Russian company Gazprom says it will halt gas supplies to Poland and Bulgaria from Wednesday morning. Poland currently depends on Russian imports for around half of its gas. The country’s deputy foreign minister Marcin Pzydacz tells us his government was already been prepared for this move. Plus, the World Bank’s latest commodities report makes sobering reading, suggesting that high food and fuel prices could blight the global economy for years to come. We hear from its author, World Bank Senior Economist Peter Nagle. With Elon Musk poised to take over at Twitter, the European Union’s Commissioner for the Internal Market Thierry Breton tells us that the firm will be welcome to operate in the EU under new management, providing it adheres to the bloc’s rules. As Delta Air Lines reveals that cabin crew will be paid for boarding as well as flight time in a landmark announcement, the president of the Association of Flight Attendant Sara Nelson says unionization efforts by airline staff forced the company’s hand. And the BBC’s Ivana Davidovic investigates urban mining, the process of reclaiming raw materials from spent products, buildings, and waste. Throughout the program we’re joined live by Zyma Islam, a journalist with The Daily Star newspaper in Bangladesh, and by Tony Nash, chief economist at AI firm Complete Intelligence, based in Houston, Texas.
Show Notes
EB: Joining me today to help discuss all of this to guests from opposite sides of the world, Tony Nash, chief economist at the AI firm Complete Intelligence in Texas. Hi, Tony.
TN: Hi, Good Evening.
EB: Good to have you with us. Tony Nash in Texas, what do you think is interesting, isn’t it, because this could I don’t know, it could go two ways, just politically. It’s an interesting move from Moscow to, if you like, preempt European sanctions against Moscow by cutting off the supply to Europe.
TN: Yeah. I think the further this goes along, the more I like people buying oil and gas from Texas, since that’s where I live. So we’ll take that. But for Poland, less than I think, about 10% of their electricity mixes from gas. So it wasn’t a majority gas driven market anyway. So they were very smart to put resources in place, alternatives in place. And, of course, it hasn’t been cost free. It’s taken a lot of resource to get that in place, but it’s good for them. And being on the border with Russia, they have to be prepared for anything.
EB: Yeah. I mean, gas is obviously very important during the winter months and we’re entering spring. So maybe European countries are feeling the crunch a little bit less strongly. Nonetheless, the question does remain, is Germany especially willing to cut off the oil? The oil is by far the bigger element, isn’t it, in terms of Russian revenue from its energy exports? And that’s the thing that Europe is resisting so far. Do you think we are pushing in that direction?
TN: I think if the fighting continues, they’ll have to. The problem is they don’t really have alternatives right now. And so that’s their dilemma is Europe did not diversify when they should have, and now they’ll pay much, much higher prices. So that will eat into European economic growth and it will really hurt consumers. So I think Europe is in a very difficult position. That’s obvious. But a lot of it is on some level, I wouldn’t say completely their own making, but they had opportunities to diversify, which they didn’t take.
EB: Yeah. I mean, Tony, everyone wants to get their LNG from Qatar and they all from the United States. There are going to be some pretty wealthy Qatari and American exporters of LNG, even if they can meet the demand next year.
TN: All of my neighbors in Houston are benefiting. I’m not in the oil and gas sector, but they are certainly benefiting from this.
EB: Let me bring in Tony there. I mean, we saw a story this week, Indonesia, for instance, banning the export of some palm oil food protectionism could be a thing. We’re not really talking about that yet. But those countries I mean, Bangladesh neighbor, India, will it start cutting off its exports when it starts to see global prices rising and perhaps being more pressure on its domestic supply?
TN: Yeah, it’s possible. And we also have a situation where the US dollar is strengthening and emerging market currencies are weakening. So these ad commodities are becoming more expensive in US dollar terms for sure. But it’s an accelerated inflation rate in emerging market currencies. So one would hope that, say countries like China, who are suffering with this, who devalued their currencies in a big way over the last week, would start to put pressure on Russia to resolve the conflict so that both Russia and Ukraine can start exporting food commodities again.
EB: Tony Nash, what do you think? I’m forgetting the unicorn thing. Could officials come down that hard on Twitter, a new, less regulated Twitter platform under Elon Musk?
TN: Well, let’s assume that he obviously doesn’t understand the technology is regulating 100 million Europeans could turn on their VPNs tomorrow and access Twitter from a pop outside of Europe in 5 seconds. It would be no problem at all. So Twitter could unilaterally shut down in Europe and they’d still have 100 million customers on the European mainland. So he has a fundamental misunderstanding of the technology that he’s supposedly regulating. But what I don’t think he also understands is Twitter has people like Rouhani from Iran and Vladimir Putin and Chinese people who deny that they have a million Muslims in prison and all this other stuff. So why is he not cracking down on Twitter for allowing those guys to have a voice when he’s worried about Elon Musk, who is a loud guy, but he’s a pretty middle of the road guy, seemingly. So I just don’t understand why there’s so much hyperventilating about Elon Musk. I don’t get it.
EB: So you’re along with, I guess certainly a large number of Republicans in Congress right now who are saying bring it on. We’re delighted that this takeover is happening because we imagine we’re going to see a much less regulated platform.
TN: Let’s take another view. Let’s take Jeff Bezos, who owns The Washington Post. Right. It’s a media platform, and it’s had some really questionable practices over the past few years. So why aren’t media regulators in Europe looking at The Washington Post? They’re just not. And so I think if Musk is really going to have Twitter be in the center and not moderate except for things that are illegal, then more power to them. It’s in the spirit of the US law from the 1990s that said that internet content publishers can’t be sued because they’re not Editors. They’re only publishers. So I think it’s more in the spirit of the 1990s Internet regulation than anything that’s out there today.
