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Economic Warfare: What kills the US Dollar & Inflation’s hold on Europe

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In the latest episode of “The Week Ahead”, Tony Nash, Michael Kao, Albert Marko, and Ralph Schoellhammer discussed the current market trends and key themes in the world of finance. The discussion revolved around three main topics – “What kills the US dollar?”, “DXY to 112? Turbulence Incoming”, and “Inflation’s hold on Europe”.

Mike started the discussion by talking about the symposium on the Great Power Competition with China and the US Dollar’s primacy in an era of economic warfare. He emphasized that the US dollar’s status as the world’s reserve currency is at risk due to the rise of other currencies such as the Chinese Yuan. Mike further elaborated on the factors that could potentially kill the US dollar, such as a shift towards a new reserve currency or the decline of the US economy.

Moving on to the next topic, Albert spoke about the DXY, which he expects to reach 112 in the near future. He explained that this is due to the strengthening of the US economy, coupled with rising interest rates and the anticipation of the Fed’s monetary tightening. However, he also cautioned that the markets are likely to experience turbulence due to the uncertainties surrounding the central bank policy and the geopolitical risks.

Ralph then focused on the impact of inflation on Europe. He pointed out that inflation in Europe has been rising at an alarming rate, with Austria’s inflation rate being 0.9% m/m and 11.2% on year. Ralph also tweeted about the rapid increase in bankruptcies, and how this could lead to a domino effect on the European economy. He predicted that the European Central Bank’s (ECB) decision to tighten monetary policy would lead to further economic challenges, especially in Q2 of this year.

Key themes:
1. What kills the US dollar?
2. DXY to 112? Turbulence Incoming
3. Inflation’s hold on Europe

This is the 54th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

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Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash and today we’re joined by Michael Kao. Michael is @urbankaoboy on Twitter. He’s an ex-hedge fund manager and now he’s a private investor. We’re also joined by Albert Marko, who you’re well familiar with, and Ralph Schoellhammer, who is at Webster University in Vienna and he’s a political economics expert.


So before we get started, I want to talk about our Friends of Tony promo. So I have more than one friend. So it’s plural. Friends of Tony Promo. So, CI Futures is our markets forecasting platform where we forecast about 800 items every month. We do currencies, commodities and equities every week, every Monday morning. And we do the top 50 economies economic variables once a month where we do show our error rates there. So that is what distinguishes us from other folks. There is accountability. And you don’t have to guess about our previous performance. We’re having a promo. The coupon code is friends of Tony. Plural friends. It’s $19.99 per month for a twelve-month subscription. It’s for new subscribers only. We’re only doing it for the first 25 people who come in. So please make sure you get on this right away. Please go to and we hope you subscribe.

So guys, thank you for joining us. We have a few key themes this week. First, Michael has written quite a bit about the dollar and about the kind of economic warfare happening now between the US. And China. So we’re going to take the other side of his typical argument and look at what kills the US dollar. We’re going to talk to Albert about dollar strength. He made a statement about the dollar going to 112 with some turbulence. So we’re going to dig into that. And then Ralph is going to talk us through inflation’s hold on Europe. So, should be a really broad macro conversation for us today, which I’m really looking forward to. Mike, you did recently attend this symposium on the Great Power competition with China, I think it was at West Point. And you spoke about US dollar primacy and an area of economic warfare, which must have been great. I missed my invite, but it must have been a great discussion and I think we’re all pretty jealous. I assume that much of the presumption or fears about the Chinese Yan, right.

Is that kind of what the basis was of this?


Yeah, I think generally when people are talking about threats to the US dollar system right. The most glaring contender is the Chinese Yuan, given all the scaffolding that they’re setting up with 60 plus odd bilateral swaps around the world and one belt, one road and all this stuff. Right. But anyways, if you want I can go. First of all, I love the fact that you’re forcing me to steal, man, the counter argument against my own thesis. Good. Which is great. Yes.


You’ve talked about the US dollar wrecking ball. Right. And you’ve really talked a lot about how the dollar has really kind of hurt some emerging markets. So I do have a chart of USD CNY, and we’ve seen the volatility of the CNY over the past really five years, ten years. And you know, part of my concern about the CNY is the PBOC.

And you know, we can talk about that in detail, but I’d really like to hear, what do you think? If the dollar was displaced, how would that happen? And we could spend days talking about this, but I guess in a summary conversation, how would that happen and what would be a potential other store of value that would be accepted globally?


Okay, so I was going to answer this question on different time scales, right? There’s short term and there’s longer term, but I believe where you’re going with this is a longer term time scale. Like what ultimately displaces the dollar as the global reserve currency. Right.


We can talk different timescales. I actually think that’s very interesting.


Right, well, look, let me dispense with the easy part first, which is the shorter time scale. I’ve been saying for a while now that I don’t necessarily think that we’ve seen the cyclical top in the US dollar in the short term just because I don’t think any of the competing regional blocks can outhawk the Fed. Or conversely, I don’t think the Fed is going to be in a position where it’s going to outdove the rest of the world either. Right. So either of those scenarios tell me that I think the US dollar is probably going to resurge. And so obviously the counter to that, what would have to happen for that not to happen? Well, I think that the US economy would have to suddenly take a turn for the worst and be in a much worse spot than the rest of the world. And the rest of the world would basically be able to become a much more hawkish visa vis the Fed. I see the exact opposite playing out in the short term. Okay, so now longer term and this is basically the topic of my paper, right? So I think the premise of my paper is that this notion that Breton Woods was basically this top down construct that it foisted a Trojan horse mechanism on the world where, hey, everybody, come use the US dollar because we’re going to be convertible to gold.


And then all of a sudden in 1971, nixon shocks the world and takes that gold tether away. But it’s too late. Everybody is stuck using a dollar. I call bullshit on that thesis because if you look at the Euro dollar, the rise of the Euro dollar banking system, it started happening probably 15 years before that.


And he was actually very popular when he did that.


Right? Yeah, well, it’s started happening by the way. It started happening the real catalyst to it first it was the failure of the tripartite agreement after World War II, which tried to stabilize the frank and the pound and the dollar exchange rates. But then in 1957, when Britain basically in a domestic flight against inflation, surprise, surprise, they they basically instituted capital controls. So there was a there was a tremendous global need for a liquid reserve alternative. And so the world actors on the world stage organically flocked to the US. Dollar. So the premise of my paper delves into what are if trust in the dollar already went well beyond its gold backing back then, right? What lent that trust? And so our paper posits that it rests upon national power. It’s a bedrock of national power. And I focus on three economic pillars of national power geography, which informs everything. But then geography also informs a country’s access to its natural resources and its industrial capacity. So in our paper, we talk about how, look, the US. It’s well known that the US. Is very, very naturally bowed with geographic assets that are really unparalleled in many ways.


And China is short a lot of those assets. However, because we have a federalist capitalist system, china is using essentially economic warfare to target that as a vulnerability, right? So they have unfairly competed and stolen IP in the world of semiconductors. Right. They’re trying very hard to replicate Taiwan success with TSMC. Fortunately the US. Controls critical choke points in that industry still. But yet, in that area at least, the US. Is finally starting to come around and make some very specific targeted export controls as well as changes to its industrial policy. The point here is that in that area alone, the US. Is starting to recognize the importance of reshoring and defending our flank from an industrial policy perspective. But when you compare and contrast that to oil and gas, which is the other critical supply chain where the US. Is currently the leading oil supplier in the world, and we are naturally long that natural resource, but because of blind devotion to ESG adoption and this erroneous assumption that an energy transition is going to follow Moore’s Law dynamic when it won’t right. Is going to leave us in a very dangerous lurch. I point out that there’s a real inconsistency there where we’re kind of shooting ourselves in our own foot when it comes to energy policy.


To answer your question, what has to happen for the US. To really lose its status? I started thinking. I said, well, number one, okay. Oh, the other thing is much ado has been made of the US. Weaponization and the criminal west seizure of Russian reserve assets and whatnot. Okay, well, look, I also point out in my paper that, yes, that should be a shot across the bow for US. Policymakers because, like the situation in the 1950s, right, it certainly creates an incentive for our adversaries to look for an alternative. But what are the alternatives? Because if you look at the eurozone, the yen, the pound. The euro is, frankly, the most successful challenger to the dollar to date. And yet, since its inception in 1999, us share of FX reserves has stayed constant 60%. It’s the euro that’s actually lost share. Now, the Chinese yuan. Here’s the problem. What has to happen for the yuan to supplant? The US number one, china would have to prove that it will be a better benefactor and more trustworthy sort of steward of the global commons than the US. I don’t see that happening in almost any circumstance.


So let me ask you just in that what allies does China have? Like, if China were to say, okay, boys, we’re going to war. Line up and let’s form a coalition, who would China’s allies be?


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Well, that’s that’s a really good question, because right now right now well, yeah, those those are the those are the two, right? And perhaps, perhaps Iran. Right? But, like, Russia is interesting because China’s relationship with Russia over decades and centuries and even centuries, certainly, right. Has been kind of a storied one. Right. I wouldn’t say that this dragon bear romance is necessarily that chummy, because, look, China is really happy that it’s getting big discounts to Russian euros, right. And that’s directly countered to Russia’s interest, I think this whole notion that right now they share a common interest in wanting to counter the US’s. Hegemony, but that is a very fragile bromance, to say the least. The other thing I was going to say is that the other thing that would have to happen for the US. To see dominance, I think, would be that the US. Willingly essentially becomes a vassal state to China and allows China to roll over. Basically, our interest in the Indopacific, that the US. Allows China to take over Taiwan and we just roll over and do nothing. I guess in a parallel universe, that could happen. I’m not seeing that happening.


I think that China’s significance alone, not just as an unthinkable aircraft carrier, potentially for China if seized, given its geostrategic position in the first island chain, but obviously Taiwan semiconductor alone is of critical significance.


Just to take the other side of that for a minute, you know, let’s also be very aware that, you know, the wars that the US. Has lost over the last 80 years have really been to China in Korea, to China in Vietnam. Right.


We didn’t lose those wars, Tony. Our military objectives were all met. We’re confusing the political opponent.


We lost those two wars. I mean, we had to negotiate the settlement, and the US lost those two wars. So the only people the US has really lost to over the last, you know, hundred years is the Chinese. And so, you know, I do sit with you and with Albert in terms of if things were to happen, you know, with the US prevail, I actually think they would I don’t think it would be a cakewalk, and I do think there are some scars there in Asia. Right.


I think you have to compare and contrast that to where the US. Was in World War II, like when Britain lost its hegemony, where the pound lost its hegemony is because the UK was in a very tough spot. It had essentially bankrupted itself after World War II and was completely beholden to the US. The US’s lend Lease program. Right. So the US essentially had all the cards. Now, here the two wars that you talk about. I agree with Albert. It’s not even close to the same thing. We withdrew, and it wasn’t a great withdrawal, but it wasn’t a situation where we had essentially bankrupted ourselves and we were completely dependent on the largess of somebody else. Right.


If I can interject Michael, we can.


Go on and on.


About to go back to Tony’s question, what would come next? I mean, theoretically, the United States would have to have some sort of societal breakdown. Our rule of law would have to break down, and we’d have to become a nonintervationalist nation. We wouldn’t be able to protect our interests globally at that point. Something could come along to dethrone the dollar. But even if we’re at that point, I think the next logical step of removing the dollar as a reserve currency would be an Anglosphere plus Japan digital currency, where regional players would secure their own interests in those regions and have a collective I mean, this is just theoretical and way out of our lifetimes, in my opinion. But I think it would be a step down to that first where our allies and the US. Would jointly have a currency block yeah. Running through all the scenarios, in my opinion, that would be the only thing that would take the dollar. That would be I mean, the dollar would still be a part of it, but it wouldn’t be the main part of it. It would be the sole unit polar one. But you could have an angle sphere plus Japan digital currency for just for trade settlement.


Now, you know what I think the highest probability sort of gray rhino would be out of all this. It would be that if China made overtures toward Taiwan and Taiwan willingly just say, Here, take me. Because I think last year, or maybe two years ago, I wrote a thread about this, how some of the older guard in Taiwan and you know this, Tony some of the older guards that are with the KMT, they really don’t like the DPP because the DPP wants to get away from the Chinese ancestral roots of the Taiwanese. So the old God doesn’t like that. And so what if China says, hey, we’re going to take you? And then what if Taiwan says, Here, take me to me? That is much more worrisome than an amphibious takeover of Taiwan, which I see is very low probability.


Yeah, exactly.


Yeah. I think that is the most likely scenario of the scenarios of China taking over Taiwan. Right. It’s a mutual but with the DPP in power and with DPP as a sizable political party there, it’s a north versus south issue for people don’t really understand. KMT is largely North, DPP is largely south, and DPP comes to power when their policies really align with people in the north from time to time. Right. And so that’s how the DPP gets into power. The DPP is much more nationalistic and independent than the KMT.


That would be pretty risky, I mean, for the United States if it didn’t intervene in some which way, because then you could talk about North Korea and South Korea unification and siding with the Chinese at some point, which is not out of the realm of possibility, in my opinion.


Right, okay. Can we agree? Is it eliminated for the next probably 2030 years?




Do you think it’s eliminated, Michael?


I think so. I think so as well. I was on a different podcast earlier this week, and I keep alluding to this interesting podcast that Andrew Hunt out of the UK did, where he did analysis on 36 Chinese private banks. And his assessment is that there’s four there’s a $4 trillion liability gap that’s not captured in the in the balance of payments. China is much china is much, much more levered than the US.




But but it’s but it’s hidden. It’s just pin behind the Opacity curtain. That’s exactly right.


