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Week Ahead

The Week Ahead – 02 May 2022

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Sam Rines wrote a piece on business costs and uncertainty weighing on earnings this season. He talked us through what’s happening with interesting charts on Caterpillar and Old Dominion.

We saw Facebook turn dramatically this week and we saw KWEB up over 7% on Friday. At the same time, Amazon, Pinterest, and others with disappointing earnings. Tech isn’t really a sector-wide play as it was in 2020 and 2021. Alber Marko explains what should we be looking at in tech.

We’ve had a lot of action in Europe with Russia cutting off the gas in Poland and Bulgaria and a demand that oil and gas be paid in Rubles. Tracy Shuchart explains what it means for commodity prices and the market in general.

Key themes from last week

  1. Earnings: COGS in the Machine
  2. Earnings: Tech
  3. Europe-Gas-Ruble Chaos

This is the 16th episode of The Week Ahead in collaboration with Complete Intelligence and Intelligence Quarterly, 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:

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

Listen to the podcast on Spotify:

Transcript

TN: Hi everyone. This is The Week Ahead. I’m Tony Nash. We’re joined today by Tracy Shuchart, Sam Rines, and Albert Marko. Before we get started, I’d like to ask you to like and subscribe. Also, please note this is the last weekend for our CI future promo. $50 a month for thousands of assets reforecast weekly. So please go to completeintol.com/promo. Subscribe for $50 a month and you will get global market and economic information. Thanks for that.

So, guys, this week is a little bit exciting. We have a few key themes that we’re looking at this week. Two of them are earnings-related. One is COGS in the machine, which is related to a newsletter that Sam Rines put out today. The other one is tech. And the last thing we’re looking at is the Europe-Gas-Ruble chaos.

So, Sam, you wrote a piece today on business costs and uncertainty weighing on earnings. So can you walk us through this? We’ve got a couple of slides from your newsletter up. One is Caterpillar Earnings. Maybe you could walk us through that first and then we’ll go to the Old Dominion earnings and walk through why those are so important.

SR: I think it’s really interesting to kind of at least be able to get some real-world understanding of what’s happening on the ground. Right. We all know wages are going up. We know costs are going up. We know shipping costs are going up. But how that was going to be reflected through the earnings season was somewhat of an unknown. Right. We knew it was going to affect us, but we didn’t know to what extent.

The interesting part about Caterpillar and one of the reasons I like to point it out is that they had pricing power. They pushed prices pretty heavily down the system. The problem for them was that they couldn’t push the price as much as their materials and shipping costs went up. It was simply too big of a headwind, at least for the first quarter. Their orders are fine. The business itself is okay. But generally what we saw was pricing power. Not… There were a few, but pricing power was generally unable to keep up with the cost pressures overall.

The interesting one and kind of related to Caterpillar are Polaris. Polaris is one of the most interesting companies. It’s consumer-facing yet, it’s a manufacturer. It’s something you don’t need a new side by side typically. You don’t need it. Right. These aren’t needs. These are more of discretionary spending. They had a very similar problem to Caterpillar. But the end market user for these is very similar to Harley Davidson. There was another one that had issues.

The inventories are extraordinarily low. Right. Their inventory levels at dealerships are very low. So eventually when they can pick up their production, they’re going to be able to push up their production numbers pretty significantly just to be able to refill the inventory pipeline at their dealership. So while it’s a big headwind today, it’s worth watching call it nine to 18 months down the road when you begin to see signs of these material costs abating, the supply chains getting back to normal.

Those companies are going to be able to put up some pretty interesting numbers very quickly.

TN: So, Sam, will they leak in gradual price rises? Because it doesn’t sound like they’ve been able to do it all at once. But will they continue to raise prices even as, say, the primary factors of inflation start to abate a little bit?

SR: Oh, yes. That’s been a constant theme of this earnings season has been. We will continue to either try to find ways to squeeze costs out of the supply chain, and normalize those somewhat, but almost more emphasized was there will be price increases to offset all of this.

To your point on Old Dominion, they just tossed on fuel surcharges.

TN: Yeah.

SR: If you’re going to have problems with freight, fine. But we’re going to surcharge you on fuel. And they only pushed about 50% of their overall gain. And year over year was pure surcharge. So it was an interesting one.

TN: And fuel charges are sticky, right. They don’t take those off right when fuel prices go down, they keep those for a year after the prices go down, right?

SR: Correct. Right. It’s the interesting part about all of this is these price increases are not going to be reversed. Caterpillar is not going to take off their price increases. Polaris probably isn’t going to take off some of their price increases, Old Dominion is unlikely in the near term. These are going to be fairly sticky over time.

