Tag: cpi

The Week Ahead – 11 Apr 2022

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Post date April 10, 2022
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As a start, we looked at the Friday’s trading session and what it means. Is this a bullish market?

We’ve made a few recommendations over the past couple of months. We hope you’ve been paying attention specially on $IPI (Intrepit Potash) and $NTR (Nutrien).

We’ve talked about the tumbling lumber markets in recent weeks. What are Sam and Albert’s current thinking on lumber as we’re looking at $LB lumber futures. Sam talked about housing last month. We looked at $XHB, the home builders ETF. How about the rates and housing? We’ve seen that homebuilders are getting hit with expected rate rises. What is the impact of this on the mortgage market, housing inventory, etc?

Shanghai has been closed for a few weeks now and the largest port in the world won’t open for about another week. How can the second largest economy continue to close when the West has already accepted Covid as endemic? How can manufacturers rely on China as a manufacturing center if they’re unreliable?

For the week ahead, we talked about the earnings season, their portfolios, and Albert talked about Chinese equities for months, etc. Is now the time to look at KWEB, which he discussed for some time?

We’ve got CPI out on Tuesday and is expected at around 7.9% and Retail sales on Friday, which is expected at around 0.3%. Inflation seems unstoppable and consumers seem to be getting tired of spending. Sam explains on this.

Key themes from last week

Friday trading session
Don’t say we didn’t warn you
Rates and housing (Tuna & Caviar)
China’s shutdown

Key themes for the Week Ahead

Earnings season expectations
Near-term equity portfolios
CPI (Tuesday), expected 7.9%

This is the 14th 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.

Follow The Week Ahead experts on Twitter:

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

Listen to the podcast on Spotify:

https://open.spotify.com/episode/4uQUT91ocSlxs0sdNR7Vt6?si=3ba0d0bb07724b9f

Transcript

TN: Hi, guys, and welcome to The Week Ahead. My name is Tony Nash. I’ve got Albert Marco and Sam Rines with us. Tracy is not able to join us today. Before we get started, if you don’t mind, could you please like and subscribe. That would help us out. And we’ll let you know every time a new episode is up and running.

This past week we saw a lot, but I think the most interesting thing or one of the most recent interesting things is Friday’s trading. We’re going to start talking about the market action on Friday, and then we’re going to get into a couple of things that we told you about trades that if you were paying attention, you would have seen. We’re actually going to go into rates and housing, and Sam’s going to talk a little bit about tuna and Caviar, that discussion from the Fed speech earlier this week. And then we’re going to talk about China’s shutdown, which seems to be getting worse by the hour. So first let’s get into the Friday trading session, guys. What are some of the things you saw on Friday?

AM: Well, from my perspective, the market is acting like crypto. I mean, we’re seeing interday moves on some of these equities, like 5% up and down. It’s a little bit silly. And you wonder if it’s like light volume, if it’s market manipulation by the Fed. It’s just uncanny. I’ve never seen anything like this before. And obviously the market is weak and we’ve talked about black clouds coming over the market and what’s going on. But I don’t see anything any catalyst that would say that this is the bullish market at all. So we’re waiting for multiple numbers of CPI, retail and whatnot. But for me, it’s just like everybody is on pause waiting to see which way this market goes before they take action.

TN: So a couple of weeks ago, we saw a lot of money move into equities. Right? So that money moved in. It’s just parking and waiting. Is that what’s happening?

AM: Yeah, I assume so. The Fed, as it just ups the rates, forces more money to move into the US market, which is actually a brilliant move. You know, this is what we’re seeing. A lot of money here, not knowing what to do at the moment.

SR: To Albert’s point, there’s a lot of money that’s moved in here, but it’s moved into some pretty passive areas that it’s just not moving much in terms of the overall market. You look at fixed income, right? Lots of money moving in there, short into the curb, et cetera, et cetera. I think that’s some of the more interesting stuff as well. But there’s also this weird thing going on where equal weight is outperforming the market cap weight. And has been for some time now, particularly over the last week. If you look yesterday, S&P closed in the red, but if you were equal weighted, close green and it closed green on a non trivial basis, and it was 35 basis points, something like that.

That deviation between market that was led by predominantly tech and only tech, to a market that’s led by other sectors in general is something I think under the surface that paying attention to it can be something that at least can make some money in the near term.

TN: Including Crypto Walmart, which we’ve seen over the past week as well. So we’ll talk about retail later in the show.

Okay. So we had as a group talked about some calls over the past couple of months. Some of those were calls earlier, but let’s get into those just to walk through. Albert, you and Tracy had talked about Intrepid Potash. She talked about Nutrien. We’ve got those on the screen right now. Can you walk us through those and kind of what you’re thinking was on those and what’s happened? What do you expect for those to happen in the near term?

AM: Well, speaking about IPI, Intrepit. It’s like a leveraged ETF in the fertilizer market. That thing swings 5-10, 11% in a week, no problem. That call was basically on the premise that the Ukraine war is going to go on. Russia is cutting off the fertilizer supply. Belarus has a big fertilizer supply. OCP in Morocco has shifted from actual fertilizers to more like phosphate batteries for EVs.

So it only made sense that besides Mosaic, which is the 800 pound gorilla, IPI and Nutrien were just the logical choices for investments.

TN: And is there room to run on fertilizers like there was a target put on Nutrient by one of the banks of like 126 or something? Do you think we could keep running on those trades?

AM: We can, right? Certainly we can. It just really depends on what goes on with the Russians and whatnot. My only risk for running too far is that the Dixie could go to 105, 110 and then we have significant problems across the market, not just fertilizer prices.

TN: Okay. So even if dollar does go to 110, we’re planting now in the US, right. And now and for the next couple of months. And the fertilizer demand is right now and it has been for the past couple of months. But it’s especially right now, is all of that, say planting demand, is that all priced in already, or do you feel like some of that is to come?

AM: I think it’s pretty much priced in. And let’s just be careful because some of the farms that are planting crops are using nitrogen and also fertilizer derived from nat gas. So it really depends on which way the farming community wants to go, what they see the most profitable crops.

TN: Okay, great. That’s good to know. We also talked about lumber, as I remember a conversation probably three or four weeks ago where I think, Sam, you brought up lumber and how lumber was coming off. Can you walk us through that trade, as we have it on the screen?

SR: Yeah, sure. I mean, it’s a Fed trade, right. It’s a Fed tightening quickly, mortgage rates going up and housing demand coming down. The idea that a Fed going this quickly and having the market priced in, there’s a difference. Right. The Fed has only moved 25 basis points.

TN: Right.

SR: The market has done the rest of the tightening for it across the curve. It’s been pretty spectacular. Housing, housing related stocks, those in general, are going to be the first thing that the Fed affects and they’re going to be the first thing that the Fed affects on the margin very quickly. And you’ve seen mortgage rates go to five plus percent.

TN: Sure. Before we get on to housing, I just have a couple of questions about lumber and other commodities. So the downside we’ve seen come in lumber over the past week or so. Do we expect that to come to other commodities as well? I mean, things like weed and corn, there’s still pressure upward pressure on those. But do we expect other commodities to react the way lumber has?

SR: Oh, no, I would not expect the foodstuffs to react in anywhere near the same manner as lumber. Right. Lumber is a fairly… Lumber, you cut it up, you put it in inventory, you sell it, and then you use it for something.

TN: Right.

SR: It doesn’t last forever in good condition either.

TN: Great. Okay, good. Thank you. Now moving on to home builders, which is where you are going. You also talked about XHB, I think two or three weeks ago, and we’re flashing some warning signs about that. We’ve seen obviously rates rise. I was speaking to a mortgage broker earlier this week. He’s doing mortgage at almost 6% right now and expects them to go up kind of close to 8%.

We’re starting to see the resurgence of ARMs. People are already getting back into adjustable rate mortgages because 5.99% is high. Just as a bit of background, less than 10% of US mortgages over the past few years have been adjustable rates. So can you talk us through XHB? And maybe you had mentioned earlier kind of Home Depot and some of the other home makers. Can you talk us through what kind of… Home Depot was a leading indicator on that? Is that fair to say?

SR: It’s fair to say Home Depot and Lowe’s this kind of ties into the lumber conversation. Home Depot and Lowe’s were two of the best at ordering and trying to actually keep inventory on the shelves, even when during the first tremendous spike in lumber. Right. So they kept a lot of lumber on the shelves. They currently have a lot of lumber inventory on the shelves. And it’s part of the reason that you’re seeing what could be described as almost an over inventory of lumber, not just at those two entities, but across the board, because everybody had to buy lumber in order to keep it in stock.

So, yeah, Home Depot and Lowe’s are the tip of the spear in terms of both home building and in terms of home remodeling. Those are both fairly significant drivers of the business there. There’s a little bit of weekend contractor type deals, but very little.

So overall, I would say they are a leading indicator and they have not been acting very well. But when you have mortgage rates to your point at 6%, that creates a problem for the marginal buyer. It’s not a problem for somebody who owns a home. Right. You have your mortgage rate locked in, et cetera, et cetera. It’s not going to destroy you. It might set off being able to put a new deck and redo a pool or something like that. But it’s not going to hurt you in any meaningful way.

TN: Right.

SR: It does hurt the marginal buyer. It hurts the first time buyer, et cetera. So you begin to have slower turns in housing and you begin to have problems with where does that incremental inventory of homes go? And that’s the real problem with higher invetories.

TN: Right. Before we move on to officially talking about rates and housing, I’ll share a story about a friend who is building a house and their lumber broker who should be able to get the best pricing actually has worse pricing right now than Home Depot. Okay. So they can actually go to Home Depot and get better pricing than their lumber broker. And that’s how messed up the lumber market is right now. They’re arbitraging their lumber broker versus retail any given week in their bulk buying to make sure that they can get their house built. So that market both on the lumber side and on the housing side is just a mess.

So let’s officially go to housing and rates. We’ve done a lot of the discussion, but there was a CNBC story about rising mortgage rates are causing more home sellers to lower their asking prices.

And Sam, you talked about that marginal buyer, which is great, and that new buyer. When I talk to people who are doing mortgages, they tell me that even with the rate rises we’ve seen over the past couple of weeks, there is still not a lot of inventory on the market. That’s a big issue. And they’re not seeing a fall in demand for new houses. So is this kind of a last minute rush for people to get a house before rates rise even more? Is that plausible?

SR: There’s some plausibility to that. Yeah, 100%. The other thing is that we’re in Texas. Right. The demand for housing in Texas, the demand for housing in Florida does not tend to be, I would say, as tied to mortgage rates as everywhere else. The rest of the country is much more sensitive to what’s going on. Texas and Florida and a couple of other spots simply have too much inbound demand from higher priced areas. So California, New York, et cetera. There’s still an arbitrage when you sell a place in California or sell a place in New York and move to Texas, Florida, some of the Sunbelt States.

So it’s tough to take Texas as an example, particularly Houston. We’re actually the fourth largest city in the country, and yet we do not get counted in the S&P Schiller because of how different the housing market is here. Dallas gets kind of for whatever reason, but Houston does not.

TN: We’re not jealous at all about that.

SR: No, we’re not.

AM: Go ahead, Sam. Sorry.

SR: But just to wrap that up, I do think that there’s a nuance to Florida and Texas that should almost be ignored. When I look at the data, I’ll be taking out the Southeast region just because it’s one of those that is a little special at the moment.

AM: Yeah, that’s a key point that I always made is like, because of the migration patterns in blue to red States, things are just really wacky. Florida and Texas, Arizona will be red hot. Meanwhile, Seattle, Chicago, parts of New York are just dead spots at the moment. So until that all gets weeded out, people stop moving. Then we’ll actually see the housing market starting to cool off.

TN: Right? Yeah. I was just up in Dallas yesterday, and things are just as hot up there. And the immigration from the coast to Dallas, especially around financial services and tech, it’s just mind blowing. It is not stopping. It has been going on for probably five years, and it’s just not stopping. Those counties just north of Dallas are exploding and they continue to explode.

Okay, so our next topic is China and China’s slowdown. Shanghai has been closed for a couple of weeks with kind of a renewed round of Covid. And obviously the largest Port in the world, which is in Shanghai, is closed. And that kind of exacerbates our supply chain issues, especially around manufactured goods that we’ve been seeing globally. We’ve seen overnight that. Well, not just overnight, but over the last, say, five days. Food has become really scarce in Shanghai. We’ve seen people on social media talking about how it’s difficult to get food. We’ve started to see little mini protests around Shanghai, around food. And things are seem to be becoming pretty dire.

Overnight, we saw that parts of Guangzhou that the government is considering closing, parts of Guangzhou, which Guangzhou is the world’s second largest port. So the two largest ports in the world, there is a potential that those are closed. There is also gossip about parts of Beijing being closed as well. So I’m curious, what do you guys think about that? I can talk about China for days, but I’m curious, kind of, what alarm bells does that raise for you? Not just for China, but globally.

AM: Well, Tony, you recall, you Balding, and I discussing China’s attempt to attack Taiwan and what had happened. And I had pointed out that closing those ports would cause food insecurity and here we are. Although it’s not a Taiwan invasion, it’s a zero Covid policy that shut down the ports and now we have food stress in China causing all sorts of problems.

Most China observers, especially yourself, know that Shanghai has always been the epicenter of uprising for the CCP. It’s a problem for them. They’ve always tried to wash it. Maybe that’s why they’ve come down hard on Zero Covid Policy. That’s something that I’d have to ask you. But from there, this was very predictable. I mean, you shut down ports, China has a food security problem.

TN: On a good day, China has a food security problem. It is an issue that the Chinese authorities worry about day in, day out, not just when there’s a pandemic. Okay. So one of the things that I was talking to some people about yesterday is why is China closing down? Why are they closing down these big cities? There’s a lot of gossip. You can find a lot of theories around social media saying there’s some sinister plan, honestly and for people that don’t know. I’ve done work with Chinese officials over years. And the economic planners I was seconded to economic planner for almost two years. I believe that they’re closing because they’re worried about how the China virus looks, meaning they don’t want Covid to be seen as the China virus. And they worry about the world’s perception if there’s another outbreak that comes from China.

And so I think the leadership believes that they have to be seen to be disproportionately countering COVID so that there isn’t more wording and dialogue about the kind of, “China virus.” And so, again, I don’t think there’s something sinister going on. There’s a lot of gossip about China intentionally trying to stop supply chains to bring the west to its knees and all the stuff. I don’t believe that at all. I think it’s real sensitivity to how they look globally.

Of course, there’s the public health issues domestically. That goes without saying. But I think a big part of it is how do they look globally.

AM: Yeah, but doesn’t shutting down these ports is going to cause even a bigger spike in inflation within China and actually globally?

TN: Oh, absolutely. This is the one thing that I think they didn’t plan on is they’re about to embark on a whole lot of fiscal, a whole lot of monetary stimulants because they have major government meetings in November of this year. So they absolutely cannot go into recession.

But here’s what I have been thinking about. Okay. We’re looking at a Russia-Ukraine war that could potentially bring down Russia and destabilize Russia domestically. We’re now over the past couple of weeks, looking at a China that is starting to self destruct domestically. And I don’t know of anybody who had the domestic issues of both China and Russia as systemic risks in 2022. These things are just coming out of nowhere. And those two risks can be destabilizing for the whole world. And I’ve said for some time, Western governments have to sit the Chinese leadership down and say, look, you guys are systemically important globally. You need to get your act together around COVID, and you have to normalize your economy because it’s hurting everybody.

AM: Great points. Now, going back to Guangdong, there are some really elite families in China out of that area, really wealthy ones, that actually basically gives Xi the support he needs in the CCP. If he loses those families, there’s real trouble for Xi going forward.

TN: I think there’s trouble for him anyway. I think he is not a one man show. Contrary to the popular Western opinion, Xi Jinping is not a one man show. He is not a single Emperor, kind of claiming things from on high. There is a group of people who run China. It’s just too big for a single individual to run.

So I think Xi has been, I wouldn’t necessarily say on thin ice, but I think things have been risky for him for some time. And as you say, it’s pretty delicate for him right now. And if he doesn’t handle this deftly, I think, again, there could be some real destabilizing factors in China. So this is something again, they didn’t plan for. They were talking about major infrastructure stimulus. They were talking about monetary stimulus, getting ready for this big party in November to nominate Xi for more power and all this other stuff. But it’s possible that these events could really hurt him and really hurt his relationships, meaning the key people around him and then the other factions.

Because as much as people say that China is a one party state, sure, it’s a one party state. But there are factions within that one party. And it should be alarming for China and destabilizing China should be alarming for other people around the world.

AM: Yeah. Same thing as Putin. Like their factions behind them that keep them in power. Same thing as Xi. Most autocratic rulers have a circle of trust behind them that keep them in there. If Xi falls and China starts to, I don’t want to say crumble, but at least wobble, if we think we have serious supply chain issues now, wait till that happens.

TN: Oh, yeah. So Russia is important on energy and a couple of other things, but it’s not globally systemically important on a lot. Okay. I would say maybe it’s regionally important, especially to Europe, but China is globally important. And if they can’t figure this out, it will destabilize everybody.

And so I think Western governments need to not lecture to China, but they need to go forward with real concern about China. How can we help you guys out? Right? How can we help you out? Can we get you vaccine? Can we get you support? Is there anything logistically we can do? That is a way that Western governments can come to the legitimate aid of China. They’ll act like they have it all together, but they don’t. It’s obvious. We see it every day on social media. They don’t.

So Western governments really need to offer genuine aid to China in terms of intelligence, in terms of vaccines, in terms of capabilities, and so on and so forth.

Good. Anything else on that?

AM: No, we covered that.

TN: Okay. Looking at the week ahead. Guys, we’ve got earnings season coming up. Can you talk us through your expectations for earnings season?

SR: Sure. I’ll jump in here quickly. I think there’s a few things to watch. One, the consumer sentiment has been dismal. Right. For the last six months. It’s falling off a cliff. Where the US University of Michigan survey, well below where it was at peak of Covid. But we haven’t necessarily seen retail sales. We haven’t seen corporate earnings and corporate announcements follow that sentiment lower whatsoever.

For anybody paying attention this past week, you had Costco with absolute blow out numbers in terms of its same store sales. Take out gasoline, take out anything, and you still have 7% foot traffic. That was stunning. And that’s not a cheap place to shop.

TN: Right.

SR: So that’s indicative of the higher end consumer that’s still holding in there, at least fairly well through March. That’s pretty important. So then there was Carnival with its best week ever in terms of bookings. Those two things are pretty important when it comes to what is the consumer actually doing versus what is the consumer actually saying, which I think is very interesting.

This week we’ll have Delta Airlines. It’ll be interesting to kind of listen to them and see what their bookings have looked like, see what their outlook is for the summer. And then I’ll be paying really close attention to the consumer side of the earnings reports, not necessarily as much the banks. I don’t really care what Jamie Dimon has to say about Fed policy, but I will say…

TN: I think she do.

SR: Nobody does. But I’ll say the quiet thing out loud. But I will be paying very close attention to what the earnings reports are saying about the consumer, because the consumer drives not just the US economy, but the global economy generally, both on the goods side, services side and really trying to parse through what’s happening, not what the US consumer keeps telling us is happening.

TN: Go ahead.

AM: Sam, really quick. How much of these earnings because I’m a little bit suspicious of how much is it inflationary, prices of everything are higher and remnants of stimulus PvP, whatever the people have been getting for the past year. How much is that calculated?

SR: Yes, which is one of the reasons why it’s a great point, one of the reasons why I pointed out Costco. Costco much less on the stimulus side, much less on the saving side, much more on the high-end kind of consistent consumer. And with foot traffic up 7%, inflation was I think it was about 8%, give or take. So they’re passing on the inflation and they’re still getting the foot traffic. So I think that’s an important one.

On the CCL side, it was after the bookings were after the significant stimulus had already run out or run off. You just weren’t getting checks. I think that was also an indication that maybe there’s a shift from the goods to the services side. The one thing that was somewhat disconcerting, if you’re paying attention to the higher end consumer, was Restoration Hardware. They ran down their book to about 200 million in backlog and don’t really appear to be bullish about this year. They guided well below what some were expecting. I think we’re going to hear a lot more about that, partially because they just can’t get enough inventory in time and they’re kind of in trouble on that front.

AM: Yeah.

SR: To your point, it’s a lot of inflation, but some of these guys are seeing some pretty good traffic, too.

AM: Yeah, actually, funny, you mentioned Restoration Hardware because that was one of the things I was looking at specifically for the housing market, like who’s buying a $30,000 at the moment right now. You know what I mean? It’s just silly.

