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.
US banking giants express optimism for the year ahead despite warning of potential risks to the economic recovery. Sachs reports a 51% increase in earnings, driven by strong performance in asset and wealth management. However, Morgan Stanley’s net income falls over 30% due to charges, reflecting a mixed performance in the banking sector. The market sell-off is attributed to concerns about the resilience of US markets, potential volatility in the coming months, and uncertainty surrounding the upcoming presidential election and US fiscal spending.
Additionally, Wall Street is affected by the mixed reports from Goldman Sachs and Morgan Stanley weighing on market sentiment.
The show also discusses the upcoming reports from middle regional banks to gauge the performance of commercial lending, consumer activity, and the overall tone for corporate finance and insurance in the next quarter. Overall, market sentiment remains cautious due to uncertainties surrounding economic indicators, the upcoming election, and fiscal spending in the US.
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US banking giants are finally calling the bottom, signaling a deal making comeback in the coming months. Executives of two major lenders expressed optimism for the year ahead as they reported fourth quarter earnings. But they also warned of risks that could disrupt the economic recovery. And Goldman Sachs stuck the landing after tumultuous year for the bank. Its earnings jumped 51% in the fourth quarter from a year ago. A strong performance from its asset and wealth management business supported the profit boost, offsetting weaker investment banking, and its shares ended up about seven tenths of a percent. Meantime, Morgan Stanley also topped revenue estimates on an investment banking rebound. But the net income fell more than 30% due to one of charges, pushing its shares lower by more than 4% there. Now it is the first scorecard under new CEO Ted pick, who warned of two major downside risks, including concerns around geopolitics and the health of the US economy. Those bank earnings results posing one of the biggest drags on Wall street, pushing all three major indices lower overnight. Now the S&P 500 had been trading near its all time closing peak, reached in 2022 over the past several sessions, but it is now down about 1% from that record high.
CNA
Meantime, the tech heavy Nasdaq shed about two tenths of a percent. Boeing was the biggest loser in the Dow, shedding about 8%. The plane maker has yet to regain investor confidence after us aviation regulators extended the grounding of its seven three seven max nine jets indefinitely for new safety checks. Spirit Airlines, though, losing more altitude over a blocked acquisition deal. A federal judge ruled against JetBlue’s nearly $4 billion takeover proposal of spirit airlines over antitrust issues. And as equities tumbled, US treasury yields rose with the dollar amid easing rate cut expectations. Yields on benchmark tenure notes are back above 4%. Again on hawkish remarks from Fed governor Christopher Waller. Tony Nash, founder and CEO at Complete Intelligence, joins us for more now. Tony, we’re looking at Wall Street’s sell off accelerating. We’re hearing at the that, you know, markets may have gotten ahead of themselves regarding how deep and how fast those policy rate cuts could be. Your take on that and how we can expect markets to move?
Tony Nash
Sure, the problem with us markets right now is that they’re priced for perfection. So if anything goes wrong, if the Fed signals an overly hawkish message or an overly dovish message, or say, a government macroeconomic data print comes out that isn’t perfect, or if company earnings don’t come out that aren’t perfect, then we can really see some wobbles in us markets. So I’m not really sure about the resilience of markets here. I think what we’ve been telling our customers is you’re going to see some intramonth volatility for the next few months until investors become confident in the direction of the Fed.
CNA
At the same time, this year is a pretty big one. For the US. It is election year. How much of this of lack last step performance is actually due to this? S&P 500 historically performs well in an election year, but it typically sees a slower start first, or is this just part of what is usually happening?
Tony Nash
Yeah, a lot of this really depends on Janet Yellen, the treasury secretary. If she can sell enough bonds to have cash to spend money from the US government, then we can really see markets rally pretty hard. But if Yellen can’t get the authority and can’t sell the bonds necessary to do that, then the US fiscal spending will be problematic. We also have a budget that’s going through in the US and a tentative budget agreement. If the Republicans halt that agreement and make more fiscal spending cut demands, then that could weigh on the US economy as well. Yes, traditionally markets do well in a presidential year, but I think there’s a little bit uncertainty around the election. And people, I think people are a little bit hesitant to spend partly because they’re a little bit loaded up on debt or a lot loaded up on debt. And we’ve seen a really robust 22 and 23. And so really people are wondering how far can we push this in 2024?
CNA
Indeed, dampening sentiment there. Big bank earnings. We’ve got Goldman and Morgan did the latest two report appears to be quite a mixed bag, but mostly not so great this quarter. And that’s weighed on Wall street as well. How do you read the latest earnings report? Are we talking bad debt, the lingering effects of high for longer rates? And what does it tell you about the consumer?
Tony Nash
Yeah, I think that what we’re really waiting for is some of these middle regional banks to see how they report because we’ll know how, say, commercial lending is doing and how commercial real estate lending and how consumers are doing. It’ll be much more evident as we see these regional and mid sized banks report. The larger banks, they’ll be fine. They are fine. They know how to manage and trade off the different lines of business that they have. It really is the mid sized banks that we’re waiting on and that will set the tone for a lot of the corporate finance and banking and insurance for the next quarter.
CNA
All right, Tony, appreciate time this morning. Tony Nash, founder and CEO at Complete Intelligence.
In the latest “Week Ahead” discussion, three experts delve into three crucial topics: synchronized global risks, the spending patterns of the US consumer, and the copper gap in the energy transition.
Keith Dicker of IceCap Asset Management and Loonie Hour Podcast takes the lead on synchronized global risks, highlighting how a banking crisis in Silicon Valley has led to crises at other regional banks in the US and abroad. He also discusses the potential risks of the Hong Kong dollar breaking its peg and its impact on the Canadian dollar.
Albert Marko shares his insights on the spending patterns of US consumers, presenting surprising findings on mainstream companies like Carnival Cruise Lines and McCormick, which have been able to raise prices despite the economic recession. These findings challenge the notion of the Federal Reserve’s ability to pivot or pause.
Tracy Shuchart from Hilltower Resource Advisors warns about the copper gap in the energy transition, which is emerging just as the energy transition gains speed. She provides insights into what this means for copper prices in 2023 and how it will impact the energy transition.
The episode concludes with the experts’ predictions for the week ahead.
Key themes: 1. Synchronized global risks 2. The US consumer isn’t slowing down 3. Copper gap & energy transition
This is the 59th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash, and today we’re joined by Keith Dicker. You’ll know Keith on Twitter as @IceCapGlobal. He’s with Ice Cap Asset Management. He also hosts the Looney Hour Podcast, which is one of the most popular business podcasts in Canada. So we’re really lucky to have them today. We’ve also got Tracy Shuchart from Hilltower Resource Advisors and Sam Rines from Corbu. Sam Rines will be joining us a little bit later.
Tony
So let’s get started, guys. We’ve got a few key themes this week. First is synchronized global risks. And we saw that recently with the banking issues, and we’ll get that into a little bit into that a little bit deeper with Keith. With Sam, we’ll talk about the US consumer and how it really isn’t slowing down. And we’ll go into some detail on company annual reports and quarterly reports on that. And then with Tracy, we’ll talk about the copper gap and the energy transition and a message that she’s been talking about for maybe about a year, but is really kind of coming to the forefront now. So, guys, welcome. And Keith, thanks again for joining us for the first time. We really appreciate it.
Keith
Yeah, thank you for having me here. And I think with Tracy, I consider you like half Canadian, sort of with the Quebec ties, but still like one and a half Canadian against one guy from Texas. We’re still not winning, are we?
Tony
Yeah, you’re welcome here anytime.
Keith
So I’ll just talk a little bit about how we do things. We manage money for individuals and family offices, basically across Canada, as well as some European clients, in the US, and Asia. And so we’ve had a lot of success with our strategy and just a couple of things to get the view started, which I think is important. We’re Canadian. I founded Ice Cap back in 2010-2011ish around then, but prior to that, I was offshore in Bermuda for over a decade. And then before that, I was with one of the big bad Canadian banks. But I like to share this Bermuda story because I think it’s really important today because I think a lot of people today get so focused on the day-to-day and short-term factors, what’s happening. And the other challenge a lot of investors have, we tend to see the world through the eyes and minds of where you live and where you’re from. And our view, the financial world does revolve around the US. That’s just the way it’s put together. But being offshore, you don’t really belong to any country. You’re living in between the seams.
Keith
So you get to see and feel and live the world from the perspective of all these other ex-pats you hang out with and so forth. So I just share that with you because, like up here in Canada, if you know the Canadian environment or not, Tony, you should head up when it’s a bit warmer. Maybe for you, I know, but Canadians have this very insular view of our banking system and our housing market. Everyone around the world should behave and act and walk the way Canadians do and so forth. As we all know, that’s not the case at all. It’s a very bigger world out there. With just that in mind, just before I go into the immediate view that we have with the world, it’s our view that long-term interest rates, looking at the ten or 30 years, really did peak in 1982. That’s when it peaked. Back then, rates were called 20%. So from the early 80s right up to eight nine, they went to 0%. And everybody makes money when that’s happening, especially the bond managers. And when that hit zero in 809, policymakers should have let the world reset.
Keith
But we know, of course, that wasn’t permitted, and some jurisdictions did a better and worse job than others that trying to protect that. But effectively, what happened then, for the next decade-plus, we’ve been living in this world with zero rates, negative rates, unbelievable re-escalation of borrowing at both the sovereign debt level households and companies, and so forth. And the other part I like to add to it a bit of a joking way, but it’s also factual. We now have basically two generations of university kids coming out for their entire university academic careers. And now ten years of working in, say, the investment world has been in this period that just doesn’t exist. It’s zero rates. Nothing exists, because as we know, Tony, you put a zero in your denominator for any number. You’re calculating what happens. It doesn’t work. Right. So what we see now today in response to all the policies we have with the Pandemic and COVID, for better or worse, all of the economies and central banks in the world, now they’ve all synchronized. So risk has been synchronized in the US. Canada, Australia, Asia, Europe, you name it.
Keith
And now we’ve gone from this period with zero negative rates. Short term rates are now they exploded higher, and it’s created this moment where increasingly we’re starting to see these risk just come out of the blue.
Tony
Just to clarify something, and I want to make sure that I understand correctly, when you have a zero or negative interest rate, the cost of risk is only the nominal cost of the money that you put at stake. But with an actual interest rate, you have a multiplier on that risk. It may be just a small portion of the multiplier, but there is an accelerator on that risk, right? And so I think this is what it’s been really hard for people well, really easy for people to fall in love with, with zero risk, I think, is that if I risk $100 and I lose it, the value of it is only $100. But if I’ve got a 10% interest rate, then I’m not just losing $100, I’m losing $110. Right. So as we transition back into a positive interest rate environment, the financial planning and the investment planning for people, as you mentioned, say, two generations of people coming out of school, this is an environment people have never had to deal with before. Right. And at the same time, we have BOJ, ECB, and the Fed, who to varying degrees, have had zero or nerp environments where nobody’s had to deal with that.
Tony
And it’s crazy. So I know that is just some basic, basic stuff compared to the advanced calculus you’re talking about, but I think we really kind of need to highlight that that there is an actual cost to risk now that we have real interest rates.
Keith
Yeah. And it’s something we haven’t experienced for a long time. So people tend to forget that. In school, and these CFA studies that we all went through, we call that the risk free rate of return. And it’s been zero for a long time, and it’s been reset. I think this is the greatest global macro setup that we’ll ever see in our lifetime. I mean, if you’re a money manager and you’re not enjoying this right now, then I think you should get a different career, move along somewhere else. But if you think about, for example, over the last five or six months, the Brits had their crisis in their pension fund and guilt market. Of course, then we had Silicon Valley Bank just recently, and then right behind that, Credit Suisse was there. So one good result about that, policymakers, which is mostly the Fed Reserve, of course, were able to react very quickly to prevent contagion. And so they should be complemented for that. I know it’s not nice to compliment or it’s not cool to compliment Central Bank. Yeah, definitely not cool. But that’s something that is a result that did happen. However, it’s also telling us here at Ice Cap that if you went back six months ago and I said, hey, I want you to list ten things that could blow up over the next six months, you wouldn’t have had those three events on your bingo card.
Keith
Maybe the Credit Suisse story, maybe, but the other two were pretty hard to find. So that tells us that, hey, there’s other events that are out there lurking around. And because they’re out there, it doesn’t mean they have to occur. It just means that the probability of them occurring, in our opinion, it’s a lot higher than it normally would. It normally would be your normal distribution chart or graph. So we have that happening, and it seems like every day there’s increasingly more data coming out. We just say, wow, I can’t believe that’s still going down that path. But these are the things that we look at. And again, we find it’s incredibly interesting. It means it does create a lot of opportunities coming up for people managing the portfolios. But you have to be aware of these fattail events that are out there because they could happen and maybe the next one is central banks are not able to save us.
Tony
So let me ask you on the, on the kind of synchronized risk part, seems to me that developed markets are highly calibrated to these risks. A small issue causes a huge reaction in developed markets. I spent a lot of my life in emerging markets, China, Sri Lanka, India, Southeast Asia, Eastern Europe, all over the place. And so it seems to me that emerging markets can bounce around a lot and the perception of risk is a bit lower. I know that there’s a perception that if the US or if developing markets have problems they’re going to be felt even more in emerging markets. But is that true when you talk about these synchronized risks? Do they necessarily feel worse in emerging markets?
Keith
I think in a normal cycle that is the case. You just go with it because from a fundamental perspective, emerging markets look awesome. You know, they have lower debt, faster growth rates, younger, you know, younger demographics and, and things like that. However, again because we’re in this world again I call it synchronized risk. And a quick example is housing markets, real estate markets like Canada and Australia as an example. Again it’s our view that if risk does re escalate, so it happens rapidly. Then because the world.. It operates on the US dollar, that’s just a fact. That’s the way it works. All of a sudden liquidity dries up and liquidity comes out of those markets. So then it doesn’t matter how strong or weak the fundamentals are. If you don’t have dollars to operate, you have US dollar tax revenues coming in or economic gross domestic product revenues, all that stuff, then it’s going to push someone off sides. I think back prior to the 809 housing crisis it would have been hey yeah, just ride it out and you’ll be fine. But these days for example, we’re avoiding these markets. We’re not in the EM markets at all.
Keith
And sometimes that’s great, other times it’s oh wow, you missed one there Ice Cap. The main goal with investment management that we look at is if you avoid the large drawdowns for your primary portfolios then the return side will take care of itself. But if you get these big chops in value and I mean we know the numbers, if you’re down 50% you need a 100% return to get back to where you started. Again it’s being cognizant of these risks that are out there and we keep going back to this US dollar wheel that’s greasing the world.
Tony
Yeah. Speaking of currencies, Keith, you had posted this tweet earlier this week responding to a message from Kyle Bass about the Hong Kong dollar breaking and you said if the Hong Kong dollar breaks, the CAD also breaks. Can you talk us through that a little bit?
Keith
Yeah, because obviously we’re Canadian up here and the challenge that most Canadian investors have is that they don’t appreciate that the Canadian dollar and the Canadian economy and the yield curve up here in Canada, it can be significantly influenced by an external factor and that’s lost on most investors up here. So if you’re reading, like, big bank research, like, they’ll never. Sorry, they’ll rarely talk about these outside events. It could be something within the eurozone, for example, like the Italians or something. We know China is struggling quite a bit, but I will frequently talk and write and chat about these events and that if they happen, it is going to affect Canada. So the comment this week sort of stems back to… So we know the Fed opened their USD swap lines with all their friendly central banks that are set up for it and everyone drew on it. Everyone immediately. “Hey, yeah, we need the dollars.” But they also have this other repo line set up. It’s FIMA. I think it’s Foreign International Monetary Authorities. I think it is that stands for. So basically it’s a repo facility for central banks that are not attached to the swap line option.
Keith
That’s my understanding of it. And at some point, it was one week ago Friday, someone out there borrowed 60 billion USD for that. And if I think of people if you’re not aware how the repo facility works, Tracy, if I’m giving you $60 billion, you have to exchange with me at least 60 billion plus in US Treasuries to act as collateral for it. Even though you have Treasuries, you don’t have US dollars. We like to joke about if you go to a restaurant, you get your bill at the end of the night. You can’t pay it with a T bill. They’ll laugh at you. You need US dollars for it. So someone needed US dollars last week. And because of the size, and because they’re not one of the USD swap line friendly nations, you’re looking around who has that much in Treasuries that they can use for a repo? It really looks like it was or is China. And Hong Kong is the conduit for capital flows coming out of China. And it happened on a Friday afternoon. And as you know, if anyone here is running a bank, your goal is to last Friday afternoon and then you try to sort it out to get through to the weekend.
Keith
And then with that then 60 billion, it went to the Chinese, supposedly. And then every day this week we’ve had the Hong Kong dollar peg. It’s been up against its upper range, so it’s been sitting at 785, basically. And when it did open on Sunday evening, it actually broke through the range. So for this brief moment in time, it was up there. And so when I referenced that tweet, I’m more or less just pointing out to Canadians that, hey, if this peg was going to break, it is definitely going to affect world capital flows. Money will flow into the dollar, which means it’s coming out of the Canadian dollar. I like to poke Canadians sometimes with these things because they know we all feel we’re the best in the world at a lot of things, but that was the message with that.
Tony
Okay, so just staying on the Canadian dollar for a second, do you think the sensitivity with CAD, where outflows from CAD is as sensitive as, say, Hong Kong dollar could be? Especially given that CAD is so resource driven, do you think that would have an impact on it?
Keith
Yeah. So just be clear, if the Hong Kong dollar peg broke, this would be a once in two lifetime financial economic event. It will reverberate around the world several times over. If it doesn’t, and we’re just having a normal economic cycle, Canadian dollar is just going to ebb and flow with the demand for commodities and something else. But up here in Canada right now, we have a very tightly wound housing market. Everyone is familiar with that. There’s lots of reasons to support why it is strong. Our population growth has been unbelievable. We’ve had a million immigrants come in. In Californians, too. I don’t think they would last with the weather.
Tony
Albert’s got the New Yorkers. Albert and Tracy have the New Yorkers. We have the Californians.
Keith
So Albert and I met a few years back. I’ll give you guys one guess where we met in a location.
Tony
I don’t know if we can talk about that publicly.
Albert
It was actually Orlando. It was actually Orlando. I do like the Canadian dollar short term, anyways. But speaking about the population, I mean, the demographics for Canada is excellent. Probably the best they’ve had in a generation. The housing market is interesting, though, because I saw a statistic where in 2003, the average income for Canada was $60,000, yet the average home was 213. Now it’s $64,000 and $612,000 for a home. So the housing market is quite an anomaly in Canada. It’s over my head, but it’s something that I definitely should pay attention to.
Tony
I don’t mean this to sound stupid, but do you have the generational loans like they did in Japan back in the day? Do you guys do that up there?
Keith
What do you mean? No, our mortgage is…
Tony
One generation to nother to pay off a house.
Keith
No, we have 25 year amortization periods. The banks now have to do a few funny things to keep these loans from being impaired. So they’re extending to amortization period. But just a couple of quick things with Canada to be aware of right now. We have basically five major banks up here, and their loan portfolios are homogenous. They will tell you, no, we’re a little bit different than the next guy, but they’re all the same. So if we were to experience some kind of crisis in our economy or in the housing market, it will affect all banks at the same time. So we also have our term deposit insurance up here. It’s $100,000 canadian. It’s highly likely they’re going to need to increase that, but they’re not able to increase it to any level. That would actually be helpful if we were to experience a crisis because if one bank ran into trouble and they had to go to the CDIC to make a claim, all the banks are going at the same time. That’s just a function of what it is. But we are in this sort of precarious moment right now. We just had a budget came out yesterday, or the day before, I think it was.
Keith
And again, it’s like deficits forever, debt is going to grow forever, there will never be a recession. All these perfect scenarios are lining up. Again, we just like to highlight that we are in this global world and some kind of event can happen outside of your country. It doesn’t matter if it’s Canadian or Australian or British, something can happen that will trigger most likely would be a shift in your yield curve in some way where the credit spreads are hit or the long end of the curve gets hit, or banks have to take actual losses and things like that. And that’s when things get a bit funny out there. But that’s the story on what we see. Again, we think it’s incredibly interesting. There are great opportunities coming up, especially in the commodity world. We’ve been adding that space over the last three to four weeks. And the path that we like to talk about, not journey. The path, and it seems to be going where we’re expecting this year.
Tony
Perfect. We’ll talk about Canadians or commodities with Tracy in a little bit. But first, how is the Canadian consumer doing? We’re going to talk about the US consumer in a second with Albert, but how is the Canadian consumer doing?
Keith
You look everywhere, everyone is over levered. So you have that happening. Employment growth is fine, but if you look under the hood, it’s really in the service sector. One person might have they’re running three jobs, they’re an Uber driver, they’re running Uber food or DoorDash, whatever they call it, and maybe something else at the same time, because it’s kind of interesting in that we’re all expecting a recession to hit up here, but the data is still not showing that it’s going to happen. And the most important contributor, the positive contributor again, is population growth. So again, we’ve taken in over a million immigrants this year and I think that works out to about two and a half percent population. So our GDP per capita is actually declining, right? So if you take out the population growth, then we are struggling a bit. But Canadians right now, and banks are tightening their standards on lending. There’s increasing evidence that if we do start to see job losses, then it could be a bit rough. A lot of Canadians have bought houses over the last three years. They went with variable overnight mortgages, and all of a sudden, they’ve been resetting lock and step with the Bank of Canada.
Keith
So the good news is the Bank of Canada is done. They ain’t hiking anymore. Yeah, maybe we’ll get some relief with that. But the Canadian story, if something bad happened in Canada, it’s not going to affect the rest of the world. If something outside of the rest of the world happened, it will affect Canada. So we have this bit of a challenge here.
Tony
Okay, great. Keith has been it’s been really helpful to I mean, for people outside of the US and Canada. We’re different. The US and Canada are different. And Americans, I’m sorry to say, don’t really pay a whole lot of attention to what happens in Canada. So this really is helpful for us to understand this stuff. It is America’s largest trading partner, but we are a little bit selfish. And I’m sorry to say it, but it’s true. So it’s helpful for us to learn this stuff.
Tony
So let’s move on to the US consumer and little programming note. Sam Rines does not look like Albert. This is actually Albert. And so Sam Rines is ill. So Albert has so very graciously jumped in to this spot. And so, Albert, thank you so much. So I want to ask about the health of the US consumer. And Sam had done this newsletter earlier this week, and this is very much in line with things that you have been saying about inflation, Albert. And so let me just bring up a couple of things. And Sam brought up Carnival Cruise Lines earnings. And the highlighted part of this thing on screen says the company experienced the highest booking volumes for any quarter in its history, breaking booking records for both North America and Australia and Europe segments.
Tony
Okay, so Carnival Cruise Lines is not exactly a high end cruise line. This is a middle America cruise line. And they’re seeing bookings that are far beyond what they’ve ever seen. And next, Sam looked at the earnings for McCormick, a spices company, and McCormick talked about 11% growth from their pricing actions while they saw a 3% decline in volumes.
So this goes along with this concept that Sam has been talking about for about nine months called price over volume, where companies have been passing on their costs through their prices to their consumers while accepting a small volume decline. And so we’re definitely seeing the broad basis of prices continuing to rise in the US. And Keith mentioned this, that there is some broad expectation that we’re going to see a recession in the US. But Albert, we still see hiring relatively strong. We still see service wages strong. We still see price rises coming. What’s happening? How are we going to see a recession? First of all, what is your view of the US consumer. And second of all, how are we going to have a US recession while all this stuff is happening?
Albert
Well, the US consumer has been surging. It’s been relentless. I mean, wage inflation is at the core of it. I mean, people are finally the public is getting a 20-30% jump in their wages after 40 years of stagnation basically. It’s become such a problem for the Fed that they’re resorting to bank crises now to stop lending and credit from the banks. It’s just the reality of what’s happened. I don’t see it lighten up. They want the market up. That’s providing liquidity. Consumers are getting liquidity from all over the place. Certain states still have stimulus. It’s just relentless. And it’s really problematic for the Fed.
Tony
Wait, certain states still have stimulus?
Albert
Yeah, they still have stimulus programs. California has inflation checks and certain unemployment benefits are still rolled on. I think it’s 16 or 22 states still have some sort of stimulus programs kicked in for unemployment.
Tony
Okay, so one of the things that I’ve said today actually on Twitter about trying to pull back on the consumer is that we’re going to have to see some change in the housing market in order for the consumer to stop spending in the US. Because the perception of wealth in the US. Comes more from the perceived value of your house than it does from equity markets. There is this belief that as equity markets rally, there’s this broad basis of spending that comes from consumers. And while that’s certainly true for a portion of them, the value of someone’s house is so much more a part of their spending habits in practice. So does that make sense to you?
Albert
It does, but it creates another problem politically. Washington wants housing more affordable for their constituents. But on the flip end, the boomers don’t want to give up their increased prices of their homes. And on top of that, people are taking out Helocs and buying secondary and third homes for rental income. So this problem is just simply not going to end in the near term. And on top of that, thinking about jobs, when you talk about layoffs, it’s only tech. There’s not any construction jobs that are being laid off. I don’t know one company in the housing or construction field that’s dropped workers, the significant amount of workers, zero.
Tony
Right. Well, because there’s supposedly an undersupply of housing. That’s what we keep hearing. But when we hear about people taking home equity loans to buy a second house to rent out, how real is that housing shortage? I just don’t know. I mean, you can see all kinds of different data showing that there’s a shortage or not a shortage. But when we have a synthetically low interest rate and we have the Fed holding a lot of mortgage backed securities, we do have an interest rate that’s lower than it naturally would be.
Albert
Of course, there is. But when it comes to the housing shortages or oversupply or whatnot, you can’t even look at it at a national level. You have to take it state by state or even city by city. I mean, Florida and Texas are absolutely booming, but the same can’t be said for Pennsylvania. So I think we have to look at it from that aspect. It’s really hard to look at the housing.
Tony
We’re still seeing wages surge in the middle of the country, although they may not be surging on the coast. We’re still seeing prices rise and price and margins expand. With a lot of these consumer companies and services companies. We’re seeing patchy housing values rise or stagnate. What does the Fed do? Will we see a pause this year? Will we see a pivot this year?
Albert
I don’t think pivots even in the cards at the moment. A pause certainly is in the cards. The problem that the Fed faces is super core inflation. It’s just services like, even in Canada, like Keith was saying, is just sky high, rocketing up. It’s just not stopping. This is the biggest roadblock that the Fed has for combating inflation at the moment.
Tony
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Tony
Right, so we expect to see, I think you said before, at least a couple more 25.
Albert
I think two more before a pause hits.
Tony
Is it possible they could take some action on QT for MBS to hit the housing sector a little bit?
Albert
They could, but again, they’re facing headwinds from the boomers that are up there with Hank Paulson and Larry Summers and their crews. They certainly don’t want to hear from them that the housing market is crashing and their wealth being erased slowly. So that’s just again, there’s two dynamics. You have the middle class voters that can’t afford houses, and then you have the boomers that don’t want to lose their value and their wealth. So that’s what we’re stuck between.
Tony
I suspect that at some point that might be one of the only levers they have to pull to slow things down.
Albert
It’s a dangerous level to pull.
Tony
It is, but I don’t know.
Albert
I don’t even know if the banking sector can absorb too much of that kind of pain. I don’t know. I haven’t really analyzed that in any way. But theoretically, you start dropping housing prices 20, 30%, and I don’t even know what. That does to loans for people and the banks.
Tony
Keith, what do you think about that?
Keith
Just to add to that, back to the Fed comment, Albert. If you have the Fed hiking another 50 basis points and everyone else has effectively stopped, I think the ECB has stopped or they’re pretty well close to that. You could have this environment where maybe the economy does slow somewhat in the US. Yet the dollar is surging. Like it’s continually gets stronger and you just get this vicious cycle going back and forth with it. But it’s funny because everyone has been watching the Fed now since Jackson Hole back in August, expecting that they’re going to pivot. They’re going to pivot. And in my mind, I think the Powell has been very clear with which direction they want to go. And somehow they dodged that there at their last meeting, they had every opportunity to pause if they wanted to because of the banking crisis, and they just plowed straight through. So I agree with Albert. They want to continue hiking until they’re told they’re not able to do it anymore. And if they can get through several banks basically going under within a few days of each other and to continue hiking, then maybe there’s a world to get more than 50.
Keith
And again, if that happens, it’s going to push someone off sides out there. But that goes back to the whole global macro view.
Tony
Right? Well, we used to talk about how the Fed is going to push until something breaks. And so we saw some banks break and they’re continuing to push. So something else has to break. Right.
Albert
Something bigger.
Tony
What’s that?
Albert
Something bigger has to break. Something with more gusto to limit to help out the Fed right now. I mean, they unwound six months or nine months of QT in a week. Exactly. We’re back to square one now.
Tony
Right. And so banks failed, didn’t break enough. They want something else to break.
Albert
Joke. This bank failure thing is an entire joke.
Tony
Of course it is.
Albert
It’s a pre planned event. I mean, when First Republic loses 90% or 60% of their deposits and the founder is pushing back on the FDIC about a plan for salvaging the bank, it’s a joke. It really is.
Tony
Okay, so, Keith, you mentioned Fed continues to rise, stronger dollar. That seems to me to put pressure on downward pressure on commodity prices. Not necessarily everything, but it seems to put some serious pressure on commodity prices if we have a rising dollar, is that fair?
Keith
Yeah. I mean, our expected path this year with commodities prices that we go lower Q1 into Q2, and that’s exactly where we are. We start to see slower economic data coming out, Q2, Q3. They should bottom before any recession actually hits. So in that world, unless there’s a major supply disruption or discovery or something like that, we’re using this as an opportunity to start building small positions in that space, but you keep going back to like, is it a normal cycle or is there something else that may happen here at this point.
Keith
I think everyone’s been calling out for a recession. Say, hey, if you go from zero to five with overnight rates and the yield curve gets inverted so much, no matter which way you want to look at it, the recession is here and people have been looking for this back in Q4. Here we are, like five months into it and still no sign of it coming. Again, something is a bit odd out there. Maybe it’s just delaying the inevitable or maybe it’s as, you know, a bubble. You keep blowing into a bubble. I don’t mean that the economy is in a bubble or anything like that.
Keith
It just means that, again, everything has been synchronized around the world that it is giving the opportunity for something to go off sides. And when that happens, because everyone has so much risk on the table, people can start running around. And again, that doesn’t mean that you go all into cash or whatever your favorite overnight holding is. It just means you had to be aware of it and be positioned for it. And then when it does happen, it’s funny how nobody buys low and sells high anymore and most people do the opposite. So I think, though, maybe you can be a bit traditional, that opportunity will come up.
Tony
A recession is whatever we call it. So we had two quarters negative growth last year with strong employment. Right. So will we see the opposite of that this year with employment weakening but continuing GDP growth and maybe call that a recession? I have no idea.
Keith
Yeah, I think one of the main contributors to recession coming up is when banks stop providing credit to the economy or they slow the growth of credit. That’s the main thing to look for. And just using the Canadian economy as an example, that is happening. It’s now more difficult to get a mortgage. If you need credit, you’re using credit cards or stuff like that. I know the boomers are doing well. We always have access.
Tony
Boomers have always done well. It’s been good for boomers since they were 18 years old. They’re never going to suffer until they die.
Albert
That’s exactly what Keith is saying, is until the banks stop lending out, this is just going to continue. And this is most likely why this bank crisis was preempted, to stop the banks from lending.
Tony
Okay, so, Tracy, we started going down the path of commodities and with Albert and Keith, Albert thinks we’re going to see at least two more rate rises. If that strengthens the dollar. What’s your view on that in terms of general commodity prices? Does that push commodity prices down or do we start to see growth toward the end of the year pick back up and that helps commodity prices?
Tony
Sorry, you’re muted.
Tracy
Sorry. I think that it’s really going to depend on multitude of factors. The thing is that if you’re looking at some of these base metals, battery metals and things of that nature between energy transition and in Europe and North America have committed to this at all costs, even asking central banks to look past inflation in these areas. And so I think that demand particularly, and if we see pickup in China, which is also one of the largest EV makers in the world, I think that we’re going to have a problem where we’re going to have these metals go higher even in conjunction with a higher dollar. I think it’s very possible.
Tony
Okay, so let’s look at a comment you put out on Twitter earlier this week about copper.
Copper is critical to the clean energy transition. Europe and North America have committed to the transition. After 2023, incremental copper supply decelerates into 2030. And then you actually sent out a chart in November of ’22 showing kind of the copper supply gap. So can you talk us through why is there a copper supply gap? It looks like the supply just kind of flattens after growing. Why is the supply flattening out as demand is rising?
Tracy
Because we don’t have, because nobody’s mining it, really. We have about 1.1 million tons being added this year to supply as far as supply growth is concerned, and new supply coming online from new mining. But after that it levels off. And I actually sent you those charts so that you can show everybody, but you can see where supply growth literally goes from 1.1 million tons to literally nothing from here to out to 2030.
And then you have this incremental supply growth. When you’re looking at just take for example, an EV, right, it requires four and a half times the amount of copper as an ice vehicle. And when you start talking about buses, that’s twelve times as much. This doesn’t even include solar, wind, charging infrastructure and stationary energy storage that also require huge amount of copper.
And you have the green plan in the United States, and you have Europe’s rendition of a green plan, right? And so they’re planning to build all this out, and we just don’t have the supply available, and we’re just not going to have it. And if you add into this, for the past seven years, the mining industry suffered from the same problem that the oil industry has. Lack of capex.
Tracy
So you’re coming from already seven years of no cap, barely any capex, declining capex. So you’re not having supply really come haven’t had supply really come on in any notable amounts in the last seven years. And then moving forward to 2030, we’re not seeing that increase at all either.
Tony
Do you know that Simpsons meme, where they’re like barts in class and they say, say the line, say the line.
Tony
We’re going to think about that there when I say why has there been a lack of capex in mining?
Tracy
Because it’s dirty.
Tracy
Right? Is the reason.
Tracy
And nobody wants mining. Same with the oil sector. Nobody wants oil to drill for oil either. It’s dirty. Right? ESG these things are dirty, but yeah, we need them. So here’s our conundrum, and it’s not going to I think that not get any better. Regardless if we’re in a recession and regardless if we see the dollar spike. I mean, we’re already seeing copper prices are still holding up very well through this banking crisis, where we have seen oil wobble a little bit and the dollar has been over 100 and we’re still seeing these metals. We did see a pullback from the summer high when we had the electricity crisis or the natural gas crisis, right. So we did see those metals pull back from 2022 highs, but we’re starting to see them all spike again because again, we have these green programs that are coming to light now, particularly in the United States, and then again with Europe having their own kind of rendition of the IRA plan.
Tony
What will win? If you look five years out? Okay. And we have these ESG constraints on upstream development and mining and other things, and it almost seems like we’re going to have to continue to have some sort of subsidy for energy in places or some of that ESG regulation or legislation can change what will happen? Will ESG loosen or will we just continue to subsidize these things until we’ve kind of finished the transition, whatever that means?
Tracy
I don’t think just to reach 2035 goals right now, we need $35 trillion, right?