TN: Okay. So last week when both you and Tracy weren’t here and Albert and I did the heavy lifting to keep the show going, we talked about sticky prices and we talked about how we hit new pricing levels. Even if the rate of inflation slows down, we’ve hit new pricing levels. Is that semi-permanent? Is that permanent or is that transitory?

SR: It’s a step function, right. Okay. You step up and then you’re not going to step back down. You step up the price increases and then maybe you can trickle two or 3% inflation on top of that going forward. But step-functions do not reverse. And I would say that this is much more of a step function type deal.

TN: Okay, good news, Tracy. You were going to add?

TS: I was just going to add I mean, the business survey. The Fed business survey came out small business survey came out this week and they were looking at it in four out of ten small businesses said they were looking at price increases of 10% or more. So this is across the board, not just for mega-cap companies.

TN: Right. Yeah. And even since I talk about coffee so much, even one of the small coffee roasters who I know, said his costs had risen 50% over the last year and he was only able to put in a 20 to 25% price rise. But I’m certain that he’s going to continue to gradually work price rises over the next year or two as we’ve hit this kind of plateau, or at least step function in price rises. So good news all around. Right.

So as we stay on COG, Sam, you had a portion in your newsletter talking about Meta, and we’ve got that on-screen talking about their G&A increase. Can you talk us through that?

SR: Yeah. So I thought it was pretty interesting. They increased their employee base by 28% year over year. I mean, this whole idea is that hiring is tough. It wasn’t for Meta. But the funny part is, or not funny. But G&A was up 45, so you hired 28% more people, but G&A popped 45. Again, that’s a step up that probably isn’t going to step down any time soon unless they’re going to begin laying people off. Right. Maybe it’ll roll out of earnings next year, but it’s not going well.

TN: We’ve seen some tech layoffs, right.

SR: Some.

TN: Announced over the past week. It’s not like it’s not a huge trend yet, but we’ve seen a few.

SR: Yeah. And the other important part that I think was overlooked was Snapchat, Facebook, or Meta, whatever you want to call it, when they announced earnings, they cited that, listen, when you have inflationary pressures, wage pressures and you’re a small business, guess where the discretionary spend is, that’s marketing budgets.

Marketing budgets will get cut and get cut fairly dramatically and fairly quickly if you continue to have this. And not to mention if you don’t have the stuff to sell and you continue to have supply chain issues, it doesn’t make a whole lot of sense to spend a lot of money on marketing. So I think those two raised some red flags, I think we’re subtly overlooked by a lot of people sitting on.

TN: We talked about this last week and how a lot of ad inventories are likely to come online soon. So there’s a supply problem and a demand problem with those companies going forward. I think the names that come to mind will probably do fine. The smaller names are probably going to suffer. So it might be tough.

Albert, on that, we saw Facebook turned dramatically this week in the last half of the week after they reported earnings. KWEB was up 7% today, a stock that we talked about here a few weeks ago. But at the same time, Amazon, Pinterest, and others are disappointed. So tech was a sector-wide play in ’20 and ’21. It’s not that anymore, is it?

AM: Yes and no. The problem with tech is that there are about a dozen names that the Fed uses to pump the market. So forget about Pinterest. That’s too small of a company. We’re looking at Google, Facebook, Meta, whatever you want to call it. Not so much Amazon, but the other ones like AMD and whatnot? So they’re going to yoyo those earnings in those pumps. So what they’ll do is they’ll wait until Netflix…

They know that Netflix will miss and they’ll pump the market to soften the blow and then they know that Apple is going to beat so they’ll let the market sell-off and use that to drive up the market. So this is just a cat and mouse game by the Fed to just manipulate the markets until what they’ve been saying is a soft landing.

The tech earnings are just playing right into that narrative of theirs. They know what the earnings are beforehand and they just play the market like that. So going on with tech earnings? Yeah, I mean they are weak. We can see that they are incredibly weak.

Will they be weak for the whole year? I don’t know. They do like the Nasdaq. So I wouldn’t want to be short tech going into the summer. But that’s just my personal opinion. But then you see KWEB surge because the Chinese start talking…

TN: Ion subsidies. Right. And government activity.

AM: It is what it is and you never know what type of government contracts Meta, Google, or whatnot will start popping into their bookkeeping. It’s a really dangerous game to short tech in my opinion.

TN: Yeah, well it’s interesting to me to see the user’s numbers like aint Netflix and I know there’s a couple of weeks old now but Netflix goes down. Pinterest goes down, Snapchat. These sorts of things. Amazon was kind of tepid but Facebook was really good. So I think we’re seeing almost some elasticity in some of these markets as we see people going back to work and we see other things happening. We’re finding out who’s going to be there no matter what and whose demand is a little bit flexible.

AM: Yeah. And then you’ll also find that some of these tech companies will look to acquisitions to boost their user numbers going into the fall. So this is why I don’t like the short tech at this level.

