Tag: currencies

Liquidity Drain and QT, Copper Gap, & Retail and the US Consumer w/ Daniel Lacalle

Post author By admin
Post date November 19, 2022

This Week Ahead, we’re joined by Daniel Lacalle, Tracy Shuchart, and Sam Rines.

First discussion is on liquidity drain and quantitative tightening (QT). How difficult is it?

Rate hikes get a lot of the headlines, but QT peaked at just under $9 trillion in April of this year. The Fed has pulled just over $200 billion from the balance sheet since then, which isn’t nothing, but it’s not much compared to the total.

Where do we go from here? Most of the Fed’s balance sheet is in Treasuries, followed by Mortgage-backed securities. What does the path ahead look like – and where is the pain felt most acutely? Daniel leads on this discussion.

We also look at the copper gap with Tracy. We don’t really have enough copper over the next ten years to fill the demand. Despite that, we’ve seen copper prices fall this year – and Complete Intelligence doesn’t expect them to rise in the coming months. Tracy helps us understand why we’re seeing this and what’s the reason for the more recent fall in the copper price. Is it just recession? Will we see prices snap upward to fill the gap or will it be a gradual upward price trend?

We’ve had some earnings reports for retail over the past couple of weeks and Sam had a fantastic newsletter on that. On previous shows, we’ve talked about how successful US retailers have pushed price (because of inflation) over volume.

Costco and Home Depot have done this successfully. Walmart had serious inventory problems earlier this year, but their grocery has really saved them. Target has problems, but as Sam showed in his newsletter, general merchandise retailers have had a harder time pushing price. What does this mean? Is Target an early indicator that the US consumer is dead?

Key themes:
1. Liquidity drain and QT
2. Copper Gap
3. Retail and the US Consumer
4. What’s up for the Week Ahead?

This is the 42nd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Daniel: https://twitter.com/dlacalle_IA
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl

Transcript

Tony

Hi, and welcome to The Week Ahead. I am Tony Nash. And this week we’re joined by Dr. Daniel Lacalle or Daniel Lacalle. Daniel is a chief economist, he is a fund manager, he’s an author, he’s a professor. Kind of everything under the sun, Daniel does.

Daniel, thank you so much for joining us today. I know you have a very busy schedule. I appreciate you taking the time to join us. We’re also joined by Tracy Shuart. Tracy is the president at Hightower Resources, a brand-new firm. So pop over and see Tracy’s new firm and subscribe. We’re also joined by Sam Rines of Corbu. Thanks all of you guys for taking the time out of today.

Before we get started. I’m going to take 30 seconds on CI Futures, our core subscription product. CI Futures is a machine learning platform where we forecast market and economic variables. We forecast currencies commodities, equity indices.

Every week markets closed, we automatically download that data, have trillions of calculations, have new forecasts up for you Monday morning. We show you our error. You understand the risk associated with using our data. I don’t know if anybody else in the market who shows you their forecast error.

We also forecast about two thousand economic variables for the top 50 economies globally, and that is reforcast every month.

There are a few key themes we’re going to look at today. First is liquidity drain and quantitative tightening, or QT. Daniel will lead on that and I think everyone will have a little bit to join in on that.

We’ll then look at copper gap, meaning we don’t really have enough copper over the next, say, ten years to fill the needs of EVs and other things. So Tracy will dig into that a little bit.

We’ve had some earnings reports for retail over the past couple weeks and Sam had a fantastic newsletter on that this week. So we’ll dig into that as well. Then we’ll look at what we expect for the week ahead.

So Daniel, thanks again for joining us. It’s fantastic. You’ve spoken to our group about a year ago or so. It was amazing.

So you tweeted out this item on screen right now about the liquidity drain.

You sent that out earlier this week and it really got me thinking about the complexities of draining liquidity from global markets, especially the US. Since I guess global markets are hypersensitive to draining in the US.

Of course, rate hikes get a lot of headlines, but you mentioned QT, so it’s a bit more complicated. Obviously, QT peaked in April of this year. There’s a chart on the screen right now at just under $9 trillion.

And the Fed’s put about $200 billion back from their balance sheet, back in the market from their balance sheet, which isn’t nothing, but it’s really not much compared to the total.

So I guess my question is, where do we go from here? Most of the Fed’s balance sheet is in Treasuries as we’re showing on the screen right now, followed by mortgage backed securities.

So what does this say about the path ahead? What do you expect? How quickly do you expect? Does it matter that much?

Daniel

Thank you very much, Tony. I think that it’s very important for the following reason. When people talk about liquidity, they tend to think of liquidity as something is static, as something that is simply there. And when central banks inject liquidity, it’s an added. And when they take liquidity away from the system, that simply balances the whole thing. And it doesn’t work that way.

Capital is either created or destroyed. Capital is not static. So when quantitative easing happens, what basically happens is the equivalent of a tsunami. Now, you basically add into the balance sheet of central banks trillion, whatever it is, of assets, though, by taking those assets away from the market, you generate an increased leverage that makes every unit of money that is created from the balance sheet of the central bank basically multiplied by five, six, we don’t know how many times. And it also depends on the transmission mechanism of monetary policy, which is at the end of the day, what the reason why central banks do QE is precisely to free up the balance sheet commercial banks so that they can lend more.

Tony

Let me stop you there. Just to dig into so people understand what you’re talking about. When you talk about transmission mechanism, and the Fed holds mortgage backed securities, the transmission mechanism would be through mortgages taken out by people because mortgages are cheaper, because the Fed is buying MBS. Is that fair to say?

Daniel

Not cheaper. They don’t necessarily have to be cheaper. They have to be more abundant. Ultimately…

Tony

That’s fair. Yeah. Okay.

Daniel

Ultimately, this is why when people talk so much about rate hikes, rate hikes or rate cuts are not that important. But liquidity injections and liquidity training are incredibly important for markets because rate hikes or rate cuts do not generate multiple expansions. Yet liquidity injections do create multiple expansion, and liquidity draining is much more severe than the impact of the rate hike.

Tony

Okay, so when you say multiple expansion, you’re talking in the equity markets?

Daniel

In equity markets or in the valuation of bonds price. That means lower bond yields or in the valuation of private equity. We saw, for example, in the period of quantitative easing, how the multiples of private equity transactions went from ten times EV to even to 15 times easily without any problem.

So what quantitative tightening does is much worse than what quantitative easing does, because the market can absorb an increase of liquidity through all these multiple assets. However, when quantitative tightening happens, the process is the reverse. Is that the first thing that happens, obviously, is that the treasury, the allegedly lowest risk asset, becomes more cheap, ie, the bond yield goes up, the price goes down, the bond yield goes up, and in turn it creates the same multiplier effect, but a larger dividing effect on the way out.

Tony

So the divisor is greater than the multiplier.

Daniel

The divisor is greater. And I tell you why. In the process of capital creation, there is always misinformation that leads to multiple expansion. Okay? So one unit of capital adds two more units of capital plus a certain excess valuation, et cetera. Now from that point, if you reduce one unit of the balance yield of the central bank, the impact down is much larger. So where it goes to, this is the problem that we as investors find it very difficult to analyze is where is the multiple at which equities, bonds, certain assets are going to stop because it is very likely to be below the level where they started.

The challenge of quantitative tightening is even worse when the process of quantitative easing has been prolonged, not just in period of compression of economic activity or recessions, but also in the periods of growth.

Tony

Okay?

Daniel

Because the level of risk that investors take becomes not just larger but exponential under QE. Under QT. Under QE, you get Bitcoin going from 20 to 60 under QT, you get bitcoin going from 60 to maybe zero.

I don’t know. I don’t know.

Tony

The comments are going to be full of angry bitcoin people.

Daniel

I just want people to understand that just like on the way up in a roller coaster, you go slowly and it seems that everything is going relatively smoothly. When you start to go down, you go down really fast and it’s truly scary.

Tony

Okay, so let me ask you this, because when you talk about multiple expansion, I’m sure we’re going to get some comments back about tech firms because we’ve seen tech firms multiple expansion decline pretty dramatically in the past, say six months, certainly past year, for companies like Meta. So although we’ve only seen $200 billion in quantitative tightening, how does that reconcile with your statement about interest rates not necessarily impacting valuations.

Daniel

No, interest rates impact valuations, but not as aggressive as quantitative tightenint. They do, particularly in tech for a very simple reason. I think that all of us can understand that a technology company is in the process of money creation. A technology company is one of the first recipients of newly created money because it absorbs capital quicker and it obviously benefits enormously from low interest rates, obviously.

But the process of multiple expansion tends to happen in the early stages of those companies. Now the process of multiple compression is much more viscious because I would be genuinely interested to have a discussion with, I don’t know, with people that invest in nonprofitable tech, but I would really like to understand how they get to the current levels of valuation comfortably.

The biggest problem I see of quantitative tightening is the same problem I see of the hidden risks of quantitative easing is that central banks cannot discern which part of the wealth effect comes from the improvement in the real economy or simply from bubbles. And the creation of bubbles obviously, we can imagine that something is a bubble, but we don’t really know until it bursts.

So it’s going to be very problematic for a central bank to achieve almost one thing and the opposite, which is what they’re trying to do. What they’re trying to do is to say, okay, we’re going to reduce the balance sheet. Hey, we’re going to reduce the balance sheet by 95 billion a month and think that that will have no impact on the bond market, on the equity market, and on the housing market. The housing market is already showing.

Tony

Yeah, I don’t necessarily think they’re saying that will have no impact on that stuff. Sam, from your point of view, is that their expectation that QT would have no impact on asset prices?

Sam

I wouldn’t say it’s their expectation that it wouldn’t have an impact on asset prices. I think they understand that there’s an impact on asset prices from just the narrative of tightening generally. But to the point, I think it is very difficult to parse what portion of their tightening is doing what particularly for them.

You look at some of the research on coming out of the Fed, on what QT is expected to do and what QT does, and you come out of it thinking they have no idea. I think that they would probably say that quietly behind closed doors, without microphones. But to the point, I would agree that there is an effect and that the Fed likes to say set it and forget it, because they don’t really understand what the actual impact is on either the real economy or the financial economy. Come up with our star-star, which is some stupid concept that they decided to come up with to rationalize some of their ideas. But I would say no, that makes perfect sense, that they really don’t understand exactly how much it is. Which is why they say we’re just going to set it, forget it, and we’re not really going to talk about it.

Because if you listen to the Fed, their concentration is on the path to the terminal rate and the length of holding the terminal rate there. And if you Google or try to find any sort of commentary about quantitative tightening within their speeches and their statements, it’s actually pretty hard to find.

Daniel

Yeah. So just to clarify one thing, just to clarify. In the messages from, for example, of the ECB and the Bank of Japan, less so of the Fed. And I would absolutely agree with that because the Fed is not so worried because they know that they have the world reserve currency, but the ECB and the Bank of Japan certainly expect very little impact on asset prices. For example, the ECB are just saying right now that they’re expecting to reduce the balance sheet in the next two years by almost a trillion euros without seeing spreads widening in the sovereign market. That is insane to be fairly honest. So that is what I’m trying to put together is that the same… A central bank that is unable to see that negative bond yield and that compressed spreads of sovereign nations relative to Germany is a bubble. It’s certainly not going to see the risk of tightening.

Sam

I would start with saying that if the ECB thinks they are going to take a trillion off the books in a couple of years, that’s the first insane part of that statement.

Tony

Good. Okay. So what I’m getting from this is taking liquidity out of markets can be really damaging and the guys who are doing it don’t really know the impact of their actions. Is that good top level summary?

Daniel

Absolutely. That is the summary.

Tony

Okay, so since they’ve only taken 200 billion off, I say “only,” but compared to 9 trillion, it’s not much. Since they’re pulling the interest rate lever now at the Fed and they’re kind of tepidly moving forward on the balance sheet, do we expect them to finish the interest rate activities before they aggressively go after the balance sheet or are they just going to go march forward with everything?

Daniel

No, I think that’s.. They want to see the impact of interest rates first before they make a drastic action on the balance sheet. Particularly in the case of the Fed with mortgage backed securities, and the case of the Bank of Japan with ETFs because the Bank of Japan is going to kill the Nikkei if it starts to get rid of ETFs. And certainly the Fed is going to kill the housing market with mortgage backed securities are warranted.

Tony

Yup.

