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

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

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

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

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

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

Show Notes

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

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

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

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

DW: Good morning, Peter. How are you?

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

CC: Good morning, Peter.

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

TN: Thank you, Peter.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Week Ahead

The Week Ahead – 7 Mar 2022

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

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

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

Follow The Week Ahead experts on Twitter:



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

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

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

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

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

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

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

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

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

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

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

TN: Tracy?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: So weird.

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

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

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

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

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

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

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

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

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

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

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

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

TS: Something decided. Yeah.

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

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

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

TN: Are their pipelines between Russia and China?

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

TN: Okay.

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

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

TS: No, that was buying jet fuel.

TN: Okay.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AM: Got you.

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

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

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

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

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

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

SR: Yes.

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

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

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

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

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

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

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

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

AM: Yes.

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

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

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

TS: Thank you.

AM: Thanks, Tony.

SR: Thank you.


The year ahead: What have we learned from 2021? (Part 2)

Continuing the discussion with Patrick Perret-Green of PPG Macro. This second part focuses on China’s role globally and what it will look like in 2022, especially considering the real estate industry? With the US economy, why is Patrick so skeptical about it recovering and what does the stimulus have to do with that? And what about taper tantrum? Why does he believe it already happened?

Please watch Part 1 here, if you have not already.

PPG started in 1997 in research where he learned how bank balance sheets work. He also run the strategy for Citi for rates and effects in Asia and at one point worked out in Sydney. And in the past five years now, he’s been focused on the global macro environment. 

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This QuickHit episode was recorded on December 16, 2021.

The views and opinions expressed in this The year ahead: What have we learned from 2021? (Part 2) Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.


Show Notes

TN: When you look at what’s happening in China domestically, with the economy and with the political structure, I’m also curious about their outward political projection. And I do worry about Northeast Asia. Not just China, but Japan, Korea. And I’m curious, since you have such a historical background, I’m curious what you think about China in terms of political projection, say for 2022. Are you worried that they’re going to become aggressive in ’22?

PPG: Not ’22. You’ve got enough crap on your own doorstep at home without exacerbating the situation. And if you actually look through what’s going on, well, you can read what the Global Times says and things like the Wegar bill is clearly going to cause some short term aggravation. But overall, my sense is over the past few months, we’ve had a more of a nuanced approach that we need to just tone it down a bit, just dampen down the Wolf Warriors a little bit.

TN: They’re getting it.

PPG: You know what I mean? Down the line, ultimately. Clearly, Japan is arming significantly. Australia. We’ve got the whole quad or whatever you want to call it.

TN: Right.

PPG: One of the biggest problems, of course, has been the abject failure of US foreign policy over the past 20 years. So apart from Gulf War 2, worst disastrous war in history ever when we look at the consequences. Then the GFC.

So everyone they’re all focused on various different things. China’s love the vacuum and it’s been able to get away with loads of stuff, And Biden’s foreign policy towards China is not just China, obviously, but other places abject. Much as it irritates, so over here, I told people people, they love ranting about Trump.

Well, presentationally, he was awful. Foreign policy actually was the best foreign policy that came from the US in decades. Well, okay, assisted by people calling the establishment as well.

TN: But. The difference there is it was outcomes based foreign policy. Right. And I think what Americans have forgotten, particularly over the last 30 years, is it’s really been input space, foreign policy, values and other stuff, which is great. But we had, I think, through the probably 50s, a very pragmatic output based foreign policy. What are the outcomes? That’s the objective. And diplomacy school, my graduate work was in diplomacy, they’ve really focused on the other side of the equation with a fuzzy idea of the outcomes.

And I think what Trump brought, like him or hate him, what he brought was a focus on, a dogged focus on the outcomes of foreign policy. Right. A lot of people hate him. That’s fine. But it was a very pragmatic foreign policy environment in the US.

PPG: Yeah, going forward. And I think there’s a legacy of that now. The one thing the Congress, the only bypass is an issue on the hill is China. And Trump didn’t give a damn about human rights in Uighurs or Hong Kong. They veto proof majorities that he wasn’t going to go through the humiliation of being having a veto overturned. So he just had to roll with it. It actually was more of an inconvenience for him, I think. And then he’s people like Pompeo and military as well.

Overall, I think China, going back to the South China Morning Post article. They were saying that China could hit 5% growth with all the stimulus. Now, if you look at what will GDP activities now and the fixed asset investment. This year, forget about the year-on-year number because that’s the source, but it’s only grown. So I go through the data. I do a lot of data mining. I’m not particularly quantitative. I just sit there with some excel one plus times that times that times that.

TN: Sure.

PPG: Well, there’s only growth nominal terms, 1.6% year to date.

TN: Right. That’s a developed economy number. That’s not a growth economy number.

PPG: That’s a nominal number. Don’t forget. So given the fixed active effort uses lots of steel and cement and commodities which have all gone up in price. Actually, that number is a big fat, real negative. That’s sort of 49 year to date. I think the MBS came out year to date, that’s 49 trillion CNY. So pretty much still out there. That good 4 to 5% of GDP. Retail sales are only up 3.9%. That allows CPI at 1.6%. Either number is still like the lowest on record outside of the immediate pandemic shutdown.

So you sort of wonder where on Earth they come up with their growth numbers for the year? And for it, they’ve got a bit of boost to their exports from the trade surplus and a lack of collapse in tourism because Chinese is a big tourist. So the current account is being boosted. So that flatters the GDP. But even the Chinese next year expect net exports to come down. And if I’m right about the durable goods argument, then that’s even worse for the Chinese trade surface.

TN: Sure. I think you’re right.

PPG: So you’re left with what can they do?

TN: Can I ask you also something because you mentioned retail sales and consumer goods. I’m curious. With all of the real estate woes in China, how much of consumer debt in China is secured by real estate assets? Is that an issue? And how much of a crimp will that put on consumer spending?

PPG: That’s a tough one, because we know overall, the LTVs are very low. But we also know there’s 50 to 60 million vacant apartments. Chinese have a surreal concept about owning. They count as an investment property.

And if you rent it out, it sort of loses its original status. For what’s the description. But the problem is if you’re introducing these property taxes and you’re going in like that, well, then you are seeing second hand homes. I mean, the official home numbers are nonsense when we know full well that developers are sending stuff at big deep discounts.

TN: Right.

PPG: But by large, I think Chinese will just, it will affect sentiment. And some people are highly leveraged. So there are. Personal bankruptcy is still an infant industry in China. It’s not really established in the courts.

TN: There’s so much around it. It’s terrible.

PPG: It clearly is already dampening consumer confidence. And if the real estate is slowing in production, so we know that new sites, new land sales collapse. So that tells you going forward over the next two years, new construction activity is going to be much reduced. And if you’re not building homes, then you’re not going to be filling them with washing machines.

TN: Right.

PPG: I was actually looking at I think it was a big lift manufacturers like Otis and stuff like that. And you’re just going like, you look at the stock price and I think they’re up there and you’re going, like, well, Chinese real estate can’t go down there. You’re just thinking like, yeah, I mean, I basically have a big aversion to anything related or household good related book stock, but I’m not an equity man. I’m a bond man through and through. That’s what I do.

TN: It all makes sense. The logic is there. And given the direction we’re headed, all of this makes a huge amount of sense, especially for kind of ’22. I think 21 a lot of it’s behind us. And there are a lot of questions and a lot of I think, still skepticism around what we’ve heard globally in ’21 about the impact of spending and monetary policy.

But, Patrick, if you don’t mind, you had mentioned US foreign policy. So let’s focus on the US for a minute. And with the midterm elections in the US, and you seem to be skeptical about kind of positive momentum in the US economy, I’m really curious what your view on the US is for the year ahead?

