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Welcome to the latest episode of “The Week Ahead” with your host, Tony Nash! We’ve assembled a stellar lineup.
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Hi, everyone, and welcome to the week ahead. I’m Tony Nash. Today we’re joined by Albert Marco, Vince Lancey and Blake Morrow. We’ve got a few key themes. The first one, when I went out to ask about this show, the first response I got back from Twitter was, what the hell happened in China this week? So that’s the first thing we’re going to cover. The second is, why was silver rallying? This week we’re going to talk to Vince about silver and gold. And then with Blake, we’ll talk about the Fed and the QRA. CI Markets has been recognized as one of the top stock forecasting tools for 2024 by Techopedia, a leading tech authority. Why? Because it predicts future price movements with a 94.7% accuracy rate. It covers over 1600 assets with weekly re forecasts of stocks, etfs, currencies, commodities and major equity indices. It has an easy to use interface optimized for web and mobile, and pricing plans to fit your needs, including a free option. Stop playing guessing games with your investments. Take control of your portfolio with CI markets. Learn more about CI Markets today@completeintel.com. Slash markets let’s get right into it, Albert.
We’re playing kind of the where’s Albert this week. So I like your background. That looks really good, and I think you’re a great guy to answer the question, what the hell happened in China this week? So we had a pretty big turnaround in China in the equity markets. We’ve got a chart for Shanghai Composite on the screen. Of course, the Hong Seng did even better than the Shanghai composite. The central government just talked about putting a few hundred billion dollars into the markets. They didn’t actually do it. They greenlit corporate share buybacks to prop up markets. They reduced the Triple R, the reserve requirements so banks can push more cash out into the economy. And of course, we saw that pretty dramatic turnaround in equity markets. So all of this got markets back to where they were about two weeks ago. CNY gained a little bit. It’s off. Blake, maybe you can talk through some of those dynamics. But the question is this, what does this all mean? What did they do? Right, Albert, and what do you think they should have done that they didn’t do?
What they should have done is a different animal altogether. But what was happening was the narrative was just becoming overwhelming for the chinese economy of systemic collapse of the chinese system from top to bottom. And they had to step in and guarantee, I know that they haven’t done it yet, but close to $300 billion is probably going to be levered up to five to ten times that to prop up the economy. And their entire gambit was to just change the narrative. They didn’t want those headlines that China was collapsing. They’re going to have to step in, for sure. They’re going to step in. There’s no question about that. And it was all to prop up the Hong Kong markets, really. They don’t really care about Shanghai, the mainland or whatnot. But this was specifically to prop up.
The, you know, we’ve seen all these over the past probably six months. We’ve seen all these year on year comparisons. X is up triple digits in China for trade or double digits or whatever, year on year. And everyone knows the year before things were closed and these year on year things in China haven’t really matter all that much because they were closed for a year and a half or whatever. So I think what I’m seeing in things like global trade, the trade numbers actually don’t look bad, but things in China, we’re seeing deflation, we’re seeing really a lot of bad news. Politically, things are kind of sketchy. They’ve had two of their central committee members just kind of disappear over the last six months. So can money injected. I’m saying that diplomatically, Vince, can money being injected into markets solve that uncertainty? Or is this just kind of a first step? Like, have they just started and there’s a long term plan? Because we’ve been hearing about chinese stimulus for three years now and this is really the first. Aside from some kind of stupid rail investment or whatever, this is really the first tranche of cash that we’ve seen.
Well, I mean, politically, G is taking advantage of the situation right now, getting rid of his opposition party members that are causing him issues or potentially going to cause him issues. I mean, that’s what anyone really in leadership would do to take advantage in this type of scenario. Yellen has her foot on their throats at the moment and she’s been hitting the sell button on China and keeping the dollar elevated. And rates being up close to 6% is almost the abyss for the chinese market. So they’re definitely playing the defensive. They’re trying to prop up the CNY, they’re trying to prop up the economy. Is it enough? No, absolutely it’s not enough. They’re absolutely going to have to keep going on for the next four to five years. This is not going to be a one year pop and it’s going to fix everything. This is going to be five years down the road of them doing multiple, staggered steps of stimulus to get the economy back in order.
Yeah. I mean, if we want to make an analogy to the US, imagine if the secretary of state just literally disappeared five months ago. And imagine if the defense secretary just literally disappeared, right? And all of a sudden there’s some new junior person in their place. Right? and so the political uncertainty in China is huge. We saw massive shifts in chinese money into japanese and us etfs over the past two weeks. Right, and so the chinese investment itself is not showing support for the chinese markets. I was in China in June of 2015 when markets fell apart. And at that point, chinese mainlanders were encouraged by the government to put their money back in markets. They did it based on faith in the CCP. I don’t see that happening this time.
No. And the outflows from China have propped up the bond market and the US equities. I mean, it’s been just absolutely staggering of how much money has left Asia and even Europe and flowed into the United States. And this was all calculated by Janet Yellen. I mean, she knows what she’s doing. She’s been the Fed chair. She’s got her fingers on all the buttons at the treasury. They know that if China starts taking off inflation, it’s going to be another problem right now. And I’m sure our guests will talk about silver and commodities, because that’s a big key part of it. If China is firing on all cylinders, commodities are going to skyrocket again. Lithium. Copper.
Albert, I want to jump in here just because talking about commodities for the markets that I follow, especially like the australian dollar. Copper. Unresponsive to all the actions for us traders in the currency space and the commodity space, we look at it as like a shotgun approach. Yeah, maybe this might have been more of a bigger slug, I guess, that came out of this shotgun shot. But still, you can see the muted response that we’re getting in commodities and currencies. And I think you guys draw a really strong correlation, which should definitely be noted, between the Nike, the market’s definitely shunning China in favor of the Warren Buffett, Berkshire Hathaway trade of Japan, even Germany, and a lot of european equities. And us equities, they’re all beneficiaries. But then again, if we do see China turn the corner a little bit, which I think it’s too early to tell, maybe that takes a little bit of the air out of some of the other markets around the globe.
Can you talk to us a little bit about CNY dynamics, it really hasn’t moved much.
No, it hasn’t. I don’t focus on the CNY as much as my european counterparts do because my colleagues that traded. Because as a us based trader, it’s prohibited for a lot of brokers to be involved. But it’s a lever that China uses and one of the other things that if they want to really kind of kickstart their economy a little bit, they’ll weaken the CNH a little bit more. But we are up at dire levels because as Albert pointed out, this is more of a confidence, I think, topic. So if you start to see the CNH really come under pressure because the PBOC pulls that lever, next thing you know, yeah, it might help the chinese economy a little bit, but to what extent does it hurt sentiment, equities and sentiment in general? I mean, there has not been a time, I can’t really recall a time that I’ve seen a singular market so just shunned upon right now. Like you are seeing in China, right?
Yep.
Can I go ahead?
Yeah.
The two statements, blake’s comment about the muted effect on commodities as well as the emerging market. Currencies, commodity currencies, and the comment about them being too safe. I guess what I’m trying to say is in the past when they changed the reserve requirements, I had seen commodity currencies and commodities do better than chinese stocks. It’s one data point, but this time chinese stocks, as low as they are, responded very appropriately. I’m wondering if the whole lack of buying of commodities compared to stocks this time is not a comment on China saying what China’s leadership saying. We need people to buy stocks and stop buying pet rocks like gold. So anyway, I think the lack of confidence in China’s economy has been one of the reasons they’ve been buying gold at the retail level anyway, or at the individual level, and they need to change that or they’re going to have a deflationary crisis. And I just think both those things are.
Those are all great points. I think the Hong Shang was up between four and 5% this week. It’s still down like 20% over the last six months. Shanghai composite was up two point something this week. So we’ve seen a turnaround, but we haven’t seen a dramatic turnaround. Right. We haven’t seen a 15%. It’s not as if they’ve kind of backed up the truck, put in trillions of dollars. I think they’re being very careful fiscally because they do have to balance a huge amount of government debt that China has and, well, they can, but they’re very careful not to print right away. But my worry is, and if we look at the, you know, they’ve made arrr move, is that beginning, middle, end? Where do you guys think we are on that?
Well, I mean, going back to what Blake said, we are only in stage one of a long game here of what China has to do to get back on track. It’s going to be years on down the road until anything meaningful really happens with the chinese economy. Of course, we’re going to get stock market pops up and down because that’s just the nature of the stock market globally at the moment. I mean, normally you would see, like Vincent said, commodities would just rip on any kind of chinese news, but that’s just not the case anymore. So, I mean, it’s going to be a nuanced approach from this point on.
Maybe if we stop buying chinese made laundry furniture, I mean patio furniture, they’ll stop buying commodities to make them. Maybe that’s what’s going on, right?
Could be. I think it’s really interesting this week we’ve seen so many Asia equity analysts say, hey, China is a huge value right now. You need to get in and nobody’s buying it. I don’t know if anybody’s buying it, but I don’t see.
No, there are, Tony, there are big funds buying it clandestinely at the moment they’re starting to get in because honestly, if you look at a systemic collapse of China, they’re not going to let that happen. The US nor China will allow that to happen. So at some point it’s a decent play, long term to get into China. Long term. Long term. I’m not saying next six months, but next two, three, four years. Absolutely. You would be wise to put a position on.
Yeah, my biggest worry here has been that $278,000,000,000. The market looks at it and shrugs. And that’s kind of what we’ve seen. Right. And the problem with filling holes in markets is that if you don’t put enough in, they just get bigger and bigger and bigger and hungrier and hungrier. So is there a danger of that, of we open next week and markets just kind of yawn at the $278,000,000,000 and all of a sudden China has to scurry to put out a bigger number sooner?
Well, I think we have to wait until the actual mechanism of what China is going to use to do that. I know they’re going to be using offshore funds and accounts and lever it up. So we really have to wait until the data comes out because I assure you it’s not going to be just 278,000,000,000. It’ll probably in the trillion, over the trillion range.
I also read, and correct me if I’m wrong, if you heard something different, that there’s a lot of calls being made to institutional, chinese institutional clients that stop shorting the market. Only be on the long side kind of throwing those warnings out, which is I find really interesting. But the sentiment is interesting. I’ve always found it my quarter century of trading the markets, a very interesting dynamic in the markets because sentiment, you could almost use the analogy, it’s like inflation. It’s that genie that you can’t get back in the bottle sentiment. When it’s sour, it’s sour. It takes a lot to turn. And you could look at the polar opposite of the US economy right now and the optimism that people feel and regulators understand what that is. And I think Xi has a very good understanding of that sentiment and why he’s trying to turn it.
