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The Week Ahead – 15 Aug 2022: Europe drought: Cost, energy & industry impact

Learn more about CI Futures here: http://completeintel.com/2022Promo

In this episode, we talked about the European drought — and looked at the cost, energy impacts, and industry impacts. We also talked about coal and discussed more broadly energy. But more specifically coal, and what will be some of the issues around it. How will the coal issues impact refineries and other downstream activities? Finally, we looked at inflation. It’s been covered to death last week — CPI PPI — but we also put a few words in on it.

Key themes
1. Europe drought: Cost, energy & industry impact
2. Coal & energy
3. Inflation
4. What’s ahead for next week?

—————————————————————-

This is the 30th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

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

Listen to this episode on Spotify:

Time Stamps

0:00 Start
0:49 Key themes for this Week Ahead
2:16 Europe drought: containers on the Rhine
4:22 How hot is Europe compared to other places?
5:25 How is France doing?
6:02 Europe’s embargo of Russian coal – will it make things worse?
7:48 The beneficiaries of Europe’s Russian coal embargo
9:32 Where’s most of the coal coming from?
10:00 Rhine River and how it affects coal and crude transport
13:00 Is there a silver lining in what’s happening in Europe?
14:16 How will the happenings in Europe impact politics in the region?
15:36 How you should be playing European equities?
16:40 Have we hit the peak inflation?
20:22 Will there be a Feb pivot?
21:17 What’s for the week ahead? Listen to the podcast version on

Transcript

Hi everyone. Thanks for joining us for The Week Ahead. I’m Tony Nash with Complete Intelligence. We’re joined by Albert Marko and Tracy Shuchart as usual. And Sam is out this week and he’s fishing, so I hope he sends us some when he’s back. Some good fish pictures, though. Great pictures from Maine or Vermont or wherever he is. So it’s just beautiful up there.

So this week we’ve got a couple of things on top. First, we’re talking about the European drought. We’re looking at the cost, we’re looking at the energy impacts, industry impacts. Then we’re looking at coal more broadly, energy, but specifically coal, and what will some of the coal issues, how will that impact refinery and other downstream activities?

Finally, we’re looking at inflation. It’s been covered to death this week, CPI PPI, but we’re going to kind of put a few words in on it and then we’ll look at the week ahead.

So before we get started, please like this video, please subscribe to this video. Please give us your comments. We always do come in. We always do respond to comments, even if they’re negative.

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All right, so thanks very much for that. Guys, let’s dive into this for Europe. I want to look at there have been a couple of things out, stories out today about containers on the Rhine not being able to get. There’s a tweet from Bloomberg Energy that we’re showing where container companies can’t get containers up the Rhine and obviously the heat and the drought and there are a number of issues for Europe and Germany specifically.

So Albert, can you kind of go into that? And we’re going to switch to the water levels on the Rhine as well so you can see the red line is well below year to date for water levels on the Rhine.

So Albert, can you kind of help us understand what’s going on there and what the impacts are going to be?

AM: Yeah, I’ll circle back to Germany, but there are other countries that are having similar problems at the moment. You have the Italian. Italy’s pool river completely dried up. Unbelievable. The UK suffering the same effects. Heat waves are hitting France. And this is really bad timing, especially when it comes to inflation, because the commodities and energy prices are skyrocketing.

Now, they have problems for the irrigation of the crops. They have transportation down certain riverways. So the costs are just set to inflate even further from this point on.

Germany, being pretty much the economic engine of Europe right now, is just absolutely taking it on the chin month after month. And this is certainly something that they don’t really need to be happening at the moment.

The Rhine River, like you’re saying, has big effects for multiple industries, specifically energy. They just can’t get things up and down the river at the moment. And the stuff that they can get down the river, the shipping costs have gone. I don’t even know what the rate is the last time I saw this, two or three times the normal rate.

So at this point, it’s like the Europeans, they need a winter where they have a lot of snow or a lot of rain. Otherwise, they’re facing a financial crisis coming.

TN: So let me ask you this. This is going to sound pretty ignorant, but I live in Texas. It’s really hot. Florida, it’s kind of warm, a little bit beautiful. Great place to move if you’re from California. But it’s easy for us to say, “gosh, we deal with heat all the time, it’s not a big deal.” But Europe is a lot hotter than it usually is, right? So how much hotter? Celsius or? 

