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Energy Market on the Brink: Russia, CNY, and the Fed’s Dilemma

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In the latest episode of The Week Ahead, Tony Nash is joined by Michael Nicoletos, Tracy Shuchart, and Albert Marko. The panel first explores Russia’s recent announcement that it would use CNY for trade settlement outside of the US and Europe. Michael Nicoletos explains that this move could be viable, but it would depend on whether all countries would accept the terms of trade.

Albert Marko believes that the recent rate hike was the right thing to do and predicted that the Fed would raise rates twice more. He also criticizes the lack of depth in the economics department of some central banks, citing examples from the RBNZ and the ECB.

The panel also analyzes the energy market and predicted when we might see an uptrend. Tracy Shuchart updates the chart and pointed out that crude seemed to break the down cycle a bit, leading to a good week for the commodity. The team answers a viewer’s question about the possibility of energy prices remaining low for a long time and offered their perspectives on the matter.

Finally, the panel discusses what they expected for the Week Ahead. Michael Nicoletos predicts that the energy market would remain volatile, and Tracy Shuchart believes that the focus would be on the stock market, particularly the Nasdaq. Albert Marko highlights the importance of watching the inflation data and suggests that investors should keep an eye on the bond market.

Key themes:
1. Russia ❤️ $CNY. Why?
2. Where does the Fed (and other central banks) go from here?
3. When will we see an uptrend in energy?

This is the 58th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

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

Transcript:

Tony

Hi, and welcome to The Week Ahead. I’m Tony Nash and today we’re joined by Michael Nicoletos. Michael is the founder and CEO of DeFi Advisors based in Athens. We’re also joined by Tracy Shuchart of Hilltower Resource Advisors and Albert Marko. Guys, thanks so much for joining us. We have a couple of key themes and I was really in questioning mood when I put these together. The first one is around Russia and the CNY. There was an announcement this week. My question really is why? What’s the point of that? Next is where does the Fed go from here? And really where do all central banks go from here, but mainly the Fed, ECB. Albert is going to lead on that and I know Michael has some views on that as well. That’ll be really exciting to talk through. And then we’ll talk to Tracy about energy. For the first part of this week, we saw energy on an uptrend and we’ve seen a little bit of turbulence on Friday. So when do we expect to see an uptrend in energy? So again, guys, thanks for joining us. Michael, I really appreciate you taking the time from Athens to get involved with us today. Thanks so much.

Michael

Thank you. Happy to be here. Great, love to talk to you guys.

Tony

Great. So first, Michael, I know that you know a lot about China and you follow a lot of their economic activity. And I saw you commenting on this Russia announcement about CNY. Of course, they announced that they’ll use CNY for trade settlement outside of the US and Europe, which is Latin America, Africa and Asia is what they said in their announcement. So that’s about 37% of Russia’s exports. So I put a little chart together. I used UN ComTrade data.

This is 2021 data, which is the latest data that UN ComTrade has. So if they’re really doing that, Latin America is 2% of Russia’s trade, Africa is 3% of Russia’s trade. China is 14%. Okay? And so I guess is all of their trade with China settled in CNY? I seriously doubt it. And then Asia is rest of Asia is 18%. And of that about 1%, just under 1% is Taiwan. So I seriously doubt Taiwan would settle in CNY. But what’s obvious from looking at this chart is Europe is more than half of Russia’s trade. So it’s not as if this is necessarily a massive bold announcement that everything is going to be in CNY from here on out.

Tony

It really is just kind of putting a stake in the ground saying I think it’s almost a best efforts thing. So I guess is this viable? That’s really the question. And Michael, you put out this thought-provoking tweet.

You said if that were the case, China would have no issues running out of USDs. Let’s take that on and help me understand why is China trying to do this and what is the US dollar question that you have around this arrangement?

Michael

Well, first of all, again, thank you for having me. It’s great to be here. Now we need to segregate two things: wanting to do something and being able to do something. It’s clear that a lot of countries which are highly dependent on the US dollar for trading would rather be on something else and not be dependent on the dollar. We saw what happened with Russian FX Reserve when the war started. So clearly this was a warning shot or a lot of countries said we could be next if we go into a fight with the US. So clearly there is a tendency and China wants this to happen as soon as possible. Now, for this to happen, there are a lot of things that need to happen first. I’ll give just an anecdotal example because we get all this news flow and all these headlines where one signs an agreement with another and then two people or two prime ministers come up and say we’re going to do it, and everyone takes it for granted, especially on Twitter. It’s either a fanatic from one side or a fanatic from the other side. So again, I agree with everyone who is afraid of this happening in the sense that a lot of people are saying that the end of the dollar is close and that everyone’s going to go to something different.

Michael

I agree there is the willingness. I’m not sure this can happen soon, and I don’t think it can happen without some conflict occurring somewhere. So an example is that in 2018, Iran signed an agreement with China to sell oil in Yuan. Still, after four or five years, the volumes are ridiculously low. So again, there are agreements, but in order to enforce them and in order for them to happen, they take a lot more time than one would want. So Russia had no option. So because of the sanctions, they still sell to Europe, a few things, but they’re trying to outweigh it by selling more to China. And China and Russia are trying to make these agreements where they will be settling in Rubles or in Yuan. And they try to make these agreements. They want to expand them to other countries as well. However, you see, for example, India. India doesn’t want to settle in Yuan or doesn’t want to settle in ruble. They want to settle in Dirhams, which is back to the dollar. So you get all this information and the data, at least until now, does not support that there is a threat to the dollar.

Michael

There is a threat to the dollar in terms of willingness. There is no threat to the dollar in terms of data which says that this is going to happen tomorrow. So I think that this will eventually happen, but I don’t think it will happen soon. I think until it happens, we’re going to see a few episodes. And these episodes are not straightforward, how they will evolve.

Michael

Now, regarding China and its macro, the reason I’m saying what I’m saying and I’m saying that China needs dollars. China has been dependent, first of all, on its real estate, which was like 30% of its GDP. We saw what happened to the real estate. The second leg was it was highly dependent on exports. There’s a global slowdown. So these exports will have some issues. And now, how has China managed to keep this economy running? I’ll give you a few metrics to understand. The US is an economy which is like 26, I think 26 trillion of GDP. And if I’m not mistaken, its M2 is around 21 trillion. In China, the GDP is around 17 trillion, all in dollars. Okay? And M2 is $40 trillion. 40. Four, zero. So what does that mean?

Michael

The China government prints money. Prints money. Prints money. Because there are capital controls, the balloon gets bigger and bigger and bigger, but the money can’t leave, or it can leave for selected few, and I’ll explain how it leaves. And for the rest, because our capital control, the money can’t leave. So it stays in. But this is in one. Some try to buy gold, some try to invoice over invoice to Hong Kong and take it out of Hong Kong. But when the disparity is so big, clearly there is a problem. There’s an NPL problem. Chinese banks are like four times China’s GDP.

Tony

Sorry, NPL is non performing loans.

Michael

Non performing loans. Sorry. Sometimes they’re non performing. You cannot have an M2 of 40 trillion and a GDP of 17 trillion and not have non performing loans. Chinese banking system.

Tony

Sorry, I just want to go back and I don’t mean to interrupt you, but I just want to make sure that people understand. China has currency in circulation of $40 trillion, and they have a GDP of $17 trillion. Whereas the US has a GDP of what you say 24 trillion. I don’t remember what number you’re… 26 trillion. And they have 21 trillion in circulation. Right. So for all of these people who talk about China being this economic model for other people, why does it matter that their M2 is more than double the size of their economy?

Michael

Let me say something. First of all, let’s put something that the US. Is also the global reserve currency. So everyone in the world wants dollars. It’s not like only the US wants dollars. At this stage, less than 10% of the world wants Yuan. So it’s not like everyone wants to get.

Tony

I think it’s 2.1% of transactions or something like that.

Tracy

2.8%?

Tony

2.8, yeah, transactions.

Michael

Okay. I saw a number which was around 6%. Maybe I’m wrong. Okay. But again, it’s a number which is very small. 

Michael

All this money that is in the economy, if Chinese people were given the choice, they would be able to take it out. The economy is growing at a faster pace than its potential. I’ll give you a number. Right now, Chinese banks are more than 50% of global GDP in terms of size. The US, I think its peak was 32% in 1985 and Japan’s 27% in 1994. So we’ve passed all metrics in terms of the world dominant power or the dominant economy, if you want to put it this way, being a percentage of GDP in terms of banking assets. So the banking assets clearly have a lot of bad debts in there, which we cannot know what they are because the Chinese economy wants the Chinese government wants to control that. Now, there was a special committee put in place this month, I think, in order to oversee the financial situation in China. So I’m pretty sure they’re a bit worried about it. They want to switch from an export oriented economy to a consumption driven economy. But this is still less than 40% of GDP and this takes a lot of time to go like the US is around 70%, but it takes a lot of time to go for 40%, 70%.

Michael

Now, all this money stays in China. They have no option, they can’t do anything. So it’s an issue. And I’ll give you a ratio. If you take their FX reserve, it’s around 3 point something trillion. If you divide FX to M2, it’s around 7%. So if that money were to want if that money wanted to leave, in theory, only 7% can be covered by FX reserves, the fixed reserves of the government. Just to clarify, the Asian tiger crisis in 97, the tigers collapsed when the ratio went below 25%. So they didn’t have that support to keep it up.

Tony

And just be clear for the US that’s 100%, right?

