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United Airlines’ biggest ever order

Back in the BBC Business Matters, Tony Nash shares his thoughts on matters like United Airlines order of Boeing planes and how important is this order for the US economy? Also, will travel be back to normal and how soon will that be? How about pork prices becoming super cheap, and what’s the outlook for the agriculture commodities in general? And is the work-from-home people be lured back to go and work in the office?

 

This podcast was published on June 30, 2021 and the original source can be found at https://www.bbc.co.uk/programmes/w172xvqdn58y6vl.

 

BBC Business Matters Description:

United Airlines makes its biggest ever order of aircraft in a bet on a post pandemic travel renaissance; the BBC’s Theo Leggett gives us the full details and how safe the bet might be. As many people abandon the office for working from home, property companies say they need to lure us back to the office by making us want to go back – Liviu Tudor is the President of the European Property Federation and tells us how he plans on making office spaces more alluring. As some companies introduce leave from work for women in menopause, the BBC’s Ivana Davidovic speaks to women about why it’s so hard to talk about menopause in a corporate landscape. Plus, cheap pork has flooded the market as China’s pigs recover from the African Swine Flu – Kirk Maltais from the Wall Street Journal explains how the oversupply of pork has forced US producers to cut their prices to very low levels. We discuss all this with guests Shuli Ren, Bloomberg Opinion columnist in Hong Kong, and Tony Nash, chief Economist at Complete Intelligence in Houston, Texas.

 

Show Notes

 

JR: How are you, Tony? Before we get on to the sort of impact on the trumpet or the importance of the travel industry, I just want to think about the importance of this order for Boeing. And I’m remembering that old phrase about GM. What’s good for GM is good for America. I mean, you can’t say about GM anymore. You could perhaps say that about Boeing, couldn’t you? I mean, that’s why this order is important.

 

TN: It’s important. And I’m pretty sure there’s some sort of subsidy for United to buy it, especially since a lot of it’s being spent in the U.S.. It’s in listening to some of the analysis, it’s pretty easy to be critical of United since they’ve been on government support. But really, the market was pulled by the government, the travel restrictions and everything else. So it’s really hard.

 

And I’m no defender of United for sure, but it’s really hard to blame them when their market was really pulled because of public health restrictions. So I do think that they’re making the right call here. I do think that travel will come back faster than the fears of many. I don’t think it will immediately react by September. But I do think that they’re making the right call.

 

JR: You’re not one of these people who thinks that travel will never quite go back to where it was. Actually, there have been certain changes in the way we regard moving around this planet in terms of we can do video conferencing, we don’t have to go to business meetings, we don’t have to go to those international conferences anymore. Is it not a permanent change or is it a temporary one?

 

TN: I think it’s probably permanent for maybe 30% of people. But if you think about the people who have to see each other face to face, the 30% who it won’t be required for, they will aspire to do that because they want to be like their peers who are actually getting deals done and who are actually meeting people that they need to meet face to face. I used to travel, you know, twice around the Earth every four weeks or something. And if I don’t ever get on a plane again, I am a happy man. But I don’t think I’m most people. I think most people are very happy to get on a flight and go for for a holiday or for business.

 

JR: Okay. I just want to know, have you traveled actually, and spend time in the last year or two by plane?

 

TN: I haven’t. But it’s not because there haven’t been business opportunities. I just really don’t like to fly anymore. So I’ve done way too much of my life.

 

JR: Yeah, Tony, the United’s last order actually involved Airbus aircraft as well as Boeing. And that has been this truce between the US and the EU on Airbus and Boeing over the trade war between the two. Do we feel that actually aircraft production is going to get back on track now?

 

TN: Well, I think that European and Asian airlines will be slow to make capital commitments. I think American Airlines in the U.S. have old fleets and so they have to renew them and their tired fleets, too. So but I think in Europe and Asia, the Asian fleets generally a little bit newer, of course. But I think they’ll be a little bit slower to order. I think we’ll have to say some European countries that subsidize their airlines, like I don’t know if United was subsidized, but I wouldn’t doubt if they were. But European countries that will subsidize their national airlines to help out Airbus, I mean, that’s its fiscal stimulus. It’s all over the place. It wouldn’t surprise me in the least.

 

JR: We can come to, you know, about the impact it’s had on the American producers and also on Chinese US trade relations, because that’s where it really starts to get interesting, because the China was importing a huge amount of hogs and also corn and soybean in order to be able to support their industry, which was really under in dire straits.

 

TN: Right. So there are three layers here. So first, you have the news about the hogs. And I think the the commodity prices sold off on the news, I personally don’t believe it. I think the herd is improving in China, but I don’t think it’s back to normal. You also have commodities like corn and wheat that are elevated on really bad corn crops in China and bad feed crops in China. So there’s been a lower corn crop in the U.S. than usual this year.

 

And Chinese pig farmers have started to feed them wheat, which is not a normal feed for hogs in China at least. So that’s affected with corn prices and wheat prices, which are which are continue to be elevated partly on the demand in China, but partly on, say, weather and supply and other things in the U.S..

 

So I do hope for China’s sake that the herd is healed and back to normal. I’m just skeptical of it. But I do think that we are seeing pretty hot and dry summer in the Dakotas and other parts of the U.S. that produce significant part of the U.S. corn crop. And until we start to see rain in the Dakotas and elsewhere, I think there’s going to be pressure on those prices. So U.S. farmers are you know, they’re struggling just to grow. Of course, the ones who are growing are doing well. Those who have crop to sell are doing well because the prices are elevated.

 

But it’s put pressure also on U.S. consumers because what we saw in the U.S. was a lot of accumulated frozen meat, pork, beef, chicken. And with the shutdown of the meat processing plants in the U.S. with the pandemic, it wasn’t manufactured in the U.S. So we had a large stock of frozen meat in the U.S. that’s now drawn down. And so the supply chains around meat are are pretty tight, actually. So we’re seeing real upward pressure in the U.S. on meat prices. And so that’s part of the reason I don’t necessarily think that the news in China is what they say it is, because there’s still there’s still draw of pork to China now.

 

JR: That’s really interesting. A whole lot of confluence of different influences that are pushing in different directions. We have seen these very dramatic falls. But you think they may actually be just temporary and just the sort of the market volatility of the last couple of weeks, you think?

 

TN: Well, I think part of it is weather, part of it is supply chains. I think we’ll see things come back to normal in probably four to five months in terms of U.S. commodities. But I think the summer is going to be pretty volatile still. So if China does continue to have the demand, it’ll put more pressure on the volatility in the U.S..

 

JR: OK, Tony, what about in Texas? What’s happening there? I mean, you still got supply chain problems, still got sort of the difficulties of actually getting stuff or is there no problem in that?

