In this BFM 89.9 podcast, CEO of Complete Intelligence, Tony Nash, discusses the February US equities market and gives his predictions for March. Nash predicts another down month for US markets, albeit not as much as February, with China also being down markedly. He also expects Malaysia to do well and increase by about 1%. Nash also comments on US earnings season, stating that the quality of earnings reported so far is not great and that only $0.88 was matched by cash flows for every dollar of profit, with some companies passing along price hikes successfully but for how long can they keep it up. Nash also discusses interest rates and a more hawkish Fed, which could lead to the dollar rising. He also comments on a newly formed House committee aimed at examining economic competition between the US and China.
Transcript
BFM: BFM 89.9. Good morning. You’re listening to the Morning Run at 7:07 on Thursday the 2nd of March. I’m Shazana Mokhtar with Chong Tjen San and Wong Shou Ning. Now, in half an hour, we’re going to discuss Malaysia’s bilateral ties with the Philippines in light of our Prime Minister currently on a visit there. But as always, we’re going to kick-start this morning with a recap on how global markets closed.
Overnight, US markets were mixed. The Dow was up marginally by 0.2%, the S&P 500 down 0.5%, NASDAQ down 0.7%. Asian markets were also mixed. The Nikkei was up by 0.3%, Hang Seng popped it up and was up by 4.2%, Shanghai Composite up by 1%, Straits Times Index down by 0.2% and the FBMKLCI was down by 0.3%.
It’s everywhere.
That’s right. Well, we’re going to try and kind of peel some trends with Tony Nash, CEO of Complete Intelligence. Tony, good morning. Let’s review what happened back in February. It wasn’t such a great month for US equities. We did see the Dow and SP 500 both lose 4% and 2.6%, respectively. Where do you see the stock market heading in March? Is it going to be more volatility or perhaps brighter skies on the horizon?
Tony: Oh, yeah, it’s going to be pretty choppy. Generally, we expect US markets to have a down month, not down as much as it had been in Feb, but we do expect another down month. Obviously, if the Fed comes in with a very hawkish meeting, then we could see more chop there. We do expect China to be down this month as well. That kind of goes against what we’ve seen in News early this month, but we are seeing China down markedly, say more than 2% this month as well. Good news is we expect Birth of Malaysia to be up about 1%. So while we see chop in others, we may see Malaysia do squeak out a good positive month.
BFM: And Tony, as the US earnings season starts to taper off, what is your assessment of the results that have been released so far? In particular, the most cyclical consumer-facing companies?
Tony: Yes, so the quality of earnings reported so far is not great. So for every dollar of profits, only about $0.88 was matched by cash flows. That’s the largest discrepancy since at least 1990. So that means 12% are from kind of non-cash earnings. So it’s really accounting and other things. So what we’re seeing, especially on the consumer side, is some companies are passing along price hikes, and we see some of them doing that really successfully. I think we’ve talked about that here before, where they’ll hike between eight and say 15% and their sales volume will be down maybe 5%, something like that. That’s really helped the top line and margin expansion. But the real question is for how long can they keep raising those prices and kind of sacrificing transaction volume. So there’s a real question there. But many of those companies have said they’re going to continue to raise prices into later in ’23. The problem is when we run into a company like Coals, which is a retailer here in the US that reported today, and it was all bad, they’re losing customers they’re not able to keep with their costs and other things.
For those companies that cannot pass along price hikes, for whatever reason, it’s really bad news for them. The inflation they’re importing from their vendors is just squeezing their margins, and in some cases, they’re losing money. So, I don’t think the quality of earnings improves from here for at least two quarters. That’s just something to think about as we go into the next Q1 and Q2 earnings.
BFM: Okay, I want to come back to interest rates, Tony, because I’m reading Bloomberg and it seems like the Street is now expecting a terminal rate of 5.6%. Honestly, this changes every day. It was 5.4% not too long ago. But what does this mean for the US dollar? Are we back to the reign of King Dollar again?
Tony: Well, if we see a more hawkish Fed, then I would say yes, that’s probably the case. So, what we would likely see are things like 25 basis points, at least for the next three meetings, if not longer. If we continue to see hot inflation, as we have over the past couple of days, they could do a surprise 50. I don’t think that’s what they’re going to do, but we can’t rule it out. We could also see quantitative tightening, meaning the Fed could unload more mortgage-backed securities or other things, accelerating that from their balance sheet. Because housing is still pretty hot, actually. Prices aren’t moving that much, so we could see the Fed move on MBS or some other things to accelerate that off of their balance sheet. I don’t think that’s highly likely, but it’s a possibility. All of those bode well for the dollar and dollar strength. If that happens, we would definitely see the dollar rise generally.
BFM: Can we take a look at what’s happening over in the US Congress, Tony? There’s a newly formed House committee aimed at examining economic competition between the US and China. I think they held their first hearing earlier this week. What was the outcome? And do you think, as a result, we’re just going to see more trade conflicts between these two superpowers?
Tony: Yeah, so there’s a lot of focus on decoupling from China. There will never be a full decoupling from China. I don’t think we’ll even have a majority decoupling from China. But there are some key industries, like semiconductors and pharmaceuticals, some healthcare aspects that people really do want to decouple from China because we saw through the pandemic that supply chains are very, very dependent on China. Americans want many of those core things closer to home. They’re focused on decoupling. For some reason, people in Congress are just becoming aware that the CCP is in charge of everything in China. So they’ve underestimated the influence of the CCP and they’re waking up to the fact that they’re central in China. We had a couple of former national security advisors suggesting things like accelerating the arming of Taiwan and helping Chinese circumvent the Great Firewall, those sorts of things. And then, of course, human rights. They talked about CCP police outposts that are in US cities where there are actually these CCP outposts that will pursue Chinese nationals within the US, among other things. It’s taking a pretty tough stance on China. I’m not sure to what extreme that will go and what policies will be adopted yet, but I think it’s definitely trying to at least uncover some of the things that Americans haven’t been aware of.
Keep in mind, a little bit of this is theater, right? It’s people in Congress holding hearings to publicize some of their agenda. So, I think it’s a little bit of that so that they can then move into legislation and move the needle just a little bit. I don’t think we’ll see anything extreme, but you will certainly hear some extreme talk over the next couple of months.
BFM: Yeah, but does this change the way fund managers invest? You’ve got this continuing geopolitical tension between the US and China. Is it going to stop, for example, American fund managers from buying Chinese stocks?
Tony: I think it definitely puts China as a higher risk for US portfolio managers. And certainly over the past couple of years, more US portfolio managers have become aware of the risks of investing in China as supply chains close down, among other things. So, I think you will see more of a tighter risk calibration and more weighting of risk for Chinese equities. So, it could potentially not be good for American money investing in Chinese exchanges. Absolutely.
BFM: Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. As he was talking about how March is possibly going to be down, although not as down as February, I couldn’t help but think, ‘Oh, beware the eyes of March.’ But, yes, it’s still choppy out there, especially as the FOMC will be having their meeting this month. I think everyone’s going to wait and see how much they’re going to hike those rates.
Yeah, he gave some predictions on Malaysia as well. He thinks the market will possibly be up by about 1% in March, but the market has been quite disappointing in Malaysia. And he also expects the China market to be down in March by about 2%. And we spoke about the geopolitical risk which may impact US fund managers as well.
In this video, our first-time guest Jim Iuorio leads the discussion on the topic of whether markets are too good for the Fed. With speculation around CPI, layoffs, and interest rates, the question of the Fed’s direction and potential pivots later in the year is raised.
Jim also delves into the recent success of the metals market and offers insight into where the market may go in the future. He also offers his thoughts on the potential impact on equities if the S&P hits his target of 4060.
Next, Tracy takes the lead in discussing cracks and Freeport. She explains the significance of rising crack spreads and its impact on the market. She also shares her insights on the recent opening of the Freeport facility and its effect on US natural gas prices.
Albert then discusses the risks associated with Ukraine’s new hardware. He addresses the classification of “direct involvement” and its potential impact on European countries. He also offers insight into what actions Russia may take to further complicate the situation and the potential impact on markets such as wheat.
Finally, the team gives their expectations for the upcoming Fed meeting and what to look for in the week ahead.
This is the 51st episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, and welcome to the Week Ahead. I’m Tony Nash and today we’re joined by Jim Urio. Jim is at TJM Institutional and he’s with the Futuresedge podcast. Or is it on the Futuresddge podcast, right? Yes. Also with Albert Marko and Tracy Shuchart with Hightower Resources Advisors.
We’ve got a couple of key themes. Obviously, it’s the week before the Fed and we’ve had a really good week in markets. So one of our key themes is our market is too good for the Fed. Second I think Tracy is going to talk about crack spreads and Freeport and what’s happening there. And then we’re going to look at the risk with Ukraine’s new hardware. There’s been a lot of talk about tanks going to Ukraine this week, so we’re going to talk about some geopolitical risks with Albert.
So Jim, first, thanks again for joining us and watching some of your comments through the week with markets breaking through some of the key levels that you were looking at, the Fed’s direction is obviously a big factor in markets and there’s a lot of conjecture around CPI, layoffs, rates going lower or pause or pivot or whatever you want to call it, and people saying the Fed may do 25 and then pause.
What’s your view on that? You’ve been obviously speaking about this several times this week. So I’m curious, what’s your view after seeing a whole week, where do you think we go from here?
Jim
Well, I’ve been somewhat more of a bull, I think, than most over the last few months. And I’m not trying to take a victory lap or anything, it’s just a fact. And my reasoning was that every one of us knows that these Fed rate hikes have a huge lag period before we feel the efficacy. Fed knows that too. As stupid as the Fed is, this is something that’s so fundamental, but I think they genuinely do know that. So now we’re starting to see things happen. We saw a pretty good PCE report today. CPI has been trending lower too. The only things in CPI that are stubbornly high, consistently, are food and energy, which are the two things that are least rate sensitive. The yield curve is still wildly inverted, signaling to them that they still are in a financially tight market. I believe that the Fed is getting close to having some sort of gentler language. Now, whether they go 25 basis points this time and then 25 basis points again, that’s fine to me. Now, the one thing I do have a problem with is that the Fed Funds futures curve says 50 basis points over the next two meetings.
And then toward the end of ’23, there’s going to be an ease. But they say it’s only going to be a quarter, two and a half point ease. And that I say “no way.” If they’re ever going to actually pivot and start easing, it’s only going to be as if something is burning and something is falling down and then it’s not going to be a quarter point ease. That being said, I still like risk assets. And I have because I think we are nearing the end of the Fed tightening cycle. I believed, I’ve been doing my podcast for the last hour. I wanted the market to settle above 4070. It certainly did, right? We went into the closed pretty strong, I thought. And I think that that green lights the next move higher. I particularly like the metals market, and I’ll shut up in 1 second, I swear to God. I particularly like the metals market because I think that… I don’t mean to talk for so long. I thought copper was being held down by China news, by the Fed, by the strength of the dollar, and all those things have seemed disappeared. And I’ve made good money on that so far, and I plan on keeping those lumps.
Tony
So it’s a good question about metals. What are you looking at? You said China and you said China reopening other things. What are you looking at in metals? Are you looking at industrial metals, copper and so on? Are you looking at precious metals or kind of all of the above?
Jim
Copper is number one and that’s my biggest position. Silver and then go down from base industrial all the way to just gold being pressured. And the gold thesis for me is different than the copper one in that I believed at the time when I started buying more gold, that Bitcoin and Etherium in the crypto market and all that dollar safety hedge or whatever the hell it is, if that was disappearing, then money would go back into gold. Well, that didn’t disappear. Bitcoin is butting up against new cycle highs now, but gold is still doing well. So in that I was kind of wrong on the thesis. The thesis was also the dollar weakening, which happened as well. Once the Pound of the Euro started really bouncing off those October lows, I thought, okay, the green light is on for all these metals. So I’ve done okay in gold, even though my thesis about crypto was wrong.
Tony
Okay, but was your thesis wrong? Do you see crypto and gold as substitutional somewhat at the margin still?
Jim
I don’t know. I was going to ask you that same question. I always did. And I thought that the $3 trillion crypto market was sucking away some of the gold. And I thought that that was a big deal. But then it doesn’t seem to be now, so I guess I can’t answer that. I’m confused, I guess.
Tony
Yeah. I’m curious. What do you think about that, Tracy, in terms of crypto and gold? Do you think there’s a trade off there?
Tracy
This is not really my… Crypto market, is not really my market.
Tony
Internet, say whatever you want.
Tracy
Albert knows way more about this than I do, to be honest, because I’ve never traded crypto, and he’s traded a lot in the past. So I’m going to defer this to Albert.
Albert
Before I do think that there was a correlation between how much money was flying into crypto versus taken away from gold, I think there is no doubt that gold suffered because of that. I don’t think that as the case right now, simply because there’s been too many blow ups in the crypto world at the moment. I don’t really know how liquid it really is. There’s certainly no retail left in the crypto market, so it looks like it’s all institutional. So I don’t know. You can’t really make a fundamental call on crypto at the moment.
Tony
Could you ever make a fundamental call on crypto?
Albert
You could at some point, because institutional money was flying in there because their clients were forcing them to get into the space. So you could make a little bit of a fundamental case for crypto, but as all these ponzi schemes blew up, like FTX and everything, that’s just gone completely out the window at the moment.
Jim
Sure, Tony, I can make a slight fundamental argument of it. When they were adding an additional $7 trillion, throwing it into the money supply, and really being poor stewards of the dollar, that was somewhat of a fundamental argument for crypto, I guess, right?
Tony
Yeah. Okay. Are markets too good for the Fed. As we’re going into next week, are these levels too good for the fed? Is Powell going to come out and really, you know, say, look, this is irrational or whatever, and it’s too much, and is he going to pour out, say, 50 basis points and disappoint a lot of people?
Jim
Just to punish me a rug pull? I mean, I think he’s capable of that. He certainly did at the Jackson Hole meeting a while back. So you have identified, I think, the major risk, and it’ll probably go into that somewhat hedged. And again, hedging is probably going to be expensive going into it because people realize that that’s where the risk is. So on balance, I will say, no, I don’t believe he is. I think he believes that going too far this way. And again, I think he thinks going not far enough in this direction is the worst possible thing. But I also think he’s starting to realize going too far and what that looks like. He sits around and talks about creating slack in the job market, and to him, it’s just an equation on a whiteboard where the reality is talking about people losing their jobs. I think he balances a lot of realities. I think he’s incompetent. His entire tenure has been mostly incompetent, but I think he’s done a pretty good job trying to clean up the mess that he made over the last year and a half, and I don’t think he’s going to do something stupid like that. But, yes, to your point, it is a risk.
Albert
I actually disagree with Jim on this.
I think it’s going to really matter about what the market does. If we start flying into the 4200 before Tuesday on the SPX and whatnot. I think that Powell will come out. I don’t know if he’ll do 50. I don’t think he’ll do 50, but he might come out with a 25 basis point rate hike and then start talking extremely hawkish and dismiss all the rate cuts that everybody’s been talking about, which would be essentially the same thing as doing 50 to the market. If the market says that. If the market here is that we’re not getting rate cuts till 2024, I don’t see that as positive whatsoever.
Jim
I certainly hope you’re right in the near term, too, because I’m short some of those 4200 calls, like, too many. That’s the position I keep checking in my bold position was like, oh, sh*t, they’re getting too expensive. So I actually like what you’re saying a little bit in the short term.
Albert
Yeah, I have a problem because of this is falling liquidity right now and tightness at the same time. I look at the market and I’m like, well, money is starting to fly out into Asia, which we talked about Tony, repetitively for months now. Where are we going to get that $5 trillion incremental money coming into the market to keep this thing afloat? For me, it’s like I don’t see the math adding up to 4300 on the S&P and anytime soon. And on top of that, if you calculate rate hikes and everything you’re looking at the market, 4150 or 4200 is more expensive than 4800 was. It’s technically even higher valuation. So for these things, I’m just like I think we’re probably going to retrace the 3850 on some kind of ridiculous Powell talk. And on top of that, Brainard is talking about leaving. She’s not leaving if Powell is talking about being dovish. She wouldn’t be doing that, in my opinion.
