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The Week Ahead – 7 Mar 2022

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

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

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

https://open.spotify.com/episode/4SIvGPktSKT7ezaVPEUNPf?si=fcb635574d0047ba

Follow The Week Ahead experts on Twitter:

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

Transcript

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

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

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

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

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

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

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

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

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

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

TN: Tracy?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: So weird.

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

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

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

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

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

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

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

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

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

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

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

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

TS: Something decided. Yeah.

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

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

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

TN: Are their pipelines between Russia and China?

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

TN: Okay.

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

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

TS: No, that was buying jet fuel.

TN: Okay.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AM: Got you.

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

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

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

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

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

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

SR: Yes.

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

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

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

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

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

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

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

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

AM: Yes.

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

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

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

TS: Thank you.

AM: Thanks, Tony.

SR: Thank you.

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Inflation: Buckle up, it may get worse (Part 2)

Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation, part two, where we start looking into things like raw materials cost versus processing and manufacturing bottlenecks. Also discussed are the wage inflation and labor availability and how long these impacts will last. And finally, we start talking about central banks. What will the Fed do? Will it do anything? When will it do it?

 

For those who prefer to listen to a podcast, here’s the Spotify link for you: https://open.spotify.com/episode/3CK3SNwMK97oWLy1DMRQnD?si=uV1As8VsTxSVrQNE0iYuiA You can also find us in other podcast audio streaming services. Just search “QuickHit”. Thank you!

 

Part one covered a lot around specific commodity inflation and why it’s happening.

 

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This QuickHit episode was recorded on April 28, 2021.

 

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Show Notes

 

TN: What the people in the middle. So the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things, or are they passing that directly along?

 

NG: Sorry, Sam. I’m jumping in here. The beauty of that question right now is there was a major headline, the Financial Times talking about margin compression of how US corporates are going to be increasing prices. It was today. You have the likes of Chipotle. We’ll go on to that. That’s a labor cost issue. But the other company, you know, J&J, various bare necessities manufacturers for nappies for kitchenware also they’re saying they’re going to have to put price pressure through to the consumer and as we were discussing just before we started, there’s the elasticity of price increases is very high.

 

The elasticity of price decreases is extremely low. And I would contend that this becomes a rolling, snowball effect as these prices get passed through to the consumer. There are other costs that will be passed through to which we can talk about later on labor side. But this clearly, one of the signals that our well worth watching, on the margins in the corporate reporting, and all of them are suggestive of higher prices to the consumer.

 

Then you look at the ISM prices paid. I have a chart, a model that looks at that versus the CPI. And if that sticks to what it’s done over the last couple of decades, it’s indicative of CPI, actually, the big figure having a getting up to somewhere around four, maybe even higher.

 

TN: Which was kind of a China 2011 scenario of four to six percent CPI.

 

NG: Correct. But also also the the process of decoupling, as long as it may be, that process has created a demand because of the supply shock.

 

There’s a supply shock in the system. The demand is adjusting there, too, so that work as additional demand to fill in the gaps, so if the decoupling replacement process is long standing, the demand is still there, it’s a matter and then catching up. There’s a price disparity caused by that.

 

TN: Yeah, we definitely have a mismatch, at least in the short term. And will those supply chains catch up? That’s a real question. Sam, what’s your view on that in terms of manufacturers being able to absorb these cost and margin pressures?

 

SR: So I’ll jump to the housing market as my example, which I think is one of the more interesting ones filtering, filtering through down into lumber.

 

A very close friend of mine in Houston is delaying the start of one hundred and ninety homes that were supposed to be going into, well… He has the pads laid. He won’t build those homes until lumber prices go down. It’s the largest backlog he’s ever had. And that got us talking and kind of working through the market. And when you look at the market for pine studs in the US, it’s an intriguing look into kind of where the cost pressures are coming through, where mills are making mills that make the two by fours are making an absolute fortune off of the disruption.