 

TN: I don’t think there’s a problem in actually getting stuff, I wouldn’t say it’s the supply chain itself. I think it’s the after effects of the supply chain problems. We also had things like I’m sure you’ve heard of the freeze that we had here in Texas in the spring. That freeze actually killed three generations of chickens. It killed the the chickens that would be sold to market and it killed the eggs.

 

So we had a several state area where where all of the chickens died because of the freeze that happened in this part of the U.S.. So while people made fun of us for our windmills not working, there actually was real impact. And, you know, we really had an impact here. So we’re seeing an impact on chicken prices. And, of course, meat is substitutional generally. So it’s really pressuring all of the all the proteins. But again, we are seeing vegetables and other things. It’s not necessarily availability per se at the cash register. It’s really the pressure on the price. So whoever pays the most will get it. At least that’s Texas.

 

JR: Has it got to the point of the poor people it’s a problem. I mean, it’s of a wages keeping up. I mean, is this a real issue or is it just one of these things people say, oh, gosh, prices are going up. It’s, you know, what a nuisance.

 

TN: Well, because of the the programs that the federal government has had here, I think the minimum salary of someone who actually stays home and collects unemployment is something like 48000 U.S. dollars a year. So for the past, I think 15, 16 months, the people who would be the poorest and who are unemployed are actually making almost 50,000 dollars a year based on a kind of the federal kicker because of the virus. And so while it’s hitting, the people who would normally be the most affected are actually getting more money from the federal government. So the hope is that they’re not feeling it.

 

JR: Okay, Tony, thank you.

 

I was talking to my colleague, Rob Young. Now, what I think is really interesting here is the sort of power play between the various people involved, the employee, the employer, the property company. And basically, if the employee has to come back, has to come back to the office, no one’s going to bother to give them fantastic facilities and sort of going to gyms and all the rest of it, if they’ve got to come back. And it’s really depends on that part played between the two. So do you think actually, Tony, we’re going to see any change in the way property companies or employers actually treat their employees?

 

TN: No.

 

JR: I’m quite doubtful, too. I mean, it always sort of blue sky thinking about how marvelous our offices are all going to be in the future. I don’t think it’s going to be different.

 

TN: No. And in fact, I’ll go even further than that. All of the talk over the last year about how work will change. I don’t believe that’s going to happen. You know, here’s what it really comes down to. People need to be in the office. Why? Because work is a couple of things. First, it’s about achievement and what you do. It’s about how much you know, but it’s also about how you politic. OK. You have to be in the office to politic with people. Otherwise, when the next retrenchment comes around, your head is you know, you’re out the door. So people will have to go back to the office and the ones who scream the shortest about not wanting to go back will be invited eventually to go elsewhere.

 

JR: The only thing I would say possibly is that actually if there is a demand and there’s a shortage of supplies, it’s supply and demand. There’s a shortage supply of certain workers. Employers will put better facilities in place to lure them in and treat them better and give them these kind of privileges, some of which will be the privilege perhaps of working from home if they want to.

 

TN: Interesting. I actually spoke with the U.K. demographer last week talking about this very issue, and he said there will not be a shortage at all. In fact, over the next 10 years, in 10 years time, there will be something like 600 million people who cannot get a job. Sorry. 420 million people who cannot get a job globally. So there will be people will be competing very aggressively for those jobs globally.

 

JR: Tony, isn’t that really important for them to be able to see stuff, hands on whatever job that doing really?

 

TN: Especially for you, surely because the Bloomberg office in Hong Kong is spectacular, according to the office, everything. So I’m surprised you didn’t just move in.

 

JR: Yeah. Do you get free food at the Bloomberg office as well? I remember that was one of the things where I used to work for Bloomberg a long time ago. And you did get free food in the office. I remember that.

 

SR: Yes. Bloomberg is very generous. So so these days, like there is free lunch, they have like that the vegetarian option that the vegetarian option with the calorie counts, very healthy food, absolutely free food.

 

JR: They are making an effort to lure you back in from your pajamas until your comfortable bedroom. Thanks for joining us. Business matters.

Categories
QuickHit

The Death of Growth: Old & rich vs young & poor in 2030 & beyond (Part 1)

Our guest is Clint Laurent from Global Demographics, an amazing demographer, businessman and observer of global trends long before they really take hold. He shares surprising observations that he believes will happen in the next 5 to 10 years.

 

This is the first of a two-part discussion. Watch the second part here.

 

Clint started Global Demographics in 1996 and cover 117 countries throughout the world and China. They do that right down to county level of 2,248 counties. Clint believes that demographics are better than financial data from the point of view of forecasting  because they tend to be stable trends.

 

Global Demographics is able to come up with reliable forecasts at least 15 years out. After 15 years, reliability goes down and they are typically never more plus or minus 5% error in our long-term forecast. Their clients are mainly consumer goods companies, infrastructure backbones and things like that.

 

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This QuickHit episode was recorded on June 17, 2021.

 

The views and opinions expressed in this QuickHit Clint Demographics 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: Over the last year or so, we’ve seen the pandemic. We’re now having this bullwhip effect with inflation and other things. But I guess this capping off in the last 20 years where we’ve seen China as the global growth market and the marginal consumer for almost everything. And it’s really forced me to think what’s next. You and I published a piece about a year and a half ago around China’s population topping out around 2023, 2024. And so I’m really curious, what do you see happening in the next 5 to 10 years that will really come as a surprise to people? What are some of your observations over the next decade?

 

CL: The world is actually as bizarrely almost on a bit of a cusp at the moment. The pandemic is almost irrelevant to what was going to happen. I mean, I know the pandemic caused a lot of economic disturbance, obviously affected some people’s lives quite significantly. But really, there was a lot of change that was about to start to happen anyhow, irrespective of whether or not the pandemic came along.

 

From a demographic point of view, the pandemic is not really very relevant. I’m currently based in the UK and the people who have unfortunately died from it, most of them would have died in the next two years anyhow because they had severe underlying health situations. And so, its effect on death rates has actually been very, very marginal.

 

Secondly, most deaths being over the age of 60, that means it doesn’t affect the labor force, it doesn’t affect the propensity to have children. So really, it will be a horrible little blip in the history of mankind. And hopefully we move on from it and the vaccines keep working. And so a little bit of hope there. But that aside, it was going to be a big change.

 

And if I can explain the change in the following ways.

 

Up to now, the world has perhaps been a little bit lucky in the sense to be, first of all, had what I call the Older-Affluent countries, and that’s Western Europe, North America and what I call affluent Asia — Japan, Taiwan, Australia. All of those countries, which are actually only 14% of the world’s population, account for a very significant proportion of the global consumption. As you know, it grew quite rapidly, which was really quite good. And that is really the first big change is going to  come into effect.