EB: Tony Delta in Atlanta, that’s not a million miles from where you live, is it? Do you have sympathy for the flight attendants here?
TN: Yeah. It’s insane. I never knew about this. So no wonder the flight attendants are less than cheerful when we arrive on board.
EB: Especially for the check in bid, right?
TN: Exactly. It’s just insane. They’re in uniform, they’re working. Why they’re not paid. I just think that’s insane.
EB: The unionization drive does seem to be gathering a bit of pace in America, doesn’t it, right now. And we mentioned we’ve referenced all those other companies. It’s the mood of the moment. Yeah.
TN: Well, labor has the strong hand right now, and wages are rising. And when labor has the strong hand, you see more unionization. So it’s just a natural course.
EB: But it has been decades during which Union participation in the state certainly has gone down, isn’t it? I mean, since I’m in the 70s wasn’t right.
TN: But if we look at the rate of baby Boomer retirement, we have a lot of people going out of the workforce right now. And so we do have tight labor markets because of it. And that’s really part of what’s pushing the strength on the side of labor. And so this stuff is demographic.
EB: And it’s typical when it comes to technology. I mean, I have a personal take on this. I went to Acra in Garner in 2015 to the famous Agbog blushy central dump there, which is an extraordinary place. It’s one of the largest of its kind in the world. Miles of waste, all kinds of things. They’re burning cables just to extract the copper from the tubing and the wiring. But the air, I mean, it took me 24 hours just to feel my lungs clear from that place. It’s an extraordinary thing, isn’t it, Tony Nash, don’t you think it’s strange that the market around the world, the free market, hasn’t found a system whereby the value of old units is recycled efficiently?
TN: Yes. So if I want to recycle electronics here in my local town, I take it to a center and I have to pay them to take it. So they’re taking gold and platinum and other great stuff out of there, but I have to pay them to take my recyclable electronics.
EB: Is that why? I mean, do you understand the economics of that? Because you’d think that supply and demand would suggest that if there were a competitive value in the goods that they’re extracting, there would be competition and therefore there would be people offering lower prices or perhaps even paying you for your old stuff?
TN: Yeah, I understand the competition of it, but I think I just want to get rid of the stuff. And I think that’s what they realize is they can charge people just to get rid of old computers or phones or whatever, and then they get money on both sides.
EB: The big corporations, Tony, have a bigger responsibility here. I mean, they’re the ones producing the stuff. They’re the ones, I guess, I don’t know, paying for the extraction of some of these rare Earth metals and everything else. Some of the toxic stuff coming from places like Russia, Latin America, the DRC, and those are the things that are then being spat out and causing all kinds of pollution.
TN: Sure. I would think, for example, the phone manufacturers and the mobile carriers would have an incentive to collect the old phones from people.
EB: Yeah, but do you think regulators should be doing more here?
TN: I don’t really know. I think regulation tends to kind of contort things like this, And I think for something like this would potentially create an unintended economic opportunity. So we heard about the person in Bangladesh who collects used items in Singapore. I lived there for 15 years. We had somebody called a Karen Gunn person who would collect used electronics and other things and buy our house. So whether it’s that local person or whether it’s an Assembly Or a disassembly location, say, near my house, Those are people who are focused, who are specialized on what they’re doing. I do think, though, that the people who create this actually should have some sort of incentive, not from government, but from their customers to collect this stuff Once they’re finished with it, because it’s costing me money to get rid of it, but I’m paying them for it.
EB: Okay. A couple of minutes left in the show. I’m going to ask you both now for a quick thought about the things that have caught your eye most in the area, the news stories that have caught your attention. Tony, tell us in Texas what’s catching you up there?
TN: It’s really hard to follow that. So in Texas, one of the things that’s happening and this is not new, but it’s becoming more and more common is if you take your car out somewhere, Even in just a normal neighborhood, to, say, a shopping Center, It’s pretty common for someone to come even in the middle of the day and steal the catalytic converter off of your car. You go into a restaurant or a shop and you come out and someone has taken the catalytic converter off your car, which is a key part to muffling sound, and they do it for the precious metals in that piece. So that’s becoming very common here again. It’s happened for years, but it’s becoming much more intense Because of the prices of precious metals.
EB: Yeah, unauthorized recycling. We can full circle Tony Nash and Zimmer Islam in Texas and Bangladesh, respectively. Thanks to you both and thanks to you all for listening. This has been business matters as my name’s Ed Butler. Take care. Bye.
As a start, we looked at the Friday’s trading session and what it means. Is this a bullish market?
We’ve made a few recommendations over the past couple of months. We hope you’ve been paying attention specially on $IPI (Intrepit Potash) and $NTR (Nutrien).
We’ve talked about the tumbling lumber markets in recent weeks. What are Sam and Albert’s current thinking on lumber as we’re looking at $LB lumber futures. Sam talked about housing last month. We looked at $XHB, the home builders ETF. How about the rates and housing? We’ve seen that homebuilders are getting hit with expected rate rises. What is the impact of this on the mortgage market, housing inventory, etc?
Shanghai has been closed for a few weeks now and the largest port in the world won’t open for about another week. How can the second largest economy continue to close when the West has already accepted Covid as endemic? How can manufacturers rely on China as a manufacturing center if they’re unreliable?
For the week ahead, we talked about the earnings season, their portfolios, and Albert talked about Chinese equities for months, etc. Is now the time to look at KWEB, which he discussed for some time?
We’ve got CPI out on Tuesday and is expected at around 7.9% and Retail sales on Friday, which is expected at around 0.3%. Inflation seems unstoppable and consumers seem to be getting tired of spending. Sam explains on this.
