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The Week Ahead – 30 May 2022: Does this relief rally have legs?

We’ve had a big week in markets. The S&P is up 5 percent. We’re looking at whether this rally has legs, where’s the volatility, and if the recession is canceled? Also, we have a shorter trading week next week due to Memorial Day on Monday in the US. What’s to expect in 4 days?

Key themes:

  1. Does this relief rally have legs?
  2. Where’s the volatility?
  3. Is the recession canceled?
  4. What’s ahead for next week?

This is the 20th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

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

Time Stamps

0:00 Start
1:10 Does this rally have legs?
1:58 When will the tail end?
2:40 Crypto has no participation in the rally
3:31 Why tech is still weak?
3:52 Why tech is so subdued?
5:00 What to expect in the options market in the next 4 weeks?
6:42 Durable goods chart from Sam’s newsletter.
8:52 Layoffs in tech, will it continue?
11:30 Will investors and analysts become tougher on companies as we normalize?
13:55 Will we have a recalibration of valuation expectation if there is no recession?
14:34 What to watch out in the 4-day trading week?

Listen on Spotify:

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. This is Tony Nash and I’m joined by Sam Rines and Albert Marko today. We’ve had a big week in markets. The S&P is up 5 percent.

So we’re going to look at a few topics today. First, does the relief rally have legs? We’re also going to take a look at volatility and the recession. Is the recession canceled? What’s happening there? We’ve heard a lot of talk about that. And finally, we’re going to look at the week ahead. So what do we expect for the short week ahead in the US? We have a holiday here in the US on Monday. So what do we expect for Tuesday to Friday in US trading?

So let’s go to you with this relief rally. What’s your thought on this? Does this relief rally have legs?

AM: In short? No, not really. The Fed uses many tools to produce rallies. A lot of it is coming. This week was short covering. Previously, what you’ve seen, especially when during a holiday season, holiday hours, whereas like when I was trading, a lot of liquidity out there is they actually serve the market. They did this over Thanksgiving. They did this over Christmas. If you go back and look at the charts, those 4800 prints were done over holiday trading hours. It’s easy for them to do it. Does it have legs? Probably not.

TN: So legs. Does the tail of this last few days next week, or is Friday the last kind of really interesting day we see for a while?

AM: Well, they have a tendency to figure out what the Bull bear line is, and I think it’s at 4250. Don’t be surprised if Tuesday we’re in the 4200 pushing that line. That’s when the put options are absolutely just completely obliterated after today, for sure, by Tuesday. And then people start getting bulled up. Once they get bulled up, they just pulled the rug.

TN: Sam, what do you think?

SR: Well, I think it’s really interesting that you saw this rally and you had basically no participation in crypto. Crypto tends to be tip of the spear type risk. If you really want to put some significant risk on in a portfolio, you go ahead and buy crypto. That’s just what you do.

So I think that’s a fairly telling sign that, yes, there is a rally underway. And if you look at it, oil is ripping right now, particularly some of the smaller producers. So you are getting some of the underlying stuff moving, but you’re really not having that tip of the spear, real risk type move that you would really want to see for some sort of sustained long-term risk-on type rally.

TN: And we saw guys in Nvidia really take a hit this week. Granted, it’s coming back a little bit, but tech is still weak. And so we’re not seeing some of those risk names really come back.

AM: Yeah. What’s interesting and this goes into the next topic is how are they rallying the market if tech’s not running.

TN: Right. So let’s talk about that. Why is volatility so subdued? I’m not really sure. So we’ve got a chart for the VIX up on the screen. So can you talk us through it’s the lowest point it’s been since Covid. So what’s going on there?

AM: Yeah. So the question is how could it be at a three-year low with such bad news out in the market? Raising rates, Fed sitting there talking Armageddon when it comes to the markets, bad news, bad earnings, everything is going wrong. How possibly could this thing be at the three or low?