 

What’s already started to happen is people. The only growth in these countries is people over the age of 40. Every age group below that is in absolute decline. So even if they’re going up in affluence, the young affluent market is no longer a growth market. It’s more or less stable. Even if you add in increased incomes, which still occur, but at a slower rate. So you’re now looking at a 40+ age group, and in some countries, obviously, Japan is one, it’s 60+ that are the age group that’s growing.

 

So all of those societies, to some extent, are in a lot of trouble. They’re flattening out. They’ve moved from a pyramid population to a square, and that’s actually very good.

 

A lot of people say you should have a pyramid population with young people coming through and looking after the old. That’s actually the poverty trap. Because if young people come through, the dependance, first of all, will keep driving the society down. With a square, then the same number of people need education each year, the same number of people need health care each year. The capacity is there and it’s an improvement of quality rather than an increase of quantity.

 

TN: So you’re saying with these wealthy developed nations, Japan is an extreme example, consumption isn’t really the worry. It’s the growth that’s falling off. So the consumption is stable. It’s just not growing.

 

CL: Exactly. There’s one other big change to appreciate is what people say because they’re getting old, they’re going to run out of labor force. And here’s a statistic for you: In Japan, 25% of males, 70 to 74 are still in full-time employment. And you’re saying, “yeah, well, that’s Japan. It’s different everywhere else in the world.” You know, it’s exactly the same statistic in the United States.

 

The aged worker is a new phenomenon. In fact, the age worker is the fastest growing demographic. So these countries actually are not running out of workers. And the assumption that we all go decrepit and work after age 64 is just wrong. I am over 65, as you can probably guess. I don’t have a single friend who’s not in full-time employment at this point in time, enjoying it. It raises lots of issues.

 

So the labor force keeps going in these countries as well. So they don’t even need migrant workers to sustain these countries. So they are nice, comfortable niche. Growing steadily, not phenomenally. You’re talking about 1%, less than 1% growth in total consumer spending. Households are getting a little more affluent. Number of households is flattened out, which would have implications for the housing market. But it’s not going down, so it’s actually not too bad.

 

TN: So you say GDP is pretty stable, but what’s happening to GDP per capita in those countries? Does it continue to grow?

 

CL: It does, but just at a much slower rate. You’re talking 1% or even less than 1%, but it’s positive. And do remember, 1% of a hundred thousand US dollars is more money than the total income of households at the other end of the spectrum. Much of their spending power is quite significant. But a really important point to keep in your mind right now is that consumption expenditure will start to level out. It won’t hit that high growth rate anymore. It drops back to about 1% or even slightly lower.

 

Then the other big change you’ve got is what I call the next group of countries, which is older but not so affluent. And that obviously includes China. Now, let’s just put China to one side for the moment and look at the other countries in that group. You’re talking about Russia and the Eastern European countries. All of which have huge potential because like the previous group that I just talked about, they score really well on education.

 

And countries that score well on education, with the right capital investment, can lift the productivity. The countries that have weak education, it doesn’t matter how much capital you throw into them, they don’t lift their productivity. And there’s plenty of statistics to prove that. So these countries actually have a resource. I mean, Latvia, Romania. It doesn’t really matter. And that actually got the one thing that’s really hard to do. Good education.

 

Why is it hard to do? India has been really bad on education up to now. It finally has universal education. Every kid, 5 to 12 is now supposed to be in school. But it takes another 10 years before some of those kids come out of school and get into work. And it takes another 10 years before the workforce has become sufficiently skilled that the capital investment comes and lifts the productivity.

 

So these Eastern European countries and Russia are actually interesting from the QuickHit point of view. They start getting the fixed capital investment right, got the education right. They could actually be the next growth area. Only warning to you is they also are relatively old. So it’s a growth area of 40 pluses and 60 pluses. That is going to happen because they’re under earning at the moment. They can lift their incomes, obviously, buy bit of car, bit of clothing, all of those sort of things. But it’s a growth area of an older population, not a young population.

 

TN: And it’s something that nobody’s watching, Clint. Like, I don’t think anybody is really looking for that even as a possibility. A lot of people have written Russia off, see it as a petro state or whatever, and central and Eastern Europe is kind of just kind of a no man’s land in many cases. So some manufacturing there. There’s some services there in terms of globalization. But I don’t think there’s a lot of expectation to see rapid growth there and high productivity there. So I think that’s a really interesting question mark that most people aren’t even thinking about.

 

CL: That’s right. And if you go into these countries physically, you start to see some of the big brands starting to look at them. And you come across someone from XYZ Corporation there. We just have a little look. So some people are starting to see that it’s there. It’s just as you say, it’s not visible yet.

 

Let’s switch to China briefly. China slightly different and also very similar. First of all, remember 1989, China introduced the one child policy. That came under a huge amount of criticism. But ignoring how you feel about that, is one very simple thing it achieved. It levelled off the number of young kids needed to be educated. And subsequently started, it was 1979, they introduced. Such that by 1984, when they introduced compulsory education for all six to 12 year olds, they were talking of a relatively stable number of kids. So they could focus on the quality of education. And so every kid’s been going to school in such when you go to the year 2000, you’ve got this population still living in the rural areas. But who could read, write and do sums and all of those sort of things. Could get on their bike, go into town and get a job in a factory or an office or whatever.

And the differential between an urban worker and rural worker in China is 3.6. And that’s actually how China drove its growth and its productivity per worker and its influence. What it did is, it said, take all these people who are nice people, but not well-educated, not earning very much money, educate them, put them into job, let them earn lots of money, and have a good lifestyle. And that drove up the productivity and the whole success story of China.

 

 

TN: So urbanization and wage arbitrage, productivity gain for China. But is that running out in the next ten years or does that continue over that period?

 

CL: We’ve got it going through actually. It’s 20 million a year at the moment, which is a phenomenal number. That’s Australia, every year. It’s 20 million at the moment. We have it dropping down to about 11 million by 2040 because it’s still a lot of people moving there.

 

Now, this is the other big trick. Because some people have been saying, China’s population’s leveling out. And, you know, we thought it was 2023, where even the Chinese government agrees with us. Now, it’s 2023, and it’s leveling out. The working age population is starting to shrink. Oh, dear. That can have a decline in the workforce. No. They’re having a decline in the rural workforce. The rural workforce have in the next 20 years.

 

The urban workforce keeps growing for the next 10 years to 2030. The number of people working in urban jobs, which are highly productive, keeps going up. So for the next 10 years, China’s GDP growth still chugs along reasonably well. After 2030, the growth rate drops away and we have it down to about 1.3% by 2045, because it just isn’t the extra workers to keep growing the total GDP. So that’s the story there.

 

But again, coming back to the consumption side, China in the last 10 years in the urban area had this huge group of people, 220 million of them urban, aged 40 to 64 years of age, educated, earning quite good money by turning a stand and spending money on holidays and trips and things like that. And between 2010 and 2020, that went up to 100 million people. Think about it, a 100 million extra people with disposable income. It was no surprise that the retail side of China took off and tourism and all of that. It was those people. They’ve got a house. They’ve got a fridge, they’ve got a refrigerator. Let’s have some fun. That’s really what’s happening right now.