Doesn’t look good. So if we if we push China out, say, 30, 40 years before they’re a contender, and they may not even be they may be too old by that time, because there really isn’t immigration to China right. Except for from North Korea and maybe a couple of other places. So we pushed China out. What about Europe? Will we have European decide for morale in 30 years? Will we have the demographic age of people who can actually work and contribute to the economy?


They don’t have a functioning military and solely reliant. Their banks are solely reliant on the US. At the moment. They’re insolvent, in my opinion.


So, yeah, that’s a good point. If you can’t defend yourself and if the demographics continue to get worse, they won’t have people that will defend the area. So if you can’t defend yourself, you can’t have a functional currency. Right.


I guess that was a little bit an unintended consequence. And this is something Europeans hate to admit, but of course a lot of EU policy was kind of this dirty secret. The United States were constraining China and Russia, and the Europeans were trying to make deals with them. If you think back them in the entire Russian pipeline network to Europe, and I think with all of it also mentioned, kind of psychological effect was a certain form of infantilization. Right. This idea that military conflicts simply are a thing of the past in many ways, I see the biggest security risk for the United States. I don’t want to over dramatize it, but I see it almost more in Europe than in China or elsewhere, but not because of an actual military conflict, but the commitments to Europe for cultural and historical reasons that this is going to drag down American capacities. This is going to work out. But the European idea and we hear it again europe will now rearment the Titan vendors. They talked about the Germany. If you look at what’s actually happening, it’s just not happening because they know that the populations don’t really have an interest in that.


Yeah. Okay, so it’s not CNY. It’s not Euro. What else is a viable it’s not Japan.




This is what’s making me allude to the fact that I think that anglosphered plus Japan digital currency would be the only logical step. Next logical step. Just in my opinion. I just can’t see anything else out there. The Swiss francs is not big enough. The pound is not a relic of what it was without any actual alternatives that we can discuss. What’s out there? Nothing’s out there.


And by the way, all these, like, newfangled ideas of having some sort of pan global currency backed by commodities. But you know what? John made her. Cain’s backed the Bancorp during the battle for Bretton Woods. Harry Dexter White backed the unit. The SDR was tried and failed. The US. Dollar. Is that pan global currency?




Yeah, it is. I keep arguing with these gold back currency people, and I’m like, what would stop me being the dictator of Albania, of spray paying some lead and saying, there’s my gold? But you can’t really look at it. You know what I mean? No nation gives you a transparent audit. So how could you even have a currency based on such a thing? It’s just silly to me, in my opinion.


Ralph, jump in.




And I think one of the things this is what Mike did so well, I think in his paper that he presented at Westbourne, I think we have to look at kind of the structural conditions. And in many ways the United States has the occasional incompetent administration, but their structural is still more sound than any potential competitor, definitely more than Europe. And I think if one takes a closer look, they’re all structurally, at the moment, more sound than China. And in the case of a real conflict, I mean, these things really, really matter. And besides the rhetoric in America, we.


Expect our politicians to be dumb, and we just work around that.


Yeah, I mean, in a perfect world, the Pentagon would be working with the treasury to weaponize the dollar. I guess in the adversaries, I mean, that’s something the Pentagon has never really understood or really looked at, is like, you can place your adversaries in a certain position, being short commodities, short food, and you can really strain bingo, bingo.


By the way, that is the premise of our paper. Our paper is literally saying is literally saying that rather than rely on overt sanctions, that basically cause everybody to look for alternatives to the dollar. We’re at this really interesting macroeconomic window where a strong dollar policy inflicts asymmetric pain in our largest geopolitical adversary.


Yeah, it’s an absolute logical thing to do. And on top of that, not only can you use the dollar, but you can now use derivatives of the dollars, specifically grains. I mean, there’s only five companies in America that control the world’s grain. You can call them up and cause problems for the world or for China, for Russia, for any nation you really want to target if you really want to get down to that level.


And by the way, it also kills two birds with 1 st, right. Because it basically export our inflation problem because we are in a domestic fight against inflation.


Okay, that’s a great idea. Let’s do that. Great. Okay, so let’s just call this new currency TBD. How about that? Because I’m not really sure what to put in there. There are a lot of cheerleaders, as you guys have pointed out, trying to push other things forward, but I just don’t see the case for them. And outside of just suspending reality, I just don’t see the case for something else right now. I don’t say that as an American. I like, I’m not necessarily trying to kind of represent for the dollar. I just don’t see the viability of other options right now.




I would be I would be the first one waving the red flags if there was an actual alternative out there.


Oh, there was one thing I was going to riff on. Albert, what what you were saying, or Tony, what you were saying in terms of, you know, our politicians being idiots and whatnot. So so my my view on that is that it’s because of the geographic endowments that the US. Has that’s enabled our federalist free market system to arrive and to survive. Because if you think about it, right, if you’re China or Russia with unbelievably shitty geography, it takes an autocratic system to try to hold that bucket of bolts together. To paraphrase Han Solo, why would you.


Want to own all that land if you’re Russia, why do you want to own the east? I don’t get it. It’s just hard to keep it all together. So that’s a great point, Mike. Okay, great. Hey, let’s go from talking to the dollar to talking about the dollar. Okay. You put a Tweet up earlier this week saying when the dollar started breaking upward, you talked about expecting Dxy to hit 112.

So it’s kind of we’re, we’re heading back to where we were last year, I guess. So can you walk us through that reasoning? And you talked about turbulence. Incoming. Can you, can you talk about what that turbulence is?


Inflation. It’s back again. And as much as the Fed doesn’t want to admit a mistake, they’ve absolutely created policies of mistakes and allowed inflation to rear its ugly head. I don’t want to leave it all on, all on the Fed. A lot of it has to do with Yellen’s actions and what she’s done with the dollar and then bringing it up and bringing it down. I mean, this goes to Michael’s point of the weaponization of the dollar is, you know, Yellen takes the TGA and she’s in charge of dollar policy. She can take the dollar up. And what she did, and it drove all the liquidity in Europe, back in Asia, back into the United States, which kept our markets propped up.


For people who haven’t watched this word, can you talk about what the TGA is?


And then if the treasury general account, she can use it in many ways, but basically it’s injecting liquidity into the economy.


And how much at what scale has she done over the past, say, nine months or something?


Prior to the midterms, she was doing about 160,000,000,000 a month.




Okay, that’s a lot. When you say injecting, where was that going?


Well, I don’t know exactly where it was going. That’s not really clear. But she was absolutely using it and I’m sure it’s been dispersed throughout the economy and whatever sectors that she needed to send it out to to rally the markets. And she did a good job. I mean, the markets have stayed up here over 4000 for quite a long time and we don’t really deserve to be here at the moment. The problem that we’re having here now is as you rally the markets now, commodities start to rally. I mean, Europe was in a zombie status. China has been in lockdown for the most part. Yeah, I mean, they’re doing this, but as they reopen, inevitably inflation is going to come back. Wage inflation has been persistent. That’s not going to wave. I mean, I mean, honestly, the workers probably deserve wage inflation after 40 years of getting nothing. So, you know, I can’t really blame them on that aspect. But again, we’re, we’re sitting here with a hot PC PCE number today. You know, it looks like CPI is probably going to be sticky again next, next time around. And the Fed is going to be talking about 50 basis points when they, you know, previously the markets were calculating that we’re going to do a pause or a pivot in a later in the year.


That’s just not happening. A couple of meetings.


No. So I mean, this honestly feels like Q one of 22 to me. The whole setup right now feels like Q one of 22.


We’re right back where we started, Michael. Right back where we started. Because of Fed policies, they’ve done nothing to correct the situation with inflation.


Okay, so what’s going to happen to drive the dollar up? Yellen stops spending out of the TGA or doesn’t spend as much, or Fed policy, all the above. What happens to contribute to that?


I think it’s going to be a combination of Fed policy and then the ECB, the Europeans being hawkish themselves. But I think that we’re looking at 75 basis points, probably going up to five and 5.75 on the Fed funds rate by the end of the year, maybe even six. I don’t think they can go over that. But I mean, that alone should take the dollar up to 112. I’m sure they can, but taking the dollar over 115 to 120, you’re going to start causing massive problems. Rest of the world, you just start breaking things.


Can I ask Ralph a question?


Absolutely, sure.


So Ralph, I’m curious. I agree with Albert’s thesis. When I look at the inflation prints in Europe and in the UK, still so high, that gives me a little bit of pause right again on betting on the dollar continuing to rise, except when you look at the state of the economy. And so I’m curious how you see that, because I believe the last UK GDP print was very close to skirting the zero bound. So how much more can the BoE or the ECB really do?


Sorry, before we do that, let’s move into rough section, which is inflation hold on Europe, right? Which is exactly what you’re talking about. And so we saw Austrian CPI committed 11.2% year on year. When was the last time that happened, Ralph? I mean, what we’ve seen over the past few months maybe, I don’t know, 40 years ago or something.


Oh, yeah, before I was born. And so this has been significantly long time ago. The problem is, despite what the ECB does for European politicians, it’s always the 1930s. So the answer, the economic problem is that it must be a demand side problem. So every time the ECB hikes rates, the government comes in with fiscal expansion. And Australia is the best example for this. Pretty much everything that would have been caused by higher rates has been softened by government spending and now expected government spending to happen in the future, which is they very slowly or not at all changed their behavior. So the, the idea to. Kind of, you know, pull money out of the system due to high interest rates is not working as as expected. I mean, we we saw it in Germany. It was when we met the last time, right? They said that there was actually slow growth in Germany in Q four 2022. Then they said that was a slight contraction of 0.2. Today we got the second revision. That actually it’s a contraction of 0.4. And that’s mostly because there was government spending. Otherwise it would have been significantly worse.


And I think this is really the problem we are running into. So every time the ECB tries to high grade, governments will jump in with their own fiscal policies, trying to soften it. And what, of course, happens as a consequence, europe is losing its industrial base. So supply side politics, which would be necessary, they become more and more difficult. I mean, Tracy on the last weekend did a great job in kind of just listing all the aluminum smelters and all the heavy industry that has been closed down. We heard today that Germany’s chemical giant BASF is shrinking operations all over Europe. So at some point, you cannot just turn this back on again. So I’m very worried about the structural health of Europe, or even if we look at R and D and spending, right out of the top ten R and D spenders, there is one European company, which is Volkswagen, but all the other companies, most of them are American and some of them are Asian. But Europe is losing kind of connection to all of this just as a challenge to you guys. I mean, name one groundbreaking innovation or one groundbreaking area, and let’s say the high tech area where Europe or European nation was on the forefront in the last 20 years.


Nothing comes to my mind.


Well, ASM Lithography.


Ralph brings up a great point, and one I usually harp on a lot is whenever you have political policies intermixing with economic policies, you have a problem because politicians want to get elected and their terms are a lot shorter than economic policies need. You know what I mean? That’s just the reality of it. I mean, the Germans, they say they’re tightening things up, but then they give 80% of their population, 80% of their paycheck to stay home. That’s not going to help.


And by the way, all this, right, all the slowdown in BASF and all that that you’re talking about, Ralph, this is with an extremely benign weather backdrop this year that enabled Ttf and NBP to collapse.


So huge benefit.


I think there are two other very important issues that particular European politicians don’t get and that you and Mike had also talked a lot about, which is there is this weird idea that if Europeans and Americans stop drilling and supplying the world with fossil fuels, that somehow the prices will go down. But exactly the opposite is going to happen because we’re still going to consume it, we just no longer produce it, which is great for all the non European and non American producers. And the second part, what I think Europeans still don’t understand, is there is still this idea that the world will go back to as it was, let’s say ten years ago, like very early on. But even if there were, new should stop. Right? It’s obvious that there is a new kind of industrial policy happening that French showing that reassuring is going to happen and that will push upwards pressure on prices. And Europeans, at some point, they’re going to feel this. I mean, we see. With Germany, Europe is increasingly becoming a continent that has to import more and more, but everything we can export is becoming less and less.


That is not a sustainable model unless we say we just become the world’s biggest retirement home tourist destination. But other than that, it’s really problematic.


That’s interesting because I remember Belina and I were talking about what Europe should do and it was definitely bring black your supply chains to Eastern Europe, north Africa, closer to home, something Europe can drive in investments and actually hold it close to close to their hand there. But they just have not done anything. They want to rely back on the old guard of let’s go to China and grab their market share. Meanwhile, Africa is sitting right there. That’s going to have a bigger population in the next 25 years than China and Younger and Hungary for innovation and products, but they haven’t capitalized on that.


It’s like an inversion of the 19th century, right, when there was once a time where Europeans looked at the map and so everything is a potential part of the empire, not like they barely looked at the map at all. And I think it shows in their economic policies.


Yeah. Just going back over to what you were saying about the short termism of governments, and we see this, at least in the west, the bureaucracy is supposed to be the part of government that helps the office holders to see the longer term. But the quality of our bureaucracy has deteriorated so much over the last 2030 years that they just don’t care.


They don’t care. I put a lot of blame on social media right now. I mean, all these politicians get on social media and do catch phrases and this and that, and everything is in the real and now and immediate and so on and so forth, six months down the road. They don’t care. Simply, they don’t care.


Yeah. Ralph, one of the things that you tweeted out earlier, and I know Michael found this really interesting, was the bankruptcies in Europe. This was a Eurostat chart that came out looking at the rate of acceleration of bankruptcies across industries. Can you talk to us about that a little bit?


