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.
Transcript:
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.
Tony Nash, CEO of Complete Intelligence, spoke to BFM about what is moving international markets.
The recent April headline CPI numbers were better than the projected 5%, coming in at 4.9%. However, core inflation still printed at 5.5%, and so the Fed is unlikely to cut, making it hard for them to stop raising interest rates. The Fed’s rate rise vote was unanimous this month, indicating that the Fed will continue to raise by 25 basis points in June. Tony said the Fed will look at wages and employment figures along with consumer sentiment, producer prices and credit indicators as well.
With regards to the debt ceiling, Tony said it was a US domestic political tool, and in the end, it would last longer than most people wanted it to last, and we would see some melodramatic brinksmanship.
85% of S&P 500 companies have reported actual results for Q1 2023 to date, and of these, 79% have reported actual EPS above estimates. Tony explained that a lot of this is down to margin expansion, and as raw materials prices fell, labor costs rose quickly, allowing companies to raise their prices further.
However, companies are starting to slow down on price rises as consumers are fatigued with the rises. Some tech companies have started laying people off or signaling no pay rises this year, as they realize pushing price rises is something they won’t be able to do much longer in 2023.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station.
BFM
BFM 89.9. Good morning. It’s 7:07 A.M. On Thursday the 10 May. You are listening to the Morning Run. I’m Shazana Mokhtar with Keith Kam and Mark Tan. Now in half an hour, we’re going to zoom in on the outlook for Chinese equity markets, specifically the Shanghai Composite and the Hang Seng Index. But let’s recap how global markets closed overnight.
BFM
In the US market, stocks mostly climb as better inflation data offset worries about the stalled talks between political leaders that have raised fears of a US default. The Dow was down 0.1%, but S&P 500 up 0.5%, and Nasdaq up 1%. In the Asian markets, it’s rate traffic lights Nikkei down 0.4%, Hang Seng down 0.5%, Shanghai Composite down 1.2%, STI down 0.2% and FBM KLCI down 0.5%.
BFM
So for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Always good to have you. Let’s start with CPI numbers. April headline CPI numbers came in at 4.9%, better than the projected 5%. Do you think this will have an impact on the Fed’s policy decision in the near term?
Tony
Yeah, I think it’s unlikely by the next meeting. So what we have to look at is what’s called core inflation. And core inflation still printed at five and a half percent. And so that is hitting people enough that it’s really hard for the Fed to stop. They’re certainly not going to cut, but it’s really hard for them to stop raising when core inflation is still at 5.5%. So we have things like food inflation is still up 7.7% on an annual basis. Electricity is up over 8%. Transportation inflation is up 11%. So as these things are still rising at this rate, it’s really hard unless we see some other compelling data come in, it’s really hard to see the Fed either pause or cut. Now what we also have to recognize is the Fed’s rate rise vote was a unanimous vote in favor of a rate rise this month. Typically, before we see a change in policy, we’ll have votes that are not unanimous. So it seems to me that going into the June meeting, at this point, it’s likely the Fed will continue to raise by 25 basis points in June.
BFM
What are some of the other indicators that the Fed may be looking at in order to help refine this decision, Tony? What are you going to be watching coming out next in the weeks ahead of the June meeting?
Tony
Yeah, they’ll look at consumer sentiment, they’ll look at producer prices, they’ll look at wages, these sorts of things. They’ll look at employment. So the key things they’re looking at are really wages and employment. That’s really it. There are a number of other macro metrics that come out, like retail sales, that the Fed doesn’t really look at that stuff. So you don’t really hear markets here moving on retail sales. It’s more at this point in the cycle. It’s things like wages. They may also be looking at things like credit because we’re staring down, really a credit crunch, which is tight credit because rates have moved and because of the banking risks we’ve seen in the US over the past probably six to eight weeks. And so they may start looking at more credit indicators to see how that’s slowing down.
BFM
Now, US Treasury Secretary Janet Yellen has sounded alarm over possible financial market consequences if the debt ceiling was not raised by early June. What would those consequences be, and how likely would it be for Congress to strike a deal by then?
Tony
Yeah, I want to kind of help you guys and your listeners understand that the debt ceiling is really a US domestic political tool. Okay, so the debt ceiling is an annual ritual that we have here where each party threatens the other to cut programs, so say programs that the other party loves. Right. So at the end of the debt ceiling, all of the politicians just agree to spend anyway. So there will be threats that the US will run out of money, but it won’t. It’s not going to happen. The Treasury always finds money. You will likely see us get to some point where, for example, they’ll close national parks or they’ll say federal employees can’t come to work. Those are really signaling more than substantive because all of those employees get paid. We know that the debt ceiling will be signed three or four or five weeks after that happens, and all those employees get their back pay. It’s not as if anybody’s going hungry. They all have their health care while this is happening. So what will happen, and this is very predictable, and it’s a big eye-roll for most Americans. In the end, this will last a lot longer than any of us want it to last.
Tony
And we’ll see some sort of last minute melodramatic Brinksmanship to kind of save America. When we hear about the debt ceiling, we hear breathy headlines about the debt ceiling. Most Americans just kind of ignore it because this is really a Capitol Hill Washington, DC issue more than it is something that really affects real life here.
BFM
Tony, overall, 85% of S&P 500 companies have reported actual results for Q1 2023 to date. Of these companies, 79% have reported actual EPS above estimates. How would you explain this outperformance? Is it time to chill the bubbly?
Tony
Yeah. A lot of this is down to margin expansion. So in 2021 and 22, we saw goods price inflation, which allowed these companies to raise their prices a bit. As those raw materials prices fell, we saw labor costs rise quickly, and that allowed companies to continue raising prices further. So we’re starting to see companies slow down on their price rises. Consumers here are really fatigued with price rises, so we’re starting to see companies slow down. And some tech companies started this laying people off. Some will signal that there’s, say, no pay rises this year. Microsoft has already signaled that. Some of those are prudent measures that leadership teams are taking in the event of a recession. But some of them are just a realization that pushing price rises is just something that we won’t be able to do much longer in 2023.
BFM
And let’s take a look at oil prices, Tony, they’ve been pulled or they are being pulled in opposing directions. We have deteriorating global demand outlook that has been countered by some bullish supply news from the Biden administration as well as Russia. So where do you think oil prices might be heading in the next one to two months?
Tony
Yeah, you’re right. There are definitely mixed messages in crude markets and it’s easy to take either a bearish or a bullish view, depending on what data you’re looking at. Our view is that crude could rise 5% to 10% in the next month or two, and that’s a typical annual seasonal trend. After, say, June, maybe mid, late summer, we’ll definitely see a sell off in markets. Again, that’s pretty normal for this time of year. So we would expect prices to rally a little bit from here and then we’ll see a calm, say, mid summer.
BFM
Tony, I just want to pick your brains a little bit. Gold prices, they’ve managed to stay above $2,000 for some time after hovering like just below that level for the longest time that I can remember. What do you think the direction is going forward?
Tony
Yeah, so our expectation is that gold prices are going to fall a bit over the next two months back below 1900. So we do not expect gold to stay at these elevated levels. It’s possible, but it’s just not within our forecast. So I would be careful with gold at these levels. And if your listeners believe that it’s a rally, go for it. But that’s just not what our data is telling us.
BFM
1900 is quite substantial. What do you think the reason would be to bring it down to that level?
Tony
Well, if risk is taken out of the economy, so if there’s some systemic, say, relief that the Fed or Treasury gives for banks or something like that, investors typically go into gold and crypto when there’s risk, when they fear risk, or they feel devaluation of the dollar or something like that. Right. And so if there were to be programs to support banks, to backstop banks, these sorts of things, from the position that they’re in right now, I believe it would really turn a lot of that gold trade off. And so it’s quite possible that stuff’s happening because it is a concern with the government here and the government especially as we enter a tight credit cycle, they have to make sure that banks are stable. This is a real concern for them. If there isn’t confidence in the banking system, then you’ll see this domino effect of banks to firms and so on. That’s just one scenario, but it’s possible that some sort of federal backstopping of banks for a temporary period, I’ll say additional backstopping of banks will put the risk on trade back on.
BFM
All right, Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
BFM
I like what Tony said about the debt ceiling issue in the US. Right? That’s all political showmanship, and I guess here in Malaysia we’ll call it Wayang Kulit. Right.
BFM
So once all these shenanigans are over with the politicians who agree at Capitol Hill, and they’ll just continue spending their respective programs.
BFM
It’s nice to know that our politicians all over the world are just in it.
BFM
They’re the same. They have the same in a way. It doesn’t reflect well, though, and I think it does cause volatility, at least in the eyes of observers, regardless of what happens there. We’ll be watching that space, but let’s take our attention over to some of the earnings that have crossed our table. We have Walt Disney Company. They reported revenue and profit that were in line with Wall Street’s projections. The company did also reduce streaming losses by $400 million from the previous quarter. And this is thanks to price increases that helped offset the loss of 4 million subscribers at Disney Plus. So, on the one hand, they narrowed their losses, but they also lost subscribers.
BFM
So on the TV side of the business, disney’s direct to consumer segment, which includes the flagship Disney Plus streaming service, posted a loss of $659,000,000. However, this was significantly lower than the Street’s expectations. Right. The company plans to expand its streaming offerings by the end of the year with a new app that combines Disney Plus and Hulu.
BFM
And on the theme park site and Parks Experiences and Products division remains a bright spot for Disney. This saw a 17% increase in revenue to $7.7 billion during the most recent quarter. But I have to point out as well, disney movies, especially with their new live action version of their animation movies, haven’t been actually doing well. The Little Mermaid is coming out on May 26, and there’ll be something interesting to see if you just glean through social media.
BFM
It’s a bit controversial.
BFM
It is controversial, to say the least.
BFM
I think a lot of the live action films have been the subject of controversy in some form or another. I tend to be of the old school.
BFM
Yeah, me too.
BFM
Feeling. I mean, I like the cartoons. I’ll stick with the cartoons, thanks. But they’re trying to court a whole generation of younger viewers with their live action films. So I guess time will tell whether everything will pay off. Don’t forget that Disney is facing a number of challenges ahead. They’ve got their federal lawsuit against Florida Governor Ron DeSantis, and the writer strike is still ongoing. That is going to have an effect on some of the production that is stalled, such as with Blade and also the Disney Plus Star Wars series. Andor so all these things to watch when it comes to Disney Plus. We are coming up to 720 in the morning. We’re taking a quick break, but we’ll come back with more top stories in the newspapers and portals. Stay tuned. BFM 89.9 you have been listening to.
BFM
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This “Futures Edge Ep 55 : The AI Episode with Tony Nash” video discussion is originally published on https://youtu.be/ugFUvz_DYEY
Transcript
Jim
Welcome to the Future Edge podcast. I’m Jim Iuorio, always the assistant to nobody, executive producer, brains behind the operation, and co-host Bob. Today we have our friend, Tony Nash, the founder of the AI firm Complete Intelligence, who also has a kick-ass podcast called The Week Ahead, on which I was fortunate enough to be a guest and really enjoyed the conversation. You generally host it with Tracy and Albert, correct?
Tony
Yeah, quite a lot. We do it with Tracy and Albert about two-thirds of the time. Thank you for that, by the way. I really appreciate it, Jim.
Jim
Oh, no, I loved it. First of all, let’s get the nonsense out of the way. What’s your favorite drink?
Tony
Oh, coffee.
Jim
No, you don’t drink?
Bob
Not what he meant.
Tony
No, coffee. Coffee is it. I write about coffee, post about coffee, and coffee is my favorite drink.
Bob
Well, you are a fucking nerd dude, by the way.
Jim
Coffee. I think if I had to quit either coffee or booze, I think booze would be harder, but I think coffee would be damn close. I think coffee is something that I rely on.
Bob
Coffee would be much harder for me.
Jim
Yeah. How many cups of coffee do you drink a day, Tony?
Tony
Only four.
Jim
Okay, I drink about four cups a day too. I was about to ask you what your favorite show that you have watched recently was. Have you guys seen the show Shrinking with Harrison Ford and Jason Siegel?
Tony
No.
Jim
That’s your assignment for the week. It’s pretty damn funny. Harrison Ford in a comedic role was really interesting, and he killed it, I thought.
Bob
Can I throw something out here before Tony tells us his favorite show? Is it a cliche that I love Sylvester Stallone and Tulsa King? Is that a cliche?
Jim
Yeah, it’s a dago cliche.
Bob
I’m stereotyping myself, right? Is that what I’m doing?
Jim
No doubt about it.
Bob
The mobster now in Tulsa, Oklahoma. I’m down here in Southwest Florida, pretty.
Jim
Tony, before you answer the question, speaking of mobsters, you should read the Bill O’Reilly book, Killing the Mob, particularly if you’re from Chicago. It was amazing. Did you read it, Tony?
Tony
No, I did not. But it sounds great. We should read it.
Bob
Shut up and let him answer questions.
Tony
Staying on The Mob, the best show that I’ve seen over the past year. It was on Paramount Plus, and it’s about the making of The Godfather. I can’t remember the…
Bob
Offer. It’s called The Offer.
Tony
The Offer. Yeah. It was fantastic. Really?
Jim
I want to watch that. Particularly because they talk in Bill O’Reilly’s book, they talk a lot about Sidney Korsak, who was basically the biggest guy in the Mob. He was in LA and he was the Mob accountant for all the outfits. So he was the fixer, they call them. And he’s the one who hired David Evans, who made the Godfather. Right. The Mafia hated it at first, and then they loved it after it was made, which is so funny, and started adopting some of the traditions that were brought back from the movie The Godfather.
Tony
They talked through some of that in this movie about how they negotiated with the mob to allow the movie to be made. It was really well done, actually, if…
Bob
You guys want to read something good called Family Secrets. Okay, Jimmy, since you’re a restaurateur and you’re both very familiar with the Chicagoland area, you will recognize 90% of the restaurants and places that they mentioned in that book because it’s all about the Chicago outfit and the Calabrese brothers and the Kid and all that. It’s fantastic.
Jim
What was the name of the mob joint in Norwich or Norwood Park? It was an Italian restaurant that was all like my buddy who worked for the state’s attorney, they had files on these mob guys and they had like, hangouts and there was all it was the same restaurant. I used to go there occasionally. You guys don’t remember the name of it?
Bob
Talking about Capri or Sicily Restaurant?
Jim
Neither of those sound familiar. If you said it, I’d know it. But it was so funny because now there’s a place in Arlington Heights now which I think is a bunch of mob wannabes. It’s like a bunch of 80-year-olds, maybe they were back in time. But it’s a pretty funny place called Palm Court. We go there, and they have like a guy singing Lou Rawls and Dean Martin and a bunch of old Dagos dancing. It’s fantastic. Okay, let’s get to Tony. By the way, remember Tony’s here we have his brain, his knowledge, and we could talk about mob stuff the whole time. So we had a series of numbers over the last week that are beginning to suggest some level of stagflation. My opinion is that until strength in the labor market is obviously not part of stagflation, is it too early to start worrying about it? Tony, what are your thoughts?
Tony
I think it is. I think you saw some really strong quarterly reports this past week. I think banking is not as bad as people had feared. There’s some strength in tech. You see some of the services company restaurants and even some of the consumer goods companies that are still reporting price hikes. So the price hikes would be inflation. But there is a very small slowdown in their volume, right? And so they’re still growing the top line. And so it’s not as if people can’t buy because they can’t afford it. You’re also seeing service wages, especially in the middle of the country, still be very strong. And so people in the middle of the country are making more money and they’re spending it, right?
And what’s also happening is you saw, I think, eight or 9% rise in Social Security earlier this year. And so you have a bunch of old people, they’re not saving the money, right? They got a 9% pay rise and they’re going out and spending it. So we do have more money coming in. I don’t necessarily see that we’re kind of entering a recession. I do think that we’re going to have a slower Q Two and a slower Q Three. Our forecast indicate that we’ll see kind of a 0.2.3 growth rate in those quarters, and then we’ll take back up in Q Four. So we have a lot of economists talk about, well, we’re going to have a recession in the back half. I don’t think it’s the back half. I think it’s the middle part of the year that we should really worry about. And when we get to the last quarter, I think we’re going to be in much better shape. Okay.
Jim
Now, the stock market seems to be relatively buoyant. I point to the fact $7 trillion was injected into the economy over a relatively short amount of time. But there’s something to me that looks kind of ominous. If you look at the Russell compared to the Nasdaq, or let’s just say if you did equal weighted in the SP, it be down for the year. But cap weighted is up for the year, meaning the big companies, people are buying their shares. To me, it almost kind of smacks a flight to quality. Do you think that I’m reading too much into it or no, no, I.
Tony
Don’t necessarily think you’re like flight to quality right now, as people are spooked, it’s a natural thing to do, right. And you have the Fed start to dial down on or start to increase the rate of QT up until the banking scare a month ago. And so some of that money was being taken off the table and other things. So I think as that money is taken off the table, people want to move to quality because the smaller companies they’re just not sure about. But I think what we’re seeing in some of these earnings that there are some companies that are actually doing okay. People have kind of figured some of this stuff out. They’re getting more efficient with staff, especially in tech. They’re getting more efficient with staff, and they’re really learning how to pass their costs on to their customers.
Bob
Bobby Gany yeah, so I want to push back a little bit on the stack inflation thing, which you might have guessed. Tony Tweeted today, jimmy, we tagged you in. I don’t know if you got a chance to see it, but Tony said with the strong earnings, are we still talking about stagflation? And I jumped in with a yup, and I said, okay, let’s talk about that. And then, Jimmy, I actually have a question for you because one of our members on the Path Trading partners, YouTube, asked a question and asked me to ask you. So when you give me an opportunity to do that, I will. So I maintain that stagflation is the worst possible economic situation. Some people, like Charles Payne from Fox News thinks deflation is worse than stagflation. I can understand that argument. It’s it’s kind of tougher to get out of. The stagflation argument to me, sort of plays out like this. We had GDP go from 2.6% to 1.1%. So there is a slowing economy, still growth, actually still respectable versus the last 20 years. Right, guys? But versus the last 20 years, I wouldn’t call it generally respectable. And then you had both PCE numbers surprised to the upside in some forms.
Now, I would argue, and Jimmy’s been correct about this, the supply chain part of the inflation has virtually gone away, but the wage part is still biting. And that’s where we saw in the ECI numbers, the employment cost index numbers, also surprised to the upside. So my fear is this. And one of the things I said to our members is, you guys stop spending because the economy is slowing down. I really don’t want stagflation to happen. Okay? Quit our service. Do whatever you have to do. Just stop spending.
Jim
Right?
Bob
Well, some of the things like wage salesman I know, I’m awful. I am awful at this shit. Anyway, some of the things in terms of the wage growth and the increased Social Security stuff, to me smack a little bit inflationary. And it bothers me because when you look at the labor numbers, which is what a lot of economists and analysts and guys we had on the show point to as a strong part of the economy, every Fed hike cycle has ended in a recession except 1994. And every single time after the recession started, the unemployment rate rose by a lot and fast. But it was after the recession started. So my fear is that I think where we get lost in the argument is are we in a recession now? No. Are we going into one?
Jim
I think yes.
Bob
So where am I crazy?
Tony
Well, I don’t think you’re necessarily crazy. I think there is not 0% chance of a recession. There is not 0% chance of stagulation. So everything I say is just kind of and we all have recency bias whenever we analyze generally. Right. I think what Jim said is we had $7 trillion or $8 trillion pushed into markets very quickly. Right, okay.
Tony
And so that’s the sugar high that we saw, particularly in 21. Right. And we kind of weaned off it a little bit in 22. And right now we’re facing those hard trade-offs. Right.
But with that much money pushed into the market and the supply chain constraints we saw from COVID we saw goods inflation just a rocket ship. Right, right.
And then what happened? People couldn’t necessarily buy all the stuff they wanted to buy, so they demanded higher wages. So there’s a delay between goods inflation and wage inflation. Right.