Michael

The US doesn’t have any problems. So this is something that needs to be addressed and I don’t know how they will address it. They try to make all these agreements so that the one becomes a tradable currency and they can invoicing one. So if the Yuan, in theory was to become the global reserve currency tomorrow morning, their debt would become the world’s problem. Now, they haven’t managed to export that, so they need these dollars to keep that balloon, let’s say, from all the area in the balloon to be taken up. They need these FX reserves to keep the money in and they need to build confidence, and they try to build confidence with narratives and not with data. But again, they don’t have a choice right now, in my opinion.

Tony

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https://youtu.be/yYom7Zqezio

Tony

The difference between, say, the onshore and offshore CNY or CNH or whatever, there is a huge difference in perceived value. I would think you can’t change the perceived value of CNY onshore, but offshore, if people are nominating contracts in, say, I’ll say “CNY” in quotes, there is an exchange right there. But again, this M2 issue, which I can’t stress how important that is, I haven’t heard anybody else talking about this. And it’s so critical to understand the fiat value of CNY itself, right, because it’s not limited, and the government because they’re effectively fun tickets with Mao’s face on it.

Tony

Right. And that’s how the PBOC was treating it. And again, when people talk about CNY as a global reserve currency, nobody is looking at the integrity of the PBOC and nobody is looking at how the PBOC manages monetary policy in China.

Michael

I’ll give you anecdotal information. I haven’t checked the number for a few years, but the last time I checked, if you look at the import-export numbers from Hong Kong to China, and you look at the PBOC, and then you go and see the same numbers in the HKMA, you would assume that these four numbers should be the same, not the same. Import should be export and export should be imports. The numbers should be very close. The discrepancy is huge. These numbers do not reconciliate, which means that in some form there is some over invoicing to Hong Kong.

Tony

And you’re not talking about 30%, you’re talking about multiples.

Michael

You’re talking about a lot. It’s ridiculous. So I think if you see the Hong Kong peg has been stable to the upper bound lately because I guess because of the interest rate differential, a lot of money is leaving. So it’s putting pressure on Hong Kong as well. So it remains to be seen what happens there.

Tony

So let me go to Tracy. Tracy, in terms of Russia using CNY, okay? And I know you look at a lot of their energy exports, and of course there’s all this official dumb around sanctions and stuff, but what’s your kind of guess on Russia using either USD or proxy USD, Dirhams or something else as currencies for collecting on energy exports or commodity exports more broadly?

Tracy

Well, first, I think that they prefer dollars no matter what this kind of China saying we want to trade a Yuan. And Russia said, okay, but that was a suggestion. That does not mean that it’s necessarily happening. But what is really interesting is earlier this week, on Monday, Russia laid out conditions for extending the grain, the black seed grain deal, right? Because it was supposed to be for 90 days, but they cut it to 60 days because they’re trying to use that as leverage. And one of the things that they are trying to use as a leverage is they will extend the deal or they’ll give or the other part is they’ll give African countries just free grain instead of selling it. But one of the big conditions for that was for the removal of some Western sanction, specifically to get them back on Swift. And so if that happens, forget it. Everything’s going to be all the trade will be all euros and dollars.

Tony

I thought Swift was terrible and everybody wanted on Swift.

Tracy

I just thought it was important to point out because if they get back on Swift, obviously that’s going to make trading in dollars easy for everything, all commodities across the board.

Tony

Right. And so that goes back to what Michael said initially about kind of these guys really want dollars and all this other stuff. There’s the official dumb of the prime ministers meeting each other, right. And then there’s the factual activities they undertake based on the reality of their position in the world economy. Right. What are your thoughts here?

Albert

I agree with Michael and Tracy to talk about the reserve currency. Switching from the dollar to the Yuan is a joke, to be honest with you. You do have some people in other countries in the Middle East and China and whatnot talking about the death of the dollar and actual serious tone. But anyone with even like a shred of financial backing and insight knows that it’s just an impossible thing. From what it sounds like, it’s more of like a barter system. But that introduces even bigger problems. I mean, you can’t scale it up. There’s no standardization. How do you value things to begin with?

Tony

That’s it.

Albert

Valuing goods and services without using the dollar right now is just an impossibility. And on top of that, you have the political problems that come along with it. I mean, like the Saudis, they want dollars for their oil. They need defense assistance. The Greeks needed US defense assistance. The Turks, as much as they want to make noise again, they’re reliant on the US and NATO for defense and whatnot. These components not just financially, what Michael talked about and decided much more eloquently than I would ever would, but there’s also political components that you just can’t get around in the near term.

Tony

But even if they had a barter system, they would reference the price in dollars, right?

Albert

Well, yeah.

Tony

10 billion.

Tracy

Your chocolate is back to iran did that when they were first sanctioned over a decade ago. They were trading oil for gold, but it was still referencing dollars.

Albert

On top of that, you run the risk of hyperinflation eliminating dollars from your FX reserves and starting to trade away from the dollar. You’re going to end up in a hyperinflation event.

Tony

Right.

Michael

Can I say something? Can I say something? About all these points? I agree with all these points. There’s one more thing. Let’s say you trade in rubles and you trade in Yuan, okay? It means that you’re going to keep FX reserves in rubles or in Yuan. So you feel more comfortable keeping a currency from an authoritarian regime than holding the US. Dollar, which is fully liquid, fully tradable, and anyone in the street will take it at a split of a second. You need many years of track record to build that trust. There are a lot of bad things about the dollar. We agree that I don’t think anyone will say that it’s a perfect mechanism, but right now, it’s very functional, it’s very liquid. And if you want to keep your reserves in US Treasuries, you can sell them at the split of a second. You don’t have any issues with that. If you have Yuan, you’re going to do what? You’re going to buy Chinese government bonds? And how will you sell them if the PBOC calls you and says, it’s not a good idea to sell your Chinese bonds this week? We would prefer you didn’t.

Tony

Bet on the central bank, right? If you’re holding rubles, you’re betting that the Russian central bank is trustworthy. If you’re holding CNY, you’re betting that the Chinese center. So what central banks are out there that you could potentially trust? You have the Fed, you have the ECB, you have BOJ, right? Those are really the only three that are visible enough that have the scale and transparency to manage a currency. And look what the BOJ has done since Abenomics. And on and on and on. Do you trust the ECB? I don’t know. And it becomes, do you trust the ECB or the Fed more? I mean, sorry, but I just don’t trust the ECB.

Michael

I don’t trust ECB. But it’s relative. I mean, you don’t have a problem keeping Euros. Maybe it’s not your preferred choice, but you don’t lose your sleep on holding Euros. Let me put it at this stage.

Tony

That’s exactly right. That’s exactly right. Okay, guys, this is great. Let’s move on to the next thing, because I think we all agreed violently here, but I think we’re going to not agree on the next one, which I’m really excited about. So let’s talk about central banks. And where does the Fed and where do other central banks go from here? So, of course, we saw the Fed raise this week. I think it was the right thing to do. Albert, I know you think it’s the right thing to do. Markets have been up and down since then. And Albert, you’ve said that you expect the Fed to raise two more times, and I want to talk about kind of what’s behind that assertion. And then we get silly statements like this one from the RBNZ in New Zealand, where the chief economist basically says, if inflation expectations don’t fall, we’ll be forced to do more regarding interest rates.

Well, of course. Why wouldn’t you do that. So can you walk us through a little bit, kind of just very quick, because there have been thousands of hours of Fed analysis this week. But why do you think the Fed is going to raise two more times?

Albert

Supercore is trending up and it continues to trend up. Services are on fire. Real estate numbers have been on fire. There’s no slowdown in reality. I mean, even the layoffs have been slow. They’ve come from the tech sector. They haven’t come from construction or any other blue collar jobs at the moment. So until we see that, the economy is going to be red hot and it’s a problem for the Fed, inflation overall.

Tony

Okay, so play devil’s advocate here. Banking crisis, Fed had to bail out banks, all this other stuff. So why isn’t the Fed saying, let’s pause on the banking crisis worries?

Albert

Because banks are fully liquid. The big banks have no problem whatsoever. Some of these smaller banks that have no risk protocols are getting exposed. The tech heavy investments are getting exposed. Everyone knows that higher rates hurts the tech sector the most. And those banks were at fault. They didn’t hedge properly.

Tony

Now you have duration risk. I just want to be clear. I just want to make sure that people understand. You’re not saying that they failed necessarily because they’re tech, but they failed because of duration risk and then their tech depositors took their money out. Right?

Albert

Absolutely. But the banking system overall is not really at risk. They’re just shaking out some of the weaker players. But that was inevitable as interest rates have risen. A lot of the problems stem from the Fed and them guaranteeing four, five, 6% deposits, while the banks only do 1%. They can’t compete with that.

Tony

Right. Michael, I know that you think this wasn’t the right action. So what’s your perspective?

Michael

Well, let me say something first. I believe that it was a mistake, and I’ll say why it was a mistake. I think it’s a mistake when you raise interest rates as a central bank and the banks follow by raising rates on the loan side and on the deposit side, what do you do? You make debt more expensive and then you make people because you have, let’s say, a 5% interest rate on your bank, you create an opportunity cost so people want to save. So you reduce liquidity from the deposit side, and also you reduce loan demand because it’s more expensive, and that creates a slowdown. What happened now, because we had ten years of QE, everyone forgot that there was an interest rate on the deposit side. So the Fed, MDCB and all the central banks raised the interest rate. So the loan side adjusted. That became more expensive, but the deposit side stayed zero at 1%. I don’t know where this is in the US. But it’s really low. At some point, people started waking up when it arrived at 4% and they suddenly started saying, okay, I don’t have any interest on my deposit.