 

But if you own a pine stand of several thousand acres, the tree that you are cutting off of it is the exact same price that it was a year ago. You have seen none of the prices at all.

 

TN: So there’s not a supply, a raw materials supply issue. It’s a processed materials issue.

 

SR: Yes. Exactly. So it’s the supply chain breaking down. You didn’t have enough. You didn’t have the mills up and running for a couple of months. You had about 40 percent of the capacity offline. And that created a shock to the system that eventually will be sorted out at some point.

 

We didn’t destroy any capacity for two by fours. We’re building even at the current rate, we’re building one point seven million homes. That’s nowhere near what we were doing in 2005. And yet lumber is four times where it was. So, yeah.

 

NG: May I ask a question because you’re obviously in touch with that level on a micro basis? So one of the things that I’ve been told by several different sources is they don’t disagree with your number coming down eventually. The problem the homebuilders now have is labor shortage.

 

SR: That might be a problem in the northeast. That might be a problem in a kind of coastal problem in the US, where I have fewer contacts in construction. But in the south, there’s no labor shortage. Wages are still very strong. You have some projects that were delayed for large oil which created a supply of able bodied plumbers, electricians, where there’s a shortage elsewhere. So I would say that’s probably very true for parts of the country.

 

There’s anecdotally, Beth. Beth Iron Works? One of the major boat docks in the north, northeast is driving around an RV trying to recruit people to come, trying to recruit welders. That was a problem before Covid that was and will remain a problem. The trades will be a big issue. Common labor, particularly in the South, does not appear to be an issue. That is an issue in the north.

 

NG: I’ve heard it’s an issue in Florida, actually, which is back to you point about coasts. Sorry, I interrupt.

 

TN: We’re in Texas. It’s the Promised Land. I mean, I think you…

 

NG: Would agree with you on that one.

 

TN: OK, so we’ve gone long. I know these are very detailed issues, but I’m going to ask another question. I did ask for some questions over Twitter.

 

So one of them came in from Brent. This was around supply chain disruptions, which we’ve already talked about. There’s another from Jerrett Heath. He says, “Will it be velocity or magnitude that causes the Fed to react to inflationary pressures?”

 

So what do you guys think? Are we going to see kind of the magnitude inflation push the Fed to react or what’s going to push the Fed to react to start to taper a little bit, if they do at all?

 

NG: I would say both at the same time. My great fear is that there is, and this was actually covered by the Wall Street Journal, but I’ve written and spoken about this as well. I sit there looking at the Fed becoming reactive rather than proactive, and the punch bowl analogy is gone, and that worries me enormously because they have great confidence in something that they’re forecasting as transitory and we know what their forecast record is, and if you really want a bad forecast record, just go to Frankfurt and see what the ECB is all about.

 

Now, it’s interesting to me that the conventional wisdom, the consensus forecast is for tapering to the end of this year as opposed to next year. It seems like the more people talk about the inflation pressure, the greater it is. But I wonder whether we will get tapering. That’s what worries me about the Fed.

 

I’ve been really working hard on looking at what Claudia Sahm has written and said over the last couple of weeks. She wrote an op ed in The New York Times and Bloomberg. She’s said… She’s an ex-economist for the FOMC and the Board of Governors, actually. And you get the feeling that the priorities are unemployment with equity, racial equity as opposed to equality. Furthermore, you get the feeling that financial stability… Both of those more important than inflation.

 

Now, if that’s the case and we start to see any signs of a taper tantrum, I worry that this Fed is going to do a proactive. Either stop the idea of tapering or do a twist or something that eases this market. I think they’ve got themselves, we have a very political Fed that, if it’s reactive by nature, it could be procyclical by action. And that’s where I find I really worry about it.

 

Then, we’ve got Powells term expiry February. Well, Lail Brainard is one of Janet Yellen’s favorite people. And if she gets in, we’re going full MMT. So those are my concerns about the tapering, its focus on financial stability and the risk that reactive policy will be procyclical.