AM: I wouldn’t say that. Maybe the timing of the heat waves is really bad with the droughts. That’s the problem. Because it’s not exponentially hotter than it was previous summers, but it’s just the timing of it is really bad and there’s been no rainfall. Europe has always had a problem with fresh water supply, and that’s why the United States has been blessed that we have ample fresh water.

Forget about the lake meat stuff that you hear right now. I’m talking about in the farm, the Midwest, where all the farms and all the industry is ample fresh water. And Europe doesn’t have that and they are suffering for it right now.

TN: Now, the key crop… So we’ve talked about energy before and you’ve said France, they’ve kind of got their act together and they don’t have to worry like Germany or in Italy does. How is France doing compared to the other places? I’m sure they’re suffering, but are they a little bit better put together? 

AM: They are a little bit better put together. They have ample food supply that sustains their nation. I think they sold 40% of the wheat crop to China, which I think is probably going to hurt them later on in the year as the job persists. But for France right now, they’re actually sitting far better than Germany is. 

TN: Okay, great. So let’s dig down a little bit more on energy. Tracy, you mentioned before we got on that Europe just embargoed Russian coal, right? With all of the issues and the industry issues in Germany, how much worse does that embargo make things? Before we get into coal prices and all that stuff. How much worse does that make things, the embargo on Russian coal?

TS: Well, it’s just another example of self harm, right. Because we’re already seeing… Russia is already prepared for this. We’ve already seen them sell oil to China, and India makes up for those barrels that are not making it to the west. Right.

And so they’ve already been doing that with coal. Russia has actually become India’s third largest supplier within the last couple of months. And to avoid Western sanctions, they’re also paying in yuan and the Hong Kong dollar. And that’s not to say that the US dollar, they’re trading dollars for those currencies to avoid Western sanctions. So it’s not that they’re not using dollars anymore, but it is that they figured out a clever way to get around sanctions. 

TN: Just circumconvention, right? 

TS: Right. I think that just like oil, where everybody expected three to 4 million barrels to be taken off the market immediately, we never saw this come to fruition because it was such heavily discounted. Those barrels found our way to market anyway, and so is Russian coal, to be honest. So really this hurts Germany more than anything.

That said, the flip side of that is that the beneficiaries of that policy are going to be Australia, United States, Colombia and South Africa.

TN: Okay. So if we look at Australia, just to kind of focus in on there, China barred Australian coal about two years ago, a year and a half ago, something like that? So is there ample supply in Australia to support Europe? And is that new? Have they already been redirecting things to Europe?

TS: I mean, they’ve already been redirecting things everywhere else because demand has suddenly gone up. Right. And not globally. So what we’re seeing, if we look at the benchmark Australian price, which is Newcastle Coal, their prices are about 400 AUD, which is about $284. 

If we look at what current spot prices are going for in the United States, particularly on the East Coast where shipping is a lot less, we can see that those are significantly lower. So that does bode well for coal companies on the East Coast with access to ports, closer access to ports, rather than coming, say, from the Midwest or the West Coast.

TN: So we’ve got the weekly coal price commodity spot prices for us up right now. So the highest there is 186 for Illinois Basin coal. Right. So where is most of that coal coming from? Is it Appalachia? Is it Joe Manchin territory?

TS: You’re going to want to look at Appalachia. Okay. They’re closest to the East Coast, which means your shipping costs significantly go down because you don’t have to ship it across the country first. Clean coal. Yes.

TN: So that does bode well for the United States, just because it’s significantly lower. But I kind of wanted to go back and in the same vein, if we go back to the Rhine River. The fact is that because water levels are so low, they’re about 1.5 meters deep right now. That will sit around 1.2 meters deep. It sits in about 30cm leave room. At the lowest levels right now, where there’s nobody traveling, obviously, they’re about 42cm. Actually, the lowest was in the lowest in the last century was in 2018, where they were about 25cm.

But what’s happening is because, what’s happening with the energy industry in general, because we’re talking there’s a lot of oil products sent down that river as well as coal, is that what these vessels are having to do is they’re having the third with what they’re normally carrying.

TN: So. If you had a vessel that went down and you’re paying X amount of dollars, now you have three vessels going down because you have to split that into a third because those water levels are so low. There’s more demand, there’s higher shipping costs, lower capacity. So those shipping costs are times, what, five or something per unit per ton.

TS: Or are absolutely ridiculous. And then when we talk about like low river levels, they typically impact regional, downstream, refined products. Right. Rather than upstream. So this is going to have a major impact, particularly in Switzerland and Germany again. So this is going to increase the cost of their refined product, particularly diesel, which there’s already a diesel shortage. So I expect that situation to get ten times worse as well as coal and other commodities that are sent out the river.

