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Dollar stays soft till year end

Tony Nash joins BFM 89.9 The Business Station for another discussion on the global markets — particularly the growing US market amidst the weakening dollar. Why is that? Is it about the vaccine optimisim, the 2020 US election, or the pending unemployment benefits? What about gold’s fast value upgrade — will this continue or is it too vulnerable to handle right now? And Euro is performing impressively against the dollar — should investors dive right in or still be cautious?

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/dollar-stays-soft-till-year-end on August 6, 2020.

 

BFM Description

Tony Nash, CEO Of Complete Intelligence tells us why markets in US are still hitting new highs while giving us his views on the direction of the US dollar and whether it makes a difference who sits in the White House this November.

 

Produced by: Mike Gong

 

Presented by: Khoo Hsu Chuang, Wong Shou Ning

 

Show Notes

 

BFM: For more insights into global markets, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. U.S. markets continue to break records. Now, how much of that is driven by vaccine optimism and a potential deal for unemployment benefits?

 

TN: I think there is a deal for unemployment benefits and it will continue to drive consumption. The disposable income that people had — that 600 extra dollars a week — really helped the consumer side of the economy stay afloat for the things that were open.

 

There is an expectation that if something similar passes, that it will help consumption in Q3. However, we see things like manufacturing employment are coming back quite strongly despite the ADP number that was out today. Services is lagging a bit largely because of restaurants and shops and etc., not being open so much. But it is on the expectation of a weakening dollar as well with both equity markets and commodities.

 

BFM: The same euphoria is happening to gold and it’s now something like 2,040 USD an ounce, one of the highest, if not the highest it’s ever been. Is it not vulnerable to a price correction, though?

 

TN: We don’t think it would be by much for some time because a weakening dollar is more reliant on central banks’ monetary policy. It’s likely that commodities will continue to rally. And the dollar has a lot of dedicated bulls. There may be a couple of hiccups before the end of the year, but we don’t see a whole lot slowing it down. Having said that, we don’t see a lot more headway to the upside. There’s some, but we don’t see like another 20 percent gain or something like that. It’s possible, but that’s not within our baseline expectation.

 

BFM: There’s even talk of three thousand dollars an ounce. You don’t think that’s going to happen, obviously?

 

TN: I think that’s possible. But not likely.

 

BFM: Meanwhile, the Euro has strengthened against the US dollar now. So is this, again, the weakening dollar rather than Euro strength? And what does this mean now for investors? Should they be more bullish on the Eurozone?

 

TN: A number of investors are bullish on the Eurozone because many of the countries in Europe are fully back to normal and and they’re doing quite well. So there is optimism about European companies, but it is also related to the weakening dollar. I think one of the other considerations around dollar weakness, whether it’s gold or euro or other things, is the uncertainty around the U.S. election.

 

I think priced into the dollar weakness is the possibility of a Biden win. And there is not a lot of excitement around a Biden economy. If there is clarity of a Trump win, Trump has done some interesting things in the economy and pulling back regulations and other things, it’s possible there will be more dollar strength.

 

BFM: Oil has been trading in a very tight range. API and US crude data showing a fall in inventories. Why isn’t prices rising more then?

 

TN: It’s demand. Yes, the supplies are falling, but the demand, it came back, but it is not continuing to rise as quickly as they had when they first started to open up. And until we start seeing things like flights happening again, business travel, personal travel, happening again in a big way, we’re not really going to see things like jet fuel consumption come back. That’s really where a lot of the growth is.

 

A lot of Americans are driving more in cars because things like mass transit… So I’m in suburban Houston, Texas. Right next to my office is a very large car park for commuters into the city. That car park has been closed since February. So the people who want to drive into the city will have to drive their own cars. There really isn’t a mass transit option. So individual consumption has risen because people who want to go to work have to drive themselves. But we don’t have things like jet fuel consumption that have come back anywhere close to where they were in January.

 

BFM: I want to come back to the US dollar. What’s your view on it? You expect it to continue to weaken? And if so, how has that changed your strategic asset allocation?

 

TN: Well, we really just turned. Through July, we expected the dollar to start to rally in October, November. But just in our forecast on Monday and we’re expecting a weakening dollar to the end of the year. So that market has evolved a bit where it’s tough for that asset to come back in value. And part of that is the veracity of the euro strength. We are a bit worried about the dollar value. Again, if we see a Trump win, which is it likely now? I don’t think we really know that. But if we do, we do expect that we’ll see some dollar strength to come back a bit earlier. If it’s a Biden win, we expect the dollar to remain weak, as you know, monetary policy and central bank and QE infinity, those sorts of things, will potentially be part of the economic plan.

 

So we don’t expect a strong dollar rally this year. It would be Q1 before we start to see some real strength in the dollar. We’re not expecting the dollar DXY, for example, to go into the mid 80s or anything like that. But we do expect it to remain weak over the next several months.

 

BFM: Friday sees US non-farm payrolls come out. Are you expecting the numbers to reflect this softening job market?