Tony
Because we’re just making money up now, right? So what is that $35 trillion spent on?
Tracy
And that’s just to get us to where the countries have their 2035 goals. So really, that’s not going to happen. You know, that’s not going to… Europe is not going to cough that up. United States is going to cough that. Canada is not going to cough that up.
Tony
Remember the Kyoto Protocol from the UN talking about green goals? It was done in 1992 or whatever. And I think the only country that did it was I think there were only two countries that did it, maybe three, like Canada, the US, and Iceland or something like that, right? So everyone signed this deal. These were all aspirational the goals were far enough advanced that nobody who signed the treaty was going to be in office when the accountability was made.
Tracy
Exactly. And that’s where it gets me to. My next thing is that they’re going to have to push these goals out. You know that, right. Because everybody decided these 2035 goals, whoever’s in office, we have the UK, and all these people are going to be gone, right?
Tony
Whoever is the chancellor in Germany will still be there because they keep those guys.
Tracy
That’s true. So my opinion is we’re not going to have enough money. You still aren’t getting these mining companies excited enough to you can’t get oil companies excited enough to drill right now. Right. They’re all focused on investor returns, paying down debts, capital discipline. It’s no different in the mining industry. Right. So we’re going to have a problem. So you’re going to have to pull just by pure logistics. You’re going to have to push those out. I mean, it’s just logistically impossible. We just don’t have enough metals, period. And you can’t just wish that into existence.
Tony
I don’t necessarily need to get into company names. And Keith, I know you want to comment. I just come to you in just a second. But I’ve been trying to think of how do you play this ultimately, because all of these green things plug into a grid. So is the ultimate play for the energy transition power companies or the companies that provide hardware for the power grids? What is the real play here?
Tracy
I think that it’s infrastructure to build all this stuff out. Right. So I like things like heavy machinery, steel, things that make infrastructure to actually build this out or to mine, right. Not necessarily the actual metals themselves because those tend to be very volatile. So I would look at what goes into making these metals, what goes into making these grids. That’s where you’re playing. Utility companies are, I think, going for the utility companies, they always get screwed in the end. That wouldn’t be my go to for an investment longer term, looking at this sector. So I was more into kind of the infrastructure again.
Tony
Good. Okay, Keith, you had a couple of things you wanted to say.
Keith
Yeah, I just love this conversation. And maybe one thing for us to think about is that maybe the current path we’re on, it changes. So we get the pendulum swinging to the other side where it’s no longer whether it’s socially or politically, you don’t have that huge push towards green technology and so forth. It doesn’t mean that people don’t want it, but it’s not going to be pushed by the public sector. Instead, it’s going to be into the private sector. And that could change a lot of things. I do think that a lot of countries are going to be prohibited from doing a lot of these investments because they just won’t be able to raise the capital in their bond markets. And there’s also going to be other needs coming up. Again, I go back to here in Canada right now with their budget that just came out. 10% of our at the federal level of our tax revenues are now going to interest expense on the federal debt. Again, I suspect everyone is in that kind of position. So what worth goes. I love the concept of stranded assets in the energy and commodity space.
Keith
I’m incredibly bullish on this space and maybe the dirtier that the commodity is is probably the better opportunity for return. And again we’re just in this world now, we’re even having this conversation. It’s not acceptable by some sides but I think we have to be realistic that we live in a period of extremes and I think if we’re using linear thinking that that’s going to be wrong. Like something will swing back to the other side.
Tony
Extrapolate today until forever.
Tracy
I actually tweeted out a German survey today. So only 10% of Germans believe that renewable energies will be able to meet energy needs for the foreseeable future. Even among the Green voters, that figures only 18%. Instead citizens want natural gas 59% and nuclear power 57%. And that’s across all parties in Germany. So the citizens wants, needs, likes are not necessarily coinciding with our government overlords. Right.
Tony
Because they’ve lived over the past year. Right. They’ve seen how this stuff can’t meet their needs.
Tracy
Swinging.
Albert
Well, the wall of reality is starting to hit these governments. Like what do you do here? You got a budget, you have to increase your defense. Specifically for the Europeans, you have to increase your defense budget. You still have to maintain your social programs. You still want to push these subsidies for renewables. There’s no money for that.
Tony
It also comes at a time where you have a lot of baby boomers retiring so you don’t have the income taxes on those guys going into your budgets. Right. So you’ve got a gap of say ten years until millennials hit that income level. And so there is a revenue issue and a spending issue and yeah, I think there are so many things in this calculation that it’s just a very.
Albert
These renewable programs are nothing more than tax schemes by the government. They see their budgets dwindling so they know that they can tax and spend a little bit more by throwing out these beautiful narratives like the Paris Accords where nobody but the United States had haired to.
Tony
So whatever we’ll go from there just a little fact and I’m sure I’m not going to become anybody’s friend from this, but I actually co authored a couple of papers with my friend David who was the person who pulled the US out of the Paris Accords in 2017 on behalf of the Trump administration.
Albert
Good. Exactly what they should have done. If people are going to make up their own numbers and have no mechanism for enforcement, then what do we do?
Tony
Exactly. So that’s where I sit in that anyway. Okay guys, really quickly to wrap up. Keith, your first. If we look at the week ahead, what are you looking for in the week ahead? I’m not looking for companies or anything here, but what are you looking for in terms of issues whether in Canada or globally or the US or something? What do you see in the week ahead?
Keith
I mean for one week ignoring any economic data points coming up, we’re finishing quarter end today it’s been risk on for the last ten days. I suspect on Monday morning we might see a bit of a shift in that stance, but that’s it. We continue on this. I keep going back to this path and where’s the next kind of crisis going to escalate from.
Tony
Good call. Great. Tracy, what are you looking for?
Tracy
Well, OPEC meetings this week. I expect no change, so nothing really to get that excited about in the oil sector.
Tony
Even with crude prices continuing to wait.
Tracy
No, I think they’ll stay the course right now because I still think that we did have Russia come out and say they’re cutting 500,000 barrels per day. It was just supposed to be just for March. They pushed that out to June. So I think that OPEC will kind of look at that and want to see how that is factoring into everything as it is.
Tony
Very good. Albert?
Albert
Specifically grains. I’m very curious to see how grains are in the commodities market, and whether food inflation starts to go up because wheat starts going up also. The Ukrainians said that they’re 10% lower on their crop yields. The Russians have been starting to make noise about Cargill. So I’m going to be very curious to see if we can catch a bid and drive itself up into the 800s.
Tony
Okay, very good, guys. Thank you so much. Thank you so much for your time. Have a great weekend, and have a great week ahead.
In the latest episode of The Week Ahead, Tony Nash is joined by Michael Nicoletos, Tracy Shuchart, and Albert Marko. The panel first explores Russia’s recent announcement that it would use CNY for trade settlement outside of the US and Europe. Michael Nicoletos explains that this move could be viable, but it would depend on whether all countries would accept the terms of trade.
Albert Marko believes that the recent rate hike was the right thing to do and predicted that the Fed would raise rates twice more. He also criticizes the lack of depth in the economics department of some central banks, citing examples from the RBNZ and the ECB.
The panel also analyzes the energy market and predicted when we might see an uptrend. Tracy Shuchart updates the chart and pointed out that crude seemed to break the down cycle a bit, leading to a good week for the commodity. The team answers a viewer’s question about the possibility of energy prices remaining low for a long time and offered their perspectives on the matter.
Finally, the panel discusses what they expected for the Week Ahead. Michael Nicoletos predicts that the energy market would remain volatile, and Tracy Shuchart believes that the focus would be on the stock market, particularly the Nasdaq. Albert Marko highlights the importance of watching the inflation data and suggests that investors should keep an eye on the bond market.
Key themes: 1. Russia ❤️ $CNY. Why? 2. Where does the Fed (and other central banks) go from here? 3. When will we see an uptrend in energy?
This is the 58th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, and welcome to The Week Ahead. I’m Tony Nash and today we’re joined by Michael Nicoletos. Michael is the founder and CEO of DeFi Advisors based in Athens. We’re also joined by Tracy Shuchart of Hilltower Resource Advisors and Albert Marko. Guys, thanks so much for joining us. We have a couple of key themes and I was really in questioning mood when I put these together. The first one is around Russia and the CNY. There was an announcement this week. My question really is why? What’s the point of that? Next is where does the Fed go from here? And really where do all central banks go from here, but mainly the Fed, ECB. Albert is going to lead on that and I know Michael has some views on that as well. That’ll be really exciting to talk through. And then we’ll talk to Tracy about energy. For the first part of this week, we saw energy on an uptrend and we’ve seen a little bit of turbulence on Friday. So when do we expect to see an uptrend in energy? So again, guys, thanks for joining us. Michael, I really appreciate you taking the time from Athens to get involved with us today. Thanks so much.
Michael
Thank you. Happy to be here. Great, love to talk to you guys.
Tony
Great. So first, Michael, I know that you know a lot about China and you follow a lot of their economic activity. And I saw you commenting on this Russia announcement about CNY. Of course, they announced that they’ll use CNY for trade settlement outside of the US and Europe, which is Latin America, Africa and Asia is what they said in their announcement. So that’s about 37% of Russia’s exports. So I put a little chart together. I used UN ComTrade data.
This is 2021 data, which is the latest data that UN ComTrade has. So if they’re really doing that, Latin America is 2% of Russia’s trade, Africa is 3% of Russia’s trade. China is 14%. Okay? And so I guess is all of their trade with China settled in CNY? I seriously doubt it. And then Asia is rest of Asia is 18%. And of that about 1%, just under 1% is Taiwan. So I seriously doubt Taiwan would settle in CNY. But what’s obvious from looking at this chart is Europe is more than half of Russia’s trade. So it’s not as if this is necessarily a massive bold announcement that everything is going to be in CNY from here on out.
Tony
It really is just kind of putting a stake in the ground saying I think it’s almost a best efforts thing. So I guess is this viable? That’s really the question. And Michael, you put out this thought-provoking tweet.
You said if that were the case, China would have no issues running out of USDs. Let’s take that on and help me understand why is China trying to do this and what is the US dollar question that you have around this arrangement?
Michael
Well, first of all, again, thank you for having me. It’s great to be here. Now we need to segregate two things: wanting to do something and being able to do something. It’s clear that a lot of countries which are highly dependent on the US dollar for trading would rather be on something else and not be dependent on the dollar. We saw what happened with Russian FX Reserve when the war started. So clearly this was a warning shot or a lot of countries said we could be next if we go into a fight with the US. So clearly there is a tendency and China wants this to happen as soon as possible. Now, for this to happen, there are a lot of things that need to happen first. I’ll give just an anecdotal example because we get all this news flow and all these headlines where one signs an agreement with another and then two people or two prime ministers come up and say we’re going to do it, and everyone takes it for granted, especially on Twitter. It’s either a fanatic from one side or a fanatic from the other side. So again, I agree with everyone who is afraid of this happening in the sense that a lot of people are saying that the end of the dollar is close and that everyone’s going to go to something different.
Michael
I agree there is the willingness. I’m not sure this can happen soon, and I don’t think it can happen without some conflict occurring somewhere. So an example is that in 2018, Iran signed an agreement with China to sell oil in Yuan. Still, after four or five years, the volumes are ridiculously low. So again, there are agreements, but in order to enforce them and in order for them to happen, they take a lot more time than one would want. So Russia had no option. So because of the sanctions, they still sell to Europe, a few things, but they’re trying to outweigh it by selling more to China. And China and Russia are trying to make these agreements where they will be settling in Rubles or in Yuan. And they try to make these agreements. They want to expand them to other countries as well. However, you see, for example, India. India doesn’t want to settle in Yuan or doesn’t want to settle in ruble. They want to settle in Dirhams, which is back to the dollar. So you get all this information and the data, at least until now, does not support that there is a threat to the dollar.
Michael
There is a threat to the dollar in terms of willingness. There is no threat to the dollar in terms of data which says that this is going to happen tomorrow. So I think that this will eventually happen, but I don’t think it will happen soon. I think until it happens, we’re going to see a few episodes. And these episodes are not straightforward, how they will evolve.
Michael
Now, regarding China and its macro, the reason I’m saying what I’m saying and I’m saying that China needs dollars. China has been dependent, first of all, on its real estate, which was like 30% of its GDP. We saw what happened to the real estate. The second leg was it was highly dependent on exports. There’s a global slowdown. So these exports will have some issues. And now, how has China managed to keep this economy running? I’ll give you a few metrics to understand. The US is an economy which is like 26, I think 26 trillion of GDP. And if I’m not mistaken, its M2 is around 21 trillion. In China, the GDP is around 17 trillion, all in dollars. Okay? And M2 is $40 trillion. 40. Four, zero. So what does that mean?
Michael
The China government prints money. Prints money. Prints money. Because there are capital controls, the balloon gets bigger and bigger and bigger, but the money can’t leave, or it can leave for selected few, and I’ll explain how it leaves. And for the rest, because our capital control, the money can’t leave. So it stays in. But this is in one. Some try to buy gold, some try to invoice over invoice to Hong Kong and take it out of Hong Kong. But when the disparity is so big, clearly there is a problem. There’s an NPL problem. Chinese banks are like four times China’s GDP.
Tony
Sorry, NPL is non performing loans.
Michael
Non performing loans. Sorry. Sometimes they’re non performing. You cannot have an M2 of 40 trillion and a GDP of 17 trillion and not have non performing loans. Chinese banking system.
Tony
Sorry, I just want to go back and I don’t mean to interrupt you, but I just want to make sure that people understand. China has currency in circulation of $40 trillion, and they have a GDP of $17 trillion. Whereas the US has a GDP of what you say 24 trillion. I don’t remember what number you’re… 26 trillion. And they have 21 trillion in circulation. Right. So for all of these people who talk about China being this economic model for other people, why does it matter that their M2 is more than double the size of their economy?
Michael
Let me say something. First of all, let’s put something that the US. Is also the global reserve currency. So everyone in the world wants dollars. It’s not like only the US wants dollars. At this stage, less than 10% of the world wants Yuan. So it’s not like everyone wants to get.
Tony
I think it’s 2.1% of transactions or something like that.
Tracy
2.8%?
Tony
2.8, yeah, transactions.
Michael
Okay. I saw a number which was around 6%. Maybe I’m wrong. Okay. But again, it’s a number which is very small.
Michael
All this money that is in the economy, if Chinese people were given the choice, they would be able to take it out. The economy is growing at a faster pace than its potential. I’ll give you a number. Right now, Chinese banks are more than 50% of global GDP in terms of size. The US, I think its peak was 32% in 1985 and Japan’s 27% in 1994. So we’ve passed all metrics in terms of the world dominant power or the dominant economy, if you want to put it this way, being a percentage of GDP in terms of banking assets. So the banking assets clearly have a lot of bad debts in there, which we cannot know what they are because the Chinese economy wants the Chinese government wants to control that. Now, there was a special committee put in place this month, I think, in order to oversee the financial situation in China. So I’m pretty sure they’re a bit worried about it. They want to switch from an export oriented economy to a consumption driven economy. But this is still less than 40% of GDP and this takes a lot of time to go like the US is around 70%, but it takes a lot of time to go for 40%, 70%.
Michael
Now, all this money stays in China. They have no option, they can’t do anything. So it’s an issue. And I’ll give you a ratio. If you take their FX reserve, it’s around 3 point something trillion. If you divide FX to M2, it’s around 7%. So if that money were to want if that money wanted to leave, in theory, only 7% can be covered by FX reserves, the fixed reserves of the government. Just to clarify, the Asian tiger crisis in 97, the tigers collapsed when the ratio went below 25%. So they didn’t have that support to keep it up.
Tony
And just be clear for the US that’s 100%, right?
Michael
The US doesn’t have any problems. So this is something that needs to be addressed and I don’t know how they will address it. They try to make all these agreements so that the one becomes a tradable currency and they can invoicing one. So if the Yuan, in theory was to become the global reserve currency tomorrow morning, their debt would become the world’s problem. Now, they haven’t managed to export that, so they need these dollars to keep that balloon, let’s say, from all the area in the balloon to be taken up. They need these FX reserves to keep the money in and they need to build confidence, and they try to build confidence with narratives and not with data. But again, they don’t have a choice right now, in my opinion.
Tony
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https://youtu.be/yYom7Zqezio
Tony
The difference between, say, the onshore and offshore CNY or CNH or whatever, there is a huge difference in perceived value. I would think you can’t change the perceived value of CNY onshore, but offshore, if people are nominating contracts in, say, I’ll say “CNY” in quotes, there is an exchange right there. But again, this M2 issue, which I can’t stress how important that is, I haven’t heard anybody else talking about this. And it’s so critical to understand the fiat value of CNY itself, right, because it’s not limited, and the government because they’re effectively fun tickets with Mao’s face on it.
Tony
Right. And that’s how the PBOC was treating it. And again, when people talk about CNY as a global reserve currency, nobody is looking at the integrity of the PBOC and nobody is looking at how the PBOC manages monetary policy in China.
Michael
I’ll give you anecdotal information. I haven’t checked the number for a few years, but the last time I checked, if you look at the import-export numbers from Hong Kong to China, and you look at the PBOC, and then you go and see the same numbers in the HKMA, you would assume that these four numbers should be the same, not the same. Import should be export and export should be imports. The numbers should be very close. The discrepancy is huge. These numbers do not reconciliate, which means that in some form there is some over invoicing to Hong Kong.
Tony
And you’re not talking about 30%, you’re talking about multiples.
Michael
You’re talking about a lot. It’s ridiculous. So I think if you see the Hong Kong peg has been stable to the upper bound lately because I guess because of the interest rate differential, a lot of money is leaving. So it’s putting pressure on Hong Kong as well. So it remains to be seen what happens there.
Tony
So let me go to Tracy. Tracy, in terms of Russia using CNY, okay? And I know you look at a lot of their energy exports, and of course there’s all this official dumb around sanctions and stuff, but what’s your kind of guess on Russia using either USD or proxy USD, Dirhams or something else as currencies for collecting on energy exports or commodity exports more broadly?
Tracy
Well, first, I think that they prefer dollars no matter what this kind of China saying we want to trade a Yuan. And Russia said, okay, but that was a suggestion. That does not mean that it’s necessarily happening. But what is really interesting is earlier this week, on Monday, Russia laid out conditions for extending the grain, the black seed grain deal, right? Because it was supposed to be for 90 days, but they cut it to 60 days because they’re trying to use that as leverage. And one of the things that they are trying to use as a leverage is they will extend the deal or they’ll give or the other part is they’ll give African countries just free grain instead of selling it. But one of the big conditions for that was for the removal of some Western sanction, specifically to get them back on Swift. And so if that happens, forget it. Everything’s going to be all the trade will be all euros and dollars.
Tony
I thought Swift was terrible and everybody wanted on Swift.
Tracy
I just thought it was important to point out because if they get back on Swift, obviously that’s going to make trading in dollars easy for everything, all commodities across the board.
Tony
Right. And so that goes back to what Michael said initially about kind of these guys really want dollars and all this other stuff. There’s the official dumb of the prime ministers meeting each other, right. And then there’s the factual activities they undertake based on the reality of their position in the world economy. Right. What are your thoughts here?
Albert
I agree with Michael and Tracy to talk about the reserve currency. Switching from the dollar to the Yuan is a joke, to be honest with you. You do have some people in other countries in the Middle East and China and whatnot talking about the death of the dollar and actual serious tone. But anyone with even like a shred of financial backing and insight knows that it’s just an impossible thing. From what it sounds like, it’s more of like a barter system. But that introduces even bigger problems. I mean, you can’t scale it up. There’s no standardization. How do you value things to begin with?
Tony
That’s it.
Albert
Valuing goods and services without using the dollar right now is just an impossibility. And on top of that, you have the political problems that come along with it. I mean, like the Saudis, they want dollars for their oil. They need defense assistance. The Greeks needed US defense assistance. The Turks, as much as they want to make noise again, they’re reliant on the US and NATO for defense and whatnot. These components not just financially, what Michael talked about and decided much more eloquently than I would ever would, but there’s also political components that you just can’t get around in the near term.
Tony
But even if they had a barter system, they would reference the price in dollars, right?
Albert
Well, yeah.
Tony
10 billion.
Tracy
Your chocolate is back to iran did that when they were first sanctioned over a decade ago. They were trading oil for gold, but it was still referencing dollars.
Albert
On top of that, you run the risk of hyperinflation eliminating dollars from your FX reserves and starting to trade away from the dollar. You’re going to end up in a hyperinflation event.
Tony
Right.
Michael
Can I say something? Can I say something? About all these points? I agree with all these points. There’s one more thing. Let’s say you trade in rubles and you trade in Yuan, okay? It means that you’re going to keep FX reserves in rubles or in Yuan. So you feel more comfortable keeping a currency from an authoritarian regime than holding the US. Dollar, which is fully liquid, fully tradable, and anyone in the street will take it at a split of a second. You need many years of track record to build that trust. There are a lot of bad things about the dollar. We agree that I don’t think anyone will say that it’s a perfect mechanism, but right now, it’s very functional, it’s very liquid. And if you want to keep your reserves in US Treasuries, you can sell them at the split of a second. You don’t have any issues with that. If you have Yuan, you’re going to do what? You’re going to buy Chinese government bonds? And how will you sell them if the PBOC calls you and says, it’s not a good idea to sell your Chinese bonds this week? We would prefer you didn’t.
Tony
Bet on the central bank, right? If you’re holding rubles, you’re betting that the Russian central bank is trustworthy. If you’re holding CNY, you’re betting that the Chinese center. So what central banks are out there that you could potentially trust? You have the Fed, you have the ECB, you have BOJ, right? Those are really the only three that are visible enough that have the scale and transparency to manage a currency. And look what the BOJ has done since Abenomics. And on and on and on. Do you trust the ECB? I don’t know. And it becomes, do you trust the ECB or the Fed more? I mean, sorry, but I just don’t trust the ECB.
Michael
I don’t trust ECB. But it’s relative. I mean, you don’t have a problem keeping Euros. Maybe it’s not your preferred choice, but you don’t lose your sleep on holding Euros. Let me put it at this stage.
Tony
That’s exactly right. That’s exactly right. Okay, guys, this is great. Let’s move on to the next thing, because I think we all agreed violently here, but I think we’re going to not agree on the next one, which I’m really excited about. So let’s talk about central banks. And where does the Fed and where do other central banks go from here? So, of course, we saw the Fed raise this week. I think it was the right thing to do. Albert, I know you think it’s the right thing to do. Markets have been up and down since then. And Albert, you’ve said that you expect the Fed to raise two more times, and I want to talk about kind of what’s behind that assertion. And then we get silly statements like this one from the RBNZ in New Zealand, where the chief economist basically says, if inflation expectations don’t fall, we’ll be forced to do more regarding interest rates.
Well, of course. Why wouldn’t you do that. So can you walk us through a little bit, kind of just very quick, because there have been thousands of hours of Fed analysis this week. But why do you think the Fed is going to raise two more times?
Albert
Supercore is trending up and it continues to trend up. Services are on fire. Real estate numbers have been on fire. There’s no slowdown in reality. I mean, even the layoffs have been slow. They’ve come from the tech sector. They haven’t come from construction or any other blue collar jobs at the moment. So until we see that, the economy is going to be red hot and it’s a problem for the Fed, inflation overall.
Tony
Okay, so play devil’s advocate here. Banking crisis, Fed had to bail out banks, all this other stuff. So why isn’t the Fed saying, let’s pause on the banking crisis worries?
Albert
Because banks are fully liquid. The big banks have no problem whatsoever. Some of these smaller banks that have no risk protocols are getting exposed. The tech heavy investments are getting exposed. Everyone knows that higher rates hurts the tech sector the most. And those banks were at fault. They didn’t hedge properly.
Tony
Now you have duration risk. I just want to be clear. I just want to make sure that people understand. You’re not saying that they failed necessarily because they’re tech, but they failed because of duration risk and then their tech depositors took their money out. Right?
Albert
Absolutely. But the banking system overall is not really at risk. They’re just shaking out some of the weaker players. But that was inevitable as interest rates have risen. A lot of the problems stem from the Fed and them guaranteeing four, five, 6% deposits, while the banks only do 1%. They can’t compete with that.
Tony
Right. Michael, I know that you think this wasn’t the right action. So what’s your perspective?
Michael
Well, let me say something first. I believe that it was a mistake, and I’ll say why it was a mistake. I think it’s a mistake when you raise interest rates as a central bank and the banks follow by raising rates on the loan side and on the deposit side, what do you do? You make debt more expensive and then you make people because you have, let’s say, a 5% interest rate on your bank, you create an opportunity cost so people want to save. So you reduce liquidity from the deposit side, and also you reduce loan demand because it’s more expensive, and that creates a slowdown. What happened now, because we had ten years of QE, everyone forgot that there was an interest rate on the deposit side. So the Fed, MDCB and all the central banks raised the interest rate. So the loan side adjusted. That became more expensive, but the deposit side stayed zero at 1%. I don’t know where this is in the US. But it’s really low. At some point, people started waking up when it arrived at 4% and they suddenly started saying, okay, I don’t have any interest on my deposit.
Michael
Let me put my money in the money market fund. How much does it give? Three, four, 5%? I don’t know. It’s a much higher rate. So I think I saw somewhere today that around 5 trillion have gone into money market funds. The numbers close to that. So when you take your money out of the deposit and you take it to a money market fund, this is the equivalent of a bank run for the bank that you’re taking the money, it’s a deposit living. It might not feel like a bank run, but on the balance sheet of a bank, it’s a bank run. So this started happening, and again, because of what you mentioned, they had invested in Treasuries and the duration risk was a mismatch. They didn’t do some of them at least hadn’t done appropriate hedging. They started losing money and they started selling this bond at a loss, although they had them at the Healthy Maturity portfolio where you don’t need to take a mark to market loss. And suddenly both sides of the balance sheet were screwed. Let me put it this way. So a few banks started going under. Now, I know that the central bank has come up and I know a lot of people come up.
Michael
And I do agree that there’s no systemic risk. And I mean that I don’t see a cascade of people losing their deposits. But nevertheless, people feel uncomfortable and try to do something about it. Either take them more money market funds or take their money from a regional bank, if they can. To JP morgan or one of the big guys. This creates a big problem for the economy. Yes, there are some signs which show that the economy is still robust. But I think a lot of leading indicators suggest that the economy is slowing down and most of the metrics coming from the inflation side have collapsed. Yes, core CPI is still high and it’s a lagging indicator, so it will take time for it to come down. But I think that given the stress we saw this week and why do I say that? Because we look at the US as a closed system. It’s not. When you raise interest rates as the Fed and you are the global reserve currency, you create a global credit crunch. You saw that last week. The Fed had come out with swap lines for everyone. You saw today that foreign banks borrowed 60 billion in liquidity, the ones that didn’t have a swap line.
Michael
And we see today Deutsche Bank being in the headlines and Commerce Bank being in the gate. So you might think that the US system is okay, but it creates a domino effect, which we’re starting to see. We saw Credit Suisse going under in a deal, which was not, I’d say, what we would think of. I believe that that deal in combination with the high rates is probably the root of the problem in the sense that they destroyed the capital structure, they wiped out all the 80 ones without wiping out the equity holders. Which means now that in Europe everyone’s wondering if my 81 is of any value. And that creates another uncertainty in combination with the higher interest rates and the stress that has started to build up. I think we’ve passed the moment where, okay, it could be debatable if they did right or if they did wrong. The US bond market is saying that it was wrong. It was a mistake. The two years at 370. And so the bond market went from the one side and the Fed went on the other side.
Tony
Why? The two year at 270 is important.
Michael
373, 70. Sorry, yeah. Three seven. Because if in two years you’re getting 3.7% and the Fed fund rate is five someone, it means that someone is buying a two year bond getting much less. Which means what? It means that the market is saying rate cuts are coming soon. So the market is saying there’s no way we can keep it this way. And the Fed is saying the opposite. Historically speaking, the bond market has been right. If you take it into context, it could be this time that they are wrong. It feels to me, at least from the stress I look in global markets and not in US. Only, that things are getting a bit out of hand. And having a bank like Credit Suisse go under, which is a big bank, and having all the central banks come in together on a Sunday night to give up swap lines, it means that the stress in the system, it’s much bigger than with yeah, but Sunday night.
Tony
Is the best time to get swap lines. Okay, so you talk about European banks, but we had Mueller from the ECB out this week saying, I wouldn’t worry about a financial crisis in Europe.
So we have ECB guys out there going, yeah, Credit Suisse happened and we know Deutsche is an issue, but I wouldn’t worry about that in Europe. So I think we’re seeing statements from Yellen, the Fed, the ECB, other guys who are saying, no, there’s nothing to see here, but then we see things kind of blowing up all over the place. Right, and then we have a question especially specifically for you, Michael, from a viewer who said, I’d like Michael’s thoughts on the EU, particularly banks, pensions and future growth prospects. So can you talk us through? How do these banking issues in Europe flow through to European pensions?
Michael
First of all, let’s say something. We’re talking about the US and.
Albert
Duration.
Michael
Risk on the bond losses. Let’s remind everyone that at the peak of QE 18 1818 trillion worth of bonds had negative yield, and these were mostly Europe and Asia. So pension funds and banks in Europe which are forced to buy these bonds were buying bonds. With a negative yield. So they were losing on day one these bonds from -50 basis bonds have gone to two and 3%, the losses on these are much greater and pension funds will have much bigger issues than the ones that have in the US we were talking about a pension crisis in the US. But the European one is pretty bad too. Just look at in France, they raised this week the year that you take your pension from 62 years old to 64 and the country is burning to the ground. Now, you understand that it’s 62 to 64. It’s not like they made 62 to 70 years old. So it’s very delicate. And the situation in Europe, given the negative bonds, given the interest rate hikes and given one more thing in Europe, given that Europe doesn’t have the dollar and it has the Euro was mostly a supply driven issue.
Michael
It means that we were importing oil and energy from Russia and from everywhere and all these commodities were priced in dollars. So as a Europe tell, the price of these commodities were more expensive. So inflation was a supply driven problem. I think there’s a report, I think from the San Francisco Fed two thirds of the inflation was supply driven in Europe. So when inflation is supply driven and you raise rates to stop it, you’re using the wrong medicine to stop the problem. You need to crash the economy in order for this to stop. This is not really efficient. Now, in the meantime, you have yields going higher and now the yields that we see on our screen on Bloomberg or anywhere are not the yield real yields because the ECB is in and tries to contain the spreads. If you left the market low, I’m pretty sure the spreads would be much, much wider. And you have the new thing which came up this week when the Swiss National Bank decided that tier one, additional tier ones would be written off and equity holder, an equity holder would be saved. Now, imagine what happened. You probably saw what happened this week, all the 80 ones in Europe got smashed because everyone says I don’t trust this instrument.
Michael
I don’t know. Yes, central bankers will come out.
Tony
These are the cocoa bonds that came out in I think, 2013, right?
Michael
Yeah, there are a few of them, yeah, but it’s a cocoa, it’s contingent convertible. It means that they’re convertible be converted to equity if something happens. Let me put it as simple as it is, but these are supposed to be wiped out before the equity. So the question is what prevents for something else similar to happen again, the ECB came out, BoE came out, they said this is not accepted. But the fear and the is now everywhere. So you have a combination of factors. You have a factor that this ECB has been raising rates when I don’t think it’s a proper mechanism to address inflation in europe, they’ve created a slowdown. If you see Germany’s numbers and everywhere’s numbers in Europe, the economy is slowing down fast. You have a discussion on the capital structure of lending, which is very critical in the way companies and banks go and borrow themselves and all this at the same time and when the US. Is draining liquidity from the global system. I think the situation in Europe is very tough. Again, after 2008, I don’t think we have a systemic risk on our hands and the risks never materialize in the same place.
Michael
But I think things are about to get tough and it’s going to be much worse before it gets any better.
Tony
So what I would offer back, and I think everything you’re saying is valid and Albert Tracy, let me know if you want to think about this, but in the US. We have a presidential election next year. There is almost no way that we will see the US economy crash in the next 24 months because Janet Yellen won’t let that happen. And so we may see issues in Europe and we may see Europe and the rest of the world suffer based on US interest rate and monetary policy. But the US. Will do everything, the current administration will do everything they can to keep the US. From crashing in that time. And I’m not just saying this because they’re Democrats, Republicans would do the same thing to keep the economy afloat in the year before an election.
Albert
Albert, what do you think about that? It depends on what is happening specifically with debt ceiling, right? I mean, Janet Yellen and the Biden administration would gladly let the economy sink, the market sink anyways if they could blame it on escape both the GOP on the debt ceiling not getting hyped. So that’s definitely something you need to watch over the next six months because it is campaign fundraising season and they can’t really agitate their voters all that much, to be honest with you. Certainly the political component is going to be high over the next twelve months.
Tony
Okay, great. Let’s move on. Thank you for that, guys. Let’s move on to energy.
Michael
Can I say something?
Tony
Absolutely. Yes, please.
Michael
What appears to be happening right now, at least in my eyes, is that the Fed is using interest rates to attack inflation and it’s using the balance sheet to give liquidity. So these two do not go in the same direction at this point. The question is if they can do this for a long time. It doesn’t feel to me that they can. But at least right now they’re giving liquidity on the one side and they’re raising rates on the other side. I’m not sure they can do this for us.
Albert
We’ve actually talked about that at length here. But it’s not the Fed. It’s really the treasury. Sterilizing QT They’re coordinating.
Michael
They’re coordinating.
Albert
Of course they coordinate for the most part, but sometimes in the last six months or the last twelve months. Powell and Yellen have been at odds with each other in policy. So this is a lot of the reasons why the markets has just been topsy turbine. Don’t understand which way it’s going because you have conflicting policy and agendas from the treasury and the Fed.
Michael
So you feel it’s conflicting or do you think it’s coordinating? They’re doing it on purpose. That’s what I haven’t figured out yet.
Albert
I think the want to eliminate excess cash in the system is coordinated but I think the policy of how they’re doing that is conflicting and that’s going to be a bigger problem, say second half of this year.
Michael
Okay, sounds logical, but it’s one of these things that pass on me. I don’t know if they’re doing it on purpose or if they do any as you say, because they’re using other tools and they step on each other doing so.
Albert
My rule of thumb is to side with incompetence rather than conspiracy.
Tony
Okay.
Michael
It’s not conspiracy when the Fed chairman talks with the treasury guy?
Albert
No, I am absolutely in your corner on this one. I absolutely believe that they talk and coordinate things for sure. I just think that their agenda at the moment doesn’t line up 100% of the time.
Michael
Okay.
Tony
Very good. Okay, thanks for that guys. Tracy, let’s talk about energy for a while. Up until Friday we had a pretty good week for crude. I thought we were breaking that down cycle a bit, but we’re seeing some chop in energy markets. And so we had a question for you from a viewer saying when do you see oil and natty in a sustainable uptrend?
