Federal Reserve Chair Jerome Powell’s perceived dovish stance is critiqued for potentially leading to increased inflation and discontent among voters.
Market reactions to the Federal Reserve meeting were positive, resulting in a broad rally across various asset classes.
Concerns are expressed about the impact of new legislation in Hong Kong, particularly on foreign investors and the perceived shift towards authoritarianism.
The potential implications of stricter laws on data privacy and state secrets in Hong Kong are discussed, raising concerns about its impact on the region’s business environment.
Transcript
Peter Lewis
Tony, what are your thoughts? I mean, it’s interesting, isn’t it, because he’s raised the inflation forecast. He’s raised his growth forecast quite considerably, but no change to the number of rate cuts this year, although we did get one taken off for next year, didn’t we? There was going to be four next year. Now they’re only talking about three year. So I suppose one of the rate cuts has come out for next year. But what are your thoughts?
Tony Nash
I think it’s silly, Peter. We can’t be raising our economic expectations, seeing wages rise, seeing prices rise, raising our inflation expectations and saying, oh, yeah, we’re going to make money easier. Right. And he even said during the meeting that they were going to slow the pace of the offtake from the fed balance sheet. They’re cultivating an environment for pretty easy money where demand seems to be right now. And that’s how markets took it. Markets took it after the meeting and they just ran with it because he came across as very dovish. In fact, Powell has a way of coming across either way too hawkish or way too dovish. And then other Fed speakers have to course correct in the following days. So I think he probably came off way too dovish. And I think we’re going to see fed speakers over the next week. Correct. More on the hawkish side to say, whoa, that’s not really what we meant. And I really think that that’s what’s going to happen is they’ll make the three interest rate cuts seem more questionable than they are. Although the vote was unanimous, we did see a slightly more hawkish trend in the dots.
Tony Nash
Not a lot, but slightly more hawkish.
Peter Lewis
And what was also interesting was out of the 19 FOMC members, nine of them, so a minority, but a substantial minority, actually think the Fed is going to cut less than three times this year. So I think that’s maybe Jerome Powell is sort of out on a bit of a limb there, isn’t he?
Tony Nash
Yeah, I think you’re right. I do think that he does over calibrate either hawkish or dovish, depending on the direction, and I think he’s trying to signal the direction, but I think he always overdoes it just a little bit. He doesn’t have an easy job. Everyone reads everything into the way he holds his papers, the way he clears his throat or whatever. Right. I mean, everything is overly analyzed with him. But again, we have seen this where he comes out and he’s overly one way or the other. And I think, yeah, seeing those nine voters say hey, we’re not going to have three this year. I think as we’ve been talking about, my team has been talking about a resurgence in inflation for over a year, and we’ve seen it over the past couple of months, and we’re going to see that accelerate. They try to present Jan, Feb as just an aberration, but it’s not. And so it’s going to accelerate. Their expectations are going to be probably even exceeded. And it’s very difficult to have an interest rate cutting environment when you have inflation rising because it’s an election year.
Tony Nash
And consumers love, and voters love to complain justifiably about prices and prices keep rising. What did we see after the Fed meeting? We saw commodity prices soar. A lot of commodity prices soared after the Fed meeting, and that’s going to hit consumers within two. You know, this very unnecessarily dovish talk out of Powell has resulted in inflation definitely being locked in for at least two months.
Peter Lewis
Tony, I’m wondering what you think about this. Is the Fed taking a risk here? Because they basically seem to be saying the economy can run faster without generating significant overheating pressures and they’re willing to cut even while they’re still away from their target.
Tony Nash
Well, this is very similar to like a 2020 2021 argument when things were actually doing okay in the middle of COVID at least in the US, and people kept saying, hey, let it run hot. Let it run hot. Right. And it seems like we’re replaying that again, where, although people may not be using those words, the subtext is let it run hot. And I think the problem is, as Andrew was talking about GDP, the quality of that GDP is not great. It’s overwhelmingly government spending in terms of the growth areas. Okay, so we’re not having private sector growth as a contribution of GDP in the US. We’re having government spending as a growth area in GDP. And so what we’re seeing is heavy fiscal and we’re seeing dovish monetary. And so that’s great, but it just means that we’re going to see more inflation. Inflation is going to come back. Well, it already has, but it’s going to continue to accelerate. If this is the world that policymakers are comfortable with and if this is the world that policymakers are comfortable with, it makes us voters very unhappy because their pay rises are not keeping up with inflation.
Tony Nash
Now, what’s interesting, public sector pay rises are something like twice the size of private sector pay rises. So public sector wages are keeping up with inflation, but private sector wages aren’t and so this is the problem with an election year. American voters are really tired of it and inflation comes up in almost every discussion I have.
Peter Lewis
And I wonder what American voters also think about what he said about labor supply. He sort of mentioned the strength of the data on labor supply, but then he pointed to the strong pace of immigration as helping on that front. That’s rather a hot political topic to.
Tony Nash
It’s a lightning rod, and it’s not a very positive discussion in most parts of the US, even in very heavily democratic parts of the US, which favor inflation in state Massachusetts, New York, it is just a sour topic for people and it’s a very sensitive topic. So when the Fed chair gets up and says immigration is helping the labor market, it makes Americans very uncomfortable and it makes them not really like him.
Peter Lewis
Tony, what do you make of the market reaction to this? Jerome Powell didn’t talk down the rally at all, did he? In his press conference in either stocks or risk assets. He didn’t even acknowledge that this is easing financial conditions and maybe making their job a bit harder.
Tony Nash
He did not. And I think he turned it from a tech rally to an everything rally. If you look across markets at the close in the US today, and as you mentioned at the top of the program with Hong Kong was coming on strong this morning, international markets coming on strong this morning. I think with this, I think overly dovish Fed meeting, he turned the rally from a tech rally to an everything rally.
Peter Lewis
Do you think this is going to continue?
Tony Nash
It’s possible. I think we have to see how things go into the end of the week. If things stay strong into the end of the week, then look out. But I think if we start to see things stall out Thursday and Friday in the US, then we could see things settle back to the levels we had seen a few days ago.
Peter Lewis
Tony, if you look at the reaction of the yen to this, clearly the currency traders don’t think that this is the start of a sustained period of rate increases in Japan. And there’s still going to be that wide yield differential between US rates and Japanese rates.
Tony Nash
Yeah, it wasn’t a big statement. ET seems to be very conservative. He doesn’t want to be seen as shaking things up at the BOJ. He almost acts like a caretaker. And so I think currency traders expected something a little bit more. They want a little bit more in the end, want a little bit more. In terms of markets being slightly tighter, he’s not a big bold move maker and this just wasn’t it. So to see the end continue to weaken on this was just really interesting for me to watch this.
Peter Lewis
Okay. Okay, Tony, what are your thoughts? You’re obviously looking at this from overseas. As Andrew says, it’s no surprise it passed, and it passed with unanimous vote in ledge coat. But now that it has passed, and foreign investors are going to have a chance to scrutinize it and see the impact of it, is there anything to worry them?
