Tag: gas prices

How low will gasoline go? Recession worries & Japan hits 2% – The Week Ahead – 12 Dec 2022

Post author By admin
Post date December 9, 2022

Explore your CI Futures options: http://completeintel.com/inflationbuster

This Week Ahead is a special episode because it was recorded live, with guests Albert Marko, Sam Rines, and Mike Smith, together with host Tony Nash in a face-to-face conversation. It’s also the first time that we had a Twitter Spaces, joined by a few people and taking their questions.

Gasoline prices have continued to decline here in the US. Since June, RBOB has been pretty much one way, sliding from ~$4.30 to $2.16. That’s half. Of course, lower crude prices are a huge factor, but over the summer we were hearing all about refinery capacity. Is there more to it than the oil price? XLE vs crude – XOM closing in on 100, etc. How much of an impact is this having to help affordability given the broader inflationary environment?

Inflation is proceeding unabated, as we saw in Sam’s newsletter this week. Some Goldman guy was out this week saying there may be a recession in 2023. Sam looked at the terminal rate in his newsletter this week. How would accelerated inflation or steepening of recession worries affect the Fed’s actions?

We had BOJ head Kuroda (who has been in the job for a decade) begin talking about Japan hitting its 2% inflation target. If that were to happen, how likely would the BOJ be to scale back its ultra-loose monetary policy? Impact on Japan’s equity market, govt bonds, etc.

Key themes
1. How low will gasoline go?
2. Inflation/Recession worries
3. The day after Japan hits 2%

This is the 45th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Albert: https://twitter.com/amlivemon
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl

Transcript

Tony

I just want to say hi and welcome to The Week Ahead. I’m Tony Nash. We’ve got a couple of special items for this show today. First, Albert Marko is in Houston, Texas. So we’re doing a live in-person Week Ahead with Sam. Tracy will be on Spaces eventually. We also have a special guest, Mike Smith, who’s a partner at Avidian Wealth here in Houston. Second, this is our first Twitter Spaces, so this may be a little clunky and we may make some mistakes, so just bear with us, if you don’t mind.

So Mike, Sam and Tracy eventually, and Albert, thanks for joining us. I really appreciate the fact that you guys have come today.

We have a couple of key themes today. The first is how low will gasoline go? Gasoline prices I think nationally are around $2.99 are approaching that in the US. So we want to take a little bit of a look at that to understand what’s happening there. We also want to talk about inflation and recession worries. Sam will go into that quite a lot and we’ll try to figure out what’s happening with inflation.

And then we’ll talk about Japan post 2% inflation. So there have been some comments from Abe at the BOJ about Japan hitting 2% inflation, and we’ll talk about that a little bit.

Okay, so Albert just joined us. So let’s get started on gasoline prices. Guys, since June, RBOB has really come down from 430 to about 216. So it’s about 50% or 49 point something percent.

Of course, lower crude prices are a huge factor. We’ve seen crude prices come down in that time as well. So is there more to go on crude prices? On gasoline prices? Like I said, we’re waiting for Tracy, but she’s not joining. So I’m just going to throw it open to you guys. What’s your thought on gasoline? Because we’re entering the holiday season, it’s going to be a lot of driving. There’s a lot of inflationary pressures, which we’ll talk about in the next segment. But I’m just curious what your thoughts are on room for gasoline prices to fall.

Albert

Well, I think they guess some prices are going to fall because price of oil just keeps on going down. I think at the moment, whatever brokers, government entities or whatever we want to talk about is starting to drive down the price of oil because it’s beneficial to the political situation. So I think that oil, as it drifts down towards 60s, mid sixty s, the price of gasoline will also come down.

Tony

What are you hearing? We’re in Houston, energy capital of the world.

Sam

What are you going to yeah, it’s hard to make a call on the energy price kind of in its relation to gasoline for a couple of reasons. One, we really don’t know where any spare capacity can come from in terms of the ability to refine at this point.

You’re running at 96% utilization rates for refinery capacity, that’s pretty much peak. So if you have any sort of hiccup there, you’re going to have a problem on the gasoline front.

Tony

So hurricane season is over. Do you see any reasonable hiccups coming? Obviously may be unexpected, but when you’re.

Sam

Running at 96% capacity, it doesn’t take much to have a small problem. Right. And if you go from 96% to call it 90% because of an accidental outage, that could be something rather significant for the gasoline market. So while oil prices, you know, appear to be fairly volatile right now, it’s, it’s hard to translate that back into a gasoline price.

Mike

I know if 86 degrees here in Houston, but unpredictable winter can happen. I know it’s a little bit of a delay, but we don’t know. These weather patterns can happen. We could have a colder than expected winter and that could probably trigger as well.

Albert

Rail strikes is another issue. Talking about any kind of strikes in the transport industry, diesel prices making truckers, you know, trucking more. It’s not anything.

Tony

Right. I just saw Tracy pop in and then she popped out. So once she comes in, we’ll come back to her on this. Thank you. Okay, that’s great. And we’re seeing, we’ve seen XLE, the energy companies, the energy operators, we’ve seen XLE stay pretty elevated as crude prices have come down. There’s typically kind of a four to six month lead between crude prices coming down and XLE coming down. So when we look at some of these major operators, is there an expectation that those prices will come down? Or are we kind of I’m just inviting Tracy to co host. Okay. Hi, Tracy. Are you there? Sorry. Just back to XLE. Do we expect XLE, the traded operators like, say, ExxonMobil, those sorts of guys? ExxonMobile is about to break 100. They’re headed back down after topping out like 115, something like that. So do we expect their share price to follow the crude price directionally?

Albert

I would say no. Really? It’s tough. It’s a tough call, to be honest with you, because we just don’t know which way the markets are going to go. Crude prices is acting like bitcoin at the moment, just being up and down 10% per week. I can’t even give you an honest answer on that.

Sam

I mean, it’s certainly not going to be the same data that you would expect in a decade ago, but you’re likely to have the sentiment at least have some effect on XLE or XOP, whatever it might be. But the issue now is that you’re not going to have the same sort of capital expenditure catch up and overshoot that you did in previous cycles simply because investors have already said, we will punish you for that. And producers don’t want to be punished.

Sam

They’re making a lot of money at 50, 60, $70 barrel oil. I don’t think you’re going to see the level of beta to the underlying that you would normally expect.

Tony

Okay, great. So basically they’re using your old equipment at the current energy prices and they’re maxing it out. But when the capex cycle does come on, will it come on with huge force or will that trickle out? Like when will invest? Will investors decide at some point that they won’t punish these operators for capex?

Sam

No, they won’t. No. Okay. Why spend for something that has a five to seven year time rise? We’ve been told that the oil companies aren’t supposed to exist in a decade. So as a shareholder you want that return of capital. You don’t want that capital put back to the ground. And if you begin to see any sort of significant uptick in capital expenditures, you’re going to have it absolutely crushed from a stock perspective. Right. If Exxon announced that they were going to begin a significant capital expenditure program, that stock would get absolutely hammered and you can just go through any of the companies. It’s all about what are you doing for my dividend? How much stock are you buying back and maintaining output, not expanding because you talked about it.

Mike

We’ll be short or fast. I think it’ll be going to take a long time for that to happen unless some major catalyst happens that actually sparks that in.

Tony

When you think about how long it.

Mike

Is to legislate get permits, it’s a decade.

Sam

Yeah, absolutely.

Mike

So it’s got to be some major catalysts.

Tony

Tracy, are you there? I see you as a co host but I’m not sure if you can speak. Okay. Once you’re in Tracy, just speak up and I’d love to get you involved in this discussion. Sam, how much of an impact is having is say lower gasoline prices having on the affordability in broader inflationary environment? So basically are gas prices helping the inflation discussion much or is it just a relatively small thing since a lot of people are working from homes?

Sam

There’s kind of two ways to think about that. There’s the inflation dynamics, the actual inflation dynamics that lower gasoline does have that headline CPI narrative.

Tony

It’s a tax cut. I’m kidding.

Sam

The problem is that over time gasoline has become a much smaller portion of the wallet. The average person does not spend anywhere near as much on gasoline as they used to and that’s just a fact. So is it really helping people on the margin? Yes. Gasoline and groceries are the two things that you can kind of see and one you see in a big bull sign, the other you see every week when you go buy groceries. So gasoline, grocery prices coming down, it’s good for the consumer mentality. Is it good for the action and spending levels?

Tony

Okay, great. Okay guys, just so you know, this is a live spaces. We are recording this and we’ll upload on the YouTube channel probably tomorrow. Tracy has joined us. Tracy, if you’re there and you want to chime in please join. Okay, let’s move on to the next topic for inflation and recession worries. So inflation is proceeding pretty much unabated salmon, and we saw this in your newsletter this week and I’d love to talk more about that. We also had some Goldman guy, I can’t remember who it was yesterday, saying there’s probably going to be a recession in 2023. And all these people are coming out saying maybe back half of 2023 there’s a recession, which it’s a convenient time to say that right? Right now to say something’s going to happen in the back half of 23. So you look at the terminal rate in your newsletter.

So how would, say accelerated inflation, if that’s actually coming or the steeping of recession worries affect the terminal rate from the Fed?

Sam

I think you have to divide that into the first part. That is, what would inflation call it a deceleration in inflation pressures mean for the Fed? Unless it’s significant? Not much. Does a recession matter for the Fed? Not if it doesn’t come with disinflation. Does the Fed care if we have real GDP decline? No. I mean we have real GDP decline, q One, q Two. They got their mandate, they did not care. Right. You currently have north of 7% CPI and you have an unemployment rate of 3.8, maybe percent. It’s really hard for me to see which one of those metrics is comforting to the Fed at this point. So does it affect the Fed’s trajectory? Maybe it’ll take a 25 out of the terminal rate, but that’s about it. You’re simply not going to have this type of immediate Fed pivot with inflation at north of 6% and this type of unemployment rate, it’s just not going to happen.

Tony

Okay, great. Now for you guys on spaces, if you have a question or want to put up your hand, put a question in the channel or put up your hand. We’ll take some questions later on in the podcast.

Albert

That inflation is just so sticky right now. We spoke about it earlier for podcast about wage inflation just sitting there, you know, just rising every single month. Politically, it’s a great thing for people to wait 40 years to get wage inflation, but I just, I can’t see how all these consumer prices are going to come down and talk about this inflation or wage inflation is just going to stay elevated for the next 1015 years.

Tony

Yeah, that’s a good point. So I get that there’s this expectation out there where people expect prices to come down to say, 2019 levels at some point. And, you know, we were talking about this, Sam, that do you expect prices to go back down to 2019 levels? We’ve seen a dramatic rise in a lot of different areas. So do you expect that to fall back down to what it was two, three years ago?

Sam

No, I don’t even think that in the best of all possible worlds, that’s not one of the worlds.

Albert

The only people talking about that are the political people that are trying to sit there and trying to gain votes because people are struggling at the moment. But the economic guys exactly. It’s only what you want to hear, but the economic guys are looking at the numbers and, like, we have never seen I mean, why would why would companies bring the prices back down that much when they know they can get away with it?

Sam

I mean, Cracker Barrel expects wages in the coming year to be up five, 6%, right?

Tony

Those of you who aren’t in the US.

Sam

Year, right?

Tony

For those of you who aren’t in the US. Cracker Barrel is a very kind of middle America restaurant comfort food, right? It’s biscuits and gravy. It’s fried chicken, that sort of thing. And so this is not the high end yet. It’s not McDonald’s. It’s very much the middle market in the US. And so Sam’s done a very good job in his newsletter over the last couple of years covering price hikes at Pepsi, at Home Depot, at Cracker Barrel, at other places. So many of these companies have raised prices by, like, 8% to 10%, generally, or more. Who’s raised more?

Sam

So Campbell Soup this morning came out with earnings, and they divide them into two categories. They divide it into soup and kind of prepared meals type deals and then snacks.

So think Snyder’s Pretzels is one of the brands. The prepared meals, which include soup, they increased pricing, 15% from last year, and they increased on snacks, 18. And that was price that they pushed. Volumes were slightly negative, but negative 1% and 2%. Okay, you’re talking almost no budge on volume and a huge move in pricing, and that is for the most boring of all commodities. This is soup we’re talking about.

Tony

And I want you guys to understand what Sam is saying. Campbell Soup has raised their prices between 15 and 20%, and their volume declined 1%. So do we ever expect Campbell Soup to reduce their prices by 18%?

Sam

No. That’s the beautiful part if you were corporate America right now, is you get a free pass to really find the elasticity in the market for your product by raising prices until you begin to see pushback from consumers, and you just haven’t seen a significant pushback from consumers. And to the narrative of inflation peaking. Inflation is peaking. If you look at the last four quarters of price increases from Campbell Soup, it was something like 6%, 11%, 11%, 16. Right? So maybe the second derivative is negative, but the first derivative isn’t.

Tony

And it’s positive in not a small way.

Sam

Correct.

Tony

We’re not talking about 2% price rises. We’re talking about 18% price rises, which.

Mike

Is we’re seeing that for consumers, the biggest increase. But, I mean, I guess in future years, that probably somewhat levels off. And then on top of raising prices, I’m sure all of you have noticed the shrinkflation, the items have less in it and we’re paying more for it on top of everything else.

Sam

Well, that is part of the pricing element. Right. So when they take packaging down a couple of ounces that shows up in the pricing mechanism.