Great, okay.
Hey, I’d like to make sure you know that you can access our AI driven market forecasting tool called CI markets for free, no strings attached, and it does not require any credit card information. Go to completeintel.com slash markets to subscribe. CI Markets is the perfect addition to your analysis toolbox. This free account includes Nikki stocks, major currency pairs and global economics. Of course, we offer much more in our paid account, but this lets you experience CIA markets before making a financial commitment. CIA Markets uses the power of AI to help you make better trading investment decisions. It’s absolutely free. Again. Go to completeintel.com slash markets to subscribe to. CI Markets free. Let’s move on to precious metals. Vince, you put out a piece earlier this week on silver. Okay. On Tuesday you’re talking about why you bought silver this week. I know it’s retreated as we’ve headed into the end of the week, but I’ve got a gold silver chart on screen. A lot of this has to do with China, which is really interesting to me. Can you talk us through why you got in, what levels you looked for and what are you looking for going forward?
Sure, I’m happy to do that. First of all, it’s a short term trade. It’s not a macro trade. It was more like a win for one day, win for a week and then just keep running with it. If it continues to win. It stopped winning yesterday as far as I was concerned. But we’ll get to that. The thing with silver and gold is they’ve completely diverged in the public eye. Looking at the china demand for gold, looking at the BriCs demand for gold, looking at using gold as an alternative to the treasury or maybe a little bit of a hedge for the treasury as a reserve asset, that increase, well that’s kind of left silver in the dust. That’s the first leg, right? Silver is not precious enough and it takes a lot more space to store it if you are having to deal with something like that. And so that’s one leg that gets kicked out on silver and this is all going to lead to why I bought it actually. And the second leg that gets kicked out on silver is very flow oriented. The last 1015 years of behavior in precious metals have been silver isn’t good for anything.
As a silver bug I have to see what the enemy says. But the reality of it is if you’re pitching an investment or a trade, if you’re saying risk off, you buy gold. If you’re looking at metals, right? If you say risk on, you buy copper because it’s an economic metal, right. And this is manifested out of China as well. For years, every time they throw a little stimulus out there, it’s like buy steel, buy iron by copper, and then eventually you buy silver. So that’s the pecking order in precious metals on the economic side.
Never heard it put that way. That’s great, thank you for that. I’ve never heard it put that way.
Cool, thank you. So that’s how I used to trade it because I would. Whatever, oh, copper’s up. I’ll buy silver if it’s during Asia. If copper was up during the US, I would sell silver. It’s like a time trade, but bringing it back to why I actually bought silver, the commodity trading advisors, the CTAs, they tend to move in groups like a herd, and they frequently lose money on short term moves. And when they make money, it’s on big term move, long term moves. I would call them momentum. Most of them are momentum traders and they sell weakness and they buy strength. And right about the time people started talking about recession, your commodity trading advisors in the US started putting their clients into shorting oil, shorting silver, shorting copper and shorting aluminum. Those that did trade aluminum, and they do that. It’s kind of interesting because it’s so facile, but it works. Instead of selling their stocks, they hedge the economic exposure by selling commodities. And oil trended lower. They made money, silver trended lower. Despite gold’s strength coming out of China, silver was constantly beat upon and copper trended lower despite calls for a super cycle and what have you, which will come eventually, just not when we’re looking at it.
So when the markets get thin or when there’s not a lot going on, now you have a big cohort of shorts and silver and oil. I’ll put silver, oil and gold in this triangle here, right? So everyone at the CTA level, whether it be small managed money or medium sized managed money, is looking at gold having been shorted twice and gotten killed in a little bit of a shortcoming rally when the Ukraine war started and then getting killed when the Hamas Israel war started. They’re staying away from it, or they’re long. That’s their hedge. Right. Meanwhile, they’re, you know, silver, I think I’ll short that. So they’ll short that as well, economically. And when there’s nothing going on and people start talking about the Fed easing, where the Fed cuts, stocks go up and silver stops going down, oil stops going down, copper stops going down, and then one day you just see all those commodities have like a little bit of a v shaped bottom. Oil, silver. Well, oil wasn’t v shaped. Oil, silver, and the grains. Gold is nowhere, right? And they start to move up. And at that moment, I know from historical perspective and from analysis that I look at that the CTAs, which are the first to move, right, they’re the first to move.
They’re buying silver, they’re buying oil, they’re buying copper, they’re buying grains, and they’re probably selling gold, posing the whole thing out. And for three days, that worked out very nicely. And then the market paused today. So that’s why I bought it. Right? That’s why I bought. I thought, okay, maybe the Fed’s going to ease. I’m long stocks, I’ll buy silver. I kind of the opposite of what they do. And it worked for a couple of days, and then it just kind of flatlined on the flows that I saw. And I said, okay, ctas have covered, but they don’t have any money to put into it. And we talk about markets that climb walls of worry. Gold is up, stocks up over the last three years, and there’s just no, so much money on the sidelines in stocks, and yet stocks are up. And when you look at gold, it’s like, well, the macro investor speculators, they don’t even care about gold anymore, and yet gold is up. There’s such a lack of participation in silver on the american side, except for all the lunatics that think silver is going to go to the moon tomorrow, which they’re friends of mine, so I’m going to defend them, and I’m probably one of them, but I try and keep a lid on it for times like this. Nobody buys silver on the follow through. So I got out of my lungs today and I actually shorted a little bit of gold because I think China is going to get filled on their buying underneath.
So that’s it. I think in the short term it could continue to go higher, but it won’t be because of what I saw. I wouldn’t know what drives it higher in the longer term, I think if stocks drop, silver gets hit more. If stocks drop, gold gets hit. If stocks drop, oil should get hit. But oil is its own animal right now. It seems it’s got its own thing going on. So longer term, I’m very constructive on silver, but that was a trade that just came and went.
We’re just looking for the catalyst. Right, I’m sorry, catalyst. We’re looking for the long term catalyst. So, Vince, you sent me a Goldman chart. Can you walk us through this? You’ve already covered some of this, but can you walk us through this Goldman chart? And then can you walk us through what some of the catalysts might be? And I’m also curious, what happens if we don’t see a rate cut in March?
Yeah. Okay. The chart that you’re putting up there, I think it’s basically a graphic depiction of what I described, and it confirmed what I had thought. The chart describes several things, but it’s basically a year of performance. And the dark blue part of the body, forget the wicks above and wicks below. I forget what they’re called. But the dark blue body represents how long, if you go up on the chart and how short investors get in these assets. And if you look on the left, you see oil there. And what we’re focused on for this conversation is this green star. The green star shows you that, generally speaking, of all the money that investors, that CTA investors, these are small and medium sized at best. This is a sentiment indicator. Actually, when you think about what Blake was talking about, this is a sentiment indicator. The oil people had been extremely bearish and short out the wazoo. Conversely, if you go to the right side of the chart, you’ll see that they’re also long gold, and that’s because of the war. What have you, SVB, bank or whatever the reason. And then you look at silver and you say, look at silver.
Silver on the far right is they’re extremely short based on how that star is positioned. And silver is behaving in the minds of the normal person. Silver is like copper. It’s behaving like copper.
When they diverge like that, how long do they usually diverge like that?
Gold and, oh, they can diverge like that for months. And that’ll happen when the market is dominated by fed behavior, right? So if we’re just talking about domestic politics and rates and fed stuff and everything is fine in neo keynesian world, well then you’re going to see buy gold, sell silver, buy gold, sell silver, and they won’t even buy that much gold. They’ll just happily sell silver because every time they’re buying stock, they’re raising capital using something else. But when there’s a global geopolitical problem, doesn’t have to be a war. You had like Brexit was an example of one, Brexit was another one more recently. The guilt when they had the problem there with that mini budget. I forget what the actual. But anyway, what ended up happening there was, what ends up happening is everyone’s long gold and short silver and they’re just happy. And then one day they wake up and silver is $0.50 higher and they say, oh, maybe we should cover that. And so then they cover it. And so basically when the market is focused on american economics, that will stay stretched for a long period of time. But when an event happens, like the Ukraine war, for example, they all bought gold and they all sold silver at that moment.
And then a month later, gold kept going up, so they ended up buying silver. So those are your interesting domestic versus geopolitical, that’s what changes the don’t.
I don’t have a mean, aside from being, I come from the camp, I don’t like shorting precious metals. I like to own precious metals like physical, right? I try not to trade them on the short side. If I’m going to trade them, I like to be on the long side. But why? Just because I have my technical views and I actually think silver is going lower. Just throwing that out there.
I know I might be both, but why did silver outpace gold so excessively during the COVID lockdowns?
Yeah, well, during the COVID lockdowns, that was a special situation. The situation.
You can say that again.
No, but actually it’s directly Covid related. I mean, you’re basically right. This is kind of bizarre. And as a physical person, I think you’d appreciate this. There was an artificial problem, and it manifested more in silver than in gold. Then here’s what happened. It’s actually nice little story. The late George Giro and I were talking about this during COVID A lot of the flows in the US are, if you want to buy metal on the Comex, let’s say you’re going to take delivery on the Comex, right? If you’re going to take delivery on the Comex, what really happens is you buy it on the Comex, the bullion bank does an ARB, an EFPR, right? And they buy it on the Comex, and they end up taking delivery in London. They send it to a refiner to change it to Comex specs, and boom, it comes over here. If you’re the US mint, that’s what you’re doing. You have to buy domestic, so you buy Comex, and the bullion banks are just like they’re doing their arb, their little EFP, and then the London bullion market gives them the metal, they refine it there, and then it comes back here.
I don’t know, it’s blanks or whatever, even Spider man coins, who the heck knows, right? But that’s what happens during COVID and it happened for both sides, meaning gold as well as silver during COVID And I actually watched this like I actually had it on a map of it. Most of the refiners, most of the, there’s other words, smelters or what have you, they’re in northern Italy, in Switzerland. And so during that timeframe, in the Lombardi region of Italy, Lombardi was hit ridiculously hard during COVID They shut them down. You know what it was? It was regulatory arbitrage. You can see this, right? So you had these specs, I’ll use the gold one because it’s easier to understand. The gold bar in London is 300oz. The gold bar in the US is 100oz. They were not fungible, you couldn’t take. So during that time, you take the 300 ounce bar, you take it over to northern Italy, you have it broken into 3100 ounce bars, and you send it over. They were all shut. So, for a very short time frame, and you’re a trader, so you’re going to appreciate this for a very short time frame.
