fatalities are 60% lower than they were in Feb. Okay. So the case counts are just as high, but the fatalities are dramatically lower. And that’s good news, right.

 

Texas Covid cases and fatalities

 

MP: Look, Tony, I would study really the case of Israel, because if you study the overall numbers in Israel, you come up with a figure. I think it’s 60% effectiveness for Pfizer, which is lower than advertising, but that’s actually a mathematical concept called a Sisyphus paradox.

 

And what’s happening is that we need to segregate the different age cohorts not just average them together.

 

TN: That’s right.

 

MP: You know, because the elderly tends to be more vaccinated. You have a larger pool of older people who tend to have received a vaccine. They also tend to go to a hospital more often with a respiratory disease, even though they’re vaccinated.

 

So you can’t just average everyone together. The actual vaccine efficacy is in the 90s for all cohorts. Except in the 80s for some of the much older, over 80. It’s, like, about 80% effective. And so, yeah, I think a lot of this is… You know where I want to compare Covid to? And I think Sam will appreciate this. I compared it to the Euro area crisis.

 

You could have made a call in 2010 that this thing was over. Like once Germany like bit the bullet and bailed out Greece the first time? Like it was over, guys. But every time a new country showed up, he was like, Whoa. Here goes Portugal. Oh, my God! The world’s gonna end! And it’s like, similarly COVID, like, we know where we’re headed. Like, every wave is gonna cause sentiment issues and so on. But I would just bet against those.

 

TN: That’s a good call. I like that. I like the optimism there, and I like the perspective there. I think that’s really interesting. Sam, what do you think?

 

SR: I think there’s a combination of two things. One, I think Marco is 100%, right? That this is an awful lot like the Euro area crisis. Every single time, like Greece was the first big bang. Then you had the ripple effect to Portugal. Then it was Spain. And everybody was wondering what the next set of fall was and had the correction of 2011. That was fun. You had these longer term kind of ripples.

 

I think there’s going to continue to be ripples this time around. And the question is in my mind, it’s really difficult to predict what people sentiment around those ripples are going to be. I think we can look through them for the next five to ten years and say it’s all going to be fine. This is the way it’s going to play out.

 

The real question is, how does the American consumer mindset, how does that actually grasp this ripple to move through it? And how does China react? How does Europe react? Right. There’s a number of factors that play in here, but I think the really difficult and maybe not as priced in as they should be. To Marco’s point. I think this is a really long term, very strange kind of predicament that we’re in where vaccines are really good. They work really, really well.

 

How do people’s minds begin to grasp it? And do they begin to look through? We get the higher vaccine rates? Do we really power through this in a meaningful way, very, very quickly, or does it continue to be highly volatile on the consumer sentiment front? Because if consumer sentiment continues to fall, it’s going to be a big problem for the back half of this year. And that I mean. It’s kind of…

 

TN: We’re right there at the back there in the back half of the year, right? That. This is a terrible time for consumer sentiment to fall because we’re at the precipice of kind of holiday season buying. Not quite there yet, but if it stays for two more months, it gets pretty bad.

 

SR: It does get pretty bad. But I think this is also one of those points that I think could really be a tailwind to Marko’s earlier comments about fiscal stimulus and fiscal stimulus being higher than anticipated. You continue to have consumer sentiment fall. You continue to have people fearful of Delta, you have a couple of bad job prints, and all of a sudden you’re going to have much higher fiscal spend. You’re going to have a very dovish Fed.

 

TN: Right.

 

SR: I think that’s the risk to call it “the market.” That’s the risk to kind of my side of Marko and I’s bet is if all of a sudden this fear actually really ingrains itself within individuals, it’s going to be a huge, huge issue as we move into the Christmas buying season for companies, Christmas buying season for consumers, and you’re going to get big checks written out of Washington, regardless of the geopolitical situation, regardless of whether or not people want to say Biden might be lame duck because of Afghanistan, etc.

 

All of a sudden you’re going to have a Fed that’s very concerned, thinking it was a ripping economy with incredible inflation that wasn’t going anywhere. You’re going to have them reverse very, very quickly. You’re going to have senators on both sides of the aisle very concerned that they just, they might get blamed for a recession.

 

It’s going to be a really interesting queue for.

 

TN: It is.

 

MP: That’s why it’s a dynamic environment. Right. And and what I would say is like, look, I have certainty on the Delta wave. Certainty. Every wave we’ve had has crested, other than in emerging markets because their testing is poor. So it’s actually a mega wave that we constantly think is over, but it isn’t.

 

In the US we know how the story plays up. We know it. It’s a four to six week wave. The challenge here Tony, is that we’re talking in the middle of this wave. We have probably another two to three weeks of upswing, and then we’re going to have a down swing in cases. And by the way, I know this with a science, like, a hundred percent certainty because we had waves collapse even before we had vaccines.

 

So this is a really important point, because if the Fed reacts to something that is extremely impermanent, something that’s over in three weeks, if the Fed at Jacksonhole and subsequently in September waivers, you know, I mean, that will just set, I think the market alight, in my view. I think that will collapse the dollar and they will sell the bond, because it will have been using this, you know, temporary blip in sentiments to justify a changing course.

 

The other thing I would say is, like, so Sam mention Afghanistan. I think he’s right to mention it. I think it’s really significant, and it’s significant because of this. I think… I’ve always expected that during the summer, the fiscal policy would get much more challenging. And now, because of the Republicans, I think moderate Democrats in the Senate versus progressive Democrats in the House were always going to try to eat each other alive.

 

But now, with this utter failure in Afghanistan, that looks really, really bad, they are going to circle the wagons on fiscal calls because the last remaining, the last remaining lever of the Biden administration is this fiscal package. If they don’t get it through, guys. Yeah. The Biden administration is done. And I mean, I’m not talking about midterms either. So they have to do something on fiscal. Right.

 

So this is why the stakes have now become much higher. They’re gonna pay Mansion. They’re gonna pay Cinema. They’re gonna get deep water ports in Arizona and West Virginia to get their compliant with a fiscal deal. You know what I mean? Like, there’s gonna be so much more. I wish I was living in West Virginia. I mean, they’re gonna have ice rinks in every little town. It’s gonna be amazing.

 

And so this is something to keep in mind, I think on that front, too. So I agree with Sam. I think it’s a really good point of how these things are very dynamic and they reinforce each other. And I just think that the political pack of lease resistance in every single issue we’re talking about here leads to more profligacy.

 

TN: Yeah, I think you’re right. I think at least for the near term, that’s the bias, is exactly in that direction.

 

Okay. Guys. Thank you so much. Again, I think we could go on for hours with this, and I love this discussion, but I really appreciate your time.

 

For everyone who’s watching. Please subscribe to our YouTube channel, where we need a few more subscribers to bring you a few more capabilities on our channel. If you don’t mind, please subscribe.

 

And Sam and Marko. Really appreciate your time. Thanks very much.

 

MP: Thank you. Thank you.

 

TN: Let’s do it again, and I want to come back in January and see who wins.

 

MP: Yeah, sure. We should definitely do that. We didn’t tell people when we been into, but it’s like a really nice steak dinner, I think was the… If the 10-year is at like between one point 49 and one point 51, I think we just…