 

TN: You don’t necessarily see the job market softening. There are a couple of dynamics. As unemployment benefits dry up, people are going to have to start going back to work. So they probably won’t be as rich as they have been for the last few months. So people are going to have to get out and they’re going to have to work a bit more.

 

And we have also seen manufacturing come back pretty strongly. So, for example, one of our clients is an auto parts manufacturer in Michigan in the US. As auto makers pivoted to make ventilators, the auto parts business dried up. So these guys went from 400 workers to like 15 workers, like a dramatic cutback. Over the last three months, as of August, they’ll be back to 100 percent of their workforce working. So they’ve seen literally of the in their workforce utilization.

 

And we’ve spoken to a number of people who that’s what they’re seeing, and this is particularly on the manufacturing side, where they cut back dramatically in March, April, May. And since then, they’ve really started to build up pretty rapidly, given the extent of the cuts that they had to make in Q2.

 

BFM: All right. Thank you for your time. That was Tony Nash, CEO of Complete Intelligence, highlighting about the U.S. dollar rate. He expects it to remain soft until maybe when you’re recovering in the first quarter. And of course, that is also dependent on who might actually win or might be in the White House come November.

 

So let me bring this to the walking. And according to the Financial Times, Joe Biden is, you know, head and shoulders above Donald Trump in terms of the polls, which means in three months time Mr. Orangeman will be out of the White House. No more orange in the White House.

 

Yeah, but did you see those tweets that Donald Trump is trying to do to delay the elections?

 

Well, he has been questioning whether they are going to be reliable in the first place, right?

 

Yes. Well, we’ll be watching the space. I mean, it’s less than 100 days to the US presidential elections is going to be interesting times. I just wonder, you know, in the meantime, who’s really managing the United States? Because unfortunately, the COVID-19 cases just seem to get increasingly worse. But let’s hope they actually saw unemployment benefits deal quickly because otherwise the economy will really pay the price for it.

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Podcasts

Gold & Silver, Nature’s Bitcoin

Tony Nash joins BFM Malaysia for another look at the global markets, particularly discussing the “nature’s bitcoin,” which are gold and silver, the US Dollar outlook, if Tesla is a good buy right now, Microsoft, and others.

 

Listen to this podcast at https://www.bfm.my/podcast/morning-run/market-watch/gold-silver-natures-bitcoin

 

BFM Description

 

Tesla and Microsoft results were released last night but which company actually met expectations upon a closer look?

 

Tony Nash, CEO of Complete Intelligence helps us dissect the numbers while weighing in on the sharp rise on gold and silver’s which is defying the historical correlation between asset classes.

 

Produced by: Mike Gong
Presented by: Khoo Hsu Chuang, Wong Shou Ning

 

Show Notes

 

BFM: For more thoughts on what’s going on with markets, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now, markets had a choppy day last night, but still closing in the green on optimism of this spending bill and, of course, the vaccine. Now, are investors choosing to ignore the realities of what is clearly a weak, broader economy at their peril?

 

TN: Well, no. I think generally they’re trying to figure out how fast things will come back and when we look at some of the earnings, like Microsoft, they’re really, really good. And when we look at some things, like the rate at which people are coming back, say on the roads and other things, it’s looking positive. So have things got a little bit ahead of themselves? It’s possible, but I don’t necessarily think people are kind of ignoring the issues around COVID and other items.

 

BFM: Just to stay on that point a little bit, Tony. How much money do you think really will be put into the system as a result of this new spending bill? More importantly, Trump talked up, and I think allocated about two billion dollars to Pfizer for the COVID vaccine. Those two elements there, what kind of numbers in quantums can you throw into the mix here, Tony?

 

TN: I think you’re you’re looking at least at trillions. I don’t think it’ll be as large as the initial spending. I think it’ll be a bit of a tapering of the initial spending. But with the magnitude of spending to join with Pfizer and other vaccine manufacturers, they just want to be able to put a cap on this and say, “okay, as of a certain date, right now, it’s expected to be December. We’ll have a vaccine that‘ll put a limit on the risk and we can kind of set all of this stuff aside.”

 

BFM: And Tony, talking about the two bit results that came out last night. So there was Microsoft, which kind of mistreat, but Tesla, which beat. Are you a believer on Buford? Or do you actually have a preference?

 

TN: Tesla announced they’re building a factory in Texas, which is where I sit. So I’m very excited about it. But on a serious note, Tesla’s positive EPS report happened largely because they sold 428 million dollars of regulatory credits. So they’re not positive because of car sales. They’re positive because of selling regulatory credits. Investors have to look at that reality. Now, the other consideration for Tesla is it’s their fourth consecutive gap profit. So they’re now eligible for S&P 500 including. That may be a factor to pull some demand along for the stock if they are, in fact, put into the S&P 500.

 

BFM: For the benefit of the Tesla day traders. I think that’s nearly half a million of them on Robinhood. Tesla is now worth nearly 300 billion dollars, more than the entire European and American car sectors. Did you think this is a collapse waiting to happen, or do you think this going to be more upside?

