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Week Ahead

No case for $100 oil; equities have peaked; and LNG & EVs in Asia

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In this episode of The Week Ahead, we’re joined by Dr. Anas Alhajji, Michael Belkin, and Tracy Shuchart. Dr. Anas starts by tackling the intriguing question of oil prices. Despite ongoing supply constraints, including OPEC’s cuts, Dr. Anas argues that there’s currently no compelling case for $100/b oil. He’ll walk us through his reasoning.

Next, we turn to Michael Belkin who shares his perspective on the equity market. Michael believes that we’ve reached the peak of the current cycle, and recent market turbulence seems to support his view. He also provides insights into energy trends and discusses his thoughts on sector rotation, particularly as it pertains to defensive sectors.

Finally, Tracy Shuchart takes the stage to explore LNG and electric vehicles in Asia. Her analysis highlights Asia’s growing dependence on LNG as the largest energy-importing region, with projections indicating a potential doubling by 2050. Tracy also gets into how gas may outperform green technologies like wind, solar, and batteries, shedding light on the future of electric vehicles in Asia.

Key themes:

1. No case for $100 oil

2. Equities have peaked

3. LNG & EVs in Asia

This is the 79th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

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Tony Nash

Hi, and welcome to the week ahead. I’m Tony Nash. Today, we are joined by Dr. Anas Alhajji, for the first time. We’re really glad to have you here, Dr. Anas. We’re also joined by Michael Belkin and Tracy Shuchart. There’s a lot to cover today. First, we’re going to talk to Dr. Anas about $100 oil. We’re then going to talk to Michael about equities and sector rotations that are happening in markets. And then we’re going to talk to Tracey about LNG in Asia, which has been a story building over probably a decade, but it’s really starting to break out.

Tony Nash

So before we get started, I want to let you know about a new free tier we have within CI Markets, our Global Market Forecasting Platform. We want to share the power of CI Markets with everyone. So we’ve made a few things free. First, economics. We share all of our global economics forecasts for the top 50 economies. We also share our major currency forecasts, as well as Nikkei 100 stocks. So you can get a look at what do our stock forecast look like. There is no credit card required. You can just sign up on our website and get started right away. So check it out. CI Markets Free. Look at the link below and get started ASAP. Thank you.

Tony Nash

Guys, thanks so much for joining us at the end of this week. I know there’s been a lot happening this week, and I’m really, really grateful whenever you take your time here. Dr. Anas, let’s start talking about the case for $100 oil. Obviously, we’ve seen a lot of movement in crude prices over the last couple of months. There are supply constraints, of course, with Saudi and OPEC supply cuts and the extension of those cuts. But you put in a tweet earlier this week saying that there is no case for $100 oil, which sounds surprising a little bit. I’d really like to hear your reasoning through that if you can walk us through that. I’m sure there are a lot of items that go into that calculation. If you don’t mind, can you walk us through that, please?

Dr. Anas Alhajji

Sure. When we worked on our 2023 oil market outlook in December, and we published it on the third of January, we made 23 predictions in that outlook. It is available on the web for those who would like to check it out. We made those predictions, basically, most of them were against the grain. The title of it was, 2023 is going to be the tail of two-halves. That’s what the title. And the title tells the whole story about the two-halves. The increase in oil prices, etc, all was predicted. We were very bullish on the fourth quarter of 2023. We expected the Chinese economy to be very weak. You and I exchanged few tweets on this throughout the previous month. We expected that. We expected Russia in order to continue to go to the market. But what we did not expect, despite the 23 successes of those predictions, we failed to see that Chinese are going to increase their oil inventories, and they increased this substantially. We failed to see that. And given their history that we studied over the years, it was very clear that they are going to use this bill when prices go up, and they already started doing this.

Dr. Anas Alhajji

That’s messed up our very bullish fourth quarter. We are no longer very bullish, we are just bullish. If you look at all the factors that determine supply and demand in the market at this stage, and I repeat here because some people take this word and in 2025, you said no 100 in 2025. I did not say that at this stage. I think, Tracey got burnt several times with the same matter that I was burnt with. When you say something and people put it in a different time frame. At this stage, there is no case for 100 simply because if you look at supply and demand and the fact that the Chinese are releasing a lot of oil from their inventories, they already released about 35 million and we expect them to release another 45 million in the next few weeks. That’s one issue. There are many other issues that people do not know about. Now, I understand what speculators do and algorithms and all that stuff, but they need a trigger. One of the things, just to give you an idea how much people do not know those who are especially very bullish, the Russians promised the Saudi to cut production by 300,000 barrels a day.

Dr. Anas Alhajji

The Russians are cutting and people see the numbers. What people do not see is that the Russians are playing the game of what is crude because they shifted to NGLs and they reclassified the crude as NGLs. Their NGLs exports went up by 300,000, the same number they decided to cut.

Tony Nash

It’s all a statistical game, right?

Dr. Anas Alhajji

Absolutely. When we look at crude, absolutely. When we look at OPEC and people show, Look, Saudi production is declining, UAE production is declining. Look, OPEC production is declining, OPEC Plus production is declining. We’ve been saying for a long time that production does not matter, exports do, because supplies are what matter to the market. But after they build those massive refineries, what matters right now is the net exports, not the exports. Once you count the net exports, the decline is way lower. Therefore, of course, I mentioned 23 prediction, there are many things to talk about. We don’t have enough time. But the idea here is you start looking at those details, people saying, What if Iran does not deliver? Well, no one counted Iran in the first place.

Dr. Anas Alhajji

No one counted Venezuela in the first place. Why you guys are counting them when you want to?

Tony Nash

Just a very quick clarification. When you talk about exports versus net exports, for people who aren’t energy market experts, why does that matter?

Dr. Anas Alhajji

There are countries that have massive refineries that they take the oil from Russia or they take their own oil and they export it as products. If you don’t count that in the equation, you are missing something from the equation.

Dr. Anas Alhajji

Because they are exporting both. I’m just making up numbers. Let’s say if a country exports 1 million barrels of crude and their product exports go from 100-300, their exports went up. Although if you look at the crude alone, it did not change.

Tony Nash


Dr. Anas Alhajji

So you have to count that. The other issue that we fail to see, because we have two failures in our forecast. The first one is we did not see the build in the Chinese inventories. Although we know the Chinese story about releasing oil, but we did not realize that in 2023 they will build. The other related issue is we did predict that other OPEC members will buy Russian crude and Russian products. What we felt to see is the increase was fourfold our forecast.

Tony Nash


Dr. Anas Alhajji

That changed the whole dynamics because the country can cut production, but they can still consume the oil anyway.

Tony Nash

Right. Okay. Has Russia been hurt by any of these cuts? By any of the energy cuts? It seems like it’s just train diversion more than really harm from these cuts.

Dr. Anas Alhajji

Let me put it differently. Are they being affected by what’s happening? Are they getting less money, etc, Yes, there is no doubt they are hurting. But definitely it’s not what Janet is saying. Okay, they keep talking about… Let me give the audience just one example about this. The price cab and the sanctions were imposed on December fifth, 2022. Two weeks later, Janet Yellen’s office was talking about the price cab is working and it’s reducing Russian exports, although the impact has not been done yet. Between the time the companies sell the oil, get the money, pay their taxes, the government collect the taxes, and reach the level of revenues, it take 6-9 months. Those guys were talking about it two weeks later.

Tony Nash

Right. Statistically, theoretically, it made an impact, but in fact, it hadn’t made an impact yet.

Dr. Anas Alhajji

The price cap never had an impact at all. We have a history of sanctions for the last 200 years, let’s say 120, because most of the studies are done for the last 120 years. Every single study on sanctions in the last 120 years concluded that sanctions do not work and there are always ways for the product to find its way to the market.

Dr. Anas Alhajji

This is a fact of life. The Russians were lucky because the Iranians were on their side and the top expert in the world on this are the Iranians. They took a page from the Iranian book and they made a thousand books out of it. They perfected the game on their own.

Tony Nash

I’m really relieved to see your statement about no $100 oil in 2023. Our CI Markets Forecast product does not have $100 oil in 2023. We see things peaking in October and then slightly deteriorating into the end of the year. That may or may not happen. But what you’re saying very much agrees with what we’ve forecast for months. As we go into 2024, what are the dynamics that you’re looking at? And do you see pressure for higher crude prices going into 2024?

Dr. Anas Alhajji

We published a report on 2024, and then we updated that we are still bullish. But we have a serious problem that we are still struggling with. We have the worst data, quality or records. We never had… I mean, the quality of the data deteriorated substantially to the level that we are really… I mean, we have to work extra hard trying to sort it out. We never had this problem before. It’s coming from all over. Today, we published a report on the EIA adjustment and crude quality and shale. The last statement, the conclusion was the US, with its might, it can send a rocket across the world and hit its target and cannot fix the adjustment in the data. That’s how bad it is. And what happened is, supposedly on the first of August, the EIA published a warning or a press release saying that we fixed the problem, we found the blending things, and we are adding the NGLs, etc. We were happy to see the decline, and the adjustment just declined to the usual 200,000 a day a week later, it multiplied by five. A week later. That shows you that we do have a serious problem in the United States.

Dr. Anas Alhajji

Now imagine with the dark Russian fleet, with the dark Russian, with the dark, Iranian fleet, with the Syrians, the Sudanese, the the Venezuelans, etc, how bad the data is. Then China basically is playing a game where one day the Iranian oil is coming to China from Malaysia and the other day is coming directly and the third day is coming from the UAE. I mean, it takes a lot of effort even to do that, and it’s becoming too expensive for any analysts even to do the analysis right now.


Heads up for a short break.


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Thank you and now back to the show.

Tony Nash

Okay, so there’s a lot of great data. For people who are looking at that data, is there a decent proxy data to look at to understand what’s going on? Or is it just a guess at this point?

Dr. Anas Alhajji

This is mostly when it comes right now to the Russian crew, because whatever I say about Russian crew, and I’m convinced of anyone can come in and say another number, and both of us are correct.

Tony Nash


Dr. Anas Alhajji

Okay, both of us are correct. But one point about the data quality here. Just to show you how bad the situation is, we are coming to the situation. For example, yesterday there was a major report published, I’m not going to name the agency, talking about the CO2 emissions between Europe and India and saying that India permanently now outpaces Europe. It’s a complete nonsense because Europe is in a recession, and in a recession, you use more renewable energy and less fossil fuel. Just show you how data deteriorates. The other data deterioration is related to the fact I know you are going to talk about EV, so I will mention it, and then we talk about it later. About how they report the EV growth in percentages, not the numbers.