TN: Okay, so just to shift a little bit downstream. So if you talk about refined products and then we go a step further to say, plastics and that sort of thing. And we look at say, the electronics industry in Germany. We look at automotive industry in Germany. So do we expect a major impact on those industries as well? And at what pace will that happen? Will that be three months? Will that be nine months?

TS: Oh, absolutely. I think that’s going to have a major impact, especially because we’re already looking at those industries, looking to a lot of the manufacturing industry in particular are looking to go from gas to oil switching or gas to diesel switching. 

So if diesel becomes a problem, right. And oil becomes a problem coming down the river, that’s going to make that situation entirely worse. So we’re looking at this situation, I would say three to six months, much sooner than later for certain, especially as we head into the winter.

TN: Oh yeah. So it sounds to me we know that Europe has inflation problems. Right. We know that Europe has energy problems with the river issues and the drought issues. They now have crop problems and they have supply chain problems and they have, say, secondary impacts of, say,  refining secondary, tertiary impacts of refining issues. Right?

So I’m not asking this to be funny, like is there good news out of Europe? Or is there a bright spot in Europe right now? 

AM: No, there really isn’t. There really isn’t. Everything coming out of Europe right now is negative. The ECB came out today and said they’re not going to raise any more rates until next year and they’re looking at a secondary inflation event, causing bigger problems for the European Union and the UK. I don’t want to leave the UK out of it because they got drought issues and transportation inflation issues to deal with all, but there’s no silver lining for the next six to twelve months, in my opinion.

I think the euro is actually going to go down to 95 subparity for quite a while. 

TN: This year? 

AM: At the end of the year and into next year. Okay, so let me ask a couple of questions about markets and politics in Europe. First of all, how will this environment impact European politics in the near term? I expect the German coalition to break apart probably sooner than later. These inflationary effects are going to cause big problems. I mean, just the energy costs alone in Germany, God help them if they see frozen Germans dying, elderly people dying over the winter. It’s just a political nuclear bomb over there.

TN: Okay. Italy, places like that, obviously? 

AM: Italy is a disaster. Italy has always been a disaster. It’s just like their government’s rise and fall with the wind.

TN: UK, same? Do you think we’ll have a very short term government form and then it will fall away next year or something like that?

AM: Yeah, I believe one year. One year will last about a year. The French government is a little more stable, but even then McCrone lost the majority there. But Europe right now is in turmoil. The Dutch. Same problems with the Dutch. All these coalitions that have slim majorities are just going to start breaking apart. Okay, so ECB has kind of lost its backbone. European politics is in disarray. The Euro is likely to devalue or depreciate to 95.

TN: How are you playing, in a broad sense, equities in Europe? Do you think it’s a real danger zone for the next six months? Or again, are there broad equities? 

AM: When, there’s blood in the water you want to start buying. I would look at what’s systemically important to the European Union, like Deutsche Bank, French Bank Societe Generale, BASF.

These systemically important components to the economy have to be shored up so they’ll get bailouts

of support or whatnot and stimulus packages. That’s where. I’d be buying probably in January, February. 

TS: I think we’re already seeing a ton of bailouts, particularly in utilities right now. And so obviously those are going to help those stock prices. And so I expect we just hit the tip of the iceberg with Unifer. Right. And there’s a lot more to come. Those are the sectors that I would be watching.

TN: Wow, that’s pretty bad news. Okay. 

AM: It’s almost to the point where European equities will be cheaper than Chinese equities. That’s what we’re getting to.

TN: Okay, that’s good to know. We’ll keep an eye out for that. Okay, let’s move on to inflation. So everyone’s covered CPI and PPI this week. Please don’t turn off the show right now. We’re going to say something, but I did a survey yesterday. Very scientific, very statistically valid, Twitter survey yesterday looking at in light of CPI and PPI, where do we think Fed rates will go? And it’s pretty much a tie between 75 and 50. So I wonder, guys, we heard for days. There was zero month-on-month inflation, right? CPI inflation. And we saw negative. PPI. These are the things that you look at when there’s hyperinflation. We can’t find good news in the year on year. So let’s look at incremental data. So do you think we’ve hit peak inflation in the US?

AM: No. Secondary effect of inflation coming, mainly because the Fed started to rally this market for political optics. Commodities are rising. I mean, they’ve tried so hard to keep oil and wheat down, and it just simply will not break certain levels. It just won’t go down. Stay in 80s for the oil. It won’t break 750, 770 in wheat. And they just can’t do it. They have to go after these things, but they can’t during the election season.