Sam

And then it’s kind of interesting because there’s two dynamics that I think are intriguing here. One is that the Fed’s balance sheet is getting longer in duration as interest rates rise because those mortgage backs are just blowing out to the right because you’re not going to have to have the roll down and you’re not going to have the prepays on those mortgages anytime soon. So the Fed is putting themselves in a position where hitting those caps on mortgage backs is just simply not going to happen on a mechanical basis. And they’re either going to have to sell or they’re going to have to say, we’re just not going to hit we’re not going to hit our cap on mortgage backed securities for the next 20 years.

Tony

Yup. So I get to put those to maturity like they’re doing with all the treasury debt.

Sam

Yeah, they’re just letting them roll off, which means they’re not going to have mortgage backs rolling off with a six and a half percent refi rate.

Daniel

Yeah, I agree with that.

Tony

Wow. It’s almost as if QT potentially is a non issue for the longer duration debt? Are you saying they’ll continue holding? Sam you’re saying , “No.” So what am I missing? What I’m hearing is they may just hold the longer duration stuff. So if that’s the case, is it kind of a non issue if they just hold it?

Daniel

It’s not a non issue. They are in conversations all the time with the Bank of Japan to do this composite yield curve management, which in a sense means playing with duration here and there on the asset base. But it doesn’t work when the yield curve is flattening all over the place and when you have a negative yield curve in almost every part of the structure.

So the point is that by the time that markets realize the difficulty of unwinding the balance sheet, the way that central banks have said, probably the impact on asset prices has already happened because commercial banks need to end margin calls, et cetera, margin calls become more expensive. Commercial banks cannot lend with the same amount of leverage that they did before. Capital is already being destroyed as we speak.

Sam

Into the point. As soon as you had the Bank of England announce that they were going to have an outright sale of Gilts, you saw what happened to their market. They broke themselves in two minutes.

Tony

Right. Okay. So that’s what I’m looking for. So it’s a little muddy. We’re not exactly sure. Right. QT is complicated. It’s really complicated. And liquidity is dangerous, as you say, Daniel. It’s easy on the way up. It’s really hard coming down from it. And that’s where…

Daniel

I think it was Jim Grant recently who said how easy it is to become a heroin addict and how difficult it is to get out of it.

Tony

Sure, yeah. I mean, not that I know, but I can see that.

Daniel

We don’t know it, obviously. None of us do. But it’s a very visual way of understanding how you build risk in the system and how difficult it is to reduce that risk from the system.

Tony

Yeah, just stopping adding liquidity is a good first step, and then figuring out what to do after that is I think they’re right. A lot of people like to knock on the Fed, but doing one thing at a time is, I think, better than trying to reconcile everything at once.

Okay, great. Since we’re taking a little bit of longer term view on things with some of that mortgage backed security debt, I just also was in a longer term mood this week and saw something that Tracy tweeted out about copper consumption and demand.

This was looking at long term demand, say, by 2030, and there’s a gap of what, 20 no, sorry, 10 million tons. Is that right, Tracy?

Tracy

8.1 million tons.

Tony

8.1 million tons. Okay. Now, when we look at copper prices right now, we’ve seen copper prices fall. We don’t really have an expectation of them rising on the screen as our Complete Intelligence forecast of them rising in the next few months.

So why the mismatch, Tracy? What’s going on there? And why aren’t we seeing the impact on copper prices right now?

Tracy

Well, I think if we look at basic industrial metals really as a whole, except for, say, lithium, really, we’ve seen a very large pullback in all these prices in these specific metals that we are going to need for this green transition.

Now, part of that is, I think, part of that is QT, we’re just saying money liquidity drained from the system. But I also think that we have overriding fears of a global recession. We also have seen people are worried about Europe because with high natural gas prices, a lot of their smelting capacity went offline.

And one would think that would be bullish metals, but it’s scaring the market as far as global recession fears. And then, of course, you always have China, which is obviously a major buyer of industrial base and industrial metals. They’re huge consumer as well as producer of the solar panels. Wind turbines and things of that nature.

So I think that’s really the overriding fears and what I’ve been talking about even for the last couple of years, that I think metals is really going to be more of H2 2023 into 2024 story. I didn’t really expect this year for that to be the real story.

I know you thought that energy was still going to be the focus. And I think even though we’ve seen prices come off, energy prices are still very high. And I think energy prices we’re going to see a resurgence of natural gas prices again in Europe as soon as we kind of get past March, when that storage is kind of done. Because we have to realize that even though the storage is still this year, 50% of that did still come from piped in natural gas from Russia.

I think we’ll start to see natural gas prices higher. Oil prices are still high. Even at $75, $80, it’s still traditionally high. So the input cost going into metals to bring it all together, the input cost going in metals, we are going to need a lot of fossil fuels. It’s very expensive. We also see mining capex suffers from the same problem that oil does is that over the last seven years, we’ve seen huge declines. And then when we look at copper in particular, we really haven’t had any new discoveries since 2015. So all of those are contributing factors. But again, I don’t think that’s really a story until last half of 2023 and 2024 going forward.

Tony

Okay, so to me, the copper price tells me, and I could be, tell me if I’m wrong here. Copper rise tells me that markets don’t believe China is going to open up fully anytime soon, and they don’t believe China is going to stimulate anytime soon. Is that a fair assessment?

Tracy

Yes, absolutely. I think we kind of saw metal prices. We’re bouncing on some of the headlines back and forth, but really we haven’t seen anything come to fruition, and I think most people are not looking until probably spring for them to open up. And I think China really hasn’t changed its stance, right. As far as. There Zero Covid policy, they’re still on that. So I think markets have been digesting that over the last couple of weeks or so. And that’s also another contributor to seeing a pullback in some of these metals in the energy sector.

Tony

Yeah, if you look at the headlines over the past week, you definitely see a softer tone towards China, with Xi Jinping coming out in the APEC meeting sorry, not the APEC meeting, the ASEAN meeting. And he’s a real human being and all this stuff, and he’s talking with Biden and he’s talking with European leaders and Southeast Asian leaders.

So I think there’s been a softer tone toward China and this belief that good things can happen in the near term, but I don’t think most investors will believe it until they see it, first of all. And I think places like Japan, Korea, Taiwan, US. Other places, maybe not. The Germans are also a little bit worried about short term sentiment in China. Things could turn pretty quickly. So, like you say, I think base metals prices are down on that. But over the long term, obviously, it doesn’t seem like there’s enough capacity right now. So, anyway, we’ll see. So for bringing that up. Sorry. Go ahead, Sam.

Sam

Yeah, I think there’s just two things to add there. One, if you didn’t have investment in base metals and energy at zero interest rates, you’re not going to get it at five. Let’s be honest. That’s point number one, this isn’t a short term thing. This is a much longer term thing. And you need to have much higher prices for commodities broadly in order to incentivize any sort of investment, because they’re, one, very capital intensive, and two, capital is very expensive right now. So I think that’s also something to keep in mind over the medium term, is we’re not solving this problem at five and a half percent interest rates here. That’s clearly not going to happen. And the other thing is you haven’t seen the Aussie dollar react in a positive way. So if the Aussie dollar is reacting, China is not reopening. It’s just that simple.

Tony

Yeah, that’s a very point.

Daniel

If I may, I would also like to point out that the bullish story for copper, lithium, cobalt is so evident from the energy transition and from the disparity between the available capacity and the demand. But when the gap is so wide between what would be the demand and the available supply, what tends to happen is that the market, rightly so, sees that it’s such an impossibility that you don’t even consider, at least as a net present value view, that bullish signal as Tracy was mentioning until 2023 or 2024, when it starts to manifest itself.

Right now, it’s so far between the reality of the available supply and the expectation of demand that it looks a little bit like what happened with Solar in 2007, 2008. We just saw bankruptcy after bankruptcy because you didn’t match the two. And on top of it, Tracy correct me. But this is the first year in which you had a massive bullish signal on prices, in energy and in metals, yet you’ve seen no response from a capping.

Tracy

Exactly. Nobody’s prepared, nobody wants to really still spend that kind of money, particularly not the oil industry when they’re being demonized by everybody in the west in particular. So you know, you’re not going to see a lot of, nobody wants to invest in a project when they’re saying we want to phase you out in ten years.

Tony

What’s really interesting though also is BHP bought a small midsized copper miner in Australia this week, so I forget their name, but the miners are seeing opportunities, but they’re just not seeing the demand there yet. So we’ll see what happens there. So anyway, thanks guys for that. That’s hugely valuable.

Sam, you wrote on retail this week and you have really brought out some interesting dynamics around pushing price versus volume within stores over the past several months. And your newsletter looked at Target, Walmart, Costco, Home Depot. Earnings across retail sectors.

So Costco and Home Depot seem to have pushed price successfully. Walmart, as you say, had serious inventory problems earlier in the year, but their grocery business seemed to have really saved them. But Target really has problems and their earnings report this week was a mess. So we’ve got on screen a table that you took out of some government data looking at, has made a change of sales for different types of retail firms, building materials, general merchandise and food services. And things seem to be going very well for everyone except general merchandise stores like Target.

So can you help us understand why is that the case for, I mean, maybe Target is just terribly wrong, but why is that the case for general merchandise specifically and what does this say about the US consumer? Is the US consumer kind of dead in some areas?

Sam

No. US consumers is not dead, which is the strangest part about this earning season to me is everybody kind of read into Targets reporting was like, wow, this is horrible. It’s bad, it’s bad. Target is its own problem. Their merchandising, horrible. Their executive team, horrible. I mean, I don’t know how you survive this. With Walmart putting up huge comp numbers on a relative basis. I mean, they pounded Target and to me that was single number one. That’s Target’s issue.

The general merchandise store. We bought a whole bunch of stuff during COVID that we don’t really need to buy at 17 of right? We bought it during COVID You could get Walmart and Target delivered to you, that was a boom for their business and that’s just not being repeated. Same thing with if you look at Best Buy and electronic stores not doing great because we all bought TVs during COVID and computers, we needed them at home. These are just pivots. When you look at the numbers for restaurants, when you look at it for grocery, I mean, again, a lot of it is pushing price onto the consumer, but the consumer is taking it.

And those are pushing revenues higher. Look at something, the company that controls Popeyes and Burger King, absolute blowout, same store numbers. I mean, these are restaurants that are pushing price. They’re still having traffic and they’re not getting enough pushback.

Home Depot pushed 8% pricing, well, almost 9% pricing in the quarter. They didn’t care about foot traffic, but traffic was down mid 4%. They didn’t care about the foot traffic. They got to push the price and they, guess what, blew it out? Loads had a decent quarter. These are housing companies, at least home exposed companies and building exposed companies that had great third quarters that were supposed to be getting smashed, right? The housing is not supposed to be the place that you’re going to right now. And somehow these companies could push in a price.

There’s something of a tailwind to the consumer where the consumer is kind of learning to take it in certain areas and just saying, no, I don’t need another Tshirt or I don’t need to make another trip to Target. I think that it’s pretty much a story of where the consumer spending not if the consumer spending.

That retail sales report, it will get revised, who knows by how much, but the retail sales report, even if it gets knocked down by a few bips called 20 basis points, 0.2%, it’s not going to be a big deal. It’s still blowing number. These are not things you want to see.

If you’re the Fed thinking about going from 75 to 50, 2 reasons there. One is that pricing little too much. And if it begins to become embedded, not necessarily in the consumer’s mind, but also in the business’s mind, I can push price. I can push price. I can push price. That’s a twosided coin where the consumer’s willing to take it and businesses are willing to push it. That is the embedding of inflation expectations moving forward.

Going back to I think it was last quarter, Cracker Barrel announced during like, yeah, we’re seeing some traffic flow, but we’re going to push price next year, and here’s how much we’re going to push it by. These companies aren’t slowing down their price increases, and they’re not seeing enough of a pushback from consumers.

Tony

Cracker Barrel and Walmart are not topend market companies. They’re midmarket companies. And if they’re able to push price at the mid market, then it says that your average consumer is kind of taking it. But the volume is down. So fewer people are buying things, but the ones who are buying are paying more. Is that fair to say?

Sam

It’s fair to say. Fewer trips, more expensive. It’s fair to say. But there’s also something to point out where Macy’s, their flagship brand, kind of had a meh quarter. Bloomingdale’s, heirt luxury? Blew it out.

Tony

Okay.

Sam

So you’re seeing even within general merchandise stores, you’re seeing a significant difference between, call it luxury, middle, and low.

Tony

Okay. So what is it about, say, Target and Macy’s? I’ll say Target more than Macy’s, but is it just the management, or is it the mech?

