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The Week Ahead – 09 May 2022

The Fed just announced the 50 basis point hike this week. Albert and Sam explain what this means for markets in the near term. Also, how badly does JPow need media training (he said “a normal economic person probably doesn’t have that much extra to spend”)?

We also discussed what’s happening with TLT? And then, what will the Fed do next? Why is everyone talking about a 75bp move?

Tracy explains what’s happening in natural gas and the crude oil markets. Why does energy seem range-bound?

Key themes:

  1. What the F just happened? (F for Fed)
  2. What the F is next? (F for Fed)
  3. Why does energy seem range-bound?

This is the 17th episode of The Week Ahead in collaboration with Complete Intelligence and Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon

Listen to the podcast on Spotify:

Transcript

TN: Hi. Welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Tracy Shuchart, Sam Rines and Albert Marco. We’re always joined by those guys. Before we get started, I’d like to ask you to like and subscribe. Really appreciate it if you subscribe to our YouTube channel.

It’s been a very interesting week, guys. We have a few key themes. First of all, what the F just happened F is for Fed. Then we’re looking at what the F is next. So that F also is for Fed. And then we really want to look at some energy stuff. Why does energy seem to be range bound? And I think that’ll be a really interesting discussion.

So Sam and Albert, kind of talk us through what the F just happened? We said this would be the most dovish 50 basis point move in the history of the Fed and it was. And here we are at the end of the week and things don’t look so good. So what happened?

AM: Well, was it a Dovish Fed? Not really. I mean it was pretty hawkish but it was already priced in. Everyone knows it was going to be 50 basis points and everyone knows they were going to talk about all these hawkish words. But then Powell comes out and throws in a little sprinkle of dovishness in there and then the market took off with it. I think it rallied at 3%? Crazy.

However, from what my guys told me, a lot of that was because traders were loading up on spy calls and ES futures and just gamma squeezed it. It was really easy. The market is kind of liquid right now. That actually agitated the Fed because they didn’t want this thing to rally and they came back and just torched everybody the next day. It was like 4% down? Just stunning. Absolutely stunning price action that we’re seeing right now.

It’s just not tradable. I mean you’re in this market and you’re swinging 100 points up and down each way every couple of hours. It’s just not tradable right now.

TS: Albert made a very good point. The thing is these swings that we’re seeing in energy and also in equities, these swings are untradable. Right. So that is very cognizant point that you have brought up.

SR: I mean the interesting thing to me with the whole thing was how quickly you went up, how quickly you went down to follow it up. Not just in ES and S&P, but the dollar got trounced following the Fed and finished flat basically to pre-Fed to finish up the week. You had the two-year absolutely plummet and make a little bit of a comeback. But it generally actually stayed lower following the Fed minutes. But these were huge moves across the board.

It didn’t matter what asset class you were trying to hide in, besides maybe energy. It didn’t matter where you were hiding it. You were just getting whipped. And there was very little tradability across the board in that period.

So it was pretty interesting also to hear several Fed speakers today. I think there were five or six of them come out and were generally hawkish across the board. I mean, you had one non-voter, Barkin, talking about putting 75 back on the table. I mean, it’s ridiculous. Powell just absolutely said no to 75. And then you have beneficials coming back with maybe I haven’t taken 75 off the table. I mean, not that Barkin matters, but he tried to put it back on the table. Their communications are a mess.

TN: The interesting part for me about Wednesday was Yellen came out first saying, “no, it’s all good. Nothing to see here. There’s going to be no recession. Fed is going to be able to manage it.” Everything else. To me, that was the real tell, right, that he was going to be fairly gentle. Of course, it was a 50 basis point hike, but it was a fairly gentle 50 basis point hike. And he was going to stave off the 75 basis point talk.

But then today we see these guys come out being fairly hawkish. So we’ll get into kind of what’s next in a couple of minutes. But I want to ask about a couple of things. Powell, he talks, man. He is not the Greenspan kind of mysterious guy. And his talking seems to get him in trouble.

So one of the things that he said on Wednesday that really caught me, which he said, I’m looking at my notes, he said “a normal economic person probably doesn’t have that much to spend” when he was talking about inflation, that much extra to spend. Sorry, but he actually let the words “normal economic person” pass his lips. And words like that, language like that makes American people feel like it’s the government, this gilded government employee who inflation doesn’t touch versus the American people. What’s wrong with those guys? Why are they using that language?

AM: In my opinion, they want to crush excess money and they’re doing just that. These wild swings in a week that’s meant to just erase money from the system. And Powell is an attorney. He’s not really an economic guy.

TN: An attorney should know words.

AM: Yeah, well, he doesn’t. He’s flustered. He’s flustered. There’s so much stuff going on behind the scenes that he’s flustered. And really, I don’t really even think that Jerome Powell is even in control of things. I think more align on to Auntie Yellen. I think she’s the mastermind behind this dollar rise. I know she is, in fact. I had discussions about it.

She’s the mastermind of pushing this thing past 110. She’s the mastermind of getting capital to force it back into the US equities. She’s the one doing all this.

TN: Right.

AM: Powell might be fighting it, but I’ve talked about this many times. You have this disjointed policy between what the Fed wants to do and Powell and what Yellen is doing. So this is what I see is going on.

TN: Sam?

SR: And to your point. I think their communications generally are a nightmare. They’re not doing a phenomenal job of telling people anything. Right.

It was such a disastrous week. You had quarrels out early in the week talking about how because Biden hadn’t nominated Powell to come back to the Fed. That was one of the reasons why they were behind the curve. Sorry, Randy, but that’s a ridiculous statement. Everybody knew, the betting odds never really broke through 70 that Powell was going to be renominated. Let’s be honest. He was always going to be renominated.

AM: You bring up an interesting point, Sam, and kind of a signal is will Powell actually get confirmed and is Randy and those guys, because Randy deserve this, I believe.

SR: Yes.

AM: So are they trying to defend or trying to upstage Biden and possibly not getting Powell confirmed?

SR: Well, it’s interesting because you would think that Corals would want Powell confirmed because Powell he’s fairly conservative in mindset relative to some of the other people. That could be dominated.

TS: Middle ground, too, I would say.

SR: Yeah, a decent middle ground. And most likely after that, it’s going to be Brainard. Right. I don’t think Corals wants to mastermind getting Brainard in there.

AM: No, I’m saying that Corals are trying to get ahead of the game here, thinking that Powell might be ousted.

SR: Oh, yeah, maybe. I also think that there’s an awful lot of people once they get out of the Fed and they see that they’re part of the decision making that got us to the current inflationary environment and current problems. There’s a little bit of face save when it comes to, hey, look, we wouldn’t actually be here if they had done their job. It wasn’t really us. It was this lack of nomination.

So generally, then you get into the FOMC meeting, the after presser, call it the kerfuffles that he makes constantly during it. Then you get to the Fed speakers after it. The worst part about the FOMC meeting is not the FOMC meeting. It’s just the blackout ends. Let’s be honest. Then we have to listen to them for another three weeks before the blackout comes.

TN: Normal economic people do stuff.

SR: Yeah. Like buy stuff and actually contribute to the economy instead of just blustering about 75 basis points.

TN: Right? Exactly. Okay. Before you get 75 basis points, Sam, can you walk us through what’s happening in the TLT market because it’s falling off a cliff a month ago. Is it like 140. Now, it’s like 118. So what’s happening there? Because I’m hearing a lot of chatter about that.

SR: Yeah. I mean, it’s the tracker for the 20-plus year US Treasury note. When yields rise, the thing is going to get trounced. Right? I mean, that’s pretty easy.

The easiest way to underperform the S&P this year has been to buy TLT. That’s just been that bad. I think it’s down 21% or 22% as of the close today. That’s a pretty devastating bond move right, for portfolios when bonds were supposed to be the safe asset. But generally it’s liquid. Right? You can buy and sell TLT all day long and you can short it. You can do some stuff.

So it’s a fairly easy way for particularly investment advisors and other smaller players that are running separately managed accounts to get in and out of fixed income exposure quickly and be able to move their portfolio duration pretty dramatically, pretty quickly. So it’s a trading tool.

And so when you need liquidity and you’re not going to sell individual bonds, that’s going to be generally fairly liquid and you get some pretty big spreads there. You’re not going to sell those bonds, you’re going to sell TLT instead.

TN: So are TLT markets telling us that they expect tightening to accelerate? Is that what’s being communicated to us?