And so now that goods inflation has generally subsided, wage inflation, there’s going to be a lag because we saw Walmart give that big raise to all their staff in January and then that kind of cascaded to everyone else. And we saw Social Security and all these different wage rises come around. It’s going to take a while for that to cascade through. And then will we completely normalize? It depends on how we normalize is normalizing back to 2019 levels? Unfortunately, I don’t think we’re going to do that right now without serious economic damage. So I think all we’re looking for is some sort of balance point where we have this kind of sugar in the economy that has kind of diffused through the economy. Right.
It’s had all of its effects on the cost of goods and wages. And now that it’s diffused through the economy, we have to start figuring how to normalize how do we take it out? Right.
And we have to be really careful about that with higher wages. So will wages get high to a point where people start coming into the economy, people who haven’t been in the economy for a while? Right.
Because in 2020 we saw a lot of people check out of the economy, but we also have baby boomers who are retiring at an accelerating rate. So we may have a point where we have people who are out for either voluntary reasons or maybe they’re not necessarily don’t necessarily have the best skills or something like that. We may see people come back into the economy that might put wage downward pressure on wages, but I think it’s going to be maybe a year before we start to see that we’ve really got to see wages continue to rise.
Bob
I think you definitely make a compelling case that this could be different, that there could be a soft landing built in the year. I hadn’t thought of it from a perspective, even though Jimmy has said it over and over again, but I tune them out. I hadn’t thought of it from a perspective of, okay, so the sugar high is out now and there’s actually time to normalize the rate rises with the price rises where it can actually come down. And by the way, to your point, Tony, people who say there’s never been a soft landing are wrong. I mean, 1994, the Fed did engineer, quote, unquote, a soft landing.
Tony
It did happen, yeah. But I think it’s going to be a hard landing for some people. For those people who’ve been laid off from tech companies or whatever. Right. It’s already been a hard landing for them. Right. And so it just depends on how broad that hard landing is. Right.
And so can those guys get other jobs? Maybe. Is it going to be 300 grand a year checking in for 2 hours a day? Probably not. But will they be able to get other jobs that’ll soften their landing? So it depends on how broad that landing is.
I remember in the early 90s there was a recession that nobody else talks about anymore. Okay, my parents were both laid off from their job. Actually, they weren’t laid off from their job. They were at a company, they both worked for the same company, where every three months, they had to reinterview for their same job. Okay.
And so they had kind of this rolling rehiring within the company. It was terrifying for them, right, that you couldn’t make long-term plans. But at that point, in that recession, employment in places like New Jersey was 18%. Okay, so again, we talk about the 2000 recession, we talk about 2008, but 1991 was really bad, and they had to reinterview every three months, and that lasted, I think, two years or something like that.
That’s not there right now. Like, everyone is kind of complaining about having to end work from home or whatever, and complaining about not getting whatever kind of benefits with their job, rather than just having a job, period, right. So we still have so much workforce demand, so much lack of supply, that I don’t think we’re anywhere near how difficult things were in 1991. And until we get there, I really don’t think we see a really hard landing. And again, it’s a relative kind of perception. The smallest hiccup will be portrayed in media as a hard landing because somebody’s having a hard day, and it sucks. It sucks for them. And I’m really sorry that people have to go through this, but it’s all relative, and we really haven’t seen a hard landing for at least a decade. I mean, 2009 would be the last time.
Jim
So tell me this, Tony, because you look at and I like what you’re saying here. I’m not convinced of soft landing yet, but I like the word you’re saying. The money supply, m two money supply, there’s been four times in history, independent, this one, that the m two money supply contracted by more than 2%. Three of those times were a depression. 18, 70, 19, 20, 19, 29. The fourth time, I think it was a panic of some sort in like the 1890s. Right now, our m two money supply has come down two and a half percent, more than two and a half percent. Why is it different than them? Actually, I have an answer. I’m curious what your answer is, because I have an answer, too, that it is different. Why do you think it’s different?
Tony
I think it’s different because a lot of that was one-time government spending. And so people understood that PPP was one time. People understood a lot of these payouts were kind of one-time payouts. And so it’s like, okay, let’s back up the truck, take the handout. We took PPE in my company, and I’m not embarrassed about it at all, because not even more, we took the PPP, and we knew that it was one time. Right.
And so you take it, you survive, and then you live to continue the business or continue a household or whatever. So I think people are mentally prepared for the fact that this cut government spending was a one-time deal. Right.
Jim
That’s my opinion as well, by the way, too. I thought the fact that we inject the 7 trillion, 8 trillion, whatever we’re talking about here, to expect a little bit of a mean reversion, I think is relatively reasonable. So I do genuinely believe it’s different this time and again. I’m not saying I think it’s soft landing because I do think there’s a bifurcation in the economic condition. I think there was a big wealth transfer of that money we were talking about. A lot of it went to the higher end. I think people are struggling on the lower end. Tyson Foods just announced a 10% reduction of workforce. So this is different now than tech companies that were bloated and hired a shit ton of people over two years. Tyson Foods didn’t hire people. So I like what you’re saying about the soft landing. You can justify those things and still see those layoffs coming and think it’s going to be okay.
Tony
Yeah, I think, well, here’s where it’s going to be different, okay? It’s going to be different over the next two years with white-collar jobs. Okay?
And this is where kind of you roll your eyes and go, okay, he’s going to start talking about AI. But I think we will really start to see a reduction of white-collar jobs because of technology. It’s not going to happen immediately. It started a little bit, but I think we don’t really start to get traction on there for probably two years. Okay, so when we see Tyson Foods cut jobs, that’s different. Maybe part of that is automation, part of that is demand induced, but we’ll really start to see your finance people, your accounting people, your marketing people, people who say make really good money are educated, but let’s say they live their whole day or a good portion of their day in Excel. Anything that any of us do in Excel can be automated. Anything. And so these jobs where people went to school, say in the 90s or 2000s and got an MBA, got a corporate job, all that stuff, what we’re going to start seeing in two, three years time is initially there will be an augmentation of their jobs using AI, ML, whatever you want to call it. Over time, what management and boards will realize is that a lot of the time that these white-collar professionals are spending is on relatively mundane tasks, okay? And so they can’t necessarily be outsourced somewhere because it’s sensitive information. But they’re repeatable mundane tasks and ask anybody who’s white collar if they’re really honest with you, they’ll tell you a good portion of their job is kind of routine, boring stuff, right? Not just in meetings on the phone. It’s kind of reports they have to make or data they have to analyze or things that have to be written or whatever, right? And so we’ll start to see some of those structural adjustments in white-collar jobs in a couple of years’ time. That’s when we’ll hear a lot of screaming and a lot of pain from that class of worker that we haven’t really heard from in a couple of decades at least. Right.
But going back to kind of the softish landing, of course, there will be turbulence. Right.
But I think it’s possible that as long as that supercore inflation is persistent, the Fed doesn’t really have a choice. They have to continue pulling back because that supercore inflation is hitting everybody because these are services jobs, right? So everyone is hit by services jobs inflation. People who go to Walmart to shop, people who go to McDonald’s. McDonald’s pushed their price by almost 9%, I think, over the last quarter or last year. I mean, everyone’s hit by this stuff, and it’s largely on job costs and wages. Everyone is hit. And so the Fed has to move on it. So we’ll see more investment in productivity. We’ll see more focus on productivity because people just can’t continue to be pushed on price. We’re not there yet, but people just can’t continue to be pushed on price. It’s just unaffordable at some point.
Jim
Okay, you’ve mentioned AI before, too, and I like a lot of things you’re saying. Another that one company, that MCD company, I’m not allowed to talk about it. My daughter may or may not be an exec at that company, but whatever. Let’s not talk about that. Anyway, so how far are we from AI, where we could have seamlessly had one of us on this call be AI-generated and people won’t know? Are we years away from that, or no?
Tony
Oh, no, I don’t think we’re far from that. Let me give you a very tangible example of what we do. And for your watch. I don’t intend this to be a sales pitch, but this just can help you understand what’s possible. Okay?
So we do really boring stuff at Complete Intelligence. We’re an AI company. And so what we do is we help companies to augment and automate their budgeting process and their forecasting process. Okay?
So we have a customer. Their annual revenue is about $12 billion. They have, on an annual basis, about 400 people working on their annual budget. Okay?
It takes them three months, so that takes them three months to do. It cost them maybe six million dollars, five to six million dollars to go through that process. Okay?
When we worked with that company, the first time we did their budget, it took us 48 hours. We were 0.3% off of what those 400 people took three months to do. Okay?
Now, a year later, we circled back with the finance executive who we worked with, and he said, you guys absolutely nailed our budget number. At the beginning of the year, not only did you nail it. You did it for six layers deep within the general ledger. Okay.
The people that they have working on their budget do it three layers deep within their general ledger. Okay.
And these are relatively highly paid white-collar professionals who are doing this stuff. Okay.
There are 400 of them. I’m not saying we would replace them, but we certainly take a huge load off of their workload for three months of the year. Right.
And so can they do different activities? Can they do with fewer people, those sorts of things? Right.
And so these are the kind of things it’s not super sexy, it’s not Palantir doing CIA stuff or whatever. It’s really mundane stuff that really impacts the bottom line and headcount of a company. Right.
And so this is where I think the really interesting stuff in AI is, is ChatGPT interesting? Yeah, absolutely. I don’t have to hire an entry-level analyst anymore and have them take six months to come up to speed. Right.
I can actually go into ChatGPT and have something written up that it would take four to six months for an entry-level analyst to learn how to write. It takes me 15 minutes. Right.
So these things but just to let you know, kind of when I talk about white collar jobs and AI starting to be augmented or automated, I’m talking about the really boring stuff that, quite honestly, people really don’t like to do. Right.
And so we help those things to those roles to be much more productive, and we help those executives to get a much more accurate view on their business.
Bob
So, first of all, Tony, you’re a pretty ethical, honorable guy. I was on your podcast as well, and you couldn’t have been nicer or kinder. So I want you to tell people how they can get a hold of you. We have some pretty high net-worth listeners.
Tony
Okay.
Bob
You’re not on here to pitch your company. I want you to tell people in the middle of the podcast rather than the end where people might have kind of drifted off already since Jim and I are so freaking boring, where you can.
Jim
I’m excited as hell.
Bob
He never moves from that position in the chair. He literally sits like this.
Tony
He’s got a long day.
Bob
He’s actually AI. He’s not a real person. Tell me where they can reach you, Tony, before I ask you the question.
Tony
Sure. I’m on Twitter. @TonyNashnerd. T-O-N-Y-N-A-S-H nerd. My email tn@completeintel.com so I own the nerd thing. I’m not afraid of it. I get it. But, yeah, contact me. I’m happy to talk to any of your viewers.
Bob
Okay, so another thing, by the way, right now, being a nerd is cool, so don’t act like you’re admitting something that’s embarrassing right now.
Jim
It’s a flex. It’s not enough.
Bob
Yeah. All of a sudden it’s a flex these days where I don’t know who even made it a flex. I used to flex in front of nerds and try and scare them off.
Jim
It’s the Big bang theory.
Bob
That’s what it is. Big bang theory.
Jim
A long way in normalizing, which I think was very interesting. Yeah.
Jim
Big bang culture thing.
Bob
So here’s my question, Tony. Good. So I actually have very recently and I don’t think there’s any problem with me talking about this I used to have to call an attorney for every little thing, and it got so ungodly expensive that I started just kind of looking for templates online. And in simple agreements, I would just write my own and take my chances, because in a worst-case scenario with a client, like we do in Pat trading partners, we do like, boutique analysis for smaller firms. So I would just write simple documents and be like, what’s the worst that could happen? They don’t pay me for a month. It’s probably still less than I would add to pay a lawyer to write up this document. I recently used Chat GPT 4.0 to create an easement between myself and my neighbor so that our fences could connect. That goes into perpetuity. So number one, are certain white collar managers going to be slightly timid to hire you? Because obviously some of the mundane tasks they do make them valuable? And number two, do you think there’s a larger economic effect on white collar jobs? For example, my easement that I’m not going to be paying a lawyer for that comes with AI.
Tony
Yeah, absolutely. We see this all the time. When people realize what we can do. There’s kind of that holy crap moment where people realize, oh, my gosh, we have 400 people working on this stuff and these guys can process it in 48 hours. When people realize that, it’s impressive, but it’s kind of scary, right? When I think about how are you using a lawyer? You’re using a lawyer to manage risk, right? And so why do you call a lawyer? Because you want someone else you can call and say, hey, that guy told me that this was the right thing to do. So you’re basically outsourcing your risk to them, right, so that they can create a document for you. In what we do, when a CFO walks out of their office and they see 50 people or 100 people, those people are effectively managing risk for them, right? And so nobody really thinks of AI in terms of risk management, but actually those people are managing risk for a CFO. Okay?
And so when we do what we do, we’re automating that risk element and we’re making it much more consistent. Right.
How risky is it for you to forecast your budget for the next year? Right?
If you get it wrong and you give the street the wrong number or the wrong guidance or whatever, it can be really bad. Right.
But for everything we do and ChatGPT and other AI tools work the same way. We have a statistical basis for everything we do. So everything we do, we tell our customers our error rates for every single line item for every month. Okay?
And we actually have a publicly facing platform called CI Futures that people can subscribe to to see the S&P 500 stock forecasts. They can see equity markets, they can see currency forecasts, they can see commodity forecasts, and they can see global economics. It’s $20 a month. So really cheap, right? But we disclose our error rates on that platform so that people can understand the risk associated with what we do. Right?
And so I think we have a more educated society. You have more confidence in using GPT 4.0 because you’re confident in the underlying tech, the broad based adoption of it, and the kind of statistical, although you’re probably not too aware of it, the statistical underpinnings of it, right. Because all it’s doing is, all GPT is doing is going out and doing a bunch of, say, Google searches all at one time, looking at the incidence of a topic or a word, and then putting that together for you on an incidence basis. Right?
So you want a legal agreement for an easement, and it goes out and says, okay, legal agreement for easement. What are the words that are used in those agreements? How are they structured? And what’s the incidence of the order of that stuff? And it’s summarizing it up and it’s putting it together for you. Right?
And so that’s just a statistical analysis that is reducing your risk because it’s looking at what most people do, right? What do most of those agreements say? And so what we’re doing when we forecast, say, a supply chain cost or an expense budget or a revenue budget or something, is we’re looking at a lot of data. We do trillions of calculations to do this stuff. And we’re telling people, you know what, statistically this is likely what’s going to happen in that very deep line item within your budget in September of 2023, something like that. Right.
And so they have a higher degree of confidence in what we’re doing. It’s faster, higher degree of confidence, and it’s better. Right.
And your question about people who are nervous about it yes, they are. And you know what, I’m an investor in companies, in publicly traded companies. Do I want to know that they hire 5000 people in their finance team and it could be taken down to, I don’t know, 3500? I would want to know that. Right.
And so is there inefficiency, in these finance teams or marketing or other teams? Absolutely. Right. So that’s what this technology is doing. It’s allowing investors to look at the companies they invest in and go, hey, company A, why are you not looking at this technology to deploy in your company to actually make your workers more productive? That’s really what it’s all about.
Bob
You’re the boogeyman to a lot of middle managers, Tony. Go ahead, Jimmy.
Jim
Absolutely. Can we flip back to markets for a second? Because I do want to talk about the buoyancy in the stock market, particularly the last couple of days. I’m having a difficult time understanding it, particularly after we saw that the GDP number, which, like we said earlier, showed both slowing economy and inflation, that’s being persistent. What do you make of it? Why do you think the market is going higher?
Tony
We had nominal GDP at 7-8%. I don’t remember the exact number, but you have a nominal GDP number that is the same as it’s been for the past couple of years with all of the government stimulus. Okay. Real GDP is different, of course, because it factors in inflation. Right?
And so we have inflation at five to six or whatever. So that’s discounted to one point whatever percent it came out at. Right. You’re still growing nominally at the same rate you’ve been with all of the COVID stimulus. I think that’s part of the reason that people are looking at this economy and going, yeah, we really thought that pullback was coming. We really thought the economy was slowing. But in fact, statistically, on a nominal basis, it’s still running at the same rate. If we factor in inflation, then it pulls down, then it looks like it’s slowing. Right.
So as you deconstruct the data that come out, it’s not really bad. And if you look at that nominal run rate and you say, okay, if we could get inflation down, then that nominal rate actually looks really good. Right.
And so it’s possible I’m not saying this is probable, because it’s not in our outlook, but it’s possible that if the Fed can actually get inflation down while keeping nominal growth, maybe not at seven plus, but let’s say it’s at five plus, then we’re in amazing shape as an economy, right? Is that likely? Again, I don’t think it’s likely, but it’s possible. Again, here’s what I always say for people with economic data, okay? And if you see me on Twitter, I always say, Wait for the revision. Always wait for the revision. Because this first release that you see is really a bunch of government statisticians doing a best guess, with very little data, actually. Okay?
And so when we see retail sales, when we see CPI, when we see GDP, whatever, we see it’s government statisticians basically doing a sample of a sample of a sample and getting a quick number out to us to give us an indication of what’s actually happening in markets. But there’s three or four revisions to a bunch of these numbers, so we won’t know for two years what the GDP number really was.
Jim
That’s a good takeaway, by the way, from the show, because I think that’s interesting and something I don’t think about quite enough.
Tony
Nobody does.
Jim
Yeah, nobody does. Right. When you look at how gold, bitcoin, silver have performed so well over the last few months. Put a fine point on that. How do you explain it?
Tony
I think it’s just a function of the dollar coming down. I think it’s kind of the reverse of that. I think it’s people pushing a recession narrative and wanting to kind of look for a safe asset. And so that’s really, I think, all it is. I don’t hate gold. I don’t love gold. I’ve been in and out of gold over the past year or so. Not on a regular basis, but I’m not in it now. But I think it’s useful when it’s useful, but it’s not something that I’m looking at. I did have a crypto investment a couple of years ago. I was in doge for like, six weeks, and I got in at got out at $0.76. So I did okay on that. But it’s a bigger suckers market in crypto, I believe. It’s not money. It’s an asset. Okay?
Crypto is an asset. It’s not money. And so I saw it as an opportunistic asset. I got in and out. I didn’t make a huge amount of money. I just wanted to see what could happen. Did a lot better than I thought it would do. And I’m just not a huge crypto fan because I just don’t see where it’s going, especially when we’re talking about central bank digital currencies and other things. It’s just what are you going to do? If every investor in the US. Can’t fight the fed in their trading every day, then how is a cryptocurrency going to fight the fed with a central bank digital currency?
Jim
Bobby, do you agree with that? Do you think that there’s no use case scenario for crypto going forward?
Bob
What bothers me about crypto, I don’t think there’s no use case, but I agree when Tony says it’s not money. I think it could become money, but to me it’s very strange because nothing is technically money unless we get rid of income taxes, because the only thing that gives the fiat currency value is that it’s an acceptable form of payment for your taxes. Otherwise nobody would trade that paper. Why would anybody hold just pieces of paper that’s backed by nothing? Which is and Jimmy and I, you and I have talked about this both privately. And last week I did a WGN radio show where the guy said to me, bitcoin is favored by drug dealers. And I said to him, I was in studio down on Michigan avenue, and he said, favored by drug dealers? I said, pull out whatever you got in your pocket. He pulled out a bunch of cash. I go, so is that and so is that not backed by anything except that you can pay your taxes with it. You can’t pay your taxes with bitcoin. But I’ve had private arguments with people. I wish I could remember this woman’s name.
I watched this young woman who’s a Bitcoin fan, and she was arguing with Peter Schiff, right? And she said, Bitcoin is money. And he said, no, it’s not. And she said, yes, it is. No, it’s not. And she says, yes, it is. Because I pay people Bitcoin and they pay me in Bitcoin. And I said, okay, that’s fine, fair enough. But I just gave a 15 year old kid a pair of Jordans I don’t wear anymore to come and cut up a bunch of boxes for me and put them into my recycle bin. That doesn’t make Michael Jordan’s shoes money, just that he was willing to accept it to do the work. Right.
What makes it money is the ability for everyone. Or I shouldn’t say the ability the willingness for, let’s just call it the majority of the population to accept it in a transaction. We’re nowhere near that.