Michael

Let me put my money in the money market fund. How much does it give? Three, four, 5%? I don’t know. It’s a much higher rate. So I think I saw somewhere today that around 5 trillion have gone into money market funds. The numbers close to that. So when you take your money out of the deposit and you take it to a money market fund, this is the equivalent of a bank run for the bank that you’re taking the money, it’s a deposit living. It might not feel like a bank run, but on the balance sheet of a bank, it’s a bank run. So this started happening, and again, because of what you mentioned, they had invested in Treasuries and the duration risk was a mismatch. They didn’t do some of them at least hadn’t done appropriate hedging. They started losing money and they started selling this bond at a loss, although they had them at the Healthy Maturity portfolio where you don’t need to take a mark to market loss. And suddenly both sides of the balance sheet were screwed. Let me put it this way. So a few banks started going under. Now, I know that the central bank has come up and I know a lot of people come up.

Michael

And I do agree that there’s no systemic risk. And I mean that I don’t see a cascade of people losing their deposits. But nevertheless, people feel uncomfortable and try to do something about it. Either take them more money market funds or take their money from a regional bank, if they can. To JP morgan or one of the big guys. This creates a big problem for the economy. Yes, there are some signs which show that the economy is still robust. But I think a lot of leading indicators suggest that the economy is slowing down and most of the metrics coming from the inflation side have collapsed. Yes, core CPI is still high and it’s a lagging indicator, so it will take time for it to come down. But I think that given the stress we saw this week and why do I say that? Because we look at the US as a closed system. It’s not. When you raise interest rates as the Fed and you are the global reserve currency, you create a global credit crunch. You saw that last week. The Fed had come out with swap lines for everyone. You saw today that foreign banks borrowed 60 billion in liquidity, the ones that didn’t have a swap line.

Michael

And we see today Deutsche Bank being in the headlines and Commerce Bank being in the gate. So you might think that the US system is okay, but it creates a domino effect, which we’re starting to see. We saw Credit Suisse going under in a deal, which was not, I’d say, what we would think of. I believe that that deal in combination with the high rates is probably the root of the problem in the sense that they destroyed the capital structure, they wiped out all the 80 ones without wiping out the equity holders. Which means now that in Europe everyone’s wondering if my 81 is of any value. And that creates another uncertainty in combination with the higher interest rates and the stress that has started to build up. I think we’ve passed the moment where, okay, it could be debatable if they did right or if they did wrong. The US bond market is saying that it was wrong. It was a mistake. The two years at 370. And so the bond market went from the one side and the Fed went on the other side.

Tony

Why? The two year at 270 is important.

Michael

373, 70. Sorry, yeah. Three seven. Because if in two years you’re getting 3.7% and the Fed fund rate is five someone, it means that someone is buying a two year bond getting much less. Which means what? It means that the market is saying rate cuts are coming soon. So the market is saying there’s no way we can keep it this way. And the Fed is saying the opposite. Historically speaking, the bond market has been right. If you take it into context, it could be this time that they are wrong. It feels to me, at least from the stress I look in global markets and not in US. Only, that things are getting a bit out of hand. And having a bank like Credit Suisse go under, which is a big bank, and having all the central banks come in together on a Sunday night to give up swap lines, it means that the stress in the system, it’s much bigger than with yeah, but Sunday night.

Tony

Is the best time to get swap lines. Okay, so you talk about European banks, but we had Mueller from the ECB out this week saying, I wouldn’t worry about a financial crisis in Europe.

So we have ECB guys out there going, yeah, Credit Suisse happened and we know Deutsche is an issue, but I wouldn’t worry about that in Europe. So I think we’re seeing statements from Yellen, the Fed, the ECB, other guys who are saying, no, there’s nothing to see here, but then we see things kind of blowing up all over the place. Right, and then we have a question especially specifically for you, Michael, from a viewer who said, I’d like Michael’s thoughts on the EU, particularly banks, pensions and future growth prospects. So can you talk us through? How do these banking issues in Europe flow through to European pensions?

Michael

First of all, let’s say something. We’re talking about the US and.

Albert

Duration.

Michael

Risk on the bond losses. Let’s remind everyone that at the peak of QE 18 1818 trillion worth of bonds had negative yield, and these were mostly Europe and Asia. So pension funds and banks in Europe which are forced to buy these bonds were buying bonds. With a negative yield. So they were losing on day one these bonds from -50 basis bonds have gone to two and 3%, the losses on these are much greater and pension funds will have much bigger issues than the ones that have in the US we were talking about a pension crisis in the US. But the European one is pretty bad too. Just look at in France, they raised this week the year that you take your pension from 62 years old to 64 and the country is burning to the ground. Now, you understand that it’s 62 to 64. It’s not like they made 62 to 70 years old. So it’s very delicate. And the situation in Europe, given the negative bonds, given the interest rate hikes and given one more thing in Europe, given that Europe doesn’t have the dollar and it has the Euro was mostly a supply driven issue.

Michael

It means that we were importing oil and energy from Russia and from everywhere and all these commodities were priced in dollars. So as a Europe tell, the price of these commodities were more expensive. So inflation was a supply driven problem. I think there’s a report, I think from the San Francisco Fed two thirds of the inflation was supply driven in Europe. So when inflation is supply driven and you raise rates to stop it, you’re using the wrong medicine to stop the problem. You need to crash the economy in order for this to stop. This is not really efficient. Now, in the meantime, you have yields going higher and now the yields that we see on our screen on Bloomberg or anywhere are not the yield real yields because the ECB is in and tries to contain the spreads. If you left the market low, I’m pretty sure the spreads would be much, much wider. And you have the new thing which came up this week when the Swiss National Bank decided that tier one, additional tier ones would be written off and equity holder, an equity holder would be saved. Now, imagine what happened. You probably saw what happened this week, all the 80 ones in Europe got smashed because everyone says I don’t trust this instrument.

Michael

I don’t know. Yes, central bankers will come out.

Tony

These are the cocoa bonds that came out in I think, 2013, right?

Michael

Yeah, there are a few of them, yeah, but it’s a cocoa, it’s contingent convertible. It means that they’re convertible be converted to equity if something happens. Let me put it as simple as it is, but these are supposed to be wiped out before the equity. So the question is what prevents for something else similar to happen again, the ECB came out, BoE came out, they said this is not accepted. But the fear and the is now everywhere. So you have a combination of factors. You have a factor that this ECB has been raising rates when I don’t think it’s a proper mechanism to address inflation in europe, they’ve created a slowdown. If you see Germany’s numbers and everywhere’s numbers in Europe, the economy is slowing down fast. You have a discussion on the capital structure of lending, which is very critical in the way companies and banks go and borrow themselves and all this at the same time and when the US. Is draining liquidity from the global system. I think the situation in Europe is very tough. Again, after 2008, I don’t think we have a systemic risk on our hands and the risks never materialize in the same place.

Michael

But I think things are about to get tough and it’s going to be much worse before it gets any better.

Tony

So what I would offer back, and I think everything you’re saying is valid and Albert Tracy, let me know if you want to think about this, but in the US. We have a presidential election next year. There is almost no way that we will see the US economy crash in the next 24 months because Janet Yellen won’t let that happen. And so we may see issues in Europe and we may see Europe and the rest of the world suffer based on US interest rate and monetary policy. But the US. Will do everything, the current administration will do everything they can to keep the US. From crashing in that time. And I’m not just saying this because they’re Democrats, Republicans would do the same thing to keep the economy afloat in the year before an election.

Albert

Albert, what do you think about that? It depends on what is happening specifically with debt ceiling, right? I mean, Janet Yellen and the Biden administration would gladly let the economy sink, the market sink anyways if they could blame it on escape both the GOP on the debt ceiling not getting hyped. So that’s definitely something you need to watch over the next six months because it is campaign fundraising season and they can’t really agitate their voters all that much, to be honest with you. Certainly the political component is going to be high over the next twelve months.

Tony

Okay, great. Let’s move on. Thank you for that, guys. Let’s move on to energy.

Michael

Can I say something?

Tony

Absolutely. Yes, please.

Michael

What appears to be happening right now, at least in my eyes, is that the Fed is using interest rates to attack inflation and it’s using the balance sheet to give liquidity. So these two do not go in the same direction at this point. The question is if they can do this for a long time. It doesn’t feel to me that they can. But at least right now they’re giving liquidity on the one side and they’re raising rates on the other side. I’m not sure they can do this for us.

Albert

We’ve actually talked about that at length here. But it’s not the Fed. It’s really the treasury. Sterilizing QT They’re coordinating.

Michael

They’re coordinating.

Albert

Of course they coordinate for the most part, but sometimes in the last six months or the last twelve months. Powell and Yellen have been at odds with each other in policy. So this is a lot of the reasons why the markets has just been topsy turbine. Don’t understand which way it’s going because you have conflicting policy and agendas from the treasury and the Fed.

Michael

So you feel it’s conflicting or do you think it’s coordinating? They’re doing it on purpose. That’s what I haven’t figured out yet.

Albert

I think the want to eliminate excess cash in the system is coordinated but I think the policy of how they’re doing that is conflicting and that’s going to be a bigger problem, say second half of this year.

Michael

Okay, sounds logical, but it’s one of these things that pass on me. I don’t know if they’re doing it on purpose or if they do any as you say, because they’re using other tools and they step on each other doing so.

Albert

My rule of thumb is to side with incompetence rather than conspiracy.

Tony

Okay.

Michael

It’s not conspiracy when the Fed chairman talks with the treasury guy?