Tracy
Yeah, nat gas is a whole other issue. I think it’s going to be very difficult really. We’re trading in the range that we’ve been trading in most of the time for the last 20 years or so. That $2, $3 range has been very comfortable for nat gas. We produce a lot of nat gas. Yes, we are building out LNG facilities and yes, we have had problems with freeport and such. I just think that we probably won’t really see a big spike in prices unless we see another energy crisis in Europe, do you know what I’m saying? And then we’re going to have to force to sell even more. So for right now I would kind of get comfortable with nat gas about that range. But if it starts breaking above like 375 or so I would start getting bullish. But for right now, just kind of in that area where it’s been comfortable most of the time. Right. So I think it’s going to be a while for that. So we got to kind of assess the situation in Europe as we get to summer air conditioning use and to next winter if they have a bad winter, I think it’s going to be a few more months at least down the line for natural gas as far as oil is concerned.
Tracy
Brent said about $75 right now, saudi Arabia would like it around 80, 90 range is where they’re really comfortable. I think right now what we’re going to have to get through is we’re going to have to really assess we need more time to assess Russia’s situation. They just extended that 500,000 barrel a day cut out until June. The latest records do show that they actually have cut that much so far in March. So the cut is happening, which also means that they’re experiencing kind of a pullback in demand, even though they have really it’s more on the product end rather than, I should say, rather than the crude oil end, because they have floating storage, they have ships piling up everywhere with product. And so I think that will help clear their excess product a little more. So it’s really on the product end and that we also have to see everybody’s freaking if the Fed again decides to stop raising rates or pause. I think commodities really like that situation just because of the cost of carry and transportation and storage for all these commodities is very expensive. Right.
Tony
Because.
Tracy
You get bank credit lines for that. Right. And so I think that’s putting downward pressure on markets right now. And then obviously fear of recession is kind of kicking in again after the recent bank crisis in the US. And in Europe. And so I really don’t think that we’ll see higher prices. I mean, typically this is the time of year we do start seeing higher prices heading into high summer demand season. But we’ve also been seeing, I think everybody expected China. China demanded to shoot up right away. That’s taking longer than anticipated, which I kind of have been saying that on this show for quite a few months.
Tony
Long time. Exactly.
Tracy
So I think that there’s a lot of factors involved right now. I do think, again, it’s higher for longer. Historically still, prices at $70 is high for oil. The market is crashing by any means, just coming down from geopolitically induced spike last year. I think it’s higher for longer. And definitely I could see prices go into that $110 range, but likely into 2024. Not really this year, obviously, unless something happens. Okay.
Michael
Do you think if the Fed poses or whatever reason, or if they do a rate cut, do you think that commodities will explode or do you think.
Tracy
I think if they cut, commodities would get really excited. I think if they pause, they would get excited. Right. I think we would see a rebound in a lot of these commodities, grains, things of that base metals and industrial metals and oil. But if they start cutting, then I think that they’ll really like that because then they don’t have to throw product at the market because they can’t afford to store it.
Michael
Thank you.
Albert
I’m actually quite bullish for oil in the near term. One of the reasons is I’ve heard through the grapevine that the Chicanery and the futures market and I’m reading that hedge funds and other money managers sold the equivalent of 139,000,000 barrels of oil in futures over seven days a week and a half ago. So, I mean, to me, it’s like they’re almost out of ammo when it comes to suppressing oil at the moment. And any little flare up or anything is probably going to be bullish for oil and probably shoot right back up to 80.
Tony
So what could that be, Albert?
Albert
It could be a natural event. It could be weather, I mean, some kind of economic policy stimulus from Europe coming out there, or even the United States going into, like Tracy was saying, the travel season and whatnot. It could be anything, really. I mean, I think the market is just begging for some kind of bullish signal for them to run it up.
Tony
Okay. And Tracy, if you’re sitting in Europe because energy prices were such a factor in 2022, what are the main things that you’re worried about? Their nat gas storage. Has that been depleted much over the winter?
Tracy
No, it wasn’t depleted. They just had to start injections again because what we are seeing is that this really started in fall of 2021. Everybody kind of forgets that the crisis started before the Ukraine invasion, but what we saw is industry start to shut down, especially industry like smelting and glass blowing and things of that nature that require a lot of energy. Right when nat gas prices started spiking, and that was well before that summer of 2022 spike, they didn’t need to spike much where we saw a lot of those industries shut down. So what we’re seeing now is that since prices have been muted for long enough now, now we are seeing manufacturing and whatnot pick up with the numbers came in overnight for Europe. We’re seeing manufacturing pick up again. We’re starting to see some drawdowns finally in storage. Spain in particular has really ramped up a lot of their industry that had shut down prior. I have to say, natural gas prices are still more expensive than they typically are in Europe. Even at this price, right, they’re still higher than normal. So this is also why we’re not seeing a flurry of activity.
Tracy
As soon as prices came down, you have to realize that relative to where they were, they’re still generally high. But we are seeing, I think people are getting used to kind of this price range for Ttf, which is Dutchnet gas. And so we are seeing in manufacturing and industry pick up again in some of these traditional industries that require a lot of energy. So we’ll have to see, and if that really picks up, companies are going back to where they went to fuel instead of gas. We’re seeing them go back to gas now. And so that’s really what I’m watching on the energy end. Is this just one off, kind of, or does this continue throughout the summer?
Michael
Okay.
Tracy
Sorry.
Tony
And then everybody’s favorite energy secretary, Jennifer Grandholm, had some comments about refilling the Spr this week. Can you fill us in on that? And what does that mean for markets?
Tracy
Basically, she said we’re not filling in the Spr, refilling the Spr anytime soon.
Michael
Sorry.
Tracy
She said a few years, which means a lot more years unless there’s a change of administration and a policy change. But I would say from until the election not going to see an Sbr, which makes sense because they know that if they fill the Spr, what’s going to happen? Oil prices are likely going to go higher, and they can’t afford that going heading into an election year. And so I think that’s really why they kind of pushed that off. That’s kind of what’s going on with that.
Michael
Can they be saying something and doing something else?
Tracy
Yeah, but we would know if they’re actually filling the Spr or not because it’s a public auction.
Tony
Okay, why don’t we just stop calling it the Strategic Petroleum Reserve and just call it the Petroleum Reserve? Nothing strategic about the way they’re using the Tactical Petroleum Reserve.
Tracy
They’re using it as a piggy bank. Right.
Albert
Instead of strategic, you use slush fund, petroleum reserve.
Tony
Right, exactly. Okay, guys, one last question, I guess. What are you looking for in the week ahead? We’ve had a lot of volatility over the past couple of weeks. Michael, what are you looking for in the week ahead?
Michael
I’m focusing on central banks and interest rates. I think the issue will be banks. Again, I think the big stress in the economy is private markets and not public markets. BCS, private equity, all these investments need to do write downs. It will take a bit more time for them to do that. It doesn’t happen that fast. They don’t adjust as fast as public market. I believe that bank we will see that stress mostly on banking stocks. A because the cost of funding goes up, b because the capital structure is put into a discussion. C because they continue to raise interest rates. And there is a stress within, I think, focusing on what happens to the banks and to the two central banks. Again, we’re looking at the same thing, unfortunately, but the problem is not in the same place. But these are the indicators you need to look. I believe that you’re going to see inflation coming down fast. That’s my expectation. Maybe I’m wrong, but if you see inflation coming down, it’ll make the life much easier for central bank. Yeah.
Tony
And for all of us. Do you expect to see, like VCs, for example, some VCs close up because of the cost of funds and a lot of these banking issues, or do you think it really doesn’t impact them much?
Michael
I don’t know if they’re going to close down because it’s a 510 year investment. It depends if they can reinvest or if they have to liquidate. But I think funds that are coming up to their maturity, they need to liquidate or they need to roll over. It’s going to happen at a much lower price than they thought, or they’ll have to wait one or two years more. So I think that stress is going to show up somewhere.
Tony
Tracy, what do you see over the next week?
Tracy
I think it’s type based markets. There’s not really a lot coming up as far as oil is concerned. OPEC meeting is the following week, which we already know they’re going to do nothing. So really, next week, end of month stuff, there’s not a whole lot going on in the commodities world, really newswise next week. So I think probably see the same sideways action.
Tony
Okay, great. Robert, what are you looking for? Let me ask a little bit of a kind of loaded question with that. As springtime is coming in in Ukraine, do we expect that to heat up at all as things warm a bit there?
Albert
Well, yeah, I would say yes. Geopolitically? I think it would be advantageous for Russia to do something to stay face. Absolutely. But for the week ahead, I think the narrative shift I’m watching for the narrative shift of interest rates to banking, like Michael was talking about, I think Yellen is most likely going to come out and try to guarantee 500,000 in deposits and even talk about 750 and get it up there and just get the crisis over and done with. So that’s what I’m looking for.
Michael
Okay.
Tony
Wow. Would that require congressional no, they can use emergency powers. Everything’s. Emergency power is great. Perfect. Okay, thanks, guys. Thank you very much. Really appreciate your time and all your insight, and have a great week ahead.
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This Week Ahead features a discussion on banking systemic risk versus inflation with Hugh Hendry, Tracy Shuchart, and Albert Marko. The group covers recent events in the banking sector, including Credit Suisse and the potential risks posed to the global economy, the impact of higher interest rates on crude prices, and China’s growing diplomatic role.
To start, Hugh expresses concern over the lack of GDP per capita growth since the Great Financial Crisis and the failure of the remedial work undertaken since then, labeling the current environment as “The Great, Great Depression”. He warns that raising interest rates in this environment could be disastrous and discusses the creation of credit and the muted credit cap, as well as the contraction of the M2 series.
Hugh questions the need for central bankers and believes that the totality of credit creation should be examined. He suggests that the bond market has been more accurate in predicting rates than central banks and he notes that there are persistent trade surplus nations that create surplus capital, which is being invested in the United States, resulting in asset price inflation. He argues that the problem lies in the flow of capital rather than the currency (the US Dollar) itself.
Next, Tracy highlights how rising rates are affecting the prices of commodity cargoes. The discussion digs into the possible impact of falling cargo rates on the supply and pricing of commodities. Meanwhile, the discussion anticipates that the upcoming CPI report could inform the Fed’s expected raise of another 25bps at this month’s meeting. They also discuss the ECB’s recent 50bps raise to offset European inflation.
Finally, Albert leads a discussion about China’s shift from an aggressive “wolf warrior” foreign policy to one of a peace negotiator. The discussion explores the motivations behind China’s recent diplomatic efforts to negotiate a Saudi-Iran agreement and facilitate a Russia-Ukraine peace agreement. They also explore the position and potential level of involvement in these discussions by the United States.
Key themes: 1. Banking systemic risk vs inflation 2. Higher rates & commodity cargoes 3. China: From wolf warrior to peace negotiator?
This is the 57th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, everyone, and welcome to the Week Ahead. My name is Tony Nash. Today we’re joined by Hugh Hendry. I don’t think he needs an introduction, but Hugh is a founder of Eclectical and Macro, as well as being a hotelier in St. Bart’s and a lot of other things. We’ve also got Tracy Shuchart with Hilltower Resource Advisors. And we’ve got Albert Marko. Guys, thank you so much for joining us. So much has happened over the last two weeks in the banking sector and especially over the weekend with Credit Suisse. So looking forward to a lot of this discussion.
We’ve got some key themes today. The first is banking systemic risk versus inflation. As the Fed meets, and as we sort out a lot of these banking backstops, I think there’s a lot of discussion about which is more important right now. I think a lot of it is focusing on banking systemic risk panic, but we’ll talk through that with Hugh. We also want to talk about higher rates and commodity cargo prices. Tracy brought some thoughts about that earlier, I guess, over the weekend. So we want to talk through that today. And then we’ve seen China kind of come forward as kind of a negotiator for the Middle East and Russia, Ukraine and other things. And I want to talk to Albert about kind of how real is that, how much of a good faith negotiator is China in those areas?
So, Hugh, first of all, thank you so much for joining us. Hasn’t been easy to get you, and we’re really glad to have you. So we really appreciate having you here. Great. So first off, banking systemic risk versus inflation. Everybody knows the Silicon Valley Bank and First Republic and the BTFP stuff here in the US. All the Credit Suisse and UBS stuff happened over the weekend. What are you watching there? Like, what’s your biggest worry? Is it these 81 bonds? What are you focused on there?
Hugh
Well, I have been focused for some time. My focus has been this impending car crash, which is now becoming more apparent perhaps to the many. And my concern had been Fed by my observation, my belief that we’ve been operating in a silent form of depression ever since the remedial work undertaken since the great financial crisis. Let’s date that to March 2009. It has been a spectacular failure. I will share with you a chart. Maybe we’ll be looking at it now. And it comes from who does it come from? I want to say I always get these names mixed up. Michael Klein. I think the wonderful economist academic works of Michael Barr, doesn’t work with Michael Pettis, but collaborated on trade wars, of political class wars. And he shows the indexing of US GDP per capita from the starting point of the Great Depression. And likewise, he superimposes a similar series for now, if you will, from that March 2009 and over the period spanning to almost 15 years us. Per capita GDP in the Great Depression went from 100 to almost 190. And this time around we’ve gone from 100 to 115. So I said silent.
We should call it the Great Great Depression that no one is allowed to speak of. We went through the pandemic environment to realize that there are some terms where there’s almost a censorship and it would seem that in US financial literature the word depression has been assigned to the past and not to the present. So raising interest rates in a Great Depression has filled me with dread and I think that is what has come to light in the last ten days or so.
Tony
So when we look at the amount of credit that’s been created since the financial crisis and kind of the payoff in terms of GDP per capita, is that one of the variables that concerns you most? I know it’s everything and I think we’re all looking at everything, but it seems to me that the payoff for every dollar of debt incurred by the government and by individuals is rapidly kind of falling down.
Hugh
Yeah, I would say that the credit cap has been muted. And again, I make a distinction between sovereign dollar creation and by that I mean the dollar creation from onshore domestic US banks entering into new loan agreements and if you will, printing dollars versus the dollar creation. I would call it non sovereign, which is the Euro dollar which is taking place offshore and where with the ability to provide collateral, new dollars will be created. Now, the Fed I believe, is less interested in the latter and I believe over the last 40 years the latter, these non sovereign dollar creation have come to be really much greater than the sovereign onshore and the credit provision there has been really to fund assets and it’s funded asset price inflation. And I think market participants have been very aware that that credit spigot got turned off, let’s say 18 months ago very dramatically. So I would say it’s been contracting. And now we’re seeing I don’t like discussing the M two series because I think it takes away from this non sovereign creation, but we’re seeing that the onshore M Two series is now contracting as well. We don’t have much per capita GDP augmentation to show for for that.
Tony
Right. So so wouldn’t, after all of the creation of money in and I would say through, largely through government spending and obviously Fed balance sheet in 2000 and 22,021, isn’t this kind of a normal reaction, kind of a normal medium term reaction to that much creation and distribution of money into economies?
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Hugh
Well, again, it’s kind of crossing my arms. It’s a funny money conversation.
I keep saying, I go to Starbucks and ask for a caffeine latte, and I promise to pay it in bank reserves, and they kick me out. The Silicon Valley Bank was acutely sensitive because their corporate customers are startup businesses, which are very much at the riskier end of the spectrum. And typically that bank would be funding between the last six to three months. Your cash is disappointing. You need another fundraise.
But the bank steps in and it holds you over. There was no prospect of more fundraising, so it was kind of exaggerated. But I think with the other banks, what you’re seeing is that and with Silicon, you were seeing that their assumptions with regard to operating cash flow from their client, from their clients, just was not being met. That actually the economy is weaker. That we’ve we’ve, again, within this kind of silent depression, we’ve imposed I mean, I don’t dispute we’ve imposed structurally higher prices, but without again, without the legacy of a dynamic of credit creation, which left, like, a really strong economy, which was to be tamed and to be tempered by the Federal Reserve’s oversight. To my mind, it’s been a muted economy for the real folk. If we move a kilometer or so outside the financial centers of the world, the real world just seems rather grim. And that real world is being hammered by higher rates. And again, with the prevalence of debt, I keep saying, if debt was one X GDP in the so we’re taking out decimal points, then I’d say we’re four X today. And so the Fed at 5% rates is really the Fed at 20% rates in the 70s.
If I can get away with that kind of leap and you break things and we’re breaking things, that’s been my concern. My concern is, I believe, that the depression has been fueled by Bernanke. Back in was it 2013 when we had the taper tantrum, where he encouraged the private sector to raise rates on his behalf? We had seven and a half percent adult unemployment. He was saying, Heavens, I’m beginning to worry that the economy is getting overcooked. The market doubled ten year rates. You know what? The economy hit a wall. Then we had John Yellen, tentatively, in 2015, trying to raise rates again. Why? There was never this economy which was running away. And then you had Jay, and Jay is just being determined from his first day in office to kind of be some kind of volcker guy, what was it called? The Duke of York. He marched them up to the top in 2018 and promptly had to take them down and then he came back again and finally I think I feel like particularly the American economy has been crucified on the cross of Jay’s miscommunication. During the pandemic, he explicitly said on daytime television that they were printing money.
I get why he said it. He was saying it to alleviate the real fear of that time. But it was I mean, I’m going to say it, it was a lie. And so he now owns the price, I would say. Is it causality? Is it something I don’t think the inflation that we saw is monetary. I say it was a supply side thing. I think it will abate because the monetary power will not be there to perpetuate it. But Jay couldn’t escape that. He was the guy who said I’m printing money and then you had an explosion in prices. And so they’re fighting desperately to kind of preserve or reign back their reputation. But it’s the economy and these banks and other actors which are feeling that.
Tony
Yeah, I guess so if the Fed is kind of trying to bring back in their reputation I know this seems a little bit random, but who has a better reputation? Like all central banks have terrible reputations right now. No. So are they in fact the best of the major central banks or are there other people that are more credible? ECB raised 50 basis points last meeting. So is that a credible trajectory?
Hugh
There’s only one thing we know for certain that the ECB will raise rates at the wrong time.
And again, it’s like the pushback I also have is just tell me the last time any central bank made a glorious decision, you thought, gee, these guys, they got it, they got it. Maybe it was 1994 and there was a kind of preemptive hike by Greenspan maybe, but 1994 is a long time ago. So in terms of do we need central bankers? Given I mean the American central bank is the regulator of the onshore banking sector and I maintain that we should be investigating and spending a close amount of money to examine the totality of dollar creation, credit creation because I believe it’s tremendously larger outside the review of the central bank. And then finally, who does it better? Well, the inversion of the treasury curves, not just the US treasury, but it’s a global phenomenon. If you’ve seen what the German curve has been doing, especially the last really if following that huge eruption in the UK pension market when we had the fake budget or whatever, when you have an inversion, it is not the bond market telling you it’s best guess of where rates will be. They create the inversion via a desire to hedge against the expectation of negative consequences like unforeseen consequences of Federal Reserve tightening in a world of tepid demand.
And in a world of great leverage, the bond market has been spot on. Those inversions are at record levels. And again, we are seeing a record form of banks going wrong and needing record forms of financial intermediation from the central bank to fix it.
Tony
Right. So it’s interesting when you say do we need central banks? I know that’s a hypothetical question, but especially over the past week and a half, as we’ve seen the Fed come in to backstop bank runs, that’s precisely the reason why central banks were created. Is that right?
So they kind of are with this BTFD, they’re kind of doing what they were created to do. And I guess with the Swiss central bank, what they did over the weekend, they’re kind of doing what they were created to do. Although nobody loves the fact the kind of bank bailout discussion nobody loves that, but they’re kind of doing in the purest form what central banks were created to do. Is that a fair categorization.
Hugh
At the tail end of the process? Yes. I don’t dispute what they’re doing. I wouldn’t ask them not to do it. Right. But I feel that especially this time around, they are the malignant force that is causing the failure in the host banks. I mean, Credit Suisse credit Suisse has been a problem that should have been addressed at least a year ago. Oh, yeah.
Tony
It surprises nobody. I mean, the fact that anybody’s surprised is surprising.
Hugh
And there’s no bailout. Even if you bought the equity on Friday, I think you lost 60%. The equity lost just about everything. And of course, that spread into one of the tiers of the kind of quasi debt debt structure. So again, we accept that. The wider question is just why is it happening and why is it caught out the central banks? There’s no dispute that the central banks are responding. And I don’t take huge exception to how they’re responding. I take exception to the fact that they’ve been the custodians of a if you were to accumulate the myths in potential GDP you know this, Tony, that in the 30 years up to 2007, most kind of g seven. Economies outside the phenomenon of China were kind of compounding like 2.7%. And it’s been more like one and a half in those years since then. So the miss is now the equivalent of the entirety of the Chinese economy. It’s a big mess. I think it stems from a change in the risk seeking behavior of the horse bank supporting the euro dollar system. They had a near death experience and they’ve been regulated to bring it down.
Okay. And secondly, it’s been periodic preemptive hiking by the central bank, maybe with a noble cause, but actually ending up doing wrong. Those those two functions. I actually believe at the end of this, I think we’re I think the generational time clock where you get profound, you know, like ray Dalio talks about these things, you know, 75 years. He has different clocks, and they all have like, a variation of 25 years, give or take. But we’re in one of those variations in terms of where we look at the underlying monetary system. We had a gold standard. It failed. Great Depression. People talk about bread and woods. I think bread and woods was a kind of in between. It didn’t really work. Private banks went, this doesn’t work. Let’s work it to our ends. And I think that Eurodollar system from was it NatWest Bank in London in 1956 or something, I think that system is near its death as well. I think we’re getting to the point where we’ll have to invent a better way now that’s not to kind of come back and see the dollar is doomed. It’s actually that the system that America accepts is really no longer doing it.
It’s not an unfair advantage. It’s the opposite. You have to really question why they support it. What do I mean by that? Why they support being the recipient of the world’s surplus capital inflows? Why are the world’s capital inflows going into the US. Where they have absolutely no desire for investment beyond the domestic pool of savings? Okay? And so the result of that is we get profound asset price inflation. We turn an economy famed for its entrepreneurial ship, and we turn it into an economy of speculation. That speculation is being unwound with the advent of GDP. When debt accumulates or debt to GDP rises, then you end up there’s a danger that you’re overstating the current GDP at the expense of future GDP. And as you overstate growth, you kind of create a fictional wealth in terms of the price of property, the price of price of stock market, the price of private equity. And it’s not done through kind of sinister means. It’s a miscalculation. And the US. Now, for the last heavens, the last 25 years, we’ve had, what, three or four events within 25 years that in a normal distribution, if there is such a thing, you’d expect these things to be spread out over 70.
We got four events that you would expect to kind of come to bear over maybe 100 and 5200 years. And yet we’ve seen it within 25. It’s no longer doing the US. Any favors. And so I think ultimately the US. Will have to look to perhaps mimic China and say and put up barriers whereby you cannot be the recipient of all these surplus capital flows. I think there would be a better place for that, but that’s perhaps for another time.
Tony
That’s really interesting.
Albert
I’d like Tony. I don’t want to be the one to defend central bankers, by all means, but how much of it is political influence for central bankers to combat supply side inflation? I mean, voters in each of these countries are facing 2020 5% inflation on goods and services and the way I look at it is those politicians need to get reelected. And for them to push back on the central banks to try to do something to combat inflation is the way that I would work it.
Hugh
I agree. It’s an agency to my mind, this is an agency problem and not an economics problem. I mean, it’s creating an economics problem, but it’s the agency of government. It’s the government being the principal and turning to its agent, the Federal Reserve, and saying, you guys messed up and messing up. You affect me, okay? And if you affect me, I’m really going to affect you. So do something about it. It’s mafioza. But my point is this is not an economics problem. Inflation I was saying she was going to have all my tombstone. Inflation is a monetary phenomenon, okay?
Tony
Many tombstones, not just yours. Yeah. So, Albert, what you brought up about the euro dollar kind of out kind of outlasting its use. What are your thoughts on that? I know you know the euro dollar inside and out. Can you talk us through your view on that?
Albert
The problem that I have with that argument is there’s just no alternative at the moment. And I understand what she was talking about is, yeah, maybe we should look at a different alternative. And I think I was on this podcast maybe two weeks ago where saying that theoretically the Anglo sphere could come up with a digital currency founded by the dollar and whatnot to come up with a new system. But these are all theoretical policies that I don’t know how would they work. I don’t know what it would do to the economies, how things would even transpire at that point. There’s a lot of unknowns, in my opinion. But I don’t think that the euro dollar I don’t think even Hugh believes that the euro dollar is in any danger of going away in the foreseeable future.
Tony
Right now, the Euro, if we go back 20 some years, the Euro was supposed to kind of be that offshore mechanism, but it never really worked that way. Partly because the Dutch and the German.
Albert
Different national interests tony the different national interests, different financial policies, different political interests. It just doesn’t work right.
Hugh
But it’s also tony but it’s this point that Europe is founded still upon the rock of Germany, Holland, et cetera. And these are persistent trade surplus nations that create surplus capital, and that surplus capital is invested in the United States. The housing crash of 2007, 2008, the majority of mortgage credit was provided by European banks, not American banks. So again, Europe and China, Asia are less open to the flow of capital than principally the US. And the United Kingdom. I don’t believe to Alba’s point, that we have to invent a new currency. I don’t believe it has to be digital or physical or, God forbid, commodity. There just has to be a greater regulation in the conduct and behavior of trading blocks with regard to each other.
Albert
I agree. There’s a problem where Yellen is the one she’s done this before in 2013, where she drives up US. Dollar policy and hoping that capital comes back into the United States to keep asset prices elevated just purely for her own labor ideas and political leanings. So that’s something like for me, if you don’t put any controls to stop yelling and others from doing this, they’re going to just keep doing it over and over again. We’re going to be stuck in a doom loop of capital flows coming into the United States.
Tony
Okay, but that’s interesting. What you said, Albert and Hewitt, you said about almost trade flow. So it’s the flow that is the problem. It’s not necessarily the currency is that my point.
Hugh
And again, there are achievable. Here we are, and we want to talk about Greta’s recent Silicon Valley, but it’s buried so deeply the underlying problem, which has been with us for at least 25 years. I want to say that the last time the kind of Charles Kindleberger handbook to a currency crisis actually worked out with the great logic of his orthodoxy, where you could monetize it was the Thai bat. And since then and what was the change, because it was the specter of China et al. Seeing the vulnerability to those Asian currencies from being so open and so those bolt fast to being effectively closed or very much controlling the money coming in. So in return, the US. Has had profound asset price inflation. Now, if you wanted to discourage that, you could put a withholding tax on treasury holdings by central banks, by foreign central bank. They already have it at custody with the New York Fed. And and I don’t believe that these institutions are like hedge funds, that they are profit seeking. They are working to a political goal and they will pay it. And if you squeeze it enough, you may actually discourage them, but at least you could impose a rent on their behavior and the disturbances that that behavior is, as we see the disturbances today, play out again.
Tony
Okay, very interesting. Okay, so we’ve gone into kind of the core of the problem. But if we go very short term because we have a Fed meeting coming up, everyone’s nervous about the systemic banking crisis or inflation, what do you think takes the priority in the next Fed meeting? Do you think the Fed stays on its trajectory? And all you guys, Tracy, Albert, Hugh, what are you guys views on this? Do you think the Fed says, hey, this banking thing scared us. We’re going to stamp pad on zero for a meeting and then we’re going to see what happens? Or do you think they proceed with 25s as they’ve been talking about and saying, hey, we put the backstop up. The Swiss central bank came in and put their backstop up. All is good with the banking crisis. Nothing to see here. We’re going to keep fighting inflation. What scenarios do you see them coming through again with a very short term mindset.
Hugh
Or Tracy, forgive me, Tracy, we haven’t heard from you. Why don’t you contribute?
Tracy
That’s fine. I hate having an opinion. Because everybody has an opinion.
Tony
Yes, that’s why you’re here.
Tracy
Everybody’s talking. I would think they stay at 25. That said, I think that if they decided to hold, that would be great news for commodities, and the commodity markets would react very positively towards that. But I think that they’re going to stay with the 25 because they’re going to say everything’s contained, just like we’ve heard a million times before. But we’ll see.
Tony
I remember in 2007, at the beginning of the financial crisis, the early indication said, it’s a 200 billion dollar loss. We’ve got it contained. Nobody talks about this today, but it’s $200 billion. Don’t worry about it. It’s all fine. We’ve got it contained. Is it possible that we’re in one of those scenarios now where 2007, $200 billion, it’s all fine, and we just kind of keep kind of raising into this when there’s a bigger specter living out there, or do you think it’s done? Tracy?
Tracy
I feel like this is not a repeat of 2008. I think it’s completely different. So I don’t want to equate it with 2008 exactly, but I feel like the rhetoric is kind of the same where everything’s contained. It’s okay. We took care of it.
Tony
Yes. Okay. Very good. Albert, what’s your view on the next Fed meeting?
Albert
You think they’re going to do 25? I don’t know what they’re going to do, but I think they should do 25. Going to zero. Pausing is, I think, a bad sign for the market. I mean, it might be bullish for a few days, but realistically, it’s not going to help solve anything to do with inflation, specifically supercore, which is what I think the Fed is. Powell has said himself is what he’s been watching, and its trajectory is going up. So I think they have to stay the course and do 25. That said, they could do zero just because this banking issue has gotten, at least in the press, out of hand, with a lot of bazookas being sent out by central banks to squash it. So we’ll see. But I hope they do 25.
Tony
So if they do zero, do you think it indirectly confirms everyone to worst fear? It’s like, oh, my gosh, they did zero.
Tracy
It must be worth really bad.
Albert
Yeah. Narrative wise, that’s exactly what I would be thinking. It’s like, what’s going on? Why are they overreacting like this? So that’s exactly what I think the sentiment would be. Definitely negative over the long run.
Tony
Right, Hugh?
Hugh
You’re all blinking crazy. May I remind you, for the last 15 years, the growth in per capita GDP for the average American has been catastrophic. It’s been one 6th that experienced during the Great Depression. And we’re talking about the Fed hiking rates further. I recall my trading experience, Tony, you mentioned 2007, and I always sat on big dumb leverage positions and we had northern rock go under. We had some French banks kind of have closures, but it was still modest. It wasn’t really what we’ve seen of late. And the Fed cut rate and the S and P was like pretty much at his all time high. And they won’t do anything. They’ll talk about it. They’ll express concern, boom, cut interest rates. The question is, is that an old Fed? And that may be relevant in the sense that I think the Fed should have been cutting rates six months ago. I think that the sovereign curves have been telling you that. But they’re kind of trapped again to the agency point and to the assumption, as Tracy said, hey, if they hold, can you imagine they cut, your commodities would be off to the stars and risk assets would explode.
And I think the Fed is very conscious of that. And so a Fed that should be, I think, should be cutting. Can I just say, banks have discovered that they have funding deficits. These regional banks, they’re not money center banks. They don’t have colossal sums of other instruments that they can sell off to meet liquidity needs. They have illiquid pools of mortgages to corporate America. And what you can do with that is you can package them like a CDO, these illiquid tranches, and you can offer it to the big money center banks and they’ll give you Treasuries. And then with the treasury, you into the eurodollar system and then they’ll address your funding. Now, the funding is coming I believe the funding is coming from the inflation in that everything is 15% or more expensive, but the underlying business health and revenue isn’t there. And so the corporate customers are their cash balances are coming down and down and down, creating the deficit which these banks can’t fund. Like I say, we’re in a depression. And the preoccupation is how far will the Feds raise rates? It’s going to get worse. The economic fallout, the consequences of this, like finding you remember, we have what percentage of the economy is the Frankenstein businesses that were supported by the fact that the carry was so low?
How much of the economy is the conceitful economy, which hasn’t marked the market, is I am full of angst.
Tony
But are we here partly because interest rates were kept so low for so long? I mean, that was really on some level, what was behind Silicon Valley Bank is they were holding this debt that was so far underneath the market that they couldn’t keep up with their cash needs. So is that part of the problem? If they cut rates, it puts us back into that environment?
Hugh
Yeah, that is the problem. But the deeper problem again, is beg of thy neighbor policy. We’re. Missing, like I say, $15 trillion of global economic demand. And I think that’s because China et al, pures a policy of making things cheap and keeping its current. Imagine if where are we on the remembri? We’re six.
Tony
Nine.
Hugh
Yeah. Seven. Eight. They call it seven. It was at nine when we created NAFTA many years ago. So nine to seven in terms of appreciation, the damn thing should be at four. The Chinese should be the citizens in the household sector should be really rich, they should be buying tons of overseas products and we wouldn’t have that deficit. But again, owing to the Thai pad episode and how we’ve organized trade flows, that hasn’t happened. And so, again, that’s why the per capita GDP for the ordinary folk in the States has barely budged, which is why we’ve had to keep rates on life support. But of course, the consequence is you blow up asset prices and trying to get the two balance between the two. I don’t envy anyone that decision.
Tony
No, it’s painful. And as we see housing prices come down to earth, if that happens here in the States, that’s where most people’s wealth is based. Right. So if their portfolio is coming down a bit, if their house price is coming down a bit, there are a lot of delicate balances, delicate, say, household balances, that will be upset here in the States, if not globally. So I think you have a great point. I think it’s a really difficult dilemma. I hear people all the time talk about how dumb the guys of the Fed are. They’re not stupid people. I don’t think they’re stupid people. I think they understand the problem. I think it’s a very complex issue that they have to get out of.
Hugh
Right. Yeah. Can we ask Tracy? But on oil, why is oil so weaker? And where that huge surplus has come and it’s changed the shape of the curve, there’s no demand for it. Can you speak to that?
Tracy
Yeah. I think part of the problem is a lot of Russian oil is still on the market that most were anticipating. It not be. We are seeing China demand come back, but not as fast and furious as everybody had anticipated, and still kind of very soft, even though mobility data has improved significantly. Still, their demand for oil is because they were stocking it for a year in their surplus. So they have a lot of surplus. So obviously they’re going to drain that first, while oil prices are high and making deals with Russia for cheap oil. And the other part of it is that interest rates are high, and that is because when you’re talking natural resources, they’re particularly exposed to rising rates, right. Because trading houses rely on bank credit to buy, transport and store these commodities. So with higher rates, what is happening is these companies are either having to sell right away at any price because they can’t hold it like they used to and wait for a better time to sell when the price was higher or the opportunity was better. So they’re having to sell it right away for whatever price that means, which is also causing downward pressure on prices right now, realistically speaking and hearing from some of the big trading houses that they’re having to forego some trades.
Tracy
Right. And so that’s stranding product with the producers. So I think that’s why we’re seeing weaker commodity prices pretty much overall.
Hugh
Do you have data on the driving statistics in the continent of North America?
Tracy
Yes, I do.
Hugh
Am I making it up to say that here we are, so many years after the pandemic when we know that everyone was kept at home and that the mileage is not really changed much?
Tracy
It really depends on the area, I think. Right. So we’re kind of still seeing more limited in, say, some of the blue states where you’re seeing a lot of uptake in some of the red states. Obviously, in the south there’s a lot more mobility, or the mobility data is a lot better. If we go and we look at TSA, I mean, TSA, we’ve been wobbling, like just above 2019, just dipping just below and then just above. So that data is still pretty strong. So that looks good. But mobility data is very regional in the United States.
Hugh
And I guess with anyone shouting at the screen saying it’s the adoption of Teslas and electrical vehicles, I hear you. But the whole notion of this curse of inflation, that it doesn’t persist, or a sign that it’s unlikely to persist, is when you see changes in economic behavior where you have discretion. You cut back because you just don’t. Have the financial wherewithal to support a wallet which your wallet is not 15% higher. But the price of goods and services are 15% higher. And so maybe driving would be discretion in that sense. Anyway, thank you for that.