Albert

It’s incredible that Campbell Soup and all these other companies raised their prices by 16% to 19% because that is actually the true inflationary number. When you go back to what they used to do it in the 1990s, it’s 18 19%, not the 7% that the Fed tells you. CPI.

And on top of that, these inflationary numbers give you a tailwind for earnings. So all these companies that surprise earning beats, if you look at them, what inflation has done into their products, it’s not a surprise that they beat.

Sam

Yeah, right. And it’s somewhat stunning because if you think about it from a 23 24 perspective, if you have your input costs begin to move lower, or at least decelerate, and you’re holding your prices at these current levels, or even increasing slightly from here, or increasing from here, all of a sudden you begin to think about what that does to a bottom line. That is an extremely attractive thing for a business. As we begin to move into the latter part of the margin expansion that everybody kind of thought was over after COVID, that really might return to some of these boring, staid old stocks.

Tony

Right. So guys, just, just to be clear, what we’re saying here is prices are not going to go down or they’re highly unlikely to go down to what they were two or three years ago. We’ve hit an inflation level, it’s a stairstep. And companies are comfortable seeing reduced volumes, but they’ve compensated that with higher price and consumers are generally accepting higher price. Right. So as an aside, I’ll be shameless here and say complete intelligence does cost and revenue forecasting. If you guys need any help with that, let us know. Okay? So, terminal rate, you’re still looking at five to five to five somewhere in there.

Sam

Well, I think it’s probably closer to five and a half to somewhere between, I would say five and a half to six because you have the stickiness in wages, right? And the stickiness in remember this is important, that Powell, week ago at the Brookings Talk pointed out one thing, and that was Core Services Ex shelter. In other words, they, they are already throwing shelter out. Even when shelter decelerates, they’re not going to pay attention to it. And he also made it very clear that Core Services X Shelter, the main input cost for many of these businesses is wages and personnel. So while you have these wage pressures, building the Fed is not your friend in any meaningful way. So I’m much more on the give it five and a half to six. There’s this idea maybe we get 50 50 25 then done. Or 50 50 done. It’s more like 50 50. 25 and 25 and 25. It’s just slower.

Tony

You said this a month or so ago. It’s a matter of the number of 25 that we get.

Sam

Yes, it’s 25 delays.

Tony

Okay. So it’s not over, guys. We’re going to continue to see the Fed take action, and they haven’t even really started QT yet. And we’ve talked about that for some time. And when they start QT is really when markets feel is that fair to say? Yeah, depends on the market, of course.

Sam

Yeah, they’ve started QT It’s just a small 200 billion or something that’s still QT. They’re not going to sell them.

Mike

I think one of the things he said is the Fed is not your friend. And just think about that statement for a minute. For two decades, all investors we’ve all come to known as the Fed is our friend. Anytime the market was down, they’re out there doing press conferences. But I think it’s critical for people to understand we’re not going to see a return of that for a significant amount of time.

Tony

Right. You’re not public servants. Right. Exactly. They don’t like you.

Albert

It’s important that as Sam mentioned, that 50 50 and then the repetitive 25s correlates with their rhetoric of soft landing that they keep talking about whether they can actually achieve a soft landing. Well, that’s another debate that we talk about. But that’s exactly what their intentions are. Those are 25 US to the end of their they get to where they want to be.

Tony

Right. Okay, very good. Let’s move on to Japan. Bank of Japan Chairman Corona was on the wires this week talking about Japan hitting the 2% inflation rate, which they’ve been trying to hit for 30 years or something. And then they made a policy with Avionics in 2012, and they still have been able to hit it. And now that we have crazy inflation globally, they’re going to claim the win. Right. And they’re going to say, we hit it and abe nomics. Although Avi is not empowering where it was ultimately successful. So, Albert and Sam, I’m just curious, what does that mean if Japan hits 2% inflation and they tail off their quantitative easing, their kind of QE infinity and they stop buying government bonds, all this stuff. First of all, do you think that’s going to happen? Okay. And second, if that does happen, what did Japanese markets look like? And then what does the yen look like? I realize they just threw a bunch of stuff out there, so just take it away. So you might like jump in here. Sure.

Albert

The fiscal monetary setup is quite favorable, right. If they do whatever they’re going to say they’re going to do quite favorable. There are only headwinds that I can see is the US. Stock market equities. If the US equities fall, without a doubt it will affect the Asian market, specifically Japan. It’s a tall order for them to sit there and get their 2% inflation target. So I don’t even know if that’s even a valid discussion, but I guess we’ll sit there.

As much as a set up as favorable for Japan, they’re combating China. And I still think that China, because they don’t have as much connection to the US. Equity market, is a little bit more favorable. I would go China over Japan right.

Tony

Now, yes, but I’m tired of talking about it.

Albert

I know not to talk about China when Japan is so interconnected with China, so everything is interconnected in that region. But I do think that the fiscal monetary set up for Japan is favorable.

Tony

Okay, sam, what do you think?

Sam

Like Albert said, theoretically, it’s really interesting. It’s intriguing. The one thing that I think is important to remember about Japan is that every time they seem to have the monetary policy setting correct and they were heading to actually hit their 2% target, they always seem to raise taxes or do something to make sure that they missed it. Was MMT on steroids? Very good example of MMT actually working. Right. You can do as much monetary policy as you want as long as every time you’re close to an inflation target, you just race to that or taxes. So I think that’s something that I’m always somewhat skeptical of Japan doing. If they begin to lift yield curve control on Japanese government bond yields, I think it’ll do two things. One, it will make for an interesting market in Japanese bonds. The BOJ owns such a large amount of that market that is almost difficult to fathom that it actually has a functioning market. It doesn’t really have a functioning yield market. So that’s kind of the first thing is we’ll finally get a feel for how that market actually functions. The second one is that you’ve had a 2% inflation win with the yen sitting between 130 and 150, a very weak yen.

That’s a tailwind to inflationary pressures. If they do lift YCC, it doesn’t matter what else they do. If they raise interest rates, whatever it might be, the yen going back to 120 is going to undo a lot of that inflation pressure in and of itself. You’re going to really bring that in. It’s also probably a positive. Having a stronger yen in this environment when you’re at an energy shortage globally is a positive for the Japanese economy because they import so much energy. Having that stronger yen makes it cheaper in domestic terms from that perspective. So I think there’s a number of things that could line up pretty well, and there’s always the opportunity for the Japanese government to mess it up somehow. Of course, I do think that it’s a very interesting market, particularly if you can do it on a call it an outright basis investing and get some of that currency dynamics mixed in with your investment, that could be a very interesting opportunity going.

Albert

You know, what’s interesting is what you’re saying about MMT on steroids. It’s like, you know, you’re making all these descriptions of what’s going on in Japan, and I just look at the fed, and I’m just like, well, oh, my God. We’re starting to be on the verge of Japanification at the moment right now, because the 30 year bond from who I talked to the 30 year is.

Sam

Completely controlled by the federal government.

Albert

And at the moment, it’s completely controlled. And if they can sit there and pump those bonds and pump the markets, you got Japan right here in the United States with MMT and Leil Bernard and yelling, doing whatever they want to do.

Sam

You just have to raise taxes.

Albert

Yeah. So so masters at that. Yeah.

Tony

So I used to go to Japan a lot, and in the late, say, 2010, 2011, when the yen was at, like, 75, when I would go to Tokyo and I would go down to breakfast in the hotel, I was the only one there. And I remember when Abe was elected and even pre election, the yen started to weaken him taking office. The yen started to weaken. Right. And I remember the first time I went down to the hotel lobby and there was a line to get to breakfast rather than just it being wide open for me. So a devalued yen means a huge amount of power for the Japanese economy. So when you say JPY going back to 120, I remember in 2010 eleven. When people would say, gosh, if we just had a yen at 95, we’d be happy. Right. And now it’s at 145, or whatever it is.

Sam

I haven’t 130 yet.

Tony

136. So, you know, it’s you know, it’s a completely different environment and puts the Japanese economy in completely different context. But you have nationalization of bond markets, you have nationalization of ETF markets. Is it really an open, competitive economy? It’s certainly a highly centralized economy. Right. And that’s really dangerous. But they love to use demographics as the justification to intervene in markets, right?

Albert

Yes.

Tony

Okay, guys, if anybody has a question, raise your hand. Or I’m not exactly how this works. Again, this is our first time to do a spaces. So put something in the messages or raise your hand or do whatever, and we could potentially have you come on and ask your question. I’ll be very honest. If you have an anonymous Twitter handle and we don’t know you, I’m not going to let you speak. So don’t waste your time. But if you’re someone we know, then we’re glad to have you on. So I guess while we wait for people to come in with questions, we’re pre Christmas holidays here in the US. We’ve got a Fed meeting coming up, the expectations for a 50 basis point hike. What do you guys expect? We’re seeing equity markets really kind of gradually move lower. What do you guys expect for the next week? Or so in the US before the Christmas holiday.

Albert

I think the CPI is actually going to be a little bit less than consensus and probably get a rally going to the end of the year, to be honest with you. I think everybody knows it’s going to be 50 basis points. The question is what’s the guidance after that? What do they say? If it’s a good CPI number, well, then you can have this dough stock for another month.

Mike

Sentiment has been so low and kind of got your seasonality right now. I think that probably prevails here.

Sam

If you think about it, a few.

Mike

Months ago everybody was kind of in this panic, Seymour. People kind of there’s this nice little calm right now everybody’s just kind of floating around waiting to see what’s next. And what’s your point? I think everyone expects to raise another.

Albert

50 basis point, which is amazing, because 50 basis points is not dovish. I guess everyone’s expecting 75 or 100 about a month ago, you know, their.

Mike

Condition as to.

Sam

No, I would say there’s there’s a couple of interesting things about the Fed meeting it into the back half of the year. One is what does the dollar actually do here? Because if you begin to actually have a significant move in CNY stronger right lower on this chart. But if you get a significant move back towards the 650 area on CNY, that is going to have a spillover effect. To a stronger Euro continued strength in the British pound you could begin to have a number of dynamics that are somewhat negative dollar and therefore pretty bullish on the risk asset front that I think could catch some people off guard simply because of the spillover effects. But the Fed, the one thing to remember about this meeting is it’s not just a 50 basis point height. It’s also that stupid dot plot that they do that actually has some pretty serious potential consequences because if 23 comes out with higher than expected dots and 24 dots move higher, the terminal and the long term rate begins to creep a little bit higher. If you begin to have that hawkishness, I kind of want to say this, so going to, if you begin to have the hawkishness become less transitory in the dot plot, that could become somewhat problematic for markets that could take some of the sales out of what we’ve seen to be a moderating dollar effect.

So I think, I think it’s worth being a little careful until we see that dot plot and begin to hear how Powell is approaching 2023 because I think they’re somewhat aggravated about the way that the Brookings Institution, the Brookings speech was received by markets they did not want a significant asset rally going out of that right. That was counterproductive to what they want. So I think they’re going to be very careful about the rhetoric into the.

Tony

Back half of the year because they would just. Not be so jerky in their communication. They’re super bearish. They’re bullish. They’re super bearish. They’re bullish have a consistent message.

Albert

Yeah, but it depends on what’s going on behind the scenes, what data they see. All this data, they see all the CPI and the jobs numbers a week or two heading for anybody else. Don’t kill yourselves.

So I guess it comes down to what is going on behind the scenes and what they don’t want to break. I mean, Blackstone came from what I heard, blackstone was $80 billion in the hole and having problems, and they went to the Fed, and that’s what triggered Powell to be slightly dovish.

Tony

And I thought they were the fed.

Albert

Well, whenever you guys Powell’s portfolio sitting there in your grasp, you are the.

Tony

Fan of that one.

Albert

But I guess it goes down to what is happening behind the scenes and what could potentially break is why they’re coming on this roller coaster ride of rhetoric.

Tony

Yeah. Okay, I’m going to see if Valena wants to come in she’s attending. And see if she wants to come in to see what? Invite her to speak and see if she wants to Valena, are you there? If you want to come in and let us know what you’re thinking is going into the end of the year and 2023, you have an invite to speak. You’re welcome to.

Albert

Molina is sitting there in Austria, vienna, Austria. And I know the European markets are now looking quite interesting to me. A little luxury market in Europe is absolutely exploding, and it’s just unreal that. It’s just so resilient. I mean, there’s two brands that I personally liked, laura Piano and Brunello Cucinalli, which I have a tremendous amount of polls. Brunello Cucinalli didn’t care anything about the Russian sanctions or anything. Just kept on selling, and they just blew out earnings yesterday or as of today, they were up like 7% this month. Really, the luxury retail market, luxury jewelry market is just it doesn’t stop great. And it’s counter to what everybody is saying. Recession this, recession that. You go to gucci stores, lines out the door, Louis. The time you need an appointment, it’s just resilient. It’s just actually quite amazing.

Sam

It is really similar to if you look at our markets, right, particularly the masters plotted against the price of oil. If you do a six month delay, guess what? It’s almost it’s a really interesting kind of windfall type chart. You can kind of see the oil money flowing in there. And you even had China relatively shut down, and that was a huge driver, a tremendous driver of European luxury, particularly for LVMH. Even with China shut down and not really having the tourism, you had a lot of tourists from Middle East, et cetera, really put in some of the South American countries that are doing fairly well, particularly at the higher end. A lot of that is driving this kind of underneath the surface. You had tech, then you had energy. And the question is, now you have the China reopening. Is that the next leg for a lot of these lectures?