TN: Yeah, that is silly. Okay, great. Thanks for that. And I’m interested to see how the earnings from Q1 also translate to Q2. I’m expecting a real turn in Q2, and I’m wondering how much that is on investors minds as they look at Q1 earnings.

Albert, as we move into the next point around kind of short term or near term equity portfolios. You’ve talked about KWEB for some time, and I’d like you to, if you don’t mind talking about KWEB a little bit, but also if you and Sam can help us understand what is your thinking right now on your term portfolio.

AM: I mean, KWEB is one of my favorite little stocks because it’s a China technology index and it’s been beaten down to a pulp by the Fed. They have absolutely annihilated not just China, but pretty much all foreign equities. And from my perspective, you’re looking at China stimulating in the fall of the shore of Xi. So it’s like it’s a no brainer to me. I think KWEB at 28 is a fantastic deal. Start piling into that.

One of my other ones I was looking at was FXI, which is basically all the China’s big wig companies. So that’s another one I was looking at right now. In terms of the US equities and portfolios, I mean, we’re so overvalued right now. Where do you put your money into? One of my favorite stocks was TWY a tightened tire. It makes 85% of the world’s agriculture tires. Right. I mean, this thing ran up from $1.45 to $14 at the moment. You know what I mean?

How do you put more money into equities at this stage without some sort of correction or something happening with the Fed to show us which way they’re going to go? Are they going to go 50 basis points in the next meeting and then another 50 and another 50, or they’re just going to use a long bond to actually what Sam said earlier and I forgot to bring it out is they’re using the long bonds also to kill the market. So it’s just like,what do you do?

TN: Yeah. The change to valuations we’ll see over the next three months seem to be really astounding.

AM: They’re just silly. Everything is so inflated at the moment. I can’t in good conscience, say get into this stock or get into that stock, because I know how is it going to run right?

TN: Exactly. Sam, anything to add on that?

SR: I love Albert’s point on KWEB. Think about what’s built into the risk there. You have the risk of the SEC delistings. You have the risk that appears to, at least on the margin, be waning. You have the threat of sanctions on China from them helping Russia. You have a lack of stimulus. You have shutdowns. There’s a lot weighing on that index on top of Fed, et cetera. There’s a lot weighing there on that. And you begin to have some of these calls, the geopolitical onion risks begin to be pulled back a little bit. And that to me is a spectacular risk reward in a market that is generally pretty low on the reward.

TN: Okay.

AM: I had one of my biggest clients from the golden guy. I mean, it’s gold and KWEB is what he’s seeing right now. That’s the only thing he wants to even touch, which is fascinating.

TN: Yes, I can see that. Okay. Next, this week ahead, we’ve got CPI out on Tuesday, which is expected to be about 7.9%. Sorry. And then retail sales on Friday, which is 0.3%. So it doesn’t feel like inflation is abating. But, Sam, you talked about, say, Restoration Hardware and other folks earlier. What concerns you guys have about inflation eating into retail sales, do we expect serious difficulty with retail going forward?

SR: Probably not this month. We’ve going to get the release and it’s going to be for March. And I haven’t seen what I would describe as a poor number coming from any of the major retail facing guys for March. I don’t think that number is going to be distressing at all. I think it’s much more of a . May-June story in terms of the economic numbers lag with a hard L. That’s somewhat problematic.

So I would say you’re not going to see the bad official numbers for a month or two. And on the CPI front, I’ll just throw this out there. And Albert can make fun of me for it, but I don’t really care where the inflation readings come in as long as it’s above 5% the Fed still going and it’s still going with its previous plan, and it really doesn’t care, quite frankly.

TN: That’s good to know.

SR: I just think it’s one of those it’s going to be a no. It’s going to be a no reaction type deal. Unless you get a huge break, then you might get a little bit of a come down on twos through sevens or something. But that’s about it.

AM: Yeah. I mean, as much as I want to make fun of Sam on that one. Yeah. Nobody cares about the inflation. Nobody cares about the inflation number right now until the election season starts really ramping up in about June, July. That’s when I agree with Sam with the retail sales are probably crater or starting to lag significantly in May and June. But yeah, prefer inflation. It’s just like everyone is expecting a 7.9 to eight point whatever, you know, so it won’t be a surprise.

TN: Great. Okay, guys, thank you very much for this. This is really helpful and I appreciate it. Have a great week ahead.

SR: Thank you.

AM: Thank you, honey.

Tags California, China, complete intelligence, cpi, Crypto, dallas, Fed, Flordia, florida, Guangzhou, Home Depot, houston, IPI, KWEB, Mosiac, New York, Nutrien, Russia, Spotify, texas, tony nash, Tuna, Twitter, us market, Walmart, week ahead

Podcasts

Could Stagflation Be a Worry?

Post author By admin
Post date March 17, 2022
No Comments on Could Stagflation Be a Worry?

The Fed has finally increased interest rates hikes for the first time since 2018 by 25 basis points, but what are the implications for the market? Tony Nash, CEO of Complete Intelligence shares his thoughts on this

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/could-stagflation-be-a-worry on March 17, 2022.

Show Notes

SM: BFM 89 Nine. Good morning. You are listening to the Morning Run. It’s 706:00 A.m. On Thursday, the 17 March. I’m Shazana Mokhtar in studio today with Tan Chen Li and Wong Shou Ning. It’s looking quite foggy outside our studio windows here. So if it’s raining out there, we hope you stay safe on the road as always at this time of day. Let’s recap how global markets closed.

WSN: Yesterday in US, Dow was up 1.6%, SMP 500 up 2.2%, Nasdaq up 3.7%. Asian markets actually quite happening there. Nikki up 1.6%, Hong Kong and up 9%, and Shanghai Composite up 3.5%, STI up 1.7%. FBM KLCI up zero 9%.

SM: So I think we can see that the Asian markets are really rallying on the back of some news coming out of China, the fact that Chinese authorities are going to intervene to kind of support the market after this historic route that we’ve seen over the past few years.

TCL: So basically they came out with a statement with very positive market measures, one of which is that they’re going to emphasize financial stability. They’re not going to go after the technology companies. So as a result, all US China listed stocks actually sought the most. In fact, NASA Golden Dragon jumped 33% on Wednesday.

SM: All right, well, not only are we seeing announcements coming out of China, but we also saw the Fed make an announcement yesterday about the raising of rates. So joining us for some thoughts on where markets are headed, we have on the line Tony Nash, the CEO of Complete Intelligence. Tony, good morning. Thanks for joining us today. So let’s talk about the Fed announcement. After much anticipation, the Fed has finally increased rates for the first time since 2018 by 25 Bips. They also signaled six more hikes for this year. So markets seemed really relieved. We see the green rally across US markets. But has this truly been priced in?

TN: Well, I think people feared worse, but what you need to know is they raised by 25, but it was a range of 25 to 50, so there will be movement in that range over time.

TCL: Okay. But the Feds also said that they will be starting to shrink its US. 8.9 trillion billion balance sheet. Do you think that’s going to shape markets more than the height which have been talked about a lot?

TN: Yeah, I think the shrinking the balance sheet will have a big impact on the available currency in the market. Inflation is already killing available money. It’s eating people’s purchasing capability. But shrinking the balance sheet takes money out of circulation and so that will make the economy feel higher.

WSN: The US PPI numbers jumped 10% while the New York State manufacturing index recorded a steep drop in economic activity. Are we looking at possible staff stationary signs in the US economy?

TN: Yes, I think that’s a very real worry with the labor market where it is with elevated salaries, with inflation, the 10% CPI there or the PPI there. Sorry. And with manufacturing sluggish, really, supply chains are hurting manufacturing still, and that’s hurting available inventory. So we are really looking at a stagnationary environment.

SM: And Tony, oil prices have been on a roller coaster from a peak of $130 to below $100 a barrel. Now, can you give us some insight into the current supply demand dynamics underpinning these price levels?

TN: Yeah. Obviously, things are tight with the embargoes on Russia, not necessarily as tight in AMS, as crude as being sold in China and other places, but it’s certainly tight in Western markets. And we don’t necessarily see that alleviating anytime soon.

TCL: And just curious, right. About the Russian bond situation. Do you see that deteriorating? Perhaps.

And even the rubber coming under increasing pressure. It’s already down more than 40%.

TN: Yeah. And the rubber appreciated just a little bit. But the debt issue is a real problem, and I think that’s going to get worse before it gets better.

TCL: But will there be a contagion effect on global markets if the Russian bonds actually default?

TN: There would be. You’re already seeing impact on European banks, which are the banks that own the most Russian debt. So we’ve seen a lot of pressure there, but some of that has been alleviated in recent days, but still, that real debt pressure is there mostly for European banks.

SM: Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us some quick takes on some of the trends that are affecting markets, from the Fed raising of rates to what’s going to happen to Russian bonds, whether they’ll be able to make those payments.

TCL: Yeah, but staying on the topic of the Fed, I think the 25 Bips was pretty much anticipated. It was probably priced in. But what I find interesting is that they are continuing on their policy normalization, which is six rate hikes for the rest of the meetings this year. And they’re also launching a campaign to tackle the fastest inflation in four decades, even though I think there are concerns that global growth might be slowing down as a result of this Ukraine Russian war, not helped by the fact that China is actually some key cities like Sunshine and Shanghai are in lockdown. So clearly impacting the global supply chain.

WSN: And the Fed also said that they are going to allow the 8.9 trillion balance sheet to shrink at the coming meeting, but they didn’t elaborate more about this.

TCL: Yeah. The question is, can they engineer a soft lending to the world’s economy? Because you always have this concern that the Fed will over tighten, and when they over tighten, that might cause global markets to kind of crash. It’s a very delicate balance because inflation is extremely high, so it’s probably going to come in above 8% at the next reading.

WSN: Yes. CPI is about I think the last one was 7.9% in terms of inflation. Fed actually have a projection on it, and it’s 4.3% this year, which is still coming down to 2.3% in 2024.

TCL: I think this 4.3% is a bit like Malaysia CPI official figure of 2.5%. If you tell anybody that, they’ll start laughing.

WSN: Yeah, I think this is an inflation number, not the CPI number, though.

TCL: No, I know. But you have official numbers and unofficial numbers, right?

SM: That’s right.

TCL: But other I think interesting news Is coming out of China because we mentioned earlier the NASA Golden Dragon index hit a high of actually went up 32%, closing and even hang Seng yesterday closed up 9%. That’s a Whopper jump on a one day basis. And that’s very much driven by the fact that China came up with some key announcements to keep the markets going. And this was on the after a top financial policy committee Led by Vice President Yuha, who is the top economic official. So he made some promises, Stabilized better financial markets, Ease regulatory crackdown, Support property and technology companies While stimulating the economy.

WSN: But a lot of investors are also wondering, are they just words? What exactly are they going to do? They need more than just words. They need more action.

TCL: Yeah, but you just want to say this to calm markets down. It’s not the first time he’s done it. In 2008, this exact official said the same thing. It wasn’t really followed by a lot of action, but it’s a signal to the market that maybe they will ease off in terms of any crackdowns, which they did last year, Especially for the technology companies, Gaming companies, Healthcare companies, Education companies, when trying to pursue this common prosperity model. So I think they said, okay, we’re done with what we want. So you investors, maybe you don’t have to worry so much about policy risk.

SM: I think.

TCL: Yeah.

SM: So it’s going to be interesting to see whether this will actually put an end to the route. This could just be the calm before the storm, as some analysts say.

WSN: But they actually address all the five major issues that’s actually plaguing the market. They want to keep the stock market stable. Tech crackdown will be nearing an end, which you said resolve property risk support, overseas listings and also on us goods dialog on ADRs. So these are the things that have been plaguing investors, and they try to address all these concerns.

TCL: We will be asking Brock silvers These exact questions. He’s the chief investment officer Of Kayan capital to do tune in at 915. Maybe he might give us an indication of what to buy, actually, in regards to anything China related.

SM: All right. Well, it’s 7:14 in the morning. Stay tuned to BFM 89.9.

Tags Asian, bfm, bfm 89.9, bfm malaysia, bfm morning run, bfm podcast, bfm the business station, Chinese, cpi, DOW, European, NASA, Russia, Shanghai, Shanghai Composite, stagflation, Sunshine, US, US PPI

Week Ahead

The Week Ahead – 21 Feb 2022

Post author By admin
Post date February 20, 2022
No Comments on The Week Ahead – 21 Feb 2022

We have the PPI numbers from the US and China recently and we talked about its impact on the inflation, CPI numbers, and whether it’s peaking or not? We also looked at the containership traffic and supply chain changes from China as compared to other locations. And with improvement in global mobility, what does that mean for the oil and energy market? We also discussed volatility and what to expect this week?

This is the seventh 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/04ATdMquZbUb0Lm4RVLJkS?si=bf093f6490084a8e

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Nick: https://twitter.com/nglinsman/
Tracy: https://twitter.com/chigrl

Transcript

TN: Hi everybody, and welcome to The Week Ahead. Today I’m joined by Tracy Shuchart, Nick Glinsman and Sam Rines. Albert couldn’t join us today, but he will be back. He’s still friends with us. So before we get started, I’d like to ask you to subscribe to our YouTube channel and like this video. That obviously helps us with visibility. It helps you to get alerts when new videos are out. So if you don’t mind, please take care of that now.

So this week we had a lot going on. So we had a very strong PPI print come out. We had Chinese PPI come out. So the US print came out at 9.6% year on year. Chinese PPI came out around actually the same level, 9.1% down from 13%. We had US retail sales search at 3.8%. It was 2.1% was expected, avenues were down on the week, crude was sideways, precious metals were up a bit and the ten year is back below 2%. So what did we say last week?

Well, Sam, last week said that Monday’s Fed meeting was a non-event. Nice job, Sam. Nick said that the Fed wouldn’t fight Volatility. Nice job, Nick. And Tracy two weeks ago, since that was the last time she was with us, said the crude would trade sideways but be pretty volatile, which it has been. So nice job, guys. You nailed that stuff. Right on.

So let’s start with PPIs. So it looks like producer prices are maybe turning over. I don’t know if it’s too early to call that, okay. But based on the Chinese data and the US data, it looks like those PPIs may be turning over a little bit. So what do we think about that? Are we going to see PPIs moderate? First. And what’s the impact on overall inflation, secondary impacts, ultimately CPI and all that stuff? So Sam, do you want to get us started?

SR: Sure, I’ll give a little off. I think China tends to lead in terms of PPI, right. So when you begin to see their PPI go from 13 to nine, give or take a few tenths, that’s a big deal. The second derivative is extremely important when it comes to input costs. We all knew it was supply chain. We all know it’s supply chain. And we all know that the supply chain is not fixed yet. So the pace of that decline is unlikely to continue at 4% month over month or whatever it might be, but it is going to continue to dissipate, at least on the margin, at least call it moderately. That’s important.

That does feed in CPI at some point. And I think one of the interesting points that we talked about last week was housing. And when you begin to see some of these numbers come down on PPI, you begin to get lower input costs to new starts, et cetera. That has a pretty interesting feature effect.

NG: What did you think about the San Francisco Fed paper on the owner’s equivalent rent? Which I thought was reasonably hawkish in terms of having a half percent impact on core CPI.

SR: Oh, if you’re asking me, I thought it could be hawkish to a degree, but at the same time, it was also in my mind a single that was almost a core thing to them. So something that they’re going to cut out.

NG: It does lag, Zillow and apartment list.

SR: Yeah, it always will. Just on a mechanical basis. It’s impossible for the Fed to get a calculation that’s going to keep up with Zillow or any of the other indices. I thought it was almost one of those. It could be really hawkish if they were to incorporate that into their framework. What I would say is it’s more likely that they’ll go in the European direction, which is just cut it out completely in general from their inflation metrics, which is dovish.

NG: Interestingly.

TN: Let’s move on this a little bit. Sam, it seems to me that you’re indicating that PPI at least is peaking. Is that fair to say?

SR: It feels that way? Yeah, it feels that way. Okay. It feels that way. It certainly looks that way in China. I could take a month or two to feedback into the US, but I would say it’s peaking.

TN: Okay. Now, Nick, I think you take the other point of view where this is sustainable. I don’t want to put words in your mouth, but is that fair to say?

NG: Well, actually, I think last week I was mentioning that the inflation outlook is going to level off. I mean, I agree with Sam on China PPI leaving us PPI. I was just fascinated by that particular owner’s equivalent rent housing, part of the CPI composition. And actually in Europe they’re looking to introduce it, which was a paper this week, which again would be quite a surprise.

I just look at not just PPI in China as a leader. I think I’ve seen people say it’s sort of three to six months lead time before it impacts the CPI. So we could have to wait a little bit longer to see it come through. But I just think there are other things in the pipeline and we had this discussion today that suggests to me that financial conditions are of their own making beginning to compress, and if the Fed start to do stuff will compress further and that will have a negative impact on liquidity, whether you define that by balance sheet or as we defined it, we had a conversation day reserves, bank reserves, and I think that’s where I see this peak.

don’t know whether we finished, but I think we’re going to Plateau, if not start to turn around. However, it’s where we finish, where the authorities want us to finish 2% above 2%. I’m sure they want some inflation to hit the debt loads, but the question is where do we finish it? And can you fine tune that accurately? Yeah, that’s not an easy thing to do.

TN: So staying on the China PPI issue, I think if we look at, say, container rates from China and even Port backups from China, if we look at the chart that we’re showing now, the dark blue line is container traffic at major ports from China. So it looks like from Ningboy that the container traffic has subsided quite a bit over the past month. And one would think that that would take some pressure off of supply chains. So if you look potentially at PPI peaking and if you look at the kind of order to receive rates of some of these multinational companies, it’s running in about nine months from, say, China, Southeast Asia to the US hit here in six to nine months, or will it hit later?

Are you guys seeing those dynamics in your studies and with your clients? Do you think that the freight delays and the freight out of China is declining? Tracy, what do you see?

TS: Yeah, I mean, I think the data is a little bit skewed because of the Chinese lunar New Year. But that said, if we do see some pressure let off of China, that will eventually show up here, I’ve always said it’s going to be 2023 before we kind of see some supply chain issues ease. Because what I’m looking at in the industries that I particularly look at, which is materials and energy, I mean, that’s still hitting those. In fact, it’s just starting to hit the industry as far as pipes are concerned, in parts of that nature.

So if we do see that subside, it will eventually end up here in the US and North America. But again, it’s going to be on kind of a lag time.

TN: Right. So China started stimulating or easing, say, last month with a small rate cut.

TS: That’s what I was going to ask you about. Tony, you and I have talked about CMY for years now, right. In the past. And so I wonder what your thoughts were with China beginning to simulate how important is that to how important is that that they tackle the appreciating CNY? There are a number of issues.

TN: I think the appreciating CNY is an issue. I think the stimulus is an issue for a number of reasons. So the CNY is important. What they’ve done over the last two years is appreciated the CNY to accumulate commodities as commodity prices rose. They appreciated the CN so they could accumulate copper, so they could accumulate crude oil and food and other things. There was a lot of worry about food security through Cobain in China. And so they accumulated that stuff and they have a lot in storage.

So with all the political events happening this year with the party Congress in November and other things, it’s really important for them to start to stimulate and also to make things easier on exporters. And that’s why it’s important to devalue the currency. It’s a controlled currency. So it is, in fact, a devaluation that they’ll do.

So they have to do value to get those exporters on sites and to start accumulating, say, more dollars than other currencies. And so with that devaluing and the easing will also come fiscal spending as we’ve talked about in Q two and into Q three before that party meeting. So it’s a really important time for China to make their currency cheaper and to get money out into the channel. And the money transmission mechanism in China is a lot more direct than it is in the US. It’s a lot more direct.

So the PPOC says get money out and the banks get money out. It just happens the old school the way it used to in the US. Does that make sense to you all?

TS: Yeah, absolutely.

NG: Nobody does.

TN: Okay. Anything else on China and the impacts of, say, China easing while the ECB and Fed are tightening? Any concerns there.

TS: Does that mean that we see a rotation somewhat into Chinese equities?

TN: I think that’s possible, right. Although there is some currency risk there. I think the growth, the pent up demand and the growth there may be an opportunity. It really depends on Horizons and it’s something we have to watch. But I think it may be an opportunity for some sort of rotation to China. Again, not in the main, but at the edges of a portfolio.

NG: People have been waiting for that for a couple of months and it’s still not happening. So Tensor is now under investigation by the USDR. Evergreen has just been delisted from Hong Kong and I think there was another set of technology restrictions imposed by the CCP. So every time you think this could be the right time bank.

TN: But Chinese technology is for China and it’s not for the US. Necessarily. Most Chinese companies are really focused on the domestic and the regional market, not necessarily on the US.

NG: Understood. The Chinese tech has been a big expression of interest by the West Coast, and that’s where we got to watch.