Well, they keep it there on purpose to sit there and subdue the VIX. Well, now the VIX is at what, 28? I believe it is right now. But really, they could probably take this to 22 and use that to rally the market rather than tech. But, man, I’ll tell you what, you got to be very careful because the VIX at 22, and if they start rallying the market at that point, 4250 is could be the tip of the iceberg. You know what I mean?

TN: Oh, yeah. I guess my question, Albert, is the VIX measures S&P options for the next 30 days. Right. And so what it’s telling me is that the options over the next four weeks aren’t expecting a dramatic downward move. So are they just playing in that options market to make sure that it looks pretty orderly or what exactly is happening?

AM: Oh, yeah. They’re creating a story. They’re creating a narrative and tell you, hey, it’s time for you guys to get bulled up. Okay. Their objective is to erase excess money out the system and to give us a soft landing. They have said this much to Sam’s point, which he’ll talk about is they said we’re going to raise rates and we’re going to let off when we have to let off. They’re giving you all these signals to get bulled up.

TN: Yeah. I just want to make it clear because I think there’s a misconception out there about the VIX. I think a lot of people believe that the VIX reflects volatility in the market today. And that’s not at all it. I just want to make clear as we talk about it, that we’re looking at the options market over the next 30 days and how the Fed potentially is playing in that options market to make things look like a soft landing. Right?

AM: Yeah. They’ve erased trillions of dollars in the past OPEXes, and they’re just lining everybody up for another one. I mean, I think at one time it was 9 trillion. Another instance was 11 trillion. Just obliterated options.

TN: There’s a lot of opportunity in this. Right. I mean, if you see what’s coming, it can be really interesting.

AM: Well, this is a pattern thing. People do what they know. They’re creatures of habit. Fed is no different.

TN: That’s right. Very good. So on that note, Sam, you had an interesting newsletter out this week looking at kind of the recession. And one of the interesting charts which you have now is looking at durable goods, all durable goods and durable goods, excluding transportation.

Can you talk us through that a little bit and help us understand what that means for kind of the recession that we hear talked about so much over the past few weeks?

SR: Yeah, certainly. It’s pretty straightforward. Right. If you look at a combination of same-store sales across for retailers across all of them and not just a few big ones that made headlines, things were fine. Then you look at durable goods.

Durable goods skyrocketed coming out of COVID. And guess what? They’re continuing to make new COVID highs. Yeah. They just put it on a month-over-month basis. But it’s pretty aggressive to say that while they’re still growing and still ex-autos above anything that you can get back into the 80s. That’s a pretty big figure there.

It’s very hard to say, hey, we’re in the middle of or entering a recession when you have jobless claims sitting at 210, 215 thousand a week and you have durable goods sitting that high, the Red book same-store sales are in the low teens. That is an absolutely stunning figure for any time outside of call it COVID. Right. I mean, normally you’re very pleased with a 5% figure.

So it’s very difficult to get to the whole recession narrative unless you’re looking for something to really break here in a major way. We’ve already seen a housing break. I mean, we called that out a long time ago, but at the end of the day, if you don’t have people defaulting on their homes, which they’re not, and you don’t have a significant number of layoffs in the construction industry, which we haven’t seen, you can have a slowdown in home building and home builders and home buying and not really have it be systemically important to the US economy.

TN: Right. And we’ve had some layouts in Tech, which you talked about a couple of weeks ago, but a lot of those are bodies that people kind of panic bought. Right. They overbought headcount and now they’re shedding that headcount that they overbought.

I don’t know if that’s isolated to Tech or if that’s just happened across a service industry generally, but it seems like we’re starting to see a narrative that there’s a lot of layouts happening and a lot more coming. Do you see much of that, or are you seeing much of that outside of Tech?

SR: No, not really. It’s a San Francisco problem, not a San Diego problem. That’s the way I like to frame it is. Yeah. You overhired a lot of people in tech.

TN: And paid a huge amount of money for them.