 

Now, the bad news is that now it flattens out. Every age group under 40 in China is already declining and will continue to decline in size. So don’t go after the kid market in China except on the wealthy and those sort of areas for education. The 40 to 64 age, what I call the working age optimist, it grows for a little bit, and then it flattens out. And it’s named the 65 plus, which in China is not like the other countries. The 65 plus at the moment doesn’t have great health, doesn’t have a great life expectancy. You get some extension of the workforce, but not a lot.

 

So China’s consumption is healthy as well. It’ll chugging along quite nicely. And to digress slightly, but I think we need to recover quickly here. The one child policy, it’s moved to three now. That’s totally and absolutely irrelevant.

 

TN: Yeah, it doesn’t seem like it’s going to do much. They’re too rich to want to have more kids, right?

 

CL: Exactly. And actually, it’s the birth rate that’s not the important point. It’s the number of women of childbearing age. And that goes down by a third. It drops 330 million now to about 220 million in 20 years time. And the birth rate can’t give up fast enough to compensate there. So births in 2019 are 14 million. It dropped to 10 million last year because of the pandemic, waiting to come back up a bit about to 14. It’ll be down to 11 million by 2030. And they can’t change that even with the three child policy. That won’t change.

 

TN: It’s not the three child policy, it’s the fact that there are not enough women to have babies. And those women are wealthy enough that they don’t want to have three kids.

 

CL: That’s really basically it. Just look at Singapore. They tried everything to get the birth rate up.

 

TN: I was there. They were paying people to have babies and it still didn’t work.

 

CL: Even send them on cruises. I mean, I volunteered.

 

And then you have, so that’s the second group. And the key point by the first group is nice and stable now, chugging along nicely, but no longer super growth in consumption. Nice growth in consumption is how I call it.

 

The third group, what we call the family stage. And that’s obviously dominated by India, Brazil, Indonesia all there. The bulk of populations is in that 25 through to 39, having children, at work, that sort of stage. So the working age population is still growing a bit, but not a lot. Education’s improving. It varies quite a lot across this group. India is at the weaker end. Indonesia is probably one of the better ends.

 

So, you’ve got a bit of a dichotomy there. But they’re generally in a position to be able to attract capital and generally in a position to be lifting their total consumption, but not dramatically. We’re still talking of relatively low incomes under 10 thousand USD for the average family per annum. So the growth is there.

 

TN: So Indonesia, India, Brazil and so on, the capital formation, capital investment is the real weakness there. And it seems to me that’s a function of, largely, education. Is that fair to say?

 

CL: That’s exactly what it is. As they get the education right and they’re working on it, most of these countries have been quite responsible in that area. And as they get that right, so the investment comes in, so the consumer gets more affluent and becomes a virtuous circle.

 

TN: And what time scale are we talking about for that consumption to come in a really notable way to take the place of the under 40 Chinese consumption or the under 40 Western Europe or American consumption?

 

CL: Well, that’s the bad news.

Categories
QuickHit

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

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

 

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

 

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This QuickHit episode was recorded on June 2, 2021.

 

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

 

Show Notes

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

KVT: Thanks, Tony. Appreciate it.

Categories
Podcasts

Could This Be The Tail End Of The Bull Run?

In this BFM The Morning Run episode, Tony Nash explains what’s happening in the US markets, particularly the tail end of the bull run. Will value stocks improve now as compared to the growth stocks? How about stay-at-home stocks VS cyclicals? Also discussed are currencies, USD against the Japanese Yen and Chinese Yuan, and the labor market.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/could-this-be-the-tail-end-of-the-bull-run on April 1, 2021.

 

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Show Notes

 

WSN: Good morning, Tony. Now, is it likely that the U.S. indices will run out of steam for the moment? I mean, pausing to take stock of the earnings, are equity markets gravitating to what’s stay at home stocks or cyclicals?

 

TN: The problem with where we are now is that all value was stretched. Monetary policy and stimulus have really pushed money into equity markets as the remaining stimulus checks are distributed, meaning a lot of those stimulus checks are in the mail right now in the post going to homes in the US. So there’s a lot of investment expected and pushing against maybe the downdraft in equity markets. So I don’t think it’s really a question of stay at home versus cyclicals. It’s really a question of where is that value?

 

I don’t think it’s a sector question. It’s really an individual stock picking question. And that’s the problem. It’s not a sector market. It’s not a market wide phenomenon. We really have to understand where there is value because we’re in the very tail end of a bull market.

 

PS: Previously, it was the long and now five year Treasury treasuries are inching up. What impact will an upward shift of the whole yield curve have on equities?

 

TN: I think we’re seeing equities try to climb higher, but we’re not quite getting. The five year is up over five percent today on an incremental basis was up five point six percent. The 10 year is up two point three percent today. So, you know, there are a lot of risks out there. Ongoing Covid risk. France just closed down again today. There are geopolitical risks with the US and China and other geopolitical risks, of course, Syria and so on.

 

Iran, business supply chain risks. So, you know, with yields rising and the pressure on equity markets to rise as well, we believe that there’s going to come a point where equity markets break and we’re going to start to see see a decline in equity markets. So yields will rise in the U.S. and equity markets will inevitably decline, and that will likely bring some other global markets with it.

 

WSN: OK, Tony, let’s shift the conversation to currencies, because the U.S. dollar has really made some strident gains against both the Chinese yen and the Japanese yen. I just want to know, why are these two currencies taking such a beating in particular?

 

TN: Well, both currencies strengthened quite a bit in Q3 of twenty twenty and stayed strong until recently. CNY had been below seven and a bit well actually just above seven and it climbed to almost six point four versus the US dollar. So there’s been a lot of strength in both, as you say, Chinese and Japanese currencies. What’s happened while we’ve had those depreciated currencies is an accumulation of inventories of commodities like industrial metals. We’ve seen the copper price rise dramatically, for example.

 

And so as we see treasuries rise in the US, and that brings dollar strength, we’re seeing those manufacturers and those guys who’ve been building their commodity inventories in East Asia really slow down on those purchases and their future commitments. So we’ll likely see a lot of those currencies stabilize and weaken a bit more we don’t expect. A dramatic weakening from here, we don’t expect the US dollar to appreciate dramatically more, say, for the next few months. So we’re kind of in a range, we believe, for both.

 

We do see the CNY, for example, devaluing to say six point six to six point seven. And then, you know, we’ll kind of stabilize in that range unless there’s a dramatic impact.

 

PS: So a correction is in inventory levels readjust. Can I just shift your attention to oil? Because oil prices are at levels near the break even point for US shale producers. Are you expecting to see a resumption of shale activity this year?