Albert
Yeah. On top of that, I’ve talked a lot about Spr releases timed with the Fed selling oil futures to bring down the price of oil in their mind to help combat inflation. I mean, that’s something that’s happening.
Tony
Happened.
Albert
Last year for a little while. And I know that they’ve been doing it again this year. And, I mean, I heard through the grapevine that it was up to $800 million worth.
Hugh
Really? So, Tracy, I thought that had come to an end. The biden policy of selling the reserves, the oil reserves.
Tracy
We have the last little bit sold in December of 22, and that was from that 180,000,000 barrel release that was released throughout the year. There’s about 26 million barrels to release this year. That was scheduled back in 2015. That’s part of a whole different deal. It was part of the upgrading of the Spr, paying for the upgrades of the Spr. So that release will still happen. The thing is, traders were looking at at these prices the government was going to rebuy. Right? And so they did hold an auction on in January and they didn’t get any offers. They didn’t get any bids so they decided not to do that. And people are definitely looking at prices this low because really their target area was $68 to $72. So at these prices they were looking for the government but it looks like that’s just not going to happen because I think they are very happy with prices this low and they know if they start reflecting the spr that’s going to raise prices.
Tony
Okay great, thanks for that and Tracy, I appreciate the cargoes or the pricing and the urgency of the finance of commodity sales. How long do you expect that to last? Do you expect that to continue to last for the next couple of months or is that something that we’re just kind of in this period where things are changing really fast and it’s a relatively temporary issue?
Tracy
Yeah, I think it’s a relatively temporary issue. I think really what we’re going to I still think we need a few more months to really see what Russian oil is or is not off the market. And by the way that is getting very difficult to track these days because they have their own fleets and you have a whole gray market there. But from whatever Sts satellite information that those people gather they are seeing a lot of product build up on water that’s not going to be able to be sold because February 5 is when that policy enacted with the ban on products. So I think we still need a few more months to see where that goes. I still think we need a few more months and I’ve said this for months now when China started to reopen I said I think this is not going to be like it’s going to cause commodities to skyrocket. I think it’s going to be very bumpy. I think particularly the property sector is still a mess. They’re not building anything there’s not really creating a lot of stimulus right now and they have a lot of oil stored.
Tracy
So I think they’ll need to kind of work through those issues a little bit before we really see China demand take off. Maybe an H, two of the share if the whole world is not in a global depression.
Tony
Yeah I remember a few months ago I remember a few months ago talking about that when China was kind of supposed to open in Q One and there were a lot of cheerleaders saying it’s going to be a rocket ship, it’s going to take off really quickly. And I think what we talked about here was it’ll be slower than most people think and that’s come to pass right?
Albert
Yeah they’re pragmatic, they staggered their reopening. They’re making moves for the next six to twelve months on commodities. Which leads me into my section today is what they’ve done in the Middle East with brokering a deal between Iran and the Saudis. I mean, this is specifically done because the Chinese are the biggest clients of both parties. So you’re going to have to appease your biggest client and come up with some sort of truce. But it’s a short lived truce. As the Russians, the Iranians and Saudis start competing for more Chinese market share, since they are the biggest buyers on the Earth at the moment, tensions will inevitably come back up. They’ll bubble up again and this truce just doesn’t have any legs to it.
Tony
The most surprising part to me is that China just a few months ago was still under this kind of wolf warrior diplomacy kind of theme, right? Very aggressive, very direct, very unlike what I’d seen in China for decades before. And now they’ve changed really quickly to this dove policy of we’re going to negotiate peace in the Middle East, we’re going to negotiate peace between Russia and Ukraine. What happened there? Why is it just easier to sell stuff in a peaceful environment than it is in war environment? Or what is it? Because they’ve been the biggest buyer of tiny crude for a while, so that’s.
Albert
Not necessarily it’s mainly to do. The United States is leaving vacuum, their newest foreign policy, leaving vacuum in the Middle East. They’ve just basically abandoned it. We abandoned Afghanistan, we’ve pretty much abandoned Africa at the moment. And the Middle East is we’re not visible at the moment. So inevitably people like China and Russia are going to sit there and go and fill the vacuum. And it’s very easy for them to leverage their purchasing power on Iran and the Saudis and say, hey, cut a deal between you two so we can keep these trade deals going. Now I think also the Saudis are leveraging their oil reserves versus the United States and say, hey, if you don’t become a little bit more friendly with us in the defense sector and start pushing back on the Iranian nuclear aspirations, we’re going to cut deals with China. And I mean, I would do the same thing, to be honest with you.
Tony
So why this may sound like a stupid question, but why doesn’t the US come alongside these discussions and say, hey, it’s peace, let’s negotiate. Let’s get involved with this and support it? Why would the US. Not do that?
Albert
Well, it’s much more complex to say, let’s just have peace. I mean, the Iranians and the Saudis absolutely despise each other. The Israelis are also a major lobbying group in the United States. They certainly don’t want to see Iran benefit financially over this and push that right into their nuclear program. So there’s a lot of moving parts at the moment. And specifically when you talked about Russia and the Ukraine brokering peace there, the reality is the Russians are not going to leave their annexed areas and the Ukrainians are not going to accept that at best, you can get to a status quo, as we were a few years ago. But in terms of peace deals, it’s just not realistic.
Tony
But over the weekend, didn’t the White House come out and say, ukraine is a sovereign nation, but basically we won’t let them negotiate a peace deal with Russia right now? There was something like that that came out over the weekend. So how can the White House supposedly recognize Ukraine as a sovereign nation, but also not allow Ukraine to negotiate a peace deal? That doesn’t really make sense.
Albert
Ukraine’s defense is completely based on US. Armaments at the moment. So of course they can use that as leverage. And, I mean, the United States loves specifically the Biden administration loves to have Putin as a scapegoat for inflation. The moment the Russians marched in there, the term Putin price hikes came out and all over the news. It’s just one of those things where politics has reared its ugly head trying to influence economics. And here we are.
Tony
Great. Okay, so let’s take a quick look at what we expect, say, this week or the week ahead. What are you guys looking for? Tracy, we’ve seen crude way down over the past two sessions. What do you expect to happen in energy? Is this likely to continue with crude continuing downward, or is this very temporary?
Tracy
I think it is a temporary move. I mean, if you look at this, even though we have some softer demand, we are heading into higher demand season. Right. And so, again, there’s a lot of recession fears right now, too.
Tony
Right.
Tracy
So that reared its ugly head again, because of all of the banking crisis. And you also had a lot of what we saw, too, is when US treasuries spiked, right? Because everybody was short spiked. There were a lot of margin calls. And so it was kind of sell what you have to. Oil been sideways for three months, and so sell what you have to. And so I think that was part of that initial push down just from the price action, because we’ve seen that before. But I think it’s going to take a couple of months to digest all of this, to see where we’re at. Let’s see what the Fed does decide to do. Again, if the Fed decides to do nothing, commodities would love that, right? Yeah, they could.
Tony
Love it. Everyone would love it.
Hugh
I’m not sure I’d love it. I’m not sure I’d love it. And I’m not sure commodities would fly. When you say the Fed does nothing, the Fed sits at 5% rates. Or if we’re in the 1970s, the Fed sits there content with rates at 20%. I think oil has done something extraordinary. I mean, from the high tick with the Ukrainian invasion. I mean, oil the oil price is halved. I mean, oil is trading at levels prevailing 2004. That’s extraordinary. And it speaks more, I think, again, to my notion of this silent depression, an aggressive tightening of policy which is appropriate for asset price inflation, but is sheer misery for the ordinary folk.
Albert
I’m actually looking for a 25 basis point rate hike just to agitate you. But I agree with actually, I agree with you. I think that the Fed needs to actually cut rates if you want to see commodities start going these sky high parabolic moves again. And I don’t think we’re close to that at the moment. I do think that a pause would push commodity prices up, but I don’t think it would go parabolic like it did before.
Tracy
Oh, yeah, definitely it would be parabolic.
Albert
Yeah.
Hugh
Of course, if I was to talk my book, I want the Fed I want them being ECB. Like, I have to be cautious of how I say this because I don’t want them doing malevolent things to ordinary folk. But if I was to top my book, I’m really very enamored, very long of the very long end of the treasury curve. Because, again, to repeat myself, broken record depression in terms of price, if we ignore the Carry On Treasuries, which is, again, you could say fanciful, but we’ve wiped out 20 years of price performance, which is to say you’ve had profound mean reversion. And so I do like mean reversion events in terms of global asset. I don’t like mean reversion for individual stocks or individual kind of eclectic risk positions. But the generic give me something trading at the 20 years. So to my mind, where the treasury bond trades, where the inversions are trading, is that most likely we have for the curves to be correct? They’re really imagining a situation where the Fed could rapidly unwind like it did from September 2007 from five and a quarters to terminal of zero. Not a terminal five and a half, six or terminal of zero.
Hugh
And so you’ve got to think, how do you get to a terminal of zero? Well, you get there by inflicting, again, just a colossal deadweight cost of economic pain on the economy. So you can conspire how that would come about from this intellectual reputation or agency trap where they’re just forced to continue with hiking.
Tony
Yes. Over the next week. What are you looking at here? What are you looking in the very short term? What are you paying attention to in the very short term?
Hugh
You don’t want to know.
Tony
Oh, I do.
Hugh
My insights for these markets come from not watching them a great deal. I mean, I’m heading to the most outrageous party in Paris on Wednesday, thursday night. I’ll restock maybe Monday on the West Coast, next week in the US, and we’ll see what’s happened. If I had to guess, I’d expect there’s a huge desire to buy the markets here. The fed’s done something. We’ve even resolved the long standing corpse of Credit Suisse. You look at the equity market, it’s not really indicative of any great danger. The commodities. I mean, yes, I was talking about oil, but the commodity complex, it’s not kind of signaling any profound falling off a cliff. There’s just been a profound revision, I think, coming from hedging activities at the very short end of the treasury curve. Even the long end of treasury curve, it’s not really done anything. So the notion, I think and I was speaking to friends who manage risk, and they’re all agitating, and we were looking at banks. If you look at Irish listed banking securities, they’re way above where they were trading september, October last year. They’ve had a pullback for certain, but they don’t look whole.
Hugh
So I think the presumption is still going to be to feed and come back and try and chase a rally higher. That would be my guess.
Tony
Very good, guys. Thank you so much. This has been a fantastic discussion. Hugh, I’m glad we can keep up with you. Really good kind of long term views, and I really appreciate your perspective. Tracy, Albert, as always, thank you so much for your time, guys. Really appreciate it. Have a great weekend. And you have a great time at that party in there, right?
In this episode of The Week Ahead, the hosts discuss three key themes: Silicon Valley Bankruptcy, the Federal Reserve’s Quantitative Tightening (QT) and systemic risks, and America’s energy policy.
The discussion begins with a focus on Silicon Valley Bank (SIVB), which had a major issue raising capital and faced a bank run on Thursday. On Friday, the California bank regulator shut the bank down. SIVB had $175 billion in deposits, $151 billion of which were uninsured. One of the discussions surrounding the SIVB collapse is how venture capitalists have been affected.
The hosts then move on to discuss the Federal Reserve’s QT and systemic risks. They note that the US has been experiencing strong data and inflation, and Fed Chairman Powell hinted at a 50 basis point increase this month. The hosts discuss whether the Fed will accelerate QT in this environment, what that could look like, and what risks it would pose to the US financial system.
The third theme discussed is America’s energy policy. Host Tracy Shuchart mentions a speech given by US Energy Secretary Jennifer Granholm, which didn’t seem to give her more confidence in Granholm’s competence as an energy secretary. The discussion touches on the problems with America’s energy policy and how it affects the country’s overall economic outlook.
Finally, the hosts share their expectations for the week ahead.
Overall, this episode offers a comprehensive analysis of current events and trends in finance and policy, with a particular focus on the implications of SIVB’s bankruptcy and the Federal Reserve’s actions. The hosts provide insightful commentary and thought-provoking questions that will be of interest to anyone following these issues.
Key themes: 1. Silicon Valley Bank(ruptcy) 2. Fed’s QT & systemic risks 3. America’s feckless energy policy
This is the 56th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. Today we’re joined by Joseph Wang. You may know him as @FedGuy12 on Twitter. He’s a CIO at Monetary Macro and a former senior trader at the New York Fed. Joseph, we’re really happy to have you here. Thanks so much for joining us. We also have Albert Marko and Tracy Shuchart will be joining us during the show. There are some key things we want to talk about. First is a hawkish Fed of course we can’t talk about that without the Silicon Valley Bank things, events that happened today. So we’ll cover that a bit. We’ll get into the systemic risk of quantitative tightening and the likelihood of that happening, as well as America’s rudderless energy policy. And we’ll talk to Tracy about that in detail.
So guys, thanks very much. There’s been a lot going on this week. Albert, I know you’ve been on the road. Joseph, it’s your first time here, so I’m really glad we can have this conversation. Guys, let’s start out with Silicon Valley Bank. I mean, this is something that just kind of happened yesterday. It actually happened with a communications announcement on Wednesday coming in the wake of another bank failure.
And it was really bad timing, it was really bad advice for them to do this. And we’ve just seen a bank explode right, or implode. So can you help us walk through what actually happened from your perspective?
Joseph
Yeah, well, first of all, thanks for having me on the show, guys. I love your show and I do listen to it. So it’s real honor to be here today.
Silicon Valley Bank. So as of recording today, it looks like they’ve been taken into receivership by the FDIC. So basically it’s bankrupt. Now, Silicon Valley Bank over the past couple of years, if you look at their equity prices, they soared really high, especially during the crypto boom. They were known as a bank that would lend a lot to the financial tech sector. And as the financial tech sector imploded, it seemed like that kind of hurt them as well. These past few days you saw it stock price steadily decrease. So if you’re a bank, you have two big concerns. The one is solvency. Are your assets worth more than your liabilities? And the second is liquidity. Do you have enough cash on hand to meet investor withdrawals. When I put money in a bank, so I am an investor in that bank, right. So I eventually lent money to local bank and local bank bought from me and I can go and get that money back anytime I want. And that is part of the problem of a bank. Your liabilities, they are short term, so they can disappear anytime you want. But your assets tend to be longer dated, things like loans, let’s say a five year, ten year loan.
So I can’t really comment on the solvency situation of Silicon Valley Bank. I suspect that they are insolvent simply because I read that they’ve been making a lot of loans to these fintech companies and we all know how that turned out. But you can actually get pretty good insight on their liquidity situation by looking at their regulatory filings. If you want to study a bank and I study bank, so you want to look at something like this.
That’s all this is a call report. A call report is a financial report that banks file. It’s literally 100 page reporting form, and it comes with instruction manual that’s 800 pages in leads. So that’s why I can actually keep a reference here. So if you look at Silicon Valley’s financials, you’ll see that it’s a bank that is vulnerable to liquidity runs. It might not seem so on the surface, but so just for the audience, Silicon Valley Bank has about $210 billion worth of assets. It’s largely funded by deposits. Now let’s look at their asset side first. Now if you’re a bank, you got to keep liquidity on hand because what if everyone starts to ask for their money back? You want to have some liquidity on hand to meet those redemptions. So Silicon Valley Bank has actually a pretty good portfolio of liquid assets. Of the 210 billion in assets, about 120 billion are securities. Securities are good because you can sell them. That’s what a security is. If you have a loan to local company, you can sell them. That’s illiquid. Of the 120 billion, 80 billion are high quality liquid assets. So in the banking world, you want to have high quality liquid assets because you can sell them easily to raise cash.
These are Treasuries and Agency MBS. So so far, $80 billion of high quality liquid assets. Sounds like a great liquid bank. You dig down a little bit more, you find out they’ve already pledged about 50 billion of those away. So they’re already using that to either to secure borrowings. For example, let’s say you are a huge investor. You’re putting money into Silicon Valley Bank, but you don’t really know if you want to take that risk. So you could ask for some collateral. So that could be a possibility as well. So the bottom line is they don’t actually have that much liquid assets, even though they look like they do. Now let’s look at their liabilities. It doesn’t look good either. So normally if you and I okay, I don’t know about you guys, but when I put money in a bank, I have less than 250,000. So it’s within secured by the FDIC. But if you have a lot of money more than 250,000, then it’s not secured by the FDIC. Then you have credit risk. When you look at the depositor profile of Silicon Valley Bank, you can see that they have $150 billion unsecured deposits.
So those are institutional investors who basically lent maybe unsecured, maybe definitely uninsured to Silicon Valley Bank and they could lose everything. If Silicon Valley Bank goes bad, down really badly, they probably will, they’ll get something back. But it’s not good to lose money when we put it in the bank. So they have liabilities that are runnable and they began to run. Now I’ve been hearing anecdotally that everyone was like, get your money out of Silicon Valley Bank. So I’m sure they were. Now you have if you’re a Silicon Valley Bank, that’s a huge, huge problem. You have no liquidity. Everyone is asking for their money back. Your last lifeline is to borrow from, let’s say, the Fed or a Federal Home Loan Bank. It looks like they’re already borrowing from the Federal Home Loan Banks and I don’t know if they can borrow even more. A Federal Home Loan Bank is basically a government sponsored agency whose job is to provide cheap loans to the commercial banks they’re already lending to to the Silicon Valley Bank. In theory they could lend more, but they have a lot of exposure to Silicon Valley Bank. So the Federal Reserve Bank of San Francisco, which is the bank that’s lending to Silicon Valley Bank, 20% of their loan book is to Silicon Valley Bank.
So if you’re a CFO there, do you want to increase your exposure to this bank that’s probably going bankrupt? So yeah, it’s over for them, which is why the FDIC souped in.
Tony
Those are amazing details and it’s exactly what I wanted to hear. Now what I had read earlier was that there are $171 billion of deposits at Silicon Valley Bank and 175 billion but 151 billion of that is uninsured. So basically $24 billion people can pull $24 billion out, but there’s $151 billion that they may or may not get back. Right. So for a lot of these VCs, early stage tech companies and so on, I don’t know if private equity firms or investment funds bank there, but certainly it seems to me to be a systemic risk, especially in the venture capital community. Is that a fair assumption to make?
Joseph
I don’t think it’s systemic to the banking sector and we can talk about that. But these guys who in that community for sure, Tony, I imagine that a lot of people in that community are banking with Silicon Valley Bank. And if Silicon Valley Bank goes under, they’re going to have to have haircuts and maybe it’s a lengthy process. Maybe they get tied up in bankruptcy court or something. So that’s a liquidity problem for them. And so for that community, yeah, I agree, it could be a big problem.
Tony
So if I’m a limited partner in a venture fund today, I’m checking with that venture fund to make sure that my cash is okay. Is that the process that people would be doing? For people who don’t know, limited partners are the investors who put money into a venture capital fund. And my assumption is a venture capital fund would likely store that money in Silicon Valley Bank. And if they can’t access all of well, they could take the first $150,000 of that. But if they can’t get beyond that, then it’s not just the VC that’s hurt, it’s that limited partner. Is that correct?
Joseph
Yeah. So that losses, like you mentioned, partnership losses flow through from the entity to the partnership. That’s what being a partner is about. I imagine there are some rules depending on your general partner, limited partner, things like that, but yeah, it’s investors that get hurt.
Tony
And so the allocation just both of you guys probably know more about this than I do, but the allocation of, say, venture capital from, say, a pension fund is a relatively small allocation of all of the allocations of, say, a pension fund. So I would suspect that this probably isn’t a systemic risk back to, say, pension funds and other investment funds like we had maybe in 2007-8. Right. It’s probably less of a systemic risk than that was.
Joseph
Yeah, I totally agree. I don’t view this as a systemic risk.
Albert
I agree with that. Tony. I don’t think anything systemic is going to happen because SVB Bank goes under. I mean, SVB Bank is the FTX of the fintech banking world. I mean, everything on there, everything that they invested in, is based on trust, and not very much for the fundamentals at A. So it’s not a surprise that it went under as the Fed has been raising rates. Everyone knows that if the rates rise, the tech sector is one that gets hit the most. So it’s not really a surprise that this happened now.
Joseph
Yeah, I totally agree. When the Fed is raising rates, it’s trying to slow down the economy through sectors that are interest rate sensitive. I think the great irony here is that we all expected that to be real estate, right? But real estate is fine, but we miss the fact that the other really interest rate sensitive sectors is tech. And we see big layoffs in tech. So it’s actually all the well paid people who complete on Twitter who are having a bad problem, but the more blue collar industries seem to be doing fine.
Albert
Yeah. Housing got a boost because there’s a lot of cash buyers. People were cashing out at the behest of bloodstone, buying everything, but they were cashing out three and four times the value of the homes that they had a mortgage on. So they go and buy other homes, pure cash. There’s no mortgage risk in the system for the rate. Just like you were saying, the housing sector is not really affected by rates at the moment. You can see that because the houses are still going up and still a little bit of a shortage. But the tech sector was always the biggest loser of the hawks.
Joseph
One of the things that I hear is that there’s the fiscal stimulus from all the construction stuff, like is flowing into the state and local governments. And so that kind of construction spending seems to be supportive of employment, at least in the construction sector. So the guys who, if they’re building residential houses, maybe they can go and do something that’s benefiting from fiscal stimulus.
Tony
Sure. Here in Texas and probably in Florida, where Albert lives, there is construction all over the place, and it’s helping the tax base, it’s helping the overall impact of related jobs and other things. So it is still very strong, at least in the south.
Albert
Well, look at the layoffs. It’s all been tech and no construction. Construction has a shortage of workers at the moment, that’s the best indicator that you can have at the moment.
Tony
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Tony
Right. Okay, in talking about that strength, let’s talk about the Fed a little bit. Okay. If we were talking two days ago, there would probably be a bias toward the Fed becoming more hawkish. Right.
All the buzz two days ago was, well, we’re going 50. Fed is going to be more hawkish. It’s going to be tough. But over the last 24 hours, things have really started to lean away from that. So what do you see as drivers of the Fed being hawkish and drivers of the Fed being less? So we can’t say that they’re dovish. Right. But it’s more the degree of the rate rise. So what do you see in the calculus that they’re thinking through?
Joseph
Yeah, so let’s level that a little bit. So at the last FOMC conference, Chair Powell basically said that from now on, we’re going to do 25 basis points. He said that through his statement. So the language was that rather than talk about the pace of the hikes, we’re going to talk about the extent. So that’s kind of a that would seem like a done deal. And from my experience with the Fed, very slow, very conservative organization. 75-50-25-25-25, you know, you don’t go from 25 to 50. Now, that’s what everyone assumed. And also corroborated by, let’s say, President Mester. And then Chair Powell kind of threw that whole thing upside down this past week when he was testifying before the House and Senate. He was basically suggesting that, you know, if the data is still strong, we’re going to do 50 until the market began to price that in. So the question ultimately is, is data strong? And that has to do with what happened today with the non farm payrolls and what happens with the CPI report next week. Now, when you’re looking at market pricing, like you suggested, Tony, they seem to be taking out that 50 basis point hike today, Friday, and that could be in part because of fear contagion in the banking sector, I don’t know.
Now, looking at the non farm payroll itself, it looks like the jobs number over 300,000 was comfortably above Bloomberg expectations of about 200 some thousand dollars. But there was a little bit of a mix in it as well because of the unemployment rate increased. I think the pace of a wage increase is also moderated as well. So it seems to be on the stronger side, but not unambiguously. So my perception from this is if the Chair Powell is basically upending everyone’s expectations and putting 50 on the table, the presumption is 50. And this was not clearly weak. We got to watch CPI next week as well. As long as CPI is not like super, like a big disaster, I think the presumption should be about 50 basis points for the March hike.
Tony
So you think the presumption is 50 now?
Joseph
I think today’s headline employment was pretty strong. It’s not something that is weak enough, I think, to take away the presumption. Again. Everything could change with CPI next week, but we’ll see.
Tony
Thank you very much. That’s okay. We know you’re busy, so thank you so much. So Joseph, with the jobs data, there were 50,000 department store jobs in that jobs data. And to me that seems like a statistical extrapolation from an old model or something. I mean, I don’t know of any department store that’s hiring. So when these things come out, what are we supposed to think about that type of data?
Joseph
Yeah, so a lot of people get into the guts of the report and the Fed actually, internally, they have their own model for stuff like this. I would be hesitant to be looking into too much into these adjustments. As you mentioned, they matter. But then you can look at every single job report and say, oh, it’s actually not as strong as it is, or not as weak as it is. For all these little idiosyncratic reasons. I would just take it as it’s presented and knowing of full well, of course, that it is a statistical abstraction of what reality is.
Tony
So is it fair to say you see it more as a kind of a direction than something that’s more specific?
Joseph
Yes. And also if you just average this one with the past few months, it does seem like the labor market not slowing, has decent momentum and there could be revisions going forward. I mean, January was revised slightly, slightly weaker. So it’s just not obvious evidence that data is weak from my reading.
Albert
Tony, for a long time I’ve been saying the Fed should have been doing 50 basis points months ago, but here we are now talking about 50 after doing 25 a few times. I don’t think that they’re going to do 50. I think more that what they’re going to end up doing is talking about QT and doing QT for longer rather than rates at the moment, just because I think Powell and Yellen and the entire crew over there is a little bit worried about the economy, especially after the bank failed. And looking at the jobs numbers, I just can’t see more than that’s. I just think that things will start breaking. If we go 50, we’ll be down 200 points on the S&P, and things will start breaking. And you start wandering down to 3500 on the S&P, you actually make it a financial crisis.
Tony
Isn’t that kind of what they like? They kind of want some things to start breaking. Right. Not that they don’t bankrupt people, but they do want some things to start breaking.
Albert
They keep talking about a soft landing, and that’s the plan at the moment.
Joseph
I agree with Albert. I think the right policy would just be emphasized QT a bit more. It makes perfect sense. I guess we’ll talk about QT in a bit, but it’s a good policy from my perspective, because when you do QT, you’re putting upward pressure on the rates that actually matter to the economy. You hike the Fed funds up and down. Nobody really cares about the overnight rate. When you’re talking about economically sensitive rates, like mortgage rates or like your auto loan rates, those are like the five year, ten year sector, and that can be influenced by QT. So you want to slow the economy down, you want those rates to go higher. But I think the Fed is pretty stubborn when it comes to QT, in part because they don’t really understand they don’t feel like they understand it well. They feel that they understand the overnight rate a bit better.
Tony
Okay, so let’s talk about that. QT is on our agenda, so let’s move to that. So in terms of rates, Joseph, you’re the 50 camp. Albert, you’re the 25 camp. Let’s move to QT. We have been undertaking QT for, what, ten months now or something, and it’s been gradual. Albert, you smile when I say that. What’s your thought?
Albert
Well, I mean, we’ve been doing QT, but then it’s been offset by Yellen’s TGA activity.
Tony
Yeah. Now what are you hearing about the TGA? Has that slowed down?
Albert
It slowed down now, but once the tax revenue comes in late April, she’ll have that again in May.
Tony
Okay. So if we have quantitative tightening, which means the Fed is selling things from their balance sheet into the market, probably at a discounted rate, which takes money out of the out of circulation and it tightens the money supply. Right, but if we have the Treasury issuing funds from the general account, it’s offsetting those QT efforts. Right?
Albert
Yeah, that’s exactly what it’s doing. She’s actually, right now, as we speak, being questioned by the TGA from the House Ways and Means Committee. That’s exactly what she’s been doing, and I think it’s more like why she’s doing it politically rather than anything with economic policy in mind.
Tony
Okay, so what are the politicians generally asking her about, Albert?
Albert
Well, they’re asking her about her sterilization of QT by using the TGA and the effects of inflation because of it at the moment. I have a list of the questions that I can definitely give you guys for afterwards if you want to post them up here. But that’s what they’re asking her about. Why is her action why is she talking about rates when she is a CFO of the country? She is the Treasury Secretary. She’s not the Fed chair. She should be talking about rates one day after Powell comes out being hawkish.
Tony
Right. It’s hard to quit the Fed, I guess. Okay, moving on.
Joseph
I have a question, Albert. Do you have any views on who might be the next vice chair? I mean, right now the frontrunner seems to be Janet Everley, this academic in Northwestern, but I watched the hearings and everyone there was like, from the Democratic side was like, “”oh, we got to have an Hispanic vice chair. We got to have an Hispanic vice chair. And Janet Everley, maybe she has distant relatives or maybe she’s going to write a cookbook about tacos or something like that, but she doesn’t appear to be Hispanic to me.
Albert
Yeah, I don’t know. That decision is going to be made by Brainard who they want is the vice chair. That goes with their liberal policies and enacting and using the Fed to push those political agendas. That’s what they’re looking for. I mean, it could be Hispanic or black or white or whatever, but the base case is that they need someone with a liberal slant in their view to help them out.
Joseph
Yeah. Janet Everly definitely has a liberal slant. For you guys who are not aware, she thought it was a good idea to have a higher inflation target. Maybe that will be in the future, not with Jay Powell, but maybe in the future, maybe like 3%, maybe 4%. Who knows?
Albert
I think 3% is definitely coming no matter what. I don’t think it’s realistic for us to get back down to 2%, especially with the Fed members being former liberal than they were a few years ago.
Tony
Okay, let’s talk about the three 4% rate at some point.
Tony
But let’s get back to QT. Joseph, can you talk us through some of the if the Fed were to accelerate QT, which seems to be something that you’d like to see them do, more of what forms would that take?
Joseph
They could just simply raise the cap for Treasury. So right now the Treasuries can match. The QT pays for Treasuries is a maximum $60 billion a month. They could raise that. So what happens mechanically is that you can think of it as the private sector having to hold more Treasuries. You’re increasing the supply of Treasury debt that must be held by the private sector. So basic supply and demand, increasing supply prices for Treasuries decline and so yields go higher. So that’s a way that they could try to tighten policy by making, let’s say, longer dated interest rates higher. And I think it’s helpful, especially in today’s context. So investors look at the world, look at the future based on their experience in the past. And our experience over the past decade was a Fed who would just cut rates at the drop of a hat. And so because the investor community believes that you have a very, very deeply inverted curve and that’s a big problem because as the Fed is hiking rates on the front end, you don’t see that as much in the ten year. And so you can see, for example, mortgage rates continue to go down as they did in January, thus essentially undoing all the hiking the Fed is doing in the frontend.
Joseph
So you really need the market to either believe that the Fed is higher for longer, or you could have the Fed engineer it by just boosting the supply of longer dated Treasuries. And it’s hard to convince the market of something and the market has a reason to believe that JPowell and his committee of largely dovish committee is just going to cut rates. So it’d be easier to just boost the supply of Treasuries through QT.
Albert
Okay, that’s something that nobody talks about, is durational liquidity. Nobody speaks about that right now with the Fed and the Treasury. I haven’t seen one analyst talk about duration liquidity.
Tony
Okay, so can you guys talk about that? How would they change? Well, first of all, if we focus more on QT, would that potentially pose a threat to, say, banking systems or there are other potential systemic threats that QT could pose for the US.
Joseph
Yeah, it could blow up the Treasury market.
Tony
Okay, tell us how that wouldn’t tell us.
Joseph
So I think there’s huge the great systemic risk today is not in the banks or the private sector. It’s in the public sector. It’s in the Treasury market. And we saw kind of a prelude to that with what happened with the gilt market in the Bank of England last year. For those of you who don’t remember, last year we saw gilt yields basically 30 year long good data gilt yields basically explode higher late last year, and in part because, one, the Bank of England announced that they were doing quantitative tightening and also because the government announced that they were going to issue a whole bunch of gilts. Now there are some levered players in that market who basically blew up. Now if you recall throughout late last year, okay, the summer of last year, there’s a lot of articles about Treasury market liquidity. This is something that I’ve been writing about since last January. And Treasury market liquidity is not really strong, in part because the size of the Treasury market is just growing so quickly. It’s not growing in proportion to the underlying market. So I think about this as like a stadium that gets bigger and bigger, but the exits don’t get any bigger.
Joseph
So 20 years ago we had about $7 trillion in Treasuries outstanding. Today we got about 25. And Biden is going to promise that he’s going to issue even more through his spending. And the underlying market liquidity in the market hasn’t scaled in the same way. 20 years ago we were doing $400 billion a day in cash transactions. Today it’s 600. So again, there is some potential for fragility. Now the market got was looking pretty dicey in the summer last summer, but it got bailed out when recession fears predominated and people began to think that Fed is going to cut rates. Recession, you got to buy Treasuries. But in the event that those recession concerns go away or inflation stays persistent, you can have, I think, some real discontinuous event there where yields spike higher like they did in the UK, which of course wouldn’t lead the Fed to respond. Yeah. So that’s what I view as I’m not really worried about banking or anything like that. So one thing that people have to be aware of is that the banking system has really changed a lot over this past decade. So an easy way to look at that is just Fed QE, right?
Joseph
So now banks have $3 trillion of basically liquidity from QE on their balance sheet. They didn’t have that preg. There’s also a lot more regulation. Now banks are really, really boring businesses. Back then it was exciting. Everyone is making huge bonuses and so forth. But now that’s all in the tech sector.
Tony
Okay, so you say that the gilt blow up happened because of long dated yields. Is there anything, if we move into QT, is there anything the Treasuries could do? Could they move that to the shorter end of the curve to avoid that?
Joseph
I think that would be a great idea. So one of the things that they floated is a buyback operation. So what they would do is they would issue bonds and use that proceeds to buy old bonds. Now I think it would be a good idea to issue shorter dated bonds and buy longer dated bonds. They basically change the duration profile. I don’t think that’s what they want to do. So far they’ve been pretty adamant that they want to make it a maturity bond. Now I’ll give you an example. Let’s say you issued a 30 year bond and. After ten years, it rolls down to a 20 year bond. Now it’s an off the run bond. So an off the run is something that was issued, not recent, and that off the run market is very, very illiquid. So what you could do is you could issue a new on the run 20 year on the runs are very liquid because they’re the recent vintage. Take that money and buy back the old 30 year, which became a 20 year. So you don’t really change the duration of the debt outstanding, just the liquidity profile. That’s what they’re floating.
And maybe that’s something they’ll do. I suspect that it’s not going to be enough. If they want to do something like that, they probably will need to rely well, it’s not going to work, so they’re going to have to rely on the Fed. Just like in the UK, they relied on the Bank of England.
Tony
In Japan. What they’ve been doing particularly kind of seven to ten years ago, the Ministry of Finance was issuing shorter duration debt to buy longer duration debt, and the BOJ was buying that shorter duration debt and letting it expire at maturity. Is that something that we could do here? Where the Treasury would issue shorter duration debt, the Fed would buy it, they would pay off the longer duration debt, and then it would just go into nowhere?
Joseph
They could totally change the maturity structure of Treasury debt. It’d be a really good idea if they did that. They don’t actually need the Fed to buy it. There’s a ton of demand for cash at the front end in the US financial system right now. There’s so much demand that people are putting it into the Fed’s reverse repo facility, which is about $2 trillion. So that means that the Treasury could issue $2 trillion worth of Treasury bills, and the market would just lap it up like that. So they don’t need the Fed to buy it.