SR: And paid a premium. And when you paid a premium and figured out that COVID wasn’t forever and the COVID demand wasn’t forever, if you want to realign your cost structure with your revenue outlook, you’ve got to take some head count down. But to be honest, you’re really not seeing it be something that’s systemic to say the entirety of the labor market by any stretch. West Texas isn’t laying people off on the oil drilling front. They still need.

TN: I’ve two friends who’ve just been hired to go out on rigs in the past two months. I mean, that is still building up.

SR: It’s still building up. And there’s nowhere near enough labor to do it. And you don’t have enough labor and leisure, right?

TN: Yeah.

SR: I really do think that we’re going to see the summer of vacations at any price. And if you look at leisure and hospitality, they are well understaffed. And that’s going to continue to be a problem. This is San Francisco problem, not a San Diego problem.

TN: Okay. So let me ask you guys, and I’ve been running through this, bouncing this off a couple of people over the past couple of weeks. But through the COVID period, banking analysts and investors have been pretty lenient on management teams. Hey, just make it through. Just keep running your business. Yes. We can tolerate a lot of kind of variability. They’re very forgiving on things.

Now that we’re normalizing, and I heard someone say this week something like only 7% of the workforce is actually working from home. I don’t know if that’s accurate or not, but I heard somebody say that maybe it was 17, but I think it was seven.

But now that we’re kind of normalizing, will those investors and analysts become tougher on companies on those management teams? Because it seems like they’ve been very loose, giving them huge birth to do whatever they want just to keep the business together over COVID? Are those expectations tightening down?

AM: I would have to say absolutely. I mean, in the past two years, you’re talking about just companies treading water, navigating the turbulent water of the market. Now you need actual leadership to figure out what’s going on with the supply chains, how to get workers working at a productive rate, getting supply and so on and so forth.

It’s crunch time now because although we can talk about a recession not happening, and I think that’s accurate. Look at the retail numbers that just keep coming out. We even said don’t short retail do that. The piper has got to be paid and management has to step up right now. 100%.

SR: Yeah. And step down. I think that’s a completely relevant one. And a lot of it is concentrated in VC.

TN: Right.

SR: A lot of it is things that you don’t get the AK on. These are private companies that raised at ridiculous multiples during COVID. Those are going to continue to see some downroads here.

TN: Right. But not just in private companies. Do you think that because of the change expectations post COVID, do you think we’ll see some management turnover in some large companies?

SR: Yeah. You’ve already seen Jack Dorsey out, right? You’ve seen that kind of called the Elon effect on that front? Yes. You’re going to see a lot of them.

In particular, I would say you’re probably going to see give it six to nine months when the body is washed up on shore from the downturn in DC, there’s going to be a lot of people that went over their toes there and they’re going to be axed.

AM: Yeah. Not just that, Sam. Not just that being pressured but also there’s going to be a lot of companies out there looking for merges and acquisitions that are going to force these.

TN: So if we don’t have a recession, we’ll still have a recalibration of, say, valuation expectations. Is that fair to say?

AM: I would say so. I mean, talking about recession, it’s a numbers thing. It’s a perception of what numbers is being displayed by the Fed and the Treasury. I mean, they can just fabricate those for however long they have to. So you won’t technically be in recession, but wage inflation, inflation is going out of control.

TN: You kind of rolled your eyes when I said that, but what were you thinking?

SR: I don’t know.

TN: That’s a good answer. What do you expect for next week? We’ve got four trading days next week. What’s going through your mind and what are you thinking about as you go into the holiday weekend?

AM: Bull bear line, 4250. I expect them to at least try to come close to that. But there’s going to be a lot of sellers out there trying to get whatever they can figuring out that OPEX and the Fed minutes are coming out next month with more rate hikes.

TN: Okay, 4250 on the S&P. Sam, what are you thinking?

SR: I’ll be watching the dollar really closely. If you continue to see a lot less pressure underneath the dollar here, oil is going to moon. So I’m watching oil very closely, mostly due to the dollar and some downward pressure on longer term rates. As we continue to see the narrative of the fed go fast then backtrack call it 1994 with 2001 characteristics.