Tony Nash
Oh, sure there is. I think the law allows trials without a jury. It allows trials behind closed doors. It allows handpicked judges. So anybody forming a company, anybody who’s a board member, anybody who’s an officer in a company, in a jurisdiction like Hong Kong, you have to worry. Why don’t you have a lot of international companies centered in Beijing because of laws like this, right? So Hong Kong, which 1020 years ago, 30 years ago, was the place to have a company because it was the most business friendly city in the world. Today it’s not that way. And if you’re an officer or director in a company, it’s got to be a little know, give you second. You know, one of the attractors for Hong Kong for a few decades has been media. There is great media in Hong Kong, but it’s no longer a media center, it’s no longer an arts center. And the sad part about that is a lot of that stuff is moving, or has moved to Singapore, which is a pretty strong state in terms of control of messages. So people are so worried about the impact of this new law on Hong Kong that they’re moving to Singapore and seeing it as a freer place than Hong Kong, completely 180 degrees from the way things were ten years ago?
Peter Lewis
John Lee and the government will say, what this Article 23 legislation does is it brings stability to Hong Kong. So will foreign investors look at that and say, yes, Hong Kong is more stable as a result of that, and that’s a positive.
Tony Nash
No, it brings opacity and it brings authoritarianism, in truth. And authoritarianism generally is stable until it. And so, you know, Singapore is an authoritarian place and it’s stable. It’s marginally freer than Hong Kong now, I guess. But no, authoritarianism doesn’t bring stability necessarily, or the stability it does bring is short lived. And again, Hong Kong was very vibrant, very creative, very interesting business hub. And I don’t think it’s totally gone, but I think the risks to officers, investors, board members and so on are much, much higher than they were before.
Peter Lewis
Tony, you are a financial analyst. If you were based in Hong Kong, would you be worried about this state secrets legislation or this state street secrets article that includes economic information, technological information on Hong Kong?
Tony Nash
Yeah, absolutely. So I used to be with a company called IHS, and it’s since been bought by S and P. But twelve or 15 years ago, there was an IHS analyst who lived in China who had some information on crude output or something like that, crude storage. And this person, from what I understand, got it from an industry association or something because they used it in a business environment. The chinese authorities prosecuted him and put him in jail for a long, long time. And at the time, I was working with the economist, but we were shocked at what was happening, because you used to be able to do research, find information, and if you could find information, you could use it to your advantage. And part of using things to your advantage is to trade on it. Right. And so if Hong Kong is to remain a vibrant financial center and a vibrant trading hub, you have to be able to dig for information. But if the Chinese authorities are going to prosecute people for finding information, then Hong Kong as a competitive center is no more. It just isn’t.
Peter Lewis
I mean, that’s what some people are worried about is that Hong Kong is becoming more like mainland China in terms of things like data privacy, state secrets, and what constitutes state secrets?
Tony Nash
Well, there are huge data centers in Hong Kong, right? I mean, there have been for 30 years. And so those data centers, I don’t know, a lot of foreign companies that people have their servers outside of China for a reason, and they have their data stored outside of China for a reason. These new laws allow the government to look into whatever they. So, you know, that stuff that has remained in Hong Kong, I’m sure at some point will move elsewhere if it’s remotely confidential.
Peter Lewis
Okay, well, thank you very much for your thoughts this morning. Great to hear you. That’s Tony Nash over in Texas, USA, who is the founder of Complete Intelligence.
In this podcast episode from BFM 89.9, the hosts discuss the latest updates on global markets and dive into the US debt talks. They are joined by Tony Nash, CEO of Complete Intelligence, who shares his perspective on the debt ceiling and its potential impact on the markets. Tony believes that a US debt default is unlikely and views the current concerns as overblown political maneuvering. He highlights that the debt ceiling issue arises regularly and is often resolved at the last minute, causing frustration among Americans.
The conversation then shifts to the state of the US economy, particularly the labor market. Tony notes that there is fatigue in jobs growth, with ongoing layoffs in various industries, including tech companies. The hosts also discuss the recent rise in the US April services PMI, indicating a shift from goods to services and suggesting continued growth in the services sector.
Nvidia’s quarterly results become the focus of the discussion, as the company outperformed expectations and experienced significant stock price growth. Tony explains that Nvidia is a key player in the AI infrastructure space and has benefited from the increasing adoption of AI and machine learning technologies. However, he cautions that the high valuation and potential impact of a recession on corporate infrastructure spending could affect Nvidia’s future performance.
The podcast concludes with a recap of Nvidia’s financial performance and analyst expectations, noting the positive sales figures and high target price. The hosts question whether a company involved in AI deserves the current forward PE ratio of 66 times.
Overall, this podcast provides insights into the US debt ceiling issue, the state of the labor market, and the performance of Nvidia in the context of the broader market trends.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station. BFM 89.9. It’s 7:06 A.M. On Thursday the 25 May. You’re listening to the Morning Run. I’m Shazana Mokhtar, with Wong Shou Ning and Mark Tan. In half an hour, we’re going to be discussing the outlook for Netflix and the US streaming services. But as always, we’re going to kick start the morning with a recap on how global markets closed overnight.
BFM
The markets are all red, probably thanks to the jitters surrounding the US debt talks. In the US markets, the Dow Jones was down 0.8%, S&P500 down 0.7%, and Nasdaq down 0.6%. Over here in the Asian markets, Nikkei down 0.9%, Hang Seng down 1.6%, Shanghai Composite down 1.3%, STI down 0.1%, and our own FBM KLCI down 0.1%.
BFM
All right, so for more insights on what’s moving markets we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. So let’s start with what seems to be keeping markets on tenterhooks. In recent commentary, though, you’ve opined that a US debt default really isn’t on the table. So why do you say that? And why are current concerns of a debt default overblown, in your view?
Tony
Yeah, so the debt ceiling literally happens every other year in the US. And it’s happened for the past 15 years. So I’ve said this many times. This is shameless partisan positioning intended to show politicians coming to the rescue of a crisis that they created themselves. So they’ll get media attention. Then at the last minute, probably after the deadline, they’ll miraculously find a solution when everything seems the most chaotic. So this is something that most Americans are really frustrated by. It’s like we know they’re not going to default. If they do, it’s ridiculous, and it’s just shameless partisanship. So are people here worried? To be honest, not really. I think a bunch of portfolio managers are being very careful in markets, but on a personal level, I seriously doubt that many people are all that worried.
BFM
So, putting aside the political shenanigans, of much greater importance to global markets is the state of the US economy, particularly the labor market. Is there a sense of fatigue in jobs growth or more room for expansion?
Tony
There’s definitely fatigue. If we look at the data since the end of COVID there’s a metric that the Fed…
Tony
Okay, we’re going to try and get Tony back to talk more about what’s happening with the US labor market. But as he said earlier about the debt ceiling, he’s taken a little bit of a, I guess, sanguine tone on it. He’s less worried that debt default will actually have long term implications. He thinks things will be resolved, just that it’ll take a lot of drama to get there.
BFM
Yeah, but the consequences are already being felt. I mean, I’m seeing this headline on Bloomberg, United States may be cut by Fitch on debt limit fight because US ratings have been placed on Watch Negative from Outlook Stable by Fitch. So the rating watch reflects the increased political partisanship that is hindering reaching a solution to race or suspend a debt limit despite the fast approaching, as we call it, X State. This is the first rating agency that has already given them some warning snakes, right? And once this happens, what this means is that the cost of borrowing is going to rise quite significantly on top of the fact that the interest rate in the US is already 5.2%. I mean, the Feds have raised it what, ten times since last year?