In the US, we had a venue short squeeze, so everyone wanted Comex gold and Comex silver, preferably silver. Why would they not take London? Because of the regulatory differences. And for a time frame, you could not take delivery of London silver and London gold in the US. And they fixed that by creating a swap contract. But for a time frame, you had deep backwardation in the Comex front, months to one year out, 5% spread. And then you had spot in London trading below because there was no one working. So that’s what happened then.
Interesting. Yeah.
And of course the whole kicker about the economics, the money going into the hot, but that’s what happened. And in fact, if you look back at history, if you look back at history, it was just fascinating because I was like, oh, look at that backwardation on the Comex. Silver and gold must be in the moon in London. Where is it? Plenty of silver here. Why don’t you send it over there? Can’t do that. You guys won’t take it anyway, so that’s what happened then.
Oh, thanks. That’s interesting to know. I know one of my partners at Forex analytics was all over silver, around $15, just buying the living Jesus out of it. And I was like, anyway, okay, great to know.
Thank you. That was the kicker. He was right for a different reason. I’m sure that was the kicker. Look, the silver market is a broken market. I’m going to say this about paper, and I’m not even going to get into the paranoid conspiracy stuff. What I mean is the contract is so big that you can’t buy a fifth of a contract. There’s no one who trades the micro. And so you accumulate, and then you’ve got a problem. It’s made for producers. Speculators are hung out to drive very frequently.
There. Got it.
That’s great. Okay. A lot of detail there. Watch this.
To digest my first time, I had to. I want to be asked back. And so you can say, vince, you’re really cool. Thanks for coming.
Of course, of course. Speaking of being asked, doc Blake, I’m always impressed when someone as respectable as you comes back on our program. So thanks for making your performance. I really appreciate that.
Thanks for having me and I appreciate the comments. Thank you.
You told me that you’re watching Fed and QRA next week, and I think we’re all watching Fed and QRA next week. We saw Christine Lagarde speak this week at the ECB. They’re holding rates. I think there’s an expected cut in April or something.
Right.
So Europe is a mess. I’m not really sure I really trust what they say, but I think they’re trying to do all they can to manage their market. So Europe is Q two in terms of a cut. Are you looking for similar messaging from the Fed next week?
I’m not actually first of all, I have to take a step back and say, what does the Fed have to gain by doing that?
The Fed.
And you take, like Chairman Powell, he’s really good at telegraphing and giving the market what it wants. That’s, that’s, that’s a whole nother animal. But I’ve talked a lot with a lot of different macro analysts about financial conditions, and financial conditions have eased quite a bit for a lot of the United States and a lot of businesses, a lot of individuals. And you could actually even see the pending home sales today was just bonkers. Right. So the problem that you’re going to have, if you’re the Fed, is that you have to make sure you cap those expectations a little bit or the function of getting inflation sustainably below their 2% target is going to be a little bit more difficult. So I think if I was the Fed chair, I’d have to push back a little bit on expectations just to keep the market from getting too frothy. A lot of people might say that stocks are frothy right now. I mean, we are at all time highs. And you can’t ignore the fact where we’re at right now. And there is a thing called trickle down effect. Yes, the top 10% or 5% of americans own the majority of the stock market.
But if I feel wealthier, I’m going to spend more at this restaurant and it’s going to trickle down. And there is something to that. And it does ease conditions a bit. So I think the Fed’s got to walk a fine line. I don’t think they’re going to give us a whole lot. I think the bigger deal is going to be the quarterly refinance announcement, quarterly requirement announcement, QRA, the acronyms. And it’s late in the week. For me, the QRA is going to be more of the kicker that happens, actually, the morning of the FOMC and the markets, they got a bit of a gift. I was talking to one of my, they got a bit of a gift this last quarterly announcement in November that on top of the Fed, on top of Waller, who became a little bit more dovish. Now, if you think about where we’re at right now, and I was talking to one of my colleagues, a gentleman by the name of k man, he made a great point that Janet Yellen was know on the wires yesterday, she sounded pretty upbeat. She’s the lever puller, if you, you know, she could very easily tweak the QRA a bit because she’s feeling a little bit better.
About where we’re at. I don’t know if that’s necessarily going to be the case, but that’s going to be something that I think is going to be closely watched from that allocation of notes and going back over to bonds. And I don’t know if there’s going to be a change there, but I think the whole market is very queued up into it. And with the Fed, there’s a lot of risk. If you own stocks at these levels, you have to be nervous about next week. And I think if you own risk in general. One other thing I want to point out is the dollar is holding up exceptionally well in this current environment. So with that being said, I think currency traders, myself included, and I happen to have both short and long dollar exposure at the moment, but more long dollar exposure at the moment. On balance, I think if you’re short dollars, you’re going into next week a little nervous. And I think that the Fed and the QRA is going to have a lot to do with what happens not only in the currency market, but what happens in yields and what happens ultimately in equities as well.
Yeah, I want to dig into that a little bit. First, let’s step back to the Fed for a it seems to me that you think that the Fed rates are going to be pushed or the rate cuts are going to be pushed back further than people. Vince said. If you don’t have a March rate cut, it could impact markets. Seems like you’re thinking the Fed’s going to cut after the thing, but tell me where I’m wrong on that. And second, you’re not QT. Are they going to ease off QT? Are we going to see it accelerate, stay at the same rate? We’re not going to hear about it anymore. What’s going to happen there?
I don’t see why they would change the rate of QT right now. Why? Because the market’s not broken at the moment, so why change the pace of that? But as far as rates go, as far as expectations go, I think what we’re going to see next week is we’re going to see a little bit of a shift. The market has been pretty, it’s been the talk of the markets for the last couple of months, and about market expectations, know what the Fed thinks? I think they have to bring those expectations down a little bit. But what I have to also add is equity markets and risk in general, you can call it, has been very nonchalant about adjusting their expectations regardless of what the Fed says. Looking at the US economy. And a lot of the talk about soft landing. I mean, how is the Fed supposed to allow expectations to continue to be inflated like this for a great cut in this current environment without making financial conditions even looser and making their job a little bit more difficult?
PCe came in above expectations, housing came in above expectations, markets are rallying. Why do you need a cut right now? I just don’t understand why we keep hearing about cuts if all of this stuff is happening.
Well, because people think that the trajectory is going in the direction where inflation will eventually be below 2%. I look at, they’ve taken their revolver, I use a gun analogy, they’ve taken their revolver and they expended all their bullets, you know, years ago, bringing rates down to zero. They’ve currently loaded their whole chamber up now, and they could expend a couple of bullets, maybe prematurely, preventatively, if you will, because they’re looking into what’s going to happen, what potentially could happen in 2024. 2025. That would be the argument. I don’t know if I necessarily buy that argument. That’s why I think the Fed’s going to be fairly reserved in doing know, I like to use analogies. Quite a. You’re when know, running a marathon, and I’ve used this over the last six, eight months, you’re running a marathon and you’re trying to get to the very end of the marathon. Your last mile or two is going to be the most difficult, and that’s the fight against inflation. Naturally, it was coming down. Naturally, as we approach that 2% target, it’s going to be a little bit more difficult for the Fed. They’re not going to help themselves any further by not putting a cap on interest rate cut expectations, in my opinion.
Right. Okay. And speaking of rates, as we look at the QRA, I’ve got marketable treasury debt on the screen. What do you expect? I mean, I expect going into an election year, Yellen is just going to expand. Her comments on Thursday seem to indicate we’re going to have a lot of fiscal this year to aid the administration. How aggressive do you think the forward look is with that QRA?
Well, first of all, I don’t want to just give you answers, just to give you answers. I’m not one that’s going to follow all the debt issuance, but I will tell you that as far as I know, and everybody else will tell you probably in the comments down below, there’s a lot of issuance coming forward. There is now the QRA is going to be what that balance looks like.
I’m sorry, can I ask you a question, just to clarify so we don’t have to go back, when you say coming forward, do you mean it’s coming up or coming up forward on the yield curve? Okay.
No, like all the issuance that’s coming out.
I mean, how much new issuance, right?
Yeah, new issuance is coming out. So as a result, we have to keep in mind that it is coming. And you’re right, it’s going to continue to expand. What the ratio is, is what the market is going to be focused more on. So like I said, I’m not a bond expert, but I do understand the fact that the Fed continues to auction off long term maturities and the takeup has been good. Bond auctions have been pretty strong despite a lot of people thinking they won’t be.
I have a question about the Fed. Can we circle back to that 1 second?
Sure. Absolutely, Tony.
Or should I just wait a little bit, go for know, like, I feel like the market, this is a question I don’t have an answer to. So it’s not rhetorical in any way. When he seemed to come out as very dovish that first, know, a couple months ago when stock started to take market, the market interpreted that the initial comment was, everyone’s got a narrative in the story was, he doesn’t want to be seen as impeding Biden. It’s an election year. I personally don’t think they’re easing in. So that’s, that’s, I thought QT would maybe taper off, but that’s my bias. No, easing QT might taper off. That’s what I thought. But when he did that, and the markets really rallied and they started coming out, fed speakers started coming out, talking a little bit tougher, slowed it down a little bit, I couldn’t help but wonder. Your comment was essentially, he’s walking a line. The last mile or so are hard, and I guess he’s trying to let the animal spirits out without letting them rush out too hard. But how would this be different if we didn’t have an election year, if it would be different at all?
I feel like. Is he doing anything to make sure he doesn’t appear biased in any way, shape or form?
Well, first of, is JPAL political? I’m going to tell you this much. If I was JPAL, I wouldn’t want to face who I think I’m going to be facing coming up in about nine months. So he’s dealt with President Trump before. He’s probably going to be dealing with him again. And I have to imagine that I would assume and again, assumption that the Biden administration is not as forceful with JPAL as a Trump administration would. He’s, I think he’s actually genuinely trying to do what’s best for the people.
I don’t mean that I wasn’t being conspiratorial at all. I think so as well. I’m just trying to figure out if there were an election, would he not have talked nice before he got tough? I mean, look, I’m kind of threading needles here. I’m just kind of feeling like the market was so adamant for mtes that if he didn’t say something like that, it would have been like he was hurting Biden. And we don’t think he wants to hurt Biden, of course. But I’m just looking at it like it just seemed like such a departure for him after having gotten through SVB, SNB, and all these other problems, for him to just say, you know what, we might ease rates when really inflation isn’t under 2% yet. The six month outlook trajectory is definitely under 2%. But why would he do that? That’s what I understand.
Yeah. And I don’t know when you’re talking about inflation, first of all, why he came out the way as dovish as he was. It was a bit of a head scratcher for us, trading the markets.
A rare tactical error, I thought.