 

TN: Well, yeah, we you know, living in Texas, we see a lot of shale activity here. So we do expect it to start slowly. But that business runs in a way where if we’re chasing price, more of those shale firms will come online pretty quickly, actually. So, you know, with the ability for shale to turn off and turn on so quickly, we believe that the prices will be range bound if there’s upward price pressure, you know, all things held equal.

 

If there’s you know, if there isn’t a major geopolitical issue in the Middle East or isn’t a major geopolitical issue in Asia or something, we think that will be fairly wrage range bound as those as those guys come back online. The shale producers.

 

WSN: Meanwhile, Tony, U.S. numbers, job numbers excuse me, are out on Friday. Are they expected to show a robust recovery in labor markets, in your opinion? Like what sectors grew the fastest in terms of employment?

 

TN: Well, you know, we’re starting to see quite a lot more capacity in airlines, although we don’t expect a lot of hiring there. The services around, say, travel and hospitality, they were devastated in twenty twenty. And we expect some of those jobs to come back online. We expect to see some restaurant jobs, some of those services jobs to come back online. That’s where we typically see these things come back first, relatively kind of lower wage, but more flexible workforces.

 

And so we’ll see activity there first. Tourism in the US obviously still isn’t up to what it was, but we have started to see some impact back in tourism. So I would expect to see some some interesting numbers there.

 

WSN: OK, thank you for your time. That was Tony Nash, CEO of Complete Intelligence, sadly reminding us that this is maybe the tail end of the bull run that we had been enjoying.

 

It was a very short one, is that it honestly, in March 2020 when markets collapsed and then because of the concerted, synchronized monetary policies that we saw around the world, central banks really pushing rates to ultra low equity markets rallied and rallied till now.

 

So he thinks we’re in the tail end and we should stop beginning to look at value stocks as opposed to growth stocks.

 

PS: And I think specific sector specific stocks, in fact, actually.

 

WSN: Yeah.

 

PS: It’s kind of very good.

 

Go for the jugular on specific things.

 

WSN: Yeah. I think you really do need to take a very bottom up approach as opposed from the top down approach. If you’re talking about the tail end of a bull cycle, what is also worrying is that he does say that with increasing yields in the U.S. and even on the shotted to bonds, which is the five year bonds, lightly equity markets, those are going to face another round of correction. And it’s not just going to be the U.S. it’s going to be other global markets as a result, because let’s face it, we take the cue from the U.S., right?

 

PS: Yeah.

 

WSN: If there is a shock there, there’s a shock around the world.

 

But what does it mean for Malaysia markets? Because yesterday we had a really terrible, terrible day.

 

And when I look at Bloomberg now and I’m trying to understand what caused the decline, it was really very much glove driven. Topcliffe hoteling, super Max, all coming under selling pressure as a result, took the index along with it, saying it was also the case for the telco sector. Zaatar was also down. Maxi’s was also down. There was actually no stock among the IBM, Kilsyth, the three component stocks, none were in the green. So clearly bad day.

 

We were down two point to two percent. And on original, on a year to day basis, we are actually down more than three percent.

 

PS: It’s incredible. I think also the conversation about currency is going to play. So we were talking to Tony about Japan and China. You heard and we saw disconsolately in Turkish I now emerging market currencies are going to all kind of a fall out in the short term.

 

WSN: Is there going to be a question of, you know, shift from emerging markets into developed markets? That’s the big question. But in about a few minutes, in light of April Fool’s Day, we’ll be speaking to resolve. Then Gizzle, comedian and the co-founder of Crack House Comedy Club. Stay tuned for that BFM eighty nine point nine.

Categories
Podcasts

Synthetic Economy

Tony Nash joins the BFM Morning Run podcast from Malaysia and explained why we have synthetic economy and how to navigate through this. Also discussed are tech stocks — is this the end for them?

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/synthetic-economy on March 4, 2021.

 

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Show Notes

 

WSN: Nasdaq closed sharply down last night, continuing a trend that sees it almost erased all its year-to-date gains led by declines in Apple, Amazon and Tesla. Is this the end of big tech?

 

TN: I don’t think it’s the end of big tech. I think investors are taking a pause. We saw tech jump a lot in the wake of Covid. Investors are really starting to wonder how much additional growth is there over time. We’ve seen the work-from-home stocks and other things really get lifted through Covid. But how much immediate rapid growth is left is where a lot of the investor questions lie.

 

WSN: Is this also the beginning of a trend where we really see the rotation from growth into value?

 

TN: “Value” is a scary word right now. It has been for a long time. We have a ways to go, but I think we could get there. We’ve been talking for a few months about a pullback in March and we expect the pullback to continue and will begin to recover in late March, April. So we think this has a little ways to go unless there’s dramatic intervention by central banks and other things. But we think this pullback is not ideal but it’s necessary given stretched valuations and stretched expectations. So this is healthy for us. We just need to figure out what to do with it.

 

PS: Just give me another angle that instead of looking at it from values about sector specific, because yesterday, energy and financials did do relatively well. But was the energy upside due to the rising prices? And how does that correlate with OPEC’s decision coming soon with respect to oil production?

 

TN: I don’t think it gets really much more complicated than rising oil prices. These energy companies generally are still extremely bloated, extremely inefficient. Aside from the crude pressurizing, there really isn’t a lot that we see driving it. So we do expect commodities to take a pause. We’ve expected this for some time. We’ve seen copper come down by five percent or something.

 

Over the past few trading days, crude oil has leveled off in general. It’s not rising as fast as it was. Some of this has to do with CNY starting to weaken a bit. Chinese and the U.S. Dollar to start to strengthen their sort of related, but they’re not necessarily one and the same. So as we see some of that, an unraveling of some of that, Kerry, we’ll see some commodities start to come off of it as well.

 

WSN: BDA shows that the U.S. manufacturing grew at its fastest pace in three years. So are we really on the road to recovery?

 

TN: I don’t necessarily think that the economic growth expectations that we’ve seen from economists saying seven percent growth or something like that are necessarily the right way to go. When we look at the growth that we saw in Q4 and the growth that we’ve seen in Q1, I’m not sure we’re already back, at least in the U.S., to where we were before the virus. And so it’s really questionable for an economy that’s been growing one to three percent, depending on the year. Is a seven percent growth rate really warranted? Additionally, when you see things like deflation and the Chinese CPI, those two growth engines, we’re not necessarily seeing the rapid growth that some people have been claiming.

 

PS: Just another angle then, which is employment data, because December, January data didn’t meet expectations. What’s your outlook for February then?