TN: By the way, if anybody is looking for a tech acquisition. Right here.

AM: Yeah, cool. 46 billion. Cool 46 billion will do it.

TN: Okay. Let’s move on to commodities. Tracy, there have been a lot of issues in Europe with the ruble as we’ve seen more countries decide to pay for oil and gas in rubles. We’ve seen some interesting action with the Euro and the ruble and with gas prices. Can you talk us through what’s going on there? And really, what does it mean? Because we’ve seen the price action. But what do you see its kind of meaning going forward?

TS: I mean what it means is Europe’s not directly paying in rubles. Right. What they’re going to do is they’re going to set up an account at Gasprom Bank. They will continue to pay in Euros, dollars, and local currency. In turn, Gasprom Bank will convert that currency into a separate account. So it’s not technically against sanctions. It’s a workaround. Right.

The interesting thing is EU didn’t have a choice, to be quite honest. They’re dependent on Russia for 67% of their natural gas. They don’t have LNG storage facilities built out. Those are going to take at least two to four years. I don’t care what they say next year, it’s not going to happen. Those things take a very long time.

So right now, they’re kind of being held hostage by Russians. So they’re going to have to pay as much as they don’t want to. Now they can wean themselves off of Russian oil a lot quicker because you can have the Middle East pick up that slack and they don’t import all that much. Right. It depends on the country. But Europe is not a huge source of oil exports for Russia. So that can happen.

And so for what I foresee, they’ll probably do that just so that they say we’re getting rid of Russian energy. Right. So I think you’ll see Russian oil cuts, I think that can be done relatively quickly. But as far as nat gas, I think it’s going to take a lot longer than most think. Even though they said they wanted two-thirds off by the end of 2022 and then completely out of Russian gas by 2027.

Again, I think that’s going to take a lot longer than they anticipate.

TN: Yeah. Can you imagine the conversion fees that Russian banks are charging for Euro to ruble? We’ll never know. Right.

TS: Banks are going to make money. It’s good for Russia. Right. That keeps the currency stable and it keeps their economy stable. And so, I mean, it’s kind of a win for Russia on this because the banks are winning and their currency and economy are winning on this one.

TN: Yeah. So we also had an emergency kind of this week with Russia saying they would turn off gas to Poland. And they did. But Poland has taken other measures since the war started to get other sources of gas. So it didn’t hurt them all that much, did it?

TS: Yeah, no, not at all. I mean, it was Poland and Bulgaria. They’re very adamant from the beginning to get out of Russian gas. They also don’t rely on it as much as, say, Germany does. Poland already built out an LG storage facility tank that’s completed.

They also produce a lot of coal and they use a lot of coal. And so that was not a surprise to me, nor did it hurt those countries very much.

TN: Right. What country do you think is in the most difficult position right now? Is it Germany?

TS: Germany hands down. A lot of the reasons are because they don’t have any other pipelines into Germany except Russia. So they’re definitely in the weakest position right now.

TN: Okay. So, guys, what do we expect, like, with the ruble going forward? It’s hit its pre-war levels. Do we expect the ruble to strengthen?

TS: Right now, yes, I think that it probably will continue to strengthen just because they’re asking for payments of commodities in the ruble.

TN: They’re not asking.

TS: Well, yes, they’re holding hostage. But it’s not just in other words, it’s not just the energy complex. It’s metals, agriculture, et cetera. So I think that we’ll probably see that continue to strengthen.

TN: Okay. Hey, I also wanted to ask you about fertilizer. I saw some of the Fertilizer stocks come off a bit this week. I know that we’ve talked about fertilizer before. Is it still as urgent of an issue as it was, say, three weeks ago? And if it is, why are Fertilizer stocks coming, falling this week?

TS: Well, I think partially because we saw kind of natural gas pullback a bit. Right. That kind of alleviated the pressure. We also saw the broader market sell-off, which means sell what you have to if you get a margin call. Right. And you had something like IPI, whose earnings were not as good as they could have been. Right. Considering. So it’s kind of a combination of everything.

SR: Yeah. And you are beginning to see signs of demand destruction as well. There was an announcement by a Brazilian farming giant that they were going to cut their fertilizer usage by 25 or more percent this year. So, yeah. Yields down, fertilizer up.

AM: Not to mention the good old dollar looking like it’s going to go to 110 on the Dixie causing problem everywhere.

TN: What do you think about that, Albert? What’s the time horizon for 110?

AM: I think we get that within the next two months. Yellen is on a mission to destroy emerging markets. She’s going to do with the dollar. She did this in 2013 when she was Fed chair. So, I mean, it’s the same playbook. It’s nothing new.

TN: So if the dollar does hit 110, does it stay there for some time, or is it just kind of marking territory, saying, we can do this again if you don’t behave?