 

TN: Do you know what? It’s yes. The problem with that kind of statement is it’s like there’s not even close to trading on fundamentals at Tesla. So the real question is, how excited will people get and when will that taper off? The real problem is wondering how long that excitement will be there because it’s fully sentiment. I mean, anybody who thinks Tesla trades on fundamentals. It’s really what are the expectations for next quarter’s earnings? That’s what Tesla’s trading on now.

 

Plus, a lot of excitement and a lot of Robin hood fiz. It really is sentiment based. When we see that sentiment subside, I think that’s when, I don’t think we can continue north of a three, four, 500 billion dollar valuation for a company like Tesla. As cool as it is, I think it’s very hard to continue with it.

 

BFM: And Tony, talking about things that have gone up, it’s gold and silver. Both precious metals have seen sharp rises in price levels. So what’s the reason behind the focus on these commodities? And the question, again, is this sustainable?

 

TN: Is it sustainable? Gold and silver are kind of nature’s cryptocurrency, right? They really are where sentiment goes if people are skeptical about the dollar or skeptical about risk. We saw the VIX down like two percent today. So we saw gold and silver kind of about even by end of the day. When risk is going down, gold and silver typically aren’t doing great. The dollar will stay weak for the next couple of months. But we do see bit of a dollar strength coming back later in the year. Those aren’t perfectly inverse relationships. But there really is question around what will the Fed do? If the Fed continues to expand the money supply, there is an expectation that more people will flock to gold and silver. I’m just not quite seeing that much left. But it’s possible that there is.

 

BFM: I’m not sure whether your software looks at this necessarily, but it shows for silver that the technical resistance is at 21 dollars an ounce and now it’s gone past that 22 and 3 quarters. They’re talking about twenty five dollars an ounce though. Would you agree with that prognosis?

 

TN: Yeah, we see serious resistance. I mean it’s possible. So we’ll hit 25, but we don’t necessarily see the incentive there for silver to continue to rise. We do see strong resistance at these levels. And it’s, you know, from our perspective, it’s fairly risky looking at those at the moment.

 

BFM: And Tony going back to the U.S. dollar, right? I mean, we are seeing weakness now. But you say you have expectations of it recovering towards the end of the year. What is that premise on, though?

 

TN: When the Fed and the Treasury slow down, when we start to see stability around COVID. Things like ICU beds in East Texas, there’s so much more availability. That’s like 20 percent more availability this week than there were last week. When we start to see more stability around what’s actually causing the risk in markets and there’s less of a need for the Fed and the Treasury to intervene, then we see stability in money supply.

 

And as the market recovers, we start to see or we would expect to see more velocity of the U.S. dollars. That’s kind of how quickly do people spend it, right? If we see stability in the money supply and more velocity in American spending, then that could be dollar strength. If there’s instability in, say, emerging markets or Europe or something like that, if the finance ministers could ever get it together in Europe, we’d see more strength in the Euro.

 

But there’s disharmony there and there are questions in some emerging markets. So if we see stability and velocity rise in the U.S., then we could see more investment come from overseas into the U.S., which would accelerate Dollars. We don’t necessarily expect strong dollar strength for a turn before the end of the year, but we do expect moderate dollar strength to come in before the end of the year.

 

BFM: All right. Thank you for your time, Tony. That was Tony Nash, CEO of Complete Intelligence, saying that Tesla looks like something very scary at this moment, right? It looks like the stock, at six hundred times P is extremely, I would say quite expensive. I mean, you would never think that a company that isn’t it only makes less than thousand cars could be valued at six hundred times.

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Podcasts

How long can the bull run?

Now that the bull run has started, Tony Nash CEO and Founder of Complete Intelligence joins BFM 89.9 in another global markets discussion. What’s behind this rally and will it be sustained? They also discuss OPEC, the Brent price and its future, Europe’s fiscal stimulus, the ECB, and the resumption of trade war between the U.S. and China.

 

Listen to the podcast on BFM: The Business Station.

 

BFM Description:

On the back of an emerging bull run in Asia and the U.S., we reach out to Tony Nash, CEO of Complete Intelligence, for his thoughts on whether or not this momentum can be maintained, oil prices, as well as the ECB’s bond purchase programme.

 

Produced by: Michael Gong

 

Presented by: Wong Shou Ning, Lyn Mak

 

 

Show Notes

 

 

BFM: U.S. stocks extended their rally into the eighth straight day as investors clung to optimism for quick recovery from the pandemic. So the Dow Jones closed up 2.1 percent. The S&P 500 closed up 1.8 percent, and NASDAQ was up 0.8 percent. In fact, NASDAQ in the intraday trading did touch an all-time high. It’s as if COVID-19 never happened.

 

Meanwhile, Asia also had a very good run. Nikkei 225 closed at 1.3 percent. Shanghai was barely up, though. It was flat at 0.1 percent. Hang Seng was up 1.4 percent. Singapore was the big surprise here. We talked about it yesterday. The banking stocks were up and this caused the Straits Times Index to go up by 3.4 percent. Meanwhile, on the FBMKLCI, our market was up 2.1 percent. Also on the back of banking stocks, public bank RHP saw almost a pulping double-digit gains.