Key themes from last week
Friday trading session
Don’t say we didn’t warn you
Rates and housing (Tuna & Caviar)
China’s shutdown
Key themes for the Week Ahead
Earnings season expectations
Near-term equity portfolios
CPI (Tuesday), expected 7.9%
This is the 14th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
TN: Hi, guys, and welcome to The Week Ahead. My name is Tony Nash. I’ve got Albert Marco and Sam Rines with us. Tracy is not able to join us today. Before we get started, if you don’t mind, could you please like and subscribe. That would help us out. And we’ll let you know every time a new episode is up and running.
This past week we saw a lot, but I think the most interesting thing or one of the most recent interesting things is Friday’s trading. We’re going to start talking about the market action on Friday, and then we’re going to get into a couple of things that we told you about trades that if you were paying attention, you would have seen. We’re actually going to go into rates and housing, and Sam’s going to talk a little bit about tuna and Caviar, that discussion from the Fed speech earlier this week. And then we’re going to talk about China’s shutdown, which seems to be getting worse by the hour. So first let’s get into the Friday trading session, guys. What are some of the things you saw on Friday?
AM: Well, from my perspective, the market is acting like crypto. I mean, we’re seeing interday moves on some of these equities, like 5% up and down. It’s a little bit silly. And you wonder if it’s like light volume, if it’s market manipulation by the Fed. It’s just uncanny. I’ve never seen anything like this before. And obviously the market is weak and we’ve talked about black clouds coming over the market and what’s going on. But I don’t see anything any catalyst that would say that this is the bullish market at all. So we’re waiting for multiple numbers of CPI, retail and whatnot. But for me, it’s just like everybody is on pause waiting to see which way this market goes before they take action.
TN: So a couple of weeks ago, we saw a lot of money move into equities. Right? So that money moved in. It’s just parking and waiting. Is that what’s happening?
AM: Yeah, I assume so. The Fed, as it just ups the rates, forces more money to move into the US market, which is actually a brilliant move. You know, this is what we’re seeing. A lot of money here, not knowing what to do at the moment.
SR: To Albert’s point, there’s a lot of money that’s moved in here, but it’s moved into some pretty passive areas that it’s just not moving much in terms of the overall market. You look at fixed income, right? Lots of money moving in there, short into the curb, et cetera, et cetera. I think that’s some of the more interesting stuff as well. But there’s also this weird thing going on where equal weight is outperforming the market cap weight. And has been for some time now, particularly over the last week. If you look yesterday, S&P closed in the red, but if you were equal weighted, close green and it closed green on a non trivial basis, and it was 35 basis points, something like that.
That deviation between market that was led by predominantly tech and only tech, to a market that’s led by other sectors in general is something I think under the surface that paying attention to it can be something that at least can make some money in the near term.
TN: Including Crypto Walmart, which we’ve seen over the past week as well. So we’ll talk about retail later in the show.
Okay. So we had as a group talked about some calls over the past couple of months. Some of those were calls earlier, but let’s get into those just to walk through. Albert, you and Tracy had talked about Intrepid Potash. She talked about Nutrien. We’ve got those on the screen right now. Can you walk us through those and kind of what you’re thinking was on those and what’s happened? What do you expect for those to happen in the near term?
AM: Well, speaking about IPI, Intrepit. It’s like a leveraged ETF in the fertilizer market. That thing swings 5-10, 11% in a week, no problem. That call was basically on the premise that the Ukraine war is going to go on. Russia is cutting off the fertilizer supply. Belarus has a big fertilizer supply. OCP in Morocco has shifted from actual fertilizers to more like phosphate batteries for EVs.
So it only made sense that besides Mosaic, which is the 800 pound gorilla, IPI and Nutrien were just the logical choices for investments.
TN: And is there room to run on fertilizers like there was a target put on Nutrient by one of the banks of like 126 or something? Do you think we could keep running on those trades?
AM: We can, right? Certainly we can. It just really depends on what goes on with the Russians and whatnot. My only risk for running too far is that the Dixie could go to 105, 110 and then we have significant problems across the market, not just fertilizer prices.
TN: Okay. So even if dollar does go to 110, we’re planting now in the US, right. And now and for the next couple of months. And the fertilizer demand is right now and it has been for the past couple of months. But it’s especially right now, is all of that, say planting demand, is that all priced in already, or do you feel like some of that is to come?
AM: I think it’s pretty much priced in. And let’s just be careful because some of the farms that are planting crops are using nitrogen and also fertilizer derived from nat gas. So it really depends on which way the farming community wants to go, what they see the most profitable crops.
TN: Okay, great. That’s good to know. We also talked about lumber, as I remember a conversation probably three or four weeks ago where I think, Sam, you brought up lumber and how lumber was coming off. Can you walk us through that trade, as we have it on the screen?
SR: Yeah, sure. I mean, it’s a Fed trade, right. It’s a Fed tightening quickly, mortgage rates going up and housing demand coming down. The idea that a Fed going this quickly and having the market priced in, there’s a difference. Right. The Fed has only moved 25 basis points.
TN: Right.
SR: The market has done the rest of the tightening for it across the curve. It’s been pretty spectacular. Housing, housing related stocks, those in general, are going to be the first thing that the Fed affects and they’re going to be the first thing that the Fed affects on the margin very quickly. And you’ve seen mortgage rates go to five plus percent.
TN: Sure. Before we get on to housing, I just have a couple of questions about lumber and other commodities. So the downside we’ve seen come in lumber over the past week or so. Do we expect that to come to other commodities as well? I mean, things like weed and corn, there’s still pressure upward pressure on those. But do we expect other commodities to react the way lumber has?