TN: Okay, so you bring a good point with crude oil. There has been a lot of attention and work to keep crude oil prices and gasoline prices down. Tracy, how long can that happen? Because really, a lot of the zero or negative is in energy, right?

TS: Exactly. And I think what we’re seeing a lot here especially if you look at the front line, is I think we have a lot of things going on right now with the fact that as much Russian crude oil wasn’t taken off the market that people initially thought. There were recession fears. The SPR garage are really starting to weigh on that front month. So there’s a lot of things going on here that are kind of weighing on that front month. Plus open interest is nothing. And we also have China is still on their zero COVID policy and hasn’t opened up yet. So there’s a lot of things weighing on that the market right now. That said is that as soon as the SPR stops, which is end of October, coincidentally near in the Midterms.

Once that stopped and I still think Xi is going to have to open up China somewhat near the People’s Party Congress. And so I think that looking into the end of 2022 and into 2023, we definitely could see those higher oil prices again regardless of what the Fed does.

TN: Okay. Now, compound that real quick, compound those oil prices rising with the cost of rent going up astronomically and I don’t know what magic they’re going to be able to pull to keep CPI under 10%. What month? Like October, November, December?

AM: October, November. December. Okay. Smack in the middle of the Midterms. And they got to be seeing this. They have to be seeing it. If they’re not seeing it right now, it’s purely because the White House is interfering and wants politically driven news for the markets right now. 

TN: Okay, so do you think like a slight pivot to 50 basis points in September is possible or likely and then that eases up,  helps markets out, goose’s markets going into the Midterms and then we start to see this inflation rush come on and say late October, November?

AM: Well, first of all, we have to see what Powell says at Jackson Hole. Whether he’s dovish or hawkish. This rally makes me think that he’s going to have to be hawkish. Right. And then we’re still looking at probably a 50 basis point rate hike in September and after that I don’t want to even project what happens after that because it really depends on what CPI is going to be printing.

TS: Agree with that. 

TN: Okay, perfect guys. So you’re talking about markets rallying. Let’s talk about the week ahead. Equities have done pretty good this week, right? And commodities have done pretty well this week as well. So what are we looking for next week? You say volume is thin. Okay. So do we have another thin

volume week next week? Markets get goose, people feel good and then they come back the following week and we see some drama? What are you expecting?

AM: Yeah, I think that they could take this up closer to 4320 in the S&P. I think that’s the 200-day moving average, if I’m not mistaken. So they could take it up to there. But I’ll tell you what, looking at some of the order books on the S&P on the Futures, there is a boatload of sellers from 4260 to 4300. That boatload of them. 

TS: Yeah. It’s summer, right? Theres… Next week is the same as this week. You’re not going to see much until we hit September and fund managers and everybody’s back from their holidays. So I think we’ll see much of the same. The thing is that retail keeps trying to short this, which is kind of just a fuel to push this market higher because of liquidity issues. I think next week will be kind of the same. I’m not looking for outside of any disastrous thing happening, which hope not. But I think we’re going to stay in this well probably throughout the rest of August.

TN: And one of the things that I want to start thinking about, this isn’t the week ahead, but this is kind of the months ahead. I wonder if what happens if Russia Ukraine gets settled in October, November? That changes calculations pretty dramatically. So I’m starting to work on that hypothesis as well.

AM: Yeah, it depends on what a settlement is and whether Western sanctions still continue to bite the Russians, which are obviously going to retaliate economically. So a lot of the definitions need to be dealt with there.

Categories
Week Ahead

The Week Ahead – 08 Aug 2022: Low energy prices, China tech & stimulus, equity upside?

Learn more about CI Futures here: http://completeintel.com/2022Promo

Energy has taken a huge downside hit this week, in the wake of the OPEC+ announcement, US refining capacity utilization declining, etc. What’s happening? Why are we seeing differences between physical and paper crude markets?

Also, there was talk months ago about a new energy supercycle. Is that real? With China-Taiwan-US tensions tighter than they’ve been for years, we’re seeing Chinese tech stocks just muddle through. We haven’t seen a major hit – as if China tech will see major fallout from these tensions – but we also haven’t seen a major bump – as if China is expected to stimulate out of this to win domestic hearts and minds.

Also, could possible government intervention to solve China’s mortgage credit crunch be holding back the broad stimulus we’ve all expected for a couple of quarters?