 

Pandemic? What pandemic? Never happened.

 

So this morning, for more insight into global markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Thanks very much for joining us this morning, Tony.

 

Now, equities have recently exhibited strong bullish momentum in both Asia and the U.S.. What’s behind this rally? And is it sustainable?

 

TN: I think a lot of it is the monetary policy expectations and the stimulus expectations washing through. It’s a lot of hope around activity in the summer, say, for crude prices, driving and consumption. There’s an expectation that there’s been some pent up consumption because of COVID. Some of this is coming back. It’s key to know that the U.S. markets are still 10 percent below where they were pre-COVID, 10 percent or more. So it’s not completely as if things never happened, but it has come back relatively quickly. The S&P, for example, was at around 2300. So we’ve climbed about 700 points in the S&P 500 since the nadir of COVID.

 

BFM: I always ask our commentators this, and I’m going to ask you also. Why the disconnect between what is happening on Main Street versus what’s happening on Wall Street.

 

TN: There’s an expectation that most publicly traded companies are going to pack as much bad news into Q2 as possible. And so they’re just throwing the kitchen sink into Q2. So that should mean pretty clear sailing for the rest of the year, assuming that it is 2020 and all. So anything can happen. But assuming that there isn’t another major catastrophe, things should be pretty clear for the rest of the year if every- and anything that could go wrong goes into Q2 data.

 

BFM: Brent has also erased some of its recent gains and is back below the $40 a barrel mark with the OPEC meeting now in doubt. What do you think oil prices will be heading?

 

TN: Our view is that things have been pretty range traded. We don’t see things going up to, say, $50 anytime soon. It’s possible. But we’ve expected things to stay pretty range traded until probably August or so.

 

We’re going to see daily rises and we’re going to see falls. But prices have come back a little bit on some drawdowns we’ve seen in storage and expectations around driving. Although, It’s not a perfect substitution for flying. And those volumes will still be down until we start to see people get back on planes. And until we start to see commuters back on their daily drives, we really don’t expect to see things come back above, say, $50 for Brent.

 

BFM: Shifting to Europe. The ECB is expected to expand its bond repurchase program this Thursday. So they’ve got a currency 750 billion euros outlay. Is that enough or do you think they need to increase it?

 

TN: It’s not enough. But I don’t know that Europe really has the financial wherewithal to do much more. They are not a fiscal union. And so they’re really having to contort their mandate to make sure that they can do this. This is really pushing Europe and the ECB and the concept of a quasi-fiscal union under the E.U. is putting real pressure on that.

 

So the limits of the monetary, not fiscal union are really pressed. And when you look at things like the insolvencies we saw in Greece and Italy and other places in southern Europe over the last 10 years, places like Germany are just tired of fiscal stimulus of other countries in the EU.

 

BFM: And if you look at the equity markets in Europe, that’s been also the lag out. Do you think there’s any opportunities there or is it a similar situation whereby the corporates there are going to not perform up to par?

 

TN: No, we don’t think they’ll perform up to par. Until we see countries beyond Germany really lift some of these lockdowns in a big way, it’s going to be really slow going. It’s strange how we’ve seen these protests really go against the lockdown. We may actually see some of these countries rip the Band-Aid off, because if you have tens of thousands or hundreds of thousands of protesters out there, it may be a situation where you can just say, “Well, lockdown’s over,” and you may start to see consumption patterns come back to normal. That would be a good thing for markets. That would be a good thing for companies. But European companies, especially European banks, remain troubled. And I think this crisis has really forced those banks to look in the mirror. And if markets are functioning well, then we’ll start to see some consequences, particularly for European banks.

 

BFM: Thank you very much for speaking with us this morning, Tony. And that was Tony Nash, CEO of Complete Intelligence.

 

He made some comments there about Brent crude, which he doesn’t really expect to come above the fifty dollars per barrel mark until perhaps we see planes start flying again. But the Trump administration has just made an announcement to that effect, saying that they are suspending passenger flights to the U.S. by Chinese airlines effective June 16th.

 

So the U.S. government said in a statement that it was responding to the failure of the Chinese government to allow U.S. carriers to fly to and from China. Now, this hasn’t, of course, been good for the tensions that have already been flaring between the two countries over the handling of COVID-19, as well as the treatment of Hong Kong.

 

China recently paused some agriculture imports after Trump threatened to limit the policy exemptions that allow America to treat Hong Kong differently than the mainland.

 

And that was done. The global economy was cheering and it looks like they’ve started fighting again. I think I’m just curious, what else is there to fight over? Because there’s been soybeans, beef, pork imports, corn, and now airlines.

 

U.S. airlines did see a bit of a share surge amidst the broader market rally and signs that travel demand is starting to rebound. Boeing was up 13 percent at one point after a report from IATA indicated that recovery was underway for global airlines.

 

So looks like we’re going to be watching that space as well, quite closely.

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Podcasts

Message to Fed: More sugar please!