Tony
Yeah. I want to be clear. I don’t hate crypto. I don’t think it’s bad or anything. I’m not making a moral judgment call on it.
Bob
I didn’t take it that way, Tony.
Tony
And if people want to invest in it, I really don’t care. But it’s changing the topic just a little bit. I’ll make an analogy. It’s like Argentina using the CNY for trade settlement, right? All they’re going to do is two currency transactions when they pay in CNY, okay? Because everything in trade is either in dollars or euros, everything in international markets. So they may pay in CNY, but really they’re going to be checking what the dollar value of that trade transaction is, right? You can say the same thing for crypto. Does your brain work in I’m going to go buy a banana in crypto? No, you think of it in dollars, right. Or euros or whatever, right? And so, sure, you may transact in crypto, but it’s just circumvention of the dollar system because that’s what the ultimate nomination of that value is, right? And so until we start thinking about things valued in crypto, right, until I can go to the gas station and they say, oh, this is however many Bitcoin or whatever, I have no idea what their numbering scheme is. I just don’t see it as currency. I spent most of my life in Asia.
I worked with a lot of currencies like Sri Lankan Rupee and Vietnam dong and all that kind of stuff. Those are currencies. They’re nationally traded. They’re traded every day, all that stuff. So you don’t have to be the US dollar or the Euro or CNY to be a currency. There are minor currencies all around the world.
Jim
So why don’t we outline something real quick? Because I got a question to you about the de dollarization, but I want it to be known that I can hear the name of the Vietnam currency now and not snicker and laugh. This is growth.
Tony
Congratulations.
Jim
Okay, very good. So the de dollarization thing, I did think that it was a big mistake what the Russia freezing assets kind of weaponizing the financial system. I still am of the camp that I’m not particularly concerned of any sort of global de dollarization thing. I mean, the reserves are still there just does not seem to be a suitable substitution. Are you on the same camp or.
Tony
Are you concerned China still pegs the CNY to the dollar? Every day. They announce every day what their USD CNY conversion rate is. Every day. Okay, so does that tell you that there’s de dollarization? Whenever people talk about CNY, I would say you do realize that the PBOC literally uses numerology to decide their interest rate. They literally use numerology.
Jim
Okay, what does that mean?
Tony
It means it has to be a pleasing number that ends in an eight. Okay.
I’m not kidding. It’s not the only factor, but it is one of their considerations. And so you can’t have a central bank that is setting their rates, whether it’s a repo rate or an interest rate or whatever, using numerology. I mean, that’s just not credible. And if people would look into the inner workings of the PBOC, they would understand that CNY is just not a credible international currency. Regardless of what Xi Jinping wants you to believe, and regardless of what all of the kind of anti dollar people want you to believe, it’s just not practical. The other part is this Belt and Road initiative, which is kind of more of a joke than a reality. It’s all nominated in dollars. It’s all nominated in dollars. A Chinese national program now, okay, so the part outside of China I’ll say is all nominated in dollars. So if there really was a de dollarization underway, why would the Chinese government be funding trillions of dollars of infrastructure in US. Dollars and not in CNY. Those loan agreements, those equity agreements, they’re all in USD.
Jim
By the way, I agree with you 100%. I am not particularly concerned about de dollarization, but I will going to push back for a tiny bit on something. Six, seven years ago, I would have said the notion of a dollar collapsing was a .1 percentage. And I think that’s changed and I think now it’s a 1% possibility, which I think is ridiculous for us to be making these moves. Poor stewardship of the currency, what we did in Russia, it’s at least something to be concerned about. Or you have no concern over it.
Tony
What’s the alternative? Like we’re all going to trust in the ECB? I’m sorry, it’s not the currency we want, but it’s the currency we have. Right? Right.
So if you look at the Fed’s behavior, the central bank itself matters a lot. It matters more than the currency itself. Okay?
And so if you look at the Fed’s behavior, they have meetings, they have notes, they respond to media and so on and so forth. Are they as transparent as we want them to be? No. Do they do the things we want them to do? No. Do they have a bunch of bureaucrats working with them? Yes, but when you look at other central banks on a relative basis, it’s actually better. Right, right. Sorry. Go ahead.
Jim
I tweeted something about a week ago, and I said, we don’t have to have a good currency. We can even have a shitty currency. We just have to have the best currency. Right? That’s what you’re saying, right?
Tony
Right.
Bob
It’s that best house on a bad block thing.
Tony
And I don’t say this to be dismissive at all. I take the dollar as the kind of US holder of value very seriously, but I’m just not sure what that other vehicle would be. Look at the structure of the European economy. It can’t be the euro. Right?
Look at the UK and some of the policy decisions they’ve made. It can’t be the pound. Look at China. I was talking with Michael Ncolettos about a month ago, and he was saying M two in China, the amount of M two issued in China is something like three times the value of their GDP. Okay?
Now, M two in the US is something like 90% of the value of GDP. Right?
So China has three to four times the amount of money in circulation compared to GDP when we make it relative to the US. Right.
So how can that be seen as a credible currency? They just are not managing the number of fund tickets that’s in their economy. Right.
And then again, when you look at Japan, look at their central bank policies, look at their demographic structure, the Japanese yen is just not a credible currency. So I just want to understand, first of all, what is a real currency that we can use? Not crypto, which is an asset. Okay.
And what is a central bank that we can trust, that has sufficient money in circulation, that is usable? And I think I don’t know of another solution right now. Again, as an American, I don’t want the dollar debased. I don’t want it abused. I don’t want all that stuff. I want solid money policy. Right.
Have we had it for a while? Actually, we haven’t. Right.
And so things need to change, and we need a more responsible, certainly more responsible spending in DC. And we need a more responsible Fed. But I think on a relative basis, it’s kind of the best we got.
Bob
So, Tony, I want to say this correctly. We have a responsible Fed, relatively speaking. Is that correct?
Jim
You guys agree with me, by the way.
Bob
I know again, that’s the worst house. What is that? The best house in the bed? I don’t know. They saw, but they’re the best one out there. So from a perspective of that, you think a soft landing is possible? Stop me anywhere where I misrepresent you. Okay? You think a soft landing is possible? Am I wrong on that?
Tony
I’ll say uncomfortably soft landing because we’re going to have chop at points, right? So, yeah, we can have an uncomfortably soft landing.
Bob
So I have come around to the idea that the Fed might be cutting rates. I don’t think this year the CME Fed watch tool has the first rate cut pricing in September if things are okay. So if things are okay, why the hell would they do that? And this is why. There seems to be this sort of mismatch between what people are trading and I want to stress the equity markets is not GDP, the economy is not stocks. Right. There’s been several times in history well, not several, but there have been times in history, 73, 74 in the US. Where GDP was strong and stocks were negative. Same thing with Japan in the 90s. They had good GDP, but their stock market couldn’t recover. So these things are detached. They’re not as correlated as people think. But if we actually have good earnings, which no one can argue, we had good tech earnings. Right. We have terrible market breadth still, but we had good tech earnings. May continue next week. We have 709 companies reporting next week.
Tony
With market exxon Chevron reporting really well. There are some parts of the economy that are doing corporate green. Corporate green.
Jim
Go on, Bob.
Bob
Why would they cut rates? Why would they if things are going to be semi? Okay, and Jimmy, this leads me I want to ask Tony respond to that, and then I have to get this question out because it was asked of me. You said in the last podcast that you think we’re going to have a nontraditional recession. What does that mean? So go ahead, Tony.
Tony
Okay, so I’ll just parrot what somebody said to me earlier today. They said bond investors are the worst investors over the last three years. Okay.
Bob
Small data set.
Tony
Sure. What’s that?
Bob
Small data set, right? Relatively speaking, yeah.
Tony
But they haven’t performed very well at all over the last three years. Right. And it’s largely bond investors who are looking at that because it affects their bonds. There is this persistent desire among bond investors to have a recession that’s just baked into the pessimism of being a bond investor, I guess. Right. And I think if we look at earnings, certainly, especially those reported over last week, but also when we have the globally systemic banks report a week and a half ago, those were not bad earnings at all. Right.
And are they telling us that we’re entering a recession? I just don’t see it. So I think September, like, again, I don’t want a recession by September, but I actually don’t think there will be a recession by September. I actually think that things are persistently strong again, because we have that strong nominal GDP growth with relatively high inflation. So if we had stagflation, we would have high inflation and a smaller GDP number than inflation. Right.
Tony
But I think with where we are now. I don’t see us kind of on the precipice going into Q Two, going to Q Three and saying, oh gosh, we’re going to fall off a cliff, right. I just don’t see that. And again, I think part of it is because people saw those government payments as one time or limited time, right? And people have kind of buckled down and said, this is over. We have to figure something else out, and they’ve just continued to spend.
Jim
So, Bobby, to answer the question that the viewer asked, and it kind of relates to what Tony just said too, about the payments, I think that there’s a massive change in our economic condition. I think there was massive wealth transferred from the bottom 60% to the upper 20%. I think those two people still have a shit ton of money. I ride the L. I ride public transportation in Chicago. The amount of people who appear to be living on the fringes has exploded to me, even when it was going on, I was saying to people, no, you’re going to get two $400 checks, and I’m going to get massive appreciation in the four homes I own and the stock market portfolios I own. This is favoring me, not you. And I think that that’s happened in a big, big way, and I think we don’t have the tools to calibrate and figure out we can do Ginny coefficients to measure wealth inequality, but I think there’s this massive wealth inequality, and I think the government then gets involved and tries to support the lower end. Makes it even worse. It’s a yoke, it’s not a gift. And I think we’re in kind of a fucked up way right now in our economic condition. Do either of you guys agree with me on that?
Tony
Tony, I don’t disagree with you, but when we see things like supercore inflation rising, that tells me that those wages for service workers are rising in a persistent manner. And I don’t think that’s all bad. Right.
I think that’s helping the folks at Walmart, the folks in the service sector, get better wages. And they’re not getting it through government regulation. They’re getting it through the market working. Right.
And so employers have realized they have to pay more. It’s not some local city government saying you have to pay $20 an hour or whatever. It’s the market working. Does it take a long time? It does, and that sucks, but the market is working. People who work at the lower end are getting more money. People who work in the middle are getting more money, and people in the middle of the US. Who have typically lagged pay rises on the coasts are getting more money now. Okay. And so we’re seeing that makes me feel better.
Jim
Yeah.
Tony
So markets are working again. Markets sometimes take a long time to work. Right. When it comes to pay, I do.
Jim
Worry that the government is going to see what I have identified, like I’m coming in to fix it. And we all know what happens when they fix it. Bobby, do you got another question before we go?
Bob
Well, no, I just want to add on to what you guys are talking about here. What you just said, Jimmy, and what Tony explained just as clearly is why I fear Stagflation so much, why I actually said to the people who pay us, stop paying us for a little while. Because in my opinion, by the way, if you join, if you hire complete intelligence, we will not be getting paid for that. So don’t worry, there’s no discount code here that’s coming out after the show. No, but what the government will do to try and fix Stagflation is the Fed ill advisedly, so fears a recession more than inflation? I think they should fear inflation more because inflation hurts the poor and it’s a tax on the poor. And the government, because they’ll be in election close by, will send out checks to help people deal with the inflation that’s still there while the economy is slowing down, which will just spark an even worse situation. So my fear is that if we get Stagflation, not only is Stagflation bad in and of itself, but the government’s response, and including the Fed in, that will be awful for 2025 and 2026, and for the lower middle class and the poor, it will be hell on earth.
If they do that in the next five or six years, they’ll crush people. And that’s my biggest fear about Stagflation, why I hope I’m wrong about it coming?
Tony
Well, we see what’s happening in Europe with the payment for energy.
Jim
So here, both of you, lightning round real quick. I’m sorry, Tony, I didn’t mean to talk over you. I just have one quick question. I do it all the time. Yeah, it’s a shortcut thing. Can we have stagflation if we don’t have high energy prices? Tony?
Tony
Yeah, of course. We can have all kinds of we can have high food prices and have stagflation. So I think having high energy prices would certainly make it easier. But sure, high food prices or high rents or high housing, that sort of thing, I mean, major components. Yeah, absolutely. We could do that.
Bob
My answer is very similar. Yes. But it would be a hell of a lot harder with low energy. Yes.
Jim
I just think of the cost push and the energy embargoes made it a lot easier. Let’s wrap it. Unless anyone’s got something real pressing that’s going to set everyone on their ear. Guys. Good.
Tony
Thank you so much.
Jim
Yes, it’s a lot of fun. I love to do a deep dive, particularly get to know you a little bit better. This is awesome. And thanks for plugging your AI. I think that’s a really cool thing. Have a great weekend. What are you doing tonight?
Tony
Tonight I’m just resting. It has been a dramatic week. So I’m just going to shut it down tonight as a Nerd dragons. That’s right.
Jim
I’m going to a figure skating competition that’s going to be 3 hours long for my niece. She’s not even my daughter. She’s not even blood to me. She’s my wife’s niece. And I’m going to a three goddamn hour figure skating competition.
Bob
You saved yourself by saying you’re going for a relative, so that way take.
Tony
It for the team. Jim exactly. Dads and uncles everywhere. I appreciate you.
Jim
She’s one of my favorite nieces, even though she’s not blood to me. But I really like her, so I’m glad to support her.
In the latest episode of The Week Ahead, Tony Nash is joined by Michael Nicoletos, Tracy Shuchart, and Albert Marko. The panel first explores Russia’s recent announcement that it would use CNY for trade settlement outside of the US and Europe. Michael Nicoletos explains that this move could be viable, but it would depend on whether all countries would accept the terms of trade.
Albert Marko believes that the recent rate hike was the right thing to do and predicted that the Fed would raise rates twice more. He also criticizes the lack of depth in the economics department of some central banks, citing examples from the RBNZ and the ECB.
The panel also analyzes the energy market and predicted when we might see an uptrend. Tracy Shuchart updates the chart and pointed out that crude seemed to break the down cycle a bit, leading to a good week for the commodity. The team answers a viewer’s question about the possibility of energy prices remaining low for a long time and offered their perspectives on the matter.
Finally, the panel discusses what they expected for the Week Ahead. Michael Nicoletos predicts that the energy market would remain volatile, and Tracy Shuchart believes that the focus would be on the stock market, particularly the Nasdaq. Albert Marko highlights the importance of watching the inflation data and suggests that investors should keep an eye on the bond market.
Key themes: 1. Russia ❤️ $CNY. Why? 2. Where does the Fed (and other central banks) go from here? 3. When will we see an uptrend in energy?
This is the 58th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, and welcome to The Week Ahead. I’m Tony Nash and today we’re joined by Michael Nicoletos. Michael is the founder and CEO of DeFi Advisors based in Athens. We’re also joined by Tracy Shuchart of Hilltower Resource Advisors and Albert Marko. Guys, thanks so much for joining us. We have a couple of key themes and I was really in questioning mood when I put these together. The first one is around Russia and the CNY. There was an announcement this week. My question really is why? What’s the point of that? Next is where does the Fed go from here? And really where do all central banks go from here, but mainly the Fed, ECB. Albert is going to lead on that and I know Michael has some views on that as well. That’ll be really exciting to talk through. And then we’ll talk to Tracy about energy. For the first part of this week, we saw energy on an uptrend and we’ve seen a little bit of turbulence on Friday. So when do we expect to see an uptrend in energy? So again, guys, thanks for joining us. Michael, I really appreciate you taking the time from Athens to get involved with us today. Thanks so much.
Michael
Thank you. Happy to be here. Great, love to talk to you guys.
Tony
Great. So first, Michael, I know that you know a lot about China and you follow a lot of their economic activity. And I saw you commenting on this Russia announcement about CNY. Of course, they announced that they’ll use CNY for trade settlement outside of the US and Europe, which is Latin America, Africa and Asia is what they said in their announcement. So that’s about 37% of Russia’s exports. So I put a little chart together. I used UN ComTrade data.
This is 2021 data, which is the latest data that UN ComTrade has. So if they’re really doing that, Latin America is 2% of Russia’s trade, Africa is 3% of Russia’s trade. China is 14%. Okay? And so I guess is all of their trade with China settled in CNY? I seriously doubt it. And then Asia is rest of Asia is 18%. And of that about 1%, just under 1% is Taiwan. So I seriously doubt Taiwan would settle in CNY. But what’s obvious from looking at this chart is Europe is more than half of Russia’s trade. So it’s not as if this is necessarily a massive bold announcement that everything is going to be in CNY from here on out.
Tony
It really is just kind of putting a stake in the ground saying I think it’s almost a best efforts thing. So I guess is this viable? That’s really the question. And Michael, you put out this thought-provoking tweet.
You said if that were the case, China would have no issues running out of USDs. Let’s take that on and help me understand why is China trying to do this and what is the US dollar question that you have around this arrangement?
Michael
Well, first of all, again, thank you for having me. It’s great to be here. Now we need to segregate two things: wanting to do something and being able to do something. It’s clear that a lot of countries which are highly dependent on the US dollar for trading would rather be on something else and not be dependent on the dollar. We saw what happened with Russian FX Reserve when the war started. So clearly this was a warning shot or a lot of countries said we could be next if we go into a fight with the US. So clearly there is a tendency and China wants this to happen as soon as possible. Now, for this to happen, there are a lot of things that need to happen first. I’ll give just an anecdotal example because we get all this news flow and all these headlines where one signs an agreement with another and then two people or two prime ministers come up and say we’re going to do it, and everyone takes it for granted, especially on Twitter. It’s either a fanatic from one side or a fanatic from the other side. So again, I agree with everyone who is afraid of this happening in the sense that a lot of people are saying that the end of the dollar is close and that everyone’s going to go to something different.
Michael
I agree there is the willingness. I’m not sure this can happen soon, and I don’t think it can happen without some conflict occurring somewhere. So an example is that in 2018, Iran signed an agreement with China to sell oil in Yuan. Still, after four or five years, the volumes are ridiculously low. So again, there are agreements, but in order to enforce them and in order for them to happen, they take a lot more time than one would want. So Russia had no option. So because of the sanctions, they still sell to Europe, a few things, but they’re trying to outweigh it by selling more to China. And China and Russia are trying to make these agreements where they will be settling in Rubles or in Yuan. And they try to make these agreements. They want to expand them to other countries as well. However, you see, for example, India. India doesn’t want to settle in Yuan or doesn’t want to settle in ruble. They want to settle in Dirhams, which is back to the dollar. So you get all this information and the data, at least until now, does not support that there is a threat to the dollar.
Michael
There is a threat to the dollar in terms of willingness. There is no threat to the dollar in terms of data which says that this is going to happen tomorrow. So I think that this will eventually happen, but I don’t think it will happen soon. I think until it happens, we’re going to see a few episodes. And these episodes are not straightforward, how they will evolve.
Michael
Now, regarding China and its macro, the reason I’m saying what I’m saying and I’m saying that China needs dollars. China has been dependent, first of all, on its real estate, which was like 30% of its GDP. We saw what happened to the real estate. The second leg was it was highly dependent on exports. There’s a global slowdown. So these exports will have some issues. And now, how has China managed to keep this economy running? I’ll give you a few metrics to understand. The US is an economy which is like 26, I think 26 trillion of GDP. And if I’m not mistaken, its M2 is around 21 trillion. In China, the GDP is around 17 trillion, all in dollars. Okay? And M2 is $40 trillion. 40. Four, zero. So what does that mean?
Michael
The China government prints money. Prints money. Prints money. Because there are capital controls, the balloon gets bigger and bigger and bigger, but the money can’t leave, or it can leave for selected few, and I’ll explain how it leaves. And for the rest, because our capital control, the money can’t leave. So it stays in. But this is in one. Some try to buy gold, some try to invoice over invoice to Hong Kong and take it out of Hong Kong. But when the disparity is so big, clearly there is a problem. There’s an NPL problem. Chinese banks are like four times China’s GDP.
Tony
Sorry, NPL is non performing loans.
Michael
Non performing loans. Sorry. Sometimes they’re non performing. You cannot have an M2 of 40 trillion and a GDP of 17 trillion and not have non performing loans. Chinese banking system.