Tony Nash

Right. Tell me what that means. You’re saying… Sorry, let me interpret that and make sure that’s what… You’re saying the EV installed base is pretty low. Because it’s pretty low, they’re telling you about percentage growth to make it seem more important when, in fact, the installed base of EVs is just pretty low. If they just told you the numbers, it would be a yawner.

Dr. Anas Alhajji

Is that fair to say? Correct. For example, this is a true case where the number of trucks sold jumped from 400 to 900. Around those numbers, but the report was, Oh, the sales of this truck increased by 154%.

Tony Nash


Dr. Anas Alhajji

But they did not mention the numbers.

Tony Nash

Right. Okay, that makes sense. Our observation is that macroeconomic data quality has deteriorated pretty bad in the past few years. It makes sense to me also that oil, crude trade and crude quality data has deteriorated as well. There’s just some fuzziness in the past few years, and I just can’t quite put my finger on it. Anas, before we move on to the next topic, can you help us understand the supply-side dynamics? We’ve seen Saudi Arabia continue their supply cuts into October. Do you think we’ll continue to see OPEC pull supply off the market? Let’s say if Europe continues to deteriorate, if Europe’s economy deteriorates, if let’s say, US consumers deteriorate and the US economy deteriorates, do you think we could see OPEC extend their supply cuts and even grow the supply cuts into ’24 if we see economies continue to deteriorate?

Dr. Anas Alhajji

There is one fact that we have to realize here that for Saudi Arabia in particular, they’ve been proven to be true on the demand side. Opec was wrong. If you look at OPEC forecast, you look at the IAEA was wrong. And so what? Because the Saudi are adopting a policy of two legs. The policy is every month they ask Aramco and they say, Look, tell me about what people are asking you for. They have their own clients. So what are the amounts that your clients are asking you for? And they tell them. I am convinced that they have a contract with a company. It’s an artificial intelligence company that measures sentiment. They take the sentiment from the market from the AI company and they take the data from Aramco and decide what to do. They get the first orders before you and I. And if any trader knows anything about the market, they have field before anyone else. The data for the forecast for OPEC and IA and everyone else, it comes later. They have a field of market before anyone else. Therefore, they really nailed it when it comes to the demand. The demand is not as strong as people predicted earlier this year.

Dr. Anas Alhajji

Because we already have this cut and we see where we are right now. They have a few. This is the first fact. The second fact is what do Saudi’s want? Because people really need to understand what they say, Well, they need to balance the budget. Look, this is just one tiny objective among many. There are many objectives. The budget and the money is just one part of it. It is extremely important for the Saudi to control the narrative. It is extremely important for the Saudi to be in the driver’s seat. That’s why they get angry when the speculators after the banking crisis in the US, the recent one, the speculators basically took over and then the media start publishing those weird, some of them fake news. Tracey and I basically are familiar with those news that becoming really annoying from time to time where it’s either fake news or, for example, it is part of corporate planning to study all scenarios. It’s natural. If they are discussing seven issues and one of them mentioned we discussed this issue, does not mean they are going to adopt that issue. But all of a sudden it’s a headline news and the market is reacting to it.

Dr. Anas Alhajji

But the fact is they want to control the narrative. They want to, yes, they want more money, yes, they want some political gains out of it. Yes, they want some strategic gains out of it, yes. But one important element this year that did not exist before that they are going to be a super active participant in COP28. Cop28 is going to start at the end of November for about 12 days in December, and it is in Dubai. This is in their backyard. They want to go there and be a hero. The reason why they want to be a hero, because they cannot be… Remember that this is the first time the oil companies are part of those meetings. They were barred before. They are going with the rest of the old industry, trying to convince the other side to change the narrative.

Dr. Anas Alhajji

And you cannot change the narrative unless you are active participant and you are ahead of everyone. You lowered CO2, you build those big mega wind farms, and you build those solar, and you are using hydrogen, and you are planting trees. They are going to come in full force to show all those good things that I am as good as any European country. Now you listen to me. This is part of it too, because a reduction in output for three months bring us to COP28. Reduction output means a reduction in CO2. At the same time, they are changing the narrative on the consumption side because for over 40 years, the data from VP and NA and all the others, now if you go to the web and search for the top 10 consumers of oil, Saudi Arabia is always there. But that’s a mistake because they did not count the export, the product’s exports. They count them as consumption. Saudi Arabia is not among the top 10 consumers, and therefore they count them as big emitter because they are consuming that oil while they are not consuming it.

Tony Nash

Well, it’s like looking at Singapore as a consumer, right? I mean, Singapore has massive refineries. They couldn’t possibly use all the oil they import.

Dr. Anas Alhajji


Tony Nash

They import it, process it, re-export it. All these things make a lot of sense. They’re going to get involved in COP28 really to have more control over the narrative going forward. The vilification of oil and gas and the vilification of fossil fuel.

Dr. Anas Alhajji

With the cooperation of others. This is very important. They are going in with the rest of OPEC, China, India, the African nations with the oil majors, especially the Europeans. They are going there, armed with all the facts of 2022, where they show that you, Europeans, you reenact on everything you promised.

Tony Nash

That’ll be very interesting to watch. I can’t wait. Perfect. Anas, this is great. Just conclusions. No $100 oil in 2023. You’re still bullish going into 2024, but you’re not super bullish. The Saudi and OPEC will get more involved in COP28. Over time, we’ll say maybe a more friendly narrative to some of these traditionally fossil fuel-producing nations. Is that fair to say?

Dr. Anas Alhajji

Yes. On 2024, basically, the major issue we are facing is I mentioned one, but I’m going to mention something else since you are going to talk about LNG and EV and Tracy is going to talk about that, so this is a segue to it. One of the big lessons that we learned in 2022 is that we’ve seen substitution among energy sources in a way that we never seen in history, where wind stops, natural gas prices go up, people cannot afford them. Now they want LNG, LNG goes up, and now they go back to coal. It rains, there is no coal. It goes back to wood, and then from wood goes back to oil. We never seen this before, and it’s really quick. This is missing up our efforts to sort things out because we need to know the degree of substitution between all of those. This is a big problem right now in the analysis of the future.

Tony Nash

Yeah, I wouldn’t have expected to see wood as a substitutional feedstock in 2022. that’s really-

Dr. Anas Alhajji

Our regional basis, it is.

Tony Nash


Dr. Anas Alhajji

Or local, if you want to. But on a regional basis, we’ve seen that change.

Tony Nash

Very interesting. This is perfect. Thank you so much. You’re welcome. Let’s go from energy to energy with Michael. A little bit of energy. Michael Belkin, thanks for coming back this week. You mentioned last month when you were on the show that you thought equities had hit the cycle peak, and we’ve seen headwinds in equity markets ever since. Your view is that equities have peaked, which is great. And we’ve got a screenshot of your newsletter. You also thought energy would start picking up, and you covered that a bit in your newsletter as well. Can you talk us through the cycle peak and energy, as you’ve outlined in your newsletter?

Michael Belkin

Sure. Thanks for having me, Tony. Just to review what I do. The Belkin Report is a forecasting service. I was a graduate of UC Berkeley Business School in the staff department. I study time series analysis. What I do is forecasting based on time series analysis. I developed my own proprietary model. It’s similar to what I studied in Fourier analysis in Box-Jenkins on a regressive integrated moving averages, but I came up with my own way. My model gives direction, position, and intensity in a 12-period forward forecast. It works particularly well on sector rotation. We used it in proprietary trading. I was the quant strategist in equity trading back in the early 90s at Solomon Brothers. Anyway, that’s what I do. My clients are big hedge funds, private-family offices, big asset managers all over the world. Basically, I’m looking for what’s going to happen next. Again, direction, position, intensity. Is something going to go up, down? That’s first thing, direction. Second is position. Where are we? Beginning middle and how strong is the signal? With that in mind, let me give you a forward look. Sometimes my forecast sound very contrarian because the model basically likes to buy low and sell high.

Michael Belkin

It’s basically trying to pick bottoms and tops and things. Not just in markets, but in ratios, the way sector rotation works. Okay, so having said that, let’s just say where are we? July 31st, that was the peak for the S&P, Dow Jones, Russell 2000, and DAX. The NICA peaked a little bit earlier, actually July third. So we’re not down a lot from there. We’re down like 3 % for the US indexes, 8 % for the Russell 2000 from their peaks, DAX down 5 %. The stuff that people like the most actually peaked earlier and is down more. So New York-Fang, which is the best measure of all these Magic Seven stocks or whatever, it’s an index you can follow. It’s the top 10 large cap stocks in the US. That’s down 5%, peak July 18th. So we’re good six, seven weeks past the peak in the stuff. But has that changed the appetite among buyers? Not a bit. It’s funny. I was thinking before I came on here, I think I’d dubbed this the Hunter Biden market. It feels so good at first. You know the pictures of Hunter Biden in his underwear, with a cigarette in his mouth, and then a prostitute in the background, and he’s smoking crack.

Michael Belkin

So that’s my facetious view of the people who are addicted to buying these AI stocks and tech stocks which have already peaked. So it feels good at first. And I’m not a permabar, while I was on this stuff, my model turned very bullish last October. It’s almost a year ago. Anyways, but these peaked the first beginning of the third quarter into the end of the second quarter. Just one little side, one little digression on that. If you look at the flows, Deutsche Bank puts out this cumulative flows chart and it shows over the last year, tech is off the top of the chart. That’s all that people are buying and energy is off the bottom of the chart. But that hasn’t been working right. So tech is underperforming now, energy is going up. So, for instance, energy sectors were the only positive gains in the US and in Europe last month, August. Again, this week. So the S&P is down 1 %, the XLE is up 2 %, 3 % positive alpha. And is anybody getting this? I mean, a little bit, maybe, but this is not a consensus popular trade by energy. This is not something that’s wildly popular by any stretch of the time.

Tony Nash

On us and Tracy would have told us the same months ago, just like you. I mean, it’s really interesting to hear you say this, Michael, because this on energy is what Tracy has been telling us to wait for several months. So it’s great to hear this.

Michael Belkin

So it’s working. Again, the model forecast, it looks like a sine wave where the left tail is the beginning of something, the middle is the beginning, the middle is the middle, and the right tail is the end of something, time is on the bottom axis. So where are we in the oil? I might differ a little bit from your previous speaker. I’d say we’re about half to two thirds of the way through this move. So where are we? About $90 a barrel on Brent crude, a little bit below that for US crude. I could think it could go for another month or so. And energy stocks have not really become wildly popular yet. So basically, SEC in the fifth, sixth, dealing. If you think of a baseball game, nine innings, that’s where we are. We’re halfway, we’re not to the seventh-inning stretch yet. So it could keep going. So now what is this doing to the economy? So the market is peak. The market is the best leading forward indicator, economic indicator. So I was driving down the… I live on this island outside of Seattle. Gas is now five dollars a gallon here.