Tony

Okay. So let’s talk China.

Albert

I wasn’t going to do that.

Sam

Tracy.

Tony

You’Re as a speaker as well. So if you want to come in, you can come in any time. Okay, so let’s talk about China, even though I didn’t want to COVID that. So let’s talk China. What’s happening, Albert, with the reopening? Like, what do you see the next two months happening with the China?

Albert

Just as we spoke about a week ago on China, those riots and the reason the Chinese even let you see these riots happen on the social media was a signal that they were going to reopen, and in fact, they did. Days later, we’re reopening in stages. And that’s just it. And get your house in order, everybody, because inflation is going to happen. I think I think copper was up, like, two and a half percent this morning. And this is this is it just barely reopened right now, manufacturing, because the odors were down I think Western odors were down 40%.

Tony

But kind of everyone told me on Twitter that democracy came to China.

Albert

Yeah.

Tony

Okay.

Albert

Those are people that have never been to China or stayed at five star hotels or actually step foot outside of Beijing.

Tony

So let’s go there a little deeper. And Xi Jinping is in the Middle East either today or over the weekend at an Arab China summit. Right. And so, first of all, him leaving China right after there were protests, what does that say to you, Albert?

Albert

Safeguard, he’s done any kind of opposition that was pushing against Xi’s Party congress moves eroded, and then these street protests are just street protests. I get it, people are upset and their livelihoods and check down the list of whatever you want to say, but realistically, they never work unless they get violent. And they never got violent.

Tony

Right. So you kind of have to let the steam come out of that valve, I think is probably what you’re saying. Right? The CGP is saying that now with CGP going to the Middle East, sam, they are the premier buyer. China is the premier buyer from OPEC clubs now. Right. It’s not the US. And this isn’t new for people who have been paying attention. The Saudis and other people in the Middle East have been spending a lot more time in Beijing for probably six, seven years. And so and and it’s been longer, but it’s been really, really visible for the last six or seven years. So what does what does that tell you about, let’s say, OPEC’s desire to, please say, a US president going to the Middle East to try to bully them, to pump more? Is that effective anymore?

Sam

No, not at all.

Tony

Hi, Tracy.

Speaker 5

Hi. Sorry, I was having technical difficulties, and for some reason I couldn’t all gone earlier.

Tony

Welcome. No apology necessary. We’re just talking about China and with Xi Jinping in the Middle East for a summit with the Saudis and the GCC members and what that means for the ability of say, a US president to kind of bully OPEC into reducing oil prices going forward. Is there really any strength there? Do you see.

Speaker 5

That’S? Absolutely done. What I would expect she landed in China today. I would expect him to get the full lavish welcome. Right. And we want to be looking at who he brought with him as far as national heads of corporations. And I would expect this to be completely opposite of what we saw the Biden meeting with and more akin to what we saw the Trump meeting with, where they I would expect that.

Tony

So they’ll touch the crystal ball.

Speaker 5

Maybe they might bring out the ball. Yes. And I expect billions and billions in new deals as far as economic, military, energy in particular, et cetera going on at this point. Again, they’re having a conference where they’re going to have multiple leaders in the Gulf nations in Saudi Arabia. So I mean they’re really going to try to rue China on this trip big time.

Tony

Right. So when you talk about military deals, what do you think about that? Albert?

Albert

I’m not really sure Saudi Arabia will.

Tony

Do major military deals with China.

Albert

I mean maybe a few just for show up for optics theatrics but the US military hardware is the best in the world and realistically Saudi Arabia is under the US defense umbrella. Whether the left or the right likes it or not, that’s just the reality of it. And as long as Iran is not poking or poking trouble from the east and Yemen not from the south, southern regions have an easy ride. So their military deals aren’t really they’re not at the forefront at the moment. But anytime that Russia wants to string that relationship, they can certainly call up Tehran and say lob a few missiles over and things go right to elegant.

Sam

To Albert’s point, I don’t think Saudi is going to work. KSA is going to become the next India where they split their arms deals among the three major powers of arms anytime soon. I mean that’s just not going to happen.

Albert

No, there will be a little bit, yeah. India is a completely different ballgame. India has got counterbalance, they need to counterbalance Russia with China and Pakistan and it’s the old mess over there and they need to do what they’re doing.

Sam

Well Nksa is also trying to hold together their market share in a world of Russia really having to begin sending almost all their stuff to call it China India.

Tony

Right.

Sam

So if you had were the two largest pieces of growing market share for Saudi Arabia over the past decade, that was India and China. And now you have the other major energy player in the region coming after your market share. There’s got to be a little handshaking here to keep everybody happy and selling at $55 a barrel.

Tony

You don’t hate that, right?

Sam

If you’re trying to. I mean, it’s the perfect time to reopen. You’re getting cheap energy. You have supply chains that have fixed in the rest of the world. So I think this is very much a visit to make sure that they can continue reopening, get those long term energy deals in place, and then move forward.

Tony

Right. Okay, so we do have a question for Tracy, and you guys jump in. So, Tracy, there’s a listener named Rasul, and he’s asking, when China opens up, is it possibility that it could use its own SPR, like in November 21, to reduce its oil cost? Is that something they would consider doing?

Speaker 5

I think not at this juncture, right now, because, first of all, they’ve already drawn it down. Right. And they’re still worried about long term energy security, as is everybody right now. In addition, they’re also getting really cheap Russian oil, so I don’t think that would be something that they would do right now.

Tony

Okay.

Albert

No, they wouldn’t do that.

Tony

Right.

Albert

There’s no absolutely no need to do that. The US. Only did that because of Midterm economics, and that’s just that China had no intention of doing that.

Tony

Great. Okay, good. All right. Well, guys, I think we’ve covered it. We’ve been here for about 40 minutes, and the hotel we’re in has threatened to call the police if we don’t leave. So I want to thank you all for joining us for this week ahead, and we’ll get this posted on our YouTube channel within a day or so, okay? So thanks for joining us, and look forward to seeing you on the next one. Thank you.

Podcasts

US midterms: An opportunity for voters to choose their economic future

Post author By admin
Post date November 9, 2022

This podcast was originally published by the BBC here: https://www.bbc.co.uk/sounds/play/w172ydq57tyy2z0

The midterms decide who controls Congress as well as state legislatures and governor’s offices. Rahul Tandon is joined by Dianne Brady, assistant managing editor of Forbes from New York and Tony Nash, the founder of Complete Intelligence in Texas.

Billions of US dollars are being spent on the election campaign adverts that voters will be seeing and hearing in the run-up to the elections – but is it worth the investment?

And has the economic situation in the US overshadowed the overturning of Roe v Wade?

Transcript

Rahul

Hello, and welcome to Business Matters here on the BBC World Service. I’m Rahul Tandonin-depth. On the program today, we’re taking an in depth look at the US midterms. As millions of Americans get ready to vote, we’re going to be looking at the economic factors that are going to have a huge impact on their decisions. I’ll be joined throughout the program, as always, by two guests on opposite sides of the world. We have Dianne Brady, assistant managing editor of Forbes, who’s in New York, was on the program just a couple of days ago, but she did so well, we decided to bring her back. Diane, is it exciting in New York? Are people gripped by election fever?

Dianne

Well, yes and no. Let’s just say New York is considered a flyover state by some, so I don’t think this would be considered a swing state. But yes, lots of excitement, of course, as we look around the country, and everything feels high stakes.

Rahul

It does indeed. The laugh you heard there was from Tony Nash, who is the founder of Complete Intelligence, who’s in Texas you need quite a lot of intelligence to understand the midterms. I think, Tony.

Tony

I’ve never heard of New York described as a fly overstate.

Dianne

All right, well, I’m a Canadian turned American citizen, so forgive me all listeners who think I’m being cavalier here, but I think it’s not inaccurate.

Rahul

But I don’t think there’s no need to ask for forgiveness so far in the program.

Dianne

The election is over.

Rahul

Yeah, maybe by the end of it you might need more than forgiveness, but who knows? Tony, for our listeners who will have heard of the midterms, can you try and explain what happens here? Because there’s lots of terms that we’re going to use. The Senate, the House, governors. I mean, what are people voting for?

Tony

Sure. So every four years we have a presidential election where you vote from the president on down to, say, local offices. Like in Texas, it’s people who run your waterboard and judges and your local commissioners. So it’s from the president on down. In between presidential elections, we have what are called the midterms.

Tony

So every two years so in the US. House of Representatives, those representatives have to campaign and be reelected every two years. Senators are reelected every six years. So not every senator is up for election in every election cycle. And then you have governors, and those governor’s terms change by state. They’re not always the same. In some cases, it’s four years. In some cases it’s five years. And I don’t know if there’s other places, but Americans are now voting on kind of everything except the president, and those, say, Senate seats and governorships that are not up for vote.

Rahul

Well, I tell you what. That was pretty impressive, actually. If you ever see a job as a sort of political correspondent, I think you might get one, Tony, I think we’re done here. Real quick.

Dianne

Tony, summer up beautifully.

Rahul

There we go. Should we all go? No. Oh, probably not, Dianne. And this is important, isn’t it? Because at the moment, the Democrats, which is the party of President Biden, they control the House and the Senate, there is a strong possibility that they may lose both, which will have huge implications for President Biden’s ability to pass legislation.

Rahul

I think Diane said there’s a lot to get through and we’re going to try and get through some of that. Let’s start by looking at the key economic issues.

Rahul

Cost of living, Tony, is something that people around the world want tackled. I’m sure that as people begin to cast their votes in a few hours time, when those polls do eventually open up on Tuesday for the midterms, that will be close to the top of the agenda. When we talk about the Democrats and the Republicans, the left and the right, what are the big economic differences between them and tackling this problem?

Tony

Well, I think there was a bill passed about a year ago, the Inflation Reduction Act. Diane, tell me if I’m wrong. I think it was $3 trillion in spending, and I think that was one that many Republicans didn’t want because there was a feeling that that was going to contribute to inflation. And so I think there was. The irony of it is just a year earlier, in the depths of COVID there was a massive stimulus package passed under the Republicans that everyone was happy about. So I think it’s easy to say, while the Democrats are the ones who spend and the Republicans are the ones who don’t, it’s not really the case. It really just depends on what they spend on. Republicans tend to spend on things like defense and security and law enforcement and these sorts of things. Democrats tend to spend on things like social programs. So I don’t know that one is necessarily more disciplined than the other. They just have different spending priorities.

Rahul

When we think of Texas, we think of gas, gas prices. We’ve seen President Biden releasing those strategic reserves of oil to try and bring down the price of gas. Is it that crucial a factor, do you think, in these elections? Will Americans just look at the cost of putting it in their vehicles and say, it’s too high, I don’t want to vote for this government?

Tony

Well, I think I saw a poll earlier today and I think it said that 65% of Americans believe that Biden is responsible for high gasoline prices. And I thought that was really surprising. I think it was from Pew. I can’t remember who it was from, but it was credible polling group. So Americans do see that and they do see that on Biden’s first day, he killed the pipeline, a potential pipeline from Canada, which would have brought heavy sour crude from Canada to fill US refinery.

Rahul

But these are global factors really, aren’t? I mean, of course, there are individual factors that will impact that.

Tony

No, they’re not global factors because the fact is, the sources of the crude that we need for American refineries is heavy sour. And there’s places like Venezuela or Saudi Arabia or other places where we could get it. But the most accessible is Canada. And so Americans do pay attention to that stuff, and they do pay attention to what is impacting gasoline prices because it’s such a huge portion of their budget. And so I think policy does lead to the cost of living, and I think it is a big factor. And I think people are looking at the way the different parties have reacted to this. And when that pipeline was canceled, republicans were very unhappy and voiced it. So I think that’s the case. And like I said, I think 60, 65% of Americans believe that Biden does have responsibility for the gasoline price in the US.

Rahul

Tony, one thing that often happens after midterm elections in the US is we begin to get an idea of who the presidential candidates are going to be. Do you think that we are likely to see in two years time a rerun of President Biden against Donald Trump, or do you think it will be other candidates for both parties?

Tony

To be honest, I think it’s too early to tell. I think even if Donald Trump starts campaigning Tuesday or Wednesday, I don’t necessarily think that it’s a done deal because people like Ronda Santos have taken a national profile.

Rahul

That’s the governor of Florida, isn’t it?

Tony

Governor of Florida. That’s right. And so I don’t think that Trump kind of as the Republican candidate is a done deal. I also don’t think that Biden as the Democrat candidate is a done deal. I think we’re very much things are very much in play, and really, anything could happen. I wouldn’t want to put money on, say, Trump or Biden right now because I think two years is a long time.

Rahul

Is it a bit harder for the Democrats? Because we know that with the Florida governor, there is, it seems, a candidate that the Republican Party can get behind if it isn’t President Biden, is there an obvious Democratic candidate at this moment in time? Tony.

Tony

I think there are a lot of people who believe they are, but I think maybe Gavin Newsom in California, but I think his politics are a little bit too far left for most of those independent votes that both Republicans and Democrats really try to get in order to get elected. So I think people like Gavin Newsom in terms of, like, political consultants do, because he looks good on television and all this other stuff, but I just don’t think he’s electable for a nationwide office.