AM: I think it’s a moment in time. Keeping the dollar at 110 is going to cause really big problems across the world. So they can’t keep it there too long. But they can… Even China talking about the stimulus, 109 causes a problem for China. It’s quite an event to see that happen.

SR: Yeah. Into Albert’s point, and I think this is incredibly important, china has to buy food. Right. And they’re buying, you’ve seen the rip lower on RMB, CNY, that thing has gotten crushed over the last week. And they’re still buying corn and soybeans from the US en masse. And that’s getting much more expensive very quickly. That’s going to be a problem.

TS: The only thing that’s helping them right now is that their entire country is locked down. Right. I mean, that’s the only thing that’s helping slow the blow and kind of making these commodities pull back a bit so they’re not as expensive.

TN: But Xi has got to make some money to feed his people. Right. Otherwise, you’re going to have Mao 1961 all over again.

TS: What he’s doing is insane. Don’t starve your people. So obviously ulterior motives are going on there.

TN: Yeah. So we’ll talk more about China next week. Okay, good. Let’s have a week ahead lightning round, guys. What are you looking at? Kind of most Interestingly for the week ahead? Sam, if you can go first, what’s at the top of your mind right now for the week ahead?

SR: Top of my mind is going to be energy company earnings and what they’re saying about their production, whether they’re upping premium, where they’re getting production from, how they’re doing it if they’re doing it, whether or not Capex budgets are moving higher, how they’re moving higher and where. And then any comments on labor pipe concrete, et cetera, I think will be very interesting as we go through next week.

TN: I think you stole Tracy’s answer, though, right?

TS: Exactly what I’m looking at. I expect to look at production probably has not increased that much because I think they’re having labor issues and supply chain issues have not gotten any better, if not ten times worse. So that’s what I’m looking forward to.

Also always keep an eye on China. Beijing is just locked down or partially locked down. So how many more cities are we going to have, how many more States we’re going to have, and how many more people are going to be locked down for how long? Because that’s going to affect the commodities market in the midterm. But that said, if you look at the commodities complex, we’re still over 100, like 104.

So it’s still holding strong, even though we’ve had a lot of demand. They say about a million and a half barrels per day of China demand is kind of off the market right now.

TN: Yes. So if they come back online, it’s game on, right?

TS: Yes.

TN: All right. And Albert, what are you looking at for the weekend?

AM: Probably the most dovish sounding 50 basis point rate hike you’ll ever hear from the Fed. Like we did this and we’re sorry. If they want to break this market down sub 4000, go ahead and try to talk hawkish but I don’t think they want to do that. So Jerome will just put his foot in his mouth like usual and say something stupid but it’ll be dovish that’s what I’m watching.

TN: Sam, Fed guy? What do you think, Sam?

SR: I think the same. Listen, I think they’re going to try to avoid talking too much about another 50 basis points hike. They’re going to try to get away from providing clear forward guidance and be incredibly vague because if they’re vague about what they’re going to do then it’s going to be perceived as dovish. So agree with Albert, right? You get a 50 basis point hike and then we’re not sure what we’re going to do next, right?

TS: Somebody brought up like 75 basis point hike this week and the Fed was like, no, we’re not even considering that.

TS: Yeah, exciting. Sounds exciting. Okay guys, thank you very much. Have a great weekend. Thank you very much.

AM: Thank you.

TS: You too.

SR: Thanks.

Categories
QuickHit

EM Meltdown: China, Turkey & Russia (Part 2)

EM Meltdown: China, Turkey, Russia (Part 2)

In this second part, emerging markets expert Michael Nicoletos discussed Turkey and Russia. What are the major issues that Turkey is facing, specially around its FX reserves? They have an energy problem as well, and will soon need to choose between the US and Russia. And how about Russia’s love-hate relationship with Europe? How does Nicoletos see it will end up?

 

Please watch Part 1 first, if you have not already. Michael talked about China’s household debt and how much is that? Can they ever recover from the Evergrande disaster? And how they got into it in the first place? Is CNY still valuable? How do the Chinese get dollars now with their very limited FX reserve? Should you use the digital Yuan? How much is China spending right now to up its GDP?

 

Michael Nicoletos have spent most of his life around markets, and I used to run a hedge fund for more than 10 years on emerging markets. He shut it down in 2019 to take a sabbatical and Covid 19 hit the world. Now, he is doing a lot of research on emerging markets and trying to see what the next steps will be in terms of the investment world. But in the meantime, he is also advising a few firms on their investment.

 

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This QuickHit episode was recorded on October 20, 2021.

 

The views and opinions expressed in this EM Meltdown: China, Turkey and Russia (Part 1) Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Talking about EMs, and we talked about reserves, and you mentioned Turkey. Let’s talk about Turkey for a minute because you’ve made some really interesting statements about Turkey, and I’d like to really understand your perspective.

