Tag: Fed

The Week Ahead – 07 Feb 2022

Post author By admin
Post date February 6, 2022
No Comments on The Week Ahead – 07 Feb 2022

In this episode, we talked about some really interesting tech earnings like of Facebook and Amazon, crude and natgas prices, and the bond market. How does the NFP data affect the bond market? Also discussed central bank’s reaction to inflation and why you should be keeping your eyes on the CPI?

This is the fifth episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

For those who prefer to listen to this episode, here’s the podcast version for you.

https://open.spotify.com/episode/3DmO9AkU7cHG3MP1wEjuej?si=b9cd41abf47f422d

Follow The Week Ahead experts on Twitter:

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

Show Notes

TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Tracy Shuchart, Nick Glinsman, and Albert Marko. Before we get started, I’d like to ask you to subscribe to our YouTube channel. It helps us a lot get visibility, and it really helps you get reminded when a new episode is out so you don’t miss anything.

We had a lot this week. We had tech earnings, some really interesting tech earnings and market activity as a result. We had crude really ripping this week. And we had bonds raging at the end of the week. So really a lot happening across sectors, NASA classes.

So let’s start with the bond market, Nick. We seem to have gotten pretty much what you mentioned on last week’s show. So can you go into kind of what’s happened and what’s happening in the bond market right now?

NG: Yeah, we’ve basically been ambushed by inflation. That’s what’s happened. You saw yesterday out of the ECB, which was a hawkish twist, possibly one of the worst press conference performances I’ve ever seen in my life. But the facts of the matter are you’ve got five, six, 7% inflation in various countries of the EU. In Lithuania, you’ve got 12%. Okay. So they are failing at their predominant original mandate, which was inflation per the Bundes back from what I’ve been told, there were several members of the MPC.

TN: Sorry. When you say she, you mean Christine Lagarde?

NG: Christine Lagarde. Several members of the NPC wanted to get moved yesterday. Not going to happen but it’s reasonable to think perhaps two hikes this year, but that will still take us to -20 basis points. It will still be negative. Okay. And then that upset the European bond markets.

You have the Bank of England go first with 25 basis points, four dissenters wanting half a point. That started to rock the bond markets a little bit. Then the press conference out of the ECB, and you basically had, goodness how many Sigma move it was in two-year bubbles, two-year German government bonds. But they basically went up over 20 basis points in a couple of hours, terminating early this morning, and they’ve stayed elevated.

And then you had this non farm payroll data. Everybody got it wrong. And the thing is, if you think this month’s figures are nonsense, well, look at the revision.

TN: Sorry, when you mentioned the NFP data, what’s important about the NFP data? Because I think some people looked at the headline employment numbers, some people looked at the wage rate. So can you tell us what’s important there?

NG: Two things. One is nobody was expecting a non farm payroll at like this. Some people will say, well, it’s always going to be revised. Well, okay, then look at the near $400,000 upward revision for December. It’s. All their data. The way it’s coming out. The BLS isn’t necessarily the best, but everything that they look at is strong labor market.

The thing that really upset the bond market was the average hourly earnings. 5.7%. To Albert’s point last week. Wage inflation is here to stay. So having been inundated with calls this morning, that really affects what the Fed… The Fed actually are fighting for their credibility.

TN: When you say wage inflation is here to stay, but it’s really, is the Fed trying to break the back of wage inflation?

NG: Well, that’s something they could impact. Right. By increasing the demand side of the market. We’ll have another idea on inflation next week. The CPI. And the lowest forecast is 7%. The highest is 7.6%. They’re not getting the favorable comparisons because oil has continued to move up. Energies continue to move up. Right.

So assuming we’ve got a seven big handle and heaven help us if we haven’t hit the 8 handle at all, this Fed has no choice. Because as you can see with the bond market, the bond market is going to do the Fed’s job if they don’t do, it.

So every time we get to what you had over the last couple of days with a bit of pullback before the ECB had a bit of pullback by some of the Fed members, the FMC members, and the yoke of, steepened.

AM: I got a question for you, Nick. Can you buy bonds if oil goes vertical? Because I think we both think that oil is going 120 north.

NG: Yeah. Well, no. I think that’s another reason why you can’t be long bonds at the moment and the bond market will adjust to it.

Everybody said the bond vigilantes are dead. When you look at the percentage moves and the price of the bonds, they’re not these are big moves going on.

TS: Nick, can you address a little bit about what will happen to the credit markets as far as the bond movement?

NG: High yield seem to do okay today, which investment grade, fine. Historically, in rising rates, you should see investment grade is somewhat better. High yield, no. High yield. I mean, if these rates are going to start moving up and some of the stuff I heard today tells me “one and done” is not going to happen. It’s going to be more and they’re not going to have a choice.

And the central banks have been basically what you had in the last seven or eight days is the central banks admitting they made a policy error or two last year. And now they’re fearful of making further policy errors. So they’ve got to be seen to do.

And again, to Albert’s point last week, clearly the Biden administration is, had their backs on the inflation front. And I suspect from what I was being told, we’re going to be quite surprised at potentially how aggressive this Fed could be. Not 50 basis points in March. That will be too quick. Too much, too quick. But May, June could well be in play because these numbers aren’t coming down. They’re just not coming down.

TN: Okay. So regardless Q2 is when things start to happen on the interest rate front, on the rates front, right?

NG: Yeah. In terms of QT, I was told the second half, beginning of the second half. Second half.

TN: So does that mean July or November?

NG: Probably means July. Okay.

AM: I honestly think it’s a possibility we do that beforehand just because fiscal cliff is coming in March.

TN: How do they go from QE to QT? Just like that? They shouldn’t be doing QE right now anyway. That’s true. It’s still doing QE. So they missed a beat there.

AM: How do you taper if you’re doing QE still? Why doesn’t anybody ask that question or answer?

TN: I ask it every week.

AM: Tony, I was on this thing with Andreas and “we’re going to taper.” I’m like, “okay, sure.” On paper. But the reality is you’re not because the QE is continuous.

TN: I don’t know. It seems to me from what Nick is saying, it may not be continuous. It seems like that has to stop because the policy position is going to stop in March. Right?

NG: Exactly. Which is why I think 25 basis points, not 50. However, I think right now, until they’ve caught up somewhat forward guidance is not going to be with clarity.

They want to get back to normal so they can be forward guiding according to what we were used to in the deflationary times. Pre-Covid. Okay.

TN: Okay. So when you say pre-Covid, you mean pre-Covid in terms of interest rate and balance sheet?

NG: Yeah. I think it’s exactly what I’ve been told this morning. They want to get back to the interest rate level that was prevalent then. They want their balance sheet back at that level.

TN: Okay.

NG: And I think that what’s happened is not only have they been shocked by inflation, they shouldn’t be shocked by the false-ty of their forecast, but I think they were shocked by the fact that we’ve got a lot of bubbles going on.

Equity market value, housing market, NFT, crude oil. Crude oil’s not a bubble. Bonds have been a bubble. So I think we’ve got some surprise. And of course, that will then feed it.

Remember I said originally, there’s either a riot in the bond market or riot in equity market.

TN: That’s right.

NG: One or the other. It started with bonds, and then we got a bit of an equity riot yesterday, which was more earnings related. But the thing about it is if you look at interest rates as gravity, zero interest rates with basically zero gravity. So you’re on the moon. Equity starts have been up here. If they’re raising rates, they’re increasing the level of gravity. News and law means that something starts to fall.

I was also told if it’s not a cascade, if it’s orderly, sort of down 20% from here, they’re okay with it.

TN: Okay. That puts us at what, 36?

NG: 35, 36,000, which is still above where we were before Covid. Right?

TN: Right.

NG: Fed will be happy with it. This put, is not, there’s no clarity on the put anymore.

TN: Okay. Is it safe to say that your view by the end of the year is sometime between now and the end of the year will hit 35, $3600?

NG: Look, the Fed. These rate markets will carry on. Any mistake by the Fed, any hesitation, it’s going to be punished by rates. And you’ve seen what’s happening, and it happens. It crosses over. You saw what happened in the European bond market as well this Thursday. Bank of England. You saw Gilts market also adjust, and that flowed through to the US market and it continued today.

TN: So do you think the ten-year crosses 2% next month?

NG: Oh, yeah. My target on the ten-year for this year is 260.

TN: Okay, great. So let’s take that and a central bank’s reaction, inflation. Tracy, we’re seeing crude prices just kind of a rocket ship. So can you talk us through that and let us know how does that contribute to next week’s CPI? And Nick mentioned CPI, but what do you expect for that as well?

TS: Well, I mean, I expect CPI to be high. However, the Fed doesn’t really include energy and housing in there and food in their metrics. So that doesn’t necessarily play into that.

That said, I think what we saw today was a lot of shorts being squeezed out of the market. That said, still expecting higher crude prices later this year into Q3.

The reason being because the global oil inventories just drew another 8 million. We have OPEC that just announced another 400K increase for next month this week. Right. And they haven’t even been able to keep up with their production increases. I mean, their compliance is over 132% right now. They just don’t have the spare capacity to move forward. US products consumed last week hit 21.6 million barrels. That’s over 2019 levels.

So globally, we’re seeing higher demand with lower supplies. So this market is likely to continue higher just because of actual supply and demand issues, which I’ve been talking about week over week.

What’s also interesting today is that nobody’s really talking about is that Saudi Aramco just announced that they’re mulling another 50 billion equity stake sale. Right. And so it would be a good thing to keep kind of oil prices higher and inventory is kind of lower. Right?

TN: Sure.

TS: There’s a lot going on in the market right now.

TN: Okay. And as we see this cold front come through different parts of the US, of course, it’s winter. But do you expect, say, Nat gas to continue to rally or say, for the next couple of weeks or next couple of months, or do you expect that we’re kind of in the zone where we’re going to be through the winter?

TS: I mean, I think we’re kind of in the zone. US nat gas prices are not as subject to the volatility or the constraints that say European nat gas prices are concerned. I mean, we have an overabundance of Nat gas, we tend to flare it.

We’re going to be this year the world’s largest exporter. Right. But that’s not necessarily going to bring I mean, you have to look at our gas prices trading at four or $5 compared to nat gas prices in Europe trading at $40. So I think we’re at a sideways market right now just because of the oversupply that we have.

What we are saying is depending on what area you live in, then natural gas prices tend to vary. So we’re looking at the North East, for example, where we have this cold front. Nat gas prices are at $11. Right. But Henry Hub, which is what everybody’s trading is still at 4 to 5. We’re going to see not gas prices rise in Texas right now because we have a cold front coming through. But again, that’s a regional market.

TN: I was just complaining about gasoline prices being $3 here in Texas earlier today, so I just can’t deal with it. Where is it where you guys are?

AM: $4.25 in Tampa.

TN: $4.25?! Holy cow. What about you, Tracy?

TS: $3.99 in the Northeast.

TN: We’re right at $3, and I can barely stand it.

Okay, let’s move along with the geopolitical stuff. So, of course, Ukraine is on everyone’s mind. And we’ll put a link to this in the show description, the video from the State Department spokesman and the AP diplomacy reporter. Albert, can you talk us through a little bit of that kind of what’s happening there and what is that doing to the situation to find a diplomatic solution?

AM: Well, simplistically, I mean, you have the Biden administration trying to amp up the rhetoric and make it more dramatic, basically to distract from what’s going on domestically in the United States from inflation and social issues, and SCOTUS picks down the list of the problems that are facing the Biden administration. That exchange was unbelievable.

You had an AP reporter just taking him to task and saying “where’s the declassified information? And his response was, “I’m telling you verbally right now, and that’s the declassified information.” That’s unbelievable. You’re not going to get away with that.

This is just more of a symptom of the ineptitude of Anthony Blinken as Secretary of State. He shouldn’t even be called “Secretary of State” anymore. It should be “Secretary of statements,” because that’s all he does. He doesn’t do anything else. And when it’s concerning with Ukraine and his method for, “diplomacy”, he’s a non factor. The United States is a non factor, right now.

They’re behind the eight ball where they keep talking up this rhetoric and putting their allies in Europe behind the black ball here. What do we do here? We need support from the United States to show strength, but realistically, we can’t stop them going into Ukraine.

TN: Okay. Yeah. So let’s just go onto a viewer question here from @SachinKunger. He says, what will happen if there is an actual escalation between Russia and Ukraine? What’s the likelihood of actual escalation and what do you think would happen? Both you and Tracy? Part of it is commodity prices. Is there an impact on commodity supply chains, meaning wheat and gas and other stuff to Europe or other places, or is that not necessarily a huge issue?

AM: Well, I believe we’re about 75% that they’re going to have some sort of incursion into Ukraine. I mean, you don’t mobilize that many people and create supply chain logistics to not do anything. That question really depends on the level of incursion. Right. Because if it’s just ten, 20,000.

TN: It goes back to Biden’s minor incursion.

AM: That’s the Pentagon’s working model. And that’s my working model. 10, 20 thousand, you go in the same place as you were before, you loot the countryside, cause a little disturbance. The west looks weak. You leave after a month or so. Right. That’s the likelihood situation.

Of course, the markets are going to freak out in day one.

TS: That’s exactly what I was going to say. I mean, obviously you’re going to see a reaction in the commodities markets just because we’ve had four years of really not much geopolitical risk factored into a lot of these markets, the agricultural markets, the energy market. Right. Pretty much after Libya had a ceasefire in 2020, all that risk premium kind of came out of at least the energy markets and the agricultural markets, we haven’t really seen a lot of geopolitical risks.

So of course, the markets will freak out. I totally agree with Albert on this point. Whether that’s going to last or not, that’s a totally different story.

TN: Yeah. I also think that we’ve had so much money supply that that cushions geopolitical risk on some level. And interest rates have been so low that that cushions geopolitical risk as well. So as we’re in this interest rate cycle and this balance sheet cycle, geopolitical risk counts for more. It’s more costly for companies, it’s more costly for countries and investors.

NG: I would add one other thing. These markets are not trading liquidly. So these moves on geopolitical risk could be exaggerated. Right?

TS: Exactly. My point is that geopolitical risk will be exaggerated at this point.

NG: You can see there’s no liquidity, right?

AM: Yeah. To be fair, any kind of event right now just makes the markets look like it’s a crypto exchange. 30% up, 30% down 300 points on the ES. That’s insane.

TN: On that, Albert, let’s move to some tech earnings and let’s talk about Facebook and Amazon. So if we want to talk about big moves, everyone kind of knows this, but can you talk us through a little bit of that? But I’m more interested in why it’s happening. Why is everyone negative on Meta and why are they positive on Amazon?

AM: Well, from my perspective, the Fed and their cohorts use maybe a dozen companies to pump the markets. Right. They’re mainly tech. Right. They’ve expanded out into a few other things, but it’s mainly tech, Facebook being one of them, Amazon being another. AMD and Google and all these guys. Right. All these big tech names.

Now when you see Facebook miss and a couple of other miss, and the markets start to get weak, there’s a point to where… This goes back to what Nick says about different levels in the markets and whatnot. He always stresses that with me. There’s a point to where if they break this level, we’re going down to 4100 or 4000 or God forbid, 3900. Right. So that lined up right when Amazon’s earnings were coming up. And I’m looking at the market and I’m looking at these levels and I’m like, there is absolutely no way they’re going to allow Amazon to miss. Whether they let them look the books or say something in guidance or whatnot. And lo and behold, what happened? Amazon beat. Did they really beat? Probably not. You know what I mean? Yeah. And then Pinterest that nobody cares about beats and then Snapchat. I don’t even know what the hell why they’re a company. They beat unbelievably. I think they were up like 50, 60% and after hours. Right.

So now they have their juice to pump the markets back up to 45, 30 or even maybe 4600 next week before the fiscal cliff becomes a problem.

TN: Okay.

TS: You also have to look at the bond market. Right? I mean, the more the ten-year tanks, the more that’s going to drag on tech.

TN: Right. So what does that tell us about the next couple of weeks, specifically next week? But the next couple of weeks? As we’ve seen, say Meta come down, Facebook come down. But we’ve seen these other things really rally. Where is tech as a sector?

AM: It’s a pump sector. That’s all it is right now. There’s nothing really behind it. It’s built on zero rates. Well, we know we’re going to get rate heights. So what are you betting on at the moment?

TN: Right. And that’s the basis of my question. If tech is a deflation play and we’re in inflationary environment and we’re going to have rate rises, what does that mean for tech in the near term? So are we at the kind of tail end of tech? That’s my real question.

NG: We’re at the tail end whilst we have to see these interest rate rises come through. And actually, you don’t necessarily have to see the central banks officially raise because if they don’t, the bond markets are… And then there’ll be a catch up. This is the problem. If they Underperform in their credibility catch up because they’ve already implicitly admitted their errors of policy, bond market will adjust and they have to catch up again.