Michael Belkin

That’s probably more around here than it is in other parts of the country. So what is this doing? I think the higher oil price is applying the coup de gross to the US economic expansion. So think about it. Where are we? We had all that stimulus. The COVID hit, they freaked out in Y2K back in 2000. The Fed printed trillions of dollars of money. The US government spent trillions of dollars in all this fiscal stimulus. Then they pulled the plug on that a while back. Not fiscal so much, but the Fed has been doing QT. It’s been draining raised interest rates by 550 basis points, I believe. I think we’re dealing with the lagged effects of all this monetary tiding and pulling the plug on stimulus. I think the oil price typically going into a recession, the oil, not always, but typically you get a rise in the oil price while the recession is already starting and the stock market’s going down. Then the oil price peaks after a few months into it and starts going down when everything goes down together, commodities. That’s where I think we are. I think the oil price is squeezing the economy.

Michael Belkin

It’s squeezing the US consumer for sure. Let me just go through some of the sector rotation stuff. I do a stronger and weaker US industry group forecast. It’s longs and shorts basically, page six of the Belcom report. Until about a month or two ago, I had autos, airlines, all that stuff as out-perform prospects. It was working. Consumer groups, restaurants, retailers, they were all working as longs. That completely changed about the last time you had me on. Now I have for out-perform, I have energy service, oil and gas, energy MLPs, which yield a huge amount, seven %, these pipeline operators. I think they’re still a nice conservative way to play the energy thing. Coal. But after that, what is flipped into the sector rotation is flipped into defensive outperform. So that’s consumer staples, utilities, which nobody likes. These are the most hated. But these are risk off sectors and groups. And when big portfolio managers get nervous about the market, they basically sell all their tech and cyclicals, and they rotate into consumer staples, utilities, health care, and maybe REITs. That’s maybe bottom for list. So that’s what I’m starting to get. And so what is the sell?

Michael Belkin

The market is like the top of my sell list is New York-Fang. So Tesla, Meta, AMD, and NVIDIA. By the way, NVIDIA is down 5% this week. Anybody noticed that? I mean, the favorite AI stock. So to me, this AI boom is… Yeah, it’s real, of course, but it will amount to something, but not the way people expect now. Free market economy, everything changes. The competitors come out of left field. So anyways, the video is down 5% this week. Semiconductors, these are my shorts, software. Also, by the way, software stocks, the same stocks that were in the bubble that Tiger Global was long, everybody has jammed back into these things. These are now my top shorts. So Broadcom, NVIDIA, AMD, ASML. You go down the list… Wait a minute, those are semiconductors, Data Dog, TTD, I mean, Monster, Shopify, Coin, Hubs. These are the tickers. These are the stocks that blew up Tiger Global. And here we are back again. These people are loaded up to the gills in these things. There’s an old saying, a dog who turns to his vomit, I hate to be too-

Tracy Shuchart

Have loves dogs.

Tony Nash


Michael Belkin

So these are my shorts. This is not like me thinking some… This is not a subjective thing. This is what the model is coming up with, internet stocks.

Tony Nash

The sense I get, Michael, is that for a lot of these portfolio investors, they can’t not be in these things right now. They have to. They’re limited and their investors are asking them why they’re not in these things because the perception is that they’re doing so well on the tech side.

Michael Belkin

Sadly. Yeah. So I won’t mention any names, but even one of my clients whose household name, Hedge Fund Manager, I saw his letter saying, Oh, yeah, we covered all our shorts and now we’re long and all these fang stocks because it’s the only game in town. This was like right at the top six weeks ago. So, sadly, that’s how sentiment is the market is like this big vice. It tightens, squeeze you in the vice and makes you capitulate. So sentiment is a big part. One of my smartest other clients is a big sentiment fan, and they always want to know when sentiment is leaning too far one way or the other. And so does anybody like defensive stuff now? No. Do people like energy? Maybe a little, not so much. And there’s no big flows into it or anything. And do people love tap? Absolutely. So I think that’s basically what’s going to… There’s going to be this big squeeze out of this stuff. If I could just go a little bit further globally. So in the context of a global top for equity markets and the economic cycle, there were huge inflows into EM, right?

Michael Belkin

And one of the biggest was Mexico. So Mexico, for some reason, the Japanese retail investors, maybe no more or somebody, pushed these things into the Mexican cash, so Mexican bonds. If you look at charts of Mexico, the Peso got incredibly strong and the Mexican stock market went to the moon. It’s been falling apart. So it’s down four % this week. Same thing with Brazil. So we’re getting this flush, global flush. And if you’ve been around as long as I have, been through a few cycles. When EM starts getting cold feet, basically the currency start weakening, the bonds interest rates start going up, there’s capital outflows, the stock market starts going down. It’s all part of the same risk of global move. So I see this big risk-off global move just starting. So where are we? Beginning of September. The three-month view for the US market points down. So I would be short. A couple of things that are nice trades, VIX. The VIX looks incredibly depressed to me right now. So VIX call options. There’s a big game. There are big vol sellers. Don’t ask me who they are. I don’t know if it’s a conspiracy or what.

Michael Belkin

I mean, it’s part of the zero-day-option thing. People just sell options and it depresses volatility. But if we start getting big moves… Right now, volatility has been depressed, realized the vol is low. It’s like you barely get 1% moves in the market. That’s a big move. But if we start getting 2, 3% moves, those can be up and down by the way, in a bear market. It’s treacherous. So the danger is to sell them in the hall, get bearish, Oh, it’s breaking down. Sell them, get squeezed. You buy it, you short them in the hall, then it goes up four % in your face, you buy them back at the top. So that’s not the way to operate. Sell the rallies. So that’s why I’m telling clients we’re going into a higher volatility market, like the intraday rallies. Like today we’re up a little bit, sell them, short them. Buy VIX when it’s down, when they’re crushing it. Look out for tech. And there’s this big… Retail investors, it’s hard for… They might not be aware of some of these trades, but there’s… For instance, one of my clients is an Alpha Capture Fund. They’ve got almost 200 contributors, sell-side, buy-side brokers, independent guys like me.

Michael Belkin

I’m ranked number one in that. I was ranked number one in the first quarter. I’m up about 16%. That’s market neutral. So the point I’m not boasting. Boasting tends…

Tony Nash

To- Boast. That’s good.

Michael Belkin

Look out when you boast, something comes out of left field and destroys you. But the point is it’s long, short. There’s opportunity to be things like long energy, short tech. And I’m even buying things in their American AT&T, Telephone, Verizon, these are really depressed stocks, defensive, high yielding stocks, out of favor. Maybe not huge absolute gains, but huge outperformance possible, and even gold stocks. So gold stocks are almost there in the forecast. I’m just about ready to push the button on gold stocks, which is a defensive group which outperforms. That’s it.

Tony Nash

No, that’s not it, Michael. There’s one other thing. You mentioned the EMs, you mentioned some of the previous discussions. I want to ask you quickly about China. When we spoke last time, you were a little bit positive about China, and it hasn’t seemed to go well. Is there a chance that we see a resurgence in China or is the opportunity passed?

Michael Belkin

Good question. Yeah, that one I’ve been wrong on. I think I attribute it to their reluctance to go full-bazooka on stimulus. If ever there was a time and a place where it’s appropriate for huge monetary and fiscal stimulus, it’s now. But I am… He’s saying he’s afraid to do fiscal stimulus because it’s going to make the consumers, Chinese consumers, weak. I think they’ll be forced into massive stimulus eventually by how bad things are. But I’m standing aside there now in the Apple news, this is really economic warfare. So everybody knows this by now. They’re not allowing anybody in the government or even state-owned enterprises to use Apple phones at work. So that’s a response to the restrictions the US has put on semiconductors. So there’s this tip for tap thing that makes me really nervous. And it could be that China is completely uninvestible. Right now, I just don’t know. If they go full tilt, bogey on stimulus at some point, then that market could start to go up just on money creation. We’re not there yet, so I’m standing aside for now.

Tony Nash

Great. Okay. Michael, thanks. That was very comprehensive. Really appreciate that.

Tracy Shuchart

I had a question for Michael really quickly. Actually, it’s about based on industrial metals, given this green transition, do you think that… Are we just waiting on China, demanding that they’re the world’s largest commodity buyer for this take-off? We have LME inventories at Lowe’s, but yet we’re seeing prices at Lowe’s as well. I don’t know if you had any thoughts on that sector.

Michael Belkin

Yeah. So base metals, neutral. I agree with you. They’re very low and they’re enticing. If you just look, you want to buy low, they look interesting and you think nickel is going to be in batteries and everything. I’m not getting a signal on those at all right now. So I think the economy is going to head down. And a lot of these EV stocks, the things, the battery makers and things, I just think if the economy goes down, the whole rationale for owning these things is going to get pulled. And so, for instance, in Europe, autos are one of my biggest shorts there. So it’s towards the middle. The top short is tech. So Mercedes, BMW, Porsche, all these VW, all these companies. I just think the economy goes down, auto sales are going to go down and there’s going to be… The demand scenario might not be as strong as people are anticipating for now, for a down cycle in the economy. So no, I’m not bullish on base metals at the moment.

Tony Nash

Okay. I also, on your auto comment, I think is that the volume or is that the pricing power? Do you see fewer cars being purchased or do you see those automakers losing the pricing power they’ve had over the past few years because of supply shortages, or is it both?

Michael Belkin


Tony Nash


Michael Belkin

The economy tanks… Basically, Germany is a big auto manufacturing plant and export. That’s what they do. The stocks are extremely popular with international investors. They’ve been dogs and they’re just starting down. So direction, position, intensity, we’re only second, third, and down. Basically, the model doesn’t say, it doesn’t answer your question precisely, but it gives the implication that car sales are going to… The economy is going to go down, people are going to have less money to spend. They’re not going to be buying new cars so much. They’re too expensive anyways at the moment. You know how that works in an economic cycle? That’s what causes a recession. So the sales fall, companies start cutting production, they start laying people off, canceling orders, suppliers orders go down, et cetera, et cetera, inventories go up. That’s what we’re headed into, I think, inventory correction of classic economic recession.

Tony Nash

Very interesting. It’ll be interesting to see. Thanks for that, Michael. Tracy, let’s move on to some of your comments about LNG and EVs this week. Everyone’s mentioned EVs so far, so I can’t wait to dig into that a little bit. You made this post about LNG in Asia this week talking about Asia’s growing dependence on LNG being the largest importing region and doubling by 2050. Being from Texas, that’s great for us. You also mentioned how gas is likely to outperform wind, solar, batteries, which is interesting to me given that China is pushing green tech so heavily. Can you talk us through the importance of global gas demand as well as the adoption of things like electric vehicles in Asia?