SR: Oh, no, I would not expect the foodstuffs to react in anywhere near the same manner as lumber. Right. Lumber is a fairly… Lumber, you cut it up, you put it in inventory, you sell it, and then you use it for something.
TN: Right.
SR: It doesn’t last forever in good condition either.
TN: Great. Okay, good. Thank you. Now moving on to home builders, which is where you are going. You also talked about XHB, I think two or three weeks ago, and we’re flashing some warning signs about that. We’ve seen obviously rates rise. I was speaking to a mortgage broker earlier this week. He’s doing mortgage at almost 6% right now and expects them to go up kind of close to 8%.
We’re starting to see the resurgence of ARMs. People are already getting back into adjustable rate mortgages because 5.99% is high. Just as a bit of background, less than 10% of US mortgages over the past few years have been adjustable rates. So can you talk us through XHB? And maybe you had mentioned earlier kind of Home Depot and some of the other home makers. Can you talk us through what kind of… Home Depot was a leading indicator on that? Is that fair to say?
SR: It’s fair to say Home Depot and Lowe’s this kind of ties into the lumber conversation. Home Depot and Lowe’s were two of the best at ordering and trying to actually keep inventory on the shelves, even when during the first tremendous spike in lumber. Right. So they kept a lot of lumber on the shelves. They currently have a lot of lumber inventory on the shelves. And it’s part of the reason that you’re seeing what could be described as almost an over inventory of lumber, not just at those two entities, but across the board, because everybody had to buy lumber in order to keep it in stock.
So, yeah, Home Depot and Lowe’s are the tip of the spear in terms of both home building and in terms of home remodeling. Those are both fairly significant drivers of the business there. There’s a little bit of weekend contractor type deals, but very little.
So overall, I would say they are a leading indicator and they have not been acting very well. But when you have mortgage rates to your point at 6%, that creates a problem for the marginal buyer. It’s not a problem for somebody who owns a home. Right. You have your mortgage rate locked in, et cetera, et cetera. It’s not going to destroy you. It might set off being able to put a new deck and redo a pool or something like that. But it’s not going to hurt you in any meaningful way.
TN: Right.
SR: It does hurt the marginal buyer. It hurts the first time buyer, et cetera. So you begin to have slower turns in housing and you begin to have problems with where does that incremental inventory of homes go? And that’s the real problem with higher invetories.
TN: Right. Before we move on to officially talking about rates and housing, I’ll share a story about a friend who is building a house and their lumber broker who should be able to get the best pricing actually has worse pricing right now than Home Depot. Okay. So they can actually go to Home Depot and get better pricing than their lumber broker. And that’s how messed up the lumber market is right now. They’re arbitraging their lumber broker versus retail any given week in their bulk buying to make sure that they can get their house built. So that market both on the lumber side and on the housing side is just a mess.
So let’s officially go to housing and rates. We’ve done a lot of the discussion, but there was a CNBC story about rising mortgage rates are causing more home sellers to lower their asking prices.
And Sam, you talked about that marginal buyer, which is great, and that new buyer. When I talk to people who are doing mortgages, they tell me that even with the rate rises we’ve seen over the past couple of weeks, there is still not a lot of inventory on the market. That’s a big issue. And they’re not seeing a fall in demand for new houses. So is this kind of a last minute rush for people to get a house before rates rise even more? Is that plausible?
SR: There’s some plausibility to that. Yeah, 100%. The other thing is that we’re in Texas. Right. The demand for housing in Texas, the demand for housing in Florida does not tend to be, I would say, as tied to mortgage rates as everywhere else. The rest of the country is much more sensitive to what’s going on. Texas and Florida and a couple of other spots simply have too much inbound demand from higher priced areas. So California, New York, et cetera. There’s still an arbitrage when you sell a place in California or sell a place in New York and move to Texas, Florida, some of the Sunbelt States.
So it’s tough to take Texas as an example, particularly Houston. We’re actually the fourth largest city in the country, and yet we do not get counted in the S&P Schiller because of how different the housing market is here. Dallas gets kind of for whatever reason, but Houston does not.
TN: We’re not jealous at all about that.
SR: No, we’re not.
AM: Go ahead, Sam. Sorry.
SR: But just to wrap that up, I do think that there’s a nuance to Florida and Texas that should almost be ignored. When I look at the data, I’ll be taking out the Southeast region just because it’s one of those that is a little special at the moment.
AM: Yeah, that’s a key point that I always made is like, because of the migration patterns in blue to red States, things are just really wacky. Florida and Texas, Arizona will be red hot. Meanwhile, Seattle, Chicago, parts of New York are just dead spots at the moment. So until that all gets weeded out, people stop moving. Then we’ll actually see the housing market starting to cool off.
TN: Right? Yeah. I was just up in Dallas yesterday, and things are just as hot up there. And the immigration from the coast to Dallas, especially around financial services and tech, it’s just mind blowing. It is not stopping. It has been going on for probably five years, and it’s just not stopping. Those counties just north of Dallas are exploding and they continue to explode.
Okay, so our next topic is China and China’s slowdown. Shanghai has been closed for a couple of weeks with kind of a renewed round of Covid. And obviously the largest Port in the world, which is in Shanghai, is closed. And that kind of exacerbates our supply chain issues, especially around manufactured goods that we’ve been seeing globally. We’ve seen overnight that. Well, not just overnight, but over the last, say, five days. Food has become really scarce in Shanghai. We’ve seen people on social media talking about how it’s difficult to get food. We’ve started to see little mini protests around Shanghai, around food. And things are seem to be becoming pretty dire.