TN: Interesting. It’ll be great to see. It’d be really interesting to see it, guys. Have a great holiday weekend. Thanks very much and have a great week ahead. Thank you.

AM: Thanks.

SR: Thank you, Tony.

Categories
Visual (Videos)

CNA Asia First: Omicron sparks sell off

CNA Asia First: Omicron sparks sell off

The full episode was posted at https://www.channelnewsasia.com. It may be removed after a few weeks. This video segment is owned by CNA. 

Show Notes

CNA: Welcome back to Asia First. Wall Street took a hit overnight amid concerns that a rise in Omicron cases would stall growth and add to inflationary pressures. Experts say supply chains and corporate profits could be dealt another blow as the possibility of increased restrictions is back on the table.

The Dow and the Nasdaq tumbled 1.2 percent. The S&P 500 closed 1.1 lower, with financials and materials among the biggest decliners. Also weighing on sentiment, Goldman Sachs has lowered its US growth forecast for next year. This after Senator Joe Manchin said over the weekend he would oppose President Biden’s 1.75 trillion dollar spending bill.

Let’s bring in Tony Nash. Now, he’s founder and CEO of Complete Intelligence, joining us from Houston, Texas. Lots to talk about today, Tony. So let’s start with Omicron. How much do you think potential measures are going to dent economic growth given the spread of the highly transmissible variant coinciding with the end of the era of cheap money?

TN: Yeah, it’s a good question. I think it really depends on where in the US you are. I’m in Texas and in in certain parts of the country you could barely tell that there’s a pandemic. There aren’t restrictions at all here, in Florida and other places. And also, we had our surge a couple months ago. So we’re on the downside of that surge now.

In the north, where you have kind of seasonal viruses, they’re on the up upward motion of the surge and so there’s a lot of sensitivity in northern states like New York, Boston, or Massachusetts, Washington DC, Michigan those sorts of places. So I think what you’re seeing is a kind of seasonal sensitivity because of Omicron and people getting nervous and so you know, again it really all depends where you are in the US.

For the upcoming Christmas break, flights are packed. Americans are traveling again. These sorts of things are happening. So, of course, there’s always a risk that people will do a hard lockdown like DC has put in some new measures today. But other places are seeing the virus as endemic and just kind of trying to move on with it. So, I think it could go either way but I don’t necessarily think we’ll have sustained negative impact. We could have short-term negative impact.

CNA: What about the risk from Fed moves and do you think the projected three rate hikes next year are going to be enough to contain inflation given the potential for Omicron to cause these price pressures to spike?

TN: Sure. You know, I do think that the Fed will pursue the tightening, meaning of its balance sheet pretty quickly. I think the rate hikes they’ll probably do one and wait and see and then they’ll proceed with the others later.

I think we can’t forget that 2022 is a midterm election year in the US and the Fed, you know, they they try to stay nonpartisan sometimes. But you know, there’s going to be a lot of pressure for them to make sure that the economy continues growing at an acceptable pace and kind of pushes down against inflation, So they’re in a tricky spot so they can’t just go out of the gate with three rises. They have to take one. See how the market digests it. Continue to build up expectations for the later rate rises then proceed based on how the expectations are set in.

CNA: What would that mean for the flows into markets given how Biden administrations Build Back Better Plan is also facing a setback? We could see a narrower bill than the 1.75 trillion on the social and climate front. What then do you think the market drivers are going to be if both the central bank and the government are curtailing that stimulus?

TN: Right. You know it is possible. Like I said earlier, kind of travel those sorts of things are coming back. I think Americans are just dying to get back to something that’s a little more regular, a little less constricted.

You know we do see things like food, entertainment, travel these sorts of things moving. Temporarily, we do see things like technology dialing back. But you know as we get into Q1 or Q2, we think that stuff will come back and be interesting again. So. But not necessarily as much of the work from home activities. People here are gradually getting back into the office.