Rahul

What we’re seeing here, Tony, and there’s a large Hispanic community, isn’t it, in Texas who play a significant role in elections there. Are we seeing these communities, whether it’s the Latino voter, whether it’s the black vote saying, don’t take my vote for granted, and that’s a message for all parties.

Tony

Sure, absolutely. If you look, say, on the border in the US. Part of my family lives in Del Rio, Texas, and they’ve never seen the quantity of people crossing the border that they’ve seen before, traditionally Democratic voters. And they’re really questioning their voting intentions because of the things that they’re seeing on the border. We’ve seen Texas border counties really start to swing right because of that. These communities that are small and safe and other things have really had an influx of people, and it’s really threatened, I guess, their way of life on the border. So some of these places that were very, very securely Democratic locations have started to move away from that.

Rahul

Tony, have you been flooded with lots of different political adverts as well across TV, across social media, across everything?

Tony

Yeah, I saw more during the World Series than I had seen in other places, but I just kind of ignore them, to be honest.

Tony

Yeah, I think it can I think a couple of dances on TikTok are probably worthwhile as well, but I think TV advertising is probably worth it.

Rahul

Are there any dancers of Tony Nash on TikTok, by any chance?

Tony

No, but I’ve seen some comments about different candidates kind of dancing on TikTok, and it was kind of silly. But it does get people talking about the candidate, and who knows if it works. I’m not 22 anymore, so it may work on me if I was 22.

Rahul

And when we’re looking at turnout here, we touched on it briefly before we heard John Sadworth saying to us that it was going to be a good turnout here. But the simple fact is, in the midterms, the majority of voters never vote, do they?

Dianne

That’s usually the case. I don’t think that will be the case this time. Tony, what do you think?

Tony

So I went to early vote last week, and I had to stand in line for quite a while to vote. So I think people are really, really engaged this time around, and I think it’s mostly because people’s pocketbooks are hurting and they’re just tired of it. So I think you’re hugely engaged because of the economy.

Rahul

That is interesting. Let us see what those numbers are. We will get them very, very shortly. Tony, if you believe the polls, and often that may not be a sensible thing to do nowadays when we talk about elections, they do seem to indicate that this is not going to be as important an issue. Clearly it’s a very difficult issue for many Americans, but it’s not going to sway voters as much as maybe people thought it was going to sway voters a few months ago.

Tony

It definitely won’t, I think. Look, all the Supreme Court said is that they’re leaving it up to the states, and so there’s no issue for mobility in the US. So people can go to another state to have an abortion if they want. So I think we had the initial emotion after the Supreme Court judgment, but I think when people really realized it’s a state issue and many of the things in the US. Constitution are really devolved to the states, and so this just takes that same issue and puts it up to the states unless the states decide. And so I think most adults, when they read it and they consider that if they really want to have an abortion, they can drive or get on a flight and go to another state, it’s really actually pretty simple.

Rahul

It’s a communicated economy, the US. Isn’t it? Because you look at it and we hear this talk of recession, we hear this talk about the incredible rises in inflation, cost of living, and at the same time, you sort of hear still about a very strong jobs market. Still.

Tony

Yes. But what we are starting to see there was an announcement yesterday, I think, that Meta, Facebook will soon be announcing major job cuts. And so job cuts are starting to hit the tech sector. Companies like Stripe laid off, I think, 18% of their workforce. Twitter had some big layoffs last week, and so tech is really starting to be hit hard with layoffs. So a lot of the discussion about job vacancies and unemployment, say, out of the Fed and the White House, that will start to even out. And the job market by the end of the year will likely be much less strong than it is right now.

Rahul

Yeah, I knew Twitter was going to make its way into the program at some particular point. Okay. Prediction diane. What is what’s going to happen?

Dianne

I think the House will go to the Republican. Senate, will hold Democrat, and Biden will have a tougher time the next two years.

Tony

Tony, Republicans get the House, they get 52 in the Senate, and they pick up a couple of governorships.

Rahul

Okay, well, thank you to both of you for your insights and thoughts on the American midterm elections. Americans will vote on Tuesday for the Senate, for the House, for governors as well. We’ll bring you all the results here on the BBC World Service. You.

Week Ahead

US Policy for Small Businesses: The Week Ahead – 17 Oct 2022

Post author By admin
Post date October 16, 2022

Learn more about CI Futures here.

We’ve had several policies that have hurt small businesses, especially since the advent of Covid. The US administration just implemented a policy to move gig/independent workers to employee status. How does this hurt small businesses? Carol Roth, our special guest for this episode, discussed that in this Week Ahead.

Also, we’ve seen a lot of negative news this week with producer prices, wages, consumer prices rising. One Twitter user asked what would Carol do if she was in charge? What would she do and how does she think it’d help?

Albert helped us look at the Fed and is the dovish Fed dead? We’ve known this for some time, and there were hopes for a pivot, but that seems to be over.

Tracy also talked about diesel inventories, which she talked about for a very long time. She helped us dig into that in this episode.

Key themes
1. US policy punishing small businesses
2. The dovish Fed is dead
3. Diesel inventories
4. The Week Ahead

This is the 38th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Carol: https://twitter.com/caroljsroth
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Time Stamp:
0:00 Start
0:48 Key themes for this week ahead
2:43 US policy on gig workers
7:48 Is this to slow down job creation?
10:00 What other things will make things uncompetitive for small businesses?
12:07 What adjustments would Carol Roth do if she’s with the Fed?
16:47 Debt buying and the Fed
19:00 Forecasts for some currencies
20:00 Does the Fed understand that this is a supply-induced inflation?
23:50 They’re not thinking through the political fallout
25:25 Is diesel priced in dollars globally? And what’s the impact?
28:00 How long does the diesel shortage last?
31:34 What’s for the week ahead?

Transcript

Tony Nash: Hi, everybody, and welcome to the week Ahead. I’m Tony Nash. Today we are joined by Carol Roth. Carol is from Chicago. She’s the author of the War on small business. She’s got an amazing Twitter following an amazing Twitter presence. Carol, thanks so much for joining us. Really looking forward to getting your perspectives today.

We also have Albert and Tracy and I’m looking forward to getting their views on the Fed and on energy today as well. The key themes today we’re looking first at US policies punishing small business. Carol has a really unique perspective, obviously a book on the broader implications of this, but there are some recent policies that she’s been focusing on that will talk about some of those things.

Next. Albert will help us dig into the Fed. And are we looking at the end of the Dovish Fed? I think we’ve known this for some time, but there’s always kind of been some hope that there’s going to be some sort of pivot and that seems to be over.

Next we’ll look at diesel inventories. Tracy has been talking about this for a long, long time, but it really seems to be coming to a head. So we’ll dig into that today as well. Please take a look at our product CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.

Before we move on, please like this video, please subscribe to this video. You’ll be able to see all of them and we really want you to be able to see us every week as we bring these in.

So Carol, thank you very much for joining us. I know you’re busy, really demanding schedule. It means a lot to us that you could join us. So thank you very much.

Carol Roth: This is an amazing crew and I can’t believe you left out recovering investment banker out of my introduction because that’s really the most important part,

TN: Right, exactly. And a Raiders fan as we learned last week over Twitter as well. So we’ll forgive you for that. Anyway, thanks very much. I love the work you do on small business. And you’ve been talking about a recent policy and we’ve got a tweet of yours on the screen talking about the Bind regime pushing gig employees to be full time employee status with companies. Can you talk us through what that means for small businesses and why is that a competitive disadvantage?

CR: Yeah, I think the first thing that people really need to understand is how important small business is to the economy. Because I think a lot of people think, oh, it’s small, it’s just a little piece. Before COVID, small business was about half the GDP and about half the jobs. And at this point we have about 32 6 million small businesses in the US.

So if you’re somebody who believes in the concept of decentralization and that being important to economic freedom, this is the decentralized portion of the economy. This is very independent. It’s very spread out geographically via industries backgrounds. Whatnot by the way which is why big business, big governments and big special interests don’t like small businesses because they’re very hard to corral. If you look at the other half of the economy, it’s in the hands of 20 plus thousand big businesses. So it really is that sort of David versus Goliath battle but also this battle between decentralization and centralization. And we have seen all of these efforts over a long period of time to destabilize small businesses and to make competitive advantages to really tip the free market in favor of those big businesses.

And certainly the policies around COVID right, were the biggest example of that ever. It was an epic wealth transfer from Main Street to Wall Street done not based on data and science but based on political cloud and connections. So now that we kind of know what the story is in terms of this unholy triumvirate, if you will, the big business, the big special interest, big government attacking small businesses, you then look as to what else they can do to really make it harder for small businesses to compete.

So there’s this Department of labor ruling that’s come out. It’s followed something called AB Five in California. If anybody has heard or followed what was going on in California and then it has been and passed the House on a federal basis under the Pro Act. But basically the idea is they want to take gig workers and independent contractors which by the way the estimates, they number around 53 million people in the United States.

So again, this is not a small number of people who are being affected and they want to say you can no longer have the freedom to decide how you work. We don’t want you to be able to enter into a contract in a way that works for you. We don’t want you to have that flexibility. You have to be an employee. Now this may sound like, oh well, that sounds great for people.

Why would they not want to be an employee? Well, there are a lot of reasons why you don’t want to be an employee. The first is you might not have that opportunity. And that’s the biggest issue because it is very difficult. And the government are the ones who have made this very difficult for a company to hire their first employee and also to keep them on an ongoing basis.

If you hire somebody as an employee versus a contractor, you have to pay in a portion to Social Security. It affects interest. It can affect your 401K or step plans. It just kind of reverberates throughout your business and so it becomes very challenging and difficult. So if you are a small business who maybe gets busy during a certain season or need help just in certain areas, you tend to bring on independent contractors. Or if you’re creative, if you’re running a movie, you’re obviously not bringing everybody unnecessarily as an employee. You might have a caterer who comes in and feeds people, or if you’re a hairdresser, you may want to rent out a chair in a salon. And the salon doesn’t have the wherewithal to make these employees.

So they’re framing this as we’re trying to help the employees. This is going to really stick it to big business. But there are literally hundreds and hundreds of different categories of employees. Anybody who’s a 1099 employee and doesn’t have a business entity that this will threaten not only their economic freedom, the ability to work the way that they want to be flexible, but literally their livelihoods.

So if you believe in choice, it should be your work, your choice. And now the Department of labor wants to give another giveaway to all of those big special interests.

TN: So, Kara, when we’re in an environment right now where the Fed is trying to slow down job

creation, our small company is the largest portion of job creation as well. So is that another tool potentially, maybe unintended or not, I don’t know to slow down job creation?

CR: Yeah, I mean, certainly if you think of the small companies, they’re the ones that don’t have the financial wherewithal or the fortress balance sheets. They have not been loading up on the cheap debt because they have to personally guarantee it and don’t have the same scale as the big companies. So it’s a challenge for them to survive an environment where the Fed is going, we’re going to destroy demand. It’s basically we’re going to destroy the little guys who can’t endure this pain. So that’s small business. And you’re right. Having the ability to be flexible going, well, maybe I can’t hire an employee, but maybe I can hire somebody as a contractor parttime, and when things get better, I can bring them on as an employee. Or maybe this is just a flexible way that we can work in the future so we can have different people and they can also work with different companies in a way that suits them.

Absolutely. This is going to be on the shoulders of small business. And as they always do, they say, oh, this is an attack on Uber and Lyft. When this happened in California, Uber and Lyft went out and they put it on the ballot. They got an exemption, but they didn’t take everybody else with them. They just got it for a handful of big industries. And all of the other small guys were basically screwed.

So the idea that this is somehow in an attack in the front against the big guys and the small guys are going to come out smelling like a rose is a joke. If you believe that. I’ve got a bridge to sell.

TN: You right. Okay. So we have small businesses that just barely made it through COVID. So that was really a regulatory way to suffocate small business. And my company is one of them that scraped through and now we have these full time employee regulations coming in from the Department of labor. Are there other things on the horizon that you’re seeing that could make it even more uncompetitive for small businesses?

CR: I mean, everything that they’ve done is making it noncompetitive for small business, whether it’s regulation. You think about all of these minimum wage regulations and how these big companies like Amazon and Walmart have shifted their position and decided to lobby for them. Well, why do you think that is? That’s because they know they’re going to pay that level anyway and they don’t want to have the flexibility for the smaller companies to be able to maneuver around.

That certainly a higher interest rate environment messing with the labor force in general, let alone having a rule like this. The supply chains, the decisions that were made, whether it was a direct you have to close your business down or these indirect issues that affected labor supply, whatnot they killed by mandate around seven figures worth of small businesses. And unfortunately, Tony, as you’ve shared personal stories, there are many others that are just scraping by to survive.

And it’s just this like, you know, you get knocked down, you get up again and then they just keep knocking you down and you keep knocking you down. If you wanted people to succeed, if you wanted people to pursue the American dream, if you wanted economic freedom, you would be working to remove

barriers, make it easier for people to work, make it easier for companies to hire in the way that makes sense for both parties, and make it easier to be a small business. And every single thing that comes out

of government at all levels, by the way, it’s not just federal, but state and local is doing the exact opposite.

TN: Yeah, it’s overwhelming. We could talk about just that alone for hours. Let’s move on to former investment banker Warden Grad. You know your way around the economy. There is a tweet put out a few days ago asking you, if you had the big chair, what adjustments would you make to the economy, monetary policy, whatever, to change the environment today to make things better? What are a few things that you would do if you were Chair Powell or Janet Yellen or something like that?