Tony
Sorry, I just want to go back and I don’t mean to interrupt you, but I just want to make sure that people understand. China has currency in circulation of $40 trillion, and they have a GDP of $17 trillion. Whereas the US has a GDP of what you say 24 trillion. I don’t remember what number you’re… 26 trillion. And they have 21 trillion in circulation. Right. So for all of these people who talk about China being this economic model for other people, why does it matter that their M2 is more than double the size of their economy?
Michael
Let me say something. First of all, let’s put something that the US. Is also the global reserve currency. So everyone in the world wants dollars. It’s not like only the US wants dollars. At this stage, less than 10% of the world wants Yuan. So it’s not like everyone wants to get.
Tony
I think it’s 2.1% of transactions or something like that.
Tracy
2.8%?
Tony
2.8, yeah, transactions.
Michael
Okay. I saw a number which was around 6%. Maybe I’m wrong. Okay. But again, it’s a number which is very small.
Michael
All this money that is in the economy, if Chinese people were given the choice, they would be able to take it out. The economy is growing at a faster pace than its potential. I’ll give you a number. Right now, Chinese banks are more than 50% of global GDP in terms of size. The US, I think its peak was 32% in 1985 and Japan’s 27% in 1994. So we’ve passed all metrics in terms of the world dominant power or the dominant economy, if you want to put it this way, being a percentage of GDP in terms of banking assets. So the banking assets clearly have a lot of bad debts in there, which we cannot know what they are because the Chinese economy wants the Chinese government wants to control that. Now, there was a special committee put in place this month, I think, in order to oversee the financial situation in China. So I’m pretty sure they’re a bit worried about it. They want to switch from an export oriented economy to a consumption driven economy. But this is still less than 40% of GDP and this takes a lot of time to go like the US is around 70%, but it takes a lot of time to go for 40%, 70%.
Michael
Now, all this money stays in China. They have no option, they can’t do anything. So it’s an issue. And I’ll give you a ratio. If you take their FX reserve, it’s around 3 point something trillion. If you divide FX to M2, it’s around 7%. So if that money were to want if that money wanted to leave, in theory, only 7% can be covered by FX reserves, the fixed reserves of the government. Just to clarify, the Asian tiger crisis in 97, the tigers collapsed when the ratio went below 25%. So they didn’t have that support to keep it up.
Tony
And just be clear for the US that’s 100%, right?
Michael
The US doesn’t have any problems. So this is something that needs to be addressed and I don’t know how they will address it. They try to make all these agreements so that the one becomes a tradable currency and they can invoicing one. So if the Yuan, in theory was to become the global reserve currency tomorrow morning, their debt would become the world’s problem. Now, they haven’t managed to export that, so they need these dollars to keep that balloon, let’s say, from all the area in the balloon to be taken up. They need these FX reserves to keep the money in and they need to build confidence, and they try to build confidence with narratives and not with data. But again, they don’t have a choice right now, in my opinion.
Tony
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https://youtu.be/yYom7Zqezio
Tony
The difference between, say, the onshore and offshore CNY or CNH or whatever, there is a huge difference in perceived value. I would think you can’t change the perceived value of CNY onshore, but offshore, if people are nominating contracts in, say, I’ll say “CNY” in quotes, there is an exchange right there. But again, this M2 issue, which I can’t stress how important that is, I haven’t heard anybody else talking about this. And it’s so critical to understand the fiat value of CNY itself, right, because it’s not limited, and the government because they’re effectively fun tickets with Mao’s face on it.
Tony
Right. And that’s how the PBOC was treating it. And again, when people talk about CNY as a global reserve currency, nobody is looking at the integrity of the PBOC and nobody is looking at how the PBOC manages monetary policy in China.
Michael
I’ll give you anecdotal information. I haven’t checked the number for a few years, but the last time I checked, if you look at the import-export numbers from Hong Kong to China, and you look at the PBOC, and then you go and see the same numbers in the HKMA, you would assume that these four numbers should be the same, not the same. Import should be export and export should be imports. The numbers should be very close. The discrepancy is huge. These numbers do not reconciliate, which means that in some form there is some over invoicing to Hong Kong.
Tony
And you’re not talking about 30%, you’re talking about multiples.
Michael
You’re talking about a lot. It’s ridiculous. So I think if you see the Hong Kong peg has been stable to the upper bound lately because I guess because of the interest rate differential, a lot of money is leaving. So it’s putting pressure on Hong Kong as well. So it remains to be seen what happens there.
Tony
So let me go to Tracy. Tracy, in terms of Russia using CNY, okay? And I know you look at a lot of their energy exports, and of course there’s all this official dumb around sanctions and stuff, but what’s your kind of guess on Russia using either USD or proxy USD, Dirhams or something else as currencies for collecting on energy exports or commodity exports more broadly?
Tracy
Well, first, I think that they prefer dollars no matter what this kind of China saying we want to trade a Yuan. And Russia said, okay, but that was a suggestion. That does not mean that it’s necessarily happening. But what is really interesting is earlier this week, on Monday, Russia laid out conditions for extending the grain, the black seed grain deal, right? Because it was supposed to be for 90 days, but they cut it to 60 days because they’re trying to use that as leverage. And one of the things that they are trying to use as a leverage is they will extend the deal or they’ll give or the other part is they’ll give African countries just free grain instead of selling it. But one of the big conditions for that was for the removal of some Western sanction, specifically to get them back on Swift. And so if that happens, forget it. Everything’s going to be all the trade will be all euros and dollars.
Tony
I thought Swift was terrible and everybody wanted on Swift.
Tracy
I just thought it was important to point out because if they get back on Swift, obviously that’s going to make trading in dollars easy for everything, all commodities across the board.
Tony
Right. And so that goes back to what Michael said initially about kind of these guys really want dollars and all this other stuff. There’s the official dumb of the prime ministers meeting each other, right. And then there’s the factual activities they undertake based on the reality of their position in the world economy. Right. What are your thoughts here?
Albert
I agree with Michael and Tracy to talk about the reserve currency. Switching from the dollar to the Yuan is a joke, to be honest with you. You do have some people in other countries in the Middle East and China and whatnot talking about the death of the dollar and actual serious tone. But anyone with even like a shred of financial backing and insight knows that it’s just an impossible thing. From what it sounds like, it’s more of like a barter system. But that introduces even bigger problems. I mean, you can’t scale it up. There’s no standardization. How do you value things to begin with?
Tony
That’s it.
Albert
Valuing goods and services without using the dollar right now is just an impossibility. And on top of that, you have the political problems that come along with it. I mean, like the Saudis, they want dollars for their oil. They need defense assistance. The Greeks needed US defense assistance. The Turks, as much as they want to make noise again, they’re reliant on the US and NATO for defense and whatnot. These components not just financially, what Michael talked about and decided much more eloquently than I would ever would, but there’s also political components that you just can’t get around in the near term.
Tony
But even if they had a barter system, they would reference the price in dollars, right?
Albert
Well, yeah.
Tony
10 billion.
Tracy
Your chocolate is back to iran did that when they were first sanctioned over a decade ago. They were trading oil for gold, but it was still referencing dollars.
Albert
On top of that, you run the risk of hyperinflation eliminating dollars from your FX reserves and starting to trade away from the dollar. You’re going to end up in a hyperinflation event.
Tony
Right.
Michael
Can I say something? Can I say something? About all these points? I agree with all these points. There’s one more thing. Let’s say you trade in rubles and you trade in Yuan, okay? It means that you’re going to keep FX reserves in rubles or in Yuan. So you feel more comfortable keeping a currency from an authoritarian regime than holding the US. Dollar, which is fully liquid, fully tradable, and anyone in the street will take it at a split of a second. You need many years of track record to build that trust. There are a lot of bad things about the dollar. We agree that I don’t think anyone will say that it’s a perfect mechanism, but right now, it’s very functional, it’s very liquid. And if you want to keep your reserves in US Treasuries, you can sell them at the split of a second. You don’t have any issues with that. If you have Yuan, you’re going to do what? You’re going to buy Chinese government bonds? And how will you sell them if the PBOC calls you and says, it’s not a good idea to sell your Chinese bonds this week? We would prefer you didn’t.
Tony
Bet on the central bank, right? If you’re holding rubles, you’re betting that the Russian central bank is trustworthy. If you’re holding CNY, you’re betting that the Chinese center. So what central banks are out there that you could potentially trust? You have the Fed, you have the ECB, you have BOJ, right? Those are really the only three that are visible enough that have the scale and transparency to manage a currency. And look what the BOJ has done since Abenomics. And on and on and on. Do you trust the ECB? I don’t know. And it becomes, do you trust the ECB or the Fed more? I mean, sorry, but I just don’t trust the ECB.
Michael
I don’t trust ECB. But it’s relative. I mean, you don’t have a problem keeping Euros. Maybe it’s not your preferred choice, but you don’t lose your sleep on holding Euros. Let me put it at this stage.
Tony
That’s exactly right. That’s exactly right. Okay, guys, this is great. Let’s move on to the next thing, because I think we all agreed violently here, but I think we’re going to not agree on the next one, which I’m really excited about. So let’s talk about central banks. And where does the Fed and where do other central banks go from here? So, of course, we saw the Fed raise this week. I think it was the right thing to do. Albert, I know you think it’s the right thing to do. Markets have been up and down since then. And Albert, you’ve said that you expect the Fed to raise two more times, and I want to talk about kind of what’s behind that assertion. And then we get silly statements like this one from the RBNZ in New Zealand, where the chief economist basically says, if inflation expectations don’t fall, we’ll be forced to do more regarding interest rates.
Well, of course. Why wouldn’t you do that. So can you walk us through a little bit, kind of just very quick, because there have been thousands of hours of Fed analysis this week. But why do you think the Fed is going to raise two more times?
Albert
Supercore is trending up and it continues to trend up. Services are on fire. Real estate numbers have been on fire. There’s no slowdown in reality. I mean, even the layoffs have been slow. They’ve come from the tech sector. They haven’t come from construction or any other blue collar jobs at the moment. So until we see that, the economy is going to be red hot and it’s a problem for the Fed, inflation overall.
Tony
Okay, so play devil’s advocate here. Banking crisis, Fed had to bail out banks, all this other stuff. So why isn’t the Fed saying, let’s pause on the banking crisis worries?
Albert
Because banks are fully liquid. The big banks have no problem whatsoever. Some of these smaller banks that have no risk protocols are getting exposed. The tech heavy investments are getting exposed. Everyone knows that higher rates hurts the tech sector the most. And those banks were at fault. They didn’t hedge properly.
Tony
Now you have duration risk. I just want to be clear. I just want to make sure that people understand. You’re not saying that they failed necessarily because they’re tech, but they failed because of duration risk and then their tech depositors took their money out. Right?
Albert
Absolutely. But the banking system overall is not really at risk. They’re just shaking out some of the weaker players. But that was inevitable as interest rates have risen. A lot of the problems stem from the Fed and them guaranteeing four, five, 6% deposits, while the banks only do 1%. They can’t compete with that.
Tony
Right. Michael, I know that you think this wasn’t the right action. So what’s your perspective?
Michael
Well, let me say something first. I believe that it was a mistake, and I’ll say why it was a mistake. I think it’s a mistake when you raise interest rates as a central bank and the banks follow by raising rates on the loan side and on the deposit side, what do you do? You make debt more expensive and then you make people because you have, let’s say, a 5% interest rate on your bank, you create an opportunity cost so people want to save. So you reduce liquidity from the deposit side, and also you reduce loan demand because it’s more expensive, and that creates a slowdown. What happened now, because we had ten years of QE, everyone forgot that there was an interest rate on the deposit side. So the Fed, MDCB and all the central banks raised the interest rate. So the loan side adjusted. That became more expensive, but the deposit side stayed zero at 1%. I don’t know where this is in the US. But it’s really low. At some point, people started waking up when it arrived at 4% and they suddenly started saying, okay, I don’t have any interest on my deposit.
Michael
Let me put my money in the money market fund. How much does it give? Three, four, 5%? I don’t know. It’s a much higher rate. So I think I saw somewhere today that around 5 trillion have gone into money market funds. The numbers close to that. So when you take your money out of the deposit and you take it to a money market fund, this is the equivalent of a bank run for the bank that you’re taking the money, it’s a deposit living. It might not feel like a bank run, but on the balance sheet of a bank, it’s a bank run. So this started happening, and again, because of what you mentioned, they had invested in Treasuries and the duration risk was a mismatch. They didn’t do some of them at least hadn’t done appropriate hedging. They started losing money and they started selling this bond at a loss, although they had them at the Healthy Maturity portfolio where you don’t need to take a mark to market loss. And suddenly both sides of the balance sheet were screwed. Let me put it this way. So a few banks started going under. Now, I know that the central bank has come up and I know a lot of people come up.
Michael
And I do agree that there’s no systemic risk. And I mean that I don’t see a cascade of people losing their deposits. But nevertheless, people feel uncomfortable and try to do something about it. Either take them more money market funds or take their money from a regional bank, if they can. To JP morgan or one of the big guys. This creates a big problem for the economy. Yes, there are some signs which show that the economy is still robust. But I think a lot of leading indicators suggest that the economy is slowing down and most of the metrics coming from the inflation side have collapsed. Yes, core CPI is still high and it’s a lagging indicator, so it will take time for it to come down. But I think that given the stress we saw this week and why do I say that? Because we look at the US as a closed system. It’s not. When you raise interest rates as the Fed and you are the global reserve currency, you create a global credit crunch. You saw that last week. The Fed had come out with swap lines for everyone. You saw today that foreign banks borrowed 60 billion in liquidity, the ones that didn’t have a swap line.
Michael
And we see today Deutsche Bank being in the headlines and Commerce Bank being in the gate. So you might think that the US system is okay, but it creates a domino effect, which we’re starting to see. We saw Credit Suisse going under in a deal, which was not, I’d say, what we would think of. I believe that that deal in combination with the high rates is probably the root of the problem in the sense that they destroyed the capital structure, they wiped out all the 80 ones without wiping out the equity holders. Which means now that in Europe everyone’s wondering if my 81 is of any value. And that creates another uncertainty in combination with the higher interest rates and the stress that has started to build up. I think we’ve passed the moment where, okay, it could be debatable if they did right or if they did wrong. The US bond market is saying that it was wrong. It was a mistake. The two years at 370. And so the bond market went from the one side and the Fed went on the other side.
Tony
Why? The two year at 270 is important.
Michael
373, 70. Sorry, yeah. Three seven. Because if in two years you’re getting 3.7% and the Fed fund rate is five someone, it means that someone is buying a two year bond getting much less. Which means what? It means that the market is saying rate cuts are coming soon. So the market is saying there’s no way we can keep it this way. And the Fed is saying the opposite. Historically speaking, the bond market has been right. If you take it into context, it could be this time that they are wrong. It feels to me, at least from the stress I look in global markets and not in US. Only, that things are getting a bit out of hand. And having a bank like Credit Suisse go under, which is a big bank, and having all the central banks come in together on a Sunday night to give up swap lines, it means that the stress in the system, it’s much bigger than with yeah, but Sunday night.
Tony
Is the best time to get swap lines. Okay, so you talk about European banks, but we had Mueller from the ECB out this week saying, I wouldn’t worry about a financial crisis in Europe.
So we have ECB guys out there going, yeah, Credit Suisse happened and we know Deutsche is an issue, but I wouldn’t worry about that in Europe. So I think we’re seeing statements from Yellen, the Fed, the ECB, other guys who are saying, no, there’s nothing to see here, but then we see things kind of blowing up all over the place. Right, and then we have a question especially specifically for you, Michael, from a viewer who said, I’d like Michael’s thoughts on the EU, particularly banks, pensions and future growth prospects. So can you talk us through? How do these banking issues in Europe flow through to European pensions?
Michael
First of all, let’s say something. We’re talking about the US and.
Albert
Duration.
Michael
Risk on the bond losses. Let’s remind everyone that at the peak of QE 18 1818 trillion worth of bonds had negative yield, and these were mostly Europe and Asia. So pension funds and banks in Europe which are forced to buy these bonds were buying bonds. With a negative yield. So they were losing on day one these bonds from -50 basis bonds have gone to two and 3%, the losses on these are much greater and pension funds will have much bigger issues than the ones that have in the US we were talking about a pension crisis in the US. But the European one is pretty bad too. Just look at in France, they raised this week the year that you take your pension from 62 years old to 64 and the country is burning to the ground. Now, you understand that it’s 62 to 64. It’s not like they made 62 to 70 years old. So it’s very delicate. And the situation in Europe, given the negative bonds, given the interest rate hikes and given one more thing in Europe, given that Europe doesn’t have the dollar and it has the Euro was mostly a supply driven issue.
Michael
It means that we were importing oil and energy from Russia and from everywhere and all these commodities were priced in dollars. So as a Europe tell, the price of these commodities were more expensive. So inflation was a supply driven problem. I think there’s a report, I think from the San Francisco Fed two thirds of the inflation was supply driven in Europe. So when inflation is supply driven and you raise rates to stop it, you’re using the wrong medicine to stop the problem. You need to crash the economy in order for this to stop. This is not really efficient. Now, in the meantime, you have yields going higher and now the yields that we see on our screen on Bloomberg or anywhere are not the yield real yields because the ECB is in and tries to contain the spreads. If you left the market low, I’m pretty sure the spreads would be much, much wider. And you have the new thing which came up this week when the Swiss National Bank decided that tier one, additional tier ones would be written off and equity holder, an equity holder would be saved. Now, imagine what happened. You probably saw what happened this week, all the 80 ones in Europe got smashed because everyone says I don’t trust this instrument.
Michael
I don’t know. Yes, central bankers will come out.
Tony
These are the cocoa bonds that came out in I think, 2013, right?
Michael
Yeah, there are a few of them, yeah, but it’s a cocoa, it’s contingent convertible. It means that they’re convertible be converted to equity if something happens. Let me put it as simple as it is, but these are supposed to be wiped out before the equity. So the question is what prevents for something else similar to happen again, the ECB came out, BoE came out, they said this is not accepted. But the fear and the is now everywhere. So you have a combination of factors. You have a factor that this ECB has been raising rates when I don’t think it’s a proper mechanism to address inflation in europe, they’ve created a slowdown. If you see Germany’s numbers and everywhere’s numbers in Europe, the economy is slowing down fast. You have a discussion on the capital structure of lending, which is very critical in the way companies and banks go and borrow themselves and all this at the same time and when the US. Is draining liquidity from the global system. I think the situation in Europe is very tough. Again, after 2008, I don’t think we have a systemic risk on our hands and the risks never materialize in the same place.
Michael
But I think things are about to get tough and it’s going to be much worse before it gets any better.
Tony
So what I would offer back, and I think everything you’re saying is valid and Albert Tracy, let me know if you want to think about this, but in the US. We have a presidential election next year. There is almost no way that we will see the US economy crash in the next 24 months because Janet Yellen won’t let that happen. And so we may see issues in Europe and we may see Europe and the rest of the world suffer based on US interest rate and monetary policy. But the US. Will do everything, the current administration will do everything they can to keep the US. From crashing in that time. And I’m not just saying this because they’re Democrats, Republicans would do the same thing to keep the economy afloat in the year before an election.
Albert
Albert, what do you think about that? It depends on what is happening specifically with debt ceiling, right? I mean, Janet Yellen and the Biden administration would gladly let the economy sink, the market sink anyways if they could blame it on escape both the GOP on the debt ceiling not getting hyped. So that’s definitely something you need to watch over the next six months because it is campaign fundraising season and they can’t really agitate their voters all that much, to be honest with you. Certainly the political component is going to be high over the next twelve months.
Tony
Okay, great. Let’s move on. Thank you for that, guys. Let’s move on to energy.
Michael
Can I say something?
Tony
Absolutely. Yes, please.
Michael
What appears to be happening right now, at least in my eyes, is that the Fed is using interest rates to attack inflation and it’s using the balance sheet to give liquidity. So these two do not go in the same direction at this point. The question is if they can do this for a long time. It doesn’t feel to me that they can. But at least right now they’re giving liquidity on the one side and they’re raising rates on the other side. I’m not sure they can do this for us.