So you know what we will see say for US equity markets is because tapering and interest rates we will likely see a stronger Dollar and that stronger Dollar will attract more money from the rest of the world as well. So both domestic growth, although it’ll be a bit tepid in ’22 will help to continue to push markets marginally.

We’re not going to see massive growth like we saw in ’21. But the the strengthening US dollar will draw up liquidity from other parts of the world, too.

CNA: Just very quickly if you can, Tony. What do you think the outlook for energy demand and oil prices is going to be like given how some countries are already reverting back to containment measures?

TN: Yeah. Oil is tricky. In the near term, I think oil is a little bit tricky for the next few months. I think the outlook is better as we get say to the end of Q1 and into Q2. But for now, we’re not expecting a dramatic upturn in crude prices like we’ve seen in gas prices in Europe and other places.

CNA: Okay, we’ll leave it there for today and keep an eye on those commodities. Thanks very much for sharing your insights with us. Tony Nash of Complete Intelligence.

Categories
Podcasts

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 https://www.bfm.my/podcast/morning-run/market-watch/bottlenecks-to-ease-with-xmas-coming on November 25, 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.

 

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.

Categories
QuickHit

Quick Hit Cage Match: Van Metre vs Boockvar on Inflation (Part 1)

Van Metre vs Boockvar on Inflation (Part 1)

This special QuickHit Cage Match edition is joined by opposing sides of inflation versus deflation with Steven van Metre and Peter Boockvar. Why one thinks we’re having deflation and the other believes in inflation? How soon will this happen and to which commodities and industries?

 

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

 

Part 2 is out. Watch it here.

 

Steven van Metre is a money manager who have invented a strategy called Portfolio Shield. He also has a YouTube show that discusses economic data and the news three days a week.

 

Peter Boockvar is the Chief Investment Officer and portfolio manager at Bleakley Advisory Group. He has a daily macromarket economic newsletter called The Boock Report.

 

 

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This QuickHit episode was recorded on October 14, 2021.

 

The views and opinions expressed in this Quick Hit Cage Match: Van Metre vs Boockvar on Inflation 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

 

TS: I kind of want to start broadly here. So if you could give me your two minute elevator pitch on your view on whether you’re an inflationist or deflationist, even though we already know who is who. And how fluid is your view?

 

PB: So if we just break down, inflation is just the simple, too much money chasing too few goods. We certainly have too few goods with supply challenges around the world and too much money with a lot of fiscal spending over the past 18 months financed by the Federal Reserve buying most of that debt that the treasury issued to finance a lot of this fiscal spending. So it’s combining with inflation situation where it’s really just a good side. That is the part of the debate.

 

Services inflation is rather persistent. For the past 20 years leading into Covid, services inflation XNERGY is averaged almost 3%, but goods have been basically zero. And it’s always that trade off that has resulted in an inflation rate of 1% to 2% over the last couple of decades. But now you are back on trend with services inflation, and I’ll argue that will accelerate from here because of rents. And now you combine that with a period of goods inflation. Now, goods inflation is typically cyclical, if history is any guide. But how long of a cyclical rise we have really is the question. And I just think it’s not going to be so short term that it could last a couple of years.

 

SVM: Yeah. So I think that the inflation story is going to be more, at least the former Fed’s view of being on the transitory side, and I take that view strictly from my understanding of how the monetary system works, looking at the velocity of money, the fiscal stimulus cliff going away.

 

While I do agree that Peter will be right and that we will likely see higher inflation, and I agree in where he thinks it’s coming from in terms of the supply chain. I completely agree with that. But I do think ultimately those higher prices will get rejected without a sustained amount of new money coming in from fiscal or other means or from lending growth. And so even though we’ll see rising prices and they will probably go up a bit more, ultimately, I think the consumer will reject them just like we saw during the great financial crisis and that we are more likely to see inflation turn down pretty hard and perhaps even into the deflation.

 

TS: Either one of you can jump in here. Where do you see inflation, deflation hitting the soonest and the hardest? We’re looking at commodities that are still running very hot, supply chains that are very stressed. At what point do you think we see demand destruction? And how long do you think that we’re going to see these extremes in the destruction and supply chains that are causing much of this current inflation?