Tony joins BFM for another discussion on the US markets, this time, sending a message to Fed on what needs to be done. What he thinks will Powell do next and why is the Fed buying a lot of ETFs. Plus, a side topic on oil as Saudi called for a larger production cut.

 

Produced by: Michael Gong

 

Presented by: Roshan Kanesan, Noelle Lim, Khoo Hsu Chuang

 

This podcast is originally published by BFM 89.9: The Business Station.

 

 

Podcast Notes

 

BFM: The Fed chair, Jerome Powell, painted a rather negative view of the economy unless fiscal and monetary policymakers rise to the challenge. But what’s left in the toolbox, though?

 

TN: There’s quite a lot left, actually. We’ve seen a few trillion dollars spent. What we need to make sure is that that money actually gets out to businesses. So offering lower rates, nobody is really in a mood to borrow unless it’s forgivable. With the mandatory closing of a lot of small and mid-sized businesses, it’s really putting their revenue models in peril. Actually helping those businesses with cash to substitute for revenue, since this was a government shutdown, is really all they can do. But I think the next path is looking to medium-term spending programs like infrastructure. A number of these things that can go from direct cash payments to earned cash so that we can have a more viable economy again.

 

BFM: Could you elaborate more on some of the fiscal measures that you’re talking about?

 

TN: For small and mid-sized businesses, we’ve had things like the PPP, the Paycheck Protection Program. What that does is it gives about two and a half months’ worth of expenses to companies so that they can retain their staff and pay for their rent during the downtime. But what’s happened is not a lot of companies have been approved. Of those who’ve been approved, not all have gotten their money, a number of them are still waiting.

 

For small companies, they run on cash flow. They don’t have three to six months of cash sitting in the bank normally. So while they wait, they’re going bankrupt. They’re having to fire people. At the same time, we’re starting to see more and more large companies announce layoffs over the past two weeks. And so we’ve seen the devastation of a lot of small and mid-sized companies in the US. We’re starting to see that bleed into large corporate layoffs.

 

Those large companies want to see the expenses associated with those layoffs put into Q2. As we go through Q2, we’re expected to see more and more corporate layoffs, so that all those companies can pack them into their earnings reports for Q2.

 

BFM: The correction of the last couple of days, the American share market has been a bit of a test, up 30% since the March lows. A lot of billionaire investors like Stan Druckenmiller and Appaloosa management’s David Tepper say that stocks have been the most overvalued for a number of decades. What does that do for your thinking by way of your portfolio? Are you taking some money off the table? Are you getting more cautious? What are you going to do?

 

TN: The only thing we can really guarantee right now is volatility. And what is happening is they’re trying to find a new pricing level. Until we’ve found that new pricing level, really anything can happen.

 

What we’re entering right now is a phase where people are realizing that states may stay closed longer than many expected. I actually think you’re going to get a lot of push back from citizens in the U.S. Los Angeles just announced they are going to stay closed for three more months. You’re going to see a lot of unrest there. People are really pushing back because their hopes and dreams of decades of these small and mid-sized businesses are just being devastated as local officials make these decisions. I feel in the next few weeks, we’re going to see more and more people pushing back on those orders because they need to get back to work. They’ve got to run their companies. They’ve got to make some money.

 

BFM: That’s right. But this is an ongoing chasm between what’s happening on Wall Street, which is essentially a rally and Main Street, which is dying. People are divided over whether the policy response will be to get into the Fed buying equity market instruments on top of the junk ETFs and all the backstopping of the bond market. What’s your stance and what Jerome Powell is going to do next?

 

TN: They can do that. It’s certainly within their remit to lend money. The ETFs are kind of an indirect way to lend money. It’s radical, but it’s not beyond their capability. Where it looks like the Fed is going is with yield curve control. That means they’re likely to target a rate for the 10-year Treasury, and then they will spend almost unlimited cash to make sure that the rates stay there.

 

If the Treasury yield curve rises too much and people stop taking out long-term loans for infrastructure projects or for other things, if that rises too much, the Fed will push that yield curve down, let’s say, to a half percent rate so that people can borrow over long terms for cheaper. That’s the way for the Fed to encourage investing. That’s not a direct government fiscal policy, but it’s a way to get the private sector to spend cash. This is really for the larger, private sector companies. It’s a signal to me that the federal government itself is preparing itself to spend a lot more money in terms of fiscal policy, and also encourage the private sector to spend a lot more money on these long-term projects.

 

BFM: That is a theoretical concept, which hasn’t proved right in the last 10 years, because what corporations have done is that instead use that easy money to buy back shares and to return dividends to shareholders, not to invest for the long term. So that’s to be the problem.

 

TN: Well, either way, shareholders win, right? Either way, cash is spent or they get it in their return. U.S. equity markets are broadly held among most working Americans. So on some level, if that is done through share buybacks, it will help a broad base of shareholders through those equity prices. Share buybacks sound morally questionable, but either way that money is spent, it helps the broad economy.

 

BFM: So the U.S. Fed is now buying junk bonds, why ETF for the first time. Why these instruments? What’s the significance of it?

