I have adopted the position that when a central bank allows its government to overspend and abuse its currency, something has to give. You could say this is one of the unwritten laws of fiat currencies. Time and time again history has proven this to be true and it is the reason many people claim gold is the only true form of money that cannot be corrupted. In a world where everything seems subject to manipulation, this claim about gold is still up for debate.
The overspending by governments coupled with inflation has really started to affect the perceived value of currencies in relation to other currencies. As these relationships break the losers are the people holding the de-valuated currency. Of course, many factors feed into how we value a currency but the crux of this article is not about whether a currency is over or undervalued but rather what a country must do to defend its value if it comes under attack.
Brent Johnson of Santiago Capital is credited with coining the term the “Dollar Milkshake Theory.” It explains how our debt-based monetary system can cause the US Dollar to rise despite the increasing liquidity injections around the world. Whether this was a “grand master plan” or a situation that just developed over time, it is something that may bode well for the dollar. Johnson recently took part in a discussion that included subjects such as the future price of oil, housing, and the probability of a huge global huge recession.
Johnson conveys what many of us see as a truth that haunts fiat currencies. This is rooted in the fact that when the value of a currency falls, a country and its central bank cannot save both its currency and its bonds. In his “slightly edited” words;
“The problem is you cannot, and this is for every country, the US included, again, there’s a progression in how it’ll go, but you cannot save both the bond market and the currency market because they work at cross purposes. Whatever you do to save the bond market hurts the currency. Whatever you do to save the currency hurts the bond market. And every central bank in history has promised they won’t sacrifice the currency, and every central bank in history has ultimately sacrificed the currency.
And the reason they always choose the currency over the bond or the reason they always choose to sacrifice the currency over the bond market is for two reasons. One, the currency affects the citizens more than the government, and the bond market affects the government more than citizens. So they’re going to bail themselves out before they bail the citizens out. And the second thing is if the bond market blows up and the banking system blows up, there is no longer a distribution system for the government to raise money.
So they can’t let the bond market blow up because then they can’t get money anymore. And then if they can’t get money, they can’t operate. So this is a very long way of saying that I understand why the market moved the way it did. I think maybe in the short term it makes sense, but in the medium to long term, it doesn’t make any sense to me at all. Again, kind of watch what they do, not what they say.”
He later added “The problem, as we’ve kind of figured out and found out that it’s very hard to just get four for four or 5% inflation. It goes from 2% to 12% pretty quickly. They don’t have as much control as they think they do, right? And the problem with four or 5% inflation, you can kind of get away with it because it’s annoying and it is frustrating, but it’s not totally ruining your life. But with 8, 9, 10, 12, 15, 80% inflation, that starts to ruin the pledge life, as you mentioned. And that’s when they start to push back from a political perspective. And that’s what central banks and governments don’t want. They don’t want the populace revolting”
When you think about the true motivators driving this “system,” it is logical the government and central banks would throw the populace under the bus. This is about their survival. As to the question of equal pain, those in power justify taking raises to offset the impact of inflation under the idea we “need them” to steer things forward for the “greater good.”
While Johnson’s remarks were aimed at what is most apparent in the actions of Japan, this truth is problematic to all fiat currencies. For more on the Dollar Milkshake Theory see;
All eyes will be on the US CPI data as it gives us an indication of the quantum and pace of rate hikes. But is the Federal Reserve too slow to see if inflation is coming down when there is anecdotal evidence of slowing car and home sales? Tony Nash, CEO of Complete Intelligence tells us.
This is a podcast from BFM 89.9. The Business Station BFM 89 Nine. Good morning. You are listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. 07:00 a.m on Thursday the 13 October. Let’s kickstart the morning with a recap on how global markets closed yesterday.
Looking at US markets, all three key indices close in the red S&P 500, down zero 3%. The Dow and Nasdaq down zero 0.1%. And I think that the S&P has been down for six consecutive days already. Moving to Asian markets, and the Nikkei down marginally 0.02%. Hang Seng down 0.8%. The Shanghai Composite Index back the trend. It’s up 1.5%. Straights Times Index down 0.7%. And our very own FBM KLCI is down 0.5%.
So for some thoughts on where international markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Now, US CPI data is due out on Friday. What are your expectations for that figure? And how much of this do you think will determine the quantum of the next Fed rate hike?
Everything rests on CPI right now. So I think if it comes in line or higher than expected, it’s just bad news for markets for the next few days. So people are hoping for a lower number because it would provide some relief and some proof that inflation has maybe peaked or is at least slowing down. I think it’s possible that we have it come in slightly under, but given the PPI reading that came today, it’s not a good a sign. So we may see CPI continue to rise in tomorrow’s trading day in the US.