BFM
There’s a lot of moving parts to this picture, and I think there’s also discussion on what is it that other stakeholders in the US government can do if Congress can’t get its act together, what can the Treasury do? Can the Fed do anything? In any case, I think the Treasury will probably try to prioritize the debts that it owes, which means that some people will may not receive their bills. I think looking at Social Security and Medicaid and Medicare, hospitals, roads, who’s going to maintain all that?
BFM
Well, I do think that we have Tony back on the line. Tony, can you hear us?
Tony
Hi, guys. There you go. Sorry about that.
BFM
No worries.
Tony
On the debt ceiling. What’s interesting what’s happened is this week people in Congress asked Janet Yellen how she did her calculation on finding that X date. So it’s a kind of mysterious calculation and nobody knows. So people are trying to dig into that to understand when actually is the date, because nobody’s showing any math, nobody’s showing any data around it. And again, it seems like this is being hyped as a political ploy. So what you rightly point out about if it does come, the US government will have to prioritize payments. Right? And that’s fine. But again, voters and legislators don’t actually know how she’s coming up with that X date and a lot of people just don’t trust her.
BFM
Well, coming back to the point we were discussing earlier on the labor market, Tony, what’s your sense of how jobs is doing there?
Tony
Yes, jobs are in a rough spot. So there’s a metric called continuous unemployment claims and they’re at their highest level since the end of 2021. So I know that isn’t a long period, but stimulus is worn off, consumer credit levels are rising really fast, and tech companies are still laying off staff. So Verizon, a big telecom carrier here, just announced today that they’re going to be doing layoffs. So we’ve seen the Amazon and Facebook. Facebook yesterday announced another layoff. And so what’s happening now? That those initial layoff announcements were made to give a boost to stock prices. But now that that boost is largely expanded, people are simply not hiring. So they’re choosing not to hire for open jobs as a way to contain their workforce through just retirements and quits and that sort of thing.
BFM
Now, Tony, the US April services PMI rose from 55.1 from 53.6, surpassing the market expectation of 52.6. Isn’t this further evidence that at least in this sector, growth hasn’t been tempered by inflation or the rate hikes?
Tony
Yeah, well, certainly I think what it’s showing is an ongoing shift from goods to services. So during COVID everyone loaded up on goods. For the past twelve to 18 months, we’ve seen a trade off of goods purchases to services purchases. That services PLI will likely continue for the next two to three months, partly because the summer here in the US is holiday season, it’s vacation season, and so services will continue to thrive through that period. So we would expect a services PMI decline, maybe not necessarily contraction, but at least decline in Q3, probably mid Q3.
BFM
Okay, Tony, can we talk about one results, one set of results that came out last night, and that’s Nvidia. Right. They really beat street expectations up 20 over percent stock price. This is one tech stock that has done exceptionally well, I think a lot to do with AI. Are you bull on this name?
Tony
Well, Nvidia has done very well, and definitely top line growth surpassed expectations. So Nvidia is to the AI boom, which Cisco was to the Internet boom 20 plus years ago. Right. So they’re selling the infrastructure for AI and machine learning and a lot of these new capabilities, and people need them. And that same infrastructure is used for crypto mining and other things. So they planned extremely well, and they’re kind of reaping the profits of that right now. So as long as we continue to see companies adopting and expanding AI and machine learning capabilities, the value in Nvidia should be there. I don’t necessarily want to make a prediction on the stock price where it is right now. It’s a pretty high price in terms of valuation and other things. But I think in terms of corporate performance, it’s certainly strong and will remain strong.
BFM
So do you think any stock that has an edge or have first mover advantage when it comes to AI deserves a premium? Just pretty much like Tesla when it comes to electric vehicles?
Tony
Well, I think when you’re looking at a stock value, you have to look at the forward expectations. And so do you believe, or does an investor believe that that company that provides either AI software or AI hardware or something like that, do they believe there’s growth in that area? And if they believe there’s growth, so what’s the multiple on that growth and how quickly will it come? That’s how people come up with those price expectations.
BFM
Yeah, because when I look at Nvidia, the Bloomberg showing a PE of 66 times forward PE. So it looks like markets are really expecting a lot of growth.
Tony
Oh, yeah, they do. And I think part of the problem is people really load up on hardware first. And so that growth may very well continue at that same pace. But it really all depends on what happens to corporate infrastructure spending. And if that corporate infrastructure, meaning IT infrastructure spending continues, then it’s really good news for Nvidia. If we do hit a recession, then corporate infrastructure spending could be hit and that could hit Nvidia in a negative way.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, talking to us about some of the trends that he sees moving markets in the days and weeks ahead. Capping the conversation there with just some thoughts on how Nvidia has performed. And we do have their results coming out overnight, right? They did really well, performing well beyond Wall Street expectations. Their sales in the three months ending July will be about $11 billion, which is 53% higher than what analysts were foreseeing.
BFM
Revenue for the first quarter was $7.2 billion versus 6.5 expected, while earnings per share was $1.9 adjusted versus the $0.92 expected.
BFM
Okay. Sorry.
BFM
Net income was $2.5 billion versus $1.62 billion from the same period last year.
BFM
Okay. I’m so excited to tell you how many analysts cover this. Well, a lot. 44 buys, 13 holds. No sells at all. At all. Okay. So consensus target price, $307, which is already very, very close to the regular market hours share price, which was down one dollars. And but I know aftermarket hours, the stock boomed, shattered by ceiling by going up by 20%. So I won’t be surprised if a lot of the analysts actually rush out to upgrade. But the ceiling to me is the fact that PE forward PES are 66 times. Do you think a company involved in AI deserves 66 times? Which was my question for Tony.
BFM
That’s right. And I think AI is going to be driving a lot of investor interest in these kinds of stocks. But let’s turn to another stock in the tech sector that hasn’t been doing so well or hasn’t done so well recently. Then that’s snowflake. Their sales outlook for the current quarter fell short of analyst expectations, and this did lead to a share downturn. Snowflake software helps businesses organize data in the cloud, and their quarterly revenue is expected to be growing at 34%, but well below Wall Street expectations.
BFM
Snowflake also cut its outlook for the fiscal year, saying product revenue will be about $2.6 billion versus 2.7 it predicted early in March. Analysts had feared that a slowdown demand for cloud services would dance. Snowflake’s pay as you go model.
BFM
Okay.
BFM
But still quite popular with analysts. 29 buys, 13 holds, two sells, albeit not as popular as Nvidia. Consensus target price for the stock, $188. Last time, priced during regular market hours, it was up all right at 718 in the morning.
BFM
We’re going to take a quick break, but we’ll come back to cover more top stories in the newspapers and portals this morning. Stay tuned BFM 89.9.
BFM
You you have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
In this episode of “The Week Ahead,” host Tony Nash is joined by Brent Johnson, CEO of Santiago Capital, and Tracy Shuchart, a commodities trader at Hilltower Resource Advisors, to discuss the most pressing economic themes for the upcoming week.
One of the key topics of discussion is the Federal Reserve’s “Q2 Danger Zone,” which Brent believes could be a potentially scary time for the economy. He notes that we are still less than a year away from the first rate hike, and it often takes 12-18 months for rate hikes to show up in the economy. By the summer of 2022, we will be right in the heart of that time period, coinciding with YoY inflation numbers that should come down due to the crazy comparisons from the previous year. Brent warns that even if inflation remains somewhat sticky, we could see a bunch of disinflationary prints at the same time, which will make it challenging for the Fed. Moreover, by that time, Owner Equivalent Rents are expected to fall, adding to the Fed’s challenges.