Albert

No, I am absolutely in your corner on this one. I absolutely believe that they talk and coordinate things for sure. I just think that their agenda at the moment doesn’t line up 100% of the time.

Michael

Okay.

Tony

Very good. Okay, thanks for that guys. Tracy, let’s talk about energy for a while. Up until Friday we had a pretty good week for crude. I thought we were breaking that down cycle a bit, but we’re seeing some chop in energy markets. And so we had a question for you from a viewer saying when do you see oil and natty in a sustainable uptrend?

Tracy

Yeah, nat gas is a whole other issue. I think it’s going to be very difficult really. We’re trading in the range that we’ve been trading in most of the time for the last 20 years or so. That $2, $3 range has been very comfortable for nat gas. We produce a lot of nat gas. Yes, we are building out LNG facilities and yes, we have had problems with freeport and such. I just think that we probably won’t really see a big spike in prices unless we see another energy crisis in Europe, do you know what I’m saying? And then we’re going to have to force to sell even more. So for right now I would kind of get comfortable with nat gas about that range. But if it starts breaking above like 375 or so I would start getting bullish. But for right now, just kind of in that area where it’s been comfortable most of the time. Right. So I think it’s going to be a while for that. So we got to kind of assess the situation in Europe as we get to summer air conditioning use and to next winter if they have a bad winter, I think it’s going to be a few more months at least down the line for natural gas as far as oil is concerned.

Tracy

Brent said about $75 right now, saudi Arabia would like it around 80, 90 range is where they’re really comfortable. I think right now what we’re going to have to get through is we’re going to have to really assess we need more time to assess Russia’s situation. They just extended that 500,000 barrel a day cut out until June. The latest records do show that they actually have cut that much so far in March. So the cut is happening, which also means that they’re experiencing kind of a pullback in demand, even though they have really it’s more on the product end rather than, I should say, rather than the crude oil end, because they have floating storage, they have ships piling up everywhere with product. And so I think that will help clear their excess product a little more. So it’s really on the product end and that we also have to see everybody’s freaking if the Fed again decides to stop raising rates or pause. I think commodities really like that situation just because of the cost of carry and transportation and storage for all these commodities is very expensive. Right.

Tony

Because.

Tracy

You get bank credit lines for that. Right. And so I think that’s putting downward pressure on markets right now. And then obviously fear of recession is kind of kicking in again after the recent bank crisis in the US. And in Europe. And so I really don’t think that we’ll see higher prices. I mean, typically this is the time of year we do start seeing higher prices heading into high summer demand season. But we’ve also been seeing, I think everybody expected China. China demanded to shoot up right away. That’s taking longer than anticipated, which I kind of have been saying that on this show for quite a few months.

Tony

Long time. Exactly.

Tracy

So I think that there’s a lot of factors involved right now. I do think, again, it’s higher for longer. Historically still, prices at $70 is high for oil. The market is crashing by any means, just coming down from geopolitically induced spike last year. I think it’s higher for longer. And definitely I could see prices go into that $110 range, but likely into 2024. Not really this year, obviously, unless something happens. Okay.

Michael

Do you think if the Fed poses or whatever reason, or if they do a rate cut, do you think that commodities will explode or do you think.

Tracy

I think if they cut, commodities would get really excited. I think if they pause, they would get excited. Right. I think we would see a rebound in a lot of these commodities, grains, things of that base metals and industrial metals and oil. But if they start cutting, then I think that they’ll really like that because then they don’t have to throw product at the market because they can’t afford to store it.

Michael

Thank you.

Albert

I’m actually quite bullish for oil in the near term. One of the reasons is I’ve heard through the grapevine that the Chicanery and the futures market and I’m reading that hedge funds and other money managers sold the equivalent of 139,000,000 barrels of oil in futures over seven days a week and a half ago. So, I mean, to me, it’s like they’re almost out of ammo when it comes to suppressing oil at the moment. And any little flare up or anything is probably going to be bullish for oil and probably shoot right back up to 80.

Tony

So what could that be, Albert?

Albert

It could be a natural event. It could be weather, I mean, some kind of economic policy stimulus from Europe coming out there, or even the United States going into, like Tracy was saying, the travel season and whatnot. It could be anything, really. I mean, I think the market is just begging for some kind of bullish signal for them to run it up.

Tony

Okay. And Tracy, if you’re sitting in Europe because energy prices were such a factor in 2022, what are the main things that you’re worried about? Their nat gas storage. Has that been depleted much over the winter?

Tracy

No, it wasn’t depleted. They just had to start injections again because what we are seeing is that this really started in fall of 2021. Everybody kind of forgets that the crisis started before the Ukraine invasion, but what we saw is industry start to shut down, especially industry like smelting and glass blowing and things of that nature that require a lot of energy. Right when nat gas prices started spiking, and that was well before that summer of 2022 spike, they didn’t need to spike much where we saw a lot of those industries shut down. So what we’re seeing now is that since prices have been muted for long enough now, now we are seeing manufacturing and whatnot pick up with the numbers came in overnight for Europe. We’re seeing manufacturing pick up again. We’re starting to see some drawdowns finally in storage. Spain in particular has really ramped up a lot of their industry that had shut down prior. I have to say, natural gas prices are still more expensive than they typically are in Europe. Even at this price, right, they’re still higher than normal. So this is also why we’re not seeing a flurry of activity.

Tracy

As soon as prices came down, you have to realize that relative to where they were, they’re still generally high. But we are seeing, I think people are getting used to kind of this price range for Ttf, which is Dutchnet gas. And so we are seeing in manufacturing and industry pick up again in some of these traditional industries that require a lot of energy. So we’ll have to see, and if that really picks up, companies are going back to where they went to fuel instead of gas. We’re seeing them go back to gas now. And so that’s really what I’m watching on the energy end. Is this just one off, kind of, or does this continue throughout the summer?

Michael

Okay.

Tracy

Sorry.

Tony

And then everybody’s favorite energy secretary, Jennifer Grandholm, had some comments about refilling the Spr this week. Can you fill us in on that? And what does that mean for markets?

Tracy

Basically, she said we’re not filling in the Spr, refilling the Spr anytime soon.

Michael

Sorry.

Tracy

She said a few years, which means a lot more years unless there’s a change of administration and a policy change. But I would say from until the election not going to see an Sbr, which makes sense because they know that if they fill the Spr, what’s going to happen? Oil prices are likely going to go higher, and they can’t afford that going heading into an election year. And so I think that’s really why they kind of pushed that off. That’s kind of what’s going on with that.

Michael

Can they be saying something and doing something else?

Tracy

Yeah, but we would know if they’re actually filling the Spr or not because it’s a public auction.

Tony

Okay, why don’t we just stop calling it the Strategic Petroleum Reserve and just call it the Petroleum Reserve? Nothing strategic about the way they’re using the Tactical Petroleum Reserve.

Tracy

They’re using it as a piggy bank. Right.

Albert

Instead of strategic, you use slush fund, petroleum reserve.

Tony

Right, exactly. Okay, guys, one last question, I guess. What are you looking for in the week ahead? We’ve had a lot of volatility over the past couple of weeks. Michael, what are you looking for in the week ahead?

Michael

I’m focusing on central banks and interest rates. I think the issue will be banks. Again, I think the big stress in the economy is private markets and not public markets. BCS, private equity, all these investments need to do write downs. It will take a bit more time for them to do that. It doesn’t happen that fast. They don’t adjust as fast as public market. I believe that bank we will see that stress mostly on banking stocks. A because the cost of funding goes up, b because the capital structure is put into a discussion. C because they continue to raise interest rates. And there is a stress within, I think, focusing on what happens to the banks and to the two central banks. Again, we’re looking at the same thing, unfortunately, but the problem is not in the same place. But these are the indicators you need to look. I believe that you’re going to see inflation coming down fast. That’s my expectation. Maybe I’m wrong, but if you see inflation coming down, it’ll make the life much easier for central bank. Yeah.

Tony

And for all of us. Do you expect to see, like VCs, for example, some VCs close up because of the cost of funds and a lot of these banking issues, or do you think it really doesn’t impact them much?

Michael

I don’t know if they’re going to close down because it’s a 510 year investment. It depends if they can reinvest or if they have to liquidate. But I think funds that are coming up to their maturity, they need to liquidate or they need to roll over. It’s going to happen at a much lower price than they thought, or they’ll have to wait one or two years more. So I think that stress is going to show up somewhere.

Tony

Tracy, what do you see over the next week?

Tracy

I think it’s type based markets. There’s not really a lot coming up as far as oil is concerned. OPEC meeting is the following week, which we already know they’re going to do nothing. So really, next week, end of month stuff, there’s not a whole lot going on in the commodities world, really newswise next week. So I think probably see the same sideways action.

Tony

Okay, great. Robert, what are you looking for? Let me ask a little bit of a kind of loaded question with that. As springtime is coming in in Ukraine, do we expect that to heat up at all as things warm a bit there?

Albert

Well, yeah, I would say yes. Geopolitically? I think it would be advantageous for Russia to do something to stay face. Absolutely. But for the week ahead, I think the narrative shift I’m watching for the narrative shift of interest rates to banking, like Michael was talking about, I think Yellen is most likely going to come out and try to guarantee 500,000 in deposits and even talk about 750 and get it up there and just get the crisis over and done with. So that’s what I’m looking for.

Michael

Okay.

Tony

Wow. Would that require congressional no, they can use emergency powers. Everything’s. Emergency power is great. Perfect. Okay, thanks, guys. Thank you very much. Really appreciate your time and all your insight, and have a great week ahead.

Albert

Thanks.