Overnight, we saw that parts of Guangzhou that the government is considering closing, parts of Guangzhou, which Guangzhou is the world’s second largest port. So the two largest ports in the world, there is a potential that those are closed. There is also gossip about parts of Beijing being closed as well. So I’m curious, what do you guys think about that? I can talk about China for days, but I’m curious, kind of, what alarm bells does that raise for you? Not just for China, but globally.
AM: Well, Tony, you recall, you Balding, and I discussing China’s attempt to attack Taiwan and what had happened. And I had pointed out that closing those ports would cause food insecurity and here we are. Although it’s not a Taiwan invasion, it’s a zero Covid policy that shut down the ports and now we have food stress in China causing all sorts of problems.
Most China observers, especially yourself, know that Shanghai has always been the epicenter of uprising for the CCP. It’s a problem for them. They’ve always tried to wash it. Maybe that’s why they’ve come down hard on Zero Covid Policy. That’s something that I’d have to ask you. But from there, this was very predictable. I mean, you shut down ports, China has a food security problem.
TN: On a good day, China has a food security problem. It is an issue that the Chinese authorities worry about day in, day out, not just when there’s a pandemic. Okay. So one of the things that I was talking to some people about yesterday is why is China closing down? Why are they closing down these big cities? There’s a lot of gossip. You can find a lot of theories around social media saying there’s some sinister plan, honestly and for people that don’t know. I’ve done work with Chinese officials over years. And the economic planners I was seconded to economic planner for almost two years. I believe that they’re closing because they’re worried about how the China virus looks, meaning they don’t want Covid to be seen as the China virus. And they worry about the world’s perception if there’s another outbreak that comes from China.
And so I think the leadership believes that they have to be seen to be disproportionately countering COVID so that there isn’t more wording and dialogue about the kind of, “China virus.” And so, again, I don’t think there’s something sinister going on. There’s a lot of gossip about China intentionally trying to stop supply chains to bring the west to its knees and all the stuff. I don’t believe that at all. I think it’s real sensitivity to how they look globally.
Of course, there’s the public health issues domestically. That goes without saying. But I think a big part of it is how do they look globally.
AM: Yeah, but doesn’t shutting down these ports is going to cause even a bigger spike in inflation within China and actually globally?
TN: Oh, absolutely. This is the one thing that I think they didn’t plan on is they’re about to embark on a whole lot of fiscal, a whole lot of monetary stimulants because they have major government meetings in November of this year. So they absolutely cannot go into recession.
But here’s what I have been thinking about. Okay. We’re looking at a Russia-Ukraine war that could potentially bring down Russia and destabilize Russia domestically. We’re now over the past couple of weeks, looking at a China that is starting to self destruct domestically. And I don’t know of anybody who had the domestic issues of both China and Russia as systemic risks in 2022. These things are just coming out of nowhere. And those two risks can be destabilizing for the whole world. And I’ve said for some time, Western governments have to sit the Chinese leadership down and say, look, you guys are systemically important globally. You need to get your act together around COVID, and you have to normalize your economy because it’s hurting everybody.
AM: Great points. Now, going back to Guangdong, there are some really elite families in China out of that area, really wealthy ones, that actually basically gives Xi the support he needs in the CCP. If he loses those families, there’s real trouble for Xi going forward.
TN: I think there’s trouble for him anyway. I think he is not a one man show. Contrary to the popular Western opinion, Xi Jinping is not a one man show. He is not a single Emperor, kind of claiming things from on high. There is a group of people who run China. It’s just too big for a single individual to run.
So I think Xi has been, I wouldn’t necessarily say on thin ice, but I think things have been risky for him for some time. And as you say, it’s pretty delicate for him right now. And if he doesn’t handle this deftly, I think, again, there could be some real destabilizing factors in China. So this is something again, they didn’t plan for. They were talking about major infrastructure stimulus. They were talking about monetary stimulus, getting ready for this big party in November to nominate Xi for more power and all this other stuff. But it’s possible that these events could really hurt him and really hurt his relationships, meaning the key people around him and then the other factions.
Because as much as people say that China is a one party state, sure, it’s a one party state. But there are factions within that one party. And it should be alarming for China and destabilizing China should be alarming for other people around the world.
AM: Yeah. Same thing as Putin. Like their factions behind them that keep them in power. Same thing as Xi. Most autocratic rulers have a circle of trust behind them that keep them in there. If Xi falls and China starts to, I don’t want to say crumble, but at least wobble, if we think we have serious supply chain issues now, wait till that happens.
TN: Oh, yeah. So Russia is important on energy and a couple of other things, but it’s not globally systemically important on a lot. Okay. I would say maybe it’s regionally important, especially to Europe, but China is globally important. And if they can’t figure this out, it will destabilize everybody.
And so I think Western governments need to not lecture to China, but they need to go forward with real concern about China. How can we help you guys out? Right? How can we help you out? Can we get you vaccine? Can we get you support? Is there anything logistically we can do? That is a way that Western governments can come to the legitimate aid of China. They’ll act like they have it all together, but they don’t. It’s obvious. We see it every day on social media. They don’t.
So Western governments really need to offer genuine aid to China in terms of intelligence, in terms of vaccines, in terms of capabilities, and so on and so forth.
Good. Anything else on that?
AM: No, we covered that.
TN: Okay. Looking at the week ahead. Guys, we’ve got earnings season coming up. Can you talk us through your expectations for earnings season?