TN: Okay. And Tracy, you tweeted about global mobility earlier this week, and so we’re showing that tweet now. So I’m curious, what’s your thought on mobility and the impact that will have on global oil demand?

TS: I think that we’re going to see I think as we’re seeing these countries that are slowly lifting demands, especially like Switzerland, that just lifted all their mandates, including if you’re flying to Switzerland, you don’t need a test anymore. You don’t need a backstash. I think that this will be a global trend. Right? It won’t be. Even as we head into summer, which is high season demand for the Northern Hemisphere. Demand is almost at depending on who you ask, it’s almost at 2019 levels, if not above. And so they’re looking at May to August demand increasing by 5 million barrels per day at over 103,000,000 barrels per day. I mean, that’s a lot of increase in demand. And we’re just not seeing supply come online anywhere.

So I definitely think although we’re kind of seeing some consolidation and if we see Russian, Ukraine pensions kind of pull back a little bit or dissipate, then we could see a bigger pull back into say, the mid 80s. But I think we’re still headed for over 100 into the summer just because of literally supply demand fundamentals.

TN: Interesting. Okay. So while we’re on energy, we have a viewer question from Twitter from Clifford Topham. He says following BlackRock’s about turn on fossil fuels in response to Texas potential threat of removing BlackRock from managing state pensions. Is this the start of a change in attitude by Wall Street? So is it the beginning of the end of ESG?

TS: Well, I think Wall Street is about greed. Right? We all watch the movie. That’s where the money is. So what I think is going to happen is we’ll still see these smaller banks and the smaller insurance companies, etc. That we have seen this week kind of pull back and not get involved in the OMG industry. I still think that we’re going to see these major investment firms and these major banks still hang on to that, if not increase their exposure.

TN: Okay. Sam, are you with your clients on the ESG side? Is there any movement there?

SR: There’s not a lot of movement there in terms of real money. Right. So you can have a bunch of small insurance companies. You can have small pension funds. You can even have a few small colleges. In the grand scheme of things, who cares? You’re still getting all the votes going in the wrong direction for oil and gas companies. You still have Exxon being told that it needs to vest of oil and gas, which is nuts because it’s literally an oil company.

Now, to be honest, we’re not seeing a significant reversal of ESG. We’re seeing maybe call it a billion 3 billion that type of potential money going into the space. And that’s if you look at their portfolios and say do a 2% overweight to the SMP 500 and go 7.5%, that simply isn’t that much money.

TN: Okay, very good. Let’s move on to Volatility. Nick, you talked about Volatility last week, and I wanted to dig into that a little bit. We’ve seen Volatility. We’ve seen the VIX approach 30 this week. And so I’m curious, based on your hypothesis last week, do you see that sustaining? Do you see the VIX increasing and like over a time frame?

NG: I think the Volatility broadens out to other markets. For example, we’ve had VIX can be between 32 and 34. It’s known that people come in and suppress the VIX. The Fed have been active in sellers. That’s well known, and they cover it when it gets to the end. And in fact, in the zero rate world, it’s been in the Fed’s top Randy to suppress Volatility.

And thus, hence you have the Ford guidance with this diminishing Ford guidance. And Mesa mentioned it this week as well, that as they start to hike rates potentially, do QT tighten up everything? The use of Ford guidance has been diminished to it would be a hindrance. The whole point of tightening is not to give the full scope of what’s coming. But the important thing is for all subsidiary markets, Volatility in the treasury market has exploded. I remember everything is priced off of the risk free asset.

TN: Right.

NG: So you’ve seen the move index fly higher. And the reason why that’s so important is bid offer spreads on the treasury market are actually widened. So that means there’s a liquidity issue. And if you remember back in 2020, you had the repo crisis, which was a liquidity issue. If that continues, then the bit of a spread and thus liquidity in credit markets, which should be beginning to suffer and CDX rates were spiking higher stay that will suffer, that will then feed through to equity markets. You will have less liquidity, hence higher Volatility.

So it’s a very risky path and it will be a very volatile path from now on.

TN: Okay. And so when you say from now on, you mean over the next, say, through the end of the year, or is this something that happens, as we say, approach QT in second quarter.

NG: This should carry on happening.

TN: Okay.

NG: I mentioned to you earlier I still don’t trust this Fed. I think it could end up being stop start the economy at the beginning. I think this is going to carry on for quite a while.

TN: Okay. You started to interject, but did you want to add something on that?

SR: Yeah. No, I was going to take the other side of that. Saying that the Fed communicating less is, in my opinion, a Vic suppressor at this point, because if you don’t have Bullard coming out and saying stupid things that nobody should have ever taken seriously. You don’t inject half of the volatility that you currently have in the market right now. You don’t have the possibility of an intermediating hike. You don’t have the 50 basis points. You don’t have the QT coming potentially in March.

So in a way, I think taking away the forward guidance and beginning to actually have some sort of a coherent path with an economy that hasn’t actually broken yet. 30 next time seller. I saw that all day. And if something happens in Ukraine, sell it again and you get I think that’s probably the best risk adjusted return this year is selling Vixen spikes.

TN: Interesting. Very good. Okay, guys, what are we looking for the week ahead? Tracy, what’s on your mind for the week ahead?

TS: Well, again, I think that oil markets are probably going to move sideways until we get some sort of resolution. As far as the Ukraine Russia deal, I think the equity markets are still skittish about that.

Again, I think we’ll see a lot of volatility there. I think precious metals will continue to do well sideways to up, perhaps. Right. Because that market is kind of crazy, but it does well on uncertainty. And I think that if you’re looking at based on industrial metals, that will continue to see those rise because we’re having political problems, say, for instance, with copper in Chile and Peru because of the new leftist government there.

TN: How much of global supply is Chile and Peru?

TS: 40%.

TN: 40%. Okay. So that’s a little bit. Yeah, exactly. Okay. Very good. Sam, did you have something?

SR: Oh, no, I just was English.

TN: Nick, what are you looking for next week?

NG: A continuation of what we’ve had this week. And I think at some point it’s going to be up and down on Ukraine. Who knows, right. I do think the rhetoric from the Fed will continue. I think what’s interesting to me is I take the most retail of retail ETS to see whether retailers sold anything on the way down. And that would be Ark haven’t sold anything. There is a whole lot of pain out there.

And I just think we’re volatile with the downside bias. Yes. You’re going to have a spike up on good news. We had that this morning and it all gave back. Yeah. It didn’t keep it. So I think there’s something more than just Ukraine behind everything. And I think this volatility and my point on I don’t disagree with Sam on the bigs, but I think what’s going on in the fixed income markets will come as a surprise and will flow through and just make trading difficult.

TN: Okay. Let me ask you also, we’ll take this from you and then we’ll move it to Sam as well. When we see the ten year rise above two again.

NG: If things calm down, it goes straight back above two. Yeah, absolutely.

TN: Okay. Sam, what do you think about rates about the ten year?

SR: So what I would say is it would completely flip on my comment that it’s all curve flatteners from last week and say, hey, it’s curve steepener now. Any good news on Ukraine? Anything? You saw it when a few tanks moved or supposedly moved get a big move in oil. You got a big move in the curve. You got the FOMC minutes, et cetera, et cetera. Everything from here in terms of a dissipation looks like Kurt Stephen to me with two stuck somewhere between 140 and 150.

TN: Okay.

SR: And twos heading north or in towns heading north. So really like the steeper now?

TN: Okay. So it sounds like you all are saying we’re kind of in a wait and see for most markets. Is that fair to say.

NG: Wait and watch? Wait and watch?

TN: Yes, wait and watch. Okay, great. No big decisions over the next week, is that what you’re saying?

NG: Keep your risk tight and small.

TS: I mean, everybody’s going to be watching Ukraine and Russia and everybody’s going to be watching the March meeting for the fed. Until then, I think you could see a lot of volatility in the markets, whether it be in equities us Treasuries or commodity markets.

TN: Very good, guys. I always appreciate this. Thanks so much for your time. Have a great weekend. Thanks.

Tags America, Chiese, China, cpi, Fed, Monday, PPI, Southeast Asia, US, week ahead, Zillow

Week Ahead

The Week Ahead – 14 Feb 2022

Post author By admin
Post date February 13, 2022
No Comments on The Week Ahead – 14 Feb 2022

In this week’s episode, we look at the CPI numbers from last week, the inflation cycle, and will the Fed stop QE on their Monday meeting? What do you have to expect on the metals market in the longer term? Will the demonstrations around the world push the US to bring out fiscal stimulus again — and can they? What does this mean to the Democrats on November US Election? And lastly, what you should know to thrive and survive this coming week?

This is the sixth 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/3g8GVyOSmh2NYrcfHevj51?si=b923efb0567a4979

Follow The Week Ahead experts on Twitter:

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

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And we’re joined by Nick Glinsman, Albert Marko. And today we’re joined by Sam Rines for the first time. Tracy Shuchart could not make it this week. She’ll be back next week.

So before we get started, I’d like to ask you to subscribe to our YouTube channel. It obviously helps us with visibility and it gives you a reminder when a new episode is out. So if you don’t mind, please take care of that.

Now, a lot has happened this week. We saw CPI slightly higher than expected, which is what we talked about on the show last week. Consumer sentiment out on Friday, slightly lower than expected. And there were a few things that we said last week that will remind you of the ten-year cross, too. Nick pretty much nailed that. Crude went sideways. Tracy said that we would see a slight pull back in sideways move in crude. The S&P have a slight down bias, which is what we talked about. And the Dow had a slight upward bias, which is what we talked about. So good week all around. Thank you guys for being so on the spot for that.

Let’s start with CPI. And Sam, since you’re the new guy, it’s surprised high. So what really jumped out for you and what do you expect to see with CPI prints going forward?

SR: Basically, the entire print jumped out to me. I don’t think there was a single thing that was actually positive on the inflation front. There was no positive news that we could extrapolate from there. Whether you’re looking at the actual headline number, the core number, three month annualized accelerating, et cetera, it was a pure CPI hot. It was just hot. Cupcakes and cakes were the worst news in there. Both of those up. I think it was like 2.2%. 2.3% on a month over month basis. The only thing that was a little bit lower, that kind of offset, that was ice cream. So dessert got more expensive for most of us.

I think generally the way to look at CPI right now is we were supposed to have this really interesting hand off from goods to services. And what we really had was no hand off from goods and services begin to start running. You had people begin to go outside of their homes, but they’re also working at home. So you need more stuff. If you have an office and you work from home, you need two computers, you need two microphones, you need two cameras.

That’s really what we’re beginning to see is the confluence of the end of COVID restrictions, but not really the end of COVID all at the same time. That’s a big problem.

TN: So the durable good cycle is we’re late in that cycle, right. So it’s not as if we’re redoing our homes anymore. Most of that stuff is gone. It’s more consumption, right?

SR: Yeah, it is consumption to a certain degree. But also you haven’t really seen a slowdown in people buying homes. When people buy homes, when people build homes, they need to put stuff inside of them. They need couches.

TN: That’s fair.

SR: So I would say we’re probably not at the end-end of the durable good cycle, we might be in the fifth or 6th inning. Okay. But millennials still on homes, right? Millennials figured out that when you can’t go to a really cool restaurant in New York City, it’s not really worth living in 1000 square foot apartment or smaller with a kid. Right. They’ve decided that they really want to go make a household somewhere, buy a house.

So I think we’re more call it mid innings of durable good cycle. And on the services front, we’re just beginning to see the re emergence there. You’re just beginning to see housing costs, housing and rent, et cetera.

TN: Okay, so this inflation cycle is something that Nick and Albert have been talking about for over a year. You started talking about this in August of ’20 or something like that?

AM: Yeah, something like that. I mean, it was evident that the supply chain stresses is going to cause inflation. When the demand starts to tick up and there’s no inventory, of course, it was inevitable at that point.

TN: So when does it end? Obviously, this isn’t kind of the transitory inflation we’ve been told, and that’s been said many times. But do you see this continuing through, let’s say all things equal. There’s no rises from the Fed, nothing else. How long does this go before it works itself out? Nick?

NG: I’m sorry, Albert, do you want to?

AM: No. From my perspective, wage inflation is a problem. So until that gets sorted out, inflation is going to be sticky.

NG: Yeah. With Atlanta Fed wage price level, it was 5% I think it was, came out for the first time in 20 years. Actually, I’m going to be slightly contrarian. I think we’re at that peak. Whether we can go up, we can still go up a bit more, but I think there’s a peak. The trouble that people have got to get their minds around is if we’re peaking, it could take several months. Where do we come down to? And my suspicion is we come down to a level that’s still significantly above the 2% Fed targets.

The other thing that I think is really important, you’ve got the conventional wisdom. Feds behind the curve, Feds behind the curve. And now all these forecasts from the street have sort of come like this. Goldman have now joined Bank of America on seven.

The key thing to understand in a zero rates environment, they introduced forward guidance, and that was their technique to try to suppress volatility in the market. Well, now that things have shifted around so rapidly and we’re moving to a rate hiking cycle, they’re actually not going to be suppressing volatility. By definition, they can’t you hear this in Europe as well? Data dependency. We’re dependent on the data. Well, they’re dependent on the data in Europe because their forecast is so terrible. Haven’t been much better in the US either. Right.

So you’re going to have much more volatility. So what we’ve seen in the last couple of weeks, which if you traded, if you ran money through 2008, it’s sort of nothing. But what we’ve seen in the last couple of weeks, get used to it. And I suspect going back to what we mention last week and I even put it on a tweet. Newton’s law of gravity is going to start to impose itself on those stocks without the high dividends, those stocks that don’t have the earnings, those stocks that are over owned.

I know we’ve got witching out next week or OpEx not clear whether the market is long or short delta. Just not clear to me because actually a couple of days ago, Goldman came out with a chart that showed that short interest on the S&P is really low. So if that’s the case, and I maintain that we’ve got a lot of trap longs still there, this volatility is going to get worse.

I mean, you’re getting volatility in the treasury market. And remember, the treasury market, by definition, is zero rates, low rates environment, is long convexity. So the price moves to a couple of basis points are way bigger than they were back in the days when you had a decent coupon, back in those good old days where retirees would earn some money on their bank deposits.

TN: Yeah.

NG: So they’re not suppressing volatility anymore. Volatility cannot be suppressed, even if they sell VIX. We’re talking about broad systemic volatility. Is it a risk? Could be. But that’s gone. Those days have gone. Forward guidance. They’re not even going to forward guide. Powell’s last press conference. I’m going to be humble. I can’t give you whether it’s a 50 or a 25. He never said anything. No. When he was asked aggressive questions. So it’s sort of interesting.

TN: That is very interesting. I think not worried about volatility is a very interesting point, even if they just dial it down a little bit. It’s a very interesting point to me.

So let’s move in that direction, Nick. There was a lot of Fed speculation this week, obviously more intensive than even last week. Inter-meeting hike, 50 basis point hike, 25 basis point hike, all this other stuff. So what are you thinking about that and QT? I also want to get kind of your and Albert’s view and Sam, of course, on this thing going around on Thursday about an emergency meeting on Monday. So let’s talk about all of that stuff with Fed and central banks.

NG: I just don’t think this Fed has it in them to do something shocking. So the first order of business, if they were to do anything intermeeting, is stop QE. That’s absolutely absurd that that’s still going on. Right. So you stop the QE.

Remember, this is a Fed that’s built on… Most of these members are built on the gradualist approach of the Fed. They’ve been suppressing volatility. They don’t want to shock anybody. So I think there is a valid discussion to have between 25 basis points and 50. It’s a discussion they need to have and they need time to think about it.

Interesting Bollard came out as hawkish, given he used to be a Dove and we’d forecasted actually everything he said. We got a little experience of deja vu, but I’m suspicious of this intermeeting situation. The only thing I can think of really would be stopping QE. That’s where their first… If you watch the Main Street media, that was their first part of call with the “experts”, and they’re still doing QE, which is why they’re still doing QE. I think they need a proper… Right now, given it’s a new hike, first hike in the whole process, they need to have a proper meeting.

TN: So you think there’s a greater than zero possibility that they’ll stop QE on Monday? I’m not saying you’re saying it will, but you’re saying it’s greater than zero.

NG: That would make sense to me, but it would be a bit dramatic given all the huff and puff that’s been in the since last night about this secret meeting, which is also right. I would be surprised if they do an intermeeting.

I’m still trying to figure out whether they’re biased towards 25 and 50. Remember, the market is giving them 50, but when is the last time the Fed taken what the market is giving it?

TN: Albert, what do you think about Monday, the speculation about the meeting on Monday?

AM: Well, yeah, everyone’s talking about this meeting that popped up all of a sudden, and some people are starting to dismiss it’s procedural and whatnot. But realistically, they got together over the weekend to discuss what’s really happening. The last time they did something like that was pre-COVID in 2020.

Right now, the Fed and actually the Biden administration together are looking at problems with the Russian invasion of Ukraine looming, trucker rally, actually in the United States and France and Australia that are looming. I mean, any more supply chain shocks is systemic problems of the economy. And I think they have to address it one way or another.

Whether it’s a 50 basis point hike in Monday or March or something, you’re going to have to do something against inflation.

TN: So you think it’s possible that they can take some action on Monday? You don’t think this is just a procedural meeting?

AM: I don’t think it’s a procedural meeting whatsoever. I think something’s wrong with the system and they’re working to address it.

TN: So if you had to say they’re going to stop QE or they’re going to announce a rise, which is more likely on Monday.

AM: I think they’re going to announce a rise. Well, to think about it, they’ll probably stop QE before they actually do a rate hike. I think the rate hike will definitely come in March.

NG: That’s the sequence.

TN: Okay.

SR: And just to add something there, I think it’s really important to remember that effective Fed funds right now is eight basis points, right? Eight to nine basis points. It bounces around a little bit but we hike in ranges now, right? So we’re going to hike from zero to 25 to 25 to 50 or 50 to 75 and they don’t have to put it at the midpoint right? So going to ranges, so to speak, is not the only way to look hawkish.

If you raise one range of 25 to 50 and set it at 40, 45 towards the top end of the range, you can do one “rate hike”, but be pretty hawkish within that range, you can show your intention pretty quickly there which would match pretty closely to what the market expectations are when you kind of extrapolate down to actual basis points what the market is giving the Fed. So I think it’s really important to pay attention to not just where the range ends up, but where they decide Fed funds goes within that range.

TN: It could be incremental. They could be a Chinese central banks type of like 37 basis points or it’s 38 basis points or something?

SR: Exactly. Exactly. And I think that’s going to be the kind of “the shock” and all that they can use. They can have call it a very hawkish one hike. They don’t need to do two hikes to be overly hawkish.

TN: So what do you think, Sam, on Monday? Do you think it’s a procedural or do you think it’s possible that there could be some sort of policy change?

SR: I think it’s procedural.

TN: Okay. Interesting. It would be interesting to come back in a week and see what’s happened with that. I like the differences there. Sorry. What’s that?

NG: You get the coin out and heads at something.

TN: Right? Exactly.

NG: One thing it can be, it can be a hike without stopping the QE.

SR: Yes.

TN: Right. Okay. That’s a good point. So speaking of inflation, before we get onto the truckers and other stuff, Nick, you guys put out a piece last week about the metals market. And I’m really curious. It looks like there’s a view that there’s longer term rises in metals, industrial metals especially. Can you give us a little bit of color on that and help us what to expect in metal markets?

NG: Sure. It was a longer term view. It’s not really a short term trading view. The view is, I have the thesis that some of the greatest trades attached to some of the biggest traders in time have arisen because of policy mistake. Whether the policy is benefiting or whether the policy was just maligned. And right now we’re in this net zero push, which is the new neurosis and there’s no transition plan.

So the first thing, if we were to look to commodities right now, where is it? The most obvious place that it’s hit? European energy. Right. The German is getting rid of nuclear. It’s just a complete nano mess. But it’s actually in the metals market where over the next couple of years it’s going to be really keenly felt.

There’s been a lack of capex like energy. There’s been a lack of capex in metals. They learned what lessons? We don’t know. Lessons from 2011 when prices were very elevated. And with that lack of capex and they’re paying high dividends, they’re rewarding shareholders, means the supply cannot be flexible enough, elastic enough on the upside to meet all this huge demand.

So we put the blocks together. China. China, give or take, is still there as a big user and consumer of the metal. Now you add on the rest of the world, plus China, additional China on net zero products. EV cars, right. All the wind farms, solar panels. All this stuff needs metal. Some of it needs fossil fuels as well.