Albert
We’ve actually talked about that at length here. But it’s not the Fed. It’s really the treasury. Sterilizing QT They’re coordinating.
Michael
They’re coordinating.
Albert
Of course they coordinate for the most part, but sometimes in the last six months or the last twelve months. Powell and Yellen have been at odds with each other in policy. So this is a lot of the reasons why the markets has just been topsy turbine. Don’t understand which way it’s going because you have conflicting policy and agendas from the treasury and the Fed.
Michael
So you feel it’s conflicting or do you think it’s coordinating? They’re doing it on purpose. That’s what I haven’t figured out yet.
Albert
I think the want to eliminate excess cash in the system is coordinated but I think the policy of how they’re doing that is conflicting and that’s going to be a bigger problem, say second half of this year.
Michael
Okay, sounds logical, but it’s one of these things that pass on me. I don’t know if they’re doing it on purpose or if they do any as you say, because they’re using other tools and they step on each other doing so.
Albert
My rule of thumb is to side with incompetence rather than conspiracy.
Tony
Okay.
Michael
It’s not conspiracy when the Fed chairman talks with the treasury guy?
Albert
No, I am absolutely in your corner on this one. I absolutely believe that they talk and coordinate things for sure. I just think that their agenda at the moment doesn’t line up 100% of the time.
Michael
Okay.
Tony
Very good. Okay, thanks for that guys. Tracy, let’s talk about energy for a while. Up until Friday we had a pretty good week for crude. I thought we were breaking that down cycle a bit, but we’re seeing some chop in energy markets. And so we had a question for you from a viewer saying when do you see oil and natty in a sustainable uptrend?
Tracy
Yeah, nat gas is a whole other issue. I think it’s going to be very difficult really. We’re trading in the range that we’ve been trading in most of the time for the last 20 years or so. That $2, $3 range has been very comfortable for nat gas. We produce a lot of nat gas. Yes, we are building out LNG facilities and yes, we have had problems with freeport and such. I just think that we probably won’t really see a big spike in prices unless we see another energy crisis in Europe, do you know what I’m saying? And then we’re going to have to force to sell even more. So for right now I would kind of get comfortable with nat gas about that range. But if it starts breaking above like 375 or so I would start getting bullish. But for right now, just kind of in that area where it’s been comfortable most of the time. Right. So I think it’s going to be a while for that. So we got to kind of assess the situation in Europe as we get to summer air conditioning use and to next winter if they have a bad winter, I think it’s going to be a few more months at least down the line for natural gas as far as oil is concerned.
Tracy
Brent said about $75 right now, saudi Arabia would like it around 80, 90 range is where they’re really comfortable. I think right now what we’re going to have to get through is we’re going to have to really assess we need more time to assess Russia’s situation. They just extended that 500,000 barrel a day cut out until June. The latest records do show that they actually have cut that much so far in March. So the cut is happening, which also means that they’re experiencing kind of a pullback in demand, even though they have really it’s more on the product end rather than, I should say, rather than the crude oil end, because they have floating storage, they have ships piling up everywhere with product. And so I think that will help clear their excess product a little more. So it’s really on the product end and that we also have to see everybody’s freaking if the Fed again decides to stop raising rates or pause. I think commodities really like that situation just because of the cost of carry and transportation and storage for all these commodities is very expensive. Right.
Tony
Because.
Tracy
You get bank credit lines for that. Right. And so I think that’s putting downward pressure on markets right now. And then obviously fear of recession is kind of kicking in again after the recent bank crisis in the US. And in Europe. And so I really don’t think that we’ll see higher prices. I mean, typically this is the time of year we do start seeing higher prices heading into high summer demand season. But we’ve also been seeing, I think everybody expected China. China demanded to shoot up right away. That’s taking longer than anticipated, which I kind of have been saying that on this show for quite a few months.
Tony
Long time. Exactly.
Tracy
So I think that there’s a lot of factors involved right now. I do think, again, it’s higher for longer. Historically still, prices at $70 is high for oil. The market is crashing by any means, just coming down from geopolitically induced spike last year. I think it’s higher for longer. And definitely I could see prices go into that $110 range, but likely into 2024. Not really this year, obviously, unless something happens. Okay.
Michael
Do you think if the Fed poses or whatever reason, or if they do a rate cut, do you think that commodities will explode or do you think.
Tracy
I think if they cut, commodities would get really excited. I think if they pause, they would get excited. Right. I think we would see a rebound in a lot of these commodities, grains, things of that base metals and industrial metals and oil. But if they start cutting, then I think that they’ll really like that because then they don’t have to throw product at the market because they can’t afford to store it.
Michael
Thank you.
Albert
I’m actually quite bullish for oil in the near term. One of the reasons is I’ve heard through the grapevine that the Chicanery and the futures market and I’m reading that hedge funds and other money managers sold the equivalent of 139,000,000 barrels of oil in futures over seven days a week and a half ago. So, I mean, to me, it’s like they’re almost out of ammo when it comes to suppressing oil at the moment. And any little flare up or anything is probably going to be bullish for oil and probably shoot right back up to 80.
Tony
So what could that be, Albert?
Albert
It could be a natural event. It could be weather, I mean, some kind of economic policy stimulus from Europe coming out there, or even the United States going into, like Tracy was saying, the travel season and whatnot. It could be anything, really. I mean, I think the market is just begging for some kind of bullish signal for them to run it up.
Tony
Okay. And Tracy, if you’re sitting in Europe because energy prices were such a factor in 2022, what are the main things that you’re worried about? Their nat gas storage. Has that been depleted much over the winter?
Tracy
No, it wasn’t depleted. They just had to start injections again because what we are seeing is that this really started in fall of 2021. Everybody kind of forgets that the crisis started before the Ukraine invasion, but what we saw is industry start to shut down, especially industry like smelting and glass blowing and things of that nature that require a lot of energy. Right when nat gas prices started spiking, and that was well before that summer of 2022 spike, they didn’t need to spike much where we saw a lot of those industries shut down. So what we’re seeing now is that since prices have been muted for long enough now, now we are seeing manufacturing and whatnot pick up with the numbers came in overnight for Europe. We’re seeing manufacturing pick up again. We’re starting to see some drawdowns finally in storage. Spain in particular has really ramped up a lot of their industry that had shut down prior. I have to say, natural gas prices are still more expensive than they typically are in Europe. Even at this price, right, they’re still higher than normal. So this is also why we’re not seeing a flurry of activity.
Tracy
As soon as prices came down, you have to realize that relative to where they were, they’re still generally high. But we are seeing, I think people are getting used to kind of this price range for Ttf, which is Dutchnet gas. And so we are seeing in manufacturing and industry pick up again in some of these traditional industries that require a lot of energy. So we’ll have to see, and if that really picks up, companies are going back to where they went to fuel instead of gas. We’re seeing them go back to gas now. And so that’s really what I’m watching on the energy end. Is this just one off, kind of, or does this continue throughout the summer?
Michael
Okay.
Tracy
Sorry.
Tony
And then everybody’s favorite energy secretary, Jennifer Grandholm, had some comments about refilling the Spr this week. Can you fill us in on that? And what does that mean for markets?
Tracy
Basically, she said we’re not filling in the Spr, refilling the Spr anytime soon.
Michael
Sorry.
Tracy
She said a few years, which means a lot more years unless there’s a change of administration and a policy change. But I would say from until the election not going to see an Sbr, which makes sense because they know that if they fill the Spr, what’s going to happen? Oil prices are likely going to go higher, and they can’t afford that going heading into an election year. And so I think that’s really why they kind of pushed that off. That’s kind of what’s going on with that.
Michael
Can they be saying something and doing something else?
Tracy
Yeah, but we would know if they’re actually filling the Spr or not because it’s a public auction.
Tony
Okay, why don’t we just stop calling it the Strategic Petroleum Reserve and just call it the Petroleum Reserve? Nothing strategic about the way they’re using the Tactical Petroleum Reserve.
Tracy
They’re using it as a piggy bank. Right.
Albert
Instead of strategic, you use slush fund, petroleum reserve.
Tony
Right, exactly. Okay, guys, one last question, I guess. What are you looking for in the week ahead? We’ve had a lot of volatility over the past couple of weeks. Michael, what are you looking for in the week ahead?
Michael
I’m focusing on central banks and interest rates. I think the issue will be banks. Again, I think the big stress in the economy is private markets and not public markets. BCS, private equity, all these investments need to do write downs. It will take a bit more time for them to do that. It doesn’t happen that fast. They don’t adjust as fast as public market. I believe that bank we will see that stress mostly on banking stocks. A because the cost of funding goes up, b because the capital structure is put into a discussion. C because they continue to raise interest rates. And there is a stress within, I think, focusing on what happens to the banks and to the two central banks. Again, we’re looking at the same thing, unfortunately, but the problem is not in the same place. But these are the indicators you need to look. I believe that you’re going to see inflation coming down fast. That’s my expectation. Maybe I’m wrong, but if you see inflation coming down, it’ll make the life much easier for central bank. Yeah.
Tony
And for all of us. Do you expect to see, like VCs, for example, some VCs close up because of the cost of funds and a lot of these banking issues, or do you think it really doesn’t impact them much?
Michael
I don’t know if they’re going to close down because it’s a 510 year investment. It depends if they can reinvest or if they have to liquidate. But I think funds that are coming up to their maturity, they need to liquidate or they need to roll over. It’s going to happen at a much lower price than they thought, or they’ll have to wait one or two years more. So I think that stress is going to show up somewhere.
Tony
Tracy, what do you see over the next week?
Tracy
I think it’s type based markets. There’s not really a lot coming up as far as oil is concerned. OPEC meeting is the following week, which we already know they’re going to do nothing. So really, next week, end of month stuff, there’s not a whole lot going on in the commodities world, really newswise next week. So I think probably see the same sideways action.
Tony
Okay, great. Robert, what are you looking for? Let me ask a little bit of a kind of loaded question with that. As springtime is coming in in Ukraine, do we expect that to heat up at all as things warm a bit there?
Albert
Well, yeah, I would say yes. Geopolitically? I think it would be advantageous for Russia to do something to stay face. Absolutely. But for the week ahead, I think the narrative shift I’m watching for the narrative shift of interest rates to banking, like Michael was talking about, I think Yellen is most likely going to come out and try to guarantee 500,000 in deposits and even talk about 750 and get it up there and just get the crisis over and done with. So that’s what I’m looking for.
Michael
Okay.
Tony
Wow. Would that require congressional no, they can use emergency powers. Everything’s. Emergency power is great. Perfect. Okay, thanks, guys. Thank you very much. Really appreciate your time and all your insight, and have a great week ahead.
The CEO of Complete Intelligence, Tony Nash, spoke about the recent financial events in the market. In regards to Meta, Tony mentioned that the worst for Meta’s share price is over, but job cuts are still to come. Although Meta beat revenue estimates, ad impressions rose by 20%, but the price per impression fell by 22%. Tony also discussed the recent Fed interest rate hike by 25 bips, which was expected and the market welcomed it. Tony says there are likely to be at least two more rate hikes before the current tightening cycle is over. He also mentions that the market is excited but will take a closer look at the statement once they have a better understanding.
Tony also mentioned that there is some irrationality in the market because corporate earnings have been disappointing, but investors are bought off by the stock buybacks. The oil companies, Chevron and Exxon, made windfall profits due to cheap oil and fat refining margins. The refineries were operating at 94% capacity and have crack spreads and refining margins way above normal. The oil and gas companies have not invested in infrastructure since 2014, due to governments and media bullying over ESG and cost. The only option for them is to return the profits to shareholders through stock buybacks.
Transcript
BFM
This is a podcast from BFM 89.9, the business station. BFM 89.9. Good morning. You are listening to the morning run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. It is 7:05 A. M. On Thursday the 2 February. We were off yesterday because of Federal Territories Day, but we are back to bring you through the rest of the week. In half an hour, we’re going to discuss the probability of a Trump 2024 presidential run. But as always, let’s kick start the morning with a recap on how global markets closed overnight.
BFM
All US markets ended higher as the market shared the Fed’s 25 basis point rate increase. The dollar was up marginally by 0.2%, S&P 500 up by 1%, and the Nasdaq was up by 2%. Asian markets, they were all in the green. The Nikkie was up by 0.1%. Hang Seng was up by 1%, Shanghai Composite up by 0.9%. The Straits Times Index, it was up by 0.4%. But the FBMKLC, it was closed for Federal Territory Day
BFM
As mentioned and for some insights into what’s moving markets this morning, we’re going to be speaking to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks as always for joining us. Now, markets rallied on the back of the Fed, raising interest rates by 25 bips. But before we get into that, I would want to talk about some of the corporate earnings that we saw overnight, namely coming from Meta. The markets were also quite happy with what came up there, up 18% in after hours trading on the back of better than expected sales, do you think this is the worst over for Meta?
Tony
I do think the worst in terms of share price is over. I don’t think their job cuts are over. I think they’re learning how to operate in this environment. So the last two to three years has been pretty easy for a tech company as people were kind of trapped inside and didn’t really have a lot to do. They looked for things online and ad revenue was great for Meta and ad driven companies, but what we saw in there, although they beat revenue estimates, they beat their guide by almost 3%. They announced a $40 billion share buyback, all that’s great news. And the stocks up almost 20% after hours. But keynote in their earnings release, Ad Impressions rose by 20%. Remember, they’re an ad driven business. Ad Impressions rose by 23%, but price per Impression fell by 22%. So they’re not able to push price. They’ve had to drop their price and raise their volume, which is the opposite of what we’re seeing with a lot of retailers and other firms in the US where they can actually push price in light of and accept lower volumes at higher prices.
BFM
And Tony, as expected, the Fed raise rates by 25 bips. Was this in line with what you were expecting, and are we close to the end of the current tightening cycle?
Tony
Yeah, you know, I think pretty much everyone expected 25. There was a slight chance of 50, but everyone pretty much expected 25. The market welcomed it very happily, and they’re still thinking there’s only one rate rise left. But Chair Powell made it very clear that there are a couple of more rate hikes to get to that level we think is “appropriately restrictive.” Those are his words. So we’re looking for at least two more rate hikes before this is over. And the Fed is also going likely to accelerate their quantitative tightening. Okay? So that’s taking assets off of their balance sheet, which is basically hoovering up the money supply in the US. So the market will get tighter. And do we think we’re at the end? We don’t think we’re at the end. The interest rates aren’t the only tool they can use. So the market’s very excited right now, almost a relief. But I think as they look through his statement in detail, I think they’ll take a second look at expectations.
BFM
So let’s build on that. Tony, so you’re basically saying that because when I look at how markets have performed on a year to date basis, S&P up 7.5%, NASDAQ up 12%, this very much on the back of the Fed, going from a hawk to a dove. Do you think that there is some irrationality there?
Tony
I do, actually, because, you know, if you look at corporate earnings announced so far, they’re very disappointing. And so investors are expecting easy conditions to return so that underwhelming earnings are acceptable. So what did Facebook have to do? Their EPS underwhelmed by like 55%. Okay. They had to issue $40 billion in stock buybacks. So investors are basically bought off, and that’s why the stock is rising. But many other people reporting are not seeing the sales that they expected or didn’t see the sales they expected in Q4. And their costs, meaning the cost of employees and raw materials, these sorts of things. Cost of employees are up. Raw materials are down slightly, definitely year on year, but certainly quarter on quarter, they’re down slightly. But earnings are not what people had hoped for. And that’s the real problem we’re seeing in market. So the earnings picture is not reflecting the valuation picture.
BFM
Okay, so that may be the general picture, but if we zoom into oil companies or the two largest US oil companies, Chevron and Exxon, they made more money in 2022 than ever before, posting record earnings in their latest results. How are these windfall profits achieved? And I guess how sustainable is this going into the new year?
Tony
They were largely achieved on the back of cheap oil through the SPR releases and very fat refining margins. So we’ve had refineries in the US operating at about 94% capacity, which is way over what they’re designed for. And we have crack spreads and refining margins way above what is normal. So those refineries are booking profits at a record pace. And so what do they do? If you’re an oil and gas company and the government keeps bullying you over ESG and Cost, and media keeps bullying you over ESG and Cost, oil and gas companies have not invested in infrastructure in upstream or midstream since at least 2014. So if they invest in that, they’re going to be punished. So what do they do? They return it to shareholders. So you have a $75 billion buyback, because that’s really the only option they have. Otherwise, they’re going to get punished by governments, they’re going to get punished by media, and they’re going to get punished by investors. So they have to do this.
BFM
Okay, but let’s talk about OPEC Plus because there was a meeting, and I want to talk about oil prices, because the OPEC Plus Committee has recommended keeping crude production steady as the oil market awaits clarity. What does this then mean for prices? If I look at WTI, currently $77 a barrel, down 4.5%. What’s your view, Tony?
Tony
Well, I think OPEC is taking a lot of the excitement in markets for the past couple of months has been China opening. Ever since December, right? China is going to open and save us all. And that also hit crude markets. People looking at crude prices and going, oh, gosh, China is going to open. We’re going to see jet fuel and gasoline, petrol and other fuels consumption rise dramatically. Well, the opening has been slower than people expected in December, and it’s still not happening at the pace that many Westerners expected. And so I think OPEC is looking at crude consumption and draws from storage and saying, we just need to hold off on raising our level of production. We’re in a good zone with the price right now. We don’t see a dramatic impact. We expect recessions in the west, and we expect China to come back online slowly. So we’re not going to increase production right now. And so I think that’s the prudent thing to do. If I’m an oil producer, that’s what I’m doing, because I want demand to lead production increases. I want to see that people are going to use what I’m going to pull out of the ground, and I want to see pricing pressure before I agree to drill more.
BFM
Yeah, but, Tony, at the same time, what’s interesting to me is the US. Now, during the summer season, President Biden released its reserves, right? Because pump prices were just really very high. Doesn’t this change the equation? If I’m American now, wouldn’t I want to rebuild my reserves at this current level?
Tony
Well, yes and no. The SPR release was really done to get prices down for the US Midterm Elections. That’s really all it was about. Now the SPR is depleted dramatically, so the buying that will have to happen to refill the SPR will put upward pressure on prices. So I think we have to be really careful. If China is, let’s say in March, they start to come aggressively back online and the US starts buying to refill the SPR in Q2, then that’s an accelerator for crude prices in Q2and Q3. Right. So will Biden then beg OPEC again to raise their output? Maybe. China has already forward bought a lot of its crude supply. So if the US is going to choose to refill the SPR at elevated prices, it’s really not the brightest move.
BFM
Tony, thanks very much for speaking to us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets, commenting there on the earnings report of Apple, if not Apple, I’m sorry, Meta. That just came overnight. Apple is to come. So we’re going to be watching out for that before the week ends.
BFM
Let’s turn our attention, though, to what’s happening over in India, where the Adani saga has really taken attention by storm. Gautam, Adani’s flagship firm, called off its 2.5 billion US dollar share sale in a dramatic reversal yesterday as a route sparked by US short seller Hindenburg. Research criticism wiped out more than $80 billion off the value of the Indian tycoon stocks.
BFM
And the plunge accelerated after Bloomberg News reported credit Suisse Group AG has stopped accepting bonds of Adani’s Group of companies as collateral for margin loans. Adani Enterprises was offering shares to investors at $38 to $40 a share, but the stock closed yesterday at $26.13, which is 31% below the bottom price of the pricing range.
BFM
I think let’s take a bit of a step back, right, in terms of how important Adani is to the Indian economy in its way. They are like one of the major producers of energy, and then we’re talking about cement. They are such a huge conglomerate and their fortunes have been really tied to the rise of Nadira Modi. Right. Because the two, the Adani and Modi, are supposedly very close. And so when Adani came back with this 413 page objection, the allegations are all untrue. He also Adani took the step of saying that you’re attacking India as a nation. And then Hindenburg said, look, this has nothing to do with nationalism. Right. You’re just a company where we are not comfortable with your numbers. And then it’s this back and forth. And what was amazing was the share sale was almost going to happen. And the economists reported this is allegedly that the five largest and richest families in India were going to bail this company out by participating in the share sale, but now it’s not happening.