Michael

Thank you very much. Have a great weekend, too.

Tony

Thank you.

Categories
Week Ahead

The Great, Great Depression: Navigating Banking Risks, Rising Rates, & China’s Changing Global Role

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This Week Ahead features a discussion on banking systemic risk versus inflation with Hugh Hendry, Tracy Shuchart, and Albert Marko. The group covers recent events in the banking sector, including Credit Suisse and the potential risks posed to the global economy, the impact of higher interest rates on crude prices, and China’s growing diplomatic role.

To start, Hugh expresses concern over the lack of GDP per capita growth since the Great Financial Crisis and the failure of the remedial work undertaken since then, labeling the current environment as “The Great, Great Depression”. He warns that raising interest rates in this environment could be disastrous and discusses the creation of credit and the muted credit cap, as well as the contraction of the M2 series.

Hugh questions the need for central bankers and believes that the totality of credit creation should be examined. He suggests that the bond market has been more accurate in predicting rates than central banks and he notes that there are persistent trade surplus nations that create surplus capital, which is being invested in the United States, resulting in asset price inflation. He argues that the problem lies in the flow of capital rather than the currency (the US Dollar) itself.

Next, Tracy highlights how rising rates are affecting the prices of commodity cargoes. The discussion digs into the possible impact of falling cargo rates on the supply and pricing of commodities. Meanwhile, the discussion anticipates that the upcoming CPI report could inform the Fed’s expected raise of another 25bps at this month’s meeting. They also discuss the ECB’s recent 50bps raise to offset European inflation.

Finally, Albert leads a discussion about China’s shift from an aggressive “wolf warrior” foreign policy to one of a peace negotiator. The discussion explores the motivations behind China’s recent diplomatic efforts to negotiate a Saudi-Iran agreement and facilitate a Russia-Ukraine peace agreement. They also explore the position and potential level of involvement in these discussions by the United States.

Key themes:
1. Banking systemic risk vs inflation
2. Higher rates & commodity cargoes
3. China: From wolf warrior to peace negotiator?

This is the 57th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

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

Transcript

Tony

Hi, everyone, and welcome to the Week Ahead. My name is Tony Nash. Today we’re joined by Hugh Hendry. I don’t think he needs an introduction, but Hugh is a founder of Eclectical and Macro, as well as being a hotelier in St. Bart’s and a lot of other things. We’ve also got Tracy Shuchart with Hilltower Resource Advisors. And we’ve got Albert Marko. Guys, thank you so much for joining us. So much has happened over the last two weeks in the banking sector and especially over the weekend with Credit Suisse. So looking forward to a lot of this discussion.

We’ve got some key themes today. The first is banking systemic risk versus inflation. As the Fed meets, and as we sort out a lot of these banking backstops, I think there’s a lot of discussion about which is more important right now. I think a lot of it is focusing on banking systemic risk panic, but we’ll talk through that with Hugh. We also want to talk about higher rates and commodity cargo prices. Tracy brought some thoughts about that earlier, I guess, over the weekend. So we want to talk through that today. And then we’ve seen China kind of come forward as kind of a negotiator for the Middle East and Russia, Ukraine and other things. And I want to talk to Albert about kind of how real is that, how much of a good faith negotiator is China in those areas?

So, Hugh, first of all, thank you so much for joining us. Hasn’t been easy to get you, and we’re really glad to have you. So we really appreciate having you here. Great. So first off, banking systemic risk versus inflation. Everybody knows the Silicon Valley Bank and First Republic and the BTFP stuff here in the US. All the Credit Suisse and UBS stuff happened over the weekend. What are you watching there? Like, what’s your biggest worry? Is it these 81 bonds? What are you focused on there?

Hugh

Well, I have been focused for some time. My focus has been this impending car crash, which is now becoming more apparent perhaps to the many. And my concern had been Fed by my observation, my belief that we’ve been operating in a silent form of depression ever since the remedial work undertaken since the great financial crisis. Let’s date that to March 2009. It has been a spectacular failure. I will share with you a chart. Maybe we’ll be looking at it now. And it comes from who does it come from? I want to say I always get these names mixed up. Michael Klein. I think the wonderful economist academic works of Michael Barr, doesn’t work with Michael Pettis, but collaborated on trade wars, of political class wars. And he shows the indexing of US GDP per capita from the starting point of the Great Depression. And likewise, he superimposes a similar series for now, if you will, from that March 2009 and over the period spanning to almost 15 years us. Per capita GDP in the Great Depression went from 100 to almost 190. And this time around we’ve gone from 100 to 115. So I said silent.

We should call it the Great Great Depression that no one is allowed to speak of. We went through the pandemic environment to realize that there are some terms where there’s almost a censorship and it would seem that in US financial literature the word depression has been assigned to the past and not to the present. So raising interest rates in a Great Depression has filled me with dread and I think that is what has come to light in the last ten days or so.

Tony

So when we look at the amount of credit that’s been created since the financial crisis and kind of the payoff in terms of GDP per capita, is that one of the variables that concerns you most? I know it’s everything and I think we’re all looking at everything, but it seems to me that the payoff for every dollar of debt incurred by the government and by individuals is rapidly kind of falling down.

Hugh

Yeah, I would say that the credit cap has been muted. And again, I make a distinction between sovereign dollar creation and by that I mean the dollar creation from onshore domestic US banks entering into new loan agreements and if you will, printing dollars versus the dollar creation. I would call it non sovereign, which is the Euro dollar which is taking place offshore and where with the ability to provide collateral, new dollars will be created. Now, the Fed I believe, is less interested in the latter and I believe over the last 40 years the latter, these non sovereign dollar creation have come to be really much greater than the sovereign onshore and the credit provision there has been really to fund assets and it’s funded asset price inflation. And I think market participants have been very aware that that credit spigot got turned off, let’s say 18 months ago very dramatically. So I would say it’s been contracting. And now we’re seeing I don’t like discussing the M two series because I think it takes away from this non sovereign creation, but we’re seeing that the onshore M Two series is now contracting as well. We don’t have much per capita GDP augmentation to show for for that.

Tony

Right. So so wouldn’t, after all of the creation of money in and I would say through, largely through government spending and obviously Fed balance sheet in 2000 and 22,021, isn’t this kind of a normal reaction, kind of a normal medium term reaction to that much creation and distribution of money into economies?

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Hugh

Well, again, it’s kind of crossing my arms. It’s a funny money conversation.

I keep saying, I go to Starbucks and ask for a caffeine latte, and I promise to pay it in bank reserves, and they kick me out. The Silicon Valley Bank was acutely sensitive because their corporate customers are startup businesses, which are very much at the riskier end of the spectrum. And typically that bank would be funding between the last six to three months. Your cash is disappointing. You need another fundraise.

But the bank steps in and it holds you over. There was no prospect of more fundraising, so it was kind of exaggerated. But I think with the other banks, what you’re seeing is that and with Silicon, you were seeing that their assumptions with regard to operating cash flow from their client, from their clients, just was not being met. That actually the economy is weaker. That we’ve we’ve, again, within this kind of silent depression, we’ve imposed I mean, I don’t dispute we’ve imposed structurally higher prices, but without again, without the legacy of a dynamic of credit creation, which left, like, a really strong economy, which was to be tamed and to be tempered by the Federal Reserve’s oversight. To my mind, it’s been a muted economy for the real folk. If we move a kilometer or so outside the financial centers of the world, the real world just seems rather grim. And that real world is being hammered by higher rates. And again, with the prevalence of debt, I keep saying, if debt was one X GDP in the so we’re taking out decimal points, then I’d say we’re four X today. And so the Fed at 5% rates is really the Fed at 20% rates in the 70s.

If I can get away with that kind of leap and you break things and we’re breaking things, that’s been my concern. My concern is, I believe, that the depression has been fueled by Bernanke. Back in was it 2013 when we had the taper tantrum, where he encouraged the private sector to raise rates on his behalf? We had seven and a half percent adult unemployment. He was saying, Heavens, I’m beginning to worry that the economy is getting overcooked. The market doubled ten year rates. You know what? The economy hit a wall. Then we had John Yellen, tentatively, in 2015, trying to raise rates again. Why? There was never this economy which was running away. And then you had Jay, and Jay is just being determined from his first day in office to kind of be some kind of volcker guy, what was it called? The Duke of York. He marched them up to the top in 2018 and promptly had to take them down and then he came back again and finally I think I feel like particularly the American economy has been crucified on the cross of Jay’s miscommunication. During the pandemic, he explicitly said on daytime television that they were printing money.

I get why he said it. He was saying it to alleviate the real fear of that time. But it was I mean, I’m going to say it, it was a lie. And so he now owns the price, I would say. Is it causality? Is it something I don’t think the inflation that we saw is monetary. I say it was a supply side thing. I think it will abate because the monetary power will not be there to perpetuate it. But Jay couldn’t escape that. He was the guy who said I’m printing money and then you had an explosion in prices. And so they’re fighting desperately to kind of preserve or reign back their reputation. But it’s the economy and these banks and other actors which are feeling that.

Tony

Yeah, I guess so if the Fed is kind of trying to bring back in their reputation I know this seems a little bit random, but who has a better reputation? Like all central banks have terrible reputations right now. No. So are they in fact the best of the major central banks or are there other people that are more credible? ECB raised 50 basis points last meeting. So is that a credible trajectory?

Hugh

There’s only one thing we know for certain that the ECB will raise rates at the wrong time.