Yeah. And the other thing is, I hear all these debates, especially in the mainstream financial media, if you listen to Bloomberg or CNBC and they talk about people on the street, that they don’t feel like inflation is under control either. That’s because the average person doesn’t understand inflation. People don’t understand. They, they think prices go up, they come back down, but people don’t understand that prices go up and they stay up. Inflation is the rate that prices are going higher versus everybody’s like, oh, my cost of my bread has gone up to whatever it is, $4 a loaf versus $3 a loaf. So it’s eventually going to come back down to three. And that would be inflation is coming down, but that’s actually deflation. And that’s something that’s very rarely seen. So the problem that we are dealing with at this moment with inflation is people have these unrealistic expectations as Americans, just in general, because we’ve never dealt with inflation. For the majority of Americans, you can talk to anybody who’s 65 and older and they understand what real inflation is. But for us that are under the age of 60, which I’m in my 50s, we don’t know what it’s like.
And most Americans don’t know what it’s like.
I’m going to push back a little bit on that. I mean, we’ve had average 24% inflation since pre Covid. So I’m not saying you’re wrong. I really do think people do understand things hurting their pocketbook. Right.
No, I agree.
Germany, 1920, of course.
But the disconnect is when prices don’t come down. Right. That’s going to be the disconnect. And I think that’s what’s going to eventually bite the US. Consumer sentiment in general is going to be when prices don’t come down over a long period of time. And then you have the Fed that can’t reach that 2% inflation goal and then rates aren’t coming down and then consumer sentiment starts to turn sour. That’s where it all feeds together. And I think that hits somewhere in this 2024 year.
Actually, no, I’ve never understood about the inflation discussion is gasoline prices go up and they go down. They go up and they go down. We never really hear about deflation in gasoline prices.
No.
And so I hear these deflationary arguments, and what that means to me ultimately is that corporate profits collapse. Right. And as corporate profits collapse, wages are pulled back and other things. Right. So there is that follow on effect. But we have something that all of us buy every week, unless you’re on public transport in some big city or whatever, and there’s deflation in gasoline all the time. And it’s never really, I mean, this stupid discussion about gas prices falling is like a tax cut, which is ridiculous. But we never hear people saying, oh, there’s deflation in gasoline.
No, they don’t, because it’s the ultimate variable that’s moving around so quickly for most people, not even Americans. This is like globally, consumers, no matter where their benchmark is for what gas prices are, it’s the one that makes you feel better. Right. If I was just spending $100 to fill my gas tank and now I’m spending 65, that’s a huge savings to me.
It’s a tax cut.
Yeah, it’s a tax cut. There we go. Right. And that’s why for a lot of people to bet against prices coming down during an election year, it’s a tough bet. It’s a tough trade. Right. Because if you’re a politician and you’re the Biden administration. Yeah. You want prices to come down because you want people to say, hey, prices have come down. I feel better. I’ll vote for you again.
Your July 4 barbecue is $0.14 cheaper.
Right. Exactly. It’s crazy. But what I think is going to be a big shock for not just Americans, I think the global consumer is that prices for most things, they’ve risen and then they’ll stay higher. And if you look back in history and you go back to way back in the, could buy this for five cents and now it’s eighty cents. Well, there’s a reason for that.
A lot more money now, right?
You’re old. That’s the reason.
We’re old.
Okay, guys. So we have a lot to look forward. I think what you’re saying with Fed and treasury, and I don’t want to put words in your mouth, but we’re kind of at a point of uncertainty. Right. There are a lot of expectations in the market, but it doesn’t necessarily look like there’s the catalyst to change things one way or the other. Is that in general a takeaway from.
What you’re just, I’ll just add this, and I’m sure Vince wants to chime in here, this is a very pivotal week for the market. And I think people underestimate the gravity of how big this next week is for the markets in general. Whether you’re talking about risk stocks, china, monetary policy expectations, the dollar, precious metals, as Vince has been alluding to, this is going to be a very pivotal week for the markets. And this is not one to sleep on. This is not one where you’re going to go rearrange your sock drawer. You want to be in front of your computers managing what you trade.
That’s right. Exactly. Vince, any closing thoughts on the week coming up?
Well, I don’t have anything to add to that. That’s pretty much it. You have a lot of events converging in March, and I think Fed policy will, Fed’s in a reactive situation, I believe right now. So they may want to or not want to ease. They may want to or not want to taper QT, but they need to wait. The data has been kind of choppy. This week was strong, but the data in general has been up and down. So maybe they’re just going to stay the course until they get a distinct trend in the economy weakening with the inflation weaker.
Yeah, and I think staying the course was going to disappoint a lot of.
To, I forgot to mention this and just bringing it up. One thing that we have to also keep in mind, the FOMC is an open market committee. It’s a committee where he’s looking for a know decision one way or the, you know, going back to Vince, you asked about the Fed and why the Fed chair was so dovish. A lot of that thought back then and I’m just thinking about it now, but I wanted to throw this in there is because he wanted to appease a lot of the doves that were in the FOMC. And I think he’s done that and I think the market has responded to it. Obviously, in retrospect now I think he’s going to have to rein that in a little bit and be a little bit more hard stance and maybe a little bit more hawkish.
I didn’t think of it that way. So it helps to think of Powell as representing the committee. Yes, he may disagree with the committee, but he’s got to represent the committee.
Yes.
Behind closed doors he’s probably saying, told you.
Are you freaking? You know, he’s probably doing a lot of that. And I’m sure. And remember, when we get the FOMC meeting minutes, they do give us what we want to hear or what they think the market wants to hear, not necessarily what you.
Highly edited. Heavily edited.
Yeah.
Guys, thank you so much. This has been really informative. I really appreciate your time, all your thoughts, and I just hope you have a great weekend and a great week ahead.
Thank you very much for having us.
Thank you.
All right.
Thank you. Have a good weekend.
Thank you.
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Welcome to the latest episode of “The Week Ahead” with your host, Tony Nash! We’ve assembled a stellar lineup featuring Tavi Costa, Albert Marko, and Tracy Shuchart.
📈 Tavi on The Fed, Inflation, and Geopolitics: Tavi takes the lead, unraveling the intricacies of the US stock market’s divergence from emerging markets. Get ready for a deep dive into the impact of inflation on earnings and a critical look at the Federal Reserve’s monetary policy. Tavi also shares insights on commodity prices, injecting a touch of sarcasm on the potential actions of the Fed.
💥 Albert on Iran’s Aggressive Moves: Albert steps up to discuss Iran’s recent bold actions, including attacks in Pakistan, Syria, and Iraq. Explore the motivations behind Iran’s sudden assertiveness and the potential outcomes of these strategic moves.
🌊 Tracy on Red Sea Issues: Tracy guides us through the complexities of Red Sea issues, examining the stability of crude prices and potential triggers for a spike. Dive into the impact on the shipping industry, including insurers’ adjustments and airfreight companies considering alternative routes.
Experience the power of AI in forecasting Markets. Subscribe to CI Markets Free: https://completeintel.com/markets
We’re joined by Tavi Kosta, Albert Marko and Tracy Shuchart. We’ve got a few key themes. The first, Tavi is going to talk to us about the Fed equity outlook in geopolitics. Albert’s going to talk to us about Iran. They’ve had some cross border skirmishes, and we’re trying to figure out if Iran is acting out. And then Tracy’s going to talk to us about the Red Sea. Why aren’t crude prices moving? What’s happening with freight supply chains and all that stuff?
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So, Tavi, thank you so much for joining us today. I know you’re in Brazil and it’s really not easy to coordinate schedules with you. So thanks again. Really appreciate this. I want to look at one of the tweets that you put out earlier this week looking at the Fed fighting inflation. And in this you talk about three inflationary waves of the 1970s. And I’d really like to kind of understand the context, kind of what do you think that means for the situation that we’re in now and how do we handle this going forward?
Well, first, thanks for having me again. Well, I think there’s a lot of importance of analyzing what’s happening with inflation because of the behavior in markets that we may see unfolding due to those changes. It is of my view that 2021 and 2020 marked a significant change in the investment cycle. And I believe we’re now seeing structural forces in the inflation front that will mark the different regime in terms of cost of capital, in terms of cost of debt, in terms of even how we value assets. And so those structural forces to me are relevant. Number one is what we call the pillars of inflation. Those are, deglobalization comes first. I mean, that’s probably the most important one. I think a lot of analysts and Wall street in general is seeing some of those. Let’s see the Red Sea events and some others as kind of isolated events, and they’re not. I believe they are all interconnected in a big way. We’ve seen some of those big changes today in terms of even geopolitical problems relative to countries that we haven’t seen in decades now starting to become more problematic. That’s one of them. And we’re seeing the reshoring of developed economies and others that are causing the demand for commodities.
And not only that, but also the reliance of the Chinese economy and other authoritarian regimes is being reduced in a big way. The second, I think, pillar of inflation has to do with what government developed economists have been doing, which is the reckless amount of fiscal spending. I mean, even if we look back in the 1970s, we certainly didn’t see this level of government spending and support that we’re seeing. And even if you exclude things like interest payments and other entitlement payments and so forth, there’s still a really significant portion of the spending that is very inflationary. Number three would be what’s happening as well with the labor markets. Labor markets for the first time that I can recall since the 70s probably, we’re seeing finally the cost of living being so high that it’s causing folks to actually demand higher wages and salaries. And that’s just something that evolves over time. And as we’ve seen, one aspect of this that there is room to grow is the fact that a lot of corporations are still paying their employees some of their lowest portions in terms of employee compensation relative to profits we’ve seen in history.
And so there’s certainly room for not only protests and other issues heating up here that will become more and more widespread. And then I would point out to one thing that has been to me a main focus, which is the chronic under investments in natural resource industries that we, I think Tracy also covers that very well. And it’s related to the fact that supply of commodities and natural resources, those industries have been neglected for so many years now, if not decades. And that is creating a problem with especially the corporations and management of those firms being extremely conservative at not creating new projects and new developments of mines and other projects and other resources. That is creating also the limited supply of those things moving forward. And so if you ask me, I think this is the beginning of a hard assets environment where you want to be invested in resource rich economies and resource rich even companies that produce those assets over time too.
Okay, so there’s really a lot to pull apart there. But just looking at your last bit. So first of all, you really validated a lot of what Albert’s been saying for the past couple of years and a lot of what Tracy’s been saying for the past couple years. And what I’m hearing you say is the Fed may be saying that we’ve conquered inflation, but we actually haven’t. There’s more to come. So when you talk about investing in resource rich economies, you recently talked about us stock market valuations versus the rest of the world, especially emerging markets. So what are the factors behind the divergence in those markets? And what of those markets that are, say, underrepresented? What’s appealing about those markets?