 

MN: Turkey faces some other issues. Turkey faces high inflation. More than 20% rates are around 19% of negative yields. The Lira has fallen more than 50% in the past few years. So you might see nominal GDP in Turkish Lira going up. But if you put it in dollar terms, it’s actually flat for the last ten years. It’s not flat, it’s flat-ish. So in Turkish Lira, the last ten years, the Turkish GDP has gone up 350%, which is a wow. But if you put it in dollars, it’s not flat, but it’s not something meaningful.

 

Turkey GDP in Lira and USD

Now, if you look at Turkey and the devaluation, the President of Turkey, Tayyip Erdoğan, has tried to stop the Lira from falling. Right now, it’s I think at its all-time lows around 920 versus a dollar. But if you look at the FX reserve, which is very tricky and this is very interesting for Turkey, you’ll see that, okay, the number is ambiguous because depending on what source you see, you’re going to see another number. But let’s say it’s around $18 billion. Now, this is the gross number. If we deduct gold and all the other stuff and we also deduct the swap lines, and I will explain what the swap line is, this number falls around to $20 billion. And this could be negative according to some sources because the dollars are not there.

 

What has Turkey done? Instead of using its dollars to protect the Lira from falling, I’m not an advocate that you should do that, but that’s what they’ve been doing. They went to the banks and did swap lines with the banks. And the banks are using depositors dollars to buy back the Lira. So depositors right now don’t actually have those dollars in their account.

 

Turkey FX Reserves

 

MN: Because the Turkish banks have made agreements with the central bank with swap lines, which okay, when your central bank gives you a swap line, it’s a guarantee if you’re a bank. And instead of, if you go and you see the headline number of the Turkey central bank, you won’t see it falling. But if you understand that they’ve been using depositors’ dollars to cover for it, you need to subtract that. So the number could be close to 20, maybe there are some allegations that it could even be negative. So if it’s negative, imagine. FX reserves in Turkey are pretty horrible.

 

You have, let’s say, $18 billion of gross FX reserve, and you have $130 billion of short term liabilities, within the next twelve months, Turkey has 130 billion of foreign claims. So again, this metric is not really good. Now, Turkey is estimated to grow around 8 or 9% this year. Again in Turkish Lira.

 

MN: If we take the Lira is down 25% this year. So this is an issue. Another issue is in Turkey, 60% of its current account is energy. They don’t have domestic energy, so they need to import energy and we know what’s been going on with the energy crisis and natural gas and oil going higher. So all these are main problems for Turkey right now, which I think will be forced to find a drastic way to… They don’t want to go to the IMF or the World Bank, but I think at some point they’ll have to go. And again here geopolitics come to play why they say geopolitics is because Turkey is in NATO. It’s the second biggest force in NATO. The US wants to keep it in NATO because wherever US doesn’t send military, Turkey does. Not many NATO allies send military forces wherever they go.

 

So Turkey is trying to play both sides right now. Trying to be the good guy with Russia, good guy with NATO. Trying to get the most out of both sides. But I think time is ticking and they will be forced to take some form of decision on what they want to do in the future because they’re running out of time in terms of their FX reserves.

 

TN: Yeah, it sounds like it’s pretty short time. Wow. Okay. So looking at the energy issues, not just what Turkey faces, but that Europe faces, I want to spend a little bit of time talking about the Russia-Europe relationship and what you’re seeing there. Will Russia provide sufficient gas to Europe this winter? And, from a financial perspective, how much will Russia benefit from that? Just generally.

 

MN: Yeah. Okay. But the thing is here the following: Europe trying to transition to a more green related economy. The planning was pretty horrible. I would say they wanted to do it fast and they wanted to say “blackmail” corporations to go to more green energy. What did they do then? They created the CO2 emissions credits. So if you were polluting above a level, you were forced to buy CO2 credits in order to cover for that. And that was like an indirect tax, making it less efficient for corporations to use that form of energy so they would be forced to go to other forms of energy.

 

Now, from going to coal to, let’s say, totally green. It takes some time to create the wind turbines and the sun. And actually Germany shut down all its nuclear reactors because of Fukushima.

 

TN: They have a lot of low-end Taiwanese fabs transition to photovoltaics with all of the incentives they were providing. I mean, for a long time, low-end fabs across Asia were just doing a very quick transition to a PV, and it was just a kind of back up the truck moment where they were just taking all the dollars they earned or Euros or whatever currency they could because Germany and all these other places were incentivizing them to do it. And they were low-end PVs. They weren’t high-end. They were just bog standard photovoltaics.