Sam

It’s merchandising and it’s the Mexican.

Tony

Right, okay.

Sam

And if you don’t have the right stuff that you can push price on, you’re not going to make it.

Tony

So will we see some of these general merchandisers move into other sectors? Grocery or whatever?

Sam

I mean, Target has grocery. TVs closed. They have everything. It’s a question of do you have the right thing to sell right now in terms of that? So I don’t really think you’ll see many big moves, mostly because they already have too much inventory. So their ability to pivot is zero at this point. So it’s going to be a tough holiday season. I think it’s going to be a pretty tough holiday season to Target. But I didn’t see Walmart taking down numbers for the Christmas season. We’ll see with Amazon, but cool.

Tony

It seems healthy. Just observationally. They seem pretty healthy.

Sam

Yeah. And the other thing to mention, just as a side note, there’s a lot of this consternation around FedEx and UPS and their estimated deliveries for Christmas. This is the first year that Amazon has had a very, very large fleet going into the Christmas holiday season where they don’t have to send packages through FedEx and UPS only. They have a very, very large in house fleet of vehicles to do so with, and they built that out massively over the past 18 months. So I would read a lot less into that for the Christmas season, et cetera, than people are. That’s something I think it’s kind of taking the big picture and missing the finer points.

Tracy

I had a question really just on that same vein. I’ve seen a lot of the freight companies that report on freight, like Freight Waves, have been screaming at the top of their lungs, loadings are falling. People are going out of work. They’re firing everybody. Nobody’s delivering anything. Nobody’s delivering any goods. Do you think that’s sort of cyclical or because it seems like there’s a mismatch right now. There’s a lot of goods out there to be delivered, but for some reason, these guys can’t get loading.

Sam

I think it’s two things. One, everybody double ordered in spring and summer. So I think Freight Waves and a lot of other companies saw a lot of livings that they wouldn’t have seen otherwise. And you spread those out, and I think that’s point number one. Point number two is these retailers are stuffed with inventory. Target, even Walmart is somewhat elevated. They don’t have that big problem. They have the inventory. I would say it’s much more of a timing issue. You’ll probably see Freight Waves have too many loadings, called it in the spring and summer of next year because people are playing catch up and trying to get the right merchandise, et cetera, et cetera. So I think it’s just more of a Covid whipsaw than anything else.

Tracy

Makes sense, right?

Tony

Okay, so bottom line, us. Consumer is still taking it, right? They’re still spending, they’re still okay. Despite what bank deposits and other things tell us, things are still moving. And is that largely accumulating credit or how is the US consumer still spending? They’re accumulating credit?

Sam

A couple of things. One, they have their bank deposits are fine, particularly at the middle and upper levels. They’re still relatively elevated. Two, you’re getting a much higher wage. So your marginal propensity to consume when you see a significant pay raise, even if prices are higher, is higher, right. So you’re going to spend that dollar.

So you’re getting paid more. You’re switching jobs a lot more. Your switchers are getting something like a double digit pay increase. These are rather large chefs, so I would say the consumer feels a lot more comfortable with taking the inflation because they’re getting paid a lot more. Unemployment is sub 4%, so they’re not afraid of losing their job unless they’re at Twitter. So the consumer is sitting there like, all right, I’m not losing my job. I’m getting paid increases. Why would I stop spending? I think it’s that simple.

Tony

Great.

Sam

Yeah, they have credit cards.

Daniel

That is a very important point. What you just mentioned, employment. Employment makes all the difference. The pain threshold of consumers is always being tested. Companies raise prices. Volumes are pretty much okay. So they continue to raise prices to maintain their margins. And that works for a period of time.

I think that what is happening both in the Eurozone and in the United States is that after a prolonged period of very low inflation, consumers also feel comfortable about the idea that inflation is temporary. Basically everybody and actually I have this on TV this morning, we’re talking about everybody is saying, okay, so prices are rising a lot, but when are they coming down? But I’m still buying.

The problem, the pain threshold starts to appear when employment growth, wage growth, starts to stop, and at the same time, prices go up. And obviously the companies that feel comfortable about raising prices start to see their inflation rate, rise. So it’s always difficult because we never know. There’s a variable there that we’re very unsure of, which is credits. How much credit are we willing to take to continue to consume the same number of goods and services at a higher price?

But it is absolutely key what you’re saying, which is as long as even though wage growth in real terms might be negative, but you’re getting a pay rise and you still feel comfortable about your job, you feel comfortable about your wealth to a certain extent and credit keeps you safe, consumption in the United States is not going to crack.

However, where do you see it cracking? And we’re seeing it cracking in the eurozone. In Germany, where you don’t get the pay rise, you don’t get the benefit of taking expensive credit from numerous different sources or cheap credit from different numerous sources and at the same time you get elevated inflation. Consumption is actually going down the drain. The way that I see it is that the problem, the consumption, not collapsed, but certainly the consumption crack is very likely to happen more north to south in the eurozone than in the United States at the rate at which the economy is growing.

Tony

Yes, yes, very good. Thanks for that, until on Europe, Daniel, that was really helpful.

Okay, let’s do it very quick. What do you expect for the same week or two weeks ahead? We have a Thanksgiving holiday here in the US, so things are going to be kind of slow. But Tracy, what are you looking for, especially in energy markets for the next couple weeks? We’ve seen energy really come off a little bit this week. So what’s happening there?

Tracy

Yeah, absolutely. Part of the reason of that, besides all the global factors involved, the recession didn’t help UK him out and said they were already in the recession. That then sparked fears. We have pipeline at reduced capacity right now, which means that’s going to funnel some more crude into cushion, TWI contract is actually cushing. So that’s putting a little bit of pressure. I think holidays, obviously I think this next week we’re not really going to see much action as usual. So really looking forward to the following week is we have the Russian oil embargo by the EU and we also have the OPEC meeting and I would suspect that at these lower prices they would probably, they might be considering cutting again. So that’s definitely those two things. I’m looking forward to in that first week in December.

Tony

Great, thanks. Daniel, what are you looking for in the next week or two?

Daniel

The next week or two are going to be pretty uneventful, to be fairly honest. We will see very little action or messages that make a real difference from Fed officials or from the ECB. On the energy front, there’s plenty of news that we pay attention to Tracy’s Twitter account. But in Europe we will get quite a lot of data, quite a lot of data that is likely to show again this slow grind into recession that we’ve been talking and very little help. I think that from here to December, most of the news are not going to change where investors are and that will probably start to reconfigure our views into the end of the trading season, 27 to 28.

Tony

Okay, very good. And Sam, what do you see next week? The week after?

Sam

I’ll just be watching Black Friday sales that are coming in. Honestly, I think that will be a pretty important sign as to how things are developing into the holiday season and begin to set the narrative as we enter in December. Again, there’s no real interesting Fed talk coming out next week, but we’ll begin to have some pretty good data coming from a number of sources on Black Friday, foot traffic, internet traffic, etc. Tuesday and Wednesday.

Tony

Very good.

Sam

The following week. That’s all I care about.

Tony

Excellent. Really appreciate that. For those of you guys in the States, have a great Thanksgiving next week. Daniel, thank you so much. Have a fantastic weekend. Always value your time, guys. Thank you so much. Have a great weekend.

Sam

Thank you.

Daniel

Have a good weekend. Bye bye.

Sam

Thank you.

Podcasts

UK Turns To QE To Calm Markets

Post author By admin
Post date September 30, 2022

This podcast was originally published at https://www.bfm.my/podcast/morning-run/market-watch/uk-qe-outdated-government-bonds-calm-markets-british-pound

The Bank of England surprised markets by announcing that it would buy long dated government bonds in order to stabilise capital markets. Tony Nash, CEO of Complete Intelligence explains why and what does this mean for the Pound.

Transcript

BFM

Good morning. You’re listening to the Morning Run on Thursday the 29 September. I’m Shazana Mokhtar with Wong Shou Ning. Now, in half an hour, we are going to discuss the political future of Crown Prince Mama bin Salman, or MBS of Saudi Arabia, now that he’s been named the Prime Minister of the country. But as always, let’s kick start the morning with a look at how global markets closed.

BFM

Yesterday, US markets had a very good date was at 1.9%. S&P 500 up 2%, while Nasdaq was up a whopping 2.1%. Meanwhile, in Asia, it was all red. Nikkei was down 1.5%, hong Singh was down a whopping 3.4%. Shanghai and Times Index both down 1.6%, while our very own FBM KLCI was down 0.6%.

BFM

So for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us. I want to start off with moves by the bank of England that said it would move to buy long dated government bonds in order to stabilize capital markets. Can you talk us through what the BoE is trying to do and whether this will ultimately be successful?

Tony

Yes. So here’s what happened. You had some pension funds who bought debt, debt instruments called Guilt, and they used those gilts as collateral to borrow more money to buy more debt instruments. And they use that as collateral to borrow more money to buy more instruments. So they were many times leveraged on these government debt instruments. And when the value of those gifts declined, they had to provide collateral against the loans they had taken out to buy that debt. So it’s a very circular kind of series of events that’s happened. So because these pension funds got in trouble, the UK, the bank of England wanted to prevent their insolvency, of course, because many of them are government pension funds. So since the bank of England has nearly endless currency, they can help the government come to a relatively orderly decline. So is it ideal? No, but there was some messaging out from the new Prime Minister in Whitehall that was very disturbing to government bond investors and that triggered the sell off and then that triggered a multibillion pound rescue from the bank of England.

BFM

Okay, I want to stay on the topic of the United Kingdom, but us about the currency. They must be the only G seven countries still doing quantitative easing in some way. Where do you think the pound is heading? Dendu?

Tony

Well, because of the energy environment, they’re going to be spending more money on subsidies to help the British people through the winter and more pound? Denominated spending actually makes the pound stronger, but you have aggressive quantitative easing and you have a relatively stronger US dollar. It’s possible that we see the pound decline, say, 35% more, unless something dramatic happens, like another event like today or another event by the government that really erodes credibility, I don’t see a lot more decline happening, but it’s a weird year. It’s a weird few years that we’re having right now. Right. So I think on some level it’s really hard to tell. And the problem with losing credibility is that you lose credibility. And if they erode even more credibility, it could be worse than anybody thinks. So I think that’s a small chance. I think we’re probably in a range at this point.

BFM

And if we take a look over at the US, we have seen federal officials reiterate the very hawkish stance that they have. But San Francisco Federal Reserve Bank President Mary Daly said that the bank is resolute by bringing down high inflation, but wants to do so as gently as possible so as not to drive the economy into a downturn. Do you think it’s possible at this point to engineer a soft landing, or is a recession inevitable?

Tony

I think it’s possible to engineer a softish landing. I think the problem with the Feds facing as they were very slow to respond to inflation, and so now they’re trying to respond as quickly as they can, and they’re responding in a very kind of brutal kind of way. Mary Daily coming out with these as gently as possible comments are good. And that’s new. Neil Cashari yesterday said he’s another Fed governor. He said there is the risk of overdoing it on the front end, meaning that the Fed could raise rates too quickly. So some of these governors are getting out with messaging, trying to soften the Fed’s hard message over the last couple of months. So the wording from the Feds, ongoing wording generally from especially JPOW, has said that they’re going to be ongoing aggressive hikes, and that’s scaring people. So, like, the Fed needs to be less aggressively hawkish in their language. So that doesn’t mean they turn dovish. That doesn’t necessarily mean they start doing QE. They just need to be less aggressively hawkish. And that’s just toning down the language. I think it’s a little bit too little too late in as much as markets have fallen by, say, 23%, I think, since the highs.

Tony

But I think if they start inserting some less aggressively hawkish language, we can have a smoother glide path to balance, meaning higher interest rates, more moderate equity markets at a slower pace.

BFM

Okay, Tony, can you help us understand what happened today in markets? Because I’m a little bit confused in the sense that US ten year treasury yields fell the most since March 2020. On a day like this, equities shouldn’t go up, but it did. Why?

Tony

Well, I think equity investors are seeing what the bank of England did, and I think on some level they see equity markets versus central banks as a bit of a game of chicken. And the bank of England blinked. And I think equity investors are hoping that the Fed will slow down or blink. This is not a pivot. Meaning when people talk about the Fed and say a pivot, they mean pivoting to quantitative easing and pivoting to dovish language. I don’t see that at all, but I think equity investors are seeing a chance of the Fed becoming less aggressively hawkish, as I was saying. So I think that’s really what happened is just a quick breath think, oh gosh, maybe they’re going to slow down a little bit, which would be positive for equity markets.