And I got triggered a couple of weeks ago. There was a report in France that said in the next two years, the available supply of copper, not new finds, or not new mines. The available supply right now would have been used up. Yes or no. But the point is that’s the direction. Nickel, even more so. And then you think about nickel and the geopolitics of Russia having a huge nickel company. What we’re about to go through, potentially with sanctions?

All this geopolitics grinds against the need for these metals in terms of net zero. So basically you’ve got those two forces against each other which squeezes everything up in terms of price. And from the point of view, we have no transition plan. So if there was none of that, we needed a transition plan anyway.

So our view, you can go through the metals. Aluminium has been making new multi year highs this week.

TN: Right.

NG: Aluminum being the cheaper copper.

TN: Okay. Yeah. And I think as a medium, longer term plan, as a strategic placement, I think that’s very interesting.

Let’s move on to other components of uncertainties with what seems to me is a resurgence of populism with these trucker strikes and other kind of demonstrations.

Obviously, the Canadian trucker strike has stolen the headlines this week, but there are things happening across Europe, and they have been for a year. Australia has been happening for six months, something like that. Demonstrations. You see sporadic demonstrations in the US with talk about truckers striking at the Super Bowl or something like that. So what do you guys think about that? Is that a real risk, and is that a risk that will flow into markets?

AM: I think it absolutely is a risk. If you’re talking about adding more stress to the supply chain, of course it’s going to be a systemic risk. I won’t even put it past some foreign actors propelling it through social media campaigns to stress the United States, France and Australia.

TN: Okay.

AM: I certainly would if I was Russia or China. I would definitely do that.

TN: Okay. So what does that do if there is this kind of wave of populism that is pushing back against kind of COVID restrictions? Do you think that puts more stress on, say, the US government to get fiscal spending out there to kind of placate people?

AM: There’s no way we’re getting fiscal. The reasons that the Fed has been doing all the shenanigans behind the scenes is because there’s no fiscal that’s happening.

TN: Okay.

AM: Rumors are that they’re even buying oil futures.

TN: Okay. So it makes things complicated, right? I mean, if you can’t send fiscal out to the people, then it makes kind of populism even more complicated.

AM: Of course.

TN: And more acute. Right. So what does that say for November in the US? Does that mean that it’s going to be tougher than we had thought on Democrats?

AM: Oh, absolutely. I mean, they sent out a memo to all the Democratic governors with all the warning flags. If you don’t lift off these COVID restrictions, we’re going to get massacred in November. So all of a sudden you saw this week like a dozen Democratic governors lift all the mask mandates.

TN: Okay. But do you agree if they had room for fiscal, it would solve some of these populist issues?

AM: That’s a tough question, Tony. I mean, possibly, but then the talk of new stimulus checks comes out and then the inflation probably gets worse. What are we doing?

TN: It’s a complex problem, which is why I’m asking the question.

NG: Didn’t Germans should make it pretty clear though, this week? They said I’ve been… Last year with the last fiscal. I said inflation. Inflation, inflation.

TN: Yes.

NG: Clear as you can be. But he’s a swing vote in the Senate. He just said we’re not getting inflation.

TN: Inflation tramps fiscal is what you’re all saying, is inflation tramps fiscal regardless of what happens with populist.

AM: Sorry, Sam. Let’s make a quick real quickly. Inflation is a nuclear football for politicians.

TN: Well, especially at 7.6%. Right. So fuel inflation of 40% year on year. I mean, this is crazy.

Okay, let’s move into what we expect for next week. What are you guys looking for next week?

SR: The flattening on the 210s curve will continue until the Fed breaks something and has to go the other way.

TN: Okay.

SR: I think that to me is the easy trade out there right now. It’s 210 flatten and done.

NG: Put a health warning on that.

SR: Yeah.

NG: If the Fed wimp out, I even think 25 basis points and non hawkish statement. If they whimp out, that long end is going to get hit because the idea of a flattening curve.

Remember, the sequencing is wrong here. That curve flattens after they’ve well into hiking cycles because of the potential for a recession. 13 out of the last 14 hiking cycles have led to a recession. That’s why I curved bear flat. Okay. It’s already doing it.

But the point is it’s because they think it will be enough. If the Fed given the narrative now, don’t go ahead with this. And I’m still anxious about the Fed, even though Powell warned back when the QE three was being launched, you’re going to create a whole lot of problems. Ironically, he got all the problems.

I’m just still nervous about this Fed because.

TN: I think everybody is Nick. I think that’s why we’re seeing the volatility because no one’s getting a clear signal. And we saw some Fed governors out on Friday saying that 50 basis points is too much and putting 25 basis points into question.

So I’m not sure if there’s a consensus.

NG: Actually, there’s a great trade to be had. Great trade in some of the markets. You buy a struggle, you buy volatility effectively. Make it, usually pay up for premium, but you make it completely not dependent on direction.

TN: Is what you’re saying for the next several weeks.

NG: Because they’re not going to suppress volatility anymore. It’s reversed. So everything they do now is by definition going to be creating more volatility. We’ve been zero rates, forward guidance. Let’s just cruise.

And the balance sheet is pushing stocks up. The other thing you need to watch, by the way, is the level of reserves.

TN: Right.

NG: Because I actually think if back in 19 there was that Reserve issue with the repo. I think that slightly could be problematic if something like that happens again.

TN: Okay, great. Good to know. So let’s go one by one. And what do you guys see say in equity markets next week? Is your bias for equity markets? Do you have a downside bias in equity markets? Sorry, Albert, go ahead.

AM: So I was just going to say next week, I think it’s going to be all about the Federal Reserve’s narrative building. It’s going to be a choppy session in equities all week. They’re preparing you, they’re sending out boulerd with ridiculous 100 point basis comments, and they’re just preparing you for a 50 basepoint rate hike.

TN: Right.

AM: So that’s what I think is going to happen. So we’ll just be choppy on next week.

TN: Okay. Sam?

SR: I like SPX more than I like the Dow, and I like the queues less than I like the Dow.

TN: Amid the volatility, you believe in tech?

SR: No. Okay. I don’t like any of them. Okay. And I prefer the S&P to the Dow. And I prefer the Dow to the queues.

TN: Okay.

SR: Yes, exactly. And I don’t like any of them. But if you had a gun to my head and made me buy something, it would be SPX and shorting queues against it.

TN: So there’s a slight downside bias in markets next week, equity markets? Okay, Nick, same?

NG: Yes. I think, as I said, I like what I wrote. News is law of gravity. As these rates come up, it starts to put gravity on the equity market and gravity will bring it down.

TN: Okay.

NG: One provisor, though. If we get some, along the path that we’re going, we get some serious shake outs. I do think what could be interesting is some of these commodity related starts, because actually commodities do quite well during a hiking cycle. Okay. That again, fits with our thesis anyway.

AM: Of course, gold has been on a tear for the last four trading days.

NG: Confusing everybody, right?

AM: Yeah, of course.

TN: Sam, do you agree with that commodity during the hiking cycle?

SR: I think oil is great during a hiking cycle. If you look back over hiking cycles, oil tends to do pretty well. I actually like the long oil short gold trade.

TN: Okay. So you bring us into a good point. Oil was my last stopping point. So, Albert, Nick, do you guys sit in the same place with oil? You think in the short term, say next week oil is looking good, or you think it continues to trade sideways?

AM: I think it goes up. I know. Rumors are Fed buying oil futures. I think it’s going to go up to 110. Not next week, but over the next week.

TN: Even with the inflationary pressure? Even with, which is unbelievable for me to say that. Even with the dollar rising. It’s unbelievable for me to say this.

NG: Albert just made a great point. These commodities are all at new levels and really the dollar hasn’t collapsed yet.

TN: Okay?

NG: Can you imagine what would happen if the dollar sells off some of these commodities?

TN: Yeah, we’re going to have to wrap it up there. So thanks very much, guys. This has been great and have a great week ahead.

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Week Ahead

The Week Ahead – 07 Feb 2022

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Post date February 6, 2022
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In this episode, we talked about some really interesting tech earnings like of Facebook and Amazon, crude and natgas prices, and the bond market. How does the NFP data affect the bond market? Also discussed central bank’s reaction to inflation and why you should be keeping your eyes on the CPI?

This is the fifth 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/3DmO9AkU7cHG3MP1wEjuej?si=b9cd41abf47f422d

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Tracy: https://twitter.com/chigrl
Nick: https://twitter.com/nglinsman/
Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Tracy Shuchart, Nick Glinsman, and Albert Marko. Before we get started, I’d like to ask you to subscribe to our YouTube channel. It helps us a lot get visibility, and it really helps you get reminded when a new episode is out so you don’t miss anything.

We had a lot this week. We had tech earnings, some really interesting tech earnings and market activity as a result. We had crude really ripping this week. And we had bonds raging at the end of the week. So really a lot happening across sectors, NASA classes.

So let’s start with the bond market, Nick. We seem to have gotten pretty much what you mentioned on last week’s show. So can you go into kind of what’s happened and what’s happening in the bond market right now?

NG: Yeah, we’ve basically been ambushed by inflation. That’s what’s happened. You saw yesterday out of the ECB, which was a hawkish twist, possibly one of the worst press conference performances I’ve ever seen in my life. But the facts of the matter are you’ve got five, six, 7% inflation in various countries of the EU. In Lithuania, you’ve got 12%. Okay. So they are failing at their predominant original mandate, which was inflation per the Bundes back from what I’ve been told, there were several members of the MPC.

TN: Sorry. When you say she, you mean Christine Lagarde?

NG: Christine Lagarde. Several members of the NPC wanted to get moved yesterday. Not going to happen but it’s reasonable to think perhaps two hikes this year, but that will still take us to -20 basis points. It will still be negative. Okay. And then that upset the European bond markets.

You have the Bank of England go first with 25 basis points, four dissenters wanting half a point. That started to rock the bond markets a little bit. Then the press conference out of the ECB, and you basically had, goodness how many Sigma move it was in two-year bubbles, two-year German government bonds. But they basically went up over 20 basis points in a couple of hours, terminating early this morning, and they’ve stayed elevated.

And then you had this non farm payroll data. Everybody got it wrong. And the thing is, if you think this month’s figures are nonsense, well, look at the revision.

TN: Sorry, when you mentioned the NFP data, what’s important about the NFP data? Because I think some people looked at the headline employment numbers, some people looked at the wage rate. So can you tell us what’s important there?

NG: Two things. One is nobody was expecting a non farm payroll at like this. Some people will say, well, it’s always going to be revised. Well, okay, then look at the near $400,000 upward revision for December. It’s. All their data. The way it’s coming out. The BLS isn’t necessarily the best, but everything that they look at is strong labor market.

The thing that really upset the bond market was the average hourly earnings. 5.7%. To Albert’s point last week. Wage inflation is here to stay. So having been inundated with calls this morning, that really affects what the Fed… The Fed actually are fighting for their credibility.

TN: When you say wage inflation is here to stay, but it’s really, is the Fed trying to break the back of wage inflation?

NG: Well, that’s something they could impact. Right. By increasing the demand side of the market. We’ll have another idea on inflation next week. The CPI. And the lowest forecast is 7%. The highest is 7.6%. They’re not getting the favorable comparisons because oil has continued to move up. Energies continue to move up. Right.

So assuming we’ve got a seven big handle and heaven help us if we haven’t hit the 8 handle at all, this Fed has no choice. Because as you can see with the bond market, the bond market is going to do the Fed’s job if they don’t do, it.

So every time we get to what you had over the last couple of days with a bit of pullback before the ECB had a bit of pullback by some of the Fed members, the FMC members, and the yoke of, steepened.

AM: I got a question for you, Nick. Can you buy bonds if oil goes vertical? Because I think we both think that oil is going 120 north.

NG: Yeah. Well, no. I think that’s another reason why you can’t be long bonds at the moment and the bond market will adjust to it.

Everybody said the bond vigilantes are dead. When you look at the percentage moves and the price of the bonds, they’re not these are big moves going on.

TS: Nick, can you address a little bit about what will happen to the credit markets as far as the bond movement?

NG: High yield seem to do okay today, which investment grade, fine. Historically, in rising rates, you should see investment grade is somewhat better. High yield, no. High yield. I mean, if these rates are going to start moving up and some of the stuff I heard today tells me “one and done” is not going to happen. It’s going to be more and they’re not going to have a choice.

And the central banks have been basically what you had in the last seven or eight days is the central banks admitting they made a policy error or two last year. And now they’re fearful of making further policy errors. So they’ve got to be seen to do.

And again, to Albert’s point last week, clearly the Biden administration is, had their backs on the inflation front. And I suspect from what I was being told, we’re going to be quite surprised at potentially how aggressive this Fed could be. Not 50 basis points in March. That will be too quick. Too much, too quick. But May, June could well be in play because these numbers aren’t coming down. They’re just not coming down.

TN: Okay. So regardless Q2 is when things start to happen on the interest rate front, on the rates front, right?

NG: Yeah. In terms of QT, I was told the second half, beginning of the second half. Second half.

TN: So does that mean July or November?

NG: Probably means July. Okay.

AM: I honestly think it’s a possibility we do that beforehand just because fiscal cliff is coming in March.

TN: How do they go from QE to QT? Just like that? They shouldn’t be doing QE right now anyway. That’s true. It’s still doing QE. So they missed a beat there.

AM: How do you taper if you’re doing QE still? Why doesn’t anybody ask that question or answer?

TN: I ask it every week.

AM: Tony, I was on this thing with Andreas and “we’re going to taper.” I’m like, “okay, sure.” On paper. But the reality is you’re not because the QE is continuous.

TN: I don’t know. It seems to me from what Nick is saying, it may not be continuous. It seems like that has to stop because the policy position is going to stop in March. Right?

NG: Exactly. Which is why I think 25 basis points, not 50. However, I think right now, until they’ve caught up somewhat forward guidance is not going to be with clarity.

They want to get back to normal so they can be forward guiding according to what we were used to in the deflationary times. Pre-Covid. Okay.

TN: Okay. So when you say pre-Covid, you mean pre-Covid in terms of interest rate and balance sheet?

NG: Yeah. I think it’s exactly what I’ve been told this morning. They want to get back to the interest rate level that was prevalent then. They want their balance sheet back at that level.

TN: Okay.

NG: And I think that what’s happened is not only have they been shocked by inflation, they shouldn’t be shocked by the false-ty of their forecast, but I think they were shocked by the fact that we’ve got a lot of bubbles going on.

Equity market value, housing market, NFT, crude oil. Crude oil’s not a bubble. Bonds have been a bubble. So I think we’ve got some surprise. And of course, that will then feed it.

Remember I said originally, there’s either a riot in the bond market or riot in equity market.

TN: That’s right.

NG: One or the other. It started with bonds, and then we got a bit of an equity riot yesterday, which was more earnings related. But the thing about it is if you look at interest rates as gravity, zero interest rates with basically zero gravity. So you’re on the moon. Equity starts have been up here. If they’re raising rates, they’re increasing the level of gravity. News and law means that something starts to fall.

I was also told if it’s not a cascade, if it’s orderly, sort of down 20% from here, they’re okay with it.

TN: Okay. That puts us at what, 36?

NG: 35, 36,000, which is still above where we were before Covid. Right?

TN: Right.

NG: Fed will be happy with it. This put, is not, there’s no clarity on the put anymore.

TN: Okay. Is it safe to say that your view by the end of the year is sometime between now and the end of the year will hit 35, $3600?

NG: Look, the Fed. These rate markets will carry on. Any mistake by the Fed, any hesitation, it’s going to be punished by rates. And you’ve seen what’s happening, and it happens. It crosses over. You saw what happened in the European bond market as well this Thursday. Bank of England. You saw Gilts market also adjust, and that flowed through to the US market and it continued today.

TN: So do you think the ten-year crosses 2% next month?

NG: Oh, yeah. My target on the ten-year for this year is 260.

TN: Okay, great. So let’s take that and a central bank’s reaction, inflation. Tracy, we’re seeing crude prices just kind of a rocket ship. So can you talk us through that and let us know how does that contribute to next week’s CPI? And Nick mentioned CPI, but what do you expect for that as well?

TS: Well, I mean, I expect CPI to be high. However, the Fed doesn’t really include energy and housing in there and food in their metrics. So that doesn’t necessarily play into that.

That said, I think what we saw today was a lot of shorts being squeezed out of the market. That said, still expecting higher crude prices later this year into Q3.

The reason being because the global oil inventories just drew another 8 million. We have OPEC that just announced another 400K increase for next month this week. Right. And they haven’t even been able to keep up with their production increases. I mean, their compliance is over 132% right now. They just don’t have the spare capacity to move forward. US products consumed last week hit 21.6 million barrels. That’s over 2019 levels.

So globally, we’re seeing higher demand with lower supplies. So this market is likely to continue higher just because of actual supply and demand issues, which I’ve been talking about week over week.

What’s also interesting today is that nobody’s really talking about is that Saudi Aramco just announced that they’re mulling another 50 billion equity stake sale. Right. And so it would be a good thing to keep kind of oil prices higher and inventory is kind of lower. Right?

TN: Sure.

TS: There’s a lot going on in the market right now.

TN: Okay. And as we see this cold front come through different parts of the US, of course, it’s winter. But do you expect, say, Nat gas to continue to rally or say, for the next couple of weeks or next couple of months, or do you expect that we’re kind of in the zone where we’re going to be through the winter?

TS: I mean, I think we’re kind of in the zone. US nat gas prices are not as subject to the volatility or the constraints that say European nat gas prices are concerned. I mean, we have an overabundance of Nat gas, we tend to flare it.

We’re going to be this year the world’s largest exporter. Right. But that’s not necessarily going to bring I mean, you have to look at our gas prices trading at four or $5 compared to nat gas prices in Europe trading at $40. So I think we’re at a sideways market right now just because of the oversupply that we have.

What we are saying is depending on what area you live in, then natural gas prices tend to vary. So we’re looking at the North East, for example, where we have this cold front. Nat gas prices are at $11. Right. But Henry Hub, which is what everybody’s trading is still at 4 to 5. We’re going to see not gas prices rise in Texas right now because we have a cold front coming through. But again, that’s a regional market.

TN: I was just complaining about gasoline prices being $3 here in Texas earlier today, so I just can’t deal with it. Where is it where you guys are?

AM: $4.25 in Tampa.

TN: $4.25?! Holy cow. What about you, Tracy?

TS: $3.99 in the Northeast.

TN: We’re right at $3, and I can barely stand it.

Okay, let’s move along with the geopolitical stuff. So, of course, Ukraine is on everyone’s mind. And we’ll put a link to this in the show description, the video from the State Department spokesman and the AP diplomacy reporter. Albert, can you talk us through a little bit of that kind of what’s happening there and what is that doing to the situation to find a diplomatic solution?

AM: Well, simplistically, I mean, you have the Biden administration trying to amp up the rhetoric and make it more dramatic, basically to distract from what’s going on domestically in the United States from inflation and social issues, and SCOTUS picks down the list of the problems that are facing the Biden administration. That exchange was unbelievable.

You had an AP reporter just taking him to task and saying “where’s the declassified information? And his response was, “I’m telling you verbally right now, and that’s the declassified information.” That’s unbelievable. You’re not going to get away with that.

This is just more of a symptom of the ineptitude of Anthony Blinken as Secretary of State. He shouldn’t even be called “Secretary of State” anymore. It should be “Secretary of statements,” because that’s all he does. He doesn’t do anything else. And when it’s concerning with Ukraine and his method for, “diplomacy”, he’s a non factor. The United States is a non factor, right now.

They’re behind the eight ball where they keep talking up this rhetoric and putting their allies in Europe behind the black ball here. What do we do here? We need support from the United States to show strength, but realistically, we can’t stop them going into Ukraine.

TN: Okay. Yeah. So let’s just go onto a viewer question here from @SachinKunger. He says, what will happen if there is an actual escalation between Russia and Ukraine? What’s the likelihood of actual escalation and what do you think would happen? Both you and Tracy? Part of it is commodity prices. Is there an impact on commodity supply chains, meaning wheat and gas and other stuff to Europe or other places, or is that not necessarily a huge issue?

AM: Well, I believe we’re about 75% that they’re going to have some sort of incursion into Ukraine. I mean, you don’t mobilize that many people and create supply chain logistics to not do anything. That question really depends on the level of incursion. Right. Because if it’s just ten, 20,000.

TN: It goes back to Biden’s minor incursion.

AM: That’s the Pentagon’s working model. And that’s my working model. 10, 20 thousand, you go in the same place as you were before, you loot the countryside, cause a little disturbance. The west looks weak. You leave after a month or so. Right. That’s the likelihood situation.

Of course, the markets are going to freak out in day one.