PPG: Well, we got two things. One, we’ve got a big fiscal contraction. We shouldn’t underestimate how much the fiscal expansion has flattered the US economy because it was so large and that’s clearly massively in reverse.

One of the things, I don’t know the exact details of it, but something that US equity analyst convenience to ignore when it comes to earnings is if I ask the question, well, don’t you think 800 billion of PPP loans might have flattered your fingers as a whole? All the other loans to Airlines or stuff like that? US Airlines basically got extremely generously treated. UK Airlines haven’t. Like VA or Virgin Aircraft.

TN: All Americans are really unhappy about all the money the airlines got because the quality of service is terrible.

PPG: Yes. But, for example, the distortions, it’s really like they’re still echoing through. Like, I was talking about the monetary stimulus. It takes longer to pass through the economy. What’s the analogy? It’s like a python eating an elephant.

TN: Right.

PPG: It just takes longer to digest.

TN: Right.

PPG: Probably, extreme example. You get the point. When we look at all the fiscal front, we know that’s much less the hope for fiscal stimulus if you think where we were at the beginning of this year and everyone was going, oh, wow. It’s great. Biden’s going to push so much through. Well, we only just got the infrastructure bill through.

TN: Underwhelming infrastructure bill.

PPG: Yeah. And Build Back Better is still not through. And the fact the centrist Democrats are resisting not just Manchin, but overall, there’s much more of a realization that just look at Biden’s approval role. But the good thing is it’s supposed to be damping down the progressive, different word for them.

And then clearly Virginia shot the dams. And it’s basically long standing. Congresspeople are retiring in record numbers because they don’t want to have the humiliation of losing their district coming up. So let’s presume that the form book is correct. That basically Republicans probably take both houses. Certainly the House. Well, that stymies everything.

The administration has got a window doing stuff, plus dealing with inflation and stuff like that. And it’s always like, well, now you’ve got the administration going, well, we want to do this. But actually, Holy shit, the inflation has got out of control. We need the Fed to come in. And lo and behold, the Fed has just had, we’ve had a big move in short term rates pricing to the point when you’ve got 60 basis point increase in the dots, which we’ve never had before.

And if you said to someone a year ago, what do you think would happen if 60 basis points was added to the dots? Between what quarter? They say the dollar would surge. The curve was flattened. In fact, what we’re seeing is because so much is priced in that the curve is steepening and the dollar is softening. But there are other elements going on there as well.

And if the US economy in the great, you know, between the greatest economy ever couldn’t handle rates going back to two and a half percent and a minor reduction in the size of the balance sheets. And my view was that Fed should have probably stopped at one and three quarters rather than two and a half at most, because they forgot about the lags that they keep on telling us about. That the idea of the US economy with so much more debt, normally, it’s gone from 240%, 250% of GDP to 275 now.

TN: Right.

PPG: Basically, we’ll bring that down a little bit. But it’s gone up by 10% share GDP. So how sensitive is the US economy going to be to 150 basis points? Certainly. This is what the Fed is talking about now, by the end of 2023. Another 50 in ’24 plus balance sheet reduction as well. I just can’t see it getting there. So I’m skeptic that we’ll necessarily see Fed funds getting back to 1%.

TN: Two years is a long time.

PPG: Two years is a long time.

TN: I think, in general terms what I’m seeing. And I’m not sure if this is what you’re saying, but for the past two years, we’ve seen a private sector that’s been fixated on the public sector. Meaning the Covid regulations, the Covid stimulus, all this stuff. And it seems to me that with that stimulus disappearing and with the chaos in DC and at the state level, private sector will start focusing on the private sector and their customers instead of government. Does that sound fair?

PPG: Yeah. Although let’s not be too nice on the private sector. There’s large parts of the private sector that clearly gouged. The interesting one is, of course, global shipping. So if global shipping really disrupted and the costs have really gone up so much, how come is it that people like mask have made more money in the past year than they’ve made in the past 15 years combined? Because it’s clearly capitalized. Oligopoly is going on there, and they are gouging people. That will fade over time.

My biggest concern is actually what is the risk of a demand shock? So the Fed starts draining liquidity and we forget just how sensitive the US and the global economy is to the flow of the US money. And I think it’s the flows that is the thing. So it’s this whole point about there’s a sort of delicate tipping point in terms of if you think about it. I’m a big one for analogies. It’s been like an artery. How low does the blood flow have to get before you faint?

TN: So you’re saying that the flow will stop, but the stock will remain. Are they going to start selling off those balance sheet assets?

PPG: The Fed at some point. Sorry, the Fed.

TN: But not in ’22?

PPG: No, but I think they’ll see. But clearly the fact that they were already talking about this in terms of let’s reduce assets that. Well, fine. If we do the 75 basis points, we’re not going to wait until we get to one and a half, or as it did last time around. We’ll probably start reducing the balance sheet earlier because it’s a nice little tool. And actually, it’s quite a good tool if you want to crumble down on mortgages.

So what was noticeable in the last Redux was because the Fed was buying such a large share of them pretty much 100% of all mortgage where I stopped buying 100% all treasury issuance. But once they started reducing the mortgages, that was when mortgage spreads versus the 30 year mortgage versus the loan bonds actually really started to widen out.

TN: Right.

PPG: And then that mortgages are really the underlying credit of the credit market.

TN: Of course.

PPG: So everyone knows all the Treasuries, actually. And I think mortgages are a better reference than OAS or something. I’d rather look at a mortgage than bond against credit, and that filters through to the whole credit market. I’m never left with a situation where you have record shares of US business debt. If you look at the flow of funds reports, US business debt is a record share of GDP.

So I love the bullshit we get from the corporate. So again, the equity analysts who basically, I think should just should not be left in a room with any hard surfaces. So they go out and they say, oh, yeah, we got record amounts of cash on the balance sheet. So you had I think it was Viacom back, Wall Street Journal normal. Sort of. Yeah, on the corporate sector. Wonderful. Viacom CFO going, oh, yeah. We’ve got like 10.7 billion of liquid assets on a balance sheet. At the same time, Conveniently forget to mention that they had 170 billion of debt. Right? You don’t have any billion of debt. Things go wrong. Your ten or billion doesn’t go that far.

TN: I’ve heard over the past few months as talk of tapering has intensified. And I bring up the taper tantrum to people from 2015, and there seems to be a resistance that we’ll have a taper tantrum this time. And I kind of find that a little bit rose-tinted. There has to be a backlash.

PPG: Well, I think we’ve already had it. Quite honestly. I think we’ve already had it. If we look at some of the moves, if you’re a rate trader and you specialize in rates, we had some big swings. Look at the curve. So 530s in the bond curve before the tipping point was the minutes from the April meeting. So Powell being going on about we might be talking about paper. And then actually the minutes come out and said some participants said it’s time to maybe start discussing taper. And then the 530 was at 155. We’ve been down to 55 now. A 100 basis points with a big long. So there’s been a sort of subtle taper.

I also think you have to go back to the psychology of 2013, really, when we had the taper tantrum when rates exploded. We were still very much in a mindset. And central bankers were, too that we revert to normal, that rates would revert to where their previous level was. And it’s the educational experience. You think about all those Fed objections, all their dot points, and it took them to the the end of 2015 to do the first 25 basis point hike. It took them another year to do the second 25 basis point hike.

So I think we’re scarred by experience now. So there’s not the taper tantrum as of such at the same time, equities. It’s all fine, but they don’t realize how sensitive the economy is to the marginal changes in money.

TN: Very good. Patrick, thanks so much for your time. This is really a level of depth that I think everyone will appreciate. And I think the views are fascinating because it’s view of ’22 that I don’t think they’ll get anywhere else. So thank you very much for your time and just wish you all the best for ’22.