 

TN: Interesting. OK, that’s great. Thank you. Sam. Help me understand, what’s your point of view on this? What gets the Fed to react and how do they react?

 

SR: Yeah, so I would go with neither of those will get the Fed to react. It’s not a question of should they or, you know, what they think they should do. But it’s a question of will they. And they won’t react to inflation. They do not care about the magnitude. They do not care about the velocity. And they won’t care for at least another nine months because we know the combination that they’re going to look through, the combination of basic facts and supply chain disruptions, at least through the end of the third quarter. They do not care. And then they will start the clock on their four quarters of inflation above or at two percent, and they want full employment before they raise. That’s four percent at least on measured unemployment.

 

So I would say, it, whatever you want to look at for inflation numbers, they don’t care. And maybe they should, but they don’t.

 

TN: So they don’t care yet. Or they don’t care period?

 

SR: They don’t care, period, until it’s been until it’s been a year of around 2 percent in this summer and fall don’t matter to them.

 

NG: Let me add one or it’s too late.

 

SR: Yes.

 

NG: I’m with you. You and I seem to agree. I mean, that is exactly the impression I got from Claudia Sahm’s words. I mean it was just straight up. And that’s where I worry, you know, I have a huge respect for Lail Brainard. She is a very, very accomplished economist. But she’ll go full MMT is what Janet Yellen wants. It’s what the Democrats want and I really worry about that.

 

Plus, you combine this with here we go back to Larry Summers. You combine this with this fiscal effort and one thing that, so in American terminology, progressive policies typically have historically been inflationary. In English terminology, is what I am, these socialist policies have a history of inflation. More government intervention, more pushing against the string of inefficient allocation of resources. Labor restrictions, minimum wage, universal basic income. It all leads to in one direction.

 

So I agree with you, Sam. I think the Fed doesn’t care and I think, hence, the reactive. When they react, it’s going to be, in my view, potentially too late. It’s already started.

 

TN: So I just sent out on Twitter a chart that Sam published about three weeks ago from another source on the negative impact of fiscal stimulus, and as we end up ’21, like in Q3, Q4 of ’21, that fiscal stimulus starts to have a negative impact. And certainly in ’22, the US fiscal stimulus has a negative impact.

 

So, you know, there are a number of things to worry about, not just with inflation, but with the efficacy of some of this fiscal stimulus that’s going into the market.

 

So with that, I want to thank both of you guys. Honestly, we could talk about this for hours. I would love to have this discussion with you guys again, you know, even in a couple of weeks to talk about other issues. So let’s see where this goes. But thank you so much. Thank you very much for your time on this. I really appreciate it.

 

We’ll get this out as quickly as possible. Thanks to everyone who’s watching this. Thanks for everyone who submitted questions. For those who did submit questions, for the questions we used, we’ll give you guys a month of CI Futures and look forward to the next time. Thanks for joining us.

 

Categories
Podcasts

Stories from the Cloud: The Forecast Calls For…

Tony Nash joins veteran journalists Michael Hickins and Barbara Darrow at the Stories from the Cloud podcast to talk about the forecast calls for businesses, and how AI and machine learning can help in predicting the futures in budget forecasting. How does his company Complete Intelligence dramatically improve forecast accuracy of companies suffering from a huge 30% error rate. He also explained the AI technology behind the CI solutions and strategic toolkit, and how this practically applies to global companies. How can they benefit from this new technology to better be prepared in their budget planning and reducing risks in costs?

 

Stories from the Cloud description:

It’s not easy to predict the future. But when it comes to business and cash or financial forecasting tool or software, the right data and the right models are better than any crystal ball.

 

Tony Nash, CEO and founder of Complete Intelligence, explains how AI and the cloud are giving companies better cash forecasting software tools to see into their financial futures.

 

About Stories from the Cloud: Enterprises worldwide are turning to the cloud to help them thrive in an ever-more-competitive environment. In this podcast, veteran journalists Michael Hickins and Barbara Darrow chat with the people behind this massive digital transformation and the effects it has on their work and lives.