Tracy
I asked a question. I was just saying and that’s for both of you. I mean, considering that the Fed has hiked so quickly, do we even think, and the data has remained pretty good, considering right, so do we think that the rate hikes have actually even been able to filter down into the economy at?
Jim
I don’t, Tracy. I think that that’s the point. I think when you look, just take the real estate market. How in the world is it not going to be a major hurdle for the real estate market to take mortgage rates from 2.8% to 7%? I think that it’s silly to think that if they just left things the way it is, I believe that we would certainly go in recession at some point in time with money being restrictive as it is compared to… I’ve argued for 30 years that rates had to be inorganically low to make up for the fact that we have all these crappy regulations and punitive taxes on companies. They need low rates to function. I think rates are to point now where eventually they would drag on us too much. Albert, do you agree with that?
Albert
I do. But the flip side of that is, like, if Powell doesn’t stay the course, Yellen is using the TGA, in my opinion, from what I heard, to offset quantitative tightening. This could set off another round of inflation if China comes on too fast, or even Europe starts to gear up a little bit and reset their manufacturing sectors with stimulus. The fear I have is a second half inflationary run again, and then we’re going to be talking no more pauses, but another round of 50-75 basis point rate hikes.
Tony
Second half of Q2. I don’t think it’s a second half inflation run. I think it’s Q2. I think it happens a little bit sooner than that.
Albert
Yeah, it could. I mean, you could have any kind of geopolitical event like Russia re-invading Ukraine with some gusto this time.
Tony
Okay, guys, here’s my question, though. We’re talking all this potential dovishness, but all we’ve seen is the rate of inflation slow. We haven’t seen prices come down. Okay, so why would he go to zero? Or why would he just do 25? I’m not seeing it. When you look at the job market, sure, you’ve lost 70,000 tech jobs, but they hired 2 million since 2020 or something like that, right? So it’s nothing. It’s dropping the bucket.
Tracy
Chipotle hiring 15,000 so those people can get a job.
Tony
Exactly. What is it that would tell us that he’s going to go 25 or pivot or whatever? I’m just not seeing that thing because the job market is still really strong.
Jim
So here’s what I would say to that, is that the job market is going to be strong and tighten. It’s a weird kind of anomaly that happened with 3 million boomers leaving the job market prematurely over the last three years. To your point about why would he not stay the course if prices aren’t coming down? Because, remember, ultimately, the end of the day, the inflation was intentional and it was done because of this wild indebtedness all over the board. But I always focus on the five states that could not possibly have paid their bills under any possible scenario. And that’s why for ten years, they kept telling us that they needed inflation. So I think in Powell’s mind, he tells us 2%. I think he’d be perfectly happy with three and a half.
Albert
And they’ll get three and a half because they’re starting to change the way CPI has waited starting 2023.
Jim
Just like when Nixon changed the definition of unemployment back in the 70s.
Albert
The BLS have done that in the past. They changed the way unemployment is calculated. Now they changed the way the CPI is calculated.
Tracy
They changed the way inflation is calculated.
Albert
Perception is reality in the market. We can sit there and b*tch about fake data from China and fake data from the Europe and the US. But perception is reality in the markets.
Tony
Yes. So we’re going to change the rules to win.
Albert
Well, yeah, of course.
Tony
And the CPAC calculation changes this month, right?
Albert
Yeah, January 2023.
Tony
Fantastic. Okay, so you guys are in the 25 basis point camp for next week, right? 25 and very hawkish. 25 and very hawkish.
Jim
Okay, I don’t I like what Albert saying. I say 25 and mildly hawkish.
Tony
All right, we’ll see. I think it might be a little harder than that. So we’ll see. That’s good, though. I appreciate that.
Tony
Okay, Tracy, I want to talk a little bit about refineries and crack spread. You sent out a tweet on Monday about diesel prices.
Can you help us, help us understand what’s happening at refineries and what’s happening with diesel and gasoline and other refined products prices?
Tracy
Well, this is actually the perfect segue because I tweeted out a chart of ULSD, which is diesel, basically. And so we’re seeing those refinery margins explode again. And most people say, well, that’s anticipation of the diesel embargo in Russia and refineries across the world that are not part of Russia are seeing these increases. But that’s not just happening in the diesel market, that’s also happening in gasoline cracks. And so higher refining, basically the long and short, higher refining margins mean higher prices for consumers. Right. So Tuesday we just hit a three month high of $42. And when oil was at its highest price, those crack spreads were at $60. So this should start ringing alarm bells a little bit about inflation. This is why it kind of correlates to what we were just talking about. And so CBs, even though they don’t count energy in the CPI as part of inflation, they should be keeping an eye on these indicators because it kind of indicates that we’re going to see higher gasoline, diesel costs, jet fuel, et cetera. And that could add to inflationary pressures across the board, not only for just the consumer, you and I, but for companies that are heavily dependent on these products.
Tony
And when there’s inflation in energy, there’s inflation in everything.
Tracy
Right, right.
Tony
Second or two tier impacts.
Tracy
Exactly, yeah.
Albert
One of my oil friends was telling me that normally January, February, they’re running at minimum rates, trying not to lose money. But this has been like absolutely insane, where they’re just making money hand over fist right now because the demand is so high.
Jim
Tracy, I have a quick question for tracy, by the way. Is that okay?
Tony
Yes.
Jim
So, Tracy, just last week, I don’t know if it was Chevron or Conical Phillips, where they announced raising the dividend or whatever, paying bonuses and not investing in it. Was that an indication that they still feel that the government is not smiling upon fossil fuel companies expanding their operation?
Tracy
Oh, 100%. Right. For over a year now, we’ve seen elevated energy prices in that seventy dollars to eighty dollars range. Negating, the spikes that we saw from the Ukraine invasion. But so after a year of pretty much stable higher energy prices, we are still not seeing anybody want to invest in this sector. Right. They still want to cater to the investor. They still want to pay down debts. They still want to do higher dividends. They still want to engage in stock buybacks. All to placate the investor. And so that is very telling that after a year, they’re still not willing to reinvest into capex, particularly in shale.
Tony
It’s nothing but downside to invest, right?
Jim
No doubt.
Tracy
Yeah, absolutely.
Jim
It’s maddening when you think about it. Everything seems like it’s such a self inflicted wound. And this is the kind of thing that keeps me up at night. It seems like a government that’s working against us. And I’m not trying to be that guy. I’m not political. I just see policies and they’re asinine.
Tracy
Who wants to invest when they say, we want to phase you out, we want to kill you?
Jim
Right? Yeah.
Albert
Well, this is the problem when politics gets mixed up in economic policy, it starts muddying things up and mistakes become exponential at this point.
Tony
But politics is always mixed up in economic policy everywhere. You know that. I’m not telling you you don’t know, but it’s always there. When I hear you talk about refineries, and it’s been how many decades since we built refineries in the US, Tracy? The 70s was the last time we built refinery?
Tracy
70s was the last major. We’ve had a lot of brown projects, which means we’ve added refinery capacity to already existing refineries, but we haven’t had any new green projects, which means building new refineries. And we were talking about, I think, last week or the week before the expansion that we’re having in Texas. But the problem is that the amount of refining that is coming offline is more than the refining capacity that is coming online.
Tony
Right. So what’s our capacity utilization right now in refineries?
Tracy
Well, we’re down right now because we’re in the middle of maintenance. And we also had Elliot storm, which some refineries, for instance, Baytown, is just coming back up this week from the storm in December. So utilization rates right now at about 89.5%. But, you know, you have to realize that, you know, we’ve been over, well over 90%.
Tony
Yeah, 94 or something like that. Right?
Tracy
Yeah. And we have aging refineries. And so what does that mean? Those refineries are more prone to breakdown because we’re running them at, like, ridiculous max capacity. Right, exactly.
Tony
Okay, so since you mentioned Texas, let’s look at this tweet that you put out a couple of days ago saying that Freeport gets approval.
So USLNG, the Freeport terminal has been approved and reopened. So can you talk us through what that means for European nat gas and what that means for US nat gas prices?
Tracy
Well, for US natural prices, that is positive. And I know that all nat gas prices have tumbled 35% to 45%. Regardless, we’re back into that two area that is pretty much where we’ve been for several years. But it is a good thing. I think the market, I think, spiked 15% or 15% $0.15 sorry, on that move. And they kind of retraced it. I think the market is a very Freeport is an export place. So what that means is that if Freeport being closed basically landlocks US nat gas, which is obviously a negative because we have a lot of it. But I think that the market in general is a little bit skeptical. But as soon as we actually start seeing export capacity increase from that facility, then I think that the markets will be more enthusiastic about the success of that because it’s really been since August since that facility is shut down.
Tony
So you’re saying we should see US nat gas prices rise as we have more export volumes from Freeport?
Tracy
Absolutely. And even this week, Semper Energy announced that their new Port Arthur facility has already been booked. And that facility isn’t even all the way built yet. And that’s another export facility. So there’s a lot coming online and a lot being built out that we will be able to see. I think that just market participants have become a little bit placated because they look at European stocks and European stocks, of course they’re still full. They’ve had a mild winter, but everybody kind of forgets that last year 50% of their storage capacity came from cheap Russian pipeline. And that’s not going to happen this year.
Tony
Yeah. So all of those new roads that are being built in Texas, it may have been started with other money, but it’s going to be finished with European money. Right. So I just want to take this moment to thank our European friends for finishing our transportation.
Albert
About time they give back.
Tony
That’s right.
Jim
Finally, their currency has come back a little bit, so now they can actually buy stuff here.
Tony
Perfect. Okay, very good, Tracy. Anything else on nat gas? Are you still keeping eye on fertilizer for kind of late spring time period?
Tracy
Yes, absolutely. I think that’ll still come into play. I mean, nat gas prices are extremely low right now, which is great news for fertilizer prices. That will give farmers a break. This is all good news in that respect, but I still think we need to keep an eye on this going forward and keep an eye on that gas prices because obviously that’s going to affect fertilizer prices and farming in general.
Tony
Jim?
Jim
Tracy, you talked about diesel before, and I don’t trade diesel. Is the spread between diesel and regular WTI still blown out? And what could possibly get diesel back in line?
Tracy
Well, I think that there’s been a shortage for a very long time. That spreads come in a lot, comparatively speaking. But now it’s starting to blow out again because again, you have the EU embargo of diesel, and they got literally like 95% of their diesel came from Russia. Another dependent project. And I’m sure Russian diesel will go somewhere else. It’s not more about that, but it’s more about really boils down to refining capacity as well. Because even in the United States, we can’t refine. If Europe wants to buy from us, we can’t even refine enough. We’re sending what we have over there as well as our domestic needs. So really, diesel to me comes down to refining capacity altogether.
Jim
That’s an unfixable problem, right?
Tony
Until Russia’s solved, right?
Albert
What about the Jones Act waivers for sending diesel up to these coast cheaper?
Tracy
Yes, they could do that, but they haven’t done that. They’ve done that in the past for Puerto Rico after the hurricane and all of that, but they still haven’t given waivers. Even when prices were extremely high in the United States, when we were at the height back in June, July, when prices, gas prices were highest, diesel prices were highest, they still wouldn’t give Jones Act waivers. You have to understand that the Jones Act came into play into 1920 when we had a fleet of over 1000 vessels, and we now have under 100 vessels that can transport that. So, you know, it’s the government could do it. They’ve chosen not to. Why? I’m not sure, but…
Jim
We can come up with some guesses. They’re either stupid or they’re nefarious. I believe at some point in time you’re going to have to say some of it’s nefarious, where they keep making the wrong decision at every turn. And I apologize for that.
Tony
No, don’t apologize. Look, it’s making it more expensive for people on the East Coast to get diesel. It’s not good.
Tony
Okay, great. Speaking of Russia, Albert, we saw a lot of news over last week about tanks going to Ukraine. And there’s a tweet from Max Abrams, who’s a great geopolitical professor talking about Russia, says that tanks from the west count as, quote, “direct involvement in the war”.
So I wanted to get your… Jim said what would solve the diesel problem. Obviously, Russia coming back into the market would solve the diesel problem. Now with a lot of Western countries sending tanks to Ukraine, that doesn’t sound like we’re coming closer to a solution on that. So first of all, why are they sending them if they don’t have the people to operate them? Second, tanks are to take land. Right? So what do you think is being planned? And third, how risky is it? Do you think it really implicates these kind of donor countries as direct participants in the war?
Albert
I don’t really buy into the whole direct participants of the war. The rhetoric coming out of Russia is a little bit bombastic in that respect. Referring to those tanks, there’s only going to be about 100 of them, right? They’re not going to be able to push out the Russians with those tanks. On top of that, they’re going to be about six months out until they’re actually even deliver, and then you still have to train these guys and they need supplies, and the Ukrainians don’t really have all that. So the best guess that I have is that they’re forcing Russia to come into a ceasefire in about six to eight months time, which gives them a window now to try to take Dambus and have some kind of wind before these tanks get delivered. Listen, they’re no joke. The Leopard tanks and the Abrams are better than what the Russians have. But in terms of the Ukrainians using them to push Russians out of all Ukrainian territories, that’s just not happening.
Tony
Right. So are these just old tanks or is it a quality kit that they’re getting?
Albert
Well, I think they’re getting like the second tier tanks of what the west has, but that’s still better than what the Russians have or even willing to use for Ukraine. So, like I said, this is more of a measure to force the ceasefire later on in the year.
Tony
Okay. Yeah, Jim?
Jim
Albert, a couple of days ago, when this escalation started in Germany, we announced I immediately put on my screens, looked at oil, wheat, even the defense sector ETF, and nothing really budged. Do you think the market was looking at it like it wasn’t a big deal? Or do you think the market was looking at it as somewhat balanced, perhaps a quicker end of the war and not an escalation, or perhaps an escalation, the two things come around?
Albert
Oh, man, that’s a good one, Jim. I honestly think that the market’s probably in a wait and see position at the moment.
Jim
Numb to the shit kind of. Right?
Albert
Yeah. You got to wait and see what Moscow is going to do. I certainly think they’re going to use wheat and grains and other grains asymmetrical responses to the west to push inflation out over there, make it hurt. That’s the only thing they have. They don’t really have anything else to go after. I mean, the oil that they’re selling to India and China is enough to sustain their pocketbooks for a little while until this gets sorted out. But until there’s some sort of major upheaval in Ukraine, I don’t think the defense stocks will take off or wheat yet. But they will. I think they will. They haven’t moved.
Tony
The defense stocks haven’t moved for a while. If it is we and other AG stuff that is going to be their lever, that probably means the Turks will get more involved in the discussion because they’re the ones who arbitrated the discussion earlier. Is that right?
Albert
Well, they’re trying to get into the discussion. I actually have really good connections with the Turks and their main thing is to distract the West and the Russians into Ukraine while they push their trade deals out into Africa at the moment. You know, the Turks have a great drone, the TB Two, which they sell to pretty much everybody. So that’s as far as they’ll actually get into the war besides making media comments.
Tony
Right, okay. And so what risk do you think there is on wheat? Do you think we see more wheat risks, say, in Q2 – Q3 this year?
Albert
I absolutely do. The Ukrainians, they’re planting a lot less. I think 40% less is what they’re reporting, is probably even more than that.
Tony
Right.
Albert
And on top of that, if the Russians decide to blow up a port or blow up a few ships that are trying to get out with wheat, and all of a sudden, wheat, you know, takes off back to the 900 or $1,000 mark again. So I definitely see that happening in Q2 Q3.
Tony
Okay. That could be exciting. All right, guys, let’s close it up. We’re in that quiet period for the Fed. We have that Fed discussion next week. So what are you keeping an eye on next week aside from the Fed, of course, but what are you keeping an eye on in markets? Tracy, why don’t you get us started.
Tracy
Well, I know that most people are looking forward to OPEC is next week at the beginning of February. My personal stance on that is that I think they will keep everything as is. Right. They made that 2 million cut, even though it’s technically not 2 million, because they were under quota anyway. They said they were going to carry that through 2023 unless something came up that they really needed to address. And I just don’t see anything coming. I don’t see any reason they would need to change this policy stance right now. We have Russian barrels still on the market. We have China is still kind of an unknown because they haven’t really opened up yet. So that’s what I’m looking forward to, or at least that’s what my feeling is about the data.