Now, if they do something surprising on the rate side. So yesterday was an ECB shock, right? Today, there was nothing to do with the Fed. It was the data. Well, we’ve got that CPI date next week. Right. That’s going to be very interesting because I agree with Tracy. Core is at a certain level which is still too high. But it’s the full Monty, the full CPI that labor uses when they’re discussing their wage claims. Practically, that’s the behavior of economy.

TN: CPI is the single biggest event next week. Is that fair to say?

TS, AM, NG: Yes.

TN: Okay, so let’s look at that. What if it is, say seven, which is kind of the expectation, I guess the lower bound of expectation kind of. Right? So let’s say it’s seven or let’s say it’s even five. What does that mean for us? Does that mean continued, easy Fed? Or does that mean you have the same assumptions and that’s just kind of a milestone or something that we’re passing along the way to higher rates anyway?

NG: We’re on the way to higher rates anyway.

TN: Okay.

TS: I mean, if it’s five, the market, temporarily if it’s five, the market temporarily will probably rally because that lessens the effect that Fed is going to raise. Right. That percentage will probably go down. But that’s a temporary. If we’re just talking about market reaction on the data release, I don’t really see that happening. I don’t see 5% coming in. I don’t see that a possibility.

TN: But then let’s look at the other side. What if it’s eight and a half? What happens then?

NG: Well, then in the old days, it would have been an inter meeting rate hike.

TN: Okay. Right.

NG: And the bond market will just, it’ll be another riot. Even if the core is steady. Big figure eight on the full CPI? that would shock a few people. Like people were shocked today with the non- farm payroll data.

Literally, if you could watch Bloomberg TV, it was like. They couldn’t believe what was going on.

TN: So we’re in that place in the market where the porridge has to be just right. Is that fair to say?

TS: I think we’re in for volatility. Right? I mean, we’ve been experiencing volatility for the last month or so. I think this will continue until March, until we have some resolution of whether the Fed is going to raise rates or not.

In between, it’s going to be volatile because everybody’s looking at intermittent data saying, does this mean the Fed is going to raise rates? Does this mean the Fed is going to look do you know what I mean? So I think we’re in that pushbull thing, and I think that volatility will continue into next week. I think that volatility will continue until actually the March meeting, until we get some resolution on whether the Fed is going to raise rates and by how much.

TN: Okay. So if I just a couple of things for you to agree or disagree with, just short yes, no. Next week volatility in equities with downside bias, you agree or disagree?

AM: Disagree.

TN: Disagree. Nick, you agree or disagree? Downside bias, you agree. Tracy, equities, agree or disagree?

TS: I think it depends on the sector. Okay. Give me one or two. I think we’ll see, my downside bias is in tech and then obviously, yes, because it’s heavy tech. Right. And so I think we see sideways markets in the Dow and the Russell.

TN: Okay, then let’s do the same exercise for commodities. I know there’s a lot of companies out there, but generally commodities. Choppy with an upside bias. Agree or disagree?

TS, AM: Agreed.

NG: That’s a dollar call.

TN: Okay. Explain that.

NG: Yesterday because of the dollar’s weakness against the Euro and the Dixie, I tend to agree with you. I think it’s going to be choppy until we see the color of the CPI number.

TN: Okay. Very good. Anything else to add for the week ahead?

NG: Just keep your eyes on the bond market. My mantra.

TN: Very good. Okay.

TS: Keep your eyes on B come.

TN: Thanks guys. Thanks very much. Have a great weekend. And have a great week ahead.

TS: Thank you.

TN: I don’t know the left side of my screen is the pineapple people.

AM: We’re going to call Nick Luke for the episode today.

NG: The professional version of Luke.

AM: Okay. Anyways, I’m done joking. Let’s get this thing on the road. Okay.

TN: Good. Alright.

Tags amazon, Bank of England, biden, Bloomberg, BLS, complete intelligence, cpi, December, ecb, England, EU, European, European bond market, Facebook, Fed, FMC, German, intelligence quarterly, July, libya, Lithuania, March, Meta, MPC, NASA, NFP, nft, November, Pentagon, Pinterest, Russia, Saudi Aramco, SCOTUS, snapchat, Tampa, The Week Ahea, Thursday, Ukraine, US, week ahead, Youtube

Podcasts

Will The Rally Sustain?

Post author By admin
Post date February 4, 2022

Tony Nash from Complete Intelligence explains whether the US market’s biggest 4-day rally since November can sustain?

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/will-the-rally-sustain on February 3, 2022.

Show Notes

SM: BFM 89.9. Good morning. You are listening to the Morning Run. I’m Shazana Mokhtar together with Wong Shou Ning and Philip See. It 7:05am on Thursday 3rd of February. But first, let’s recap how global markets closed yesterday.

WSN: Well, the US had a pretty good day. That was up 0.7%, SP 500 up 0.9% while Nasdaq was up 0.4%. And for Asia, the only market that was really open with the Niki, and it was up 1.7%. Hong Sung, Shanghai, Singapore and our very own FPM KLCI.

SM: We were all closed for celebrating the Year of the Tiger. Speaking of meta, I think the results came out and they were not within forecast essentially.

WSN: Well, actually after hours, right. The trade actually the share actually tumbled more than 20% in extended trading earlier. And I think it’s on the back of like what you say, Charles. It’s disappointing earning results. And added to that, they are giving weak guidance and said that user growth has stagnated. Now that’s kind of scary for a company the size of matter.

PS: Yeah.

Just to break down the numbers, earnings per share was at $367 versus the expected 384. Revenue was at $33.67 billion. The expected was 33.4, which wasn’t so bad. But Facebook also missed estimates with user numbers with his daily active users at one point 93 billion versus the expected one point 95 billion.

WSN: Now, I think why the markets are nervous is because when you think about it. Right, this company is at a critical juncture at this point. It’s fighting a regulatory battle on multiple France. And it’s also, remember, guys, it’s trying to shift into the Metaverse. And this shift is costing them an extremely a lot of money. So whether they can translate these KPCS that they’ve already kind of agreed to in terms of $2 and cents, that’s the question mark when your core business is not growing.

PS: I guess a big question of how do you monetize from meta and that pathway has not been articulated very carefully, isn’t it? But that’s a long term expectation. As you said, Shannon, there’s so much regulatory pressure on them. And I wonder with the whole discussion about your revenue source, whether you can rely on advertising revenue now going forward. That’s a big challenge for Facebook going forward and better.

SM: I mean, that’s going to be one of the major headwinds to them. I mean, Apple’s iOS changes affected ad targeting and measurements. That’s already a headwind. There’s also the fact that a lot of people are sort of flocking to other options when it comes to social media TikTok, YouTube. I think the advertising rates for Metsa’s own Reals on Instagram, that’s a lot lower than what’s available on other unfeeding stories.

WSN: No rewind, a few earning season rewind. Let’s go back a few quarters. And I think what has happened is that 18 year olds to 29 year olds were flocking to Facebook. Right. So the question is better, is it going to attract them? And what progress are they going to make? So that’s another thing that the markets are looking at.

SM: Joining us on the line now for analysis on what’s moving global markets, we have Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks so much for speaking with us today. Can we get a quick reaction from you then on the disappointing results from Meta and Spotify? Does this mean something for tech bargain hunters?

TN: Well, I’d be really careful here because tech is really a deflation play. It’s not an inflation play. And so as we’re in the midst of the inflation cycle, there’s more movement to other sectors. So I don’t necessarily maybe it’s a short term opportunity, but again, if I was investing, I’d be really careful here with the Spotify and other misses.

PS: And can we get your perspective on the energy and financial sector? They helped the US Equities stage a mini rally over the last few days. Why are these economic sectors being buoyant while others like tech creating?

TN: Yeah, well, energy, commodities, finance, those are deflation plays or those are inflation plays. I’m sorry. And so that’s why more money is moving into commodities and energy and so on and so forth. So the market seems to be indicating that it doesn’t believe at least the equity market seems to be indicating that it doesn’t believe the Fed will fight inflation effectively. So they seem to be indicating that we’ll keep ripping on inflation.

WSN: So, Tony, how should we allocate our cash? Let’s say we have cash. Where would you be putting your money?

TN: Oh, gosh. Well, you really have to that’s an individual question. I just want to be really careful. So there’s a lot of money moving into commodities because there’s a belief that inflation is here to stay for a while. So if I were looking around, that’s really where I would look, of course, you have to have a risk allocation and you have to have some money and things like tech. But I would focus on companies that actually make physical stuff rather than, say, the work from home plays that we had over the last two years.

SM: And, Tony, let’s take a look at the US yield curve. It’s flattening even before the Fed has fired the first shot on rate hikes. What could possibly be causing this to happen? And do you see a short or long cycle of rate increases?

TN: Yes, I think to answer your last question first, I think what would be best is a short and abrupt cycle because it would really put a stop on the threat of inflation and so on and so forth. So like a 50 basis point hike in March would probably be the best solution we could find. But when we look at the yield curve flattening first, it is a traditional signal of a looming recession. So if you look at today’s employment data in the US, there was a loss of 300,000 jobs. So we’re in this weird place where we have booming inflation and a loss of 300,000 jobs. So it’s like the late 1970 stagflation. I’m not going to say we’re necessarily there, but if you just look at today, it seems like right. So what the yield curve flattening means is bond traders are pretty nervous and stagnation is ugly. So they seem to be saying that they don’t believe that the Fed will take the necessary action on inflation in the short term. So JPOW is not Volker is really what they’re saying. Paul Volcker from the 1980s. So bond traders can really make things difficult on both the Fed and equity markets.

So the Fed has a real balancing act to do. They don’t want equity markets to crater, but they don’t want bond traders to kind of extract their vengeance on the Fed and equity market. So if we don’t see rates rise, if we don’t see the balance sheet reduced, then bond traders are not going to be happy and it could get ugly in safety, too.

PS: I wonder what all this means for the US dollar. Where does the US dollar hit going forward and how do you see Euro and Yen perform against the greenback?

TN: Yes, again, that depends on which direction the Fed takes. If the Fed’s approach is weak and if fiscal support from Congress is weak or it doesn’t come, as many in equity markets seem to be implying, then the dollar will likely level out or even depreciate a bit. That would mean a stronger Euro and yen versus the dollar in a relative sense. And currencies are all relative. If the Fed resumes the hawkish talk that they started last week in Jpow’s comments and then on Sunday and Monday through some of the regional presence, then the dollar will strengthen and the Euro and the yen will weaken. Obviously on a relative basis. There’s not a lot of strength in Europe. And especially when you look at some of the geopolitical issues around, say, Ukraine and Russia, there’s a lot of risk in Europe. So people are really nervous about Europe and then Japan. Yeah, it’s stronger than Europe, but that’s really not saying a lot. So the yen will strengthen on a relative basis, but it’s not necessarily an endorsement of the strength of the economy.

SM: Tony, thanks so much for speaking with us this morning. That was Tony Nash, CEO of Complete Intelligence, talking to us about some of the trends that will be moving markets in the weeks and months ahead.

WSN: Yeah, it looks like markets are headed towards a very volatile period for the moment. So the Nest did really well. But what we do know is the results of Spotify and also Meta were disappointing. And after hours trading, these stocks took a huge hitting. Even PayPal, which results came out the night before, also is down 20 over percent. It looks like markets are seeing this glass as half empty rather than half full so the minute you disappoint right you really get whacked down because everyone basically was already making money the year before so their patience in terms of like writing out this maybe dip in earnings is just not there.

PS: It’s a consequence of so many issues, isn’t it? Because we saw this dip even before the real earnings came out, isn’t it? Because that was when JPY in the earlier minutes said that they were going to raise interest rates and also accelerate tapering and then I think these really disappointing earnings I think just compounded the matters worse but you do see some pickup going forward so whether they’re selective opportunities you don’t play the sector, you don’t play the themes but you really go stock by stock now, isn’t it?

WSN: Yeah, you have to take a very bottom up approach. The easy money is clearly made but you can see a shift of money and this is what Tony is saying is there’s a shift towards commodity prices right? So brand crew this morning is close to $90 barrel. It’s close to seven year high. This is despite the fact that OPEC has said that they are going to raise output but there’s a lot of judges because of the geopolitical tensions that we’re seeing coming out of Ukraine but maybe it’s also due to the fact that oil is truly an inflation play and inflation is here. It’s not transitory at all.

PS: Yeah, and I just think I do see some improvement also in Bitcoin right? If you can see across ECM and Bitcoin up actually marginally just one and a half percent you see some good news there but I wonder if this is a sign of whether that the pressure is really on the equities market going forward but the rest are still holding resilient.

Tags bfm, bfm 89.9, bfm malaysia, bfm morning run, bfm podcast, bfm the business station, Congress, ECM, Europe, Fed, Japan, JPOW, March, Meta, opec, PayPal, Spotify, Sunday, Ukraine, us dollar, us equities, Volker, Yen

Week Ahead

The Week Ahead – 31 Jan 2022

Post author By admin
Post date January 30, 2022

We’re dissecting Jerome Powell’s latest announcement — what does that mean to markets this coming week? Will we see Powell’s inner Volcker this year? What are we expecting to happen in the energy markets considering the geopolitical risks in Russia and Ukraine? Has the White House and Treasury told the Fed to fight inflation as its top priority?

This is the fourth episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

https://open.spotify.com/episode/1CgJgSFPcqQ5VMuopN9S2h?si=212cd6f83928481a

For those who prefer to listen to this episode, here’s the podcast version for you.

Follow The Week Ahead experts on Twitter:

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

Show Notes

TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Nick Glinsman, Albert Marko, and Tracy Shuchart. Before we get started, I’d like to ask you to subscribe to our YouTube channel. It helps us with visibility, helps you get reminded of our new episode. So please do that.

While you’re thinking about it, this week was all about the Fed. Of course, we expected Monday and Tuesday to be choppy. We told you that on our last Week Ahead, which they were. We talked about it last week. We talked about the said meeting last week. And as Wednesday got closer, it appeared that Powell would be more bearish. And that seems to be exactly what we got.

So today we’d love to focus on a few things. Nick, let’s start with you. What were your main takeaways from the Fed?

NG: Okay, I’ve got three takeaways, most of which came after the Fed. Okay. The statement was sort of bland, almost appalling in terms of, it felt like it was leaving the risk markets to determine the Fed’s policy. And then, boy, Powell come out hawkish. He refused to give any direct answers but never denied any of the points and the questions such as how many rates, how many it takes?

So what was interesting is today, we had the first Fed Speaker, Neil Kashkari, the Uberdam for the FOMC.

TN: That’s right.

NG: And he basically came out and said whatever it takes, we’ve got to get inflation. I mean, shocking. Now where Powell got confirmed in his hawkishness came today with the ECI data. The base figure was slightly less than expected. But lift the bedsheets up and you are seeing major wage pressures.

If you look at some of the increases in wages and salaries, four and a half percent for all civilian workers, 5% for private sector workers, up from 4.2 and 4.6% respectively. If you go deeper, hospitality, health care, you’re looking at 7% and 8% increases.

TN: Nurses in many cases are making as much as doctors now in a number of cases.

NG: Exactly. So that basically confirmed Powell’s words of a rapid pace of wage grip. Okay. And I think that was a very key piece of data, which in fact, a Bongi like me would have been waiting for. Right now.

TN: We don’t see them bonds today, did we?

NG: What’s that?

TN: We didn’t see the action in bonds today, did we?

NG: They were down initially and then after the day, they rallied a bit. But I think that was more to do with reversing a very successful week of your well positioned. And what’s interesting, though, this came after that hawkish press conference. So typically what you have is the yoke of mutually reinforces the relationship with the Fed’s monetary policy. So simplistically, when an economy is strong and in danger of overheating, you are going to see the yield curve steeper. Long end, higher rates relative to the short end.

Now that then reflects that the rates have to rise, that’s the historical perspective. What was interesting this time was the curve was bare flat, and it was headed towards an inversion, the consensus. That’s a really bad signal of an approaching recession.

What it’s basically suggesting at that point, historically, the bond market tends to suggest Fed’s tighten too much. We’re going to get a recession. It needs to stop. Reassess, perhaps even cut. So what’s startling about this whole move is you got yield curve flat, bear flattening, coming so soon before the Fed has even started raising rates.

TN: Right.

NG: So if you have a Swift move to inversion, it’s going to be slightly, somewhat harder for the Fed to carry out its hiking program over time. That tells me that you’re going to have it front loaded. It also suggests to me, which is what you got from Powell’s press conference, it may not be 25 basis points each hike. It may be 350s. Right. Especially with this inflation.