Yeah, I mean, there’s a couple of factors not work. I mean, one is that a lot of these companies it’s kind of what happened in the financial sector during the Great Recession where you had these zombie banks. I think a lot of this is now also happening in the real economy and the industrial economy where many companies have been propped up during Cobit, they have been propped up by very low interest rates and this is now coming to an end. I can only speak for Austria, but there are many companies, of course, also have loans, some of them with not fixed interest rates. And of course they are squeezed now, so they have huge problems in refinancing themselves. And I think this is just the beginning. I don’t share the optimist. I’m kind of a little bit Albert here. Everybody who says that either inflation is going to be over, there’s no trustworthy indicator for me that inflation is ending anytime soon. And the second one is this idea and you mentioned this also, Tony, one of your tweets. I think the IMF forecast for growth in the Eurozone are too optimistic. I think that factors that are not yet calculated.


Absolutely. And of course the big elephant in the room comes and go to mike, did you mention, is of course, energy. Like, everybody is like, oh, the energy crisis is over. But that’s only because elasticities in the energy sector are very low. So yes, if there is a lot available right now, it immediately affects the price. But there is no guarantee that it’s going to stay like this in the medium and long term. And if I look at European policy, I think that it’s going to get worse before it gets better seems more likely. And you see gradually signals like this coming from the International Energy Agency and from Goldman Sachs. So all of a sudden the optimists of two months ago say, well, it might be more problematic than we anticipated it to be. And one part of the story is something that also Mike mentioned. At some point, I think we have to say this also openly is this obsession with ESG and an energy transition that makes the promise that by 2030, 2035 the European economy is going to run entirely on renewables, which is an unrealistic. And we want to be more outspoken about it, which I think is a ludicrous proposal that cannot be fulfilled.


I call that the grativerse.


Yeah, we’ll all be driving.


As a quick last point if we want to put real numbers on it. I mean, the German government alone, the Europeans spent almost a trillion dollars on energy last year. The Germans spent about $465,000,000,000 only on energy and all it got them was the declining economy by 0.4% in the first quarter. So what is their strategy if they want to do this again next year and we see it in the spread? At some point markets are going to look at Germany and say, listen, your reputation has been great for the last 40 years, but can you really still.


Deliver what what you germany’s got a lot of they’ve got a lot of capacity for fiscal spending. I just think they haven’t opened up as much as they need to yet. I mean, I think that’s part of.


Their they can’t they go into a doom loop of inflation.


What happens when Mother Nature doesn’t cooperate next time around?




I think all of you are right. Tony’s right. I think there is still wiggle room. But what are they doing with the money? Right? Instead of making capital investment and saying, okay, we solve the problem, to do something they pretty much put it all into welfare checks, energy subsidies, but exactly. Encourage people to spend more and more products that are less and less available. So what’s the only thing you get? It’s inflation. I don’t know what the politicians are looking at.


Speaking of that, let’s talk about everyone’s favorite central banker, Madam Lagarde, and the choice that she has at the next meeting. She said earlier this week that they’re likely to raise by 50 basis points at the next meeting.

So what we’ve seen, the last two rate hikes were 50. We saw a couple of 75s in September and October. So there had been a hope like there was in the US. That things would not loosen or ease, but at least slow down on the rate hiking front in Europe. But with the pace of inflation, it almost seems like they don’t really have a choice, right?


I would agree. Yeah, I think they don’t have a choice.


Okay, well, that’s it.


Well, I think they’re going to try. But what I really think reading between the lines of all the tough talk with all the world central bankers what I think everybody if you look through to their actions so far, I think everybody has been holding their breath, hoping that the Fed is going to engineer a global recession so that they don’t need to be the ones to have to administer the medicine. But the problem is, and I alluded to this in a thread a couple of months ago called geopolitical mosh pits, right? We’re in this every man for himself world where everybody’s got a domestic inflation problem. And so what the Fed does needs to sorry, the United States interests need to take precedence over necessarily worrying about other central banking interests and vice versa. But the problem is that right now the US economy is still humming along whereas the rest of the world’s economies are faltering pretty badly already. Your guess is as good as mine. I just think that Lagarde’s job is really tough because there’s no panned global bond market. Really. So she’s got this ridiculous Tpi mechanism where she’s trying to hold together sovereign spreads and the ECB’s sort of bond purchases as a percentage of GDP already at like 60% compared to the Fed at like 34% compared to japan at 120%.




I’m glad you mentioned that Michael, about nation states interest because it’s one of the things I harp on, especially when I talk to younger people and they ask me about geopolitics. The first thing you have to look at is a nation’s self interest and there’s no better time than right now to prove that example and you’re seeing it firsthand. All these nations, they have to have their own self interest that are before anything else at the moment.


And that’s normal, right?


That’s healthy.


I think that it’s so silly when we have to consider other people. Of course there’s a time for that, but it’s not right now. You have to really look after your own country, whether it’s India, Germany, US, China, whatever, it doesn’t matter. You have to look after your country first. Rough.


But that’s the thing. Exactly what Albert just said and this I think makes it an even bigger ticking time bomb for Europe. You have notice absurd situation that politicians of member states of the EU, they want to continue to do populist economic policies while when they fail they can put blame on the Europe, on the ECB. So technically what probably should do before the next and out sort of a rate hike is to go out and say listen, cannot clean up the mess that you guys make in the domestic economic policies. And of course that’s not something that she’s probably going to say, but that’s really the dilemma. Data us almost have an advantage with the somewhat something that Albert is criticizing all the time, justifiably so with the kind of the chummy relationship between the Fed and the government. But at least it all happens within one state, right? It all happens within one country. And also going back to what Mike said about the federal structure. But in Europe, it’s kind of the worst of two worlds because the ECB tries to fine tune the economic problems via interest rates and the politicians that just go out and say, oh, I know you have to pay more on your loan, but here is an extra check for you.


So you could almost say it’s like the nation states are mocking in the sense what DCP is trying to do.


Yeah, Mike, you said that Lagarde has a very hard job. I actually think it’s very hard because it’s very easy. There really isn’t a lot of choice there. It’s hard having the wherewithal I guess to go through with these things that are probably going to end up being.


Pretty painful, by the way, to steal man the other side a little bit. Okay, there are some that say that okay, well the Fed, because we have all these bilateral currency swaps, the Fed is going to take care of all its friends. Right. And so we actually saw a little bit about that. I wrote a thread last year about how, when the Yen, for instance, started its first approach towards 145 ish 140 ish I got some talk from a very well placed source that basically the Fed, in conjunction with the DOJ was allowing the BOJ to essentially buy us ten years to basically kind of paint a picture to stymie the depreciation and the yen. Okay? So then we saw this big risk rally. Remember when that happened and the yen corrected back? Well, then I get a call from the same source saying, you know what my people are telling me? My people at the Fed are telling me that, you know what? They can’t hold the line anymore. They’re going to basically stop. That’s when you saw the yen go to 150. Right now we’re in this sort of everybody calls it the transitory boldilocks, where things kind of came down and you’ve got Yellen’s games with the TGA, et cetera.


But I really think, and I think I agree with everybody on on this call, that all hell is going to break loose again when the dollar starts approaching 110 again. And this time maybe there won’t be that sort of bilateral help.


Yeah, michael is absolutely right. I heard the same thing about the Fed and the BOJ on top of that.


I thought you were a source, Albert.


Right, because I talked to you about.


It a couple of times.


But they do the same thing with the Aussies and New Zealand and Canada. They give them marching orders, say, hey, we’re going to paint a picture over here, so gives us room to do something over here, so on and so forth. But like I said, that’s the Anglosphere and plus Japan. That’s why one of the things that led me to believe is like, next thing for a currency would probably be them. But they already work together as it is, whether the market knows it or not, they talk and they work together. Yeah.


I think it very often comes back to this very point that this is something that Michael’s and I said before it’s that, of course, what underwrites the dollar as the global reserve currency and the most powerful currency is because the United States have the most powerful economy. Whatever problems they have otherwise, their economy in many ways is still the most dynamic and the most innovative. And this is what I interfere about. The European situation is we can criticize politics, we can criticize the ECB, but I think we also have to criticize European industry itself. Because like in Germany with heavy industry, they never say anything. Right? They could get together and say this. You hear occasionally a voice there and occasionally a voice there, but there is no concerted actions by representatives of the industry to do something about it. And my suspicion is because they kind of made it comfortable for themselves because they know they get government subsidies, they might have to produce less, but I’d rather depend on the biggest monopoly there is. The state than on those pesky customers or those potentially unsecured international markets. But that’s a very short time perspective.


I mean, this is not something it can do forever. And again, the only reason why Europe could do what it did was because they could rely on the United States to provide with the bluewater navy to everything else. They provided the framework in which Europe could do what it did. But as this framework is changing, because Albert would never talk to me again, I’m not going to move all multipolar because you would because I don’t agree with that idea either. But it’s definitely changing, I think. I think Americans are becoming more sensitive to listen, guys, you have been pre writing for 60 years. It’s time to do something yourself.


Yeah, go ahead, Mike.


So, Ralph, you touch upon another theme that we raised in our paper, which was, again, it goes back to geography, right. Because the US has had these geographical advantages. It’s allowed its military strategy to focus outward on force projection and develop that blue water navy. Right? So when you compare that and compare and contrast that to China, right, where you could argue that they’ve got greenwater superiority within the first island chain by virtue of 350 vessels versus our 270, but the gross tonnage is one third that of the US. Navy. They cannot force project. And so if you talk about real force projection and geopolitical power right. Again, to steal man the other side, what would cause the US. To see the T hegemony? Well, it would be that scenario where China somehow decides that, hey, you know what? We are going to subsidize global maritime security for the good of the global commons. Do you see China doing that? I sure don’t.


Not for all of us to century. And it takes a lot of money to build up a navy. And then you need combat experience. And then on top of that, any kind of conflict in Taiwan or the South China Seas shuts down their ports. China cannot afford to shut down their ports. I was going back and forth with Elbridge Colby about this. He’s a military guy, and I love the guy. Right. But when you have to look at the economic aspects of it concerning the dollar and China’s food insecurity problems and their economy in general, if they invaded Taiwan and shut down those ports and their economy collapsed, she would be dead in 30 days.


There’s a little issue of China having to import 80% to 90% of its crude, all of which pretty much come through the Strait of Malacca.




I mean, so but this is this is something that it’s really important for you to talk to the military and get that USD thing out there and talk about commodities and talk about the economic ramifications and say this is a significant deterrence for China to invade. This is a significant deterrence for any nation to really go after because there’s just no money around. The economies are really weak. So it’s a great thing that you’ve done.


Thank you. I hope you guys enjoy the paper. Yeah, sorry.


Just going back to what you said, Mike, about China not having the blue water navy, really, to protect trade and waterways. They have tried that with the Belt and Road. It’s been less than a decade, but it’s kind of been a failure since the start of it.


The thing with belt and road, right? If you think about what it is, they are expending tremendous amounts of national treasure to recreate what the US. Is naturally endowed with.


Right. Yeah. It’s very inefficient.


It’s very corrupt, and they’re failing at that.


I start with those. When I was trying to put in a tendering system for the Belt and Road transparency, I asked them, how much are you comfortable losing to corruption? 20%, 30%, 50%? People just shrug shoulders. Nobody wants to even look at those basic transparency issues, much less understand that that spending is incredibly wasteful just for some sort of desperately seeking some sort of relevance with third tier countries. Right. I mean, no offense, they’re great people and all that stuff, but they are not necessarily economic powerhouses, and they’re not necessarily strategically placed. So it’s a big problem, and corruption is a big problem in those places. So not only are they going to have to buy off Chinese industry to go in these places to build, they’re going to have to buy off the officials in those countries to get the infrastructure done. Okay, guys, let’s bring this back to Europe. Since Europe is kind of our last group. Ralph, I get the sad sense that when Mike talks about dollar resurgence and Albert talk about dollar resurgence and inflation is pushed on the rest of the world and these sorts of things, europe and European industries show this as well.


Europe isn’t really a growth engine, of course. Right. So is Europe the worst place of the regions in the world generally, when we see a dollar resurgence and inflation and kind of these coming headwinds? Probably not.


I mean, I remember I asked all about this, I think almost a year ago, once on Twitter. I think that the ties between the US. And Europe are still so strong that I could imagine that the US. Would be willing to adapt their policies in a way to protect Europeans from the fallout that will find some ways to support them. Okay, I think that, again, maybe I’m putting too much hope in the US. Maybe this is wishful thinking on my part, but I think that these ties are still strong. I think this is the US. I think they still view Europe as part of the national interest. But spoke to be very clear, I’m glad of I mean, something that bothers me, really, is I think the best thing Europe could do would be to place itself as Athens to America’s wrong kind of place I can feel to the strongest player on the block. But don’t try to be as again, Albert, we’ve discussed it many times to participate in this fantasy of the new multipolar world where you will balance the US in a quasi agreement with India and China. This is all fantasy.


None of this is real. When push comes to Sharp, I think the US are still the best bet for the Europeans. But to be kind of a psychological problem in Western Europe, I think this is another thing.


Of course.


I think the Eastern Europeans, particularly Poland and others I think are much more willing to attach themselves or kind of align themselves with the US. I think Western Europe and it’s mostly cultural, psychological that they still wish to be kind of a counterweight potentially to the rude Americans and the alcohol.


We’re definitely rude. We’ll take that. Okay, guys, we’ve been an hour, so I appreciate all of the thought you put into today. For everyone watching, please don’t forget about the promo. The Friends of Tony for promo promo 1st 25 subscribers. Guys, I really appreciate your time. Time. Have a great weekend. Have a great weekend. Thank you very much.


Thank you for doing this.


Thank you.

Week Ahead

The Week Ahead – 18 Jul 2022: Biden’s Saudi Arabia trip 🛢️

Biden’s Saudi trip ended up being a disappointment and there really is no immediate spare capacity, which is a surprise to no one.