SR: No, I would actually take the other side of that. And I think it kind of goes to Albert’s point last week is long end yields don’t rise if the markets are expecting a tighter, faster Fed. Right. That would be a recipe for disaster.

Recession being pulled in towards us, not pushed out. So the Fed is expected to do 50 basis point hikes instead of potentially 75. QT was a little bit, QT was basically what was thought even a little slower to phase in. Yields could be telling us a number of things, but one of them is not that the Fed is tightening faster.

TN: Okay.

AM: This is the problem. This is the problem. Right. This is something that nobody’s really talking about is the Fed is trying to create this narrative with long bond and whatnot that? We’re going to tighten. We’re going to tighten, we’re going to tighten. However, the market is still red hot. I mean, even the consumer credit today was outrageous. Did you see that?

SR: That was insane.

AM: I was talking to my client today and we’re looking at shorting retail and whatnot? And I said we cannot show retail. And he was why? I just walked into Gucci and it was a velvet rope with a line of 100 people trying to get in there. And none of them make more than $50,000 a year. Just buying stuff left and right. It’s like, well, the Fed is trying to say we’re tightening, but the market is red hot right now.

TN: Fascinating.

SR: I have no push back to that whatsoever. The consumer numbers today were stupid. 50 plus billion. That was a silly number. That was a silly, silly number.

TN: That’s a great segue to what the F is next. Right. What’s the Fed going to do next? Because if consumer credit is still expanding it’s really fast, how do they slow it down? Is 75 basis points are realistic? I know he said no. But then why do we keep hearing about it? Then why are all these geniuses saying 75?

SR: I haven’t seen a single genius.

TS: That doesn’t mean that it’s necessarily going to come to fruition.

TN: Okay.

SR: Yeah, I mean it’s, James Bullard basically planting that seed. Yeah, one fed and then Barkin picked up on it and said I wouldn’t rule it out. I mean, it’s two people that if you still listen to Bullard and Barkin, I’m sorry, but you’re going to lose money.

TN: Bullard was great like ten years ago, right?

AM: Yeah, but they’re trying to sway less than intelligent traders to believe that it’s coming. Maybe sway some money that way.

TN: The only reason I’m saying it is because I want everyone watching to know that.

AM: They are lying to you. Okay? They are lying.

TN: So the expectation is that what the F is next is kind of staying disciplined. 50 basis points in the next meeting and maybe QT accelerates slightly. Is that kind of what we expect to happen next?

SR: Yeah, I would say 50 bps, but I don’t think you even have to accelerate QT. It’s very difficult to accelerate.

TS: This mark is going to scare them. And what is going to happen is they’re going to be another 50 for sure. But they’re going to be even more dovish than they were last time.

TN: Okay.

AM: I actually want to take a train. I think they’re going to do 50 bips for sure, without question. But I think they’re going to have to accelerate tightening just to scare the market a little bit, for God’s sake, because especially if they want to…

TS: Acceleration timeline, I mean, you could barely take a magnifying glass to it. Right. So you’re talking about almost $9 trillion going down to maybe 8.5. I mean, can you really see that?

AM: No, but they’re also going to be using the dollar. They might even take a dollar to 115 or 120. It breaks everything.

TS: Any QT that they have, it has the exact opposite effect. So they’re not stupid. They know that monetary policy that they’re doing right now may break the market, but they’re going to ensure that…

AM: Yeah, but they want to do QE later in the year.

TS: They want to be able to do it.

TN: I saw an interesting discussion on social media this week about what’s the worst central bank to be a part of right now. And I think it was easily the Hong Kong Monetary authority. Right.

With everything terrible happening in China, but they have to match what the US is doing. It’s just a very difficult place to be in. So I think even as we talk about what is the Fed going to do next, there are some central banks out there that are just in a terrible place. And raising the dollar at 110, 115, 120 would absolutely break some of these central banks and put in a very terrible position.

AM: Yeah, but Tony, the Chinese, they’re very pragmatic with that respect. They’re waiting to see what the Fed does and they’ll react. They are for sure going to stimulate their economy.

TS: They’ve already announced so much stimulus. It’s ridiculous. The market hasn’t particularly reacted at this point as far as the commodities sector is concerned. But literally they have so much if you look at what they have said, they have so much stimulus on the line as far as infrastructure. They do not want, they want, they’re determined to have their 5.5% GDP by the end of year ’22. Right.

TN: Yeah. Well, they’ll hit that no matter.

TS: What they are doing is they’ve already announced so much stimulus. Markets not looking at right now. Right. Or the North American market shows looking at it right now, I promise you.

AM: Yeah, but Tracy, also, you got to remember that the SEC started coming out with delisting threats all over the place. They added 80 more companies to the delisting threat. That’s actually toned down.

TS: I’m not saying I would invest in Chinese companies. What I’m saying is I would invest in commodities.

AM: I know. But when you say that the market hasn’t reacted, that’s a lot to do with it. These delisting things have really scared investors away from them.

TN: What China needs is dump truck and helicopter loads of cash on the boon like tomorrow. And I think to hit 5.5, they’re going to have to do that in every major town. They’re going to have to unleash dump truckloads of cash. The infrastructure they’ve announced is close to what they need to hit that. Sorry? And they have a share… t

TS: hey’re made up number. But in order to. Yes. Hit that, you’re completely correct.

TN: Yeah. They’ve got to do it and they’ll end up canceling unofficially. They’ll give dead jubilees, all that kind of stuff. Like they’ll do all of this unofficially. But it’s to let people reload so they can spend more money. They’ll do all of this stuff starting as soon as they rip the Band Aid off of the lockdown.

TS: That’s why we’re seeing a deval in the currency right now.

TN: Right, right. Which we talked about for months and months. And I’m so glad that it happened. Let’s move to energy, guys. And Tracy, we were talking about this a little bit earlier about energy being kind of range bound.

I’ve got Nat Gas and WTI on screen. We’ve seen Nat Gas really come down hard over the past couple of days. Can you tell us what’s going on there? Because it’s performed really well over the past month, except for that little period. So what’s going on with Nat Gas and what’s going on with WTI? Is it really range-bound?

TS: I mean, it is range bound. What we’re seeing is we’re saying although it’s a larger range, right, like we’re seeing $10-15 ranges in WTI. What we are seeing is that if you look at a daily or weekly chart, you’re seeing that range is coming down. Right.

TN: Okay.

TS: And that’s to be expected. One thing that the market did was that they increased margins. Thank you.

TN: Yeah.

TS: They increased margins. That put a lot of retail traders out of the market. That said, if we look at the recent OI? OI has actually increased daily all this week. So it looks like and we can’t tell at this point whether it’s retail traders or institutional traders. But OI has increased this week in that sector across gasoline.

AM: Yes. Speaking of gasoline, I’m looking at diesel and gasoline crack. I think you’re looking at shortages coming in the summertime. Those things look to get explosive.

TS: You know, texted you two months ago and said, get long diesel.

AM: Yeah.

TS: It lies in the EU. Right. And they are going to see shortages. This is going to affect their overall GDP. We’re going to see less transportation we’re going to see less manufacturing. We’re going to see because they can’t handle these prices. That said, if you’re an investor, you’re going to look at the refiners right now that are refining these because the crack spreads are increasing exponentially.

So if you want to invest in this sector, I think you would be looking at refiners right now that specifically are involved in distillates. Interesting.

TN: Great. Perfect. All right, great. So, guys, what are we looking at for the week ahead? What’s on your mind, Albert? Definitely not shorting retail.

AM: Definitely not shorting retail. I just can’t take that out for at least June. But honestly, the Roe versus weighed the political atmosphere right now and how that’s going to affect the congressional races, not so much the House, because the House is set for the GOP, but possibly the Senate. And why I bring that up is because now those economic bills going through Congress, they start getting affected. And investors started calling me to try to figure out what’s the makeup of Congress.

And I think that’s what I’m going to actually start paying attention to because the beginning of next year we’re going to need stimulus the way that this economy is going. So I’m taking a look at what the makeup of the committees are going to be, what possible stimulus packages will be materializing.

The auto sector, for God’s sake, it’s completely trashed. I think that’s on life support and definitely going to need some help. I’m actually looking for auto sector plays for the long term, 24 months out.

TN: Okay, Sam, what’s on your mind?