Tracy Shuchart

Well, I think first of all, if you’re talking about Asian markets and we can lump Africa into this as well, even though it’s not Asia. We’re looking at the LNG market. It makes sense that you would make the transition from coal to LNG and then perhaps to renewables because they still need cheap energy. It’s clean energy. It makes sense for that jump to happen. You’re not going to jump from coal to wind. It’s just not a natural technology evolution. It makes sense that the LNG market would grow specifically in those areas. We’re seeing that it actually grow in Europe as well too. Or if you look at Germany, they’re going backwards and investing in coal again. But aside from that, so it’s a natural transition. There was just a big gas tech symposium in Singapore this week. It was everybody from the LNG industry. If you look at really the supply demands and what those orders are looking like for some of those larger LNG companies, particularly many in the US, that just makes sense. As we in the West are talking about cutting off, we want to end fossil fuels by 2050. Whether or not you can actually do that or not, it’s a totally different question, but that is the stated goal at this point.

Tracy Shuchart

We’re really going to see, especially in these emerging markets, fossil fuels grow as they move out of coal and into things like LNG, just as here in the West, how that naturally happened.

Tony Nash

Okay. As they raise their dependence on gas, so India, China particularly have huge dependence on coal right now. Not a small portion of their economy is focused on mining coal. Indian coal miners, Chinese coal miners, that thing. But as they transition to more LNG, are there gas sources in Asia outside of, say, Indonesia, Malaysia, a little bit of say, Myanmar and so on. But are there large gas sources and gas fields in Asia?

Tracy Shuchart

I mean, there are some, and a lot of that is coming from Russia as well. They have the Siberia-1 pipeline, they’re building the Siberian-2 pipeline. You also have large gas sources in Africa, so to speak. There’s a lot of natural resources that are still stuck in the ground at this point. If we’re talking about gas, it’s very abundant in the West as well. Obviously, Europe doesn’t tract, and so we don’t see that coming out of European markets, but certainly in the US, it’s a big abundant energy source.

Tony Nash

Okay, so let’s also talk through EVs because you mentioned that in this tweet as well, and we’ve talked about it with Anas and Michael. With the transition to gas, will those grids have the, say, feedstock and capacity to power the EVs that are expected to come online across Asia in the next, say, decade, two, three decades?

Tracy Shuchart

Well, expected is the key word here at this point, which you mentioned because we’ve seen a lot of these very aggressive goals from, say, the IEA, which puts out what they think this is going to be. But in reality, we have to understand that right now, as far as energy is a concern, we’re in higher for longer. We have energy scarcity right now instead of energy abundance. I think it’s going to be higher for longer. Does that mean it’s going to be $100 oil from here on out? No, I’m not saying that. But it’s certainly not going to be… We’re probably… We’re not going to see $20 oil for any length of time, probably well within our lifetimes. I just think it’s higher for longer. It’s scarcity is concerned. I think this is going to be a very big problem when it comes to EV and EV production, which requires a lot of fossil fuels. You have to mine for all these metals. You have to charge these cars. Most grids are still based on some fossil fuels, and renewable energy mix is still a very small portion of that, and not to mention the problems with interminence.

Tony Nash

Isn’t it strange, though? I don’t mean this to sound as cynical as it’s going to come off. But we’ve had a push for alternative energy for the last, say, 20 years. I mean, trillions of dollars of subsidies with solar and wind and other stuff. But we still have supply constraints. We still have a deficit of energy and fossil fuel. There’s been this massive push to have more of the feedstock as these alternative feedstocks, but we still don’t have enough fossil fuels. Why is that?

Tracy Shuchart

Well, I mean, because we have these green transition goals. The West is really pushing for this. Whether they’re realistic or not, that’s up to debates. But at this juncture, when you’re telling oil and gas companies, We want to phase you out in the next 10, 15, 20 years. How much CaPEx are you going to throw at that? You’re just not. We’re seeing that. We’ve seen the same lack of CaPEx in the metals industry. This includes mining for cobalt, nickel, and all the things that you need for EV batteries, which is also going to be a challenge. I think combining this scarcity factor in metals and mining and in oil mining, we’re going to have a big problem as far as how much EVs cost. When you’re talking about these emerging markets and you’re talking about EVs that are suddenly 40, 50, 60, these people can’t afford those vehicles. It’s just completely unrealistic at this point. I think although these goals seem idealistic, they’re just in practice are not, and we’re going to suffer the consequences of this over the next 20 years because of the scarcity this is creating and the things that we need to make these changes.

Tony Nash

Right. With EVs and both you and I know Anas has written a lot about EVs. We have a subsidy for the EV manufacturer. We have a subsidy for the battery manufacturer. We have a subsidy for the consumer purchaser. What is the true cost of an EV? That’s what I don’t understand because there are subsidies at every… It seems to me at every step in that value chain. Absolutely. What am I missing? I’ve got those three subsidies. What other subsidies am I missing?

Tracy Shuchart

I think that if you look at the Inflation Reduction Act, it’s where do you source your materials? There’s a lot of embedded subsidies within green infrastructure or green transition renewables, not just EVs, but also wind and solar, depending on where are you sourcing this? Are you using American made parts? There’s a lot of embedded subsidies, which a lot of the babies don’t even actually can even capitalize on because a lot of those materials are not sourced within the United States. Those were incentives to get people to drill for those materials here in the United States. But then you look at our permitting process, which takes 10 years, and so that adds a whole other problem.

Dr. Anas Alhajji

Sorry. Add to that that the Department of Energy, the Biden administration is giving GM $12 billion for it to build its factory. That’s something on the side. The other related issues is all the research that’s been done free for them at the Department of Energy.

Tony Nash

Yeah. I’m not anti EV. I just want to be clear. I don’t have an issue with EVs as just an object. I just want to understand what is the true cost of that? Because if we’re supposed to see this EV adoption in Asia, particularly, which is largely in emerging markets, who’s going to pay for that? Because the countries themselves, let’s say in Indonesia, they can’t necessarily pay for all these subsidies. Are we necessarily going to see the grid impacts that we’ve seen in places, say in Europe and the US and other places, not in a place like Indonesia?

Tracy Shuchart

No. That doesn’t even include the cost of the overhaul of the grids. You have to completely overhaul your grid for this. Electricity, people think electricity comes from your socket. No. Electricity comes from burning fossil fuels generally in those countries, whether they be coal or natural gas or crude oil. There are a lot of things that are very altruistic about it. What I think, especially if you’re looking in, and I’m just going to throw this out there, especially if you’re looking in DM markets with the United States and all these people that want to go to these EVs, really, I think hybrid vehicles are a missed and overlooked niche market here. Nobody’s really talking about hybrids, but that solves a lot of the in-term problem. Again, they’re not inexpensive, so I’m talking for DM markets, but it’s incredible to me that people really are looking at hybrids more, especially because we don’t have charging infrastructure in the United States. You know that. You can’t drive across the country probably and make it on an EV alone.

Tony Nash

Yeah. Hybrids aren’t cool anymore, Tracy. They were cool in 2005. They’re just not cool anymore. It’s not cool anymore. Okay, guys, this has been a great show. Thank you so much for all that you’ve contributed, all the amazing thoughts you have. I appreciate all of that. Have a great weekend and have a great week ahead. Thank you so much.

Dr. Anas Alhajji

You too. Thank you.

Tracy Shuchart

Thank you.

Dr. Anas Alhajji

Thanks, Michael. Tracey, bye.


That’s it for this week’s episode of The Week Ahead. Please don’t forget to rate us and review on whatever platform you are watching or listening to this. Thank you.

Week Ahead

The Week Ahead – 04 Jul 2022: Metals Meltdown

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We’ve all seen many chops in the markets, especially on the energy side, with the fuel and oil shortages. That was a little bit unexpected to people. Equity markets are struggling and there are a lot of talks this week about recession and trying to move the Fed into being more accommodative, which is 180 degrees from where we were two weeks ago.

Copper is hurting and down 28% since March. What is this telling us about metals, generally, and drivers of metals demand? Is this telling us that China – the largest buyer of industrial metals – won’t really bounce back? Does the market doubt China’s stimulus announcements?

We also discussed Europe, its slowing economy, rising unemployment, and gas shortages.

Lastly, is the Fed anchoring inflation?

Key themes:

  1. Metals Meltdown
  2. How badly is Europe hurting?
  3. Fed inflation anchors
  4. What’s ahead for next week?

This is the 24th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:


Time Stamps

0:00 Start
1:45 Key themes for this episode
2:23 Metals meltdown – what are they telling us?
3:48 Will there be a comeback of automotive?
5:09 Does the market believe China’s promise of a stimulus?
7:25 How much is China’s manipulation be beneficial for China?
9:26 What about Japan?
12:00 Europe’s economy and inflation
15:21 Europe’s concentration risk on the sale side
19:42 Europe’s problems stem from this
20:32 Fed and anchoring inflation
25:50 What’s for the Week Ahead?

Listen to the podcast version on Spotify here:


TN: Hi everybody, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Sam Rines and Albert Marko. Tracy is out for the long holiday weekend. Before we get started, please don’t forget to like and subscribe the video and please comment on the video. We look at them, we engage. We want to hear your feedback. Also, while you’re here, we have a promo for CI Futures. This is our markets forecasting tool. Our promotion is three months free on a twelve-month subscription. That promotion ends on July 7. So please take a look at it now and get our best promo ever.

So, key theme for this week. We’ve all seen the markets a lot of chop as we talked about. We saw a lot, especially on the energy side, kind of negative with the fuel shortages and oil shortages. I think that was probably a little bit unexpected to people. Equity markets are struggling and there’s a lot of talk this week about recession and trying to move the Fed into being more accommodative, which is 180 degrees from where we were two weeks ago. So a few things we’re talking about.

First is the metals meltdown. Second, Albert Marco, although he’s been in an undisclosed location, he has been in Europe. And we’re going to talk a little bit about how badly Europe is hurting right now. And then we’re going to look at inflation and how the Fed is potentially anchoring inflation.

So first, let’s look at the metals meltdown. If we look at copper. Copper has been a lot of buzz around copper over the last few days and copper is down 28% since March. But I think we could speak to metals more broadly. We’ve got the copper chart on the screen right now. So Albert, if you don’t mind, what are metals telling us generally about markets and the drivers of demand?

AM: Well, I mean, it’s pretty clear that the manufacturing sector across multiple industries is hurting at the moment and has taken a toll in the metals market. There just simply isn’t any demand for consumer products. There’s not going to be any demand for metals probably until the Chinese really start to stimulate.