TS: That’s exactly what I was going to say. I mean, obviously you’re going to see a reaction in the commodities markets just because we’ve had four years of really not much geopolitical risk factored into a lot of these markets, the agricultural markets, the energy market. Right. Pretty much after Libya had a ceasefire in 2020, all that risk premium kind of came out of at least the energy markets and the agricultural markets, we haven’t really seen a lot of geopolitical risks.

So of course, the markets will freak out. I totally agree with Albert on this point. Whether that’s going to last or not, that’s a totally different story.

TN: Yeah. I also think that we’ve had so much money supply that that cushions geopolitical risk on some level. And interest rates have been so low that that cushions geopolitical risk as well. So as we’re in this interest rate cycle and this balance sheet cycle, geopolitical risk counts for more. It’s more costly for companies, it’s more costly for countries and investors.

NG: I would add one other thing. These markets are not trading liquidly. So these moves on geopolitical risk could be exaggerated. Right?

TS: Exactly. My point is that geopolitical risk will be exaggerated at this point.

NG: You can see there’s no liquidity, right?

AM: Yeah. To be fair, any kind of event right now just makes the markets look like it’s a crypto exchange. 30% up, 30% down 300 points on the ES. That’s insane.

TN: On that, Albert, let’s move to some tech earnings and let’s talk about Facebook and Amazon. So if we want to talk about big moves, everyone kind of knows this, but can you talk us through a little bit of that? But I’m more interested in why it’s happening. Why is everyone negative on Meta and why are they positive on Amazon?

AM: Well, from my perspective, the Fed and their cohorts use maybe a dozen companies to pump the markets. Right. They’re mainly tech. Right. They’ve expanded out into a few other things, but it’s mainly tech, Facebook being one of them, Amazon being another. AMD and Google and all these guys. Right. All these big tech names.

Now when you see Facebook miss and a couple of other miss, and the markets start to get weak, there’s a point to where… This goes back to what Nick says about different levels in the markets and whatnot. He always stresses that with me. There’s a point to where if they break this level, we’re going down to 4100 or 4000 or God forbid, 3900. Right. So that lined up right when Amazon’s earnings were coming up. And I’m looking at the market and I’m looking at these levels and I’m like, there is absolutely no way they’re going to allow Amazon to miss. Whether they let them look the books or say something in guidance or whatnot. And lo and behold, what happened? Amazon beat. Did they really beat? Probably not. You know what I mean? Yeah. And then Pinterest that nobody cares about beats and then Snapchat. I don’t even know what the hell why they’re a company. They beat unbelievably. I think they were up like 50, 60% and after hours. Right.

So now they have their juice to pump the markets back up to 45, 30 or even maybe 4600 next week before the fiscal cliff becomes a problem.

TN: Okay.

TS: You also have to look at the bond market. Right? I mean, the more the ten-year tanks, the more that’s going to drag on tech.

TN: Right. So what does that tell us about the next couple of weeks, specifically next week? But the next couple of weeks? As we’ve seen, say Meta come down, Facebook come down. But we’ve seen these other things really rally. Where is tech as a sector?

AM: It’s a pump sector. That’s all it is right now. There’s nothing really behind it. It’s built on zero rates. Well, we know we’re going to get rate heights. So what are you betting on at the moment?

TN: Right. And that’s the basis of my question. If tech is a deflation play and we’re in inflationary environment and we’re going to have rate rises, what does that mean for tech in the near term? So are we at the kind of tail end of tech? That’s my real question.

NG: We’re at the tail end whilst we have to see these interest rate rises come through. And actually, you don’t necessarily have to see the central banks officially raise because if they don’t, the bond markets are… And then there’ll be a catch up. This is the problem. If they Underperform in their credibility catch up because they’ve already implicitly admitted their errors of policy, bond market will adjust and they have to catch up again.

Now, if they do something surprising on the rate side. So yesterday was an ECB shock, right? Today, there was nothing to do with the Fed. It was the data. Well, we’ve got that CPI date next week. Right. That’s going to be very interesting because I agree with Tracy. Core is at a certain level which is still too high. But it’s the full Monty, the full CPI that labor uses when they’re discussing their wage claims. Practically, that’s the behavior of economy.

TN: CPI is the single biggest event next week. Is that fair to say?

TS, AM, NG: Yes.

TN: Okay, so let’s look at that. What if it is, say seven, which is kind of the expectation, I guess the lower bound of expectation kind of. Right? So let’s say it’s seven or let’s say it’s even five. What does that mean for us? Does that mean continued, easy Fed? Or does that mean you have the same assumptions and that’s just kind of a milestone or something that we’re passing along the way to higher rates anyway?

NG: We’re on the way to higher rates anyway.

TN: Okay.

TS: I mean, if it’s five, the market, temporarily if it’s five, the market temporarily will probably rally because that lessens the effect that Fed is going to raise. Right. That percentage will probably go down. But that’s a temporary. If we’re just talking about market reaction on the data release, I don’t really see that happening. I don’t see 5% coming in. I don’t see that a possibility.

TN: But then let’s look at the other side. What if it’s eight and a half? What happens then?

NG: Well, then in the old days, it would have been an inter meeting rate hike.

TN: Okay. Right.

NG: And the bond market will just, it’ll be another riot. Even if the core is steady. Big figure eight on the full CPI? that would shock a few people. Like people were shocked today with the non- farm payroll data.

Literally, if you could watch Bloomberg TV, it was like. They couldn’t believe what was going on.

TN: So we’re in that place in the market where the porridge has to be just right. Is that fair to say?

TS: I think we’re in for volatility. Right? I mean, we’ve been experiencing volatility for the last month or so. I think this will continue until March, until we have some resolution of whether the Fed is going to raise rates or not.

In between, it’s going to be volatile because everybody’s looking at intermittent data saying, does this mean the Fed is going to raise rates? Does this mean the Fed is going to look do you know what I mean? So I think we’re in that pushbull thing, and I think that volatility will continue into next week. I think that volatility will continue until actually the March meeting, until we get some resolution on whether the Fed is going to raise rates and by how much.

TN: Okay. So if I just a couple of things for you to agree or disagree with, just short yes, no. Next week volatility in equities with downside bias, you agree or disagree?

AM: Disagree.

TN: Disagree. Nick, you agree or disagree? Downside bias, you agree. Tracy, equities, agree or disagree?

TS: I think it depends on the sector. Okay. Give me one or two. I think we’ll see, my downside bias is in tech and then obviously, yes, because it’s heavy tech. Right. And so I think we see sideways markets in the Dow and the Russell.

TN: Okay, then let’s do the same exercise for commodities. I know there’s a lot of companies out there, but generally commodities. Choppy with an upside bias. Agree or disagree?

TS, AM: Agreed.

NG: That’s a dollar call.

TN: Okay. Explain that.

NG: Yesterday because of the dollar’s weakness against the Euro and the Dixie, I tend to agree with you. I think it’s going to be choppy until we see the color of the CPI number.

TN: Okay. Very good. Anything else to add for the week ahead?

NG: Just keep your eyes on the bond market. My mantra.

TN: Very good. Okay.

TS: Keep your eyes on B come.

TN: Thanks guys. Thanks very much. Have a great weekend. And have a great week ahead.

TS: Thank you.

TN: I don’t know the left side of my screen is the pineapple people.

AM: We’re going to call Nick Luke for the episode today.

NG: The professional version of Luke.

AM: Okay. Anyways, I’m done joking. Let’s get this thing on the road. Okay.

TN: Good. Alright.

Tags amazon, Bank of England, biden, Bloomberg, BLS, complete intelligence, cpi, December, ecb, England, EU, European, European bond market, Facebook, Fed, FMC, German, intelligence quarterly, July, libya, Lithuania, March, Meta, MPC, NASA, NFP, nft, November, Pentagon, Pinterest, Russia, Saudi Aramco, SCOTUS, snapchat, Tampa, The Week Ahea, Thursday, Ukraine, US, week ahead, Youtube

Week Ahead

The Week Ahead – 31 Jan 2022

Post author By admin
Post date January 30, 2022

We’re dissecting Jerome Powell’s latest announcement — what does that mean to markets this coming week? Will we see Powell’s inner Volcker this year? What are we expecting to happen in the energy markets considering the geopolitical risks in Russia and Ukraine? Has the White House and Treasury told the Fed to fight inflation as its top priority?

This is the fourth 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.

https://open.spotify.com/episode/1CgJgSFPcqQ5VMuopN9S2h?si=212cd6f83928481a

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

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Tracy: https://twitter.com/chigrl
Nick: https://twitter.com/nglinsman/
Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Nick Glinsman, Albert Marko, and Tracy Shuchart. Before we get started, I’d like to ask you to subscribe to our YouTube channel. It helps us with visibility, helps you get reminded of our new episode. So please do that.

While you’re thinking about it, this week was all about the Fed. Of course, we expected Monday and Tuesday to be choppy. We told you that on our last Week Ahead, which they were. We talked about it last week. We talked about the said meeting last week. And as Wednesday got closer, it appeared that Powell would be more bearish. And that seems to be exactly what we got.

So today we’d love to focus on a few things. Nick, let’s start with you. What were your main takeaways from the Fed?

NG: Okay, I’ve got three takeaways, most of which came after the Fed. Okay. The statement was sort of bland, almost appalling in terms of, it felt like it was leaving the risk markets to determine the Fed’s policy. And then, boy, Powell come out hawkish. He refused to give any direct answers but never denied any of the points and the questions such as how many rates, how many it takes?

So what was interesting is today, we had the first Fed Speaker, Neil Kashkari, the Uberdam for the FOMC.

TN: That’s right.

NG: And he basically came out and said whatever it takes, we’ve got to get inflation. I mean, shocking. Now where Powell got confirmed in his hawkishness came today with the ECI data. The base figure was slightly less than expected. But lift the bedsheets up and you are seeing major wage pressures.

If you look at some of the increases in wages and salaries, four and a half percent for all civilian workers, 5% for private sector workers, up from 4.2 and 4.6% respectively. If you go deeper, hospitality, health care, you’re looking at 7% and 8% increases.

TN: Nurses in many cases are making as much as doctors now in a number of cases.

NG: Exactly. So that basically confirmed Powell’s words of a rapid pace of wage grip. Okay. And I think that was a very key piece of data, which in fact, a Bongi like me would have been waiting for. Right now.

TN: We don’t see them bonds today, did we?

NG: What’s that?

TN: We didn’t see the action in bonds today, did we?

NG: They were down initially and then after the day, they rallied a bit. But I think that was more to do with reversing a very successful week of your well positioned. And what’s interesting, though, this came after that hawkish press conference. So typically what you have is the yoke of mutually reinforces the relationship with the Fed’s monetary policy. So simplistically, when an economy is strong and in danger of overheating, you are going to see the yield curve steeper. Long end, higher rates relative to the short end.

Now that then reflects that the rates have to rise, that’s the historical perspective. What was interesting this time was the curve was bare flat, and it was headed towards an inversion, the consensus. That’s a really bad signal of an approaching recession.

What it’s basically suggesting at that point, historically, the bond market tends to suggest Fed’s tighten too much. We’re going to get a recession. It needs to stop. Reassess, perhaps even cut. So what’s startling about this whole move is you got yield curve flat, bear flattening, coming so soon before the Fed has even started raising rates.

TN: Right.

NG: So if you have a Swift move to inversion, it’s going to be slightly, somewhat harder for the Fed to carry out its hiking program over time. That tells me that you’re going to have it front loaded. It also suggests to me, which is what you got from Powell’s press conference, it may not be 25 basis points each hike. It may be 350s. Right. Especially with this inflation.

He was all about inflation risks to the upside and a very strong labor market.

TN: 350 basis point hikes. I just want to make sure we make sure that we know what you said.

NG: Yes. Basically the Yoker is suggesting that. But some of his comments were this is a labor market that’s rocketing. This is inflation that still has risk. The upside. We saw a bit of that today. He also said supply chains are not going to get resolved this year. We’re going to have to wait till next year.

TN: Okay. Let’s stop there, because I want to ask you something, and this may be an overly simplistic way of asking the question and Albert and Tracy jump in here.

But it seems to me that kind of what he’s saying indirectly is, hey, there are supply side inflation, okay. And we as the Fed can’t control the supply side, we can only control the demand side to some extent. And so what we’re going to do is we’re going to put a stopper on demand so that demand can come down to match up with the available supply. And that’s how we’re going to we don’t have the tools to put the kibosh on the supply side inflation. So we’re going to bring the demand down.

First of all, does that seem to be what he’s saying?

NG: I think that’s probably what he’s trying to say. I would add one other point. So we were all thinking that after the big rise in crude oil and energy prices last year, we would get some beneficial payback by the comparison, but we’re not oil still going up, so we’re not getting that.

And the most extreme version is, for example, Europe. These have all got to feed through from wholesale to retail.

AM: Yeah.

NG: I think it was 95% of surveyed American CEOs. I can’t remember the sort of survey, but I can dig it out. Are expecting to raise prices.

AM: Yeah. The problem with them trying to limit demand, though, is it’s going to start affecting jobs. Labor market’s certainly going to weaken if demand starts to fall off. Because wage inflation is going nowhere. I’ll tell you that right now. Wage inflation is here to stay politically is absolutely just not going to ever come back down. So that’s going to be sticky for quite a while.

NG: But I think Powell was implying that where he basically said the labor market is super strong. So I don’t disagree with it will dampen it. The question is whether it turns around.

Remember, we’re getting all these people retiring and dropping out. Yes, that was your data, Albert.

TS: He kept reiterating the labor market is super strong. But the labor market really, if you look under the hood of it, it’s not really super strong. We all know that.

TN: That’s true.

NG: Yeah. Agreed. But it’s perceptions. Remember, these guys are basing their work off their forecasts. One of their forecasts have ever been right. Okay. Even worse in Europe. So the point I’m making is they have their parameters. They have the data that they look at and monitor and whether we agree with that data or not. And I mean, I would always disagree with the way the Fed measures, the BLS measures CPI, but it was impacted by Arthur Burns of the Fed in 1970s. Right.

So the point to be made is they have their data sets that they watch, and according to those data sets, they may be wrong. I don’t disagree.

TN: So just yes or no, because you’re implying some things that two weeks ago we talked about or last week we talked about, yes or no. Will we see J. Powell’s innver Volcker this year?

NG: Yes.

TN: We will?

NG: In the short term.

TN: Albert, what do you think? Yes or no? Will we see J. Powell’s inner Volcker?

NG: Mini Volcker.

AM: Mini Volcker, I agree with. One and done Volcker, a one week Volcker, yes, I agree with.

NG: If he does the one and done, the bond market will riot. If you look at the Fed meeting. But look at the statement. That statement said, basically risk assets will determine the level of Fed funds, right?

AM: Yeah.

NG: Bond market’s sold off. Hold on. The bond market’s sold off, aggressively. Sold off all across the curve and particularly the long end. It didn’t start to flatten in a bare manner until that press conference.

TN: Sorry, guys, let me stop you both just for a second. Tracy, will J. Powell show his inner mini Volcker this year?

TS: I said this last week. I’m in the one and done camp, maybe two, but I’m cutting it out there. I know Bank of America came out today and said seven. They said the “seven” yes, today, which I think I don’t know what they’re smoking exactly. But I’ll go with max two on this one, even though I said one and done. I’ll stretch that out.

Maybe one more, but that’s where I stand on that one.

TN: Okay. So while we’re with you, Tracy, can you give us a quick view on what did markets get right and wrong this week from your perspective? What do you think is a little bit out of whack?

TS: Well, I mean, I think energy markets obviously remain elevated because of the Russia-Ukraine risk, right? Because Russia’s 10 million barrels per day, they produce a lot of gas. That’s here with us to say we have a northeastern so that kept a bid under at least the energy markets, right. I think last week we were talking about continued volatility all around in, say, the indices and obviously that trend is continued and probably likely will continue into next week.

Again, looking ahead to next week, I expect that probably we’ll still keep a bid under oil, but we did go kind of sideways this week. Even though we got new highs, I still think we’ll stay in that $82 to $87 range, probably for the next week or so, and then probably get a little bit. If nothing happens with Russian and Ukraine, we’ll get a little bit of pullback there. But still looking at the overall fundamentals of the market, they remain very strong. So I don’t think we’ll see any kind of material.

TN: Okay. This is on the commodity side. On the commodity side. Okay. What about the equity side?

TS: Well, it’s. Far as equities indices are concerned, I think that we’re again going to see continued volatility. What I think is very interesting. As long as the market is pricing in rate hikes, that’s going to put pressure on growth versus value. Right.

And so I think that trend will continue. I think we’re in for a rough note. Until that March meeting, until we actually hear an actual decision, we could be setting up for another volatile month in February.

TN: Okay. That’s fun. Right. Okay. So let’s take that and let’s swing over to geopolitics for a minute. And Albert, I want to ask you a couple of things about geopolitics. Tracy mentioned Kazakhstan, which we’ll get to in a minute. But has the White House told the Fed and treasury that inflation is a top priority? Is that what you’re hearing out of DC? Are they getting political pressure to make inflation their top priority?

AM: Oh, absolutely. Inflation is a nuclear bomb for politicians. I mean, gas prices rising, food prices rising. The job market is they can say it’s strong, but it’s not. I mean, realistically talking about 15%, 20% unemployment, so it’s not strong. So, yeah, inflation is absolutely priority number one for the next couple of months.

TN: Right. Okay. And then as we move into a little bit more on geopolitics, so we got a viewer question from at 77, Psycho Economics. He says, has Russia’s stabilization of Kazakhstan increased their influence over energy exports to Europe?

So give us a little bit of kind of overview of what you see happening in Kazakhstan. And then if you and Tracy can help us understand what’s happening with the energy exports to Europe, that would be really helpful.

AM: Yeah. Kazakhstan has been stuck between Russia and China for a couple of years now. But realistically, that’s Russia’s backyard. They control the area. Ever since the United States was booted out of Uzbekistan, they’ve lost a lot of sway in the region. So the energy sector from Kazakhstan all the way to Turkey and into the Mediterranean is pretty well dominated by the Russians right now.

TS: And I would agree with that. I would also like to mention just as an energy producer, I mean, Kazakhstan doesn’t produce all that much.

So if you’re looking at the commodity side, I would say Ukraine would have more of a dent because of how much they’re involved in the cereals markets. How much do they export in the cereals markets, how much they export in the uranium market. So that’s definitely more commodities heavy area that I would be concerned about then Kazakhstan, just from the energy standpoint.

AM: Yeah. And when you’re looking at Russia and talking about energy, it’s not necessarily you don’t single out just Russia’s energy production. They go out and they meddle everywhere they possibly can, whether it be Libya, Kazakhstan, Turkey, everywhere they can to sit there and depress those energy exports so they can pump out there. So that’s what I mean by Russian dominance in the sectors. Sure.

NG: Will Russia attack the Ukraine?

AM: You’re looking at maybe 1020 thousand conscripts that Russia probably hasn’t paid in a while to go and loot the countryside of Ukraine where it’s already Russian dominated speakers.

Biden comes out and talks about sacking Kiev as if it’s Hannibal on the gates of Rome. This is just absurdity. Russia has no military, nor does he want to go into Kiev and hold it. What’s the point of bombing the thing? Of course, they can go in and destroy Kia if they wanted to overnight, but that serves absolutely zero purpose. So are they going to invade? Yeah. I mean, I would give it a 60 70% chance, but would it be something some big kind of issue at. No, the market is looking at this issue as World War II. And it’s just nothing more than a little bit of a skirmish that’s kind of kinetic.

TN: But they’ve already invaded the economy. They’ve already invaded any investors who want to go into Ukraine, that nobody’s going to touch Ukraine for at least the next year. Right.

AM: Well, Tony, listen, I’ve been to that region, worked there for years in Georgia and Ukraine. I mean, Ukraine has corruption issues, of course, aside from the Russian problem. Right. They’ve got legal framework problems and corruption problems that it makes investing there quite difficult.

TN: Right. Okay, so you’re saying no, not going to happen. You’re saying maybe some looting in Eastern Ukraine.

AM: But they’ll reinvent the same areas that they did in 2014. They’ll make Biden and the west look inept, and that’s their goal. That’s it.

TN: Great. Okay. Sounds fun. As we look ahead, what milestones are you looking for? The week ahead, Nick, what are you expecting to see next week in markets?

NG: I’m fascinated to see the next bunch of Fed speakers come out. If we had the Uber Dove, very hawkish. That’s as hawkish as he’s ever spoken, Kashkari. I’m fascinated to see what the others are going to say.

What I can’t get a handle on is whether this is a genuine bear market inversion or flattening going on the bomb market. I still maintain the point that you’ve got to look at the market and watch what’s going on. Okay.

So I’ll be interested to see whether that continues. If it doesn’t continue, that tells me that it was actually a bit half partly people reversing bad positions on the Euro curve because really traditionally we should be having your curve deepening.