SR: Sure. I’ll jump in here quickly. I think there’s a few things to watch. One, the consumer sentiment has been dismal. Right. For the last six months. It’s falling off a cliff. Where the US University of Michigan survey, well below where it was at peak of Covid. But we haven’t necessarily seen retail sales. We haven’t seen corporate earnings and corporate announcements follow that sentiment lower whatsoever.
For anybody paying attention this past week, you had Costco with absolute blow out numbers in terms of its same store sales. Take out gasoline, take out anything, and you still have 7% foot traffic. That was stunning. And that’s not a cheap place to shop.
TN: Right.
SR: So that’s indicative of the higher end consumer that’s still holding in there, at least fairly well through March. That’s pretty important. So then there was Carnival with its best week ever in terms of bookings. Those two things are pretty important when it comes to what is the consumer actually doing versus what is the consumer actually saying, which I think is very interesting.
This week we’ll have Delta Airlines. It’ll be interesting to kind of listen to them and see what their bookings have looked like, see what their outlook is for the summer. And then I’ll be paying really close attention to the consumer side of the earnings reports, not necessarily as much the banks. I don’t really care what Jamie Dimon has to say about Fed policy, but I will say…
TN: I think she do.
SR: Nobody does. But I’ll say the quiet thing out loud. But I will be paying very close attention to what the earnings reports are saying about the consumer, because the consumer drives not just the US economy, but the global economy generally, both on the goods side, services side and really trying to parse through what’s happening, not what the US consumer keeps telling us is happening.
TN: Go ahead.
AM: Sam, really quick. How much of these earnings because I’m a little bit suspicious of how much is it inflationary, prices of everything are higher and remnants of stimulus PvP, whatever the people have been getting for the past year. How much is that calculated?
SR: Yes, which is one of the reasons why it’s a great point, one of the reasons why I pointed out Costco. Costco much less on the stimulus side, much less on the saving side, much more on the high-end kind of consistent consumer. And with foot traffic up 7%, inflation was I think it was about 8%, give or take. So they’re passing on the inflation and they’re still getting the foot traffic. So I think that’s an important one.
On the CCL side, it was after the bookings were after the significant stimulus had already run out or run off. You just weren’t getting checks. I think that was also an indication that maybe there’s a shift from the goods to the services side. The one thing that was somewhat disconcerting, if you’re paying attention to the higher end consumer, was Restoration Hardware. They ran down their book to about 200 million in backlog and don’t really appear to be bullish about this year. They guided well below what some were expecting. I think we’re going to hear a lot more about that, partially because they just can’t get enough inventory in time and they’re kind of in trouble on that front.
AM: Yeah.
SR: To your point, it’s a lot of inflation, but some of these guys are seeing some pretty good traffic, too.
AM: Yeah, actually, funny, you mentioned Restoration Hardware because that was one of the things I was looking at specifically for the housing market, like who’s buying a $30,000 at the moment right now. You know what I mean? It’s just silly.
TN: Yeah, that is silly. Okay, great. Thanks for that. And I’m interested to see how the earnings from Q1 also translate to Q2. I’m expecting a real turn in Q2, and I’m wondering how much that is on investors minds as they look at Q1 earnings.
Albert, as we move into the next point around kind of short term or near term equity portfolios. You’ve talked about KWEB for some time, and I’d like you to, if you don’t mind talking about KWEB a little bit, but also if you and Sam can help us understand what is your thinking right now on your term portfolio.
AM: I mean, KWEB is one of my favorite little stocks because it’s a China technology index and it’s been beaten down to a pulp by the Fed. They have absolutely annihilated not just China, but pretty much all foreign equities. And from my perspective, you’re looking at China stimulating in the fall of the shore of Xi. So it’s like it’s a no brainer to me. I think KWEB at 28 is a fantastic deal. Start piling into that.
One of my other ones I was looking at was FXI, which is basically all the China’s big wig companies. So that’s another one I was looking at right now. In terms of the US equities and portfolios, I mean, we’re so overvalued right now. Where do you put your money into? One of my favorite stocks was TWY a tightened tire. It makes 85% of the world’s agriculture tires. Right. I mean, this thing ran up from $1.45 to $14 at the moment. You know what I mean?
How do you put more money into equities at this stage without some sort of correction or something happening with the Fed to show us which way they’re going to go? Are they going to go 50 basis points in the next meeting and then another 50 and another 50, or they’re just going to use a long bond to actually what Sam said earlier and I forgot to bring it out is they’re using the long bonds also to kill the market. So it’s just like,what do you do?
TN: Yeah. The change to valuations we’ll see over the next three months seem to be really astounding.
AM: They’re just silly. Everything is so inflated at the moment. I can’t in good conscience, say get into this stock or get into that stock, because I know how is it going to run right?
TN: Exactly. Sam, anything to add on that?
SR: I love Albert’s point on KWEB. Think about what’s built into the risk there. You have the risk of the SEC delistings. You have the risk that appears to, at least on the margin, be waning. You have the threat of sanctions on China from them helping Russia. You have a lack of stimulus. You have shutdowns. There’s a lot weighing on that index on top of Fed, et cetera. There’s a lot weighing there on that. And you begin to have some of these calls, the geopolitical onion risks begin to be pulled back a little bit. And that to me is a spectacular risk reward in a market that is generally pretty low on the reward.
TN: Okay.
AM: I had one of my biggest clients from the golden guy. I mean, it’s gold and KWEB is what he’s seeing right now. That’s the only thing he wants to even touch, which is fascinating.
TN: Yes, I can see that. Okay. Next, this week ahead, we’ve got CPI out on Tuesday, which is expected to be about 7.9%. Sorry. And then retail sales on Friday, which is 0.3%. So it doesn’t feel like inflation is abating. But, Sam, you talked about, say, Restoration Hardware and other folks earlier. What concerns you guys have about inflation eating into retail sales, do we expect serious difficulty with retail going forward?