Key themes:

1. Low energy (prices)

2. China tech & stimulus

3. Equity upside?

4. What’s ahead for next week?

This is the 29th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd

Albert: https://twitter.com/amlivemon/

Tracy: https://twitter.com/chigrl

Time Stamps

0:00 Start

0:30 Key themes for this Week Ahead episode

1:51 Moves we’re seeing in energy markets – why there’s a fall?

3:39 How much of the energy moves is seasonal?

6:58 EIA computer “glitch” problem

7:24 What happened in the refining capacity now at 91%?

8:30 Capacity utilization fall – is this a statement about the denominator or falling demand?

10:14 Is the commodities supercycle happening?

12:13 China and technology – KWEB is not falling or rising

14:00 Will the Chinese government help real estate developers? Will that take away from possible tech stimulus?

16:58 Viewer question: Is there still upside benefit to SPY?

22:18 How will be the start of the Fed pivot — 25 or 50 bps rise?

24:45 What’s for the week ahead? Listen to the podcast version on

Spotify here:

Transcript

TN: Hi everyone. Welcome to The Week Ahead. I’m Tony Nash, and today we have Tracy Shuchart and Albert Marko joining us.

We’re going to walk through a number of topics today. First is energy prices, low energy prices. We want to understand why that’s happening and what’s around the corner. Next, we’re looking at China tech and potentially the stimulus in China and how that will impact tech.

Finally, we want to look at equities. What remaining upside is there in equities right now, given the environment we’re in? Before we get started, I would like to ask you to like and subscribe to the channel. Also give us your comments. We’re very active and respond to comments, so please let us know what you’re thinking. If there’s something else we should be covering, let us know.

Also, we have a promo for our subscription product, CI futures, right now for $50 a month. With CI futures, you get equity indices, commodities and currencies reforecast every week. And you get all of those, plus about 2000 economic variables for the top 50 countries reforecast every month. So please check it out on the link below. $50 a month for CI Futures.

Okay, so guys, we’ve had a really weird week with the Pelosi visit to Taiwan, geopolitics and the risk associated with geopolitics is kind of back on. We’re not really sure exactly how that’s going to resolve, but I’m really interested in the moves we’re seeing in energy, Tracy, and we’ve seen energy really fall throughout the week and I’m curious why we’re seeing that, particularly with crude, as we’ve seen geopolitics dial up. I know there’s not a perfect correlation there, but we typically see crude prices rise a bit with geopolitics. 

TS: I think, it’s a combination of a lot of things. First of all, we’ve had which is ramped up to 200 million barrels being released to the SPR, which is fine initially, but we’re looking at the cummulative effect of this. In fact, we’re releasing so much so fast that now those barrels are actually finding their way overseas because we have nothing else to do with them. We can’t process that much right now.

And so we’re looking at that which is putting a damper kind of on the front end. We’re also looking at the fact that open interest is almost at the lowest in a decade, which means there’s nobody participating in this market. People are just not participating in this market.

In addition, we have physical traders that are completely nonexistent in this market anymore. They’re all trading via clear port on the OTC market as I’ve talked to actual physical traders, they don’t even want to be involved in this volatility.

And so that’s also taken a lot of open interest out of this contract. So this contract is easily pushed around because there’s just not of liquidity.

TN: How much of that is seasonal? How much of that is because it’s early August, late July, early August?

TS: It is seasonal. I will give you that because this summer is the summer lag. We generally see more participants in getting in September, and we’ll have to see how that kind of plays out.

But in general, the market is, this whole dive started in, was this market was factoring, we’re going to have this huge recession. Right? It’s going to be low berry session. Demand is going to go up.

And then we have this EIA discrepancy. The discrepancy was on gasoline demand. Actual gasoline demand versus what the DOE is reporting. Right? And ever since they had that “glitch,” where we had two weeks of no reporting whatsoever, those numbers suddenly changed.

And now they’re putting gasoline demand at below 2020 numbers at the height of COVID, which is to me,

not to sound conspiratorial, but to me, there’s just no way that we are below 2020 numbers. Right. And if you look at Gas Buddy demand, which is they look at a kind of a different look. What they look at is how

many gallons are being sold per station across the nation. And that’s how they kind of factor in what demand is. DOE is at the midpoint, right? So it’s like the midstream level. But those numbers should

eventually correlate. That discrepancy should eventually get together.

TN: So Gas Buddy is showing demand still growing, and DOE has it kind of caving. Is that correct? You know what I’m saying?