PPG: Yeah. Thank you. Happy Christmas. Happy holidays. And you have politically correct happy.

TN: Thank you, Sir.


The year ahead: What have we learned from 2021? (Part 1)

Patrick Perret-Green of PPG Macro joins us for a QuickHit episode to reflect what 2022 brings. Patrick got not only the Covid call, but a lot of inflation calls right through the pandemic. As we wrap up 2021, what does he think about right now and how does that set the stage for his view on 2022?

PPG started in 1997 in research where he learned how bank balance sheets work. He also run the strategy for Citi for rates and effects in Asia and at one point worked out in Sydney. And in the past five years now, he’s been focused on the global macro environment.

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This QuickHit episode was recorded on December 16, 2021.

The views and opinions expressed in this The year ahead: What have we learned from 2021? (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, Patrick, you’ve got not only the Covid call, you’ve gotten a lot of inflation calls right through the pandemic. And as we wrap up 2021, I guess what I’d really like is, what are you thinking about right now and then how does that set the stage for your view on 2022?

PPG: Well, there’s a whole lot of multiple issues. So I was rewatching Powell’s Q&A this morning. And clearly there is the energy side of things. There is the good side of things, the demand for goods, and they are responsible for big chunks. And I was quite surprised by the ECB’s massive upward revision for inflation for 2022 in the press conference earlier on today. But base effects are very powerful. So we always knew we were going to get peak base effects. We’re going to come in around October, November time. Oil average WTI average below about 39 to $40 last October, November. And by January are up to, or early February, we were early 60s. That base effect will tumble out quite dramatically.

I also think that the durable goods effect is also going to tumble out dramatically. We’ve had record purchases, but I remember talking joking with people last year. It was about the middle of last year, and I was saying I was just as an experiment going on ebay and seeing what I could pick a Peloton up for. So everyone got their Peloton or they bought a flat screen TV. They did the house, they did the kitchen because everyone was at home.

And I think when you look at durable goods purchases in the US and this is chart I’ve posted many times on Twitter. They are off the charts and they’re off the charts relative to disposable income as well, which is now falling. Okay, due to inflation as well. But in the US, we’ve also got this remarkable thing that it’s very different to other countries.

So you look at the UK. We had the employees taken out the other day. We’ve now got more people on payrolls than we had prepandemic. Non-farm payrolls are still down 3.9%. And in Europe employment has been much better. So the great retirement, the great resignation seems to be a US phenomenon.

But I think next year the risks are that everyone that goods purchases collapse and pricing power similarly collapses with that. And even things like autos as well will pass. So we know for well that the auto manufacturers have got lots full of 95% completed cars, and the chip shortage is actually a thing. It’s not that the world has run out of chips. There’s some papers recently looking at chip supply.

So the supply chain disruptions are being true. Yes, there’s still log jams with ports in the US, but in Asia, around Singapore, they’ve largely cleared into chain. Yeah, we’ve still got subjects very pandemic risks of problems with changing over ship crews and things like that. But overall, I think that side of things will ease down.

Okay. The pandemic is of pain, but we all know that. And there’s a lot of we’ve got Omicron now, but there is some cause for hope. It’s incredibly infectious. But all the people I know have got it. I don’t know anybody who’s had it really bad. Whereas I know people who even had Delta and they were really late. I don’t know anybody hospitalized, really. But could this be, like a bit of a bushfire?

It goes through very quickly. But actually, then we have the benefit because it’s so infectious. So many people get it. That herd in unity becomes higher. And actually, by February we’re back and everyone not giving a damn.

TN: Which is what I love. I love it. I love it. Let it be. So I hope it happens.

PPG: But let us go. But let’s not forget the underlying reality. People seem to stare in sort of my a rose tinted glasses and look back and think like, oh, wasn’t it wonderful prepondemic? No, it wasn’t. The world central banks weren’t cutting rates in 2019 because we were in good shape and there wasn’t a load of excess capacity. My concern is now that actually we talk about capacity being built. So records for containerships is less.

However, the volume of global trade actually is not particularly higher. It’s more because of disruptions. An empty container has been trapped in places. So people are building more containers and they’re building more factory space. But once the supply chain disruptions come down, then you’re going to be left with even more excess capacity.

TN: Right. Well, it’s the other side of letting all those old containerships and book carriers retire in kind of 2011 to 15. Right?

PPG: I’m still left with an image of a world that, compared to 2019, has more debt, it’s older and the capacity hasn’t gone away. And then we’ve also got the geopolitics and the politics and all that sort of stuff as well.

Watching Powell last night, I was struck by how amazingly sort of confidently was about the outlook for the US economy. Two, how he seemed to have lost all recollection of the effect of the last tightening cycle on what was a much healthier economy. So here we’re talking about, we got a 150 basis points of tightening by the end of 2023.

Okay, tapers. We all knew that’s going to end quickly. It’s going to be done by middle of March, in 10 weeks time.

TN: Just words, Patrick. It’s just words.

PPG: And then they do Redux. And he admitted at the end towards the end that they had their first discussion about the balance sheet. So I think they’ll start balance sheet reduction much sooner. But the problem is if we go back to last time when debt was so much lower, the Fed overtightened.

My reckoning, was they should have only really gone to one of the records. They completely underestimated the impact of balance sheet reduction on liquidity. I did quite a lot of work on the plumbing, and the irony is that the Fed is in charge of a mandatory systems. They’re not a very good plumber. They seem to actually understand how their own system works properly. So you end up being like the repo crisis. No, it’s not QE. We’re just buying bills and then we’re buying coupons. But it’s not QE it’s just liquidity management.

All these various issues and the other aspects I think about inflation is, there’s a lot of similarities with what happened with China in 2008, 2009. China had this. It was only a $7 trillion economy. A trillion dollars of stimulus. M1 was up 40%, M2 was up 30%. And rather than normal lags of six to eight, nine months, M2 growth peaked at the end of 2009 or late 2009. But inflation didn’t peak until the end of 2010, early 2011. So such was the volume of stimulus that came through. It just reverberated along. You dropped a Boulder in a pond?

TN: Sure.

PPG: So the ripples effect just last for much longer. And I think that’s one of the things we’re seeing, but obviously, what we also are seeing is global money growth as a whole has slowed very dramatically. And even when I look at things like excess reserves or where we are now or currency and circulation within the US, the sort of three to six month annualized rates are backed down to rates that they were at pre crisis.

So the year on year base effects are all fading out. And ultimately, unfortunately, most central bankers aren’t monetarists. They seem to have banned monetary economics. Greens bank scrapped M3 in the US. He’s a great scenery as far as I’m concerned.

TN: So when do you see this stuff really taking hold? Is it kind of mid 22 or?

PPG: The second quarter it really picks it. And we got the other side of it. So we got a US that’s doing okay or brilliantly, as far as pounds and the Feds… Europe, that actually is doing all right as well I mean, everyone’s got perpetual downer in Europe. But I think Europe could be the surprise next year.

And we got China, which is everyone still gets on this sugar high. They’re doing stimulus. And I keep on trying to explain to people, it’s not stimulus. This is dialysis.

TN: That’s a great statement.

PPG: I had a long term view on China, and it really goes back to sort of 2014. Once Xi really took control, got rid of all the rivals, started centralizing the power.

And there’s a long term rationale behind that. So, yes, in terms of the Chinese are great at some long term thinking. In other ways, I describe them to people as like, yeah, China is like a linebacker. He’s like 250 pounds. He’s six foot six tall, but unfortunately, he’s got the brain of an 18-year-old.