BFM

And if you take a look at the Nordstream gas pipeline disruption, that does seem to have changed the energy calculus in Western Europe. How do you think it’s going to affect the dynamics of energy prices over there, especially with winter looming?

Tony

Yeah, I think it will affect, but there isn’t a lot of gas coming by Nordstream. There are other pipelines bringing gas to Europe, so it’s really, at the moment, more perception than reality. So Europe has a fair bit of gas and storage for winter. It’s 87% of their goal, so they’re in pretty good shape. They’re not in great shape, but they’re in pretty good shape. They can make it all the way through winter with what they have in storage, but they aren’t reliant on Nordstrom to fill their reserves further. So I think the kind of the gut punch on this is that it’s a pretty damaging leak and so it would be really hard to get it back online. If Russia say something happened with a resolution of UK, sorry, Ukraine, Russia, and there was optimism that Russia could turn on the taps again, that would be really hard to achieve. So it’ll be an expensive winter for energy in Europe. But Nordstream doesn’t really impact it all that much. It’s more, say, the long term hopes and expectations for Nordstream.

BFM

Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Really assessing what’s happening over in the UK with the actions by the bank of England overnight. That has helped somewhat to calm the plunge in the pound sterling that we’ve seen over the past few days. I think this pound has rallied, but how long this equilibrium will last, I think, is anyone’s guess.

BFM

Well, this morning pound against ringgate is 5.0260 at the lowest in the last two days, if I’m not wrong, 4.8. Right. So it has truly, truly recovered. But volatile markets ahead, I think still question marks about whether this trust economic policy makes any sense. Confusion over the tax cuts, how they’re going to pay for it, reverberating around global markets because we’ve seen actually global bond yields peak. Question about whether there will be more activities by central banks to intervene, to prop up their currencies or to restore come to their own respective markets, because we saw that in Japan. And apparently even South Korea says it plans to conduct an emergency born buyback program.

BFM

Indeed, we do see also that the yuan is coming under pressure, and China central bank has issued a strongly worded statement to warn against speculation after the currency dropped to its lowest versus the dollar since 2008.

BFM

I love the language. The language is released yesterday. Do not bet on one way appreciation or depreciation of the yarn, as losses will definitely be incurred in the long term. Can’t spell it out more clearly than that, right? Indeed.

BFM

716 in the morning. We’re going to head into some messages. And when we come back, what does long or need more? Another quarry or preservation of its forests? Stay tuned. BFM 89.9 you have been listening to.

News Articles

How AI-based ”nowcasts“ try to parse economic uncertainty

Post author By admin
Post date August 11, 2022

This post was published originally at https://www.emergingtechbrew.com/stories/2022/06/17/how-ai-based-nowcasts-try-to-parse-economic-uncertainty?mid=13749b266cb1046ac6120382996750aa

This month, the S&P 500 officially hit bear-market territory—meaning a fall of 20+ percent from recent highs—and investors everywhere are looking for some way to predict how long the pain could last.

Machine learning startups specializing in “nowcasting” attempt to do just that, by analyzing up-to-the-minute data on everything from shipping costs to the prices of different cuts of beef. In times of economic volatility, investors and executives have often turned to market forecasts, and ML models can offer a way to absorb more information than ever into these analyses.

One example: Complete Intelligence is a ML startup based outside Houston, Texas, that specializes in nowcasting for clients in finance, healthcare, natural resources, and more. We spoke with its founder and CEO, Tony Nash, to get a read on how its ML works and how the startup had to adjust its algorithms due to market uncertainty.

This interview has been edited for length and clarity.

Can you put the idea of nowcasting in your own words—how it’s different from forecasting and the nature of what you do at Complete Intelligence?

So Complete Intelligence is a globally integrated machine learning platform for market finance and planning automation. In short, we’re a machine learning platform for time series data. And nowcasting is using data up to the immediate time period to get a quick snapshot on what the near-term future holds. You can do a nowcast weekly, daily, hourly, or minutely, and the purpose is really just to understand what’s happening in markets or in a company or whatever your outlook is right now

And what sort of data do you use to fuel these predictions?

We use largely publicly available datasets. And we’re using billions of data items in our platform to understand how the world works…Macroeconomic data is probably the least reliable data that we use, so we use it for maybe a directional look, at best, at what’s happening. Currencies data is probably the most accurate data that we use, because currencies trade in such narrow bands. We use commodities data, from widely traded ones like oil and gold, to more obscure ones like molybdenum and some industrial metals. We’re also looking at individual equities and equity industries, and we track things like shipping times for goods—shipping times…are usually pretty good indicators of price rises.

Who are your clients, and how are the nowcasts used in practice?

Our clients range from investors and portfolio managers, to healthcare firms and manufacturing firms, to mining and natural resources firms. So they want to understand what the environment looks like for their, say, investment or even procurement—for example, how the current inflation environment affects the procurement of some part of their supply chain.

In fact, we’re talking to a healthcare company right now, and they want to nowcast over the weekend for some of their key materials. In an investment environment, of course, people would want to understand how, say, expectations and other variables impact the outlook for the near-term future, like, days or a week. People are also using us for continuous budgeting—so revenue, budgeting, expenses, CFOs, and heads of financial planning are using us…to understand the 12- to 18-month outlook of their business, [so they don’t have to have an annual budgeting cycle].

Tell me about how the AI works—which kinds of models you’re using, whether you’re using deep learning, etc.

There are basically three phases to our AI. During the pre-process phase, we collect data and look for anomalies, understand data gaps and how data behaves, classify data, and those sorts of things.

Then we go into a forecasting phase, where we use what’s called an ensemble approach: multiple algorithmic approaches to understand the future scenarios for whatever we’re forecasting. Some of those algorithms are longer-term and fundamentals-based, some of them are shorter-term and technical-based, and some of them are medium-term. And we’re testing every forecast item on every algorithm individually and in a common combinatorial sense. For example, we may forecast an asset like gold using three or four different forecast approaches this month, and then using two forecast approaches next month, depending on how the environment changes

And then we have a post-process that really looks at what we’ve forecasted: Does it look weird? Are there obvious errors in it—for example, negative numbers or that sort of thing? We then circle back if there are issues…We’re retesting and re-weighting the methodologies and algorithms with every forecast that we do.

We’ve had very unique market conditions over the past two years. Since AI is trained on data from the past, how have these conditions affected the technology?

You know, there’s a lag. I would say that in 2020, we lagged the market changes by about six weeks. It took that amount of time for our platform to catch up with the magnitude of change that had happened in the markets. Now, back then, we were not iterating our forecasts more than twice a month. Since then, we’ve started to reiterate our forecasting much more frequently, so that the learning aspect of machine learning can really take place. But we’ve also added daily interval forecasts, so it’s a much higher frequency of forecasting and in smaller intervals, because we can’t rely on, say, monthly intervals as a good input in an environment this volatile.

News Articles

Complete Intelligence – an AI-powered intelligence platform for strategic investment and procurement decisions

Post author By admin
Post date December 13, 2021

This article first appeared and originally published at https://cxcreate.io/complete-intelligence-an-ai-powered-intelligence-platform-for-strategic-investment-and-procurement-decisions.

Complete Intelligence – a fully automated and globally integrated AI platform for smarter cost and revenue planning.

Complete Intelligence provides actionable, accurate, and timely data to make better investment and procurement decisions.

Download the report to get the full story.

CLICK HERE TO DOWNLOAD REPORT

About this report

Based on interviews with Tony Nash, founder, CEO, and Chief Data Scientist, this brief report introduces Complete Intelligence, one of a growing number of highly innovative companies supported by the Oracle for Startups program. The company, founded in 2019, is already significantly improving the forecasting and budget planning of a variety of large corporations through its advanced AI-driven intelligence platform. The theme for this month is around startups in the energy and utility sector and how they are innovating, changing the competitive landscape, and contributing to sustainability. CX-Create is an independent IT industry analyst and advisory firm, and this report is sponsored by the Oracle for Startups program team.

The business context for Complete Intelligence

Commodity price volatility and a post-pandemic surge in demand drive the need for more timely and accurate forecasting
Businesses coming out of lockdown have increased demand for commodities, from energy supply to raw materials for their products. In Europe, benchmark prices for natural gas to power their factories and heat their buildings have risen from €16 megawatt-hour in January 2021 to €88 in October. This, in turn, has sent electricity prices soaring. (Source: Euronews). While some have locked in prices through forward-buying, others have been exposed and seen profit margins plummet, unable to pass on price hikes to their customers.

But it is not just energy prices that are volatile. Semiconductor chip shortages have impacted many industries that depend on them, from automotive to electronic household goods manufacturers, putting a brake on their post-pandemic recoveries despite strengthening demand.

The growing demand for clean and sustainable energy sources and precious metals, like copper and lithium that power batteries have also seen tremendous volatility. As major industrial companies digitally transform their organizations and business models seeking elusive growth, the importance of data and AI are increasingly recognized as fundamental to success.

Forecasting and budgeting needs data science, not spreadsheets
The ability to sense change, respond quickly and adapt rapidly relies on a synthesis of massively increased volumes and varieties of data, both from operational and external sources. Data volumes are too complex for manual approaches and spreadsheets and require AI to extract insight and meaning from this complex array of external demand and supply signals. The old industrial-age planning approaches can’t cope. They are too slow, involve armies of accountants and analysts, and political wrestling between departmental heads, and are often based on opinion and inaccurate forecasts leading to erroneous budgeting decisions.

Complete Intelligence provides the accurate evidence base for budgeting and forecasting decisions

When markets are relatively calm and stable, the cycle of annual planning and budgeting makes sense. But amidst continual volatility and dramatic accelerated change, the planning cycle is too slow. It fails to mitigate the risks unfolding at such speed and is impacted by a confluence of so many variables, like extreme weather, scarcity of raw materials, pandemics, and weakened supply chains. An array of intelligent internal and external feedback loops is needed to mitigate risks and optimize resources in pursuit of the company’s goals. This is what Complete Intelligence provides with its integrated and modular intelligence platform.

Key observations

• Complete Intelligence provides the accurate evidence base for budgeting and forecasting decisions
• The Complete Intelligence Platform consists of three modules – CI Futures, RevenueFlow and CostFlow
• Forecast accuracy has rapidly improved, and error rates are now around 2%, which compares favorably with traditional methods and error rates of 35% or more

Complete Intelligence, the story so far

Tony Nash, founder, CEO, and Chief Data Scientist, is steeped in market intelligence. A former VP of market intelligence firm IHS (now IHS Markit), and The Economist Intelligence Unit, where he was Global Director Consulting and Custom Research. He observed that large international companies he had supported typically followed an annual budgeting cycle based on often inaccurate or opinion-based data. It was not unusual to find large teams of people, sometimes several hundred involved in the process and heavily reliant on gathering data from multiple departments in complicated spreadsheets. The process could last several months, and the variance between forecasts and actuals was often above 35%, which could erode profits or tie up resources unnecessarily.

Trial, error, and persistence
As a data scientist familiar with cloud technologies, he developed algorithms to improve forecast accuracy and a complete process from data ingestion to forecasting and testing the results. He started developing the machine learning ML algorithms in 2017 while still consulting in Asia from his base in Singapore. His first iteration failed to produce a level of accuracy that would provide a sufficiently compelling proposition. He wanted to get down to an error rate of no more than 5%-7%. He adopted the ‘ensemble’ approach covering thousands of different scenarios layering external data on commodities such as the copper price with a customer’s actual costs, identified in their general ledger.

Ready for launch late 2019
In 2019, Nash returned from Singapore and set up his company in The Woodlands, near Houston, Texas. He continued his work on the algorithms and developed a commercial product ready to launch in early 2020. And then Covid-19 struck.

Through Covid-19, companies first tried to understand the changing environment, then remained risk-averse until public health, business environment, and supply chains became more stable. This has been a challenge for a cutting-edge machine learning firm like Complete Intelligence. It is only as the environment has begun to stabilize that enterprises have sought new solutions to legacy problems. With that has come a renewed interest in Complete Intelligence and deployment at a large scale.

Solution overview
The Complete Intelligence Platform consists of three modules
The Complete Intelligence Platform hosted on Oracle Cloud Infrastructure (OCI) consists of three forecasting modules:

• CI Futures – to forecast market trends. Covering over 1,400 industries in more than 100 countries and a database of over 16 billion data points from proprietary and publicly available data. Millions of learning algorithms are used, which factor in the most recent global events.