CR: Burn the fed down. I burned down the Federal Reserve. The very first order of business, I put myself out of a job. And I say that kind of jokingly, but I like to clarify. I would take away the Fed’s powers because as I’ve said to many people before, the only thing worse than the Fed making monetary policy decisions and meddling in the markets and doing things like printing money and whatnot would be Congress doing that? So you don’t want to have those if you get rid of the Fed, you don’t want to have somebody else take away the powers. We’re really getting at, you know, getting rid of those powers to interfere. So that would be the first thing I would do.

But obviously that would not solve what is going on. Now. This is not going to be a surprise to any of you, but what we’re dealing with right now is a supply side imbalance. And it has been. They stimulated demand, but they stimulated it into a supply constrained economy. And so we are under supplied, as I know Tracy tweets about all the time in energy, certainly in labor, as we’re talking about food, housing, other commodities. So I personally don’t believe that the Fed has the tools to solve this problem and attack it. And frankly, I think that they’re going to just cause a massive amount of destruction not only here in the US. But reverberating through the global economy, which then swings back and has an impact on the US.

So what needs to be done, again, are policies that remove barriers to supply. What we’ve been talking about, certainly on the energy front, anything that we could do to stimulate supply of energy, which again, do it here, where we do it more cleanly, and not let China and Venezuela and all these countries that don’t do it cleanly be the ones to do that. Because the last time I checked, we all share the same air. It’s not like you believe in a smoking section, right? Like, oh well, they’re just smoking over there, we’re great over here in the same restaurant. Like, that’s so stupid.

So we would obviously do a 180 on energy policy. The same thing with labor. All the things we’re talking about make it easier for companies to hire people to go to work in the way that they want to work and then we close that gap in the labor market, which is insane.

The same thing in housing. The National Association of Home Builders did a study last year. $94,000 in regulatory costs are added to the cost of every new home from the government. I mean, that’s insane. The average house is almost 4000. So like 25% of the cost is in regulation. And I’m not saying we don’t need anything, but that’s certainly excessive and it’s gone up by something like 30% to 50% over a very short period of time. So it’s those kinds of things that the policies need to be focused on stimulating the supply and shrinking that supply, demand and balance by increasing supply, not by trying to kill the demand. And that’s just where I land on it.

Albert Marko: That’s exactly what I was tweeting last few months now. And actually on the show is they are trying to create demand destruction, but the problem is the supply disruption that they’re creating and they put themselves in a doom loop to where when demand comes back, there’s no supply. So you get a cycle of inflationary situations happening, and it’s bad here, it’s worse in Europe and it’s even worse in Asia. So we’re going to be stuck in this until the policies start changing, not just from the Fed, but it’s got to be political also because the governments are doing this COVID zero in Asia and the energy crisis in Europe, and they’re just making it worse. So until those policies change, we’re going to be stuck in this cycle.

TN: Yeah. So I respect both of you, but the Fed doesn’t. So they’re going to do whatever the hell they want. What’s really interesting to me is you guys may have seen today. The treasury was asking investment banks. Hey. Do we need to buy some of the debt off of you so that we can create some liquidity in debt markets. Just basically transfer some cash to you so we can take some of those assets off your balance sheet.

Whether it’s the Fed or the treasury or whatever is done. It just seems like the benefit is for the small circle of people. And when you talk about whether it’s interest rates or QT or whatever, it seems like interest rates are the bluntest instrument that hit the biggest number of people. Right. And it’s hard for me to understand why that’s absolutely necessary.

And Albert, we’re going to segue into your section on the death of the Davis Fed. If we look at interest rates, we’re looking at a terminal rate about around 5% now. Right. And so help me understand what is happening with the Fed, what you’re hearing, what you’re seeing and what you’re expecting for the next couple of months.

AM: Well, I mean, everything at this point well, it should have been for a year now, but everything from this point on is strictly to combat inflation. They are getting screamed at by literally everybody to get the 5.5%. Not just five, they’re going to get the 5.5%. They’re going to do 75 again on this next meeting and then another 75 after that. And their intention is demand destruction. That’s what they’re going to do. And they’re not going to be dovish anymore. But they’re have to walk a tightrope here because Europe, they’ve destroyed so much in the global market, specifically Europe that lost 30 trillion in the bond market, that it could be a systemic problem.

And they can’t have that, so they’ll do 70. Five to 75. Talk guidance extremely hawkish. They’re intent on trying to get inflation down until November and December.

TN: November and December.

AM: They’re going to do 75 both. And they’re just going to have to because their time is out and they have

no more tools left to hit. Inflation at JPY at. Euro will be at 90.

TN: And JPY will be what?

AM: I don’t know the correlation on that one off hand, but the euro is definitely going to go to 90. 90 to 90 on this. But it’s all $30 trillion, Tony. That’s a lot of money. The only people in the money. Yeah, it’s still a lot of money. So when the treasury starts talking about, do we need to buy debt back from banks? Is that the US. Banks or is that European banks? Because I guarantee there’s going to be some European banks in there.

TN: Oh, they have to be. Yeah.

AM: Like I said, they’re causing systemic problems and they can’t have your completely blow up. I mean, they’ll use them for a scapegoat to stop QT announce QT stop. But that’s where we’re at it right now.

TN: Okay, so does the Fed understand that this is largely supply induced inflation?

AM: No, they don’t. They don’t? No, because people do what they know, right? If you go back and you look at what Yelen did, when I say Fed, I just toss in the treasury at the same time because they’re one of the same. They talk. They talk, and they have correlating policies and whatnot. And if you look back in 2013, this is what Yellen did last time. She drove the dollar up, crushed the markets, and drove all the money back into the United States. Yes, the United States market looks all beautiful at 3600 to 3700, and people talking about Fed pivots and 3900 in the es, but it’s not real.

CR: Okay, so first of all, can we just discuss the fact that between the time that Janet Yellen was Fed chair and Treasury Secretary, the woman pulled down over $7 million in economic speeches when she didn’t know how to handle, you know, coming out of quantitative easing. She didn’t see inflation. She said that I think this was actually from you, Tracy, but she said that everything looked great in the treasury markets and then the next day went, oh, yeah, I’m worried about liquidity. I mean, clearly, I’m not sure she knows anything.

And I want to know how to get in on that gig in terms of making that money for speeches for something that you know nothing about. But I find it hard to believe since everybody and their brother has been talking about all of the issues that are going to happen here.

And maybe it’s my wart and bias, but I go along with Jeremy Siegel, noted finance professor who’s been out there hammering the Fed, saying, look, first of all, you not only do you not necessarily have the tools we’ve seen some elements of demand destruction in small places, and it takes a while to work through the system.

So if you go too fast, kind of like you didn’t see it on the front side, you’re going to do the same thing and you’re going to overshoot. But the bigger issue alluding to what Albert said is the potential to drag down the global economy. I mean, that the fact that you can end up with currency crises, with a treasury market crises, the whole slew of risk assets could be a massive sale of risk assets so that they

could get their hands on dollars because the Fed wants to keep raising interest rates.

It just seems to me it’s not a question of do they not know this? It’s a question of what’s their intention are. They trying to drag down the global economy so there is a financial reset, so they can introduce some sort of a central bank digital currency and have an excuse for it. It just seems to me to go, oh, they’re ignorant of what’s going on. When every single one of us sees this, you’ve got the IMF talking about it, you’ve got professors talking about it.

The fact that this hasn’t crossed their mind with the people that are involved yelling aside, but the Powells of the world and other folks there, that just seems not very likely to me.

AM: No, it’s not. A lot of it is political right there’s. U.S. Midterms, they don’t want Trump back, so they start throwing in these economic numbers to make Biden Democrats look good. And that screws up Fed

policy going forward. I mean, Yellen takes a dollar up, the Fed gets stuck, and then they have to go back and create a new crisis in Europe or Ukraine or whatever crisis they want to create sometime in the future to blame for everything. Yeah, I think the Fed guys are smart. I think they do know these are not stupid people, although certain people, they. Know they just don’t care.

TN: I think you’re right. I think they don’t care. But what I think they’re not thinking through is the political fallout we saw that Chancellor or the exchequer in the UK kicked out today after about two weeks in office or something. And that’s relatively light compared to what happened in Sri Lanka a few months ago and what’s happening in Africa, what’s happening in, say, Pakistan, Bangladesh, what’s happening in Latin America.

So I think we’ll see political fallout here as a result of the Fed’s inability to understand the implications. Where it will really hurt is if it hits Japan and you get minority party in Japan back in power. They’ll pay attention then. And if you see powers in Europe that aren’t favorable to the US. But that’s already kind of starting to see Czech Republic and Hungary, certainly we’ve. Already started to see this, and it’s just getting started.

We thought we saw populism in 2016. I don’t think we’ve seen anything yet. I think we’re going to see

this in a big way globally.

AM: Yeah, Tony, you’re right. I mean, the Europeans are absolutely screaming at yelling about this because she straight up lied to them about the bond market. She can’t even talk to the Norwegians

or the Swiss at the moment. This is how bad it’s become.

TN: Yes, I believe it. Okay, so let’s move on to energy. Tracy, you’ve talked a lot about distillates for a reason, warned us for months about diesel shortages and diesel prices, and it seems like it’s really coming back. And as you talk about this, I want to understand, is diesel priced in dollars globally? And so is that going to hit supply chains in other countries as well because of the pricing basis of diesel. Coming out of refineries

Tracy Shuchart: diesel’s price in local currencies and trade in local currencies. Products are crude, obviously, prices in dollars and traded that way globally, except for some instances. But products are generally like Nat gas, it’s traded in different currencies. But really, I mean, we were having a diesel problem. This started back in 2021, so this is nothing new. I was tweeting about it summer of 2021. I was really worried about distalates. I started tweeting about that then because I saw our inventory slow down. It’s even worse now.

But what’s come to a head all of a sudden, and what’s making this obviously 10 million times worse, is that Europe, for instance, mostly bought diesel from Russia, and they’re trying to lean off of that, right? And so in the meantime, the US. Is trying to supply Europe with diesel. But now over the last week, we’ve had three weeks of ongoing refinery strikes with total. So France has 2500 gas stations that have at least one product that is completely gone, and 2000 of them are shut down entirely. And then we just had a malfunction in the Netherlands and Shells Curtis refinery, which is the largest diesel refinery in all of Europe.

So right now we have a massive global problem that is just getting worse. And if you see the diesel crackspreads have been they’re ridiculously flowing out. And backwardation is flying right now, which is kind of obscene. In the meantime, we’re still drawing these distills. We had a 9 million build and a 4 million draw in distance, and we’re headed into winter. So we’re going to have major problems here already in the United States, particularly in the Northeast, because they don’t have the refinery capacity there to really supply that area.

TN: Okay, so what does that mean? How long does this last? Does it last into spring? Does it last beyond spring? I’m curious about the magnitude of the impact on price, but I’m also curious about the duration, how long this is going to last.

TS: Well, you know, I mean, this has pretty much been gone ongoing since 2021. We’ve had times where it’s worse and times where it’s not. But it’s been over a year now, over a year and a half now. I don’t see that going away anytime soon because we don’t have the supply. We don’t have enough heavy oil to, you know, to make these products globally, especially when you’re cutting off Russia, because that’s what they produce is heavy oil. You’ve got Venezuela that’s producing 700K bpd. They’re not producing anything. And most of that’s going to China to pay for debts. We don’t have them. We’ve got Canada, but we don’t want to build pipelines right. For that. We can import more for that. So, I mean, we have kind of a global shortage of heavier oils. And sure, we get some from the Middle East.

That’s fine. We get some from Saudi Arabia. They own motiva here in the United States. And certainly they do produce diesel, but it’s still it’s still not enough. And especially when you’re talking about the west, it’s talking about, you know, we’re talking about a complete oil embargo on December 5 of Russian

oil and oil products.

TN: So this isn’t something that’s done by January. This has legs for quite a while.

TS: Yeah, absolutely. We’re already seeing prices rise. We’re at 518 a gallon for diesel here in the United States on a national average, which is higher than gasoline prices, by lots higher than the average. And the gasoline people that I talked to at Opus basically say, man, this is not even a safe level. This is going much, much higher.

CR: I have a question for you, Tracy. So it seems to me everyone seems to be focused on getting through the winter in Europe and the immediate impacts, as if there’s, like, some magic solution waiting on the other side as more of a layperson in this area. It seems to me that this massive under investments, this supplied depression that we’ve been having, there’s nothing coming online to help with that. So doesn’t that suggest that this is something that doesn’t get sorted out even though there may be some volatility, but, like years and years and years that we’re going to be dealing with?

TS: Yes, absolutely. I mean, we’ve got a problem for the next eight to ten years. Really? And if you look at, you know I know if we look at the natural gas situation in Europe, everybody’s thinking, oh, we’re at 95% full before winter, we’re going to be fine. If we just make it through winter, that’ll be fine. That’s great and all, but if you are not replacing that, you’re going to need it in the summer. You need to keep refilling that. So it’s not like, you know, unless they decide to stop using natural gas in March, end of story, we still have a problem. Right. And the next winter is probably going to get even worse.