SR: I’ll be paying pretty close attention to where the dollar heads, particularly based on our earlier conversation on the Renminbi. And in the end, following the Fed this week and then listening to how other central banks begin to form a narrative around their next moves based on the Fed in particular, Latin America is going to be very interesting given some of the inflation pressures down there and the push and pull of someplace like Brazil, where commodities are both good and bad for an economy, or Argentina, good and bad for an economy, export a lot of food, but import a lot of energy, even though you have the black maritime, psychotic, that’s pretty poorly run.

Anyway, that to me is going to be one of the really interesting stories of the next couple of weeks, given the Fed. The Fed moving quickly, beginning to do some quantitative tightening.

Generally, that would be your number one method of affecting markets is through the dollar. So I just want to see what the dollar does and follow the dollar and not fight that tape.

TN: Yeah, very good. Tracy, what’s on your mind for next week?

TS: I’m going to be concentrating actually on the yuan at this strength. I want to see how much are they going to actually devalue their currency, because I think that’s the sign of how desperate they are to bolster the domestic economy. That’s where my main focus is right.

TN: Supposed Fed your eyes on China.

TS: But you have to realize what happens is that people don’t really talk about why does China devalue the currency? They devalue the currency so that exports become cheaper and more competitive. In turn, that makes imports more expensive. Why does that help the domestic economy? That means that people in China are not buying imports. They’d rather buy from domestic businesses which bolsters their economy.

So right now I think that’s one of the most important things to be looking at right now is to see how much are they going like, how desperate are they?

TN: That’s a great observation and something that I watch every day and I’ll tell you, they’re very desperate. I don’t mean to laugh at it. I feel really empathetic for the people in China but they’re very desperate. So I would watch for some moves that are I would say that tried to appear disciplined because they don’t want to look desperate. But in fact, they’re desperate to get their economy moving because of these lockdowns.

So I think the first sign of that would have to be starting to see a lifting of the lockdown like a legitimate lifting of the lockdowns and not moving into more towns like they did in Beijing over the past couple of weeks. But really legitimately taking these lockdowns off and free movement.

Looking at things like the port zone in Shanghai and how many people are allowed to work in those bonded warehouses, those sorts of things to get that port activity moving. As we look at those indicators, we’ll know how serious the Chinese government is about getting back to work. If they don’t do it, they’re not serious. And if they’re not serious, they’re going to have some real trouble.

I’m not a gloom and doom kind of China is going to have a coup or anything type of guy. But I do think that they’re going to have some real trouble. They want everyone to be happy and harmonious going into the national party meeting in November and there’s going to be some runway needed to get everybody happy. And by everybody being happy, I mean all of those CCP guys in Guangzhou and all the different provinces, they have to be happy coming into that Congress because if they’re not, then Xi Jinping has several problems. Serious problems.

Okay, guys? Hey, thanks very much. I really appreciate this. Have a great week ahead and have a great weekend. Thank you.

AM: Thanks, Tony.

SR: Thank you, Tony.

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Podcasts

Business and Market Discussion

This podcast was originally published in https://www.rthk.hk/radio/radio3/programme/money_talk/episode/810164.

Surging energy and food prices in the United States have sent inflation to a 40-year high. Consumer prices rose 8.5% in March, the fastest annual gain since December 1981. The monthly rise was 1.2%, the fastest jump since September 2005 and a sharp acceleration from February’s 0.8% increase. 

Russian President Vladimir Putin says peace talks with Ukraine have reached a “dead-end” and he accused Ukraine of deviating from agreements reached in Turkey. He said Russia’s “military operation” will continue, blaming Ukraine for “inconsistency in key issues” from talks and “fake claims” about war crimes.

The World Trade Organisation said that global trade could be cut almost in half and is expected to grow by 2.4% – 3% in 2022, lower than its previous estimate of 4.7% in October due to the ongoing conflict between Russia and Ukraine. The WTO said the war could lower global GDP growth by 0.7-1.3 percentage points to somewhere between 3.1% and 3.7%. 

Sri Lanka said yesterday it will temporarily default on its foreign debts amid its worst economic crisis in over 70 years. The country was due to pay a US$1bn international sovereign bond in July, part of a total of US$7bn of debt payments due this year. Sri Lanka’s foreign reserves stood at US$1.93bn at the end of March. 

Shanghai saw a drop in new Covid cases on Tuesday after ten straight days of record highs. The financial hub reported 23,342 new local cases for the day, compared with just over 26,000 the day before. However, it was being reported on Tuesday that authorities were backing away from lifting restrictions in several thousand low-risk areas. Residents can move around within their compounds but are still barred from venturing out onto the streets if their surroundings belong to higher-risk areas. Officials ordered another round of mass testing, at least the seventh in 10 days, in the highest lockdown zones. 

On today’s Money Talk we’re joined by Dickie Wong from Kingston Securities, Carlos Casanova of UBP and Tony Nash, Founder & CEO & Chief Economist at Complete Intelligence.

Show Notes

PL: This is Radio Three Money Talk. Good morning. It’s eight in Hong Kong. Welcome to Money Talk on Radio Three. From me, Peter Lewis. Here are the top business and finance headlines for Wednesday, 13 April. Surging energy and food prices in the United States have sent inflation to a 40 year high. Consumer prices rose 8.5% in March, the fastest annual gain since December 1981. The monthly rise was 1.2%, the fastest jump since September 2005 and a sharp acceleration from February’s zero 8% increase. Russian President Vladimir Putin says peace talks with Ukraine have reached a dead end, and he accused Ukraine of deviating from agreements reached in talks in Turkey. He said Russia’s military operation will continue, blaming Ukraine for inconsistency in key issues and fake claims about war crimes. The World Trade Organization said that global trade could be cut almost in half and is expected to grow by 2.4% to 3% in 2022, lower than its previous estimate of 4.7% in October due to the ongoing conflict between Russia and Ukraine. Wto said the war could lower global GDP growth by zero 7% to 1.3 percentage points. Sri Lanka said yesterday will temporarily default on its foreign debts amid its worst economic crisis in over 70 years.

The country was due to pay a $1 billion international sovereign bond in July, part of a total of $7 billion of debt payments due this year. Sri Lanka’s foreign reserves stood at just under 2 billion at the end of March, and Shanghai saw a drop in new covert cases on Thursday after ten straight days of record highs. The financial Hub reported 23,342 new local cases for the day, compared with just over 26,000 the day before. However, it was being reported yesterday that authorities are backing away from lifting restrictions in several thousand low risk areas. On today’s Money Talk, we’re joined by Dicky Wong from Kingston Securities, Carlos Casanova of UBP, and Tony Nash, founder and CEO at Complete Intelligence. The moderation in core CPI initially prompted a rally in stocks on Wall Street and sent US Treasuries higher. But stocks then gave up their gains as the session wore on, with the S Amp P 500 and Nasdaq falling for a third day. The S Amp P 500, which was up 1.3% at the high of the day, closed a third of a percent lower at 4397. The Dow relinquished a gain of over 360 points to close 88 points lower at 34,220, and as the composite index, which was up 2%, declined zero 3%, ending at 13,372.

In Europe, the regional Stock 600 index fell a third of a percent. Deutsche bank and Commerce Bank led losses for the index, with both falling more than 8% after an undisclosed shareholder unloaded roughly 5% stakes in both German banks. London’s footsy 100 dropped null. .6% and it was a volatile day for mainland China and Hong Kong stocks, which opened higher before plunging late morning and then staging a drastic rebound in the afternoon session with reports that the China National team was actively supporting the market. The rebound came amid calls from China’s market regulator that firms buy back shares and ask major shareholders to support stock prices amid a sluggish stock market. The Hangsting index had slipped half a percent by lunchtime to a four week low before rebounding to close 111 points, or half a percent higher at 21,319. Tech index was up two and a half percent in the morning session before dropping zero 8% at lunchtime and then rebounding to close 1.4% higher. The Shanghai Composite recovered from losses of 0.8% to close one and a half percent higher at 3213. $0.10 advanced 3.6% added 4.2% after China approved new online gaming titles for the first time since July.