Well, first of all, I think there are some decades resource businesses are usually terrible companies, especially in the mining space where I, and most of those companies make no money. They’re very capital intensive and they’re highly dilutive. They burn a lot of capital. But there are some specific decades that are very interesting to own them, and they usually are linked to inflationary decades. So if you looked back in the 1910s, the all those three decades actually coincided with periods where inflation was running hotter than usual. And so, yes, you see the operational costs and other things rising at those periods, but the hard assets overall tend to really outperform even the cost structure, but also other assets like financial assets overall. And so that is one very important aspect. And the other thing has to do with why they have been neglected for so many years to not only. Well, they’re not really growth companies, and that has been one part of the market has probably attracted most of the capital we’ve seen in the last decade or so. Technology has been a big portion of. Well, and that has to do with, I think with the cost of debt being so cheap, allowing investors to not focus in bottom lines and profitability.
I think somebody, maybe David Einhorn, made a point about we should measure how many, the frequency of analysts actually listening to earnings calls nowadays. I mean, you’ve probably seen, there’s a good chart of CFA level two people. The volume of those have been drastically declining. It’s just another way of seeing how fundamental analysis is just over. I mean, no one really does that. And I am of the view that we’re going to go back to that. We see decades that are like that and the same will go for mining. So why do I think those things look appealing? Because historically, when those companies start being extremely conservative, that’s the time you want to start getting exposure to it. And there are many ways you can measure that. My favorite one is looking to aggregate capex, and you can see that across not only the overall commodity space of producers, but also specifically in different parts of the commodity industries like agricultural commodities, energy, or you can look into the mining space and even break down into the metals as well. And what you’re going to find is that, yeah, overall, most of those companies have been extremely conservative, and it’s just hard to believe that that’s not going to drive the prices of things in general moving a lot higher.
And I’ll point out to one more thing that I think is very relevant. I am of the view that gold is going to make new highs. And not only that, but we enter a new cycle and we can get into the reasons for that. But I’ve never seen a gold cycle that doesn’t coincide with a commodity cycle. And so to me that’s really what it comes down to. It’s just another way of betting on the idea that precious metals will enter a cycle. And if that happens, we’re probably going to see other commodities follow along.
Okay, let’s talk about that, because I want to understand your gold thesis. Can you tell us why you think gold is going to run up?
Well, I think there’s two pools of capital that really move the markets in general. There’s the 60 40 portfolios, the pension funds and all those kind of more idealistic investment strategies. And then you have the other side of it, which is central banks. And those are very relevant. And we have to understand where are those guys allocated and where they’re likely to move towards. So let’s separate the two. One of them is what is called the 60 40 portfolios. I mean, that has been the most successful way to be invested probably in the last 20 years or so and maybe 30 years. But now with this new investment cycle, I believe we’re entering where we’re seeing changes of correlations and so forth. I think we’re going to start favoring other assets. And to me this is the first time in 45 years that the downside volatility of gold versus treasuries is actually in a way where gold is less volatile than treasuries. And so I would think that those funds running those types of analysis will start favoring gold as at least a portion of that 40% of their portfolio in safe havens. And so it starts seeing that moving from zero to five to percent ten on the gold side.
I think that would be a very significant and meaningful dynamic of flows into the space. The second one is central banks. Well, central banks, if you look at the history of them, the way you do it, at least the way I do it, is looking at their assets and the composition of their assets throughout history. And you can go back all the way to the 70s or even further, but what you find is that gold used to be a really big portion of their balance sheet assets in the past. And to be more specific, back in the late 70s, after the gold standard ended, we actually went to a period where central banks were accumulating gold, believe it or not, and their central bank assets actually peaked at the end of the beginning of the about 74% of their international reserves. So central banks have different priorities. They own things not because of a risk perspective. They own things because they want to create stability to their monetary systems. And so they need something credible. And so since then, treasuries and other sovereign institutions or sovereign instruments got really cheap, and so they accumulated those assets it makes sense.
So on the back of that we had the success of six to 40 portfolios, the declining of interest rates, the improvement of growth stocks. And so everything is kind of linked to that significant change. And so now we’re starting to see the beginning of purchases of central banks. And you may say, wow, that’s pretty significant. Those are record amounts of purchases. But what is really significant is the fact that they are just 20% of their central bank assets today in gold allocation. So what if we go back to the median, which is about 40%, which is double from where we are today, and I think that’s very plausible. So coming from those two parts of the market, I would say that that can be a very important segment, or I should say attraction of capital to this industry. And not to go on a lot further, but there’s more to this. But I’ll keep it short.
It’s a great overview. Just a quick question about gold and Albert and Tracy. I want to bring you guys in in a second, but I feel like there’s, on some level, at least from retail, there’s almost a substitutional factor between, say, gold and crypto. Crypto was kind of used as that counter dollar Deval asset. And now that we have crypto or say bitcoin spot funds coming out, that sort of thing, will that take away from the gold market as kind of a counter dollar deval, say asset for retail to hold? I know you were just talking about central banks, but I’m talking kind of that marginal, say retail or portfolio investor, will they see the crypto or bitcoin ETFs as a substitute to gold?
Look, I think the reason for the gold being so unfavorable across the retail investors has been the fact that it just hasn’t performed very well. And a lot of people like to just ignore the metal because of that factor. When to me, as a contrarian, I love that factor. It’s exactly why I don’t go to a restaurant or a bar and I talk to a person and they’re telling me they’re buying claims of properties looking for gold and silver and copper. No, they talk about crypto assets and other things. And so to me, it’s a totally a contrarian opinion. I think there’s no marketing that is better than making money. And the fact that we haven’t made a lot of money in gold certainly is unfortunately a negative situation. And so do I think that will change? Yes, I do think that will change. I don’t think you’re going to get rich buying gold. I’m never going to say that. But I think there is a symmetry to buying assets that are linked to gold that are likely to be performing way better than the metal itself. That to me is what is very attractive about the space.
And as we see people actually being successful and making every gold cycle, there’s a new period of new billionaires and successful investors that emerge. And I’m trying to be one of them. And that’s certainly my goal. And I think there’s a lot of other people creating credible vehicles that will do the same. And I think that that will attract the capital from the retail. You know, the fact that retail is not very interested to me is actually probably a positive factor instead. But
Interesting.
Yeah.
Tracy, you follow precious metals and miners. What’s your thought on gold appreciation?
I think the bigger question here, just kind of jumping on to your question on the bitcoin gold thing. I think the bigger question here is do we think that these bitcoin ETFs are going to hurt or help the underlying asset? I think that’s a more interesting question than does the bitcoin trade hurt or help the gold trade, in my opinion.
And I guess for me, a bigger question regarding related central banks is CBDC versus gold. Is that something that offsets the underlying value of gold? I mean, I don’t know how realistic that is for, say, the Fed, but obviously it’s a discussion point and I’m just not sure about it because I really don’t know. Albert, what are your thoughts on gold?
What are my thoughts on gold? If we’re talking about trading it in a range between 1700 and 2300, I would absolutely agree.
You should have it in your portfolio and diversify. Hoping that it goes to three, four, five, 6000 is just pure lunacy in my world, right. I’ve been told from treasury secretaries that they’re going to cap it at 3000. They’ll never let it because it affects the US dollar. When you’re sitting there trying to fight someone like the Fed or the treasury, especially in a commodity like gold, you’re never going to win.
Right.
But like I said, he’s right. Gold sitting there at 1718 1900. Why would you not have your portfolio allocated in an asset? Which is clear that for whatever reason the central banks are know buying gold for their portfolio, they’re clearly doing. It’s whether as Tavi was saying, or whether I believe, because it’s arbitrage for dollars in the long run. So doesn’t matter which argument you make, they’re certainly doing it right. So onto the other point about investing in commodity rich countries. Absolutely. We’re in a cycle where commodities are becoming much more hard to get. The supply chain disruptions are problematic. The only concern I have is when you start investing in those countries, you really have to look at the politics behind who’s leading those countries, because some of them are left leaning, some of them are right leaning. The left leaning countries tend to favor climate change and environmental policies that sometimes is contrary to mining and whatnot. So that’s the only tidbit I’d throw in there with that.
Yeah, that was actually my next question to Tavi is if we look at that chart that he has on kind of the premiums across stock markets, the market value to GDP and more of those countries that you look on the right. My question is around geopolitical risk. How do you factor geopolitical risk into investing in these countries, not just those that have precious metal mining, but also the ones that are on the right that aren’t necessarily hit the valuations, that haven’t necessarily hit the valuations that are, say, a median valuation.
Well, it’s an important question because the risk is not taking away of the trade at all. As we know, markets will prioritize different things at different times. And right now, certainly the risk of the political side has been, I think, the largest thing that has been causing this big difference in valuations of companies in the mining space specifically because I can speak a little better about that. Know, one thing that you can see today is the fact that if you buy, let’s just say a project and mining project in Peru versus in Canada, you’re going to pay a much higher premium in Canada. For obvious reasons. But the thing is, because of ESG issues and other things, for you to put that project into production in Canada will take you 15 years, while you can do that in Peru. Depending on the project, depending on the situation, you can maybe get that into production in three years. And so I’m not joking. I mean, we have a project in Bolivia now that is actually going to get into production hopefully in about three years. And government has been very supportive. Why? Because they know they need people to be employed, so they want the projects to go ahead.
And so when do we start actually shifting the prioritization from markets, giving a premium to the political jurisdiction rather than maybe the speed of getting a project into production? I think that we’re going to see some of that shift. I personally think that that’s going to be an important one because I want to own more projects that will actually get into production in this cycle, not the next one. Because buying an exploration project, you only going to get into production in 15 years from now. So why even bother? So that to me is an important aspect.
Interesting.
That’s really difficult to do. I commend you on that one, especially trying to find something that’s going to be productive in the next two, three, four years. That’s tough.
Yeah, it all depends on the idea, right. This project I’m talking about has infrastructure already ready to go. They spent over $2 billion in infrastructure and found a discovery. And the discovery now is the big discussion, can we get this discovery into production? And so you need permits, you need all sorts of things. You need to build some infrastructure there as well because it’s 40 km away. And if you’re trying to do that in Canada, boy, good luck. It’s going to take you a while to get those permits and approvals and you got to talk to the natives and all those things in Bolivia, you might be able to get there much quicker, especially if you don’t have to build a lot of infrastructure. So this is a very specific case that I’m talking about, but that certainly is one to consider. There are other projects like the ones we’re looking at that are in similar positions.