• RevenueFlow – provides accurate results for demand and forecast sales and revenue projections.

• CostFlow – to enhance product line profitability and improve supply chain and procurement outcomes.

Figure 1. provides a diagram of the Complete Intelligence Platform

Figure 1: Complete Intelligence Platform by Complete Intelligence.

Market data is ingested from multiple trusted data sources like national statistical agencies, multilateral banks, multilateral government bodies, commodities exchanges, bilateral trade bodies and combined with the client’s data from their general ledger. A multi-layer testing and validation process used to ensure the accuracy of the data to be used in any forecast. Third-party data is
gathered via internet spiders and APIs.

The platform provides an integrated global model to ensure that actions in one market, country, or sector of the economy are reflected elsewhere in markets, industries, and the global economy.
International trade, economic indicators, currencies, commodity prices, and equity indices are all factored in to create a proxy of the global economy.

A comprehensive list of futures, currencies, and market indices is covered and accessed through a highly graphical and easy-to-use interface. Almost 1,000 assets, with historical data from 2010 and
forecasts over a one-year horizon, are provided. More assets are being added all the time.

The platform is designed around three attributes:
• A globally integrated model
• A data-driven process without human intervention in the output
• A simple means of interfacing with the platform.

The platform can be connected to existing ERP systems and automatically upload pricing data from the general ledger at a very granular level for each item.

The Complete Intelligence Platform supports a variety of use cases:
• Supply Chain & Purchasing Optimization – help lower costs, anticipate risks, and provide input to sourcing strategies.
• Sales and market entry strategies – by identifying higher growth markets and optimizing resources
• Strategic Financial Planning – identifying growth markets and fine-tuning resource allocations in each market to minimize exposure to currency fluctuations.
• Mergers and acquisitions – provide a snapshot of cost structures and projections of future costs and profitability of target acquisitions.

Forecast accuracy has rapidly improved, and error rates are now around 2%
Nash’s persistence has resulted in significant levels of forecasting accuracy. A twelve-month forecast now sees error rates around 2%, which gives users considerable confidence compared with traditional methods, where the error rates are often above 35%.

As well as dramatically improving forecast accuracy on markets, revenues, and costs, the onboarding process to going live is a matter of a few weeks. After that, forecasting takes hours, not months.

Current position

Successes to date

While still a relatively new company, Complete Intelligence has already proved its value to several large companies.

• A major petrochemical company wanted to improve its predictive intelligence capability for feedstocks and refined products. They asked Complete Intelligence to examine nine categories across crude oil, gasoline, diesel, natural gas, and gas-to-liquid (GTL) products. Monthly forecast averages are provided by category with extremely low differences from actual results on the order of 3% or less.

• A global furniture company wanted a more explicit link between their sales and revenue planning and their sales teams in China. Complete Intelligence built a sales forecasting model that more clearly identified and utilized market demand drivers and connected these directly to their business. An analytics-based approach to identify the drivers of sales by city and industry. Complete Intelligence built a city and industry-level forecasting tool that determined the company’s growth trajectory and provided recommendations to support the direction and transition of their sales teams.
• A global chemicals company needed a better understanding of the trends for costs in their supply chain and a more precise way to manage margin expansion and contraction at the bill of material level. Complete Intelligence was commissioned to forecast factor inputs and currencies for the key categories. The forecasts were calibrated based on the component make-up of the bill of materials. This enabled the client to identify the direction of the materials pricing and the impact on their BOM. Through the process, the client learned how to anticipate cost movements and protect margins.

Current go-to-market model

Complete Intelligence sells directly to large organizations, mainly targeting CFOs and COOs with a broad view of their companies and strategic decisions.

The company also has strategic partnerships with Microsoft and is listed on the Azure Marketplace and with Oracle as part of the Oracle for Startups program and hosted on OCI.

Other partnerships with Bloomberg and Refinitiv allow for exchanging financial and market data and connection to their platforms.

More transparent accuracy reporting so customers can view accuracy/error for every line item
More robust and flexible data visualization for clients to utilize Complete Intelligence forecasts within their visual narratives
More sophisticated data science to account for detailed sentiment and other qualitative factors
Do-it-yourself forecasts for customers to do ad hoc forecasts for any data at any time. This will enable teams within a company to do their own sophisticated, reliable forecasts without waiting on their in-house market analysis or forecasting team with complicated macros and massive spreadsheet workbooks
Embedding Complete Intelligence forecast APIs into ERP and accounting software.

Oracle Cloud Infrastructure and the Oracle for Startups program prove their value to Complete Intelligence
When asked what he felt about the relationship with Oracle and the Oracle for Startups program, Nash said, “Oracle Cloud Infrastructure is very flexible and secure. The Oracle for Startups team has been great. Oracle has been the most responsive and helpful of all our partnerships, connecting us to the right people to help with marketing, sales, or technical questions. I really feel that they want
us to succeed. I’m a huge advocate of the Oracle for Startups program.’’

CX-Create’s viewpoint
The Complete Intelligence Platform addresses a fundamental business need

Providing a global proxy model on markets, commodities, currency fluctuations, and many other aspects and making this easily accessible for business people will significantly improve strategic
investment and procurement decisions. The emphasis on accurate and timely data supported by ML models will make it easier for business people to make informed decisions, stripped of personal
bias. Digital transformation should lead to a more agile and responsive organization. The more progressive organizations will want highly attuned external signals that are constantly updated,
enabling them to de-risk investment decisions and optimize resources for growth. Complete Intelligence provides for that.

Summary details
Table 1: Fact sheet

News Articles

China’s Belt And Road Has Failed. TONY NASH In Conversation With Daniel Lacalle

Post author By admin
Post date November 4, 2021

Tony Nash joins Daniel Lacalle in a discussion on the rise of the machines in a form of AI and machine learning and how Complete Intelligence helps clients automate budgeting with better accuracy using newer technologies like now casts. How GDP predictions are actually very erroneous yet nobody gets fired? And how about China’s GDP as well, and why it’s different from other economies? All these and so much more in markets in this fun discussion.

The video above is published by Daniel Lacalle – In English.

Show Notes

DL: Hello everyone and welcome to this podcast. It is a great pleasure to have somebody that you should actually follow in social media on Twitter, Tony Nash. He is somebody that you definitely need to need to look for because it has very very interesting ideas. Tony, how are you?

TN: Great, thanks Daniel. Thanks so much for having me today.

DL: It’s a tremendous pleasure as I said I was very much looking forward to to have a chat with you. Please introduce a little bit yourself. A little bit to our audience and let us know what is it that you do.

TN: Sure, thanks Daniel. My name is Tony Nash. I live in Houston, Texas. I’ve spent actually most of my life outside of the U.S. I spent most of my 20s in Europe, North Europe, the UK, Southern Europe and from my 30s to almost the end of my 40s I was in Asia. And so you know being in the U.S., Europe and Asia has really given me personally an interesting view on things like trade economics markets and so on and so forth.

During that time I was the global head of research for the economist out of London, I was based in Singapore at the time. Led the global research business. I moved from there to lead Asia consulting for a firm called IHS Markit which is owned by S&P now.

And after that I started my current firm Complete Intelligence which is a machine learning platform. We do global markets currencies, commodities, equity indices, economic concepts. We also do corporate revenue and expense forecasting so we’ll automate budgeting for large multinational firms.

DL: Wow! amazing. Truly amazing. You probably have a very interesting viewpoint on something that a lot of the people that follow us have probably diverging views. Know the situation about the impact of algorithms in the market the impact of high frequency trading and machines in markets.

We had a chat a few months ago with a professor at the London School of Economics that he used to invite me to his year-end lectures to to give a master class. And he mentioned that he was extremely concerned about the almost the rise of the machines. What is your view on this?

TN: I think so an Algo is not an Algo, right? I mean, I think a lot of the firms that are using Algo’s to trade are using extremely short-term algorithmic trading say horizons. Okay? So they’re looking at very short-term momentum and so on and so forth. And that stuff has been around for 10 plus years, it continues to improve. That’s not at all what we do we do monthly interval forecasts, Okay?

Now, when you talk to say an economist they’re looking at traditional say univariate and multivariate statistical approaches, which are kind of long-term trendy stuff. It’s not necessarily exclusively regression, it gets more sophisticated than that.

When we talk to people about machine learning, they assume we’re using exclusively those kind of algorithms. It’s not the case. There’s a mix we run what’s called an ensemble approach. We have some very short-term approaches. We have some longer-term traditional say econometric approaches. And then we use a configuration of which approach works best for that asset or that revenue line in a company or that cost line or whatever for that time.

So we don’t have let’s say, a fixed Algo for gold, Okay? Our algorithm for the gold price is continually changing based upon what’s happening in the market. Markets are not static, right? Trade flows economics, you know, money flows whatever they’re not static. So we’re taking all of that context data in. We’re using all of that to understand what’s happening in currencies, commodities and so on, as well as how that’s impacting company sales. Down to say the department or sub department level.

So what we can do with machine learning now. And this is you know when you mentioned should we fear the rise of the machines. We have a very large client right now who has hundreds of people involved in their budgeting process and it takes them three to four months to do their budgeting process. We’ve automated that process it now takes them 72 hours to run their annual budgeting process, okay? So it was millions of dollars of time and resources and that sort of thing. We’ve taken them now to do a continuous budgeting process to where we churn it out every month. So the CFO, the Head of FP&A and the rest of the say business leadership, see a refresh forecast every month.

Here’s the difference with what we do, compared to what a lot of traditional forecasters and machine learning people do, we track our error, okay? So we will as of next month have our error rates for everything we forecast on our platform. You want to know the error for our gold price forecast, it’ll be on there. You’ll know the error for our Corn, Crude, you know, JPY whatever, it’s on there. So many of our clients use our data for their kind of medium term trades so they have to know how to hedge that trade, right? And so if we have our one, three month error rates on there, something like that it really helps them understand the risk for the time horizon around which they’re trading. And so we do the same for enterprises. We let them know down to a very detailed level to error rates in our forecast because they’re taking the risk on what’s happening, right? So we want them to know the error associated with what they’re doing with what we’re doing.

So coming out of my past at the economist and and IHS and so on and so forth. I don’t know of anybody else who is being transparent enough to disclose their error rates to the public on a regular basis. So my hope is that the bigger guys take a cue from what we’re doing. That customers demand it from what we’re doing. And demand that the larger firms disclose their error rates because I think what the people who use information services will find is that the error rates for the large firms are pretty terrible. We know that they’re three to seven times our error rates in many cases but we can’t talk about that.

DL: But it’s an important thing. What you’ve just mentioned is an important thing because one of the things that is repeated over and over in social media and amongst the people that follow us is well, all these predictions from the IMF, from the different international bodies not to the IMF. Actually the IMF is probably one of the one that makes smaller mistakes but all of these predictions end up being so aggressively revised and that it’s very difficult for people to trust those, particularly the predictions.

TN: Right. That’s right.

DL: And one of the things that, for example when we do now casts in our firm or when with your clients. That’s one of the things that very few people talk about, is the margin of error is what has been the mistake that we have made in the in that previous prediction. And what have we done to correct it because one might probably you may want to expand on this. Why do you think that the models that are driving these now cast predictions from investment banks in some cases from international bodies and others? Are very rarely revised to improve the prediction and the predictability of the of the figures and the data that is being used in the model.

TN: It’s because the forecasters are not accountable to the traders, okay? One of the things I love about traders is they are accountable every single day for their PNO.

DL: Yeah, right.

TN: Every single day, every minute of every day they’re accountable for their PNO. Forecasters are not accountable to a PNO so they put together some really interesting sophisticated model that may not actually work in the real world, right? And you look at the forward curves or something like that, I mean all that stuff is great but that’s not a forecast, okay? So I love traders. I love talking to traders because they are accountable every single day. They make public mistakes. And again this is part of what I love about social media is traders will put their hypothesis out there and if they’re wrong people will somewhat respectfully make fun of them, okay?

DL: Not necessarily respectfully but they will.

TN: In some cases different but this is great and you know what economists and industry forecasts, commodity forecasters these guys have to be accountable as well. I would love it if traders would put forecasters up to the same level of criticism that they do other traders but they don’t.

DL: Don’t you find it interesting? I mean one of the things that I find more intellectually dishonest sometimes is to hear some of the forecasters say, well we’ve only made a downgrade of one point of one percentage point of GDP only.