Tracy then delves into the topic of oil production and cuts, specifically Russia’s decision to cut 500k barrels. She explains what this means for the market, how it could impact crude prices, and who will be hurt the most – Asia or the West. Tracy also raises an interesting point about Russia’s decision to smuggle oil through Albania despite the cuts, leaving us with questions about their motivations.
Finally, the discussion turns to commercial and industrial loan growth, which saw a sharp rise after rate hikes started. Tracy explores why this is happening, and what it means for the economy. She believes that companies are taking out loans to fund capital expenditures, which is good news for the economy as it indicates that businesses are investing in themselves and their future growth.
Key themes: 1. The Fed’s Q2 Danger Zone 2. Capex & C&I Loan Growth 3. 500k fewer Russian barrels
This is the 55th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Brent Johnson and Tracy Shuchart. We may be joined by Albert Marko at some time, but we’re just going to focus on Brent and Tracy right now. Guys, thanks so much for taking the time to join us. I really appreciate it.
https://youtu.be/yYom7Zqezio
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We’ve got a few key things, themes we’re going to cover today. First is the Fed’s second quarter danger zone. There’s a lot setting up for Q2, and Brent’s going to talk us through that. Then we’re going to get into Capex and CNI, commercial and industrial loan growth. And then finally, we’re going to talk about those Russian barrels that are coming off the market this month, and Tracy will talk us through the impact there.
Okay. Guys, thanks a lot for taking the time. Brent, when I asked you what you want to talk about, you really want to talk about this kind of Q2, potentially Q3, these issues that we may see in markets in that time. Can you help me understand or help us understand what are you looking for there? Because there’s a lot going on, of course, and you can talk us through a number of items. But I have a tweet from Daniel Lacalle, who’s joined us a few times talking about the ECB under pressure for faster rate hikes.
We’re seeing similar stuff in the US. But markets keep going up. What are you thinking?
Brent
Well, I think there’s a couple of very, I guess, poignant and competing narratives fighting each other right now. And they’ve been fighting each other for a while. And I’ll explain why I think they’re fighting each other. But I’ll also explain a little bit about why I think Q2 and Q3 have the potential, again, there’s no guarantee. We’re all speculating here. But has the potential for one of these narratives to kind of come to the fore or something to change dramatically in Q2 or Q3. So I think the first narrative that has been around for a year now, so we’re almost still not yet, but very close to now, the one year anniversary from the first rate hike. And I think a lot of people forget that it hasn’t even been a year yet since they started raising rates. And typically when you raise rates, it doesn’t have an immediate impact in the economy. Sometimes it takes nine months, twelve months, 18 months for those rate hikes actually kind of work there through the economy and have the full effect of them show up. So we’re not even to a year yet, but in another three or four months we’ll be in the 12- to 18-month range when they typically start to show up.
Now, in the meantime, we continue to have inflationary prints that are stickier than some people have expected. Again, part of the reason markets have been pretty favorable for the last two, three, four months is the expectation that rate hikes would slow and potentially even reverse and maybe we even get to a cutting cycle. And as a result, the markets are front running that. But now in the last couple of weeks and so at the beginning of the year, we had a big rush up in bond prices as rate hike expectations came down, and stock prices and commodity prices. But for the last month, let’s call it since the, to the last week of January, 1 week of February, I’ve kind of turned it violently sideways. We’ve gone up and down and up and down and up and down, but kind of just treaded water. And actually if you look back two years, we’re kind of where we were a couple of years ago. We’ve gone up and we’ve gone down, but we’re kind of where we were two years ago. But because of the stickiness, the relative stickiness of the inflationary prints, this idea that rate hikes are now going to go the other way is starting to get a little queasy.
And maybe they’re going to have to go back to 50, maybe they’re going to have to go longer, maybe they’re going to have to go higher for longer. And so now markets are trying to figure this all out. And so the reason I think once we get into Q2 and Q3, it gets very important is for two reasons. One, if things stay sticky in the meantime, the Fed may have to either keep hiking or continue to message higher for longer. And then if at the same time all of the previous interest rate hikes start to show up in the economy and then at that point we are going to be in the heart of the year-over-year inflationary prints. And those will most likely show negative. Even if inflation is still high, it’s probably, you know, I think was it last June or last July we had the 9% print in inflation. So even if this year it comes in at 7%, it’s going to show a negative two year-over-year. And so that puts the Fed in the position, okay, inflation is starting to come down, we’re making progress. But you still have high inflation.
So does that mean that they stop or do they start? And it’s going to be at the same time where all the previous rate hikes are going to be showing up in the economy. Right.
Tony
Sorry, go ahead.
Brent
No, but my point is we’re getting to the point where a lot of the decisions that have already been made would naturally start showing up in the economy, but we’re not quite there yet. In the meantime, the Fed is in a tough spot as to whether to continue rate hikes or to slow them down because we are seeing some disinflationary pressures. Right. And so they’re in a tough spot right now.
Tony
Yeah. When Powell spoke, gosh, I think it was in the last meeting, he talked about the lag effects of Fed policy, and it was almost in a defensive way, saying, hey, it may not look like much is going on, but there are serious lag effects to our policies and you better watch out. And I think that’s when they rolled out the 25s or they started rolling out the 25s.
I’m not sure that at this point I see an end to 25s. Sam Rine’s on the show talks several times about how it’s at least 25s until mid-summer. Right.
Brent
I think so.
Tony
And I think we’re starting to get some nervousness from the pace of inflation in Europe. And I think that’s kind of bleeding over here a little bit because people are seeing the prints in Europe and saying, gosh, is that coming our way too? The ECB is going to have to hike faster. And so what’s that going to do to say, the dollar and other things as well? And when we have a relatively strong dollar, the impact that’s having on commodity prices, it mutes them. Right?
Brent
So now you just touched on something else that’s very important to understand. Okay. So if Europe is pressured to keep hiking, or at least hiking more than expected, that has the potential, again, no guarantee. Not everything trades on rates, but it has the potential for the dollar to fall more. That’s why the dollar has fallen for the last four months, is the pace of rate hike expectations. So if we already have sticky inflationary data and then the dollar starts to fall in price again, that can actually provide a tailwind for the inflation that the Fed is trying to counteract. Right. So again, it puts them in this tough spot. The other part that you just mentioned is, and this is where it gets tricky as well, is if you look over the last year, but not just last year, if you look over the last ten years, oil is about where it was a year ago and about where it was ten years ago. Natural gas is below where it was a year a you go. Huge drop off in about where it was ten years ago. Corn is about where it was ten years ago.
Wheat’s about where it would… Copper? You look at all these commodities, they’ve actually come down quite a bit from a year ago. But what has remained the stickiest is the wage data or sorry, wage inflation. Those costs, I know we’re going to talk about that at some point as well. And that could be more to do with a structural issue that the Fed has really no control over. Right. If people have, they’re retiring, they’re moving out of the workplace and they’re just not coming back. And so you have a demographic issue where there’s just not enough supply of labor. It pushes up the price of labor. That is something the Fed could influence, but not as easily as they can influence asset prices. And so, again, you get into this situation where I think everybody knows the further down the road we go, the higher the likelihood we have some kind of an event, right? Whether that’s a crash or just a volatility explosion or whatever it is, I think everybody knows that something down the road is not going to be good. Now, whether that’s six days or six months or six years from now, that’s the debate.