In the commodities markets, brewing crude oil rose almost 6% to $104.87 a bowel. Gold is up close to 1% at $1,966 an ounce. The yield on the benchmark ten year treasury notes fell five basis points to two point 73% after hitting two point 83% early in the session. And in the currency markets, the US dollar is stronger this morning. The Euro is trading at $1.08 and a quarter cents. The Bucks at 125.5 Japanese yen Sterling is worth one point $0.30 and Hk$10.19, and the Chinese yuan is at six point 38, versus the dollar in offshore markets. Bitcoin this morning is about 1% firmer at $40,100. Around Asian stock markets this morning. In Australia, the SX 200 up about zero. 1%. Stocks in Japan have now opened the nicate 225, about three quarters of a percent higher. The Cosby in South Korea is half a percent higher, but futures markets pointing to a loss of about 70 points for the Hang Sein at the open this morning. Fine. Let’s welcome our guests. We have with us Dicky Wong, head of research at Kingston Security this morning, Dickie

DW: Good morning, Peter. How are you?

PL: I’m well, thank you. And also with us, Carlos Cassanova, senior Asia economist at UBP. Morning to you, Carlos.

CC: Good morning, Peter.

PL: And over in Texas, in the USA, we have Tony Nash, founder and CEO and chief economist at Complete Intelligence. Thanks for joining us again, Tony.

TN: Thank you, Peter.

PL: Let’s start in the US with those inflation numbers. Surging energy and food prices in the United States have sent inflation to 40 year high. Consumer prices rose eight and a half percent last month. That’s the fastest annual gain since December 1 981. The monthly rise was 1.2%, the fastest gain since September 2005. Excluding food and energy, core CPI increased 6.5% on an annualized basis in line with expectations, core inflation rose zero. 3% for the month energy prices, they were up 32% year on year food prices, they jumped 8.8%. And shelter costs, which make up about a third of the CPI, rose by 5%. Tony, you’re over there in the US, so let’s start with you. It’s hard to find very much good news in this data. But who do workers blame for this?

TN: I think a lot of Americans really do see inflation rising as Joe Biden has been in office. It’s accelerated during his tenure. So whether it’s his fault or not, he’s sitting in the seat while it’s happening. There is a lot of resource from the White House going into saying that this is Putin’s inflation responsibility, claiming that inflation didn’t really accelerate until the war started. But again, if we look back to the rapid acceleration of inflation, it really started, I guess you could say maybe October. But we’ve been at this for a year or so. I think Americans working level, Americans, whether they’re working class, blue collarly workers, they’re obviously the hardest hit by this. And for workers at those levels, it’s really looking at the political issues, not something that’s happening on the other side of the world.

PL: So what can Joe Biden do to try and bring inflation under control? What are people expecting to do?

TN: Well, I think one of the really easy things that he could do, which I’m in Texas. So this is a very biased view, but since Joe Biden has come to office, he’s put a lot of restriction on the drilling and transport of oil and gas. And so there could be a lot of alleviation of energy prices if the White House would remove the regulations that they put in place on the drilling and transport of oil and gas. The White House also killed a pipeline of Canadian crew or a pipeline from Canada that would transport heavy crude to American refineries, which is what’s needed for petrol or gasoline here. And Americans actually don’t necessarily use the light sweet crude that’s refined or drilled, say in Texas. They use the heavy sour crew that say from Canada and from Venezuela. So the pipeline from Canada would have been very helpful to keep prices stable in the US, energy prices stable in the US, but that was killed literally on the first day of the Biden administration.

PL: Vicki, what is the impact for markets and particularly out here, US markets? They rallied initially because they took some optimism for the fact that the core CPI had declined slightly from last month, but they lost those gains. How do you think markets are going to respond to this?

DW: Well, in terms of inflation, I guess it’s an overall problem not only in US but basically everywhere else, also in China. And you may say, like Russia invasion of Ukraine intensified the situation of inflation in US, but inflation is already there. It’s already a problem in US. So in terms of the market expectation, I would expect first of all will probably have another rate cut for even 50 basis points in May and continue to high interest rate until the year end. At the year end, maybe the sets and target rates will be like two point 75 even at this really high level compared to one year ago. So in terms of the year car still going on, keep going up there’s no question ask but already probably the market already digest this kind of situation like you asked me have to continue to high interest rate. But in terms of in mainland China is another thing. Even though China official CPI rose by 1.5% in March, still below US CPI or everywhere else in Europe. So expecting that PVoC may have some kind of room to have an outer round of rate card or triple archives.

But in terms of the situation now in mainland China it’s pretty dilemma because if they really want to have another round of fresh cut of interest rate or even triple R may intensify the situation now because the ten year value of the US Treasury is slightly higher than the same period treasury in mainland China. Now it may be some kind of money outflow from mainland.

PL: Is the window of opportunity for the PPO to go and cut rates? Is it closing the worst this inflation data gets? It doesn’t leave them much opportunity, does it?

DW: Exactly. So I don’t really expect a rate cut in the near term but maybe I expect Arrr cut instead of a rate cut because rate cut create a high pressure of capital outflow. We have already seen in March no matter in the bond market, also in the Asia market from the stock connect. So people actually getting money out from mainland China. So this is also another reason why recently the Asian market underperformed even the US market because the capital outflow. So it’s not a good timing for China but then you still have to think about it, what they can do because capital outflow and intensified the situation in Russia and Ukraine. So also create another round serious pressure. The CPI future growth is mainland June.

PL: Let me bring Carlos in. Carlos, this is not an easy situation for central banks to deal with, is it’s? Because this is not demand led, this is a supply shock, correct?

CC: I think what we saw in the market this week was some investors pricing in the probability that inflation was peaking within the next few months. We think it’s a little bit early to say we are expecting around eight to 9% inflation in the US in the coming months and of course then a gradual descent, but it will nonetheless remain significantly higher than expected in 2022. And as Tony was mentioning, this will be front and center with Biden facing elections in the fall. So I do think that central banks around the world are going to be very focused in trying to address the demand side factors or drivers of inflation even as they have very little control over the supply side factors. And on that note, just keep in mind that we have this conflict in Ukraine that’s leading to supply chain disruptions. But we are already seeing disruptions to global shipments through the Port of Shanghai following from the lockdown there. So it is likely that these supply factors will continue to exert pressures in the coming months. So in my opinion, I think central banks will unfortunately remain in this very hawkish trajectory even though they don’t have 100% control.

PL: And what does the PPOC do? That’s probably the one major central bank in the world that would like to ease monetary policy to cope with the slowdown there on the mainland. It’s in a difficult position as well, isn’t it?

CC: Ppoc is in a very difficult position because we’ve seen authorities voice their concerns about the lack of easing quite a few times since the middle of March, and yet PPOC has an east the risk of outflows is real. We saw that China’s premium over the US in terms of its ten year yield is completely gone. So any form of eating will exacerbate potential capital risks. But you have inflation creeping up potentially above the 3% target set by the beginning of the year. So the conditions could turn less accommodative very quickly. So PPO has a narrow window of opportunity in my opinion to deliver stimulus and a triple our card won’t be enough given what is happening in Shanghai, given that we have -40% sales in the housing sector and that accounts for a third of the economy is not going to be enough to get us from where we are now to 5.5% growth by the end of the year. So unfortunately, they should be doing a rate cut even if that exacerbates capital outflows and even if the impact of a rate cut might be more muted as most people remain in some form of lockdown.

So it’s less easy to go out and spend money. I think that is something that PVC has been discussing, but it doesn’t matter. They need all hands on deck in order to reach the fact growth target by the end of the year and really running out of time given that inflation is rising.

PL: Tony, you mentioned energy prices, but of course, food prices are also jumping as well. They were up 8.8% over the period. We’re seeing global trade slow quite dramatically now. And the UN saying that the war in Ukraine is causing a huge leap in food prices. The UN food prices index is at a record high. It was up 13% in March are on consumers feeling that as well. Over in the United States, this rise in food prices?

TN: Yeah, for sure. Americans are feeling the rise in food prices. I think, however, the most acute food price rises will be in places like Lebanon and Egypt and other places that are more directly affected by the Ukraine and Russia war. Here in the US, we do have pressure on wheat and corn prices, corn prices or maize prices. There’s upward pressure on those prices partly because the White House just said they want to add corn to fuel here to in their minds, reduce fuel prices. So there’s pressure on corn both to feed people and for fuel now and of course, with proteins, those prices are up as well double digits. So Americans are feeling it really all around, but not as acutely as some of the people in Europe and the Middle East will as the pressures from, say, Ukrainian and Russian exports hit those markets.

PL: We’ve already had an energy shock in many parts of the world. Do you think we’re heading for a food crisis that we’re going to see shortages, we’re going to see prices soaring, and maybe, as unfortunately always happens in this case, it affects the poorest parts of the world the most?