BFM
That’s right. I mean, that came as a big surprise, the fact that they managed to get buyers who were willing to buy these shares at such a high price compared to what the market was having. So, as mentioned, you said, Jensen, they would be buying it at a loss. But yeah, Adani said that the company’s board felt that going ahead with this share issue would not be morally correct because of that big gap in what the prices are being sold for now.
BFM
Yeah, but it was really amazing. You will never get a scenario similar in, let’s say, in America, where the richest families bail out another rich family. Right. So that’s what the economists point out, that doing business in India is very, very different. But the share price, of course, down 45% on a year to date basis.
BFM
I really wonder what they can do to build up to the levels that they were before. I mean, maybe it’s not going to happen again. So something to watch, for sure. This has taken everyone, really by surprise. The twists and turns in the saga at 718 in the morning. We’re going to take a quick break and we’ll come back with more top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9.
BFM
You have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
In this video, our first-time guest Jim Iuorio leads the discussion on the topic of whether markets are too good for the Fed. With speculation around CPI, layoffs, and interest rates, the question of the Fed’s direction and potential pivots later in the year is raised.
Jim also delves into the recent success of the metals market and offers insight into where the market may go in the future. He also offers his thoughts on the potential impact on equities if the S&P hits his target of 4060.
Next, Tracy takes the lead in discussing cracks and Freeport. She explains the significance of rising crack spreads and its impact on the market. She also shares her insights on the recent opening of the Freeport facility and its effect on US natural gas prices.
Albert then discusses the risks associated with Ukraine’s new hardware. He addresses the classification of “direct involvement” and its potential impact on European countries. He also offers insight into what actions Russia may take to further complicate the situation and the potential impact on markets such as wheat.
Finally, the team gives their expectations for the upcoming Fed meeting and what to look for in the week ahead.
This is the 51st episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, and welcome to the Week Ahead. I’m Tony Nash and today we’re joined by Jim Urio. Jim is at TJM Institutional and he’s with the Futuresedge podcast. Or is it on the Futuresddge podcast, right? Yes. Also with Albert Marko and Tracy Shuchart with Hightower Resources Advisors.
We’ve got a couple of key themes. Obviously, it’s the week before the Fed and we’ve had a really good week in markets. So one of our key themes is our market is too good for the Fed. Second I think Tracy is going to talk about crack spreads and Freeport and what’s happening there. And then we’re going to look at the risk with Ukraine’s new hardware. There’s been a lot of talk about tanks going to Ukraine this week, so we’re going to talk about some geopolitical risks with Albert.
So Jim, first, thanks again for joining us and watching some of your comments through the week with markets breaking through some of the key levels that you were looking at, the Fed’s direction is obviously a big factor in markets and there’s a lot of conjecture around CPI, layoffs, rates going lower or pause or pivot or whatever you want to call it, and people saying the Fed may do 25 and then pause.
What’s your view on that? You’ve been obviously speaking about this several times this week. So I’m curious, what’s your view after seeing a whole week, where do you think we go from here?
Jim
Well, I’ve been somewhat more of a bull, I think, than most over the last few months. And I’m not trying to take a victory lap or anything, it’s just a fact. And my reasoning was that every one of us knows that these Fed rate hikes have a huge lag period before we feel the efficacy. Fed knows that too. As stupid as the Fed is, this is something that’s so fundamental, but I think they genuinely do know that. So now we’re starting to see things happen. We saw a pretty good PCE report today. CPI has been trending lower too. The only things in CPI that are stubbornly high, consistently, are food and energy, which are the two things that are least rate sensitive. The yield curve is still wildly inverted, signaling to them that they still are in a financially tight market. I believe that the Fed is getting close to having some sort of gentler language. Now, whether they go 25 basis points this time and then 25 basis points again, that’s fine to me. Now, the one thing I do have a problem with is that the Fed Funds futures curve says 50 basis points over the next two meetings.
And then toward the end of ’23, there’s going to be an ease. But they say it’s only going to be a quarter, two and a half point ease. And that I say “no way.” If they’re ever going to actually pivot and start easing, it’s only going to be as if something is burning and something is falling down and then it’s not going to be a quarter point ease. That being said, I still like risk assets. And I have because I think we are nearing the end of the Fed tightening cycle. I believed, I’ve been doing my podcast for the last hour. I wanted the market to settle above 4070. It certainly did, right? We went into the closed pretty strong, I thought. And I think that that green lights the next move higher. I particularly like the metals market, and I’ll shut up in 1 second, I swear to God. I particularly like the metals market because I think that… I don’t mean to talk for so long. I thought copper was being held down by China news, by the Fed, by the strength of the dollar, and all those things have seemed disappeared. And I’ve made good money on that so far, and I plan on keeping those lumps.
Tony
So it’s a good question about metals. What are you looking at? You said China and you said China reopening other things. What are you looking at in metals? Are you looking at industrial metals, copper and so on? Are you looking at precious metals or kind of all of the above?
Jim
Copper is number one and that’s my biggest position. Silver and then go down from base industrial all the way to just gold being pressured. And the gold thesis for me is different than the copper one in that I believed at the time when I started buying more gold, that Bitcoin and Etherium in the crypto market and all that dollar safety hedge or whatever the hell it is, if that was disappearing, then money would go back into gold. Well, that didn’t disappear. Bitcoin is butting up against new cycle highs now, but gold is still doing well. So in that I was kind of wrong on the thesis. The thesis was also the dollar weakening, which happened as well. Once the Pound of the Euro started really bouncing off those October lows, I thought, okay, the green light is on for all these metals. So I’ve done okay in gold, even though my thesis about crypto was wrong.
Tony
Okay, but was your thesis wrong? Do you see crypto and gold as substitutional somewhat at the margin still?
Jim
I don’t know. I was going to ask you that same question. I always did. And I thought that the $3 trillion crypto market was sucking away some of the gold. And I thought that that was a big deal. But then it doesn’t seem to be now, so I guess I can’t answer that. I’m confused, I guess.
Tony
Yeah. I’m curious. What do you think about that, Tracy, in terms of crypto and gold? Do you think there’s a trade off there?
Tracy
This is not really my… Crypto market, is not really my market.
Tony
Internet, say whatever you want.
Tracy
Albert knows way more about this than I do, to be honest, because I’ve never traded crypto, and he’s traded a lot in the past. So I’m going to defer this to Albert.
Albert
Before I do think that there was a correlation between how much money was flying into crypto versus taken away from gold, I think there is no doubt that gold suffered because of that. I don’t think that as the case right now, simply because there’s been too many blow ups in the crypto world at the moment. I don’t really know how liquid it really is. There’s certainly no retail left in the crypto market, so it looks like it’s all institutional. So I don’t know. You can’t really make a fundamental call on crypto at the moment.
Tony
Could you ever make a fundamental call on crypto?
Albert
You could at some point, because institutional money was flying in there because their clients were forcing them to get into the space. So you could make a little bit of a fundamental case for crypto, but as all these ponzi schemes blew up, like FTX and everything, that’s just gone completely out the window at the moment.
Jim
Sure, Tony, I can make a slight fundamental argument of it. When they were adding an additional $7 trillion, throwing it into the money supply, and really being poor stewards of the dollar, that was somewhat of a fundamental argument for crypto, I guess, right?
Tony
Yeah. Okay. Are markets too good for the Fed. As we’re going into next week, are these levels too good for the fed? Is Powell going to come out and really, you know, say, look, this is irrational or whatever, and it’s too much, and is he going to pour out, say, 50 basis points and disappoint a lot of people?
Jim
Just to punish me a rug pull? I mean, I think he’s capable of that. He certainly did at the Jackson Hole meeting a while back. So you have identified, I think, the major risk, and it’ll probably go into that somewhat hedged. And again, hedging is probably going to be expensive going into it because people realize that that’s where the risk is. So on balance, I will say, no, I don’t believe he is. I think he believes that going too far this way. And again, I think he thinks going not far enough in this direction is the worst possible thing. But I also think he’s starting to realize going too far and what that looks like. He sits around and talks about creating slack in the job market, and to him, it’s just an equation on a whiteboard where the reality is talking about people losing their jobs. I think he balances a lot of realities. I think he’s incompetent. His entire tenure has been mostly incompetent, but I think he’s done a pretty good job trying to clean up the mess that he made over the last year and a half, and I don’t think he’s going to do something stupid like that. But, yes, to your point, it is a risk.
Albert
I actually disagree with Jim on this.
I think it’s going to really matter about what the market does. If we start flying into the 4200 before Tuesday on the SPX and whatnot. I think that Powell will come out. I don’t know if he’ll do 50. I don’t think he’ll do 50, but he might come out with a 25 basis point rate hike and then start talking extremely hawkish and dismiss all the rate cuts that everybody’s been talking about, which would be essentially the same thing as doing 50 to the market. If the market says that. If the market here is that we’re not getting rate cuts till 2024, I don’t see that as positive whatsoever.
Jim
I certainly hope you’re right in the near term, too, because I’m short some of those 4200 calls, like, too many. That’s the position I keep checking in my bold position was like, oh, sh*t, they’re getting too expensive. So I actually like what you’re saying a little bit in the short term.
Albert
Yeah, I have a problem because of this is falling liquidity right now and tightness at the same time. I look at the market and I’m like, well, money is starting to fly out into Asia, which we talked about Tony, repetitively for months now. Where are we going to get that $5 trillion incremental money coming into the market to keep this thing afloat? For me, it’s like I don’t see the math adding up to 4300 on the S&P and anytime soon. And on top of that, if you calculate rate hikes and everything you’re looking at the market, 4150 or 4200 is more expensive than 4800 was. It’s technically even higher valuation. So for these things, I’m just like I think we’re probably going to retrace the 3850 on some kind of ridiculous Powell talk. And on top of that, Brainard is talking about leaving. She’s not leaving if Powell is talking about being dovish. She wouldn’t be doing that, in my opinion.
Tracy
I asked a question. I was just saying and that’s for both of you. I mean, considering that the Fed has hiked so quickly, do we even think, and the data has remained pretty good, considering right, so do we think that the rate hikes have actually even been able to filter down into the economy at?
Jim
I don’t, Tracy. I think that that’s the point. I think when you look, just take the real estate market. How in the world is it not going to be a major hurdle for the real estate market to take mortgage rates from 2.8% to 7%? I think that it’s silly to think that if they just left things the way it is, I believe that we would certainly go in recession at some point in time with money being restrictive as it is compared to… I’ve argued for 30 years that rates had to be inorganically low to make up for the fact that we have all these crappy regulations and punitive taxes on companies. They need low rates to function. I think rates are to point now where eventually they would drag on us too much. Albert, do you agree with that?
Albert
I do. But the flip side of that is, like, if Powell doesn’t stay the course, Yellen is using the TGA, in my opinion, from what I heard, to offset quantitative tightening. This could set off another round of inflation if China comes on too fast, or even Europe starts to gear up a little bit and reset their manufacturing sectors with stimulus. The fear I have is a second half inflationary run again, and then we’re going to be talking no more pauses, but another round of 50-75 basis point rate hikes.
Tony
Second half of Q2. I don’t think it’s a second half inflation run. I think it’s Q2. I think it happens a little bit sooner than that.
Albert
Yeah, it could. I mean, you could have any kind of geopolitical event like Russia re-invading Ukraine with some gusto this time.
Tony
Okay, guys, here’s my question, though. We’re talking all this potential dovishness, but all we’ve seen is the rate of inflation slow. We haven’t seen prices come down. Okay, so why would he go to zero? Or why would he just do 25? I’m not seeing it. When you look at the job market, sure, you’ve lost 70,000 tech jobs, but they hired 2 million since 2020 or something like that, right? So it’s nothing. It’s dropping the bucket.
Tracy
Chipotle hiring 15,000 so those people can get a job.
Tony
Exactly. What is it that would tell us that he’s going to go 25 or pivot or whatever? I’m just not seeing that thing because the job market is still really strong.
Jim
So here’s what I would say to that, is that the job market is going to be strong and tighten. It’s a weird kind of anomaly that happened with 3 million boomers leaving the job market prematurely over the last three years. To your point about why would he not stay the course if prices aren’t coming down? Because, remember, ultimately, the end of the day, the inflation was intentional and it was done because of this wild indebtedness all over the board. But I always focus on the five states that could not possibly have paid their bills under any possible scenario. And that’s why for ten years, they kept telling us that they needed inflation. So I think in Powell’s mind, he tells us 2%. I think he’d be perfectly happy with three and a half.
Albert
And they’ll get three and a half because they’re starting to change the way CPI has waited starting 2023.
Jim
Just like when Nixon changed the definition of unemployment back in the 70s.
Albert
The BLS have done that in the past. They changed the way unemployment is calculated. Now they changed the way the CPI is calculated.
Tracy
They changed the way inflation is calculated.
Albert
Perception is reality in the market. We can sit there and b*tch about fake data from China and fake data from the Europe and the US. But perception is reality in the markets.
Tony
Yes. So we’re going to change the rules to win.
Albert
Well, yeah, of course.
Tony
And the CPAC calculation changes this month, right?
Albert
Yeah, January 2023.
Tony
Fantastic. Okay, so you guys are in the 25 basis point camp for next week, right? 25 and very hawkish. 25 and very hawkish.
Jim
Okay, I don’t I like what Albert saying. I say 25 and mildly hawkish.
Tony
All right, we’ll see. I think it might be a little harder than that. So we’ll see. That’s good, though. I appreciate that.
Tony
Okay, Tracy, I want to talk a little bit about refineries and crack spread. You sent out a tweet on Monday about diesel prices.
Can you help us, help us understand what’s happening at refineries and what’s happening with diesel and gasoline and other refined products prices?
Tracy
Well, this is actually the perfect segue because I tweeted out a chart of ULSD, which is diesel, basically. And so we’re seeing those refinery margins explode again. And most people say, well, that’s anticipation of the diesel embargo in Russia and refineries across the world that are not part of Russia are seeing these increases. But that’s not just happening in the diesel market, that’s also happening in gasoline cracks. And so higher refining, basically the long and short, higher refining margins mean higher prices for consumers. Right. So Tuesday we just hit a three month high of $42. And when oil was at its highest price, those crack spreads were at $60. So this should start ringing alarm bells a little bit about inflation. This is why it kind of correlates to what we were just talking about. And so CBs, even though they don’t count energy in the CPI as part of inflation, they should be keeping an eye on these indicators because it kind of indicates that we’re going to see higher gasoline, diesel costs, jet fuel, et cetera. And that could add to inflationary pressures across the board, not only for just the consumer, you and I, but for companies that are heavily dependent on these products.
Tony
And when there’s inflation in energy, there’s inflation in everything.
Tracy
Right, right.
Tony
Second or two tier impacts.
Tracy
Exactly, yeah.
Albert
One of my oil friends was telling me that normally January, February, they’re running at minimum rates, trying not to lose money. But this has been like absolutely insane, where they’re just making money hand over fist right now because the demand is so high.
Jim
Tracy, I have a quick question for tracy, by the way. Is that okay?
Tony
Yes.
Jim
So, Tracy, just last week, I don’t know if it was Chevron or Conical Phillips, where they announced raising the dividend or whatever, paying bonuses and not investing in it. Was that an indication that they still feel that the government is not smiling upon fossil fuel companies expanding their operation?
Tracy
Oh, 100%. Right. For over a year now, we’ve seen elevated energy prices in that seventy dollars to eighty dollars range. Negating, the spikes that we saw from the Ukraine invasion. But so after a year of pretty much stable higher energy prices, we are still not seeing anybody want to invest in this sector. Right. They still want to cater to the investor. They still want to pay down debts. They still want to do higher dividends. They still want to engage in stock buybacks. All to placate the investor. And so that is very telling that after a year, they’re still not willing to reinvest into capex, particularly in shale.
Tony
It’s nothing but downside to invest, right?
Jim
No doubt.
Tracy
Yeah, absolutely.
Jim
It’s maddening when you think about it. Everything seems like it’s such a self inflicted wound. And this is the kind of thing that keeps me up at night. It seems like a government that’s working against us. And I’m not trying to be that guy. I’m not political. I just see policies and they’re asinine.
Tracy
Who wants to invest when they say, we want to phase you out, we want to kill you?
Jim
Right? Yeah.
Albert
Well, this is the problem when politics gets mixed up in economic policy, it starts muddying things up and mistakes become exponential at this point.
Tony
But politics is always mixed up in economic policy everywhere. You know that. I’m not telling you you don’t know, but it’s always there. When I hear you talk about refineries, and it’s been how many decades since we built refineries in the US, Tracy? The 70s was the last time we built refinery?
Tracy
70s was the last major. We’ve had a lot of brown projects, which means we’ve added refinery capacity to already existing refineries, but we haven’t had any new green projects, which means building new refineries. And we were talking about, I think, last week or the week before the expansion that we’re having in Texas. But the problem is that the amount of refining that is coming offline is more than the refining capacity that is coming online.
Tony
Right. So what’s our capacity utilization right now in refineries?
Tracy
Well, we’re down right now because we’re in the middle of maintenance. And we also had Elliot storm, which some refineries, for instance, Baytown, is just coming back up this week from the storm in December. So utilization rates right now at about 89.5%. But, you know, you have to realize that, you know, we’ve been over, well over 90%.
Tony
Yeah, 94 or something like that. Right?
Tracy
Yeah. And we have aging refineries. And so what does that mean? Those refineries are more prone to breakdown because we’re running them at, like, ridiculous max capacity. Right, exactly.
Tony
Okay, so since you mentioned Texas, let’s look at this tweet that you put out a couple of days ago saying that Freeport gets approval.
So USLNG, the Freeport terminal has been approved and reopened. So can you talk us through what that means for European nat gas and what that means for US nat gas prices?
Tracy
Well, for US natural prices, that is positive. And I know that all nat gas prices have tumbled 35% to 45%. Regardless, we’re back into that two area that is pretty much where we’ve been for several years. But it is a good thing. I think the market, I think, spiked 15% or 15% $0.15 sorry, on that move. And they kind of retraced it. I think the market is a very Freeport is an export place. So what that means is that if Freeport being closed basically landlocks US nat gas, which is obviously a negative because we have a lot of it. But I think that the market in general is a little bit skeptical. But as soon as we actually start seeing export capacity increase from that facility, then I think that the markets will be more enthusiastic about the success of that because it’s really been since August since that facility is shut down.
Tony
So you’re saying we should see US nat gas prices rise as we have more export volumes from Freeport?
Tracy
Absolutely. And even this week, Semper Energy announced that their new Port Arthur facility has already been booked. And that facility isn’t even all the way built yet. And that’s another export facility. So there’s a lot coming online and a lot being built out that we will be able to see. I think that just market participants have become a little bit placated because they look at European stocks and European stocks, of course they’re still full. They’ve had a mild winter, but everybody kind of forgets that last year 50% of their storage capacity came from cheap Russian pipeline. And that’s not going to happen this year.
Tony
Yeah. So all of those new roads that are being built in Texas, it may have been started with other money, but it’s going to be finished with European money. Right. So I just want to take this moment to thank our European friends for finishing our transportation.
Albert
About time they give back.
Tony
That’s right.
Jim
Finally, their currency has come back a little bit, so now they can actually buy stuff here.
Tony
Perfect. Okay, very good, Tracy. Anything else on nat gas? Are you still keeping eye on fertilizer for kind of late spring time period?
Tracy
Yes, absolutely. I think that’ll still come into play. I mean, nat gas prices are extremely low right now, which is great news for fertilizer prices. That will give farmers a break. This is all good news in that respect, but I still think we need to keep an eye on this going forward and keep an eye on that gas prices because obviously that’s going to affect fertilizer prices and farming in general.
Tony
Jim?
Jim
Tracy, you talked about diesel before, and I don’t trade diesel. Is the spread between diesel and regular WTI still blown out? And what could possibly get diesel back in line?