 

TN: They can’t invest directly in equities. Some of this stuff is a signal that they want to do more in debt markets. They’re too big to help out small companies. They’ve put together this main street lending program as a way to lend to, quote, unquote, small companies. But those small companies are actually pretty big. Most of the corporate entities in the U.S. are actually pretty small. The Fed is trying to alleviate the market of certain risk assets. I believe and hope that banks will lend to small and medium-sized companies. They’re trying to take the risk out of the market and off the balance sheets of banks so that those banks will invest more directly in actual operating companies that need the money and not necessarily the risky, junk bond companies.

 

BFM: A little bit on oil. Saudi Arabia has called for larger production cuts. Will the whole OPEC plus community back them? Should we expect some pushback? And what does this look like for oil prices?

 

TN: I don’t think you’re going to get a lot of pushback. We have about three months of crude supply overhang right now. Given that economies are locked down, there’s really no way to burn that off. So the only way to get prices back up to a sustainable level is really to cut off supply. Until the largest producers really slow down their production, and we can burn off some of that supply overhang, we’re not going to see prices rise much.

 

Demand’s not necessarily coming about quickly. It’s going to be gradual. As demand gradually accelerates and supply declines gradually, hopefully, we’ll meet in the middle somewhere and get a price that’s a little bit more livable for oil producers globally.

 

 

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Podcasts

In America, the economy sinks but markets surge. What gives?

 

BFM 89.9: The Business Station speaks with CEO and founder of Complete Intelligence, Tony Nash, to explain why the markets have surged and earnings seem resilient despite the US GDP falling to negative 4.8 percent.

 

Produced by: Michael Gong

Presented by: Noelle Lim, Khoo Hsu Chuang

 

Listen to the podcast, originally published in BFM 89.9.

 

 

Podcast Notes

 

BFM: We are talking to Tony Nash, the chief executive of Complete Intelligence on the American markets. Tony, thank you for talking to us. American GDP shrank by 4.8% overnight, the steepest fall since the last recession. What did you think of these numbers in terms of what you expected prior?

 

TN: It was a bit worse than many people thought. But it wasn’t as bad as it could have been. That was the thought that many people had, and markets tend to be looking forward. So looking at Q2, we now have big states like Texas and Florida and others that have started to open up fairly aggressively. So markets themselves are looking forward. And markets are looking pretty favorably on some of the opening up lines.

 

BFM: Fed Chair Jerome Powell is calling for more action from the government. What are the options and what do you hope to see?

 

TN: Well, there are options for more fiscal stimulus. The federal government could do things like an infrastructure plan. Two years ago, in his State of the Union address, the President talked about a $1.5 trillion infrastructure plan for the U.S. They could do something like that. The individual states, which really imposed a lot of these restrictions, they really haven’t had to pay up much aside from kind of the standard unemployment benefits.

 

So the states could pony up a bit more cash than they have. They’ve really been relying on the federal government to pay for this whole thing. And they haven’t really had any accountability for the decisions that they’ve made. So I think the states really need to pay up a bit in terms of fiscal stimulus.

 

BFM: The Fed has backstopped the corporate bond market in the fixed income market for some time. Obviously, you can see that exemplified in the six and a bit trillion dollars of debt on the balance sheet. Do you think they’ll come a time when the Fed backstops the equity market as well?

 

TN: I don’t know. There’s been talk about that, they’ve certainly done that in Japan and the BOJ owns a lot of the ETFs in Japan. I don’t necessarily see that happening in the U.S. because it’s a door that once you open, it’s very, very difficult to close.

 

It’s the same question with negative interest rates. And so these are activities that once you start, they tend to be very, very hard to stop. And most of the market observers don’t really want that to happen.

 

 

BFM: Q1 GDP came in minus 4.8 percent. But the consensus estimate of economist on Bloomberg reckoned there’s going to be a minus 26 percent drop in Q2. And even more astonishingly, I think a nine percent improvement in Q3. Do those two numbers strike you as a little bit extreme?

 

TN: Q2 seems a little underestimated, meaning I don’t necessarily think it’s going to be that bad. Q3? It’s possible it could be nine percent. I think given how negative it could be in Q2, you could definitely see a rebound like that. But that’s just a base effect in terms of the quarter on quarter growth. It’s not necessarily a dramatic year on year growth. In fact, year on year, that’s actually negative and a negative print. One would hope that if Q1 and Q2 are so bad that you would see a print that’s at least nine percent in Q3.

 

 

BFM: Yet markets charge ahead despite relatively bad macro data. What is this optimism based on?

 

TN: Seeing the states open, seeing some realistic plans being put together to do this, there’s a balance of doing it aggressively and carefully. I know that sounds a little silly, but we’re seeing some real push by Americans to want to open. So the state governments are going to probably do things a little more aggressively than they initially wanted.