TN: Only, right. It’s okay.

DL: So that is that we’ve grown accustomed to this idea that you start the year with a prediction of say, I don’t know three percent growth, which goes down to below two. And that doesn’t get anybody fired, it’s sort of like pretty much average but I think it’s very important because one of the things. And I want to gather your thoughts about this. One of the things that we get from this is that there is absolutely no analysis of the impact of stimulus packages for example, when you have somebody is announcing a trillion dollar stimulus package that’s going to generate one percent increase in trendline GDP growth it doesn’t. And everybody forgets about it but the trillion dollars are gone. What is your thoughts on this?

TN: Well, I think those are related in as much as… let’s say somebody downgraded GDP by one percent. What they’re not accounting for, What I think they’re not accounting for is let’s say the economic impact kind of multiplier. And I say that in quotes for that government spending, right? So in the old days you would have a government spending of say you know 500 billion dollars and let’s say that was on infrastructure. Traditionally you have a 1.6 multiplier for infrastructure spend so over the next say five years that seeps into the economy in a 1.6 times outs. So you get a double bang right you get the government spending say one-to-one impact on the economy. Then you get a point six times that in other industries but what’s actually happened.

And Michael Nicoletos does some really good analysis on this for China, for example. He says that for every unit of say debt that’s taken out in China, which is government debt. It takes eight something like eight units of debt to create one unit of GDP. So in China for example you don’t have an economic multiplier you have an economic divisor, right?

DL: Exactly.

TN: So the more the Chinese government spends actually the less GDP growth which is weird, right? But it tells me that China is an economy that is begging for a market. A real market, okay? Rather than kind of central planning and you and Europe. I’m sure you’re very familiar with the Soviet Union. I studied a lot of that in my undergrad days very familiar with the impact of central planning. China there’s this illusion that there is no central planning in China but we’re seeing with the kind of blow-ups in the financial sector that there is actually central planning in China.

And if you look at the steel sector you look at commodity consumption, these sorts of things it’s a big factor of china still, right? So but it’s incredibly inefficient spending. It’s an incredibly inefficient way and again it’s a market that is begging for an open economy because they could really grow if they were open but they’re not. They have a captive currency they have central planning and so on and so forth.

Now I know some of the people watching, you’re going to say you’ve never been to China, you don’t understand. Actually I have spent a lot of time in China, okay? I actually advise China’s Economic Planners for about a year and a half, almost two years on the belt and road initiative. So I’ve been inside the bureaucracy not at the high levels where they throw nice dinners. I’ve been in the offices of middle managers for a long time within the Chinese Central Government so I understand how it works and I understand the impact on the economy.

DL: Don’t you think it’s interesting though that despite the evidence of what you just mentioned. And how brutal it has been because it’s multiplied by 10. How many units of debt are required to generate one unit of GDP in a little bit more than a decade? Don’t you find it frustrating to read and hear that what for example the United States needs is some sort of central planning like the Chinese one. And that in fact the the developed economies would be much better off if they had the type of intervention from from the government that China has?

TN: Sure, well it’s it’s kind of the fair complete that central bankers bring to the table. I have a solution. We need to use this solution to bring fill in the blank on desired outcome, okay? And so when central bankers come to the table they have there’s an inevitability to the solution that they’re going to bring. And the more we rely on central bankers the more we rely on centralized planning. And so I’ve had so many questions over the last several years, should the us put forward a program like China’s belt and road program, okay?

We know the US, Europe, the G20 nobody needs that, okay? Why? Because Europe has an open market and great companies that build great infrastructure. The US has an open market and although European infrastructure companies are better. The US has some pretty good companies that build infrastructure in an open market. So why do we need a belt and road program? Why do we need central planning around that? And we can go into a lot of detail about what’s wrong with the belton road and why it’s not real, okay? But that type of central planning typically comes with money as the as kind of the bait to get people to move things. And so we’re already doing that with the FED and we’re already doing that with treasure with money from the treasury, right?

And if you look at Europe you’re doing it with the ECB. You’re doing it with money from finance ministries. The next question is, does the government start actually taking over industries again? And you know maybe not and effectively in some ways they kind of are in some cases. And the real question is what are the results and I would argue the results are not a multiplier result they are a divisor result.

DL: Absolutely. Absolutely it is we saw it for example. I think it’s, I mean painfully evident in the junk plan in Europe or the growth and jobs plan of 2009 that destroyed four and a half million jobs. It’s not easy to to achieve this.

TN: You have to try to do that.

DL: You have to really really try it, really try.

I think that you mentioned a very important factor which is that central banking brings central planning because central banks present a program of monetary easing of monetary policy. And they say well we don’t do fiscal policy but they’re basically telling you what fiscal policy has to be implemented to the point that their excuse for the lack of results of monetary policy tends to be that the that the transmission mechanism of monetary policy is not working as it should. Therefore because the demand for credit is not as much as the supply of money that have invented. They say, well how do we fill in the blank? Oh it has to be government spending. It has to be for planning. It has to be so-called infrastructure spending from government.

You just mentioned a very important point there is absolutely no problem to invest in infrastructure. There’s never been more demand for a good quality infrastructure projects from private equity, from businesses. But I come back to the point of of central banks and a little bit about your view. How does prolonging easing measures and maintaining extremely low rates affect these trends in growth and in these trends in in productivity?

TN: Well, okay, so what you brought up about central banks and the government as the transmission mechanism is really important. So low interest rates Zerp and Nerp really bring about an environment where central banks have forced private sector banks to fail as the transmission mechanism. Central banks make money on holding money overnight, that’s it. They’re not making money necessarily or they’re not doing it to successfully to impact economies. They’re not successfully lending out loans because they say it’s less risky buying bonds. It’s less risky having our money sit with the Fed. It’s less risky to do this stuff than it is to loan out money. Of course it’s less risky, right? That’s goes without saying.

So you know I think where we need to go with that is getting central banks out of that cycle is going to hurt. We cannot it… cannot hurt, well I would say baby boomers in the West and and in Northeast Asia which has a huge baby boomer cohort. Until those guys are retired and until their incomes are set central banks cannot take their foot off the gas because at least in the west those folks are voters. And if you take away from the income of that large cohort of voters then you’ll have, I guess I think from their perspective you’ll have chaos for years.

So you know we need to wait until something happens with baby boomers. You tell central banks and finance ministries or treasuries will kind of get religion and what will happen is behind baby boomers is a small cohort generally, okay? So it’s that small cohort who will suffer. It’s not Baby Boomers who will suffer. It’s that small cohort who will suffer. It’s the wealth of that next generation that Gen x that will suffer when central banks and finance ministries get religion.

So we’re probably looking at ten more years five more years of this and then you’ll see kind of… you remember what a rousing success Jeff Sax’s shock therapy was, right?

DL: Yeah.

TN: So of course it wasn’t and it’s you know but it’s gonna hurt and it’s gonna hurt in developed countries in a way that it hasn’t hurt for a long time. So that kind of brings to the discussion things like soundness of the dollar, status of the Euro that sort of thing. I think there are a lot of people out there who have this thesis. I think they’re a little early on it.

DL: Yeah, I agree.

TN: So economists you know these insurance people see it from a macro perspective but often they come to the conclusion too early. So I think it’s a generational type of change that’ll happen and then we start to see if the US wants the dollar to remain preeminent. They’re going to have to get religion at the central bank level. They’re going to have to get religion at the fiscal level and really start ratcheting down some of the kind of free spending disciplines they’ve had in the past.

DL: Yeah, it’s almost inevitable that you’re in a society that is aging. The net prison value of bad decisions for the future is too positive for the voters that are right now with the middle age, in a certain uh bracket of of age. Me, I tried the other day my students I see you more as the guys that are going to pay my pension than my students. So yeah…

TN: But it’s you and me who will be in that age bracket who will pay for it. It’s the people who are 60 plus right now who will not pay for it. So they’ll go through their lives as they have with governments catering to their every need, where it’s our age that will end up paying for it. So people our age we need to have hard assets.

DL: Absolutely.

TN: You know when the time comes we have to have hard assets because it’s going to be…

DL: That is one of one of the mistakes that a lot of the people that follow us around. They they feel that so many of the valuations are so elevated that maybe it’s a good time to cash in and simply get rid of hard assets, I say absolutely the opposite because you’ve mentioned a very important thing which is this religious aspect that we’ve that we’ve gotten into. And I for just for clarity would you care to explain for people what that means because…

TN: I say get religion? I mean to become disciplined.

DL: I know like you because that is an important thing.

TN: Yes, sorry I mean if anybody but to become disciplined about the financial environment and about the monetary environment.

DL: Absolutely because one of the things that people tend to believe when you talk about religion and the the state planners religion and and central bank’s religion is actually the opposite. So I wanted to write for you to very make it very clear. That what you’re talking about is discipline you’re not talking about the idea of going full-blown MMT and that kind of thing.

TN: No. I think if there is if there is kind of an MMT period, I think it’s a I don’t think it’s an extended period. I think it’s an experiment that a couple of countries undertake. I think it’s problematic for them. And I think they try to find a way to come back but…

DL: How do you come back from that because one of the problems that I find when people bring the idea of well, why not try. I always, I’m very aware and very concerned about that thought process because you know I’ve been very involved in analyzing and in helping businesses in Argentina, in Hawaii, in Brazil and it’s very difficult to come back. I had a discussion yesterday with the ex-minister of economy of Uruguay and Ignacio was telling me we started with a 133 percent inflation. And we were successful in bringing it down to 40 and that was nine years.

TN: Right. So, yeah I get how do you come back from it look at Argentina. look at Zimbabwe. I think of course they’re not the Fed. They’re not you know the EU but they are very interesting experiments when people said we’re going to get unhinged with our spending. And we’re going to completely disregard fundamentals. Which I would say I would argue we are on some level disregarding fundamentals today but it’s completely you know divorced from reality. And if you take a large economy like the US and go MMT it would take a very long time to come back.

DL: Absolutely.

TN: So let’s let’s look at a place like China, okay? So has China gone MMT? Actually, not really but their bank lending is has grown five times faster than the US, okay? So these guys are not lending on anything near fundamentals. Sorry when I say five times faster what I mean is this it grew five times larger than the bank lending in the US, okay? So China is a smaller economy and banks have balance sheets that are five times larger than banks in the US. And that is that should be distressing followers.

DL: Everybody say that the example of China doesn’t work because more debt because it’s growing faster what you’ve just said is absolutely critical for for some of our followers.

TN: Right, the other part about China is they don’t have a convertible currency. So they can do whatever they want to control their currency value while they grow their bank balance sheets. And it’s just wonderland, it’s not reality so if that were to happen there are guys out there like Mike Green and others who look at a severe devaluation of CNY. And I think that’s more likely than not.

DL: Yeah, obviously as well. I think that the the Chinese government is trying to postpone as much as it can the devaluation of the currency based on a view that the imbalances of the economy can be sort of managed through central planning but what ends up happening is that you’re basically just postponing the inevitable. And getting a situation in which the actual devaluation when it happens is much larger. It reminds me very much. I come back to the point of Argentina with the fake peg of the peso to the dollar that prolonging it created a devastation from which they have not returned yet.

TN: Right. And if you look at China right now they need commodities desperately, okay? Metals, they need energy desperately and so on and so forth. So they’ve known this for months. So they’ve had CNY at about six three, six four to the dollar which is very strong. And it was trading a year ago around seven or something like that. So they’ve appreciated it dramatically and the longer they keep it at this level. The more difficult it’s going to be on the other side. And they know it these are not stupid people but they understand that that buying commodities is more important for their economy today because if people in China are cold this winter and they don’t have enough nat gas and coal then it’s going to be a very difficult time in the spring for the government.

DL: And when you and coming back to that point there’s a double-edged sword. On the one side you have a currency that is out to free sheet are artificially appreciated. On the other side you also have price controls because coal prices are limited by the government. And therefore you’re creating on the one hand a very big monetary hole and on the other hand a very big financial hole in the companies that are selling at a loss.

TN: That’s true but I would say one slight adjustment to that things like electricity prices are controls. When power generators buy coal, they buy that in a spot market, okay? So coal prices have been rising where electricity prices are highly regulated by the government this is why we’ve seen blackouts and brownouts and power outages in China. And why it’s impacted their manufacturing base because they’re buying coal in a spot market and then they’re having to sell it at a much lower price in the retail market.