 

TN: It’ll probably be OK. I think if the employment data is extremely positive. The US is susceptible to politicization of macro data just like everyone else. If we see a pop in employment data, I think they would be revised out. All of these macroeconomic indicators are revised three or four times. If we see a pop in a sample of employment data, which they look at a subset of houses and companies, they don’t look at the entire economy. If we see a pop, which we’re not necessarily seeing, we think that would be revised out over time. So I would say be really careful about optimism here. OK, it’s great. I live in Texas. We just announced that Texas one hundred percent open yesterday. All this stuff. It’s great to be optimistic, but we’ve really had synthetically driven growth. It’s not necessarily real growth. It’s all subsidized growth in many, many countries over the last, say, nine to 12 months.

 

WSN: That’s very true because this the twin Goldilocks effect of monetary and fiscal stimulus but somewhat related to unemployment numbers is that if the number is better on Friday, do you think markets might get nervous? Because that’s one of the indicators the feds are looking at to raise rates.

 

TN: We’re in that place where bad news is bad news and good news is potentially bad news. So we really have to be careful. What’s going to happen to Treasuries? Is the Fed going to raise rates? How does all that work if we start going to hot? I think it’s the right question that you’re asking. When we have an equity market and global equity markets that are so stretched, if the cost of money, which is what interest rates are, starts to rise, then we really have to be careful about equity valuations.

 

PS: During a deep dove into a specific sector, which is basically all this office collaboration companies like Zoom and Slack, what’s your outlook for those kind of sectors in the short term and mid-term?

 

TN: It’s good. They’ve grown a huge amount over the past year, but I really think we have to look at what growth is. They’re likely going forward, meaning there is growth. But is it as fast as what we’ve seen over the past year? I think the answer is probably no. They are probably also working on their revenue models to monetize some of the things that they’ve been giving away for free for the past year. Like a Zoom call is free. How do they monetize those things? That’s a serious question, but what are they substitution for and what do they enhance?

 

They’ve been substitution for meeting face to face people in the same office. But as more places go back to work, albeit slowly, they won’t necessarily need that for day to day, although it’ll still be used. Again, my question is the growth will be slower, but I would hope it’s better growth, meaning more monetized growth.

 

WSN: All right. Thank you for your time. That was Tony Nash of Complete Intelligence, giving us his views on markets and a very important point in that all these work from home teams may be the easy money is made because we did see stellar growth. Right, as everyone switch to zoom calls and all these kind of new technology. But now the question is, are we going to really see profit coming in? Is there going to be margin expansion?

 

PS: I want to know how they’re going to monetize and whether they’re going to expand the services beyond what they do. As Tony, you see, a lot of it is kind of free of charge. So what is the business model going to evolve to deliver sustainable profit? It’s a big question mark for me.

 

WSN: Yeah, and one company which hasn’t impressed is actually Snowflake, and that’s a data cloud company. Now, they announce a revenue for fourth quarter, which came in at one hundred and ninety million U.S. dollars, slightly better than the one hundred seventy eight million dollars that was expected. So this represents I mean, it is impressive when you just look at the headline numbers. It represents one hundred and seventeen percent growth year on year. But like as Tony highlighted, this company actually suffers a net loss.

 

So their net loss widened to one hundred and ninety nine million U.S. dollars. That’s more than double that 83 million in the. The same period a year ago.

 

PS: Yeah, I mean, the markets didn’t like it because the stock dropped eight percent on Wednesday. I mean, just a reminder to all of you guys, Snowflake was the largest IPO in 2020. Right. So with respect to guidance, snowflakes specs 185 to 200 million U.S. dollars in productivity in the first fiscal quarter, which is will be up about 90 to 96 percent year on year.

 

WSN: So, yeah, you can be hard on a stock that has a fantastic concept data. Right. Everybody wants that in the clouds. But in a day, patience with investors will run thin if you don’t make money. And that’s the reality of any business. So I think, like you sit like what Tony highlighted those companies where you see stellar revenue growth, but not profit after a while.

 

Market’s not going to tolerate it for that long. And when they issue like a set of results, which are below expectations and widened widening, no losses, no end to that, you know, no no sense of when are they going to turn around. I think you then see that sharp sell down again.

 

PS: And take, you know Tony, said something really interesting. Bad news is bad news. Good news could be potentially bad news.

 

WSN: Is that there is the cup half full or is it half empty? Sometimes the market is like this, the same set of data. Depending on the mood, the sentiment can be viewed either very positively or negatively. So if you get a better data but you’re in a positive mood, you can say, oh, the worst is over, let’s look forward.

 

But if you’re in a bad mood or you think the market’s being pessimistic and resolve, everyone’s like, oh, no more to come. So who knows? But up next, we’ll be speaking to on JinMing MP for Bungay about Malaysia’s economic recovery. Stay tuned. BFM eighty nine point nine.

 

Categories
Podcasts

Cold Front on Oil Prices?

Tony Nash is back in the Morning Run, hosted by BFM 89.9, as he points out the crude oil price and how long to expect the rally, considering factors like weather, demand, and supply. Tony also mentioned about a potential pullback and snap and how you can better be prepared for it. Should you continue buying tech stocks or move elsewhere? Also, they discussed crops and where the prices are going this year.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/cold-front-on-oil-prices on February 18, 2021.

 

❗️ Check out more of our insights in featured in the CI Newsletter and QuickHit interviews with experts.

❗️ Discover how Complete Intelligence can help your company be more profitable with AI and ML technologies. Book a demo here.

 

BFM Description

 

Tony Nash from Complete Intelligence, from freezing Texas, shares with us the current supply constraints in the US impacting oil prices in the short- and medium-term.

 

Produced by: Mike Gong

 

Presented by: Philip See, Wong Shou Ning

 

 

Show Notes

 

WSN: For some color on where global markets are heading, we have in the line with us Tony Nash, CEO of Complete Intelligence. Tony, are you freezing out there in Texas?

 

TN: Yes, we are. We haven’t had it this cold air for decades. So it’s it’s been a really interesting week.

 

WSN: That has had an impact on oil prices. Bloomberg showing Brent crude at $64 per barrel, WTI at $61 per barrel. So how badly impacted our energy markets at the moment? Where do you think oil prices are going?

 

TN: A lot of this is very short term. What you’re not seeing that the traders really pay attention to right now is that a lot of refineries are closed because of weather and they’re starting to close for annual maintenance. There’s this presumption that there’s a demand pull, which we’re not really seeing from anywhere in the world right now, and that the winter storm issues will pull energy prices. But again, the fact is the refineries that would take this stuff are closed. We expect this to be short lived. This is an extension of a crude price rally that we saw that we expected to come in Jan, it’s lasted into February and we really don’t expect this to have a lot of legs to it.

 

PS: What do you think the outlook looks like then for the mid-term like quarter to quarter three?