 

MN: No, no. Okay, but besides that, what did the European Commission do? There are auctions every now and then of CO2 credits. But the auctions are arbitrary. So the Commission, whenever it wanted the prices to go up, they did not do the auctions. So then the supply of credits was less and less. CO2 credit emissions went through the roof. So suddenly, if you use natural gas as an energy, it went even higher. And this created the viscious loop, creating the natural gas prices to go even higher.

 

In the meantime, Europe was negotiating with Russia about Nordstream, too. So Russia, which is a pretty good strategic and geopolitical player, realized that Europe was going back as being back in the corner and said, unless you sign whatever I want, let me put it in layman’s terms. I’m not going to pump anymore natural gas. Europe says, no, we have to sit down. We have to discuss. Okay, I’m not pumping. So one brings to another. And every time that Europe trying to play hardball, Russia says, okay, there’s no such a problem. I’m not going to be pumping and prices go higher and higher.

 

So I guess that at some point Europe will need to sign anything Russia wants at this moment. And will try to negotiate some form of an agreement which will be obviously not, it won’t be good. But it will be much better than the current prices that we’re seeing now. And because of the energy prices going higher, Russia is benefiting on a macro level, benefiting on a geopolitical level, and it’s gaining a lot of strength in the region.

 

TN: Hugely. Yeah. Hugely.

 

MN: So the two are interconnected. It’s not one or the other. So the energy crisis has helped Russia, and Russia has exploited Europe’s inability to act smoothly and fast.

 

TN: It’s very interesting. Okay. Just to close this out because I know we’ve been going on for a while. I’m just curious about Russia’s position with Europe, say, over the medium term. Do you see Russia and Europe growing closer? Do you see that relationship becoming tighter, or do you see that eventually becoming an antagonistic relationship? Are there substitutional energy sources that Europe can utilize and that eventually becomes an antagonistic relationship again? Just in general terms. I don’t necessarily political specifics. But how do you think that plays out?

 

MN: Well, I’ll use Henry Kissinger’s famous quote that was back, like 40 years ago. He said, “When I called Europe, who do I call?” So right now, you have, in Germany you just had elections. They haven’t formed the government. It might take months before they form a government.

 

In France, there are elections in April. It seems that the right could be a threat to Macron. And we don’t know what the “right’ means in France. It could be Le Pen or it could be someone else, but it could be anything right now. So right now, I don’t see a leader. If Macron wins, he could be the next leader of Europe. But right now, there’s a leadership problem within Europe.

 

So as long as there’s a leadership problem within Europe, in my view, there’s a vacuum. And I think Russia will exploit it to gate as much influence as it can. And I cannot foresee the future. But in the next six to eight months, I think Russia will try and get as much influence as it can and try to exploit that vacuum.

 

TN: I think you’re right. They’re very smart. They’re very smart political players.

Categories
QuickHit

QuickHit: Decentralized Finance and Crypto

JP Baric, of Aurum Capital Ventures, joins Tony Nash for this week’s QuickHit episode where he discussed crypto currencies and how it plays in decentralized finance or de-fi. Also, what is stranded energy and how is it mined? What is the future of crypto and why is its fiat currency value is very volatile? Was the industry affected by Covid? If so, how?

 

Aurum Capital Ventures is a company that’s focused on using stranded energy to mine cryptocurrency and other digital currencies and building a yield generation or building a way to generate yield through the mining process for consumers and for institutional investors.

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***This QuickHit episode was recorded on November 4, 2020.

 

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

 

Show Notes:

 

TN: Okay. Very interesting. So I want to go into a couple things about cryptocurrency. But first, I want to ask what is stranded energy?

 

JB: Sure. So stranded energy is energy that is either not accessible to the grid so it can’t connect to the standard power grid or energy that’s been built up in areas where the federal subsidies for wind and solar farms have basically built these infrastructure that wasn’t needed in one area but it was built there because of those subsidies and in return the power prices are actually going negative during the night because there’s over supply and not enough demand. So that’s where we target when we build out mining sites.

 

TN: Very interesting. Okay. Thanks, JP. So let me ask you this. Just in terms of some crypto basics, okay. Is cryptocurrency, is it an asset or is it a currency? And so by that, you know gold is an asset, right? You know you can’t really go to 7/11 and spend gold. Dollar’s a currency. You can go to 7-eleven and spend a dollar.

 

So is cryptocurrency is it an asset? Is it a currency? Is it both? Is it moving from one to another? How do you think of it?

 

JB: Yeah, the more I look and think about Bitcoin is the more I think it’s actually an asset less than a currency. I’ve used bitcoin to buy laptops that you know 12 bitcoins for a laptop and then you realize that’s worth more than a house eventually. So I think the Bitcoin as an asset is really where how I view it. It’s a way to store value digitally that can easily be separated and transferred anywhere in the world and you also, it’s an asset that we know there’s a finite supply of it. We know how much there’s going to be, how many new bitcoins are going to be every day for the next 100 years and there’s not, that’s something you can’t really get without saying many other assets.