 

Show Notes

 

SFC: Hey, everybody, welcome back to Stories from the Cloud sponsored by Oracle. This week, I am here, as always, with Michael Hickins, formerly of The Wall Street Journal. I am Barbara Darrow. And our special guest today is Tony Nash. He’s the founder and CEO of Complete Intelligence. And this is a very interesting company. Tony, thanks for joining us. And can you just tell us a little bit about what the problem is that Complete Intelligence is attacking and who are your typical customers?

 

Tony: Sure. The problem we’re attacking is just really bad forecasting, really bad budget setting, really bad expectation setting within an enterprise environment. Companies have packed away data for the last 15, 20 years, but they’re not really using it effectively. We help people get very precise, very accurate views on costs and revenues over the next 12 to twenty four months so they can plan more precisely and tactically.

 

SFC: It sounds like a big part of the mission here is to clean up… Everybody talks about how great data is and how valuable it is. But I mean, it sounds like there’s a big problem with a lot of people’s data. And I’m wondering if you could give us an example of a company, let’s just say a car maker and what you can help them do in terms of tracking their past costs and forecasting their future costs.

 

Tony: So a lot of the problem that we see, let’s say, with the big auto manufacturer, is they have long-term supply relationships where prices are set, or they’ve had the same vendor for X number of years and they really don’t know if they’re getting a market cost, or they don’t have visibility into what are those upstream costs from that vendor. And so, we take data directly from their ERP system or their supply chain system or e-procurement system and we come up with very specific cost outlooks.

 

We do the same on the sales revenue side. But say for an automaker, a very specific cost outlook for the components and the elements that make up specific products. So we’ll do a bill of material level forecast for people so that they can understand where the cost for that specific product is going.

 

Before I started Complete Intelligence, I ran research for a company called The Economist and I ran Asia consulting for a company called IHS Markit. And my clients would come to me and say, there are two issues at both companies. Two issues. First is the business and financial forecasting tool or even strategic toolkit that people buy off the shelf has a high error rate. The second issue is the forecasts don’t have the level of context and specificity needed for people to actually make decisions. So what do you get? You get very generic data with imprecise forecasts coming in and then you get people building spreadsheets and exclusive models or specific models within even different departments and teams and everything within a company.

 

So there are very inconsistent ways of looking at the world. And so we provide people with a very consistent way and a very low error way of looking at the future trajectory of those costs and of those revenues.

 

SFC: So I’m curious, what is the what is the psychology of better business forecasting software? So on your customers and I’m thinking, if I’m a consumer, so this is maybe not a good analogy, but if I’m a consumer and I look at the actual costs are of a phone that I may have in my pocket, I may think, jeez, why making a thousand dollars for this? But then part of me says, such things mark up and well, I guess so. There are uncertainties in financial projections. So on me, I mean, I don’t need a financial projection software to tell me that the components of the pocket computer have don’t add up to what I paid for them. But I kind of understand that there needs to be money made along the way. I just I want it. Right. How does that translate on a B2B perspective? What are the people’s attitude about price and how do they react to the data that, as you said, I mean, heretofore, it’s kind of been unreliable.And all of a sudden, I think you say a lot of procurement projections have been around 30 percent, which is huge. Right. So how does that happen and how do people react to something that seems more trustworthy?

 

Tony: Well, I think that expectations depend on the level within a manufacturing company that you’re talking to. I think the more senior level somebody is, of course, they want predictability and quality within their supply chain, but they’re also responsible to investors and clients for both quality and cost. And so at a senior level, they would love to be able to take a very data driven approach to what’s going on. The lower you get within a manufacturing organization, this is where some of the softer factors start to come in. It’s also where a lot of the questionable models are put in as well.