Okay, Tony, we have a history of the Fed being late to the game, right, when it came to inflation. They kept saying “transitory, transitory,” and we know it wasn’t transitory at all. Do you think that they are also late to the game in recognizing that inflation has been brought under control? Because when I look at some of the data points, one of which is used car sales, that’s dropping. New car sales are also dropping. House sales, home sales are also dropping. Is it possible that inflation is being overstated?
Well, you’re 100% right on the Fed being late to the game, both to recognize inflation and to impact it. The problem that we’re seeing with, say, used cars is, although the unit volume is slowing, the unit price is still rising for, say, used cars, for eating out, for these sorts of things. There’s still been upward pressure on these because of the factor input costs and supply chains and labor and others. So it does feel in the US like things have not that prices have gone back down, but that the rate of rise has slowed. That’s what it feels like at the consumer level, except for petrol, gasoline, which has started to rise again over the past week.
Let’s take a look over at the UK, where George Bailey, the Bank of England Governor, said that the BoE would end support for UK Gilts by the end of this week. What does this mean for the Pound specifically and other sterling-denominated UK assets like equities?
Oh gosh, we’re likely to see more devaluation of the Pound. There’ll be pressure on the Pound. Well, maybe not devaluation, but depreciation of the Pound. UK pension funds and other guiltholders will likely have to sell assets if the BoE is stopping their intervention in that market. They’re likely to likely to see downward pressure on those prices. So holders of those assets, like big pension funds, will have to use other assets to pay for their collateral for those investments. So it’s going to be ugly all around once the BoE stops because the market for guilt is so weak.
And we’ve seen for the Bank of Japan, we’ve seen for the Fed, for different auctions, different government debt auctions, there have been zero takers for government debt auction. And that tells me they’re not paying enough. The interest rates for that debt has to rise because people feel like inflation and interest rates are going to rise. So these governments need to offer their debt out at a higher rate so that people can make a profit with it, given the inflation environment.
And Tony moving on to China with a Party Congress meeting happening very soon, and with Xi Jinping set to win an unpresented term, what economic implications would that have for China? And with growth slowing down across the world, how will they aim to achieve the goal of common prosperity?
Yeah, Common Prosperity as a definition can be really taken as raising people up, or it can be taken as pushing kind of those achievers down. Okay. And if you look at China’s history in the late 50’s and the 60’s, as you know, Mao Zedong really pushed those achievers down through the great famine and all this other stuff. So my fear is that as Xi Jinping has consolidated his power, he’s going to start well, he’s already started a couple of years ago, pushing some of those economic overachievers down like Jack Ma and other people.
So I really do worry coming out of this Party Congress that we get a much more restrictive Chinese economy. We’ve already seen foreign investor sentiment sour on China, and we’ve already seen with code lockdowns, with supply chain lockdowns and other things, there has been a functionally more restrictive environment and with sentiment souring as well.
I’m not optimistic, at least in the short term. The Chinese government, whether it’s Xi Jinping or other elements of the Chinese government, they’re going to have to do something to reassure the world that they are a good faith partner in global supply chains and for manufacturing. It’s not going to make them happy to do that. But if they want to continue growing at the rates they have grown, they’re going to have to do that.
So when I say I’m not optimistic about China, I’m not saying China is going to crash. I’m saying I think they’re going to have some pretty mediocre growth rates in the coming years because of the economic environment, regulatory environment and market environment that they’ve cultivated of late.
OK, Tony, I want to stay in Asia and I want to look specifically at Japan because the Yen weakened to a fresh two-decade low, hitting 146 to the US dollar. What do we make of this? Is this really on the back of Corona vowing to maintain its very accommodative monetary policy?
Well, they have a choice. They can either support the yen or they can buy government bonds. And they’ve continued buying their bonds. So I think they’ve made a choice not to support the currency. And with the strong US dollar position and Janet Yellen made some comments today saying, again, saying that it’s really not the US’s responsibility to maintain the currencies, economies of other parts of the world. It wasn’t those exact words, but it was similar. That will likely push the dollar even stronger and we’re likely to see even more depreciation of the Japanese yen.
So there is a lot of pressure on Japan right now, and the Bank of Japan really has some decisions to make about how they’re going to approach that. Maybe they’re okay with depreciating their currency, but it will fundamentally change things like their imports of energy. They’re very dependent on imported energy. They’re very dependent on imported, say, raw materials like metals for their manufacturing. So this really changes their approach to managing those imports.
Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
Yeah, I like his comments on the yen. Right. At what point does it then become really painful for the Japanese economy? Net energy imported, clearly LNG from Malaysia is one of the key imports. What does this then mean for inflation? But it’s one country where inflation has been ultra low, almost as low as ours, I think barely 2-3% for them. But for them it’s a bit of a shocker because they’ve been in a deflationary period for more than ten years.
Yeah, and his comments on China, I think he said that growth would likely be slow over the next couple of years, and I guess Xi Jinping and China will unlikely dial back on its Zero Covid policy next week. It looks very unlikely at this point.
I mean, everyone’s hoping to see some kind of announcement to that vein. But again, lots of things to look out for in the weeks ahead.
We just heard headlines coming out Shanghai, parts of it under even more lockdown.
Well, very quickly, let’s take a look at some good news. I guess that’s coming out of Australia. We have contest airways. They said their first half year profit will jump to as much as 1.3 billion Australian dollars as travel demand accelerates and the airline stabilizes operations after a prolonged and bruising period of cancelations and delays. This ends a streak of five consecutive half yearly losses totalling 7 billion Australian dollars.
It said that the frequency of scrap flights, late departures and loss backs are all improving. CEO Alan Joyce said it’s been really challenging time for the national carrier, but the announcement shows that how far the airline has actually improved, and they’ve seen big improvements in their operational performance and acceleration in financial performance as well. And this takes some pressure off Joyce.
Well, if I look at the street, they like this stock. Twelve buys, three holes. One sell. Contest at close was $5 and 17 Australian cents. Tucker price, 653.
All right, 718 in the morning. We’re heading into some messages. Stay tuned. BFM 89 Nine you have been listening.
To a podcast from BFM 89 Nine, the business station. For more stories of the same kind, download the VSM app.
This month, the S&P 500 officially hit bear-market territory—meaning a fall of 20+ percent from recent highs—and investors everywhere are looking for some way to predict how long the pain could last.
Machine learning startups specializing in “nowcasting” attempt to do just that, by analyzing up-to-the-minute data on everything from shipping costs to the prices of different cuts of beef. In times of economic volatility, investors and executives have often turned to market forecasts, and ML models can offer a way to absorb more information than ever into these analyses.
One example: Complete Intelligence is a ML startup based outside Houston, Texas, that specializes in nowcasting for clients in finance, healthcare, natural resources, and more. We spoke with its founder and CEO, Tony Nash, to get a read on how its ML works and how the startup had to adjust its algorithms due to market uncertainty.
This interview has been edited for length and clarity.
Can you put the idea of nowcasting in your own words—how it’s different from forecasting and the nature of what you do at Complete Intelligence?
So Complete Intelligence is a globally integrated machine learning platform for market finance and planning automation. In short, we’re a machine learning platform for time series data. And nowcasting is using data up to the immediate time period to get a quick snapshot on what the near-term future holds. You can do a nowcast weekly, daily, hourly, or minutely, and the purpose is really just to understand what’s happening in markets or in a company or whatever your outlook is right now
And what sort of data do you use to fuel these predictions?
We use largely publicly available datasets. And we’re using billions of data items in our platform to understand how the world works…Macroeconomic data is probably the least reliable data that we use, so we use it for maybe a directional look, at best, at what’s happening. Currencies data is probably the most accurate data that we use, because currencies trade in such narrow bands. We use commodities data, from widely traded ones like oil and gold, to more obscure ones like molybdenum and some industrial metals. We’re also looking at individual equities and equity industries, and we track things like shipping times for goods—shipping times…are usually pretty good indicators of price rises.
Who are your clients, and how are the nowcasts used in practice?
Our clients range from investors and portfolio managers, to healthcare firms and manufacturing firms, to mining and natural resources firms. So they want to understand what the environment looks like for their, say, investment or even procurement—for example, how the current inflation environment affects the procurement of some part of their supply chain.
In fact, we’re talking to a healthcare company right now, and they want to nowcast over the weekend for some of their key materials. In an investment environment, of course, people would want to understand how, say, expectations and other variables impact the outlook for the near-term future, like, days or a week. People are also using us for continuous budgeting—so revenue, budgeting, expenses, CFOs, and heads of financial planning are using us…to understand the 12- to 18-month outlook of their business, [so they don’t have to have an annual budgeting cycle].
Tell me about how the AI works—which kinds of models you’re using, whether you’re using deep learning, etc.
There are basically three phases to our AI. During the pre-process phase, we collect data and look for anomalies, understand data gaps and how data behaves, classify data, and those sorts of things.