He was all about inflation risks to the upside and a very strong labor market.

TN: 350 basis point hikes. I just want to make sure we make sure that we know what you said.

NG: Yes. Basically the Yoker is suggesting that. But some of his comments were this is a labor market that’s rocketing. This is inflation that still has risk. The upside. We saw a bit of that today. He also said supply chains are not going to get resolved this year. We’re going to have to wait till next year.

TN: Okay. Let’s stop there, because I want to ask you something, and this may be an overly simplistic way of asking the question and Albert and Tracy jump in here.

But it seems to me that kind of what he’s saying indirectly is, hey, there are supply side inflation, okay. And we as the Fed can’t control the supply side, we can only control the demand side to some extent. And so what we’re going to do is we’re going to put a stopper on demand so that demand can come down to match up with the available supply. And that’s how we’re going to we don’t have the tools to put the kibosh on the supply side inflation. So we’re going to bring the demand down.

First of all, does that seem to be what he’s saying?

NG: I think that’s probably what he’s trying to say. I would add one other point. So we were all thinking that after the big rise in crude oil and energy prices last year, we would get some beneficial payback by the comparison, but we’re not oil still going up, so we’re not getting that.

And the most extreme version is, for example, Europe. These have all got to feed through from wholesale to retail.

AM: Yeah.

NG: I think it was 95% of surveyed American CEOs. I can’t remember the sort of survey, but I can dig it out. Are expecting to raise prices.

AM: Yeah. The problem with them trying to limit demand, though, is it’s going to start affecting jobs. Labor market’s certainly going to weaken if demand starts to fall off. Because wage inflation is going nowhere. I’ll tell you that right now. Wage inflation is here to stay politically is absolutely just not going to ever come back down. So that’s going to be sticky for quite a while.

NG: But I think Powell was implying that where he basically said the labor market is super strong. So I don’t disagree with it will dampen it. The question is whether it turns around.

Remember, we’re getting all these people retiring and dropping out. Yes, that was your data, Albert.

TS: He kept reiterating the labor market is super strong. But the labor market really, if you look under the hood of it, it’s not really super strong. We all know that.

TN: That’s true.

NG: Yeah. Agreed. But it’s perceptions. Remember, these guys are basing their work off their forecasts. One of their forecasts have ever been right. Okay. Even worse in Europe. So the point I’m making is they have their parameters. They have the data that they look at and monitor and whether we agree with that data or not. And I mean, I would always disagree with the way the Fed measures, the BLS measures CPI, but it was impacted by Arthur Burns of the Fed in 1970s. Right.

So the point to be made is they have their data sets that they watch, and according to those data sets, they may be wrong. I don’t disagree.

TN: So just yes or no, because you’re implying some things that two weeks ago we talked about or last week we talked about, yes or no. Will we see J. Powell’s innver Volcker this year?

NG: Yes.

TN: We will?

NG: In the short term.

TN: Albert, what do you think? Yes or no? Will we see J. Powell’s inner Volcker?

NG: Mini Volcker.

AM: Mini Volcker, I agree with. One and done Volcker, a one week Volcker, yes, I agree with.

NG: If he does the one and done, the bond market will riot. If you look at the Fed meeting. But look at the statement. That statement said, basically risk assets will determine the level of Fed funds, right?

AM: Yeah.

NG: Bond market’s sold off. Hold on. The bond market’s sold off, aggressively. Sold off all across the curve and particularly the long end. It didn’t start to flatten in a bare manner until that press conference.

TN: Sorry, guys, let me stop you both just for a second. Tracy, will J. Powell show his inner mini Volcker this year?

TS: I said this last week. I’m in the one and done camp, maybe two, but I’m cutting it out there. I know Bank of America came out today and said seven. They said the “seven” yes, today, which I think I don’t know what they’re smoking exactly. But I’ll go with max two on this one, even though I said one and done. I’ll stretch that out.

Maybe one more, but that’s where I stand on that one.

TN: Okay. So while we’re with you, Tracy, can you give us a quick view on what did markets get right and wrong this week from your perspective? What do you think is a little bit out of whack?

TS: Well, I mean, I think energy markets obviously remain elevated because of the Russia-Ukraine risk, right? Because Russia’s 10 million barrels per day, they produce a lot of gas. That’s here with us to say we have a northeastern so that kept a bid under at least the energy markets, right. I think last week we were talking about continued volatility all around in, say, the indices and obviously that trend is continued and probably likely will continue into next week.

Again, looking ahead to next week, I expect that probably we’ll still keep a bid under oil, but we did go kind of sideways this week. Even though we got new highs, I still think we’ll stay in that $82 to $87 range, probably for the next week or so, and then probably get a little bit. If nothing happens with Russian and Ukraine, we’ll get a little bit of pullback there. But still looking at the overall fundamentals of the market, they remain very strong. So I don’t think we’ll see any kind of material.

TN: Okay. This is on the commodity side. On the commodity side. Okay. What about the equity side?

TS: Well, it’s. Far as equities indices are concerned, I think that we’re again going to see continued volatility. What I think is very interesting. As long as the market is pricing in rate hikes, that’s going to put pressure on growth versus value. Right.

And so I think that trend will continue. I think we’re in for a rough note. Until that March meeting, until we actually hear an actual decision, we could be setting up for another volatile month in February.

TN: Okay. That’s fun. Right. Okay. So let’s take that and let’s swing over to geopolitics for a minute. And Albert, I want to ask you a couple of things about geopolitics. Tracy mentioned Kazakhstan, which we’ll get to in a minute. But has the White House told the Fed and treasury that inflation is a top priority? Is that what you’re hearing out of DC? Are they getting political pressure to make inflation their top priority?

AM: Oh, absolutely. Inflation is a nuclear bomb for politicians. I mean, gas prices rising, food prices rising. The job market is they can say it’s strong, but it’s not. I mean, realistically talking about 15%, 20% unemployment, so it’s not strong. So, yeah, inflation is absolutely priority number one for the next couple of months.

TN: Right. Okay. And then as we move into a little bit more on geopolitics, so we got a viewer question from at 77, Psycho Economics. He says, has Russia’s stabilization of Kazakhstan increased their influence over energy exports to Europe?

So give us a little bit of kind of overview of what you see happening in Kazakhstan. And then if you and Tracy can help us understand what’s happening with the energy exports to Europe, that would be really helpful.

AM: Yeah. Kazakhstan has been stuck between Russia and China for a couple of years now. But realistically, that’s Russia’s backyard. They control the area. Ever since the United States was booted out of Uzbekistan, they’ve lost a lot of sway in the region. So the energy sector from Kazakhstan all the way to Turkey and into the Mediterranean is pretty well dominated by the Russians right now.

TS: And I would agree with that. I would also like to mention just as an energy producer, I mean, Kazakhstan doesn’t produce all that much.

So if you’re looking at the commodity side, I would say Ukraine would have more of a dent because of how much they’re involved in the cereals markets. How much do they export in the cereals markets, how much they export in the uranium market. So that’s definitely more commodities heavy area that I would be concerned about then Kazakhstan, just from the energy standpoint.

AM: Yeah. And when you’re looking at Russia and talking about energy, it’s not necessarily you don’t single out just Russia’s energy production. They go out and they meddle everywhere they possibly can, whether it be Libya, Kazakhstan, Turkey, everywhere they can to sit there and depress those energy exports so they can pump out there. So that’s what I mean by Russian dominance in the sectors. Sure.

NG: Will Russia attack the Ukraine?

AM: You’re looking at maybe 1020 thousand conscripts that Russia probably hasn’t paid in a while to go and loot the countryside of Ukraine where it’s already Russian dominated speakers.

Biden comes out and talks about sacking Kiev as if it’s Hannibal on the gates of Rome. This is just absurdity. Russia has no military, nor does he want to go into Kiev and hold it. What’s the point of bombing the thing? Of course, they can go in and destroy Kia if they wanted to overnight, but that serves absolutely zero purpose. So are they going to invade? Yeah. I mean, I would give it a 60 70% chance, but would it be something some big kind of issue at. No, the market is looking at this issue as World War II. And it’s just nothing more than a little bit of a skirmish that’s kind of kinetic.

TN: But they’ve already invaded the economy. They’ve already invaded any investors who want to go into Ukraine, that nobody’s going to touch Ukraine for at least the next year. Right.

AM: Well, Tony, listen, I’ve been to that region, worked there for years in Georgia and Ukraine. I mean, Ukraine has corruption issues, of course, aside from the Russian problem. Right. They’ve got legal framework problems and corruption problems that it makes investing there quite difficult.

TN: Right. Okay, so you’re saying no, not going to happen. You’re saying maybe some looting in Eastern Ukraine.

AM: But they’ll reinvent the same areas that they did in 2014. They’ll make Biden and the west look inept, and that’s their goal. That’s it.

TN: Great. Okay. Sounds fun. As we look ahead, what milestones are you looking for? The week ahead, Nick, what are you expecting to see next week in markets?

NG: I’m fascinated to see the next bunch of Fed speakers come out. If we had the Uber Dove, very hawkish. That’s as hawkish as he’s ever spoken, Kashkari. I’m fascinated to see what the others are going to say.

What I can’t get a handle on is whether this is a genuine bear market inversion or flattening going on the bomb market. I still maintain the point that you’ve got to look at the market and watch what’s going on. Okay.

So I’ll be interested to see whether that continues. If it doesn’t continue, that tells me that it was actually a bit half partly people reversing bad positions on the Euro curve because really traditionally we should be having your curve deepening.

And then next week, well, we’ve got unemployment coming out on the Friday, so that’s going to be pretty fascinating. And then we’ll have the following week, all that inflation data starting to come through, and we won’t have the favorable comparisons from a year ago.

The banks have all jumped on like Tracy said, bank of America seven hikes. Goldman is four to five hikes. They are jumping on this. This did surprise the banking community, with maybe the exception of Goldman, who came out beforehand and said this is what I was thinking. So it’s a pull and push between what we’ve just been discussing. How many heights have we got a minivolk building up here in the Fed? If he’s got the support of the White House and treasury, then maybe we have. Right. I think he had to have that before he came out with that sort of speech.

So the question I mean, I looked at today’s equity market. To me that started off as a okay, let’s cover the shorts because we’ve had a good week and there’s no liquidity. So the market just carried on popping up be interesting to see what happens on Monday. And remember, we have holiday, new lunar year, holiday in the Far East. So the forest is shut, as it were, even less liquid.

TN: Right. So, Tracy, you’ve said for a long time that Yellen is a strong dollar Treasury Secretary. And so what Nick is saying about the Fed and the treasury and the White House being in sync, it seems to make sense if they’re tightening that that is certainly something that Yellen might want.

TS: Obviously, you’re going to see a strong dollar. The Feds raising rates, they’re taking liquidity out of the dollar market. Right. So in that environment, we are going to see a rising dollar. What we should be looking at, though, is emerging markets. Right that nobody’s really talking about. How does this affect emerging markets? Emerging market debt that’s denominated in USC as a dollar gets higher, that puts pressure on emerging markets, even though a lot of banks came out and said emerging markets should do better this year than DM markets, but in my opinion, not in an environment where we see a rising US dollar. So that’s something to look forward to.

TN: In the biggest emerging market. We saw the Euro really taken to the shorts this week. Right. So the Euro is really problematic and it’s probably the newest of the emerging markets, in my view. So they’ve got real problems. But yeah, I think watching emerging market currencies is something that we really need to do over the next probably month to see how dramatic will the shift that we saw this week, will that remain? Will that get even more dire? I think it will. Yeah.

And Albert, what are you watching for the next week?

AM: I have to reiterate what Tracy just said. Literally, it’s the US dollar in the first half of the week and then this bonds the second half of the week.

I think if the US dollar gets over 98, it’s a real problem for emerging markets.

TN: Yeah.

AM: Especially the Europeans. You’re talking about the Euro. But the Europeans like the Euro suppressed right here because it’s boosting the manufacturing sector. So it’s like it’s a give and take with them. But yes, the dollar gets over 98. Start looking at problems.

TN: Well, and my big question is when will the CNT break? When will they finally say uncle and I’ve been saying for a while it’ll happen after lunar new year. They just can’t keep this up. And with an appreciated dollar, it becomes even harder for them to keep that CNY at six point 35 or whatever it is right now.

NG: Did we see a few little twitches of weakness today and yesterday?

TN: We did, yes.

AM: Just remember, Tony, October is a big meeting for the party in China and they are going to stimulate that economy sometime this year. It’s just a matter of when it starts and when you’re talking about the currency. Yeah. That’s going to be a problem that we have to tackle pretty quickly.

TN: Well, it’s monetary policy. Q one, Q two and it’s a lot of spending in Q two. Q three, right?

AM: Absolutely.

TN: They’re going to play with the currency in Q one. Q two and play with the triple R and all this other stuff in Q one, Q two. And then spending is going to rip starting in June.

AM: Oh, yeah. Full disclosure. I’m building big position in China names as we go here.

TS: And commodities will benefit from that as well. They start spending right. And you’re going to see commodities rip as well, which also hurts the inflation picture.

NG: I was going to say that will be a negative for the bond market.

TN: Okay, guys. On that note, thank you very much. It’s been great and have a great weekend. Thank you.

TS: Thank you.

NG: Thank you, Bernie.

TN: Okay. Good one, guy.

NG: That was my feet.

TS: That was good. I liked.

Tags American, BLS, China, CNT, cny, complete intelligence, cpi, Dc, ECI, Euro, Europe, Fed, FOMC, Goldman, Hannibal, Kazakhstan, Kiev, March, Monday, powell, Swift, The Week Ahead, tony nash, Uber Dove, Ukraine, United States, USC, Uzbekistan, Volcker, Yoker

Week Ahead

The Week Ahead – 24 Jan 2022

Post author By admin
Post date January 23, 2022

S&P is down about 8% from the highs of Jan 4 — why are we seeing a fall that sharp? Are we nearing the bear market? Why is the Fed standing by and what are they going to do for this coming week? Is a 50 basis point hike realistic in March? Where is the crude heading for the next week and why have natural gas calmed down? And why are gold and copper slightly up this week?

This is the third episode of The Week Ahead for January 24, 2022, in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Tracy: https://twitter.com/chigrl

Nick: https://twitter.com/nglinsman/

Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And I’m joined today by Albert Marko, Nick Glinsman, and Tracy Shuchart. Before we get started, I’d like to ask you to subscribe to our YouTube YouTube channel. It helps us get exposure and it helps you get reminded when a new episode is out. So please go ahead and do that.

Tracy, Nick, Albert, I hope you survived the week. Well, I hope everything went well on your side. I know we’ve all been talking about market activity, and it seems like you guys survived pretty well. So if we look at last week’s show, it kind of played out exactly as we said. We talked about a stock dump, thanks to Albert. We talked about a bonds dump, at least for most of the week, thanks to Nick. And we talked about crude’s nude highs, thanks to Tracy. So well done. And Congratulations, guys.

AM: Thanks.

TS: Thank you.

TN: So let’s talk about what it means for the Week Ahead. So, Albert, let’s look at equities first. It looks like the S&P is down about 8% from the highs from the peak on Jan 4. In general, what’s moving the market right now? Why are we seeing a fall that sharp?

AM: Well, the better question is what’s not moving? And that’s pretty much the Fed pump list. I mean, there’s nine to twelve names that they generally use to pump the market, and they’ve just been absent. And you’ve seen that with Netflix.

The last 18 months, whenever one of these tech names missed earnings or showed some kind of weakness, they still rallied. But this is the first week that you’ve actually seen these names just with no bid. Zero, whatsoever. And the market absolutely just cratered. And I’ve got some statistics out here that are quite interesting. Like only 24 stocks in the United States above a $3 billion cap are up 100% year over year. Right.

Only 114 up immediately 50% out of 1400 are up year over year. The last time we even tested the 200 day moving average was June of 2020.

TN: Okay.

AM: So what you’re seeing is just this super massive bubble in equity that is just deflating at the moment. And it’s because the Fed doesn’t have a bid up.

TN: I look at a company like Peloton, right. It’s about a $9 billion valuation. So it seems to me like this thing has a ways to go. Is that fair to say?

AM: Oh, yeah. I think honestly, I really think we should be at 4100 or even 3900 to 3950, to be quite honest with you. Do they let it go down that low? I don’t know. Because at that point, things can get crazy and get out of control. And the last thing they see, some kind of complete market collapse.

TN: So 3950 would be about 17% fall or something like that?

AM: 17% fall? Yeah, that’s about right.

TN: Okay, so that would be considered a real bear market.

NG: 20%.

TN: Well, I know, but I think it’s close enough. I know technically bear market is 20%, but I think people would be panicking if we crossed. Yeah.