 

PB: Well, we’re already seeing some demand responses. We are seeing a slowdown in economic growth. Part of that is a pushback against these price increases. If you look at the housing market, there’s particularly the first time home buyer that has sticker shock and doesn’t want to pay for a home that’s priced 20% more than it was a year ago. And they’re saying, okay, let me take a pause here.

 

So there is some of that. But then, of course, there’s also some forced demand destruction because enough product can’t be delivered and that an auto plan has to shut down an assembly line because they can’t get enough parts, and they’re not sure when they’re going to be able to get enough. Or it’s Nike that can’t deliver enough store product to foot locker because it’s going to take 80 days to get it from their factory in Vietnam rather than 40 days.

 

Now, at some point, goods, inflation is going to be temporary. The question is, how long does it take to resolve itself? And one of the things that I think will unfold here is that let’s just take transportation costs, because that is a main factor in the rise in inflation, because every single thing that’s made in this world ends up on a plane, a ship, a truck or a railroad to get it from point A to point B.

 

So let’s just say I’m a toy manufacturer, and my transportation costs are now 35% year of year on top of the cost of my wholesale cost to actually get the product, and my cost of labor is up 5% to 7% year over year. Well, I’m not going to recoup that all in one shot by raising prices to Walmart by 10%. It could take me a couple of years to recoup that. But I promise you, I’m going to do my best to do so, and I’m going to space that out. I’m going to try my best to cushion the blow to that end, buyer who’s buying for their kids for Christmas by spacing out that price increase. But I know I’m going to have visibility because everyone else is going to be doing the same thing for the next three years in raising prices so I can recapture, I may not be able to regain completely, but recapture some of my lost profit margin. So that’s one of the reasons why I think this is going to be sticky.

 

And to Steve’s point, yes, there’s going to be a fiscal fall up next year to some extent. We’ll see how much of the lost transferred payments are going to be offset by both the child tax money, plus people going back to work. We saw jobs claim have a two handle today for the first time since pre-Covid and to what extent wage increases can offset the rise in the cost of living? And yeah, we’ll have to see that. But the question is, how much do prices come back in?

 

You take lumber, for example, and I’ll give it to Steve right after this, lumber prices in the heart of the housing bubble in the mid 2000s was about $300. Now it went up to $1600 now it’s about 650. The cost of a home, construction wise, and what a builder would charge their customer is not going back to where it was. They are going to use this and fatten their margin as best they can, and it’s going to take years for that buyer to experience what is truly reflected at 650 lumber, but that’s even more than double where it was. So it’s still multiple years of price increases that are going to flew through the chain.

 

SVM: Yeah. Peter, you bring up some absolutely excellent points about how long this could go. And that’s something I really haven’t considered that it could run a couple of years because I look at this fiscal cliff and to me, you go back to the pandemic and we know all this was driven by fiscal stimulus. And without it, and I know we still have the child tax credit for a bit. I’m just concerned that this drop off comes a lot stronger than most people are expecting. And I do realize a lot of these goods are sitting off ports waiting to get shipped in, waiting for truckers to take them to warehouses and eventually on the stores.

 

The question I keep asking is when those goods hit the shelves, will consumers be there with money? Do they have the money to spend? Are they going to go back to work fast enough? And even though, as you mentioned, we had a two handle today, we both know that that’s almost 50% higher than normal.

 

So the question is we still see this huge amount of job openings everywhere. We’re not seeing people go back to work. We saw the jolt state. I know you looked at that recently from the other day where people are quitting their jobs. And so I keep coming back to the same question is will consumers come and spend and keep these prices up? If they don’t, then we get the reversal. But that’s my question. Do they come?

 

PB: It’s a great question of whether that will be the case. I don’t think the labor market is going back to where it was pre Covid. And all you have to do is look at the participation rate to confirm that, particularly for the age group of 25 to 54 year olds, which is sort of the core wage earning population, and it’s still well below where it was in February 2020. So, yeah, we’re not going back to a 3.5% unemployment rate with the same number of employed people anytime soon.