TN: I think the latter is more accurate, actually. With that in mind, as we move from inflation to say another obvious kind of what’s ahead for 22? What do you see for China in 22? Do you see ongoing stimulus? Do you see a roaring Chinese economy? What does China look like for you in 2022?

PPG: Well, the interesting one is that we look at everything that’s come out of the recent Central Economic Forum, all the going. The whole emphasis is on stability. None of this grandiose stuff about we’re going to be strong. It’s about stability.

Think tank South China Morning Post, which is owned by Alibaba, which is effectively controlled by the state nowadays. So there’s the G 40 Economic Council, whatever they are think tank. But it’s next PVoC governor or deputy governor on it as well. A big article. Nothing is said without less it’s approved.

So they were talking about monetary and fiscal stimulus next year and by that moderately lower interest rates. Central government stimulus because it can’t come from local governments because they’re bankrupt and they’re not getting the land sales revenue and they won’t because the collapse of the real estate.

TN: That’s an important point, though, if you don’t mind holding on the SCMP article for a second. I see people on social media say all the time, well, local governments will always come in with stimulus. But from where? I don’t understand this fallacy, that local governments can always come in with stimulus.

PPG: Well, no, they can’t, because I think even Goldman come out and say that local governments have got hidden debt of about 40 trillion CNY. And all their various financing vehicles. They’re screwed.

They don’t have the money. But over time over the past few years, we’ve probably seen this greater and greater central control. Come on them anyway. They’re more and more dependent on central government forward expenditure. And the rationale comes to this because I think the regime has always recognized that the debt or we’ll keep playing the game of Jenga is unsustainable.

TN: Right.

PPG: And therefore you have to get to a point where we’re going to take some pain. So if you look back at what Xi’s been talking about over the past few years, it’s all about struggle, the Long March. I mean, this is like really going in. That is the story of China. He conveniently forgets to mention, the Long March was actually really a long retreat and basically hardly anybody who started it survived. But that’s completely ignored.

But there is this centralization of power because they know that things have to be dealt with and there will be there’s a potential for trouble. So you become a super authoritarian super, you know, look at all the moves about data.

It’s all about the Chinese government having much more control, much more visibility, a greater ability to snuff out any sort of signs of opposition at the very earliest time.

TN: But my worry there is that China, actually, I think, is becoming fairly brittle. Meaning the Chinese government is becoming fairly brittle.

Under previous regimes, you had a fair bit of flexibility where you had the different levels, not with a lot of autonomy, but with a fair bit of autonomy. Now you have a huge amount of centralization and that creates a fairly brittle government, both economically and politically.

I’m not saying it’s necessarily going to break, but I do worry about what they’re creating.

PPG: Well, I agree with you. I’ve made sneak it past my then investment bank employees. When I came out 2014, I wrote about the stylinization of Chairman Xi.

So you have the centralization of power in one man. But then you also get that fear of slightly Tsar Russia. Nobody wants to be the bearer of bad news. So you had African swine fever. Everyone covered it up. Which was one of my concerns about Covid, because, like you saw in Wuhan, local police shut up the doctors on the 1 January.

And similarly, so you have this culture of paralysis, even pre crisis, Xi comes out and says, oh, we need to reduce coal fire stations. So good party figures, party Chiefs, local party Chiefs. We shut it, shut it down. And then they realize, actually, we haven’t got anything to heat the homes or schools.

Oh, by the way, then we have to divide the energy from the gas from the aluminium shelters to actually do that. You got this sort of, whereas, if you look back to China and Zheng and other leaders, China sort of thrived on its basically Brown envelope culture. We just get it done. Ignore central government. Okay, but at the same time, we are putting loads of cadmium into the ground and killing ourselves. But so be it.

TN: When you look at what’s happening in China domestically, with the economy and with the political structure. I’m also curious about their outward political projection. And I do worry about Northeast Asia, not just China, but Japan, Korea, Taiwan.

And I’m curious, since you have such a historical background, I’m curious what you think about China in terms of political projection, say for 2022. Are you worried that they are going to become aggressive in ’22?


Impact Of PBOC (China’s Loose Monetary Policy)

BFM 89.9 asks Tony Nash from Complete Intelligence on how China’s PBOC adoption of looser monetary policy will affect the yuan and the broader Chinese economy. 

This podcast first appeared and originally published at on December 24, 2021.

Show Notes

SM: BFM 89 nine. Good morning. You’re listening to the morning run. I’m Shazana Mokhtar are together with Philip See. It is Christmas Eve, Friday, the 24 December 9:06 in the morning. But in the meantime, let’s take a look at the activity on Bursa Malaysia.

PS: It’s flat like Coke without any bubbles.

SM: Oh, no, that’s the worst kind of flat.

PS: Yes, the foot sabotage. Malaysia is flat slightly down .09% at 1515.

SM: So still above 1500.

PS: Still above 1500.

But it’s been yoyoing a bit green and red so far. But the rest of the markets across Asia are in green territory. The Straits time is up at 3100. Cosby also up 58% at 3015. Nikkei also up zero 6%, 28814. Now, just to bring your attention, looking at the crypto Bitcoin 5998.65 above the 50,000 mark. Theorem also uptrend 4114115.184. Now, if we shift over to the currencies, ring it to US dollar 4.11988. You’re seeing some strengthening there. But across the other two currencies pound and sing dollar, we’re seeing some weakness there.

Ring it to pound 5.62967. Ring it to Sing dollar 3.0922. Now, looking over to the value board. Really. Smattering of small caps actually driving it, but cost number one Ata IMS at .72 cent unchanged, followed by SM Track up 13% at .13, followed by Kajura Tran asphas flat at .26%.

SM: Okay, so that is the snapshot of Bursa Malaysia at 9:09 this morning. We’re taking a look now at how global markets closed yesterday.

So if we look at the US markets, they closed in the green. The Dow was up 0.6%. The S&P P 500 was up zero 6% as well. The Nasdaq was up zero 9%. So a lot of optimism going into the Christmas weekend. Joining us on the line for analysis on what’s moving markets. We have Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us today. Now 2022 is just a week away. And given the triple headwinds of Fed tapering, Omicron and a China slowdown, will there be a difference in how developed and emerging markets in Asia are going to be impacted?

TN: I think with the tightening in the Fed and with what emerging markets are going to have to do, meaning in the near term, like China is going to have to loosen. So I think you’ll have a strengthening dollar and more of a rush for capital into the US, so that should at the margin, kind of help US markets stay strong across debt and equity. Other things. I think in emerging markets it could eventually China loosening. The PVC loosening could help demand in emerging markets, but it’s going to be hard to get around the hard slowdown that started in China around Omicron.

PS: I see.

And so when you contrast that to the Fed tightening, right. You said China PBOC is adopting a looser monetary policy. How will this affect the UN in relation to those Asian currencies in which there’s a lot of trade between these two countries?

TN: Yeah. CNY has been strong for a protracted period, and it’s made sense on one level, so China can import the energy and food, particularly and some raw materials that it needs in a time of uncertainty. So the PVC has kept it strong through this period. What we’ve expected for some time. And what we’ve shown is that after Lunar New Year, we expect the PPOC to begin to weaken the CNA. We don’t think it’s going to be dramatic, but we think it’s going to be obviously evident. Change of policy, Chinese exporters, although they’ve been producing at not capacity, but then producing pretty.

Okay. China is going to have to devalue the CNY to help those exporters regain their revenues that they’ve lost over the last two years. So we’re in a strange period globally of moving from kind of state support back to market support, whether it’s the US, Europe, Asia, we’ve really had state supportive industries, state supportive individuals as we move beyond covet. Hopefully we’re moving more into a market orientation globally, and there will be some volatility with that.