What does the appreciated USD mean? We’ve already seen a fall in Sri Lanka and other places which we’ve talked about for weeks, but where is that going and when will that end?

We also talked about the FOMC expectations. What will the Fed do, especially given CPI PPI data? We have to also keep in mind that we have an election coming up in November, so it’s really hard for the Fed to keep the heat on.

Key themes:

  1. Biden’s Saudi Arabia trip 🛢️
  2. USD🚀 rocket ship and fallout
  3. FOMC expectations (CPI/PPI)
  4. What’s ahead for next week?

This is the 26th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:


Time Stamps

0:00 Start
0:49 Key themes for the episode
1:55 Biden’s trip to Saudi Arabia
3:23 PR game and disastrous foreign policies
5:00 The US President looks like he has no power?
6:17 US can be a marginal price setter for oil, but…
7:34 what happens to crude prices?
10:08 Why is USD pushing higher?
11:22 What’s happening in the Euro Dollar and why?
13:51 FOMC
19:00 What happened to the gasoline prices?
20:07 When will Yellen give up on the 2% inflation?
23:45 What’s for the week ahead?

Listen to the podcast version on Spotify here:


TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. I want to thank Albert and Sam for joining us to take a look at The Week Ahead. Before we get started, please, please like and subscribe on this channel and please comment, ask us questions, let us know additional information you think we should have. We get back to every single one of those and we want to make sure that you guys are happy with what we’re talking about today.

So today there’s a lot that’s happened over the past week and even over the weekend that we want to get into. We’ve got three topics here, but there’s going to be a lot of overlap in these. So I’m just going to introduce these and then we’re going to have a pretty open discussion.

The first is Biden’s Saudi trip, ended up being kind of a disappointment and there really is no immediate spare capacity, which is kind of a surprise to no one, but it happened and we’ll cover it. Next is the US dollar, and what does the appreciated US dollar mean? We’ve already seen a fall in Sri Lanka and other places which we’ve talked about for weeks, but where is that going and when will that end? Next is FOMC expectations. What will the Fed do? Especially given CPI PPI data? And we have to also keep in mind that we have an election coming up in November, so it’s really hard for the Fed to keep the heat on when we have an election coming in November or that would be a normal election year.

So Albert and Sam, thank you so much for taking your Sunday afternoon to talk through to us. Let’s first get into Biden’s trip. Albert, can you give us a little bit of a kind of geopolitical backdrop for us? Help us understand what were the expectations and what actually happened?

AM: Well, I mean, the expectations were that Biden goes into the Saudi Arabians in the Middle East and cuts a deal for them to increase production and capacity and name your whatever little policy that they’re talking about. The reality was Biden wanted to get away from the PPI number and the CPI. They’re just atrocious. So he decided it’s a normal thing that politicians leave and go overseas so they don’t have to deal with it.

So he went over to Saudi Arabia meets MBS, which was already a problem considering the comments that he had for the election. But his goal for upping production by the Middle East and OPEC, it was a fantasy. It was nothing more than a PR gimmick in my opinion, that the Fed has been playing in futures and crushing the price of oil. So it was one of these, look here, this is what I’m doing on the grand stage and oil prices are falling, but in reality they weren’t really connected.

TN: So were there really expectations in the administration that there would be additional immediate capacity? Do they really think that that would be on the table?

AM: I don’t think so to be honest with you, Tony. Like I said, this is a PR game that they’re playing now specifically because, like you mentioned, elections are coming up and their intent is to save the Democratic majority in the Senate. The House is lost, but the Senate is what they’re eyeing up. So in my opinion, this is all PR games.

TN: Okay. But the PR game that is really hard for me to understand is the President, regardless of who it is, okay. The President going to a place that is an ally. Saudi Arabia is pretty much an ally to the US. And coming away with nothing. One would think that the Secretary of State and the Nat Sec guys, other guys would have gone in first to make sure that we could announce something positive and nothing happened.

So it seems to me that there is foreign policy disaster after foreign policy disaster with this administration. I don’t want to be putting my own view on it, but is it that, too?

AM: Of course, we’ve had just multiple disasters and foreign policy. But even from the Saudi Arabian perspective, who’s their biggest client? At the moment, it’s China. Why do they have to listen to Biden, who’s made the Biden administration has made unbelievable mistakes in foreign policy and actually risk their security more than anything else. He’s taking the foot off of the Iranians. The Saudis have to deal with that. The Russians are in their own little world of adventures, but there’s no real stability in the Middle East, and the United States under Biden doesn’t really show that there is anyone stepping up to the plate.

TN: Right. And that’s kind of a leadership issue. Whether or not the US is their main customer, the US has been their main advocate in the Middle East and around the world. Or one of their main advocates. Right.

AM: Yeah.

TN: So that’s the big loss that I see is you have a president going in, not getting an agreement with a huge entourage for agreements that should have been done before they arrived, and it just makes them look like they have no power. Sam, is that how you read it?

SR: Yeah. There’s two things that I think the US. Generally gave to Saudi Arabia, and that was global clout and weapons, right? Yes. And the second part is probably very important to the Saudis going forward because there’s only so many places that manufacture weapons that are decent, and that’s the US, to a certain degree, Russia, China and basically Turkey. So you can kind of buy weapons from those places. Guess what? That was a tool that really wasn’t flexed at all.

And if you’re going to flex policy power, that probably should have been flexed a little bit. And honestly, it doesn’t appear to have been at all. So I would say to Albert’s point exactly, we’re not the largest customer when it comes to oil by a mile. Right, that’s just true. But we are the largest supplier for their national defense.

TN: Here’s the thing that I don’t understand is, with US production, we can be the marginal price setter for global oil prices, but we pull that card off of the table by disabling our domestic manufacturers. Is that a fair thing to say?

SR: Well, I would say that that’s the muscle that we’re kind of flexing right now, right? To a certain extent

TN: Okay, tell me more about that. How are we flexing that?

SR: Well, we’re flexing it. I’m not saying it’s good flex. Right. We’re flexing it by not doing anything. So we are basically the ones holding up global price of oil. OPEC honestly has pumped exactly what they said they would pump with a little variability, and they don’t have much marginal capacity.

The marginal capacity was passed to fracking a long time ago. This is not a shocking revelation. So when you’re the global incremental supply that can flip on in a relatively fast manner and you say, we are not going to do that, period, and we’re not going to in any way supplement the regulatory overhangs and the capital overhangs, and guess what? You’re going to end up with a global shortage of oil and distillates, etc.

TN: Right. So what happens to crude prices with the Saudis saying, okay, maybe capacity in 2027? What do we see in the short term with crude prices? I mean, with a recession looming, supposedly, whether that’s real or not remains to be seen. Right. And we had a good retail sales figure on Friday, pretty strong.

So what do we see happen with crude prices in the short term? Is there upward pressure on crude prices or are we kind of in this range?

AM: I think we’re in this range of 90 to 115. Just simply because of the reality. I want to differentiate pre election versus post election. Right. Pre election, we’re definitely in a range of 90 to 115. The Feds not going to let the price of oil gets to the point where people are paying six, $7 a gallon to the tank. So that’s first and foremost.

After that, hands up. Who knows what’s going to happen then? Because Europe’s going through an energy crisis with gas. The price of oil is probably going to go up just because the green deals that the Biden administration are intent on passing are going to ramp up right at the election and just afterwards. So after the election, I could see 130, 140.

TN: Okay. Sam, any near term change in crude prices because of this? No?

SR: Well, near term, Albert’s point, $90 a barrel seems to be kind of the low here. I don’t think we’re going to go much lower. And that’s a combination of DXY at 108, which DXY at 108 is atypical to oil remaining elevated.

So if you begin to have a dollar breaking into the back half the year, that’s kind of the post election story. I think Albert would back me up on that part. You begin to see that breaking. Guess what? The scaling, that makes 130, 140 is relatively reasonable. But you call it 90 to 115. Absolutely not a problem here. And you probably creep back towards the upper end of that 150 because you’ve seen two things.

You’ve seen gasoline prices come down, which means demand is going to remain resilient, if not pick up on the margins. And guess what? That flows downhill. So I would say oil prices, gasoline prices, they look good right now. I saw a free handle on gasoline close to my house. That’s not going to last. That’s not going to beat the system.

TN: Right. Okay. So, Sam, you mentioned the dollar at 108. We hit 109 last week. Why is the dollar pushing higher, guys?

AM: I can tell you why. I’ve been adamant about this. Yellen tell the European counterparts that she was going to drive the dollar up to 110 and above. She’s done this in 2013 before. There’s nothing new under the sun. It’s part of her playbook. She knows what she’s doing. She can even go up another 10%. Now, what that does to emerging markets? Oh, God help them at the moment. But still, the dollar is the most effective tool in their eyes for inflation busting, at least short term.

TN: So how far are we going?

AM: I think we go up to 112 to 115.

TN: Okay, over what time horizon? The next month? The next three months?

AM: Yeah, I think it’s in the next month. I think they want to get this over and done with so they can pivot starting September. Stop the rate hikes. And on top of that, this is something for Sam that could talk about the Fed is I think that Powell probably loses the majority of votes in the Fed for Fed members come October.

TN: Okay, hold on, hold on, hold on. I want to talk about that. But let’s finish up with the dollar first. Okay? This is good. Okay, so with the dollar, help me understand what’s happening in the Euro dollar markets right now. Okay. We’ve seen the Euro dollar fall as the dollar rises. What’s actually happening there, and why.

SR: Not me?

AM: Okay.

TN: Yes.

AM: I’ve been adamant about this. Also, as global trade slows down, the need and use of Euro dollars becomes less so. And a lot of people sit there mistake that as the dollar is dying and gold is coming back and whatever name your crypto, that’s supposed to be the next reserve currency. But that’s just the reality of the moment, is they are purposely trying to kill demand. When you kill demand, the Euro dollar starts to fall because there’s less need of it. That’s just the most simple basic explanation that I can give you at the moment.

TN: Okay, so, Sam, that is non US demand in US dollars, right?

SR: Yeah. Dollar denominated non US debt.

TN: Okay. And so the largest portion of the euro dollar market. Is that still in Europe?

SR: No, it still flows through Europe. Right, okay. But it’s a much larger market than simply Europe.

TN: Okay. It tells me outside of the US, there’s a slow down generally. Is that fair to say?

SR: Yeah.

TN: And we’ve talked about this before. Europe has big problems. We saw China’s numbers last week, which are obviously overreported anyway, so Japan is having problems. So all the major markets are having issues. So the Euro dollar is just a proxy for what’s actually happening, those markets through trade and through the demand for actually US dollar currency spent outside of the US.

SR: Correct.

AM: Yes. Very simplistic terms, yes, that’s exactly right.

TN: Good. Anything else for the viewers here? Like, anything else that you guys want to add on Euro dollars just so they can pay attention to things?

AM: Not really. It’s a very good just simplistic, basic understanding of Euro dollars. I mean, we can get into the whole mechanics of your dollars, but it’s so big it’ll take up an entire episode.

TN: Okay, good. Very good.

SR: Very into the weeds very quickly.

TN: Good.

AM: Yeah.

TN: So if anybody’s watching has questions about Euro dollars, let us know. We’ll get Sam and Albert in on this and help them answer the questions. All right?

Okay. Finally, FOMC, okay. We saw CPI hit to the high side. We saw PPI hit to the high side last week. A lot of talk about 100 basis point hike. Sam had a newsletter out that said could be 100, could be 75. And Albert obviously thinks that there’s going to be a pivot in September. So Sam, do you want to kick this one off?

SR: Yeah, sure. I do want to point out that I said there’s a difference between should and will in the newspaper, and the notion was, should the Fed go 100 now? Will they? Probably, unless the University of Michigan survey comes in light. And it came in light. So you’re 75 basis points now. It’s that simple.

TN: Okay.

SR: Very straightforward. The Fed probably wanted to have flexibility for 100, but when they tied themselves to something so stupid as the University of Michigan survey and it falls I mean…

AM: You know what, Sam, the funny thing is that you say that is, that is exactly what they look at, for making their policy decisions. The only thing they look at.

TN: University Of Michigan.

SR: I know they look at it. The problem was they said it out loud. Like, you don’t say that out loud. That’s the mysterious parts of it. It’s a survey of a very small subsection that is basically never been tied to reality at all across any time frame whatsoever. And like yeah..

TN: It’s like making policy based on Atlanta GDP now. Right. It’s like a lot of these things are proxies of small survey sizes of whatever.

SR: Error terms that interact with each other, yes.

TN: Right. I think a lot of people who watch markets see these indexes, like the University of Michigan index come out and they think that it means something, but it kind of does, but it kind of doesn’t. And so I always recommend people, you have to understand these indexes. You have to understand what these releases mean. You have to understand the methodology. If you’re going to make investment decisions based upon these things, you have to understand what they are.

And as you dig down beneath these things like University of Michigan was put out what 30 years ago initially. The methodology hasn’t changed much since then. So if you imagine the technology and the capabilities 30 years ago and they carried that forward, it’s pretty light. It’s pretty light. A lot of these things are pretty light.

AM: Yeah, but they want it like that though Tony. They don’t want to update their stuff because they don’t want transparency. Seriously.

TN: It’s true.

AM: If you want to massage the numbers, you go with what you know, what you know is flawed and that’s what you go with.

TN: Right.

AM: I had a quick question for Sam. Like I said, I think that they’re going to pivot in September after 75 basis point rate hike now and whatever CPI coming in in August. But I don’t think this is the right decision for them to pivot this early because they’re expecting demand to come down and I see no demand coming down anywhere at the moment. So what happens if they sit there and try to pivot for September, October, November, election time and then January, December comes along and demand is sky high again? What does that do to inflation for 2023?