AM: This is a perception game. Nick is right. 20% would be a bear market thing. But in this market, in the perception of this market, anything under 4300 would be Armageddon for these people.

I mean, can you imagine how many bag holders there are and tech names and meme names.

NG: Trap longs. There’s huge both professional retail there are trap longs. And you can see that today 61 minutes was the difference between the Bloomberg headline that said down 2%, Nasdaq recouped all the losses. 61 minutes recoup the losses straight packed out. That tells you there’s a lot of trap long.

TS: I think what also happens is because everything was so tech weighted, right, and that the puke basically in tech is causing margin calls, which in effect makes you forcibly makes you have to get rid of other positions. Right. So what you have to so because that sector was so overweighted and fees were so ridiculously high and everybody was piled into that sector. That brings down the rest of everything, basically.

TN: It’s interesting, Tracy, you said the PE were so ridiculously high.

TS: Well, they still are.

TN: Kind of. Right.

TS: They still are. I don’t mean to say that. We haven’t had that big of a correction. Yeah.

NG: I think the margin point was very important. Came out with a chart. And the margin that we have in the market is still massively, exceeding what we saw in the peaks in 2008 and even in the peak that crossed over the year 2000. So that means again, I go back to the point that’s clearly suggestive of trap longs and Tracy’s right. People will sell what they can as a profit first to get their margin calls. What we haven’t seen, and that’s where you get a capitulation.

I think we’re far away from capitulation. It will be much longer and deeper is where people are then forced to sell those equities where they have the margin calls being hit.

TN: Right. But with the degree of margin that we have right now, if a capitulation were to come, could actually come pretty quickly. Right.

NG: Bear markets are always that much quicker than the Bull market.

TN: Yeah. That’s not a prediction. It’s just a what if. Right?

NG: Yeah, absolutely.

TN: Okay. So where are we looking at next week? Do you think we’re continuing to. Do people want to hold equities over the weekend? Obviously, we don’t think many wanted to because today was a sell off. But do you think people come into Monday and Tuesday feeling like, okay, we’re ready to play again and we want to get long again?

AM: I think it’s a chop day for the first two days of the week, honestly. Seeing what the market’s done, I don’t think the Fed can be really too hawkish at this point, which would probably make the market rip another 100 points up. But there’s really nothing to rally about in this market until some fundamentals get sorted out.

TN: From your perspective, Albert the Fed seems to be standing by right now. Is that fair to say?

AM: Yeah, they have to stand by. They’ve threw out all their Arsenal of pumping the market for the last 18 months that at this point, what possibly more can they do without just causing systemic risks on the line?

From their perspective, why would you keep this show going without some kind of, especially when you’re looking at a fiscal cliff coming in March or February, March.

TN: I don’t want to talk bonds yet, Nick. Do you see a scenario where the Fed does come in, say, next week to save the day, or do you think they’re just going to sit passively and kind of wait and see? And Tracy, do you guys see the Fed coming back in to say, oh, you know, 10% from the high, we’re good for now. We just want to pause it and we’re going to intervene a little bit to make sure things are okay. What do you think they’ll continue to stand by?

NG: I’m sitting here, I wrote today, Equating JPOW to the captain of Titanic flying through all these icebergs and not really worried about navigating through.

They’ve got a lot of problems here. So they’ve got Joe Biden, “please get rid of inflation.” You’ve got the chat that runs fiscal now, Joe, Manchin, I’m not talking about anything until this inflation is sorted out. So they’ve got the political backing to actually start to do something.

The bond market today’s price action was partly in reflection of the stock market. But actually with what’s going on for the last couple of days in the stock market, the bond market should have done a lot better. So the bond market is sort of on hold, and they’re waiting to see one of three scenarios.

One is the Fed tells you they’re going to rate hike rates in March, and that’s when QE will finish. The alternative is they’re going to change policy guidance to indicate the mileage rate hike at and end QE immediately because remember, they’re still doing QAE. Third is to raise rates next week.

TN: I’m going to stop you right there, and I’m going to say we got a viewer question from @FedChairmanB, and he says, what’s the Fed’s end game, push interest rates back and live with inflation or hike rates, crash the markets and let the economy enter recession. And what happens to the high yield and bond issuance market?

So you’ve kind of already spoken to those first two in your scenarios. So what happens to the bond issuance market in the scenarios that you’re talking about?

NG: Well, we’ve seen enormous amount of bond issues right at the beginning of this year. And towards the end of last year. That tells me that corporate treasurers were actually getting nervous that the Fed was going to start to take notice of the inflation and react accordingly.

High yield will underperform as I think will emerging market dollar credit for a variety of reasons.

TN: Underperform, you said.

NG: Well underperformed in terms of the emerging market dollar credit, that’s also dollar point. I’ll stick by my comments of last week and I keep reiterating them and everything I write.

I’m not convinced yet of this Fed’s fighting credentials. I haven’t seen the inner Volcker in JPOW so on that basis action more than words and those words come in the guise of Ford guidance until we I’m really fast. Wednesday is a real crapshoot, okay? We just don’t kno.

TN: When you say real crapshoot. What do you mean?

NG: We don’t know what the fed is going to do. They could do it. I think the most likely thing is they’re going to indicate guys that they’re going to hike rates in March and nqe then which is not really anything new despite all the whole Orkish talk from some of the other boards members.

TN: You say end QE. Do you mean stop purchases or slow purchases?

NG: Stop purchases. They’ve already started slow anyway. So stop purchases. There’s no reason for QE. From all the data that they give us and all the guidelines that they’ve given us for inflation, unemployment, they don’t need to do QE.

AM: Well, I disagree with that because if they don’t get fiscal, they’re going to have to continue with QE. I’ll tell you that right now.

They don’t get fiscal in March. They’ll just unleash more QE.

TN: Okay. That’s a Q two issue, right? That’s not a Q two necessarily. So let me ask you this. Over the past week or so, I’ve seen people talking about a 50 basis point hike in March. Is that realistic?

AM, NG: No.

TN: I don’t think it is. That would bear the anti inflation teeth of an aggressive inflation fighting Fed.

TN: Right.

NG: Absolutely.

TS: You know, it would be really interesting if they watched what BOC meets on the 26th as well and has a rate decision.

So if I were the Fed, I would be watching what Doc does. And how does that affect the economy? And then we’ll wait until March to make a decision.

TN: So first, Tracy, are you saying something nice about Canada?

TS: No. Let them be the guinea pig. Right. So let them raise rates first. Let’s see how bad goes, because really what the to do administration has done is let this go. Amok.

TN: Right.

TS: So if I were the Fed, I would say, let’s see what POC does. Let’s see them raise rates. Let’s see how that happens to the environment. That’s what I would be thinking. And then make your decision in March.

TN: Is there any chance I think it’s close to zero, but is there any chance that the Fed could do something like a ten basis point hike instead of 25? Because that’s what Voe did, right?

NG: Yeah.

AM: It’s a waste of time, but at least it shows that they’re doing something in their minds anyways.

TS: Look, we did something, but we didn’t really do anything.

NG: Yeah. The bond market would not be impressed.

TN: Good. Okay, good. So the bound of 50 basis points or ten basis points, like neither of those extremes is going to happen?

AM: I don’t know. I would say it’s more likely they do ten basis points and 50 by a long shot. I can see them doing ten basis points just to say that they did something. That’s what this Fed does is show that they do something but not really do anything.

TN: Yes, it is. So that’s perfect. Okay. Staying with inflation, I guess. Let’s talk about energy markets and commodities markets. Tracy, you called a new high and crude this week. We saw it. We’ve seen those prices come off a little bit. Kind of. Why are we seeing things come off a little bit now?

TS: Well, I think in general, the broader markets are coming off. Right. So sell what you have to. In addition, I mean, this market was way overbought. Right.

So personally, being an oil bowl, that I am, I welcome kind of this pullback. And I think that this is healthy for the market. Right. And so I wouldn’t be surprised, especially because we’re not even in high demand season.

So I would like to see this market kind of go sideways for a bit because I think we got a little bit overextended it falls through in that $80 to $87 range for a little bit, at least until we reach the new seasonal tendency higher.

TN: So that’s later in Q one.

TS: It starts late February.

TN: Okay.

TS: That starts that demand season. That’s when usually seasonally, you tend to go long oil.

TN: Okay, very good. So you think we’re sideways or on a pause at least for the next, say, four weeks or something?

TS: Yeah, I would like to see that from a technical standpoint, I would like to see some of that bullishness kind of being worked out of the market a bit.

TN: Okay. Very good. I like that. I think that’s solid. Now, what about Nat gas? Because a few weeks ago we were talking about nat gas surging, and we’ve seen things really calm down despite some cold fronts in North America and Europe. So what’s happening there?

TS: Right. So we had two major things happen in the market. Where is the 46 vessels carrying that gas are starting to arrive in Europe, and that’s alleviating pressure on that particular market. And then we also had China Sinopec flood the market with cargo for 2022. They put out 46 cargoes for sale. So that alleviated pressure for 2022. So that alleviated pressure for JKM or the Asian market.

So in general, we’re seeing supply hit those markets. So we’ve seen a pullback in those two markets. As far as the US is concerned, it’s still a range bound market. We are up a little bit today because we have very cold weather in the northeast into Canada, and they share partial grids. And here Texas is going to have some sleep. But that’s pretty much why that market really hasn’t gone anywhere and why we’ve seen some pull back in the Asian and European markets.

TN: Okay. But we’ve seen some action in coal last couple of days, right?

TS: Yes. Coal is surging once again. So we’re at $300 coal in the Asian markets. We’re at about 270 in the Australian markets. We’re at about 165 in the spot market in the US.

So that is surging because it’s being used as an energy alternative rate, which is incredibly crazy.

TN: Yeah. Okay, interesting. Okay, let’s talk about metals for a minute. We’ve seen some chatter about gold this week, and gold is ending up slightly this week. Some industrial metals. Copper is also ending up slightly this week. So what’s happening there as well? Is that just a slight rotation away from equities or is there a real demand there?

TS: I mean, if we’re talking about precious metals, obviously that is a completely different trade than if we’re talking about base metals or industrial metals such as copper.

What I would like to see is like for gold, for example, I would like to see a solid close over 1835 to really put this into a Bull market, even though I’m bullish minors in general because of lack of capex, et cetera, et cetera. But really that market has not flipped bullish yet.

TN: Right.

TS: And then if we’re looking at something like copper is still sideways too, although long term, I’m very much a copper Bull because of reasons that I’ve stated another right before.

TN: Very good. Okay, guys, so aside from Wednesday with the Fed, what are we looking for for the week ahead uncertainty with equities? Is that a downside bias or an upside bias? With that uncertainty.

TS: I think what will be really interesting if we had $3.3 trillion worth of options notional expiring today. So I think next week will be to tell really what direction this market is going. Do we bounce next week? I’m not giving a day. Specifically, was it an options thing or are people going to buy the dip because that’s the second largest options X ray ever in history, options X Ray.

I think we need to be looking next week to really see where we stand as far as the markets are concerned.

TN: Okay, very good.

NG: Options expiry was long Delta. The market makers were all having to sell their Delta positions rapidly. Which is why you saw. I think, yesterday late in the session. It really accelerated on the downside, having been up during the day, and then today it just couldn’t get a bid, which I think combined with, I think the thing that holds this market down is possibly the trap logs. They’ll be nervous this weekend.

TN: Yeah.

AM: Yeah. I’d like to see what happens Sunday night in Apex. Still Sunday night going into Monday morning. But like I said, I think that we chop Monday, Tuesday, and then probably rise up with the Fed being a little bit more dovished than people think they’re going to be.

TN: I think so. Okay.

TS: Yeah, I agree.

TN: Yeah, they may have to.

NG: It’s consistent with what I think until I’ve seen.

AM: The anti inflation teeth have been a little bit dulled down, especially with yelling today saying that we’re going to be living with inflation for at least until 2023.

TN: That was notable.

AM: She didn’t no indication that they’re going to take it on head on.

TN: Yes, that’s right. Okay, guys, hey, we’re out of time. Thank you so much. Have a great week ahead, and we’ll speak next week. Thank you.

AM: All right, thanks.

NG: Bye. Okay. Do I look okay? Am I evenly lighted everything else?

AM, NG: Yeah.

TN: Really? All right, thanks.

TS: Oh, my God. You guys are seriously worse than I am.

TN: Of course, we’re middle aged men.

AM: We’re like obviously, it’s all we got.

TS: I took 2 hours to take a shower and get ready. Don’t tell me about that.

TN: Okay. All right. Are you guys ready?

TS: Yes.

Tags Armageddon, Arsenal, Fed, JPOW, natgas, Peloton, QE, The Week Ahead

Week Ahead

Week Ahead 17 Jan 2022

Post author By admin
Post date January 16, 2022

This is the second episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week. Among the topics: industrial metals, energy markets, natural gas, China’s flood of liquidity and property market, CNY, and bond market.

You can also listen to this episode on Spotify:

https://open.spotify.com/episode/1JGX3v5tpmQ5sS2wtOr0mK?si=3692162380a84ab0

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Tracy: https://twitter.com/chigrl

Nick: https://twitter.com/nglinsman/

Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone, and thanks for joining us for The Week Ahead. My name is Tony Nash. We’re with Tracy Shuchart, Nick Glinsman, and Albert Marko. To talk about the markets over this past week and what we’ve expect to see next week. Before we get started, please subscribe to our YouTube channel so you don’t miss any of the upcoming episodes.

So, guys, this week we saw kind of a whipsaw in equity and commodity markets with a slow start, but a lot of action mid week. And commodities seem to kind of extend gains until the end of the week. We saw bonds really wait until Friday to start taking off, but they took off quite a bit today. And part of that may have been on the back of the retail sales print that we saw. That was pretty disappointing. So, Tracy, do you want to kick us off a little bit with talking about commodity markets and energy?

TS: Sure. I mean, obviously, we’ve seen a big push in the oil market. Right, in WTI and Brent this week. We’re definitely a bit overbought. But that said, what I think is happening here is we’re seeing a shift from sort of growth to value. I think the markets are pricing in the fact that OMA crime is over. Right. And the Fed may raise rates. That’s putting pressure on growth and giving kind of a boost to the value market. And we’re kind of seeing a chase here a little bit in the oil markets.

As far as if we look at the natural gas markets, it’s been very volatile this week, not only in the US, but global markets. I think that will continue. And we saw a big push up on Wednesday, and then we saw a big pullback, but that was due to weather. But now we’re looking at this weekend, we’re having another cold front. And part of that reason was also because we discovered that Germany had less natural gas in storage than initially thought. So that market, I definitely think it’s going to continue to be very volatile. So try lightly in that market there’s.

TN: You mentioned the Germany supply side of the market, but what does supplies look like, say in the US and other parts of Europe? Are supplies normal? Are they low? What is that dynamic?

TS: Yeah, we’re pretty much normal in the US, and we’re set to in this year. We’re set to pretty much overtake the market as far as the export market is concerned. That would mean taking over Australia and Qatar because of the amount that we’re building out in the delivery system in Texas. But the supplies here are okay. The problem is within the United States is that the distribution is uneven.

So you’re talking about the Northeast, where you’re seeing local natural gas prices a lot higher there. Then you’re seeing, say, in Henry Hub, which is the natural gas product that trade that you’re trading.

TN: So I saw some just to get a little bit specific on this. I saw some news today about some potential brownouts in, say, New York or something because of this winter storm. How prevalent will that be? Maybe not just say, this weekend going next week, but for the rest of the winter. Are the supply problems that extreme?

TS: Yeah, I think you’re going to have a lot of problems in the Northeast. And I’ve been alluding to this over the last few months saying that they have decided not to go ahead with pipelines. They’ve shut pipelines. They kind of cut off their supply because they don’t really want to pursue that Avenue anymore.

However, it’s turning out to be a particularly cold winter, and that’s a lot of pressure on that market. And that’s why we’re seeing $11 natural gas prices up in that area as opposed to $4 in Henry Hub.

TN: Right. Meantime, Albert’s warm down in Florida, right.

AM: Yeah. Well, I wanted to ask Tracy what happens if we have an extended winter where the winter temperatures go into late March or early April.

TS: Then that’s extremely bullish. That’ll be extremely bullish for domestic supplies because domestic supplies will be in higher demand than they are normally seasonally, especially at a time where we’re a giant exporter right now.

We just came to save the day in Europe with 52 now cargo. So we’re exporting a lot if we have an expanded winter here. Supplies are unevenly distributed. We’re going to see I think we’ll see higher prices in out months that we normally see a pullback in those markets.

TN: Great. Texas, thanks you for those cargo, by the way. We really appreciate it. Okay. What about the broader commodity complex? What are we seeing on, say, industrial metals and precious metals?