And then next week, well, we’ve got unemployment coming out on the Friday, so that’s going to be pretty fascinating. And then we’ll have the following week, all that inflation data starting to come through, and we won’t have the favorable comparisons from a year ago.

The banks have all jumped on like Tracy said, bank of America seven hikes. Goldman is four to five hikes. They are jumping on this. This did surprise the banking community, with maybe the exception of Goldman, who came out beforehand and said this is what I was thinking. So it’s a pull and push between what we’ve just been discussing. How many heights have we got a minivolk building up here in the Fed? If he’s got the support of the White House and treasury, then maybe we have. Right. I think he had to have that before he came out with that sort of speech.

So the question I mean, I looked at today’s equity market. To me that started off as a okay, let’s cover the shorts because we’ve had a good week and there’s no liquidity. So the market just carried on popping up be interesting to see what happens on Monday. And remember, we have holiday, new lunar year, holiday in the Far East. So the forest is shut, as it were, even less liquid.

TN: Right. So, Tracy, you’ve said for a long time that Yellen is a strong dollar Treasury Secretary. And so what Nick is saying about the Fed and the treasury and the White House being in sync, it seems to make sense if they’re tightening that that is certainly something that Yellen might want.

TS: Obviously, you’re going to see a strong dollar. The Feds raising rates, they’re taking liquidity out of the dollar market. Right. So in that environment, we are going to see a rising dollar. What we should be looking at, though, is emerging markets. Right that nobody’s really talking about. How does this affect emerging markets? Emerging market debt that’s denominated in USC as a dollar gets higher, that puts pressure on emerging markets, even though a lot of banks came out and said emerging markets should do better this year than DM markets, but in my opinion, not in an environment where we see a rising US dollar. So that’s something to look forward to.

TN: In the biggest emerging market. We saw the Euro really taken to the shorts this week. Right. So the Euro is really problematic and it’s probably the newest of the emerging markets, in my view. So they’ve got real problems. But yeah, I think watching emerging market currencies is something that we really need to do over the next probably month to see how dramatic will the shift that we saw this week, will that remain? Will that get even more dire? I think it will. Yeah.

And Albert, what are you watching for the next week?

AM: I have to reiterate what Tracy just said. Literally, it’s the US dollar in the first half of the week and then this bonds the second half of the week.

I think if the US dollar gets over 98, it’s a real problem for emerging markets.

TN: Yeah.

AM: Especially the Europeans. You’re talking about the Euro. But the Europeans like the Euro suppressed right here because it’s boosting the manufacturing sector. So it’s like it’s a give and take with them. But yes, the dollar gets over 98. Start looking at problems.

TN: Well, and my big question is when will the CNT break? When will they finally say uncle and I’ve been saying for a while it’ll happen after lunar new year. They just can’t keep this up. And with an appreciated dollar, it becomes even harder for them to keep that CNY at six point 35 or whatever it is right now.

NG: Did we see a few little twitches of weakness today and yesterday?

TN: We did, yes.

AM: Just remember, Tony, October is a big meeting for the party in China and they are going to stimulate that economy sometime this year. It’s just a matter of when it starts and when you’re talking about the currency. Yeah. That’s going to be a problem that we have to tackle pretty quickly.

TN: Well, it’s monetary policy. Q one, Q two and it’s a lot of spending in Q two. Q three, right?

AM: Absolutely.

TN: They’re going to play with the currency in Q one. Q two and play with the triple R and all this other stuff in Q one, Q two. And then spending is going to rip starting in June.

AM: Oh, yeah. Full disclosure. I’m building big position in China names as we go here.

TS: And commodities will benefit from that as well. They start spending right. And you’re going to see commodities rip as well, which also hurts the inflation picture.

NG: I was going to say that will be a negative for the bond market.

TN: Okay, guys. On that note, thank you very much. It’s been great and have a great weekend. Thank you.

TS: Thank you.

NG: Thank you, Bernie.

TN: Okay. Good one, guy.

NG: That was my feet.

TS: That was good. I liked.

Tags American, BLS, China, CNT, cny, complete intelligence, cpi, Dc, ECI, Euro, Europe, Fed, FOMC, Goldman, Hannibal, Kazakhstan, Kiev, March, Monday, powell, Swift, The Week Ahead, tony nash, Uber Dove, Ukraine, United States, USC, Uzbekistan, Volcker, Yoker

Week Ahead

Week Ahead 17 Jan 2022

Post author By admin
Post date January 16, 2022

This is the second 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. Among the topics: industrial metals, energy markets, natural gas, China’s flood of liquidity and property market, CNY, and bond market.

You can also listen to this episode on Spotify:

https://open.spotify.com/episode/1JGX3v5tpmQ5sS2wtOr0mK?si=3692162380a84ab0

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Tracy: https://twitter.com/chigrl

Nick: https://twitter.com/nglinsman/

Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone, and thanks for joining us for The Week Ahead. My name is Tony Nash. We’re with Tracy Shuchart, Nick Glinsman, and Albert Marko. To talk about the markets over this past week and what we’ve expect to see next week. Before we get started, please subscribe to our YouTube channel so you don’t miss any of the upcoming episodes.

So, guys, this week we saw kind of a whipsaw in equity and commodity markets with a slow start, but a lot of action mid week. And commodities seem to kind of extend gains until the end of the week. We saw bonds really wait until Friday to start taking off, but they took off quite a bit today. And part of that may have been on the back of the retail sales print that we saw. That was pretty disappointing. So, Tracy, do you want to kick us off a little bit with talking about commodity markets and energy?

TS: Sure. I mean, obviously, we’ve seen a big push in the oil market. Right, in WTI and Brent this week. We’re definitely a bit overbought. But that said, what I think is happening here is we’re seeing a shift from sort of growth to value. I think the markets are pricing in the fact that OMA crime is over. Right. And the Fed may raise rates. That’s putting pressure on growth and giving kind of a boost to the value market. And we’re kind of seeing a chase here a little bit in the oil markets.

As far as if we look at the natural gas markets, it’s been very volatile this week, not only in the US, but global markets. I think that will continue. And we saw a big push up on Wednesday, and then we saw a big pullback, but that was due to weather. But now we’re looking at this weekend, we’re having another cold front. And part of that reason was also because we discovered that Germany had less natural gas in storage than initially thought. So that market, I definitely think it’s going to continue to be very volatile. So try lightly in that market there’s.

TN: You mentioned the Germany supply side of the market, but what does supplies look like, say in the US and other parts of Europe? Are supplies normal? Are they low? What is that dynamic?

TS: Yeah, we’re pretty much normal in the US, and we’re set to in this year. We’re set to pretty much overtake the market as far as the export market is concerned. That would mean taking over Australia and Qatar because of the amount that we’re building out in the delivery system in Texas. But the supplies here are okay. The problem is within the United States is that the distribution is uneven.

So you’re talking about the Northeast, where you’re seeing local natural gas prices a lot higher there. Then you’re seeing, say, in Henry Hub, which is the natural gas product that trade that you’re trading.

TN: So I saw some just to get a little bit specific on this. I saw some news today about some potential brownouts in, say, New York or something because of this winter storm. How prevalent will that be? Maybe not just say, this weekend going next week, but for the rest of the winter. Are the supply problems that extreme?

TS: Yeah, I think you’re going to have a lot of problems in the Northeast. And I’ve been alluding to this over the last few months saying that they have decided not to go ahead with pipelines. They’ve shut pipelines. They kind of cut off their supply because they don’t really want to pursue that Avenue anymore.

However, it’s turning out to be a particularly cold winter, and that’s a lot of pressure on that market. And that’s why we’re seeing $11 natural gas prices up in that area as opposed to $4 in Henry Hub.

TN: Right. Meantime, Albert’s warm down in Florida, right.

AM: Yeah. Well, I wanted to ask Tracy what happens if we have an extended winter where the winter temperatures go into late March or early April.

TS: Then that’s extremely bullish. That’ll be extremely bullish for domestic supplies because domestic supplies will be in higher demand than they are normally seasonally, especially at a time where we’re a giant exporter right now.

We just came to save the day in Europe with 52 now cargo. So we’re exporting a lot if we have an expanded winter here. Supplies are unevenly distributed. We’re going to see I think we’ll see higher prices in out months that we normally see a pullback in those markets.

TN: Great. Texas, thanks you for those cargo, by the way. We really appreciate it. Okay. What about the broader commodity complex? What are we seeing on, say, industrial metals and precious metals?

TS: So obviously, those have been very bullish are going to continue to be bullish because they’re in deficit. As far as if we’re talking about battery metals and such, I think we’ll continue to see that we’re seeing a little bit in the platinum markets. We’re seeing some demand. I think there’s going to be bigger demand this year.

TN: So we’ll show some platinum on screen here so our viewers can see kind of where the platinum price is and where it’s expected to go.

TS: Yeah. So platinum demands expected to grow because of the automobile markets and because of Palladium is so high they can substitute platinum for that. But that may be capped for the rest of the year, and then we may continue to see higher prices going into 2023.

TN: Okay. So when you say that’s growing because of automotive, is this growth in ice ice vehicles. Okay. And is that happening because and I don’t mean these leading questions, but is that happening because the chip shortage is alleviating and we’re having more manufacturing in ice vehicles?

TS: I mean, that’s part of it. But platinum is used for catalytic inverters Palladium. And because of the fact that there’s platinum happens to be a lot less expensive. Right now. And also there’s more of it right now. So we’re seeing kind of demand pulled to the platinum industry. And I’ve kind of been worrying about this for the last couple of years that this was going to happen.

And now we’re kind of seen that comes to fruition because it takes a couple of years to retool and everything to sort of switch that metal. So I think demand looks good right now for that. We may see it capped a little bit. That may go up again. But if we look at this chart, technically speaking, I would say anywhere between 1005 a 1010. If we kind of Zoom above that, then that market could go a lot higher.

TN: Right. So short term opportunities in platinum, medium term, not so much, but longer term back in.

TS: Yes.

TN: Okay, great. Now when you talk about industrial metals like copper and you say a lot is needed for batteries, these sorts of things, that’s a more medium, longer term term opportunity. Is that right?

TS: Absolutely. When you’re talking about things, I mean, we’re already seeing the nickel market, cobalt market, lithium market, aluminum markets all hitting new highs. Copper’s kind of waffling about. But that’s kind of more a marathon trade rather than a sprint trade, in my opinion. So I think we’re going to see more and more demand for that further out in the market. So it’s kind of a longer term investment.

TN: Okay, great. And then what about industrial metals demand in China? As we switch to talk about a China topic, are we seeing industrial metals demand rise in China, or is it still kind of stumbling along and it’s recovery.

TS: That is still kind of stumbling along. And so what I have said before try to emphasize is that I think a lot of these battery metals in particular demand is going to go going to be outside of China.

China won’t be the main driver of this demand anymore as the west policies want to change to EVs and greener technology. So I think you’re going to start seeing very much increased demand for the west. So China demand might not be as significant anymore in that particular area.

TN: Okay. So that’s interesting. You mentioned China demand, Dink and Albert, I’m interested in your view on that. We had the Fed come out last week and talk about tightening and reinforced some of that this week. What dynamic is necessary in China, if anything, for the Fed to start tightening?

AM: Well, I think first of all, Tony, China is going to have to stimulate. They’re starting to prioritize growth for the first time in a long time. They see the US in a bit in a little bit of trouble here with the Fed making policy errors. I don’t want to say heirs. We’re more about like throwing together against the wall and see what works. Right.

So China is trying to be the seesaw for the world’s finance sector. Money comes into the United States it goes out. Where is it going to go? It’s either Europe or China. Europe right now is a complete mess. So obviously you see that money going into China you will keep on leaning on businesses and look to control more than you should but they’re breaking up a lot of the old power structures and that’s actually bullish long term for China. We can debate many of these episodes that we’re doing now, Tony, about whether it’s a good or bad thing for the China power structure. But that’s for another day.

TN: Right. What kind of stimulus if we look at things like loan demand so we’ll put up that chart on loan demand. Can you talk us through can you talk us through the chart of what it means and what the PPO will likely do as a result of low demand or consumer credit? Sorry.

NG: Yeah, the credit impulse so that’s private sector lending as a percentage of GDP and that chart shows it may have based and that looks like what we’ve been hearing is that the PBOC has been encouraging the private sector to start extending credit into the system, particularly to find off the real estate market which is not a surprise.

My personal view and some of the people that I talked to on China is that’s just filling a hole. This is plugging holes or putting plasters on various holes. So what will be interesting is to see how that progresses further down the line along this year. I don’t think nothing’s going to happen before February 1, lunar new year and then you’re running into that plenum. Do they encourage that you’ve got the Olympics and then you’ve got the plenum? Do they encourage some sort of boost?

I don’t think there’s going to be much fiscal. I think there’s a reason for that. I think there’s a connection with the real estate sector. Real estate sector. As a source of great funding for the local governments.

TN: They spend fiscal on bailing out real estate already. Why would…

NG: You have to provide fiscal to the local governments just for the services?

TN: Right. So the central party meetings are in November, so there’s plenty of time between Lunar New Year and November to really tick off some monetary stimulus and get some feel good factor in, say, Q three or something. Is that what you’re thinking?

NG: There is a desire, as Albert rightly said, they are talking about the economy now, but it just feels like it’s one plug the bad, the big holes that have been appearing and they just keep appearing and now we’ve got Shamal. It just seems like it’s step by step plug every hole and then give a little bit of access to try and get the private credit rolling again.

AM: Tony, everybody is looking for a flood. When is the flood of liquidity going to come into China? Right. But that’s not going to happen until May or June until they see what the US Fed is going to do because nobody right now knows what the Fed is going to do.

Inflation is obviously a problem within China, specifically oil and other commodities, as Tracy was talking about. Their eyes are completely on the Fed. China will have to pop services sector as a real economy. It’s kind of a shambles there due to commodity prices and inflation.

The willingness is there to lend. There’s no question about that. But who wants property right now in China? They can force feed the economy via credit. But that’s inflationary also. So there’s another do move here within China. How do they boost their economy but still keep inflation down? Same thing the United States is going through. Okay.

TN: So let me give you a really simple trick here.

NG: Let’s not forget you’re seeing some majors. Shanghai now has Omikaron. Remember, China, supposedly, according to the World Health Organization, didn’t suffer the first route, but you got Dahlin is closed, Nimboa’s got problems now Shanghai, Shenzhen, and they’re worried it’s going to head up towards Beijing.

All these international flights to Hong Kong completely canceled. So that’s another problem if you extrapolate and equate it to what’s happened in the west whenever these outbreaks have occurred.

TN: Yeah, but I think the solution. Yeah, that’s a problem. I think everybody’s facing that and I think China is just very, very sensitive about that. We can come up with whatever kind of conspiracy theories we want about China, but I just really think that they’re very embarrassed by COVID and they’re trying to cover things up, not cover up, but they’re trying to offset the negative preconceptions globally by taking dramatic action at home. That’s my view.

TS: And they have Chinese New Year and the Olympics coming up, right?

TN: Yeah. And they’re being very careful about that now. My view for quite some time has been that they would keep the CNY strong until after Lunar New Year and after Lunar New Year, they could get some easy economic gains by weakening CNY just a bit. Is that fair?

AM: I think it’s fair. They don’t want the bottom to fall out of the economy. And the extent of their damage the extent of damage to the economy was pretty significant. So they’re going to have to pull off a few tricks. Like you said.

TN: It’s percentage wise, it’s a lot. But in reality, at 65667 CNY historically, it’s nothing compared to where that currency has been historically. And I think it’s pretty easy to devalue to that level. And I think they would get some real economic gain from that.

AM: Yeah. But again, it matters what the Feds are going to do with rate hikes. That’s the wild card.

NG: The devaluation not just look at the dollar, look at the CFA, because I think it pays them to value against the Euro more than the dollar.

TN: Yeah. Okay. We can have a long talk about the CFO’s basket at some point.

NG: My point is you got to look at the Euro CNY as well as the US, because I think that’s where they’ll go.

TN: Yeah. Okay. So does this present an opportunity for Chinese equities in the near term, or is it pushed off until Q two?

AM: I mean, from my perspective, I’ve been on Twitter saying that I’ve gotten into Chinese equities. They are de facto put on the US market, in my opinion. They don’t have the strength of the actual but does. But money has got to flow somewhere, and if it’s not going to the United States. It’s going to go to China.

TN: Okay. All right. Let’s move on to bonds. Okay. Nick, can you cover bonds and tell us are we on track? Are things happening as you expected? Do markets do bonds like what the Fed has been saying? What’s happening there?

NG: Well, the initial reaction after the testimony from Powell was you had a steadying and a slight rally in bond prices, slightly slower yields. But I thought today was fascinating because today we’ve across the York Cove. We’ve made new highs for the move, so we’re at the highest yield for the last year.

What was interesting is we had that disappointing retail sales. Okay. That would typically suggest if this Fed is sensitive on the economy, perhaps they won’t do much. Well, the bond market didn’t like that. So now you have what is typically good news for the bond market, creating a sell off. And that tells me that the bond market is beginning, especially with the yield curve. Stevening, the bond market is beginning to express more anything that suggests that the Fed doesn’t do what they’re talking about. The market wants to see action. Not words.

TN: We’re getting punished for now.

NG: And what’s interesting is if you think a little bit further forward, if the Fed does hold back and isn’t as aggressive as some of the governors have been suggesting, three to four hikes I didn’t think Ms. Bond Mark is going to like that.

TN: Or Jamie Diamond saying eleven heights.

AM: Jamie diamond is nothing that comes out of his mouth should be taken at face value. Him knocking the 30 year bonds down today, he’s just setting himself up to buy. I mean, the guys he talks his book always has.

TN: Hey, before we move on, before we move on to talking about next week, we did get a question from Twitter from @garyhaubold “Does the FOMC raise rates at the March meeting? And how much does the S&P500 have to decline before they employ the Powell put and walk back their lofty tapering and tightening goals” in 20 seconds or less going, Albert? Oh, 20 seconds or less.

AM: Well, the market needs to get down to at least the 4400, if not the 43 hundreds. That’s got to be done in a violent manner. And it has to put pressure on Congress to do it. And they can’t raise rates unless they get at least $2 trillion in stimulus.

NG: And also don’t forget the Cr expires on February 18. So we could be in the midst of a fiscal cliff.

TN: February 18. Okay. We’ll all be sitting at the edge of our seat waiting for that. Okay. So week ahead, what do you guys think? Albert, what are you seeing next week?

AM: Opec pump for Tuesday and then Biden dump for Wednesday as they set up a build back better push in Congress, along with probably a hybrid stimulus bill to try to get to that $2 trillion Mark. Otherwise, they got no fiscal and this market is going to be in some serious trouble.

TN: Okay. Can they do it? Can they do some sort of BBB hybrid?

AM: Yeah, they can do it. They can get ten Republicans on board as long as there’s a small business, small and medium sized business stimulus program. Okay. They’ll get that.

TN: And if they do market react and you say that’s $2 trillion. You say that’s…

AM: They need a minimum of 2 trillion to be able to even think about raising rates in March.

TN: Okay. And Nick, how does it matter?

AM: This is dependent on how bad inflation actually gets, because if we get an 8% print of inflation next month. Then everything is on the table.

TN: So can you say that you cut out just a little bit if we get what, an 8% print?

AM: If we get an 8% print on CPI the next time around and anything is on the table.

NG: Okay. I think what was happening with the bond market basically is it’s beginning to look a little bit longer term. And I’ve had this conversation, the big traders, the big fund managers are sitting there thinking, okay, look at crude oil now, 85 on Brent. Energy price is crazy in Europe.

That’s going to feed through from the wholesale level all the way through to the consumer via manufacturing goods, via the housing market, via service industries. Starbucks has to charge some more because they’ve got a much bigger overhead.

TN: Netflix just raised their prices by a buck 50 or $2 a month or something.

TS: Filters down to everything. Energy runs the world, right? So that’s going to higher energy prices are going to factor into literally everything you do.

NG: And my personal view, I think that sort of works is in sync with Tracy. I think crude goes a lot higher. I think this year we could see north of 100, perhaps as high as 120. This all feeds through, right? So the point is the bond market there’s a lot of conversations on a longer term plane right now. And the bond market is an expression if it’s higher yields, yield curves deepening.

Anything that says that the fed is hesitant, I think you get sent off. I think that’s why we sold off. We should have been running on week retail sales.

TN: Okay, Nick. Sorry. If we do get a $2 trillion bill, what’s going to happen with bonds?

NG: They’ll be sold.

TN: They’ll be sold. Okay. So they’re going to punish the fed if we get fiscal?