TN: Yes, it does. And sadly, I think that is the case because places like Ukraine and Russia do provide so much mostly Ukraine provide so much weed and maize and cooking oil to some of these markets. So, yes, I definitely think that that is.

PL: Our Americans questioning President Biden’s support for Ukraine. When you start to see the costs of this mounting. They’ve banned American. They banned Russian oil and gas imports. That’s helping fuel price rises. They’re seeing the price rises in food. Are they starting to question whether or not the US is on the right track supporting Ukraine?

TN: I don’t know. I know that a number of Americans have questioned it from the start, not that they don’t support Ukraine, but Americans are worried about being directly involved, meaning sending troops to Ukraine. I think Americans generally are comfortable sending weapons and supporting with that aid, but not necessarily with the troops.

PL: Okay, Dickie, let’s talk about the lockdowns up on the mainland. There was a slight decrease in COVID cases yesterday, but we’ve had ten days now of record cases in Shanghai. Guangdong, Guangzhou has gone into a partial lockdown as well. Now, what sort of impact is this having on the economy?

DW: Well, that’s so obvious. The big lockdown in Shanghai may give some kind of pressure to not only the first quarter GDP, but indeed the 5.5% annual gain of the GDP. It’s probably not that easy to achieve. So I do see some kind of civil linings because China’s government recently added some of the approval of the online and cellphone gaming. And also when we talk about the first quarter lending also hits record to 1.3 trillion before PVC take any action in the first quarter because last year PPOC cut LPR rate triple R, but not this quarter. So I would expect definitely I do agree that PPOC has to take some kind of action like seriously to treat the problem, especially the lockdown in Shanghai. And 5.5% is not something easy. So they have to no matter fiscal policy, monetary policy, and et cetera regulations has to be used, especially some of the tech companies.

PL: Let me ask you also because I want to ask you about the markets as well. We’re seeing a lot of calls now from Premier Leakage, the State Council to take steps to support the economy and also from the regulators now to support the market the China Securities Regulatory Commission wants shareholders to buy back stock. It wants Social Security funds, pension funds, trusts, insurance companies to increase their investment in the markets. What are your thoughts on this? Isn’t this the regulator going way over their skis here? It’s not the job of the regulator, is it to tell companies to buy back more shares and to put public money into the stock market? Surely this is way, way beyond what the regulator should be doing.

DW: Well but in terms of the mainland market, the HR market, this is probably the regulator will regularly do I know they do it but it’s wrong isn’t it wrong that the regulator should do that?

PL: It’s sort of almost an outrageous abuse, isn’t it? The regulator should be there to make sure the market operates fairly and efficiently to crack down on abuses but not do this?

DW: You may say so but the regulator to mainland because you can see intensifying the tension between China and US never gone and also like recently no recently just yesterday the holding foreign companies accountable action called Hscaa a fresh round of addiction of a lot of Chinese companies like more than twelve companies this is the fourth round already it gives some kind of pressure to the ADR market yesterday in US and definitely some of the ADR may open slightly lower today although the pressure may not be as high as the previous one or the first round of the addiction of the Hscaa but because of the tension of these two countries China may have to do their own thing so in terms of like Green Valley always comment about the stock market and try to interfere with the stock market I will not say good or bad but at least it would be some kind of support to the local Hong Kong stock market so I believe we find support at 21,000 because investors may expect or they will expect like PPOC will take action very soon so it may help to stabilize the overall sentiment in Hong Kong as well as in Asia Carlos.

PL: We’Ve heard Premier Leakage now has issued his third warning about economic growth in under a week what can they do?

CC: Well, we do expect to see weaker growth in March, April and May so those will be the three weakest months I think that in addition to doing more monetary policy and fiscal policy support the big question Mark is will they announce some easing of restrictions or at least provide some degree of regulatory clarity for global investors? On the housing and also tech front there’s a whole debate around this. Recent regulations surrounding dual circulation in China points to some additional regulatory headwinds for some of these companies but I think that the issue is not so much regulation it’s more the lack of visibility so they are likely going to at least provide that in the coming weeks. And of course, if this contraction is bigger than expected in the first half, and I did use the word contraction because I do think that GDP has a chance of actually declining in Q two, then the measure of last resort in order to achieve that growth target would be to effectively inflate the housing sector again in Q four. But we should be back to square one. So I think they will try as much as possible to use more Australian and other channels to try to prop up the economy so that growth doesn’t follow the cliff.

But they are running out of time and we do hope that they will announce something big in April.

PL: Okay, Tony, final word to you. I know all sorts of things go on on the mainland that perhaps wouldn’t go on elsewhere, but when you see the regulator trying to arm twist companies into buying back their own stock and get public funds to get the market back up, what do you make of that, Peter?

TN: It reminds me of June of 2015, if you remember, when markets on the mainland really fell pretty hard. There is pressure domestically in China for people to buy shares for a patriotic reason. Even within the Chinese bureaucracy. There was pressure for Chinese bureaucrats to buy shares. So I think they’re just doing it out loud now and they’re doing it for the companies themselves. But to me, when I first saw this news, it really was an Echo of June of 2015 when markets fell and there was real pressure on Chinese retail investors to buy the dips and to support the market. And a lot of them lost. I knew people there who lost 2030, 40% of their wealth because they were buying patriotically.

PL: Yeah. Okay. Well, that’s a fair warning. Thanks very much. That’s Tony Nash, founder and CEO and chief economist at Complete Intelligence. Dickie Wong, head of research at Kingston Securities, Carlos Casanova, senior Asia economist at UBP. You’re listening to Money Talk on RTHK Radio Three. Let’s take a final look at the markets for today. In Australia, the SX 200 up zero 2%, the Nico two five in Japan rallying as well, up zero 8%. The Cosby is up. A third of the cent in South Korea does look like, though the hangsting is going to fall slightly, about 50 points or so at the Open later on this morning. Thank you very much for listening this morning. Please join me again for the final time this week in a holiday shortened week at 08:00 tomorrow. Stay tuned for covered updates after the news with Jim Gold and Anna Fenton. The weather forecast, mainly cloudy, few showers going to be hot with sunny intervals during the day. Maximum temperature of 29 degrees, mainly fine and hot during the day tomorrow. And on Friday, the temperature right now 25 degrees, 82%. Relative humidity 32 here’s Andy Shawski with the half hour news.

AS: Thank you, Peter. The head of the Government’s policy innovation and coordination office says the authorities have expanded it’s $10,000 subsidy for people who have recently lost their jobs Due to covet. Officials say they have received 470,000 applications for the subsidy. In February. They expected only 300,000 Would apply. Doris Hoe said that’s because more people have lost their jobs.

DH: This is partly because more people were out of employment in March When the unemployment situation was in February and partly because we expanded our scheme subsequently to cover employees working in closed app premises such as affinity centers and beauty salons and who were forced out of work about their employers.

AS: Medical Association President Choi keen says the government initiative giving private doctors access to oralcobid drugs will definitely be effective in preventing severe cobalt infections. Authorities on Monday said that private doctors could request antivirals through a dedicated electronic platform. Doctor choice said this is a sensible arrangement.

DH: The patients usually see the GP first before they go to the emergency Department before they get very ill, so it’s the first stage that the antivirus are infected. So if they are seen at the first stage and given the medication, they will not proceed to a very ill stage so it is effective and useful.

AS: Police in New York are searching for a man who shot ten people at a Brooklyn subway station during the morning rush hour. Six others were also hurt, Mostly through smoke inhalation. None of the injuries are life threatening. The New York city police Commissioner, Ketchen Sewell, gave details of the incident just before 824 this morning.

KS: As a Manhattan bound and train waited to enter the 36th street station, an individual on that train donned what appeared to be a gas mask. He then took a canister out of his bag and opened it. The train at that time began to fill with smoke. He then opened fire, Striking multiple people on the subway and in the platform. He is being reported as a male black, approximately 5ft five inches tall with a heavy build.

AS: The city of Guangzhou has reported 13 new COVID cases. Health officials in the city say the new infections were linked to previous cases, but they warned that transmissions might have been taking place for some time before the new cases were found. And the next few days will be critical. To contain the outbreak, local authorities have been conducting mass testing to screen out patients primary and secondary schools of suspended face to face class.