Yeah, you have to be hyper aware of the politics on the ground in these cases. Right. So I don’t think we can underscore enough the importance of geopolitics, especially in the environment of higher interest rates. Right. When that cost of capital rises, the downside of geopolitical risk is much more painful. So let’s switch to us equities for a minute. Tavi, given where us stock valuations are. What’s your outlook on earnings? We saw massive earnings growth with inflation in 2021, especially in early 2022. As inflation grew, so did margins for companies because they could push stuff onto their customers. With inflation abating, where do you see earnings coming from? Are we at the point in the cycle where earnings growth comes from cost and staff cuts? Does that stuff become the focus?
Boy, if that happens, I don’t know how the population will keep moving because the widespread labor strikes to me are a big portion of all this. And I’m going to start actually putting out some stats on this because I don’t think people are doing enough. The point of how much corporations are getting paid relative to how much the labor market is getting their share. And so that’s going to change. I think that’s going to create an even more inflationary problem. But to your question, look, I’m not of the view that we’re going to see a soft lending. I’ve been of the view. I’m not going to say. I think most of the managers that are writing 2022 that absolutely nailed 2022 had issues in 2023, and the same guys that nailed 2023 had a terrible 2022. And so who do you know that did well in 2022 and 2023? I mean, that’s very rare to see because most people fall into one of the two categories. They’re either inflationary or deflationary. And you can strapolate those moving forward. The deflationary likes technology and some other things, and the others like value stocks and commodities and other things like that, I’ve been of the view that this profusion of macro indicators suggesting that we’re going to see a recession will eventually happen.
And when I say eventually, I think six months, twelve months is probably very plausible. I think it’s going to happen. And so if I’m of the view of that, and I don’t think there’s a lot of big themes in the short side that look attractive. I mean, the dominance of mega cap companies, is that something that will continue? I don’t think so. I highly doubt we’re going to see that this entire year. I think that that’s going to be fading. There are issues with companies maturing debt in 2024 and they have to reissue that debt, along with the government that has $8.2 trillion of debt, has to be reissued. What’s the resolution of all that? We all know the average interest rate right now is 3%, but interest rates itself is at what? I don’t know. Interest rates are below four. The majority of them are above four or 4%. So talking about that, it’s going to be a big change in interest payments and margins that will get squeezed. And then you extrapolate that in corporations it could be even worse. And so yield curve inversions, deeply inverted. Now steepening. Well, how many times have we seen that in the past?
So I’m not the one who is going to bet against history. And maybe history is wrong and all these indicators are wrong and we don’t even see a lending, maybe we’re going to see actually a booming economy. And I’m completely off here, but I think there’s. Yeah.
All of these things sound like headwinds for earnings. Do we see a return to earnings growth in 24 or do we see flat earnings for the next several quarters? Because I’m just not sure where that earnings growth comes from. Albert, what do you think on that?
I don’t know why it matters. I mean, they’re using seven stocks to pump the market in bonds. What does it matter? I mean, I agree with them to a point. Things don’t look really that great historically. You’re looking at most likely a recession. I just don’t buy the recession talk for 2024 for only one reason, is there’s an election in the US for that reason alone, and they’re willing, and they’ve shown that they’re willing to pump money into the economy, into the markets. They’ve done it multiple times in the past. And from what Yellen’s actions are, I don’t see it stopping now. Twelve months from now, completely different story. That’s a completely different era. And the situation changes after that. But for the next six months.
I think they’ll probably launch the market close to 5000 or 5300 or something stupid.
Tavi, what do you think?
Can I ask a question?
Go ahead.
I find an interesting point because I thought about that too. I mean, this is an election year and so forth, and the Fed to me was a total political shift. What happened recently, I can’t explain. Well, what exactly happened when inflation is where it is right now and anyways, and it’s decelerating and there’s no point there. But the year of 2000, the year 2008 was also, both of them were peak of the market in eight was a very terrible market. Both were election years. How do we put so much weight on the fact that it is an election year when history shows that actually there were some really brutal years during election?
There’s a key difference, though. Back then, China and the Europeans were not complete zombies like they are today. They’re dead right now. So all that money, all the inflow coming into the US markets is helping, is helping the US stock exchange. There’s no question about that. Flies into bonds, it flies into the equities. It goes everywhere. There’s no one right now to hold us accountable of what misdeeds we’re doing. Back then, you could have said, okay, well, I’m going to take my 30% or 40% of my portfolio and put it into China, or I’m going to put it into the European economy. Can’t do that right now. That’s one of my main contentions is that part alone, it really stops any kind of argument. It’s like, okay, well, then where’s the money going to go at this point? Who’s going to stop the political actions of Janet Yellen from this point on?
That’s fair. And if we look at Tavi’s chart from earlier, a lot of those European countries are relatively overvalued as well. Right? So if you want to stay relatively safe, do you want to put it in Europe? Well, it looks overvalued. Do you want to put it in Japan? Well, you have the currency risk and you have, according to Tavi’s chart, overvalued. Right.
So I think it’s a good point.
You also have a very politicized Fed and treasury at the moment. Obviously, like Michael Green was saying the other day, the treasury secretary is an appointee of the president and pushes aims. No question about that. But the other thing is, a lot of fed members were ousted last year for more liberal minded MMT in the frame of Lael Brainard’s MMT type economy. Right. So this is why I think that this is a new regime. They don’t care what happens in a year.
They think they have full control, which I completely agree with Tabi, historically, you can see that that doesn’t really play out very well in the long run, but because of, there’s nowhere else for money to, right, And they have almost full control politically at the moment. I just can’t see them allowing a recession to happen only for political optics. Sure, the data can say this and that in a few sectors and whatnot, but they manipulate the BLS, they manipulate the CPI numbers. So for me, they can do whatever they want and they’ll make some kind of chart to make it look like we’re not in a recession, even though 90% of America is already in a recession as it is.
Tavi, what do you think about that?
Well, I think I’m happy to be wrong on the recession call if that means precious metals and other hard assets will do much better because the Fed and other institutions are stimulating the economy just because of elections. That would be good for copper, that would be good for zinc, that would be good for a lot of things.
100% because they’ll lower the dollar to help the market up. If they lower the dollar, God knows what commodities are going to do.
Yeah, and I think you guys are kind of saying the same thing. You’re saying you don’t expect a recession in 24 and you’re both saying maybe in twelve months this stuff happens. And I think at least we’re in.
A different timing issue, whether it’s six months, twelve months, 18 months, that’s all it is because we’re on the same wavelength that commodities are the definite to play here.
The beauty of starting the year, sorry to interrupt, but the beauty of starting the year is that you can see all these calls for 2024. And if you think about that chart, the very first chart that you’re referring to that shows the waves of inflation that I think it’s a critical chart to think about. One of the things that is overwhelmingly the consensus view right now is that inflation is over, that it will decelerate. Just look at the two year yields and what’s been happening with the rate cuts price in, in the markets right now. Most of those things, I think, reflect maybe some sort of recession play as well. But the recession thing, the thing is, the recession thing is from a sentiment standpoint, it’s not as attractive as the inflation reacceleration. The inflation reacceleration to me looks much more of a play because there’s room for that, for people to have that view. Right. It’s 100 people that have the opinion.
Yeah, completely agree with that. That is much more better of a play than it is to play with recession, which is way more political right now. But the secondary inflation wave absolutely is a great play right now.
Tracy, what do you see there in the secondary inflation?
Well, absolutely. I’ve been very vocal over the last month, actually starting in December, late December, that I thought this problem in the Red Sea was going to lead to a bigger disaster than everybody thought that it would. And it’s played out pretty much as I predicted. And I think that right now we’re not seeing these effects in the numbers yet as far as extra fuel consumption, extra insurance rates, extra.
Let’s not get into too much of Red Sea stuff now. I don’t want to spoil the third, but. So you’re saying Red Sea will be a driver of a secondary wave of inflation?
Absolutely. And I think that hasn’t shown up at the data yet, but it will a few months down the road. And this could be a very big problem, not only for the election, for the government, but also for central banks.
Right.
Tracy, can I ask two questions to you, if you don’t mind? Tony? Just I think critical here, and it’s not Red Sea related, but one of them is how much do you think is sustainable, this increase of energy, or should say oil production in the US specifically? And the second question is how much of a war premium is currently priced in, in oil prices today?
I think.
Two different questions.
Well, I’ll do the easiest one first. There is no war of premium price in, well, prices right now. Nobody is expecting it. And that’s partly in the fact that we’re not seeing hooties lob missiles at Aramico facilities anymore. And so if that should happen, which I do not think it would happen, that obviously would be driver for oil prices to move higher. So I don’t think that geopolitical risk is factored into the market right now. The market’s pretty, being pretty relaxed about it because really no oil facilities end or no oil production has been hurt at this point, even though we are finally starting to see tankers avoid the Red Sea. But that’s kind of a new development. And then the first question was, what was the first question?
Oil production in the US.
Absolutely. I think that oil production in the US, I think. Can you cut out that part until I say oil production in the US? Oil production in the US. Let me start over terrible today. And to answer to your first question, I think oil production in the US is set to slow. I think expectations are very high. I think that 2023 came as a surprise to most markets because even though we had declining ducks and we had declining rig counts, oil production continued to move higher. But what we are getting from the. So I think this is a two part thing. I think, one, what we’re getting from these wells is getting gassier and gassier. That means lighter and lighter. That means stock. That is really, you can only use for chemical production, petrochemicals and things of that nature. That’s what kind of, we’re kind of getting out. And what I think that we also saw is that with this wave of consolidation in the industry and we’re seeing all the big majors start to suck up all these smaller companies. What they’re doing is they’re sucking up production. So what we saw is these smaller companies try to produce as much as they can to look as attractive as they can for an acquisition, and as a result, we’re seeing some major big deals over the last year, and it’s expected to continue. That trend is expected to continue within 2024. And so that’s kind of what I mean by all these majors are not expected to grow production. None of them are saying we want to grow production in the US. They’re buying production growth, if that makes sense at all. I think that is part of the reason that oil production continued to rise in 2023, much to most people’s surprises, because we have these smaller companies really trying to produce as much as they possibly could to be attracted to these majors.
Yeah, I mean, if these guys are disincentivized for doing capital investment, then of course they just have to buy the assets that are already developed. Right? The smaller assets. I mean, it’s a way of backing into it instead of doing it greenfield. As they’ve done in decades before. So in hindsight, it looks natural, but looking forward, it would have been kind of a hard thing to expect that thing.