 

Very few companies that we talk to actually monitor their internal error rates for their cost and revenue outlooks. So they’ll have a cost business forecasting software model or a revenue forecasting model that they rely on because they’ve used it for a long period of time, but they rarely, if ever, go back and look at the error rates that that model puts out. Because what’s happening is they’re manually adjusting data along the way. They’re not really looking at the model output except for that one time of the year that they’re doing their budget.

 

So there really isn’t accountability for the fairly rudimentary models that manufacturing companies are using today. What we do is we tell on ourselves. We give our clients our error rates every month because we know that no no business forecasting software model is perfect. So we want our clients to know what the error rate is so that they can understand within their decision making processes.

 

SFC: And it’s kind like a margin of error in a political poll?

 

Tony: Yeah, we use what’s called MAPE – mean absolute percent error. Most error calculations. You can game the pluses and minuses. So let’s say you were 10 percent off, 10 percent over last month and 12 percent under this month. OK. If you average those out, that’s one percent error. But if you look at that on an absolute percent error basis, that’s 11 percent error. So we gauge our error on an absolute percent error basis because it doesn’t matter if you’re over under, it’s still error.

 

SFC: Still wrong, right.

 

Tony: Yeah. So we tell on ourselves, to our clients because we’re accountable. We need to model the behavior that we see that those senior executives have with their investors and with their customers, right? An investment banking analyst doesn’t really care that it was a plus and a minus. They just care that it was wrong. And they’re going to hold those shares, that company accountable and they’re going to punish them in public markets.

 

So we want to give those executives much better data to make decisions, more precise decisions with lower error rates so they can get their budgeting right, so they can have the right cash set aside to do their transactions through the year, so they can work with demand plans and put our costs against their say volume, demand plans, those sorts of things.

 

SFC: I have to just ask I mean, Michael alluded to this earlier, but I want to dive into a little more. You had said somewhere else that most companies procurement projections are off by 30 percent. That’s a lot. I mean, I know people aren’t… I mean, how is that even possible?

 

Tony: It’s not a number that we’ve come up with. So first, I need to be clear that that’s not a number that we’ve come up with and that’s not a number that’s published anywhere. That’s a number that we consistently get as feedback from clients and from companies that we’re pitching. So that 30 percent is not our number. It’s a number that we’re told on a regular basis.

 

SFC: When you start pitching a client, obviously there’s a there’s a period where they’re just sort of doing a proof of concept. How long does that typically last before they go? You know what? This is really accurate. This can really help. Let’s go ahead and put this into production.

 

Tony: Well, I think typically, when we when we hit the right person who’s involved in, let’s say, category management or they actually own a PNL or they’re senior on the FPNA side or they’re digital transformation, those guys tend to get it pretty quickly, actually. And they realize there’s really not stuff out there similar to what we’re doing. But for people who observe it, it probably takes three months. So our pilots typically last three months.

 

And after three months, people see side by side how we’re performing and they’re usually convinced, partly because of the specificity of projection data that we can bring to to the table. Whereas maybe within companies they’re doing a say, a higher level look at things. We’re doing a very much a bottom up assessment of where costs will go from a very technical perspective, the types of databases we’re using, they’re structured in a way that those costs add up.

 

And we forecast at the outermost leaf node of, say, a bill material. So uncertainties in financial projections are solved. A bill Of material may have five or 10 or 50 levels. ut we go out to the outermost kind of item within that material level, and then we add those up as the components and the items stack up within that material. Let’s say it’s a mobile phone, you’ll have a screen, you’ll have internal components. You’ll have the case on the outside. All of this stuff, all of those things are subcomponents of a bill of material for that mobile phone.

 

SFC: So I am assuming that there is a big role here in what you’re doing with artificial intelligence, machine learning. But before we ask what that role is, can you talk about what you mean by those terms? Because we get a lot of different definitions and also differentiations between the two. So maybe talk to the normals here.

 

Tony: OK, so I hear a number of people talk about A.I. and they assume that it’s this thinking machine that does everything on its own and doesn’t need any human interaction. That stuff doesn’t exist. That’s called artificial general intelligence. That does not exist today.