SR: I think it’s complicated, right? Because it’s kind of the goods versus services problem going into the back of the year. Right. We’ll have plenty of goods, print, crap on store shelves and Target for toys and whatnot because that part of the supply chain is solved.

What’s going to be persistent on the CPI price is going to be shelter, which we all know is six months lagged and is going to be a problem for the rest of the year. And there’s nothing they can do about that because their methodology is, again, stupid. So there’s nothing they can do on the prints from here out.

They’re going to have prints that are sitting at 30 basis points plus just because of shelter and it’s weight in core, that’s going to be a big problem for them on the CPI front. So if they pivot, they’re basically going to have to say that, you know, look at headline, it absolutely plummeted. Gasoline.

TN: Will we get a core rating, x Energy, Food and shelter? Will we start quoting that?

SR: Yeah. That’s what I started looking at for the exact reason of trying to find a pivot. Because eventually that will be the metric that they are forced to go to if they want to pivot. It’ll be SuperCore and guess what you call it supercore.

SuperCore doesn’t look that great right now, but it could look pretty interesting if you begin to have gasoline coming down 40% month over month with what the next one is going to say or 25% month over month. So you’re going to continue to have some volatility on the headline CPI front, which is basically what the Fed is going to have to look at in order to pivot.

TN: Okay, so can I ask what happened with gasoline prices? We still have 94% or whatever utilization. Crude prices haven’t come down that much. So why have we seen a 30% fall in gasoline prices over the past three to four weeks?

SR: Recession fears?

AM: Yeah.

TN: That’s it. Okay.

AM: Yeah, pretty much exactly. It’s just the narrative of recessions coming and trying to kill demand based on that. It’s just like I said, PR games, nothing more.

SR: The one thing that I want to point out that I think is really important to kind of consider for Albert’s point of a pivot is equities tend to move in a six month precursor. And what you’ve seen since July 1 is an absolute rip in home builders and a relative squashing of utilities.

And if people were betting on a longer recession in a longer Fed cycle, XLU would be the buy and homebuilders would be the short. And that has simply not been the case so far.

TN: Very interesting, Sam Rines.

AM: When do you think that Yellen this is for both of you, when do you think that Yellen gives up on the 2% inflation number and says 4% is the goldilocks level?

TN: Sam Rines you first. It’s a great question.

SR: I don’t think they go 4%, but I think they say, and they’ve begun to do this, if you go back over the last six months of speeches that 2 to 2.5 is fine.

AM: Still it’s going to be higher.

SR: They’re creeping it up. Right. I don’t think it’ll be 4%. I think between two and 3% is a reasonable target, blah, blah, blah, given and they’ll go into things like because of the way that we measure CPI, 2 to 3%, blah, blah, blah. There’ll be some.

AM: Fun times.

TN: I think if they did that, Albert, I think it would be after the election.

AM: Oh, of course. They’re not doing anything that’s going to trip up Operation Save the Democratic Senate, you know what I mean? They’re just not going to do that. Right?

TN: Yeah. I think people are already really upset about inflation. Companies are starting to report or expected report numbers down, their earnings down, and so it’s hurting everybody.

AM: Yeah, but everything they’re doing is just going to make inflation worse in 2023. But it’s going to come back with a vengeance because unemployment is still unemployment is going to start ticking up, because…

TN: It’s not an election year. Nobody cares because it’s not an election year.

AM: Stimulus checks will flow again. It’ll be fun.

SR: The one thing, again this goes to Albert’s point on, will a potential September pivot be a mistake? Pepsi’s report this week showed a 1% organic volume growth and 12% pricing. They put 12% pricing and consumers and had volumes creep up 1%. Guess what? If companies can get away with that, they are going to all day long, and they will in fact, make a fortune on the back side of this.

AM: Of course.

SR: Paying attention to that demand destruction has not crept through yet. If you can push that kind of price and not have volumes fall, guess what?

TN: Well, the biggest thing, of course, and this is a no brainer, but prices are not going back to where they were. They are not going back to where they were. This is not a temporary inflation thing. And it may have started that way, but the way we responded to it was completely wrong. And it just baked in these supply side things that flowed all the way through to the retail side.

AM: Wage inflation alone. Wage inflation alone.

TN: Yeah. But I think we’re going to see more on the, say, low, medium side of wages. I think in order to keep up with a 12% price hike in Pepsi, you’re going to have to see more action on the wage side.

SR: Granted, that was mostly free online. That was mostly salty snacks. And it might have had something to do honestly, it might have had something to do with more frequent gasoline stops. You buy more chips. But I wouldn’t read too much into that. Right. I do think that their ability to push price is pretty good.

TN: Great.

SR: Yes. To your point, it’s a step function in pricing and therefore it’s a step function in inflation. Great. Okay, guys, 60 seconds. What do you see for the week ahead? Albert, go.

AM: Commodities. Rebounding commodities. I’m long wheat. I think there’s problematic globally for wheat. I want to see wheat prices start to track back up, to be honest with you. Same thing with oil.

TN: So soft and energy.

AM: Yeah.

TN: Okay. Sam?

SR: Yeah. Watching the inflation trade, honestly, and I think it’s very similar to Albert’s point on oil. And wheat, I’ll be watching the relative sector distribution pretty closely here, looking for those like XLU versus the housing guys versus some of the other trades to see what people actually putting money to work are really thinking, not just by them.

TN: Very good, guys, thank you so much. Thank you so much for taking your Monday afternoon. Thanks, everybody, for watching our late week ahead. And guys, thanks. Have a great week ahead.

AM: Thanks, guys.

Week Ahead

The Week Ahead – 13 Jun 2022: CPI & “Peak Inflation”

We had a chop last week. And towards the end of the week, we had the CPI print, which put a damper on markets. In this episode, we’ll talk about CPI and peak inflation, which people have been talking about for months, but we haven’t quite hit it yet.

Of course, we’re going to talk about the hot dollar, and we’re going to talk about fuel inflation and things like refining capacity and even a nat gas plant explosion that happened here in Texas last week.

And then finally, what is going on in the week ahead?

Key themes:

  1. CPI & “Peak Inflation” – Core CPE, hand off from goods to services, Fed policy and markets.
  2. Hot dollar – DXY has only been higher in Feb 1985 and Jan 2002. Fed, Dollar, Yellen, etc.
  3. Fuel Inflation – Refining capacity, natgas explosion.

This is the 22nd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:


Listen to the podcast version on Spotify here:


TN: Hi everybody. And welcome to The Week Ahead. My name is Tony Nash. We are with Tracy and Sam today. Albert is in an undisclosed location, so he won’t be joining. But we’ll have a good show anyway. So before we get started, please like and subscribe. And as importantly, please comment. We really appreciate those. We respond to all of them. And it’s great to have the engagement.

This week. We had chop, as Sam talked about. And towards the end of the week, we had the CPI print, which really put a damper on markets. So we’re going to talk about a few things. First, CPI and peak inflation, which people have been talking about for months, but we haven’t quite hit it yet. Of course, we’re going to talk about the hot dollar, and we’re going to talk about fuel inflation and things like refining capacity and even a natgas plant explosion that happened here in Texas last week. And then finally, what is going on in the week ahead?

So first, CPE was all of the focus for the last half of the week. Sam put out an amazing note, a couple of amazing notes this week talking about inflation and what the Fed will do. So we’re looking at a chart right now on core CPI. And Sam, can you walk us through why the core matters and what’s happening there?

SR: Sure. The core matters because it strips out food and energy, and that’s what the Fed likes to look at. Right. That’s what the market looks at for underlying inflation dynamics generally. It’s kind of a quick and easy number. Luckily, it’s accelerated by some marginal amount on a month over month, year over year basis. Cool. Nobody should really care about that, because when you break apart the actual numbers, the entirety of the deceleration and core inflation was in the good side. We know that goods are coming down, particularly on a year over year basis. They want skyrocket and to the right, that’s just not sustainable.

TN: Is that because of the inventories that were accumulated at retailers and other folks.

SR: That’s part of it. Used cars as well. There’s airline fares are in there, too. So that’s going to be somewhat of a problem as we move forward.

The interesting thing to me is when you actually dig into it. Yeah. Core goods accelerated, but core services, which are far stickier and far more difficult for the Fed to kind of get a hold of accelerated.

TN: Right. So let’s put that up now and then. Yeah. So we’ve got your chart up now about the commodities, less food and energy and then services, less energy. So can you help us understand what that means?

SR: Yeah, sure. That’s just call it the core CPI broken into services and goods. Right. So it strips out food and energy from both of them. And then you kind of get a more of a feel of what’s really happening in the underlying economy. And there was always this big debate among economists about when this hand off from goods to services was going to happen and how that was going to affect the economy. And unfortunately for the Fed and for market participants, that hand off is happening.

You can see it in the data and you can see it in the inflation data in particular. It’s happening. The problem is that you don’t have goods coming down fast enough and you have services moving up way too quickly. And those two components are unlikely to give the Fed any sort of comfort in the next six to nine months.

TN: Okay. With services moving up, does that mean that wages, say on the lower end around things like hospitality and restaurants, does it mean that those wages are going up?

SR: Not directly. There’s some implied probability that you’re beginning to see some movement there, but you’ve seen quite a bit of movement at a leisure and hospitality in particular in terms of the wage gains there.

Unfortunately, the wage gains can be pretty large in magnitude, a 5 to 9 percent type acceleration year over year in leisure and hospitality wages. But it doesn’t really move the needle in terms of overall wage gains because those tend to be the lower end of the income scale.

TN: Okay. So I saw some data this week looking at credit capacity, and it looks like US consumers put record amounts on credit cards in April and May. Does that make you nervous? And I’m not talking about the high end of consumers. I’m talking about the middle and lower end of consumers because there’s a lot more of them. Right. Does that make you nervous?

SR: Yes. And it goes to the conversation that Tracy and I are going to have in a little bit here. A lot of it is due to gasoline. Right. You don’t go to a pump and typically pay with cash. I mean, you did that 10, 15, 20 years ago. You typically go to the pump and pay with a credit card.

So when you begin to have prices like this, move this quickly on the pump side of things and grocery side of things, you tend to have a move up in credit card usage that’s translating to debt because you simply don’t have wages keeping up. Yes, wages are ticking higher, but they’re not keeping up. So the lower end of the consumption, called the lower two quartiles, they are struggling with this, and that is going directly on the credit cards.

TN: I’ve talked to a few people this week about how wages in developed economies work. And if we were in an emerging economy, middle income economy, there would be more flexibility on wages because wages rise faster generally in those economies. But in, say, the US, wages really don’t rise fast.

So on some level, it’s a bit hard for people to understand that wages in the US are generally inflexible, especially at the lower and middle ends. And so it is kind of zero sum. Right. So as gas and food prices rise, that takes away consumption from other areas, right?

SR: It does. And the other thing that it leads to is more of a trend towards unionization and other forms of labor activism. And you’re going to continue to see labor activism if wages continue to trail this far behind inflation. That is an underlying trend that I think is going to be somewhat important for understanding how markets react because labor was fairly cheap, give or take for US businesses in particular.

If you begin to have more unionization, if you begin to have more of an activist labor movement, that is going to be a thing to corporate earnings, not just for the next year. That’s going to be a thing for corporate earnings going forward.

TN: Okay. So let’s talk about corporate earnings. As we look at, say, Q2 corporate earnings, it doesn’t look good, right? I mean, generally the expectation is that their margin compression, all this other stuff really starts to sting in Q2 Is that right?

TS: It depends on the industry as well, because what we’re seeing and what I’m hearing as far as obviously oil companies are going to do extremely well so are refiners right now. But we are also seeing the hospitality industry do extremely well as far as travel is concerned, because we’re seeing a lot of pent up demand where people are not spending retail spending, but they’re still spending for trips.

If we look at US air bookings, for example, there are 93% of 2019 levels for Europe. We’re at 95% for South America. We’re at over what we were in 2019 to the Caribbean. And we’re also seeing soaring hotel bookings right now, even with cost pushing higher and ticket prices higher. So I think that Q2 is going to be very good actually, for, say, oil and gas and the hotel industry. But then as we move into Q3, I think we’re going to see a big hangover in that area in the fall.

SR: And to Tracy’s point, hotel bookings are above 2019 levels and the average price of those rooms through the roof. So you multiply those two together to get your average room rate and Occupancy, those are some big numbers that we’re going to see over the summer. To Tracy’s point, there’s going to be a lot of people that blow it out of the water in terms of earnings, and there’s going to be a lot of people that surprise the downside.

If you were a work from home darling, that was expecting work from home and those dynamics to be permanent and you’re in trouble. Right. That’s the target problem. People aren’t buying goods. They’re going places. And the bifurcation there is going to become stark as we move through the second quarter and probably into the third quarter.

TN: Really interesting. Okay. And then I guess the question that is probably overanalyzed, but people are waiting for is what does this mean for the Fed? They’re still on target for 50 in June, 50 in July and 50 in September. Is that your assessment? And maybe 25 in November? I think.

SR: 50 in November, 50 in December.

TN: 50 in November, 50 in December? Wow. So we’re going back to the 90s.

SR: Basically fully priced in the market.

TN: Is there any chance that they will accelerate beyond 50? Like, would they front load any of that just to shock the system?

SR: No, because I don’t think they want to shock the system. The Fed already has a credibility problem. If you move from 50 to 75, you create more of a credibility problem because you forward guided 50-50, and now all of a sudden you’re telling the market you’re doing 75, the market is just going to stop believing and they’re going to push the Fed and they’re just going to push back and it’s going to be a huge problem.

So I don’t think they’re surprised on that front. They may tweak the balance sheet. That’s a little bit of an easier move to make. Right. You can speed up the MBS role. You can pick up a little bit of the front end roll on US Treasuries, you can tighten that way and have it not be as much of a shock to the system.