TN: Great. Just so you know. Awesome. Okay, so let’s move into kind of the week ahead section. Albert, you want to get us started. What are you looking at going into the week ahead? What’s on your mind?

AM: Continuation of the Feds 100 basis point rate hike. I mean, they’re not going to do 100, but they’ll tell the market that they might start thinking about it and the market might start pricing it in. So we’ll definitely have a lot of weakness in the market going ahead in the next week, but it’s midterms, so you never know,

they could defend the quote unquote Trumpl ine of 35, 40 so they don’t look like complete idiots and give them Fodder for the midterms. Do you still think we’re going to hit maybe 3200 or something eventually? I can guarantee you that by the end of the year for sure. The economic indicators across multiple data sets is just atrocious right now.

TN: Okay, great. Carol, I know you’re not really kind of in Marcus, but what are you keeping your eye on for the week ahead?

CR: So I do actually commentate on markets from a sort of a macro perspective, and much like Albert, I’m sort of in the camp that until the Fed tells us what is their intention, is this really just about the midterms? Are they feeling the pressure that it’s risk off from my perspective until we know what’s happening with them. So that’s been sort of my perspective.

TN: Great. Okay. Thanks, Tracy.

TS: On China next week, party congress looking at China, I want to see what they’re going to do policy wise because that’s definitely going to affect the commodities market. We all know that they’re looking for a five 5% GDP by the end of the year, which they’re not going to get. They’ll say they got it, but we all know that they’re not going to get it. So I want to look, an economy is suffering right now and we’re starting to see stirrings of unrest in China. Right.

There was just that article where they had the people on the bridge with the signs that got scrubbed from China Internet. But I think that she is going to have to do something to stimulate that economy. So I’m kind of looking to see what his focus is on that and if they have any plans going forward to simulate the time. Because again, that’s going to affect the commodity markets and to see if he has a plan for the housing market. Oh, he’s got a plan.

TN: Central planners always have plans, don’t they? That’s right. So if you talk to any China economist

for the bank, they’ll tell you that China is going to hit five 5% or maybe they live on the edge and say five three. Right. So as you said, we know they’re going to make it issh somewhere in the ballpark, but we know in reality you can’t have a zero code environment and make a growth rate that high. So my worry, I was just talking about this with somebody earlier in the week, my worry is that China really has made that transition to a slower growth environment for starting with demographic reasons, but also some structural reasons that they put in place.

And I think what she’s going to talk through next week, although not directly, but someone indirectly, is much more control, which will lead people to the conclusion that it’s not a safe place for foreign investment anymore, which will lead them to a slower growth environment economically. Because he’s basically talking about leveling people out. Right. And everyone has the same maybe not opportunity, but the same outcome. And you can’t necessarily do that in China with some of the economic outperformers that you’ve had, like Jack Ma and other people. You have to bring people down instead of push people up. And that’s what I’m expecting.

Again, he’s not going to say he’s going to bring people down, but that’s what I expect is the main message coming out of next week’s meeting.

AM: Yeah, he has already done that, Tony. And there is a little bit of a power struggle with Wang. Yang is actually slated to be power sharing with him. All they’re trying to get him to do that, but all my sources have said that they’re locking down for code with zero until at least March, so we’ll see what kind of fake numbers they come out with.

CR: I will add that this all ties into their social credit system, which is the most advanced one in the world right now. And they really started the social credit on the business front, which is notable for the reasons you were saying. You can’t have that capitalism that’s leaked in a little bit over the past several decades and have these outperformers. So it’s an easy way to sort of bring those folks down a peg and then let that bleed into sort of the individual social credit. And it’s something we should be paying very close attention to as the Fed keeps talking about things like Central Bank, Digital Currencies, and as we see these companies going after people for misinformation, what part of that could leak here as well.

TN: Yep, very worries. So okay, guys, thank you so much for your time. Carol, I’m so grateful that you can join us today. Please come back anytime. Really appreciate this, guys, and have a great week ahead.

Week Ahead

Systemic Risks: The Week Ahead – 10 Oct 2022

Post author By admin
Post date October 8, 2022

Learn more about CI Futures here: http://completeintel.com/futures

In this episode, we’re joined by our special guest, Simon Mikailovich from the Bullion Reserve, along with regular guests Tracy Shuchart and Albert Marko.

First, we looked at systemic risk in the case for hard assets with Simon. When we look at recent events like the BOE intervention in the long-term gilt market, where does he think the next systemic risks could come from? Is it developed more market (European) debt?

Also, Simon discussed how we should be looking at the gold market now. Why is there a divergence between physical gold at the retail level and institutional demand for gold derivatives?

Next, we went into a little bit on OPEC cuts with Tracy. OPEC cut supply by 2m BPD. Everyone has talked about this. We’ve spoken in earlier episodes about a price spike in oil later in Q4, partly owing to SPR releases stopping or slowing. Is this even likelier now? Some US legislators are pushing a bill to break up OPEC. Is that even remotely possible?

And then finally, we took our first look at US midterms. Democrats now control both House and Senate. That’s a huge advantage for Joe Biden. For many reasons – inflation, crime, etc – Democrats are in trouble for November’s midterms, but will they lose control of both the House and the Senate? Albert discussed that in this episode. We’ll cover more of this in the coming weeks, but we want to have a starter conversation here.

Key themes:
1. Systemic risks and the case for hard assets (Gold)
2. OPEC cuts = Q4 Crude price whipsaw?
3. US Midterms
4. The Week Ahead

This is the 37th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Simon: https://twitter.com/S_Mikhailovich
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Listen to this episode on Spotify:

Transcript

Tony Nash: Hi, everyone, and welcome to The Week ahead. I’m Tony Nash. This week we’re joined by our special guest, Simon Mikailovich from the Bullion Reserve. Simon, thanks so much for joining us. We really appreciate it. We’re also joined by Tracy Shuchart and Albert Marko.

We’ve got a lot to dig into this week. The first we’re looking at is systemic risk. And the case for hard assets? We’ll dig into that quite a bit with Simon.

Next, we’ll go into a little bit on OPEC cuts with Tracy. You’ve all heard about it, there’s no secrets there, but what do we expect for crude prices in Q4?

And then finally we’ll take our first look at US midterms. I think we’ve got a lot to talk with Albert about over the next few weeks before US midterms, but we’ll just do a quick dive in this week.

So before we get started, please take a look at our product, CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon, economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.

So, Simon, welcome and thanks for taking the time on a Friday. I know there’s a lot going on in markets, so it’s a huge compliment for you to be here. I want to ask about systemic risks, something you tweet about quite a lot. And we put a tweet, one of your tweets on screen.

You talk about the BoE commits to ensure unicorn in every pot. And this happened a couple of weeks ago, the Bank of England. And I’m really curious, when we look at events like the BoE intervention in the long term guild market, where do you think the next systemic risks could come from? And I guess, more specifically, do you expect those risks to come from developed, more developed markets or emerging markets or does it matter?

Simon Michailovich: First of all, it’s a very difficult subject because obviously you can spend hours and hours talking about it. It’s like the existential problems of our time. And I know we’re also going to talk about gold and systemic risk. What I think I’d like to do is I’d like to have a little parable that kind of explains, I think, or illuminates the situation that we’re in generally. And the dichotomy that may exist, I think exists between markets and life out there.

And terrible comes from very appropriately named for the Times from Russia With Love, which is Ian Fleming’s story, one of the James Bond books. And just to set up this quote that I’m going to read to you, the situation is that James Bond is absconding with a Russian decryption machine on a train and it’s supposed to be met somewhere down the line by the British intelligence agents. And he’s accompanied by a much wiser and older head of station from Istanbul whose name is Kareem Bay.

And Kareem advises him to get off the train immediately because there’s existential danger. They’re being hunted and Bond wants to see this gamble through. And so Kareem tells him a little story which I’d like to read to you which I think kind of explains more or less or answers a question about systemic risk and generally what’s going on between the markets and events that we’re all observing through press but may not necessarily fully understand or yet appreciate their implications.

So what Kareem tells him, he says “you’re a gambler. To me, this is business, to you this is a game.” And then he puts a hand on his shoulder and he says, “this is a billiard table. An easy, flat, green billiard table and you hit your white ball and is traveling easily and quietly towards the end. The pocket is alongside. Fatally, inevitably you’re going to hit the red and the red is going to go into that pocket. It is the law of the billiard table, the law of the billiard room. But outside the orbit of these things a jet pilot has fainted and his plane is dining straight at that billiard room or a guest main is about to explode.

It already has actually, in the real life with Nordstream or lightning is about to strike and the building collapses on top of you and on top of the billiard table. Then what has happened to that white ball that could not miss the red ball and to the red ball that could not miss the pocket. The white ball could not miss according to the laws of the billiard table.

But the laws of the billiard table are not the only laws. And the laws governing the progress of this train and of you to your destination are also not the only laws in this particular game.

And so the point is that for 40 years, the markets, the financial system and the economy has gone along with that, have lived by the laws of financialization, by the laws of the billiard room and of the billiard table and other laws that are outside the real economics more famine, pestilence, inflation have not entered into the equation. And so within the framework of the billiard table there is no, for example US Treasuries do not have credit risk. US dollar does not have counterparty risk. Banking deposits are safe, 100% safe. That’s by the laws of the billiard table. That’s by the laws of the markets.

So essentially this bubble, the everything bubble that the credit bubble that we have been in for x number of years. All the problems inside this bubble were nominal problems related to nominal values in financial markets. And those values can be fixed by creating additional money, by creating additional credit, by creating conditions, by providing liquidity. What cannot be fixed inside this bubble are real problems like energy shortage, like supply chain disruptions, like World War, like the fact that a significant number of other countries are suddenly developing their own ideas as to economic policies and monetary policies and other policies that they want to pursue.

Whereas our system has come to depend on the US dollar as a source of cheap financing without any limits and without any constraints on our ability to create credit, create money, pay the bills, however much, in any quantity at any time. So when you ask me about systemic risks, what I would say is that systemic risks are coming from outside this framework and are not yet fully understood inside the framework.

Which is why, for example, the dollar is on a tier relative to other currencies. And the phrase that’s used to describe it is it’s the least dirty shirt? What is not being said in that statement is how dirty is the least dirty shirt? Has it been already worn for ten days and all the other ones for 20 days, or is it just been worn for ten minutes? That’s my point. So how healthy is the healthiest course in the soap factory? That’s the question, right?

TN: And I guess the question about systemic risk, which is almost unanswerable. But when these things break, do they usually break gradually or do they usually break all at once? Is that an answerable question?

SM: Well, they break gradually and then all at once. Just like the famous also overused quote from Hemingway how do you go broke slowly and then all at once? Obviously you can think of this phenomenon as a confidence collapse. Now, confidence collapse is not a problem in itself. It’s a consequence of other problems where the preponderance of the evidence and preponderance of the mental recognition reaches a certain critical mass, where in the physics it’s called phase transition.

Like for example, boiling water, which looks the same whether it’s half boiling or almost boiling. And then suddenly you see the bubbles, you see the churn, and it almost happens in moments, but it didn’t happen in the moment. It’s been heating up for a while. So that’s how I would describe it. And

TN: this is all great, I guess, if we have a doomsday clock, are we like really close to midnight or are we kind of approaching midnight? And it’s something that will come at some point I know that’s kind of an ambiguous question, but does it feel to you like we’re really close to midnight or can we put it off for a little bit?

SM: Well, I would answer it this way. I think the proverbial train has left the station. The crisis is now underway. Okay? The crisis, geopolitical crisis, military crisis, supply chain crisis, economic crisis, and financial crisis. All of the… And political crisis. You’re going to talk about elections. So all of these events, and by crisis I mean a moment of high danger, again develops similarly to boiling water. Crisis itself, once it starts, it means the heat is now in real time, is going up. The boiling point has not yet been reached. How long does it take to reach it? It depends on the intensity of the flame. Right. So that we cannot gauge. But what we can gauge is that the process has started and it can accelerate or decelerate as it goes, but I don’t think it can stop suddenly.

TN: Right. And a US president using the word Armageddon in a fundraising speech half a dozen times this week doesn’t really help lower the boiling point.

SM: It does not help lower the boiling point. It does not help. And frankly, I think that people are not paying much attention to what happened with this Nordstream explosion. But this is the first act of sabotage on an international against an international supply chain infrastructure, which I think is going to have dramatic consequences ultimately, because it changes the rules of the game. Sure something unthinkable becomes feasible.

Albert Marko: Just real quick. I agree with Simon on the systemic risks. And the fact is the Fed policies have completely ignored geopolitical issues, political issues, supply chain problems. I mean, they keep going on this tear about raising rates is going to bring down inflation, but then they put themselves in doom loop because the demand is going to come back faster than the supply damage that they’re creating.

So, yeah, Simon is correct that the systemic risks are there and getting worse and that’ll see any chance that they can be alleviated in the next six months. I’m skeptical that ongoing rate rises or rapid rate rises is going to have an impact on inflation given… Wait till they end QT in the next couple of months and continue on with rate hikes thinking that’s going to fix things. It’s not. It’s not. It’s whistling past the graveyard. It’s way overused. But that’s what we’re doing.

TN: So before we move on to other things, I want to ask you about gold. Okay, Tracy, kindly put out some questions for you last night. And we got some responses from some Twitter users and this Twitter user @Spudlink1, asked, “if gold doesn’t rally in this environment, how could conditions possibly get more perfect than the last three years? Is gold dead?”