Tony
Okay, while we’re here, while we’re talking about people buying Treasuries, I saw some notes over the past week or so where people are saying China is selling their Treasuries, everyone needs to worry. Can you talk to us about that? Joseph Albert, can you talk to us about that? To me, that seems laughable, but it is laughable.
Albert
They need dollars to keep even if you look at if you look at over the long run, I think over the last, like, five years, yeah, sure, they had bought a lot of Treasuries and now they’re selling Treasuries. But it’s pretty even at the moment, if you look going back five years, I don’t even take that kind of argument seriously. When people say that China is going to sell Treasuries and dollars going to crash and blah, blah, blah, buy my crypto, buy my gold, it’s what it usually is. So I personally don’t see it as a big deal. I mean, you know, that’s just the way I think about it, so pretty pretty explicit about it.
Tony
Joseph, what do you think?
Joseph
Yeah, it’s hard for China to find a substitute for Treasuries. So Brad sets there at the Council of Foreign Relations, he’s an expert on this and he has done some pretty interesting detective work. And one of the things that seems interesting is that the China foreign reserves actually hasn’t changed all that much over the past several years. So based on their publicly disclosed data, it stayed around, let’s say three, three and a half trillion over the past few years. But if you recall, China has been making a lot of money through exports. During COVID for example, they were exporting like trades to the US trade deficit with China between US exploded higher. Right. So where is all that money going? It’s not going to the sovereign fund. It must be going somewhere else. I think part of it is going to the commercial banks, but I don’t really know how their data works out. I think they definitely have a huge problem in that they have a lot of exposure to the US. That kind of gives the US political power over them, just like the US could seize Russia’s sovereign reserves. It’s a problem for them.
I don’t know how they can solve it. I’m sure they want to solve it, but so far it seems like they’re stuck, at least for the moment, in Treasury.
Albert
It is a big problem for China because when Yelling calls them up and said, you got to help us out in inflation and crush commodities, you’re going to have to do what Yellen and the Fed say just because of how much they’re held off. I absolutely agree with you on that one.
Tony
Let me bring Tracy in here because I don’t like it when she’s quiet. So, Tracy, what do you think about the issue about Chinese selling US treasuries? Do you see that as an issue from your perspective? Does China have other options? What do you think they’re doing with the money they’re making on US. Export, on exports to the US?
Tracy
Well, I think if we look at the big picture, right, we have seen increased central banks buying gold and selling US treasuries, but we have to look at the bigger picture. More people own US debt than any other country in the entire world, so that’s not going away soon. So I hate to cater to these people and say, yeah, central banks are wearing a lot of gold, but that means that they’re shutting us right? Because it’s simply not true. You still look at the highest countries that own US debt still continue to be the same one china, Japan, et cetera. That’s not going away anytime soon. It is notable in the fact that looking at the gold market, which has been particularly lagging, I think it’s very interesting if we’re looking at the commodity side of things because we’ve seen last year particularly we saw outflows of gold flows, people investing in gold, whether it’s physical, ETF, et cetera, literally for eight months straight. I think that kind of makes this market interesting. But again, I don’t want to conflate that with central banks are buying gold, digging US. Treasuries. That means nobody likes us.
Tracy
Debt anymore.
Albert
That’s an important fact that, yeah, whenever they sell gold or Treasuries, they’re just raising my opinion. They’re just arbitraging for dollars later on. It’s nothing systemic that’s a threat to the US dollar by any means.
Tracy
That was my point. Let’s not make this a bigger issue than it needs to be that we have often seen, yeah, central banks can.
Tony
Walk and chew gum and spin plates and all that stuff at the same time. I think they’re capable. They’re very smart people are capable of doing all this stuff. So okay, just before we move on from QT, albert, is there anything else on QT that you wanted to bring up that you’re watching?
Albert
No, Joseph pretty much talked about it extensively, and there’s not really much I can add. I just think that the proper thing for power to do right now is to accelerate QT and keep rates as they are at the moment.
Tony
Okay, so with housing remaining relatively strong, do you think that they’ll sell off more MBS as a part of their QT portfolio, or do you think they’ll just keep it in the same proportion that it’s been now?
Albert
I think they’ll just keep it in the same proportion right now. I mean, housing at the moment is a big political problem because homes are unaffordable at 70% mortgage rate. So they’re going to have to do something they’re keeping an eye on. That I can guarantee.
Joseph
Yeah. I also note that Powell has been asked his point, Blake, and just said no. He can always change his mind. Powell has a reputation for being a pivotal like he just did. But to Albert’s point, mortgage rates are 7%. That’s kind of already a big drag on housing. If it went to 8%, would that really make that much of a difference? It’s already very high, and you’ve already.
Tracy
Seen housing prices come down extensively, right? Redfin just came out and said 45% decrease in luxury homes and 37.5% decrease. So I think what we’re seeing is housing prices decrease in response to the increase in mortgage rates.
Tony
Okay, very good. Okay, let’s move on. Since we’ve been talking about the US. Government for the first two segments, let’s move on to the US. Government for the third segment and talk about America’s rudderless energy policy. So, Tracy, you were tweeting about a speech that Jennifer Granholm, U. S. Energy Secretary, made earlier this week, and I want to kind of parse that through with you because she is the spokesperson for US. Government’s energy policy.
And there just seems to be a lot of mixed messages. And I’ve got a tweet on the screen about the grand home speech where you said she said, we’ll still need fossil fuels in 30 to 40 years, then to send it into how the Inflation Reduction Act makes the US. Irresistible for new energy. So can you talk us through kind of what were you thinking of as you heard her, and what were your big takeaways?
Tracy
Well, the first thing I want to note in that speech is that for the last two years, this administration has been pushing on the energy industry, right. And has been talking about how they have all these profits and they’re not.
Tony
Producing greeny energy companies. Greedy.
Tracy
That’s been the mo, right. For the last two years. And then in this speech, she did like, 180 when asked the question.
Tony
How.
Tracy
Do you think oil companies, oil and gas companies are responding? She said, we’re very happy how oil and gas companies are responding to our request for like, she gave them props, which is literally 180 degree. So to me that I was like, what? Because really our production has not really increased at all. But suddenly she’s at Fair a week giving props to the energy companies because.
Tony
The CEOs were there.
Tracy
Well, right. So it’s a huge mixed message. The other important thing, I think, to take away from that particular speech was that the US. Wants to move on to energy transition. We want to move away from China. We want to be able to mine our own metals and minerals in the US. For this energy transition. But she was quick to add that the permitting process is a nightmare. It takes ten years just to get a permit. And then if you get lawsuits on top of that, to get to an idea from, I want to build this mine in the US. To actual fruition is a ten year permitting process, and then it’s then plus however many lawsuits you have. I thought that was really interesting and that she actually admitted that the permitting process was completely horrible. Since her administration, or the administration that she works for, has said, what we want to do is streamline this permitting process. We’re going to give people all these incentives to build mines, et cetera. Basically, what she did I take away from the speech is basically what she said was completely opposite of what this administration has been telling us, and that is we have all these incentives.
Tracy
We can build all these mines, no problem. And we love the fact that the US. Oil and gas companies have responded to us and are producing more, which is outright not true. Sorry.
Tony
Okay.
Albert
These are political pipe dreams by the Biden administration. As long as the EPA is there and staff with environmental Nazis, there’s no way that manufacturing and mining is going to propel to the next level in the United States.
Tony
Biden budget proposes 17,000 more EPA staff.
Albert
Oh, yeah, that’s a great sign. That’s a great sign.
Tony
But what they’re saying, tracy, tell me if I’m wrong. They’ve already pushed all this money or they’re already planning to push all this money out into the market. Okay. And this week, the EU developed a proposal to kind of complement the US. And compete with the US. So there’s dump trucks of cash now out there to develop alternative energy. But both the US. And Europe have very restrictive policies on getting those mines together. So out of one side of the mouth, they’re saying they want alternative energy for a safe future. But the reality is they’re paying companies to have Congolese children mind cobalt. I mean, that’s the reality of the situation, right.
Tracy
Situation is it’s not in my backyard. Right, right. That’s the reality situation.
Tony
We want cars that plug in, and we don’t want people to know that Congolese children are mining cobalt. But that’s the crude, stark, horrific reality of these policies today.
Albert
Absolutely, yeah. If you want an American built iPhone or American built Tesla, from the battery on all the way up, it’s going to cost you $5,000 for an iPhone and $190,000 for a little smallest Tesla you can possibly buy.
Tracy
Yeah, it doesn’t matter because it’s never going to be enough, but it doesn’t matter. You think Yellen went to Africa, right? Her trick on Africa, all we heard was she went into Africa to join the renewable generator. That is not why she went. She went to go make deals for mining in Africa. It’s really the back of that situation.
Tony
Wow, that’s terrible. I mean, it’s just the rainbows and unicorns of the policy as it’s portrayed versus the reality, the ugly reality of this industry is pretty horrific. So, Tracy, as you watched Grand Home, what did you think about the oil and gas sector? Did you think, okay, everything’s fine, I don’t have to worry about all this restrictive stuff for 510 years, they’re just going to keep on with status quo?
Tracy
No, I think once you’re looking at the oil and gas sector and you have to look at what actual oil companies said. So you had Scott Sheffield, a pioneer, say there’s five good years left of the permian. That’s a scary thought. Right. And there’s no incentive to drill more because the government’s telling you that in ten years, we want you totally phase out. And so we are going to have a serious problem. And I have said repeatedly, I think that the 13.1 million barrels per day the US. Produced at the end of 2019 in December is probably the height of that’s. It that’s the height of shell, unless something drastically changes within policy.
Tony
Okay, so it sounds to me, since there’s five good years left to the permian, since the US. Government wants this phased out in ten years, there is no ability for oil and gas and money firms actually to have a capital planning cycle. Right. Anything that has longer than a five year payback just is not worth investing in, is that fair to say?
Tracy
I would say that’s fair to say in the United States. Now, if we look offshore, which is really interesting, and that’s where we’re seeing a lot of investment in, say, Guyana or Namibia or a lot of offshore sector kind of seems to be the focus right now in other countries because they just don’t have the same policy hurdles that the United States does.
Tony
Okay.
Albert
Yeah. All places where the EPA is not at.
Tony
Right. So the entire US energy policy and renewables policy is just a big Nimby policy, like you said, just not in my backyard.
Tracy
It is right now. We’ll see what happens. There’s a project going on in Alaska right now which people should be paying attention to their policymakers want this to go through. I sincerely doubt that it’s going to go through because no majors want to invest up there because they run into a bunch of lawsuits. Right. And so why would you knowingly, even if you bought the land rights or the leases, it’s a horrible place because you know that you’re going to be faced with a million lawsuits and give me a million hurdles and whatever. Even if you look at the recent Gom auction, now, you have environmentalists suing anybody that bought leases. It’s a lose lose situation if you’re really trying to explore more gas in the United States right now.
Tony
Okay, so when you say it’s a horrible place, do you mean specifically that Alaska is a horrible place? Because I think we have, like, three there.
Tracy
Alaska is amazing place. I have friends from Alaska.
Tony
Okay.
Tracy
I’m just saying the problem is that you run into a whole lot of regulatory issues, and then you run into a whole lot of lawsuits that are going to take place. And really, that’s a whole separate issue. Now, I really wrote about this in 2020 was the land that they auctioned off is part of a reserve?
Tony
That’s always a good idea.
Tracy
Probably should have never been. Right? And that’s why it really got no interest. It did get a bid from Chevron again, but I don’t see that project going forward ever.
Tony
Okay. Yeah, it’s crazy. And as I try to figure out the policy and I talk to you and I talk to other people, I just can’t figure out what we’re going to look like in five years. And if I was in charge of capex budgets with upstream, downstream, midstream, I honestly wouldn’t know what to do.
Tracy
Because there’s that’s why we continue to look at these companies, continue to focus on dividends, capital, discipline, and paying down debt. I mean, you have to remember, these studies were not making money for years.
Tony
That’s an important point. So when the President of the United States says that Chevron is a terrible company for giving large dividends and doing large share buybacks, they’re doing that because they cannot spend that money on capex. Because they don’t know what the environment is going to be like in five or ten years, is that correct?
Tracy
Yes, exactly. And that’s the point. And they’re trying to gain shareholders. You have to look, two decades ago the oil and gas sector was 20% of the SF 500 weighting wise. Right. And at the lowest in 2020 we were a little bit below 2%. We’re now at about 4%. But you can see where that market has fared fairly poorly.
Tony
Yeah, but Tracy, it’s all going to be AI software forward, so just complete intelligence.
Tracy
It’s going to be chevron AI.
Albert
Yeah, I’ll fund it by a new Silicon Valley bank.
Tracy
That’s right.
Tony
Okay guys, we have a big week ahead going into leading up to the Fed meeting. So what are you all expecting? Joseph, what do you expect to see next week with the various prints coming up?
Joseph
It’s all about the CPI. I mean, I want to know if it’s actually strong. If it’s strong, then we got 50 basis points blocked in right now. Like you mentioned, Tony, that’s been taken out of the market. It could be a violent repricing. So that’s what we want to focus. So I’m suspecting that a lot of people are pricing in rate cuts in part because of what they perceive to be some risk in the banking sector. I just don’t see that. And so when we see that come out of the market, we could have rates go back to expecting a more higher for longer stance by the Fed.
Tony
Okay, great. What is a high CPI to you?
Joseph
I haven’t checked this expectations yet, but whatever is higher than expectations.
Tony
Okay, so literally higher than expectations, if it’s higher than the consensus, then that’s a high CPI.
Joseph
Yeah. If you think back a couple of months, we’re seeing CPI go down. Right. Deceleration, I want to know if it really just did reaccelerate or if it just kind of gave back. What the increase from last month?
Tony
Okay, great. That’s perfect. Albert, what are you looking for next week?
Albert
Same thing CPI is to make a break for the Fed on 25 verse 50. I’m hoping somehow they’ve managed to manipulate the CPI number to make it somewhat in line with the consensus. Hoping for a nothing burger probably be the best option at the moment. Something meaning consensus. If core CPI is hot, like Joseph said, fifty S, fifty S locked in.
Tony
And if super core CPI is hot, that just reinforces wage expectations and it’s all this super circular situation. Right? Okay, so if we do see a 50, do you see an impact on equities? Like a negative impact on equities? Do you think it’d be sideways?
Albert
Without a doubt. Without a doubt. I think if they go out and do 50, I think we’re down 200 points in the S and P pretty quickly in a week. If they do 25, we might even rally 100 points. You know how it is, we’re in bitcoin world now in the S and P. Right?
Tony
Exactly. Okay, that’s good to know. Tracy. We’ve seen oil kind of move sideways. We see energy kind of move sideways lately. What’s happening and what do you expect to see?
Tracy
You know what? I think we talked about this the other week. I continue to think it’ll move sideways. I think we’re in a range. OPEC is very comfortable with that $80 to $90 range for Brent crude oil. And so I see no reason for much to change in that. I think as we head into high demand season right, june, July, August, we could see an uptick in prices. But for right now, the market is very comfortable.
Tony
Okay. And then this Saudi Iran peace agreement that was announced today, do you think that has an impact on crude supply? Do you think that could push crude prices down?
Tracy
I don’t think that, no. Because OPEC has existed for a very long time. Iran is an original member of OPEC.
Tony
They were the founding member. Right.
Tracy
So that relationship has existed cohesively beyond any of the other geopolitical problems that they have had. And Saudi Arabia has always said that this relationship will exist beyond whatever other problems we are having. So I don’t think within the oil market, it really changes any dynamic because that relationship was already solid.
Tony
That’s good to know. Okay. Thank you so much. Thanks for your time. Thanks for all your knowledge. Have a great weekend. And have a great weekend. Thank you.
The Morning Run podcast by BFM 89.9 featured Tony Nash, CEO of Complete Intelligence, discussing the state of the US economy, market movements, and supply chains. The podcast began with a brief overview of the previous day’s market performances. The key US markets had ended in the green, while all Asian markets were in the red, except for the FBMKLCI, which was up by 0.3%.
The podcast host then discussed with Tony the state of the US economy. The US retail sales in January increased the most in two years, and the home builder sentiment rose in February by the most since 2020. Meanwhile, US inflation rose by 0.5% in January. According to Tony, these indicators suggest that there is still demand, and consumers are still willing to spend. Companies are able to raise prices pretty dramatically, resulting in more revenue and faster growth, even if the volume of sales is slightly lower. Tony believed that the Federal Reserve will continue to raise interest rates. He felt that the Fed should have kept the foot on the brake a little more in the last meeting when they hiked by 50. He thinks that the interest rate will remain at 25 for the next three meetings, but the question is how much beyond that will they raise it.
The podcast then moved on to discuss company performance, particularly in the tech industry. Cisco delivered strong results and beat street expectations, suggesting that companies still have money for capex. Tony believed that companies are having to build out more robust technology infrastructure for their existing operations, which is good for tech infrastructure companies like Cisco. However, there is a divergence in the tech industry, with old tech like HP Enterprise and Cisco doing better than new tech like Apple and Amazon. Companies like Apple, Amazon, and Meta suffer on the ad side because there is a growing supply of ad space, but there are not as many ad dollars, and companies have generally less to allocate to marketing on a proportional basis.
Finally, the podcast touched on supply chains. Tony believed that supply chains have generally recovered, partly due to the falling demand. However, there are still challenges, particularly with logistics and labor shortages. Companies are looking at how to reduce supply chain risks and increase resilience, including reshoring and nearshoring. Tony believed that the current supply chain challenges could last up to two years, and he recommended that companies should develop more robust supply chain strategies.
In summary, Tony Nash shared his insights into the state of the US economy, the tech industry, and supply chains during The Morning Run podcast. He believes that there is still demand in the US economy, with consumers willing to spend and companies able to raise prices. The tech industry is experiencing a divergence between old and new tech, with old tech companies doing better. The supply chains have recovered, but there are still challenges, particularly with logistics and labor shortages. Companies should develop more robust supply chain strategies to increase resilience and reduce supply chain risks.
BFM
This is a podcast from BFM 89.9, The Business Station.
BFM 89.9, 7:05 A.m. On Thursday, the 16 February you are listening to The Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen. Now, in half an hour, we’re going to move the proposal for Petronas to be publicly listed in order to pare down national debt. But we are going to kickstart the morning as we always do, and it looks like it’s going to be a glorious morning with a look at how global markets closed overnight.
So all key US markets ended in the green. The Dow was up 0.1%, S&P 500 up 0.3%, NASDAQ up 0.9%. In Asian markets, they were all in the red, except for our very own FBMKLCI. The Nikkei was down 0.4%. Hang eng down 1.4%. Shanghai Composite down 0.4%. The Straits Times Index down 1.1%. But the FBMKLCI, it was up by 0.3%.
So for some thoughts on what’s moving markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now, US retail sales in January jumped at the most in two years, and home builder sentiment rose in February by the most since 2020. While US inflation rose by 0.5% in January. What do all these indicators tell us about the state of the US economy?
Tony
It says that there’s still demand. It says that consumers are still willing to spend and that people really aren’t slowing down. We’re seeing things like price over volume. Meaning as we see more companies report, their earnings reports, they’re able to raise prices pretty dramatically, say, eight to say 12%, generally with a volume decline of, say, one to 3%, meaning the number of sales. Okay, so these companies are choosing to raise their prices and have fewer sales, but it results in more revenue and faster growth. So consumers are willing to pay more. They’re just buying slightly less of things.
BFM
And Tony, taking all this into account, what do you think the Federal Reserve will likely do next?
Tony
Yeah, they’re going to continue to raise. I do think that Powell missed a trick in hiking 50 in the last meeting. I do think they probably should have kept the foot on the brake a little bit more as a transition from 75 to 25. But I think for 25, it’s kind of as far as the I can see right now, at least while the current pace of the economy holds up. So, you know, we’ll certainly see 25 for the next three meetings. The question is, how much beyond that will we see it?
BFM
And Tony, are you in the camp where I have seen more economists raising their forecast for US GDP growth? I see numbers jumping from 1% to 2% for the first quarter. Are you in that camp?
Tony
Our view has been 1.4 this year, so it really hasn’t changed.
BFM
Okay.
Tony
We do reforecast each month.
CI Futures covers 50+ economies around the world. You can see historical data and forecasted data in an instant, like the US GDP here. Learn more about CI Futures: https://www.completeintel.com/futures
BFM
All right. And then looking at some results right. Old tech, Cisco delivered really good numbers, beating street expectations with strong spending on tech infrastructure, suggesting that companies still have money for capex. Is this indicative that actually companies are doing better than we expected?
Tony
Well, I’m not sure it means companies are doing better because earnings generally are on a slowing trend. But I think what it means is that companies are having to build out more robust technology infrastructure for their existing operations. And that’s good for the tech infrastructure companies like Cisco. So we are at the emergence of a new tech cycle with generative AI, there’s a ChatGPT and so on. So companies are going to need more robust infrastructure to deal with that.
BFM
But then we also notice there’s a divergence right when it comes to results. So old tech like HP Enterprise and Cisco doing better versus new tech like you see results being soft from the likes of Apple, Amazon. Will this divergence continue?
Tony
Well, I think when you look at things like Apple, Amazon, Meta, these sorts of guys, part of their revenues are ad revenues. And what’s happening on the ad side is we have a growing, say, supply of ad space with different companies coming on, like Netflix offering ad models. So there’s more ad supply. There are not as many ad dollars out there, or even if you assume the same ad dollars. With inflation, people are having to make trade offs. Companies are having to make trade offs, so they have generally less to allocate to marketing on a proportional basis. But there’s more ad supply out there. So many of those tech companies where ads are a part of their revenue mix, they’re suffering on the ad side.
BFM
Turning our attention to supply chains. During the Pandemic, the world faced a series of supply chain stresses made worse by the Ukraine conflict and China’s sporadic lockdowns. Do you think that global supply chains have recovered? Are they functioning better now? Or do you still see some kind of rocky road ahead?
Tony
I’d say generally supply chains have recovered. Part of that is demand falling. So we had in the port of Long Beach, we had the volume declined by about 28% in January. So the volume of imports have have actually gone down year on year on the west coast of the US. So the demand there is slowing. We’ve seen one of the indicators is headcount cuts. Guys like Federal Express or FedEx and UPS are cutting headcount. FedEx has announced about a 10% workforce cut, which tells me those are usually the guys who see the supply chain issues first and the guys who see the slowdowns first as well. So if they’re cutting staff, it tells me that some of these things are really slowing down.
When we look at delays at Chinese port, for example, they’re about half the time of what they were about a year and a half ago. So they’re not really bad at all. And then when we look at, say, freight that’s waiting on ships that’s down dramatically to, say, Q1 of 2020 levels before all of the COVID stuff set in. There’s a great just for your listeners, keel. The Kiel, K-I-E-L, I think in Germany has a great indicators on supply chain delays. So I would recommend you guys to check that out.
BFM
And Tony, ASEAN is a key player in this global supply chain. Which countries in this region are likely to be major outperformers in that regard?
Tony
Well, you guys know Malaysia is seeing more inward investment, especially around electronics, so I wouldn’t be surprised if we saw some upside in Malaysia. I know the expectations for Malaysia aren’t as aggressive as, say, Indonesia or Vietnam, but it’s possible that Malaysia overperforms those expectations. Indonesia, I think there are a lot of expectations on indonesia’s outperformance partly on AG prices, but also partly on movement of some manufacturing to Indonesia, which has a pretty low base. And then Vietnam, of course, you know, we’ve seen blistering growth in Vietnam. We expect that to continue as people look for a substitute for Chinese supply chains.
BFM
And Tony, are you still a bull on energy stocks? Because if you look at the sector, it’s the worst performing in the S&P 500 today and also for the month so far. We see energy stocks all coming under pressure, I think in part due to all prices stagnating and weak earnings from some of these companies. Is it time to buy or is it time to just step back and say, hey, maybe I should cash in my chips?
Tony
Yeah, I think you have to look at the different segments of energy. So, for example, oilfield service providers, we’re starting to see upstream, meaning people who take oil and gas out of the ground starting to spend on development outside of the US. So some of these oil and gas services providers, it’s a very interesting space to look at right now because we haven’t had CapEx in so long in oil and gas. And as we get that, we could see some of these service providers do really well. In terms of oil price. I do think that we do see upward pressure. I don’t think anybody really expected that to hit in Q1, but as we end Q1 and go into Q2, we do start to see that. And I think we do see I don’t think we see two or $300 crude oil this year, but I think low 100s, 110s, high 90s. I think those are definitely within possibility and likelihood.
BFM
Tony, thanks very much for speaking with us today. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Ending the conversation there with just a projection on how oil prices could be trending later on this year.
Yeah, so I think we’ll have to watch this space. But I want to focus on one of the names that I mentioned earlier on, which is Cisco. Right. So their results came out. In fact, it went up 8% after market hours trading because the street was really impressed with the numbers. Apparently the earnings, the last time we saw this kind of level earnings was in 2013, and that’s like a long time ago. So a lot of attention on Wall Street has been on what I call the new tech. So Amazon, meta, Apple, Microsoft, even on some level. But there’s a little bit of a shift. And I think what these names are showing is that, hey, there is still spending out there.
Yeah, I think the CEO actually said that the public sector business performed stronger than expected as compared to historically. While in the service provider category, some customers are adjusting to better delivery of the company’s products into the environment. In terms of the guidance for the next quarter, Cisco is guiding adjusted earnings of 96 to 98 cents to share and revenue of roughly about 14.25 to 14.5 billion dollars.
So currently the street doesn’t really like this name that much because there’s only 14 buys, 15 holds, and one sell. Consensus target price for the stock is $53.83. Like we say, it was already up 8% after market hours, right. I won’t be surprised. After these set of numbers, we will see quite a number of upgrades on this name because the company is already suggesting on giving guidance a more positive one.
That’s right. Their guidance is more positive for the next quarter. But turning our attention to other earnings report we have, the Canadian ecommerce platform Shopify. Shopify, in contrast to Cisco, didn’t have such a great report. They reported a loss of $623.7 million in the fourth quarter after adjusting for stock based compensation, gains on investments and other costs. The company reported earnings of 7 cents a share, down from adjusted earnings of 14 cents per share in the holiday quarter.
And revenue came in at about $1.73 billion, up from $1.38 billion. And the analysts on average expected an adjusted loss of a penny a share on sales of about $1.65 billion. The company said Black Friday sales rose close to 20% last year from 2021. And this year is working to recover from a misplaced bet that the Pandemic Field search in online shopping would become more permanent. Although he’s cut jobs, raised prices, and expanded offerings to merchants.
19 buys, 25 holes, five sells. Consensus target price for the stock, $46.48. Actually, the current share price is already above that, to $53.39 year to date. Actually, the stock is up 53%, but I think came from a very low base because 2022 was very painful for them.
All right, 07:17 A.m.. We’re going to take a quick break, but we’ll come back and cover more top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9 you have.
Been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
The Week Ahead with Tony Nash brings together experts Tony Greer, Albert Marko, and Tracy Shuchart to discuss the key themes affecting the markets. In this episode, the focus is on Inflation 2.0, Market Chaos, and Russian Supply Caps.
Albert Marko leads the discussion on Inflation 2.0, and explains his view that inflation will re-accelerate this year. He talks about how various factors such as the Federal Reserve, a potential recession or slowdown, and war could impact his thesis. He also mentions the upward revision of December Consumer Price Index (CPI) and the upcoming release of the January CPI.
Tony Greer then takes the lead on Market Chaos and explains why he is bullish on metals and oil. He discusses his views on copper and explains his outlook on crude oil, which he tweeted about in January.
Tracy Shuchart focuses on Energy and the Russian supply caps. She talks about Russia’s announcement to cut production to 500k barrels per day and what this could mean for crude quotas and price caps. She also discusses the impact on natural gas.
Finally, the experts provide their expectations for the Week Ahead.
Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. And today we’re joined by Tony Greer. Tony is with TG macro. He does the morning navigator newsletter. He’s an OG with RealVision and he’s just very, very popular and we’re really lucky to have him today. We have Albert Marko, of course and Tracy Shuchart. We’re very fortunate to have both of them today. So thanks guys, for taking the time to talk with us today. I really appreciate it.
Tony Greer
My pleasure. Thanks for asking.
Tony Nash
Great. So we’re going to start today with Albert. We’re going to be talking about inflation. Albert, you’ve said several times over the past several months that we’re going to have kind of a re-acceleration of inflation this year. And we just had an upward revision of the December CPI. And of course, we have another CPI, the Jan CPI is out on Tuesday. There was a viewer question talking about kind of your Inflation 2.0 thesis.
Can you talk us through that? What are you thinking of when you think through that and when do you think it’ll materialize?
Albert
I’m looking at multiple variables at the moment. Russia probably reactivating some of the military operations in Ukraine, which I think we started to see the last couple of days a little bit. We have China reopening. The Europeans have been in a zombie state, so they’re technically reopening, so their demand is coming back. All that’s going to be inflationary, in my opinion. But the biggest factor that I see has been Yellen’s use of the TGA to offset QT.
Tony Nash
What’s the TGA?
Albert
Well, the treasury general account. So she has a big slush fund of money where she can place wherever she wants. And what that’s been doing has been helping rally the markets purely out of political reasons. And when you have a net zero quantitative tightening cycle, it’s like, what do they expect that to happen at the moment?
Tony Nash
Let me back up just for people who aren’t… So we had a Fed meeting last week. They raised by 25, they’re continuing QT incrementally. Right. And so what you’re saying is that Yellen is offsetting that QT with spending from the TGA?
Albert
Yeah, it’s exactly what I’ve been saying. I’ve been at this for quite a long time. She’s gone hog wild on the treasury bills in the recent months and that’s pretty much the reason we got a stock rally. You’re looking at the duration of liquidity, which is very, very important and nobody really wants to talk about that at the moment. So I mean, these stock rallies have gives a perception of a solid market and overall economy aiming to help the Biden administration for purely political reasons. Right. And this revision, yeah, it was revised and people think it’s an incremental revision, but it’s a 33% rise and CPI from the for the previous data, so it’s not incremental whatsoever.
Tony Nash
Yeah, month on month it’s, it’s a little bit elusive for people to understand how big of a revision this is. Whenever economic data come out, anybody who follows me knows I always say wait for the revision. Right. Especially with OECD countries, wait for the revision because they hide stuff and they leak it out in previous data, other things. And so, as you just said, Albert, there was a 33% revision in the December CPI. That’s massive, right?
Albert
Yeah. Wage inflation is spiraling out of control. We have not just the United States, but now you have the Bank of Japan reporting more inflation from their side. In fact, the Australians did the same thing. They’re having hot CPI numbers. I mean, if we have a hot CPI number coming Tuesday, I mean, it’s just not going to be pretty for equities, in my opinion. And I think that’s why Jerome Powell would soft last week, just because he sees the data and he knows what’s coming.
Tony Nash
So what is a hot CPI number to you?
Albert
I think anything above what the consensus is, whether it’s even 0.1 or .2, anything that’s sticky in the core CPI is going to be hot.
No, I mean, I was hoping for a specific magnitude, you know what I mean? As a trader, I’m like, how much higher is he expecting? And he was anything higher and I was like, 8%, 9%, 10%, what do we like? That’s all. I’m very interested. I think he’s on the absolute right track.
Albert
It’s hard because the VLS has been using different calculations and methodologies to calculate CPI. They just changed the way they weigh it, so they’re trying to keep it within a reasonable amount. But when you’re looking at fertilizers and fertilizer companies like Mosaic, and then you have nat gas spiking and then wheat spiking today, either that’s Russia ramping up military affairs in Ukraine, or there’s a hot CPI number coming, my opinion, or both.
Tony Nash
Okay. How much of a factor is like the earthquake in Turkey? Or is any of that a factor?
Albert
That’s a huge factor, Tony, because that’s going to start cutting off, that’s going to start up cutting oil supply, and that’s one of the prime components of inflation. And I’ll let Tracy get onto the details of that. But that’s one in many variables that we’re going to start looking at.
Tony Nash
Okay, when you say inflation 2.0 is coming, are you looking at say, Q2 or something when that will kind of reemerge or what’s your timing on that?
Albert
I’m thinking Q2 at this point. Originally I thought it would be in September or October, but I think the timeline definitely come faster.
Tony Nash
Okay, so what’s driving that is largely kind of energy and ag? Is that..
Albert
Energy, ag, and specifically just the market just being just rallying relentlessly, it just won’t go down. And that’s spurring commodities. Copper, oil, you name it, wheat, grains, everything.
Tony Nash
Okay, if I understand you correctly, just to reiterate what you said. We have more money going into the money supply because of the spending from the TGA that’s offsetting QT. And that money in the money supply is going to people who are driving up commodity prices, driving up equity markets, and potentially driving up real estate. Right. Because we saw some real estate numbers this past week that were not discouraging. Right. I mean, real estate isn’t dying like many people thought right now. And mortgage rates are generally kind of going down. So it seems like we have money going into those things, which is kind of the opposite of what the Feds here are trying to achieve.
Albert
Yeah, the mortgage rate ticks down just a little bit and all of a sudden the spurs on buying. So everything that the Fed has been trying to do is just not happening. Labor, housing, stocks, everything, literally everything.
Tony Nash
Okay, and so how much longer can Yellen use the TGA, does she have unlimited capacity there?
Albert
No, she doesn’t. And Congress can definitely put on oversight on that. But she started off in… Well started off, but she had about 160 billion per month just prior to the midterms. But now she’s down to about 50, 60. Yeah, but that’ll get replenished in April when the tax money comes in for the use.
Tony Nash
Okay, so it will be muted in Feb-March. But she can go guns blazing again in April.
Albert
And this is part of the negotiations with the budget, with the Republicans and the Democrats is trying to limit what she can do with the TGA at the moment. They won’t say it publicly, but they’re certainly trying to.
Tony Nash
Okay, very interesting. Okay, so for those of you guys out there, check out the treasury general account and just see what’s out there, I think that would be really interesting to look into. Okay. Anything else on this, Albert? Is inflation 2.0? Is it going to hit the US or hit, say, Europe or Asia or where do you think?
Albert
I think Asia and Australia is up first for inflation and then leaking over the United States. Obviously I don’t think we’re going to see 9.9 prints on the CPI, but steady 6-7. We definitely see that.
Tony Nash
Okay, great. All right. And then do you think that tapers off in say, Q4 or something like that?
Albert
I think so. I think it’ll start tapering off again. I think it’s going to be in a cycle.
Tony Nash
Okay, great. All right, so we just put out our I just tweeted out our Complete Intelligence CPI print expectations for the year and we think on average we’re going to be about 5.3% for the year. So we’re probably a little bit below your expectations. All right, Albert, thanks very much. I really appreciate that.
Albert
Thanks.
Tony Nash
Tony, let’s move on to you. When we spoke before this discussion, you talked about market chaos like you enjoy it. Are you having fun with this?
Tony Greer
Yeah, I am. This is the kind of trading that benefits, a more active trader, I think, like me, and somebody that’s not afraid to get flat things and take advantage of what looked like absurd price opportunities in the immediate term and things like that. So, yeah, I’m having a good time with this, Tony. I really am.