TS: Okay, yes. First of all, I think we need to look at the 914 numbers, the monthly numbers, which are definitely lagging. They’re too much behind, but they have been correct on production. Right? So I think they have weekly production at 12.1 million. Last 914 monthly report was at 11.6 million. So it is lagging information. But we have to start really looking at these weekly numbers and what the DOE is reporting and what they’re not reporting.

TN: If anything, what I’m seeing just observationally traffic seems to continue to grow. Like, I’m seeing more people going back into the office. I’m seeing more people take drives where they wouldn’t have taken long drives before. So what we’re seeing out of DOE doesn’t really match with what I’m seeing observationally. I could have selection bias, but it just doesn’t seem to match what we saw in April, May

of 2020. 

AM: Tracy is absolutely spot on on that. I actually had a few people note that the EIA computer “glitch” problems set all this thing off in the DOE inventory shenanigans. It’s starting to gain more traction with everybody. It just doesn’t add up. When things don’t add up, bad data comes in, and it’s politically advantageous for the moment try to get gasoline down, going into midterms. I mean, Tracy is absolutely 1000% spot on that assessment.

TN: So, Tracy, I want to ask you a couple of questions. We’ve got a chart on refinery capacity utilization, and it shows capacity utilization at about 91%. So last month we were talking about being at 94%. Now it’s at 91%. What’s happened? Has the Denominator going? 

TS: Well, that’s not actually a bad thing. Let me tell you that. Refineries operating at 94% 95% leads to a lot of problems. You’re going to see problems with maintenance, you’re stretching that capacity. Personally, I love anything over 90, 91. I’m much more comfortable with than 94 95%, which we got to, which is very stressing to me because you’re stressing those refineries, right. And that’s going to lead

to problems down the road. So for that to come down, it’s not a big deal to me, to be honest. Anything above 90, great. We’re good.

TN: Okay, so we’ve seen gasoline prices fall as we’ve seen capacity utilization fall. And so is that a statement about the, say, the denominator meaning the available capacity, or is that a statement about falling demand?

TS: I don’t think it’s a statement about necessarily anything. Okay. To be honest. Is the expectations around say that the gasoline price falling, is it expectations maybe around recession, but given the job numbers we got? Expectations about being around recession right when we’re seeing these prices fall. And I think we have a lack of participants in this market, especially lack of participants in the physical markets. The physical guys, like guys that trade for BP and Shell, which is where they’re just not in this market anymore because it’s too volatile, it’s too pulled around, and they can’t deal with that right now. So there’s nothing structurally changed about the physical markets right now.

You have to understand, too, is that the paper markets far outweigh the physical markets, meaning that there’s far more paper barrels traded than there are actual available physical barrels on the market

to be traded.

And when we look at a contract like WTI, which is actually physically deliverable, and we look at the market participants that are involved in deliverability, that is shrinking, shrinking margin, and then you look at something like the Brent contract, is completely just a financial contract.

So there’s a lot of hanky panky goingon in that market.

TN: Okay, now one last question while we’re on crude. Months and months ago, we kept hearing about this emerging commodities super cycle. And as we’ve seen commodities fall over the past few months, there have been some questions about is that really happening? So where are you? Do you think we’re in the early stages of another super cycle or do you think we’re just kind of modelling through?

TS: I actually think we’re still in the early stages of a super cycle. I mean, I think we’re kind of like I think my best comparison sake would be like, let’s look at the 1970s, right? And everybody’s looking at that ’73, ’74 when the oil embargo happened. But I actually think we’re closer to the ’67, ’69 era where we saw inflation kind of hit. Right. They tried to hide us into a recession, and then we had another peak in ’73, ’74 because issues with the market and then we have a third wave. So I actually think we’re only in this first wave of an inflationary cycle as far as commodities are concerned, okay.

Because we’re still in a structural supply deficit across not just the energy sector, but base metals, agriculture, et cetera. but you have to think your input cost for metals and for agriculture, it’s all energy.

So if energy is high to see inflation in energy costs, then you’re going to see inflation across all

of these commodities. We’re at $90. We were at negative $37 two and a half years ago. So to think that we’re crashing? You know.

TN: Okay, let’s switch over to China and technology and kind of talk through a few things with Albert. Obviously. Albert, we spoke earlier about Pelosi’s visit to Taiwan and US. China Taiwan affairs, and I’d recommend anybody view that that we published on Tuesday night US time. But I’m curious, Albert, as we look at and we’ve got KWEB up on the screen, which is an ETF of Chinese technology companies, it’s kind of middling. It’s not really falling. It’s not really rising. It seems like people are a little bit uncertain about what’s happening with Chinese tech. We have the closures of different cities. We have one of the big manufacturing cities that’s going zero COVID now.