 

It was explained to me a few years ago, and this is probably a bit broader than most people are used to, but artificial intelligence from a very broad technical perspective includes everything from a basic mathematical function on upward. When we get into the machine learning aspect of it, that is automated calculations, let’s say, OK. So automated calculations that a machine recognizes patterns over time and builds awareness based on those previous patterns and implies them on future activities, current or future activity.

 

So when we talk about A.I., we’re talking about learning from previous behavior and we’re talking about zero, and this is a key thing to understand, we have zero human intervention in our process. OK, of course, people are involved in the initial programming, that sort of thing. OK, but let’s say we have a platinum forecast that goes into some component that we’re forecasting out for somebody. We’re we’re not looking at the output of that forecast and go, “Hmmm. That doesn’t really look right to me. So I need to fiddle with it a little bit to make sure that it that it kind of looks right to me.” We don’t do that.

 

We don’t have a room of people sitting in somewhere in the Midwest or South Asia or whatever who manually manipulate stuff at all — from the time we download data, validate data, look for anomalies, process, forecast, all that stuff, and then upload — that entire process for us is automated.

 

When I started the company, what I told the team was, I don’t want people changing the forecast output because if we do that, then when we sit and talk to a client and say, hey, we have a forecast model, but then we go in and change it manually, we’re effectively lying to our customers. We’re saying we have a model, but then we’re just changing it on our own.

 

We want true kind of fidelity to what we’re doing. If we tell people we have an automated process, if we tell people we have a model, we really want the output to be model output without people getting involved.

 

So we’ve had a number of unconventional calls that went pretty far against consensus that the machines brought out that we wouldn’t have necessarily put on our own. And to be very honest, some of them were a little bit embarrassing when we put them out, but they ended up being right.

 

In 2019, the US dollar, if you look at, say, January 2019, the US dollar was supposed to continue to depreciate through the rest of the year. This was the consensus view of every currency forecaster out there. And I was speaking on one of the global finance TV stations telling them about our dollar outlook.

 

And I said, “look, you know, our view is that the dollar will stabilize in April, appreciate in May and accelerate in June.” And a global currency strategist literally laughed at me during that interview and said there’s no way that’s going to happen. In fact, that’s exactly what happened. Just sticking with currencies, and for people in manufacturing, we said that the Chinese Yuan, the CNY, the Renminbi would break seven. And I’m sure your listeners don’t necessarily pay attention to currency markets, but would break seven in July of 19. And actually it did in early August. So that was a very big call, non consensus call that we got months and months ahead of time and it would consistently would bear out within our forecast iterations after that. So we do the same in say metals with things like copper or soy or on the ag side.

 

On a monthly basis, on our base platform, we’re forecasting about 800 different items so people can subscribe just to our data subscription. And if they want to look at ag, commodities, metals, precious metals, whatever it is, equities, currencies, we have that as a baseline package subscription we can look at, people can look at. And that’s where we gauge a lot of our error so that we can tell on ourselves and tell clients where we got things right and where we got things wrong.

 

SFC: You know, if I were a client, I would I would ask, like, OK, is that because you were right and everyone else is wrong? Is that because you had more data sources than anyone else, or is it because of your algorithm or is it maybe because of both?

 

Tony: Yes, that would be my answer. We have over 15 billion items in our core platform. We’re running hundreds of millions of calculations whenever we rerun our forecasts. We can rerun a forecast of the entire global economy, which is every economy, every global trade lane, 200 currency pairs, 120 commodities and so on and so forth. We can do that in about forty seven minutes.

 

If somebody comes to us and says, we want to run a simulation to understand what’s going to happen in the global economy, we can introduce that in and we do these hundreds of millions of calculations very, very quickly. And that is important for us, because if one of our manufacturing clients, let’s say, last September, I don’t know if you remember, there was an attack on a Saudi oil refinery, one of the largest refineries in the world, and crude prices spiked by 18 percent in one day.