Tony Nash
That’s great. Can you talk us through kind of… You seem to indicate that you’re pretty bullish on metals and oil, so can you help us through that? And let’s look at metals first. I’ve got a chart for copper up and that price has obviously come down recently. But why are you so bullish on metal? Is copper included?
Tony Greer
Yeah. So let’s go right into it, Tony. The copper is definitely included. What got me so bullish was last year, I remember spending the whole entire second half of 2022 watching copper pound 6500 on the LME. Right? And for me, that equates to the 2017 and 2018 peak in copper, from which point it failed and faded lower and then traded down below 5k during the lockdown. So we saw the big spike to 11k, where everybody thought copper was going to the moon.
Tony Greer
All of that was essentially the lead in to the Biden Administration. That was the lead into the Biden administration. The pivot to electronic vehicle was that big copper rally to 11k and it consolidated there for the entirety of 2021. Then in 2022, copper backed off and pounded the highs from 2018 at 6500, held, and got back up above its moving averages. So when you see that and it coincides with another fairly tight physical market, another backward dated commodity, another commodity where inventories are nosediving, so you’ve got the supply side really on your side. The sort of argument against that is that China is storing and taking a lot of copper off of inventory.
Tony Greer
And my response to that is if they’re taking it off inventory, they’re probably not going to sell it anytime soon, so I don’t have to worry about it. That’s kind of the sort of one basic slant of my metal bullishness, right?
Tony Greer
And the other side of it I have in my mind, I’m fairly convinced that the dollar is going to be on a path lower this year. If you notice last year, she peaked at the Bank of England intervention when the guilt market came apart, and then she formed a lower high when Dollar-Yen got to 150 and the Bank of Japan showed up and said, “hold on, hold on, hold on. You guys kill it.” You know what I mean? That was an absolutely inexplicable FX rally that people haven’t seen in decades.
Tony Greer
So with those two central banks at the top, Tony, a curl down below the moving averages, and coincidentally, with the backdrop of two stories, number one, central bank digital currency story seems to be gaining traction. Whether we like it or not, whether it’s good for us or not, I feel like we’re going to have those and that’s going to detract from the purchasing power of the dollar again.
Tony Greer
And then you’ve got the story where it seems like Russia, Saudi Arabia, China, the rest of the BRICS are very interested in starting their own commodity markets, priced in their own currencies.
Tony Nash
Don’t get Albert started on that.
Tony Greer
Yeah, exactly. I was going to say, I don’t know if that’s a fair topic for discussion and maybe he may be a perma petrol dollar and that’s fair too. I don’t know. But I see that as a story, as sort of deteriorating credibility in the dollar, certainly. And that’s just the way I’m leaning. And it’s not something my money is where my mouth is. The dollar for me is a barometer that tells me how much wind am I going to have in my commodity sales. So I do not have any risk on in the dollar.
Tony Nash
Okay, we should actually come back and talk about that at some point in detail. Sorry, Tracy. You were saying?
Tracy
I was going to say we should also factor into this conversation the fact that we’ve had the lack of capex in the mining industry as far as the metals are concerned. That is equal to the same lack of capex that we’ve had in, say, the oil industry. So that definitely factors into the situation as well when you’re trying to transition to EVs, EV charging stations and all of these metals, even windmills as far as copper is concerned, et cetera. The mining industry again, I don’t know how you feel about that, but I just want to kind of throw that in there.
Tony Greer
Couldn’t agree more.
Albert
The only thing I have to say about the dollar moved down and up is I do agree with Tony that I think the dollar will probably go down a little bit, probably 97, 98. Right. But unfortunately, if inflation comes back, they’re going to have to use the dollar to kick it in the rear so we could see a 97-96 and then go right back up to 105 as they try to fight inflation again. It’s certainly possible. This is going to be a topsy turvy of a year no matter which way you look at it, whether it’s going to be dollar up, dollar down, commodities up, down. It’s just going to be all about the Fed and what intervention they do with inflation.
Tony Greer
It’s nonlinear chaos. Right. The curve.
Tracy
Yeah.
Albert
But this is great for a trader, for a trading. You want to see volatility.
Tony Nash
Very good. Okay, Tony, let’s let’s move into oil then. You’re also seem to be very bullish crude and and we have a tweet from you from Jan. 17 talking about crude going through its 50 day moving average and so on and so forth, talking about some serious muscle in crude markets. So can you talk us through that as well?
Tony Greer
Yeah, so that’s strictly a technical look. And to me, oil continues to make bottom formations and fail. Right? That’s what it keeps doing. We keep seeing an inverted head and shoulders, and then it kinda break the moving averages, and then we see another inverted head and shoulders. That’s even shallower than the last one because they can’t pound it any lower, and that can’t break the moving averages and we back off. And now we’ve got another situation where we’ve got another pattern that’s extremely bullish, where we just had the recent low fall between the last two lows, Tony.
Tony Greer
And that’s a little bit of tea leaves, but that formation is called a wiggle, and we haven’t traded lower since we put in that low. That was between those two lows, if you notice. And so now we’re attacking the 100 day moving average. I mean, this could be it. I walked into this year saying technically, I’m not going to miss out on the trade where crude oil goes through the 50 day, the 100 day, the 200 day, and keeps going, right? That’s the trade I’ve got a bullseye on. And if I have to stop myself out of it ten times, I’m going to be in the 11th time, I can guarantee you. So that’s how I’m looking at the world.
Tony Greer
From the supply side, the driver to me has been gasoline demand. Quite honestly, gasoline demand globally is sort of everybody’s concerned about the recession now. Not concerned about recession. I’ve traded through dozens of recessions and I have noticed that many of them don’t put a major dent in gasoline demand. So I feel like we’re set up for that type of move again, where we have steady gasoline demand. We’re able to keep this crack spread elevated at a $30 to $50 level, where they used to be eight to $12. Right. That’s the margin that a refiner makes for splitting barrels of crude into jet fuel and diesel. So with that crack spread and remaining elevated, the rest of the curve remaining backwardated, although that’s another trip that’s going to be non linear and wacky. But with inventories largely diving below five-year average inventories across the board, the demand for diesel, the demand for jet fuel. Demand for diesel was last year. This year, it seems like demand for jet fuel is really coming back quite a bit. So I just see a great supply side story, a fairly good demand side story, and I see resource nationalism everywhere I look, and that’s generally positive for crude oil.
Tony Greer
So when you line all of that up, the stars align with the technical picture. When we do eventually go skipping through those moving averages, the stage is set for it not to come back. I don’t know if that’s going to happen, but as a trader, I’m going to put my chips in that circle and see what happens.
Tony Nash
Sounds very solid. Tracy, I see you agreeing pretty violently. What else do you have to add there?
Tony Greer
Yeah, I want to hear what you’re adding, Tracy.
Tracy
No, I absolutely agree. When we talk about the supply side and the demand side, we really have to take a look at China. And I know we keep talking about the China opening story, but if we do really look at mobility data and I posted a couple of charts on this today, mobility data is up. Right. And then you also have what I think is more important is if you look at flight data and jet fuel demand, which is up once again, because we know that for Chinese New Year, we had a lot of domestic demand increase, but what we’re really looking for is international demand increase. Right. And so we’ve recently seen China flights to Hong Kong increase in full because that flight pattern was shut down. And so I think this is going to be a major forecast, and we have to realize that China has been drawing down on their stocks locally. Right? And so eventually they’re going to have to rebuy on the international market. If they’ve been depending on the stocks that they accrued since they’ve been shut down over the last year, if they’re pulling down those stocks. China is one country that is not the US.
Tracy
Let’s put it that way. They do not want their SPR to go to zero, all right? They really depend on this. And so because they’ve had to draw down on their domestic stocks, I would be looking for them to start buying on the international market again, especially when they’re getting really cheap crude oil right now from Russia. They would start buying.
Tony Nash
When do you think that is?
Tracy
I think now. They are buying now. I’ll post some charts on Twitter again, but according to Bortex data, there is a lot of seaborne crude going to China right now. We know that they get a lot of natural gas domestically through pipeline, and they’re expanding those pipelines, but realistically, crude oil is still seaborne, and so we can track that.
Tony Nash
Okay, interesting.
Albert
Yeah. Tony a lot of people sit there and criticize it like, well, China has been open and they’re not doing anything, and blah, blah, blah. But it’s not a black or white thing with China. I mean, they’re staggering their opening. They’re not dumb, because if they open just full speed ahead, they’d have a commodity inflation issue even worse than the United States would. So they are buying. And I agree with Tony with the oil bull market case, and I agree with Tracy. The supply side demand side is heavy. The Chinese are reopening and buying still. And I think oil goes to minimum 110 this year. Minimum.
Tony Nash
I love it when ours says, I agree with Tony because I’m not used to hearing that. But I know he’s talking about you, Tony Greer.
Tony Greer
That’s fine looking, Tony. Beautiful part. Yeah. The beautiful part about this market, Tone, is that you can find the opposite side of your trade. You just got to open your eyes and ears, right?
Tracy
That’s what you really need to do, because if you have a thesis, you really want to hear the opposite side. Right?
Tony Nash
Tell me about that. What is the downside thesis for oil? What is that downside thesis?
Tony Greer
Drill, baby, drill.
Albert
That’s not politically viable.
Tracy
Which is not going to happen. Which is not going to happen.
Tony Greer
Right. So that’s why you say you can get annoyed at what’s going on or you can make moves in the market, right. You can buy the energy complex and buy oil because that’s the direction it’s naturally going to go if they’re going to try to put this electric vehicle squeeze on by 2030. Right? I mean, that’s almost necessary. And almost the necessary trade is for the Bloomberg Commodity Index to go up 40% from here. If we’re going to fill all these orders to build battery packs and battery power all over the world.
Albert
The only the only other downside for oil is if the government starts playing around in oil futures and trying to sell it down just to keep it relatively safe on the inflation front, which they did.
Tony Greer
It was remarkably effective. It was remarkably effective. What they did with the SPR, you have to say, whether we like it or not, they knocked 30, $40 off the price.
Albert
It wasn’t just the SPR, though. They were sitting there selling down in oil futures in the market.
Tony Greer
They have a president’s working group that’s allowed to do that. I’m sure they are.
Albert
They do.
Tony Nash
Free market capitalism. You got to love it, right?
Albert
Yeah.
Tony Greer
Well, free market, political-driven capital.
Albert
Well, this is what Tony was mentioned this is what Tony was talking about when he said nationalizing commodities and whatnot. Of course they’re inflationary effects, but the governments only care about short term. What’s going to make my voters happy for the next election in six months? That’s all they care about.
Tracy
It’s kick the can theory, right? The Fed does this all the time. We see central banks do this all the time. Why not governments, right?
Tony Nash
Yes. Okay, guys, let’s move on to crude oil, specifically. Tracy, on Friday, we saw Russia announce plans to cut production to 500,000 barrels a day. Brent rose on the news. And I’m really curious. What is Russia producing right now? So are they at that volume capacity? And what does that mean for the crude quota and the price cap?
Tracy
Well, Russia is already producing at their quota according to the OPEC. The thing is, their OPEC quota and I won’t get into the logistics of this, but their OPEC quota is a lot of condensate oil, not straight oil. But aside from those details, we have to go in fact, Russia Euros is trading literally between $40 and $45 right now as we are speaking today on Friday. The the what date is this? I just want to make sure some people the 10 February. And so I think that you have to you know, I think what Russia is trying to do right now is try to bump up the price of oil for themselves, because I think if oil prices are higher for them, even though they are supplying less, they’re going to make more money regardless. I also think that this puts a thorn in the side to the west, because they’re trying to bump up oil prices. When Western nations are trying to push down oil prices. Right. They don’t want to see inflation go higher. And energy is a big part of that, even though central banks don’t realize that. But we have to, you know, it is a big part of the inflation factor.
Tracy
And so what I think they’re trying to do is basically say, I’m going to be a thorn in your side. We’re going to kick up oil prices. I’m also going to benefit myself because oil prices are going to go higher for me. And maybe they reach the cap $60. They’re well below then. You know, they’re still making more money with reduced volumes.
Tony Nash
Okay, so Euro trades at $20 discount, right, at this point.
Tracy
To the price cap.
Tony Nash
Right. But who are they hurting, aside from, say, India and China and a few other countries that are their traditional allies?
Tracy
Well, even if that price went up of your rails, at this juncture, China and India are still getting great deals, right? At $60 a barrel, you’re still getting a great deal. Right. You’re $20, $30 below what Brent and WTI are trading at. And so I don’t think that really matters to them. As far as am I going to lose China and India as customers, I don’t think that’s even a concern of theirs because they realize that their oil is trading well below everybody else.
Tony Nash
So I guess if they’re going to have the same customers, the China India customers generally, why does it matter? Aside from… Why does it matter to Brent that Russia has raised or capped off their production? If it’s going to go to the same markets anyway? I’m just curious. Why does it matter to the non-Euros crude?
Tracy
Because you’re taking barrels off the market, and that is the only thing the market looks at. How many barrels are you taking off the market? If you’re taking 500,000 barrels per day off the market, then these other that’s 500 barrels per day off the market.
Tony Nash
Sorry, what do they have said this before? What are they producing now?
Tracy
They’re at about 10.5, but again, that includes condensate. It’s not exactly 10.5 million barrels of oil per day.
Tony Nash
Okay.
Albert
Basically, how’s the earthquake in Turkey affecting things on the supply side?
Tracy
All right, so if we look at saline ports, we’ve taken 8885 barrels per day off the market as well. Almost a million barrels per day off the market from that specific port. That specific port was supposed to be down for two to three days. That’s looking like a lot longer at this junction.
Tony Nash
Okay.
Tracy
That’s also affecting global markets.
Tony Nash
Okay. So between Russia and the Turkey earthquake, there’s a real impact on markets?
Tracy
Absolutely.
Tony Nash
Okay.
Albert
And of course they’d probably take advantage of it. Yeah, that’s the way things work in that part.
Tony Nash
Of course. Of course. Tracy, we had some viewer questions about natgas. There were probably four of them on Twitter. What new insights do you have in natgas over the last couple of weeks?
Tracy
Well, as far as natgas is concerned, everybody’s asking when is this market going to bottom? Right? Because it’s been just a disaster since summer. We’ve seen like over 40% decline and in my opinion, really what we should be looking at right now, I think we’ll probably consolidate down here for a while. I think what we should be looking for is going into summer because what I think it’s going to happen is that we’re going to see China demand increase because they’re coming back online and cargoes that were bound for the EU will probably go to China now. They’ll outbid the EU because EU is basically full at this juncture, right. So they don’t really need the cargoes. Those cargoes can move to Asia. But during the summer, what we may see happen is increase. And we got very lucky with the EU as far as winter was concerned. And what I think will happen is during summer, if we have a particularly hot summer, air conditioning rises, that means nat gas increases. And so what I think we could see is somewhere this summer we see an increase in prices again because you have to realize that last year EU still had 50% of their capacity filled from Russia before everything went offline. That’s gone.
Tony Nash
Right.
Tracy
I would be looking towards, more towards this summer if you’re looking for kind of price increase. And generally right now I think that we’re probably going to see some consolidation down in this 2, 2.50 area, which is where it’s traditionally traded.
Tony Nash
My neighbors in Texas need more money, so let’s get that pumping.
Tracy
But the thing is that at this, the producers in Texas that their costs are higher, that production is going to drift if we stayed up long enough. So you have to think about that as far as production is concerned anyway, I mean, we are in surplus right now, but that may not last forever.
Tony Nash
Great. Okay. Very good. That’s really good. Thank you for that. Hey Tony, what does next week look like for you? I know we’ve got CPI coming out. What are you looking at for the week ahead?
Tony Greer
I’m thinking like Carl icon, to be honest with you. Tony. No, I’m serious. If you saw his options play, I guess he’s got, I guess it’s 5 billion notional of options that are struck at 40, 50 for next Friday. If you ask me, he’s looking at number, he’s looking at a couple of things. He’s looking first at I think the bond market, the credit markets in terms of the bonds and break evens in terms of yields and break evens trading higher in the last week, they have both vaulted off of the lows. So there’s been a clear turnaround in market based inflation perception. So I think that he sees that and looks on the calendar and sees CPI and PPI next week, knows that inflation is not linear in any direction and maybe is making a bet on and maybe it’s just a hedge, but maybe investing that money on the idea that we have an upside surprise in any of the economic data. The bond market tanks, stocks tank. If rates go higher, they’re going to mash big tech again and he’s probably going to be in the money and his 40-50 puts.
Tony Greer
So that’s how I’m looking at it. I’m looking to see if my portfolio of trades that I’ve got on can weather that type of storm and if I’m out of the way in certain places, if I should join him in certain places. That’s the way I’m thinking about next week, man. I’m trying to stay alive.
Tony Nash
Sounds very exciting. Tracy, what are you looking for next week?
Tracy
Continue, obviously watching the commodities markets, metals, energy, watching China data, the mobility data, flight data, see how this is moving along and we’ll see how that.
Tony Nash
We see a higher CPI, what does that do for crude prices, do you think? Do you think there’s a direct impact?
Tracy
I think you’re going to see crude prices go higher, yeah.
Tony Greer
Tone, what, the dynamics…
Tracy
Counterintuitive, right?
Tony Greer
Yeah. It’s kind of like the market speak to each other, right. Like a dynamic that we definitely saw along the way of the commodities rally as rates went higher last year. Right. Call it the whole period going into the Russia Ukraine invasion, right. It was oil straight up, but it was kind of like the credit market. I called two year yields last year the bat signal, and I named them that because they were getting out ahead of commodity inflation. We were having weeks where the bond market was getting shellac and there wasn’t much going on in the commodity markets, but all of a sudden they would pick up at the end of the week. And I think it was a lot of the time, like the bond market signaling inflation here. The commodity markets are going to go up. And I think that that’s kind of a sort of a cadence that established itself. And so it’s going to be really interesting to see how that unwinds.
Tony Nash
Fantastic. Okay. That’s a really great explanation, Tony. Thank you. Thank you so much. I really appreciate your time. Thanks so much. Have a great weekend and have a great week ahead. Thank you.
Natgas is down 63% from its high in late August. The average price before Q2 ’21 was $2-3, so we only have 7% more to fall to below $3. While we saw Natgas rise – along with every other commodity – in 2021, prices had begun to fall until Russia invaded Ukraine.
Russia and Ukraine are still at war, but we have this issue with the restart of the LNG terminal. Tracy Shuchart tells us what’s behind the fall in Natgas prices and what she’d look for before expecting prices to stop falling.
The Fed pivot has been wishful thinking for quite a while and Sam Rines has been repeating this for months or so. As the Fed’s minutes were released last week, Sam pointed out that NO MEMBER saw the need for a rate rise in 2023. He stated many times that the Fed has been very clear about its indicators. We see this so often that it seems obvious. Why is this so difficult for some people to see? Sam Rines explains that in this episode.
This week, Sam also made the point that the Fed is maybe “stuck in the middle”. Literally, employment in the middle of the US could be a factor that keeps the Fed from slowing down. Sam explains why the middle is so important.
We’ve seen a lot of chatter in research notes, op-eds, and tweets over the last week stating that the future is a multipolar world. This seems largely based on a call for the decline of the USD and the rise of the petroyuan, etc. Albert Marko walks us through this.
Key themes:
1. Natgas sub $3? 2. The Fed Pivot is Dead 3. Multipolar, Post-USD World
This is the 48th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. This week we are joined by Tracy Shuchart, Albert Marko, and Sam Rines. Thank you guys for taking the time to join us this week.
It’s been a pretty volatile short week, and there are a number of things we’re talking about. First is Natgas. We’ve seen Natgas come off pretty dramatically this week, and we’re going to talk to Tracy about whether or not we’re going to see Natgas below $3 soon. Also the Fed pivot. There’s been a lot of statements from the Fed, and Sam’s covered that in detail, so it looks pretty dead. But we want to find out from Sam what’s going on. And we’ve also seen a lot of coverage of or a lot of commentary about a multipolar world in the last week or two, which sounds like 2006 era rhetoric or something, but we’re seeing a lot of that kind of rear its head again, and we want to talk through that with Albert. Thanks, guys. Tracy, let’s jump into it with with Natgas. Natgas is down something like 63% from its high in late August. I’ve got a price chart on the screen right now.
The average price before Q two of 21 was in the two to $3 range, 260 or something like that. So I only have 7% more to fall below $3. So we’ve seen it rise with every other commodity in 2021. But of course, with Russia invading Ukraine, we saw that spike up. So Russia and Ukraine are obviously still at war. And then we have this issue with an LNG terminal in Texas with Freeport. So we’ve got that story from Bloomberg up on the screen right now.
Can you tell us what is behind that Nat gas price fall, and what are you looking for in that market for that to stop?
Tracy
Well, first, again, Freeport, since you already put that up right, which went down in August, and people have been waiting for that facility to reopen because it’s an export facility. What happens is that since that facility is shut down, that landlocked US. Nat gas or that pushed downward pressure on US. Nat gas. Originally they were supposed to reopen in October. Then it was November, then it was December, and now it’s mid January. So that does contribute to a lot of problems. We’re also seeing warmer weather right now in the EU, and stocks are full in the EU. This market has become very complacent. That said, if we’re looking forward, there is a cold front coming in, I think January 22 to the EU. It’s supposed to be really cold for a few weeks. So what traders will be watching is to see how much does their build bring down during that time. But again, yes, the markets have become very complacent. They think that they’re indicative that this crisis is over, but that’s not necessarily true. We’ll have to see this winter how much stock is brought down in Europe due to cold weather.
Tracy
And you have to remember that in 2022, half of their storage came from cheap Russian gas pipeline. Right. So looking forward to when we have to refill this, they’re going to have more expensive LNG coming in, and that takes longer and it’s more expensive. And then we look at US. Export capacity. It’s still not built out enough for the contracts that we actually signed with the EU. So that may put pressure on US. Nat gas, but that would put upward pressure on European nat gas.
Tony
So does that pressure, does it drive the price up or does it just hold the price steady? Is there a mean reversion at some point where we go to, say, 260 or 270 on average and kind of some of these weather issues and Restocking just kind of maintains it? Or do you expect things to go back up to $9 or whatever?
Tracy
I think we could see a spike. Again, there’s a lot of mitigating factors in this market right now, and we really have to see how much is pulled from storage in Europe at this point. And hopefully Freeport is supposed to open mid January. We’ll see if that happens.
Tony
Okay.
Tracy
But that would really leave a lot of the downward pressure on prices in the US. Market because it would open us up to being able to export that.
Tony
We also saw the Japanese buying a US. Nacas company this past week. Right. Can you talk to us a little bit about that?
Tracy
Yeah, which makes sense. I mean, Japan has been one of the largest natural gas importers in the world, and they’re very concerned right now about energy security, as most countries are, particularly in Asia. They’ve had some problems with their deal with Russia because they have a joint project together, and due to sanctions, there are some problems involved in that. And so I think that was a very smart move, again, for Japan to kind of secure energy. I mean, they’re looking forward, much more forward than I would say Europe is.
Tony
Okay. Very good. So it sounds to me that there’s not really anything decisive coming up in the near term to change the direction, but the magnitude may slow.
Tracy
Is that yeah, technically speaking, we are very oversold at this point. That said, what we really are going to have to be looking at, or what traders should be looking at moving forward is do we have this reopening of Freeport mid January and this cold front coming in? If it does, traders will be looking at how much draw is is going to happen in in Europe or Bill stock? Okay.
Albert
Not to mention, Tony, that planting season for 2020, late 2023 and 2024 is coming up in Fertilizer. You need that gas fertilizer. So that’s that’s something else to look at. I’m not sure exactly how much it weighs on it or a bullish case from that gas by any means, but something will keep your eye on.
Tracy
Right.
Tony
But we have had some fertilizer volatility over the past couple of years, right? Oh, yeah. Russian invasion.
Albert
Yeah, I’ve been a big mosaic fan, which is a phosphate play, but also nat gas is the other component on the other side for the fertilizers that they use.
Tony
Great. Tracy, what’s your thought on fertilizer?
Tracy
Yeah, absolutely. I mean, I think we’ve seen that obviously pull back, but we’re heading into planting season again starting in the spring. So again, that’s going to be another factor as far as not gas is concerned. And the fertilizer analysts that I’ve talked to say they expect another price spike coming into about March.
Albert
Yeah, I believe also there’s going to be a price spike on the fertilizer front because the soil that the farmers haven’t used can’t sit as from what I’m told, can’t sit around not being used for too long. So 23,024 they’ll have to be replanting, those fields.
Tony
Interesting. Okay, well, good to know. Thanks for all of that. So let’s move on to the Fed. Sam, you’ve put out a few notes this week about the Fed and the Fed Pivot. Obviously, you’ve been saying for about nine months that the Fed Pivot is kind of wishful thinking. You’ve said it over and over and over again and there haven’t been hasn’t been a lot of kind of listening to it or people really haven’t heeded that necessarily as we see kind of run ups and and hope that we’ll see a pivot. But Fed minutes were released this week and you pointed out no member saw a need to raise rates in 2023. So that from your newsletter is on the screen right now.
So you’ve stated many times that the Fed has been very clear what their indicators are. And honestly, we’re seeing what you’ve said many times, that it’s vu and nominal wages. So vacancies and unemployment as well as nominal wages as well as core services, excluding shelter inflation.
And those have been very clearly stated by the Fed chair in his briefings. So why is it so difficult for people to see these things that seem to be very clearly stated by the Fed?
Sam
It’s personal preference. Right. The presuppositions and the initial conditions that you want based on the way you’re positioned. Right. So our brains really like to be correct. So if we can convince ourselves that the Fed is doing the wrong thing and should do something else and ignore the Fed will do something different, then it makes us feel a little bit better. So I think that’s part of it. But I do think that there’s something to be said for when no member of the FOMC sees the need to cut rates in 2023. That should be heated. That’s a pretty one sided trade. And you listen to some of the members of the Fed this week, bostic, who could be considered one of the more dovish individuals. He was still somewhat indeterminate between hiking 25 and 50 at the next meeting. When the most dovish member that I can kind of come up with or one of them doesn’t know if they’re going 25 or 50, that’s, that’s problematic. Right? That’s, that’s something that I think people are somewhat ignoring, particularly market participants, is that the Fed is not the Fed is not pivoting towards being dovish at this point.
Right. That the narrative that they have put out for the last six months has not changed. It has been very consistent and it has been very clear that vacancies to unemployment is a problem because one, when you poach people, you have to pay them a lot more money. So instead of call it the ADP report is really intriguing because they release what the pay rates are for people who aren’t switching jobs. It’s somewhere in the seven percentage range and the people who are switching jobs are getting 15% pay bumps. So the differential there is somewhat stark and somewhat shocking. I think that is somewhat underestimated by people when they look at what’s going on in the labor market. We have had a very good year for job creation and we just finished it off with a number that was well above expectations. And, you know, you can kind of nitpick and say, well, the average hourly wage was only up 30, basis points 0.3%. And you know, that’s that’s a positive for the Fed. Well, yeah, it’s only going to be up .3% because the vast majority of jobs were created in lower paying industries.
When you create jobs in leisure and hospitality, those are below the median. So you’re going to drag down the wage growth just naturally on that front. So I think a lot of it is going to be evolutionary for the Fed, right. They’re going to have to evolve their rhetoric at some point, but they’re not going to do it yet and they’re certainly not going to do it before the February FOMC meeting and they’re probably not going to do it until after the March 1. And that to me is probably not priced in at this point. And what’s really not priced in is the Fed just not really caring about the data until sometime in early 2024.
Tony
So you mentioned that in one of your newsletters, I think it was yesterday, talking about on Thursday most recent employment report. You talked about the Fed being stuck in the middle and literally you put some maps, which I put on screen.
Employment in the middle of the US could be a factor that keeps the Fed from slowing rate rises or at least from kind of pivoting. So why is the middle so important? We get so much coverage of what’s happening in Silicon Valley or New York or whatever, but why is the middle so important? And why is the Fed paying so much attention to the middle?
Sam
Sure, so the regions to the west were the only ones that lost jobs, according to the ADP report, which is pretty interesting. And the rest of the country made up for it and made up for it in spades. So while all the tech layoffs get a lot of headlines, you never really hear about the opening of XYZ plant in Kentucky or Tennessee, or the building of a plant in Tennessee, right? Those don’t get the headlines that Facebook laying off a few thousand people get. Quite frankly, who cares about a bunch of people getting laid off from Facebook? They probably shouldn’t have had jobs in the first place. Even say I’ll say it about alphabet. I’ll say it about all the tech companies. They overhired and they overhired in the wrong area, and now they’re laying them off. I mean, that’s what happens. It’s called the tech cycle. It’s not that difficult. But middle America is more than making up for it, and it’s making up for it in spades. And I think the Fed actually might be getting caught by the middle of the country. And it’s kind of the revenge of middle America, right?
Middle America always takes the brunt of the BS from the coast in terms of being dominated on monetary policy, being dominated on economic policy, and now they’re the ones kind of driving the ship. And I think that’s really underestimated within people’s frameworks that when we’re isolated to New York and California and see people getting laid off, that doesn’t really matter to the Fed as long as it’s being made up for by people in the middle. And people in the middle are making more money and they continue to spend. And there’s a lot of states in the Midwest and call it just flyover states. There’s a lot of states with a two handle on unemployment. A two handle. So if you want to hire people in middle America, guess what? You’re going to have to pay up if you want to hire a tech worker on the West Coast. Maybe you don’t, but that’s what’s going to get the headlines. But you’re going to have to pay up in the middle.
Tony
Well, you may not have to in terms of the rise on the West Coast, but the wages there aren’t necessarily coming down, are they, on the West Coast?
Sam
No, they’re not coming down, but it’s all about wage growth at this point. As long as you have a pretty sharp deceleration, you have some people on the market to hire. That’s important, right? Nevada and California have two of the highest unemployment rates in the country.
Tony
So is it fair to say that the middle is not say perfectly, but in some extent kind of catching up with the coast in terms of, say, real wages or something or no. No. Okay, so it’s still pretty cheap, but still just wage growth. Okay, very good. What else are we missing? Because look, you have been consistent on all of this. And you have for anybody who’s either listened to us or read your stuff for the last nine months could have seen this play out pretty much exactly as you’ve laid out. So what are people missing? I think the Fed has been fairly boringly, consistent, and you’ve said they would be, and that’s what’s happened. So are there any lines to read between that we should be looking at right now?
Sam
Yeah, so I laid it out about a week ago that I think what you really want to look for is the Fed going from a hawk to a grackle, hawkish to grackleish. And if you live in Texas, have lived in Texas, grackles are the worst birds ever because all they do is squawk. They wake you up and you can’t shoot them. They’re not like dubs, so play that all the way through there. But Grackles are an incredibly annoying creature. And when the Fed goes from being pure hawkish to really starting to grackle up its communication, squawk, squawk, squawk. You have no idea what they’re looking at. You have no idea what the metrics are. That’s when they’re getting ready to pause and pivot. And frankly, we have seen none of that right. Until the Fed process is not hawk to dove or dove to hawk, it’s dove, grackle, hawk, hawk, grackle, dove. And until they really begin to confuse their messages, they’re not changing shape. That we simply haven’t seen them begin to change shape. I do think that sometime this year, probably in the call, it the May to June time frame. That’s when you’re really going to begin to see the Grackles come out.
And a lot of confusing language about what they’re watching. A lot of confusing talk about the balance sheet. A lot of confusing talk about the future, the path of Fed Funds rates. And that’s really when I’ll get a little more bulled up on a Fed pause in the length and the structure of the potential to pivot. I don’t think there is a reasonable case to be made at this point. The Fed is going to cut in 2023. If there is a credible argument, it’s that the Fed breaks something and has to cut a lot. Right. So it’s it’s a little bit of a call. It a convex play here that if the Fed does cut, it’s not it’s not cutting 50 basis points, it’s cutting two or 300. And if and on the other side, you know, if nothing bad happens or nothing very bad happens, the Fed is just going to hold it there. So I think there’s a little bit of skew here.
Tony
Great.
Tracy
Okay, thank you. I have one question. Yesterday we had, like, Fed george came out and said the Fed, quote unquote, Fed, still has a lot to learn about how balance sheet policy works. Can you explain that to the audience? And would that not be one of your grackle birds? What is it called?
Sam
No, I think it was actually George just being honest. I think we had this convers we had this conversation a few weeks ago, Tony and I, with a guest that the Fed really doesn’t understand or doesn’t have quite the concept to pinpoint exactly how much tightening or additional tightening to Fed funds. Quantitative tightening does that’s, that’s what George was getting at. She’s a little bit behind the curve there. The Fed does have a proxy rate that I pointed out earlier this week in a, in a note. The Fed has a proxy rate that they publish that’s sitting at about 6.4%, give or take. So it’s about a 260 basis point spread, 2.6% spread to the current Fed funds rate. I think that’s something to kind of pay attention to, is that the Fed does have measures. I think it’s more that if you’re out there talking all the time, it’s difficult to get into the math.
Tony
They’re not stupid, they’re just annoying at times.
Sam
Exactly. They’re not stupid. They’re really not stupid. They know how tight they are. They know they’re sitting at about six and a half percent, 6.4% on an overall tightening basis. They don’t care that’s number one. They don’t care that it’s that tight. Number two, they’re going to continue to do it until they actually achieve their mission. Right. And it’s a multipronged process. And as long as markets seem to be fixated on what’s going on with the Fed funds rate and not going on with the entirety of tightening, that’s going to continue to be an issue for them. Like today, when everybody’s like, oh, look, we printed 223,000 jobs. Maybe this gives them reason to pause because average hourly earnings didn’t go up that much. Guess what? I mean, you can’t rip markets 2% and have financial conditions loosen like that and have the Fed go, yeah, I think we’re accomplishing our mission. Inflation is still high and unemployment is at 3.5%. Yeah, it sounds like a great time to pivot. Yeah, that’s the dumbest thing I’ve ever heard.
Tony
Right? Yeah. Okay, that’s great. Speaking of stupid not you, Sam. Albert, let’s talk about multipolarity.
Albert
One of my favorite.
Tony
Yeah, so we’ve had a lot of op eds and research notes and tweets over the past week or two stating that the future is a multipolar world. And this seems to be based on a lot of talk about the decline of the US dollar or the rise of the petrieon or something like that, around Chinese crude purchases from the Middle East or whatever. So, Albert, you put a series of tweets out, which I’m showing right now on screen about this very diplomatic, as you always are.
So can you walk us through this and help us understand what’s going on? And I’m going to try to play devil’s advocate as you lay.
Albert
No, that’s fine. I mean, you can play devil’s advocate if you want, but when it comes to multipolarity, it’s not simply a financial or economic thing that you need to look at. There’s multiple variables, including legal frameworks of the nation that is the currency issuer, the military strength of the reserve currency issuer. There’s multiple, multiple variables for it. And for some reason we have these economists that come out and say, oh well, the petroleum is coming into effect and that’s going to destroy the petro dollar and therefore the dollar is going to fall and blah, blah, blah. I’ll let Tracy get into the petrowan stupidity, but the dollar is simply the lifeblood of all trade in the financial system. You’re talking about for me, it’s like taking out your blood into Transfusion and putting in Mountain Dew and saying, oh yeah, everything’s healthy, you’re going to be fine. The whole system is raring to go. It’s a dumb argument. It just boggles my mind how people can sit there and even claim multipleity when there’s literally no alternative on a global scale for anyone to be thrown.