And again, it’s like the pushback I also have is just tell me the last time any central bank made a glorious decision, you thought, gee, these guys, they got it, they got it. Maybe it was 1994 and there was a kind of preemptive hike by Greenspan maybe, but 1994 is a long time ago. So in terms of do we need central bankers? Given I mean the American central bank is the regulator of the onshore banking sector and I maintain that we should be investigating and spending a close amount of money to examine the totality of dollar creation, credit creation because I believe it’s tremendously larger outside the review of the central bank. And then finally, who does it better? Well, the inversion of the treasury curves, not just the US treasury, but it’s a global phenomenon. If you’ve seen what the German curve has been doing, especially the last really if following that huge eruption in the UK pension market when we had the fake budget or whatever, when you have an inversion, it is not the bond market telling you it’s best guess of where rates will be. They create the inversion via a desire to hedge against the expectation of negative consequences like unforeseen consequences of Federal Reserve tightening in a world of tepid demand.

And in a world of great leverage, the bond market has been spot on. Those inversions are at record levels. And again, we are seeing a record form of banks going wrong and needing record forms of financial intermediation from the central bank to fix it.

Tony

Right. So it’s interesting when you say do we need central banks? I know that’s a hypothetical question, but especially over the past week and a half, as we’ve seen the Fed come in to backstop bank runs, that’s precisely the reason why central banks were created. Is that right?

So they kind of are with this BTFD, they’re kind of doing what they were created to do. And I guess with the Swiss central bank, what they did over the weekend, they’re kind of doing what they were created to do. Although nobody loves the fact the kind of bank bailout discussion nobody loves that, but they’re kind of doing in the purest form what central banks were created to do. Is that a fair categorization.

Hugh

At the tail end of the process? Yes. I don’t dispute what they’re doing. I wouldn’t ask them not to do it. Right. But I feel that especially this time around, they are the malignant force that is causing the failure in the host banks. I mean, Credit Suisse credit Suisse has been a problem that should have been addressed at least a year ago. Oh, yeah.

Tony

It surprises nobody. I mean, the fact that anybody’s surprised is surprising.

Hugh

And there’s no bailout. Even if you bought the equity on Friday, I think you lost 60%. The equity lost just about everything. And of course, that spread into one of the tiers of the kind of quasi debt debt structure. So again, we accept that. The wider question is just why is it happening and why is it caught out the central banks? There’s no dispute that the central banks are responding. And I don’t take huge exception to how they’re responding. I take exception to the fact that they’ve been the custodians of a if you were to accumulate the myths in potential GDP you know this, Tony, that in the 30 years up to 2007, most kind of g seven. Economies outside the phenomenon of China were kind of compounding like 2.7%. And it’s been more like one and a half in those years since then. So the miss is now the equivalent of the entirety of the Chinese economy. It’s a big mess. I think it stems from a change in the risk seeking behavior of the horse bank supporting the euro dollar system. They had a near death experience and they’ve been regulated to bring it down.

Okay. And secondly, it’s been periodic preemptive hiking by the central bank, maybe with a noble cause, but actually ending up doing wrong. Those those two functions. I actually believe at the end of this, I think we’re I think the generational time clock where you get profound, you know, like ray Dalio talks about these things, you know, 75 years. He has different clocks, and they all have like, a variation of 25 years, give or take. But we’re in one of those variations in terms of where we look at the underlying monetary system. We had a gold standard. It failed. Great Depression. People talk about bread and woods. I think bread and woods was a kind of in between. It didn’t really work. Private banks went, this doesn’t work. Let’s work it to our ends. And I think that Eurodollar system from was it NatWest Bank in London in 1956 or something, I think that system is near its death as well. I think we’re getting to the point where we’ll have to invent a better way now that’s not to kind of come back and see the dollar is doomed. It’s actually that the system that America accepts is really no longer doing it.

It’s not an unfair advantage. It’s the opposite. You have to really question why they support it. What do I mean by that? Why they support being the recipient of the world’s surplus capital inflows? Why are the world’s capital inflows going into the US. Where they have absolutely no desire for investment beyond the domestic pool of savings? Okay? And so the result of that is we get profound asset price inflation. We turn an economy famed for its entrepreneurial ship, and we turn it into an economy of speculation. That speculation is being unwound with the advent of GDP. When debt accumulates or debt to GDP rises, then you end up there’s a danger that you’re overstating the current GDP at the expense of future GDP. And as you overstate growth, you kind of create a fictional wealth in terms of the price of property, the price of price of stock market, the price of private equity. And it’s not done through kind of sinister means. It’s a miscalculation. And the US. Now, for the last heavens, the last 25 years, we’ve had, what, three or four events within 25 years that in a normal distribution, if there is such a thing, you’d expect these things to be spread out over 70.

We got four events that you would expect to kind of come to bear over maybe 100 and 5200 years. And yet we’ve seen it within 25. It’s no longer doing the US. Any favors. And so I think ultimately the US. Will have to look to perhaps mimic China and say and put up barriers whereby you cannot be the recipient of all these surplus capital flows. I think there would be a better place for that, but that’s perhaps for another time.

Tony

That’s really interesting.

Albert

I’d like Tony. I don’t want to be the one to defend central bankers, by all means, but how much of it is political influence for central bankers to combat supply side inflation? I mean, voters in each of these countries are facing 2020 5% inflation on goods and services and the way I look at it is those politicians need to get reelected. And for them to push back on the central banks to try to do something to combat inflation is the way that I would work it.

Hugh

I agree. It’s an agency to my mind, this is an agency problem and not an economics problem. I mean, it’s creating an economics problem, but it’s the agency of government. It’s the government being the principal and turning to its agent, the Federal Reserve, and saying, you guys messed up and messing up. You affect me, okay? And if you affect me, I’m really going to affect you. So do something about it. It’s mafioza. But my point is this is not an economics problem. Inflation I was saying she was going to have all my tombstone. Inflation is a monetary phenomenon, okay?

Tony

Many tombstones, not just yours. Yeah. So, Albert, what you brought up about the euro dollar kind of out kind of outlasting its use. What are your thoughts on that? I know you know the euro dollar inside and out. Can you talk us through your view on that?

Albert

The problem that I have with that argument is there’s just no alternative at the moment. And I understand what she was talking about is, yeah, maybe we should look at a different alternative. And I think I was on this podcast maybe two weeks ago where saying that theoretically the Anglo sphere could come up with a digital currency founded by the dollar and whatnot to come up with a new system. But these are all theoretical policies that I don’t know how would they work. I don’t know what it would do to the economies, how things would even transpire at that point. There’s a lot of unknowns, in my opinion. But I don’t think that the euro dollar I don’t think even Hugh believes that the euro dollar is in any danger of going away in the foreseeable future.

Tony

Right now, the Euro, if we go back 20 some years, the Euro was supposed to kind of be that offshore mechanism, but it never really worked that way. Partly because the Dutch and the German.

Albert

Different national interests tony the different national interests, different financial policies, different political interests. It just doesn’t work right.

Hugh

But it’s also tony but it’s this point that Europe is founded still upon the rock of Germany, Holland, et cetera. And these are persistent trade surplus nations that create surplus capital, and that surplus capital is invested in the United States. The housing crash of 2007, 2008, the majority of mortgage credit was provided by European banks, not American banks. So again, Europe and China, Asia are less open to the flow of capital than principally the US. And the United Kingdom. I don’t believe to Alba’s point, that we have to invent a new currency. I don’t believe it has to be digital or physical or, God forbid, commodity. There just has to be a greater regulation in the conduct and behavior of trading blocks with regard to each other.

Albert

I agree. There’s a problem where Yellen is the one she’s done this before in 2013, where she drives up US. Dollar policy and hoping that capital comes back into the United States to keep asset prices elevated just purely for her own labor ideas and political leanings. So that’s something like for me, if you don’t put any controls to stop yelling and others from doing this, they’re going to just keep doing it over and over again. We’re going to be stuck in a doom loop of capital flows coming into the United States.

Tony

Okay, but that’s interesting. What you said, Albert and Hewitt, you said about almost trade flow. So it’s the flow that is the problem. It’s not necessarily the currency is that my point.

Hugh

And again, there are achievable. Here we are, and we want to talk about Greta’s recent Silicon Valley, but it’s buried so deeply the underlying problem, which has been with us for at least 25 years. I want to say that the last time the kind of Charles Kindleberger handbook to a currency crisis actually worked out with the great logic of his orthodoxy, where you could monetize it was the Thai bat. And since then and what was the change, because it was the specter of China et al. Seeing the vulnerability to those Asian currencies from being so open and so those bolt fast to being effectively closed or very much controlling the money coming in. So in return, the US. Has had profound asset price inflation. Now, if you wanted to discourage that, you could put a withholding tax on treasury holdings by central banks, by foreign central bank. They already have it at custody with the New York Fed. And and I don’t believe that these institutions are like hedge funds, that they are profit seeking. They are working to a political goal and they will pay it. And if you squeeze it enough, you may actually discourage them, but at least you could impose a rent on their behavior and the disturbances that that behavior is, as we see the disturbances today, play out again.

Tony

Okay, very interesting. Okay, so we’ve gone into kind of the core of the problem. But if we go very short term because we have a Fed meeting coming up, everyone’s nervous about the systemic banking crisis or inflation, what do you think takes the priority in the next Fed meeting? Do you think the Fed stays on its trajectory? And all you guys, Tracy, Albert, Hugh, what are you guys views on this? Do you think the Fed says, hey, this banking thing scared us. We’re going to stamp pad on zero for a meeting and then we’re going to see what happens? Or do you think they proceed with 25s as they’ve been talking about and saying, hey, we put the backstop up. The Swiss central bank came in and put their backstop up. All is good with the banking crisis. Nothing to see here. We’re going to keep fighting inflation. What scenarios do you see them coming through again with a very short term mindset.