So, very poignant question, but what are your thoughts on that?

SM: So my thoughts on that are very simple. Gold itself. Gold is not a company. It doesn’t release results. It’s not like things are going better or worse. Gold is the same gold. So the price of gold and the prospects of gold are not determined by gold itself or anything that it does, but it is determined by supplying demand, which is human driven. So it’s human perception and human behavior.

So why is gold not behaving like certain people like this gentleman expect it should? That’s because what this gentleman thinks and what few of us think is not accepted as received wisdom by the vast majority of investors. That’s not consensus.

So the fact that these are perfect conditions for gold is absolutely not consensus because by the rules of the billiard table inside the billiard room, gold is not seen at the moment as a safe haven. The dollar is because the dollar is fiat gold. Now, fiat of gold is no gold. But inside this framework that we’ve been in for 40 years, it has been and so demand for gold, you don’t need to take my word for it. I mean, you can just look at the ETF flows like GLD publishes ETF laws and you can see that money is not flowing into gold.

So demand from investors for gold is anemic in an environment where some of us think it should be robust. But that’s because we see certain things and we believe that there’s tremendous systemic risk and market large does not believe it.

Again, you don’t need to take this as the only example. You can look at the Treasuries, they’re trading, I mean for something percent with the percent inflation. Well, why is that? Well, because the breakeven rate, which is market expectation of future inflation, the curve, the forward curve shows that rates are actually positive and getting more positive because inflation is supposed to drop to 2-3% imminently. Well, is it going to? Well, that’s conventional wisdom is that it will. So that’s one thing.

The other thing I would say is when people say that gold is dead, I mean, it’s an American century theory because gold is essentially a reserve currency. It has outperformed all other currencies, reserve currencies but gold. So let’s say in dollar terms gold is down like 6% year to date, but in yen terms it’s up 18%. In pound terms it’s up 13%. In Europe, in Swiss Franc, all of the DXY components, currencies, DXY, Canadian dollar in all of those currencies, gold is up.

So gold is outperforming financial assets, stocks, equity is down 23%, Nasdaq is down whatever it is, 33% or 34% here today. Gold is down 6%. So it’s outperforming financial assets and an underperforming US dollar because US dollar is gold by the rules of the billiard table and the guest line has already blew up, but maybe the plane has not yet hit the room.

And so as long as that’s continuing, everybody’s playing by those rules where there’s no credit risk in the dollar. So if there’s no credit risk in the dollar or in Treasuries, in US sovereign obligations, then by the dent of that reasoning, getting any kind of coupon beast getting no coupon, if you factor out credit risk and market is not factoring in credit risk, I think the credit risk is tremendous. And obviously people who are asking and wondering how come gold is not surging, they think there’s credit risk. But that’s a minority opinion. That’s a simple answer to that question.

TN: And that is fantastic. Thank you so much for that. This is an amazing perspective because I think there is a lot of cynicism around gold in the markets today around kind of popular chatter. And it’s so great to get this perspective.

AM: Tony, I mean, I’ve been a big critic of gold for a long time. However, in this scenario, I even have to admit that if you want to arbitrage for dollars, especially in other currencies and FX’s, gold is the only real way to do it. And the longer that the Fed makes errors in policy, there’s no question that people are going to start resorting to gold just as a hedge.

SM: My only warning to people is gold is a commodity that’s sort of it’s an industrial commodity in physical form. So, of course, all the paper gold exposure has counterparty risk. Physical gold does not have counterparty risk, but physical gold is a manufactured product. And manufactured product borrows coins.

By the way, the premiums on coins are surging, and it’s doubled this summer since the beginning of the summer. So manufactured products, they’re supply chains, they’re manufacturing facilities that produce them. They can work 24 hours a day, but three ships, but they can’t work faster than that.

So just like with toilet paper, it all works until suddenly there’s a surge in demand. Then there’s no toilet paper in your supermarket. It’s the same thing with gold. It’s available until everybody wants it, at which time, by definition, it’s not available because the inventory and supply chain is geared towards test demand, not towards surging demand. So as soon as demand surges, it disappears.

So you buy insurance when you can, not when you think you really need it, because you’re not the smartest guy or person you know, other people achieve the same reach the same conclusion at the same time. And so everybody wants insurance at the same time.

TN: You’re the only guy I’ve ever heard who compared gold to toilet paper in a positive way. Yeah. Okay, let’s move on to crude from one physical quantity to another. Tracy, we talked about OPEC in recent weeks. We talked about crude prices in recent weeks.

And with the OPEC announcement, the supply cut announcement this week, I want to revisit our discussion from a couple of weeks ago about crude prices in Q4. We talked about the possibility of a whipsaw effect for crude prices in Q4. What’s your thoughts on that? Do we see that happening?

Tracy Shuchart: Well, I think what we’re… First, I kind of wanted to touch on this 2 million barrels because it’s not actually a 2 million barrel cut, right? Because the group hasn’t been producing a quota all year, basically. So we’re running at a 3.58 million barrel shortfall, really, which happened in September. And so if we take a look at the cut distribution, yes, the five countries that are producing at or near quote, which are Iraq, Kuwait, Saudi Arabia, UAE and Russia, yes, they are shouldering most of that burden. But when you net everything out, it’s really closer to like 1.25 million barrels. So I just kind of wanted to clear that up because it’s really not 2 million.

Going into Q 4, what we have to pay attention to is, one, the ending of the SPR, which if they keep releasing it, eventually it will drain. But so far it should end in November, which is going to immediately take four to 7 million barrels off the market because that’s kind of what they’ve been releasing per week on average. Then we also have to look at China and their COVID lockdowns trying to come to an end because they’re looking for 5.5% GDP by end of year, which is not going to happen.

TN: Well, it’ll happen.

TS: Well, on paper it’ll happen. Statistically it’ll happen. But we are starting to see a little bit of firmness in mobility data in traffic and airlines. What I’m also looking at is they are talking about lifting export quotas. If they do that, that means they are going to have to purchase more crude barrels because it would be a significant increase. Those are kind of the things that I’m.. Going into Q4, in other words, I think the pressure is definitely to the upside rather than the downside, just looking at what is coming online potentially that could propel this market higher as far as… I mean, we’re already in a structural supply deficit, so it’s not going to take a lot for this kind of freak out.

TN: Post US midterms, post CCP meeting, post SPR, post other stuff. Right.

TS: And then December 5, we have to see if EU actually follow through with their oil and product embargo for Russia. So also another thing that would take more barrels off the market.

TN: Right. So I’ve also heard, I think you may have said it where this OPEC meeting, and what we’ve seen over the past few months is really OPEC changing their orientation to Asia and really forgetting about the west. Is that real? Are you seeing that, in fact, or is that just kind of a myth?

TS: Well, no, I mean, if you look throughout the last few years, I mean, China and Russia basically compete, sorry, Russia and Saudi Arabia basically compete for China’s fitness. So off and on, one of those countries has been their biggest suppliers. So this is not new where the focus is towards Asia, especially because over the last few years, the west is pursuing green policies and trying to stay away from that. And so where they can sell barrels like you see Saudi Arabia or you see OPEC in general raising their OSP to Asia consistently, right. Because they can capture above markets for their barrels. That’s not really a new phenomenon.

TN: Well, China’s perpetuating green policies, too, right. Kind of wink wink, supposedly as they build out coal plants and other things. But I think what I find interesting is Europe and the US are kind of begging for more energy and OPEC is saying, no, we’re going to cut back. I think the headline is more important than the fact the 2 million is more important than the 1.25, because that’s what really moved markets in the immediate term. But China had really bought all their crude already by, say, April or something, right? And so they had fixed all that stuff, the prices for the year in kind of second quarter. So this doesn’t at least for now, it doesn’t really affect them. It won’t affect them until early next year or something like that. Is that fair to say?

TS: Well, unless in Q4 they raise these export quotas, then it’s going to matter because that’s still on the table for discussion next year. This is kind of a last-minute thing. And so that’s definitely something that I’m watching if they actually follow through with that. Right?

TN: And also with purchases in a dollar equivalent, whether it’s not US dollar, whether or not it’s US dollar, these are extraordinarily expensive barrels compared to what they could have gotten in Q2. So something has to change for them to want to buy the volumes that they bought. And then if they’re buying at the same time the US is trying to refill the SPR, that creates even more pressure on the market. Is that fair to say?

TS: Yeah, absolutely. In fact, our SPR barrels are going to China, right? Right.

TN: So, Tracy, what are we missing? I mean, we’ve heard all this chat about OPEC over the last couple of days. What’s the nugget that you feel like people are missing?

TS: I think as prices have come down, I think everybody has been forgetting we are still in a structural supply deficit. Even though prices were coming down, they were down to extraneous reasons like recession fears and not as many Russian barrels off the market as initially anticipated. But really, the market structure hasn’t changed, nor has the supply problem. Right. Let me add another question there. I want to ask about refining capacity. What are we at now with refining capacity? We need more refining capacity. 90 something. We’re currently we’ve been between 90 and 95% of our refining capacity, which is crazy because I’m actually surprised that we haven’t seen more heart breakdowns. They’re not built to Google at 95%.

TN: So we have a hurricane goes through Louisiana, cuts out some refineries for a week. What does that do?

TS: Well, that would be a little bit of a relief for crude prices, right? Because you shake it with the barrels. But that’s going to take your product prices through the roof, and your current tax rates are going to go through the roof.

TN: And what’s the lag on that? What’s the tail on that?

TS: That really depends on how long the refinery is offline for. Right. Whether it’s a week or two, that’s fine. But if we start going into, like Katrina, where you’re going in months, then that’s going to be longer. Problem.

TN: Okay, very good. Thank you for that. And as we talk about gasoline, it becomes very political at some point. And Albert, as we go into we’re deep into the midterm season right now, and I’ve got a couple of graphics from Real Clear Politics looking at the House and the Senate races in the US.

And it looks like it’s very competitive in the Senate. The House, it seems like Republicans are doing very well to reclaim the House, but it seems like the Senate is really competitive at the moment. Can you walk us through that?

AM: Yeah, well, simply, the Republicans will easily take the majority. Redistricting alone will give them 20 seats, which is the majority, and then you start looking at any Democrat that one with 2% or less across the country is probably going to lose. So I think that will probably end up getting 250 seats in the House of the GOP. So I think that would end up being like 185 for the Democrats, which is important because you need a buffer to avoid any messy infighting the Senate becomes difficult because the Republicans have kind of weak candidates in Oz, in Pennsylvania, and Walker in Georgia.

If those two candidates were stronger, it would have been a slam dunk, but it’s not at the moment. Nevada looks like it’s trending towards the GOP, which is a big, big problem for the Democrats at the moment. If they lose Nevada, they’ll probably end up losing Arizona. And if they lose Arizona, it’s going to be a one or two seat GOP majority.

TN: Okay, and so what does that do? Okay. We covered Pennsylvania, right? You said it’s potential

Republican but not strong. Georgia potential, but not strong. Arizona is leaning that way. Nevada is leaning that way. Wisconsin is Wisconsin.

AM: Wisconsin and North Carolina are solid Republican.

TN: Okay, so then what does that mean for the second half of the Biden administration?

AM: Not good things. Hearings all over the place, from Hunter Biden’s antics to Biden’s pipeline policies, environmental policies that’s affecting the economy at the moment. Border crime, elections, election integrity, I mean, you name it, it’s going to be all over the news. So it’s just not good for the Biden administration. I expect them to keep on going with executive orders because there won’t be anything that he can pass.

TN: Okay, very interesting. Now for the people not in the US. Most Americans view legislative gridlock as a good thing, right? I mean, it’s a good thing for business when we have legislative gridlock. So this is not necessarily a bad thing for US government. There will be a lot of talk about can’t pass a budget, can’t get extensions on certain things, and that’s just drama that comes every year. But legislative gridlock is not necessarily a bad thing for American business. Is that fair to say?

AM: It’s not. You’re absolutely correct about that. However, actually, with Biden insisting on producing executive orders for his own policies and the treasury, with the Allen just acting insane, in my opinion, god knows what they’re going to sit there and pass. If you can’t pass something legislatively, they’ll do it via budgets. That’s fine. But it sets a terrible pressing going. Forward because we’re well past that, Tony. We’re well past that president. We’re well past that.

TN: Okay, great. I want to cover this over the next couple of weeks as we lead up to the election. So I just want to give people a taste of what we can talk about. So if we don’t mind if you guys don’t mind, let’s just go around and I’d love to know what you guys are looking for in the week ahead. Tracy, do you want to get us started? Then Simon will go to you. And now what are you guys looking for for the week ahead?

TS: Obviously, I’m watching the energy markets right as we get closer and to see what sort of policies the US is going to or the current administration is going to try to pull out of a hat to derail oil prices in front of Midterms. They’ve been talking about fuel bans, fuel export bans. They’re talking about actually trying to pass the no peck bill again. They’re also talking about actually seizing assets of Saudi Arabia, which they do own, motivo, which is the largest refinery in the US. Which is paramount to all out oil war. So closely watching the administration and how they’re going to move forward with energy policy.

TN: is this Venezuela thing real? Will they dial back the restrictions on Venezuela to get Venezuelan crude?

TS: Venezuela produces 7000 barrels per day and literally most of that goes to China to pay debts. There’s nothing more you can squeeze out of Venezuela.