TS: So obviously, those have been very bullish are going to continue to be bullish because they’re in deficit. As far as if we’re talking about battery metals and such, I think we’ll continue to see that we’re seeing a little bit in the platinum markets. We’re seeing some demand. I think there’s going to be bigger demand this year.

TN: So we’ll show some platinum on screen here so our viewers can see kind of where the platinum price is and where it’s expected to go.

TS: Yeah. So platinum demands expected to grow because of the automobile markets and because of Palladium is so high they can substitute platinum for that. But that may be capped for the rest of the year, and then we may continue to see higher prices going into 2023.

TN: Okay. So when you say that’s growing because of automotive, is this growth in ice ice vehicles. Okay. And is that happening because and I don’t mean these leading questions, but is that happening because the chip shortage is alleviating and we’re having more manufacturing in ice vehicles?

TS: I mean, that’s part of it. But platinum is used for catalytic inverters Palladium. And because of the fact that there’s platinum happens to be a lot less expensive. Right now. And also there’s more of it right now. So we’re seeing kind of demand pulled to the platinum industry. And I’ve kind of been worrying about this for the last couple of years that this was going to happen.

And now we’re kind of seen that comes to fruition because it takes a couple of years to retool and everything to sort of switch that metal. So I think demand looks good right now for that. We may see it capped a little bit. That may go up again. But if we look at this chart, technically speaking, I would say anywhere between 1005 a 1010. If we kind of Zoom above that, then that market could go a lot higher.

TN: Right. So short term opportunities in platinum, medium term, not so much, but longer term back in.

TS: Yes.

TN: Okay, great. Now when you talk about industrial metals like copper and you say a lot is needed for batteries, these sorts of things, that’s a more medium, longer term term opportunity. Is that right?

TS: Absolutely. When you’re talking about things, I mean, we’re already seeing the nickel market, cobalt market, lithium market, aluminum markets all hitting new highs. Copper’s kind of waffling about. But that’s kind of more a marathon trade rather than a sprint trade, in my opinion. So I think we’re going to see more and more demand for that further out in the market. So it’s kind of a longer term investment.

TN: Okay, great. And then what about industrial metals demand in China? As we switch to talk about a China topic, are we seeing industrial metals demand rise in China, or is it still kind of stumbling along and it’s recovery.

TS: That is still kind of stumbling along. And so what I have said before try to emphasize is that I think a lot of these battery metals in particular demand is going to go going to be outside of China.

China won’t be the main driver of this demand anymore as the west policies want to change to EVs and greener technology. So I think you’re going to start seeing very much increased demand for the west. So China demand might not be as significant anymore in that particular area.

TN: Okay. So that’s interesting. You mentioned China demand, Dink and Albert, I’m interested in your view on that. We had the Fed come out last week and talk about tightening and reinforced some of that this week. What dynamic is necessary in China, if anything, for the Fed to start tightening?

AM: Well, I think first of all, Tony, China is going to have to stimulate. They’re starting to prioritize growth for the first time in a long time. They see the US in a bit in a little bit of trouble here with the Fed making policy errors. I don’t want to say heirs. We’re more about like throwing together against the wall and see what works. Right.

So China is trying to be the seesaw for the world’s finance sector. Money comes into the United States it goes out. Where is it going to go? It’s either Europe or China. Europe right now is a complete mess. So obviously you see that money going into China you will keep on leaning on businesses and look to control more than you should but they’re breaking up a lot of the old power structures and that’s actually bullish long term for China. We can debate many of these episodes that we’re doing now, Tony, about whether it’s a good or bad thing for the China power structure. But that’s for another day.

TN: Right. What kind of stimulus if we look at things like loan demand so we’ll put up that chart on loan demand. Can you talk us through can you talk us through the chart of what it means and what the PPO will likely do as a result of low demand or consumer credit? Sorry.

NG: Yeah, the credit impulse so that’s private sector lending as a percentage of GDP and that chart shows it may have based and that looks like what we’ve been hearing is that the PBOC has been encouraging the private sector to start extending credit into the system, particularly to find off the real estate market which is not a surprise.

My personal view and some of the people that I talked to on China is that’s just filling a hole. This is plugging holes or putting plasters on various holes. So what will be interesting is to see how that progresses further down the line along this year. I don’t think nothing’s going to happen before February 1, lunar new year and then you’re running into that plenum. Do they encourage that you’ve got the Olympics and then you’ve got the plenum? Do they encourage some sort of boost?

I don’t think there’s going to be much fiscal. I think there’s a reason for that. I think there’s a connection with the real estate sector. Real estate sector. As a source of great funding for the local governments.

TN: They spend fiscal on bailing out real estate already. Why would…

NG: You have to provide fiscal to the local governments just for the services?

TN: Right. So the central party meetings are in November, so there’s plenty of time between Lunar New Year and November to really tick off some monetary stimulus and get some feel good factor in, say, Q three or something. Is that what you’re thinking?

NG: There is a desire, as Albert rightly said, they are talking about the economy now, but it just feels like it’s one plug the bad, the big holes that have been appearing and they just keep appearing and now we’ve got Shamal. It just seems like it’s step by step plug every hole and then give a little bit of access to try and get the private credit rolling again.

AM: Tony, everybody is looking for a flood. When is the flood of liquidity going to come into China? Right. But that’s not going to happen until May or June until they see what the US Fed is going to do because nobody right now knows what the Fed is going to do.

Inflation is obviously a problem within China, specifically oil and other commodities, as Tracy was talking about. Their eyes are completely on the Fed. China will have to pop services sector as a real economy. It’s kind of a shambles there due to commodity prices and inflation.

The willingness is there to lend. There’s no question about that. But who wants property right now in China? They can force feed the economy via credit. But that’s inflationary also. So there’s another do move here within China. How do they boost their economy but still keep inflation down? Same thing the United States is going through. Okay.

TN: So let me give you a really simple trick here.

NG: Let’s not forget you’re seeing some majors. Shanghai now has Omikaron. Remember, China, supposedly, according to the World Health Organization, didn’t suffer the first route, but you got Dahlin is closed, Nimboa’s got problems now Shanghai, Shenzhen, and they’re worried it’s going to head up towards Beijing.

All these international flights to Hong Kong completely canceled. So that’s another problem if you extrapolate and equate it to what’s happened in the west whenever these outbreaks have occurred.

TN: Yeah, but I think the solution. Yeah, that’s a problem. I think everybody’s facing that and I think China is just very, very sensitive about that. We can come up with whatever kind of conspiracy theories we want about China, but I just really think that they’re very embarrassed by COVID and they’re trying to cover things up, not cover up, but they’re trying to offset the negative preconceptions globally by taking dramatic action at home. That’s my view.

TS: And they have Chinese New Year and the Olympics coming up, right?

TN: Yeah. And they’re being very careful about that now. My view for quite some time has been that they would keep the CNY strong until after Lunar New Year and after Lunar New Year, they could get some easy economic gains by weakening CNY just a bit. Is that fair?

AM: I think it’s fair. They don’t want the bottom to fall out of the economy. And the extent of their damage the extent of damage to the economy was pretty significant. So they’re going to have to pull off a few tricks. Like you said.

TN: It’s percentage wise, it’s a lot. But in reality, at 65667 CNY historically, it’s nothing compared to where that currency has been historically. And I think it’s pretty easy to devalue to that level. And I think they would get some real economic gain from that.

AM: Yeah. But again, it matters what the Feds are going to do with rate hikes. That’s the wild card.

NG: The devaluation not just look at the dollar, look at the CFA, because I think it pays them to value against the Euro more than the dollar.

TN: Yeah. Okay. We can have a long talk about the CFO’s basket at some point.

NG: My point is you got to look at the Euro CNY as well as the US, because I think that’s where they’ll go.

TN: Yeah. Okay. So does this present an opportunity for Chinese equities in the near term, or is it pushed off until Q two?

AM: I mean, from my perspective, I’ve been on Twitter saying that I’ve gotten into Chinese equities. They are de facto put on the US market, in my opinion. They don’t have the strength of the actual but does. But money has got to flow somewhere, and if it’s not going to the United States. It’s going to go to China.

TN: Okay. All right. Let’s move on to bonds. Okay. Nick, can you cover bonds and tell us are we on track? Are things happening as you expected? Do markets do bonds like what the Fed has been saying? What’s happening there?

NG: Well, the initial reaction after the testimony from Powell was you had a steadying and a slight rally in bond prices, slightly slower yields. But I thought today was fascinating because today we’ve across the York Cove. We’ve made new highs for the move, so we’re at the highest yield for the last year.

What was interesting is we had that disappointing retail sales. Okay. That would typically suggest if this Fed is sensitive on the economy, perhaps they won’t do much. Well, the bond market didn’t like that. So now you have what is typically good news for the bond market, creating a sell off. And that tells me that the bond market is beginning, especially with the yield curve. Stevening, the bond market is beginning to express more anything that suggests that the Fed doesn’t do what they’re talking about. The market wants to see action. Not words.

TN: We’re getting punished for now.

NG: And what’s interesting is if you think a little bit further forward, if the Fed does hold back and isn’t as aggressive as some of the governors have been suggesting, three to four hikes I didn’t think Ms. Bond Mark is going to like that.

TN: Or Jamie Diamond saying eleven heights.

AM: Jamie diamond is nothing that comes out of his mouth should be taken at face value. Him knocking the 30 year bonds down today, he’s just setting himself up to buy. I mean, the guys he talks his book always has.

TN: Hey, before we move on, before we move on to talking about next week, we did get a question from Twitter from @garyhaubold “Does the FOMC raise rates at the March meeting? And how much does the S&P500 have to decline before they employ the Powell put and walk back their lofty tapering and tightening goals” in 20 seconds or less going, Albert? Oh, 20 seconds or less.

AM: Well, the market needs to get down to at least the 4400, if not the 43 hundreds. That’s got to be done in a violent manner. And it has to put pressure on Congress to do it. And they can’t raise rates unless they get at least $2 trillion in stimulus.

NG: And also don’t forget the Cr expires on February 18. So we could be in the midst of a fiscal cliff.

TN: February 18. Okay. We’ll all be sitting at the edge of our seat waiting for that. Okay. So week ahead, what do you guys think? Albert, what are you seeing next week?

AM: Opec pump for Tuesday and then Biden dump for Wednesday as they set up a build back better push in Congress, along with probably a hybrid stimulus bill to try to get to that $2 trillion Mark. Otherwise, they got no fiscal and this market is going to be in some serious trouble.

TN: Okay. Can they do it? Can they do some sort of BBB hybrid?

AM: Yeah, they can do it. They can get ten Republicans on board as long as there’s a small business, small and medium sized business stimulus program. Okay. They’ll get that.

TN: And if they do market react and you say that’s $2 trillion. You say that’s…

AM: They need a minimum of 2 trillion to be able to even think about raising rates in March.

TN: Okay. And Nick, how does it matter?

AM: This is dependent on how bad inflation actually gets, because if we get an 8% print of inflation next month. Then everything is on the table.

TN: So can you say that you cut out just a little bit if we get what, an 8% print?

AM: If we get an 8% print on CPI the next time around and anything is on the table.

NG: Okay. I think what was happening with the bond market basically is it’s beginning to look a little bit longer term. And I’ve had this conversation, the big traders, the big fund managers are sitting there thinking, okay, look at crude oil now, 85 on Brent. Energy price is crazy in Europe.

That’s going to feed through from the wholesale level all the way through to the consumer via manufacturing goods, via the housing market, via service industries. Starbucks has to charge some more because they’ve got a much bigger overhead.

TN: Netflix just raised their prices by a buck 50 or $2 a month or something.

TS: Filters down to everything. Energy runs the world, right? So that’s going to higher energy prices are going to factor into literally everything you do.

NG: And my personal view, I think that sort of works is in sync with Tracy. I think crude goes a lot higher. I think this year we could see north of 100, perhaps as high as 120. This all feeds through, right? So the point is the bond market there’s a lot of conversations on a longer term plane right now. And the bond market is an expression if it’s higher yields, yield curves deepening.

Anything that says that the fed is hesitant, I think you get sent off. I think that’s why we sold off. We should have been running on week retail sales.

TN: Okay, Nick. Sorry. If we do get a $2 trillion bill, what’s going to happen with bonds?

NG: They’ll be sold.

TN: They’ll be sold. Okay. So they’re going to punish the fed if we get fiscal?

NG: They’ll punish the fiscal fed to start acting and acting in short order. And I remain unconvinced. We’ve only heard words. We got to see the action. They’re still doing. Qe. Right? It’s absurd.

TN: Yes. We’re going to keep the flow going over here, but we’re going to raise interest rates over here. I’m not sure I get it. There’s been that disconnect ever since they announced this in December.

Okay, guys. Thank you very much. We’ve hit our time. Have a great week ahead and we’ll see you next week. Thank you very much.

AM, TS, NG: Thank you. Bye.

Tags Beijing, China, Chinese, cny, cpi, Dahlin, Europe, Fe, Fed, florida, FOMC, germany, hong kong, Lunar New Year, Netflix, Nimboa, Olympics, OMA, Palladium, PPO, Qatar, s&p500, Shanghai, starbucks, texas, The Fed, The Week Ahead, Twitter, United States, US, Youtube

Week Ahead

The Week Ahead 09 Jan 2022

Post author By admin
Post date January 9, 2022

This is the first episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd

Tracy: https://twitter.com/chigrl

Nick: https://twitter.com/nglinsman/

Albert: https://twitter.com/amlivemon

Show Notes

TN: Hi, everyone. Thanks for joining us for the week ahead. My name is Tony Nash. We’re joined today with Tracy Shuchart, Nick Glinsman and Albert Marco to talk about the markets for this past week and what’s going to happen this next week.

Guys, we saw a really dramatic market this week, a lot happening around the Fed announcements around inflation in Europe. We saw some real action around bonds. So can we talk about some of those things as well as what’s happening in energy markets? So, Tracy, could you actually get us started with what you’re seeing in energy markets?

TS: Well, obviously, we had big bounce this week in the energy markets, and a lot of that had to do with we had problems in Libya with some production offline 500,000 barrels. We also saw some big drop in Ecuador production and then Nigeria ongoing problems. And of course, we had Kazakstan, which these protests put potentially 1.6 million barrels at risk. So that was another geopolitical risk factor.

And then what we were seeing at home is because of weather, because of the cold snap we were seeing. We had Keystone down for about a day. And that brings Canadian crew to the United States. And then we’re also seeing production problems in the back end. So there were a lot of things going on in this market that propelled it higher.

TN: Okay. And what about the geopolitical problems with Europe and Russia? Is that still tightening? Do we see that still affecting gas prices in Europe?

TS: I think actually, we’ve actually seen a pullback ever since the US Calgary came with the initial 46 vessels. And then we’ve also seen countries such as the Netherlands come and say that they’re going to provide more gas, so the market is going to be volatile. It’s definitely going to remain volatile. But we have definitely seen it pull back off the highs.

TN: Good. Okay. Very good. Nick and Albert, can you talk to me a little bit about the Fed? What’s your view on the Fed remarks? And will they actually raise three times in 22?

NG: Well, actually, might be on the Fed remarks. Is it was nothing new. We knew absolutely everything. December the 15th, it was statement and then the press conference. It was very clear people just wanted to ignore it. So it’s come home to Roost. What was interesting that treasury market was already acting first day of trading and had a really good sell off. And it’s just carried on.

Now I’m wary of this Fed. Have they got the guts to actually take inflation on, or are they worried about the stock market? And there is obviously that correlation between the stock market and the economy. However, at this high level on the stock market, one wonders whether that correlation is a bit little bit looser because we have from a data point of view, whether it’s reality or not, it’s a booming economy.

And I actually had a conversation with a very well known economist on the street. It’s his own shop. And he said a couple of people he respects are talking about unemployment going sub 3% by their measure.

TN: But, Nick, that’s just a denominator function.

NG: I understand. We all know it’s not really less than 3%. But we all know that inflation is a 7.2% the forecast for next week. Okay. So I mean, this data has issues, and I’m very much aware of this issue. But the point is, if this carries on going that way and the seasonal adjustments accentuate the situation.

Plus, you’ve got to, you know, Albert mentioned this last year. There is a huge number of people retiring. So there’s a supply shortage of the labor side. It’s not just supply chains causing inflation, that labor has a supply shortage.

TN: We’ve been waiting for this for about a decade, right? For the baby to start. Really?

NG: They wanted a bit more inflation. They wanted a moving economy. They got it. Now the Fed has to show whether if the Fed goes all in on it to fight inflation, 170 is not the terminal rate on Fed funds. I think it’s going to be between two and a half or three and a half. Clearly, I’m just concerned about this Fed. In that respect, they’ve shown no willingness.