But I think we all know that there’s the potential for this great event. And again, if we get into Q2 or Q3 and it hasn’t happened yet, and you have this confluence of all these events that I’m talking about and in the meantime, asset prices have gone higher or at least held where they’re at, you have the potential for this bursting of this bubble, for lack of a better word.
Tony
Right? Go ahead, Tracy.
Tracy
Sorry, I had a question. So we’re seeing that two-year and five-year inflation expectations start to rise again. So what do you make of that? And what does that mean for the Fed and the Fed’s decision? Right?
Brent
Yeah. Well, I think this gets to everything we’ve just been taught it puts them in a tough spot because they’ve already… They have very clearly started to slow, right? Now, they have said we’re going to maintain and we’re not cutting and we could be higher for longer. But there’s no question that they have, at least for the last four months, have not been hiking at the same pace that they were last summer. But the worst thing for the Fed is if they’re back at 25 basis points now, or if they were to indicate that maybe we’ll have one more hike of 25 and then we’ll be done. But then you get inflation starting to rise again. I mean, that’s horrible for that. That’s the worst possible thing for the Fed and it throws their whole object not objectivity. It’s not that their repu… Not that their reputation is great anyway, right? But after getting the last couple of years so wrong, for their credibility to be challenged again is a really tough thing. And I’ve mentioned this before, you cannot underestimate, in my opinion, you cannot underestimate the influence of getting it wrong would have on Powell’s legacy. And I think he’s been very clear that he doesn’t mind having asset prices lower.
In fact, I think he wants asset prices lower. And so while I completely understand the argument for they’re going to have to cut, I don’t think he can personally take the risk of stopping hikes too soon because the risk of stopping too soon is extremely high for him personally.
Tony
I want to go back to your wages point for a minute. So, you know, when we have a company like Walmart make their minimum wage $15 and then that cascades through the economy because it doesn’t hit everyone immediately, you know, there’s a lag to that hitting the economy too, right. What you talk about? And it doesn’t just hit people making below $15. Those people who are making $15 are like, wait, I was making 15. Now everyone’s making $15. So it cascades up a little bit, right. And it cascades out. And so that takes months to hit also. Right. So that just happened in January, this impact on wages, at least for the next couple of months, right, or do you think it happens?
Brent
I think so. And again, when we get to an event, let’s call it either a credit event or a contraction in the money supply or a bursting of an asset, whatever, when we get to an event and things turn the other way quickly, then that stuff can change quickly. But until that happens, there is a tailwind for them to get worse or for the structural wage inflation for them to work themselves through the economy. And the other thing that I think many people forget this is that and I got to be careful how I say this because… I don’t want to confuse people and I don’t want people to think that I’m just absolutely bullish, because I’m not. I do think we’re going to have one of these credit events, and I do think disinflation is more likely than runaway inflation. But until we get that event, there is an inflationary tailwind, not just because of the things we’ve already talked about, but because of the higher rates. And what I mean by that is, as long as the banking system doesn’t contract and there’s not a deflationary crash, the higher rates are actually pumping more money into the economy.
Right. It wasn’t that long ago you had to go out ten years on the yield curve to get anywhere close to 4% return on your money. Now you can put your money in the closest thing to cash and get 4% on your money. So the people who have the money in their accounts are getting more money pushed into it because the Treasury has to pay higher rates. And that’s just now, kind of, again, the federal funds rate has been slowly ticking up, but some of those rates that people receive are just now resetting higher or have just started to reset higher in the last couple of months. And the further we go along without this “event”, more money gets put into their account in the form of interest payments. And that’s a tailwind because now you have more money to spend.
Right. No, the point that I just want to make is that I believe that we’re going to have this event and I think we’re going to have it sometime this year. But until we have it, there’s a tailwind. So it’s almost like it’s going to be speeding up into the wall.
Tony
How much of that tailwind, Brent, is… People have put on pretty easy trades for the past few years? And how much of that tailwind is people who have a little extra money in their account who just want to make that one last trade, right?
Brent
I think there’s a lot of that. I think there’s a lot of that. And that’s typically why it ends badly, right. If you think about an exponential curve, it goes up and up and up and up and up and up, and then it crashes and it’s because those last people are trying to get that last little trade in. And the other thing that I’ll say is I think this is really important to understand and we were talking about it a little bit before, so it’s repetitive but for the people on the show. It was last summer Q3 of last year where the yield curve inverted. Actually, it inverted just slightly in Q2 of last year. But then the real inversion took place in Q3. And at the end of Q3, we had a point where the stocks were at their lowest level in two years. The VIX was at its highest level in two years. The dollar was at its highest level in two years. And I actually at that point, I even sent out a tweet that said to probably do for the dollar to pull back. And I bought, I took off all my equity hedges and I actually bought equity calls and people were like, why the hell are you doing this?
And I said, Because the yield curve is inverted. And they said, that means there’s going to be a recession. And I said, yeah, but usually that takes twelve to 24 months to show up. And historically in that twelve to 24 months, between the time the inversion happens and the recession arrives, you typically get a run in equities. And so that it kind of goes counter. Everybody thinks higher rates, you don’t want to own equities that’s bad for growth, but in actuality it ends up that way. But in the short term it’s actually typically, historically good for stocks. And so to be honest, and I fully admit it, that trade worked, but I sold it way too soon. I chickened out because I see this wall coming, right? But had I held it for this last six months. It would have been a monster trade, but I sold it after, like, one month because I chickened out on it, to be quite honest. But that’s something that’s very important to understand. And here’s the other thing, and I’ll give you some historical context and it’ll explain two things. It’ll explain the magnitude of the run that can happen, and it’ll also explain the horrendous result that can come up afterwards.
And that is it. From 1926 to 1929… Let’s call it, from 1920 to 1926, you had seen stock prices run very high. It was like the Roaring 20s, right? And then in 1926, the yield curve inverted and it stayed inverted until 1929. And in that time period, from 1926 to 1929, the long-term US Treasury fell 30%. So if you were invested in bonds during that yield curve inversion, you lost a lot of money, just like last year, right? But guess what stocks did over that three-year period? They more than doubled. They went up 150% with the yield curve inverted for three years. And now we all know what came after 1929, right? After that last trade, to your point, pushing that last trade into the market, then you had the huge fall. We could very easily have something like that again. Now, I personally am not in the camp that we’re going to go into another Great Depression. I don’t think it’s going to play out that way, but I can’t rule it out. But it’s all of these cross currents.
It’s because I understand the tailwinds and it’s because I see this massive wall that we’re racing towards that I think right now is the hardest environment I’ve ever seen to be an investor, or at least to be an investor with conviction, I think it’s very hard. The good news, and I would encourage people to think about this, the good news is that in the last ten years, if you didn’t have conviction, it was very hard to sit on the sidelines because you got no return in your account. Interest rates were zero, but you can now sit on the sidelines, wait for clarity and get paid 4 to 5%. That’s not a horrible idea. Right. So, anyway, that’s kind of my soapbox moment.
Tony
These are all great points for it. I guess it’s just time for people to be careful. I don’t think you’re saying the sky is falling today. I think you’re saying, just don’t hold the bag. Yeah.