Tony
Great. Okay. Albert, what are you looking at next week?
Albert
Well, obviously the Fed. I think, is in order with a hawkish tone, but honestly, I want to see how the dollar reacts to all this. And the VIX. The VIX at 17, start looking at some good old put options and call options with the 17 VIX is fantastic. But, yeah, basically what the dollar is going to do. I really want to see if the dollar breaks into the 90s with some kind of bull market talk.
Tony
Excellent. Okay. And Jim. Wrap us up. What are you looking at?
Jim
The unemployment numbers on Friday. Big deal. The last shooter drop is going to be the slack in the labor market that they want. Albert mentioned that level on the dollar. I call it like 101 to 100. As soon as it goes below that, as soon as we get a nine handle on the dollar, I think it greenlights a lot of risk assets. But the thing I’m mostly focused on is unemployment and then the week after that my trip to South Florida. Because every time I leave these damn markets, something crazy happened. So you guys can count on that. I’ll tell you when I’m on my flight. Something weird is going to happen.
Tony
When is that?
Jim
I don’t know. My wife makes the arrangements. I think it’s the next, like a week from next Thursday. I think we’re going on vacation.
Tony
Keep an eye on. Jim, thanks so much for joining us, Jim. Guys, this has been great. Thanks very much everyone have a great weekend. Thanks Jim.
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, we’re joined by Daniel Lacalle, Tracy Shuchart, and Sam Rines.
First discussion is on liquidity drain and quantitative tightening (QT). How difficult is it?
Rate hikes get a lot of the headlines, but QT peaked at just under $9 trillion in April of this year. The Fed has pulled just over $200 billion from the balance sheet since then, which isn’t nothing, but it’s not much compared to the total.
Where do we go from here? Most of the Fed’s balance sheet is in Treasuries, followed by Mortgage-backed securities. What does the path ahead look like – and where is the pain felt most acutely? Daniel leads on this discussion.
We also look at the copper gap with Tracy. We don’t really have enough copper over the next ten years to fill the demand. Despite that, we’ve seen copper prices fall this year – and Complete Intelligence doesn’t expect them to rise in the coming months. Tracy helps us understand why we’re seeing this and what’s the reason for the more recent fall in the copper price. Is it just recession? Will we see prices snap upward to fill the gap or will it be a gradual upward price trend?
We’ve had some earnings reports for retail over the past couple of weeks and Sam had a fantastic newsletter on that. On previous shows, we’ve talked about how successful US retailers have pushed price (because of inflation) over volume.
Costco and Home Depot have done this successfully. Walmart had serious inventory problems earlier this year, but their grocery has really saved them. Target has problems, but as Sam showed in his newsletter, general merchandise retailers have had a harder time pushing price. What does this mean? Is Target an early indicator that the US consumer is dead?
Key themes: 1. Liquidity drain and QT 2. Copper Gap 3. Retail and the US Consumer 4. What’s up for the Week Ahead?
This is the 42nd 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 am Tony Nash. And this week we’re joined by Dr. Daniel Lacalle or Daniel Lacalle. Daniel is a chief economist, he is a fund manager, he’s an author, he’s a professor. Kind of everything under the sun, Daniel does.
Daniel, thank you so much for joining us today. I know you have a very busy schedule. I appreciate you taking the time to join us. We’re also joined by Tracy Shuart. Tracy is the president at Hightower Resources, a brand-new firm. So pop over and see Tracy’s new firm and subscribe. We’re also joined by Sam Rines of Corbu. Thanks all of you guys for taking the time out of today.
Before we get started. I’m going to take 30 seconds on CI Futures, our core subscription product. CI Futures is a machine learning platform where we forecast market and economic variables. We forecast currencies commodities, equity indices.
Every week markets closed, we automatically download that data, have trillions of calculations, have new forecasts up for you Monday morning. We show you our error. You understand the risk associated with using our data. I don’t know if anybody else in the market who shows you their forecast error.
We also forecast about two thousand economic variables for the top 50 economies globally, and that is reforcast every month.
There are a few key themes we’re going to look at today. First is liquidity drain and quantitative tightening, or QT. Daniel will lead on that and I think everyone will have a little bit to join in on that.
We’ll then look at copper gap, meaning we don’t really have enough copper over the next, say, ten years to fill the needs of EVs and other things. So Tracy will dig into that a little bit.
We’ve had some earnings reports for retail over the past couple weeks and Sam had a fantastic newsletter on that this week. So we’ll dig into that as well. Then we’ll look at what we expect for the week ahead.
So Daniel, thanks again for joining us. It’s fantastic. You’ve spoken to our group about a year ago or so. It was amazing.
So you tweeted out this item on screen right now about the liquidity drain.
You sent that out earlier this week and it really got me thinking about the complexities of draining liquidity from global markets, especially the US. Since I guess global markets are hypersensitive to draining in the US.
Of course, rate hikes get a lot of headlines, but you mentioned QT, so it’s a bit more complicated. Obviously, QT peaked in April of this year. There’s a chart on the screen right now at just under $9 trillion.
And the Fed’s put about $200 billion back from their balance sheet, back in the market from their balance sheet, which isn’t nothing, but it’s really not much compared to the total.
So I guess my question is, where do we go from here? Most of the Fed’s balance sheet is in Treasuries as we’re showing on the screen right now, followed by mortgage backed securities.
So what does this say about the path ahead? What do you expect? How quickly do you expect? Does it matter that much?
Daniel
Thank you very much, Tony. I think that it’s very important for the following reason. When people talk about liquidity, they tend to think of liquidity as something is static, as something that is simply there. And when central banks inject liquidity, it’s an added. And when they take liquidity away from the system, that simply balances the whole thing. And it doesn’t work that way.
Capital is either created or destroyed. Capital is not static. So when quantitative easing happens, what basically happens is the equivalent of a tsunami. Now, you basically add into the balance sheet of central banks trillion, whatever it is, of assets, though, by taking those assets away from the market, you generate an increased leverage that makes every unit of money that is created from the balance sheet of the central bank basically multiplied by five, six, we don’t know how many times. And it also depends on the transmission mechanism of monetary policy, which is at the end of the day, what the reason why central banks do QE is precisely to free up the balance sheet commercial banks so that they can lend more.
Tony
Let me stop you there. Just to dig into so people understand what you’re talking about. When you talk about transmission mechanism, and the Fed holds mortgage backed securities, the transmission mechanism would be through mortgages taken out by people because mortgages are cheaper, because the Fed is buying MBS. Is that fair to say?
Daniel
Not cheaper. They don’t necessarily have to be cheaper. They have to be more abundant. Ultimately…
Tony
That’s fair. Yeah. Okay.
Daniel
Ultimately, this is why when people talk so much about rate hikes, rate hikes or rate cuts are not that important. But liquidity injections and liquidity training are incredibly important for markets because rate hikes or rate cuts do not generate multiple expansions. Yet liquidity injections do create multiple expansion, and liquidity draining is much more severe than the impact of the rate hike.
Tony
Okay, so when you say multiple expansion, you’re talking in the equity markets?
Daniel
In equity markets or in the valuation of bonds price. That means lower bond yields or in the valuation of private equity. We saw, for example, in the period of quantitative easing, how the multiples of private equity transactions went from ten times EV to even to 15 times easily without any problem.
So what quantitative tightening does is much worse than what quantitative easing does, because the market can absorb an increase of liquidity through all these multiple assets. However, when quantitative tightening happens, the process is the reverse. Is that the first thing that happens, obviously, is that the treasury, the allegedly lowest risk asset, becomes more cheap, ie, the bond yield goes up, the price goes down, the bond yield goes up, and in turn it creates the same multiplier effect, but a larger dividing effect on the way out.
Tony
So the divisor is greater than the multiplier.
Daniel
The divisor is greater. And I tell you why. In the process of capital creation, there is always misinformation that leads to multiple expansion. Okay? So one unit of capital adds two more units of capital plus a certain excess valuation, et cetera. Now from that point, if you reduce one unit of the balance yield of the central bank, the impact down is much larger. So where it goes to, this is the problem that we as investors find it very difficult to analyze is where is the multiple at which equities, bonds, certain assets are going to stop because it is very likely to be below the level where they started.
The challenge of quantitative tightening is even worse when the process of quantitative easing has been prolonged, not just in period of compression of economic activity or recessions, but also in the periods of growth.
Tony
Okay?
Daniel
Because the level of risk that investors take becomes not just larger but exponential under QE. Under QT. Under QE, you get Bitcoin going from 20 to 60 under QT, you get bitcoin going from 60 to maybe zero.
I don’t know. I don’t know.
Tony
The comments are going to be full of angry bitcoin people.
Daniel
I just want people to understand that just like on the way up in a roller coaster, you go slowly and it seems that everything is going relatively smoothly. When you start to go down, you go down really fast and it’s truly scary.
Tony
Okay, so let me ask you this, because when you talk about multiple expansion, I’m sure we’re going to get some comments back about tech firms because we’ve seen tech firms multiple expansion decline pretty dramatically in the past, say six months, certainly past year, for companies like Meta. So although we’ve only seen $200 billion in quantitative tightening, how does that reconcile with your statement about interest rates not necessarily impacting valuations.
Daniel
No, interest rates impact valuations, but not as aggressive as quantitative tightenint. They do, particularly in tech for a very simple reason. I think that all of us can understand that a technology company is in the process of money creation. A technology company is one of the first recipients of newly created money because it absorbs capital quicker and it obviously benefits enormously from low interest rates, obviously.
But the process of multiple expansion tends to happen in the early stages of those companies. Now the process of multiple compression is much more viscious because I would be genuinely interested to have a discussion with, I don’t know, with people that invest in nonprofitable tech, but I would really like to understand how they get to the current levels of valuation comfortably.
The biggest problem I see of quantitative tightening is the same problem I see of the hidden risks of quantitative easing is that central banks cannot discern which part of the wealth effect comes from the improvement in the real economy or simply from bubbles. And the creation of bubbles obviously, we can imagine that something is a bubble, but we don’t really know until it bursts.
So it’s going to be very problematic for a central bank to achieve almost one thing and the opposite, which is what they’re trying to do. What they’re trying to do is to say, okay, we’re going to reduce the balance sheet. Hey, we’re going to reduce the balance sheet by 95 billion a month and think that that will have no impact on the bond market, on the equity market, and on the housing market. The housing market is already showing.
Tony
Yeah, I don’t necessarily think they’re saying that will have no impact on that stuff. Sam, from your point of view, is that their expectation that QT would have no impact on asset prices?
Sam
I wouldn’t say it’s their expectation that it wouldn’t have an impact on asset prices. I think they understand that there’s an impact on asset prices from just the narrative of tightening generally. But to the point, I think it is very difficult to parse what portion of their tightening is doing what particularly for them.
You look at some of the research on coming out of the Fed, on what QT is expected to do and what QT does, and you come out of it thinking they have no idea. I think that they would probably say that quietly behind closed doors, without microphones. But to the point, I would agree that there is an effect and that the Fed likes to say set it and forget it, because they don’t really understand what the actual impact is on either the real economy or the financial economy. Come up with our star-star, which is some stupid concept that they decided to come up with to rationalize some of their ideas. But I would say no, that makes perfect sense, that they really don’t understand exactly how much it is. Which is why they say we’re just going to set it, forget it, and we’re not really going to talk about it.
Because if you listen to the Fed, their concentration is on the path to the terminal rate and the length of holding the terminal rate there. And if you Google or try to find any sort of commentary about quantitative tightening within their speeches and their statements, it’s actually pretty hard to find.
Daniel
Yeah. So just to clarify one thing, just to clarify. In the messages from, for example, of the ECB and the Bank of Japan, less so of the Fed. And I would absolutely agree with that because the Fed is not so worried because they know that they have the world reserve currency, but the ECB and the Bank of Japan certainly expect very little impact on asset prices. For example, the ECB are just saying right now that they’re expecting to reduce the balance sheet in the next two years by almost a trillion euros without seeing spreads widening in the sovereign market. That is insane to be fairly honest. So that is what I’m trying to put together is that the same… A central bank that is unable to see that negative bond yield and that compressed spreads of sovereign nations relative to Germany is a bubble. It’s certainly not going to see the risk of tightening.
Sam
I would start with saying that if the ECB thinks they are going to take a trillion off the books in a couple of years, that’s the first insane part of that statement.
Tony
Good. Okay. So what I’m getting from this is taking liquidity out of markets can be really damaging and the guys who are doing it don’t really know the impact of their actions. Is that good top level summary?
Daniel
Absolutely. That is the summary.
Tony
Okay, so since they’ve only taken 200 billion off, I say “only,” but compared to 9 trillion, it’s not much. Since they’re pulling the interest rate lever now at the Fed and they’re kind of tepidly moving forward on the balance sheet, do we expect them to finish the interest rate activities before they aggressively go after the balance sheet or are they just going to go march forward with everything?
Daniel
No, I think that’s.. They want to see the impact of interest rates first before they make a drastic action on the balance sheet. Particularly in the case of the Fed with mortgage backed securities, and the case of the Bank of Japan with ETFs because the Bank of Japan is going to kill the Nikkei if it starts to get rid of ETFs. And certainly the Fed is going to kill the housing market with mortgage backed securities are warranted.
Tony
Yup.
Sam
And then it’s kind of interesting because there’s two dynamics that I think are intriguing here. One is that the Fed’s balance sheet is getting longer in duration as interest rates rise because those mortgage backs are just blowing out to the right because you’re not going to have to have the roll down and you’re not going to have the prepays on those mortgages anytime soon. So the Fed is putting themselves in a position where hitting those caps on mortgage backs is just simply not going to happen on a mechanical basis. And they’re either going to have to sell or they’re going to have to say, we’re just not going to hit we’re not going to hit our cap on mortgage backed securities for the next 20 years.
Tony
Yup. So I get to put those to maturity like they’re doing with all the treasury debt.
Sam
Yeah, they’re just letting them roll off, which means they’re not going to have mortgage backs rolling off with a six and a half percent refi rate.
Daniel
Yeah, I agree with that.
Tony
Wow. It’s almost as if QT potentially is a non issue for the longer duration debt? Are you saying they’ll continue holding? Sam you’re saying , “No.” So what am I missing? What I’m hearing is they may just hold the longer duration stuff. So if that’s the case, is it kind of a non issue if they just hold it?
Daniel
It’s not a non issue. They are in conversations all the time with the Bank of Japan to do this composite yield curve management, which in a sense means playing with duration here and there on the asset base. But it doesn’t work when the yield curve is flattening all over the place and when you have a negative yield curve in almost every part of the structure.
So the point is that by the time that markets realize the difficulty of unwinding the balance sheet, the way that central banks have said, probably the impact on asset prices has already happened because commercial banks need to end margin calls, et cetera, margin calls become more expensive. Commercial banks cannot lend with the same amount of leverage that they did before. Capital is already being destroyed as we speak.
Sam
Into the point. As soon as you had the Bank of England announce that they were going to have an outright sale of Gilts, you saw what happened to their market. They broke themselves in two minutes.
Tony
Right. Okay. So that’s what I’m looking for. So it’s a little muddy. We’re not exactly sure. Right. QT is complicated. It’s really complicated. And liquidity is dangerous, as you say, Daniel. It’s easy on the way up. It’s really hard coming down from it. And that’s where…
Daniel
I think it was Jim Grant recently who said how easy it is to become a heroin addict and how difficult it is to get out of it.
Tony
Sure, yeah. I mean, not that I know, but I can see that.
Daniel
We don’t know it, obviously. None of us do. But it’s a very visual way of understanding how you build risk in the system and how difficult it is to reduce that risk from the system.
Tony
Yeah, just stopping adding liquidity is a good first step, and then figuring out what to do after that is I think they’re right. A lot of people like to knock on the Fed, but doing one thing at a time is, I think, better than trying to reconcile everything at once.
Okay, great. Since we’re taking a little bit of longer term view on things with some of that mortgage backed security debt, I just also was in a longer term mood this week and saw something that Tracy tweeted out about copper consumption and demand.
This was looking at long term demand, say, by 2030, and there’s a gap of what, 20 no, sorry, 10 million tons. Is that right, Tracy?
Tracy
8.1 million tons.