Tony
So let’s take this bit by bit. Okay? So a lot of these people are saying that the CNY will become more powerful partly on the back of crude coming out of the Middle East and crude coming out of Europe that could be denominated in CNY. Okay, so let’s take that. Tracy, can you talk to us about the Shanghai benchmark for crude? How successful has that been?
Tracy
Not at all. Even the futures market hasn’t been successful.
Tony
What percent of world order oil, just as a wild guess, do you think is traded on the Shanghai benchmark?
Tracy
2%.
Tony
2%. Okay. And it’s been around for how long? Two years?
Tracy
Yes. And if you look at their futures market, which has been around since 2016, we’re still only saying that domestically traded, you’re not seeing big players come in and hedge like they do with WTI or bread. So that aside, China came to Saudi Arabia with a suggestion after this new summit, the latest summit that they just had, and said, yeah, we would love for you to we could trade this on Shanghai and this could be traded in yuan. Saudi Arabia still has not yet come back with an answer. And so everybody jumped to conclusion saying it’s a petrol. Saudi Arabia is giving up dollar denominated oil. This is not true. I’ve talked to a lot of people in Saudi Arabia about this. I’ve talked to a lot of journalists. I actually had a spaces about it. So this is not true. And even if Saudi Arabia did decide to sell some oil in yuan on the Shanghai exchange, for whatever reason, all that would happen is they would be paid in yuan and instantly changes into dollars. Nobody wants you.
Tony
Wait a minute, let’s dig into that. Why does nobody want CMY?
Tracy
Well, because it’s not globally traded like the dollar is. Everybody wants dollars. People don’t want you on it.
Tony
Not freely convertible.
Tracy
Right. At all. Right. And especially if you’re in a merging market with USD denominated debt. You on. Nobody wants you on. Nobody wants you on. Right. And it’s not really free floating, right?
Tony
It’s not at all. We talk about crude and the ability for the Chinese purchase crude. We talk about their currency, CNY. But behind the CNY and the lack of convertibility is the PDOC, right. China central bank. So ultimately, if you trust a currency, you ultimately trust their central bank. So is there a basis for people globally to trust the PBOC? That’s a sincere question. It’s not a cynical question.
Tracy
No, I think people are not trusting central banks anywhere, but especially in China right now. People don’t believe what’s going on in China right now. People haven’t believed the data in China right now. And so, again, there will be a small amount of oil traded globally in yuan if China wants to do so and another country chooses to do that. Right? Russia has india was brought up for them, but that’s a very small 1% to 2% of globally traded oil, which is certainly not going to put the U on in a position to overtake the dollar in traded markets.
Tony
And something I’ll point out is the PBOC has literally, at times, used numerology to determine their benchmark rate. Okay? For people who go down this path, that the CNY is a rising currency. If you’re going to trust a currency, first of all, it has to be convertible. But second of all, you have to trust the central bank. And you can’t have people using numerology. I know we all complain about the Fed, right? But at least there’s a standard approach and there is a level of transparency as to the way decisions are made, right? Everybody knows what the Fed says, what minutes are released and all that stuff. But when you have a central bank that has at times and it’s rare, but at times use numerology by raising by anything that ends in eight or whatever, something like that, I mean, this is just stupid. And it’s not a credible central bank when those sorts of things are happening. Okay, let’s go on to multiplarity, to have defense. Okay? So is there a defense to enforce decisions that are made? So does China or whatever other multipolar places that these people are talking about have the ability to enforce their decisions overseas?
Albert
No, none. None whatsoever. I mean, even to take the Saudis as an example, right? The Saudis rolled out the red carpet for the Chinese, and the Petrowan argument started coming out all over research papers. But what will happen when Iran decides to press the Saudis once again in Yemen, or just through airspace violations and threatening missiles? Do you think that Riyadh is going to run to the Chinese? Are they going to run to Moscow? Or are they going to call up the Pentagon and say, hey, we need more, you know, Patriot missile batteries, you know, we need your support.
Tony
You tell me why. I think I know the answer, but I want to understand why.
Albert
The US. Has the most advanced military hardware there is on Earth by far.
Tracy
Right?
Tony
But why would they not call, let’s say the Chinese.
Albert
Do you want an effective defense system? What are the Chinese have for defense system? Are the Chinese able to put Chinese troops to defend against Iran if something happens or against the Yemenis? I mean, they failed in every single aspect of China.
Tony
Just some basic questions. Does the PLA have the logistical capability to get their resources to Yemen if needed?
Albert
Zero. They couldn’t even invade Albania if they wanted to. That’s how ridiculous it is.
Tony
I’m sorry.
Albert
How are you going to move 250,000 troops across the world, right? You have no ability. The Russians can’t even barely invade Ukraine. That’s on their border, and we’re sitting there talking about multipolarity. For an example, is the United States took out Manuel Noriega. That’s because he was in the Panama Canal area and he was screwing around. If that situation happened, do you think the Chinese or the Russians did hop on over there and take it out? They cut it.
Tony
Noriega fell out of a building, which is plausible.
Albert
Well, that’s the Russian way to fix things. But, I mean, this is just a silly conversation. I have no idea where this multiplarity is coming from unless it’s investment banks putting their analysts out there to help their clients get out of gold or get out of crypto or something. We know with the whole death of the dollar thing coming, what are we.
Tony
Missing on multi polarity? Is there something that we’re missing from this discussion on either side?
Sam
I don’t think we’re missing much. I mean, there’s always the want for multipolarity if you’re not the United States, right? Everybody wants it, but to the point. You have to have a credible currency, you have to have an open account, you have to be willing to have a deficit, trade deficit, period. And you have to have incredible military and defense. And guess what? In this world, the only country that ticks those boxes is the US. And if Europe ever got its act together, maybe it could have the military part, but that’s it. China simply does not have the capability to be a global offsetter to the US dominance. That’s simply what I would call fantasy, at least for the foreseeable future. Could it become one down the line?
Tony
Maybe.
Sam
We were all concerned about Japan 20 years ago. Look how that worked out. Then we were concerned about the Euro. Look how that worked out. I mean, it happens. Yeah, it happens on a cyclical basis. Every 20 years, we come up with a new thing to be concerned about on the multiplayer front, and every single time, nobody has the willingness to do what the US does. Somebody call it the exorbitant privilege. Right? It’s not. It is. Actually a pretty big load to bear, particularly on the military and spending front. So I think that’s wildly overlooked. And I think the other thing that’s overlooked is oil for dollars will persist for a meaningful amount of time. Nobody wants oil for Trinkets.
Tony
Right?
Tracy
And another thing I have to mention, does China even want to open up enough to be the world? They like to be shrouded in kind of secrecy, right? And they have to be secret. Whatever. If you’re world current reserve currency, you have to be completely open to the world, and they don’t seem to like that.
Tony
Well, part of it is they don’t want to be embarrassed. They don’t want to be seen to be making a mistake. It’s easier to point out other people’s mistakes. If they had transparency and they made a mistake, it’s embarrassing. If you remember, in 2015, they tried to devalue a little bit, they messed up and they way overshot, and it was really embarrassing. And then they did nothing for, like, four years. So they don’t want to be embarrassed. That’s a huge issue.
Albert
These are all complexities that have to be taken into account. And like Sam said, there’s only one nation at the moment that ticks the box. And listen, I’d be the first one to throw out warnings, red flags. If there was a competitor stepping up in the US’s shadow, they’d be the first person to say this, but just not right now. None of the components are there at the moment.
Tony
Right? And I mean, having said all this, I don’t want this to sound super pro American. Like, we’re all Americans, and I think we can all agree that the US is kind of a lumbering idiot around the US at times. Well, this is not trying to say raw, raw US. We’re just saying the Pragmatism of the moment is this.
Albert
Yeah, there’s so many different details that have to be looked at. And I spoke with Mike Green on this in our podcast and our spaces. It’s like the United States has water, has geography, is isolated from the rest of the world, has a military, has this, has that. It’s nothing to do about RA America. It’s just the way things have been laid out at the moment.
Sam
We’re lucky in that.
Tony
So if anybody’s watching and has a counter argument, please let us know. Honestly, we want to hear it and put it down there, and I’ll try to talk to Albert and see if he can come back to you. You may be careful what you wish for, but we’ll try to get Albert to come back to you. But let us know seriously, if there are valid counterarguments that encompass all these issues, just let us know in the comments, and we’d love to engage. So, guys, thank you very much. Really appreciate your time and all the thought you put into this. And have a great weekend. Thank you.
Gasoline prices have continued to decline in the US. Big Fed meeting. 50bps. JPow insists the terminal rate is 5.5. Markets seem to want a rosier picture. How do you trade this? Bob Iaccion shares his expertise.
We’ve seen some weakness in crude prices, of course, and consumers are seeing a bit of a break with energy prices. Jay Powell doesn’t see inflation abating soon – he seems to believe it’ll be persistent. Part of that must be with energy. Our Complete Intelligence US headline CPI forecast looks at a reacceleration in early Q2. Is that around the time Josh expects energy prices to re-accelerate or does he have a different expectation – and why?
Tracy posted a really interesting chart recently. We’ve been talking about the SPR releases for a long time, but this chart is super stark. She walks us through what this means.
Hi, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by, by Bob Iaccino. Bob is with Path Trading Partners. We’re also joined by Josh Young. Josh is with Bison Interests, and Tracy Shuchart, who is with High Tower Resource Advisors. Guys, thanks for joining us today.
And Bob, I know this is your first time to join us and I really appreciate you taking your time. I’m always really shocked by the the quality of people who will talk to us, which is just amazing. So it’s, it’s great to have you here. And Josh, this is your second time and you have just hit a lot of home run since your fund started. I think you’re up 140% or something while the industry index is down like 20% or something. Is that right?
Josh
I can’t talk about my performance.
Tony
Okay. So I think you’re doing pretty well. So I’m just really grateful to have you guys here. We’ve got a few key themes here.
Of course, there’s been a lot of macro data out and some of that stuff has been classified by a few people as kind of widowmaker trades. So let’s get a little bit into that with Bob.
We’re going to look at energy and inflation and Josh is going to lead on that. And then we’ll look at WTI and the SPR with Tracy. So Bob, let’s start. You had sent this tweet out from Emma a few days ago where she says that markets kind of are believing what they want to believe and it’s really a trap and some of them are kind of widowmaker trades.
So can you talk us through that? Of course. We just had the big Fed meeting with a 50 bps rise and JPowell now insists that the terminal rate is 5.5 or somewhere around there. We saw PMIs come out today that were a lot lower than expected. We saw a downward revision in unemployment by over a million jobs sorry, of employment by over a million jobs. So why do markets continue to want to see a rosier picture or where are we right now and where is it going?
Bob
Well, it’s interesting, Tony, and again, thanks for having me. When you’re looking at equity markets specifically okay, let’s just talk when we talk about markets in a general sense, we’re usually talking about equities, which is one of the things I think the mainstream gets wrong.
But when we’re talking about equities, you’re talking about just a natural upward bias. There’s many millions and billions of dollars that go into 401ks and long only mutual funds every single month that people don’t even look at. So when all else is equal, you have a slight upward bias in equities.
And therefore it kind of stands to reason that people in general, investors, retail investors, want things to go up. And I suspect when somebody starts trading I remember I gave a speech pre COVID and somebody came up to me and said, I don’t understand how you trade the ES, which is S&P futures. I said, what do you mean? They said, well, stocks always go up, right? So sometimes you can be short ES. And I’m like, oh, my Lord, let me show you a chart. Stocks don’t always go up. If you take a look at an equity chart going back to 1920 or however long you want to be, yes, it is angled this way.
But when you see what’s going on right now, there’s a lot of old adages in the markets that I honestly can’t stand. But one of them gets repeated a lot is, you can’t fight the Fed. And most people are trying to fight the Fed. And Jerome Powell keeps coming out there and says, why are you guys fighting me? So the more and more stern Jerome Powell gets about interest rates, the more and more the markets get comfortable with what the Fed is doing and saying, sort of, and I’m paraphrasing what I think the market would be saying as a whole, “okay, we know what you’re doing now, so we’re comfortable with it, and we’re just going to buy stocks.”
And that seems to me to be troubling. It’s interesting because I’m bearish medium to long term, but I own the S&P Futures right now. I actually bought them on the first day of the fourth quarter with a mindset toward this type of activity. I said, okay, the fourth quarter is going to be higher than the third quarter, so I can go ahead and buy a small ES position within the context of my thesis that toward the end of the first quarter, beginning of the second quarter, I think equities dump again. I don’t think that the lows that we saw in October are the ultimate lows for this particular bear market.
Tony
So you’re saying that selling out of Trump’s NFT doesn’t mean we’ve hit the bottom yet or whatever.
Bob
I took screenshots galore of that Trump Superman thing with the laser. I’m like, if he could have a body like that, so can I, right? By eating McDonald’s and drinking Coke. I thought that was amazing.
No, I mean, again, these kinds of things a lot of people would think is peak bullishness just in any market overall. It certainly is probably peak bullishness, at least in the short to medium term and NFTs that that happened.
Tony
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Why do you think we’ll continue to see ES rise through, say, first quarter? Like, what are you seeing? Is it sentiment or is it some of the data coming out?
Bob
It’s the data being done and it’s the big events being finished. So, again, as I mentioned the beginning of this conversation, Tony, all else equal equities have an upward bias. And I said to myself, okay, we’ve got one more Fed meeting, one PCE, one CPI, a couple of small to medium sized business PMIs in the form of the S&P PMIs, and then not a whole lot.
So given that backdrop, people say, okay, we’re still near enough to the lows, or this is probably the lows. Even some of the people that I respect a lot think that the October lows are the lows, and I just happen to disagree with them going into next year. But they’re probably, they’re likely this is not a bold statement, the lows for 2022. It’s not a very scary thing to say considering we’ve only got, what, ten trading days left, 20 trading days left at the most.
So from that perspective, I feel very comfortable with the buy at the end of the third quarter and sell somewhere near the beginning of the first quarter position that I put on and I have a break even stop. I mean, I’m not going to lose money on this trade, which means I’m not going to pay a whole lot of attention to it anymore.
Tony
Right? Okay, very good. So, Josh, let’s talk about the data for a minute. Josh highlighted a chart that was sent out today looking at the difference, say, the divergence between hard and soft economic data. And hard economic data is still relatively positive, significantly more positive than the soft data.
So can you help us understand what’s the difference between hard and soft data and then what’s your view of the divergence between hard and soft data?
Josh
Yeah, so I focus more on sort of the energy side than the general broader market data side. But it is interesting. So the hard data and my understanding of this is the measures of actual activity and the soft data is more measures of sentiment or sort of modeled or forecast activity. And then I guess where I sit on it is I’m looking at actual oil and gas consumption data, and it looks a little weak. And so when I look at it looking a little weak, and that doesn’t mean I’m bearish I like the supply situation a lot. It’s very bullish, and that probably overwhelms. But from my perspective, tracking oil and gas consumption, it looks like maybe some of this ostensible hard data isn’t as hard as it’s represented. So that’s my take on that.
Tony
Let’s talk about that a little bit. Bob, you seem to be a little bit skeptical of some of the hard data.
Bob
Yes.
Tony
What do you think is a little bit overstated right now?
Bob
Well, I’ll give you an example. This past non farm payrolls report. Negative 40,000 on retail jobs. When have we seen that going into a holiday season? It’s likely that a lot of it has to do with seasonal adjustments in my view, because how do you correctly adjust for seasonality that changes every season, along with technology changing every single season at a rapid pace what seasonality may or may not look like?
So I’m not a conspiracy theorist by any stretch of the imagination, but hard data produced by the government is where there is possible manipulation. I’m not accusing anyone of manipulating anything. I’m just saying that’s where it’s possible. In sentiment data, that is the survey respondent sentiment. That’s what it is. And that generally shows up in hard data.
Josh mentioned in his tweet about this divergence between hard and soft. Right now we have a divergence between iron ore and crude oil prices, right. Which has a very positive correlation over time. We can look at the data. Josh can look at the data, and so can Tracy better than I can, and say, okay, I believe these will converge, and I think this one will leave because it’s data.
Sentiment, you can’t say, that’s not the respondent sentiment, whereas data coming out of the government, if you believed the government’s data isn’t manipulated, then the data is what it is. But when you look at something so strange as retail employment falling going into the holiday season, that’s either economically catastrophic. Is that a word? Economic catastrophe?
Tony
Sure. Catastrophe.
Bob
Economic catastrophe. Or it’s wrong. One of the two. Catastrophic. That’s what it’s right.
Tracy
And we have all these huge revisions and the employment data every month, right. Going back, they’ll revise two, three months back.
Tony
They’ll revise two years back, Tracy. There are generally four revisions on OECD country data, and so they’ll go two years in and revise stuff. And whenever I see an initial kind of print of economic data, I always say, and you see this regularly on Twitter is I say, I’ll wait for the revision. And it’s not the first revision. It’s typically the second or third revision.
My view is that the first two say the initial print and the first revision are really PR for every macroeconomic print. Not just in the US. Globally. And then we start to kind of see back adjustments of what really happened. So I just don’t understand why initial prints of economic data move markets. I don’t understand why the financial media make a big deal about these initial prints of data because they’re wishful thinking. In the same way, Bob was talking about how investors have a rosy view of stocks always going up. Macro data typically has the bias of those government statisticians either too negative or too positive.
Okay, good. So is the view, guys, that the soft data will pull the hard data down? Is that kind of where we’re kind of falling on this?
Bob
It’s definitely my view. I mean, again, if that’s your sentiment, something has to happen to flip that sentiment. I always like watching the politicians. I don’t make political statements on shows like this. I make political statements, unfortunately, at the dinner table. But when you’re talking about political statements, you’ll see jobs are strong and you’re making enough money to pay for the inflation. That doesn’t change the reality on the ground for people. You’re not going to actually have somebody say, well, the President said, I have the money to pay for this, so everything is fine. So I always believe that the sentiment is much more reliable than the data, even though it shouldn’t be that way. It really should be the opposite.
Josh runs a fund and he can’t talk about his performance even though the performance is real data. That’s what his performance is. I was at a fund of funds years ago as part of the investment committee. We had nine full disclosure, was a low volatility fund. So our biggest up year was about 90 basis points. But we never had a down year. I’m sorry, 3.9 basis points, 390 basis points. But we never had a down year in nine years.
And our auditors and our regulators said we couldn’t publish that performance. And when we said why, they said, because it implies that you can’t have a down year. Well, yeah, if you’re stupid, it implies that.
But, you know, this was our actual performance, but we can’t put it forward. Josh has great performance and can’t talk about it. And this is the same kind of thing where to me, the sentiment will pull the actual data down and then you question whether that’s going to be manipulated for political gains or not by either side.
Tony
Right, exactly. Not one party or the other. It’s both parties.
Bob
Absolutely.
Tony
We don’t figure that anybody individually.
Tracy
I mean, I think the employment data has been wrong all year, for two years now. You just look at labor force participation rate and how many people are multiple jobholders, not single job holders. And we just had that huge revision of 1.1 jobs.
Tony
Yeah. So we saw jolts turn over a couple of weeks ago and then we have this downward revision of jobs. So if we look at the Fed’s mandate, they’re kind of not really doing either, right? Either they’re not doing either or they’ve already achieved the job stuff which they said six months ago that they hadn’t achieved and they continue to persist that they haven’t achieved. So is it fair to say that with the downward revision and employment data and the downward trend in jolts data that they’re kind of getting there already? So this is kind of a bad news is good news thing potentially?
Tracy
Potentially if the market chooses to read it like that. I don’t think the algos know how to read it that way. But yeah, I mean, it’s possible. We already are at 4.5% with all these revisions on unemployment.
Tony
Right? Okay, very good. So we’re going to get off the macro data for a minute. We’re going to move to energy prices. Actually, we’re going to stay on some macro data for a little bit. I put on the screen our Complete Intelligence CPI forecast and what we’re looking at potentially is a gradual rise of CPI accelerates a bit in April and goes into the summer.
So it’s possible, according to our forecast, that we do see a second bump in CPI. I have to say there is no human intervention in this. This is all machine driven. And so we’re reading things in the markets or the machines are reading things in the markets that are saying we could see a second bite of inflation coming in, say end of Q1 or early Q2.
So Josh, the question for you is we’ve seen some weakness in crude prices and consumers are seeing a bit of break with energy prices, gasoline prices and so on. But we saw from the Fed meeting that JPowell doesn’t see inflation abating anytime soon. So it seems like it’ll be fairly persistent. How do you expect energy prices to fit within that?
Are you seeing energy prices accelerate quickly or do you expect energy prices generally? Of course, I know there are different segments, but generally do you expect them to kind of accelerate quickly or do you see kind of a delayed acceleration of energy prices?
Josh
This is a great opportunity to run real briefly a potential economic analog to where we are in some respects. And the potential economic analog is the Asian financial crisis, the ’97 and ’98 scenario. And where that might be real similar to what we’re seeing now is one, we’re actually seeing consumer deposits start to fall with loans increasing. We’re seeing mortgage rates start to fall even though the Fed reset or keeps raising rates. And so we’re seeing the housing markets start to clear and then we have this very low labor force participation, sort of similar to what you saw in prior periods.
And you see this, they say, what is it that good times lead to weak men, and then weak men lead to bad times, and bad times lead to strong men. And sorry for the gender aspect of that, but just sort of the general idea. When I see all this, I think that there’s a real chance that we see much higher consumption of real goods and real inputs. And then when I tie that so that’s relevant for the inflation question as well as for oil and gas in particular, because there is this huge non participating aspect of the labor force that is increasingly likely to participate as NFTs and crypto and various day trading, tech stock and other sorts of speculative activity comes down.
And then there is this other aspect, which is that with oil and gas starting to come into China more, and other commodities potentially coming into China as they reopen and restimulate, there is the potential for inflation on raw materials and deflation on consumer goods and other stuff that China exports. And so it’s a sort of very weird, messy time. I’m not sure, I think that tech equities rebound like they did after that ’97, ’98 time frame. But other than that, it looks like sort of the most similar to maybe that plus 2003, something along those lines.
And I’m interested in your guys take on that, because it seems like we have room, actually, for significant uptake in demand, not just in China, for oil and gas, even in the US potentially, as employment potentially improves, just because you have all these people, you have all these open jobs still, especially in the low end, and you have a lot more people who maybe are relevant for those jobs and more interest in them now.
Tony
Yeah. So when you talk about uptake so if we look at China, for example, there were zero international flights going into China from, say, 2020 until, what, this month, right? Something like that. International tourist flights. And those are restarting. And so that’s just one kind of proxy indicator of, say, trade, the economy, travel, other things. Right. So do you have a view on that, on, say, passenger flights into China, tourism in China and how that would impact, say, crude?
Josh
So I have a better view on China to China flights than China to international. It actually does look like there’s a lot more bookings for international to China and vice versa flights, but there’s not a lot more actual flights yet. But there are way more China to China flights. We’re actually up from a low of two weeks ago or two and a half weeks ago.
We’re up about 100%, actually, maybe even more than 100%. And again, the data is not perfect, but I’ve been posting daily seven day average lag data just to to sort of show a moving average, and the moving average is up over 100% for that. So just those China to China flights, it looks like, represent about 200,000 barrels a day of jet fuel consumption and jet fuel is very oil intensive.
You use more than a barrel of oil to get a barrel of jet fuel because of the energy component and because of various other aspects of that refining process. And so also, jet fuel consumption historically has been a good proxy for oil and gas consumption in an economy. If you’re using more jet fuel, you’re using more gasoline, you’re using more diesel, you’re using more coal and natural gas and various other things.
It’s a great sort of real time economic proxy. And there’s lots of this is one of the places where I disagree on the sentiment surveys. I’m an economist by training and education. And the problem with surveys is that there’s no money in them, right? So people just tell you whatever they think, whereas consumption is actual money. It’s a buying decision. It’s not a speaking or a writing decision.
And the consumption matters more. So these real time actual consumption indicators are very promising, it looks like, from China, even as there’s headlines of Beijing is totally shut. So the headline is that and then the consumption data is that the consumption is way higher. I’m going to go with the consumption data, and that looks very promising. Again, that’s only part of this theory, and I’m interested in your guys take on it to the extent that you’re.
Tracy
Open to talking about bob was talking about iron ore earlier, and they came out overnight, actually, and said they have a state buying purchasing iron ore is how they purchase it now. They started about a year ago, and so they said they’re going to start buying iron ore again. So really, to me, that does say they are really getting ready to sort of push this stimulus, and they really want that 5% GDP for next year because of how much it has come down and how much has been lagging over the last two quarters, including this quarter.
So to me, hint, not that just them saying no more COVID passenger. I’m looking for real things that they’re actually doing. So look for them to start buying hard assets and buying sort of in the material sector and that’s kind of to me, that, okay, we’re ready to stimulate this economy.
Tony
Okay, that’s fantastic for everyone, right? I don’t think anybody in the world wants China to fail because it hurts everyone. There’s such a big economy, and especially their Asian neighbors, but also their big trading partners like the EU and the US. So I hear a lot of kind of sour China sentiment and people kind of cheering China failing. And I don’t think anybody in reality wants that to happen because it would hurt all of us.
So since we have three energy experts on, I guess let me ask you about China’s position with their crude reserves. Are they pretty tight? Do they have a lot in storage? Do they have stuff contracted? Like, if they grow, how will that impact the spot price.
Tracy
Well, they will have to buy more because when oil prices were at their peak just a few months ago, even though they were closed, and even into 2021, when oil prices really started to spike higher, they used a lot of their SPR, especially starting in summer of 2021. So they started using a lot of their SPR because they like cheap commodities and oil prices were Spiking. And so I do know that, you know, from what we can tell, you have to remember, we only know what’s above ground that we can see by satellite. We have no idea what’s underground for for what they have in storage.
I just want to preface that, because a lot of people say you don’t know what time. So we do know some storage. So what we can see is that they have drawn down their SVR quite significantly. If they start opening up and they need to purchase more, especially with kind of these oil prices lower and then being able to strike deals with Russia right now, I do think we’ll start to see them purchasing a lot more, not just for consumption now, but to refill their SBR.
Bob
Again, I’ll defer to Josh and Tracy more about China. I’m actually much more knowledgeable about Japan than I am about China, but from a perspective of what they’re likely to do there’s, the interesting sort of component of Chinese culture can be quite monolithic. And if you have sort of spikes in COVID cases and it brings about this sort of I mean, they obviously protested Lockdowns, but there were reports overnight about Beijing looking like a ghost town today because cases were spiking again.
And you could see this potential sort of spike in demand and then drop off in demand. And that would likely be the last drop off where I suspect that the demand that we saw here in the US. China’s demand, would increase three and four fold of the spike that we saw here in the US. Which is why I kind of agree with Josh’s overall bullish sentiment, even though we haven’t quite reached my downside WTI targets that Tracy and I talked about a couple of weeks ago. From that perspective, though, there is an interesting possibility of this downturn. But to Tracy’s point, I don’t think the Chinese government stalls their purchases because of their SPR usage.
It’s called an SPR globally, but they certainly use it quite a bit more than we do here in the US. To manage their it’s almost like a hedge account for them, where they sort of buy and sell much more rapidly in store. And they do the same thing with copper. And it’s interesting because when the copper market started really getting into the headlines and Spiking three years ago, there was all this talk about copper inventory and copper being used as a currency in China. You can store copper for quite a bit longer than you can store fresh crude oil. It’s got to be rotated.
Tony
So that’s a great point. That’s great. Okay, so speaking of SPR, Tracy, you punched out a chart this week on WTI versus SPR, WTI price versus SPR, and it looks like that divergence is pretty stark.
So you guys just mentioned China drawing down their SPR. The US. Has drawn down its SPR. So can you talk us through what this chart means and really what it means for crude prices?
Tracy
I mean, really what it’s showing is it’s showing all of the times that we’ve pretty much needed to tap into the SBR because of an actual emergency. You can see the difference between when we had to tap the SDR and say war or Katrina or Libya, right, how little that was compared to a non emergency event, that we drew it all the way down.
Now, Biden has said this really just showing the magnitude of this SPR draw for literally no reason. But if, you know, Biden did say that he was looking to refill it at 68 $72, we have gotten down on that in that area. We haven’t really been able to stay there. But it is possible that we could be looking at, by our calculations, Q2, they could possibly be looking to repurchase if oil prices are down there, which there’s no guarantees with China reopening and sort of seasonal tendencies and what have you. Generally, we see about mid February through summer really starts to kick in higher demand season, and you start refining for summer grades and things of that nature. But it is possible that we could see the US.
Kind of start at least thinking about repurchasing Q 223 again, that would buoy oil prices as well and kind of put a floor underneath it.
Tony
Okay, so that kind of reinforces the headline CPI data that I put out there saying, say, March, April, May, things really could tick up. I think it’s silly to expect crude to be down at that level, especially, as you guys say, if China is opening up, if they’re refilling their SPR, if the US. Is refilling SPR, that sort of thing. So that’s all super interesting. Is there anything on energy that we’re missing right now, guys? I just want to make sure going into the end of the year that we’re covering the areas we need to COVID on energy. What are we missing?
Josh
So I’ll jump in on this just real quick. On inventories, there’s a lot of uncertainty. Like Tracy was saying, we don’t really know how much oil is in storage in China right now. The way I approach it is just to assume the worst to some extent to to underwrite to that and then, you know, understand sort of upside. And the worst case is, is somewhat bad. Like it looks like for, for oil prices, it looks like there might be two or 300 million barrels of oil and storage in China.
More than some of the most optimistic analytics services or whatever are showing. And it is, in theory, possible, right? They have big caverns. They could store it like we do. It’s possible. To the extent that that’s the case, it still might not matter, because as China reopens, to the extent on the low end, again, of Chinese consumption, maybe you get another 2 million barrels a day or so of consumption versus where it’s been. And maybe they were importing a million barrels a day to store up until this point.
So you still have a delta of a million barrels a day. And so if you have 200 million in storage, 200 days from now you’re out of storage and you’ve been importing, you end up with this, like, million or 2 million barrel a day need to draw on world inventories.
But world inventories are really low ex China. So you end up with a situation where on the low end for recovery, you end up with an undersupplied situation. And that’s not assuming any Russia disruptions on the high end, if you end up with a sort of three or 4 million barrels a day.
Again, what Tracy and Bob were saying about the imports of iron ore and some of these other indicators, if those are right, and we end up on that sort of higher end of demand, which we also saw in the US. As we reopened, I mean, things could get crazy real fast, and China could end up looking like the world leader in oil trading from having imported and stored all of this oil to the extent they have it.
And then the last thing oil was in Biden’s buy target range, and they were selling from the SPR, not buying it in the last week or two. So that tells me it’s very unlikely that there’s repurchases of oil into the SPR anywhere close to these price levels and anywhere close to these economic circumstances.
Tracy
I mean, I think most people agreed they probably won’t buy back in the SPR, but they say they will. But I think if that even happens, we won’t see that until at least three of 2023. But again, prices will probably be higher than where they want them to be to purchase it anyway. But I do lean towards the fact that it’s going to be a very long time before they actually start repurchases.
Tony
Okay, great.
Bob
I have a couple of closing things, if I could, because first of all, I like Josh until he told me he was an economist. But I think that’s more of a strategist. We’re like a strategist, and we’re like the little brother of economists, and we’re always jealous of that. They get to put the economists, find their name and strategists. I could just say I’m a strategist. No, I don’t have to show a degree to do that. But from a perspective of the SPR, I worry about the political, the future political implications of what the administration did. If you look at the exact somebody sent me the exact definition of what the SPR is supposed to be and I guess in that context he used it correctly, right?
But I think I know at least Tracy and I agree that it was used incorrectly here because it was just a price increase. It wasn’t really an emergency. Prices were coming off on their own. Biden’s own. Treasury put out a report in July that said the SPR release only affect prices somewhere in the range of $13 to they revised that from about $28 to pump.
So it wasn’t even that big of an effect through Biden’s own. Treasury said this it’s not me saying this, but I worry about the future of prices are up, let’s dump a bunch because we’ve got midterms coming. And then next thing you know, there’s a massive outbreak of some sort of geopolitical problem in the Middle East and there’s a real emergency and we don’t have what we need. So that’s my concern about that. The last thing I’d like to say isn’t really energy based, it’s more about CPI.
I was on a Twitter space yesterday waiting for the mic. I never got the mic, and I heard somebody who I won’t mention say prices are decelerating at an accelerating rate when the exact opposite is actually true. Prices are accelerating at a decelerating rate. They’re not decelerating an accelerating rate. People forget. First of all, I don’t like the Consumer Price Index, but that’s a whole nother podcast. CPI is exactly that. It’s the consumer price index. It’s an index. If you go to the St. Louis Fred website and you look at a chart of CPI, it’s basically always increasing, right? That’s why the Fed’s target is a 2% increase in prices.
If we’re in the midst of disinflation, not deflation. And I think sometimes the public doesn’t realize, they’re like, oh, prices are coming down. No, they’re actually not. The rise in prices is actually slowing down, but they’re still rising. It’s like if you went to buy a car for $22,000, I don’t know where you’d get that, but and you go the next month and it’s up $23,000, and then you go the next month, that’s up 23,100. Prices didn’t go down, they just increased at a slower rate. And I’m going to be saying this everywhere I appear from now because I think the public’s misunderstanding of what’s happening with inflation, maybe I’m going to affect sentiment if I say it too much. Josh, I don’t know. But that’s the issue I have in terms of CPI specifically, and energy is obviously a huge part of that.
Tony
Well, I tweeted out almost the exact same thing this week about CPI, about inflation, and inflation isn’t falling right. The rate of price rises is slowing and there’s just a huge misunderstanding of that. So before we close up, as we go into these last ten or so trading days of the year. What are you guys thinking about over the next couple of weeks? Is there anything that’s on the top of your mind as the year closes? Josh, let’s start with you.
Josh
Sure. So people have talked a lot about this. We haven’t talked about this yet. The divergence in between oil prices and oil and gas stock prices, especially on the large cap and mega cap side. And I think people forget that commodity prices other than the spot price are not predictive. The forward curve is not predictive. It’s terrible. It’s used as a hedging mechanism that’s used as a prediction mechanism. Equities are forward looking and they’re not perfect, but they’re one of the best prediction mechanisms that we have.
And so energy stocks, oil and gas stocks are telling us that oil prices are likely to be higher, similar to your analytics software and the pundits and what. The sentiment is terrible in saying that oil prices will be lower and the price has deviated in the short run with the equities. So it does look like the more likely scenario, just even using that heuristic, is that oil prices go higher again, ignoring all the fundamentals and whatever. And so the interesting thing is, if that’s right and oil prices go higher, it might send those oil and gas stocks even higher.
There’s sort of this sort of soros reflexivity that happens with those sorts of things. So I think it’s worth touching on. Many people are posting about it, talking about how they need to converge. And actually I just think you got to understand what they are and what they are.
Tony
That’s a good point. Tracy, what are you thinking about going in last two weeks now?