 

There was some concern that Q1 earnings would be worse than they are. Meaning that companies may try to pack all their negative news into Q1 in hopes that Q2 will look slightly better. But sure, they’ve packed some of the negative news in Q1. But some of the Q1 earnings haven’t been as bad as people had feared. So markets are looking forward. And in the U.S., it’s a flight to safety.

 

We’re also seeing on a relative basis, U.S. markets perform fairly well as, say, non-dollar assets or overseas dollar assets come into the US.

 

 

BFM: Microsoft, Facebook, and Tesla all came out last night all the better than expected. Microsoft showing some picture of health in the corporate sector. Tesla, obviously, where car sales are concerned, then Facebook where the ad consumer market is concerned. Can we read this optimism into Q2 and possibly even into Q3?

 

TN: I think certainly Facebook and Microsoft, with people sitting at home, those two will probably do quite well in Q2. Tesla? I wouldn’t expect Tesla to do well in Q2. Auto sales have been way down in Q2. And with oil and gas prices as low as they are, the substitutionality effect of electronics from internal combustion engine cars, the incentive is not as high as it once was. So I don’t necessarily see Tesla’s performance to be better than expected. But then again, Tesla bulls are Tesla bulls. They’ll buy, and they’ll pump up the price regardless of how they perform in real life.

 

BFM: So you don’t expect this to be a broader momentum for the broader market?

 

TN: Anything focused on productivity, anything focused on virtual activity, will do very, very well. But things like car sales, again, they’ve been really difficult. Anything around entertainment or group, physical, in-person, entertainment, obviously, it’s just not possible or hasn’t been possible for those to grow. So those are going to be really, really hard for people to get optimistic about.

 

On the other hand, you’ve seen, energy firms actually performing really well today. The major oil and gas firms and U.S. markets performed really well. Part of that is on the back of gossip that the U.S. Treasury may come to the rescue with some preferential financing for American oil and gas firms. Whether or not that’s going to happen, we don’t really know yet. But that may come to pass, which may help some of these firms.

 

BFM: Talking about the oil industry, are there any structural changes they can make to improve their prospects of survival? Some of these oil majors that you spoke of?

 

TN: Oil and gas firms are incredibly inefficient. There are a lot of productivity changes the oil and gas firms could make, whether they’re NOCs, the national oil companies, or the private sector majors. Oil and gas workers tend to make a lot more than other sectors.

 

They tend to be more bloated, so there are a lot of productivity measures that can be taken. For NOCs, for the national oil companies, there can be more activities taken to make them more accountable than markets. And so I think in Malaysia, you’re lucky. Petronas performs pretty well.

 

But other NOCs don’t perform as well and you can see some major changes in terms of fiscal accountability. Assuming oil prices stay lower, accountability to the central governments and performance rather than the subsidies coming from central governments, as we’ve seen in the past, may come to pass in some countries if they can’t really afford to continue to subsidize these governments. Because, you know, we’re seeing the emerging market and middle-income country currencies come under a lot of pressure versus the U.S. dollar. If you’re seeing energy revenues decline and you’re seeing pressure on the currency, it’s really hard for some of these governments to subsidize their national oil companies.

 

Categories
Podcasts

Why Bank Stocks are Falling?

BFM 89.9 discusses with Tony Nash about why bank stocks are falling — the US markets were dragged down by financial stocks as big banks JP Morgan, Wells Fargo and Citigroup reported their first-quarter earnings.

 

Find this podcast originally published at the BFM: The Business Station.

 

 

Show Notes:

BFM: Right now, taking a look at the wider global markets, we speak to Tony Nash, CEO of Complete intelligence. Tony, thank you for taking the time to speak to us today. The Fed book was released showing that almost all economic data activity has stopped and the question is how difficult will it be to restart it? Do you expect even more contraction?

 

TN: Very difficult. I mean, as we’ve talked about before, this is a government-mandated shut down, so it’s going to take a lot of fiscal stimulus to get things restarted. That’s why you’ve seen governments come out with such large stimulus programs. We don’t believe it’s a situation where central banks can wave a magic wand and use monetary policy to get things started. It’s not that kind of problem. This is a problem that has to be addressed with fiscal stimulus and direct spending from governments.

 

BFM: Is there enough fiscal stimulus so far?

 

TN: No. We’re two weeks into the second quarter, and when we look at all of the country, where the orders to not work are in place, it’s going to be at least two to three to four, maybe six weeks before some countries are up and running. And because a this is government-mandated order, those governments have to find a way to compensate individuals and companies for those close-down orders. Otherwise, we’d have catastrophic economic contraction. Spending is a key component of the GDP calculation. So if you count “don’t spending” as a substitutional factor to consumption and investment, you can still grow your economy or have it not contract as much as it would. Governments are feverishly trying to find find where they can spend, but I think many governments don’t really have the money. They accumulated so much debt over the last 10 or 20 years, they don’t have the money to be able to stimulate the way they need to.

 

BFM: Tony, Mexico’s been downgraded by Fitch to just one or just one level of Junk. Do you think this portends a rash of similar downgrades by other agencies?