Categories
Week Ahead

The Week Ahead – 11 Apr 2022

As a start, we looked at the Friday’s trading session and what it means. Is this a bullish market?

We’ve made a few recommendations over the past couple of months. We hope you’ve been paying attention specially on $IPI (Intrepit Potash) and $NTR (Nutrien).

We’ve talked about the tumbling lumber markets in recent weeks. What are Sam and Albert’s current thinking on lumber as we’re looking at $LB lumber futures. Sam talked about housing last month. We looked at $XHB, the home builders ETF. How about the rates and housing? We’ve seen that homebuilders are getting hit with expected rate rises. What is the impact of this on the mortgage market, housing inventory, etc?

Shanghai has been closed for a few weeks now and the largest port in the world won’t open for about another week. How can the second largest economy continue to close when the West has already accepted Covid as endemic? How can manufacturers rely on China as a manufacturing center if they’re unreliable?

For the week ahead, we talked about the earnings season, their portfolios, and Albert talked about Chinese equities for months, etc. Is now the time to look at KWEB, which he discussed for some time?

We’ve got CPI out on Tuesday and is expected at around 7.9% and Retail sales on Friday, which is expected at around 0.3%. Inflation seems unstoppable and consumers seem to be getting tired of spending. Sam explains on this.

Key themes from last week

  1. Friday trading session
  2. Don’t say we didn’t warn you
  3. Rates and housing (Tuna & Caviar)
  4. China’s shutdown

Key themes for the Week Ahead

  1. Earnings season expectations
  2. Near-term equity portfolios
  3. CPI (Tuesday), expected 7.9%

This is the 14th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon

Listen to the podcast on Spotify:

https://open.spotify.com/episode/4uQUT91ocSlxs0sdNR7Vt6?si=3ba0d0bb07724b9f

Transcript

TN: Hi, guys, and welcome to The Week Ahead. My name is Tony Nash. I’ve got Albert Marco and Sam Rines with us. Tracy is not able to join us today. Before we get started, if you don’t mind, could you please like and subscribe. That would help us out. And we’ll let you know every time a new episode is up and running.

This past week we saw a lot, but I think the most interesting thing or one of the most recent interesting things is Friday’s trading. We’re going to start talking about the market action on Friday, and then we’re going to get into a couple of things that we told you about trades that if you were paying attention, you would have seen. We’re actually going to go into rates and housing, and Sam’s going to talk a little bit about tuna and Caviar, that discussion from the Fed speech earlier this week. And then we’re going to talk about China’s shutdown, which seems to be getting worse by the hour. So first let’s get into the Friday trading session, guys. What are some of the things you saw on Friday?

AM: Well, from my perspective, the market is acting like crypto. I mean, we’re seeing interday moves on some of these equities, like 5% up and down. It’s a little bit silly. And you wonder if it’s like light volume, if it’s market manipulation by the Fed. It’s just uncanny. I’ve never seen anything like this before. And obviously the market is weak and we’ve talked about black clouds coming over the market and what’s going on. But I don’t see anything any catalyst that would say that this is the bullish market at all. So we’re waiting for multiple numbers of CPI, retail and whatnot. But for me, it’s just like everybody is on pause waiting to see which way this market goes before they take action.

TN: So a couple of weeks ago, we saw a lot of money move into equities. Right? So that money moved in. It’s just parking and waiting. Is that what’s happening?

AM: Yeah, I assume so. The Fed, as it just ups the rates, forces more money to move into the US market, which is actually a brilliant move. You know, this is what we’re seeing. A lot of money here, not knowing what to do at the moment.

SR: To Albert’s point, there’s a lot of money that’s moved in here, but it’s moved into some pretty passive areas that it’s just not moving much in terms of the overall market. You look at fixed income, right? Lots of money moving in there, short into the curb, et cetera, et cetera. I think that’s some of the more interesting stuff as well. But there’s also this weird thing going on where equal weight is outperforming the market cap weight. And has been for some time now, particularly over the last week. If you look yesterday, S&P closed in the red, but if you were equal weighted, close green and it closed green on a non trivial basis, and it was 35 basis points, something like that.

That deviation between market that was led by predominantly tech and only tech, to a market that’s led by other sectors in general is something I think under the surface that paying attention to it can be something that at least can make some money in the near term.

TN: Including Crypto Walmart, which we’ve seen over the past week as well. So we’ll talk about retail later in the show.

Okay. So we had as a group talked about some calls over the past couple of months. Some of those were calls earlier, but let’s get into those just to walk through. Albert, you and Tracy had talked about Intrepid Potash. She talked about Nutrien. We’ve got those on the screen right now. Can you walk us through those and kind of what you’re thinking was on those and what’s happened? What do you expect for those to happen in the near term?

AM: Well, speaking about IPI, Intrepit. It’s like a leveraged ETF in the fertilizer market. That thing swings 5-10, 11% in a week, no problem. That call was basically on the premise that the Ukraine war is going to go on. Russia is cutting off the fertilizer supply. Belarus has a big fertilizer supply. OCP in Morocco has shifted from actual fertilizers to more like phosphate batteries for EVs.

So it only made sense that besides Mosaic, which is the 800 pound gorilla, IPI and Nutrien were just the logical choices for investments.

TN: And is there room to run on fertilizers like there was a target put on Nutrient by one of the banks of like 126 or something? Do you think we could keep running on those trades?

AM: We can, right? Certainly we can. It just really depends on what goes on with the Russians and whatnot. My only risk for running too far is that the Dixie could go to 105, 110 and then we have significant problems across the market, not just fertilizer prices.

TN: Okay. So even if dollar does go to 110, we’re planting now in the US, right. And now and for the next couple of months. And the fertilizer demand is right now and it has been for the past couple of months. But it’s especially right now, is all of that, say planting demand, is that all priced in already, or do you feel like some of that is to come?

AM: I think it’s pretty much priced in. And let’s just be careful because some of the farms that are planting crops are using nitrogen and also fertilizer derived from nat gas. So it really depends on which way the farming community wants to go, what they see the most profitable crops.

TN: Okay, great. That’s good to know. We also talked about lumber, as I remember a conversation probably three or four weeks ago where I think, Sam, you brought up lumber and how lumber was coming off. Can you walk us through that trade, as we have it on the screen?

SR: Yeah, sure. I mean, it’s a Fed trade, right. It’s a Fed tightening quickly, mortgage rates going up and housing demand coming down. The idea that a Fed going this quickly and having the market priced in, there’s a difference. Right. The Fed has only moved 25 basis points.

TN: Right.

SR: The market has done the rest of the tightening for it across the curve. It’s been pretty spectacular. Housing, housing related stocks, those in general, are going to be the first thing that the Fed affects and they’re going to be the first thing that the Fed affects on the margin very quickly. And you’ve seen mortgage rates go to five plus percent.

TN: Sure. Before we get on to housing, I just have a couple of questions about lumber and other commodities. So the downside we’ve seen come in lumber over the past week or so. Do we expect that to come to other commodities as well? I mean, things like weed and corn, there’s still pressure upward pressure on those. But do we expect other commodities to react the way lumber has?

SR: Oh, no, I would not expect the foodstuffs to react in anywhere near the same manner as lumber. Right. Lumber is a fairly… Lumber, you cut it up, you put it in inventory, you sell it, and then you use it for something.

TN: Right.

SR: It doesn’t last forever in good condition either.

TN: Great. Okay, good. Thank you. Now moving on to home builders, which is where you are going. You also talked about XHB, I think two or three weeks ago, and we’re flashing some warning signs about that. We’ve seen obviously rates rise. I was speaking to a mortgage broker earlier this week. He’s doing mortgage at almost 6% right now and expects them to go up kind of close to 8%.

We’re starting to see the resurgence of ARMs. People are already getting back into adjustable rate mortgages because 5.99% is high. Just as a bit of background, less than 10% of US mortgages over the past few years have been adjustable rates. So can you talk us through XHB? And maybe you had mentioned earlier kind of Home Depot and some of the other home makers. Can you talk us through what kind of… Home Depot was a leading indicator on that? Is that fair to say?

SR: It’s fair to say Home Depot and Lowe’s this kind of ties into the lumber conversation. Home Depot and Lowe’s were two of the best at ordering and trying to actually keep inventory on the shelves, even when during the first tremendous spike in lumber. Right. So they kept a lot of lumber on the shelves. They currently have a lot of lumber inventory on the shelves. And it’s part of the reason that you’re seeing what could be described as almost an over inventory of lumber, not just at those two entities, but across the board, because everybody had to buy lumber in order to keep it in stock.