Brent
And I’m not saying you can’t make money. I’ve used this analogy with clients a few times to explain what I mean, because I said, Couldn’t stocks run another 15 or 20%? And I say, yeah, absolutely they can. I said, It’s like when Evel Knievel jumps over the fountains at Caesars Palace and then his son does the same thing. Well, Evel Knievel crashed and broke every bone in his body. Robbie Knievel landed the jump and was fine. Got a lot huge glory, but they did the same jump. So whether you landed well or land poorly, if you took the same amount of risk. So I’m not saying you can’t make money over the next six months by being in the stock market. I’m just saying you’re taking a lot of risk in order to do it. And if you don’t want to take that level of risk, you can sit in T bills and get 4.5%. That’s not a horrible that’s not a horrible sideshow. Right?
Tony
Right. Yeah. And just for people who aren’t familiar with Brent, I don’t know who isn’t? But he’s not a total doomer. Right. You’re not this, you know, permabear.
Brent
And I try not to be.
Tony
I just don’t want people to think you’re kind of a permabear coming on and try to spread kind of the permabear gospel. You do change your views as markets change, and this is just kind of a sober view on kind of where we are.
Brent
I own a lot of equities for my clients right now. We have participated in the run, but we have not been levered on it. And I’m not all in on that trade, but we own stocks in our portfolio. We think it’s time to be careful. We think you should have some hedges, we think you should have some cash. But we’re not sitting in our bunker just waiting for the sky to fall.
Tony
Great. Okay, that’s all good to know. Time to be very, very sober about things. You mentioned loans and interest rates, and Brent, you were mentioning some things about commercial and industrial loans. And Tracy, you’ve talked about capex, especially in energy, pretty regularly. And Brent, you were saying something about the CNI loans have risen over the past year, even as interest rates have gone up. Can you talk us through that?
Brent
Yeah. So this is kind of another part of the narrative. The combating narratives that I think people forget is many people didn’t think the Fed would ever be able to raise rates. But not only did they raise once, they’ve been raising them for a year now, and they’ve raised them aggressively. And the markets have not collapsed, to many people’s chagrin and many people said, well, as soon as the Fed starts raising rates, they’re no longer going to be increasing the money supply. Okay, that’s fair. And I know a lot of people think that the central banks just print money and flood the market with money. But where the real printing of money comes from, where the real creation of money comes from is when banks loan money. When you go down to your bank and you take out a loan, they don’t and let’s say you take out a million dollar loan, they don’t take somebody else’s million dollars and give it to you. They create it out of thin air. That’s rational.
Tony
Million dollars?
Brent
That’s right. That that’s a new million dollars that’s now in the economy that wasn’t there before. And so a year ago, loans had been coming down aggressively since COVID so they’ve been ramping up, I want to say, like in 2020, it was around $2.4 trillion. And then after COVID, they did all these PPP loans and it spiked to like $3 trillion. And then since the PPP loans, it’s just been steadily every month down, down, down. But I think it was last March or April, it stopped going down and it actually started to tick up. And now it’s been going up for a year, and so it’s up about 10% or 15% from the bottom. So that’s the creation of new money. And despite the fact that the higher rates have not yet caused anybody to go bankrupt, it’s starting to happen. And BlackRock had this happen to them with one of their funds recently. But despite the raising rates, you haven’t seen mass bankruptcies yet. And not only that, you see new loans being taken out. The existing supply of money is still there because we’re not getting the big credit contraction, and new money is being created through new loans.
And so again, you have this tailwind that’s actually speeding things up towards this wall that I believe we’re heading towards. It’s kind of part of the same thing we’ve already been talking about, but it’s just another facet of it.
Tony
No, it’s good. Some economists are going to ride in and say “that’s not technically new money.” But it is new money, right, because it’s circulating in the system and people are using it. Okay, so what drives that? I mean, it seems to me that when you have interest rates kind of steady for a long period of time, people tend to say, well, I can always put that investment off until tomorrow. But then when you see interest rates start to rise, people wake up and go, whoa, wait a minute, I better make that investment before it rises even more. Is that what’s happening?
Brent
I’m actually not an expert on this, and I don’t know for sure, but here’s my theory on it. And so I’m sure we’ll get a lot of people that tell me I’m wrong, but this is kind of how I think about it. I’ve been on record in the past as saying low rates are deflationary for the reason you just explained. If the market condition is so bad that the Federal Reserve has to resort to these extraordinary measures and pull interest rates to zero, is that really an environment where you want to go borrow a million bucks? Maybe, but that’s kind of scary, right? And so I kind of feel like low rates keep people from borrowing money and keep people and it’s borne out, if you look at these reports, that’s typically what’s happened. But if you are in an industry and you are competitive in that industry, and you want to remain in that industry, and you have not taken out that loan. But then let’s pretend as an example, you own a shoe store in Dallas, right? And you compete with a couple of the malls and a couple of the other independent sellers.
And a year ago, they took out a loan and bought more inventory and increased the size of their showroom or whatever it is. And you didn’t. But now we’re a year ahead. Market is holding up. Everybody’s going to those new stores to buy shoes. They’re not coming into your store as much. And in order for you to compete with them, you need to build a bigger showroom. You need to buy more, whatever it is. Well, now your loan costs two or 3% more than it did a year ago. And so now your question is, if I want to remain in this business and the crash doesn’t come in the next two months, if I wait another three or four months, our rate is going to be 2% higher? And so they’re kind of behind the eight ball. And so what I think happens is, as interest rates start to rise, if you need the money, you will borrow it. And we get into…
Tony
A friend who is doing a restaurant franchise who’s going who went through that exact process in terms of deciding when to take out money. It was extremely low. Interest rates started to rise and he felt urgency to get his loan locked in and got it locked in because of the change of rate, right? And the perception of the future change of rate made him so those expectations play.
Brent
I did the same thing. I bought a place in Puerto Rico last summer, and I think our mortgage is around 5%. It had been like 3%. If I’d have done it three years ago, we did it at five, and now I think they’re at six or seven. But that was part of my calendar calculation. It’s possible that rates will go higher. Now, it’s also possible that they’ll crash the three, in which case I refinance and I’ll be fine. But the point is, as money gets more expensive, if you’re going to stay in business, you need money. And so we get into this other theoretical thing where money is a gift. And I say money is a gift and good. And a gift and good is something that typically when something rises in price, the demand falls. But not with a gift and good, with a gift and good is as demand rises, price rises. Or as price rises, demand rises as well. And it’s because you just need it. It’s like this drug you just have to have. And as interest rates start to rise, you will pay more and more and more. And people say, well, if it gets too high, they won’t pay.
And I always say, okay, maybe but if high interest rates keep people from borrowing, then explain to me why Visa is in business and why loan sharks exist. They exist because even though they have rates, people need money and they will borrow at high rates. And so I think that’s kind of what we’ve seen as well. Again, I think this is all going to end, but all of this contributes to where we see markets at today.
Tony
Yeah, I think you’re exactly right. Tracy, can we change this focus of capex to energy? Because it’s pretty well known and you’ve talked about several times that energy hasn’t invested in the upstream since 2014 or something, right? So do you think that rising interest rates and there is some change in the tone of ESG speak in the US over the past couple of months? Do you think the rising interest rates may push some of these companies to start investing in the upstream, or is that just completely ridiculous?