Hugh

Or Tracy, forgive me, Tracy, we haven’t heard from you. Why don’t you contribute?

Tracy

That’s fine. I hate having an opinion. Because everybody has an opinion.

Tony

Yes, that’s why you’re here.

Tracy

Everybody’s talking. I would think they stay at 25. That said, I think that if they decided to hold, that would be great news for commodities, and the commodity markets would react very positively towards that. But I think that they’re going to stay with the 25 because they’re going to say everything’s contained, just like we’ve heard a million times before. But we’ll see.

Tony

I remember in 2007, at the beginning of the financial crisis, the early indication said, it’s a 200 billion dollar loss. We’ve got it contained. Nobody talks about this today, but it’s $200 billion. Don’t worry about it. It’s all fine. We’ve got it contained. Is it possible that we’re in one of those scenarios now where 2007, $200 billion, it’s all fine, and we just kind of keep kind of raising into this when there’s a bigger specter living out there, or do you think it’s done? Tracy?

Tracy

I feel like this is not a repeat of 2008. I think it’s completely different. So I don’t want to equate it with 2008 exactly, but I feel like the rhetoric is kind of the same where everything’s contained. It’s okay. We took care of it.

Tony

Yes. Okay. Very good. Albert, what’s your view on the next Fed meeting?

Albert

You think they’re going to do 25? I don’t know what they’re going to do, but I think they should do 25. Going to zero. Pausing is, I think, a bad sign for the market. I mean, it might be bullish for a few days, but realistically, it’s not going to help solve anything to do with inflation, specifically supercore, which is what I think the Fed is. Powell has said himself is what he’s been watching, and its trajectory is going up. So I think they have to stay the course and do 25. That said, they could do zero just because this banking issue has gotten, at least in the press, out of hand, with a lot of bazookas being sent out by central banks to squash it. So we’ll see. But I hope they do 25.

Tony

So if they do zero, do you think it indirectly confirms everyone to worst fear? It’s like, oh, my gosh, they did zero.

Tracy

It must be worth really bad.

Albert

Yeah. Narrative wise, that’s exactly what I would be thinking. It’s like, what’s going on? Why are they overreacting like this? So that’s exactly what I think the sentiment would be. Definitely negative over the long run.

Tony

Right, Hugh?

Hugh

You’re all blinking crazy. May I remind you, for the last 15 years, the growth in per capita GDP for the average American has been catastrophic. It’s been one 6th that experienced during the Great Depression. And we’re talking about the Fed hiking rates further. I recall my trading experience, Tony, you mentioned 2007, and I always sat on big dumb leverage positions and we had northern rock go under. We had some French banks kind of have closures, but it was still modest. It wasn’t really what we’ve seen of late. And the Fed cut rate and the S and P was like pretty much at his all time high. And they won’t do anything. They’ll talk about it. They’ll express concern, boom, cut interest rates. The question is, is that an old Fed? And that may be relevant in the sense that I think the Fed should have been cutting rates six months ago. I think that the sovereign curves have been telling you that. But they’re kind of trapped again to the agency point and to the assumption, as Tracy said, hey, if they hold, can you imagine they cut, your commodities would be off to the stars and risk assets would explode.

And I think the Fed is very conscious of that. And so a Fed that should be, I think, should be cutting. Can I just say, banks have discovered that they have funding deficits. These regional banks, they’re not money center banks. They don’t have colossal sums of other instruments that they can sell off to meet liquidity needs. They have illiquid pools of mortgages to corporate America. And what you can do with that is you can package them like a CDO, these illiquid tranches, and you can offer it to the big money center banks and they’ll give you Treasuries. And then with the treasury, you into the eurodollar system and then they’ll address your funding. Now, the funding is coming I believe the funding is coming from the inflation in that everything is 15% or more expensive, but the underlying business health and revenue isn’t there. And so the corporate customers are their cash balances are coming down and down and down, creating the deficit which these banks can’t fund. Like I say, we’re in a depression. And the preoccupation is how far will the Feds raise rates? It’s going to get worse. The economic fallout, the consequences of this, like finding you remember, we have what percentage of the economy is the Frankenstein businesses that were supported by the fact that the carry was so low?

How much of the economy is the conceitful economy, which hasn’t marked the market, is I am full of angst.

Tony

But are we here partly because interest rates were kept so low for so long? I mean, that was really on some level, what was behind Silicon Valley Bank is they were holding this debt that was so far underneath the market that they couldn’t keep up with their cash needs. So is that part of the problem? If they cut rates, it puts us back into that environment?

Hugh

Yeah, that is the problem. But the deeper problem again, is beg of thy neighbor policy. We’re. Missing, like I say, $15 trillion of global economic demand. And I think that’s because China et al, pures a policy of making things cheap and keeping its current. Imagine if where are we on the remembri? We’re six.

Tony

Nine.

Hugh

Yeah. Seven. Eight. They call it seven. It was at nine when we created NAFTA many years ago. So nine to seven in terms of appreciation, the damn thing should be at four. The Chinese should be the citizens in the household sector should be really rich, they should be buying tons of overseas products and we wouldn’t have that deficit. But again, owing to the Thai pad episode and how we’ve organized trade flows, that hasn’t happened. And so, again, that’s why the per capita GDP for the ordinary folk in the States has barely budged, which is why we’ve had to keep rates on life support. But of course, the consequence is you blow up asset prices and trying to get the two balance between the two. I don’t envy anyone that decision.

Tony

No, it’s painful. And as we see housing prices come down to earth, if that happens here in the States, that’s where most people’s wealth is based. Right. So if their portfolio is coming down a bit, if their house price is coming down a bit, there are a lot of delicate balances, delicate, say, household balances, that will be upset here in the States, if not globally. So I think you have a great point. I think it’s a really difficult dilemma. I hear people all the time talk about how dumb the guys of the Fed are. They’re not stupid people. I don’t think they’re stupid people. I think they understand the problem. I think it’s a very complex issue that they have to get out of.

Hugh

Right. Yeah. Can we ask Tracy? But on oil, why is oil so weaker? And where that huge surplus has come and it’s changed the shape of the curve, there’s no demand for it. Can you speak to that?

Tracy

Yeah. I think part of the problem is a lot of Russian oil is still on the market that most were anticipating. It not be. We are seeing China demand come back, but not as fast and furious as everybody had anticipated, and still kind of very soft, even though mobility data has improved significantly. Still, their demand for oil is because they were stocking it for a year in their surplus. So they have a lot of surplus. So obviously they’re going to drain that first, while oil prices are high and making deals with Russia for cheap oil. And the other part of it is that interest rates are high, and that is because when you’re talking natural resources, they’re particularly exposed to rising rates, right. Because trading houses rely on bank credit to buy, transport and store these commodities. So with higher rates, what is happening is these companies are either having to sell right away at any price because they can’t hold it like they used to and wait for a better time to sell when the price was higher or the opportunity was better. So they’re having to sell it right away for whatever price that means, which is also causing downward pressure on prices right now, realistically speaking and hearing from some of the big trading houses that they’re having to forego some trades.

Tracy

Right. And so that’s stranding product with the producers. So I think that’s why we’re seeing weaker commodity prices pretty much overall.

Hugh

Do you have data on the driving statistics in the continent of North America?

Tracy

Yes, I do.

Hugh

Am I making it up to say that here we are, so many years after the pandemic when we know that everyone was kept at home and that the mileage is not really changed much?

Tracy

It really depends on the area, I think. Right. So we’re kind of still seeing more limited in, say, some of the blue states where you’re seeing a lot of uptake in some of the red states. Obviously, in the south there’s a lot more mobility, or the mobility data is a lot better. If we go and we look at TSA, I mean, TSA, we’ve been wobbling, like just above 2019, just dipping just below and then just above. So that data is still pretty strong. So that looks good. But mobility data is very regional in the United States.

Hugh

And I guess with anyone shouting at the screen saying it’s the adoption of Teslas and electrical vehicles, I hear you. But the whole notion of this curse of inflation, that it doesn’t persist, or a sign that it’s unlikely to persist, is when you see changes in economic behavior where you have discretion. You cut back because you just don’t. Have the financial wherewithal to support a wallet which your wallet is not 15% higher. But the price of goods and services are 15% higher. And so maybe driving would be discretion in that sense. Anyway, thank you for that.

Albert

Yeah. On top of that, I’ve talked a lot about Spr releases timed with the Fed selling oil futures to bring down the price of oil in their mind to help combat inflation. I mean, that’s something that’s happening.

Tony

Happened.

Albert

Last year for a little while. And I know that they’ve been doing it again this year. And, I mean, I heard through the grapevine that it was up to $800 million worth.

Hugh

Really? So, Tracy, I thought that had come to an end. The biden policy of selling the reserves, the oil reserves.

Tracy

We have the last little bit sold in December of 22, and that was from that 180,000,000 barrel release that was released throughout the year. There’s about 26 million barrels to release this year. That was scheduled back in 2015. That’s part of a whole different deal. It was part of the upgrading of the Spr, paying for the upgrades of the Spr. So that release will still happen. The thing is, traders were looking at at these prices the government was going to rebuy. Right? And so they did hold an auction on in January and they didn’t get any offers. They didn’t get any bids so they decided not to do that. And people are definitely looking at prices this low because really their target area was $68 to $72. So at these prices they were looking for the government but it looks like that’s just not going to happen because I think they are very happy with prices this low and they know if they start reflecting the spr that’s going to raise prices.