 

TN: We would see 10 to 20 percent off of this price? We don’t necessarily think that this is a sustainable level short of some sort of supply cuts. But the weather in Texas, for example, we’re going to be kind of in normal weather ranges in two days. What we’ve seen this week and the close down, as we’ve seen this week, it’ll take people a couple of days, maybe a week at most to get things back on line. So this perceived supply shortage will be back on line fairly soon.

 

WSN: How about yields on U.S. 10 year bonds? Because they’ve hit a new high one year high. What what is that trying to tell this? What a market try to tell us?

 

TN: U.S. is trying to raise money and they’re willing to pay more for it. I think that is is really it. I think there is a growing fear that equity markets are as high as they’ll get. We’ve started to see more of that tension come in into chatter over the last few days. People are willing to pay to get out of markets, to park their money in debt.

 

So I’m sure it helps the U.S. as they’re raising more money for stimulus and for operations. But as we creep up to four thousand, that is just unimaginable for a lot of people. And it’s not as if we are doing better as an economy than we were in 2019 or the first quarter of 2020. This is built on stimulus, as we’ve talked about before. It’s built on central bank activity.

 

And you can only stretch that so far before things have to snap. We’ll see some of these things that are at double and triple and quadruple kind of the standard multiples. And P is the only way to measure this stuff. But we’ll see things that are really, really stretched, snap into a more reasonable region. But it’ll happen any time tomorrow, three weeks from now, a month from now, whatever. It’ll just happen. It’ll happen any time. And it’s best to be prepared for it.

 

PS: So are you expecting some pullback eventually? Right. What is the tipping point where investors will essentially do that exodus or flock to U.S. Treasuries then?

 

TN: One of the tipping points is going to be the resolution of stimulus. I’ve been saying for weeks that stimulus will not be what the administration wants it to be. There are such high expectations put on that stimulus right now and they’re not going to get it. They’ll get a lot of it, but they’re not going to get all of it. Expectations are sky high. And when it doesn’t hit, I think that will be one of the catalysts.

 

But there are other things like when the crude price starts to fall because this supply constraint isn’t there anymore. These sorts of things, these things add up and then they snowball and and then you start to see markets really, really take a dove. We’re not necessarily calling for a 2008 generational type of decline in markets. It’s just a bit of a pullback so that people can just say, “OK, wait a minute, let’s check, take stock how businesses are doing. Take a look at our investments and our allocation and then reallocate.” That’s really what it’s about.

 

WSN: Where would you relocate to and what are the safe haven assets? Because almost every asset class on a year to date basis is up. Right. And maybe except for Google, which is down six percent on the year today.

 

TN: What you’re likely going to see is a pretty serious rotation out of technology where people have focused on because of the work from home activities. This may not be immediate, but I think you’ll see a rotation out of a lot of the work from home stuff as people start real life again and you’ll see people move into. This is not really my the basis of our outlook. But you may see more of a regional move into things like tourism.

 

These things have just taken real hits. A lot of them have had speculative rises, some of the cruise lines. But some of them are still way down. All of this depends on gradual normalization. But I can tell you, Americans are really tired of being locked in, really tired of not socializing. And some of these things are going to have to start up again.

 

PS: What about not all out commodities then, like agriculture and precious metals?

 

TN: We had some real pressure. And part of the reason of that pressure was because there was a perception that a lot of the Chinese corn crop didn’t come in last year. But a lot of the drought was outside of that zone. Some of that pressure was alleviated.

 

But still, we’re seeing some pressure on wheat right now in the U.S. It really all depends on how much the current cold snap impacts the output later in the year or the ability to plant. Right now it’s not terrible.

 

Until we start seeing real demand come back in entertaining and in consumption and these sorts of things, we’re not going to see a major demand pull on food because people are already buying their standard cook at home type of things right now as they’ve rebuilt their behaviors over the last year. We’ll see that change. But unless we see a drought or unless we see an issue in a high consumption part of the world, we’re not necessarily going to see a boom in those places.

 

WSN: All right. Thank you for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his views on global markets and saying that, hey, oil prices are going to come under pressure probably in the next two to three months, because this is not really driven by real demand, is just probably weather patterns which are going to normalize anyway in Texas in a few days.

 

PS: He also made a point about oil, where this, I think, a slight surge in prices is actually a short term because supply is going to get back on quite soon.

 

WSN: Yeah, but other interesting news is actually the ongoing saga of big tech versus Australia, because it looks like Facebook has defied Australia’s push to make big pay for news by banning the sharing of content on its platform in the country. And this is the most far reaching restriction is ever placed on any publisher in any part of the world.

 

PS: So the extreme step to remove Australian news came as Google separately struck a global deal with Rupert Murdoch’s News Corp diffusing a long running dispute between the two companies. The dramatically different approaches could mark a pivotal moment for the media industry, which had hoped Australia’s tough regulatory approach would help reset its terms of trade with Google and Facebook worldwide.

 

WSN: So the moves by Google and Facebook came on the day Australia begin debating laws that would force big online platforms to license news. Now Facebook’s action will have a global impact. Under the provisions, news from Australian publishers will be blocked on the platform for all Facebook users, regardless of where they are based. The Australian government said it will continue to engage with Facebook. Press ahead with legislating the code, Canberra also warned that withdrawing news from Facebook’s platform in Australia could dent its credibility with users.

While this is quite big stuff. Actually, yes.

 

PS: Yes. I mean, Australia wasn’t the first country to, you know, get into this spat. I think you really was in having discussions. And France and Spain already had deals with a lot of with Google and Facebook with respect to media purchase. But it’s a question about publishers.

 

WSN: Yeah, I mean, at the end of the day, right. We do know media companies are suffering. Right. Álex has come under pressure. Subscriber growth has come down. How a media company is going to generate the revenue. So in the past, all these big tech companies, the argument was that they got to earn super normal above what is the what super normal profits without paying the likes of the media companies because they were using these media companies content to their benefit.

 

So some countries like Australia and even if you try to kind of diffuse the situation and have, I suppose maybe in their mind, a fairer playing field. But the Google deal nonetheless, if you look at it, the Google deal with News Corp announced on Wednesday goes beyond the Australian market, extending to Murdoch’s titles such as The Wall Street Journal and The New York Post in the U.S. and The Times and the Sun in the UK. No other news publisher has reached a single deal with Google across multiple countries.

 

Now, critics say the deal would benefit News Corp. rather than the rest of the news industry.

 

PS: Yes, well, we’ve been talking about the price. And since you looking at Google’s valuation, I suspect Google’s to be the winner because they have just really this unique access to this quality content. So. So why not?

 

WSN: Well, they’ve pledged so far to spend one billion over the years on buying news content and reach agreements with publishers in about a dozen countries.

 

But we’ll be watching this space because we do a media outlet.

 

But up next, we’ll be discussing the recently announced national unity blueprint. Stay tuned for that. BFM eighty nine point nine.