NG: They’ll punish the fiscal fed to start acting and acting in short order. And I remain unconvinced. We’ve only heard words. We got to see the action. They’re still doing. Qe. Right? It’s absurd.

TN: Yes. We’re going to keep the flow going over here, but we’re going to raise interest rates over here. I’m not sure I get it. There’s been that disconnect ever since they announced this in December.

Okay, guys. Thank you very much. We’ve hit our time. Have a great week ahead and we’ll see you next week. Thank you very much.

AM, TS, NG: Thank you. Bye.

Tags Beijing, China, Chinese, cny, cpi, Dahlin, Europe, Fe, Fed, florida, FOMC, germany, hong kong, Lunar New Year, Netflix, Nimboa, Olympics, OMA, Palladium, PPO, Qatar, s&p500, Shanghai, starbucks, texas, The Fed, The Week Ahead, Twitter, United States, US, Youtube

Week Ahead

The Week Ahead 09 Jan 2022

Post author By admin
Post date January 9, 2022

This is the first 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.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Tracy: https://twitter.com/chigrl

Nick: https://twitter.com/nglinsman/

Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone. Thanks for joining us for the week ahead. My name is Tony Nash. We’re joined today with Tracy Shuchart, Nick Glinsman and Albert Marco to talk about the markets for this past week and what’s going to happen this next week.

Guys, we saw a really dramatic market this week, a lot happening around the Fed announcements around inflation in Europe. We saw some real action around bonds. So can we talk about some of those things as well as what’s happening in energy markets? So, Tracy, could you actually get us started with what you’re seeing in energy markets?

TS: Well, obviously, we had big bounce this week in the energy markets, and a lot of that had to do with we had problems in Libya with some production offline 500,000 barrels. We also saw some big drop in Ecuador production and then Nigeria ongoing problems. And of course, we had Kazakstan, which these protests put potentially 1.6 million barrels at risk. So that was another geopolitical risk factor.

And then what we were seeing at home is because of weather, because of the cold snap we were seeing. We had Keystone down for about a day. And that brings Canadian crew to the United States. And then we’re also seeing production problems in the back end. So there were a lot of things going on in this market that propelled it higher.

TN: Okay. And what about the geopolitical problems with Europe and Russia? Is that still tightening? Do we see that still affecting gas prices in Europe?

TS: I think actually, we’ve actually seen a pullback ever since the US Calgary came with the initial 46 vessels. And then we’ve also seen countries such as the Netherlands come and say that they’re going to provide more gas, so the market is going to be volatile. It’s definitely going to remain volatile. But we have definitely seen it pull back off the highs.

TN: Good. Okay. Very good. Nick and Albert, can you talk to me a little bit about the Fed? What’s your view on the Fed remarks? And will they actually raise three times in 22?

NG: Well, actually, might be on the Fed remarks. Is it was nothing new. We knew absolutely everything. December the 15th, it was statement and then the press conference. It was very clear people just wanted to ignore it. So it’s come home to Roost. What was interesting that treasury market was already acting first day of trading and had a really good sell off. And it’s just carried on.

Now I’m wary of this Fed. Have they got the guts to actually take inflation on, or are they worried about the stock market? And there is obviously that correlation between the stock market and the economy. However, at this high level on the stock market, one wonders whether that correlation is a bit little bit looser because we have from a data point of view, whether it’s reality or not, it’s a booming economy.

And I actually had a conversation with a very well known economist on the street. It’s his own shop. And he said a couple of people he respects are talking about unemployment going sub 3% by their measure.

TN: But, Nick, that’s just a denominator function.

NG: I understand. We all know it’s not really less than 3%. But we all know that inflation is a 7.2% the forecast for next week. Okay. So I mean, this data has issues, and I’m very much aware of this issue. But the point is, if this carries on going that way and the seasonal adjustments accentuate the situation.

Plus, you’ve got to, you know, Albert mentioned this last year. There is a huge number of people retiring. So there’s a supply shortage of the labor side. It’s not just supply chains causing inflation, that labor has a supply shortage.

TN: We’ve been waiting for this for about a decade, right? For the baby to start. Really?

NG: They wanted a bit more inflation. They wanted a moving economy. They got it. Now the Fed has to show whether if the Fed goes all in on it to fight inflation, 170 is not the terminal rate on Fed funds. I think it’s going to be between two and a half or three and a half. Clearly, I’m just concerned about this Fed. In that respect, they’ve shown no willingness.

TN: Sure.

AM: I just want to add a real quick thing about that. Tony, I agree with what Nick is saying pretty much being clear on that. But from my perspective, the story is, are they going to go with inflation or are they going to have a recession? This is zero rates or rake hikes.

This market is realistically built on zero rates. Everybody knows this for them to hike. They would need some sort of stimulus program. And even then, you need lower job reports, which I think probably are coming. But even then, we have a physical flip coming in March that we have to address.

TN: Right. But, Albert, we would need a stimulus program with hikes just to stay neutral.

AM: Of course.

TN: Here’s what I don’t understand. Okay. And maybe you guys can fill me in. But the Fed has a massive balance sheet. Why even mention rates when there’s so much they can do with the balance sheet in terms of tapering being neutral and then tightening that on its own is a massive task. It seems to me that interest rates were kind of premature for that.

NG: I think they’re fearful of tantrums. My view on the tantrum side of things is either the Fed does deal with inflation. So you get then risk assets like equities will have a tantrum. It’s quite possible. And people wouldn’t expect that the bond market will have a tantrum, but it will be an inflation tantrum.

You’re right on QT quantitative tightening. I mean, they’ve got so much in the short end if they just let it roll off that’s $3 trillion in two years off the balance sheet. But then that would cause problems in the short end of the market.

TN: Yes. Previously, they didn’t start tightening for four years, right. QT didn’t start until four years after 2011 or whatever. So it was a long time, and I wouldn’t expect them to start selling off the balance sheet for an extended period of time. It’s just a matter of stopping the flow onto the balance sheet.

NG: This is the biggest hedge fund leveraged in the world.

TN: Yeah, it is. Okay. Speaking of funds, we’ve seen a little bit of rotation start in the market this week. So can you talk to us a little bit about that? And, Tracy, can you guys both talk a little bit about the rotation that’s underway in markets and how far will it go?

AM: It’s pretty clear that we’re rotating out of the US markets and out of tech going into China, possibly even Indonesia. The US market is nearing almost 60% of the entire global market. And that’s simply absurd. And just can’t go on.

Some are talking about disinflation, but the wage inflation continues to rise and the supply chain stress isn’t really getting any better. So where does the money go? Really, in my opinion, it goes to China right now. The European Union is a mess. Can’t go there. Indonesia is a likely candidate. But unless the Fed, they can’t hike rates, they need massive stimulus, everything’s rotating out of the United States and out of tech for the time being. I don’t know how long it’s going to last. I mean, I think the tech sales are maybe a couple of weeks.

The Fed needs that to pump the markets via Nasdaq. So I give it a couple of weeks, Max.

TN: Okay. Tracy?

TS: I’m looking at the rotation within just the US market and not the global markets. But we are kind of seeing a rotation from the tech sector from growth to sort of more value real assets. Right. So all week, we’ve seen the Nasdaq pull back. But oil and banking have remained very strong all week.

So I think that’s kind of where just internally where we are seeing the markets, the commodity markets have done really well this week. Metal is included.

TN: And how long does that last? Is that something that’s just a couple of weeks, or is that something that we see happening through Q1?

TS: I mean, I think it really depends on what the Fed decides to do. So if they decide to raise rates, that’s going to kill the tech market. Right. So that’s why I am of the opinion it’s going to be a one and done, because what do you sacrifice? You sacrifice the market. Right.

And are you going to do that? Is the Biden administration going to allow that sort of to happen during an election year? Right.

AM: Tracy is absolutely correct. They’re not going to let that happen. I mean, right now, the entire perception of the economy is doing well is based on the market performance for them to raise rates or rotate. And right now they’re rotating into reflationary names. I mean, that helps now, but they need the market to act. It is solid.

NG: There is a dark with that view because, as I said, either you get a tantrum equities, particularly on growth, or you get a tantrum in bonds, which then feeds into account. Because if they don’t deal with inflation, everybody’s saying, well, January base effects are fantastic. They’re high, but we’re going to benefit from thereafter.

And I’ve got this and Tracy, but I think we will attest to this. And Alberto, there is this point that as things get normalized, crude oil is going to go up because jet fuel will be in huge demand and people are going to be out moving.

In Europe, there’s no normalization of energy prices. They’re already way above normalization. You’re looking at five to six times the price of energy from last year. So this is all going to feed through the system. It goes. Fee through manufacturing services and comes out as core CPI as opposed to full CPI.

AM: Yeah, but I mean, this week, Nick, we’ve seen a 4.5 wage gain causing issues in the market. There’s…

NG: Actually my fault on the date of the day was it was actually the unemployment. They have said the natural rate is 3.6%. If you look at what happened the last time we had unemployment here, we had inflation at I think it was 4% ten year yields with 270%.

AM: Yeah, I understand that, Nick, but everyone right now is talking about disinflation thinking that inflation is going to come down because the bet is going to help push it down. But how do you get rid of wage inflation? There is no way you can sit there and take…

TS: You’re not going to get rid of supply chain issues either.

NG: Push inflation. This is where it’s changed. And I don’t think these central bank staff has realized have accepted this that everything prior to the pandemic was demand poor cost push. So whole different ballgame. They’ve already said they can’t control price of commodities.

Actually, they can because they can. That’s the point. But the point I’m making is we’ve crossed the Rubicon from something that I’m not saying demand hall has gone away. But we’ve crossed the Rubicon from something that would be affected by monetary policy and financial tightening to something that is not going Redux is rough to charge.

TN: Okay. Before we go on there, there are two questions. First, Nick, you said either there’s an equity side tantrum or there’s a bondside tantrum, which is worse.

NG: Oh, the bondside tantrum. Okay. That will also be feed through to the equity market.

TN: Right. Okay. So the bondside tantrum is worse.

NG: For everybody that Feds behind the curve and London control.

TN: Right. And I think that’s well understood. The other question I have is Tracy mentioned one and done. Do we all think the Fed is kind of going to do a one and done? I mean, that’s my view. It sounds like it’s Tracy’s view, Albert, is that what you think?

AM: So I absolutely think so. They can’t let this thing melt down. They’ll bring it down to, like 4400, but that’s it.

TN: Okay. Nick, do you think it’s one and done?

NG: I’m putting my old hat on as a bond market person. Yeah, because they’ll then have to do QE because the bond market won’t sit there.

AM: They will do QE. They will absolutely do QE. They haven’t signed up and they control the bond market as it is anyway, so they can do whatever they want right now. There’s nobody else in the world that can hold us accountable for what they do.

TN: Are you saying QE and Q two? Do you expect QE and Q two?

AM: Absolutely.

TN: Okay. That’s very interesting. All right. I like that. I think that as a thesis is very interesting.

NG: By the way, the rest of the world may need it.

TN: Absolutely. I think they will.

AM: Of course they do.

NG: I’ve got a great piece of trade Union wage claim in Europe. This is hysterical. So the ECB says inflation is going to trend back to the forecast. 2%. It’s all transit free. The guard still on holiday, but she’ll never die by that.

Every person at the ACB by the governors is a member of the ECB trade Union. Do you know what their claim is right now for this year?

TN: They need wage acts.

NG: I think that’s a tell. Oh, yeah, it’s a tell, right. I think other countries may need the Fed’s help. That’s where I veered back towards Albert. In that respect, I don’t know my traditionalist central bank.

TN: Yes, I don’t doubt that at all. Okay, let’s start looking ahead to kind of next week. We’ve got wholesale inventories, NFL, small business, CPI. We’ve got retail sales coming on. What do you expect to happen next week?

Do we expect, say, retail sales to kind of be moderate or do we expect the CPI to moderate, or do we think things will continue as they have been?

NG: I’m an inflation. So I think CPI will be problematic and we’ve seen this inflation data. The estimates have been lower than the actual. So I’m sort of expecting that to occur.

Retail sales. I’ve not really got a view. To be honest.

AM: I think retail sales are going to come in a little bit higher than most people think. I think the luxury market right now is just absolutely on fire. A lot of free money has just been floating around the system and people have been buying things left and right.

I mean, even the credit card data show that consumers have just used more credit. It’s pretty clear.

NG: Okay, so we’re 2% ten year yield. It’s a possibility next week there.

TN: So also the small business survey, the small businesses that I know from auto manufacturers to other things. They’re having a really hard time. So do you think NFIB is going to continue to be positive, or do you think it’s going to trend out?

AM: I think we’re going to go down. I think the entire reason that they’ve been talking about a new business stimulus program in DC.

TS: Exactly 100%. I think we’re definitely going to go see that slowing down, slowing economy.

AM: They need it because they need stimulus anyways in March. So might as well start throwing money around everywhere.

TN: Right. So build back better. Is that dead, or are they going to try to take another run at it this month?

AM: They’ll take another run at it, but it’ll be toned down and probably separated into different pieces.

TN: Okay. Do you think it will ultimately pass and be one and a half trillion or something like that?

AM: I think it’ll be a part of a stimulus hybrid program of build back better with business stimulus program in mind. So it’ll probably be around two and a half trillion.

TN: Two and a half trillion. Okay. Anybody else have a view on that?

NG: With the emphasis on the stimulus as opposed to the build back better.

TN: I think you’re right now.

TS: Yeah, I personally don’t think build back better is going to pass anytime soon.

NG: Great question for Albert Finabaster won’t be broken with it.

AM: No, they’d be absolutely insane for them to try to do that. They know the GOP is going to have the House and the Senate for them to sit there and break the filibuster. It would just lead to absolute chaos for a lot of different policies.

TN: Bad news. That’s really bad news.

AM: If they get rid of the filibuster and they pass that voting law, the next thing that’s going to happen is the GOP is going to use the same method to have voter ID for the entire country and under the same reason and why they want to get rid of the filibuster. It’s a car bout. Really. It’s not an entirely.

NG: Voter ID in Europe is good to go. Everybody has it.

AM: Yes, I know. But this is the United States. I mean, nowhere in the world does about the United States. So we have to differentiate what happens in Europe.

TN: Yes, we do. All right. So what are you guys expecting to see next week? Are we expecting to see this rotation intensify. Nick, what are you expecting to see in say, bonds? Do you see further action in bonds or are we kind of at two for now?

NG: Well, look, I think think we ten years can go from. I always look at the ten year and in fact, many institutions is five. But the ten years gives you enough of the long bond and the inflation out of it. We’re at 176. 77 today close. If the data is strong, we go to two. Yeah. That becomes very interesting.

I mean, we travel a long way this week, right?

TN: Yes.

NG: And if you look at the CFTC data, the market is not short. A lot of blood was built for cause of last year people slowly stepping themselves in where I’m really interested. I mean, if that happens, we continue to see growth to that value.

What I’m interested in is I think the dollar rebounds on Monday. The dollar seems to have days with that lag to what the interest rate markets do. Albert and I have been speaking about this, but I’m interested to see, even with dollar strength, we’ve seen strength in the commodities market. And this is one of our thesis is China is going to be replaced by the Green Revolution.

We found a wonderful study in France that was reported in one of the French dailies that was talking about 60% of copper will be used up in about two or three years. And then he went through all the other key metals for the metal. I think actually, copper go quicker because of the new left winger in Chile.

TN: So you think dollar appreciation and commodities at least industrial metals appreciation for the, say foreseeable future.

NG: I think the whole complex crazy, and that’s where this time around will be rather like people’s disbelief in equities. How can we keep going this time around? We can have the whole commodity complex elevated.

TN: That’s really scary.

TS: I absolutely agree. Absolutely. Well, I mean, my three main themes in the commodities markets since last year and going into at least 2025 is metals, oil and gas and agriculture.

TN: Fantastic. Okay.

AM: I actually think the tech market is going to make a rebound next week just because the Fed is probably defending the 50 day moving average. I think we see a rebound up until the middle of the week next week.

TN: Wonderful guys. Thanks so much for this. Look forward to doing it again next week for everyone watching. Please, like our Twitter page or our YouTube page. Sorry. So you can get alarms for next week. All right.

Thanks, guys. And have a great week ahead.

TS , AM, NG: Thank you.

Tags biden, Canada, CFTC, Chile, complete intelligence, cpi, Ecuador, european union, Fed, Kazakstan, libya, NASDAQ, netherlands, NFIB, NFL, Nigeria, QE, The Week Ahead, United States, US, US Markets

Podcasts

Bottom Up is the Strategy

Post author By admin
Post date November 12, 2021
No Comments on Bottom Up is the Strategy

Tony Nash, CEO and founder of Complete Intelligence, joins the BFM 89.9 The Morning Run show to give insights on the US Market, specially now that the CPI hits 6.2%. What does this mean for the Fed Fund? They also discussed Disney Plus and how to invest in equities right now, especially how to allocate your assets in the current economic climate? Will the telecommunication and transport sector, and oil and gas benefit from the $1 trillion infrastructure spend bill that was just passed? Lastly, what is his view on the oil market? Will it continue its bullish trend, and for how long?

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/bottom-up-is-the-strategy. on November 11, 2021.

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Show Notes

SM: BFM 89.9 Good morning. You are listening to The Morning Run. I’m Shazana Mokhtar there together with Wong Shou Ning. But for some thoughts on what’s moving global markets we have on the line with us. Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Always good to have you. Can we get some of your thoughts on, I guess this red equity markets outlook? One of the stocks that reported after hours was Disney and they reported results that underwhelmed with only about 2 million new streaming subscribers added this quarter the stock is down and after market hours trading. Do you see this as a buying opportunity, or do you think that there are still headwinds when it comes to the sectors that Disney operates in?

TN: Yeah. I think Disney has some real headwinds. Their park attendance is down on COVID concerns and regulations. Their streaming service just doesn’t really have the content throughput meaning the new content that people would expect from, say a Netflix or a Hulu or other types of streaming services. So part of what Disney needs to do is really have much more throughput on their content on Disney+.

WSN: What about CPI numbers, Tony? Are you really concerned about that? They came in at 6.2%, which was higher than street expectations of 5.9%. I think from now onwards, it’s going to be very hard for the Fed to say that inflation is just transitory, right?

TN: Oh, very much. So the Fed targets 2%, and this was just a little bit above that to the point where it’s really turning heads now and it’s really got people afraid. So part of this is base effects on last year, but not much it really is the supply and demand are weird. In some places, you have real supply chain shocks. You also have demand issues, say winter is coming, things like natural gas, oil, these sorts of things. They’re really being impacted. Food is being impacted. So people are seeing price rises that they haven’t seen for a long, long time.

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WSN: Does this change your investment strategy, Tony? Or maybe a change in terms of your asset allocation? Are you going to go long equities or short fixed income? What’s your plan for 2022 or even in the next three months?

TN: Well, we’ve been saying for a while that this really isn’t a broad market environment. This is individual equity or say individual commodity type of market. Because if you are investing broad, yes, you’ll get incremental gains depending on where you are in the world in which market you’re in. But it really is a stock pickers market. You really have to understand the company. You have to understand how a trade you have to understand where the value is and how that is relative to the rest of the market in the economy.

And you also have to understand, actually, at least in the US, you have to understand what the Fed is doing. In your own country, you have to understand what your central bank is doing and what I mean by that is how easy are the monetary conditions? How does that impact individual countries and markets? How does that impact demand and, say commodity prices? So it’s not an easy question to answer, but it is a more specific and expert-driven market than it has been for the last two years.

SM: All right. Sounds like you’re giving our listeners a good reason to stay tuned to our chats every morning, Tony. Turning our attention to some recent developments in the US Biden’s 1 trillion infrastructure bill has just been passed. How much of a windfall will this be for US transport infra and telecommunication companies?

TN: Well, it’ll be a windfall, but it’ll happen over an extended period. This really won’t be spent for probably five to eight years. It will drip out over that time. So, yes, it is a lot of money, but it’s not happening in one tranche. And by passing this bill, it’s effectively saying this is it for infrastructure for the next almost decade. Okay.

So those companies who can successfully lobby and or successfully bid are going to get paid well over that period, those who don’t have the infrastructure in place to do that are going to have a tougher time. So. It’s a massive number. But it’s happening over an extended period.

WSN: What about oil and gas? Do you see them benefiting from this push into infrastructure?