 

The reason why I don’t think it’s a currency is because we’ve seen other people have built on the Bitcoin blockchain and built on top of it as a way to build stable coins or other ways to transact, which are just more efficient and don’t have the price fluctuations that you do with using Bitcoin as a medium of exchange.

 

TN: Okay. So one of the things I’m really puzzled about with Bitcoin is, you know, normally with software, it’s the newer versions that are more desirable and more valuable, okay. Bitcoin is kind of the, you know, Windows 3.1 or something like that I mean it’s the OG of cryptocurrencies, right. So why is Bitcoin more desirable and valuable than other coins?

 

JB: So my opinion really comes down to first the miners. The miners are the ones who are allocating the most amount of capital in the space, who are taking the risk to capture this Bitcoin. You have to put that capital up uh millions of dollars when building out the infrastructure before they even see return. So because the miners are centrally focused around Bitcoin, it’s um you know the top currency for miners. I’ve seen that network effect um has really grown Bitcoin to keep its position and its power.

 

The amount of computing power protecting the Bitcoin network is ten times if not a hundred times more than any of the other networks out there. That would always say the first thing. The second thing is the on-ramps. To use a digital currency like bitcoin we need um on-ramps that have been put together over the past 10 years and have been focused solely on building on-ramps for this cryptocurrency.

 

Bitcoin works in the way and it functions as that secure digi secured and digital store of value. Other currencies have tried to do that. But the reason why it’s a store of value goes back to my first point which is the miner spending all that capital and infrastructure to secure the network using that energy on a day-to-day basis and giving Bitcoin that
floor price.

 

TN: Okay. So when you say on-ramps, what do you mean? So if I have a new coin, I need to have a way to be able to uh uh mine it and distribute it. Is that what you’re talking about?

 

JB: I was uh when I was referring to on-ramps, I was actually referring to fiat on-ramp. So basically, how does fiat currency come into the space. So US Dollars, Euros, Japanese Yen, how do they come into the space and then from there how does that get turned into this digital currency?

 

Those are on-ramps. Then also custody solutions, insurance. All right. Okay. All of that being on ramps.

 

TN: Okay. Very good. Okay. So um also in terms of crypto, what I’m really interested also also is when I look at the current environment, we’re in the wake of an election in the US. It’s a little bit uncertain. We’ve got, we’re in the wake of Covid. There’s a lot of uncertainty, you know. Is there kind of an optimal, say, environment for cryptocurrencies? Um, uh you know. Do we see say um uh confidence in traditional currencies waning and people moving to cryptocurrencies?

 

Is it in either or world or you know. Is it both and and what does that environment look like for people to turn their attention to cryptocurrencies?

 

JB: So I think the the as you mentioned the two different types of pandemic. The Covid pandemic and the election has really pushed crypto to the forefront as another asset class, as a safe haven. I don’t think cryptocurrency necessarily follows uh the same, you know, SP500 or other type of cycles out there when it comes to economics and social cycles. Bitcoin to me really follows the having events, which happen every four years. And so that would, that in my mind is what brings the momentum required to push Bitcoin to a new price. And in those having events is when Bitcoin miners receive half of the amount of Bitcoins they were getting every day just simply because it’s past
the four years and the issue and schedule is set.

 

So as I mentioned, we’ll know exactly how many coins are coming out. That in my opinion, is what creates these price rises about every four years, which then drives new interest to Bitcoin which then drives more speculation and which then drives the community growing at massive scale. And then shrinking because the people that are just speculators, just coming in to make a quick buck, they make their quick buck or they lose a lot of money. But the people who then now start to understand the technology and understand how much better of a monetary system it is because it empowers the user.

 

It provides them a steady base that they can build their life on. A steady-based currency that they know is not going to be inflated away and don’t they know it’s going to retain its value over the long period of time.

 

TN: Okay and so when you talk about having events, what happens around those having events in terms of say processing power, in terms of the the computing requirements. Are there cycles to build up more equipment and less as it ages and and what does that look like?

 

JB: So right now, they’re the cycle. There’s definitely there are cycles to build up equipment and the in May, when was that that having event occurred, the the amount of machines came down by about 15% 20%. And those machines were turned off because they were just older generation. The newer machines are coming in line. They’re being deployed. But we see it as in, if you want to get into Bitcoin mining, the next two years after the having event are the best time to get in because as I mentioned, that momentum will start to build up the Bitcoin price will continue to rise. You’ll have a great two years of profitability and you’ll be very very profitable and you’ll be a big arbitrage there. But then as Bitcoin price rises to an extreme height, there’s not enough actual bitcoin miners available for everyone to buy and acquire.