TN: Okay.

SR: But have it be pretty interesting on the tightening front.

TN: Okay. But let’s dig into that, though. I’m sorry to spend too much time on our first topic, but if they accelerate the MBS stuff, housing is already kind of at a standstill over a two month period. Two to three month period.

A lot of people have had wealth effects because of the rapidly inflated house prices. So if they accelerate MBS, that perception of housing wealth collapses even more. Right. And so does that have relatively like a multiplier effect on the deceleration of consumption?

SR: It does. But that transmission is pretty slow generally, and you had a significant amount of call it front running against the housing market to take out equity. So I would push back a little bit on a collapse in transactions is going to have a big effect. What you really need to see is pricing actually coming down because it’s about pricing.

TN: Pricing coming down.

SR: Yeah. And pricing. The data is so delayed that it’s almost worthless.

TN: Nominal housing prices.

SR: Yes. But you’re still seeing housing prices hold up pretty well for most of the country. So until you really begin to see a crack there, I don’t think the wealth effect really takes hold from houses.

But you’re probably talking about a September, October type time frame for home prices to be weighing on people’s minds.

TN: Okay. It feels like over the past few months things have changed pretty dramatically. Expectations and these sorts of things. I know you’ve been talking about this for months, but I think the world is just catching up to it. And two months ago everyone said, oh, it’s all priced in. And then we get a day like Friday where obviously it’s not priced.

SR: I’ll stop after this but the interesting part about Friday was it wasn’t just call it the November December meetings getting priced higher for Fed rate hikes. It was March and May of next year that also saw pretty significant volumes and saw the pricing of the Fed movement get pushed pretty hard. So you’re seeing movement across a very long time horizon.

You’re talking twelve months out is kind of what people are pushing on now. So that really creates a different dynamic. But it’s a different dynamic to have eight or ten basis points priced in in September or November. It’s a bigger deal to have quite a bit of tightening priced in for December and March. Those are some out months those begin to really move markets on the margin.

TN: All of this in a midterm year. All of this in the midterm election year.

SR: It’s really painful all around, right? It’s painful all around. But I think the Fed kind of plays second fiddle to Tracy’s point on energy and how that flows through the consumer and the consumer psyche because that is critical at this point.

TN: Okay. So speaking of second fiddle let’s move on to the hot dollar and Fed playing second fiddle to Janet Yellen as Tracy has said before. We’re looking. At DXY that is the third highest it’s been ever it was very high in the mid eighty s it was very high in I think February 2002.

We’ve got that chart up now and now it’s hitting rates that it hasn’t hit for years so we have the Fed doing certain things to tame but we also have things like crude and other commodities that are rising in dollars. Terms. And it looks like the dollar is being pushed up to fend off some of that. So, Tracy, can you talk us a little bit through your view of kind of Yellen and her dollar bias and then impacts that you expect to see.

TS: She said since the beginning she wanted a strong dollar. Right. The problem is that right now this is a disastrous recipe for emerging markets right now with high energy prices and high dollar. And it’s no wonder we’re seeing huge outflows in emerging markets right now as far as investments are concerned. And so really that’s who’s going to feel the pain the most that could throw us to a global recession, for sure.

TN: Right.

SR: To that point, Europe is in a lot of trouble, and the Dixie is basically a measurement of euros and yen. That’s right. If you want to talk about a central bank that’s lost credibility, there’s none better than the ECB and Madame Lagarde and that wonderfully stupid speech that she gave this week, it was spectacularly bad.

TN: It’s what happens when you have a lawyer running monetary policy.

SR: They’re raising rates, and we have them, too. Anyway, moving on. So there is an interesting kind of dynamic there where you basically had the ECB for the first time in forever, say we’re going to raise rates like they just told us straight up they were going to do it and they got the wrong reaction across markets.

The currency didn’t go up. The currency didn’t strip. The currency looked pretty ugly that day. And then you’ve got yen sitting at 135 because they’re still doing yield curve control and it doesn’t look like they’re ever going to end it. So you have the Fed going in the exact opposite direction or much quicker than the rest of the world. In the DM world in particular.

That’s a recipe for a stronger dollar. And until you either get the ECB to smarten up or you get YCC brackets moved, yield curve control brackets moved by the bank of Japan, there’s no stopping the Dixie from moving higher. Right. It’s a two currency, two currencies basis.

TN: Remember Abenomics, when they were fighting to get 2% inflation in Japan.

SR: Yes.

TS: They’re still fighting. That’s why you can’t see inflation, it’s incredible.

TN: Yeah. Tracy, if we continue to see the dollar strengthen, do you think that has much impact on, say, crude prices and fuel prices?

TS: I know that everybody likes to think it’s a one to one correlation. Right. We think stronger dollar commodities. But it’s really not a one to one correlation, especially when you’re talking when you have actual supply demand issues. Right. Like we have a supply deficit across. So a stronger dollar is not going to hurt oil prices when you have real supply demand issues. Whereas if you look at something more like gold, the stronger dollar is not necessarily great for gold right now.

TN: Yeah. So I love it when people like talking about correlations of oil and dollar because many of them don’t realize that actually the positive correlation between oil and dollar is more frequent than many people want to admit, and it’s more persistent than many people want to admit.

So the kind of go to there’s a negative .9% correlation between oil and the dollar. It’s just not true. It’s a fiction.

SR: And the dynamic changed when the US became a major producer of oil.

TN: Right.

SR: That completely changed the dynamic. So if you’re not paying attention to the structural breaking system where the US became the world’s largest producer of hydrocarbons, you don’t know what you’re doing.

TN: Right. So who hurts the most? I think we mentioned EMs, but kind of who hurts the most, aside from Sri Lanka, which we already know? Is it like North Africa, those types of places? Is it Southeast Asia? Just off the top of your head, we didn’t rehearse this, so I’m just curious, what do you think hurts the most?

TS: I think you’re going to see a lot of problems in Africa for certain only because a lot of the OPEC producers there are struggling themselves already. Right. All of those people are the ones that are contributing majorly to the quota misses right now. So I think you’re going to see real pain there over Asia, I would say.

TN: Okay, Sam?

SR: Yeah, I would agree with Tracy. North Africa, East Africa, those look very vulnerable, particularly when you combine food costs with gasoline costs and oil. It’s kind of a toxic mix because if you have oil at 125 Brent, there’s an incentive that you want to pump and the people expect you to pump and buy them food. And if you can’t pump and buy food, then you’re basically an illegitimate government in North Africa.

TN: Right. Which is just trembling all around. Okay, let’s move on to energy prices and gasoline and petrol prices. Of course, we just hit this week again, I think three or four times this week we hit record prices for gasoline. And of course, that’s happening all around the world.

I think in the UK it’s £2 a liter or something like that. In the US, it broke $5 a gallon on average. I think 5.01 this morning, Patrick Dejan was saying that. Tracy, can you walk us through? We’ve mentioned this a couple of weeks ago, but in a bit more detail about what’s happening with refining capacity in the US and why this is such a big deal?

TS: Right. The last largest Greenfield project that we had was 1977. We’ve had a lot of brownfield projects, meaning adding to capacity to already existing refining facilities. However, right now we sort of peaked in 2018 and 19 as far as refining capacity is. And now we’re starting to come down again because we’re starting to see more closures, we’re seeing more unplanned outages.

These facilities are very old. So the operable capacity has been on the decline for the last few years. And if you look at Europe and Europe, it’s even worse. Right. So, I mean, Europe already has a problem, too, and that’s why they buy most of their diesel from Russia, which is going to affect them, because the diesel that they buy from them is seaborne. Right. All of it, which it falls under sanctions.

TN: And they can’t get insurance for those vessels.

TS: Yeah. And so they’re going to have a lot of problem. just to put a little tangible example, there’s a news here in Houston this week that I think it’s a Lyondell refinery that’s being closed, and that refinery is over 100 years old. Yes, our refineries are old. They’re aging facilities. They need a lot of maintenance. And we just really haven’t built out enough capacity for the amount that is coming offline over the last few years.

TN: So, Tracy, I know this is a little bit of a request, but we’re sending $40 billion to countries around the world to do different things. Would it not make sense to have some sort of government incentive for midstream companies to actually build refineries?

TS: Well, yeah, absolutely. I mean, infrastructure projects as far as the oil industry is concerned. If you look at the government’s complaining about oil companies are making so much money. However, where were they when they were in the red and racking up the debt? They were nowhere. How many times do we bail out the Airlines and the auto industry? The oil industry never got any help.

TN: Because they’re bad, tracy, oil companies are bad. They’re all my neighbors. But you would think they’re all bad, evil people.

TS: This is causing… Where our refinery operable at capacity? We’re at 94.2% refining right now, which is off the charts. Good. That means good news for your refining stocks if you own any. But we’re pushing it. We’re using it as much as we’re producing. Right.

TN: Let’s say somehow people came to their senses and said, look, we need to incentivize new refineries. How much just off the top of your head? Ten, $20 billion. Is it $100 billion? Just to get things started? How much do you think that would cost? Since we’re throwing money around.

TS: Since we’re throwing money around, I think if you could throw 10 billion, 20 billion at it, you could get some good projects going or tax incentives or something like that for current refineries to be able to build out or upgrade things of that nature. There’s a lot of things the government could do to help boost refining capacity.

TN: Okay. So while we’re throwing money around, would it make sense to reconfigure some of those refineries to refine light sweet Texas crude instead of, say, I don’t know, Venezuelan crude?

SR: Yes, it’s pretty simple. We built the right type of refining for a certain point, but we didn’t build the right type of refining for now. Yes, we would need to upgrade all of them, and it’s going to be a pretty significant issue.

The other really important thing that I think gets overlooked a lot is that even if you begin these projects now. It’s not a solution for several more years. By several more years, three to four at a minimum, kind of where you would expect these to begin to come online.

And the question is, what does the oil market look like at that point? What kind of mix do we have? So you have to make some fairly large assumptions about what your input mix is going to be down the road. So, yeah, I do think that it would be worthwhile to at least upgrade the current refineries, but I think that’s kind of a pipe dream.

TN: Okay. So while we’re throwing $40 billion overseas, we could take half of that and build new refineries and reconfigure refineries with American crude oil. Am I misunderstanding this?

SR: No.

TN: I just want to hammer the point home again. Okay, great. Thank you, guys. We had a really choppy week. We had a lot of kind of bad news come out. What are we looking forward to next week? Is it kind of more the same? Are we still in a really rough place and the Fed meetings this week, some announcements. I don’t think it’s going to surprise anybody, but what else are you looking for this week?

TS: Pretty much the same. I think we’re kind of stuck in this market low for a while now. So I figure you still see chop, you probably see oil sideways to up again. I expect that trend to pretty much continue into the summer until we really start to see some demand destruction, which we’re just not seeing enough yet.

So I think headed into fall, we have a better chance of seeing oil prices come down because again, I think that we’re sort of going to have a travel hangover and everybody’s going to get home and they spend a bunch of money on their credit cards and the economy is not that great. So that’s what I’m looking at. And again, for the week ahead, I think more of the same.

TN: Sam?

SR: Yeah, you have a million meetings next week of central banks. I think that’s really what the markets are going to key off of. And it really depends who says the most dumb stuff. And it’s going to be a competition because you have Powell and then you have the Bank of Japan. So we’ll see if maybe you get a little bit of a bracket move on yield curve control that would make things a little more spicy across markets. And we’ll see what Powell is capable of messing up when it comes to forward guidance during the press conference.

So I would say it’s more the same, but there’s a likelihood that markets are about as hawkish as they can be going into the meeting and that Powell doesn’t want to push markets more. So there may be a little bit of a rally off Powell just not being an uberhawk, and that might be positive, but I would say you’re in for some serious chop, particularly across the rates markets, currency markets.

And when it comes to equity markets, I think it’s going to be exactly what Tracy and I talked about earlier. It’s going to be the story of travel over retail.

TN: Okay? So next week, let’s talk about who said the stupidest central bank statement. Okay?

SR: Perfect.

TN: You got it.

SR: Does that work?

TN: Very good. Okay. Thanks, guys. Thank you very much. Have a great weekend. And have a great weekend.

SR: You, too. Tony.

Week Ahead

The Week Ahead – 23 May 2022

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The SPX was down 4%, WTI was up 2.8%, and the 10-year yield was down 2.9%. Intraday vol has been an issue all week. What’s going thru an institutional trader’s mind in this market? Sam Rines explains.

On the commodities market, wheat was down 6% this week. Corn ended this week down about 1%. We’ll help you understand ag and fertilizer markets with Tracy Shuchart.

The dollar (DXY) is down a bit this week, about half a percent. Are global central bankers worried about a rising dollar and is there anything they can do about it? Albert Marko gives his insights on this.

Key themes:

1. How are institutions trading the intraday vol?

2. Ags and fertilizer: Demand Destruction vs Supply Shortages

3. $USD 💪 – 🙂 or ☹️


This is the 19th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:





Listen on Spotify:


TN: Hi everyone, and welcome to The Week Ahead. I’m Tony Nash, joined as always by Sam Rines,

Albert Marko, and Tracy Shuchart. Before we get into it, please, please like and subscribe. Please like and subscribe.

Also, we just started our new CI Futures promo. You get your first three months free. Get global markets, currencies commodities economics with CI Futures. Check it out at 

So guys, this week S&P was down 4%. So I think some people are relieved it wasn’t down more. WTI was up almost 3% and the 10-year yield was down 2.9%. So I think it was a little more tame, at least by the end of the week than some people thought it might be, which probably not helpful to everybody, but I think it helped people a little bit, just kind of get a grip on things.