TN: Sure.

AM: I just want to add a real quick thing about that. Tony, I agree with what Nick is saying pretty much being clear on that. But from my perspective, the story is, are they going to go with inflation or are they going to have a recession? This is zero rates or rake hikes.

This market is realistically built on zero rates. Everybody knows this for them to hike. They would need some sort of stimulus program. And even then, you need lower job reports, which I think probably are coming. But even then, we have a physical flip coming in March that we have to address.

TN: Right. But, Albert, we would need a stimulus program with hikes just to stay neutral.

AM: Of course.

TN: Here’s what I don’t understand. Okay. And maybe you guys can fill me in. But the Fed has a massive balance sheet. Why even mention rates when there’s so much they can do with the balance sheet in terms of tapering being neutral and then tightening that on its own is a massive task. It seems to me that interest rates were kind of premature for that.

NG: I think they’re fearful of tantrums. My view on the tantrum side of things is either the Fed does deal with inflation. So you get then risk assets like equities will have a tantrum. It’s quite possible. And people wouldn’t expect that the bond market will have a tantrum, but it will be an inflation tantrum.

You’re right on QT quantitative tightening. I mean, they’ve got so much in the short end if they just let it roll off that’s $3 trillion in two years off the balance sheet. But then that would cause problems in the short end of the market.

TN: Yes. Previously, they didn’t start tightening for four years, right. QT didn’t start until four years after 2011 or whatever. So it was a long time, and I wouldn’t expect them to start selling off the balance sheet for an extended period of time. It’s just a matter of stopping the flow onto the balance sheet.

NG: This is the biggest hedge fund leveraged in the world.

TN: Yeah, it is. Okay. Speaking of funds, we’ve seen a little bit of rotation start in the market this week. So can you talk to us a little bit about that? And, Tracy, can you guys both talk a little bit about the rotation that’s underway in markets and how far will it go?

AM: It’s pretty clear that we’re rotating out of the US markets and out of tech going into China, possibly even Indonesia. The US market is nearing almost 60% of the entire global market. And that’s simply absurd. And just can’t go on.

Some are talking about disinflation, but the wage inflation continues to rise and the supply chain stress isn’t really getting any better. So where does the money go? Really, in my opinion, it goes to China right now. The European Union is a mess. Can’t go there. Indonesia is a likely candidate. But unless the Fed, they can’t hike rates, they need massive stimulus, everything’s rotating out of the United States and out of tech for the time being. I don’t know how long it’s going to last. I mean, I think the tech sales are maybe a couple of weeks.

The Fed needs that to pump the markets via Nasdaq. So I give it a couple of weeks, Max.

TN: Okay. Tracy?

TS: I’m looking at the rotation within just the US market and not the global markets. But we are kind of seeing a rotation from the tech sector from growth to sort of more value real assets. Right. So all week, we’ve seen the Nasdaq pull back. But oil and banking have remained very strong all week.

So I think that’s kind of where just internally where we are seeing the markets, the commodity markets have done really well this week. Metal is included.

TN: And how long does that last? Is that something that’s just a couple of weeks, or is that something that we see happening through Q1?

TS: I mean, I think it really depends on what the Fed decides to do. So if they decide to raise rates, that’s going to kill the tech market. Right. So that’s why I am of the opinion it’s going to be a one and done, because what do you sacrifice? You sacrifice the market. Right.

And are you going to do that? Is the Biden administration going to allow that sort of to happen during an election year? Right.

AM: Tracy is absolutely correct. They’re not going to let that happen. I mean, right now, the entire perception of the economy is doing well is based on the market performance for them to raise rates or rotate. And right now they’re rotating into reflationary names. I mean, that helps now, but they need the market to act. It is solid.

NG: There is a dark with that view because, as I said, either you get a tantrum equities, particularly on growth, or you get a tantrum in bonds, which then feeds into account. Because if they don’t deal with inflation, everybody’s saying, well, January base effects are fantastic. They’re high, but we’re going to benefit from thereafter.

And I’ve got this and Tracy, but I think we will attest to this. And Alberto, there is this point that as things get normalized, crude oil is going to go up because jet fuel will be in huge demand and people are going to be out moving.

In Europe, there’s no normalization of energy prices. They’re already way above normalization. You’re looking at five to six times the price of energy from last year. So this is all going to feed through the system. It goes. Fee through manufacturing services and comes out as core CPI as opposed to full CPI.

AM: Yeah, but I mean, this week, Nick, we’ve seen a 4.5 wage gain causing issues in the market. There’s…

NG: Actually my fault on the date of the day was it was actually the unemployment. They have said the natural rate is 3.6%. If you look at what happened the last time we had unemployment here, we had inflation at I think it was 4% ten year yields with 270%.

AM: Yeah, I understand that, Nick, but everyone right now is talking about disinflation thinking that inflation is going to come down because the bet is going to help push it down. But how do you get rid of wage inflation? There is no way you can sit there and take…

TS: You’re not going to get rid of supply chain issues either.

NG: Push inflation. This is where it’s changed. And I don’t think these central bank staff has realized have accepted this that everything prior to the pandemic was demand poor cost push. So whole different ballgame. They’ve already said they can’t control price of commodities.

Actually, they can because they can. That’s the point. But the point I’m making is we’ve crossed the Rubicon from something that I’m not saying demand hall has gone away. But we’ve crossed the Rubicon from something that would be affected by monetary policy and financial tightening to something that is not going Redux is rough to charge.

TN: Okay. Before we go on there, there are two questions. First, Nick, you said either there’s an equity side tantrum or there’s a bondside tantrum, which is worse.

NG: Oh, the bondside tantrum. Okay. That will also be feed through to the equity market.

TN: Right. Okay. So the bondside tantrum is worse.

NG: For everybody that Feds behind the curve and London control.

TN: Right. And I think that’s well understood. The other question I have is Tracy mentioned one and done. Do we all think the Fed is kind of going to do a one and done? I mean, that’s my view. It sounds like it’s Tracy’s view, Albert, is that what you think?

AM: So I absolutely think so. They can’t let this thing melt down. They’ll bring it down to, like 4400, but that’s it.

TN: Okay. Nick, do you think it’s one and done?

NG: I’m putting my old hat on as a bond market person. Yeah, because they’ll then have to do QE because the bond market won’t sit there.

AM: They will do QE. They will absolutely do QE. They haven’t signed up and they control the bond market as it is anyway, so they can do whatever they want right now. There’s nobody else in the world that can hold us accountable for what they do.

TN: Are you saying QE and Q two? Do you expect QE and Q two?

AM: Absolutely.

TN: Okay. That’s very interesting. All right. I like that. I think that as a thesis is very interesting.

NG: By the way, the rest of the world may need it.

TN: Absolutely. I think they will.

AM: Of course they do.

NG: I’ve got a great piece of trade Union wage claim in Europe. This is hysterical. So the ECB says inflation is going to trend back to the forecast. 2%. It’s all transit free. The guard still on holiday, but she’ll never die by that.

Every person at the ACB by the governors is a member of the ECB trade Union. Do you know what their claim is right now for this year?

TN: They need wage acts.

NG: I think that’s a tell. Oh, yeah, it’s a tell, right. I think other countries may need the Fed’s help. That’s where I veered back towards Albert. In that respect, I don’t know my traditionalist central bank.

TN: Yes, I don’t doubt that at all. Okay, let’s start looking ahead to kind of next week. We’ve got wholesale inventories, NFL, small business, CPI. We’ve got retail sales coming on. What do you expect to happen next week?

Do we expect, say, retail sales to kind of be moderate or do we expect the CPI to moderate, or do we think things will continue as they have been?

NG: I’m an inflation. So I think CPI will be problematic and we’ve seen this inflation data. The estimates have been lower than the actual. So I’m sort of expecting that to occur.

Retail sales. I’ve not really got a view. To be honest.

AM: I think retail sales are going to come in a little bit higher than most people think. I think the luxury market right now is just absolutely on fire. A lot of free money has just been floating around the system and people have been buying things left and right.

I mean, even the credit card data show that consumers have just used more credit. It’s pretty clear.

NG: Okay, so we’re 2% ten year yield. It’s a possibility next week there.

TN: So also the small business survey, the small businesses that I know from auto manufacturers to other things. They’re having a really hard time. So do you think NFIB is going to continue to be positive, or do you think it’s going to trend out?

AM: I think we’re going to go down. I think the entire reason that they’ve been talking about a new business stimulus program in DC.

TS: Exactly 100%. I think we’re definitely going to go see that slowing down, slowing economy.

AM: They need it because they need stimulus anyways in March. So might as well start throwing money around everywhere.

TN: Right. So build back better. Is that dead, or are they going to try to take another run at it this month?

AM: They’ll take another run at it, but it’ll be toned down and probably separated into different pieces.

TN: Okay. Do you think it will ultimately pass and be one and a half trillion or something like that?

AM: I think it’ll be a part of a stimulus hybrid program of build back better with business stimulus program in mind. So it’ll probably be around two and a half trillion.

TN: Two and a half trillion. Okay. Anybody else have a view on that?

NG: With the emphasis on the stimulus as opposed to the build back better.

TN: I think you’re right now.

TS: Yeah, I personally don’t think build back better is going to pass anytime soon.

NG: Great question for Albert Finabaster won’t be broken with it.

AM: No, they’d be absolutely insane for them to try to do that. They know the GOP is going to have the House and the Senate for them to sit there and break the filibuster. It would just lead to absolute chaos for a lot of different policies.

TN: Bad news. That’s really bad news.

AM: If they get rid of the filibuster and they pass that voting law, the next thing that’s going to happen is the GOP is going to use the same method to have voter ID for the entire country and under the same reason and why they want to get rid of the filibuster. It’s a car bout. Really. It’s not an entirely.

NG: Voter ID in Europe is good to go. Everybody has it.

AM: Yes, I know. But this is the United States. I mean, nowhere in the world does about the United States. So we have to differentiate what happens in Europe.

TN: Yes, we do. All right. So what are you guys expecting to see next week? Are we expecting to see this rotation intensify. Nick, what are you expecting to see in say, bonds? Do you see further action in bonds or are we kind of at two for now?

NG: Well, look, I think think we ten years can go from. I always look at the ten year and in fact, many institutions is five. But the ten years gives you enough of the long bond and the inflation out of it. We’re at 176. 77 today close. If the data is strong, we go to two. Yeah. That becomes very interesting.

I mean, we travel a long way this week, right?

TN: Yes.

NG: And if you look at the CFTC data, the market is not short. A lot of blood was built for cause of last year people slowly stepping themselves in where I’m really interested. I mean, if that happens, we continue to see growth to that value.

What I’m interested in is I think the dollar rebounds on Monday. The dollar seems to have days with that lag to what the interest rate markets do. Albert and I have been speaking about this, but I’m interested to see, even with dollar strength, we’ve seen strength in the commodities market. And this is one of our thesis is China is going to be replaced by the Green Revolution.

We found a wonderful study in France that was reported in one of the French dailies that was talking about 60% of copper will be used up in about two or three years. And then he went through all the other key metals for the metal. I think actually, copper go quicker because of the new left winger in Chile.

TN: So you think dollar appreciation and commodities at least industrial metals appreciation for the, say foreseeable future.

NG: I think the whole complex crazy, and that’s where this time around will be rather like people’s disbelief in equities. How can we keep going this time around? We can have the whole commodity complex elevated.

TN: That’s really scary.

TS: I absolutely agree. Absolutely. Well, I mean, my three main themes in the commodities markets since last year and going into at least 2025 is metals, oil and gas and agriculture.

TN: Fantastic. Okay.

AM: I actually think the tech market is going to make a rebound next week just because the Fed is probably defending the 50 day moving average. I think we see a rebound up until the middle of the week next week.

TN: Wonderful guys. Thanks so much for this. Look forward to doing it again next week for everyone watching. Please, like our Twitter page or our YouTube page. Sorry. So you can get alarms for next week. All right.

Thanks, guys. And have a great week ahead.

TS , AM, NG: Thank you.

Tags biden, Canada, CFTC, Chile, complete intelligence, cpi, Ecuador, european union, Fed, Kazakstan, libya, NASDAQ, netherlands, NFIB, NFL, Nigeria, QE, The Week Ahead, United States, US, US Markets

Podcasts

Expectations Of Higher Rate Are Crushing Markets

Post author By admin
Post date January 7, 2022

Markets are tanking on concerns that rate hikes might occur sooner than expected, hence the possibility that heightened volatility and a flight to value havens could be in store for 2022, according to Tony Nash, CEO, Complete Intelligence.

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/expectations-of-higher-rate-are-crushing-markets on January 5, 2021.

Show Notes

KHC: Good morning. This is BFM 89 nine, five minutes past seven in the morning, 6 January 2022. I’m Khoo Hsu Chuang and I’m joined by Philip See. Okay, let’s also recap how global markets closer today, Phil.

PS: Yeah. Markets in the US really didn’t enjoy the fair minutes. So the Dow is down 1% SMP 500 down 1.9% Nasdaq also down 3.2% across over in Asia mixed the Nikkei was up zero 1% Hang Sing down 1.6% Shanghai Composite down 1% Singapore STI down 6%. But back home as FBMKLCI was up zero 4%.

KHC: Of course, markets are being rented all over the world because of the Fed minutes, which disclose that JPowell might introduce higher rates as early as March. So for some thoughts on what’s moving these markets, we now talk to Complete Intelligence Chief Executive Tony Nash. Tony, good morning. Now we are talking about how financial markets are being crushed everywhere, including in the US by the Fed minutes, which is just faster and higher rate hikes. Maybe as early as March. Do you share the same sentiment?

TN: Yeah. I think it’s a little bit weird. So it makes sense for the Fed to stop buying things. So they buy, like mortgage backed securities so that they can put money into the market. So those are things that go onto their balance sheet. So they’ve acquired trillions of dollars worth of assets in order to support markets and get money into the system. So it makes sense to taper off the things they buy. But it doesn’t make sense to raise interest rates because people are complaining about inflation.

Right. And so if people can’t afford stuff, the major issue is stop putting money into the market don’t necessarily raise the cost of money, which is what interest rates are. So the markets feel like Powell has things a little bit out of order and that he needs to just stop putting money in the market before he raises rates. It may be appropriate to raise rates later in the year, but not just yet. So people think this is a little bit preemptive. So I would expect to see statements to walk back this Fed meeting over the next couple of days or week.

KHC: Well, the thing, Mr. Tony, according to the Bloomberg and markets being the forward indicators, that they are the Bloomberg, that there’s going to be a 71% chance that there’s going to be a rate hike as early as the March 16 meeting for the FOMC. What do you make of that?

TN: I see that. But that’s a forecast by economists. So I’d love to see the error rates of the economists. So I think that the real expectation is around the market welcoming of that. So is it possible they raised by March? Yeah, it’s possible. I think they need to start the paper first to see how likely it is, because again, the major issue is inflation and raising interest rates is a very old school way of fighting inflation before we had the tools that we have right now brand QE QE and other things.

PS: So getting a perspective. Clearly, what we saw in the nest was 3% down. I think interest rate sensitive stocks like tech stocks, I think were biggest hit. Is it time to take some money off the table after a good run?

TN: Sure. Yeah. That’s definitely part of the calculation. Absolutely.

PS: And then the question is, do you rotate it into value?

TN: Well, I think what we’re expecting probably sooner rather than later. We saw some big moves today, but yeah, there is expected irritation out of tech. We’ve seen people load up on tech and durable goods over the past two years. They’re way overstretched. So we do expect tech to see some serious downside over the next quarter, two quarters. And we do expect a rotation more into traditional industries, what people would consider boring industry. So people who make stuff like actually make stuff, even things like tourism and those sorts of things.

So we expect to do some rotation there.

KHC: Yeah. Tony, the other spectre is obviously the covered variants. IHU and of course Florona as well. Assuming that you are right in the possibility of the Fed walking back comments about the March rate hike or the possibility of a March rate hike. Right. What would the smart money be doing now in terms of possibly buying to the dip and getting a nice bounce from a short term trading perspective?

TN: Well, I think you have to look at things like energy, which has gotten a lot of attention over the past week. I think you have to look at what opportunities will there be if the variant slows down and money remains cheap. Okay. So if we’re not going to see a dramatic rise in interest rates from the Fed, then you may have some legs on some things like real estate. I’m not sure. But you may I’d have to do some research there, but I think you really need to look at things like tourism and people getting out Airlines.

Those sorts of things really have to think about when people start to get out in force, what kind of difference can be made in markets?