Tony

Okay great, thanks for that and Tracy, I appreciate the cargoes or the pricing and the urgency of the finance of commodity sales. How long do you expect that to last? Do you expect that to continue to last for the next couple of months or is that something that we’re just kind of in this period where things are changing really fast and it’s a relatively temporary issue?

Tracy

Yeah, I think it’s a relatively temporary issue. I think really what we’re going to I still think we need a few more months to really see what Russian oil is or is not off the market. And by the way that is getting very difficult to track these days because they have their own fleets and you have a whole gray market there. But from whatever Sts satellite information that those people gather they are seeing a lot of product build up on water that’s not going to be able to be sold because February 5 is when that policy enacted with the ban on products. So I think we still need a few more months to see where that goes. I still think we need a few more months and I’ve said this for months now when China started to reopen I said I think this is not going to be like it’s going to cause commodities to skyrocket. I think it’s going to be very bumpy. I think particularly the property sector is still a mess. They’re not building anything there’s not really creating a lot of stimulus right now and they have a lot of oil stored.

Tracy

So I think they’ll need to kind of work through those issues a little bit before we really see China demand take off. Maybe an H, two of the share if the whole world is not in a global depression.

Tony

Yeah I remember a few months ago I remember a few months ago talking about that when China was kind of supposed to open in Q One and there were a lot of cheerleaders saying it’s going to be a rocket ship, it’s going to take off really quickly. And I think what we talked about here was it’ll be slower than most people think and that’s come to pass right?

Albert

Yeah they’re pragmatic, they staggered their reopening. They’re making moves for the next six to twelve months on commodities. Which leads me into my section today is what they’ve done in the Middle East with brokering a deal between Iran and the Saudis. I mean, this is specifically done because the Chinese are the biggest clients of both parties. So you’re going to have to appease your biggest client and come up with some sort of truce. But it’s a short lived truce. As the Russians, the Iranians and Saudis start competing for more Chinese market share, since they are the biggest buyers on the Earth at the moment, tensions will inevitably come back up. They’ll bubble up again and this truce just doesn’t have any legs to it.

Tony

The most surprising part to me is that China just a few months ago was still under this kind of wolf warrior diplomacy kind of theme, right? Very aggressive, very direct, very unlike what I’d seen in China for decades before. And now they’ve changed really quickly to this dove policy of we’re going to negotiate peace in the Middle East, we’re going to negotiate peace between Russia and Ukraine. What happened there? Why is it just easier to sell stuff in a peaceful environment than it is in war environment? Or what is it? Because they’ve been the biggest buyer of tiny crude for a while, so that’s.

Albert

Not necessarily it’s mainly to do. The United States is leaving vacuum, their newest foreign policy, leaving vacuum in the Middle East. They’ve just basically abandoned it. We abandoned Afghanistan, we’ve pretty much abandoned Africa at the moment. And the Middle East is we’re not visible at the moment. So inevitably people like China and Russia are going to sit there and go and fill the vacuum. And it’s very easy for them to leverage their purchasing power on Iran and the Saudis and say, hey, cut a deal between you two so we can keep these trade deals going. Now I think also the Saudis are leveraging their oil reserves versus the United States and say, hey, if you don’t become a little bit more friendly with us in the defense sector and start pushing back on the Iranian nuclear aspirations, we’re going to cut deals with China. And I mean, I would do the same thing, to be honest with you.

Tony

So why this may sound like a stupid question, but why doesn’t the US come alongside these discussions and say, hey, it’s peace, let’s negotiate. Let’s get involved with this and support it? Why would the US. Not do that?

Albert

Well, it’s much more complex to say, let’s just have peace. I mean, the Iranians and the Saudis absolutely despise each other. The Israelis are also a major lobbying group in the United States. They certainly don’t want to see Iran benefit financially over this and push that right into their nuclear program. So there’s a lot of moving parts at the moment. And specifically when you talked about Russia and the Ukraine brokering peace there, the reality is the Russians are not going to leave their annexed areas and the Ukrainians are not going to accept that at best, you can get to a status quo, as we were a few years ago. But in terms of peace deals, it’s just not realistic.

Tony

But over the weekend, didn’t the White House come out and say, ukraine is a sovereign nation, but basically we won’t let them negotiate a peace deal with Russia right now? There was something like that that came out over the weekend. So how can the White House supposedly recognize Ukraine as a sovereign nation, but also not allow Ukraine to negotiate a peace deal? That doesn’t really make sense.

Albert

Ukraine’s defense is completely based on US. Armaments at the moment. So of course they can use that as leverage. And, I mean, the United States loves specifically the Biden administration loves to have Putin as a scapegoat for inflation. The moment the Russians marched in there, the term Putin price hikes came out and all over the news. It’s just one of those things where politics has reared its ugly head trying to influence economics. And here we are.

Tony

Great. Okay, so let’s take a quick look at what we expect, say, this week or the week ahead. What are you guys looking for? Tracy, we’ve seen crude way down over the past two sessions. What do you expect to happen in energy? Is this likely to continue with crude continuing downward, or is this very temporary?

Tracy

I think it is a temporary move. I mean, if you look at this, even though we have some softer demand, we are heading into higher demand season. Right. And so, again, there’s a lot of recession fears right now, too.

Tony

Right.

Tracy

So that reared its ugly head again, because of all of the banking crisis. And you also had a lot of what we saw, too, is when US treasuries spiked, right? Because everybody was short spiked. There were a lot of margin calls. And so it was kind of sell what you have to. Oil been sideways for three months, and so sell what you have to. And so I think that was part of that initial push down just from the price action, because we’ve seen that before. But I think it’s going to take a couple of months to digest all of this, to see where we’re at. Let’s see what the Fed does decide to do. Again, if the Fed decides to do nothing, commodities would love that, right? Yeah, they could.

Tony

Love it. Everyone would love it.

Hugh

I’m not sure I’d love it. I’m not sure I’d love it. And I’m not sure commodities would fly. When you say the Fed does nothing, the Fed sits at 5% rates. Or if we’re in the 1970s, the Fed sits there content with rates at 20%. I think oil has done something extraordinary. I mean, from the high tick with the Ukrainian invasion. I mean, oil the oil price is halved. I mean, oil is trading at levels prevailing 2004. That’s extraordinary. And it speaks more, I think, again, to my notion of this silent depression, an aggressive tightening of policy which is appropriate for asset price inflation, but is sheer misery for the ordinary folk.

Albert

I’m actually looking for a 25 basis point rate hike just to agitate you. But I agree with actually, I agree with you. I think that the Fed needs to actually cut rates if you want to see commodities start going these sky high parabolic moves again. And I don’t think we’re close to that at the moment. I do think that a pause would push commodity prices up, but I don’t think it would go parabolic like it did before.

Tracy

Oh, yeah, definitely it would be parabolic.

Albert

Yeah.

Hugh

Of course, if I was to talk my book, I want the Fed I want them being ECB. Like, I have to be cautious of how I say this because I don’t want them doing malevolent things to ordinary folk. But if I was to top my book, I’m really very enamored, very long of the very long end of the treasury curve. Because, again, to repeat myself, broken record depression in terms of price, if we ignore the Carry On Treasuries, which is, again, you could say fanciful, but we’ve wiped out 20 years of price performance, which is to say you’ve had profound mean reversion. And so I do like mean reversion events in terms of global asset. I don’t like mean reversion for individual stocks or individual kind of eclectic risk positions. But the generic give me something trading at the 20 years. So to my mind, where the treasury bond trades, where the inversions are trading, is that most likely we have for the curves to be correct? They’re really imagining a situation where the Fed could rapidly unwind like it did from September 2007 from five and a quarters to terminal of zero. Not a terminal five and a half, six or terminal of zero.

Hugh

And so you’ve got to think, how do you get to a terminal of zero? Well, you get there by inflicting, again, just a colossal deadweight cost of economic pain on the economy. So you can conspire how that would come about from this intellectual reputation or agency trap where they’re just forced to continue with hiking.

Tony

Yes. Over the next week. What are you looking at here? What are you looking in the very short term? What are you paying attention to in the very short term?

Hugh

You don’t want to know.

Tony

Oh, I do.

Hugh

My insights for these markets come from not watching them a great deal. I mean, I’m heading to the most outrageous party in Paris on Wednesday, thursday night. I’ll restock maybe Monday on the West Coast, next week in the US, and we’ll see what’s happened. If I had to guess, I’d expect there’s a huge desire to buy the markets here. The fed’s done something. We’ve even resolved the long standing corpse of Credit Suisse. You look at the equity market, it’s not really indicative of any great danger. The commodities. I mean, yes, I was talking about oil, but the commodity complex, it’s not kind of signaling any profound falling off a cliff. There’s just been a profound revision, I think, coming from hedging activities at the very short end of the treasury curve. Even the long end of treasury curve, it’s not really done anything. So the notion, I think and I was speaking to friends who manage risk, and they’re all agitating, and we were looking at banks. If you look at Irish listed banking securities, they’re way above where they were trading september, October last year. They’ve had a pullback for certain, but they don’t look whole.

Hugh

So I think the presumption is still going to be to feed and come back and try and chase a rally higher. That would be my guess.

Tony

Very good, guys. Thank you so much. This has been a fantastic discussion. Hugh, I’m glad we can keep up with you. Really good kind of long term views, and I really appreciate your perspective. Tracy, Albert, as always, thank you so much for your time, guys. Really appreciate it. Have a great weekend. And you have a great time at that party in there, right?

Hugh

Nice white shot.