PS: Yeah, but I was wondering for China, especially, I’m interested to know what the state of the Chinese consumer will be in 2022 because the government is worried for slow down. Right. And wouldn’t they want to expedite and give a bit more ammunition to the Chinese consumer?

TN: They would. But the problem is with Chinese real estate values declining, a lot of consumer debt is secured against real estate. And so the ability of Chinese consumers to expand the debt load that they’re carrying. Is it’s pretty delicate? It’s a fine balance that they’re going to have to run. So either the economic authorities in China push real estate markets up to allow Chinese consumers to keep debt with their real estate portfolios, or they make other consumer debt type of rules that allow Chinese consumers to hold more debt.

Real estate is the part that’s really tricky in this whole equation in China, because if real estate values are falling, the perceived wealth of those consumers is falling pretty rapidly as well, and the desire to consume excessively, it’s just tempt out.

SM: And I suppose still sticking to our view of China looking at metal commodities, what metals have been affected by the slowdown of demand in China? And do you foresee a recovery for them in early 2022?

TN: Yeah. We’ve seen industrial metals like copper and steel, and those sorts of things really slow down dramatically compared to where they were earlier in 2021. We’re seeing reports of, say, copper shortages at the warehouse level at the official warehouses in China, but that’s not real. What we’re seeing and I speak to copper producers in Australia and other places. What they’re telling us is that those copper inventories are being shifted to unofficial warehouses to create a perception of shortage. So we may see a run. We may see an uptick in, say, industrial metals prices in early 22, but we don’t expect it to last long because the supply of constraint is not real.

So until demand picks up for manufacturing and goods consumption. And the other thing to remember is we’ve had a massive durable goods wave through covet. Everyone’s talked up on durable goods. Okay, so there is almost no pent up demand for durable goods. And this is the stuff that industrial metals go into on the demand side, there are some real problems on the supply side. There seems to be plenty of supply in many cases. So we don’t necessarily see the pressure upward, at least in Q1 of 2022 on industrial metals.

PS: And that’s why I’m quite interested where you say that this demand is, I think slowly going to dissipate because yesterday key US inflation gauge sharpest rise in nearly 40 years, right? Personal consumption expenditure surged 5.7% in November. How long do you think this elevator level will last?

TN: Well, US consumers are pretty tapped out. So I think inflation happens for a couple of different reasons. Some people say it’s only monetary. Not necessarily true. We’ve seen real supply constraints that contribute to inflation. We’ve seen demand pulls because of overstimulating economies, and those two things together have accelerated inflation. And so we have to remember at the same time in 2020, we saw prices. If things go down pretty dramatically around mid year, say a third of the way through the year to mid year to just after mid year.

Some of these inflationary effects have been a little bit base effects because prices fell so hard in 2020. But we have seen consumption ticking up because of government stimulus. And we have to remember if the Fed is tightening things like mortgage backed securities, their purchases of mortgage backed securities will slow. Okay, so if people can’t refinance their house or buy new houses again, those wealth effects dissipate if you have a home. If your home price is rising, whether it’s the US or China or elsewhere, the wealth perception is there and people have a propensity to spend.

But if the Fed is pulling back on mortgage backed securities, then you won’t necessarily have that wealth effect that will dissipate. So government spending will decline marginally because build back better didn’t pass. We won’t have that sugar rush of government spending flowing into the economy early in 2002, although we may see something later. I believe governments love to spend money. So I believe the US government will come with some massive package later in the year to bring government spending back up.

SM: Tony, thanks very much for speaking to us. And an early Merry Christmas to you. That was Tony Nash, CEO of Complete Intelligence, giving us a quick take on what he sees moving markets in the final year. In the final weeks of 2021. Looking ahead to 2022.


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

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

You can watch Part 1 of the discussion here.

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

This QuickHit episode was recorded on December 2, 2021.

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


Show Notes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: That’s what happens. Right.

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

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

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

TN: It’s residual. I can tell you.

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

TN: Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MG: Tony, thank you for having me.


Bottlenecks To Ease With Xmas Coming?

Tony Nash gave the BFM 89.9: The Morning Run his thoughts on how the sooner-than-expected Fed rate hikes could affect global markets. Will inflation derail hastening of the tapering talk? How does crude oil look like in the next few months? As the Christmas season is coming, how much of a concern supply chains will be for the consumers and the economy? When the Fed begins normalizing rates, which currencies will be vulnerable if or when this happens?


This podcast first appeared and originally published at on November 25, 2021.


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Show Notes


SM: BFM 89.9 good morning. You are listening to the Morning Run. I’m Shazana Mokhtar together with Khoo Hsu Chuang and Philip See. It’s 9:07 in the morning. Thursday, the 25 November. If we look at how the US markets closed yesterday, the Dow was down marginally by 0.3%. The S&P 500 was up 0.2%. Nasdaq was also up 0.4%. So for some thoughts on where international markets are headed, we have with us on the line Tony Nash, CEO of Complete Intelligence. Good morning, Tony. So the Fed minutes revealed that the pace of tapering may be hastened, while macro data points from personal spending to job data suggest that the US economy is in quite the sweet spot, but will inflation derail this?


TN: Yeah. There was a statement from one of the Fed governors today talking about that inflation is not transitory in their mind or could potentially not be transitory in their mind. That’s a real danger to people who are thinking that we’re really in a sweet spot right now because it could mean Fed intervention, meaning tightening sooner than many people had counted on. So I think people had counted on some sort of intervention, maybe in Q2, but it may be happening sooner. That would have a real impact on the dollar. The dollar would strengthen, and that would have a real impact on emerging markets all around Asia, all around Africa. People would feel it in a big way where there is US dollar debt.


KHC: We are seeing that strengthening US dollar in our currency now. But I just want to get your perspective on crude oil because various countries from the US to China are now tapping into their strategic crude reserves to alleviate the present energy crisis. But if you look at crude now, it’s not really being responsive, right to these actions?


TN: Right? That’s right. So what the US agreed to release is about two and a half days of consumption. Not much. The releases agreed in the UK and India, for example, were really token releases. They weren’t really major portions of their consumption. So these countries are kind of giving a nod to the Biden administration, but they’re not really alleviating the supply concerns that are spiking prices. So it really has been a dud for the White House. It’s been kind of an embarrassment because crude prices haven’t fallen, really. They fell initially, but they really came back after the release announcement was absorbed.


PS: Yeah. Tony, that trickling in oil supply releases from the US government hasn’t done much to alleviate the supply concerns. Gas prices in America have been on a massive uptrend as well, just in terms of inflation and not being as transitory as people expected, as we enter Christmas season, how much of a concern is it for consumers as well as the economy?


TN: It’s a real concern. I have to tell you, I’ve driven halfway across the US for our Thanksgiving holiday, which is tomorrow morning. It’s Thursday here, and we’ve seen a lot of trucks with cargoes on US roads, and I make this drive pretty regularly. So it seems like a lot more on roads than I normally see. So that’s good in terms of the domestic supply chain.


I think it’s the international supply chain that is really concerning, and we still have those backups in the Port of Long Beach. That is the real main constraint for supply chains in the US. So I don’t think we’re going to see major disruptions outside of other ports. But through Long Beach, we definitely see issues.


The semiconductor supply chain is the main impact for, say, electronics and automobiles in the US. We did see semi manufacturers start to produce more auto related semiconductors, say mid-Q3 and into Q4. We should start to see those automotive supply chains, the semiconductor dependent issues and automotive supply chains alleviate, probably in Q1. So that will help.


But for the Christmas season, I’m not sure that there’s a whole lot that’s going to help with electronics and say automobiles.