So, yeah, Home Depot and Lowe’s are the tip of the spear in terms of both home building and in terms of home remodeling. Those are both fairly significant drivers of the business there. There’s a little bit of weekend contractor type deals, but very little.

So overall, I would say they are a leading indicator and they have not been acting very well. But when you have mortgage rates to your point at 6%, that creates a problem for the marginal buyer. It’s not a problem for somebody who owns a home. Right. You have your mortgage rate locked in, et cetera, et cetera. It’s not going to destroy you. It might set off being able to put a new deck and redo a pool or something like that. But it’s not going to hurt you in any meaningful way.

TN: Right.

SR: It does hurt the marginal buyer. It hurts the first time buyer, et cetera. So you begin to have slower turns in housing and you begin to have problems with where does that incremental inventory of homes go? And that’s the real problem with higher invetories.

TN: Right. Before we move on to officially talking about rates and housing, I’ll share a story about a friend who is building a house and their lumber broker who should be able to get the best pricing actually has worse pricing right now than Home Depot. Okay. So they can actually go to Home Depot and get better pricing than their lumber broker. And that’s how messed up the lumber market is right now. They’re arbitraging their lumber broker versus retail any given week in their bulk buying to make sure that they can get their house built. So that market both on the lumber side and on the housing side is just a mess.

So let’s officially go to housing and rates. We’ve done a lot of the discussion, but there was a CNBC story about rising mortgage rates are causing more home sellers to lower their asking prices.

And Sam, you talked about that marginal buyer, which is great, and that new buyer. When I talk to people who are doing mortgages, they tell me that even with the rate rises we’ve seen over the past couple of weeks, there is still not a lot of inventory on the market. That’s a big issue. And they’re not seeing a fall in demand for new houses. So is this kind of a last minute rush for people to get a house before rates rise even more? Is that plausible?

SR: There’s some plausibility to that. Yeah, 100%. The other thing is that we’re in Texas. Right. The demand for housing in Texas, the demand for housing in Florida does not tend to be, I would say, as tied to mortgage rates as everywhere else. The rest of the country is much more sensitive to what’s going on. Texas and Florida and a couple of other spots simply have too much inbound demand from higher priced areas. So California, New York, et cetera. There’s still an arbitrage when you sell a place in California or sell a place in New York and move to Texas, Florida, some of the Sunbelt States.

So it’s tough to take Texas as an example, particularly Houston. We’re actually the fourth largest city in the country, and yet we do not get counted in the S&P Schiller because of how different the housing market is here. Dallas gets kind of for whatever reason, but Houston does not.

TN: We’re not jealous at all about that.

SR: No, we’re not.

AM: Go ahead, Sam. Sorry.

SR: But just to wrap that up, I do think that there’s a nuance to Florida and Texas that should almost be ignored. When I look at the data, I’ll be taking out the Southeast region just because it’s one of those that is a little special at the moment.

AM: Yeah, that’s a key point that I always made is like, because of the migration patterns in blue to red States, things are just really wacky. Florida and Texas, Arizona will be red hot. Meanwhile, Seattle, Chicago, parts of New York are just dead spots at the moment. So until that all gets weeded out, people stop moving. Then we’ll actually see the housing market starting to cool off.

TN: Right? Yeah. I was just up in Dallas yesterday, and things are just as hot up there. And the immigration from the coast to Dallas, especially around financial services and tech, it’s just mind blowing. It is not stopping. It has been going on for probably five years, and it’s just not stopping. Those counties just north of Dallas are exploding and they continue to explode.

Okay, so our next topic is China and China’s slowdown. Shanghai has been closed for a couple of weeks with kind of a renewed round of Covid. And obviously the largest Port in the world, which is in Shanghai, is closed. And that kind of exacerbates our supply chain issues, especially around manufactured goods that we’ve been seeing globally. We’ve seen overnight that. Well, not just overnight, but over the last, say, five days. Food has become really scarce in Shanghai. We’ve seen people on social media talking about how it’s difficult to get food. We’ve started to see little mini protests around Shanghai, around food. And things are seem to be becoming pretty dire.

Overnight, we saw that parts of Guangzhou that the government is considering closing, parts of Guangzhou, which Guangzhou is the world’s second largest port. So the two largest ports in the world, there is a potential that those are closed. There is also gossip about parts of Beijing being closed as well. So I’m curious, what do you guys think about that? I can talk about China for days, but I’m curious, kind of, what alarm bells does that raise for you? Not just for China, but globally.

AM: Well, Tony, you recall, you Balding, and I discussing China’s attempt to attack Taiwan and what had happened. And I had pointed out that closing those ports would cause food insecurity and here we are. Although it’s not a Taiwan invasion, it’s a zero Covid policy that shut down the ports and now we have food stress in China causing all sorts of problems.

Most China observers, especially yourself, know that Shanghai has always been the epicenter of uprising for the CCP. It’s a problem for them. They’ve always tried to wash it. Maybe that’s why they’ve come down hard on Zero Covid Policy. That’s something that I’d have to ask you. But from there, this was very predictable. I mean, you shut down ports, China has a food security problem.

TN: On a good day, China has a food security problem. It is an issue that the Chinese authorities worry about day in, day out, not just when there’s a pandemic. Okay. So one of the things that I was talking to some people about yesterday is why is China closing down? Why are they closing down these big cities? There’s a lot of gossip. You can find a lot of theories around social media saying there’s some sinister plan, honestly and for people that don’t know. I’ve done work with Chinese officials over years. And the economic planners I was seconded to economic planner for almost two years. I believe that they’re closing because they’re worried about how the China virus looks, meaning they don’t want Covid to be seen as the China virus. And they worry about the world’s perception if there’s another outbreak that comes from China.

And so I think the leadership believes that they have to be seen to be disproportionately countering COVID so that there isn’t more wording and dialogue about the kind of, “China virus.” And so, again, I don’t think there’s something sinister going on. There’s a lot of gossip about China intentionally trying to stop supply chains to bring the west to its knees and all the stuff. I don’t believe that at all. I think it’s real sensitivity to how they look globally.

Of course, there’s the public health issues domestically. That goes without saying. But I think a big part of it is how do they look globally.

AM: Yeah, but doesn’t shutting down these ports is going to cause even a bigger spike in inflation within China and actually globally?

TN: Oh, absolutely. This is the one thing that I think they didn’t plan on is they’re about to embark on a whole lot of fiscal, a whole lot of monetary stimulants because they have major government meetings in November of this year. So they absolutely cannot go into recession.

But here’s what I have been thinking about. Okay. We’re looking at a Russia-Ukraine war that could potentially bring down Russia and destabilize Russia domestically. We’re now over the past couple of weeks, looking at a China that is starting to self destruct domestically. And I don’t know of anybody who had the domestic issues of both China and Russia as systemic risks in 2022. These things are just coming out of nowhere. And those two risks can be destabilizing for the whole world. And I’ve said for some time, Western governments have to sit the Chinese leadership down and say, look, you guys are systemically important globally. You need to get your act together around COVID, and you have to normalize your economy because it’s hurting everybody.

AM: Great points. Now, going back to Guangdong, there are some really elite families in China out of that area, really wealthy ones, that actually basically gives Xi the support he needs in the CCP. If he loses those families, there’s real trouble for Xi going forward.

TN: I think there’s trouble for him anyway. I think he is not a one man show. Contrary to the popular Western opinion, Xi Jinping is not a one man show. He is not a single Emperor, kind of claiming things from on high. There is a group of people who run China. It’s just too big for a single individual to run.

So I think Xi has been, I wouldn’t necessarily say on thin ice, but I think things have been risky for him for some time. And as you say, it’s pretty delicate for him right now. And if he doesn’t handle this deftly, I think, again, there could be some real destabilizing factors in China. So this is something again, they didn’t plan for. They were talking about major infrastructure stimulus. They were talking about monetary stimulus, getting ready for this big party in November to nominate Xi for more power and all this other stuff. But it’s possible that these events could really hurt him and really hurt his relationships, meaning the key people around him and then the other factions.

Because as much as people say that China is a one party state, sure, it’s a one party state. But there are factions within that one party. And it should be alarming for China and destabilizing China should be alarming for other people around the world.