Tracy
I’d be hesitant to say, yeah, I think oil companies are going to jump on board with this because we still have this rhetoric in the west saying that we’re phasing you out in ten years. We want you gone. And so oil companies are therefore they just don’t want to spend the money. And it doesn’t really matter what rate it is at. It’s good news. We’ve seen Vanguard leave the Zero Alliance, and we’ve kind of seen a lot of these banks kind of push back and a lot of these investment funds kind of push back on this ESG narrative. But I just don’t think that’s quite enough until we see governments really focus more on ESG. And even though, say, for example, and it seems hypocritical, we’ve seen Germany, for example, their coal usage skyrocketed in 2022 as they’re closing nuclear plants. Meanwhile, they’re pushing this green initiative. The problem is that since natural gas prices have come back down to prices that they were pre-summer of 2022, I think that they’ve become very complacent. This is how natural gas prices will stay, and natural gas prices are going to stay low.
But that’s looking at the European economy, on the other hand, the damage has already been done. We’re already seeing some deindustrialization in Germany. You have BASF leaving forever. You have a lot of smelters across the whole of EU that are just not going to come back online when they had to. In fact, a lot of them started shutting down in fall of 2021 before the Ukraine invasion. And the thing is, you can’t just reignite those glass furnaces. It takes a lot of money. You have to keep them running 24 hours, 24/7. You know, we’re just not seeing that industry come back, unfortunately. And the ironic thing is if we go back to BASF in particular, they are moving to China, who is buying cheap Russian oil.
Brent
Crazy, right?
Tracy
Because it’s cheaper to do business over there in general. But so I think at this point and we’ve also at one of that, we’re also seeing companies, oil and gas companies, in the UK, sort of because of their windfall taxes. That’s affecting business as well. And so they have decided to either leave the UK altogether we just had Suncor in Canada sell all their assets in their joint venture to BP. And we heard from Shell, Equinor, and BP all said that whatever we wanted to invest in UK, we’re not going to do that anymore because of these windfall taxes. I think that we’re running up against a lot of problems here that are more government-oriented, bureaucratic-oriented than our state central bank oriented, rates oriented.
Tony
We have had some state governments in the US push back on ESG. Right. And we did have a bill in Congress that passed that was pushing back on ESG, but there’s a veto coming or something on that bill, is that right? Governments are getting involved to some level.
Tracy
Absolutely. We have 20 states right now, basically, that are pushing back on the ESG narrative, saying, we do not want our pension funds investing based on ESG. We want our pension fund, our state pension funds, investing on what we think is going to make us money.
Brent
That’s going to make money. Imagine that. Right?
Tony
That would be a good focus.
Tracy
So there are 20 states involved in that. Texas is one of them. Florida is one of them. So that’s still kind of going through the court system at this point. And as far as this new, the amazing thing is this ESG legislation that will likely get vetoed was that it passed the House and the Senate. That’s huge. That’s a huge shift, right? Not by a small margin, I mean, relatively speaking, when we’re talking about other pieces of legislation. So the narrative is shifting in the US. So I think it’s too early to say where this is going to go, but it is definitely something worth keeping your eye on.
Tony
Great. Okay. All right, that’s good. Let’s talk about the Russian supply cuts going into this month. They’re going into this month, Tracy, what does that mean? Can you kind of put that in perspective of their overall supplies?
Tracy
Yeah, I think in general, what people expected was when they announced this and they announced this in a month ago, that oil prices were going to skyrocket. But I don’t think they were doing that to raise oil prices and stick it to the west, right. And raise oil prices that they wanted to see. What they wanted to do is narrow that spread between urals and ESPO, which are their two main crude grades with respect to Brent, because that’s how the prices quoted, European oil prices are quoted in Brent minus whatever the spread is. Right. So what they wanted to do is they wanted, after the price caps and all of the sanctions, et cetera, they wanted to, we saw those prices, those front month prices in those particular grades fall dramatically. And so I think what they want to do is narrow the spreads. And so really, that’s what I think that whole thing, that whole decision was aired for.
And then you also have to understand that Russia includes condensates, which is those lighter oils within their total oil production, whereas the rest of the world does not. And so we don’t really know exactly where that 500K is coming from. Are they those like NAFTA, or is it pure crude? And where that really remains, just so people kind of understand the market over there.
Brent
I think Tracy and I might be wrong, but you’re the expert here, but I think another contributing reason that they cut production is, to your point, in order to get that spread closer, right? Because the discount was pretty significant. Right. And a month ago, I think they announced the production cuts, and a month ago, they announced that tax revenues were falling and as a result, they were going to have a budget deficit this year. But what I didn’t see until kind of a couple of weeks ago was that as a result of the production cuts and as a result of the tax revenues falling so severely in Russia that they are changing the way taxes are calculated on Russian producers.
Tracy
Exactly. Exactly.
Brent
And they are doing and this is not going to be in favor of the Russian producers, they’re going to increase the taxes on the Russian producers to try to alleviate that budget deficit. So I don’t know that they were 100% correlated, but I don’t think that they’re unrelated. Right? In other words, if they’re going to tax Russian producers at a higher rate, and it is taxed on the difference of the spread between the west and Europe, they not only want to get the spread closer or the price higher, the discounted price higher, and then tax at a higher rate. So it’s kind of a double whammy on the producers.
Tracy
It’s a double whammy on the producers, but it’s income for the government.
Brent
Right, exactly. No, exactly.
Tracy
You know what I mean? And this is the same thing I was kind of talking about earlier on another podcast. What is interesting is that Russia is suddenly buying this huge fleet of vessels, right? So they own the vessels and they’re now insuring themselves. So the government’s making money no matter what. They’re just paying themselves. So Russia is not really losing money on this, even with the price cap and with that spread being lower. Now, if you look at and moving on to that, there was just an independent study done that assessed the international sanctions impact on Russian oil imports. And I think it was researchers from Columbia University, University of California, and the International Institute of Finance. And what they discovered is really that Russian crude oil is really selling for $74 right now, all is said and done, which is well above the $60 price cap. All we hear from mainstream media is they’re losing money, they’re losing money. But in reality and I read this paper, and I’ll post it on Twitter later if anybody wants to read this paper. It’s very interesting and it’s very well done. They essentially are selling oil above the price cap, and there’s no way to stop. There’s no way to stop.
Tony
Yeah, sanctions are great, but if there’s no enforcement mechanism, they don’t mean anything. And the Russians know that. Russia, Iran, China, they all know how to circumvent.
Tracy
Iran is the most sanctioned country in the entire world as far as the oil industry is concerned, and they’re still making money, and they’re still able to export, so.
Brent
Shows you how powerful oil is.
Tony
Right, exactly. So, Tracy, who does the 500,000 cut hurt? Is it hurting Asia more, or does it hurt markets generally, globally, just because it’s crude oil?
Tracy
Well, I think, again, it’s very hard to decipher because we don’t know what 100% is being cut. Is it all oil, or is it just these light condensates? And so I think in general, I don’t think it hurts anybody in particular, because if the markets were that worried about it, well, it would be at $100 right now, easy. Right? And so I don’t think markets are that worried about it. I also think markets are kind of let’s wait and see what this actually is. And that brings to a second point, is that right now what’s happening is that we’re having a bifurcated market, right? So the oil market, which did its thing for 30 years, 40, 30 years very nicely, trade routes were settled. We were in this crew. Now we have literally a gray market. I mean, we always had a black market in the gray market, but, I mean, now we’re talking 10 million barrels a day in the gray market, not a few million barrels wherever else. So we’re talking about a large 10 million barrels, which is approximately Russia. And this is a gray market right now, right, because they have their own vessels again, their own insurance. They’re doing ship-to-ship transfers. They’re doing all these shady stuff offline to kind of mitigate and get around Western sanctions in any way possible. And so we really are seeing this market where it’s going to be harder and harder if you’re a barrel comes here, it’s going to be harder and harder to actually track these barrels because that gray market has exploded in volume.