And we obviously have the China Taiwan issues. What are your thoughts on China tech right now? And what should we expect over the next, say, two to three months?

AM: Well, over the next two to three months, I think China is going to be forced to stimulate. Once they stimulate names like KWEB, Alibaba actually, I really like Alibaba. There’s some good things happening there. I mean, the delisting stuff is a risk and it’s always been a risk, mainly because Gensler and Yellen have been trying to suppress the Chinese to stop stimulus because it hurts the United States and their plans to fight inflation.

So, yeah, I’m really bullish on KWEB. I really like it at 25 26 level. It’s not that far from where we are right

now. For the Chinese tech, it’s like, I don’t really think domestically, there’s too many problems domestically for KWEB. For me, it’s just all the delisting risk and that shot, the warning shot across the bow from the US. 

TN: Okay, so when you talk about stimulus, I want to understand a little bit of the substitutionality of stimulus. So if we have this big mortgage crisis in China where owners aren’t paying their mortgages,

and that’s even worse on the property developers, and there are trillions of dollars at risk there, do you think the Chinese government will intervene  and help those property developers? And if they do, will that take away from stimulus that could help technology companies?

AM: They will step in, but they’ll step in selectively for the most systemically important property developers. Not just the best connected, but the ones that touch the most debt and whatnot. So they don’t want things getting out of control. So for sure they will step in. I don’t think it will take away from the tech

sector at all. I think that the Chinese have been pretty pragmatic and diversifying how they get money into the system, whether it be other Asian countries, the US, Europe and whatnot. But they’re definitely in line right now to stimulate the economy going into the fall.

TN: Okay, great. If you’re trying right now and you’re talking about stimulus, that is to make up for kind of the COVID Zero close downs, but it’s also, I would assume, kind of winning some of those hearts and minds going into the big political meetings in November. Right, so you’ve whipped up nationalism with the Taiwan thing over the last couple of weeks and now you need bridge to get you to November. So you’re going to put out a bunch of stimulus to keep people fairly nationalistic and obedient. Is that fair to say?

AM: Yeah, that’s definitely fair to say. I think going even a little bit further than that is keeping the circle around Xi happy. That nexus of connected families that make money off the tech sector manufacturers. They need to be able to solidify it economically and stimulus will be targeted like that. And so when you say keep those families happy. You’re talking about skimming, you’re talking about sweet deals on contracts and that sort of thing.

TN: And I just want to make clear that doesn’t only happen in China. That happens in every country, right?

AM: Oh, every country you can imagine that happens. How politically connected with the donors, the political parties and so on and so forth. I just want to make clear to viewers. Like everybody. 

TN: Yeah, I just want to clear to viewers, we’re not just picking on China. This happens everywhere. 

AM: No, this is nothing negative towards China whatsoever. This literally happens in every country in every single country. Yeah.

TN: We had a question come in from a regular viewer talking about one of Sam’s calls. He’s not here, so he can talk behind his back today. The question was, Sam had talked about risks being to the upside a while ago for SPY, for the S&P 500. Now that we have had a mini rally, does he still see higher as the path of least resistance or is the risk reward fairly balanced here? I mean, we’ve seen a really nice uptick in the S&P and equities generally. Do you think there’s still upside benefit, or would you be a little bit hesitant in terms of the broad market?

AM: I’m bullish for a week, basically going a week, maybe two. I think that the CPI number is probably going a little bit lower than people think. And then all the peak inflation people are going to come out the woodwork and then they’re going to talk about Fed pivot, whether it’s real or not. I don’t think the Fed actually pivots. I think they just build a narrative of a pivot, if that makes sense, to rally the market.

But going forward, the economy is not a good footing. The job numbers are just not accurate. It’s a purely political headline for Biden going into the midterms. CPI is going to follow the same suit. They’ll probably have a 50 basis point rate hike in September and say that they’re slowing down. And whether it’s real or not. 

TN: I want to question you just to push back a little bit. When you say the economy is not on a good footing, what do you mean? Help me understand how it’s done on a good footing? 

AM: Well, the whole jobs? Listen, 20% of people don’t have a job. 19% of people have two jobs or more. You’re sitting there making this glorified headlines thatBiden is great for the job market and the economy, but it’s just not accurate. We have people that are struggling paycheck to paycheck more than any time in the last 20 or 30 years. So the underlying economy, forget about the top half that are millionaires that are buying whatever, the bottom half of the country is an absolute recession. So that’s what I’m saying the economy is not good.