TN: Okay, that’s good to know. So that’s fake news. All right. Okay. Simon, what do you see

going into the week?

SM: Well, a week is not my reference, in my opinion, but I think that the most important thing people should be watching are international geopolitical developments because I believe we are in a world war. It sounds very dramatic. War usually is assumed to be bomb flying, but there are other forms of enforcing essentially will on other people and economic, financial, political, ideological, cyberspace,

space, outer space these days.

So I think the most critical thing to watch are developments like with Tracy’s talking about confiscation of Saudi refinery. I mean, that’s an act of war. That’s an act of economic war. So this is where I think a lot is going to come from. And the other thing I would watch very carefully for the types of developments like what we saw with Gilts in UK just overnight, things happen. Like for example, the repo lines right now are in excess of 2 trillion. I mean, in 2019, the first blow up, they went in with 30 billion. So this is a crisis that’s continuing and it’s being bailed out by the Fed.

So I would watch all these excess, telltales of all these excesses and watch for ripples on the surface to make sure to identify if something is really breaking. Like you said, when is it going to come? Well, is the water starting to boil? That’s what I want…

TN: Real quickly, do you get the sense that at least in the US, they’re trying to hold this back until midterms and then we’ll start to see a bunch of bad news come?

SM: Well, for example, they’re releasing strategic petroleum reserve, which is clearly controlling an attempt to control energy prices at the pump, gas prices at the pump. So, yes, I think after the elections we’re going to see some damage break.

TN: Yeah, interesting. Albert, week ahead, what do you got. Your eyes on?

AM: CPI. And I think it’s going to end up coming in hot and all of a sudden you’ll see the dollar surge once again, maybe threatening 120. Then you talk about what Simon is saying about things breaking and building up of a narrative of ending QT, although we haven’t really started it, but it is what it is.

TN: Well, exciting times guys. Thank you so much. Thanks for your time. Thank you very much for all your insights. And have a great weekend. Thank you very much.

QuickHit

OPEC+, JCPOA & Delta Variant: Strength or weakness for oil & gas prices?

Post author By admin
Post date July 19, 2021

Energy commodities experts Tracy Shuchart and Sam Madani joined forces in this special #QuickHit episode to talk about crude, OPEC+, JCPOA, and how lockdowns will affect the market this year. Most importantly, how investors should plan?

Tracy writes for a Hedge Fund Telemetry, where she is the energy and material strategist. She also manages an energy and materials portfolio for a family office. Meanwhile, Samir Madani is the co-founder of TankerTrackers.com. They’re an online service that keeps track of oil that’s being shipped around the world. His specialty is the tricky tankers, the ones that like to play according to the rules.

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This QuickHit episode was recorded on July 17, 2021.

The views and opinions expressed in this OPEC+, JCPOA & Delta Variant: Strength or weakness for oil & gas prices? QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

TN: We’ve seen kind of an uplifting crude prices. We’ve seen things like copper prices come down, natural gas prices really start to see some upward pressure recently. At the same time, we’re seeing talk about the JCPOA and some other Middle East type of changes with OPEC+ and UAE and Saudi. What’s your thoughts on the crude and natural gas markets? We can talk about commodities generally.I know that’s a big, wide open question. Tracy, do you want to give us generally your view and some of your positioning at the moment?

TS: Well, I’m very bullish on commodities, particularly industrial metals, base metals and minerals needed for this energy transition. So copper and things of that nature.

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We have seen a little bit of a pullback in a lot of commodities, which is not surprising. We had such a large move up. However, everybody’s looking at this as a group like the CRB index rate has pulled back. But if you look at individual commodities, you’re still seeing iron ore still at highs. So it’s not like a whole commodity collapse. You’re still seeing strength in a lot of different areas.

So my positioning is instead of index, I’m positioned in individual stocks and particularly on the minor side, because minors are going to have the same capex problem that oil is having.

TN: OK, that’s a great point. Sam, what’s your view like generally with with energy?

SM: I remain bullish when it comes to oil in particular, and I pat myself on the back for having gone long in at the end of March last year, when the the mutual funds were at the all time lowest in regards to oil. And that’s come up quite a lot since then.

I do believe that we will probably find a good footholding now in the 70s. And in order for that to remain, I think something drastic is going to have to happen on the upward probably scathe $100 and come back down so that the OPEC can look like the good guys in the mid 70s. So I think also because of the fact that there’s a capex shortage in the oil sector, they need this revenue to come in order to sustain production as well.

My original intended investment horizon was around three to four years. I’m going to be cutting that short until September of next year because the issue that we have now is that the lockdowns are still in effect in many areas, but also when it comes to Europe where I’m situated, most of the inoculations have only gone through the first phase. So we’re still waiting for the second shot and therefore this summer will be delayed. We’re not going to be traveling everywhere like we were in 2019. Instead, that will happen most likely next summer.

There’s still one big run up towards the three-digit oil price and that would be most likely to happen next year rather than now.

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TN: So you brought up OPEC. There’s been news this week around OPEC+ and a deal with Saudi and UAE and some other Middle East dynamics. What’s your view on that? How much downward pressure will that put on crude markets?

TS: Because of those factors in the Middle East, because I am of a belief we will see a deal and we will get some more barrels on the market, the market is actually very tight right now. But we’re also having lockdowns in some places in Asia. So right now, we already are seeing a pullback in crude. Until we get a little bit more certain that 65-75 range will probably hold us for a while, I see some consolidation there and after $115 move from the lows last year, it makes sense for oil to chill out, consolidate here a little bit.

TN: Sam, what’s your view on the kind of OPEC+, Saudi, UAE and other kind of OPEC countries wanting to tag along on the UAE?

SM: I think one issue that they themselves want to know is status of the JCPOA. They really want to know how much of an issue Iran would be if their balance come back to market. Now, that’s a big if.

But if we look at what happened during the Trump administration, the United States pulled out of the deal and that was not good optics for the U.S. side. But now what’s happened is that Iran is not complying with the deal. So the ball is now in their court instead. So the Biden administration is saying, yes, the United States wants to be part of the deal, even though it’s not a very popular deal in the US. I don’t see any popular support for it. It’s more of a let’s just get back in there so Iran can improve its compliance. But they’re not improving their compliance. Instead, what they’re doing is going the other direction and they’re increasing their enrichment. They’re becoming more brazen about how they move around the world with Navy vessels and so on.

And now, of course, there’s an Iranian president that’s going to take office in August. So I think the deal will play fall apart instead because of the fact that Iran is not complying.

TN: If the deal falls apart, does that chaos help oil prices, meaning rise or does it create the perception that there will be a dramatically larger supply in the market?

SM: I think the initial reaction will be that, “Oh, these barrels are not going to be reentering the market, therefore the price will go higher.” So that’s the first automated response. But then, you know, the dust will begin to settle after a while when there’s an understanding of what kind of barrels are not entering the market.

So in Iran’s case, they are shipping sour crude. Whether it’s light or heavy, it’s sour. In order for that oil to become sweet, which is more attractive, you have to de-sulfur the oil. And so Iran, what they do is they give you a discount if you want to buy light sweet oil, but then they’re buying like sour oil. Iran gives $10 discount, for instance, and then they just remove the sulfur at the refinery at their own expense. And that’s what’s causing, for instance, West Africa to lower their exports. So moving out a lot less oil now out of Africa than before on account of China buying more Iranian oil instead.

TS: I think what people forget, there’s already a lot of Iranian oil on the market. So even if they came back at production of 4 to 4.5 million, it’s not really a lot of extra added barrels that are not already on the market.

SM: Exactly. And it will be absorbed by the demand that’s coming of course.

TN: But it seems to me the kind of perception of legitimacy that would come through JCPOA may calm prices down a bit through the kind of perception of legitimacy of that supply?

TS: Yeah. I mean, if it came to fruition, which I don’t foresee it, I have to agree with Sam on this point. But yeah, the market would think, oh, OK, we have all these barrels coming on even though there isn’t, and that it would be a numbers game from there, then you’d have to see supply and demand numbers from the various agencies monthly reports.

SM: And the thing also does not happen overnight. So even if the process of JCPOA happens and Biden finally signs, for instance, initially a waiver, the whole process takes forever to reboot again. We saw it last time. Remember Tracy back in years ago, it took many months.

And also in the case of Iran, most of their domestic national fleet is tied up containing gas condensate. So they have around 70 million barrels of gas condensates floating. And that used up nearly all of the VLCC supertankers, the ones that can carry two million barrels. So what Iran has done is they put additional vessels, vintage VLCC. So now they have 200 vessels as opposed to 70. And those are the ones, the foreign flagged vessels that are moving the oil mostly to China.

TN: You both mentioned lockdowns earlier in the conversation. And I think the tone here is that we have a pretty strong basis for rising crude prices. But we’ve seen some moves over the last week in the Netherlands and California and other places for maybe not full lockdowns, but more severe compliance with masks and other things and that seems to be leading toward potentially some lockdowns. First of all, if there are lockdowns coming, what would be driving that? And we all know about the Delta variant and stuff. But are there political factors that would be driving that? Second of all, if there were, how would that impact the six to nine month view of crude markets for you guys?

TS: The United States is so big, I don’t believe that they’re going to lock down the whole country again. It just won’t happen. You would literally have riots on the streets in some places. So I don’t foresee that happening. I could see some of the states like California just reinstated their mask mandates. I’ve been watching those states that kind of had more severe lockdowns to begin with like Michigan. If they’d lockdown again in the fall, that would probably be more politically motivated, but we’ll have to see what the numbers are and whatnot.

As far as my crude view, I’m very bullish on crude. But that doesn’t mean like I’m expecting a $100 tomorrow. How I’m invested is longer term. So I’m invested for at least the next five years or so.

And I do believe that if we get through the fall and we don’t have lockdowns in the United States, Europe and Asia, then I definitely think six to nine months, we’re back in the swing of things, because that’ll put us right to basically next spring when oil demand really starts.

TN: Sam, what’s your view in Europe on lockdowns? Do you see that stuff coming back and how do you see that impacting consumption?

SM: I would think that it would be mostly in the countries with the high population density. Germany is obviously one of those countries and the UK is another. In other countries, not so much the case. I live here in Sweden. We never had lockdowns. So we had seniors living in retirement homes and so on. But then, we pretty much met the same statistic level as every other country — 10% population suffer through it, 1% or so perished as a result. But I don’t think that we’ll be seeing any big efforts on locking down countries again.

And what’s more interesting now is schools are coming up in a couple of months or at least a month and a half. Here in Sweden, life will pretty much continue as is. I have four kids and none of them missed more than a week of school, throughout the entire ordeal since 2020.

TN: So it sounds to me like you both see there may be some lockdowns at the edges, but it doesn’t sound like it’s something you expect to affect the mainstream. Maybe we see a slight dip in the rate of rise of demand. But it doesn’t sound like it’ll have a huge impact to the downside on energy prices generally, whether it’s crude or natgas or something like that. Is that fair to say?

SM: Yep.

TS: Absolutely.

TN: When it comes to natural gas, Tracy, I know you’ve been talking about that a lot lately. Can you tell us a little bit about your observations and your thesis and and what you’re seeing there?

TS: For natural gas, the reason I like it is it’s the great transition fuel especially for emerging markets, because it’s very inexpensive than to go straight into something like solar or wind just because the cost of those minerals and metals can make those are skyrocketing right now. So natural gas is abundant. It’s a great transition fuel. It’s cleaner burning than oil.

We just saw the EU green deal, they just stepped back and now are including that gas, whereas before there was no oil or gas, because I think they’re also realizing that it’s inexpensive, it’s a good transition fuel. If you look at Germany, there’s still a lot of coal going on in Germany. So for Europe, it’s not like fossil fuels are gone.

I think they realize also it’s an inexpensive transition fuel. In particular for the United States, what I like right now is we’re seeing European natgas ETF and JKM, which is the Asian natgas, are trading at significantly higher than the United States is right now. And so I think there is opportunity there because the US can export and still come in at a lower cost, even with the cost of transportation to Europe or to Asia.

TN: Interesting. Living in Texas, I have to say that I love that message. Sam, what about the tanker fleet? Is the global tanker fleet ready to to provide the capacity needed to power EMs with, say, American natgas or Middle Eastern natgas?

SM: So natgas, I haven’t checked too much. But tankers in general, the demand is not that great right now. When I say that, I mean that usually, they really step up to the plate whenever there’s a floating storage opportunity to talk about. So you had that case in Q2 of last year, and that really drove up the prices from the growing normal rate of 20,000 barrels a day to 500,000. That spike.

And it’s come down so much. Complete occupancy is far lower than what I normally see if I talk about the tonnage and it’s around under 40%, which is very little. We were looking at April of last year, it was around north of 55, close to 60%. So that’s a big swing. And that really crushed the prices for tanker rates. They’re even negative. Below zero. But when I look at the transfers of illicit oil, it’s around $38,000 a day. So there’s a lot lot of money to be made in those transfers, unfortunately. But for nat-G, I’m not entirely sure. So I can’t say for sure.

TN: OK, very good. Guys, thank you so much for your time. This has been really helpful. I’m really intrigued by kind of the long bull thesis for energy because we hope that we’re going to start recovering much quicker than we had been, which is fantastic. So thanks for your time. I really appreciate. Always, I really appreciate talking with you guys. Thanks very much.

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