It’s pretty clear. And then on top of that, they have pressure from the dollar that just keep on charging along trajectory to 110. So those things are really weighing on the metal market. I mean, copper specifically, like you mentioned, aluminum taken some hits just across the board.

TN: Right. So if we look at things like automotive, automotive is held up because of semiconductor supply chain issues which are working out, but automotive manufacturing slowed pretty dramatically. If we see, say, the chip issues get worked out for, say, automotive, do you expect to see more like a comeback of automotive, of car manufacturing, which will pull metal prices along?

AM: No, I don’t. And I don’t think that’s even going to be the case for the next 18 to 24 months. I mean, the auto sector is actually in a really bad shape, And it’s not specifically just because of the chips, like everyone assumes, but you have rubber shortages, you have polyurethane shortages, you have shortages across the board for the entire auto sector, for the manufacturing process. So until all of those supply chain issues get settled, there’s just no hope at the moment, which is interesting because there hasn’t been really any layoffs yet.

I know they’re artificially keeping these people on payroll and doing whatever they want to do with the shifts and manipulating that. But at some point and i’ve been arguing about this specifically the auto sector, there will be layoffs because of all this.

TN: Just for the people who don’t know. Albert is from Detroit, so he pays attention to the auto sector pretty closely, and he knows he has pretty close relationships there. So we’re talking to a man who really does kind of pay attention to what’s going on. Sam, as we see metals prices fall, we’re also seeing china become more aggressive in making statements about economic stimulus and other things. Are the metals prices right now telling us that the market doesn’t believe that china is going to put in the stimulus that they claim to be?

SR: I would say it’s a show me game with China. There’s been way too many people that have been burned way too badly, listening to the rhetoric and trying to get ahead of things on the ground, and then nothing actually happens, or they do something a little different than what they said they were going to do, and you end up with an investment profile that’s completely different.

I think that’s one of the big things to keep in mind is, yes, China is probably going to have to do something into or around the party congress this fall in terms of stimulus. They have to look at going into it. So there’s going to be some stimulus. The question is, what is it and when does it hit and what does it look like? Is it a tax cut? Because in that case, who cares, right?

It’s not going to be that big of a deal for picking up the manufacturing side in a meaningful manner. Is it going to be reopening? Right. Because if they’re sending out checks but not reopening, that’s not going to allow their manufacturing sector to get back to work, which is going to Albert’s point, going to continue to clog the supply chains for autos and auto manufacturing significantly, whether you’re us. Based manufacturer or your South Korean manufacturer, et cetera.

This is a longer term problem where I think you’re not necessarily going to have the pop and metals until people actually see the real data from either Australia or the us. Or even in Mexico. But that’s a significant amount of the auto sector assembly. You’re going to actually have to see the data before people.

TN: Right. And so what I hear about metals in China and I’ve mentioned this before, but what I’m told by people, especially in the copper sector, is that the warehouses in China are actually full, although we’re told that they’re not. They are. And words that warehouses empty out from time to time is simply to manipulate the market up. But there’s ample, say, copper and other industrial metals in warehouses in China, given the demand that the world has.

AM: Let me ask you both little question here. How much is China’s manipulation of their stimulus on and off due to them trying to force the Fed into lowering the rate hikes or putting them into a position where it’s beneficial for China overall?

TN: Sam, what do you think?

SR: I would say they definitely have a calculus instead of the ECB, instead of a certain extent the BOJ when they.. they all have to take that into account and they all have to either front run or attempt to talk their markets one way or the other. That’s why I’m saying it’s definitely part of the calculus. I don’t know how much of the fiscal side is directly related to counteracting with that and how much is directly related to keeping the people happy. I would say those are the two primary catalysts.

TN: Yeah, I think that’s right. I think any Chinese stimulus that’s going to be effective in the short term has to be cash in, say, local government accounts, people’s accounts, company’s accounts. As Sam said, that tax cuts not going to cut it, indirect payments are not going to cut it. Announcing a new rail stimulus, which they do every other year, is not going to cut it. They actually have to just churn cash out in markets. But with the US dollar and rates, I think they’re really careful right now about how quickly they devalue CNY. And I think that is one of the things that they’re being careful of. They don’t want to devalue it too quickly because Chinese exports have surged over the past six weeks. And so if they can continue to make money at the rate they have, they’ll put off the DeVal as long as they have to. But if the dollar continues to appreciate, they may have to accelerate the evaluation and they’re in a tough spot. China is not the all seeing, all knowing planner that many people think, well.

AM: Part two of that would be what about Japan? Because they devalued the Yen and they’re kind of combating whatever China is trying to try and propose and stimulus. So how does that all come into the equation?

SR: And I’ll just pop out that one of the interesting pieces to kind of throw into the puzzle is not copper sending one signal that China is maybe not going to stimulate, et cetera. But you look at Chinese Equities X, the state owned entities, and guess what? You had a plus almost 7% second quarter for those equities. So the market is sniffing something out there. There might be a little bit of a hedge of, well, if you’re not going to build a bunch of stuff, you might hand out checks, like you said. And if you hand out check, it’s going to benefit the Internet and Chinese tech companies more than it’s going to benefit the metals industry.

TN: Right. And if they want to stimulate the top echelon of Chinese society, they could just goose equities and focus on a trickle down theory, which is very anticommunist, but it’s something that they can do pretty quickly. They did it in 2015, they’ve done it at other times, and they can do that. But going back to your Japan question, Albert, it’s an interesting one because China is such a supply chain risk going forward, the uncertainty there, that Japan is selling itself as a secure alternative to China. And that’s why one of the reasons why they’re devaluing so strongly is so that it’s just a no brainer to get stuff done in Japan. Right?

AM: Yeah, of course. That’s a great explanation. It’s very concise and simplistic, and I had known this, but I wanted you guys to explain this to the viewers because it’s a critical thing that most people don’t really take into account. They always see China. China. And they ignore Japan and South Korea.

TN: Yeah, Japan and South Korea have been devaluing. It’s more depreciating than devaluing. I know there’s a nerdy difference between those two, but they’ve been pushing depreciation because they wanted to be seen as a safe alternative to China. But then you also look at Southeast Asia, places like Vietnam, other places, things in Vietnam, all those exports are done in dollars, not in dong, so they can’t really play the currency card to do values.

SR: It’s also worth remembering that Japan exports a lot of machinery to China, and so if they don’t, if they strengthen their currency while China is devaluing, that puts them in there.

TN: That’s right. Great questions, Albert. Thank you for that. Okay, let’s move on to Europe. Albert, so you’ve been there. Let’s start by looking at inflation. So we’ve got on the screen right now a comparison of inflation rates in, say, the US. Europe and China. And PPI, especially in Europe, is blistering hot. It’s 40%. And CPI, of course, is accelerated as well. It’s ten plus percent, if you believe that. I think it’s higher than that. But as you’ve been there, can you walk through some of your observations of what’s happening in Europe right now and how it’s affecting companies and the way people spend and so on?

AM: Well, from the bottom up, for the general public, that’s just pure desperation. The media just doesn’t want to cover it because it’s just bad news for every single political party out there. Inflation is running rampant. Food, it’s running rampant. And every single product they have, they’re used to high gas prices to begin with, but like the United States, there’s a certain amount where the strain is just too much for families.

I believe the UK. One out of four people were skipping meals because of food inflation prices. One out of four? That’s stunning. And that will have long term health effects down the road. But we’re talking about the year now. Europe’s manufacturing sector is an absolute shambles. Their export engine into China is just nonexistent. They haven’t built out any overseas networks into Africa or other emerging markets to be able to compete. They have no military to sit there and actually push the trade issues their way. They’re secondary. Not secondary. They’re behind Russia and China in that aspect, not to Mention The United States. So, I mean, I complain about the auto sector in the United States. The manufacturing and the auto sector in Germany is absolutely dead.

TN: Okay, I want to pull that Apart a little bit. Okay, so the manufacturing in Germany is dead or dying, largely because of concentration risk in Russian gas as a feed fuel, right, for electricity.

AM: The energy prices have skyrocketed. Corporations And Private businesses are struggling to keep up with margins to cover their costs. And the governments are just like. They’re just making things worse in Germany, I believe they’re handing out money to every single person, refugee or youth person, that think that will vote for them in the future. That makes inflation worse. I can go down the list of different things that they’re doing an error, but I don’t see how Europe pulls out of this specifically in the fall and going into 2023. I mean, their gas shortages are such a problem here right now that I can’t even fathom what the problems are going to be in Germany and Italy and France going forward.

Actually, in Germany and Austria, they’re running out of wood to heat their homes because people are stockpiling that already, and this is July. So I mean, there’s going to be some serious repercussions of Europe. And this is why I targeted Europe to be a problem, possibly for financial crisis and contagion leading back into the United States. It’s just a big problem across the board.

TN: That PPI chart is just so stunning. Now we talk about concentration risk on the supply side. Let’s look at concentration risk on the sales side. Right. Europe has really over concentrated a lot of its sales requirements in China. China has been the market for a lot of European companies. Right. And outsource manufacturing. So they’re as concentrated in China or more concentrated in China than many US companies are, first of all.

AM: By far.

TN: And they’re more dependent on China as a sales market in many cases, than many US companies are, right?

AM: Yeah. This is the problem that I’ve had with Germany specifically. I want to pick on Germany because they are economic. That’s just the fact of the matter. But the Germans, they go out and they see China as a huge market, and they start pushing out their high tech trains and their windmill technology and so on and so forth. Well, the Chinese, all they did was order that stuff, buy it, piece it apart, copy it, and then they sell that to the Africans for one fourth of the cost of the Germans could possibly sell it to the Africans.

So not only is Germany losing out long term with Chinese trade in the market, because that’s stagnating, but now they have no chance to go into the African market because it’s flooded with Chinese parts.

TN: Sure.

AM: They made such critical errors for the years, and they were just so drunk on cheap money out of China that now for the next decade or two, they’re going to have problems.

TN: Yeah, but my overarching points are that Europe is over concentrated on the energy side with Russia, and they’re over concentrated on the manufacturing and then market side with China. And aside from that, they’re kind of out of bullets. They don’t have a lot. And I think that is a lot of the basis for the reason we’re seeing PPI just explode in Europe.

AM: Yes, of course. The only country that even has the only country… The French are smart. I don’t want to hear anything from the Americans be like, Oh, the French are weak and put up the white flag on the Eiffel Tower, whatever these jokes are. But the French have nuclear power and they have food security for their entire nation.