 

TN: Oh, sure, absolutely. I think emerging and middle income markets are going to have a tough year. And that’s the case because we have a strong US Dollar and are likely going to have a stronger US Dollar. And on a relative basis, emerging market currencies are going to have a real uphill battle. So those emerging markets that are export-dependent will have a tough time, as well as we see consumption collapse. So I don’t want to sound entirely pessimistic, and it’s actually quite hopeful once we hit, say, July or August. But, Q2 is a very, very difficult situation. And the quicker governments can get their countries moving from an economic perspective, the better off we are.

 

BFM: So Tony, let’s move back to the US for a bit. The banks, the big banks, have started releasing the Q1 results with JP Morgan, Wells Fargo, Goldman Sachs, Bank of America and Citi or reporting significantly lower profits and more particularly huge provisions there, some as five times more than usual. What does this tell you about the broader economy? What are they expecting at least?

 

TN: Well, we’ve been trying to tackle all the bad news now. That’s for Q2. They can say, we accounted for that before and they can report better numbers in Q3. And this is all relative. A lot of companies are going to report horrific numbers for Q2. But, you know, the government is coming in and encourage loan repayment to be delayed and backed up the number of loans as well.

 

So should these provisions be larger than they are or as large as they are? Maybe that’s a prudent thing to do. But it looks really like there, you know, these provisions should have been in Q2, not necessarily in Q1. So I think they’re being conservative and I think that’s fine. But I think to some extent it’s really you just tacking all the bad news or what they expect to be the bad news into Q1 so that they can look better later in the year.

 

BFM: Yeah, that’s always what this was about to ask you, actually, Tony. Do you think they’re trying to pack as much bad news in this quarter as possible? Yes. But I think on on the call yesterday with Bank of America’s chief financial officer, he also seemed a bit, well, at sea in terms of really putting a finger on exactly what kind of quantums provisions might lead to the next quarter. Do you think they really know what’s happening around the corner, do you think?

 

TN: I don’t think they know. And I know that, the US banks are really, say take serious problems with like with PPP, these are small business loans. They’re just overwhelmed with the number of applications for these small business loans. That loan processing is truly inefficient and it’s not all the banks’ fault because it was, the US department pretty pretty quickly. So they’re kind of doing the best they can, but those are not their most efficient operations and we’re having to just adjust to where the attention is.

So I think they don’t know how bad it is. Until we know when some of these stay at home orders will be lifted, nobody really knows. And it’s the same thing in Asia as it is here. You’d see all these kids schooled, and it’s a problem, and so until it’s lifted, we really don’t know the full extent of the economic damage.

 

BFM: Well, speaking about Asia, even after better than expected March trade figures, People’s Bank of China cut medium term lending rates by 20 basis points. What do you read from what they just did?

 

TN: Honestly, guys, a 20 basis points isn’t going to do anything. I mean, nobody is going to take a loan out because it’s 20 basis points cheaper. What China needs is a very large fiscal stimulus package to make sure that their factory workers and other certain workers are given, maybe not a full wage, but enough of a wage to continue to get by. Our major worry for China this year is a very sharp contraction of industrial production, meaning manufacturing. We’re looking for contraction in exports starting in February, going through March and April, May, simply because the consumption markets are not there.

 

There is a global demand problem. So there is a demand problem domestically in China, but there’s also a demand problem in the rest of the world. So how can China, which is an assembly point and a maker of finished goods, how can China have kind of relatively normal export data when the rest of the world isn’t buying. It’s just not possible. So, you know, what we’re worried about is the industrial production contraction in China and we’re worried about deflation in China.

 

We think deflation will be worse in China than in any other parts of the world because of the dependence on manufacturing. So it’s manufacturing insures on making stuff, their workers aren’t working, and so they don’t have the money to buy stuff. And so that creates a huge gap in demand, which is likely deflationary, which is a big, big worry for us.

 

BFM: I’m wondering, though, I mean, if it’s not likely to move the needle by too much, why would it cut interest rates?

 

TN: I think a lot of central banks right now are going through the motions, hoping to kind of ride on the coattails of the big moves at the ECB, BOJ and Fed are doing, right? PBOC is is taking some big moves. So I’m not saying that they’re not doing their part. They’re definitely playing a part. But little moves like this, I think with what we’ve seen is generally a big action is taken. We saw this with the first Fed action and so does in the central bank with the OPEC move over the weekend, right? A big action is taking, and the markets really just going on, they don’t care that a big action has been taken. But what happens is a series of smaller actions are then taken, and markets take notice. So if anything, I think there’s 20 basis point cut is in one action among many that the PBOC is planning so that they can gradually feed that market expectation.

 

But again, the markets are really bored and not satisfied by a single big move. They’re looking for a series of moves, can be satisfied and to gradually kind of re-course positive expectations into markets. But 20 basis points is not going to do it, especially when you’re looking at a fall in manufacturing or fall in wages, a fall in consumption, and potential deflation. Nobody is going to take out a market rate loan when they have all these other worries to tick down the list.

 

BFM: All right. Thank you so much for spending some time with us this morning. That was Tony Nash, CEO of Complete Intelligence.