So our key themes this week, first, how are institutions trading this market and more specifically kind of Intraday Vol?

For AGS and Fertilizer. Is it demand destruction or supply shortages or both? How are those playing out?

And for the US dollar strength? Are global central banks happy about it or sad about it?

So today for our first segment, Sam, if you can help us understand this. Intraday vol has been an issue all week and for the past couple of weeks. What’s going through an institutional traders mind in this market We’ve got a tweet and there was a great thread from Kris Sidial. I definitely recommend reading it. So can you walk us through that a little bit, Sam, what they’re thinking about and what institutional traders are doing?

SR: Sure. I would say what they’re thinking about is not losing money, particularly after you had the target earnings, Walmart earnings. There were some landmines out there in individual retail land. That brought up some call it concerns about the consumer. It brought volatility into places you hadn’t really seen volatility recently. So staples began to really get a little more volatile. In particular, they were more volatile than the S&P500 for the back half of the week. So you began to see call it the volatility spread on underlying issuer basis, but not necessarily really spiking at the headline index level.

TN: So traders are trying to keep it flat, right?

SR: They’re keeping their risk very tight. There’s quite a bit of blood in the streets, so to speak, particularly those trading rates and individual equity names. So yeah, I would say it didn’t look like it was that volatile, but the intraday vol was incredible and it took a lot of the risk out of the system. It’s worth noting that a lot of the risk managers out there aren’t looking at day to day vol. They’re looking at Intraday Vols, PNLs. So you’re likely to get a shoulder tap Intraday if you’re playing these markets with too much leverage.

TN: You tap out at like 2:00 PM or something because of your positions? Is that what happens?

SR: Or you just have to unwind one that you like. Right. If you put on a S&P future trade early in the morning and you get 100 point move Intraday in the S&P, you’re going to get blown out of that position pretty quickly. Right. You have to have really tight stop loss limits. That’s it.

TN: Albert, what are you seeing?

AM: Well, the Fed has done a marvelous job of erasing excess wealth out there, excess money. Not just from retail. Retail is dead in the water right now. But even institutional wise, a lot of funds just been obliterated for the past month and a half now? The problem becomes liquidity. And where is it? I’m looking at the order book on the e-minis, and it’s just there’s nothing there. There’s nothing on the buy side,

nothing on the… Nothing. So these massive 100 point moves, I mean, of course, we’ve never seen anything like this, but if you look at the problem with liquidity there, it makes perfect sense.

TN: So, Albert, from a hedge fund world perspective, do you think we’re going to see some hedge funds cleaned out? Obviously, Melvin, we know that story. But are we going to see some issues there with some funds?

AM: Without question, you’ll see a lot of them unwinding by the end of the year. I know a few personally that have closed up shop or in the process of closing up shop. And I can’t imagine there’s at least 25% more that’s out there that are in some serious trouble. I mean, redemptions will start taking off clients that were sold, big tech names in a zero rate economy, they’re gonna be calling every single day what’s

going on for returns, and there’s none to be found right now.

TN: Yeah.It’s tough to get things out right now. Okay, good. Thanks for that. Let’s move on to our second topic.

Tracy, wheat was down 6% this week. Corn ended down about 1%. We got an interesting viewer question from Thomas Sieckmann, who’s a regular viewer. Can you help us understand AG and fertilizer markets. Thomas is saying, “love to hearyour thoughts on AG commodities. Demand destruction versus supply shortages, fertilizer prices and shortages, drought, lots of cross currents.” Can you help us understand kind of those markets a bit better?

TS: Sure. Well, first, I don’t think you’re going to see demand destruction even at higher prices,

because people need to eat. Right.

TN: Eating is good. Yeah, right. We can agree on that.

TS: The thing is what I think we’re going to see a structural shift in the market, whereas you’re going to see different crops being produced over other crops. In other words, if we look at, say, wheat, for example, what’s happening right now is that wheat crops are being produced more because it’s easier to do, less energy intensive, and that’s going to make a problem on the corn market. Not necessarily in the United States. I would single out the United States as it is kind of a different market altogether?

But if we look at the global markets, where I think this is headed. We’re going to see shortages in areas where you didn’t think so. Right.

We’re all scared about wheat because of obviously Ukraine and Russia and then being major producers, et cetera. But that is going to, in turn, affect the corn market, global production and what those crops are, what crops are being produced globally, if that makes sense. I think that’s what we need to be on a lookout for.

And things like rough rice. Rice. Rice is going to, because nobody wants to put wheat and corn into, say, animal food anymore. Right. Rice is much cheaper. So I would look for rice to go much higher because

they’re going to use that to replace something like animal feed.

TN: Interesting. Okay.

So we’ve seen political instability in Sri Lanka, especially over the past couple of weeks, and part of that is just terrible government. Part of that is weak currency and food affordability. How far do you think this goes? Does it get extended to a lot of other countries, or is there a few other countries that this gets exposed to? Both you and maybe Albert, if you guys can both jump in on this.

TS: Yes, I think it extends. We’re already seeing that name around. Right. We’re already seeing protests in Iran, and I think that this is going to continue, especially in emerging markets. Right. So I think this is nothing new. I think we should expect more of this and be reminded of when we saw the Arab Spring. It all started because of food. Right. So that’s something that we need to pay attention to, in my opinion.

AM: Yeah, I agree with Tracy. Some of the emerging markets are going to be the most hardest hit. It’s funny, because four or five months ago when my client and I were sitting there discussing what countries to look at to invest in, and one of the key components is which ones are stable in their food supply.

I mean, the United States. But France is actually quite stable. I think that they can actually make quite a play for the European Union’s leadership over Germany going forward, specifically because they’ve got enough food to sustain themselves.

As for the other countries…

TN: That’s a good point, Albert. I hadn’t thought about that. But that’s a really good point about France.

AM: Yeah. Well, I mean, they got their own food. They have a big agricultural industry, they’re

top in the world, and they’re self sufficient. And they have water from the Alps, too. So they have everything they need for themselves. So they’re pretty isolated from this.

But you look at Spain, they’re in trouble. North Africa, they’re in significant trouble. Sri Lanka won’t be the first looking for at least a dozen more instances of that happening around the world.

TN: So we have a summer of new government.

TS: I’m looking towards Brazil and Argentina, even though everybody kind of hates those markets right now, is if we look at their agriculture? Their agriculture is robust. And so I think that in the end, that will serve them from an investment standpoint if you’re looking to invest in.

AM: But the only problem with Argentina is so I mean, their government is just absolutely atrocious. And then the Brazilian. High risk. And Brazilians have a big election coming up, and that’s going to be extremely contentious. So I would stay away from those two until after those elections happen and whatnot. 

But yeah, I mean, Brazil, they have fertilizer, they have fruits, they have sugar cane, a lot

of chicken, a lot of soybeans, a lot of meat.

TN: Okay, perfect. Let’s move on to the next topic. Albert, we got a question from Gary

Haubold, who’s a regular viewer. He’s talking about the dollar and how central banks. There’s gossip that central banks are getting nervous about a strong dollar. So dollars up or down, sorry, a little bit this week, but how worried are global central banks about the dollar?

Of course, you have, say, the North African or Brazilian or other kind of fairly shaky monetary markets. But if you look to, say, European or developed Asia or some of those other markets, how worried are those central bankers about a strong dollar?

AM: Well, I just want to isolate this between just the United States and Europe right now, because that’s only really what matters to the market back in the United States. A strong dollar for the Europeans is not good. It’s just absolutely not good. It would be good if the Euro was falling. They had exports to send to China, but they don’t have that anymore. So now they have dollar liabilities that are getting out of control. And I think that the Europeans, I’ve heard whispers inside the Fed and treasury that they’re worried about a European financial crisis. And it makes perfect sense. If they want to get the markets down, blow up Europe, that’s the best way to do it.

TN: But I thought we’ve had a financial crisis in Europe since about 2012.

AM: Yes, but we have it every five or ten years because Europe is a welfare state. It’s a welfare state that lives on Fed swaps. Right. That’s all it is. And I don’t want to insult the Europeans on here, but let’s just get real here. Without Chinese exports, they’ve got nothing.

TN: Sam, what do you think about that?

SR: Yeah. If China doesn’t open up soon, it is going to be extremely problematic for Europe. That would be the saving grace in a lot of ways to Europe for a strong dollar. Other than that, there’s going to have to be some sort of interesting talk down to the dollar, either from treasury or some hawkish comments coming out of the ECB. And you’d begun to hear the ECB be a little bit more hawkish recently. If they really want the dollar to abate, they’re going to have to get more hawkish.

TN: Yes, for sure. And on your China point, I saw a story this week that the Shanghai Port was at about a 90% capacity at some point this week. Whether that’s true or not, I don’t know. But I saw it in a legitimate newspaper so let’s see how long that lasts.

TS: I was going to ask you, Tony. From a China perspective, how do you look at this opening? Do you think Shanghai is really opening like they say it is or is this hearsay or, can you give us a little bit of insight on kind of the China situation right now because that makes a huge difference in demand for energy and materials?

TN: Sure. Absolutely. So I sure want it to open because I want both China and the rest of the world to thrive but because of a lot of domestic considerations, COVID or monkey pox or whatever it is. I don’t know. They’re just lifting it slowly. 

But we talked about this in detail on last week’s show but I really don’t think they’re going to open to any interesting degree until mid summer. Maybe later. I wish they would open tomorrow but they won’t. I think for a lot of reasons they’re kind of getting in their own way and I’ve said this many times China needs to be saved from China. It’s just such terrible management of the country and has been for 50 or more years

and they’re potentially going back into the great famine type of environment which I worry about a lot and that would be detrimental to everybody around the world.

TS: That makes sense.

TN: So on that happy note, thanks so much for taking time for the show, guys. Really appreciate that. Have a great week ahead. Thank you very much.


Sentiment has soured: How will governments and companies respond? (Part 2)

In this second part, Sam and Marko discussed possible tapering, what can the government do to help private companies, how the consumer sentiment is looking right now, what should you do with your investment in this Delta variant scare? Are vaccines really effective? And what is this thing that the Biden administration needs to do right or they’ll be dead?


Please go here for the first part. 


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This QuickHit episode was recorded on August 19, 2021.


The views and opinions expressed in this Sentiment has soured: How will governments and companies respond? (Part 1) QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes


TN: Sounds like both of you agree that China is going to do more stimulus. I think they’re late. I think they should have started five or six months ago. But better now than never. Right. So it sounds to me like you believe that there will be the beginning of a taper, maybe a small beginning of a taper late this year. Is that fair to say?


SR: Yeah, I think it’s fair to say that there will be some form of taper. Okay. I don’t know, even if it’s just rhetoric, as we move into 2022, at least with what we know right now, I don’t think they should. But what I think they should do and what they’re likely to do are two wildly different things.


TN: So even if it say 10 billion a month, which is nothing compared to the entire kind of stimulus, monetary stimulus are doing right now, that would have a dramatic sentimental chain. Is that your view?


SR: Yes. So it’s all about that incremental change in Cinnamon. It’s not about the incremental change in the addition to the portfolio.


TN: Right. Marko, are you the same? Do you think there’s a change in the sentiment of the Fed and there’s going to be a move toward tapering late in the year?


MP: I mean, I think tapering happened in June at the FRC meeting. And so that’s… Because that’s when the Fed incrementally turned hawkish. The DXY dropped quite significantly after the meeting. So I think that the risk in your view is that a lot of the things that we’re talking about right now have been slowly priced in over a period of time. And while oil prices and S&P 500 haven’t really corrected to this view reality. You know, so S&P 500 is reaching a new high, except for the last two days. Oil prices have started to come down finally.





Brent Crude Oil
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Now the 10-year has actually been pretty stable through the last couple of weeks worth of volatility. And that tells me a couple of things. I think the bottom market price, a lot of the things we’re talking about already. The second issue is that fiscal policy is really tricky when we talk about it.

CBOT 10-year US Treasury Note
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And here’s what I mean. 1953 we had a fiscal cliff recession after the Korean War. But that’s because the fiscal cliff was very clean, very simple. We spend a lot of money on bullet casings and tanks and airplanes during the Korean War, and then that fiscal spend stayed on the Korean Peninsula. We couldn’t take it back with us in 1953. In other words, we got a fiscal cliff recession.


This time around, the 1.9 trillion, you know, fiscal stimulus we had earlier this year, that actually, in a curial mathematical terms, shows up as a huge fiscal cliff next year. But that actually lives on on household balance sheets. And so that’s where I would say that like, let’s see how the Delta variant issue resolves itself, because in one month, here’s what I know.


I know the savings rate in the United States, the personal savings rate is still elevated at 9.6%. I know that revolving credit is going through the roof, and the households are re-leveraging themselves in a way that they have it for ten years. The US consumer is acting in the ways they acted in the 90s and 2000s.


If you look at household debt, percent of GDP, you got this long period of deleveraging for the past ten years. And now it’s coming back up. And so to me, that’s where I think the fiscal cliff of next year is overstated. And the reason that even a ten year fiscal package matters is because you’re talking about a ten-year bond. If I’m going to hold a ten-year bond, that on the back end of that 10-year, there is Trump tax cut level of unnecessary fiscal stimulus.


Let me say that again, what this fiscal spend right now is going to produce a similar procyclical fiscal thrust that we had during the Trump administrations in the last two years, through doc cuts, this time through infrastructure spending. That’s going to create a modest fiscal thrust, positive fiscal thrust for the duration of the asset that you’re holding. And I think that the market will still have to respond to that, even though next year there’s no way to avoid mathematical fiscal flip.