Then we go into a forecasting phase, where we use what’s called an ensemble approach: multiple algorithmic approaches to understand the future scenarios for whatever we’re forecasting. Some of those algorithms are longer-term and fundamentals-based, some of them are shorter-term and technical-based, and some of them are medium-term. And we’re testing every forecast item on every algorithm individually and in a common combinatorial sense. For example, we may forecast an asset like gold using three or four different forecast approaches this month, and then using two forecast approaches next month, depending on how the environment changes
And then we have a post-process that really looks at what we’ve forecasted: Does it look weird? Are there obvious errors in it—for example, negative numbers or that sort of thing? We then circle back if there are issues…We’re retesting and re-weighting the methodologies and algorithms with every forecast that we do.
We’ve had very unique market conditions over the past two years. Since AI is trained on data from the past, how have these conditions affected the technology?
You know, there’s a lag. I would say that in 2020, we lagged the market changes by about six weeks. It took that amount of time for our platform to catch up with the magnitude of change that had happened in the markets. Now, back then, we were not iterating our forecasts more than twice a month. Since then, we’ve started to reiterate our forecasting much more frequently, so that the learning aspect of machine learning can really take place. But we’ve also added daily interval forecasts, so it’s a much higher frequency of forecasting and in smaller intervals, because we can’t rely on, say, monthly intervals as a good input in an environment this volatile.
Our engine also forecasts currency pairs for Forex, different equity indices in the world, and economic indicators like GDP and inflation. For a complete list of what we forecast, please go to the Forecast Assets list. 88.6% of the items we forecast have more than 95% accuracy.
Part 2 of the Fed and ECB Playbooks discussion is here with Albert Marko and Nick Glinsman. In this second part, the housing and rent market in the US, UK, Australia, etc. was tackled. Also, do we really need a market collapse or correction right now? And discover the “sweet spot” for the Fed to “ping pong” the market. When can we see 95 again? What is the Fed trying to do with the dollar? And what currencies in the world will run pretty well in a time like this?
This QuickHit episode was recorded on July 29, 2021.
The views and opinions expressed in this The Fed & ECB Playbooks: What are they thinking right now? (Part 2) QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
TN: Now, with all of that in mind, Nick, you did a piece recently about the Fed and housing and some of the trade offs that they’re looking at with regard to the housing market.
Now, housing is an issue in Australia. It’s an issue in the UK. It’s an issue in the U.S. and other places. Can you walk us through a little bit of your kind of reasoning and what you’re thinking about with regard to the Fed and housing?
NG: Well, I actually think, it was, I was watching Bloomberg TV as they ask after the Fed comments from me, well, you know, maybe the Fed’s right because the lumber has collapsed. Right. Lumber’s in an illiquid market, takes one player and you can move that price 5 to 10 percent. But that was an irrelevance.
I think there’s a couple of things that lead the Fed in the wrong direction. First of all, the mortgage backed securities QE, that really isn’t necessary. That they could definitely tap and that would perhaps quell some of the criticism on you letting inflation on. Know this criticism, by the way, the Fed and the other central banks is all coming from some of the former highest members of those central banks. It seems that once you leave the central bank, you get back to a normal DNA to Mervyn King and the be governor of the Bank of England, hugely critical.
And you have that House of Lords touching on QE. Bill Dudley ran, said New York. That is the second most important position at the Fed. And in fact, my thought process there is the repo problems that we’ve had is because his two market lieutenants of many years experience were let go when Williams took over. Big mistake.
Anyway. So back to the federal housing. I think they focused on cost of new housing. My view is the slowdown that we will get on new homes is purely a function of supply of goods used to make homes, where essential supply. Then tell me is or if it’s not essential supply, it’s become incredibly expensive. Copper wire and so on and so forth. But my fear is that focused on this and the thing that’s going to come and hit them really hard at some point in the future, which is why I think inflation is not going to be transitory. It’s going to be persistent. Rent. Going one way is… I mean, New York rents have picked up dramatically. New York being an exceptional example, but.
TN: Remember a year ago you couldn’t give away an apartment in New York?
NG: So I think in that respect, everybody’s talking about mortgage backed securities and QE. Why are you doing it? Housing market doesn’t need it. Look at the price action. Fine. All valid points. I think the Fed should be more worried ultimately about rent. And the rent.
AM: Rent is a problem. You’re right, Nick. The other thing I want to point out is there’s a disconnect because it’s not just one housing market in the United States. Because of covid, the migration from north to southern states has really jumbled up some of the figures and how they’re going to tackle that is something that it’s above my pay grade right now, but it’s just something I wanted to point out.