 

There were a number of companies who wanted to understand the impact of that crude spike on their cost base. They could come into our platform. They could click, they could tell us that they wanted to rerun their cost basis. And within an hour or two, depending on the size of their catalog, we could rerun their entire cost base for their business.

 

SFC: By the way, how dare you imply that our listeners are not forex experts attuned to every slight movement, especially there’s no baseball season. What else are we supposed to do? I wanted to ask you: to what extent is the performance of the cloud that you use, you know, important to the speed with which you can provide people with answers?

 

Tony: It’s very important, actually. Not every cloud provider allows every kind of software to work on their cloud. When we look at Oracle Cloud, for example, having the ability to run Kubernetes is a big deal, having the ability to run different types of database software, these sorts of things are a big deal. And so not all of these tools have been available on all of these clouds all the time. So the performance of the cloud, but also the tools that are allowed on these clouds are very, very important for us as we select cloud providers, but also as we deploy on client cloud. We can deploy our, let’s say, our CostFlow solution or our RevenueFlow solution on client clouds for security reasons or whatever. So we can just spin up an instance there as needed. It’s very important that those cloud providers allow the financial forecasting tools that we need to spin up an instant so that those enterprise clients can have the functionality they need.

 

SFC: So now I’m the one who’s going to insult our readers or listeners rather. For those of us who are not fully conversant on why it’s important to allow Kubernetes. Could you elaborate a little bit about that?

 

Tony: Well, for us, it has a lot to do with the scale of data that’s necessary and the intensity of computation that we need. It’s a specific type of strategic toolkit that we need to just get our work done. And it’s widely accepted and it’s one of the tools that we’ve chosen to use. So, for example, if Oracle didn’t allow that software, which actually it is something that Oracle has worked very hard to get online and allow that software to work there. But it is it is just one of the many tools that we use. But it’s a critical tool for us.

 

SFC: With your specialization being around cost, what have you looked at… Is cost relevant to your business and so on cloud? How so?

 

Tony: Yeah, of course it is. For us, it’s the entry cost, but it’s also the running cost for a cloud solution. And so that’s critically important for us. And not all cloud providers are created equally. So so we have to be very, very mindful of that as we deploy on a cloud for our own internal reasons, but also deploy on a client’s cloud because we want to make sure that they’re getting the most cost effective service and the best performance. Obviously, cost is not the only factor. So we need to help them understand that cost performance tradeoff if we’re going to deploy on their cloud.

 

SFC: Do you see this happening across all industries or just ones where, you know, the sort of national security concerns or food concerns, things that are clearly important in the case of some kind of emergency?

 

Tony: I see it happening maybe not across all industries, but across a lot of industries. So the electronics supply chain, for example, there’s been a lot of movement toward Mexico. You know, in 2018, the US imported more televisions from Mexico than from China for the first time in 20 some years. So those electronics supply chains and the increasing sophistication of those supply chains are moving. So that’s not necessarily sensitive electronics for, say, the Pentagon. That’s just a TV. Right. So we’re seeing things like office equipment, other things. You know, if you look at the top ten goods that the US receives from China, four of them are things like furniture and chairs and these sorts of things which can actually be made in other cheaper locations like Bangladesh or Vietnam and so on. Six of them are directly competitive with Mexico. So PCs, telecom equipment, all these other things.

 

So, you know, I actually think that much of what the US imports will be regionalized. Not all of it, of course, and not immediately. But I think there’s a real drive to reduce supply chain risk coming from boards and Coming from executive teams. And so I think we’ll really start to see that gain momentum really kind of toward the end of 2020 and into early 2021.

 

SFC: That is super interesting. Thank you for joining us. We’re kind of up against time, but I want to thank Tony for being on. I want to do a special shout out to Oracle for startups that works with cool companies like Complete Intelligence. Thanks for joining us. Please try to find Stories from the Cloud at on iTunes or wherever you get your podcasts and tune in again. Thanks, everybody.