Two of the biggest problems right now in Europe, France has a grasp on. The rest of Europe is total chaos. But those two issues in France are absolutely secure, and the French are smart and they’re looking for long term gains to push the Germans out of the way and take over the EU, and that will actually end up happening. But in the near term, inflation is almost worse there than it is here. Their housing market is mainly cash based, so it’s not as bad of a bubble, but everything else.

TN: So you don’t see much let up in Europe for the rest of 22. You think it continues to be pretty dire in Europe for the rest of 22?

AM: Oh, absolutely. I think the only reason that it’s even somewhat stable at the moment is the tour season has kicked up, and then that’s created other problems where you’re going to cancel flights and overbooked hotels.

TN: Right. Sam, do you have a similar view on Europe at least for the remainder of the year? It continues to be really difficult for the remainder of the year.

SR: Oh, yeah. And the only other place that I would point out is Italy. I mean, Italy is in a pretty rough spot here too. Even with Mario Draghi at the helm, they’re still in a pretty tight spot, and part of it is natural gas and pretty tight there. But the other part is that when it took Legarde about 35 seconds of saying, we’re going to tighten up a little bit here, from negative rates to maybe zero to almost blow up the bond market in the BBB market, it was insane what was going on, and it was a very small move, and you still had yields blow out across the Italian government deck. It’s one of those situations where things move very quickly, things break very quickly, and it doesn’t have a whole lot of bullets in the site.

TN: It’s not like they can go to their version of the permian and drill again. Just to bring this back to something really basic. A lot of Europe’s problem stems from the fact that it has a very old population. So they don’t have young, productive people to keep up with the commitments to very old people in very simple sense. Does that make sense? Is that right?

AM: Oh, absolutely. Looking at just the Italian demographic, all those young Italian guys have bolted for the UK, London, and New York and Miami. They’re gone.

TN: So until they either have a lot of babies, automate, or have a lot of new immigrants, Europe continues to have the same issue?

AM: 100%.

TN: Okay, good.

SR: Demographics don’t change quickly.

TN: No, they don’t.

SR: It’s about 18 years.

TN: That’s right. Okay, so let’s move on to the Fed and inflation anchoring. Sam, you had a great piece in your newsletter, which I’ve referenced many times, and people always ask me how they get their hands on it. So it’s one of the most exclusive newsletters you can get in America. But you had a great piece on Fed Anchoring. Now, I put a chart up on five year inflation expectations. The only reason I put this up is because they really peaked back in late February. Okay? And after that, the five year inflation has really broken down a lot, almost to normal ranges. Okay. So I know you’re looking shorter term, but can you walk us through a little bit about the Fed Anchoring inflation and what you expect? Kind of the near term impact?

SR: Sure. So kind of the point of what I was trying to get across. There’s really two things that you needed anchored for markets to begin to find some footing in the US. At least. And that was you needed to have inflation expectations begin to become anchored. And I think we’ve seen that. Right. You see that chart and it peaked in March, give or take, and has fallen back towards call it normal ranges, if not slightly below what you would expect in this type of environment. That makes sense, right?

In five years, we’re not going to have this type of solution. I’ll be willing to accept that no problem unless we have another flare up somewhere. But I think that’s a fairly reasonable thing to do. But also you have to have the expectations for the Fed anchored as well, because you had two unanchorings that were really happening side by side that was highly problematic for markets.

One, you had inflation unanchoring very quickly, and that’s problematic for markets generally. But you also have the Fed expectations becoming unanchored, and the market was pushing, pushing, pushing for whatever it could get in terms of hikes. Right. It was 75-75-50-50-50. Adding an item to somewhere around four and a quarter percent at the peak. And as of today, you’re back to having the terminal rates or where the Fed raises interest rates to happen by December of this year, and it’s 3.25% 3.5%, and then it cuts next year, is the expectation.

So you’ve begun to have, call it a pricing that’s similar to 1994 hike and then cut style of Fed. That is pretty interesting. That’s a pretty anchored expectation for the Fed. It’s a reasonable expectation of the towards neutral. You’re probably somewhat towards real rates at that point being somewhat positive just because you have inflation of about 3.2 and you have a Fed funds rate a little bit above that. nThat’s why I think that’s a fairly reasonable place for it on the inflation expectations front, that’s largely specifically going to call it close in inflation expectations under a year.

Those are largely call it oil and gasolated and groceries.

TN: Very much energy.

SR: Yeah, this is US. This is not Europe. But as long as in the US, you don’t continue to have those rise in a dramatic fashion, people tend to stop extrapolating. Those forward in their inflation expectations either stabilized or declined back to what they call it normality. And that normality would be somewhere between two and a half and two so that we could spot.

TN: So if gas prices, gasoline prices in the US stopped at, say, 490 or whatever they’re selling at now as a national average, let’s say we plateaued there for three or four months, people would adjust and it would be livable?

SR: It would be livable, yeah, it would be livable. So long as the not accelerating higher.

TN: As long as what, sorry?

SR: As long as they’re not accelerating higher.

AM: Yeah, Sam is right. The risk is as long as they stabilize, I completely agree with Sam. We have one hurricane in the Gulf of Mexico. We have a problem, like a real problem, looking at like $5.50 to $6 gas, and then inflation becomes absolutely just insane.

Going back to the inflation number that they printed out last time, they’re using this ridiculous 5% for housing and shelter and the CPI equation. It’s a little bit hard for me to swallow, but if they can do some kind of magic and keep inflation somewhat steady over the next few months I agree with Sam.

TN: It’s kind of a short at that point.

SR: The interesting part about that is you create an interesting duality in calling risk markets, where the US risk market looks very attractive. If you’ve peaked on Fed pricing, if you peaked on the PE killing. PEs are down 35% year over year. That’s a bigger drop than we’ve seen for several corrections.

You can have a really interesting US risk market going into the back half of the year across markets. The curve, on the other hand, that could be two spends to get very interested very quickly.

TN: Very good. Okay, good guys. What are we looking for for the week ahead? We’ve got a holiday here on Monday. We’ve started to see, say, gasoline prices perk back up in markets on Friday. Are we going to start to see potentially in the near term gas prices rise post July 4?

AM: I think so. One of the things that’s not being said, I don’t think we touched upon, I think last time we did, but the Saudis come in with lower than expected barrels per day, lower capacity, and this must have been stemmed from McCrone and Biden trying to price cap them. Come on, you do that to us, we’re going to do this to you. It’s a game at this point. And the Russians are certainly pulling strings of the Saudis and the Iranians to make this a little bit more chaotic for the US. So I think gas does go does start to trend a little bit higher over the next two weeks.

You’re certainly going to hear noise from people with July 4 prices for barbecues coming up. So that’s going to be all over the news.

TN: Okay, interesting. Sam, what are you looking for during the week ahead?

SR: To build on what Albert was talking about? I think it’s really interesting that spare capacity from OPEC just doesn’t appear to be there whatsoever. But at the same time, you’re also probably going to have at least somewhat of a call, a permanent impairment of Russian oil fields if you continue to have sanctions, that puts a floor long term in global energy prices, period. And if you don’t have US service firms keeping those fields going, we’ve seen what happens when you send Chinese and Russian oil services firms to Venezuela just before you destroy the oil industry.

So look forward to that. On the other side, I’m really looking forward to the conversations that a bunch of millennials have to have with their parents, the crypto markets this July 4.

TN: You are a millennial.

SR: But I am looking forward to some glorious Twitter cons that Tuesday.

TN: Fantastic. Okay, guys, thanks very much. Have a great holiday weekend and have a great weekend.

AM: Thanks, Tony.

SR: Thanks, Tony.


What signals are markets missing right now?

In this QuickHit episode, our guest Julian Brigden answers “What signals are markets missing right now?” How important is the equity market right now in the current economic cycle? Most importantly, how long before we can see directional change in the market, and what you should do before then?


Julian Brigden is based in Colorado and started in the markets in the very late 80s, trading precious metals. He moved into trading FX, then switched into sales for various investment banks. He also worked for a policy consultancy group called Medley Global Advisors in the very late 90s to early 2000s and fell in love with the research space. Just over ten years ago, he set up MI2. MI2 was grown organically. Julian can be seen together with Raul from Real Vision where he does Macro Insider.


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This QuickHit episode was recorded on November 3, 2021.


The views and opinions expressed in this What signals are markets missing right now? Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.


Show Notes


TN: Julian, I’ve watched a lot of your videos, and I love a lot of the thoughts you’ve talked about recently about velocity, about the yield curve, about central banks. It’s all great stuff. I guess one of the things that I’m really wondering right now, especially, is what is the market missing? What are market participants missing? Because this is something that I don’t hear a lot of talk about. We hear a lot of the Fed should do this or this asset is going that way or whatever. But what is the market missing right now?


JB: Right. So we’ve been on this inflation gig since, actually, March of 2020. Sorry. Apologies. So at the depths kind of the pandemic. It’s a very long thesis. I’ve probably been in the inflation court really since the end of 2016. But in this sort of current phase, and we’ve been in and out of them, you have to. That’s what markets are about. We have been on this inflation kick since March of 2020. And initially it was just a trade breakevens, which are a metric of inflation in the bond market had got crushed because they were held by the risk parity boys as their inflation hedge in their portfolios. And they delevered like everyone else did in the spring of 2020. And those things dropped to like, five-year inflation was priced at 50 basis points.


Well, Tony basically trades the cycle, right. So as the economy recovers, which you had to assume it would, they were going to come back. But as we’ve sort of taken a step back and from a bigger picture perspective, we’d always said that even as soon as Trump came in, when you start playing with just monetary, that’s one thing. But when you add that fiscal side into the equation, into the mix, it becomes totally and utterly different.


And we’ve actually always used the period from the mid 1960s to the late 1960s. That’s where I kind of think we are. So we’ve had these sort of pro-cyclical, unnecessary, excessively large fiscal stimulus. And they came to create this accelerative oscillation. Okay. So I’ve got a couple of very smart ones, way smarter than me.


Classic example of the A students working for the C student. And we were looking at inflation back in 2016, and I was just looking at the chart in the 60s, and my quant came up to me and went, Boss, that’s an accelerative oscillation. And I said, Steven, what the hell is that? And he goes, well, he was, by the way, he was a mining expert, specialized in explosives. And he said, kind of what you do when you model an explosive wave is it goes out in a wave until it hits something. And if it hits it at the wrong time, far from the wave decelerating because you expected to hit something and stop, it can actually accelerate the oscillation of the wave. And so essentially, from an inflation perspective is that the way that you think about this is you get something like the Trump stimulus, which was back in late 2016, totally unnecessary fiscal stimulus at the wrong point of the cycle, where we didn’t need it.