And so again this is the problem with central planning this is the problem with kind of partial liberalization of markets. You liberalize the coal price but you keep the electricity price regulated and if you don’t have the central government supporting those power plants they just blow up all over the place. And we’ve seen the power generators in the UK go bankrupt. We saw some here in Texas go bankrupt a couple years ago because of disparities like that and those power generators in the UK going bankrupt that’s the market working, right? So we need to see that in China as well.

DL: Yeah, it’s a very very fascinating conversation because on the other hand for example in Europe right now with the energy shortage we’re seeing that a few countries Spain, France, etc. are actually trying to convince the European Union, the European Commission to try to get into a sort of intervened market price in the in the generation business. Which would be just like you’ve mentioned an absolute atrocity very very dangerous.

TN: This creates a huge liability for the government.

DL: It creates a massive liability for the government. This is a key point that people fail to understand the debate in the European union is that, oh it’s a great idea because France has this massive utility company that is public. And therefore there’s no risk it had to be bailed out twice by the taxpayers. People tend to forget that you’re paying for that.

TN: But again this is what’s that block of voters who doesn’t really care about the impact 10 or 20 years down the road. That’s the problem. There’s a huge block of voters who don’t really care what the cost is because the government’s going to borrow money long-term debt. And it’s going to be paid back in 10 or 20 years and the biggest beneficiaries of this and the people on fixed incomes they actually don’t care what the cost is.

DL: Yeah, yeah exactly, exactly. There’s this fantastic perverse incentive to pass the bill to the next generation. And that obviously is where we are right now. Coming back to the point of the infrastructure plans and the belt and road plan. What in your view are the the lessons that we must have learned or that we should be learning from the Belgian road initiative?

TN: So here’s a problem with the Belton road and I had a very candid discussion with a senior official within China’s NDRC in probably 2015 which was early on, okay? And this person told me the following they said the Belgian road was designed to be a debt financed plan. What’s happening now, and again this was six or seven years ago, very early on in the in the belts and road dates. They said the beneficiary countries are pushing back and forcing us to take equity in this infrastructure, okay?

Now why does that matter well the initial build out of infrastructure is about five percent of the lifetime cost of that asset, okay? So if you’re if China is only involved in the initial build out they’re taking their five percent, it’s a loan and they get out. If they’re equity holders in that let’s say they’re 49 equity holders in an Indonesian high-speed rail then they become accountable for part of that build-out. And then they have to maintain the other 95 of the cost for the next 30 to 50 years. So they thought they were going to be one and done in and out. We do this infrastructure we get out they owe us money and it’s really clean what’s happened is they’ve had to get involved in the equity of those assets.

And so I’ve since had some uh government officials from say Africa ask me what do we do with the Belton road with china? Very simple answer force them to convert the debt to equity, okay? They become long-term involved on a long-term basis. They become involved in those assets and then they’re have a different level of interest in them in the quality maintenance and everything else but they’re also on the long-term basis accountable for the costs.

So they don’t just build a pretty airport that and I’m not saying this necessarily happens but they don’t just build a pretty airport that falls apart in five years, okay? They then have to think about the long-term impacts and long-term maintenance costs of that airport, right? And so but you know the original design of the Belton road was debt financing. Mobilizing workers and so on and so forth what it’s become is a mix of debt and equity financing. And that’s not what the Chinese government has wanted.

So I’ve been telling people for three or four years the Belton road is dead, okay? And people push back me and say no it’s not, you know think tank people or whatever. But they don’t understand the fundamental fact of how the Belton road was designed it was designed as a one-and-done debt financed infrastructure build out it’s become a long-term investment all around the world. So it’s a different program. It’s failed, okay?

They’re not going to make the money they thought yes they’ll keep some workers busy but they’re not going to make the money they thought. All of those assets, almost all those assets are financed in US dollars, okay? So they’re not getting their currency out. It’s not becoming an international unit like they had hoped. They’re it’s not they’re not clean transactions and so on and so forth. So this is what’s happened with the Belgian road. So the lesson learned is they should have planned better. And they should have had a better answer to you become an equity owner. And uh

I think you know if any western governments want to have kind of a belt and road type of initiative. They’re going to have to contend with the demand from some of these countries that they become equity owners. And I think that’s a bad idea for western governments to be equity owners in infrastructure assets so you know this is this is the problem.

Japanese have taken a little bit different because of where the Yen is and because of where interest rates are in Japan. Japanese have basically had kind of zero interest or close to zero interest on the infrastructure they’ve built out. And so they haven’t gone after it as aggressively as China has. They’ve had a much cleaner um structure to those agreements. And so they’ve been, I think pretty successful in staying out of the equity game and staying more focused on the debt financing for their infrastructure initiatives.

DL: Oh, absolutely big lesson, big lesson there because the we see now that the vast majority of those projects are impossible to the debt is impossible to be repaid. There’s about 600 billion dollars of unpayable debt out there. And we also have the example from from the internationalization of the French, Spanish, Italian companies into Latin America that they fell into the same trap. They started with a with a debt-financed infrastructure build type of clean slate program that ended up owning equity. And in some cases with nationalizations hopefully that will not…

TN: And watch for debt to equity conversions in these things. It’s good. There’s going to be huge pressure because the Chinese say the exit bank the CDB. A lot of these organizations are going to be forced to convert that debt to equity and then unload it on operating companies in China. They’re not going to want to do it but we’re going to start to see more and more pressure there over the next couple of years.

DL: Great! Well I’m absolutely convinced that will happen. Tony, we’ve run out of time so it’s been an incredible conversation lots of things that are very very interesting for our followers. We will give all the details to follow you and to get more information about your company in the details of the of the video. And thank you so much for your time. I hope that that we will be able to talk again in a not too distant future.

TN: Thank you Daniel. Anytime. Thank you so much.

Visual (Videos)

Dollar Doldrums Before the Surge

Post author By admin
Post date July 27, 2020

This is an original publication by Real Vision and was posted on Youtube at https://www.youtube.com/watch?v=AHq0n_Bm7YA

This week Real Vision use Refinitiv’s best-in-class data to discuss the outlook for the US dollar and commodities with Tony Nash, CEO and Founder of Complete Intelligence, a forecasting company across currencies, commodities and equity indexes. Whilst many investors are expecting fireworks, Tony expects asset prices to remain subdued for now, before exploding back into life after the US election.

See the full series and access expert data-driven insights and news from Refinitiv: https://refini.tv/2Tq42o2

Show Notes

RV: Many of us make sweeping statements about the direction that markets will take, but accurate forecasting across a wide range of assets is a rare entity and has been made particularly difficult today by the distortions of central bank activity. That’s a financial forecasting challenge. Forecasting company Complete Intelligence has joined forces with Refinitiv to provide companies and investors with an outlook on assets such as currencies and commodities. In this week’s Big Conversation, I talk to founder and CEO Tony Nash about the prospects for the US dollar, commodities and also trade relations between the US and China.

Tony, great to see you.

TN: Thank you.

RV: Thanks very much for coming on The Big Conversation. And today we got to talk about a lot of things. We’re gonna talk about the dollar, currencies in general and a bit of commodities. But before we get into that, for those who do know you, could you give me a little bit about your background, what you’ve been doing and what you’re currently doing?

TN: I’ve been in research for couple of decades, actually, and in the past I led global research for a UK based firm called The Economist, I led Asia Consulting for a firm called IHS Market, and I jumped out to start Complete Intelligence about four or five years ago. Initially we were based in Singapore and now we’re based in Houston, Texas.

So Complete Intelligence is an artificial intelligence platform or a globally integrated AI platform. We help companies make better cost purchasing and revenue decisions. As a part of that, of course we work with raw materials, currencies, futures, commodities and even equity indices. All of this works in a layered environment so that we understand the interdependencies of supply chains and revenues and sales.

We go live on Refinitiv this month in July, and Refinitiv is a very positive partner for us. They’re great to work with. Our forecasts will be distributed on the Refinitv platform for purchase by Refinitiv clients.

RV: A lot of these forecasts are completely wrong, but your forecasts have been relatively accurate. They are pretty accurate, which is why I wanted this discussion. Your views on these commodities and currencies will be quite interesting. So how do you do that? What is it? What are the main inputs into your product?

TN: We started Complete Intelligence because my clients in my previous firms told me they can’t get good forecasting, whether it’s internal to their own firms or external from off the shelf information services firms. It’s definitely a financial forecasting challenge. What we found is generally external forecasters, whether they’re economists or banks or industry experts, typically have double-digit error rates on an absolute percentage error basis. Our average error rate is about 4.6 percent on a MAPE basis. We do much better generally than either internal forecasters or say industry experts, consensus forecasts.

What we do is we use what’s called an ensemble approach. We have a number of core methodologies that we use that build and learn scenarios for every iteration of our forecasts that we do. We do our forecast twice a month on the first of the month and mid-month. So we’re looking at thousands of methodological configurations for every line item that we forecast. So for example the dollar, we’ll look at between five and ten thousand configurations of methodologies to forecast the dollar. So that’s millions of calculations just for the dollar. And we do that for every line item foot.

Off the shelf, we have about 800 different assets that we forecast across currencies, commodities, equities. We also do economics and trade. So together it’s about 1.3 million line items that we forecast every month.

Obviously there are charts, so you can see the directional change in the lines. But we disclose the top relationships, six months ago, three months ago and this month. So you can see how those things change over time as well. That’s really a key part of understanding the market changing. If you see those relationships changing dramatically, then that’s a real indication. So if we look at last December, we saw things change dramatically and we saw that sometime ahead of that forecast. So we expected that dramatic change. When we expect, say, a mild change in October or a dramatic change in Jan/Feb, those relationships really do start to iterate because the market starts to restructure with every change.

RV: Tony you mentioned the dollar, ultimately. I always think of it as the apex predator of the financial market. You get the dollar right, you’re probably going to get a vast amount of the rest of your portfolio correct. Recently, the dollar had a lot of volatility very early on, but it’s actually been in a fairly kind of narrow range for a long period of time. At the moment, it’s testing the bottom of that range.

Let’s talk about the maybe the dollar index, the DXY, which is 57% Euro. Let’s talk about that first. Where do you see that going over the rest of the year and what do you see as the big drivers and the reasons for your view on the dollar?

TN: We see the dollar weakness continuing until about September. After September, we see a bit of strength coming back. And then in Q1, we start to see more dollar strength coming back. So obviously, monetary policy, economic questions, these sorts of things in the US are behind that, but also economic questions around other parts of the world. The dollar is doesn’t operate in a vacuum. So there are a number of inputs there, and we’re really worried about a lot. Big monetary policies in the US have been made and they’re working themselves out. But we’re worried about other parts of the world, specifically Europe and China. But we do see the dollar continue to weaken until about September, late August and September, after which we see a slight return to strength. And then once we hit Q1 of 2021, we start to see that as well.

RV: What are those key drivers? Because in some ways, people have been, I wouldn’t say caught offside, but actually the dollar has been weakening as the Fed’s been tightening its balance sheet. So as it’s been reducing a little bit of liquidity and the other central banks is still going for it. Which of the drivers is it? Is it liquidity driving? It is perception? Is it interest rate differentials? Is it real, real yields and real difference? What are the key drivers that mean that you think it’s going lower?

TN: I don’t know that there’s necessarily trust in the fact that the Fed is actually reducing its balance sheet. Is that temporary? I think there’s a belief that the Fed will do anything to keep markets up.

We all see this cynicism in the market every day, and so I’m not sure that there is a lot of trust right now of the Fed’s true intentions. We’re in a position where both the Fed and the Treasury will do anything to grow the U.S. economy through COVID. And once we get through COVID, different rules apply. But for now, they’ll do anything to get us through. That’s until we see some proof points about a policy that isn’t just kind of throw everything at it. We’ll start to see that in October. But for now, we’re still in that very skeptical position where the U.S. institutions, finance and monetary, isn’t really questioned at the moment because we’re in the middle of this unprecedented period.

RV: When people are looking at currencies, people say, OK, I can see all these negatives for the US, but then you think, “well hang on a minute, Europe has a lot of negatives.” When we talk about the dollar, what are the alternatives? So with the Euro, do you see therefore that because a big part of the dollar index is the euro, do you see the Euro going sort of 1-17 from where it is today, or do you see the Euro being challanged as well, and over what timeframe or not perhaps?