Absolutely.
I think. Okay, great. This has been fantastic, Tavi. I’m going to move on to some geopolitical issues with Albert.
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Albert, we saw on Tuesday, we saw that Iran launched some attacks against Pakistan.
Pakistan retaliated midweek. Earlier in the week, Iran launched attacks against Syria and Iraq. So what’s happening here? Why is Iran suddenly acting so aggressively? And what outcome do they know?
Honestly, it’s just theatrics, deception more than anything else. I mean, the Iranians didn’t actually attack Pakistan military installations themselves, right? And the Pakistanis also didn’t retaliate versus the IRGC directly themselves. They just threw some lobster missiles back and forth at some proxy militant organizations, nothing more. This is nothing more than hyping up the whole Houthi Red Sea issue to probably drive up oil prices at the be. There’s no threat of expanding regional war with the Pakistanis and the Iranians, which is absolutely absurd since both of them are within the sphere of influence of Moscow.
And Beijing.
Yeah, and Beijing to a lesser degree, though. I mean, the Beijing. Beijing is a trade partner, whereas the Soviets actually supply them with defense equipment and whatnot. Right. And advisors. And it’s a different dynamic. I would associate more influence on Moscow than I would in Beijing in this part of the. Yeah, you know, I don’t see much of anything coming of know.
Zuran is kind of portrayed as kind of this puppet master in the Middle east of the Houthis and know, Syria and other places. Are they really?
Well, yeah, they are. I mean, they supply arms, weapons, narcotics, trade through multiple areas of the world through the Middle east. And they fund a lot of the proxies and operations out of there. There’s no question that they’re definitely a player. Most of this is just testing the United States’ resolve, the west’s resolve in the region and to, you know, we’re don’t. To show the entire muslim world, hey, we’re know, don’t discount us. We’re not, you know, like I said, as some kind of grand scheme of undermining the entire west.
I just don’t get it. I just don’t get kind of, especially this week’s tactical movements by Iran. Maybe it’s to prop up the oil price, but. I know this sounds kind of crazy, but would they coordinate that with Pakistan beforehand and say, hey, we’re going to take out these militants on your side and then you can take out these militants on our mean.
Yeah, of course.
In the west.
You think they. Oh, yeah, of course. The IRGC and the ISI, I’m sure they have connections, you know, winking a nod. We’re going to throw missiles over here. Don’t be surprised. Yeah, we’ll respond with missiles over there. Don’t be surprised. Of course you’re going to have that communication. You’re not going to just do something surprise in the middle of the night because that can lead into a serious conflict.
Okay, so there’s really nothing to see here.
Not really.
And we’ll get into the Red Sea in a minute. But that is really backed by Iran. That’s not really backed by Russia, is that.
I mean, obviously, I’m sure the Russians would have some sort of notice about what’s going on over there, but realistically, it’s the IRGC of Iran that’s pushing the Houthis to do these sort of things. I mean, the Houthis get total funding from them, so they can’t just sit there and do something all willy-nilly without approval.
Right. Okay, interesting. So that segues perfectly into Tracy’s red Sea segment, and both you guys jump in here as needed. But Tracy, you know, we’ve all seen what’s happening with the Red Sea and the Houthis and the US kind of bomb strikes and all this. You know, crude prices really haven’t budged since mid December. So why we saw European gas prices plummet this week. Why have they not budged? And what would make them spike at this point?
Well, I think as far, and I’ve been saying this for a week now, weeks now, this is a shipping and insurance issue. So if you were invested in container ships at the start of this, you did really well. They’re starting to back off now, but they spiked this. Oil prices did nothing. Natural gas prices did nothing. Globally, we’re oversupplied on LNG and natural gas. I don’t expect that to subside anytime soon. As far as a long term investment prospect, I think that some of these individual companies are attractive. But as far as actual futures markets, net gas is just not attractive right now. And then if we look at oil prices again, the Houthis aren’t lobbying missiles again at Aramco facilities as they once did. That spiked oil price at $7 in a day. Right. And tankers until the last week or so have been largely unaffected and have been able to traverse the Red Sea with no problem at all. And you have to understand, because Iran has ships traversing the Red Sea in oil products as well, the Saudis are staying out of this for the most part. They’re not getting involved, which means there’s not that tension between the Houthis and Saudis right now and the Emiratis. So there’s not that threat that they’re going to be lobbying this little city. So there’s oil facilities. And so I think that’s why oil has been largely ignoring this right now because there really hasn’t been a direct threat at this point.
It’s really notable to me that the Saudis and the Emirates have been really quiet on this. I think it’s really fascinating, especially given that the Saudis and the Emirates were involved in Yemen for so long for over a, I mean, there’s a story, because there’s not a story there, there’s just something going on, right.
No, I agree, absolutely.
Yeah, this is, this is what we’ve been saying, Tony. Listen, I’ll be the first one to throw up the flags, the red flags, and say, hey, there’s a real conflict happening right now. But I mean, the Saudis just completely dismissed it, right? They don’t want to get involved. The US is going to. I mean, they had to act because of the shipping lanes and whatnot. But nobody else is really taking this seriously. Listen, this was a serious problem. Oil would be at $95 right now without question. And because the market hasn’t moved on it, I don’t think anybody’s taking this seriously.
Well, you’re not even seeing brentured or Dubai or any of those grades spike up.
No.
Nothing consumed in Europe, right?
Nothing.
No action in WTI. That’s not a surprise. But you’re not seeing spikes in brentured or any of the Dubai grades or anything like that. I mean, it just doesn’t really make that much sense to me given the geopolitical aspects.
I feel like. Can I just say, I think there’s.
Absolutely. Yeah.
I think there’s probably some backdoor deal where the IRGC, Saudi Arabia, basically they said, you know what, we’re not going to hurt your tankers. Don’t worry about it. Everything’s going to be know. I think there’s some political backdoor deals and why. Perhaps we’ve seen the Saudis and the Emirates kind of quiet about it because I’m sure that there was a lot discussed regarding oil when this first happened and why it’s been mostly container ships again, I said up until this last week.
Yeah, well, we did see that trip. I think it was the Iranian foreign minister to Riyadh about three or four weeks ago. So is a backdoor deal plausible? Yeah, it’s plausible. It’s definitely something that could be in the works or having been agreed already. Tracy, you mentioned insurers, and we saw insurers adjust Red Sea rates weeks ago, but we’re now seeing exclusions for us and UK vessels. What does that mean?
Well, you know, obviously that’s not good. They don’t want to touch us, UK vessels or anything. That’s going to Israel. That’s also going to be a very big problem for Israel, which is massively importing country. They don’t produce much except for some agricultural goods and some NatGas.
But a lot of software.
Ans cyber security. That’s going to be a huge problem for Israel as far as getting good to their country. And it’s a very concerning problem for the US and the UK, which keep poking the bear know, I think that it just doesn’t look good. It’s not going to necessarily hurt the US because they can avoid the Red Sea. Merchant ships can avoid the Red Sea. That’s not really a look, it looks bad and it will be a problem for Israel getting goods to their country.
Sure. Okay. So we’re also seeing air freight companies talking about goods potentially rerouting via air to avoid the Red Sea. And you tweeted about this earlier this week. So is that a real possibility or likelihood or is that just airline CEOs kind of pitching their business?
Well, this was DHL. There was a DHL thing. And really, I think they were really talking about their container ships. But if I were to speculate, depending on how long this lasts and how much insurance rates go up and how long these and how big these shortages actually get on container shipping rates, I think you’re going to see air cargo do extremely well because you’re going to start diverting what would be on sea onto air eventually. But that, again, we’re not at that point yet, but it’s something to be looking forward to as this kind of drags on. We saw Maersk come out this week and said this is going to be months instead of weeks. And so the longer this drags on, the higher the wait times, the more know, container shortages you’re going to see, which we’re particularly seeing in Asia right now, which is bad news for, you know, I would kind of start looking at air power.
So this plays really well into Tavi’s chart about the three waves of inflation. Right. So, Tavi, we’ve got geopolitical risk, we have potential supply chain risk and other things. So how do events like this kind of accelerate the kind of worldview that you have around those three waves of inflation?
Well, I think the three waves of inflation is really predicated. Again, it’s figuring out, or at least trying to identify are these forces, there’s always forces in the deflationary and inflationary side, and are they cyclical, structural? I would argue that they are certainly not what we saw in the, what we saw in the 40s. But majority of people, when I show that chart, they immediately say, well, this is not like the 1970s. And when you look back in the, we did see inflation developing through waves. In fact, I just haven’t showed this charts. But if you go to other economies, Germany, France and other Argentina, Turkey, and you look at their inflationary problems, they also develop through waves. And it’s just mathematical how things work. Things get really heat up and then on a year over year basis they decelerate. It doesn’t mean prices necessarily are contracting. They’re just accelerating the growth. And then you bottom at a certain level and you’re starting to see some signs of that. I still think CPI may fall a little more and I think it’s a total lagging indicator. You may see what’s the best way of trading this sort of my view, this overall potential for too much sentiment of further deceleration of inflation, and the problem is over.
Well, it’s the fact that if you look at the commodity price, the equal weight of commodity prices, they’ve been on a range, trading on a range for about 18 months and they haven’t done much right, basically. They also haven’t done really bad either. They’ve been kind of going sideways for a while. And so what do I think it’s going to happen? Yeah, I think we’re going to retest the levels that we saw during that Russia invasion problem and probably going to go much higher than that at some point. And that’s what creates the second wave of inflation. So looking at the housing market is probably a huge factor here. I think there’s a reason why Warren Buffett owns home builders. I don’t blame him. I think there’s a total issue with housing inventories. Sorry, I got a notification on my phone. And I actually think that plays into the long term thesis of the inflation problem. I can’t imagine that building homes are not going to create a demand for commodities overall. The reshoring of economies won’t create demand for that. And this is all long term things that will at some point start driving the prices of those assets.
And so knowing that the fact that the chronic issues in the commodity space have not been solved, I mean, access for capital is still the same situation. Over the last three years, especially in the mining space, things have been as distressed as they can be. Every company we own that is looking for capital now to raise, it’s all these difficulty of finding investors that are savvy enough that want to put capital into this. And so it’s really hard. And how do we build the next mines and the next supply of things in general? Well, we need capital and so all the capital is going into mega caps right now. Those things have to at some point translate into the markets. And I would think that the second wave of inflation could certainly happen this year. And I would say that it’s probably high conviction that we will.