PS: Yeah, Tony with JPowell still back and still in the fair chair in terms of his reappointment. And he does hike rates earlier than expected to address inflationary concerns. How much of a dangerous is to slowing down the economy in America and as  the rest of the world.


TN: Sure, it is a risk in America. I think it’s really hard to hire people in the US right now. There’s a lot of job switching happening and people haven’t come back into the workforce. We lost about 5 million people in the workforce in the US through the Covid period. So that’s a real issue. Anything that raises the cost of doing business is problematic for the US and will inhibit growth. The main problem in the US is that the environment right now, it continues to crush small companies. It’s very difficult for small companies. And while it may seem that small companies don’t matter that much, they are the main employer in the US and the main growth engine in the US. And the Biden administration hasn’t helped this with a lot of their policies. Their policies have been very favorable toward big companies. If the Fed pushes inflation, it will make borrowing a little bit harder. I’m sorry if the Fed pushes the interest rate, it’ll make borrowing a little bit harder. But the collapsing, say, the tapering of the Fed balance sheet will have a bigger impact on liquidity in the US.


SM: And if I could just touch on large US dollar debt and what happens to emerging markets when the Fed begins normalizing rates, which currencies do you see as going to be particularly vulnerable if or when this happens?


TN: Well, I think one that I’m really keeping an eye on is the Chinese Yuan because it’s a highly appreciated currency right now. And the Chinese government has kept the CNY strong so they can continue to import commodities and energy for the winter. And they’ll likely keep it strong through Chinese New Year. We expect CNY to really start to weaken, say, after Chinese New Year to help Chinese exporters. So winter we mostly pass. They want to help kind of push a Chinese export, so they’ll start to really devalue, seeing why probably end of Q1 early Q2.

We do see pressure, the Euro, as you’ve seen over the last three weeks, there’s been real pressure on the Euro as well. Other Asian currencies. We do think that there will be pressure on other Asian currencies. Sing Dollar will likely continue to stay pretty consistent. But we’ll see some pressure on other Asian currencies simply because of the US dollar pressure. The US dollar is something like 88% of transnational transactions. So the US dollar as a share of transnational transactions actually come up over the past two to three years. So there’s much more pressure with an appreciated dollar and it’s coming.


KHC: Just like the one. Tony, India Indian equities record high. Have you reached to speak considering PTM’s IPO failure?


TN: Yeah. I think there’s been a lot of excitement there, and I think it’s at least for now. I think it has I don’t think you can ever really claim that an equity market has hit its peak, but I think for now, a lot of the excitement is dissipated. It may come back in a month, it may come back in six months. But I think that momentum is really important. And as you see, failed IPOs, I think it’s really hard for equity investors to kind of get their mojo back.


SM: Tony, thank you so much as always for speaking to us and happy Thanksgiving to you and your family. That was Tony Nash, CEO of Complete Intelligence, giving us his thoughts on how the sooner-than-expected Fed rate hikes could affect global markets.


Inflation: Buckle up, it may get worse (Part 1)

Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation. Where are we in the inflation and what is the horizon? Both guests have different views and they explain exactly why they have such views. And what about China’s manipulation of CNY through hoarding metals and commodities? Is that a valid way of looking at inflation?


Part 2 of this discussion can be found here:


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This QuickHit episode was recorded on April 28, 2021.

The views and opinions expressed in this nflation: Buckle up, it may get worse QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.


Show Notes


TN: Today we’re talking about inflation. It’s been on everyone’s mind for the last couple months and we’ve got two macro geniuses to talk to us about it today. We’ve got Nick Glinsman from EVO Capital and we’ve got Sam Rines from Avalon.


We look at copper. We look at a lot of these indicators of inflation and it’s been on everyone’s mind over the last few months. A year ago, people were worried about deflation. Now the worry is inflation. Obviously we’ve seen a lot of monetary and fiscal policy in the interim.


So, Nick, can you give us your view on where we are with inflation and what that looks like over what horizon? Is it months? Is it five years? Is it, you know, how does this play out?


NG: The horizon is a little bit tougher. But my my thesis is based on looking back at historical precedence and I focused on the LBJ Vietnam War spending, combined with his great society fiscal spend, which ultimately led in the early 70s Paul Volcker’s fame containing huge inflation there was at that period.


And I’m sitting here having spent the last year but actually building this thesis up for a couple of years thinking that the equivalent of the Vietnam expenditure is Covid and the relief spending that’s been has combined Trump and now Biden, and then the great society equivalent would be Biden’s green infrastructure spending which, I slightly tongue-in-cheek called the green ghost plan, which is enormous. Amazing.


When I find myself agreeing with Larry Summers on inflation. I think his odds of a third in terms of this creating inflation, I would suggest a higher. In terms of timeline, it took five to seven years for the inflation to really kick in during the 60’s leading to Volcker. I think this time around, it will be much quicker due to the differences, a lot of globalization and supply chain management.


TN: Sam, can you kind of give us your view of where we are in inflation and what’s the duration that you kind of expect this to play out?


SR: I have a very different view. If you look at the lumber market, copper, et cetera, these are things that tend to sort themselves out rather rapidly. Being in Houston, the best cure for high prices and energy is high prices. We will pump more if oil ever goes to 80. It’s very similar with lumber and copper. Most of the mills are becoming much more efficient in lumber, for instance.


So we will see that begin to roll over and that will roll over in a very meaningful way as we begin to work through these supply chain issues that we know are coming in the summer and we know are probably going to persist in the fall. But as we get into the fall and we get into early 2022, even if we have a couple trillion dollars infrastructure, it’s going to be spread over the better part of 10 years infrastructure.


It’s not a fast spend and it will not save us from the fiscal cliff. It will not save us from the lower employment numbers that we’ve been seeing on an overall basis. Yes, unemployment is moving lower, but employment is not keeping up with the employment figures.


Once the economy begins to have to stand on its own two legs, even if it has a touch of a tailwind from the government, it’s still going to be very difficult to continue to see consumption going through the roof, continue to see the types of disruptions that we’ll see for the next six to nine months in terms of supply chain that will have one-off price implications.


But that to me says we’re probably getting towards the peak of the sugar high as we get into the summer and the other side of the sugar high is going to be very painful in terms of going back to a one and a half to two and a half percent growth rate in the US inflation that will be very difficult to get higher simply because it’s difficult to have sustained disruptions in supply and demographics that aren’t changing anytime soon. So we will continue to have a number of those headwinds. And I think that’s what the US 10-years is telling you, US tenure at 1.5 is telling you that the market’s looking through this summer and saying the next decade doesn’t look as good as the last decade in a lot of ways.


It’s something to at least keep in the back of our minds that the Fed doesn’t have great control over the 10-year. The fed has great control over zero to two-year timeframe. But nothing beyond that.


TN: Okay, so let’s look at common areas. It seems to me that both of you see inflation continuing to rise maybe not in terms of the rate of rise but certainly continue to rise until, let’s say say Q3 Q4? Do we at least have comic around there?


SR: Yeah.


NG: Yes, absolutely.


TN: When we look at some of the the pressures in inflation, part of my assertion has been, and I’m sure you’re both going to tell me I’m wrong, but as we’ve seen the CNY strengthen, my hypothesis has been with a strong CNY, Chinese manufacturers are stocking up on industrial metals, food, other things because it’s in dollar terms. They can get it pretty cheaply and they’re waiting for CNY to devalue again when their buying power will decline.


What I’m hearing is that a lot of these things are really going to China to be hoarded and as a play on a potentially devaluing CNY. What do you think of that hypothesis aligned with a lot of the central bank easing? Is that a valid way of looking at inflation? Meaning this is stockpiling more than it is demand pull?