Tracy
Well, I think that there’s been a shortage for a very long time. That spreads come in a lot, comparatively speaking. But now it’s starting to blow out again because again, you have the EU embargo of diesel, and they got literally like 95% of their diesel came from Russia. Another dependent project. And I’m sure Russian diesel will go somewhere else. It’s not more about that, but it’s more about really boils down to refining capacity as well. Because even in the United States, we can’t refine. If Europe wants to buy from us, we can’t even refine enough. We’re sending what we have over there as well as our domestic needs. So really, diesel to me comes down to refining capacity altogether.
Jim
That’s an unfixable problem, right?
Tony
Until Russia’s solved, right?
Albert
What about the Jones Act waivers for sending diesel up to these coast cheaper?
Tracy
Yes, they could do that, but they haven’t done that. They’ve done that in the past for Puerto Rico after the hurricane and all of that, but they still haven’t given waivers. Even when prices were extremely high in the United States, when we were at the height back in June, July, when prices, gas prices were highest, diesel prices were highest, they still wouldn’t give Jones Act waivers. You have to understand that the Jones Act came into play into 1920 when we had a fleet of over 1000 vessels, and we now have under 100 vessels that can transport that. So, you know, it’s the government could do it. They’ve chosen not to. Why? I’m not sure, but…
Jim
We can come up with some guesses. They’re either stupid or they’re nefarious. I believe at some point in time you’re going to have to say some of it’s nefarious, where they keep making the wrong decision at every turn. And I apologize for that.
Tony
No, don’t apologize. Look, it’s making it more expensive for people on the East Coast to get diesel. It’s not good.
Tony
Okay, great. Speaking of Russia, Albert, we saw a lot of news over last week about tanks going to Ukraine. And there’s a tweet from Max Abrams, who’s a great geopolitical professor talking about Russia, says that tanks from the west count as, quote, “direct involvement in the war”.
So I wanted to get your… Jim said what would solve the diesel problem. Obviously, Russia coming back into the market would solve the diesel problem. Now with a lot of Western countries sending tanks to Ukraine, that doesn’t sound like we’re coming closer to a solution on that. So first of all, why are they sending them if they don’t have the people to operate them? Second, tanks are to take land. Right? So what do you think is being planned? And third, how risky is it? Do you think it really implicates these kind of donor countries as direct participants in the war?
Albert
I don’t really buy into the whole direct participants of the war. The rhetoric coming out of Russia is a little bit bombastic in that respect. Referring to those tanks, there’s only going to be about 100 of them, right? They’re not going to be able to push out the Russians with those tanks. On top of that, they’re going to be about six months out until they’re actually even deliver, and then you still have to train these guys and they need supplies, and the Ukrainians don’t really have all that. So the best guess that I have is that they’re forcing Russia to come into a ceasefire in about six to eight months time, which gives them a window now to try to take Dambus and have some kind of wind before these tanks get delivered. Listen, they’re no joke. The Leopard tanks and the Abrams are better than what the Russians have. But in terms of the Ukrainians using them to push Russians out of all Ukrainian territories, that’s just not happening.
Tony
Right. So are these just old tanks or is it a quality kit that they’re getting?
Albert
Well, I think they’re getting like the second tier tanks of what the west has, but that’s still better than what the Russians have or even willing to use for Ukraine. So, like I said, this is more of a measure to force the ceasefire later on in the year.
Tony
Okay. Yeah, Jim?
Jim
Albert, a couple of days ago, when this escalation started in Germany, we announced I immediately put on my screens, looked at oil, wheat, even the defense sector ETF, and nothing really budged. Do you think the market was looking at it like it wasn’t a big deal? Or do you think the market was looking at it as somewhat balanced, perhaps a quicker end of the war and not an escalation, or perhaps an escalation, the two things come around?
Albert
Oh, man, that’s a good one, Jim. I honestly think that the market’s probably in a wait and see position at the moment.
Jim
Numb to the shit kind of. Right?
Albert
Yeah. You got to wait and see what Moscow is going to do. I certainly think they’re going to use wheat and grains and other grains asymmetrical responses to the west to push inflation out over there, make it hurt. That’s the only thing they have. They don’t really have anything else to go after. I mean, the oil that they’re selling to India and China is enough to sustain their pocketbooks for a little while until this gets sorted out. But until there’s some sort of major upheaval in Ukraine, I don’t think the defense stocks will take off or wheat yet. But they will. I think they will. They haven’t moved.
Tony
The defense stocks haven’t moved for a while. If it is we and other AG stuff that is going to be their lever, that probably means the Turks will get more involved in the discussion because they’re the ones who arbitrated the discussion earlier. Is that right?
Albert
Well, they’re trying to get into the discussion. I actually have really good connections with the Turks and their main thing is to distract the West and the Russians into Ukraine while they push their trade deals out into Africa at the moment. You know, the Turks have a great drone, the TB Two, which they sell to pretty much everybody. So that’s as far as they’ll actually get into the war besides making media comments.
Tony
Right, okay. And so what risk do you think there is on wheat? Do you think we see more wheat risks, say, in Q2 – Q3 this year?
Albert
I absolutely do. The Ukrainians, they’re planting a lot less. I think 40% less is what they’re reporting, is probably even more than that.
Tony
Right.
Albert
And on top of that, if the Russians decide to blow up a port or blow up a few ships that are trying to get out with wheat, and all of a sudden, wheat, you know, takes off back to the 900 or $1,000 mark again. So I definitely see that happening in Q2 Q3.
Tony
Okay. That could be exciting. All right, guys, let’s close it up. We’re in that quiet period for the Fed. We have that Fed discussion next week. So what are you keeping an eye on next week aside from the Fed, of course, but what are you keeping an eye on in markets? Tracy, why don’t you get us started.
Tracy
Well, I know that most people are looking forward to OPEC is next week at the beginning of February. My personal stance on that is that I think they will keep everything as is. Right. They made that 2 million cut, even though it’s technically not 2 million, because they were under quota anyway. They said they were going to carry that through 2023 unless something came up that they really needed to address. And I just don’t see anything coming. I don’t see any reason they would need to change this policy stance right now. We have Russian barrels still on the market. We have China is still kind of an unknown because they haven’t really opened up yet. So that’s what I’m looking forward to, or at least that’s what my feeling is about the data.
Tony
Great. Okay. Albert, what are you looking at next week?
Albert
Well, obviously the Fed. I think, is in order with a hawkish tone, but honestly, I want to see how the dollar reacts to all this. And the VIX. The VIX at 17, start looking at some good old put options and call options with the 17 VIX is fantastic. But, yeah, basically what the dollar is going to do. I really want to see if the dollar breaks into the 90s with some kind of bull market talk.
Tony
Excellent. Okay. And Jim. Wrap us up. What are you looking at?
Jim
The unemployment numbers on Friday. Big deal. The last shooter drop is going to be the slack in the labor market that they want. Albert mentioned that level on the dollar. I call it like 101 to 100. As soon as it goes below that, as soon as we get a nine handle on the dollar, I think it greenlights a lot of risk assets. But the thing I’m mostly focused on is unemployment and then the week after that my trip to South Florida. Because every time I leave these damn markets, something crazy happened. So you guys can count on that. I’ll tell you when I’m on my flight. Something weird is going to happen.
Tony
When is that?
Jim
I don’t know. My wife makes the arrangements. I think it’s the next, like a week from next Thursday. I think we’re going on vacation.
Tony
Keep an eye on. Jim, thanks so much for joining us, Jim. Guys, this has been great. Thanks very much everyone have a great weekend. Thanks Jim.
The CEO of Compete Intelligence, Tony Nash, was interviewed on BFM to discuss the current state of the US markets.
The S&P fell 1.6%, the worst decline in a month, and the tech-heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Nash suggests that this may be due to bad economic data, specifically PPI and retail sales falling, but also notes that consumer is still strong. Nash explains that the US economy is built on services, so people may be trying to confirm their downward bias in things, and when bad news is reported, a sell-off day occurs. Nash also mentions that if PPI falls, that should mean inflation is slowing, which should mean the Fed would ease a little and slow down on rate rises.
He also mentions that markets may be spooked by all the announcements regarding job cuts, such as Microsoft announcing they plan to cut 10,000 jobs and Bank of America telling their executives to pause hiring. Nash suggests that these job cuts are small in terms of the gap that we see in the US workforce, which is still missing millions of jobs in terms of the openings versus the available people.
Nash also mentions the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. He suggests that the BOJ is managing the yield curve to suppress borrowing costs and wants to keep it below 0.5%. Nash also mentions that Japan’s central bank is getting pressure from other central banks to keep their rates low, this means that if Japan lets their rates rise, then that would have a knock-on effect around the world and cause a repricing of government debt all around the world.
Nash concludes by saying that he expects a weaker yen, but doesn’t think we would necessarily hit those lows.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station. BFM 89.9. It’s 7:06, Thursday, the 19 January, and you’re listening to the Morning Run with Chong Tjen San and I’m Wong Shou Ning. And earlier on, we did ask our listeners how traffic is like and Roberto said traffic today really smooth and super low compared to just yesterday. He loves Chinese New Year in KL. And so do we. I just love Chinese New York because I like the feasting and I like the ang bao collecting.
BFM
I get the hint.
BFM
Yes, we’re all looking at you, Tjen San. But in 30 minutes, we will be speaking to Angela Hahn of Bloomberg Intelligence on the impact of China’s reopening to Markhouse gaming and hospitality sector. But in the meantime, let’s recap how global markets closed yesterday.
BFM
After a good run, all key US. Markets ended down yesterday. The Dow was down 1.8%, S&P 500 down 1.6%. The Nasdaq was down 1.2%. In terms of Asian markets, the Nikkei was up by 2.5%, Hang Seng up by 0.5%. The Shanghai Composite Index, it was unchanged, the Straits Times Index, it was up by 0.3%, and the FBMKLCI it was down by 0.3%.
CI Futures has S&P500, Nikkei, Nasdaq, Hang Seng, and nearly a thousand other assets across equity indices, currencies, and commodities. Subscription starts at $99/mo with a monthly commitment. Learn more here.
BFM
Why are we always again and again there’s a trend here for sure. But to tell us where international markets are heading, we have on the line with us Tony Nash, CEO of Compete Intelligence. Good morning, Tony. Help us understand what’s happening in US markets. Because the S&P fell 1.6% is the worst decline in a month. Tech heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Is this just really due to bad economic data?
Tony
Yeah, we saw PPI and retail sales fall today. The weird part is consumer is still strong. The US economy is really built on services, so I think people are trying to confirm their downward bias in things. And whenever we see bad news, we see a sell off day. So I’m not necessarily sure I would read that much into it, aside from just there was really nothing else going on. So people saw some bad PPI news and they were negative. So if we see downward PPI, that should mean inflation is slowing, which should mean the Fed would ease a little. Not ease, but would slow down on rate rises a bit. So that should have been positive news for markets. So it’s just kind of a weird read of some of that data.
BFM
Do you think markets are also spooked by all these announcements with regards to job cuts? Because Microsoft says they plan to cut 10,000 jobs. Amazon of course, made announcements last week, and even Bank of America is it telling their executives to pause hiring. Not great for the mood on Wall Street?
Tony
Well, maybe, but I think those job cuts are actually kind of small in terms of the gap that we see. So the US is still missing millions of jobs in terms of the openings versus the available people so I think there’s something like 7 million jobs open. We also had a million people post COVID not come back to work. So we have a gap in the workforce, just a status quo workforce of a million people, but we have something like 7 million open positions. So when Microsoft lays off 10,000 people or Goldman lays off 4000 people, sure, it’s tragic. It’s definitely tragic for those individuals. But in terms of the overall health of the economy, it really doesn’t make that much of a difference.
BFM
And Tony, the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. What possible reasons would the central bank have for keeping this status quo?
Tony
Yes, so the BOJ is managing the yield curve to suppress borrowing costs and they want to keep it below kind of 0.5%. There have been some hedge funds and some big investors who’ve been betting that they would tighten it. And the BOJ is just bigger. I mean, when they came back and they said, we’re going to hold the line at 0.5, they spent about $100 billion so far this month to defend that and they have plenty of resources to hold that. So the release issue is this is if Japan lets their interest rates rise, then Japanese, say, banks and pension funds and other investors would consider selling debt from other parts in the world and buying Japanese debt. Okay, so if Japan lets their rates rise, then that would have a knock on effect around the world and that would cause a repricing of government debt all around the world. So it’s not just the BOJ wanting to keep this for Japanese domestic reasons. They’re getting pressure from other central banks to keep their rates low.
BFM
Okay, Tony, but what does this then all mean for the yen? I mean, at its worst point, the yen was trading 150 against the US dollar. Today it’s 128. That’s a very wide range in just a few months. So what are your expectations?
Tony
It is yeah, certainly I would look for a weaker yen. I don’t know that we would necessarily hit those lows. But the BOJ has made their stance clear. The BOJ has a new head coming in in a few months. I would say they’re unlikely to dramatically change policy with a new head because they don’t want to make people nervous. So I think they’re going to aggressively defend the status quo. So I don’t necessarily think you see a yen appreciating dramatically from here. I think the bias is really toward the downside.
BFM
Okay, staying on the topic of currencies then, what’s your view on US dollar? We’re just looking at the Bloomberg Dollar Spot Index this morning. It’s already down 1.5% on a year to date basis. The era of King dollar, is it over?
Tony
Well, I think not necessarily. If you’re looking at the DXY, it’s really heavy on the euro. And so we’ve seen Europe do better than many people thought through the winter because we haven’t had a cold winter there and energy prices haven’t bitten as hard as many people thought they would. So I think Europe is doing better and the Euro is doing better than many people thought. And everything in Currencies is relative. China is opening, although it’s gradually. China is opening. And so that’s good for CNY. Again, in a relative basis, I think there is downward pressure on the dollar, but I don’t necessarily think we’re over on that. I don’t think we’re heading straight down to, say, 95. I think we’re going to see some back and forth over the next couple of months as we figure out what the forward trajectory of the dollar is. And a lot of that really has to do with what direction will the Fed take in terms of their rate hikes and their quantitative tightening. And it has to do with treasury activity from the US. Treasury. How will they spend, what will they do, how will they fund the US government?
BFM
Tony, some analysts are saying that without a recovery in the Chinese economy, a global recession is all but assured. But what are your thoughts on this?
Tony
I don’t necessarily think that’s the case. I think China will do okay this year, and I think regardless, Europe will likely dip into recession this year, although fairly moderate. In the US, you see a very strong employment environment. And so employment is one of the key considerations for recession. So I don’t believe the US. Will dip into recession really on the back of employment news more than anything else. And so once we see some of these layoffs with larger companies and we get through this as, say, equity valuations stabilize, I think we’ll start to see a renormalization in the US economy as the Fed kind of takes the foot off the brake of the US economy. Of course, the Fed will continue to raise rates, but they’ll do it at a much slower pace, and that will make people much more comfortable in doing things like investing capital and so on and so forth, that will help the US to grow.
BFM
All right, thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his outlook for the world economies and also markets in the coming weeks. I think very much the question everyone has on their mind is Fed rates. What is the terminal rate? Will they basically raise rates too much and then cause the US. Tip into a recession? But I see increasingly our guests, our commentators sounding a little bit less pessimistic, hinting that perhaps we’re going to have a soft landing rather than a hard landing.
BFM
Yeah, I think it’s really on the back of the really still strong employment in the US. I mean, he did mention there’s still 7 million jobs available in the US. And there are one million people post COVID that didn’t come back to work. And I think that really is his key point, that the US may not slip into recession, but it looks like EU will and China, it looks like they are really on track to a better recovery this year. I’ve seen some economists say that GDP growth could be like five to 6% as well.
BFM
I see that consensus figure that range is around there for China’s GDP for 2023. Now, turning our attention to corporate that released results they reported, which is Alcoa excuse me, which is aluminium company. They reported fourth quarter results earlier today, which saw losses narrow to $374,000,000. Loss per share as a result was $2.12. The loss included a 270 million charge related to tax expense. Revenue did decline 20% to $2.66 billion.
BFM
And Alcoa attributed the decline in revenue to lower prices for both Alumina and aluminium. Additionally, Alcoa will see some executive leadership changes effective February 1, including CFO William Oplinger reassignment to chief operations officer, in addition to his executive vice president role.
BFM
Okay, the street doesn’t really like this stock when you look at Bloomberg. Five buys, only seven holes, no sells. Consensus target price for the stock, $52.18. During regular market hours, the stock was already down one dollars. And now I think we need to talk about one of the world’s biggest companies, Apple. They are expanding their smart home lineup, taking on Amazon and Google. Are you surprised by this move?
BFM
Jensen not surprised at all. I think Apple is really the leader in terms of innovation, and we’ve seen it over the years, so no surprises there. So I think they’re launching some new devices. There’s a smart display tablet, there’s a HomePod. There’s a TV box and a MacBook and Mac mini using their cutting edge new processor, which is the M Two chip.
BFM
Are you going to buy any of these gadgets? You don’t even use an Apple phone. You haven’t joined a cult. You’re about the only one on the morning run. You and Philip sees that hanging on.
BFM
The iPad at home, but they’re quite old.
BFM
Okay, but will this make a dent to Apple’s earnings? Perhaps. I think they are trying to diversify their product range, because the iPhone, I think, hasn’t done as well as expected. If you look at Apple or Cost, still a darling on Wall Street. 36 buys, eight holes, two sells. Consensus target price for this to $169.24. At regular market hours, it was down seventy three cents to one hundred and thirty five dollars and twenty one cents. I, for one, will be curious as to what these products will be or how they’ll fare. Up next, of course, we’ll cover the top stories in the newspapers and portal. Stay tuned for that. BFM 89.9 you have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
This video interview is owned by Channel News Asia, and the original source can be found at https://youtu.be/U_Im05ClsN0
The United States Federal Reserve’s plan to ease its pace of interest rate hikes as soon as December would bring some relief for markets concerned about the central bank overtightening too quickly, Mr. Tony Nash, founder and chief executive of data analytics firm Complete Intelligence, told CNA’s Asia First.
Transcript
CNA: Federal Reserve chair Jerome Powell has signaled policymakers could slow interest rate increases starting this month. That sets the stage for a possible to downshift to a 50bps rate hike when Fed officials gather again in two weeks.
Powell: Monetary policy affects the economy and inflation with uncertain lags. And the full effects of our rapid tightening so far are yet to be felt.
Thus it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.
CNA: But it isn’t quite a dovish turn. The U.S Central Bank Chief also stressed that they have a long way to go in restoring price stability despite some promising developments.
Mr. Powell warns against reading too much into one month of inflation data saying that the FED has yet to see clear progress on that front. In order to gain control of inflation, the Fed chair says the American labor market also has to loosen up to reduce upward pressure on wages. Job gains in the country remain high at nearly 300,000 positions per month and borrowing costs are likely to remain restrictive for some time to tamp down rapid price surges.
This is where U.S interest rates stand after an unprecedented series of four 75 bps rate hikes. Policymakers projected earlier that this could go as high as 4.6 percent but Powell says they will likely need to keep lifting rates more and go beyond that level until the inflation fight is done.
The less hawkish tone from Powell Boyd U.S market stow and the S&P500 erased losses it searched three percent. The Dow gained two percent while the NASDAQ jumped more than 4.4 percent. the 10-year treasury yield also dipped as Bond Traders dialed back their expectations on how high the Fed may push interest rates while the U.S dollar retreated.
Tony Nash is founder and CEO of Complete Intelligence joining us from Houston, Texas for some analysis. Now Tony, just looking at Powell’s comments, the first differs in some way with what the Fed and its officials have been telling us earlier in the year and how we’ll get there fast to try to reach the terminal rate. But now it’s signaling that it will get there slower. What is this going to mean for businesses and consumers in the US?
Tony: I think what it means is we’re going to get to the same destination. It’s just going to take a little bit more time to get there. So the Fed has seen jobs turn around they’ve seen jobs aren’t necessarily slowing but the rate of rise in open jobs is slowing. We’ve seen mortgage rates go up. We’ve seen the rate of inflation rise slowly.