 

We don’t have enough semiconductors and so what happens is the value of those machines will rise rapidly and the people that are just coming into the space that are new are trying to pick them up and grab them and buying these machines for a really top dollar. The problem is, is that bitcoin price will crash. But you still have new machines on order for maybe six or nine months out. Those machines will continue to come online, will continue to run until it squeezes the profitability of all the miners and then you see a crash in difficulty usually in correlation as the bitcoin price is continuing to push down back to a normalized you know area and not in the hundred thousand dollars ranges or really overvalued where we see it uh once it kind of starts that on ramp.

 

TN: Okay. So when you say there’s a hardware replacement after the having event. So my understanding is this, you’re getting half the amount of Bitcoin for doing the same amount of work. You have old equipment. It’s it’s uh utilizing the same energy it did at double the price. So you have to cycle out that old equipment so you can still be profitable in your Bitcoin mining. Is that?

 

JB: That’s exactly right. That’s exactly. We either cycle the equipment or we move to lower cost power about half the cost in order to stay competitive. Those machines aren’t necessarily going to immediately become unprofitable after having. But they will become unprofitable very quickly after the having. And now, because Bitcoin price has risen, those machines you actually can turn back on and make a few pennies depending on what your power rates are.

 

TN: Okay. And so, since it’s so equipment intensive and we have supply chains bottleneck through Covid out of Asia, what has that done to the Bitcoin mining environment? Is it, has it, has Bitcoin risen in price as a result of it? Or are people using less efficient machines and maybe losing money or coming close to losing money on mining?

 

What’s happening as a result of the supply chain issues that we saw out of Asia earlier this year and also is there still kind of pent-up demand for that equipment?

 

JB: Yeah. So right now, the you know, with Covid and the supply chain issues that have occurred, the machines got backed up, the factories had to close, and so those orders that were maybe supposed to deliver in December of this year aren’t going to deliver until January or February. So they have been backed up by two months. Also due to 5G and the new phones coming out, the the amount of chip production capacity that is allocated to Bitcoin miners from the fabrication facilities like TSMC that has gone down as well um and they’re not able to get as many chips as they would like.

 

Right now, if you’re buying miners and you’re doing a project like we’re looking to do one in Oklahoma to buy 50 megawatts worth of miners or 15 000 machines, it’s going to take us about four months to acquire those machines and get them delivered to the United States in multiple batches. So that’s the, you know, the expected timeline to wait for these newer machines. But as they do ship from bitmain and from the manufacturers, we expect that hash rate to continue to grow and as Bitcoin price grows faster, it’s going to create more demand and it’s that vicious cycle.

 

TN: Interesting. Okay. So as you look out at the next year, are there certain things you’re looking for like are there coins that that you’re interested in? Are there you know, where is your attention going and what do you see over the next say six months in the crypto cryptocurrency environment?

 

JB: So over the next six months you know I’m I’m really focused on bitcoin particularly. But I do think decentralized finance. So de-fi has a lot of opportunity. There’s a lot of very cool projects. One of them being a token called lend token. L-E-N-D. And that token has something called a flash loan. And what flash loans are is that a concept that liquidity is no longer an issue for anyone that can prove there’s an arbitrage opportunity on in the market. And so, when these Ethereum contracts are written, um they basically have to balance the price points and if the prices start to become a little bit off, someone can go in and balance that contract and take the reward for balancing that contract. Before, you might have to put up the capital yourself to do these balances so that you can make the profits from balancing this contract and getting that arbitrage there. No longer do you need to do that with protocols like LEND, which are really trying to decentralize the credit problem. Decentralize uh what is credit look like on the blockchain. How do we give credit to companies.

 

How do we ensure that um we can lend to them without necessarily having to verify uh everything and do the, you know, do the verification process we have currently but how do we do that on chain in a contract. So protocols like that are what I’m really focused on. I think decentralized finance is going to blow up. I think it’ll be the next ICO hype as we would say in 2016, 2017. There’ll be good projects and there’ll be projects like we saw with Sushi that, you know, the developer just ran away with the funds because the contracts weren’t audited. That’s another big thing. If you’re investing in a project or investing anything, you want to make sure that it’s backed by you know VC companies in the United States that are these very popular VC companies in China and Europe or that it’s been audited by reputable sources in the community.

 

TN: Great. Okay JP. Thanks so much for your time today. I know you’ve got a lot going on so uh thanks so much for joining us and talking about this. Really appreciate this. Wish you all the best um over the next six months as all those things come to come to pass. I also want to thank our viewers and remind you please subscribe to our YouTube page. Please subscribe to our newsletter. Both are in the foot of the video. Thanks very much.