So far from sort of rolling over like a sine wave, which the economic cycles behave that way, too. And inflation cycles generally behave that way because of self limiting on the tops and the bottom, cycle actually picks up amplitude. And what you tend to do is you create policy error after policy error after policy error because you’re behind the curve all of a sudden, you know what it’s like in trading, right?


If you’re on your game and you’re short something or long something and it moves in your direction, you might take some profit. Look for the retracement, double up, whack it hard. You get caught the wrong way into the move and your head just becomes discombodulated. And that’s what happens from a policy perspective. So. When I look at this current situation, the first thing I would say is I think people are, they’ve finally woken up to this concept that maybe inflation is not transitory. I think they’re right. We’ve been on this gig for a long time, but the immediate risks, I think, are twofold.


The first one is they are not. And it’s not necessarily here in the US. I think it’s going to be a problem here in the US, but I think it could be a bigger problem, actually, in Europe and for the bond market that matters because all those bond markets are all fungible. Right. So if bonds blow out or your eyeboard, the front end contracts in Europe blow out, it’s all going to affect our markets over here. And. They’ve totally underestimated the price pressures in the pipeline.


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TN: In Australia, right?


JB: Yeah, we have. But not. I think we’ve got another maybe three months of numbers of I think could make people’s eyes bleed. You’ve got this price pressure in the system. Three possible outcomes. Price pressures dissipate. PPI pressures just dissipate. Okay?


Well, we just got the market survey this last week. Pressures are up. We just got the ISM services. Price pressures are back up to the previous highs. We just got the Swedish service thread bank PMI services yesterday. Price pressures at new highs. Okay.


TN: China’s PPI are like 14% or something year on year, right?


JB: Exactly. And their PMI price pressure number, which was dropping, just re accelerated. So option number one, that somehow price pressures just miraculously evaporate, doesn’t seem like an option. Option number two, the companies eat the price increases. They take them in margins. Well, if that’s the case. And this is one of the things the equity market hasn’t woken up to, then your assumptions on margin growth are. The good stuff that you can get here in Colorado, right.


Now thus far in the United States, it’s absolutely not the case, right? Companies are pushing through those price increases. Okay. Which brings you to option number three. Price inflation, given where these PPIs are, right? So US, even the final demand, the new sort of slightly adjusted, surprising how when they do adjust these things, Tony, they generally drop from the old metric?


Now it’s like, two and a half to 3% under the old PPI series. But anyway, it doesn’t matter. Eight and a half percent here in the US. I think we printed another 45 high in Sweden. And I’m picking Sweden because it’s a nice open economy. And you see the data come through very quickly. I think there’s one of those 17%. Spain, 23. Eurozone, 13 and a half. Okay. So higher than the US.


If companies can pass those price increases on, what makes people think for a nano second that CPI is going to stay here in Sweden at two and a half in the Eurozone at four. Why couldn’t Eurozone HICP, which is their CPI, which is max only ever had a 5% spread to PPI, right? At the moment, we have a nine plus spread. Why couldn’t HICP print somewhere, my guess is between eight and a half and eleven?


TN: So those are Chinese figures?


JB: Yeah. Exactly. What the hell does this? Do you think Lagarde is going to be able to say, like King Canute, “stop?”


TN: So in one of your interviews that I watched, you said central bank assets and inflation are effectively the same thing. And I think that’s really interesting. Can you explain that a little bit?


JB: So the balance sheet? Yeah. Essentially. Look, you print money, which is what it is. QE is printing money. Monetary 101. This is how the Roman Empire ended up falling apart. And you can inflate asset prices because I know this is not how central banks initially told you it worked actually. Having said that, I do love it. And we’ll come to this, I think the second point, the markets are missing in a second, and another central banker.


The only central banker who’s been truly honest was Richard Fisher, the old Dallas Fed central bank chairman. And I love the Texans from the Dallas Fed because they’re just straight shooters. They’re just bloody honest, right? I mean, he came out on CNBC, and I remember watching this interview because it was done on CNBC Europe, I think. And the guy always had one of the British guys on CNBC in the US. The guy nearly fell off his damn chair when Richard Fisher said, “of course, it was about the equity market. It was always about the equity market.” Right.


We just front load this stuff and they could boost asset prices. And you can look at the PA of the S&P. You can look at the S&P itself. You can look at the NYSE, you can look at the value line geometric index, which is a super broad metric of US Equities, and you can put them all against the Feds balance sheet. And it’s the same thing.


TN: Let me ask you this. And I hear you and I am aligned with what you’re saying. The question is, why does it have to do with the equity markets? And my understanding is that it has to do with equity markets because that’s where American 401Ks are. And there’s such a large baby Boomer cohort with their money in 401Ks that they can’t be losing their wealth. Is that the reason why it’s always about equity markets?


JB: Well, I mean, I say it’s housing as well, right. But they tend to try and deemphasize that one because politically, that can be a bit of a pain in the ass. Right. But look, this is true monetary debasement 101, right? I mean, we wrapped it up in this veneer that is G7 central banking or the sophisticated theories. But we’ve done this throughout history, right? We just debased the currency.


People forget in the Weimar Republic, the Reichsmark was imploding in value. Sorry, the pre-Reichsmark was imploding in value, and the stock market was going up thousands of percent today to keep phase with this because it’s a claim on a tangible asset, right? A cash flow or a piece of land or a factory or whatever, right? So this is not new. I think this is. No, I think it’s not so much about the 401Ks. The thing that I think is truly problematic in the US is what I refer to as the financialisation of the real economy.


Tony, that CEOs are not paid to produce a thing. There are actually numerous companies in the S&P that I’ll argue don’t produce anything, right? They are simply an utterly shepherds of an equity price. That’s how they’re compensated. We talk about perverse incentives. Okay. That’s how they’re compensated. They basically compensate to bubblish their stock as much as they possibly can.


And as a result, the minute that stock prices got going up, let alone fall. They look immediately to the bottom line as to how to address costs and keep those profits falling. So if you look at the correlations between, and it’s just frightening, the correlations between total US employment and the NYSE, broad metric of US Equities, Capex and NYC. They’re the same bloody chart.


TN: Sure.


JB: So literally, you can’t really allow stocks even to go sideways for an extended period of time. You’ve got to keep this game go.


TN: Sure, it’s not the flow, right? We’re in a flow game. We’re not in a stock game.


JB: Bond markets much more flow in terms of the shape of the curve is much more a flow thing. Equities are really about, they care when the flows turned off, but they’re really about the quantity.


TN: Overall stock. Okay. So what else are markets missing?


JB: The second thing is I just want to raise this. There’s a really important Bloomberg story out today by Bill Dudley, the ex New York Fed President, ex Goldman guy. And once again, I love the honesty of these retired US Fed guys. And he’s been talking at some length about policy error. But today is fundamentally the issue.


So let’s use that old storyline. If a tree falls in the woods and no one hears it, did it fall? Okay. So in the last few weeks, we’ve had a lot of pressure at the front end of these bond markets. We built in rate hikes. And that’s a market assumption on what the Fed or ECB or the Bank of England or the RBA or whatever is going to do with their policy, right?


But at the end of the day, Tony, do we care what banks here in the US earn in the overnight from Fed funds? No. There’s literally no relevance unless you’ve got some sort of liable based funding mortgage. But really, essentially, even then, has no relevance to the real world. Right? Policymakers raise policy rates to affect broad financial conditions. And broad financial conditions are essentially five metrics depending on the waiting in every single index. And they are short term rates, let’s say two years. Long term rates, let’s say ten years. Credit, tightness. Level, equity market. And the Dollar.


And what you can see in the US and most other places is despite the fact that we’ve seen these big moves at the front end of these bond markets, financial conditions haven’t budged. Ten-year yields, if anything, have fallen. It’s a bare flattener. It’s kind of what you would expect at this point in the cycle. But nonetheless, there is no tightening coming from the ten year sector. Because there is no tightening coming from the ten-year sector.


There is no tight, not much tightening going on in the mortgage market, okay? Because there is no tightening coming from the ten-year sector, the equity market where the Algos literally just trade ten-year treasuries is their metric and wouldn’t know what a Euro dollar was, in order to fund the interest rate contract if it bit them in the proverbial ass, okay? Have completely ignored what’s going on. The dollar is caught in the wash between these various central banks who are all behind the curve and has gone nowhere. And credit hasn’t moved, because he’s looking at the equity market.


So there has been no tightening of financial conditions. What Bill Dudley said is that’s all that bloody matters. And so until there is a tightening of financial conditions in an economy which at least the President, probably, I suspect well into the middle of next year could change quite dramatically in the middle of next year. But for the moment, and that’s a eight, seven, eight month trading horizon, until there is a tightening of financial conditions, which means stocks down, credit wider, dollar up, ten-year yields higher. Those two year yields have to go further and further and further and further.


And this concept that the market is currently pricing, that we’re going to try and raise a little bit. And the whole edifice is going to blow up because they have what they refer to as the terminal rate, kind of the highest projection of where rates are essentially going to go in the tightening cycle is that one six is wrong.


We may have to go way through that. And Bill Dudley actually talks about 2004, 2006, where the Fed started off way behind the curve and the economy just kept running. Demand was there and they had to go 225 basis points and they had to do all sorts of other stuff before the damn things slowed down.


TN: True. When we consider that. So you’re saying, really seven, eight months before we see a major directional change in markets. I don’t want to put words in your mouth.


JB: Well, look, I think there’s sufficient, I do not see this as a slowing economy. I see this as an economy where demand is utterly excessive because central banks and policy makers misread. I think it was a fair mistake to make. I’m not critical of that, misread Covid.


TN: Sure. Policy errors are all over the place.


JB: All over the shop. Right. So we have far too easy, excessive policy. Right. Look, today the Fed is going to taper, but let’s be honest, tapering isn’t tightening. Tapering is less easing. We are driving into the brick wall that is the output gap, right. The economy at full capacity, not at 120 billion a month. But let’s say from next month, 105. Right. If you drove into a brick wall in your car at 105 versus 120, I think it would make very little difference to the outcome.


TN: That’s a good point. But we all remember the taper tantrum. So will we see a bit of a breather in markets before things amp up again? Or do you think people are just going to take and stride this time?


JB: I don’t think we get a taper tantrum this time. I think the Fed has been pretty clear. You’re sort of getting a little bit of a taper tantrum at the front end of these bull markets. But because most of the world doesn’t look at wonks like me, care what EDZ3 is, right? Or LZ3 in the UK, right? Or Aussie two year swaps. But most people don’t, aren’t aware of them, and they should be. But I mean, that’s what policymakers have to watch.