Tony
8.1 million tons. Okay. Now, when we look at copper prices right now, we’ve seen copper prices fall. We don’t really have an expectation of them rising on the screen as our Complete Intelligence forecast of them rising in the next few months.
So why the mismatch, Tracy? What’s going on there? And why aren’t we seeing the impact on copper prices right now?
Tracy
Well, I think if we look at basic industrial metals really as a whole, except for, say, lithium, really, we’ve seen a very large pullback in all these prices in these specific metals that we are going to need for this green transition.
Now, part of that is, I think, part of that is QT, we’re just saying money liquidity drained from the system. But I also think that we have overriding fears of a global recession. We also have seen people are worried about Europe because with high natural gas prices, a lot of their smelting capacity went offline.
And one would think that would be bullish metals, but it’s scaring the market as far as global recession fears. And then, of course, you always have China, which is obviously a major buyer of industrial base and industrial metals. They’re huge consumer as well as producer of the solar panels. Wind turbines and things of that nature.
So I think that’s really the overriding fears and what I’ve been talking about even for the last couple of years, that I think metals is really going to be more of H2 2023 into 2024 story. I didn’t really expect this year for that to be the real story.
I know you thought that energy was still going to be the focus. And I think even though we’ve seen prices come off, energy prices are still very high. And I think energy prices we’re going to see a resurgence of natural gas prices again in Europe as soon as we kind of get past March, when that storage is kind of done. Because we have to realize that even though the storage is still this year, 50% of that did still come from piped in natural gas from Russia.
I think we’ll start to see natural gas prices higher. Oil prices are still high. Even at $75, $80, it’s still traditionally high. So the input cost going into metals to bring it all together, the input cost going in metals, we are going to need a lot of fossil fuels. It’s very expensive. We also see mining capex suffers from the same problem that oil does is that over the last seven years, we’ve seen huge declines. And then when we look at copper in particular, we really haven’t had any new discoveries since 2015. So all of those are contributing factors. But again, I don’t think that’s really a story until last half of 2023 and 2024 going forward.
Tony
Okay, so to me, the copper price tells me, and I could be, tell me if I’m wrong here. Copper rise tells me that markets don’t believe China is going to open up fully anytime soon, and they don’t believe China is going to stimulate anytime soon. Is that a fair assessment?
Tracy
Yes, absolutely. I think we kind of saw metal prices. We’re bouncing on some of the headlines back and forth, but really we haven’t seen anything come to fruition, and I think most people are not looking until probably spring for them to open up. And I think China really hasn’t changed its stance, right. As far as. There Zero Covid policy, they’re still on that. So I think markets have been digesting that over the last couple of weeks or so. And that’s also another contributor to seeing a pullback in some of these metals in the energy sector.
Tony
Yeah, if you look at the headlines over the past week, you definitely see a softer tone towards China, with Xi Jinping coming out in the APEC meeting sorry, not the APEC meeting, the ASEAN meeting. And he’s a real human being and all this stuff, and he’s talking with Biden and he’s talking with European leaders and Southeast Asian leaders.
So I think there’s been a softer tone toward China and this belief that good things can happen in the near term, but I don’t think most investors will believe it until they see it, first of all. And I think places like Japan, Korea, Taiwan, US. Other places, maybe not. The Germans are also a little bit worried about short term sentiment in China. Things could turn pretty quickly. So, like you say, I think base metals prices are down on that. But over the long term, obviously, it doesn’t seem like there’s enough capacity right now. So, anyway, we’ll see. So for bringing that up. Sorry. Go ahead, Sam.
Sam
Yeah, I think there’s just two things to add there. One, if you didn’t have investment in base metals and energy at zero interest rates, you’re not going to get it at five. Let’s be honest. That’s point number one, this isn’t a short term thing. This is a much longer term thing. And you need to have much higher prices for commodities broadly in order to incentivize any sort of investment, because they’re, one, very capital intensive, and two, capital is very expensive right now. So I think that’s also something to keep in mind over the medium term, is we’re not solving this problem at five and a half percent interest rates here. That’s clearly not going to happen. And the other thing is you haven’t seen the Aussie dollar react in a positive way. So if the Aussie dollar is reacting, China is not reopening. It’s just that simple.
Tony
Yeah, that’s a very point.
Daniel
If I may, I would also like to point out that the bullish story for copper, lithium, cobalt is so evident from the energy transition and from the disparity between the available capacity and the demand. But when the gap is so wide between what would be the demand and the available supply, what tends to happen is that the market, rightly so, sees that it’s such an impossibility that you don’t even consider, at least as a net present value view, that bullish signal as Tracy was mentioning until 2023 or 2024, when it starts to manifest itself.
Right now, it’s so far between the reality of the available supply and the expectation of demand that it looks a little bit like what happened with Solar in 2007, 2008. We just saw bankruptcy after bankruptcy because you didn’t match the two. And on top of it, Tracy correct me. But this is the first year in which you had a massive bullish signal on prices, in energy and in metals, yet you’ve seen no response from a capping.
Tracy
Exactly. Nobody’s prepared, nobody wants to really still spend that kind of money, particularly not the oil industry when they’re being demonized by everybody in the west in particular. So you know, you’re not going to see a lot of, nobody wants to invest in a project when they’re saying we want to phase you out in ten years.
Tony
What’s really interesting though also is BHP bought a small midsized copper miner in Australia this week, so I forget their name, but the miners are seeing opportunities, but they’re just not seeing the demand there yet. So we’ll see what happens there. So anyway, thanks guys for that. That’s hugely valuable.
Sam, you wrote on retail this week and you have really brought out some interesting dynamics around pushing price versus volume within stores over the past several months. And your newsletter looked at Target, Walmart, Costco, Home Depot. Earnings across retail sectors.
So Costco and Home Depot seem to have pushed price successfully. Walmart, as you say, had serious inventory problems earlier in the year, but their grocery business seemed to have really saved them. But Target really has problems and their earnings report this week was a mess. So we’ve got on screen a table that you took out of some government data looking at, has made a change of sales for different types of retail firms, building materials, general merchandise and food services. And things seem to be going very well for everyone except general merchandise stores like Target.
So can you help us understand why is that the case for, I mean, maybe Target is just terribly wrong, but why is that the case for general merchandise specifically and what does this say about the US consumer? Is the US consumer kind of dead in some areas?
Sam
No. US consumers is not dead, which is the strangest part about this earning season to me is everybody kind of read into Targets reporting was like, wow, this is horrible. It’s bad, it’s bad. Target is its own problem. Their merchandising, horrible. Their executive team, horrible. I mean, I don’t know how you survive this. With Walmart putting up huge comp numbers on a relative basis. I mean, they pounded Target and to me that was single number one. That’s Target’s issue.
The general merchandise store. We bought a whole bunch of stuff during COVID that we don’t really need to buy at 17 of right? We bought it during COVID You could get Walmart and Target delivered to you, that was a boom for their business and that’s just not being repeated. Same thing with if you look at Best Buy and electronic stores not doing great because we all bought TVs during COVID and computers, we needed them at home. These are just pivots. When you look at the numbers for restaurants, when you look at it for grocery, I mean, again, a lot of it is pushing price onto the consumer, but the consumer is taking it.
And those are pushing revenues higher. Look at something, the company that controls Popeyes and Burger King, absolute blowout, same store numbers. I mean, these are restaurants that are pushing price. They’re still having traffic and they’re not getting enough pushback.
Home Depot pushed 8% pricing, well, almost 9% pricing in the quarter. They didn’t care about foot traffic, but traffic was down mid 4%. They didn’t care about the foot traffic. They got to push the price and they, guess what, blew it out? Loads had a decent quarter. These are housing companies, at least home exposed companies and building exposed companies that had great third quarters that were supposed to be getting smashed, right? The housing is not supposed to be the place that you’re going to right now. And somehow these companies could push in a price.
There’s something of a tailwind to the consumer where the consumer is kind of learning to take it in certain areas and just saying, no, I don’t need another Tshirt or I don’t need to make another trip to Target. I think that it’s pretty much a story of where the consumer spending not if the consumer spending.
That retail sales report, it will get revised, who knows by how much, but the retail sales report, even if it gets knocked down by a few bips called 20 basis points, 0.2%, it’s not going to be a big deal. It’s still blowing number. These are not things you want to see.
If you’re the Fed thinking about going from 75 to 50, 2 reasons there. One is that pricing little too much. And if it begins to become embedded, not necessarily in the consumer’s mind, but also in the business’s mind, I can push price. I can push price. I can push price. That’s a twosided coin where the consumer’s willing to take it and businesses are willing to push it. That is the embedding of inflation expectations moving forward.
Going back to I think it was last quarter, Cracker Barrel announced during like, yeah, we’re seeing some traffic flow, but we’re going to push price next year, and here’s how much we’re going to push it by. These companies aren’t slowing down their price increases, and they’re not seeing enough of a pushback from consumers.
Tony
Cracker Barrel and Walmart are not topend market companies. They’re midmarket companies. And if they’re able to push price at the mid market, then it says that your average consumer is kind of taking it. But the volume is down. So fewer people are buying things, but the ones who are buying are paying more. Is that fair to say?
Sam
It’s fair to say. Fewer trips, more expensive. It’s fair to say. But there’s also something to point out where Macy’s, their flagship brand, kind of had a meh quarter. Bloomingdale’s, heirt luxury? Blew it out.
Tony
Okay.
Sam
So you’re seeing even within general merchandise stores, you’re seeing a significant difference between, call it luxury, middle, and low.
Tony
Okay. So what is it about, say, Target and Macy’s? I’ll say Target more than Macy’s, but is it just the management, or is it the mech?
Sam
It’s merchandising and it’s the Mexican.
Tony
Right, okay.
Sam
And if you don’t have the right stuff that you can push price on, you’re not going to make it.
Tony
So will we see some of these general merchandisers move into other sectors? Grocery or whatever?
Sam
I mean, Target has grocery. TVs closed. They have everything. It’s a question of do you have the right thing to sell right now in terms of that? So I don’t really think you’ll see many big moves, mostly because they already have too much inventory. So their ability to pivot is zero at this point. So it’s going to be a tough holiday season. I think it’s going to be a pretty tough holiday season to Target. But I didn’t see Walmart taking down numbers for the Christmas season. We’ll see with Amazon, but cool.
Tony
It seems healthy. Just observationally. They seem pretty healthy.
Sam
Yeah. And the other thing to mention, just as a side note, there’s a lot of this consternation around FedEx and UPS and their estimated deliveries for Christmas. This is the first year that Amazon has had a very, very large fleet going into the Christmas holiday season where they don’t have to send packages through FedEx and UPS only. They have a very, very large in house fleet of vehicles to do so with, and they built that out massively over the past 18 months. So I would read a lot less into that for the Christmas season, et cetera, than people are. That’s something I think it’s kind of taking the big picture and missing the finer points.
Tracy
I had a question really just on that same vein. I’ve seen a lot of the freight companies that report on freight, like Freight Waves, have been screaming at the top of their lungs, loadings are falling. People are going out of work. They’re firing everybody. Nobody’s delivering anything. Nobody’s delivering any goods. Do you think that’s sort of cyclical or because it seems like there’s a mismatch right now. There’s a lot of goods out there to be delivered, but for some reason, these guys can’t get loading.
Sam
I think it’s two things. One, everybody double ordered in spring and summer. So I think Freight Waves and a lot of other companies saw a lot of livings that they wouldn’t have seen otherwise. And you spread those out, and I think that’s point number one. Point number two is these retailers are stuffed with inventory. Target, even Walmart is somewhat elevated. They don’t have that big problem. They have the inventory. I would say it’s much more of a timing issue. You’ll probably see Freight Waves have too many loadings, called it in the spring and summer of next year because people are playing catch up and trying to get the right merchandise, et cetera, et cetera. So I think it’s just more of a Covid whipsaw than anything else.
Tracy
Makes sense, right?
Tony
Okay, so bottom line, us. Consumer is still taking it, right? They’re still spending, they’re still okay. Despite what bank deposits and other things tell us, things are still moving. And is that largely accumulating credit or how is the US consumer still spending? They’re accumulating credit?
Sam
A couple of things. One, they have their bank deposits are fine, particularly at the middle and upper levels. They’re still relatively elevated. Two, you’re getting a much higher wage. So your marginal propensity to consume when you see a significant pay raise, even if prices are higher, is higher, right. So you’re going to spend that dollar.
So you’re getting paid more. You’re switching jobs a lot more. Your switchers are getting something like a double digit pay increase. These are rather large chefs, so I would say the consumer feels a lot more comfortable with taking the inflation because they’re getting paid a lot more. Unemployment is sub 4%, so they’re not afraid of losing their job unless they’re at Twitter. So the consumer is sitting there like, all right, I’m not losing my job. I’m getting paid increases. Why would I stop spending? I think it’s that simple.
Tony
Great.
Sam
Yeah, they have credit cards.
Daniel
That is a very important point. What you just mentioned, employment. Employment makes all the difference. The pain threshold of consumers is always being tested. Companies raise prices. Volumes are pretty much okay. So they continue to raise prices to maintain their margins. And that works for a period of time.
I think that what is happening both in the Eurozone and in the United States is that after a prolonged period of very low inflation, consumers also feel comfortable about the idea that inflation is temporary. Basically everybody and actually I have this on TV this morning, we’re talking about everybody is saying, okay, so prices are rising a lot, but when are they coming down? But I’m still buying.
The problem, the pain threshold starts to appear when employment growth, wage growth, starts to stop, and at the same time, prices go up. And obviously the companies that feel comfortable about raising prices start to see their inflation rate, rise. So it’s always difficult because we never know. There’s a variable there that we’re very unsure of, which is credits. How much credit are we willing to take to continue to consume the same number of goods and services at a higher price?
But it is absolutely key what you’re saying, which is as long as even though wage growth in real terms might be negative, but you’re getting a pay rise and you still feel comfortable about your job, you feel comfortable about your wealth to a certain extent and credit keeps you safe, consumption in the United States is not going to crack.
However, where do you see it cracking? And we’re seeing it cracking in the eurozone. In Germany, where you don’t get the pay rise, you don’t get the benefit of taking expensive credit from numerous different sources or cheap credit from different numerous sources and at the same time you get elevated inflation. Consumption is actually going down the drain. The way that I see it is that the problem, the consumption, not collapsed, but certainly the consumption crack is very likely to happen more north to south in the eurozone than in the United States at the rate at which the economy is growing.
Tony
Yes, yes, very good. Thanks for that, until on Europe, Daniel, that was really helpful.
Okay, let’s do it very quick. What do you expect for the same week or two weeks ahead? We have a Thanksgiving holiday here in the US, so things are going to be kind of slow. But Tracy, what are you looking for, especially in energy markets for the next couple weeks? We’ve seen energy really come off a little bit this week. So what’s happening there?
Tracy
Yeah, absolutely. Part of the reason of that, besides all the global factors involved, the recession didn’t help UK him out and said they were already in the recession. That then sparked fears. We have pipeline at reduced capacity right now, which means that’s going to funnel some more crude into cushion, TWI contract is actually cushing. So that’s putting a little bit of pressure. I think holidays, obviously I think this next week we’re not really going to see much action as usual. So really looking forward to the following week is we have the Russian oil embargo by the EU and we also have the OPEC meeting and I would suspect that at these lower prices they would probably, they might be considering cutting again. So that’s definitely those two things. I’m looking forward to in that first week in December.
Tony
Great, thanks. Daniel, what are you looking for in the next week or two?
Daniel
The next week or two are going to be pretty uneventful, to be fairly honest. We will see very little action or messages that make a real difference from Fed officials or from the ECB. On the energy front, there’s plenty of news that we pay attention to Tracy’s Twitter account. But in Europe we will get quite a lot of data, quite a lot of data that is likely to show again this slow grind into recession that we’ve been talking and very little help. I think that from here to December, most of the news are not going to change where investors are and that will probably start to reconfigure our views into the end of the trading season, 27 to 28.
Tony
Okay, very good. And Sam, what do you see next week? The week after?
Sam
I’ll just be watching Black Friday sales that are coming in. Honestly, I think that will be a pretty important sign as to how things are developing into the holiday season and begin to set the narrative as we enter in December. Again, there’s no real interesting Fed talk coming out next week, but we’ll begin to have some pretty good data coming from a number of sources on Black Friday, foot traffic, internet traffic, etc. Tuesday and Wednesday.