TN: I don’t see an immediate positive impact for oil and gas. There are other reasons I’m positive on oil and gas, but on infrastructure, because this will come out over such an extended period of time. You see, infrastructure spending is really meant to be the foundation for future growth. Right. So you create the infrastructure that, say productivity gains and other things can leverage off of in the future. If we were doing a lot of infrastructure over, say, the next three years, you would expect a lot of oil and gas to be used to manufacture that, to power that and so on and so forth. But because it’s an extended period and because it’s distributed all around the US, there really isn’t a concentration of, say, the activity and it’s happening over a long period. I know I’ve said that several times, but that’s my biggest takeaway from this bill is the slow drip that it comes out on.

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WSN: But you did say that you are a bit of a oil and gas bull at this juncture. What are your reasons for it, though?

TN: Well, we have regional, say, shortages or regional supply chain issues, say in Europe and parts of Asia for oil and gas, particularly gas, right now, as winter is coming on. Gas has performed well over the last, say six to nine months, maybe a year, and we expect it to continue to do well for the next few months. Crude oil? It looks like we’ll see some interesting upside in crude oil as well, partly on those regional supply issues as well.

WSN: But historically, by this time, right. Wouldn’t the shale producers be pumping away, too? And kind of adding supply? But it doesn’t seem to be the case this time, right. Because Brent crude this morning is still $83 a barrel.

TN: Right. Well, the shale is a different story because there are so many restrictions and regulations put in place by the US government under the current administration that it’s taking more for them to get started. So without the, I would say, aggressive kind of enforcement and new impediments to domestic shale production in the US, Yes, I believe we would have more rigs moving by now. But because of the impediments that the administration has put in place, the US administration is asking the Middle East, and they’re asking Russia to produce more.They’re not necessarily leaning on US producers. They’re trying to minimize the production here in the US. And part of that is the Green New Deal and other things to kind of regulate green energy into existence in the US.

SM: Tony, thanks very much for your insights. That was Tony Nash, CEO of Complete Intelligence, talking to us about some of the trends moving markets, capping the conversation with a look at the oil and gas sector, and specifically why perhaps the US shale producers aren’t pumping out product, given the higher oil prices at the moment.

WSN: Yeah. I think it’s very interesting to follow this very closely because it’s almost as if the oil and gas or energy sector because of the renewables, is going through a structural change. So the transition to renewables is real. But it’s not going to be linear. And because a lot of national oil companies are shifting the way they spend their capex, it does mean that for the moment, all prices might remain elevated because we haven’t found these new energy sources to fully compensate. So I think this is an interesting time, but it also makes running a business extremely challenging, because all of us, whatever said and done are energy dependent.

SM: And it’s interesting for Malaysia as well, because while other consumers would Bimbo the high oil prices as a country, we do benefit from the high energy prices.

WSN: We are still a net energy exporter, but we do, of course, subsidized petrol at the pumps. I mean, Ron 95 is still to ring it in $0.07, but there are still going to be costs for industrial usage because that’s based on market prices. So of course, it’s inflation. That’s the thing everybody’s talking about US 6.2% never anybody would ever thought it would hit that high. Yeah.

SM: It really seems to look like the use of the word transitory by the Fed wasn’t completely transitory now. Maybe they may be regretting their choice of words. It is coming up to 719 in the morning. We’re taking a quick break. Stay tuned. BFM 89.9.

QuickHit

What signals are markets missing right now?

Post author By admin
Post date November 10, 2021
No Comments on What signals are markets missing right now?

In this QuickHit episode, our guest Julian Brigden answers “What signals are markets missing right now?” How important is the equity market right now in the current economic cycle? Most importantly, how long before we can see directional change in the market, and what you should do before then?

Julian Brigden is based in Colorado and started in the markets in the very late 80s, trading precious metals. He moved into trading FX, then switched into sales for various investment banks. He also worked for a policy consultancy group called Medley Global Advisors in the very late 90s to early 2000s and fell in love with the research space. Just over ten years ago, he set up MI2. MI2 was grown organically. Julian can be seen together with Raul from Real Vision where he does Macro Insider.

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This QuickHit episode was recorded on November 3, 2021.

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

Show Notes

TN: Julian, I’ve watched a lot of your videos, and I love a lot of the thoughts you’ve talked about recently about velocity, about the yield curve, about central banks. It’s all great stuff. I guess one of the things that I’m really wondering right now, especially, is what is the market missing? What are market participants missing? Because this is something that I don’t hear a lot of talk about. We hear a lot of the Fed should do this or this asset is going that way or whatever. But what is the market missing right now?

JB: Right. So we’ve been on this inflation gig since, actually, March of 2020. Sorry. Apologies. So at the depths kind of the pandemic. It’s a very long thesis. I’ve probably been in the inflation court really since the end of 2016. But in this sort of current phase, and we’ve been in and out of them, you have to. That’s what markets are about. We have been on this inflation kick since March of 2020. And initially it was just a trade breakevens, which are a metric of inflation in the bond market had got crushed because they were held by the risk parity boys as their inflation hedge in their portfolios. And they delevered like everyone else did in the spring of 2020. And those things dropped to like, five-year inflation was priced at 50 basis points.

Well, Tony basically trades the cycle, right. So as the economy recovers, which you had to assume it would, they were going to come back. But as we’ve sort of taken a step back and from a bigger picture perspective, we’d always said that even as soon as Trump came in, when you start playing with just monetary, that’s one thing. But when you add that fiscal side into the equation, into the mix, it becomes totally and utterly different.

And we’ve actually always used the period from the mid 1960s to the late 1960s. That’s where I kind of think we are. So we’ve had these sort of pro-cyclical, unnecessary, excessively large fiscal stimulus. And they came to create this accelerative oscillation. Okay. So I’ve got a couple of very smart ones, way smarter than me.

Classic example of the A students working for the C student. And we were looking at inflation back in 2016, and I was just looking at the chart in the 60s, and my quant came up to me and went, Boss, that’s an accelerative oscillation. And I said, Steven, what the hell is that? And he goes, well, he was, by the way, he was a mining expert, specialized in explosives. And he said, kind of what you do when you model an explosive wave is it goes out in a wave until it hits something. And if it hits it at the wrong time, far from the wave decelerating because you expected to hit something and stop, it can actually accelerate the oscillation of the wave. And so essentially, from an inflation perspective is that the way that you think about this is you get something like the Trump stimulus, which was back in late 2016, totally unnecessary fiscal stimulus at the wrong point of the cycle, where we didn’t need it.

So far from sort of rolling over like a sine wave, which the economic cycles behave that way, too. And inflation cycles generally behave that way because of self limiting on the tops and the bottom, cycle actually picks up amplitude. And what you tend to do is you create policy error after policy error after policy error because you’re behind the curve all of a sudden, you know what it’s like in trading, right?

If you’re on your game and you’re short something or long something and it moves in your direction, you might take some profit. Look for the retracement, double up, whack it hard. You get caught the wrong way into the move and your head just becomes discombodulated. And that’s what happens from a policy perspective. So. When I look at this current situation, the first thing I would say is I think people are, they’ve finally woken up to this concept that maybe inflation is not transitory. I think they’re right. We’ve been on this gig for a long time, but the immediate risks, I think, are twofold.

The first one is they are not. And it’s not necessarily here in the US. I think it’s going to be a problem here in the US, but I think it could be a bigger problem, actually, in Europe and for the bond market that matters because all those bond markets are all fungible. Right. So if bonds blow out or your eyeboard, the front end contracts in Europe blow out, it’s all going to affect our markets over here. And. They’ve totally underestimated the price pressures in the pipeline.

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TN: In Australia, right?

JB: Yeah, we have. But not. I think we’ve got another maybe three months of numbers of I think could make people’s eyes bleed. You’ve got this price pressure in the system. Three possible outcomes. Price pressures dissipate. PPI pressures just dissipate. Okay?

Well, we just got the market survey this last week. Pressures are up. We just got the ISM services. Price pressures are back up to the previous highs. We just got the Swedish service thread bank PMI services yesterday. Price pressures at new highs. Okay.

TN: China’s PPI are like 14% or something year on year, right?

JB: Exactly. And their PMI price pressure number, which was dropping, just re accelerated. So option number one, that somehow price pressures just miraculously evaporate, doesn’t seem like an option. Option number two, the companies eat the price increases. They take them in margins. Well, if that’s the case. And this is one of the things the equity market hasn’t woken up to, then your assumptions on margin growth are. The good stuff that you can get here in Colorado, right.

Now thus far in the United States, it’s absolutely not the case, right? Companies are pushing through those price increases. Okay. Which brings you to option number three. Price inflation, given where these PPIs are, right? So US, even the final demand, the new sort of slightly adjusted, surprising how when they do adjust these things, Tony, they generally drop from the old metric?

Now it’s like, two and a half to 3% under the old PPI series. But anyway, it doesn’t matter. Eight and a half percent here in the US. I think we printed another 45 high in Sweden. And I’m picking Sweden because it’s a nice open economy. And you see the data come through very quickly. I think there’s one of those 17%. Spain, 23. Eurozone, 13 and a half. Okay. So higher than the US.

If companies can pass those price increases on, what makes people think for a nano second that CPI is going to stay here in Sweden at two and a half in the Eurozone at four. Why couldn’t Eurozone HICP, which is their CPI, which is max only ever had a 5% spread to PPI, right? At the moment, we have a nine plus spread. Why couldn’t HICP print somewhere, my guess is between eight and a half and eleven?

TN: So those are Chinese figures?

JB: Yeah. Exactly. What the hell does this? Do you think Lagarde is going to be able to say, like King Canute, “stop?”

TN: So in one of your interviews that I watched, you said central bank assets and inflation are effectively the same thing. And I think that’s really interesting. Can you explain that a little bit?

JB: So the balance sheet? Yeah. Essentially. Look, you print money, which is what it is. QE is printing money. Monetary 101. This is how the Roman Empire ended up falling apart. And you can inflate asset prices because I know this is not how central banks initially told you it worked actually. Having said that, I do love it. And we’ll come to this, I think the second point, the markets are missing in a second, and another central banker.

The only central banker who’s been truly honest was Richard Fisher, the old Dallas Fed central bank chairman. And I love the Texans from the Dallas Fed because they’re just straight shooters. They’re just bloody honest, right? I mean, he came out on CNBC, and I remember watching this interview because it was done on CNBC Europe, I think. And the guy always had one of the British guys on CNBC in the US. The guy nearly fell off his damn chair when Richard Fisher said, “of course, it was about the equity market. It was always about the equity market.” Right.

We just front load this stuff and they could boost asset prices. And you can look at the PA of the S&P. You can look at the S&P itself. You can look at the NYSE, you can look at the value line geometric index, which is a super broad metric of US Equities, and you can put them all against the Feds balance sheet. And it’s the same thing.

TN: Let me ask you this. And I hear you and I am aligned with what you’re saying. The question is, why does it have to do with the equity markets? And my understanding is that it has to do with equity markets because that’s where American 401Ks are. And there’s such a large baby Boomer cohort with their money in 401Ks that they can’t be losing their wealth. Is that the reason why it’s always about equity markets?

JB: Well, I mean, I say it’s housing as well, right. But they tend to try and deemphasize that one because politically, that can be a bit of a pain in the ass. Right. But look, this is true monetary debasement 101, right? I mean, we wrapped it up in this veneer that is G7 central banking or the sophisticated theories. But we’ve done this throughout history, right? We just debased the currency.

People forget in the Weimar Republic, the Reichsmark was imploding in value. Sorry, the pre-Reichsmark was imploding in value, and the stock market was going up thousands of percent today to keep phase with this because it’s a claim on a tangible asset, right? A cash flow or a piece of land or a factory or whatever, right? So this is not new. I think this is. No, I think it’s not so much about the 401Ks. The thing that I think is truly problematic in the US is what I refer to as the financialisation of the real economy.

Tony, that CEOs are not paid to produce a thing. There are actually numerous companies in the S&P that I’ll argue don’t produce anything, right? They are simply an utterly shepherds of an equity price. That’s how they’re compensated. We talk about perverse incentives. Okay. That’s how they’re compensated. They basically compensate to bubblish their stock as much as they possibly can.

And as a result, the minute that stock prices got going up, let alone fall. They look immediately to the bottom line as to how to address costs and keep those profits falling. So if you look at the correlations between, and it’s just frightening, the correlations between total US employment and the NYSE, broad metric of US Equities, Capex and NYC. They’re the same bloody chart.

TN: Sure.

JB: So literally, you can’t really allow stocks even to go sideways for an extended period of time. You’ve got to keep this game go.

TN: Sure, it’s not the flow, right? We’re in a flow game. We’re not in a stock game.

JB: Bond markets much more flow in terms of the shape of the curve is much more a flow thing. Equities are really about, they care when the flows turned off, but they’re really about the quantity.

TN: Overall stock. Okay. So what else are markets missing?

JB: The second thing is I just want to raise this. There’s a really important Bloomberg story out today by Bill Dudley, the ex New York Fed President, ex Goldman guy. And once again, I love the honesty of these retired US Fed guys. And he’s been talking at some length about policy error. But today is fundamentally the issue.

So let’s use that old storyline. If a tree falls in the woods and no one hears it, did it fall? Okay. So in the last few weeks, we’ve had a lot of pressure at the front end of these bond markets. We built in rate hikes. And that’s a market assumption on what the Fed or ECB or the Bank of England or the RBA or whatever is going to do with their policy, right?

But at the end of the day, Tony, do we care what banks here in the US earn in the overnight from Fed funds? No. There’s literally no relevance unless you’ve got some sort of liable based funding mortgage. But really, essentially, even then, has no relevance to the real world. Right? Policymakers raise policy rates to affect broad financial conditions. And broad financial conditions are essentially five metrics depending on the waiting in every single index. And they are short term rates, let’s say two years. Long term rates, let’s say ten years. Credit, tightness. Level, equity market. And the Dollar.

And what you can see in the US and most other places is despite the fact that we’ve seen these big moves at the front end of these bond markets, financial conditions haven’t budged. Ten-year yields, if anything, have fallen. It’s a bare flattener. It’s kind of what you would expect at this point in the cycle. But nonetheless, there is no tightening coming from the ten year sector. Because there is no tightening coming from the ten-year sector.

There is no tight, not much tightening going on in the mortgage market, okay? Because there is no tightening coming from the ten-year sector, the equity market where the Algos literally just trade ten-year treasuries is their metric and wouldn’t know what a Euro dollar was, in order to fund the interest rate contract if it bit them in the proverbial ass, okay? Have completely ignored what’s going on. The dollar is caught in the wash between these various central banks who are all behind the curve and has gone nowhere. And credit hasn’t moved, because he’s looking at the equity market.

So there has been no tightening of financial conditions. What Bill Dudley said is that’s all that bloody matters. And so until there is a tightening of financial conditions in an economy which at least the President, probably, I suspect well into the middle of next year could change quite dramatically in the middle of next year. But for the moment, and that’s a eight, seven, eight month trading horizon, until there is a tightening of financial conditions, which means stocks down, credit wider, dollar up, ten-year yields higher. Those two year yields have to go further and further and further and further.

And this concept that the market is currently pricing, that we’re going to try and raise a little bit. And the whole edifice is going to blow up because they have what they refer to as the terminal rate, kind of the highest projection of where rates are essentially going to go in the tightening cycle is that one six is wrong.

We may have to go way through that. And Bill Dudley actually talks about 2004, 2006, where the Fed started off way behind the curve and the economy just kept running. Demand was there and they had to go 225 basis points and they had to do all sorts of other stuff before the damn things slowed down.

TN: True. When we consider that. So you’re saying, really seven, eight months before we see a major directional change in markets. I don’t want to put words in your mouth.

JB: Well, look, I think there’s sufficient, I do not see this as a slowing economy. I see this as an economy where demand is utterly excessive because central banks and policy makers misread. I think it was a fair mistake to make. I’m not critical of that, misread Covid.

TN: Sure. Policy errors are all over the place.

JB: All over the shop. Right. So we have far too easy, excessive policy. Right. Look, today the Fed is going to taper, but let’s be honest, tapering isn’t tightening. Tapering is less easing. We are driving into the brick wall that is the output gap, right. The economy at full capacity, not at 120 billion a month. But let’s say from next month, 105. Right. If you drove into a brick wall in your car at 105 versus 120, I think it would make very little difference to the outcome.

TN: That’s a good point. But we all remember the taper tantrum. So will we see a bit of a breather in markets before things amp up again? Or do you think people are just going to take and stride this time?

JB: I don’t think we get a taper tantrum this time. I think the Fed has been pretty clear. You’re sort of getting a little bit of a taper tantrum at the front end of these bull markets. But because most of the world doesn’t look at wonks like me, care what EDZ3 is, right? Or LZ3 in the UK, right? Or Aussie two year swaps. But most people don’t, aren’t aware of them, and they should be. But I mean, that’s what policymakers have to watch.

And as I said, I think the bigger thing is how far the rates have to go in an economy where demand is literally off the charts, where we’re seeing wage growth in the private sector from the ECI at 4.6%, where John Deere factory workers just rejected a 10% wage increase this year with following subsequent increases that probably work out around six odd percent over the next five years where they just said, forget it. Not enough, right? Not enough.

TN: Look at retail sales. The stepwise rise in retail sales over the past six months is incredible how quickly.

JB: I’m looking at stuff and if you look at the senior loan, which is the banking where they ask the bank loan offices what they intend to lend and who they’re lending to, and are they tightening conditions or whatever. Lending, they’re falling over backwards to try to lend money. Now we know that people have got some cash on sidelines because of the stimulus.

We know that companies have still got PPP loans that they’re still working through. So demand is a little lower, but supply is literally off the chart. So lending bank willingness to lend to consumers, decade highs, right. Bank willingness to lend to companies all time survey highs, 30-year highs. Right. So even if we were to get and I don’t think this is the case, even if wages would not keep space with inflation next year in the US, people have got plenty of places to go and borrow money to keep consuming.

So I just think this is an economy which is in the middle of its cycle. I mean, most cycles are three years long, three plus years long, with 15 months 16 months into this thing. I mean, this is mid cycle stuff. It’s the easiest of easy money, right?

TN: Okay. And so just kind of to end the three-point sermon, what else are markets missing? This is really interesting for me because I’m hearing a lot of different kinds of thesis out there every day, but very few about kind of what the market’s missing.

JB: Look. And I think it comes back to the final point, which we alluded to earlier. The equity market is making an assumption, of course, the equity market, I’m a bond guy and an FX guy. I hate the equity market. My glass is absolutely, defensively, half empty. Right. And ideally someone’s paid in it. But that’s the best day for it. That’s like the best market for me. Right. But the XG market is doing its classic thing where they’re just assuming the best of both worlds. So they’re assuming that margins are going to grow, so there is no cost pressure that could infringe on those. And we’re starting to see that.

I think Q4 numbers that we get in Q1 will start to get a little bit more interesting. Right. But we sure what wild wings or whatever the thing is called the Buffalo Wing place just got stumped because their wage costs were up and their input costs were up and they couldn’t pass it on. Right. But the equity market, as is classic, has taken the highest margins in 20 years, which is what we have now. And they’ve assumed that next year it grows even more. And in ’23, it grows yet again. Okay.

So as I said, if you’ve got this cost push and firms can’t pass it on, that doesn’t happen. Margins get crushed. Don’t think that’s a risk here in the US at the moment. Do think that’s a risk in Europe because these PPI increases are just so large. Right. And if you’re a Spanish company and your PPI went up 23.6%, you cannot pass on 23.6% increases to the consumer. In the US, if your prices went up eight and a half, you can wiggle a little bit through productivity, maybe a couple. You can probably get away with 5% price increases. Okay. So margin assumptions may be utterly wrong, but if they aren’t, what does that mean, Tony? It means that price inflation is rising, and in which case inflation is not transitory. And that’s the second big assumption. So they’ve assumed margins rise. Oh, and conveniently, inflation is transitory. And that in a cost push environment, you can’t square that circle. Right. One has to be wrong.

My gut is at the moment, it’s the latter in the US, not the former, more worried about the former in Europe in Q4. But that’s another thing, which I think the market has miraculously misread. But as I said, as those pricing pressures come through, I think policymakers and markets will have to adjust significantly. And I think it set us up for a policy error sometime next year. Probably huge. Probably.

TN: We’ll trip over ourselves with policy errors until we see this. And then when we do see some sort of reckoning, we’ll have even more policy errors.

JB: Correct. As Raul and I say constantly on Macro Insiders you just do buy the dip. You just got to figure out when the dip comes because you don’t want to be in when the dip comes and when you hold your nose and grab your bits and decide that you’re going to jump into the deep end and buy it by the seller.

TN: Great. Julian, thank you so much for your time. This has been fantastic for everyone watching. Please subscribe to our YouTube channel. It really helps us a lot to get those subscribers. And Julian, I hope we can revisit with you again sometime soon. Thanks very much.

JB: Thanks. Bye bye.

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