And as I said, I think the bigger thing is how far the rates have to go in an economy where demand is literally off the charts, where we’re seeing wage growth in the private sector from the ECI at 4.6%, where John Deere factory workers just rejected a 10% wage increase this year with following subsequent increases that probably work out around six odd percent over the next five years where they just said, forget it. Not enough, right? Not enough.


TN: Look at retail sales. The stepwise rise in retail sales over the past six months is incredible how quickly.


JB: I’m looking at stuff and if you look at the senior loan, which is the banking where they ask the bank loan offices what they intend to lend and who they’re lending to, and are they tightening conditions or whatever. Lending, they’re falling over backwards to try to lend money. Now we know that people have got some cash on sidelines because of the stimulus.


We know that companies have still got PPP loans that they’re still working through. So demand is a little lower, but supply is literally off the chart. So lending bank willingness to lend to consumers, decade highs, right. Bank willingness to lend to companies all time survey highs, 30-year highs. Right. So even if we were to get and I don’t think this is the case, even if wages would not keep space with inflation next year in the US, people have got plenty of places to go and borrow money to keep consuming.


So I just think this is an economy which is in the middle of its cycle. I mean, most cycles are three years long, three plus years long, with 15 months 16 months into this thing. I mean, this is mid cycle stuff. It’s the easiest of easy money, right?


TN: Okay. And so just kind of to end the three-point sermon, what else are markets missing? This is really interesting for me because I’m hearing a lot of different kinds of thesis out there every day, but very few about kind of what the market’s missing.


JB: Look. And I think it comes back to the final point, which we alluded to earlier. The equity market is making an assumption, of course, the equity market, I’m a bond guy and an FX guy. I hate the equity market. My glass is absolutely, defensively, half empty. Right. And ideally someone’s paid in it. But that’s the best day for it. That’s like the best market for me. Right. But the XG market is doing its classic thing where they’re just assuming the best of both worlds. So they’re assuming that margins are going to grow, so there is no cost pressure that could infringe on those. And we’re starting to see that.


I think Q4 numbers that we get in Q1 will start to get a little bit more interesting. Right. But we sure what wild wings or whatever the thing is called the Buffalo Wing place just got stumped because their wage costs were up and their input costs were up and they couldn’t pass it on. Right. But the equity market, as is classic, has taken the highest margins in 20 years, which is what we have now. And they’ve assumed that next year it grows even more. And in ’23, it grows yet again. Okay.


So as I said, if you’ve got this cost push and firms can’t pass it on, that doesn’t happen. Margins get crushed. Don’t think that’s a risk here in the US at the moment. Do think that’s a risk in Europe because these PPI increases are just so large. Right. And if you’re a Spanish company and your PPI went up 23.6%, you cannot pass on 23.6% increases to the consumer. In the US, if your prices went up eight and a half, you can wiggle a little bit through productivity, maybe a couple. You can probably get away with 5% price increases. Okay. So margin assumptions may be utterly wrong, but if they aren’t, what does that mean, Tony? It means that price inflation is rising, and in which case inflation is not transitory. And that’s the second big assumption. So they’ve assumed margins rise. Oh, and conveniently, inflation is transitory. And that in a cost push environment, you can’t square that circle. Right. One has to be wrong.


My gut is at the moment, it’s the latter in the US, not the former, more worried about the former in Europe in Q4. But that’s another thing, which I think the market has miraculously misread. But as I said, as those pricing pressures come through, I think policymakers and markets will have to adjust significantly. And I think it set us up for a policy error sometime next year. Probably huge. Probably.


TN: We’ll trip over ourselves with policy errors until we see this. And then when we do see some sort of reckoning, we’ll have even more policy errors.


JB: Correct. As Raul and I say constantly on Macro Insiders you just do buy the dip. You just got to figure out when the dip comes because you don’t want to be in when the dip comes and when you hold your nose and grab your bits and decide that you’re going to jump into the deep end and buy it by the seller.


TN: Great. Julian, thank you so much for your time. This has been fantastic for everyone watching. Please subscribe to our YouTube channel. It really helps us a lot to get those subscribers. And Julian, I hope we can revisit with you again sometime soon. Thanks very much.


JB: Thanks. Bye bye.


Could COVID-19 Finally Kill the EU?

The fallout from COVID-19 might result in the disintegration of the European Union while the flight to safe havens like the USD is yet another headache for the financial markets to stomach, according to Tony Nash, CEO of Complete Intelligence.

Produced by: Michael Gong

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


Listen to the podcast in BFM: The Business Station


Show Notes:


BFM: So for more on global markets right now, we speak to Tony Nash, CEO of Complete Intelligence. Welcome to the show, Tony. Now U.S. markets closed down sharply again last night, erasing all gains from the time President Trump was elected. So what’s your outlook for markets? Is it still too early to buy?


TN: Gosh I don’t know. Actually, we don’t really know if it’s a really good time to buy. At this point, it’s really hard to catch that kind of falling knife. But what we don’t see is a V-shaped recovery. We think we’re in the zone where the fall may start slowing down. But we believe the equity markets will trade in a pretty low range for the next couple of months. And that’s because we’re not really sure of the economic impact of the slowdown in the West.


This COVID-19 is a government-driven recession that countries have lawfully gone into. So a lot of the recovery has been how quickly the fiscal stimulus is put into the hands of consumers and companies, and how quickly those individuals will get back to work.



BFM: Well, oil continues to fall last night to record lows with the Brent at $26 per barrel. What’s your view on oil? I know you are seeing the stock market. We do not know where the bottom is. But for oil, are we hitting the bottom yet?


TN: We may not be, but we’re pretty close. Our view is that crude will bounce once the Saudi-Russia price standoff is resolved. So we actually see crude moving back into the 40s in April.


But after that, we expect a gradual fall back into the low 40s to the high 30s in May. So, you know, we’ll see the next several months’ prices will be depressed. And we think it’s going to be quite a while before we see oil at 50 bucks again.



BFM: Yeah, Tony, you would have seen the stock futures point in green, obviously quite buoyed by the ECB’s whatever-it-takes policy. In Asia this week, four central banks are meeting. I’d like to go off a piece of possible talk about Australia, Thailand, Philippines, Indonesia. Our central banks are expected to meet this week. What do you expect them to do in terms of responding to the market turmoil?


TN: So it can’t just be central banks. I think central banks will do whatever it takes. But you really have to get finance ministries involved because, again, this is a government-induced recession.


Governments have demanded that people stay at home due to COVID-19. They’ve demanded that places of business close. And so until finance ministries and treasury departments get involved to get money in the hands of consumers and companies, we’re in a pretty rough place and there’s a lot of uncertainty.


So I think the central bank activity is fine. But I think getting a fiscal stimulus out there right now and not waiting is what they need to do. The US is talking about doing something in mid-April, that is just not good enough.


We have to get fiscal stimulus out right now because the governments have brought this on. The markets did not bring this on. The governments brought this recession on.



BFM: Yeah, Tony, obviously the helicopter money is going beyond the conceptual stage right now. But from a fiscal standpoint, how many central banks in Asia can afford, you know, the financial headroom to pay these helicopter money solutions?


TN: Well, whether they can afford it and whether they need to afford it are two different questions. And so I think we have real issues with a very expensive U.S. dollar right now.


Dollar strength continues to pound emerging market currencies. And emerging markets and middle-income markets may have to print money in order to get funds in the hands of consumers and companies.


So I think you have a dollar where appreciation continues to force the dollar strength. And you also have middle income and emerging market countries who may have to turn on printing presses to get money into the hands of consumers. So I think for middle income and emerging markets, it’s a really tough situation right now. The dollar, I think, is both a blessing and a curse for the U.S. But the U.S. Treasury and the Fed have to work very hard to produce the strength of the dollar.


There is a global shortage of dollars, partly because it’s a safety currency, partly because of the debt that’s been accumulated in U.S. dollars outside of the U.S.. And if those two things could be alleviated, it would weaken the dollar a bit. But the Treasury and the Fed are going to have to take some drastic measures to weaken the dollar.



BFM: Well, how much higher do you think the green buck can go?


TN: It can be pretty high. I mean, look, it depends on how panicked people get. And it depends on how drastic, I’d say, money supply creation is in other markets.


I think there are real questions in my mind about an environment like this and around the viability of the euro. The EU is in a very difficult place. I’m not convinced that they can control the outbreak. I think they have a very difficult demographic position. And I don’t think Europe within the EU, have the fiscal ability to stimulate like it is needed. The ECB cannot with monetary policy, wave a magic wand and stimulate Europe.


There has to be fiscal policy, and the individual finance ministries in every single EU country cannot coordinate to the point needed to get money into the hands of companies and individuals. So I think Europe and Japan, actually, have the most difficult times, but Europe has, the toughest hole to get out of economically.



BFM: It really sounds like Europe has its work cut out for it at this point. What do you think? What could we see coming out of Europe in terms of any fiscal policy? Or will this pressure the EU, put more pressure on the EU?


TN: ECB doesn’t really have the mandate for fiscal policy, so they would have to be granted special powers to develop fiscal policy solutions. It has to be national finance ministries in Europe that develops that.


So the ECB can backup as many dump trucks as it wants, but it just doesn’t have the power for fiscal policy. So, again, our view is that there is a possibility that the Euro and the EU actually break up in the wake of COVID-19.


This is not getting enough attention. But the institutional weakness in Europe and the weakness of the banking sector in Europe is a massive problem and nobody is really paying attention to it.



BFM: Do you think this has been a long time coming?


TN: Oh, yeah. I mean, look, we’re paying for the sins of the last 20 years right now. And for Asia, you know, Asian countries and Asian consumers and companies have taken on a huge amount of debt over the past 20 years to fund the quote unquote, “Asian Century.” And I think a lot of Asian governments and countries will be paying the price over the next six months. The same is true in Europe. But the institutions there are very, very weak.


The U.S., of course, has similar problems, not because the U.S. dollar is so dominant, the U.S. can paper over some of those sins, although those problems are coming from the U.S. as well.


So, again, what we need to think about is this: The people who are the most affected by COVID-19 are older people. Those people are no longer in the workforce generally, and they’re no longer large consumers, generally.


OK. So all of the workforce is being sidelined or has been sidelined in Asia, is being sidelined in the West now, and consumption is being delayed for a portion of the population that is no longer consuming and is no longer working.


And so getting the fiscal stimulus out is important because those people who are contributing to the economy can’t do anything, right?


So and this isn’t to say we’re not caring about the older populations. Of course, we all are. But it’s a little bit awkward that the beneficiaries of this economic displacement are largely people who are not contributing to economies anymore.



BFM: All right. Tony, thank you so much for joining us on the line this morning. That was Tony Nash, CEO of Complete Intelligence.


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