Tony
Very good.
Sam
The following week. That’s all I care about.
Tony
Excellent. Really appreciate that. For those of you guys in the States, have a great Thanksgiving next week. Daniel, thank you so much. Have a fantastic weekend. Always value your time, guys. Thank you so much. Have a great weekend.
Emma Muhleman, Boris Ryvkin, and Albert Marko join us for this Week Ahead episode. We talk about FTX and why it happened. FTX transferred about $8 billion of customer deposits to a trading arm called Alameda, and they lost it. FTX was assumed to be a regulated institution. It wasn’t. So customer deposits evaporated. There was a desperate attempt to merge with Binance. That didn’t happen. FTX filed Chapter 11 on Friday, and then Sam Bankman-Fried apologized as if that just absolves him and makes everything better.
Albert, Emma, and Boris help us understand what happened here and what it means not just for FTX executives, but for markets in the week ahead.
We also saw some selling in crude markets as FTX collapsed. Emma talks us through that and tells us how long the crypto unwinds will impact commodity markets.
Based on the market reaction to Thursday’s CPI print, you may think inflation is solved. CPI seemed to override FTX worries and there was this huge sigh of relief in markets. Not so fast. Boris, Emma, and Albert talk us through the CPI print and where we’re seeing persistent inflation (diesel, food, etc). Will the Feds raise by 50 in December followed by some 25s? How will this affect layoffs across the economy?
This is the 41st episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Tony Nash: Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. Today we’re joined by Emma Muhleman. She’s a macro strategist and if you don’t know her, you’re not on social media. We’re also joined by Boris Ryvkin. He’s with Montefly Holdings. He’s also a former M&A attorney with Skadden and a bunch of law firms, and he was National Security Advisor in Capitol Hill. And Boris has an amazing perspective on macro, on history, on markets. It’s really great to have both of you guys. And we have Albert Marko. You guys know Albert. So it’s just great to have you guys. Thanks so much for being here.
Before we get started, I’m going to take 30 seconds on CI Futures. Our core subscription product. CI Futures is a machine learning platform where we forecast market and economic variables. We forecast currencies, commodities, equity indices. Every week markets closed, we automatically download that data, have trillions of calculations, have new forecasts up for you Monday morning. We show you our error. You understand the risk associated with using our data. I don’t know if anybody else in the market who shows you their forecast there. We also forecast about 2000 economic variables for the top 50 economies globally, and that is reforecast every month.
So we had a lot going on this week, particularly kind of in the second half of the week with FTX. Unless you’ve been kind of on vacation or away, you probably know about this already, but I’ll recap a little bit.
FTX transferred, I think, something like $8 billion of customer deposits to a trading arm, Cart Alameda, and they lost it. FTX was assumed to be a regulated institution. It wasn’t. So the customer deposits evaporated.
There was a desperate attempt to merge with Binance. That didn’t happen. FTX filed Chapter 11 on Friday, and then Sam Bankman-Fried apologized. We’ve got his tweet from Thursday on the screen. He sent another apology out today. And if that just absolves him and makes everything better.
So, Albert, I know you’re a huge fan of crypto, so can you help us understand kind of what happened here? And really, what does it mean not just for Sam, but what does it mean kind of for markets going into next week?
Albert Marko: Well, for Sam, you can look at my shirt. That’s I purpose wore stripes, because that’s where he needs to go to. He needs to go to prison. The crypto space has been just littered with fraud. I mean, just incredible fraud. This guy had the nerve to go up into Congress and talk about transparency and central banks are illiquid and there’s no transparency.
Meanwhile, he’s taking customer deposits, not only just setting it to Alameda, right. But then now there’s a political component of it because he was spreading it around to super PACs for the Democratic, for Democrats.
This is a bigger story than people are alluding onto. On top of that, you had a bunch of Republicans come out and say, why was Gary Gesler helping him get through loopholes in the system?
TN: Was that actually happening? Because I saw that gossip on Twitter, but I’m just not sure if that was actually happening.
AM: Well, yeah, this is political season, so I’m not sure if it actually happened. But you don’t just come say something like that, right? You don’t just make those kind of accusations out of nowhere.
So there’s definitely going to be congressional hearings on this. SBF could be in jail at some point in time.
Concerns of where the customer’s money is. This is not funny. As much as I just absolutely despise crypto, this is not funny when you take people’s hard earned money and put it into different outfits without
any transparency whatsoever.
TN: I hear a lot of comparisons of this to Corzine from, like, 15 years ago. Are there similarities between what Jon Corzine did and what Sam did?
AM: That’s a really good question. I don’t think I can really answer that because we know exactly what FTX actually did with all these funds, where they’re at. Because there are stories that there’s penthouses and condos all over the Bahamas and the Caribbean that they can’t even touch yet. We’d have to find out a little bit more detail of what went on, what transpired into FTX.
Emma Muhleman: Because a lot of the deposits don’t invest in them in illiquid private equity investments, including VC funds that were invested in FTX.
AM: Like Sequoia put in a little bit of money and then they get 500 million back.
EM: Sequoia put in like $420 million that they wrote down to zero.
TN: And they got 500 back? It’s a great deal.
Boris Ryvkin: What was interesting was that Kevin O’Leary, he had a Jim Cramer moment with FTX. He said, if there’s one place where I could feel totally safe and fine, it’s FTX, apparently, because he was confident in their compliance capabilities. Because apparently the CEO was like his parents were like compliance lawyers or something. And he’s probably that’s not one of Mr. Wonderful’s more wonderful calls, I think.
AM: Well, when your parents are compliance lawyers, it just means that they’re going to teach them how not to be compliant and not get caught. That’s what happens when that occurs.
TN: Okay, so what does this mean for crypto generally? I know you’ve been not been a crypto fan for a long, long time. So is this an FTX issue or is this a crypto issue?
AM: This is a crypto issue. This ruins the credibility of any crypto that’s even valid in people’s eyes at the moment. Even Bitcoin is the 800 pound gorilla. There’s other cryptos that are trying to be stable and compliant and everything, and it kills.
TN: Do you know how many crypto pages we’re going to get in the comments to this?
AM: I bring it on because I’ve been telling these people for years that the space has been just a positive scheme after another.
TN: So does this permanently kind of impair crypto, or do you think there’s a time that two or three months from now, everyone forgets about it and people are back in and crypto is back on?
I just think that the crypto excitement is so persistent that I’m just not sure that this hurts it for the long time. They haven’t had that moment yet.
AM: No, not yet. It doesn’t hurt it. Actually, I want to say it actually kind of makes it better because it is weeding out the real problems and showing the problems that are in the space.
But the bigger problem that they have now is one side of credibility is getting retail money into the space. Retail money is just not going to get into the space, and even institutional money is going to have to think ten times more about getting an investment in the future.
TN: So what was it, thanksgiving of 2019, I think, when all the retail money went into the space Something like that, right? We got Thanksgiving coming up here in the States, and we’re probably not going to have the same effect this year.
AM: Oh, God, no.
TN: Are there any other players, do you think, that are likely to fail as spectacularly as FTX has failed?
AM: I don’t think so. At this point, I think that the FCC is going to have to really crack down on the entire crypto space and really force these guys to be compliant with, your know your customer rules and whatnot. So that’s something, actually, Boris could talk about, but I think they’re going to have to do something drastic here with the whole space.
TN: Boris, I guess from a legal perspective, how much do these guys have to worry? Do you think Sam can get away with this?
BR: I just don’t. No, I don’t. I think that, you know, the issue, of course, is just going to be the chain of ownership, first of all, of all, these shell companies. Where’s the money? Where did the money go? Because the money’s gone. I think it was something I know that there were a lot of jokes. He went from 16 billion net worth to a dollar, and he can’t afford his verification badge on Twitter now.
I think there was specifically because he’s now requesting, what, 94 billion as a rescue package. Once you’re already, and today he officially announced today was that they were filing for Chapter Eleven. So that was the official name today after requesting 94 billion, which was already I mean, when you’re already at that point, it means that nobody’s keeping the book.
So first of all, just in terms of any kind of account, whoever the accountant is, if there even was an accountant tied to this, whoever was signing off on this needs to worry a great deal. It’s not just Sarbanes Oxley and everything related to that, but it’s just simply who are these accountants and who was actually keeping these books? Because these numbers that were being thrown out, putting aside that it was impossible for him to get any kind of rescue package that quickly. But that number, it’s a number that is simply not credible.
TN: I’m going to get really boring on you for a second. Most companies have a DOA delegation of authority, right? And so I would think that to transfer $8 billion, the delegation of authority would go up to the board level. Is that fair to say?
BR: Well, I mean, it should, because again, it depends how these companies are actually managed, right? Because these could be not under US law managed, board managed, or there could be LLCs involved here which are member managed or have separate managers or what have you. It should go to the board level.
And in any event, you should have the senior management sign off on the accounts, not just the account. Even though that’s the position with public companies now since Starbucks and everything else. But even when it comes to private companies, to have for sufficient transparency, to really have investors comfort, you would need to have that chain of control.
So the DOA would have to come depending on who actually the board would have to authorize the management to give the DOA either broadly upfront or specifically for a specific transaction as it would happen.
TN: Because of $8 million, that’s still a fair bit of money, right?
EM: There were several acquisitions that he made that were private companies with the tune of over a billion each. So I guess you got like two $1.5 billion private investment, 500 million here. So I guess that’s how that all works out.
TN: You would guess that those have to have board approval at some point, I would think.
BR: I’ve done in the past very discreet deals where it’s sort of like, we’ve already transferred 100 million for this property. Please paper all of that over retroactively.
I’m sure that that’s what happened here. In other words, there was a lot of money moving around, nobody papered over what they needed to paper over. And I would be surprised if there’s actually a chain where all of the documentation that was needed at each stage of the transfer was actually put in place.
I’m certain that money just moved around all over the place, which makes it now very hard to track because there’s going to be a very limited paper trail to find, which is going to be a problem for him and everybody who’s authorized per the corporate documents of these companies for having to move the money around. So it’s going to be multiple levels of potential liability.
TN: Okay, so I would guess also that everyone in every crypto company is probably also coming up with their policies, if they didn’t have them already.
BR: So what are the investors are going to start calling to talk major policies. But I think the bigger issue, and Albert sort of touched on this, is the fact that this is an exchange, fundamentally.
So the issue isn’t we’re talking about Bitcoin as a currency, but if you can’t trust one of the largest exchanges and I forgot that was it, it wasn’t Coinbase, it was one of the others that pulled out of an attempt to that’s a last minute shotgun. Binance. And that has a second and third order effect. So not only did this huge exchange fail, it was such a disaster that the Binance, which is one of the more credible exchanges like Coinbase and what have you, just simply said, you know, this is beyond saving.
So it could really have a cascade effect. I know some are calling it the Lehman moment for crypto, although Albert would say there have already been five or six of those.
TN: Right, well, and before we get too critical of FTX as an exchange, let’s look at the LME and the credibility of kind of traditional exchanges. So, I mean, it’s easy to point the finger at crypto exchanges, but the LME has done some pretty screwy stuff over the years. So I think we need to be really careful
of just saying, well, I know you didn’t say this Boris, but crypto exchanges do screw things. Other exchanges do screw things as well.
EM: might I mention, though, with the LME, they are now under the control of the Communist Party of China via HVX. Great. Who is running the show? Real competent folks at the CCP. Binance is even shiftier if you ask me, but we’ll see.
TN: Speaking of markets and crypto, Emma, can we talk a little bit about kind of markets and correlations? How are we seeing this crypto activity and how do we expect this crypto activity to kind of flow through into other markets, equities, commodities, other things? Obviously it didn’t hit equities yesterday and today, but it seemed to be hitting earlier in the week.
EM: Yeah, just as it was all falling apart, we saw a big risk off move in equities. We saw the Nasdaq coming down, we saw some weakness in oil that may have not had anything to do with the
fundamentals in the oil market. I would venture to guess or argue that it had more to do with the FTX sell off because there were several companies, including pension funds, that had significant exposures in FTX. So that oil related selling around the time that FTX all this broke. It may not have to do with the report, this actual EA report.
TN: So I’ve got a graphic from Tracy’s newsletter earlier this week where she talks about the funds and the investors that were deleveraging in oil because of FTX. BlackRock, Ontario Pension Fund, Sequoia, Tiger Global, et cetera, et cetera.
So there were some big players impacted by this and I can’t believe that it just impacted oil. I also have a hard time believing that it was a one time, say, 48 hours event.
EM: Yeah, I would think that. Not having done any diligence for a pension fund, Ontario Pension Fund,
like for BlackRock. I mean, I don’t want to call out too many names. We all know what SoftBank is about. They were intimately involved. There’s going to be a lot of problems and a lot of spillover that we’ll just have to wait.
TN: At the end of the day, I hate to say “only”, but in terms of global fund flows, it’s only $8 billion of retail money that was lost. It’s I say “only”, but, you know, it’s not a huge amount in terms of flows, but I just don’t know how much is in these funds themselves.
AM: Yeah, you don’t know how much the funds have lost and what they’re trying to make up and like yeah, sure, 8 billion doesn’t sound a lot, but in a market that’s so illiquid with a lot of these funds blowing up right now, it can be a lot. You don’t know what they’ve leveraged off of it.
EM: And what they might be being forced to sell as a result.
TN: So we probably haven’t seen the end of that. Fair to say?
EM: We’ll see a long restructuring or not restructuring Chapter Eleven. Not a restructuring, but a liquidation.
TN: Yeah, it’ll be liquidation.
AM: Discovery will be fun. See where all this money went to.
TN: Great, that’d be great. Okay, perfect. Anything else on markets and FTX and crypto? Are we looking at is this impacting, say, European markets or Asian markets? Since crypto has been so big in Asia, are we seeing impacts in Asian markets, like in China?
AM: I don’t think so. I think that’s really Binance’s territory at the moment. Right now, I think FTX was solely the US and Western Europe.
EM: I would think you would see an impact on Japanese investors as well, who own a lot. But just like, not the kind that puts out life insurance companies or puts you a lot of business, but more like retail investors getting screwed.
AM: retail investors have just been taking it on the chin for the last 18 months. It doesn’t stop. 30 years.
BR: Except for Warren Buffett and those who invest with him because yet again, everyone’s underwater, he’s up like 2.3%.
TN: Boris, say, can you talk us through the CPI print this week? Because it seems like CPI, the rate of rise of CPI slowed. CPI didn’t slow, but the rate of rise of CPI slowed. And so it feels like it kind of overrode the FTX worries and there was this huge cyber relief in markets for the past couple of days that we’ve kind of conquered inflation. And the Feds only going to raise by 50 in December, and then after
that we have some 25s. What’s your sense of that? Do you feel like kind of inflation is conquered? Is that base effects? Is that kind of core inflation coming down? What does that seem like to you?
BR: Yeah, I don’t think that it’s conquered. I mean, what’s interesting to me is sort of the degree to which all that matters is what the Fed may or may not do and trying to price in factional differences within the Fed. That’s how granular it’s now become. Because I think the markets were waiting for any reason, anything, to cling onto for Powell to reverse course and to after his very hawkish last meeting, where he said, ignore all of the pivot talk.
Essentially, you know, we’re going to continue to do this as effectively as long as it takes to see a sustained reduction in inflation over that’s defined. So he essentially was very angry and Albert and I were talking about this as well, that he was very angry by some of the Pivot talk from brainer than some other people yelling, was saying certain things. It looked like some of the more devastated member. And then Powell comes out and basically says, I don’t know what you’ve heard about any Pivot talk, we’re going to stay the course until we see more evidence of multi quarter reductions and declines in inflation.
But it looked like the market really was desperate to find a reason to not believe them and to hope that anything that might persuade him to in other words, the market is looking for anything to latch onto to have a pivot, even if we don’t actually get one.
So initially it was the official position, if you were even to read the kind of the superficial financial media was they were worried if we focused on the red wave, that was what was going to get the relief rally. Then we forgot about what was happening with the midterms. And now we have this softer inflation report that as you said, to slowed the rate while most of the slowdown was because of on energy, used cars and a couple of these other, in my view, short term fluctuations which are, I mean, to the extent that CPI has already been massaged to death.