 

Now, what is replacing a lot of the lost sort of or not made up fiscal money that has been spent, particularly December 2020 with Trump’s last fiscal package and then repeated just a few months later with Biden, is that eventually we do have that child tax money that’s going out. We do have an increase in food stamps. Basically that reservation wage, which is basically the wage level at which someone has a tough choice of whether do they go take that job or do they collect all the government handout? That continues to go up.

 

So that person who may not want to go back to work while they’re getting a lot of benefits elsewhere. And while the aggregate, we’re going to probably see some sort of fiscal drop off. The question is, is that enough from the demand side to offset what’s going on in the supply side?

 

Now, again, supply side is going to normalize at some point. There’s no question about it. Just a matter of when. Taiwan semi is spending billions of dollars that just broke ground in June in Arizona to build a semi plant. Well, it’s not going to be done until 2024.

 

Now, there could be a lot of double ordering, triple ordering that’s going on in Semis right now. We’re going to have this major inventory hangover. We’re already actually seeing it in DRAM, for example. And that could happen. And there’s going to be a mess at the other end of this. I just think that this drags out and also a key part of this inflation debate, too, is in what context is this coming in?

 

If we had a Fed funds rate in the US of 3%, if we had a ten year at four to five, if we didn’t have such thing as negative interest rates, I’d say, “you know what the world can handle about of higher inflation because interest rates are higher. If equity valuations weren’t as extreme as they are and they were more in line with history,” I would say, okay, “we can absorb it.” But that’s not the case right now. We have valuations that are excessive in a variety of different things. Obviously, we have zero interest rates, negative interest rates, QE and so on. So even if inflation decelerated to, let’s just say a 3% rate for a year or two. I just don’t think that the world is positioned for that.

 

SVM: Yeah. I’m not worried about the upper 50%. I’m really curious about the bottom 50%, who is really the big recipients. I know a lot of people got the fiscal checks, but my wife is a fourth grade teacher, and one of the problems they’re having in schools right now, and you’ve probably been hearing about this is a kid or a staff or a teacher gets Covid, and next thing you know, they’re quarantining out segments of the classroom. They’re sending them home. And the parents are really struggling with this because they want to go back to work. But then all of a sudden, their kids back and they can’t.

 

And so they’re forced to stay at home and they don’t have the family support. Maybe they don’t want to send the kids to grandma and grandpa because they don’t want them to get sick in case their kid has it. And so I keep wondering, without all this fiscal support from the government is the natural expectation, particularly with higher energy prices, as we go into the winter, that these cash-strapped households are going to ultimately make the choice to I’ve got to buy food. We all know that’s gone up. We have to pay for energy. We know that’s gone up. As Peter, as you mentioned earlier, that rents are probably going up. So what does that leave in terms of discretionary income to spend to drive inflation?

 

And I kind of wonder, without their spending power, how is this going to last? And that’s my big concern is I don’t think it does. I think consumers are going to reject it. I don’t think they have the income. I don’t think the money supply is growing fast enough. And then you start looking at the dollar and interest rates and you would want to see the dollar going down. You want to see interest rates going up and we keep seeing the dollar fighting to go higher.

 

We keep seeing interest rates trying to press back lower, and it’s telling us that financial conditions are tight. And, of course, the Feds potentially about to taper and start to remove their support of that. And I just keep kind of shaking my head going, like, how are we going to get through the holiday season unless consumers come out and spend a big way? I’m just not convinced.

 

TS: Well, perfect segue into what I kind of wanted to get into next was talking about the Fed tapering. So first, because everybody’s talking about this. Do you see the Fed tapering? And if they do, how much is this going to affect inflation? And also, I know the market is saying the Fed is going to raise rates in ’22, ’23. But is this a reality at all?

Categories
Visual (Videos)

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

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

 

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

 

Show Notes

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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