SR: Probably not this month. We’ve going to get the release and it’s going to be for March. And I haven’t seen what I would describe as a poor number coming from any of the major retail facing guys for March. I don’t think that number is going to be distressing at all. I think it’s much more of a . May-June story in terms of the economic numbers lag with a hard L. That’s somewhat problematic.
So I would say you’re not going to see the bad official numbers for a month or two. And on the CPI front, I’ll just throw this out there. And Albert can make fun of me for it, but I don’t really care where the inflation readings come in as long as it’s above 5% the Fed still going and it’s still going with its previous plan, and it really doesn’t care, quite frankly.
TN: That’s good to know.
SR: I just think it’s one of those it’s going to be a no. It’s going to be a no reaction type deal. Unless you get a huge break, then you might get a little bit of a come down on twos through sevens or something. But that’s about it.
AM: Yeah. I mean, as much as I want to make fun of Sam on that one. Yeah. Nobody cares about the inflation. Nobody cares about the inflation number right now until the election season starts really ramping up in about June, July. That’s when I agree with Sam with the retail sales are probably crater or starting to lag significantly in May and June. But yeah, prefer inflation. It’s just like everyone is expecting a 7.9 to eight point whatever, you know, so it won’t be a surprise.
TN: Great. Okay, guys, thank you very much for this. This is really helpful and I appreciate it. Have a great week ahead.
Our CEO and founder, Tony Nash, joins the BBC Business Matters podcast to discuss mainly the anniversary of the US Capital riot — and why most Americans don’t really care anymore. Also discussed are the patent-free Covid vax and the CES 2022 and the coolest thing in the event.
FN: Let’s go to Tony and the view from Texas. And I’m just wondering, Tony, we talked about, you know, viewing this from outside the nation’s capital. What have people been talking about today?
TN: Fergus, I gotta be really honest. No, nobody cares. I talked to students. I talked to business people. I talked to people across the country, and this is a DC event, and it’s drama that DC has conjured up and nobody in the rest of the country really cares. It’s just not a big deal for people.
FN: Okay, I’ll tell you why. I find that interesting. One thing. People travel to DC, right? For this event, whether they attended the rally or whether they actually went to the capital and took part. They weren’t DC residents, all of them. And the second thing is it’s a political thing right now, surely, across the country, there are politicians running on this event as a mandate. No?
TN: I don’t think so. No, I don’t think there are politicians running on this. You may have some politicians who are trying to run on this, but honestly, I just spoke to a couple of College students an hour ago and asked them what they thought about it. They didn’t care. I spoke to business people today and they just didn’t care. And they shrug it off as just something that’s in DC, and they shrug it off as the administration trying to distract attention. That is in the middle of the country.
That is the view from Chicago down to Texas and across the middle of the country. Nobody cares. And even in the capital building. So if these guys really wanted to overthrow the government and harm Congress people, they would have gone to the administrative buildings. I mean, these aren’t stupid people, but nobody else cares.
KA: I’m sorry, that’s not accurate. They were in the capital building.
TN: It is. Absolutely. We were in the administrative building.
TN: There were Congress people who weren’t even close to the administrative building.
FN: So, demonstrators sitting in the Speaker’s chair. Right.
TN: The demonstrators were there. The Congress people weren’t there at the end of the day. Fergus, look at the end of the day here’s what we’re talking about. We’re talking about trespass and we’re talking about property crime. Okay. That’s why people don’t care.
FN: There were five fatalities.
TN: Yeah. The Capitol police shot a woman. Right.
FN: Tony, I want to pick up on your point about people in Chicago down to Houston, not caring. This is what you’re reflecting to us about. Hang on. Let me please ask. Does that mean that nobody from Houston up to Chicago, et cetera, in the middle of America believes the message that was behind this campaign because it strikes me that 48% of the Republican Party believe the message behind what happened a year ago.
TN: What message is that, Fergus?
FN: That the election was stolen. This is the message that President Trump continues. A former President Trump continues to put out and the message that those demonstrators sought to enact as they see it. When you say people don’t care, you’re suggesting that it’s done and dusted. And I’m suggesting to you that’s far from the case.
TN: I think it is done and dusted. And I think if you look at people like Ashley Babbitt, who was shot in the back as she was entering like she was unarmed and shot at the back, these were not people who were fighting for something. Right.
FN: All right. Tony, come in. You want to jump in there?
TN: Yeah. I think Rachel is absolutely right. With the Pelosi’s support of the storming of the entry into Ledgeco in 2019, I think the Apathy in the US is really just more exhaustion than anything. I think Americans are just tired of the partisan nonsense. They’re just exhausted by it. And I think people don’t care because they don’t see this coming to an end. And DC is a world unto itself. And most of America just doesn’t care anymore. Honestly.
FN: But at that point and Rachel’s point, I was just reflecting on some of Carrie Lam’s comments exactly a year ago. And this phrase double standards, she said foreign audience should set us. Do Americans recognize that as double standards?
TN: Oh, absolutely. Yes, absolutely. They do. Well, most do not all, of course. But I think most do. If you were to rewind to 2019 and show those tapes to many Americans, they would completely get it. We’re not the Cretans that everyone tries to make us out to be. We understand that.
FN: Tony Nash is with us from Houston, may well be familiar with many of the names we’ve been discussing in the last five, six minutes. Tony, let’s focus on the philanthropy first. Presumably, that’s something you recognize that when you don’t get federal funding, you don’t get the big sort of specific targeted funding that a lot of big Pharma got back at the beginning of the pandemic. You reach into donor sections.