TS: I mean, I totally agree with Albert. I mean, I’ll make a case for the bullish side. Let’s put it this way. So not a single trades work this year. Average hedge fund scrambling on how to salvage this year. There’s no other choice, really, but to get long. I mean, we have long going girlfriends been shell shocked. Font, shitty year. Value guys waiting to buy the dip in cyclicals. So I think that until when November comes and we have redemptions and these guys are faced with losing money from clients, I think that right now they have no other choice than to buy the dip, which is really interesting because that coincides with midterms. But not to put on my tinfoil hat there. So that’s my case for we may see a little bit higher than people that anticipate.

Even though I agree we’re still in a bear market. Albert makes a ton of good points, totally agree with

him 100% on that. But for the next few months, we may be looking at different kinds of things, especially because we also have the CTAs that are still super short.

So we have the possibility that we could see a short squeeze now if hedgies start

eating up the market and… This is exactly what the administration wants to see, because they want to see the S&P higher going into Midterm electric if it makes them look great. Of course.

AM: And Tracy is right. And this goes back into the oil numbers from the DOE and the EIA Shenanigans. They lower gas, they try to get inflation lower. They rally the market going into Midterms. It’s just the way it is. Now, going back to the economy, real quick, Tony, I see across the street the US consumer credit was $40 billion. I mean, people are spending and collecting debt like it’s going out of stock.

TN: That’s not a good number. You saw my tweet this last week about the $15 grapes. I mean, that sounds ridiculous, but people are having to. I talked to people about their electricity bills and they’re doubling and tripling over the last few months. And so people are having to do this. Rents are doubling in New York and so on and so forth. So it’s hitting everybody. And people are having to tap into consumer credit just to make ends meet.

AM: Just for the viewers, Tony, the forecast was 27 billion. It came in at 40.

TN: Wow. That’s a slightly overestimate, I would say. Let me ask you a quick question about the Fed pivot. Okay. You say the Fed is going to kind of act like they pivot but not actually pivot. So would that mean and I know everyone’s been on Twitter today or on social media saying, oh, the job’s number puts 75 basis points in focus again, all this stuff. But would the start of a pivot be 50 or 25 basis point rise?

AM: The start of a narrative of a pivot would be 50. But let’s just be honest. Inflation is not going away. They can fake a CPI number, maybe one, maybe two months. But come October, December, January, and inflation is raging, nine point whatever, 9.5%, 10%. They are going to have to keep going 75 basis points. 

TN: So when you talk about a pivot, you’re talking about the beginning of a pivot, maybe a 50 basis point rise in September or something just to kind of ease nerves off a little bit?

AM: Yeah, that’s exactly what it is. It’s just the beginning of a narrative to move the market. It’s all it is. 

TS: Okay, if we went 50 instead of or even 25 instead of 75, which the market is expecting, the barn market would freak out. 

TN: Now what happens to commodities in that case, Tracy, if we’re in September and we go 50? You’re

going higher.

AM: Okay, this is the problem I keep telling screaming people and why I didn’t think that’s why I didn’t think this rally was a good idea is because all of a sudden now you’re going to create this stupid pivot narrative and do 25 or 50 basis points. But then, like Tracy just mentioned, commodities are going to rip. What’s that going to happen then? We’re going to have stage two of inflation coming around in 2023. That’s going to make this like nothing.

TN: Yeah, but as long as it happens after November, I think. Everything’s fine. Right. No, seriously, we have to think we’re in that. We’re in those closures.

TS: You have to think everything is political right now. So every decision is political right now and you have to factor that into kind of your investment thesis right now.

AM: Tracy’s absolutely right. I was just talking to a client. I said I don’t want to hear anything after November of this year. This era is this era right now. After November is a different era. We’ll talk about that accordingly in the next month. But until now it’s just a pure political game.

TN: What are you guys watching in particular for the week ahead?

AM: CPI. I think the CPI comes in a little bit lower than people expect and will rally the market for another 100 points. Like a seven handle or something? I think it’ll be a seven handle.

TS: I mean, everybody is watching CPI, I agree. I’m watching CPI as well. I think what’s really interesting going into this next week is I would start looking at Basin Industrial Metals and miners at this point because I think that they are lagging crude, they have been lagging crude oil. But we’re kind of starting to see a little bit of turnaround. So my focus really is going to be on base and industrial metals.