Tracy
That chart is everywhere. To be honest, I’m still looking very closely at open interest in the oil and gas mark, oil in particular. A lot of length has come out of that contract. People just aren’t interested. A lot of people took profits because it was one of the more profitable commodities. Right. Over the last year or two years, we haven’t really seen anybody actively short that market short.
Open interest has actually declined a little bit, but not as much as length. So if people get interested in this market again, there’s a lot of room to the upside if people jump in because that length has been taken out of the market. So I’m watching that towards the end of the year in particular, see what happens after the beginning of the year. See if this market find some more interest.
Tony
Okay, all three of you are being pretty subtle about your expectations for energy prices. Bob, why don’t you close out? What are your expectations going into the last two weeks of the year?
Bob
First of all, I agree. I think there’s almost I shouldn’t say this, but I think there’s almost no way energy prices continue lower on the crude oil side and natural gas is doing what natural gas is going to do. So I think overall energy prices go up. Electricity prices are going up. And given that backdrop, if the three of us are right, by the way, if I mischaracterize what you two think, please jump in. If energy prices go higher, there’s very little chance in my view, that of the three possible scenarios for the Fed that the right one can come true in the Fed’s view.
So I’m actually more looking at EPS estimates for equities need to come down, earnings estimates need to come down, and the Fed is either going to have to a admit to a higher inflation target or B accept a higher level of inflation without saying so, or equities have to make a new low. And when that low happens, if that low happens, I should say if it’s a very good opportunity for industrials and consumer staples to sort of get in and kind of ride the recession wave back up as the economy itself restrains inflation by us going into some sort of a shallow or deep recession.
The other two things I would say is there any way I can get an economist title without putting in the work that Josh did? If anyone knows how to do that, absolutely. Just put it on your bud, Josh, don’t let me do that. You actually worked for it. And then the last thing I would say, if anybody wants to send me a bottle of Blantons, I’m willing to give you a free trade that is guaranteed to either make or lose money.
Tony
Hey Bob, just kind of latch on to what you just said about energy prices rising and industrials. So we’ve seen through 2022, a lot of industrials and retail firms raise price. Okay. And consumers have accepted that price. But if you’re saying that commodities are generally going to rise yes. Does that mean that we’ll see margins compress for those industrials okay?
Bob
So in the short term, consumers are.
Tony
At a threshold where they can’t accept higher prices soon.
Bob
So if you guys remember, you look back to the Great Recession in 2008, the last thing people did was let their car be repossessed. That kind of shows you the inelasticity of energy demand in general. People were defaulting on their mortgages before they let their car payment go into default. So from that perspective, people might be overestimating how far demand for energy can drop even in a recession. I’m making a correlation that probably isn’t accurate, but just anecdotally that’s something that we’ve seen. And it’s the same thing with heating and cooling your home.
People are probably less likely to stop heating their home. They’re probably more likely to accept cooling at a little bit hotter of a temperature. So going into summer it may not be as apparent, but I do think that when we come out of it, industrial utilities, energies and consumer staples are going to lead us as most times coming out of recession simply because of the first things that people start spending again on and they’re the last things that people stop spending on. So I like those things coming out of what I expect to be a fairly decent drop and end of the first quarter, beginning of second quarter next year.
Tony
Very good, guys. Thank you so much. I really appreciate your time. This has been fantastic. So have a great weekend. And have a great weekend. Thank you.
This Week Ahead is a special episode because it was recorded live, with guests Albert Marko, Sam Rines, and Mike Smith, together with host Tony Nash in a face-to-face conversation. It’s also the first time that we had a Twitter Spaces, joined by a few people and taking their questions.
Gasoline prices have continued to decline here in the US. Since June, RBOB has been pretty much one way, sliding from ~$4.30 to $2.16. That’s half. Of course, lower crude prices are a huge factor, but over the summer we were hearing all about refinery capacity. Is there more to it than the oil price? XLE vs crude – XOM closing in on 100, etc. How much of an impact is this having to help affordability given the broader inflationary environment?
Inflation is proceeding unabated, as we saw in Sam’s newsletter this week. Some Goldman guy was out this week saying there may be a recession in 2023. Sam looked at the terminal rate in his newsletter this week. How would accelerated inflation or steepening of recession worries affect the Fed’s actions?
We had BOJ head Kuroda (who has been in the job for a decade) begin talking about Japan hitting its 2% inflation target. If that were to happen, how likely would the BOJ be to scale back its ultra-loose monetary policy? Impact on Japan’s equity market, govt bonds, etc.
Key themes 1. How low will gasoline go? 2. Inflation/Recession worries 3. The day after Japan hits 2%
This is the 45th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
I just want to say hi and welcome to The Week Ahead. I’m Tony Nash. We’ve got a couple of special items for this show today. First, Albert Marko is in Houston, Texas. So we’re doing a live in-person Week Ahead with Sam. Tracy will be on Spaces eventually. We also have a special guest, Mike Smith, who’s a partner at Avidian Wealth here in Houston. Second, this is our first Twitter Spaces, so this may be a little clunky and we may make some mistakes, so just bear with us, if you don’t mind.
So Mike, Sam and Tracy eventually, and Albert, thanks for joining us. I really appreciate the fact that you guys have come today.
We have a couple of key themes today. The first is how low will gasoline go? Gasoline prices I think nationally are around $2.99 are approaching that in the US. So we want to take a little bit of a look at that to understand what’s happening there. We also want to talk about inflation and recession worries. Sam will go into that quite a lot and we’ll try to figure out what’s happening with inflation.
And then we’ll talk about Japan post 2% inflation. So there have been some comments from Abe at the BOJ about Japan hitting 2% inflation, and we’ll talk about that a little bit.
Okay, so Albert just joined us. So let’s get started on gasoline prices. Guys, since June, RBOB has really come down from 430 to about 216. So it’s about 50% or 49 point something percent.
Of course, lower crude prices are a huge factor. We’ve seen crude prices come down in that time as well. So is there more to go on crude prices? On gasoline prices? Like I said, we’re waiting for Tracy, but she’s not joining. So I’m just going to throw it open to you guys. What’s your thought on gasoline? Because we’re entering the holiday season, it’s going to be a lot of driving. There’s a lot of inflationary pressures, which we’ll talk about in the next segment. But I’m just curious what your thoughts are on room for gasoline prices to fall.
Albert
Well, I think they guess some prices are going to fall because price of oil just keeps on going down. I think at the moment, whatever brokers, government entities or whatever we want to talk about is starting to drive down the price of oil because it’s beneficial to the political situation. So I think that oil, as it drifts down towards 60s, mid sixty s, the price of gasoline will also come down.
Tony
What are you hearing? We’re in Houston, energy capital of the world.
Sam
What are you going to yeah, it’s hard to make a call on the energy price kind of in its relation to gasoline for a couple of reasons. One, we really don’t know where any spare capacity can come from in terms of the ability to refine at this point.
You’re running at 96% utilization rates for refinery capacity, that’s pretty much peak. So if you have any sort of hiccup there, you’re going to have a problem on the gasoline front.
Tony
So hurricane season is over. Do you see any reasonable hiccups coming? Obviously may be unexpected, but when you’re.
Sam
Running at 96% capacity, it doesn’t take much to have a small problem. Right. And if you go from 96% to call it 90% because of an accidental outage, that could be something rather significant for the gasoline market. So while oil prices, you know, appear to be fairly volatile right now, it’s, it’s hard to translate that back into a gasoline price.
Mike
I know if 86 degrees here in Houston, but unpredictable winter can happen. I know it’s a little bit of a delay, but we don’t know. These weather patterns can happen. We could have a colder than expected winter and that could probably trigger as well.
Albert
Rail strikes is another issue. Talking about any kind of strikes in the transport industry, diesel prices making truckers, you know, trucking more. It’s not anything.
Tony
Right. I just saw Tracy pop in and then she popped out. So once she comes in, we’ll come back to her on this. Thank you. Okay, that’s great. And we’re seeing, we’ve seen XLE, the energy companies, the energy operators, we’ve seen XLE stay pretty elevated as crude prices have come down. There’s typically kind of a four to six month lead between crude prices coming down and XLE coming down. So when we look at some of these major operators, is there an expectation that those prices will come down? Or are we kind of I’m just inviting Tracy to co host. Okay. Hi, Tracy. Are you there? Sorry. Just back to XLE. Do we expect XLE, the traded operators like, say, ExxonMobil, those sorts of guys? ExxonMobile is about to break 100. They’re headed back down after topping out like 115, something like that. So do we expect their share price to follow the crude price directionally?
Albert
I would say no. Really? It’s tough. It’s a tough call, to be honest with you, because we just don’t know which way the markets are going to go. Crude prices is acting like bitcoin at the moment, just being up and down 10% per week. I can’t even give you an honest answer on that.
Sam
I mean, it’s certainly not going to be the same data that you would expect in a decade ago, but you’re likely to have the sentiment at least have some effect on XLE or XOP, whatever it might be. But the issue now is that you’re not going to have the same sort of capital expenditure catch up and overshoot that you did in previous cycles simply because investors have already said, we will punish you for that. And producers don’t want to be punished.
Sam
They’re making a lot of money at 50, 60, $70 barrel oil. I don’t think you’re going to see the level of beta to the underlying that you would normally expect.
Tony
Okay, great. So basically they’re using your old equipment at the current energy prices and they’re maxing it out. But when the capex cycle does come on, will it come on with huge force or will that trickle out? Like when will invest? Will investors decide at some point that they won’t punish these operators for capex?
Sam
No, they won’t. No. Okay. Why spend for something that has a five to seven year time rise? We’ve been told that the oil companies aren’t supposed to exist in a decade. So as a shareholder you want that return of capital. You don’t want that capital put back to the ground. And if you begin to see any sort of significant uptick in capital expenditures, you’re going to have it absolutely crushed from a stock perspective. Right. If Exxon announced that they were going to begin a significant capital expenditure program, that stock would get absolutely hammered and you can just go through any of the companies. It’s all about what are you doing for my dividend? How much stock are you buying back and maintaining output, not expanding because you talked about it.
Mike
We’ll be short or fast. I think it’ll be going to take a long time for that to happen unless some major catalyst happens that actually sparks that in.
Tony
When you think about how long it.
Mike
Is to legislate get permits, it’s a decade.
Sam
Yeah, absolutely.
Mike
So it’s got to be some major catalysts.
Tony
Tracy, are you there? I see you as a co host but I’m not sure if you can speak. Okay. Once you’re in Tracy, just speak up and I’d love to get you involved in this discussion. Sam, how much of an impact is having is say lower gasoline prices having on the affordability in broader inflationary environment? So basically are gas prices helping the inflation discussion much or is it just a relatively small thing since a lot of people are working from homes?
Sam
There’s kind of two ways to think about that. There’s the inflation dynamics, the actual inflation dynamics that lower gasoline does have that headline CPI narrative.
Tony
It’s a tax cut. I’m kidding.
Sam
The problem is that over time gasoline has become a much smaller portion of the wallet. The average person does not spend anywhere near as much on gasoline as they used to and that’s just a fact. So is it really helping people on the margin? Yes. Gasoline and groceries are the two things that you can kind of see and one you see in a big bull sign, the other you see every week when you go buy groceries. So gasoline, grocery prices coming down, it’s good for the consumer mentality. Is it good for the action and spending levels?
Tony
Okay, great. Okay guys, just so you know, this is a live spaces. We are recording this and we’ll upload on the YouTube channel probably tomorrow. Tracy has joined us. Tracy, if you’re there and you want to chime in please join. Okay, let’s move on to the next topic for inflation and recession worries. So inflation is proceeding pretty much unabated salmon, and we saw this in your newsletter this week and I’d love to talk more about that. We also had some Goldman guy, I can’t remember who it was yesterday, saying there’s probably going to be a recession in 2023. And all these people are coming out saying maybe back half of 2023 there’s a recession, which it’s a convenient time to say that right? Right now to say something’s going to happen in the back half of 23. So you look at the terminal rate in your newsletter.
So how would, say accelerated inflation, if that’s actually coming or the steeping of recession worries affect the terminal rate from the Fed?
Sam
I think you have to divide that into the first part. That is, what would inflation call it a deceleration in inflation pressures mean for the Fed? Unless it’s significant? Not much. Does a recession matter for the Fed? Not if it doesn’t come with disinflation. Does the Fed care if we have real GDP decline? No. I mean we have real GDP decline, q One, q Two. They got their mandate, they did not care. Right. You currently have north of 7% CPI and you have an unemployment rate of 3.8, maybe percent. It’s really hard for me to see which one of those metrics is comforting to the Fed at this point. So does it affect the Fed’s trajectory? Maybe it’ll take a 25 out of the terminal rate, but that’s about it. You’re simply not going to have this type of immediate Fed pivot with inflation at north of 6% and this type of unemployment rate, it’s just not going to happen.
Tony
Okay, great. Now for you guys on spaces, if you have a question or want to put up your hand, put a question in the channel or put up your hand. We’ll take some questions later on in the podcast.
Albert
That inflation is just so sticky right now. We spoke about it earlier for podcast about wage inflation just sitting there, you know, just rising every single month. Politically, it’s a great thing for people to wait 40 years to get wage inflation, but I just, I can’t see how all these consumer prices are going to come down and talk about this inflation or wage inflation is just going to stay elevated for the next 1015 years.
Tony
Yeah, that’s a good point. So I get that there’s this expectation out there where people expect prices to come down to say, 2019 levels at some point. And, you know, we were talking about this, Sam, that do you expect prices to go back down to 2019 levels? We’ve seen a dramatic rise in a lot of different areas. So do you expect that to fall back down to what it was two, three years ago?
Sam
No, I don’t even think that in the best of all possible worlds, that’s not one of the worlds.
Albert
The only people talking about that are the political people that are trying to sit there and trying to gain votes because people are struggling at the moment. But the economic guys exactly. It’s only what you want to hear, but the economic guys are looking at the numbers and, like, we have never seen I mean, why would why would companies bring the prices back down that much when they know they can get away with it?
Sam
I mean, Cracker Barrel expects wages in the coming year to be up five, 6%, right?
Tony
Those of you who aren’t in the US.
Sam
Year, right?
Tony
For those of you who aren’t in the US. Cracker Barrel is a very kind of middle America restaurant comfort food, right? It’s biscuits and gravy. It’s fried chicken, that sort of thing. And so this is not the high end yet. It’s not McDonald’s. It’s very much the middle market in the US. And so Sam’s done a very good job in his newsletter over the last couple of years covering price hikes at Pepsi, at Home Depot, at Cracker Barrel, at other places. So many of these companies have raised prices by, like, 8% to 10%, generally, or more. Who’s raised more?
Sam
So Campbell Soup this morning came out with earnings, and they divide them into two categories. They divide it into soup and kind of prepared meals type deals and then snacks.
So think Snyder’s Pretzels is one of the brands. The prepared meals, which include soup, they increased pricing, 15% from last year, and they increased on snacks, 18. And that was price that they pushed. Volumes were slightly negative, but negative 1% and 2%. Okay, you’re talking almost no budge on volume and a huge move in pricing, and that is for the most boring of all commodities. This is soup we’re talking about.
Tony
And I want you guys to understand what Sam is saying. Campbell Soup has raised their prices between 15 and 20%, and their volume declined 1%. So do we ever expect Campbell Soup to reduce their prices by 18%?
Sam
No. That’s the beautiful part if you were corporate America right now, is you get a free pass to really find the elasticity in the market for your product by raising prices until you begin to see pushback from consumers, and you just haven’t seen a significant pushback from consumers. And to the narrative of inflation peaking. Inflation is peaking. If you look at the last four quarters of price increases from Campbell Soup, it was something like 6%, 11%, 11%, 16. Right? So maybe the second derivative is negative, but the first derivative isn’t.
Tony
And it’s positive in not a small way.
Sam
Correct.
Tony
We’re not talking about 2% price rises. We’re talking about 18% price rises, which.
Mike
Is we’re seeing that for consumers, the biggest increase. But, I mean, I guess in future years, that probably somewhat levels off. And then on top of raising prices, I’m sure all of you have noticed the shrinkflation, the items have less in it and we’re paying more for it on top of everything else.
Sam
Well, that is part of the pricing element. Right. So when they take packaging down a couple of ounces that shows up in the pricing mechanism.
Albert
It’s incredible that Campbell Soup and all these other companies raised their prices by 16% to 19% because that is actually the true inflationary number. When you go back to what they used to do it in the 1990s, it’s 18 19%, not the 7% that the Fed tells you. CPI.
And on top of that, these inflationary numbers give you a tailwind for earnings. So all these companies that surprise earning beats, if you look at them, what inflation has done into their products, it’s not a surprise that they beat.
Sam
Yeah, right. And it’s somewhat stunning because if you think about it from a 23 24 perspective, if you have your input costs begin to move lower, or at least decelerate, and you’re holding your prices at these current levels, or even increasing slightly from here, or increasing from here, all of a sudden you begin to think about what that does to a bottom line. That is an extremely attractive thing for a business. As we begin to move into the latter part of the margin expansion that everybody kind of thought was over after COVID, that really might return to some of these boring, staid old stocks.
Tony
Right. So guys, just, just to be clear, what we’re saying here is prices are not going to go down or they’re highly unlikely to go down to what they were two or three years ago. We’ve hit an inflation level, it’s a stairstep. And companies are comfortable seeing reduced volumes, but they’ve compensated that with higher price and consumers are generally accepting higher price. Right. So as an aside, I’ll be shameless here and say complete intelligence does cost and revenue forecasting. If you guys need any help with that, let us know. Okay? So, terminal rate, you’re still looking at five to five to five somewhere in there.
Sam
Well, I think it’s probably closer to five and a half to somewhere between, I would say five and a half to six because you have the stickiness in wages, right? And the stickiness in remember this is important, that Powell, week ago at the Brookings Talk pointed out one thing, and that was Core Services Ex shelter. In other words, they, they are already throwing shelter out. Even when shelter decelerates, they’re not going to pay attention to it. And he also made it very clear that Core Services X Shelter, the main input cost for many of these businesses is wages and personnel. So while you have these wage pressures, building the Fed is not your friend in any meaningful way. So I’m much more on the give it five and a half to six. There’s this idea maybe we get 50 50 25 then done. Or 50 50 done. It’s more like 50 50. 25 and 25 and 25. It’s just slower.
Tony
You said this a month or so ago. It’s a matter of the number of 25 that we get.
Sam
Yes, it’s 25 delays.
Tony
Okay. So it’s not over, guys. We’re going to continue to see the Fed take action, and they haven’t even really started QT yet. And we’ve talked about that for some time. And when they start QT is really when markets feel is that fair to say? Yeah, depends on the market, of course.
Sam
Yeah, they’ve started QT It’s just a small 200 billion or something that’s still QT. They’re not going to sell them.
Mike
I think one of the things he said is the Fed is not your friend. And just think about that statement for a minute. For two decades, all investors we’ve all come to known as the Fed is our friend. Anytime the market was down, they’re out there doing press conferences. But I think it’s critical for people to understand we’re not going to see a return of that for a significant amount of time.
Tony
Right. You’re not public servants. Right. Exactly. They don’t like you.
Albert
It’s important that as Sam mentioned, that 50 50 and then the repetitive 25s correlates with their rhetoric of soft landing that they keep talking about whether they can actually achieve a soft landing. Well, that’s another debate that we talk about. But that’s exactly what their intentions are. Those are 25 US to the end of their they get to where they want to be.
Tony
Right. Okay, very good. Let’s move on to Japan. Bank of Japan Chairman Corona was on the wires this week talking about Japan hitting the 2% inflation rate, which they’ve been trying to hit for 30 years or something. And then they made a policy with Avionics in 2012, and they still have been able to hit it. And now that we have crazy inflation globally, they’re going to claim the win. Right. And they’re going to say, we hit it and abe nomics. Although Avi is not empowering where it was ultimately successful. So, Albert and Sam, I’m just curious, what does that mean if Japan hits 2% inflation and they tail off their quantitative easing, their kind of QE infinity and they stop buying government bonds, all this stuff. First of all, do you think that’s going to happen? Okay. And second, if that does happen, what did Japanese markets look like? And then what does the yen look like? I realize they just threw a bunch of stuff out there, so just take it away. So you might like jump in here. Sure.
Albert
The fiscal monetary setup is quite favorable, right. If they do whatever they’re going to say they’re going to do quite favorable. There are only headwinds that I can see is the US. Stock market equities. If the US equities fall, without a doubt it will affect the Asian market, specifically Japan. It’s a tall order for them to sit there and get their 2% inflation target. So I don’t even know if that’s even a valid discussion, but I guess we’ll sit there.
As much as a set up as favorable for Japan, they’re combating China. And I still think that China, because they don’t have as much connection to the US. Equity market, is a little bit more favorable. I would go China over Japan right.
Tony
Now, yes, but I’m tired of talking about it.
Albert
I know not to talk about China when Japan is so interconnected with China, so everything is interconnected in that region. But I do think that the fiscal monetary set up for Japan is favorable.
Tony
Okay, sam, what do you think?
Sam
Like Albert said, theoretically, it’s really interesting. It’s intriguing. The one thing that I think is important to remember about Japan is that every time they seem to have the monetary policy setting correct and they were heading to actually hit their 2% target, they always seem to raise taxes or do something to make sure that they missed it. Was MMT on steroids? Very good example of MMT actually working. Right. You can do as much monetary policy as you want as long as every time you’re close to an inflation target, you just race to that or taxes. So I think that’s something that I’m always somewhat skeptical of Japan doing. If they begin to lift yield curve control on Japanese government bond yields, I think it’ll do two things. One, it will make for an interesting market in Japanese bonds. The BOJ owns such a large amount of that market that is almost difficult to fathom that it actually has a functioning market. It doesn’t really have a functioning yield market. So that’s kind of the first thing is we’ll finally get a feel for how that market actually functions. The second one is that you’ve had a 2% inflation win with the yen sitting between 130 and 150, a very weak yen.
That’s a tailwind to inflationary pressures. If they do lift YCC, it doesn’t matter what else they do. If they raise interest rates, whatever it might be, the yen going back to 120 is going to undo a lot of that inflation pressure in and of itself. You’re going to really bring that in. It’s also probably a positive. Having a stronger yen in this environment when you’re at an energy shortage globally is a positive for the Japanese economy because they import so much energy. Having that stronger yen makes it cheaper in domestic terms from that perspective. So I think there’s a number of things that could line up pretty well, and there’s always the opportunity for the Japanese government to mess it up somehow. Of course, I do think that it’s a very interesting market, particularly if you can do it on a call it an outright basis investing and get some of that currency dynamics mixed in with your investment, that could be a very interesting opportunity going.
Albert
You know, what’s interesting is what you’re saying about MMT on steroids. It’s like, you know, you’re making all these descriptions of what’s going on in Japan, and I just look at the fed, and I’m just like, well, oh, my God. We’re starting to be on the verge of Japanification at the moment right now, because the 30 year bond from who I talked to the 30 year is.
Sam
Completely controlled by the federal government.
Albert
And at the moment, it’s completely controlled. And if they can sit there and pump those bonds and pump the markets, you got Japan right here in the United States with MMT and Leil Bernard and yelling, doing whatever they want to do.
Sam
You just have to raise taxes.
Albert
Yeah. So so masters at that. Yeah.
Tony
So I used to go to Japan a lot, and in the late, say, 2010, 2011, when the yen was at, like, 75, when I would go to Tokyo and I would go down to breakfast in the hotel, I was the only one there. And I remember when Abe was elected and even pre election, the yen started to weaken him taking office. The yen started to weaken. Right. And I remember the first time I went down to the hotel lobby and there was a line to get to breakfast rather than just it being wide open for me. So a devalued yen means a huge amount of power for the Japanese economy. So when you say JPY going back to 120, I remember in 2010 eleven. When people would say, gosh, if we just had a yen at 95, we’d be happy. Right. And now it’s at 145, or whatever it is.
Sam
I haven’t 130 yet.
Tony
136. So, you know, it’s you know, it’s a completely different environment and puts the Japanese economy in completely different context. But you have nationalization of bond markets, you have nationalization of ETF markets. Is it really an open, competitive economy? It’s certainly a highly centralized economy. Right. And that’s really dangerous. But they love to use demographics as the justification to intervene in markets, right?
Albert
Yes.
Tony
Okay, guys, if anybody has a question, raise your hand. Or I’m not exactly how this works. Again, this is our first time to do a spaces. So put something in the messages or raise your hand or do whatever, and we could potentially have you come on and ask your question. I’ll be very honest. If you have an anonymous Twitter handle and we don’t know you, I’m not going to let you speak. So don’t waste your time. But if you’re someone we know, then we’re glad to have you on. So I guess while we wait for people to come in with questions, we’re pre Christmas holidays here in the US. We’ve got a Fed meeting coming up, the expectations for a 50 basis point hike. What do you guys expect? We’re seeing equity markets really kind of gradually move lower. What do you guys expect for the next week? Or so in the US before the Christmas holiday.
Albert
I think the CPI is actually going to be a little bit less than consensus and probably get a rally going to the end of the year, to be honest with you. I think everybody knows it’s going to be 50 basis points. The question is what’s the guidance after that? What do they say? If it’s a good CPI number, well, then you can have this dough stock for another month.
Mike
Sentiment has been so low and kind of got your seasonality right now. I think that probably prevails here.
Sam
If you think about it, a few.
Mike
Months ago everybody was kind of in this panic, Seymour. People kind of there’s this nice little calm right now everybody’s just kind of floating around waiting to see what’s next. And what’s your point? I think everyone expects to raise another.
Albert
50 basis point, which is amazing, because 50 basis points is not dovish. I guess everyone’s expecting 75 or 100 about a month ago, you know, their.
Mike
Condition as to.
Sam
No, I would say there’s there’s a couple of interesting things about the Fed meeting it into the back half of the year. One is what does the dollar actually do here? Because if you begin to actually have a significant move in CNY stronger right lower on this chart. But if you get a significant move back towards the 650 area on CNY, that is going to have a spillover effect. To a stronger Euro continued strength in the British pound you could begin to have a number of dynamics that are somewhat negative dollar and therefore pretty bullish on the risk asset front that I think could catch some people off guard simply because of the spillover effects. But the Fed, the one thing to remember about this meeting is it’s not just a 50 basis point height. It’s also that stupid dot plot that they do that actually has some pretty serious potential consequences because if 23 comes out with higher than expected dots and 24 dots move higher, the terminal and the long term rate begins to creep a little bit higher. If you begin to have that hawkishness, I kind of want to say this, so going to, if you begin to have the hawkishness become less transitory in the dot plot, that could become somewhat problematic for markets that could take some of the sales out of what we’ve seen to be a moderating dollar effect.
So I think, I think it’s worth being a little careful until we see that dot plot and begin to hear how Powell is approaching 2023 because I think they’re somewhat aggravated about the way that the Brookings Institution, the Brookings speech was received by markets they did not want a significant asset rally going out of that right. That was counterproductive to what they want. So I think they’re going to be very careful about the rhetoric into the.
Tony
Back half of the year because they would just. Not be so jerky in their communication. They’re super bearish. They’re bullish. They’re super bearish. They’re bullish have a consistent message.
Albert
Yeah, but it depends on what’s going on behind the scenes, what data they see. All this data, they see all the CPI and the jobs numbers a week or two heading for anybody else. Don’t kill yourselves.
So I guess it comes down to what is going on behind the scenes and what they don’t want to break. I mean, Blackstone came from what I heard, blackstone was $80 billion in the hole and having problems, and they went to the Fed, and that’s what triggered Powell to be slightly dovish.
Tony
And I thought they were the fed.
Albert
Well, whenever you guys Powell’s portfolio sitting there in your grasp, you are the.
Tony
Fan of that one.
Albert
But I guess it goes down to what is happening behind the scenes and what could potentially break is why they’re coming on this roller coaster ride of rhetoric.
Tony
Yeah. Okay, I’m going to see if Valena wants to come in she’s attending. And see if she wants to come in to see what? Invite her to speak and see if she wants to Valena, are you there? If you want to come in and let us know what you’re thinking is going into the end of the year and 2023, you have an invite to speak. You’re welcome to.
Albert
Molina is sitting there in Austria, vienna, Austria. And I know the European markets are now looking quite interesting to me. A little luxury market in Europe is absolutely exploding, and it’s just unreal that. It’s just so resilient. I mean, there’s two brands that I personally liked, laura Piano and Brunello Cucinalli, which I have a tremendous amount of polls. Brunello Cucinalli didn’t care anything about the Russian sanctions or anything. Just kept on selling, and they just blew out earnings yesterday or as of today, they were up like 7% this month. Really, the luxury retail market, luxury jewelry market is just it doesn’t stop great. And it’s counter to what everybody is saying. Recession this, recession that. You go to gucci stores, lines out the door, Louis. The time you need an appointment, it’s just resilient. It’s just actually quite amazing.
Sam
It is really similar to if you look at our markets, right, particularly the masters plotted against the price of oil. If you do a six month delay, guess what? It’s almost it’s a really interesting kind of windfall type chart. You can kind of see the oil money flowing in there. And you even had China relatively shut down, and that was a huge driver, a tremendous driver of European luxury, particularly for LVMH. Even with China shut down and not really having the tourism, you had a lot of tourists from Middle East, et cetera, really put in some of the South American countries that are doing fairly well, particularly at the higher end. A lot of that is driving this kind of underneath the surface. You had tech, then you had energy. And the question is, now you have the China reopening. Is that the next leg for a lot of these lectures?
Tony
Okay. So let’s talk China.
Albert
I wasn’t going to do that.
Sam
Tracy.
Tony
You’Re as a speaker as well. So if you want to come in, you can come in any time. Okay, so let’s talk about China, even though I didn’t want to COVID that. So let’s talk China. What’s happening, Albert, with the reopening? Like, what do you see the next two months happening with the China?
Albert
Just as we spoke about a week ago on China, those riots and the reason the Chinese even let you see these riots happen on the social media was a signal that they were going to reopen, and in fact, they did. Days later, we’re reopening in stages. And that’s just it. And get your house in order, everybody, because inflation is going to happen. I think I think copper was up, like, two and a half percent this morning. And this is this is it just barely reopened right now, manufacturing, because the odors were down I think Western odors were down 40%.
Tony
But kind of everyone told me on Twitter that democracy came to China.
Albert
Yeah.
Tony
Okay.
Albert
Those are people that have never been to China or stayed at five star hotels or actually step foot outside of Beijing.
Tony
So let’s go there a little deeper. And Xi Jinping is in the Middle East either today or over the weekend at an Arab China summit. Right. And so, first of all, him leaving China right after there were protests, what does that say to you, Albert?
Albert
Safeguard, he’s done any kind of opposition that was pushing against Xi’s Party congress moves eroded, and then these street protests are just street protests. I get it, people are upset and their livelihoods and check down the list of whatever you want to say, but realistically, they never work unless they get violent. And they never got violent.
Tony
Right. So you kind of have to let the steam come out of that valve, I think is probably what you’re saying. Right? The CGP is saying that now with CGP going to the Middle East, sam, they are the premier buyer. China is the premier buyer from OPEC clubs now. Right. It’s not the US. And this isn’t new for people who have been paying attention. The Saudis and other people in the Middle East have been spending a lot more time in Beijing for probably six, seven years. And so and and it’s been longer, but it’s been really, really visible for the last six or seven years. So what does what does that tell you about, let’s say, OPEC’s desire to, please say, a US president going to the Middle East to try to bully them, to pump more? Is that effective anymore?
Sam
No, not at all.
Tony
Hi, Tracy.
Speaker 5
Hi. Sorry, I was having technical difficulties, and for some reason I couldn’t all gone earlier.
Tony
Welcome. No apology necessary. We’re just talking about China and with Xi Jinping in the Middle East for a summit with the Saudis and the GCC members and what that means for the ability of say, a US president to kind of bully OPEC into reducing oil prices going forward. Is there really any strength there? Do you see.
Speaker 5
That’S? Absolutely done. What I would expect she landed in China today. I would expect him to get the full lavish welcome. Right. And we want to be looking at who he brought with him as far as national heads of corporations. And I would expect this to be completely opposite of what we saw the Biden meeting with and more akin to what we saw the Trump meeting with, where they I would expect that.
Tony
So they’ll touch the crystal ball.
Speaker 5
Maybe they might bring out the ball. Yes. And I expect billions and billions in new deals as far as economic, military, energy in particular, et cetera going on at this point. Again, they’re having a conference where they’re going to have multiple leaders in the Gulf nations in Saudi Arabia. So I mean they’re really going to try to rue China on this trip big time.
Tony
Right. So when you talk about military deals, what do you think about that? Albert?
Albert
I’m not really sure Saudi Arabia will.
Tony
Do major military deals with China.
Albert
I mean maybe a few just for show up for optics theatrics but the US military hardware is the best in the world and realistically Saudi Arabia is under the US defense umbrella. Whether the left or the right likes it or not, that’s just the reality of it. And as long as Iran is not poking or poking trouble from the east and Yemen not from the south, southern regions have an easy ride. So their military deals aren’t really they’re not at the forefront at the moment. But anytime that Russia wants to string that relationship, they can certainly call up Tehran and say lob a few missiles over and things go right to elegant.
Sam
To Albert’s point, I don’t think Saudi is going to work. KSA is going to become the next India where they split their arms deals among the three major powers of arms anytime soon. I mean that’s just not going to happen.
Albert
No, there will be a little bit, yeah. India is a completely different ballgame. India has got counterbalance, they need to counterbalance Russia with China and Pakistan and it’s the old mess over there and they need to do what they’re doing.
Sam
Well Nksa is also trying to hold together their market share in a world of Russia really having to begin sending almost all their stuff to call it China India.
Tony
Right.
Sam
So if you had were the two largest pieces of growing market share for Saudi Arabia over the past decade, that was India and China. And now you have the other major energy player in the region coming after your market share. There’s got to be a little handshaking here to keep everybody happy and selling at $55 a barrel.
Tony
You don’t hate that, right?
Sam
If you’re trying to. I mean, it’s the perfect time to reopen. You’re getting cheap energy. You have supply chains that have fixed in the rest of the world. So I think this is very much a visit to make sure that they can continue reopening, get those long term energy deals in place, and then move forward.
Tony
Right. Okay, so we do have a question for Tracy, and you guys jump in. So, Tracy, there’s a listener named Rasul, and he’s asking, when China opens up, is it possibility that it could use its own SPR, like in November 21, to reduce its oil cost? Is that something they would consider doing?
Speaker 5
I think not at this juncture, right now, because, first of all, they’ve already drawn it down. Right. And they’re still worried about long term energy security, as is everybody right now. In addition, they’re also getting really cheap Russian oil, so I don’t think that would be something that they would do right now.
Tony
Okay.
Albert
No, they wouldn’t do that.
Tony
Right.
Albert
There’s no absolutely no need to do that. The US. Only did that because of Midterm economics, and that’s just that China had no intention of doing that.
Tony
Great. Okay, good. All right. Well, guys, I think we’ve covered it. We’ve been here for about 40 minutes, and the hotel we’re in has threatened to call the police if we don’t leave. So I want to thank you all for joining us for this week ahead, and we’ll get this posted on our YouTube channel within a day or so, okay? So thanks for joining us, and look forward to seeing you on the next one. Thank you.