So the Fed is seeing some things that they want and they’re worried about over-tightening too quickly. Because what we’ve seen so far is really just interest rate rises. They really haven’t even started quantitative tightening yet. I mean they’ve done a little bit maybe a couple hundred billion dollars. But they have nine trillion dollars on their books give or take.
They haven’t even started QT yet. And they’re starting to see inflation and some of these pressures on markets at least slowed down a little bit. So I think they’re saying “hey guys we’re still going to get to a terminal rate of five percent or five and a half percent but we’re going gonna slow it down from here unless we see things accelerate again.”
CNA: When do you think we will actually see that five to five and a half percent?
Tony: You’ll see it in the first quarter. You know if we do say 50bps in December and maybe another 50 in January, we’ll see some 25bps hikes after that but I think what markets the cyber leaf that markets are giving right now is just saying. Okay, we’re not at 100 or 75 in December.
I think that’s a big size that you saw today and you know. It raising at 75bps per meeting just put some real planning challenges in front of operators people, who run companies. So if they slow down that pace and people know we’re still going to get to that 5 to 5.5%, it allows people to plan a little bit more thoughtfully, and a little bit more intelligently.
I think this does relieve some people of the worries of the Fed over-tightening too quickly and it also relieves worries that the Fed is only relying on monetary policy. They’re not relying on interest rates I’m sorry and they’re not relying on quantitative tightening. so the Federal balanced approach sometime in Q1.
CNA: Okay, you also mentioned before in our past conversations, the concern that the market has been having for this week especially since it’s China’s lockdowns and you see these restrictions ending gradually. What is that going to mean for Energy prices and inflation?
We see Energy prices say now they’re what high 70s low 80s somewhere in that range. We do see a rise of say crude oil prices by about 30 percent once China fully opens. We could easily be 110-120 a barrel once China fully opens. And so there will be pressure on global energy markets once China opens. Other commodity prices will see the same because we’re just not seeing the level of consumption in China that we expect.
What we also expect is for Equity markets to turn away from the U.S. and more toward Asia. So the US has attracted a lot of investment over the past year partly because of the strong dollar partly because of kind of a risk-off mentality consolidating in U.S markets. As China opens and there becomes more activity in Asia than we would expect, some of that money to draw down out of the US and go back to Asia.
CNA: Can you look at the jobs market in the US even as we expect this potential pivot towards Asia for stock market investors? The jobs market and the picture on wages there because the ADP data shows that there seems to be a cooling in demand for labor how soon do you think we can see a broadening out to the broader jobs market?
Tony: You would have broader cooling of demand in the jobs market I think, that’s definitely hidden tech. You’ve seen a lot of layoffs in technology over the past say three weeks. And that will cascade out. I don’t necessarily see think that you’ll see that in places like energy, but you will see that in maybe finance, some aspects of financial services. You’ve seen some of that and say mortgage brokers and this sort of thing so you’ll see that in some aspects of financial services. Some aspects of say manufacturing at the edges. but I do think there’s a lot of growth in U.S manufacturing as this reassuring narrative really takes uh gets momentum in North America. And so even though we may shed some manufacturing jobs in one area I think we’ll see growth in manufacturing jobs in other areas.
CNA: Okay, Tony. We’ll leave it there for today. Thanks for sharing your analysis with us. Tony Nash is founder and CEO of Complete Intelligence.
Investors were not impressed by results from Meta and Alphabet leading to a sell-off in tech stocks on Wall Street. We speak to Tony Nash, CEO of Complete Intelligence, to find out how results from Apple and Amazon set to come out soon might impact overall market sentiment.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station.
BFM
BFM 89 Nine. Good morning. You’re listening to the Morning Run. I’m Shazana Mokhtar with Keith Kam. It’s 7:06am on Thursday, the 27 October a rather overcast Thursday morning. For now, perhaps we’ll see the sun come out a little bit later. As always, we’re kickstarting the morning with a look at how global markets closed overnight.
BFM
It was a bit of a mixed day for what generally red though the Dow Jones on Wall Street, the Dow Jones ended marginally higher, that’s 0.01% barely changed. S&P 500 was down 0.7%. But the action was on the Nasdaq that closed 2% lower because of disappointing results from Meta and Alphabet. We’ve just got to wait for the Apple and Amazon results that will be out tonight US time. So we’ll be discussing that tomorrow. Early in the day, Asian markets were generally green. The Nikkei was up 0.7%, the Hang Seng was up 1%. The Shanghai Composite and Singapore’s STI, they were both 0.8% higher. And back home the FBM KLCI closed 0.7% up.
BFM
For some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony, thanks for joining us today. Now, notwithstanding overnight results, global equities led by US stocks have extended gains over the last week, avoid by the expectations that peak inflation has been reached. What do you think? Are they being too sanguine about inflationary pressures?
TN
I don’t necessarily think they’re being too sanguine. There are cases to be made that housing prices and wage growth have turned the corner. Goods price inflation has likely peaked, but there doesn’t necessarily mean that we’ll see prices decline. Regardless of what’s happening in the inflation environment. The Fed is going to raise rates in November, likely by 75 basis points and again in December. So the Fed typically lags inflation on both sides on the way up and on the way down and so they’re likely going to over tighten. Markets have largely factored in a 75 and 50 basis point hike over the next two months. So are they sanguine? I don’t know. I think if we start to see inflation really take a downward turn, then it could be a very good thing for all of us.
BFM
But Tony, the 75 basis point expected hike by the Feds comes at a time when a lot of analysts are also expecting recession to hit the US sometime sometime next year. Would there be some reassessment as we go along?
TN
Well, we’ve already had kind of negative economic growth for half a year, so we do need to see jobs come down. And with the tech earnings coming out, as you guys mentioned in the news segment, we expect tech companies to announce some pretty major layoffs before the end of the year.
BFM
Let’s get into that a little bit, Tony, in terms of tech results, I mean we did see Meta overnight, we’ve seen how Microsoft also came in below market expectations. What do you think this tells us about the direction of the tech sector moving forward, especially with this environment of rising interest rates and a looming global recession?
TN
Yeah, well, tech companies have overhired. They were hiring based on valuation, not necessarily based on revenue. And so now that their valuations have come down, they have excess staff and they need to clear the decks. And the productivity within the technology sector, although it sounds a little weird, the productivity is pretty low because they’ve had too many people. So as these companies come out and give pretty sad earnings reports, there’s going to be pushback from investors that they need to lay people off, and that will come out in the next couple of months. So we’ll see some of that. Now, if you compare that to, say, companies like Coca Cola and GM who beat the street, those companies have been able to pass on cost rises to their customers, so they’ve factored in cost rises to their price. Now, many of those companies saw volumes decline, but price rises more than made up for the volume decline. So they’ve beat expectations by raising price, in many cases by double digits.
BFM
Tony, we’re expecting Amazon and Apple results to come out tonight, and what we’ve seen from the previous results have sort of, well, dampened market sentiment, if you may, what are your expectations going forward?
TN
Yeah, I don’t think they’re going to be stellar results. I think Amazon had this, at least in the states, they had this kind of second prime day a couple of days ago to goose sales revenues for the quarter, which tells me that things are not stellar at Amazon, and so there are signs that things aren’t working out. The new iPhone is kind of a yarn for a lot of people, so it’s not necessarily pushing out. And so I think the expectations are for pretty mediocre results. So if they report in excess of expectations, then tomorrow will be a fantastic day in markets. But I don’t think that’s necessarily likely at this point.
BFM
All right, something we’re going to be keeping an eye on. Another thing to keep an eye on is the slew of indicators that are going to be coming out. We’ve got US GDP, durable goods, and initial jobless claims numbers. Which indicator are you paying the most attention to in terms of being a gauge of how well the economy is going?
TN
Yeah, one of the things that I always tell people to be careful of with some of these macroeconomic numbers is things like GDP. What’s being announced is what’s called a preliminary release. So they kind of have a sketch of what’s happening in the economy, but it’s not detailed. So when these GDP announcements come out and it’s the first release, it’s not really accurate. And those things can change by 50% or more in some cases. So GDP is not really something I look to. It’s kind of a headline, but it doesn’t really mean a whole lot.
TN
Durable goods is interesting because that tells me that people are investing in things, buying things that last a long time so that they can deliver new services or new products in, say, three to six months time. So that would tell me people are looking forward. So if durable goods is a bad number, then it tells me people are really just trying to take care of today and not investing in the future.
TN
Jobless claims. I don’t know. Sometimes it’s meaningful, sometimes it’s not. I think the sentiment around jobless claims is overhyped. The Fed is definitely watching jobless claims because they want to see wages and jobs come down. So with jobless claims, it’s one of those good news and bad news types of things. So we’re kind of hoping for a poor jobless claims so that the Fed can kind of tick off the box and say, mission accomplished.
BFM
Tony I just want to pick your brains on this. We’ve seen three straight days of market gains on Wall Street and this morning, or rather last night for you or today for you. We’ve just seen a reversal of that. Is this an indication that maybe fortunes might be changing going forward?
TN
I think it’s a good question, and I think it’s hope that the Fed is changing course. And I think regardless of what comes out, say, this month, and I think probably next month, I don’t think the Fed is going to change course. They were caught flat footed. They said that inflation was transitory, they messed up, they’re embarrassed, and they’re going to make people feel it. And people are going to lose jobs and homes and all sorts of things because regional Fed governors don’t want to be embarrassed again. So I think at least over the next two months, they’re probably not going to change course. They’re going to continue to tighten. I don’t think there’s been a dramatic change in everything. I think this is a little bit of hope, and I think it is some earnings that have been reported that are better than expected. But I think in general, people are being very cautious about trades they make.
BFM
Tony let’s end the conversation with a look at oil prices. They are taking a breather on news that US stock bells have risen. How will that translate in terms of energy prices as the Northern Hemisphere moves into winter?
TN
Yeah, the SPR, the Strategic Petroleum Reserve release, it’s put a lot of volume in the market in recent months. And of course, that’s lowered crude prices and it’s lowered the price of refined products. So after the election, and it’s no secret we expect the SPR releases to decline dramatically. And we’ve talked for a few months about how we expect crude prices to kind of spike towards the end of the year. And that would be spikes in crude prices and downstream products like, say, petrol. So we do expect that to happen in the North American market, kind of in Q4 and through Q1 out of the effects of that SPR release wear off.
BFM
And meanwhile, OPEC has also forecasted that China’s oil demand will decline by 60,000 barrels per day. Is that something that you see could cap further spikes in prices?
TN
It could. I mean, 60,000 barrels isn’t a lot, but it could. I think if China were simply to end COVID Zero, it would really drive consumption of crude. So OPEC must expect further dampening of the economy in China, and that’s no surprise. I mean, China is really having a hard time right now, and whether or not they can come back in ’23 is questionable, so it’s no surprise. But 60,000 barrels a day really isn’t a lot, and I don’t think it would affect prices dramatically.
BFM
Tony, thanks as always, for speaking with us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
BFM
Yeah, so we did see Meta shares plummet 17% on week fourth quarter forecast. And earning miss. It basically came up well short of Wall Street’s expectations. Earnings per shares earnings per share was $1.64 versus a $1.89, which was what was expected. Revenue was at $27.7 billion. Daily active users did meet expectations at 1.98 billion users, and the monthly active users came in at 2.96 billion versus 2.94 billion.
BFM
I mean, Meta is contending with a broad slowdown in online ad spending, challenges from Apple’s iOS privacy update and increased competition from other players like TikTok. It’s getting more expensive to run the company as Meta’s costs and expenses rose 19% year over year to $22.1 billion. And that’s something that Tony alluded to earlier, the fact that they’re likely going to see more layoffs moving forward. Tech companies have just been on a hiring spree that they cannot afford at this point. And I bet the WhatsApp outage the other day didn’t help a Meta’s fortunes either, at least in terms of its reputation and image. It could see a lot of people try to migrate elsewhere from using WhatsApp as their main communication source to another platform that is more stable, perhaps.
BFM
I must say we could wait until to see what happens towards the end of the year. Well, November actually, just next month when the midterm elections come, and we see if there’s any pick up in usage then.
BFM
That’s true. All right, it is 7:18 in the morning. We’re heading into some messages, and when we come back, we will be covering the top stories in the newspapers and portals this morning. Stay tuned. BFM 89.9. You’ve been listening to.
BFM
A podcast from BFM 89 Nine, the business station. For more stories of the same kind, download the VFM app.
All eyes will be on the US CPI data as it gives us an indication of the quantum and pace of rate hikes. But is the Federal Reserve too slow to see if inflation is coming down when there is anecdotal evidence of slowing car and home sales? Tony Nash, CEO of Complete Intelligence tells us.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station BFM 89 Nine. Good morning. You are listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. 07:00 a.m on Thursday the 13 October. Let’s kickstart the morning with a recap on how global markets closed yesterday.
BFM
Looking at US markets, all three key indices close in the red S&P 500, down zero 3%. The Dow and Nasdaq down zero 0.1%. And I think that the S&P has been down for six consecutive days already. Moving to Asian markets, and the Nikkei down marginally 0.02%. Hang Seng down 0.8%. The Shanghai Composite Index back the trend. It’s up 1.5%. Straights Times Index down 0.7%. And our very own FBM KLCI is down 0.5%.
BFM
So for some thoughts on where international markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Now, US CPI data is due out on Friday. What are your expectations for that figure? And how much of this do you think will determine the quantum of the next Fed rate hike?
TN
Everything rests on CPI right now. So I think if it comes in line or higher than expected, it’s just bad news for markets for the next few days. So people are hoping for a lower number because it would provide some relief and some proof that inflation has maybe peaked or is at least slowing down. I think it’s possible that we have it come in slightly under, but given the PPI reading that came today, it’s not a good a sign. So we may see CPI continue to rise in tomorrow’s trading day in the US.
BFM
Okay, Tony, we have a history of the Fed being late to the game, right, when it came to inflation. They kept saying “transitory, transitory,” and we know it wasn’t transitory at all. Do you think that they are also late to the game in recognizing that inflation has been brought under control? Because when I look at some of the data points, one of which is used car sales, that’s dropping. New car sales are also dropping. House sales, home sales are also dropping. Is it possible that inflation is being overstated?
TN
Well, you’re 100% right on the Fed being late to the game, both to recognize inflation and to impact it. The problem that we’re seeing with, say, used cars is, although the unit volume is slowing, the unit price is still rising for, say, used cars, for eating out, for these sorts of things. There’s still been upward pressure on these because of the factor input costs and supply chains and labor and others. So it does feel in the US like things have not that prices have gone back down, but that the rate of rise has slowed. That’s what it feels like at the consumer level, except for petrol, gasoline, which has started to rise again over the past week.
BFM
Let’s take a look over at the UK, where George Bailey, the Bank of England Governor, said that the BoE would end support for UK Gilts by the end of this week. What does this mean for the Pound specifically and other sterling-denominated UK assets like equities?
TN
Oh gosh, we’re likely to see more devaluation of the Pound. There’ll be pressure on the Pound. Well, maybe not devaluation, but depreciation of the Pound. UK pension funds and other guiltholders will likely have to sell assets if the BoE is stopping their intervention in that market. They’re likely to likely to see downward pressure on those prices. So holders of those assets, like big pension funds, will have to use other assets to pay for their collateral for those investments. So it’s going to be ugly all around once the BoE stops because the market for guilt is so weak.
TN
And we’ve seen for the Bank of Japan, we’ve seen for the Fed, for different auctions, different government debt auctions, there have been zero takers for government debt auction. And that tells me they’re not paying enough. The interest rates for that debt has to rise because people feel like inflation and interest rates are going to rise. So these governments need to offer their debt out at a higher rate so that people can make a profit with it, given the inflation environment.
BFM
And Tony moving on to China with a Party Congress meeting happening very soon, and with Xi Jinping set to win an unpresented term, what economic implications would that have for China? And with growth slowing down across the world, how will they aim to achieve the goal of common prosperity?
TN
Yeah, Common Prosperity as a definition can be really taken as raising people up, or it can be taken as pushing kind of those achievers down. Okay. And if you look at China’s history in the late 50’s and the 60’s, as you know, Mao Zedong really pushed those achievers down through the great famine and all this other stuff. So my fear is that as Xi Jinping has consolidated his power, he’s going to start well, he’s already started a couple of years ago, pushing some of those economic overachievers down like Jack Ma and other people.
TN
So I really do worry coming out of this Party Congress that we get a much more restrictive Chinese economy. We’ve already seen foreign investor sentiment sour on China, and we’ve already seen with code lockdowns, with supply chain lockdowns and other things, there has been a functionally more restrictive environment and with sentiment souring as well.
TN
I’m not optimistic, at least in the short term. The Chinese government, whether it’s Xi Jinping or other elements of the Chinese government, they’re going to have to do something to reassure the world that they are a good faith partner in global supply chains and for manufacturing. It’s not going to make them happy to do that. But if they want to continue growing at the rates they have grown, they’re going to have to do that.
TN
So when I say I’m not optimistic about China, I’m not saying China is going to crash. I’m saying I think they’re going to have some pretty mediocre growth rates in the coming years because of the economic environment, regulatory environment and market environment that they’ve cultivated of late.
BFM
OK, Tony, I want to stay in Asia and I want to look specifically at Japan because the Yen weakened to a fresh two-decade low, hitting 146 to the US dollar. What do we make of this? Is this really on the back of Corona vowing to maintain its very accommodative monetary policy?
TN
Well, they have a choice. They can either support the yen or they can buy government bonds. And they’ve continued buying their bonds. So I think they’ve made a choice not to support the currency. And with the strong US dollar position and Janet Yellen made some comments today saying, again, saying that it’s really not the US’s responsibility to maintain the currencies, economies of other parts of the world. It wasn’t those exact words, but it was similar. That will likely push the dollar even stronger and we’re likely to see even more depreciation of the Japanese yen.
TN
So there is a lot of pressure on Japan right now, and the Bank of Japan really has some decisions to make about how they’re going to approach that. Maybe they’re okay with depreciating their currency, but it will fundamentally change things like their imports of energy. They’re very dependent on imported energy. They’re very dependent on imported, say, raw materials like metals for their manufacturing. So this really changes their approach to managing those imports.
BFM
Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
BFM
Yeah, I like his comments on the yen. Right. At what point does it then become really painful for the Japanese economy? Net energy imported, clearly LNG from Malaysia is one of the key imports. What does this then mean for inflation? But it’s one country where inflation has been ultra low, almost as low as ours, I think barely 2-3% for them. But for them it’s a bit of a shocker because they’ve been in a deflationary period for more than ten years.
BFM
Yeah, and his comments on China, I think he said that growth would likely be slow over the next couple of years, and I guess Xi Jinping and China will unlikely dial back on its Zero Covid policy next week. It looks very unlikely at this point.
BFM
I mean, everyone’s hoping to see some kind of announcement to that vein. But again, lots of things to look out for in the weeks ahead.
BFM
We just heard headlines coming out Shanghai, parts of it under even more lockdown.
BFM
Well, very quickly, let’s take a look at some good news. I guess that’s coming out of Australia. We have contest airways. They said their first half year profit will jump to as much as 1.3 billion Australian dollars as travel demand accelerates and the airline stabilizes operations after a prolonged and bruising period of cancelations and delays. This ends a streak of five consecutive half yearly losses totalling 7 billion Australian dollars.
BFM
It said that the frequency of scrap flights, late departures and loss backs are all improving. CEO Alan Joyce said it’s been really challenging time for the national carrier, but the announcement shows that how far the airline has actually improved, and they’ve seen big improvements in their operational performance and acceleration in financial performance as well. And this takes some pressure off Joyce.
BFM
Well, if I look at the street, they like this stock. Twelve buys, three holes. One sell. Contest at close was $5 and 17 Australian cents. Tucker price, 653.
BFM
All right, 718 in the morning. We’re heading into some messages. Stay tuned. BFM 89 Nine you have been listening.
BFM
To a podcast from BFM 89 Nine, the business station. For more stories of the same kind, download the VSM app.