TN: The euro is challenged once they get through these meetings now. The issues with the Euro are many and I think we’ll see probably four to five months of difficulties for the Euro. After which, let’s say, the end of Q1 2021, I think we’ll start to see more strength in the Euro. But we just don’t see the justification for Euro strength right now, even on a relative basis with the dollar. We find it really challenging to see a bull case for the Euro until early next year.

So what are the alternatives? Things like Aussie dollar or things like Japanese yen, those are also alternatives, but again, it’s the ugly sisters right there. It’s difficult to pin down a winner.

RV: So when you’re talking about that dollar weakness, what are you really thinking here? Is It’s probably dollar weakness that’s commensurate with volatility in currencies remaining relatively subdued. It sounds like the alternative to, if you’ve got dollar weakness through to September, maybe beyond, but you haven’t really got Euro strength and maybe the strength comes in Yen and Aussie dollar. But overall, we really talking about grinding currencies and low volatility currencies, is that you think is the next few weeks, months?

TN: That’s right. And I don’t know that anybody is really confident to say currency A is the currency I’m going to place the next three months of my bets on. It’s all speculative, vol related trades, or at least that’s what we see. And until we start to get some good direction, typically when we see good direction, we see dollar strength. We don’t really see good direction coming back to markets until maybe December or Q1 of 2021.

RV: And do you think in terms of people who are looking for signs of things, that change is there a sequencing that you were looking for, for instance? Well, what I think we really saw last year was those very challenged emerging market currencies, in places like Turkey obviously Argentina, they tended to move first. Then you saw things like the Aussie dollar moving, sort of commodity based, slightly EM style, and then eventually that was shifted through. Do you think that’s still going to be the way to look at this? That if we want to, an early warning that currencies are on the move, do you think it’s going to be in the challenged currencies again first like maybe Brazil moving slowly through? Or do you see a different sequencing now with slightly different paradigm post-COVID?

TN: I think until the end of COVID, I think we’re looking at the same patterns. And again, I think part of that is COVID, part of that is the US election, part of that is what’s really going on with Chinese data. There are a number of different considerations, macro considerations that until we have a good idea of what the data actually mean. And let’s say what you know, what is the future of U.S. politics? I don’t think we’re really going to settle. And if you don’t know the future of U.S. economic policies, you really don’t know the future of Chinese economic policies. And so you have the two biggest economies in the world that have a big question mark around them for the next four or five months.

RV: When it comes to commodities, as I think commodities has been the first item on the Refinitiv platform, currencies coming at the end of this month. So as a sort of segway between one and the other, the Aussie dollar is often considered to be a very important part of the multi complex, even though it’s not a commodity itself. Is that one of the ones you think will have a bit of strength VS the Dollar over the shorter term as in the next couple of months? How do you feel the Aussie dollar is going to play out and what are the key players behind that?

TN: We do see strength in the Aussie dollar. I mean Aussie dollar had this amazing trip over the past five months right? We do see strength coming in, say, through the next two to three months in the Aussie dollar. Then we see it returning to the normal levels, kind of around 70 cents. So part of that is COVID related, part of that is obviously China related, as Australia and China re-figure out what their relationship is, their trading relationship and their diplomatic relationship.

There is a bit of risk because obviously, Australia exports a lot of commodities to China. And if that relationship isn’t there, then the underlying driver of their economy is in question. And so we do have some questions about the Aussie dollar and the sustainability of some of those exports for some short to medium term. But some of that quite frankly, is just diplomatic positioning more than reality. There’s a bit of volatility until we figure out exactly what that looks like, but we don’t expect a return to say, of the Fed March position and the volatility we saw there.

RV: When you look at the Aussie dollar, are you looking at real economy assets like copper and like oil? Because obviously these have had, we’ve seen oil, WTI’s closed its gap from the trade war, the oil war earlier in the year, copper is now back at a big, i think it’s the 10 year resistance level. How do you see these real economy assets performing over the next two, three months because it feels like we’re recovering, but we’re recovering from such a low place that it looks v shaped, but we’re not recovering, we’re not going to return to where we were. Doesn’t that put pressure on some of these currencies like the Aussie dollar, which rely on the real economy to get back to where it was? I think we’re back to where we were beginning of year with the Aussie dollar, but should not really be capping it?

TN: Yeah, it’s been kind of a foreshock of recovery. It’s not really an aftershock. It’s never really recovered yet, but we’ve started we’ve seen markets recover. So we do see, say the Brent and WTI really having strength over the next, say, to three to four months. After that I think there’s some questions around the sustainability of that. Short of a supply, more controls on supply I think we hit some levels where we’re we’re not quite sure where things will go and we may see those kind of pare some of their gains that we’ve seen since, say, the lows in April. Going into early twenty one, we may very well see some downside, not serious downside, but gradual downside to crude oil. We do believe that WTI has more legs than Brent going into Q4, but not much.

When we look at things like copper, which is very, very important to the Australian economy, that’s really looking strong until, say, December, Jan, after which again, twenty one, I think people really take stock of where markets have gone and start to question whether the value is really there, whether, say, manufacturing and transportation have caught up with the prices that we’ve hit. And if we don’t see things like consumer goods and consumer electronics hit their previous pace, if we don’t see airlines starting to hit they’re approaching their previous pace, going back online, I think we’re going to start to see some questions around that value. And that’s kind of our base case right now, is we’re not necessarily expecting those things to start to approach their previous levels, and what we’ve faced from the beginning of this is a demand problem. The demand problem that came as a result of government’s pulling the plug on their economies.

So when will that demand return? Is the big question. We do see it coming back, but not necessarily at the pace that markets have expected for the past couple of months. But that won’t necessarily hit investors for another three to four months, actually.

RV: How much of that is dependent on the furlough support scheme we see in place? The US went first, it went hard, it went in size, and it took Europe’s only just caught up about a month ago. Japan’s never really stopped, and China’s may been more reticent, but let’s say we get into a scenario where we see the furlough schemes running off at the end of this month in the US, and what if the U.S. decides not to come back too aggressively? But other markets where the current countries do or other regions do? Is that is that going to change the view materially or is this kind of a global context and kind of everyone lives and falls together as it where?

TN: Well, I think everyone lives and falls together. Look, it’s an election year in the U.S. of course, they’re gonna put out more money. I mean, it’s you can’t I don’t think you can in an election year say, oh, we’re going to be fiscally responsible no. There’s just no election works that way at all. So the U.S. will definitely come out with more support. And because the US is doing it, every other Treasury and finance ministry and central bank will say, well, the U.S. is doing it, so we’re gonna do it. So exactly what you say kind of they’ll all rise or fall together. Once the US election is over, that tail will kind of taper off and then we’ll see things really starting to fall to Earth again. We’re not saying anything dramatic, but we’ll start to see some of the steam come off post-election in the US.

RV: We’ve been focusing on the currencies and a little bit on the commodities, but in some ways what people worry about is that we’ve gone from this liquidity issue at the beginning of the second quarter of the year to potentially a solvency issue. So a real, real economy growth issue. And do you think that that is going to come to fruition? Because those that will have a very, very key impact on bond yields, and if you look at these major bonds particularly in the U.S., they’ve been struggling, I mean, that would merely making new all time lows in the U.S. fight it? Where do you see bond yields going? Because in some ways, the bond yield is the one that will tell us the true growth, the equity market told us, how much liquidity, where do you see bond yields going?

TN: I don’t think there’s any choice but for bonds to continue to fall until we see more solvency to the economy, that’s really it. And we’ve seen so many SME’s go out of business, we’ve seen a complete section of the U.S. economy just give up. And we are now on to kind of the medium term players who are keeping it together but maybe can’t in for three to four to five to six months if they don’t have more support from the central government in the US. Until we see the baton passed from government support to market support, which again, probably won’t happen until sometime in twenty one, you know, we’re going to have this question around solvency. Once the market takes over again, then I think we’ll be in a very good place, we’ll have cleared out a lot of fairly weak companies, we’ll see consolidation in sectors that weren’t really healthy, and then as we go into twenty one and the market takes over again, I think the path has really cleared for companies to do extraordinarily well.

RV: Something that you talked about in depth last year, generally, you sort of you talked about was the the impact or the underestimation of the impact of the trade war and relationships like that. How important do you think that will be? Because obviously the politics today is kind of quite visceral in this, you know, in the last couple of months. Do you think that that is more bark than bite or do you think that we’re going to go back to the worst of what we saw with the trade wars, which was almost also reflecting the difficult position that the Chinese economy was in prior to all this if we went back a year, 12 to 18 months?

TN: One view that I’m kind of moving toward is that potentially a trade war is actually over. So with COVID, at least North American companies have taken an assessment of their supply chains and said, hold on a minute, we have a highly centralized supply chain sitting in China and other parts of Asia. COVID’s come along and we haven’t really been able to get access to our goods.

We need to diversify our supply chain. Now, before the financial crisis in 2008, there was a strategy that manufacturing companies were pursuing called the China plus one, China plus two, China plus three strategy, where they would have part of their supply chain in China and part elsewhere in Asia. I think what we’re at now because after the financial crisis, people just double and tripled down on their China-centric supply chains because it was convenient and in their in their eyes at the time, less risky.

I think we’re in a position now where especially North American companies have said it’s very risky for us to have our North American and our European manufacturing based in China. We need to disaggregate, we need to have regional supply chains. We look at, for example, the amount of electronics supply chain that’s moving to Mexico, when we look at companies like TSMC, Taiwan Semiconductor, moving to the US, these are major generational movements of supply chains. That to me is a signal that the trade war is almost over, meaning both sides have said enough, we’re not going to do this.

That’s a very bad signal for China, and you could potentially be looking at kind of a Russia post-World War Two scenario where all the foreign investors who went into Russia in the nineteen thirties from the UK and the US and other guys, they gave up with World War Two and really never went back. And so China could potentially be looking at that type of scenario.

The big question mark is around kind of Angela Merkel and a bunch of European investors in China, what will they or leaders in China, what will their investors do? Will they regionalize in Europe, which is what was happening in the 90s? Or will they continue to double and triple down on China? If they do, the problem that Europe has is that China has to export even more deflation than they were exporting two or three years ago because they have the additional capacity that is not going to the US now. That is a serious risk for the hollowing out of European industry and European unemployment.

RV: By the sounds of it, the next few months therefore, across pretty much every asset should be relatively low volatility, so maybe still working out all the support that’s come into the system as it still moves its way through the global framework. But it sounds like at the end of this year, particular into Q1 of next year there could be some inflection points. How do people use your product to spot those inflection points? Because its those inflection points where people are going to really win or lose?

TN: The inflection points are really where the risk comes in. So in our partnership with Refinitiv, you know, people can use our product to understand, as you say, when are those inflection points, what’s the degree of those inflection points? With all of our outlooks, we have high base, low scenarios. And so, those clients can understand where we see things going and the range where we see those things going. Whether it’s a currency, commodity and equity market. And so, as you say, we see a larger inflection coming kind of mid Q1, but in the in the near term, we see kind of a small calibration coming in September, October.

RV: Whilst most people want to hear about fireworks, where prices are either going to break down or break out, the reality is that for most of the time, they tend to grind through ranges. For corporate planners and investors, accurate forecasts help to prepare for the unexpected without getting bogged down by sensationalism.

Complete Intelligence currently forecasts the commodity and currency volatility will remain suppressed, with the dollar drifting lower, helping push oil and copper prices higher. The first market wobble should appear in September and October, but the big inflection point is expected after the US election. Markets in the first quarter of 2021 are forecast to be challenged by a stronger U.S. dollar as the real economy impact of the COVID crisis emerges from beneath the flood of government support.

About Refinitiv: For new insights on artificial intelligence (AI), digitalization, big data, risk management, compliance, fighting financial crime and the future of trading and investing, visit our insights hub – http://refinitiv.com/perspectives. Refinitiv is one of the world’s largest providers of financial markets data and infrastructure, serving over 40,000 institutions in approximately 190 countries. It provides leading data and insights, trading platforms, and open data and technology platforms that connect a thriving global financial markets community – driving performance in trading, investment, wealth management, regulatory compliance, market data management, enterprise risk and fighting financial crime. https://www.refinitiv.com

About Real Vision™: Real Vision™ is the destination for the world’s most successful investors to share their thoughts about what’s happening in today’s markets. (Think of it like TED Talks for Finance.). Understand the complex world of finance, business and the global economy with real in-depth analysis from real experts.

Tags Big conversation, china us trade relations, china-us, commodities, currencies, dollar, financial forecasting challenge, real vision, refinitiv, tony nash, Trade relations, USD

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