KHC: I think you quite rightly pointed out that increasing interest rates is a very old fashioned way of dealing with inflation. What, in your opinion, are possibly alternative solutions to addressing higher costs, which is definitely a reality today.

TN: Look, a lot of the issue is on the supply side. So you raise interest rates when the issues are on the demand side and the demand side peaked in 2020 after the Fed just released a huge amount of money on to US citizens. So a lot of the issues are supply chain issues, and they’re on the supply side. So better to reduce or taper off the supply of money going into the system and focus on building out supply chain so if there were an infrastructure bill that came and said, we’re going to focus on these supply chains and make them more robust.

And we’re going to focus on near shoring manufacturing to reduce the length of the sophistication of those supply chains. I think that’s really all that they can do right now to focus on that supply side. So in short, interest rates aren’t going to help. There has to be a more medium and long term investment in Shoring up the supply side. Yeah. I agree with you.

PS: I think that’s a very medium long term outlook. And I just wondering how earnings will look like this year.

TN: Well, certainly not going to look like 20 or 21. A lot of the 21 interest earnings were up until, say Q3, there were effects based on expenses that were cut in 20. There was a lot of headcount reduction and real estate reduction in 20 because of work from home and staff reduction, those sorts of things. So 22 is going to be harder. It’s going to be a much more disciplined old school efficiency, automation and top line growth type of environment.

KHC: Well, Tony, given that we are only six years, six days into the new year, how should asset allocation strategies look like for the conservative investor in 2022?

TN: You know, you’ve got to really be careful of volatility and you’ve got to be careful of risk, even things like political risk, which is what’s happening in Kazakhstan today. We really have to be careful of political risk in market. So with the events in Kazakhstan, then I think you’ll start to see people really take another look at Em and try to figure out how much risk are in those investments. You may see people steer away from em because of that risk. So I think you’re going to see more consideration for developed markets.

You may even see more consideration for Europe. I think Europe may have a good year this year.

PS: And I wonder if there’s a consideration for traditional safe havens like gold, US dollar and treasury spend.

TN: Yeah. Well, that certainly supports the dollar, Treasuries and so on. Gold. I’m not so sure about gold may have some upside, but the focus on developed markets may will definitely support the US dollar and Treasuries.

KHC: All right, Tony, thank you so much for your time. And that was Tony Nash, the chief executive of Complete Intelligence, talking about the Fed minutes, which I have perturbed markets in a significant way.

PS: I think markets are factored in the tapering, but not the interest rate moving earlier.

KHC: Yeah.

PS: That’s why you saw the tech heavy Nasdaq really hit quite badly with 3.2% decline.

KHC: Yes. And of course, we saw the Bloomberg indicators surveying economists a 71% chance that there’s going to be a rate hike at the March 16 meeting.

PS: Incredible.

TN: Right.

PS: You know, you talk about just four or five months ago, we were talking about only two hikes at best, in June. And now we’re seeing things shift very fast.

Tags bfm, bfm 89.9, bfm malaysia, bfm morning run, bfm podcast, bfm the business station, Bloomberg, complete intelligence, Europe, Fed, IHU, Kazakhstan, NASDAQ

QuickHit

The year ahead: What have we learned from 2021? (Part 2)

Post author By admin
Post date January 4, 2022

Continuing the discussion with Patrick Perret-Green of PPG Macro. This second part focuses on China’s role globally and what it will look like in 2022, especially considering the real estate industry? With the US economy, why is Patrick so skeptical about it recovering and what does the stimulus have to do with that? And what about taper tantrum? Why does he believe it already happened?

Please watch Part 1 here, if you have not already.

PPG started in 1997 in research where he learned how bank balance sheets work. He also run the strategy for Citi for rates and effects in Asia and at one point worked out in Sydney. And in the past five years now, he’s been focused on the global macro environment.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

This QuickHit episode was recorded on December 16, 2021.

The views and opinions expressed in this The year ahead: What have we learned from 2021? (Part 2) Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

TN: When you look at what’s happening in China domestically, with the economy and with the political structure, I’m also curious about their outward political projection. And I do worry about Northeast Asia. Not just China, but Japan, Korea. And I’m curious, since you have such a historical background, I’m curious what you think about China in terms of political projection, say for 2022. Are you worried that they’re going to become aggressive in ’22?

PPG: Not ’22. You’ve got enough crap on your own doorstep at home without exacerbating the situation. And if you actually look through what’s going on, well, you can read what the Global Times says and things like the Wegar bill is clearly going to cause some short term aggravation. But overall, my sense is over the past few months, we’ve had a more of a nuanced approach that we need to just tone it down a bit, just dampen down the Wolf Warriors a little bit.

TN: They’re getting it.

PPG: You know what I mean? Down the line, ultimately. Clearly, Japan is arming significantly. Australia. We’ve got the whole quad or whatever you want to call it.

TN: Right.

PPG: One of the biggest problems, of course, has been the abject failure of US foreign policy over the past 20 years. So apart from Gulf War 2, worst disastrous war in history ever when we look at the consequences. Then the GFC.

So everyone they’re all focused on various different things. China’s love the vacuum and it’s been able to get away with loads of stuff, And Biden’s foreign policy towards China is not just China, obviously, but other places abject. Much as it irritates, so over here, I told people people, they love ranting about Trump.

Well, presentationally, he was awful. Foreign policy actually was the best foreign policy that came from the US in decades. Well, okay, assisted by people calling the establishment as well.

TN: But. The difference there is it was outcomes based foreign policy. Right. And I think what Americans have forgotten, particularly over the last 30 years, is it’s really been input space, foreign policy, values and other stuff, which is great. But we had, I think, through the probably 50s, a very pragmatic output based foreign policy. What are the outcomes? That’s the objective. And diplomacy school, my graduate work was in diplomacy, they’ve really focused on the other side of the equation with a fuzzy idea of the outcomes.

And I think what Trump brought, like him or hate him, what he brought was a focus on, a dogged focus on the outcomes of foreign policy. Right. A lot of people hate him. That’s fine. But it was a very pragmatic foreign policy environment in the US.

PPG: Yeah, going forward. And I think there’s a legacy of that now. The one thing the Congress, the only bypass is an issue on the hill is China. And Trump didn’t give a damn about human rights in Uighurs or Hong Kong. They veto proof majorities that he wasn’t going to go through the humiliation of being having a veto overturned. So he just had to roll with it. It actually was more of an inconvenience for him, I think. And then he’s people like Pompeo and military as well.

Overall, I think China, going back to the South China Morning Post article. They were saying that China could hit 5% growth with all the stimulus. Now, if you look at what will GDP activities now and the fixed asset investment. This year, forget about the year-on-year number because that’s the source, but it’s only grown. So I go through the data. I do a lot of data mining. I’m not particularly quantitative. I just sit there with some excel one plus times that times that times that.

TN: Sure.

PPG: Well, there’s only growth nominal terms, 1.6% year to date.

TN: Right. That’s a developed economy number. That’s not a growth economy number.

PPG: That’s a nominal number. Don’t forget. So given the fixed active effort uses lots of steel and cement and commodities which have all gone up in price. Actually, that number is a big fat, real negative. That’s sort of 49 year to date. I think the MBS came out year to date, that’s 49 trillion CNY. So pretty much still out there. That good 4 to 5% of GDP. Retail sales are only up 3.9%. That allows CPI at 1.6%. Either number is still like the lowest on record outside of the immediate pandemic shutdown.

So you sort of wonder where on Earth they come up with their growth numbers for the year? And for it, they’ve got a bit of boost to their exports from the trade surplus and a lack of collapse in tourism because Chinese is a big tourist. So the current account is being boosted. So that flatters the GDP. But even the Chinese next year expect net exports to come down. And if I’m right about the durable goods argument, then that’s even worse for the Chinese trade surface.

TN: Sure. I think you’re right.

PPG: So you’re left with what can they do?

TN: Can I ask you also something because you mentioned retail sales and consumer goods. I’m curious. With all of the real estate woes in China, how much of consumer debt in China is secured by real estate assets? Is that an issue? And how much of a crimp will that put on consumer spending?

PPG: That’s a tough one, because we know overall, the LTVs are very low. But we also know there’s 50 to 60 million vacant apartments. Chinese have a surreal concept about owning. They count as an investment property.

And if you rent it out, it sort of loses its original status. For what’s the description. But the problem is if you’re introducing these property taxes and you’re going in like that, well, then you are seeing second hand homes. I mean, the official home numbers are nonsense when we know full well that developers are sending stuff at big deep discounts.

TN: Right.

PPG: But by large, I think Chinese will just, it will affect sentiment. And some people are highly leveraged. So there are. Personal bankruptcy is still an infant industry in China. It’s not really established in the courts.

TN: There’s so much around it. It’s terrible.

PPG: It clearly is already dampening consumer confidence. And if the real estate is slowing in production, so we know that new sites, new land sales collapse. So that tells you going forward over the next two years, new construction activity is going to be much reduced. And if you’re not building homes, then you’re not going to be filling them with washing machines.

TN: Right.

PPG: I was actually looking at I think it was a big lift manufacturers like Otis and stuff like that. And you’re just going like, you look at the stock price and I think they’re up there and you’re going, like, well, Chinese real estate can’t go down there. You’re just thinking like, yeah, I mean, I basically have a big aversion to anything related or household good related book stock, but I’m not an equity man. I’m a bond man through and through. That’s what I do.

TN: It all makes sense. The logic is there. And given the direction we’re headed, all of this makes a huge amount of sense, especially for kind of ’22. I think 21 a lot of it’s behind us. And there are a lot of questions and a lot of I think, still skepticism around what we’ve heard globally in ’21 about the impact of spending and monetary policy.

But, Patrick, if you don’t mind, you had mentioned US foreign policy. So let’s focus on the US for a minute. And with the midterm elections in the US, and you seem to be skeptical about kind of positive momentum in the US economy, I’m really curious what your view on the US is for the year ahead?

PPG: Well, we got two things. One, we’ve got a big fiscal contraction. We shouldn’t underestimate how much the fiscal expansion has flattered the US economy because it was so large and that’s clearly massively in reverse.

One of the things, I don’t know the exact details of it, but something that US equity analyst convenience to ignore when it comes to earnings is if I ask the question, well, don’t you think 800 billion of PPP loans might have flattered your fingers as a whole? All the other loans to Airlines or stuff like that? US Airlines basically got extremely generously treated. UK Airlines haven’t. Like VA or Virgin Aircraft.

TN: All Americans are really unhappy about all the money the airlines got because the quality of service is terrible.

PPG: Yes. But, for example, the distortions, it’s really like they’re still echoing through. Like, I was talking about the monetary stimulus. It takes longer to pass through the economy. What’s the analogy? It’s like a python eating an elephant.

TN: Right.

PPG: It just takes longer to digest.

TN: Right.

PPG: Probably, extreme example. You get the point. When we look at all the fiscal front, we know that’s much less the hope for fiscal stimulus if you think where we were at the beginning of this year and everyone was going, oh, wow. It’s great. Biden’s going to push so much through. Well, we only just got the infrastructure bill through.

TN: Underwhelming infrastructure bill.

PPG: Yeah. And Build Back Better is still not through. And the fact the centrist Democrats are resisting not just Manchin, but overall, there’s much more of a realization that just look at Biden’s approval role. But the good thing is it’s supposed to be damping down the progressive, different word for them.

And then clearly Virginia shot the dams. And it’s basically long standing. Congresspeople are retiring in record numbers because they don’t want to have the humiliation of losing their district coming up. So let’s presume that the form book is correct. That basically Republicans probably take both houses. Certainly the House. Well, that stymies everything.

The administration has got a window doing stuff, plus dealing with inflation and stuff like that. And it’s always like, well, now you’ve got the administration going, well, we want to do this. But actually, Holy shit, the inflation has got out of control. We need the Fed to come in. And lo and behold, the Fed has just had, we’ve had a big move in short term rates pricing to the point when you’ve got 60 basis point increase in the dots, which we’ve never had before.

And if you said to someone a year ago, what do you think would happen if 60 basis points was added to the dots? Between what quarter? They say the dollar would surge. The curve was flattened. In fact, what we’re seeing is because so much is priced in that the curve is steepening and the dollar is softening. But there are other elements going on there as well.

And if the US economy in the great, you know, between the greatest economy ever couldn’t handle rates going back to two and a half percent and a minor reduction in the size of the balance sheets. And my view was that Fed should have probably stopped at one and three quarters rather than two and a half at most, because they forgot about the lags that they keep on telling us about. That the idea of the US economy with so much more debt, normally, it’s gone from 240%, 250% of GDP to 275 now.

TN: Right.

PPG: Basically, we’ll bring that down a little bit. But it’s gone up by 10% share GDP. So how sensitive is the US economy going to be to 150 basis points? Certainly. This is what the Fed is talking about now, by the end of 2023. Another 50 in ’24 plus balance sheet reduction as well. I just can’t see it getting there. So I’m skeptic that we’ll necessarily see Fed funds getting back to 1%.

TN: Two years is a long time.

PPG: Two years is a long time.

TN: I think, in general terms what I’m seeing. And I’m not sure if this is what you’re saying, but for the past two years, we’ve seen a private sector that’s been fixated on the public sector. Meaning the Covid regulations, the Covid stimulus, all this stuff. And it seems to me that with that stimulus disappearing and with the chaos in DC and at the state level, private sector will start focusing on the private sector and their customers instead of government. Does that sound fair?

PPG: Yeah. Although let’s not be too nice on the private sector. There’s large parts of the private sector that clearly gouged. The interesting one is, of course, global shipping. So if global shipping really disrupted and the costs have really gone up so much, how come is it that people like mask have made more money in the past year than they’ve made in the past 15 years combined? Because it’s clearly capitalized. Oligopoly is going on there, and they are gouging people. That will fade over time.

My biggest concern is actually what is the risk of a demand shock? So the Fed starts draining liquidity and we forget just how sensitive the US and the global economy is to the flow of the US money. And I think it’s the flows that is the thing. So it’s this whole point about there’s a sort of delicate tipping point in terms of if you think about it. I’m a big one for analogies. It’s been like an artery. How low does the blood flow have to get before you faint?

TN: So you’re saying that the flow will stop, but the stock will remain. Are they going to start selling off those balance sheet assets?

PPG: The Fed at some point. Sorry, the Fed.

TN: But not in ’22?

PPG: No, but I think they’ll see. But clearly the fact that they were already talking about this in terms of let’s reduce assets that. Well, fine. If we do the 75 basis points, we’re not going to wait until we get to one and a half, or as it did last time around. We’ll probably start reducing the balance sheet earlier because it’s a nice little tool. And actually, it’s quite a good tool if you want to crumble down on mortgages.

So what was noticeable in the last Redux was because the Fed was buying such a large share of them pretty much 100% of all mortgage where I stopped buying 100% all treasury issuance. But once they started reducing the mortgages, that was when mortgage spreads versus the 30 year mortgage versus the loan bonds actually really started to widen out.

TN: Right.

PPG: And then that mortgages are really the underlying credit of the credit market.

TN: Of course.

PPG: So everyone knows all the Treasuries, actually. And I think mortgages are a better reference than OAS or something. I’d rather look at a mortgage than bond against credit, and that filters through to the whole credit market. I’m never left with a situation where you have record shares of US business debt. If you look at the flow of funds reports, US business debt is a record share of GDP.

So I love the bullshit we get from the corporate. So again, the equity analysts who basically, I think should just should not be left in a room with any hard surfaces. So they go out and they say, oh, yeah, we got record amounts of cash on the balance sheet. So you had I think it was Viacom back, Wall Street Journal normal. Sort of. Yeah, on the corporate sector. Wonderful. Viacom CFO going, oh, yeah. We’ve got like 10.7 billion of liquid assets on a balance sheet. At the same time, Conveniently forget to mention that they had 170 billion of debt. Right? You don’t have any billion of debt. Things go wrong. Your ten or billion doesn’t go that far.

TN: I’ve heard over the past few months as talk of tapering has intensified. And I bring up the taper tantrum to people from 2015, and there seems to be a resistance that we’ll have a taper tantrum this time. And I kind of find that a little bit rose-tinted. There has to be a backlash.

PPG: Well, I think we’ve already had it. Quite honestly. I think we’ve already had it. If we look at some of the moves, if you’re a rate trader and you specialize in rates, we had some big swings. Look at the curve. So 530s in the bond curve before the tipping point was the minutes from the April meeting. So Powell being going on about we might be talking about paper. And then actually the minutes come out and said some participants said it’s time to maybe start discussing taper. And then the 530 was at 155. We’ve been down to 55 now. A 100 basis points with a big long. So there’s been a sort of subtle taper.