NG: Albert’s absolutely right. People have been incentivized to be in real estate. People have been incentivized effectively to be in related markets to the collective real hard assets in this environment. Absolutely.
I mean, I would argue that part of Bitcoin’s rise is because, in fact, it’s a collectible. Limited supply. It’s such a collectible. It’s got no intrinsic value. But it’s a collectible. But I would, I think that’s. Albert’s right to point out the demographic moves in the US. I think there’s a huge pressure. One policy doesn’t fit every market. And I think the red pressure will be reflected in the similar fashion. It’s a huge problem.
TN: So what can the Fed do about it? Is there anything they can do about it?
NG: Become a commercial banker in terms of policy. You know, we’ve I mean, in the U.K., there was certain lending criteria for corporates that were imposed during the crisis that actually did help. But I think also the other thing that seems to be problematic for the commercial banks is Basel III. So, even if the Fed wants to help, how much can they help within that framework? Of course, the US Fed can just say thank you Basel.
TN: Doesn’t apply to us.
AM: They can also raise rates if they want to be cheeky.
TN: Yeah, but then it’s not just real estate that collapses. It’s everything, right?
AM: Maybe it needs to be collapsed, Tony. Maybe it needs to correct a little bit because, what are we buying here? We’re buying stuff, we’re buying equities that are 30, 40 percent above what they were pre-Covid.
It’s just silly at this point. I was talking to one of my clients and this is like we have to look through, we have to sift through US equities, which are probably going to go down to like twenty seven hundred of them right after this shenanigans ends and trying to find a gem in there to invest in. Whereas we can go overseas in emerging markets and look through thirty four thousand of them. Right. So you know, we need a correction.
TN: Famous last words.
The last thing we’d really like to talk about is currencies. So, you know, we’ve seen a lot of interesting things happening with the dollar, with the euro, with the Chinese yen. And so I’d really like to understand the interplay of how you see the Fed and the ECB with the value of the dollar and the euro. Albert, you said, you know, the ECB really has no control or very little control over the euro because of what the Fed does. So what is the Fed trying to do with the dollar?
AM: You know, Tony, Nick and I had wrote a two-page piece on the dollar’s range of ninety one to ninety three. And that seems to be the sweet spot for them, where they can ping pong the markets and drop the Russel a little bit, promote the Nasdaq and then vice versa and go back and forth like that. That is where they’ve been keeping this thing for… How long has that been, Nick? For like six months now, that we keep it in that range?
NG: We wrote eighty nine to ninety three, but really ninety one midpoint should start to be the, the solid support. That’s played out exactly.
AM: They’re a bunch of comic jokesters where they go to ninety three point one and three point one five and then they scare people and then they come back down and drop it back to ninety two. I mean it almost with the ninety one today, I believe. You know, so it’s just we’re stuck in that range, Tony, until they want to correct the market after the market corrects, they’ll probably go to ninety five, ninety six.
NG: Our view on that is partly because that the dollar is the ultimate economic weapon of destruction. Not to the US. For other countries. First of foremost emerging markets, but because it’s included in emerging market indices and ETFs as a result, I include China there. And you know, to be honest with you, I not only the geopolitics suggestive and Albert and I tweeted on some of the things that we believe are going to happen. How can the US authorities allow China to wipe out investors the next day after an IPO?
The people forget, it astounds me. Not more is made of this and no more commentary. We’re dealing with a Stalinist bunch of communists led by Xi. They will do anything to retain power, and they certainly don’t care about American and international investors. We’ve just seen that. You seen that with DiDi. You seen that with the education companies that are created in the US. We’ve even seen Tencent down. Tencent is one of the worst performing stocks in the world. It’s a tech stock in China, and look at tech in the US.
AM: Yeah. Let’s not deviate too far into the Chinese thing because we can do a whole hour just on China. When it comes to the currencies, Tony, the dollar being at ninety one, ninety two. The only other currencies that I do love are the Canadian dollar and the Aussie dollar, simply for the fact that they’re a commodity rich nations. And in a time of inflation, there’s no better place to be right now.
TN: Yeah, I think they’ll run pretty well.
NG: Yeah, I think as a macro trade in the next couple of years is commodities and it doesn’t necessitate economic reflation. You’ve got enough supply chain issues and supply issues and lack of capex and politics with regard to energy that restrict the supply. And the demand is there. Can you imagine, even if we don’t have a fully reflation story from the economy, if Jet Blue has a shortage of jet fuel in the in the US right now, imagine what happens to jet fuel when Europe starts to travel properly, which won’t happen this year, it will be next year.
In fact, the commodity minus the big ones? Have you seen their profits? Huge increase in dividends and share buybacks.