NG: My view on China is that, if you look at food firstly, there is a food shortage crisis. And we all know what the CCP are most scared of, which is society unrest. And we can take the examples of the Arab Spring, food is the key. But I also wonder whether the Chinese are stockpiling in anticipation of decoupling? I think of rare earths, of which they have a large control of the refining thereof being problematic. Semiconductors, there is an issue there.


So if I extrapolate further, my view is I think the supply chain issues are much longer standing now because of various geopolitical forces creating a decoupling with China for sure. And we have this Anglosphere grouping that’s clearly beginning to take shape, which now looks like that will include India because of the health crisis there.


If we look at that, then the question is what happens with Europe? Again, I think that’s part of the supply chain problem whilst they decide which site they go to. Is it china-centric or is it anglers-centric?


So I think the supply chain issue is much longer standing, hence I suspect that we’ve got China positioning, because nothing goes on which in China without the government knowing about it, quite frankly. In terms of anticipating a supply chain issue, because all the commodities they’re importing they’re short off.


TN: Okay, Sam, first of all, what do you think about my hypothesis and then Nick’s qualification around the supply chain issues being much longer term on the back of decoupling?


SR: I would take the argument that decoupling isn’t an action. It’s a process, and the process takes a very, very long time. And that creates in my mind a much longer time frame for the United States to build out its portion of the supply chain, for instance semiconductors, et cetera. So I would say I don’t disagree that there is a decoupling underway. In my opinion or my argument would be that it will take much longer than a few years to really get that process to move and it’ll be particularly under this administration a much more diplomatic and less blunt force tools than we’ve seen in the past being used. So I don’t disagree with the supply chain eventually being at least somewhat disentangled from China. I would just argue that it will take quite a while to really begin to become an issue unto itself.


On your point that China stockpiling, that does appear to be happening. It does appear to be a hedge against a weaker CNY to come including with lumber. One of the reasons that lumber prices are spiking is because China’s buying a lot of lumber in the US. That is a significant problem. And I would point to, when they stop stockpiling, that tends to have a significant effect on the price of commodities in the opposite direction. We’ve seen that with copper a couple of times during their infrastructure builds.


The interesting thing right now is you’ve actually seen a pullback from infrastructure spending. From the peak in China, they’ve begun to do their form of policy tightening on that front already. Suspected will continue at least on the margin and that will be a significant headwind for those commodities that have been stockpiled when less of them are being used on the margin as well. So that that does play into a 2022 disinflationary type environment versus 2021.


TN: Given that we have all these different pressures, whether it’s supply chains, whether it’s stockpiling, whatever it is, what the people in the middle, so that the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people, when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things? Or are they passing that directly along?


Future of the US Dollar: Weaker or Stronger?

Commodities expert Tracy Shuchart graced our QuickHit this week with interesting and fresh insights about USD, CNY, oil, and metals. Will USD continue on the uptrend with Yellen on board? What is the near-term direction of CNY? Will metals like copper, aluminum, etc. continue to rise, or will they correct? Will crude continue the rally or is it time for a pause? Watch as Tracy explains her analysis on the markets in the latest QuickHit episode.


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This QuickHit episode was recorded on March 12, 2021.

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


Show Notes


TN: I’ve been focused for the past few weeks on the Dollar and Chinese Yuan and on industrial metals. Can you talk to me a little bit about your view on the Dollar? What’s happening with the Treasury and Fed and some of their views of the Dollar and how is that spreading out to markets?


TS: Right now, we have a little bit of mixed messaging, right? So, we have the Fed that wants a weaker Dollar. But then, we have Yellen who’s come in and she wants a strong Dollar policy. So, I think that markets are confused right now. Do we want a weaker Dollar or do we want a stronger Dollar? And so, we’re seeing a lot of volatility in the markets because of that sentiment.


TN: So who do you think’s gonna win?


TS: I think that Yellen’s going to win. I think we’re probably going to get a little bit of a stronger Dollar. I don’t think we’re going to see a hundred anytime soon again. We’ve seen stronger Dollar when she was at the Fed. She’s come in right now and said that she wants a stronger Dollar. We would probably have at least a little bit more elevated than the low that we just had, like 89.


TN: I think things are so stretched right now that even a slightly marginally stronger Dollar, let’s say to 95 or something like that would really impact markets in a big way.


I’ve been watching CNY. I watch it really closely and, you know, we bottomed out, or let’s say it appreciated a lot over the last six months. It feels like we bottomed out and it’s weakening again. What does that mean to you? What is the impact of that?


TS: The impact obviously will have a lot to do with manufacturing, with exports, and things of that nature. So if their currency starts depreciating, and they’re going to export that deflation to the rest of the world, it’s just starting to bounce over the last week or so. Unless we have another trade war, I don’t think we’re probably gonna see like seven, seven plus. I remember last time we were talking about it, we were talking about it’s going to be 7.20 and you nailed that. It’s definitely something to keep an eye on obviously, because they’re such a big purchaser and because they’re such a big exporter.


TN: We’re expecting 6.6 this month, and continue to weaken, but not dramatically. We’re expecting a pretty managed weakening of CNY barring some event.

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What I’ve been observing as we’ve had a very strong CNY over the past six months is hoarding of industrial metals and we’ve seen that in things like the copper price. Have you seen that yourself? And with a weaker CNY, what does that do to some of those industrial metals prices in terms of magnitude, not necessarily specific levels, but what do you think that does to industrial metals prices?


TS: We’ve been seeing that across all industrial metals, right. It hasn’t just been copper. It’s been iron ore. It’s been aluminum. It’s been nickel. We’ve seen that across all of those. China likes to hoard. So when everything was very cheap like last summer, when everything kind of bottomed out, they started purchasing a lot. Then we also had problems with supply because of Covid. So prices really accelerated and then suddenly we just had China’s currency pretty much strengthened. We’ll probably see a pullback in those prices. It’ll be partly because of their currency. If they allow that to depreciate a little bit. And then also, as extended supply comes back on the market.


But it’s even getting to the point now where if you look at oil, oil prices are getting really high too. We’ll likely see China scale back on purchases, probably a little bit going forward just because prices are so high. Or we will see them, which we’re seeing now, is buy more from Iran, because they need the money. They get it at a great discount. It’s cheap. If they start buying more from Iran, that takes it away from Saudi Arabia and Russia, who are the two largest oil producers.


TN: When I look at Chinese consumption, at least over the past 15 months, there’s been almost an adverse relationship of CNY to USD and say industrial metals prices. It looks like a mirror. Crude oil doesn’t look that way. It’s really interesting how the crude price in CNY there really isn’t that type of relationship.


One would expect that if CNY devalues, they’ll necessarily cut back on purchases. I would argue and I could be wrong here, that it’s not necessarily the currency that would cause them to cut back on purchases. They’ve hoarded and stored so much that they don’t necessarily need to keep purchasing what they have been. Is that fair to say?


TS: They still like to hoard a lot. Between January and February, they were still up 6% year over year, where January was very high, February was lower because they have holiday during February. Oil, that is different. It’s not really related so much to their currency because you have outside factors such as OPEC, which has really taken eight percent off the market and they’ve held that over again for another month. And the fundamentals are improving with oil. I’ve been seeing a lot of strength in the market over the last eight months.


US is the world’s largest consumer. Whereas you look at something like industrial metals, they are the world’s largest consumer. When we were talking about crude oil, because that’s spread out so much, they don’t really have that much pull on the market per se that they would in metals markets.


TS: And I’ll remind you. I’m sure you remember this. When we spoke in Q2 of 2020, you said it would be Q2 of ’21 before we even started to return to normal consumption patterns for crude and downstream products. I think you hit that spot on. And it’s pretty amazing to see. I had hoped that it would return sooner, but of course it didn’t.