I also think you have to go back to the psychology of 2013, really, when we had the taper tantrum when rates exploded. We were still very much in a mindset. And central bankers were, too that we revert to normal, that rates would revert to where their previous level was. And it’s the educational experience. You think about all those Fed objections, all their dot points, and it took them to the the end of 2015 to do the first 25 basis point hike. It took them another year to do the second 25 basis point hike.

So I think we’re scarred by experience now. So there’s not the taper tantrum as of such at the same time, equities. It’s all fine, but they don’t realize how sensitive the economy is to the marginal changes in money.

TN: Very good. Patrick, thanks so much for your time. This is really a level of depth that I think everyone will appreciate. And I think the views are fascinating because it’s view of ’22 that I don’t think they’ll get anywhere else. So thank you very much for your time and just wish you all the best for ’22.

PPG: Yeah. Thank you. Happy Christmas. Happy holidays. And you have politically correct happy.

TN: Thank you, Sir.

Visual (Videos)

CNA Asia First: Omicron sparks sell off

Post author By admin
Post date December 28, 2021

The full episode was posted at https://www.channelnewsasia.com. It may be removed after a few weeks. This video segment is owned by CNA.

Show Notes

CNA: Welcome back to Asia First. Wall Street took a hit overnight amid concerns that a rise in Omicron cases would stall growth and add to inflationary pressures. Experts say supply chains and corporate profits could be dealt another blow as the possibility of increased restrictions is back on the table.

The Dow and the Nasdaq tumbled 1.2 percent. The S&P 500 closed 1.1 lower, with financials and materials among the biggest decliners. Also weighing on sentiment, Goldman Sachs has lowered its US growth forecast for next year. This after Senator Joe Manchin said over the weekend he would oppose President Biden’s 1.75 trillion dollar spending bill.

Let’s bring in Tony Nash. Now, he’s founder and CEO of Complete Intelligence, joining us from Houston, Texas. Lots to talk about today, Tony. So let’s start with Omicron. How much do you think potential measures are going to dent economic growth given the spread of the highly transmissible variant coinciding with the end of the era of cheap money?

TN: Yeah, it’s a good question. I think it really depends on where in the US you are. I’m in Texas and in in certain parts of the country you could barely tell that there’s a pandemic. There aren’t restrictions at all here, in Florida and other places. And also, we had our surge a couple months ago. So we’re on the downside of that surge now.

In the north, where you have kind of seasonal viruses, they’re on the up upward motion of the surge and so there’s a lot of sensitivity in northern states like New York, Boston, or Massachusetts, Washington DC, Michigan those sorts of places. So I think what you’re seeing is a kind of seasonal sensitivity because of Omicron and people getting nervous and so you know, again it really all depends where you are in the US.

For the upcoming Christmas break, flights are packed. Americans are traveling again. These sorts of things are happening. So, of course, there’s always a risk that people will do a hard lockdown like DC has put in some new measures today. But other places are seeing the virus as endemic and just kind of trying to move on with it. So, I think it could go either way but I don’t necessarily think we’ll have sustained negative impact. We could have short-term negative impact.

CNA: What about the risk from Fed moves and do you think the projected three rate hikes next year are going to be enough to contain inflation given the potential for Omicron to cause these price pressures to spike?

TN: Sure. You know, I do think that the Fed will pursue the tightening, meaning of its balance sheet pretty quickly. I think the rate hikes they’ll probably do one and wait and see and then they’ll proceed with the others later.

I think we can’t forget that 2022 is a midterm election year in the US and the Fed, you know, they they try to stay nonpartisan sometimes. But you know, there’s going to be a lot of pressure for them to make sure that the economy continues growing at an acceptable pace and kind of pushes down against inflation, So they’re in a tricky spot so they can’t just go out of the gate with three rises. They have to take one. See how the market digests it. Continue to build up expectations for the later rate rises then proceed based on how the expectations are set in.

CNA: What would that mean for the flows into markets given how Biden administrations Build Back Better Plan is also facing a setback? We could see a narrower bill than the 1.75 trillion on the social and climate front. What then do you think the market drivers are going to be if both the central bank and the government are curtailing that stimulus?

TN: Right. You know it is possible. Like I said earlier, kind of travel those sorts of things are coming back. I think Americans are just dying to get back to something that’s a little more regular, a little less constricted.

You know we do see things like food, entertainment, travel these sorts of things moving. Temporarily, we do see things like technology dialing back. But you know as we get into Q1 or Q2, we think that stuff will come back and be interesting again. So. But not necessarily as much of the work from home activities. People here are gradually getting back into the office.

So you know what we will see say for US equity markets is because tapering and interest rates we will likely see a stronger Dollar and that stronger Dollar will attract more money from the rest of the world as well. So both domestic growth, although it’ll be a bit tepid in ’22 will help to continue to push markets marginally.

We’re not going to see massive growth like we saw in ’21. But the the strengthening US dollar will draw up liquidity from other parts of the world, too.

CNA: Just very quickly if you can, Tony. What do you think the outlook for energy demand and oil prices is going to be like given how some countries are already reverting back to containment measures?

TN: Yeah. Oil is tricky. In the near term, I think oil is a little bit tricky for the next few months. I think the outlook is better as we get say to the end of Q1 and into Q2. But for now, we’re not expecting a dramatic upturn in crude prices like we’ve seen in gas prices in Europe and other places.

CNA: Okay, we’ll leave it there for today and keep an eye on those commodities. Thanks very much for sharing your insights with us. Tony Nash of Complete Intelligence.

Tags asia first, Christmas, cna, cna asia first, dollar, Fed, florida, joe biden, Massachusetts, Michigan, New York, Omicron, President Biden, President Joe Biden, texas, us dollar, US equity, wall street, Washington DC

QuickHit

The year ahead: What have we learned from 2021? (Part 1)

Post author By admin
Post date December 28, 2021

Patrick Perret-Green of PPG Macro joins us for a QuickHit episode to reflect what 2022 brings. Patrick got not only the Covid call, but a lot of inflation calls right through the pandemic. As we wrap up 2021, what does he think about right now and how does that set the stage for his view on 2022?

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This QuickHit episode was recorded on December 16, 2021.

The views and opinions expressed in this The year ahead: What have we learned from 2021? (Part 1) Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

TN: So, Patrick, you’ve got not only the Covid call, you’ve gotten a lot of inflation calls right through the pandemic. And as we wrap up 2021, I guess what I’d really like is, what are you thinking about right now and then how does that set the stage for your view on 2022?

PPG: Well, there’s a whole lot of multiple issues. So I was rewatching Powell’s Q&A this morning. And clearly there is the energy side of things. There is the good side of things, the demand for goods, and they are responsible for big chunks. And I was quite surprised by the ECB’s massive upward revision for inflation for 2022 in the press conference earlier on today. But base effects are very powerful. So we always knew we were going to get peak base effects. We’re going to come in around October, November time. Oil average WTI average below about 39 to $40 last October, November. And by January are up to, or early February, we were early 60s. That base effect will tumble out quite dramatically.

I also think that the durable goods effect is also going to tumble out dramatically. We’ve had record purchases, but I remember talking joking with people last year. It was about the middle of last year, and I was saying I was just as an experiment going on ebay and seeing what I could pick a Peloton up for. So everyone got their Peloton or they bought a flat screen TV. They did the house, they did the kitchen because everyone was at home.

And I think when you look at durable goods purchases in the US and this is chart I’ve posted many times on Twitter. They are off the charts and they’re off the charts relative to disposable income as well, which is now falling. Okay, due to inflation as well. But in the US, we’ve also got this remarkable thing that it’s very different to other countries.

So you look at the UK. We had the employees taken out the other day. We’ve now got more people on payrolls than we had prepandemic. Non-farm payrolls are still down 3.9%. And in Europe employment has been much better. So the great retirement, the great resignation seems to be a US phenomenon.

But I think next year the risks are that everyone that goods purchases collapse and pricing power similarly collapses with that. And even things like autos as well will pass. So we know for well that the auto manufacturers have got lots full of 95% completed cars, and the chip shortage is actually a thing. It’s not that the world has run out of chips. There’s some papers recently looking at chip supply.

So the supply chain disruptions are being true. Yes, there’s still log jams with ports in the US, but in Asia, around Singapore, they’ve largely cleared into chain. Yeah, we’ve still got subjects very pandemic risks of problems with changing over ship crews and things like that. But overall, I think that side of things will ease down.

Okay. The pandemic is of pain, but we all know that. And there’s a lot of we’ve got Omicron now, but there is some cause for hope. It’s incredibly infectious. But all the people I know have got it. I don’t know anybody who’s had it really bad. Whereas I know people who even had Delta and they were really late. I don’t know anybody hospitalized, really. But could this be, like a bit of a bushfire?

It goes through very quickly. But actually, then we have the benefit because it’s so infectious. So many people get it. That herd in unity becomes higher. And actually, by February we’re back and everyone not giving a damn.

TN: Which is what I love. I love it. I love it. Let it be. So I hope it happens.

PPG: But let us go. But let’s not forget the underlying reality. People seem to stare in sort of my a rose tinted glasses and look back and think like, oh, wasn’t it wonderful prepondemic? No, it wasn’t. The world central banks weren’t cutting rates in 2019 because we were in good shape and there wasn’t a load of excess capacity. My concern is now that actually we talk about capacity being built. So records for containerships is less.

However, the volume of global trade actually is not particularly higher. It’s more because of disruptions. An empty container has been trapped in places. So people are building more containers and they’re building more factory space. But once the supply chain disruptions come down, then you’re going to be left with even more excess capacity.

TN: Right. Well, it’s the other side of letting all those old containerships and book carriers retire in kind of 2011 to 15. Right?

PPG: I’m still left with an image of a world that, compared to 2019, has more debt, it’s older and the capacity hasn’t gone away. And then we’ve also got the geopolitics and the politics and all that sort of stuff as well.

Watching Powell last night, I was struck by how amazingly sort of confidently was about the outlook for the US economy. Two, how he seemed to have lost all recollection of the effect of the last tightening cycle on what was a much healthier economy. So here we’re talking about, we got a 150 basis points of tightening by the end of 2023.

Okay, tapers. We all knew that’s going to end quickly. It’s going to be done by middle of March, in 10 weeks time.

TN: Just words, Patrick. It’s just words.

PPG: And then they do Redux. And he admitted at the end towards the end that they had their first discussion about the balance sheet. So I think they’ll start balance sheet reduction much sooner. But the problem is if we go back to last time when debt was so much lower, the Fed overtightened.

My reckoning, was they should have only really gone to one of the records. They completely underestimated the impact of balance sheet reduction on liquidity. I did quite a lot of work on the plumbing, and the irony is that the Fed is in charge of a mandatory systems. They’re not a very good plumber. They seem to actually understand how their own system works properly. So you end up being like the repo crisis. No, it’s not QE. We’re just buying bills and then we’re buying coupons. But it’s not QE it’s just liquidity management.

All these various issues and the other aspects I think about inflation is, there’s a lot of similarities with what happened with China in 2008, 2009. China had this. It was only a $7 trillion economy. A trillion dollars of stimulus. M1 was up 40%, M2 was up 30%. And rather than normal lags of six to eight, nine months, M2 growth peaked at the end of 2009 or late 2009. But inflation didn’t peak until the end of 2010, early 2011. So such was the volume of stimulus that came through. It just reverberated along. You dropped a Boulder in a pond?

TN: Sure.

PPG: So the ripples effect just last for much longer. And I think that’s one of the things we’re seeing, but obviously, what we also are seeing is global money growth as a whole has slowed very dramatically. And even when I look at things like excess reserves or where we are now or currency and circulation within the US, the sort of three to six month annualized rates are backed down to rates that they were at pre crisis.

So the year on year base effects are all fading out. And ultimately, unfortunately, most central bankers aren’t monetarists. They seem to have banned monetary economics. Greens bank scrapped M3 in the US. He’s a great scenery as far as I’m concerned.

TN: So when do you see this stuff really taking hold? Is it kind of mid 22 or?

PPG: The second quarter it really picks it. And we got the other side of it. So we got a US that’s doing okay or brilliantly, as far as pounds and the Feds… Europe, that actually is doing all right as well I mean, everyone’s got perpetual downer in Europe. But I think Europe could be the surprise next year.

And we got China, which is everyone still gets on this sugar high. They’re doing stimulus. And I keep on trying to explain to people, it’s not stimulus. This is dialysis.

TN: That’s a great statement.

PPG: I had a long term view on China, and it really goes back to sort of 2014. Once Xi really took control, got rid of all the rivals, started centralizing the power.

And there’s a long term rationale behind that. So, yes, in terms of the Chinese are great at some long term thinking. In other ways, I describe them to people as like, yeah, China is like a linebacker. He’s like 250 pounds. He’s six foot six tall, but unfortunately, he’s got the brain of an 18-year-old.

TN: I think the latter is more accurate, actually. With that in mind, as we move from inflation to say another obvious kind of what’s ahead for 22? What do you see for China in 22? Do you see ongoing stimulus? Do you see a roaring Chinese economy? What does China look like for you in 2022?

PPG: Well, the interesting one is that we look at everything that’s come out of the recent Central Economic Forum, all the going. The whole emphasis is on stability. None of this grandiose stuff about we’re going to be strong. It’s about stability.

Think tank South China Morning Post, which is owned by Alibaba, which is effectively controlled by the state nowadays. So there’s the G 40 Economic Council, whatever they are think tank. But it’s next PVoC governor or deputy governor on it as well. A big article. Nothing is said without less it’s approved.

So they were talking about monetary and fiscal stimulus next year and by that moderately lower interest rates. Central government stimulus because it can’t come from local governments because they’re bankrupt and they’re not getting the land sales revenue and they won’t because the collapse of the real estate.

TN: That’s an important point, though, if you don’t mind holding on the SCMP article for a second. I see people on social media say all the time, well, local governments will always come in with stimulus. But from where? I don’t understand this fallacy, that local governments can always come in with stimulus.

PPG: Well, no, they can’t, because I think even Goldman come out and say that local governments have got hidden debt of about 40 trillion CNY. And all their various financing vehicles. They’re screwed.

They don’t have the money. But over time over the past few years, we’ve probably seen this greater and greater central control. Come on them anyway. They’re more and more dependent on central government forward expenditure. And the rationale comes to this because I think the regime has always recognized that the debt or we’ll keep playing the game of Jenga is unsustainable.

TN: Right.

PPG: And therefore you have to get to a point where we’re going to take some pain. So if you look back at what Xi’s been talking about over the past few years, it’s all about struggle, the Long March. I mean, this is like really going in. That is the story of China. He conveniently forgets to mention, the Long March was actually really a long retreat and basically hardly anybody who started it survived. But that’s completely ignored.

But there is this centralization of power because they know that things have to be dealt with and there will be there’s a potential for trouble. So you become a super authoritarian super, you know, look at all the moves about data.

It’s all about the Chinese government having much more control, much more visibility, a greater ability to snuff out any sort of signs of opposition at the very earliest time.

TN: But my worry there is that China, actually, I think, is becoming fairly brittle. Meaning the Chinese government is becoming fairly brittle.

Under previous regimes, you had a fair bit of flexibility where you had the different levels, not with a lot of autonomy, but with a fair bit of autonomy. Now you have a huge amount of centralization and that creates a fairly brittle government, both economically and politically.

I’m not saying it’s necessarily going to break, but I do worry about what they’re creating.

PPG: Well, I agree with you. I’ve made sneak it past my then investment bank employees. When I came out 2014, I wrote about the stylinization of Chairman Xi.

So you have the centralization of power in one man. But then you also get that fear of slightly Tsar Russia. Nobody wants to be the bearer of bad news. So you had African swine fever. Everyone covered it up. Which was one of my concerns about Covid, because, like you saw in Wuhan, local police shut up the doctors on the 1 January.

And similarly, so you have this culture of paralysis, even pre crisis, Xi comes out and says, oh, we need to reduce coal fire stations. So good party figures, party Chiefs, local party Chiefs. We shut it, shut it down. And then they realize, actually, we haven’t got anything to heat the homes or schools.

Oh, by the way, then we have to divide the energy from the gas from the aluminium shelters to actually do that. You got this sort of, whereas, if you look back to China and Zheng and other leaders, China sort of thrived on its basically Brown envelope culture. We just get it done. Ignore central government. Okay, but at the same time, we are putting loads of cadmium into the ground and killing ourselves. But so be it.

TN: When you look at what’s happening in China domestically, with the economy and with the political structure. I’m also curious about their outward political projection. And I do worry about Northeast Asia, not just China, but Japan, Korea, Taiwan.

And I’m curious, since you have such a historical background, I’m curious what you think about China in terms of political projection, say for 2022. Are you worried that they are going to become aggressive in ’22?

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