Obviously the listeners of this podcast of course know that very well. If we measure inflation how it used to be measured from the 1970s on, we’d be in double digits. I mean, that’s just a fact. So taking even to the extent that they were able to massage it, what I saw here was the market latching onto the top line figure, hoping that this would block the Fed into doing what the markets want the Fed to do, rather than actually looking at what’s happening to the core and actually looking below the hood and the underlying trend.
That’s what I’m seeing. You also can’t have to take into account biden’s political depletion of strategic petroleum reserve. You have to take into account the unseasonably milder sort of late fall that we’ve been having, I think that’s been having an impact on natural gas prices which have this very sharp decline and now have rebounded a little bit.
Certainly that’s coming out of Europe as well, but I’m not seeing anything fundamental that would actually allow us to conclude peak inflation and sustained reduction inflation has been achieved. So I’m not saying that when it comes to energy, I’m not seeing that when it comes to food, I’m not saying that. I mean, the housing market is not doing well. I’m not seeing any fundamental changes in the housing market. Really. This to me seems like a short term story and the market overreact, in.
TN: My view at least, this is that’s great. So I’ve got on screen Sam’s from Sam Rines newsletter, the core CPI and all CPI items, just showing a bit of turnover there. So it could be encouraging to people who like lines. Right.
But if we look at the target rate probabilities for the Fed, which is the second item on the screen, it does look like we have from a 4.5 almost to a 5.5 target rate.
So that shows there may be ongoing tightening, say maybe into Q one, if we don’t see a dramatic continued decline in the rate of rise of inflation. Is that fair to say?
BR: Yeah, I think so. I think that it seems that the growing chorus is shifting from do what continue as long as it takes to fear of overtightening, at least outside of Powell and maybe one or two other people. And Albert really, I think, is the resident expert on FOMC, inside of baseball on that and sort of thinking, et cetera.
But once that rhetoric shifts to fear of overtightening, that tells me that they’re looking for any excuse to stop and to begin moving back. And that will just bring the inflation genie back out. Because again, these policies are being set by people who don’t fundamentally understand what inflation is and isn’t and what’s causing the inflation. So they’re looking at the wrong things still, in my opinion.
So none of the fundamentals that I’m seeing, as I said, that would really drive a sustained reduction in inflation have changed in that direction. And once if they do decide, as you said, Tony, if they do continue to tighten into the first quarter and then decide to do a sharp 180, that’s going to just bring everything back, if not make the situation even worse.
So they’re in a very difficult position and I think, as I said, there’s a lot of political pressure for them to move back, especially given what’s happening with these midterms, certainly on the part of Yellen and the bike administration. But I think maybe Albert can also chime in.
TN: Let’s talk about the Yellen Fed factor and also since she’s a labor economist, Albert, let’s wrap some of these layoffs that happened this week into that discussion.
AM: How coincidental that these layoffs come right after Midterms and after Yellen has done everything in her power to keep equities up so they don’t have to have layoffs until now. Well, now all the layoffs are coming. Like we’ve talked before, they’ll do this right before Christmas.
But also on the CPI and the inflation front, there are two glaring problems that they’re staring at the moment right now. How’s y’all going to deal with the Chinese reopening in March? Because that’s going to be really announced in February. They did a little bit about real estate today. They talked a little bit about real estate supporting the real estate market. And every Chinese name that was on my screen was up by 7%.
And then you talk about oil and then we have a big diesel shortage in New England at the moment and it’s leaking down all the way into the Southeast. And those are just going to add to costs across the board. And I don’t think that they understand how bad inflation can really get. They can only suppress it for so long with SPR releases and whatnot. But it’s coming to a head and I don’t think that Paul is going to be able to release. I think he’s going to have to do another 75 again.
EM: The thing that’s just disturbing to me about that is that, like, for instance, we are going to have a serious diesel shortage coming here currently and it’s only getting worse. Powell cannot fix that problem. So let’s just shoot the consumers even more like his policies. They’re not helping. Unless you want to completely destroy the economy and have a complete disaster blow up with Deleveraging and the whole shebang.
TN: Default rate in auto loans this week. Right. I can’t remember the percentage of people who were two months behind in auto loans.
AM: Skyrocketing wastelouses start kicking into that, too. Started kicking in. But just to touch on what Emo is saying about Powell trying to kick the teeth into the consumers from his perspective, he’s trying to do the right things, but he’s just not getting any help from yelling or other members coming out there talking about pivots.
TN: What would that look like? Help from Yellen. What would that look like?
AM: Well, she can drive the dollar down to Dixie. That rallies the markets pretty easily.
EM: Well, he doesn’t want a market rally, right? She can help.
AM: Powell does not want a market rally. Brainer and yelling did want to market rally for the midterms. So this is the problem that they have. There’s a civil war within the Fed and treasury that is just making these policies look even stupider than usual. And I know Powell is going to get the brunt of it because he’s the Fed chair, but he only has two other members that are on his side. The rest of them are against them. So he doesn’t really have much of a choice. He’s going to have to do 75 in December.
TN: Well you say he’s going to have to do 75 in December.
AM: He’s going to have to do 75 because we have a CPI print coming out December 14. It’s probably not going to be as nicely massaged as this one was. And on top of that he’s running out of time because the Chinese look like they’re going to stimulate in February, March.
TN: Yeah, you’re right. I agree with the timing on China opening and Chinese stimulus in the meantime is going to be really ugly in China. Do you think that it’s possible that there’s some sort of regulatory relief especially for energy that allows, eventually allows more US. Supply, this sort of thing? Or are we too far down that path with the current administration?
AM: Me and Boris are bred from DCP, the Beltway guys, we’ll just laugh at anyone with the notion that think that anything is going to get done legislatively in the next two years.
TN: Okay, but nothing getting done legislatively is not terrible, right? At least we know the rules of the game and their content.
AM: Yeah, it’s not if there wasn’t problems but there’s glaring problems everywhere and things need to get fixed. So you need something from progress.
TN: Okay, let me throw this out to you guys. We have seen a little bit of move on CPI, whether it manipulated or not. We all kind of know it’s always in there a little bit. But what’s the timing on inflation coming back into a reasonable area? Let’s say five to six, I don’t know. Are we a year, two, three years from that, six months from now? What do you guys think? Emma, what do you think?
EM: If we’re ignoring energy and then we’re ignoring fertilizer prices and food prices, we’re looking at goods, those we may see services come down and wait the wage issue come down a little bit. Just like we’ve seen with auto delinquencies, used cars, these sort of things. You see numbers starting to roll over as demand destruction and liquidity has been pulled.
But I think you’re going to see the opposite in energy and you’re going to see diesel shortages which pushes goods prices up. Right. If every trucker in the nation has to spend a time for every time they fill up with diesel and they can’t even fill up enough, then there’s going to be not only a shortage of goods but goods prices will less go up.
I don’t see how we fix that situation. We only have extra finding capacity. It takes like 30 years to build a new one so I don’t see how that gets fixed. So that’s something that really looks like it would push inflation upwards. So if we add all that together, I’d say we’re going to have a problem with inflation for good at least another year if we include energy and food.
TN: OK, let me ask this. That’s a great answer. Let me ask this divorce, because I know I’m going to get an answer that doesn’t agree with what I think is there pressure to broker a Russia Ukraine piece? And if that happened, would that alleviate some of these diesel price issues?
BR: I think that there is. I know that Orban, for example, and Erdogan met and basically said to Zelensky’s, time to use this window of opportunity to start negotiating. So they liberated Kirstan today, which was.
They liberated Kirsten today, which was the one major city that the Russians were able to occupy and they were offensive earlier the year. So this is kind of a huge move with the Russians on the back foot. And these are people who are everyone is playing all sides.
And Orban, of course, is more kind of the one European leader that’s closest to Putin major leader. But I don’t think that the US is. I know that there was some discussion from the Biden administration about don’t be so categorical about Zelensky, about saying you’re not going to negotiate with Putin. It’s irritating African countries, South America, et cetera.
You have to start taking advantage. I don’t think there’s any pressure and will be in the near term, and especially after these midterm results, I think that the risk of any major, immediate cutoffs in military economic aid from the US to Ukraine are going to be somewhat subdued now, given the kind of the risk from right and left. So I don’t think there’s going to be any nearterm pressure on the Ukrainians right now to start looking at essentially trading land for some kind of an intermediate piece.
But as a side issue, there was some in terms of alleviating the diesel and the gas problems, especially in Europe, there was some discussion about Erdogan purchasing Russian gas at a discount and essentially creating an alternative for the Europeans through that pipeline that was being built basically through the Black Sea, et cetera.
And there was a lot of kind of talk in the US and some European capitals like Erdogan is going to save us because he’s playing everybody and he’s going to create a new gas hub in Turkey, as he declared with the Russian gas. What he’s actually going to do, and Albert and I were talking about this too, in my opinion, is because of Turkish elections next year, he’s going to keep the discounted gas, sell it at home, domestically cheaply, in order to drum up support for his reelection next year. He’s not going to resell that to the European.
So that life raft is not going to be sailing. So therefore, I think that unless there is some relief from the weather, I’m not seeing any, because I know that at that moment, because the weather was unseasonably warm to a large extent, you have this natural gas flood in Europe now, which has driven down natural gas price, at least in the short term.
Dutch and et cetera, the benchmark. But I don’t think that’s necessarily going to sustain. I think we could have a colder winter and Erdaman is not going to provide that relief. I know the Ukrainians are looking at alternatives themselves, but the Ukrainian economy doesn’t exist anymore, really.
Right now, we’re basically balancing their budget through direct cash transfers at the moment. I think it’s only going to be bad news and it will reinforce what Emma has said about her predictions about the diesel shortage and about just energy in general and how that would impact inflationary changes. So I’m not seeing any major improvement.
And also, in terms of the broader discussion on inflation, I also agree that, again, kind of what I said before to dovetail off of that, like, none of the fundamentals to reduce inflation have improved, have changed markedly. So we could be, it’s really, to me, a risk tolerance for recession on the part of the Fed.
When will the Fed decide that if they’ve given up on a soft landing, then we’re going to have one projection in terms of when inflation is going to start coming down dramatically. If they still are insisting on the fantasy of a soft landing, then there will come a point where they might decide.
Regardless of what happens with inflation, recession is a much bigger problem. And we’re going to have to, sooner than we had hoped, begin to pivot, which is probably not something that Powell would want to do, but that’s a recession versus a soft landing versus hard landing balancing act that they’re, I think, going to have to perform over the next couple of quarters.
And I think that’s sort of their near term focus and to kind of close that point off. Right. I mean, I think that the layoffs and I mean, the fundamentals are cooling, the economy is slowing. We’re seeing that with the layoffs, the housing market is going to get worse, in my opinion. Oh, yeah, it’s a disaster.
TN: Look at the MBS holdings at the Fed. They’ve just started to tighten them. They’ve just started. Right.
BR: But then you also have to take we talked about you said auto defaults for auto loans. What about credit card debt, consumer credit card debt? And also, what about the leverage that’s on the books of these companies? Why is the tech, which is tech at the tip of the spear? Why are we seeing all of them down 70%, 60, 70% on the year? Why are we seeing the layoffs hit tech massively? First, because they grew too much too quickly and are over level.
EM: They did refinance in 2021 when they had a chance. So they’ve got like a couple of years.
BR: I don’t know who’s advising Zuckerberg here and his colleagues. I think what we’re going to do is we’re not going to refinance, we’re going to double down on Meta, which we don’t really know what to do with and we’re going to double up on the head count dealing with Meta, on the Metaverse thing, that isn’t getting adopted the way that we would want it adopted. It’s like everything, every mistake that could possibly have been made from the financing to the head count to the rollout, and that’s happening across the tech sector, but we’re financing.
TN: Would you have done differently? I would have taken on all that too, because it was fun. I’m kidding. But I actually think that there are more rounds of layoffs in tech coming. I don’t think this is the only round. I think that in the auto sector, tony and auto and other guys.
So I think I was in Silicon Valley in 1998 to 2001. I know that’s ancient history, but my company went through six rounds of layoffs. I didn’t know when I say my company, the company I worked for, they went through six rounds of layoffs.
So I think all these stories about people at Meta thinking they were going to dodge it and all this stuff, I don’t think that I don’t think this is the only one. I think they’re going to have to do more in three to four months.
I think you’re going to see more companies bandwagon on top of this to say, hey, Meta is doing it and Stripes done it and all these other guys are doing it. So let’s use this opportunity to become more productive and we’re going to see a flood of these before the end of the year. Just a flood. I think the tech sector is going to be wrecked in terms of employment.
AM: Oh, yeah, without question. Even going back to your previous point about the Ukrainians and the Russians getting some kind of peace agreement, even if they did, that would solve the diesel problem overnight.
Even if they did that today, it would take a year, maybe 18 months until all that got rolling in again if they looked at the sanctions, because they still have to go through that whole process for all the countries.
EM: Russia doesn’t send us diesel heavy crude and then we have to process it at refineries, which are running at max capacity. Hence the crack spreads being so wide, we can only convert so much crude into distillates, which diesel of which is one of which jet fuel for planes is another, but both things that cost a lot of money when the prices of the input key input goes up.
TN: Okay, great. Let’s do just a really quick round the week ahead. What are you guys looking for for next week? Albert, you go first.
AM: I’m actually going to look at to see what the House majority and Senate majority makeup comprises of and whether the markets are going to react negatively towards it. Because if the Republicans, I know they’re going to take it, but when they get announced that they take the House, the stimulus packages all but die at that point for two years. So I’m very curious to see how the markets react to that.
EM: I’ll be continuing to watch what’s going on in Crypto to see if anything’s happening with Bitcoin ethereum, because we’ve already seen a lot of other tokens just literally, basically go to zero. So just see how that continues to play out.
TN: Great. My $20 a DOJ is still at, like, three times where I bought it at, so I’m just holding on to it just to see where it goes.
EM: And then I’ll also, obviously, as usual, be watching China and certainly the bank of Japan and just the end period.
BR: Yeah, like Albert, the makeup in Congress and also going to be looking at some of the emerging markets. I think maybe if we’re going to get more evidence out of China as to when they’re still pursuing COVID Zero, I think they’re now recording again, like, a record high number of cases from April. It’s not working yet. They’re continuing to double down and reward everybody who’s pursuing that.
So I want to see if they’re going to continue with that and they’re going to be on track for what Albert said to reopen early next year or if it’s just going to get worse. So that’s what I’m going to be focused on.
TN: Yeah. You’ve heard of the great league forward, right? I mean, these don’t really take sound policy advice. When they get their mind on something, they just push it and push it and push it until it harms everybody they can.
EM: I often when you’re trying to when you have, like, the worst debt crisis ever and the population that’s, like, you know, put the equivalent of $50,000 down on apartments, like, millions of people have done that, and they’ve got nothing to show for it, and you want to keep them from acting out and protesting in the streets. It’s pretty convenient to have them all segregated where they’re not communicating. I wonder really what the motivation behind COVID Zero is. And so I don’t know if I buy that it’ll ever end until it’s convenient for it to end economy wise, where she feels no threat.
TN: I don’t necessarily disagree with you. I think things in China don’t necessarily end until they want them to end. Right. And if you look at exports from China to the US. They’re back up to preCOVID levels now. So in terms of that export machine in China, it’s humming, right? So there’s not feeling economic pain, at least in terms of trade.
So if they’re comfortable feeling the domestic economic pain, then why would they stop? So I think what Albert talked about is Code Zero ending in March, and he and I’ve talked about that a couple of months ago as well. I think that’s the best case. So I think there’s a best case that they end it and they stimulate in March, but it’s quite possible it continues going on because there may be social reasons, there may be other reasons to not open up.
So I don’t think, as westerners, we can look at the Chinese government necessarily and understand the perspective they have on policy and the reasons they have for policy. There is so much inside of Jungkonghai and all of the different things that happen that we just can’t look at it rationally and say they should do A, then B, then c, and very few Americans can look at that and understand why and how it’s happening. You may be exactly right.
EM: Yeah. It’s not a logical I mean, it’s more like if I’m she or if I’m trying to do this, it’s not really like what westerners typically associate as logical things to do economically. It’s more like it’s possible.