It’s just interesting to me that this started because of supply chain issues, a lack of supply, and then consumers have been conditioned to these higher rates.
Well.
This is higher.
Well, this is the problem. Right. Tavi is right about pointing out the housing market. Right. It’s a political problem also because they need housing to be affordable and the only way to do that is to lower rates. Well, the moment you lower rates, you’re going to get next secondary inflation and the housing market go berserk. I guarantee you if they cut rates this year like half, like 50 basis points, that you’ll see housing market probably go up 15% to 20% immediately.
Exactly right.
And by the way, this is an issue I have with having such a bearish view overall, is because housing market is in a way an economy as well. So I’m not that bearish on the housing market personally. If you look back in the see the ratio of house prices versus the s and P, you’re going to find the house prices actually outperformed the s and p quite significantly during that decade. And if you go back to the was also the same thing. And the interesting aspect of this is, again, it’s a hard asset that outperforms a financial asset during an inflationary era. And do I think that could happen today? Yeah, I just don’t think that within the hard assets realm, housing looks very attractive relative to other things. But I wouldn’t bet against it. I think there’s better things to do.
Interesting. Guys, thank you so much for this. I really appreciate your time. All that you’ve said today and have a great weekend and have a great week ahead. Thank you.
Thanks, Tony.
Thanks, Tony.
This podcast is originally produced and published by BFM 89.9 and can be found at https://www.bfm.my/podcast/morning-run/market-watch/2024-fed-hawk-rate-cuts-oil-red-sea-dollar.
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The BFM hosts discuss the current status of global markets and the impact of the recent Fed minutes on market sentiment. They interview Tony Nash, CEO of Complete Intelligence, who provides insights on the potential impact of the Fed’s hawkish tone on asset allocation and equity markets, as well as the implications for the US dollar strength and Asian equity markets. Nash also touches on the volatility in oil prices and the potential impact of geopolitical events on crude shipments.
Additionally, the show provides updates on Cal-Maine Foods, including a significant drop in net income and a jury’s decision regarding an alleged conspiracy to raise egg prices.
BFM
BFM 89.9, it’s 7:05, it’s Thursday. It’s the fourth of January listening to The Morning Run with Keith Kam and I’m Wong Shou Ning.
Now in about 30 minutes, we’ll discuss the current status of Jimmy Lai, the founder of Apple Daily, a once upon a time newspaper in Hong Kong’s National Security Trial.
But in the meantime, let’s recap how global markets closed yesterday. So on Wall Street, it was pretty much a red day. The Dow Jones ended 0.8 % lower. The S&P 500 closed 0.8 % lower as well. The Nasdaq fell 1.2 %. Earlier in the day in Asia, the Nikkei was down 0.2 %. Hongkong’s Hang Seng closed 0.9 % lower. Shanghai’s Composite rose 0.2 %. Singapore’s STI was down 0.9 %. The FBMKLCI managed to gain 0.6 %.
Okay, so for some insights as to where international markets are heading, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. I think it’s still not too late to wish you a happy 2024. Shall we start with the Fed minutes that just came out last night? Oh, well, your time today. I just want to find out what you think about the language they used because they just basically said that it might be appropriate to maintain a restrictive sense for some time. Does this mean that the mantra of hire for longer is still relevant this year?
Tony Nash
Yeah, I think it is. So what was interesting about the last Fed press conference is how doveish the President, the chairman came across and the markets read it as the punch bowl is back and as extremely doveish telegraphing from the Fed.
I think as we see these notes, we realize that the Fed really is serious about hire for longer. There are some banks that expect something like seven rate cuts in the first half of the year, something like that. It just sounds a little bit overly aggressive.
When we saw the Fed’s last press conference, it seemed like a serious discontinuity from their hire for longer mantra that they had been saying for two years, two, three years. And so it really did force a lot of us to scratch our head and say, Wait, why are they doing that? Is this political? Is there some data that the Fed is seeing that we’re not seeing?
And I think as we see the minutes today, we realize that neither one is the case. It’s just that Chair Powell came across more doveish than he probably intended.
BFM
Okay, so what does this then mean for asset allocation, or at least let’s focus on equities. Is that the reason why the new year has started on such a negative note, especially for the Nasdaq?
Tony Nash
Oh, yeah, definitely. I think technology, especially, does well in environments of low interest and loose monetary policy. If we are not going to see a rapid loosening of monetary policy, meaning lower interest rates, more cash in the system, then the valuations that we see in technology are not questionable.
The other consideration is this, and we’ve talked about this before. If we don’t have accelerating inflation, and this seems a little bit counterintuitive, but if we don’t have accelerating inflation, then the margins that companies can charge start to compress. Companies can’t raise their prices as quickly using inflation as a justification, and competition comes in and we start to see price competition again, which is normal for markets.
I think there’s going to be a lot of questions around the valuations that companies have, especially if the Fed persists with this higher for longer messaging and we don’t see doveishness in the pipeline.
BFM
Tony, how do you reckon this will play into the US dollar strength, which has pretty much been the theme for 2023, going into 2024? Where do you think this will go?
Tony Nash
Well, I think it’s status quo for the US dollar. If we’re not seeing aggressive easing, if we’re not seeing accelerated QE or a halting of QT, quantitative tightening, then we can expect the dollar to stay in the environment, all else held equal. We can expect the dollar to stay pretty consistent.
One of the questions there is around fiscal. How much fiscal spending will the US government do? Which creates a demand for dollars, right? But it is an election year, so I wouldn’t expect fiscal spending to really ease up that much. The real question is, and we look at the CNY and the band that the CNY is trading in, there was some expectation that we’d see more strength in CNY and JPY and other currencies, and we’re just not seeing that today because of what we’ve seen coming out of the Fed.
BFM
What does this then mean for Asian equity markets? Because there was the expectations that as the Fed unwinds and becomes more doveish, there would be fun inflow into emerging markets. Is that theory now not going to be disputed?
Tony Nash
Yeah, I think it will be disputed because look, if you have a stronger dollar, of course, you have value retention in a stronger dollar. If you have a stronger dollar, you have, on a relative basis, you have weakening, not all, but some weakening Asian currencies. Then if you have those weakening Asian currencies, then the inflows of capital from international markets to those middle income and emerging markets and even, say, Japan, are relatively lower because the currency is a risk for those investors.
I don’t necessarily think it means that Asian markets are out or are negative, but I do think it means that emerging markets generally will take less of an allocation than some people had thought in 2024. The economic managers in Asia are going to have to be much more careful with their monetary policy to make sure that their currencies don’t erode in the wake of dollar strength. When I say dollar strength, I’m not saying that the dollar is going to rocket up in value, but even if it stays at its current level, it’s a relatively strong currency.
BFM
Okay, Tony, where do we then park our money? Because for us in Asia, it’s all in the red on a year to date basis, so is the United States. So where can we put our cash to work, or do we just keep cash for the moment then?
Tony Nash
I don’t know that I would necessarily keep cash. I think you have to look at, say, commodity-related stocks, miners, that thing. You have to look at financial services. You have to look at things that are consistent businesses, regardless of, say, the business cycle. And if we start to see margins erode, so some of these things that we saw that were really attractive over the past couple of years, like consumer discretionary and things like dining out in restaurants and these sorts of things where they could pass along inflation to customers, those things are going to be relatively less profitable.
Assuming we continue with the hire for a longer environment and the allocations that people would make there would necessarily pull back as people look for more consistent, probably value-ish, I wouldn’t necessarily say full value, but value-ish type of stocks. Really, it’s a time to be value-aware and relatively conservative until we have a clear idea of the path.
BFM
Tony, we’ve seen some volatility in oil prices due to what’s happening in the Red Sea area. How do you see crude prices trending over the next week or so as energy markets seek clarity in this situation?
Tony Nash
Yeah, we saw Brent up, I think, around three and a half % today. It may be, give or take a little bit, but Brent was up quite a bit today to, I think, around 78, 50. But that’s down from, say, $94 in October. So Crude is still relatively weak compared to where it was just a few months ago.
There is slack in the environment and we are starting to see, say, the job market in the US be weaker. We’re starting to see more, say, layoff announcements, these sorts of things. We’re seeing growth in, say, China expected to continue to slow. Europe really isn’t picking up.
The question, I think, is on the demand side. If we had tight demand, we could expect to see crude prices spike up pretty quickly, but we’re not necessarily seeing that. The real question is, are we going to have a major geopolitical event that’s going to halt crude shipments? We’re not necessarily seeing that. We’re seeing some putty rockets in the Red Sea, but we’re not necessarily seeing major disruptions yet.
And if that becomes a major disruption, then yeah, we could expect some serious rises, especially in Brent, but we’re not necessarily there yet. There’s some volatility, there’s some up and down. I would expect to see some action taken against the Hootie positions ongoing for the next several weeks to take them out and reduce that risk.
BFM
All right. Thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence, reminding us that the Fed remains still quite hawkish, their tone. And as a result, it looks like the reign of the King dollar continues, at least for a while. Status core, he says. But there are things that we could continue watching for perhaps… I mean, everything seems to be hinged on China’s long-awaited recovery since 2022, and I don’t know if that’s going to happen in 2024, but let’s wait. And see, I guess.
China, the comeback hit that didn’t materialize. Maybe 2024 is their year. But let’s turn our attention to Cal-Maine Foods. Now you’re wondering, what does this company do? It is actually the United States largest shell-egg production company. They reported a net income of $17 million for the second quarter of fiscal 2024. Now what was significant was the 92 % drop compared with $198 million in the same quarter last year. Was there foul play there? I don’t know. But CalMaine did say that one of its facilities in Kansas tested positive for Avient flu production at that facility was temporarily halted. The company is working around with other facilities to minimize disruptions.
Meanwhile, a jury has also found that Cal-Maine and other companies were liable for an alleged conspiracy to raise prices of egg products from 1998 to 2008. They have their own egg cartel there. That’s not an extraordinary type news. Sounds familiar, right? Oh, my goodness, Keith. You’re really rolling with all the puns this morning. Anyway, the jury did award plaintiffs around $18 million in damages. So that’s some context for you there.
Okay, so Cal-Maine, not much coverage on Wall Street. There are only three analysts that cover this job. And guess what? They’re evenly split because there’s just one buy, one hold, one sell. Consensus target price for the stock, $55. It was actually down $1.82 during regular market hours, trading to $54.86. The stock is actually down more than four % for what is the United States. Just two days of trading at this moment, right? Not very exciting. Oh, my goodness, there goes another pun. Up next, we’ll cover the top stories in the newspapers and portals. Stay tuned for that BFM 89.9.