Rotating Permanently into Cyclicals

In this Morning Run BFM episode, Tony Nash shares his views where equities are heading now that the 2020 Election has concluded. Will the new administration reverse China policies by Trump? Also, what is the implication to the world exports with a weaker USD and stronger CNY? Lastly on oil: what is its future? Will the rally continue? Does it have enough support?


This podcast first appeared and originally published at on January 7, 2021.


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BFM Description


With a blue wave in Georgia, what does this mean for the US economy and equity market? Tony Nash, CEO of Complete Intelligence, tells us that the rotational play is now here to stay while giving us his view on oil prices.


Produced by: Mike Gong


Presented by: Lyn Mak, Wong Shou Ning



Show Notes


WSN: Joining us on the line for his take on where markets are headed is Tony Nash, CEO of Complete Intelligence. Equity and currency markets were waiting for the Georgia election results, which have just come out. Given that outcome, where the Democrats have won, where do you see U.S. equities heading?


TN: We don’t see major upside for U.S. equities without significant short-term intervention by the Fed or by some stimulus or infrastructure package. Given where Congress is, I’m not sure that there would be the ability to get much through Congress so it would have to come from the Fed. It’s possible, but we see more the hard assets like gold and commodities. And then you see crypto currencies rising pretty fast as well. But the risk really with equities is to the downside more than to the upside.


WSN: But if we just look at last night’s flows, there was some rotation into cyclicals like banks and small caps with less fund flow into big tech, perhaps over concerns of increased litigation action against them. Do you think this will change into a more long-term kind of rotation?


TN: We’ve expected that for some time. That rotation is long overdue. But the Fed have enabled tech and crypto to have a longer run. That rotation has been put off a bit. So if now is the time, great. We would definitely welcome it. We’re just overexposed in certain sectors.


WSN: And meanwhile, last night, US 10-year treasuries top two percent. What does that tell us?


TN: The U.S. is having a harder time raising money? They need to pay a little bit more to get money. I don’t necessarily think it’s a harbinger of inflation. Although it’s possible with a weaker dollar. I would say higher import prices. Chinese yuan on the run, strengthening. You may have higher import prices, but people have been warning about inflation for years now and we just have not seen it register. I think it just means that that the U.S. Treasury has to pay more to raise money.


WSN: And with Biden coming in on January 20th as the next US president, I would like to see a reversal of Trump’s more adversarial policies with China?


TN: Biden will be very accommodating to China. I think you’ll see different parts of the House and the Senate not be happy about it. But he’ll be absolutely extremely accommodating. More accommodating than Obama was.


WSN: What impact do you think that might have on the U.S. economy? Because in the past there was some shift into more U.S. based manufacturing. Will that then reverse?


TN: With the USMCA, the NAFTA number two agreement, I think there’s more incentive for companies to have facilities in the NAFTA zone. China obviously is more expensive and with an appreciating CNY, that makes it more difficult to invest while you get less for your money in China. China is becoming an increasingly hard sell. That has been the case since 2017, 2018. It’s not going to turn back. Until there is a reciprocal and enforceable investment agreement in place with China, I think China is where it is. I don’t think you would see a mad rush of direct investment going to China.


WSN: What are your views in terms of where the U.S. dollar is hitting? Because you just mentioned that the Yen is likely to appreciate?


TN: It already has. The Chinese officials are becoming a little bit nervous about how strong CNY has become because it’ll put a real damper on their their ability to export. You have the Euro versus CNY weakening. You have the Dollar versus CNY weakening. It’s coming to a point where it could be somewhat problematic for China. So they will push to weaken their currency, maybe not immediately, but say in first quarter. As you see more stability, post Brexit with the new normal Europe. As you see more stability in the US with the new administration, I think you’ll see a bit of relative strengthening of those two currencies versus CNY.


WSN: And shifting our attention to one of the commodities: oil. Yesterday, Saudi Arabia’s cutting oil output while Russia is increasing theirs. What’s the rationale for this? And OPEC members then divide it on production quotas?


TN: OPEC members may verbally agree to things. Whether or not they comply with that has been a burden for OPEC for decades. So what they all want is more volume export and the prices is the real issue.


So I think there’s an intention to present mixed messages so that there’s uncertainty in the market so that we see Brent price that’s sustainably above 50 dollars. That is is good for OPEC. That’s good for some of the producers like Malaysia and Texas where I live. I think consumers, we don’t necessarily to expect to see a sustainably strong oil price because we don’t necessarily expect to see a dramatic recovery in 2021. But we don’t expect to see a dramatic recovery that would spike oil prices up to 70, 80 dollars.


WSN: Do you expect oil prices to be where it is, which is currently around 50 U.S. dollars per barrel for WTI?


TN: For six plus months, we’ve expected a spike in January. And we’ve been telling people since July, August that we would see a spike in oil prices in January. And this is exactly what our artificial intelligence platform has told us for quite a long time. So we’re seeing what we’ve expected. We’ve also expected a fall going into February. Like I said, this is great. This is very much in line with what we thought would happen. But we expect there to be some downside to this and downward pressure within the next 30 to 60 days.


WSN: All right. Thank you for your time. That was Tony Nesh, CEO of Complete Intelligence, giving us his views on where markets are heading. And it seems like it’s not surprising that there’s a bit of a market correction or at least a market rotational flow out of tech, which valuations have kind of hit all time high and some rotation into the cyclicals like banks and small caps. But I think his views on oil are pretty interesting that it’s you know, we are going to see maybe a bit of downside from here.


What will he take? Reasoning?


LM: I think his comments about particularly what we can expect out of a Biden administration were quite interesting because commentators now kind of are kind of split over how they believe Joe Biden will kind of stack up compared to Barack Obama once he is inaugurated as president of the U.S. And the idea of Joe Biden being more accommodating than Obama, particularly with Trump also still continuing his crackdowns on China. It’s almost enough to give you whiplash, isn’t it? Because once January 20 is rolls around, how much of Trump’s measures will be rolled back?


I mean, only recently he’s just signed an executive order as well, banning several Chinese payment apps over security concerns. So this affects eight payment apps and it’s supposed to take an IT take effect in 45 days after Trump has left office.


WSN: Yeah, and what’s interesting is these eight p.m. apps are very well known to include the likes of ADP, Tencent, Cucu and even WeChat P now in the executive order, said that these apps captures swaths of information, including sensitive, personally identifiable information and private information. Now, how much of this an impact will have is unclear, since it’s understood that the usage of these apps outside of China remains limited. For example, the ALP has roughly one billion users, but they are mostly in China.


However, it does have deals with merchants in the U.S. such as Walgreens, and claims to work with more than two hundred and fifty overseas partners. Now, separately, the New York Stock Exchange has made another U-turn on its earlier U-turn to delist three Chinese telecom companies, which be. Going round and round and round, yeah, it’s like a mini roundabout now, so and these three companies are China Mobile, China Telecom and China Unicom.


LM: So the NYSE first announced that it would delist the companies on New Year’s Eve before changing course four days later. And the delisting complies with Trump’s executive order banning investment in Chinese companies with purported ties to the military. So the exchange said its latest decision is based on new specific guidance received on Tuesday provided by the Treasury Department. Treasury Secretary Steve Mnuchin reportedly called the NYSE president, Stacie Cunningham, to voice his displeasure with the decision to allow these three companies to remain on the big board.


WSN: Well, I think this story will just get the plot will get thicker and thicker, and whether the roundabout will get bigger and bigger, we’ll just have to find out. But up next, we ask the question, what can you do to attract more foreign direct investment for us? Ross, the senior economist with Mark, will be joining us for that discussion. Stay tuned for that BFM eighty nine point nine.


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