 

Thank you for listening to this podcast. To find full great interviews, go to PFM Goodbye or find us on iTunes, BFM eighty nine point nine. That is the station.

 

Categories
QuickHit

QuickHit: Can Western companies solve the China dilemma?

This week’s QuickHit, we have Isaac Stone Fish of Strategy Risks to talk about how western companies and other companies around the world should deal with China and compromises that you need to do for that. He also shares the status of Hong Kong as a gateway to China. How about the environmental and human rights violations of China and how the US companies can make sure they are running an ethical business? And what is the status of non-profit organizations in China, especially those that are environment and human rights focuses?

 

Strategy Risks quantifies corporate exposure to Beijing. This was started because Isaac got frustrated at the way that ESG environmental, social and corporate governance providers were ranking Chinese companies and US companies that had exposures to China. Isaac thought it would be fun and interesting and hopefully very useful to have a different way of measuring and quantifying this exposure.

 

Isaac grew up in Syracuse, a nice little place but basically about as far away from the center of anything as possible. He started going to China when he was 16 for something different. He started in Western China and ended up living in Beijing for about six years. He also worked in journalism mostly, it was the Asia foreign policy. Spent a few years doing a mix of public affairs, commentating, bloviating, writing, and then started Strategy Risks roughly six months ago.

 

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This QuickHit episode was recorded on February 3, 2021.

 

The views and opinions expressed in this Normalization of China 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: It’s really interesting looking at ESG and public markets and I think we’ve seen over the past few years a lot of tensions between China and the U.S. They’ve been there for 10 years but they really took shape over the last few years. If you’re a publicly traded company today in the U.S. or traded on a U.S. exchange, what are the things that you need to really think about with regard to China? What are the biggest risks and biggest considerations that you’re talking to your clients about?

 

ISF: One thing that people overlook is the risks of their China strategy. Not in China itself but globally and especially in the United States. The rules for engagement in China are so different for these corporations in China than they are in the United States. And the U.S. is drawing some pretty thick regulatory lines especially around Xinjiang, the region of northwest China where there are roughly a million Muslims in concentration camps. That a lot of times, these major corporations, their China offices will ignore or overlook or not put nearly enough attention on.

 

The messages that we’re communicating and the things that luckily are starting to bubble up into these board rooms is the understanding that to have a China strategy, you need to have a global strategy that is very aware both of what Beijing wants but also what the Biden administration and many American people want.

 

TN: For the last 15, 20 years it almost seems like companies have had a global strategy and then they’ve had this China strategy off to the side because it was such a big market, growing so fast. It seems to me like you’re talking almost about the normalization of China in terms of performance expectations, social expectations, those sorts of things. Is that right? Is that kind of what you’re implying?

 

ISF: One of the smartest ways of the Chinese communist party, which has ruled China since 1949, were the smartest things they have done is made it seem like their country was a normal country. And there’s nothing aberrant about China or the Chinese people. But there’s something quite apparent about the Chinese Communist Party.

 

And the rules for playing in China are quite different than they are in basically everywhere else. What we’re starting to see is the realization that companies need to do something to limit the influence of Beijing on their corporate headquarters, on their products and on their decision making.

 

TN: But can you do that actually? Because if you’re saying an automotive company and most of your revenues come from China, and the Chinese government says something, it seems really hard. And companies have been awkward about doing that for the past say 10, 15 years. Really changing how you help companies treat them like any other country? I think what you raised about what the CCP has done since 1949 is amazing. It’s great perspective. But can the CCP understand that they’re being normalized as well?

 

ISF: The CCP are doing this as an active strategy in as much as such a complex institution has a single strategy. They’re certainly trying to make people think that they are normal in our sort of western liberalism definition of that. Most of the companies that we talk about in this space, the U.S. is a far more important market for them than China. NBA is a great example.

 

China is its growth market. The USA is its most important market and what companies are starting to realize is that what happens to them in China and what touches China doesn’t just touch on their business in China but affects their business in the United States as well.

 

What we do at Strategy Risks is less working with the companies like the NBA that are having these problems, but work with other people in the financial chains, institutional investors, pension funds, endowments and explain to them the different risks and exposures that they’ll have with the companies in their portfolio and some of the problems they might have with being overweight in certain companies about Chinese or American that are complicit in Chinese human rights abuses.

 

TN: From a portfolio investor’a perspective, until very recently, you could park a whole lot of money in Hong Kong and then dip into China as needed. But it seems that that’s becoming less of an easy strategy since the crackdown in Hong Kong last year. Is that the case or is Hong Kong still in a pretty good place to take advantage of mainland stuff?

 

ISF: From a pure markets perspective, Hong Kong is still an excellent place for that. What’s really changed is the safety and the rule of law and the feeling of security for people doing deals in Hong Kong. Hong Kong is still an excellent window into China and we’re seeing Shenzhen and Shanghai supplanting a lot of what Hong Kong is doing in Seoul to agree. But the issue with Hong Kong is much more for the people there as opposed to the people who are using it as a conduit.

 

TN: That’s really interesting what you say about Shenzhen, Shanghai, and Seoul because I’ve been seeing that take shape over the last five or six years and it’s interesting that it’s getting a lot of traction.

 

With Xinjiang and with other things happening socially in China, what about things like non-profits? Issues that they have to raise in China? How can you operate a non-profit in China and stay true to your mission if it’s kind of awkward with Beijing or with the CCP, which are one and the same?

 

ISF: Most times, you can’t. What’s been happening is that a huge amount of western nonprofits have, sometimes it’s this evangelical view and sometimes it’s just well this is a very important country filled with a lot of lovely people and we want to come here and do good. But they find that knowingly or unknowingly, their message and their mission gets corrupted because they need to work with their government partners. And sometimes, their mission is totally at odds with the mission of the party. And so, they have to make sacrifices that I would say perverts what they’re doing.

 

We see this perhaps most intently in both the very human rights focused nonprofits and in the environmental focused non-profits. A lot of whom have found themselves being very praiseworthy of what Beijing is doing even though China’s far and away the worst polluter and the worst carbon emitter. They take signs coming from top leaders that Beijing is committed to making these changes even though the changes often don’t get made. But they are finding themselves in a position where in order to be there, they have to sacrifice some of their credibility. A very heartening sign I’m seeing is people saying, maybe I don’t actually need to be in China in order to do something that’s positive for the world.

 

TN: Do you see a path to China having that type of environment in 5, 10, 20 years time? Or do you think we’re kind of on this this really is it slower than that?

 

ISF: It’s such an important question and I wish I had some good way to answer it. In China, as Chinese officials love to say, has 5,000 years of history. The Communist Party has been in power for what, one and a half percent of that time. At some point, in the near future, the party will no longer rule China. Will that be next year? Will that be 30 years? Will that be 200 years? It’s so hard to say, but it’s certainly not inevitable.