TN: Yeah. Anything’s possible. Guys, thank you so much. I really appreciate the time you took to talk through this. Have a great weekend. And have a great weekend. Thank you so much.
It has been a terrible week in markets. It is not looking good for anybody, at least on the long side. A lot of that seemed to change when the CPI number came out. It’s like people woke up and terminal rate is going to be higher and just everything flushes out.
We talked through why the dollar is where it is and how long we expect it to stay there. Brent Johnson recently said that the USD & equities will both rise. And so we dived a little bit deep into that. We also looked at crude.
Crude’s obviously been falling. Tracy discussed how long is that going to last.
We also did a little bit of Fed talk because the Fed meets this week. And we want to really understand when does the Fed stop? After last week’s US CPI print, the terminal rate rose from 4% pretty dramatically. Does QT accelerate?
Key themes: 1. $USD 🚀 2. How low will crude oil go? 3. When does the Fed stop? 4. The Week Ahead
This is the 34th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Time Stamps 0:00 Start 1:20 Key themes for this episode 2:24 What got us to stronger USD and will it continue to rise? 8:29 Dedollarization 10:23 Intervention in the dollar if it gets too strong? 12:22 Both the USD and US equities will be rising? 14:18 Crude: how low can it go? 18:03 Look at the curves for crude 19:17 Slingshot in December? 20:18 How India and China buys Russian oil and resell 21:33 Restock the SPR at $80?? 22:57 When does the Fed stop raising rates? 29:33 What if Russia, Ukraine, and China don’t lock down anymore? 32:08 What’s for the week ahead?
Listen to the podcast version on Spotify here:
Transcript
Tony Nash: Hi everybody, and welcome to The Week Ahead. My name is Tony Nash. We’re joined today by Tracy Shuchart and Brent Johnson. So thanks guys for joining us, really appreciate the time to talk about what’s going on in markets this week and next week.
Before we get started, I want to remind you of our $50 promo for CI Futures. CI Futures is a subscription platform to get forecast for thousands of items: currencies commodities, equity indices and economics. The currencies commodities equities are refreshed every week. So every Monday you come in for a new forecast, economics forecast every month. That $50 a month promo ends on September 21. So please take a look now go in and check it out and if you have any questions, let us know, we’re happy to answer them. So thanks for taking the time to do that.
So, Brent and Tracy, it has been a terrible week in markets. It is not looking good for really anybody, at least on the long side. And so a lot of that seemed to change when the CPI number came out. It’s like people woke up and we’re like, oh no, the term rate is going to be higher and just everything flushes out, right. And earnings and a bunch of other stuff. So we can go into a lot of specifics. But one of the items that I’ve been really curious about for weeks, if not years, ever since I met Brent in 2018, 19, is the dollar. So we’re going to go a little bit deep into the dollar today.
We’re also going to look at crude. Crude’s obviously been falling. So we’re going to ask Tracy kind of how long is that going to last? And then we’re going to do a little bit of Fed talk because the Fed meets in the week ahead. And I want to really understand kind of when does the Fed stop.
So those are our key themes today.
So, Brent, welcome. Thanks again for joining us. I’d really like to talk through the dollar and we are where we are, which is amazing. And you have seen this years ago. On the screen, I’ve got a chart of our CI Futures forecast which shows a dollar continuing to rise over the next year. We’ve got some bumps in there, but for the most part we see a persistently strong dollar.
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So I’m curious what got us here and what will continue to push the dollar higher?
Brent Johnson: Sure. Well, first of all, thanks for having me. I always enjoy talking to you, Tony. The reason I like talking to you is you’ll talk a lot about Asia, but you’ve actually lived there and you actually know what you’re talking about rather than people who’ve just read it in a book. And same with Tracy. So I’m happy to do this and happy to do it anytime you invite me.
But anyway, what’s really going on with the dollar is a function of the fact that it’s not only the Fed and it’s not only the US that has, for lack of a better word, idiotic leaders. The rest of the world does, too.
And I think over the last several years. At least in the retail investment world. There’s been this theme that the Fed is out of control. The government’s out of control. They’re going to spend all this money. The dollar is going to pay the price. And it’s going to get inflated away and go to zero. And the rest of the world is going to do great and we’re going to do poor.
And I understand that view if you just analyze the United States. But the problem is you can’t just analyze the United States because it’s a big world and everything is interconnected. And all of the problems that people have forecast to fall upon the US.
Dollar are currently happening to a greater extent in Europe and Asia. And the budget deficits, the printing of the money, the central bank support, the holding down of rates, all of that applies even more so to Japan and Europe than it does the United States. And that’s really what you’re seeing.
Over the last, let’s just call a year, you’ve seen the yen fall 20% versus the dollar. That is an incredible move for any currency, but it is an absolutely astonishing move for a major currency, specifically the third biggest currency in the world, or some would even argue the second biggest currency in the world. And then you’ve seen the euro over the last year is down 10% or 15%.
So these are very big moves. Again, the reason is because the Fed is raising rates. So on a relative basis, we have higher rates than those two big competitors. And on a relative basis, those two big competitors are doing more monetary stimulus or QE or extraordinary measures, however you want to define that central bank activity.
And you always because the globe runs on the dollar, there is a persistent and consistent bid for the dollar globally. And so it’s really a supply versus the demand issue. Now, everybody always focuses on the supply. Central banks are increasing the currency in circulation. They’re going to print all this money and so therefore the dollar falls or the currency falls. Well, that’s just focusing on the supply side.
But again, you have to remember that all central banks are increasing supply, but the demand is what makes the difference and that there is global demand for the dollar. Now, whether you think there should be, whether you think it’s the right thing, it doesn’t really matter. It just is. That’s the way the system works.
But there is not that same global demand for yen. There’s not that same global demand for yuan, there’s not the same global demand for euros or Reals or Florence or Liras or anything.
And so what you’re really seeing play out is Trifan’s dilemma. And so I’ve spoken about this before. But Trifon’s dilemma is an economic theory that states that if you have a single country’s currency that also serves as the global reserve currency, at some point the needs of the domestic economy for that global reserve currency will come into conflict with the needs of the global economy. And that’s what we have.
We have an inflationary pressure problem in the United States. The Fed is very embarrassed about it. They got it wrong and now they need to do something about it. And they’re bound and determined to try to bring it under control. And so they’re raising rates to counteract that. Well, when you raise rates, you’re tightening the monetary supply. And that’s happening. That’s fine for the US. But there’s many countries around the world that cannot handle that right now.
But that’s what’s happening. And so the needs of the domestic economy are in conflict with the needs of the global economy. And it’s going to be the global economy that suffers more than the domestic economy as a result. It doesn’t mean that the domestic economy won’t be hurt. It just means on a relative basis, you want to be closer to the money than far away from the money. And because we have the global reserve currency, we’re closer to the money.
TN: So it’s interesting when you talk about the dollar versus other currencies, and we often hear people say, oh, CNY is rising as a share of spend, which that’s debatable. But from my perspective, it’s not the dollar that’s kind of in the gladiator ring of currencies. It’s the yen, it’s the euro, it’s the British pound, it’s the aussie dollar, it’s these secondary currencies. They’re going to lose share before the dollar does. Is that wrong?
BJ: No, I think that’s absolutely right. And again, that’s a very good way to put it. I know gladiator walks into the ring and thinks, I’m not going to at least get a few scratches. It’s going to hurt. That’s just the nature of being a gladiator. But what matters is who’s standing at the end of the day, right? And so I think it’s these other currencies are getting hurt by the battle more so than the dollar. It doesn’t mean that we’re not getting hurt. It doesn’t mean it doesn’t sting. It doesn’t mean there isn’t going to be any pain involved. But at the end of the day, if you’re at war, you want to be the last man standing because of the way the system is designed, I believe that that will be the US dollar.
The other thing that I would just quickly point out is a lot of people say, why can’t you see it? It’s very obvious. The rest of the world wants to de-dollarize. They’re putting all of these trade deals in place, the dollars falling as a percent of reserves, etc. And the point I would make is, yes, I do see it. I agree with you the world would like to dedollarize, but it’s much harder to dedollarize than just saying, just because you put an announcement out there doesn’t mean you’re actually going to be able to do it.
I’d like to make the analogy that I’ve said I want to lose weight and get in great shape for 20 years. It doesn’t mean it’s going to happen. It hasn’t happened yet.
But that’s the headline versus reality, right? I just think that’s where we’re at. And the dollar, for better or worse, it’s a rigged game in favor of the dollar. And the US set it up that way is the global hegemon. They set it up that way. Now, it doesn’t mean they’re not trying. It doesn’t mean that the world doesn’t want to get away from it. It’s just very hard to do it.
The last thing I’ll say and I’ll shut up, but the other thing I would say is the process of de-dollarization, even if it is successful, will not be a calm transition. And the process of dedollarization is not necessarily, and in my opinion, not probable to be negative for the price of the dollar. I think the volatility and the lack of liquidity in dollars that would go along with de-dollarization would actually squeeze the price of the dollar higher.
And so it doesn’t matter to me whether de-dollarization happens or not. I think the dollar is going higher for all of these reasons.
TN: I think what’s funny there is people always put de-dollarization in this almost moralistic language. It’s a good or a bad thing. And it’s just not. It just is.
Tracy Shuchart: I just had a question for Brent. I mean, do you see at any point that there’s some kind of intervention on the dollar? The dollar gets too strong because it’s going to crush emerging markets? Do you think there’s any point in which Yellen kind of backs up?
BJ: I do think they will. And that’s why I think the dollar is going to go back to all-time highs before this is all said and done. I don’t think it’s going to be a straight line. It can’t be a straight line without absolute devastation. Doesn’t mean it can’t happen. But I think this is going to play out over several years rather than several weeks. It could play out over several weeks, but I think it will take longer. And the reason I think it will take longer is I think that they will interact or they will get involved, as you’re suggesting, Tracy.
I actually think right now the Fed and the Treasury want the dollar strong. I think they’re using it as a weapon or as a tool. It’s something that can be used very effectively. Again, whether you think it should be used or not, I don’t care. I just think it will be, and I think it is being and so I think that will continue.
But I think the Fed and the treasury, they want the dollar higher, but they want it done in a measured fashion that they can control. If it starts to get out of control, I think that they will rein it in. I think they want some of the other parts of the world to be an economic pain, but I don’t think they want the whole system to collapse. And so my guess is that we’ll get the dollar higher, maybe it goes to 115, 120, and then they’ll do something, it’ll pull back for six months, three months, whatever, and then it’ll get higher again and they’ll come out and do something.
So I think this will be a process, a little bit of a roller coaster, up and down, but I think that the general trend is higher and I think there’s more pain to come for the global economy as a result.
TN: Brent, real quick, before we get onto oil. You sent out a tweet earlier this week that said you think that we’re going to come to a point where both the dollar and equities and US equities are rising. Can you walk us through that just real quickly? I know there’s a very detailed thesis behind that, but can you walk us through that very quickly so we understand kind of what you’re talking about there?
BJ: Yeah, so the first thing I’ll say for anybody who’s just kind of passing through this conversation is that I don’t think this is happening right now. It could happen right now. In the short term, I expect US equities to go lower. I think that’s just kind of where markets are headed.
But as the pain develops throughout the global economy, I think we are going to experience a global sovereign debt crisis. And when the world, the US included, starts selling sovereign debt rather than buying sovereign debt, I think that money will have to go.
Now, some of the money will just be, it’ll just go poof. It’ll be gone. And so that money won’t have anywhere to go but the people who start selling the bonds looking for another place to go, I think the next best place to go will eventually be US equities. And I think US equities will be seen as the new… I don’t want to say new Treasuries.
That’s a little bit hard to say. But on a relative basis, the place where big global capital can go, that is the most advantageous to them. And so I think we will get into a point in the sovereign debt crisis where US equities will get safe haven flows and I think the whole world will potentially be printing more money, right.
So be sending more liquidity out there. And so I think that liquidity that is generated with little liquidity there is, I think we’ll find its way into the US and the US Dow, big blue chip stocks and I think they’ll go higher. I might be wrong on that, but that’s my working thesis as of right now.
TN: Let’s move on to crude oil. Obviously we’ve seen crude take some hits over the past few weeks and we’ve got a WTI chart on the screen right now.
So how low will crude go? Are we almost there? Are we headed to 65 where it was for a while? And what then pushes it higher?
TS: I don’t really want to forecast exactly where crude is going to go. I definitely think that we could see some more downside, but we have to look at what is weighing on price and sentiment right now. One, there’s more Russian barrels on the market than everybody anticipated.
Two, you’ve got never ending zero Covid China lockdown that haven’t seemed to let up yet. We also have EU recession, right? And then we had 160 million barrels of SPR thrown on the market. And so that’s really weighing kind of on the front end of the curve. Those are the things kind of weighing on sentiment right now. That’s why we’re seeing a lot of weakness.
That said, if we look at the fundamentals of the market, the market is still very tight. We’re still drawing globally. We definitely have a diesel problem that is global. And I think where we start to see kind of a change in this, I think when it comes to the end of October, when the SPR is done this with kind of been looking over the last couple of weeks, had we not had such large SPRs, we would have actually been drawing a regular stock.
So it’s not as if that oil is going piling up anywhere. So I think as soon as the SPR stops, I think after Midterms, because I think this administration is trying to do whatever they can to suppress the price of oil, thus, gasoline. And I also think that we have to see kind of what happens in China after the People’s Party Congress in the middle of October and trying to see what their policy is going to be moving forward.
Are they going to open up? I mean, they’re looking at they want 5.5% YoY GDP by the end of the year,
which…
TN: They’ll hit it. On the nose, we can guarantee that.
TS: But I think they’re going to have to start stimulating the economy a little bit more. And we kind of saw announcement Evergrande is going to start financing more inspection projects and whatnot going into starting at the end of September. So I think we’ll probably see the last quarter if we get a little stimulus and if they back on their policy because, that’s the big thing for oil right now, is that if that demand comes back because they’re down about 2.7% on the year and as far as consumption is concerned.
So I think if that demand comes rushing back, know that’s going to be a huge upside surprise for the market. I think over the long run, oil is going higher, but out looking out into 2023, I just think that’s just the trajectory of it. I’m not calling for $200 oil, anything crazy like that. I just think that we will see higher oil, and I think we’re poised to see higher for longer than the functionality of the market and the fact that we have no capex for the last seven years.
TN: So last month you said to look three to four months out, look at the curves three to four months out to understand kind of what the real oil price was or is going to be. And so that would be two to three months now. So that’s November. December.
TS: Look at those spreads are widening out or not, right. You want to see if we’re moving into more backwardation and even more backward dated market, right? So you kind of want to look at that.
TN: Okay, so I paid $2.88 a gallon for gas at my local last night. We’re the energy capital in the world. Yeah, I’m going to show it off. Anyway, that is kind of coming down. And energy has been the biggest upward factor in some of the inflation issues. That’s good news, at least until the election. Hey, I’ll take it while I can get it, right? And if it heads back up after the election, I think we’re all prepared for that on some level.
So I guess SPR, as he said, election happens, there’s no political reason necessarily to suppress these prices and so on and so forth. So do you expect to see almost a slingshot in, say, December, where things trend higher pretty quickly?
TS: I don’t think we’ll have… I don’t want to call it a slingshot because anything can happen in the oil market. I mean, we’ve seen $7 to $10 in a day before, so that’s not unheard of. But I do think we go higher, especially if you’re looking into the market, is going to get even tighter in December because of tax reasons. December 31 is the tax assessment date for the barrels that you have on hand. So they tend to pull back on production so they can move out inventory as much as they can, so they’re not taxed at the end of the year.
Usually we see a little decline in production anyway in December and the second half of December, we do see prices start to rebound off the seasonal for regular seasonal trend low. Okay, so that would be normal.
TN: Brent, I think you had a question for Tracy on crude markets as well.
BJ: Yeah, I actually had two quick questions. One, I wanted to get your thoughts on the fact that India and China are buying oil at a discount from Russia. And then there’s lots of stories about them selling that oil
on to Europe or other places. And so they’re making that spread. I just wanted to get your thoughts on that and logistically how that actually takes place.