TN: Interesting. So. All of these things together, just going back to the reason I initially contacted you guys. I was hearing companies telling me that their Q3 revenues were really, they were downgrading them, and they’re really worried about their performance in Q3. And I think we’ve seen that or I’ve seen it anecdotally.


We saw tourism not necessarily be what we thought it would be. We’ve seen a lot of things happen that we didn’t really think would happen over the summer or not happen that we thought would happen. So how are you seeing these policies or how do you expect these policies to manifest at the company level? And when do you expect them to help companies to move forward?


MP: Well, I don’t think any policies will help companies. I think what will help companies is once Covid cases go down, and people kind of stop being afraid of the Delta wave.


Right now, if you look at hotel stocks. Hotel stocks are back through, like November 20th level, like they’re back to pre-Pfizer result levels. And I think that that’s a great investment opportunity. I would be long COVID place right now because, you know, the data from Israel, the data from Iceland, the data from a lot of different places that are fully, almost fully vaccinated are pretty clear, which is that vaccinated people can absolutely get Covid, and very few of them have adverse effects. The efficiency is actually at very high levels. A lot of people misinterpret, a lot of people… Sorry, the media is misinterpreting the data. And once you account for age disparities and so on, the efficiency here is like in the 90s.


TN: So it’s amazing.


MP: Yeah. Look, it’s a simple fact. Now that’s going to take some time as Sam said, I think that’s going to be articulating the data for the next month. I think that you have a great entry point into the Covid place right now. And I don’t think that any of the policies we’re really talking about are going to have much of an effect on earnings over the next quarter.


TN: I’ll give you a data point that I was looking at earlier today. Texas right now has the same number of cases that it had in Feb of ’21. Okay. But the daily fatalities are 60% lower than they were in Feb. Okay. So the case counts are just as high, but the fatalities are dramatically lower. And that’s good news, right.


Texas Covid cases and fatalities


MP: Look, Tony, I would study really the case of Israel, because if you study the overall numbers in Israel, you come up with a figure. I think it’s 60% effectiveness for Pfizer, which is lower than advertising, but that’s actually a mathematical concept called a Sisyphus paradox.


And what’s happening is that we need to segregate the different age cohorts not just average them together.


TN: That’s right.


MP: You know, because the elderly tends to be more vaccinated. You have a larger pool of older people who tend to have received a vaccine. They also tend to go to a hospital more often with a respiratory disease, even though they’re vaccinated.


So you can’t just average everyone together. The actual vaccine efficacy is in the 90s for all cohorts. Except in the 80s for some of the much older, over 80. It’s, like, about 80% effective. And so, yeah, I think a lot of this is… You know where I want to compare Covid to? And I think Sam will appreciate this. I compared it to the Euro area crisis.


You could have made a call in 2010 that this thing was over. Like once Germany like bit the bullet and bailed out Greece the first time? Like it was over, guys. But every time a new country showed up, he was like, Whoa. Here goes Portugal. Oh, my God! The world’s gonna end! And it’s like, similarly COVID, like, we know where we’re headed. Like, every wave is gonna cause sentiment issues and so on. But I would just bet against those.


TN: That’s a good call. I like that. I like the optimism there, and I like the perspective there. I think that’s really interesting. Sam, what do you think?


SR: I think there’s a combination of two things. One, I think Marco is 100%, right? That this is an awful lot like the Euro area crisis. Every single time, like Greece was the first big bang. Then you had the ripple effect to Portugal. Then it was Spain. And everybody was wondering what the next set of fall was and had the correction of 2011. That was fun. You had these longer term kind of ripples.


I think there’s going to continue to be ripples this time around. And the question is in my mind, it’s really difficult to predict what people sentiment around those ripples are going to be. I think we can look through them for the next five to ten years and say it’s all going to be fine. This is the way it’s going to play out.


The real question is, how does the American consumer mindset, how does that actually grasp this ripple to move through it? And how does China react? How does Europe react? Right. There’s a number of factors that play in here, but I think the really difficult and maybe not as priced in as they should be. To Marco’s point. I think this is a really long term, very strange kind of predicament that we’re in where vaccines are really good. They work really, really well.


How do people’s minds begin to grasp it? And do they begin to look through? We get the higher vaccine rates? Do we really power through this in a meaningful way, very, very quickly, or does it continue to be highly volatile on the consumer sentiment front? Because if consumer sentiment continues to fall, it’s going to be a big problem for the back half of this year. And that I mean. It’s kind of…


TN: We’re right there at the back there in the back half of the year, right? That. This is a terrible time for consumer sentiment to fall because we’re at the precipice of kind of holiday season buying. Not quite there yet, but if it stays for two more months, it gets pretty bad.


SR: It does get pretty bad. But I think this is also one of those points that I think could really be a tailwind to Marko’s earlier comments about fiscal stimulus and fiscal stimulus being higher than anticipated. You continue to have consumer sentiment fall. You continue to have people fearful of Delta, you have a couple of bad job prints, and all of a sudden you’re going to have much higher fiscal spend. You’re going to have a very dovish Fed.


TN: Right.


SR: I think that’s the risk to call it “the market.” That’s the risk to kind of my side of Marko and I’s bet is if all of a sudden this fear actually really ingrains itself within individuals, it’s going to be a huge, huge issue as we move into the Christmas buying season for companies, Christmas buying season for consumers, and you’re going to get big checks written out of Washington, regardless of the geopolitical situation, regardless of whether or not people want to say Biden might be lame duck because of Afghanistan, etc.


All of a sudden you’re going to have a Fed that’s very concerned, thinking it was a ripping economy with incredible inflation that wasn’t going anywhere. You’re going to have them reverse very, very quickly. You’re going to have senators on both sides of the aisle very concerned that they just, they might get blamed for a recession.


It’s going to be a really interesting queue for.


TN: It is.


MP: That’s why it’s a dynamic environment. Right. And and what I would say is like, look, I have certainty on the Delta wave. Certainty. Every wave we’ve had has crested, other than in emerging markets because their testing is poor. So it’s actually a mega wave that we constantly think is over, but it isn’t.


In the US we know how the story plays up. We know it. It’s a four to six week wave. The challenge here Tony, is that we’re talking in the middle of this wave. We have probably another two to three weeks of upswing, and then we’re going to have a down swing in cases. And by the way, I know this with a science, like, a hundred percent certainty because we had waves collapse even before we had vaccines.


So this is a really important point, because if the Fed reacts to something that is extremely impermanent, something that’s over in three weeks, if the Fed at Jacksonhole and subsequently in September waivers, you know, I mean, that will just set, I think the market alight, in my view. I think that will collapse the dollar and they will sell the bond, because it will have been using this, you know, temporary blip in sentiments to justify a changing course.


The other thing I would say is, like, so Sam mention Afghanistan. I think he’s right to mention it. I think it’s really significant, and it’s significant because of this. I think… I’ve always expected that during the summer, the fiscal policy would get much more challenging. And now, because of the Republicans, I think moderate Democrats in the Senate versus progressive Democrats in the House were always going to try to eat each other alive.


But now, with this utter failure in Afghanistan, that looks really, really bad, they are going to circle the wagons on fiscal calls because the last remaining, the last remaining lever of the Biden administration is this fiscal package. If they don’t get it through, guys. Yeah. The Biden administration is done. And I mean, I’m not talking about midterms either. So they have to do something on fiscal. Right.


So this is why the stakes have now become much higher. They’re gonna pay Mansion. They’re gonna pay Cinema. They’re gonna get deep water ports in Arizona and West Virginia to get their compliant with a fiscal deal. You know what I mean? Like, there’s gonna be so much more. I wish I was living in West Virginia. I mean, they’re gonna have ice rinks in every little town. It’s gonna be amazing.


And so this is something to keep in mind, I think on that front, too. So I agree with Sam. I think it’s a really good point of how these things are very dynamic and they reinforce each other. And I just think that the political pack of lease resistance in every single issue we’re talking about here leads to more profligacy.


TN: Yeah, I think you’re right. I think at least for the near term, that’s the bias, is exactly in that direction.


Okay. Guys. Thank you so much. Again, I think we could go on for hours with this, and I love this discussion, but I really appreciate your time.


For everyone who’s watching. Please subscribe to our YouTube channel, where we need a few more subscribers to bring you a few more capabilities on our channel. If you don’t mind, please subscribe.


And Sam and Marko. Really appreciate your time. Thanks very much.


MP: Thank you. Thank you.


TN: Let’s do it again, and I want to come back in January and see who wins.


MP: Yeah, sure. We should definitely do that. We didn’t tell people when we been into, but it’s like a really nice steak dinner, I think was the… If the 10-year is at like between one point 49 and one point 51, I think we just…


Future of the US Dollar: Weaker or Stronger?

Commodities expert Tracy Shuchart graced our QuickHit this week with interesting and fresh insights about USD, CNY, oil, and metals. Will USD continue on the uptrend with Yellen on board? What is the near-term direction of CNY? Will metals like copper, aluminum, etc. continue to rise, or will they correct? Will crude continue the rally or is it time for a pause? Watch as Tracy explains her analysis on the markets in the latest QuickHit episode.


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This QuickHit episode was recorded on March 12, 2021.

The views and opinions expressed in this How robust is the global financial system in the wake of Covid? QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.


Show Notes


TN: I’ve been focused for the past few weeks on the Dollar and Chinese Yuan and on industrial metals. Can you talk to me a little bit about your view on the Dollar? What’s happening with the Treasury and Fed and some of their views of the Dollar and how is that spreading out to markets?


TS: Right now, we have a little bit of mixed messaging, right? So, we have the Fed that wants a weaker Dollar. But then, we have Yellen who’s come in and she wants a strong Dollar policy. So, I think that markets are confused right now. Do we want a weaker Dollar or do we want a stronger Dollar? And so, we’re seeing a lot of volatility in the markets because of that sentiment.


TN: So who do you think’s gonna win?


TS: I think that Yellen’s going to win. I think we’re probably going to get a little bit of a stronger Dollar. I don’t think we’re going to see a hundred anytime soon again. We’ve seen stronger Dollar when she was at the Fed. She’s come in right now and said that she wants a stronger Dollar. We would probably have at least a little bit more elevated than the low that we just had, like 89.


TN: I think things are so stretched right now that even a slightly marginally stronger Dollar, let’s say to 95 or something like that would really impact markets in a big way.


I’ve been watching CNY. I watch it really closely and, you know, we bottomed out, or let’s say it appreciated a lot over the last six months. It feels like we bottomed out and it’s weakening again. What does that mean to you? What is the impact of that?


TS: The impact obviously will have a lot to do with manufacturing, with exports, and things of that nature. So if their currency starts depreciating, and they’re going to export that deflation to the rest of the world, it’s just starting to bounce over the last week or so. Unless we have another trade war, I don’t think we’re probably gonna see like seven, seven plus. I remember last time we were talking about it, we were talking about it’s going to be 7.20 and you nailed that. It’s definitely something to keep an eye on obviously, because they’re such a big purchaser and because they’re such a big exporter.


TN: We’re expecting 6.6 this month, and continue to weaken, but not dramatically. We’re expecting a pretty managed weakening of CNY barring some event.

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What I’ve been observing as we’ve had a very strong CNY over the past six months is hoarding of industrial metals and we’ve seen that in things like the copper price. Have you seen that yourself? And with a weaker CNY, what does that do to some of those industrial metals prices in terms of magnitude, not necessarily specific levels, but what do you think that does to industrial metals prices?


TS: We’ve been seeing that across all industrial metals, right. It hasn’t just been copper. It’s been iron ore. It’s been aluminum. It’s been nickel. We’ve seen that across all of those. China likes to hoard. So when everything was very cheap like last summer, when everything kind of bottomed out, they started purchasing a lot. Then we also had problems with supply because of Covid. So prices really accelerated and then suddenly we just had China’s currency pretty much strengthened. We’ll probably see a pullback in those prices. It’ll be partly because of their currency. If they allow that to depreciate a little bit. And then also, as extended supply comes back on the market.


But it’s even getting to the point now where if you look at oil, oil prices are getting really high too. We’ll likely see China scale back on purchases, probably a little bit going forward just because prices are so high. Or we will see them, which we’re seeing now, is buy more from Iran, because they need the money. They get it at a great discount. It’s cheap. If they start buying more from Iran, that takes it away from Saudi Arabia and Russia, who are the two largest oil producers.


TN: When I look at Chinese consumption, at least over the past 15 months, there’s been almost an adverse relationship of CNY to USD and say industrial metals prices. It looks like a mirror. Crude oil doesn’t look that way. It’s really interesting how the crude price in CNY there really isn’t that type of relationship.


One would expect that if CNY devalues, they’ll necessarily cut back on purchases. I would argue and I could be wrong here, that it’s not necessarily the currency that would cause them to cut back on purchases. They’ve hoarded and stored so much that they don’t necessarily need to keep purchasing what they have been. Is that fair to say?


TS: They still like to hoard a lot. Between January and February, they were still up 6% year over year, where January was very high, February was lower because they have holiday during February. Oil, that is different. It’s not really related so much to their currency because you have outside factors such as OPEC, which has really taken eight percent off the market and they’ve held that over again for another month. And the fundamentals are improving with oil. I’ve been seeing a lot of strength in the market over the last eight months.


US is the world’s largest consumer. Whereas you look at something like industrial metals, they are the world’s largest consumer. When we were talking about crude oil, because that’s spread out so much, they don’t really have that much pull on the market per se that they would in metals markets.


TS: And I’ll remind you. I’m sure you remember this. When we spoke in Q2 of 2020, you said it would be Q2 of ’21 before we even started to return to normal consumption patterns for crude and downstream products. I think you hit that spot on. And it’s pretty amazing to see. I had hoped that it would return sooner, but of course it didn’t.