AM: Yeah. Same thing as Putin. Like their factions behind them that keep them in power. Same thing as Xi. Most autocratic rulers have a circle of trust behind them that keep them in there. If Xi falls and China starts to, I don’t want to say crumble, but at least wobble, if we think we have serious supply chain issues now, wait till that happens.

TN: Oh, yeah. So Russia is important on energy and a couple of other things, but it’s not globally systemically important on a lot. Okay. I would say maybe it’s regionally important, especially to Europe, but China is globally important. And if they can’t figure this out, it will destabilize everybody.

And so I think Western governments need to not lecture to China, but they need to go forward with real concern about China. How can we help you guys out? Right? How can we help you out? Can we get you vaccine? Can we get you support? Is there anything logistically we can do? That is a way that Western governments can come to the legitimate aid of China. They’ll act like they have it all together, but they don’t. It’s obvious. We see it every day on social media. They don’t.

So Western governments really need to offer genuine aid to China in terms of intelligence, in terms of vaccines, in terms of capabilities, and so on and so forth.

Good. Anything else on that?

AM: No, we covered that.

TN: Okay. Looking at the week ahead. Guys, we’ve got earnings season coming up. Can you talk us through your expectations for earnings season?

SR: Sure. I’ll jump in here quickly. I think there’s a few things to watch. One, the consumer sentiment has been dismal. Right. For the last six months. It’s falling off a cliff. Where the US University of Michigan survey, well below where it was at peak of Covid. But we haven’t necessarily seen retail sales. We haven’t seen corporate earnings and corporate announcements follow that sentiment lower whatsoever.

For anybody paying attention this past week, you had Costco with absolute blow out numbers in terms of its same store sales. Take out gasoline, take out anything, and you still have 7% foot traffic. That was stunning. And that’s not a cheap place to shop.

TN: Right.

SR: So that’s indicative of the higher end consumer that’s still holding in there, at least fairly well through March. That’s pretty important. So then there was Carnival with its best week ever in terms of bookings. Those two things are pretty important when it comes to what is the consumer actually doing versus what is the consumer actually saying, which I think is very interesting.

This week we’ll have Delta Airlines. It’ll be interesting to kind of listen to them and see what their bookings have looked like, see what their outlook is for the summer. And then I’ll be paying really close attention to the consumer side of the earnings reports, not necessarily as much the banks. I don’t really care what Jamie Dimon has to say about Fed policy, but I will say…

TN: I think she do.

SR: Nobody does. But I’ll say the quiet thing out loud. But I will be paying very close attention to what the earnings reports are saying about the consumer, because the consumer drives not just the US economy, but the global economy generally, both on the goods side, services side and really trying to parse through what’s happening, not what the US consumer keeps telling us is happening.

TN: Go ahead.

AM: Sam, really quick. How much of these earnings because I’m a little bit suspicious of how much is it inflationary, prices of everything are higher and remnants of stimulus PvP, whatever the people have been getting for the past year. How much is that calculated?

SR: Yes, which is one of the reasons why it’s a great point, one of the reasons why I pointed out Costco. Costco much less on the stimulus side, much less on the saving side, much more on the high-end kind of consistent consumer. And with foot traffic up 7%, inflation was I think it was about 8%, give or take. So they’re passing on the inflation and they’re still getting the foot traffic. So I think that’s an important one.

On the CCL side, it was after the bookings were after the significant stimulus had already run out or run off. You just weren’t getting checks. I think that was also an indication that maybe there’s a shift from the goods to the services side. The one thing that was somewhat disconcerting, if you’re paying attention to the higher end consumer, was Restoration Hardware. They ran down their book to about 200 million in backlog and don’t really appear to be bullish about this year. They guided well below what some were expecting. I think we’re going to hear a lot more about that, partially because they just can’t get enough inventory in time and they’re kind of in trouble on that front.

AM: Yeah.

SR: To your point, it’s a lot of inflation, but some of these guys are seeing some pretty good traffic, too.

AM: Yeah, actually, funny, you mentioned Restoration Hardware because that was one of the things I was looking at specifically for the housing market, like who’s buying a $30,000 at the moment right now. You know what I mean? It’s just silly.

TN: Yeah, that is silly. Okay, great. Thanks for that. And I’m interested to see how the earnings from Q1 also translate to Q2. I’m expecting a real turn in Q2, and I’m wondering how much that is on investors minds as they look at Q1 earnings.

Albert, as we move into the next point around kind of short term or near term equity portfolios. You’ve talked about KWEB for some time, and I’d like you to, if you don’t mind talking about KWEB a little bit, but also if you and Sam can help us understand what is your thinking right now on your term portfolio.

AM: I mean, KWEB is one of my favorite little stocks because it’s a China technology index and it’s been beaten down to a pulp by the Fed. They have absolutely annihilated not just China, but pretty much all foreign equities. And from my perspective, you’re looking at China stimulating in the fall of the shore of Xi. So it’s like it’s a no brainer to me. I think KWEB at 28 is a fantastic deal. Start piling into that.

One of my other ones I was looking at was FXI, which is basically all the China’s big wig companies. So that’s another one I was looking at right now. In terms of the US equities and portfolios, I mean, we’re so overvalued right now. Where do you put your money into? One of my favorite stocks was TWY a tightened tire. It makes 85% of the world’s agriculture tires. Right. I mean, this thing ran up from $1.45 to $14 at the moment. You know what I mean?

How do you put more money into equities at this stage without some sort of correction or something happening with the Fed to show us which way they’re going to go? Are they going to go 50 basis points in the next meeting and then another 50 and another 50, or they’re just going to use a long bond to actually what Sam said earlier and I forgot to bring it out is they’re using the long bonds also to kill the market. So it’s just like,what do you do?

TN: Yeah. The change to valuations we’ll see over the next three months seem to be really astounding.

AM: They’re just silly. Everything is so inflated at the moment. I can’t in good conscience, say get into this stock or get into that stock, because I know how is it going to run right?

TN: Exactly. Sam, anything to add on that?

SR: I love Albert’s point on KWEB. Think about what’s built into the risk there. You have the risk of the SEC delistings. You have the risk that appears to, at least on the margin, be waning. You have the threat of sanctions on China from them helping Russia. You have a lack of stimulus. You have shutdowns. There’s a lot weighing on that index on top of Fed, et cetera. There’s a lot weighing there on that. And you begin to have some of these calls, the geopolitical onion risks begin to be pulled back a little bit. And that to me is a spectacular risk reward in a market that is generally pretty low on the reward.

TN: Okay.

AM: I had one of my biggest clients from the golden guy. I mean, it’s gold and KWEB is what he’s seeing right now. That’s the only thing he wants to even touch, which is fascinating.

TN: Yes, I can see that. Okay. Next, this week ahead, we’ve got CPI out on Tuesday, which is expected to be about 7.9%. Sorry. And then retail sales on Friday, which is 0.3%. So it doesn’t feel like inflation is abating. But, Sam, you talked about, say, Restoration Hardware and other folks earlier. What concerns you guys have about inflation eating into retail sales, do we expect serious difficulty with retail going forward?

SR: Probably not this month. We’ve going to get the release and it’s going to be for March. And I haven’t seen what I would describe as a poor number coming from any of the major retail facing guys for March. I don’t think that number is going to be distressing at all. I think it’s much more of a . May-June story in terms of the economic numbers lag with a hard L. That’s somewhat problematic.

So I would say you’re not going to see the bad official numbers for a month or two. And on the CPI front, I’ll just throw this out there. And Albert can make fun of me for it, but I don’t really care where the inflation readings come in as long as it’s above 5% the Fed still going and it’s still going with its previous plan, and it really doesn’t care, quite frankly.

TN: That’s good to know.

SR: I just think it’s one of those it’s going to be a no. It’s going to be a no reaction type deal. Unless you get a huge break, then you might get a little bit of a come down on twos through sevens or something. But that’s about it.

AM: Yeah. I mean, as much as I want to make fun of Sam on that one. Yeah. Nobody cares about the inflation. Nobody cares about the inflation number right now until the election season starts really ramping up in about June, July. That’s when I agree with Sam with the retail sales are probably crater or starting to lag significantly in May and June. But yeah, prefer inflation. It’s just like everyone is expecting a 7.9 to eight point whatever, you know, so it won’t be a surprise.

TN: Great. Okay, guys, thank you very much for this. This is really helpful and I appreciate it. Have a great week ahead.

SR: Thank you.

AM: Thank you, honey.