TS: So if you’re looking at India, definitely they are buying discounted crude. What they do is they don’t
resell that to Europe. What they do is they blend it and they sell fuel. So that’s refined. So it’s really hard to trace what’s in… They don’t trace those barrels that way.
So that’s how that oil is kind of emerging back in Europe. It’s really by way of refined products. Now when we talk about China with the gas, really what they’re doing is they’re buying gas right now, literally half off from Russia, and they’re turning around and selling their own gas to Europe for the higher marked up. The gas they already have. So they’re selling the gas they already have? So that’s kind of how that’s working.
BJ: And then the other question I have for you quickly is I was surprised this week when the rumor was floated by whoever floated that they would restock the SPR at $80. It seems like they’re doing everything they can to get the price lower. And then to have that rumor come out and put kind of a floor under it was kind of surprising to me. So maybe nothing more than just the speculation, but did you have any thoughts on that?
TS: Yeah, I mean, basically they put a floor on it. Everybody’s calling it, the Biden put now. But the thing is that it’s all nice and well if they want to do that, they still got enough 60 million barrels that they need to release. And then by the time those contracts go through and you want to refill the SPR, I mean, that’s months away. We’re looking at months and months down the road. And who knows what oil price would be? To me, it was just another try to jaw bone market down lower.
BJ: It kind of reminded me of the ECB where they’re raising rates on one hand, but they’re buying bonds with the other. Biden wants his cap. He’s like got a collar on it. He’s trying to put a cap on it and a foot on it.
TN: Strategy. Let’s move on to a little bit more of kind of the Fed kind of Fed talk. There’s a Fed meeting next week, and when CPI came out this week, the terminal rate really rose very quickly. And that’s when we started to see equities fall pretty dramatically. And we’ve got on the screen right now expectations for the rates coming out of each meeting. So 75 in September, 75 in November, and another 50 in December. That has accelerated the expectations for the Fed by about 25-50 basis points?
When does the Fed stop, basically from where you are now, do you think this continues to accelerate in 2023 or given, let’s say, CPI? Of course on a year-on-year basis it looks terrible. But once we get to November, when CPI really started to accelerate, November 21, do we start to see some of those base effects in a year-on-year basis and the Fed starts to pull back a little bit and go, okay, wait a minute, maybe we’re okay with the plan we have when we stop at say 450 or whatever as a terminal rate.
The other complicating factor will add in there is University of Michigan came out, University of Michigan survey came out on Friday and it’s a bit lower than what was expected. And the Fed has really been looking to University of Michigan, which is kind of a semi-serious survey, but they’ve really used that to justify some of their decisions.
So we obviously have a mixed environment. But I’m wondering, with all of this stuff coming out this week, do we expect the Fed to keep marching pretty aggressively into 2023?
BJ: I’ll take that first. So I actually do expect them to keep marching higher into 2023. And I say that for a couple of reasons, and I’m going to qualify this and say that they will pivot when they have to pivot, but I don’t think they’re going to pivot until they have to pivot. And so I think a lot of people that are predicting the pivot are misunderstanding the Fed’s intentions and perhaps for a good reason. They’ve done a fantastic job of ruining their credibility. So it’s understandable not to believe them.
But in this case, I think you kind of have to believe them. And I’ll tell you why I think you have to believe them. Number one, I think they don’t mind the dollar being stronger. Again, I think that’s kind of policy that I spoke of earlier in conjunction with the treasury.
Number two, I think they want asset prices lower. So the fact that the stock market goes down I don’t think would bother them. I think if the Dow was at 28,000 and the S&P was at 3600, I think they’d say that’s totally fine. I don’t think they have a problem with that as long as it’s not collapsing. Right? Now, if it collapses, then they have to come in. And they will come in, but I don’t think they mind if the stock market is 10% or 20% lower than here.
The third thing I’d say is the Fed central banks in general, they’re always lagging. They’re a reactionary agency. They’re not a predictive agency. We all know that. They can’t predict anything anyway. I’m not sure I want them predicting things, but to me they’re always behind the curve because they always wait until they see it and then they react, right? They come in and they try to save the day. So when things get really bad, then they’ll eventually come in and provide support.
And when things are always too late to tighten as they are now, and then they try to make up for it. So I think they’re going to despite, like you said, the Michigan number starting to come down, Atlanta Feds already slash their GDP. So even though they’re getting these signals that things are slowing down, they’re not reacting to it yet. They will react to it late.
And then the fourth thing I’d say is that I think Powell is mad and he’s pouting, right? Not just Powell, but mainly Powell, but he got all this advice from all his staff and however many staff, PhD staffers they have at the Fed, and they all said inflation is transitory and it’s going to be fine. And then it wasn’t. Right? Now he’s mad.
TN: He’s a lawyer, not an economist.
BJ: And I’m going to do something about it. And if you don’t think that I can bring inflation down, well, then you just watch me, right? And I’ll take my ball and go home. And his ball is interest rate. So he’s taking them higher, and he’s taking them home, he’s taking them higher. And so it come hell or high water, and after the, I don’t know, the chink in their armor or the threat to their credibility that they’ve had over the last year or two, I think the last thing in the world that Powell wants to deal with is the fact that he slowed down or, God forbid, cut rates and then inflation kept going higher.
That would look even worse than waiting for it to crumble, right? So I think for all of those reasons, you kind of have to take them at their word. Again, I’m not saying not unless the markets force them to do it
and the markets might force them to do it. I’m not saying that that’s out of the possibility. The only thing I don’t like saying about this is this is the hole they’re going to hike until it breaks theory, right?
And I agree with that. The thing I don’t like about it is everybody else seems to agree with it now, too. That seems to be the common refrain, is that they’re going to hike until something breaks, and everybody says, yeah, that’s kind of what’s going to happen. Usually when everybody thinks something, it doesn’t happen that way. But as long as equity prices are higher and as long as inflationary prints keep coming in high, I think they continue hiking.
And think about it, inflation could fall by 30%, and it’s still at five or six, which is still two or three times higher than their goal. So is there a path to a pivot? Yes, I think there’s a path to a pivot, but every week, when people come out every week and, oh, they’re going to pivot, they’re going to pivot. I don’t think they’re pivoting next week, and I don’t think they’re pivoting in October unless they have to.
TN: Okay, Tracy, what do you think of that?
TS: Yeah, I absolutely agree. All the data coming in, there’s no way they’re not doing 75 next week. In my opinion. I could be wrong. Somebody will come back. I think that’s pretty much a lock.
TN: Yeah, I think short of, let’s say sometime in Q4, Russia, Ukraine ends, and China says we’re not going to lock down anymore, that would fundamentally change the Feds calculations, right?
BJ: Well, if they weren’t locked down anymore and it pushed demand higher and it pushed prices higher as a result of demand increasing, then to me, that would keep them on their path to hiking. The flip side. And the flip side is that if something breaks in China, and China has to devalue or revalue the yuan in order to deal with the real estate collapse or the internal problems, whatever it is, that could send a deflationary wave to the rest of the world.
So I’m not going to sit here and deny the inflationary pressures that we’re seeing, but I think to a certain extent, people have again dumped themselves into the inflation camp or the deflation camp, and I think we’re going to have periods of both.
I think if you fundamentally understand the design of the monetary system, the threat of a deflationary
wave is always there. But if you don’t admit that the inflationary pressures are here, I think you’ve also got your head in the sand. I’ve said this several times, but I will admit to a big mistake, and that is, for several years, I hated the term stagflation. I thought it was a cop out. I thought it was for people who just couldn’t decide if they were in the inflation or deflation camp. But I think that’s what we have, and I think we have it in spades. I think some assets and some prices are going to continue to rise and be higher, and I think others are going to collapse, and that’s what makes it so hard to deal with.
So to anybody I ever took a shot at for them using stagflation as a cop out, I apologize. I’m with you now. I got that part wrong.
TN: Brent, one of the things I admire about you is you’re not afraid to say you were wrong, right?
BJ: No. I mean, do you mind if I just make a comment on this really quick? I think too often in our business, people will make a call and then they’re just so afraid to change it. Or you’ll make a call, and then somebody else will call you out on it if you got it wrong. At the end of the day, our job is sort of to predict the future. And so anybody who thinks that they can accurately predict the future 100% of the time has the biggest ego in the history of the world.
The reason I don’t mind making predictions is number one. I don’t mind being wrong because I don’t think I’m the smartest guy in history. And if I get something wrong, then I’ll have to deal with it. But this idea that we’re always going to be right and we know everything, it’s ridiculous. So anyway, we’re all speculating at the end of the day.
TN: That’s right. Okay, real quickly, guys, what are you looking for in the week ahead? More the same. More the same disappointment, difficulties, headwind, all that stuff. Until the Fed meeting? Is that what we’re looking for until the press conference?
TS: Yeah, I think we’re the markets will be in limbo, definitely until the Fed. I mean, everybody expects 75. We get 75. Maybe we see a bounce in equity, actually, because it’s already done with, right. There’s no question anymore. So maybe we get a bounce after that.
TN: Slightly less hawkish language than is expected, right?
BJ: I think that’s right. Now we’ve got the potential of maybe 100 basis points, right. So if they come in a couple of weeks ago, although now there’s a path to pivot, they’re probably only going to do 50 basis points in September.
Well, then we got the CPI print and it’s 75. That’s 75 is going to happen. Then a couple of people go hundreds now on the table, right? So now if they only come out and do 75, maybe the market kind of breathes a little bit. At least it wasn’t 100. So my guess is that we would have some volatility leading up to the meeting. Maybe they do 75. Perhaps things get a little bit of a bounce as a breather.
But I don’t think markets are going to change a whole lot between now and the election. I think they’re going to be volatile. I think the Feds are going to keep hiking. And I think Market Powell said it himself. We had the boom and now we have to deal with the pain. This is the unfortunate side effect of what we have to do. So he’s telling you he’s going to cause pain. He just doesn’t want to collapse. So if it starts to collapse, it’s the sad truth.
TN: Guys, thank you so much for your time. Thank you so much. Have a great weekend and have a great week ahead.
This week’s QuickHit episode, Tony Nash talked with Dave Mayo, CEO and Founder of FedFis, and an expert on banking, finance, and Fintech. This episode looks at US financial institutions like banks and how they are faring during the Coronavirus pandemic. Will new financial technologies help streamline the process of providing services like loans to medium and small businesses?
The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
Show Notes
TN: Hi, everybody. This is Tony Nash. I’m the founder and CEO of Complete Intelligence. This is our Quick Hit where we talk to industry experts about issues in markets and in industries.
Today we’re with Dave Mayo. Dave is the founder and CEO of FedFis based in Texas. Dave, thanks for joining us, I really appreciate it.
Can you tell us a little bit about FedFis? And then I’d really love to jump into how you’re helping out the financial services sector.
DM: Sure. We’re a unique company. We sit as a layer above banking, we call FI fintech, and then fintech. From the banking side obviously, we are a data company and provider and intelligence. From the FI fintech side, those would be the vendors to the institutions like their core mobile offering. And then FinTech, that’s the new stuff, right? That’s the sexy stuff, like the Chime and the SoFis and those types of companies that used to be alt banking and now they’re joined back to banking again. So we help all of those different layers in one way or another through a data set that we have and intelligence.
TN: With everything going on in the wake of Coronavirus, there’s been a lot of talk about fiscal stimulus coming out of D.C. and stimulus through the Fed and other things. What is the health of the banking sector from your perspective? Because back in 2008 the banking sector was the worry, right? Is that the worry now? Is that something we should be worried about?
DM: I think our banking industry is based on a level of faith. It always has been, right? Now that said, this is a completely different situation. Banks are very well-capitalized. Banks are not the cause of the problem. We don’t have a systemic banking problem or issue. We’re very, very healthy right now. When you talk about a stimulus being put into the economy, the more money flows in and out, the more people spend and buy and purchase, the better things are. That’s just the way the banking industry is built.
TN: How do you see banking and FinTech really helping? Obviously we know how they help big companies with big placements and debt and these sorts of things. But how do you see them helping small and mid-sized companies with this economic gulf that we have right now, where the economy’s effectively been turned off for a period of time, which is a bit weird? How do you see, what you’re doing, and banks generally, really helping out there on the smaller and midsize level?
DM: I think there’s a big gap in education in our country when it comes to banking. People are like, “I don’t like banks” or “I like banks.” When there are the big banks, the big four: the B of A, Wells Fargo, Chase, Citi. And then we have community banks.
Community bankers all across the country, they’re the life of our banking system. They’re the heartbeat. It’s actually a lower touch point for consumers and FinTech with the dramatic decline in a number of community institutions that has really opened up this opportunity for a FinTech. And the reason being is it’s a direct touch point.
So if you were to say “I want to use my mobile device” or “I want to use my online to do banking without having to actually drive to an institution and deal with all their policies and all of the things that go with it,” it’s a faster connection point. And I think we’re probably going to see a lot of that in these business loans the PPP loans through the stimulus plan.
TN: How do we actually execute that from the Treasury to the small business owner or to the individual that needs help? So, do you think that some of these FinTechs are kind of non-banks? I mean, would you consider them kind of non-banks within this system? Do you think they’ll be able to do this stuff faster? And I don’t mean this as a negative to banks. Banks are highly regulated. Do you think some of these FinTechs will be able to do some of this stuff faster?
DM: It depends on which way you look at it. Because here’s the deal: so when we talk about banking and then we talked about FI FinTech and then FinTech. So a bank is a chartered institution and FI FinTech is a technology arm of that like online banking, mobile banking. A FinTech is something that looks like a bank, talks like a bank, but it doesn’t have a charter. It’s not really a bank. So they have to partner with an existing bank to charter. So there’s a bank behind every FinTech company. So when you think of Chime and companies like that, there’s an actual bank behind that company that’s doing the regulatory side of this to protect consumers.
TN: You guys track a lot of data around banking and real estate and consumer stuff and industry stuff. Are you seeing any data that’s really talking about or raising your worries about the velocity of money about how quickly people are spending? Are you seeing that data? If it’s worrying you, when does that worry end for you? Do you see us going back in to say a quasi-normal situation within the next two months or something?
DM: Predicting the future I’ve never really been a big proponent of. That’s your business. But for us, what we look at are key components.
One way to measure things right now is to look at a mortgage note on a 15 or a 30. What is the spread between, what we would call in the old days, prime and what is the asking rate on that loan So you’re generally looking at above 3 percent. And as long as you’re looking at that, that’s a strong indication that there’s a lot of refis going on right now. And so the spread is there. That’s an adequate spread for banks to make money. There’s a huge volume of it going on. And as long as we see that volume and people continue to go to the bank, cash their checks, direct deposit always helps.
When we use our debit cards, when we go out and do the things that we do. Changing our mechanism of spending money whether it’s through Amazon as opposed to going through the mall doesn’t change the fact that you’re still spending money. Those are all positive things.
But I think the one thing we want to keep an eye on is the volume of lending. Everyone in a situation like this is going to have a tendency to kind of climb up a little bit. And, as long as that continues to flow, and one of the primary things that I’d be looking at is refis and other lending types of loan, etc.
TN: Are there any specific indicators you’re looking at on the commercial side to see if people are climbing up?
DM: I don’t really see anything from that perspective. I don’t think people are running out there right now at a time like this. It’s fairly obvious. You wouldn’t want to run out and start a new construction project or something like that. Those are gonna have an impact. There’s no way around it, but there again that’s what stimulus is there to offset.
Right now, I would say we’ve got a very healthy banking system. We’re coming out of a very healthy economy and so what’s our time frame of a bounce-back is it going to be a v-bottom or is it going to be spread out? I think it’ll be a little more spread out than a V-bottom and I think they’ll probably be multiple cycles of this that go on to some degree.
But starting from a really healthy position in our banking system and in our economy, this will pass. And when it does, here’s the thing I think is so interesting, unprecedented levels of stimulus and, the old saying you don’t fight the Fed, right? So does the market go up and we have a stimulated economy? Of course it does. And with this level of pent-up demand and stimulus, will there be a bounce back? Yeah, there’ll be a bounce back. The question is how huge will it be and how fast?
TN: That’s great Dave. It’s a huge source of optimism. Thank you so much for that and I really appreciate that you’ve taken the time to join us today. So really appreciate your time and and thanks very much for, for all that you’ve shared with us today. I really appreciate it.