Tony
Interesting, you tweeted a story about some Russian crude being seized in Albania. So that’s one of the, I guess, paths to circumvent. Can you talk us through that and why that’s important?
Tracy
Well, I think that it was interesting because this is not something that, you know, again, there are offshore ship-to-ship transfers going everywhere. You know, particularly if you look off, Spain is a very big on ship-to-ship transfers, right, in Greece. I just thought that was interesting because my first thought was five minutes later, it’s going to be on the black market via the Albanians.
Tony
Sure.
Tracy
But yeah, I mean, they just happened to get caught and too bad that Albert’s not here. He could probably better explain the Albanian relationship.
Brent
It was probably him.
Tony
Okay. I guess the message that I’m getting pretty consistently and tell me if I’m wrong, these are sanctions put on by Europeans, but through Albania, through Greece, through Spain and other places, they’re circumventing the sanctions. When I say “they”, I mean people in Europe are circumventing the sanctions that their own governments put on. Have I misread that?
Tracy
No. I mean, I think that everybody’s trying to kind of find a way around the sanctions right now. And you have to remember, this only applies to seaborne Russian crude. I mean, we still have gas pipes into Europe and we still have oil pipes into Europe right now. So it’s really only seaborne crude.
Tony
So when it’s piped, it’s fine.
Tracy
Yes.
Tony
That’s amazing. Really amazing. Okay, great. Hey, guys, listen, let’s just take a quick look at what you guys are expecting in the near term. What are you guys looking for, say, for the next week? What’s ahead? Tracy it sounds like energy markets are kind of sideways for a while.
Tracy
I think we’re kind of stuck in this $70-80 range right now in WTI. OPEC is very comfortable at $80-90 range for right now in Brent. And so, you know, I think that as we move closer to, say, high demand season and we get more clarity on China and what their domestic demand is going to really look like, I think we could definitely see a push to the upside. But for right now, I think markets are very comfortable where they are, and I think OPEC is very satisfied where markets are right now.
Tony
Okay, great. That’s what events happen, though, right?
Tracy
When everyone’s coming, right? Exactly. You never know what could happen. You had what the story this morning from The Wall Street Journal say EU is leaving. I was like, what? No, they’re not. And they retracted the statement.
Tony
You leaving OPEC and all that stuff? Yeah. Crazy. Brent, what are you looking for in the next week or so?
Brent
I kind of think we’re going to continually have this violent sideways. I think markets are going to go up one day and they’re going to go down the next. And I think in general, I don’t think we’re going to get real clarity in one direction or the other until at least the Fed meeting. Possibly. We do have CPI that comes out a week before the Fed, so that will have a big impact, no doubt, unless it comes in right on the number, which in which case it will be violent sideways again. But I’m trying to just be nimble right now. Again, I don’t have any huge convictions either way right now. I kind of have my long term view while I understand the short term tailwinds, but I think it’s a time to be prudent rather than a time to try to be brave. So that’s kind of a cop out answer, but that’s kind of the truth right now.
Tony
No, I think that’s a great way to put it. Time to be prudent rather than time to be brave. I love it. Okay, guys, thank you so much for your time. I really appreciate it. This is great, great insights. So I appreciate it. Have a great weekend. And have a great weekend. Thank you, thank you.
Congressman Kevin Brady started the morning with a national update. He discussed tax reform, job growth in the United States, record low unemployment rates, the need for our country to win the innovation race, as well as factors that are halting our growth.
“The biggest obstacle of growth in America is our workforce,” he said. “Not having the workers we need is already slowing growth right now in America. It is slowing corporate growth, it is slowing small business growth … Nine of ten companies that hire blue-collar workers can’t find the workers they need. We’ve got to solve this problem if we want stronger growth over the next decade for the United States,” he said.
Gil P. Staley, CEO of The Woodlands Area Economic Development Partnership continued the day with a community/regional update. He announced that healthcare is now the largest employment sector in our service area; growing from 24 percent in 2019 to 26 percent in 2020. The second largest employment sector is energy at 22.4 percent, and the third is education at 17.8 percent. Healthcare represents 40 percent of the Top Major Employers, with 10,027 jobs.
The Top Ten Major Employers (Non-Retail) in order are as follows: Conroe Independent School District, Memorial Hermann The Woodlands Medical Center, ExxonMobil, Occidental, CHI St. Luke’s Health – The Woodlands Hospital, Houston Methodist The Woodlands Hospital, Alight Solutions, Lone Star College – Montgomery, Texas Children’s Hospital The Woodlands, and Huntsman Corporation.
Senior Economist at the Houston Branch of the Federal Reserve Bank of Dallas, Jesse Thompson, provided an economy update. His main conclusion: Houston’s economy in 2020 is predicted to be, “positive, modest, but certainly not booming”.
Following Thompson’s presentation, an innovation panel, compiled of four executives, discussed how the latest trends in innovation help businesses solve economic issues. Innovation panelists included: Clint Brinkley, CEO of Your Business Solutions; Ashok Gowda, president and CEO, of Biotex, Inc.; Deanea LeFlore, senior director of corporate and community engagement for The Ion; and Tony Nash, founder and CEO of Complete Intelligence.
The afternoon concluded with a luncheon where keynote speaker, Dr. Renu Khator inspired the audience with her life story. Dr. Khator is Chancellor of University of Houston System and President of University of Houston. Within three years, she was able to establish UofH as a Tier One university.
Between intelligent speakers, and numerous networking opportunities, the Economic Outlook Conference 2020 provided an enlightening and productive experience for all involved.
THE WOODLANDS, TX — The Woodlands Area Chamber of Commerce, the largest business association in Greater Houston, will host the 34th Annual Economic Outlook Conference on Friday, February 21, 2020, at The Woodlands Waterway Marriott Hotel and Convention Center.
This year’s conference, themed “Innovative Solutions in a Diverse Community,” will feature a community, national and economy update, a CEO panel focused on technology and innovation, and keynotes highlighting the projected growth of the economy in Montgomery County and beyond.
Tickets are on sale now at woodlandschamber.org/EOC for $199 and Chamber members receive a discounted price of $169.
“The Chamber’s Economic Outlook Conference not only features economic experts who share valuable information for business leaders about current events and the future of the economy, it also offers a business expo that provides sponsors and attendees the opportunity to engage in one-on-one conversations with more than 700 professionals,” Margo McZeal, director of governmental affairs for The Woodlands Area Chamber of Commerce, said.
Renu Khator, the University of Houston System Chancellor and the University of Houston President, will give a keynote presentation.
A highlight of the 2020 event includes an Innovation Panel where four CEOs will discuss how the latest trends in innovation are helping to solve economic issues. Panelists include Clint Brinkley, Your Business Solutions CEO; Ashok Gowda, Biotex, Inc. president and CEO; Tony Nash, Complete Intelligence founder and CEO; and Gabriella ‘Gaby’ Rowe, The Ion executive director will discuss how the latest trends in innovation are helping businesses to solve economic issues.