TN: Sure. Yeah, absolutely. And I think the Baylor College of Medicine did fantastic work here with the resources they had, and everyone here is proud of them. Texas is a huge force in medical like in public health, in oncology in many areas of healthcare. And this is just a very public view, public way of doing it. I love what they’re doing. It’s hard not to love what they’re doing.
FN: In terms of the generic issue. We’ve heard a lot about big Pharma is, I guess, easy to demonize, because a lot of the companies are making some very big returns on vaccines, and these people seem to be ready to maybe not give up the whole game, but essentially go for the generic version so that it can be spread more quickly and more cheaply.
TN: Well, all of the private sector vaccine developers, I think they got $20 billion from the US government in 2020, so those medicines have been paid for. They should give them out for free. All their IP should be open source. There should be nothing secret. The American people paid for the ones that were developed in the US. And I think as a foreign policy, we should open source that and let every country develop it at whatever cost they can.
FN: It would be a fantastic kind of diplomatic soft power, too. Wouldn’t it be?
TN: Absolutely would.
FN: And, Tony, I’m not sure how much you heard. There a quick thought from you as we end the program on the survival of Tech despite the pandemic?
TN: I think tech has thrived in the pandemic. And I’m glad to see shows like CES happening where people can go in person or be remote. I think it’s great to be in person. So I’m really happy to see it. And the coolest thing I saw at CES was a car that could change color because of nanotechnology in the paint. That was the coolest thing I saw there.
FN: Yeah, I saw that one online as well. That’s the purple thing I was referring to. Kind of Sci-Fi is real, I guess. All right, Tony, thank you very much. Indeed. Glad we got you back. Briefly. Sorry we lost the line halfway through there.
This is the most recent guesting of our CEO and founder Tony Nash in CNA’s Asia First, where he shares his expertise on inflation and the US economy. Will consumers continue to spend to help the economy? What’s his view on Biden’s call to boost oil supply to ease prices? Where does he think the US dollar is headed and how will that impact Asian currencies?
The full episode was posted at https://www.channelnewsasia.com. It may be removed after a few weeks. This video segment is owned by CNA.
Show Notes
CNA: What’s still ahead here in Asia First. We’ll check if US companies continue to charm investors with some big earnings in focus. Plus, to give us a stake on markets inflation and the US economy, we’ll be joined by Tony Nash from Complete Intelligence.
US stocks closed in the red overnight as lingering inflation concerns continue to dog investors. The Dow ended lower by six tenths of one percent, dragged down by a four point seven percent. Drop in visa the S&O 500 slipped 0.2 percent. And the NASDAQ fell by 0.3 percent.
Now after the bell, we also had some US tech earnings. NVIDIA shares rose after it beats on the top and bottom lines. The ship maker saw its revenue jump 50 percent on year on strong gaming and data center sales. Cisco shares tumbled and extended trade after missing on revenue expectations before the quarter. The computer networking company also issued a weaker than expected guidance.
For more on the broader markets and economy. We’re joined by Tony Nash is founder and CEO of Complete Intelligence speaking to us from Houston, Texas. So Tony as we heard their inflation fears seem to be back despite better expected earnings but CEO’s are starting to warn of more pain when it comes to supply chains. And that could put a damper on in that could lift inflation. Do you think the US consumers will continue to spend despite all this and will that help the recovery of the US in the next year?
TN: Yeah, I think the real issue here is that inflation is rising faster than wages. And what we’re seeing with oil prices. These oil prices are not terrible given kind of historical prices but it’s oil prices within the context of everything else. Obviously, the supply constraints really are pushing up prices of food and other activities as well as say goods that are imported for say the holiday purchases that Americans will make.
So Americans have absorbed a lot of those price rises to date. They’ll continue to absorb some but I think they’re almost at their limit in terms of what they can tolerate without getting upset.
CNA: Yeah, Do you think there’s a disconnect here when it comes to energy because Biden administration is hoping to boost supply to ease that oil price pressure but OPEC and its allies expect surplus into the next year. So, do you think they’re looking at it differently? And who has it right here and where oil prices headed?
TN: Yeah, I think part of the issue in the US with crude oil is the Biden administration restrictions on pipelines and on the supply side in the US. So, Joe Biden is asking other countries Russia, Saudi Arabia, other OPEC members to supply more oil yet he’s restricting the supply domestic supply in the US. So, I think what’s happening with those other suppliers they have customers who are buying their crude oil. They don’t necessarily want to have to produce more because they want slightly higher prices. They don’t want things too high but they want slightly higher prices and so they’re pushing back on on Joe Biden and saying look you really need to look at your own domestic supply. You really need to look at at those issues yourself before we start to open up our own market.
So you know, the current administration is trying to have it both ways. They’re trying to restrict supply within the US. They’re trying to bring in more supply from overseas. Americans see this and they understand kind of the incongruent nature of that argument from the administration.
CNA: I want to get your thoughts on the US dollar, Tony. Because that hit a 16-month high amid his expectations of more aggressive policy from the Federal Reserve. Where do you think the US dollar is headed and how will that impact us here in Asia, especially Asian currencies?
TN: Sure, it’s a great question. We saw a lot of action with the US dollar yesterday. The dollar index as you said reached highs for in the last say 18 months, two years. And that is on Fed action but one thing to consider is we’re looking at potentially changing the Fed chairman later this year.
So, if the current Fed chairman is exited. There is an expectation of a more dovish Fed chair coming in that’s one possibility. I think people are really trying to… While there is upward pressure on the dollar. People are trying not to get too far too much behind it because there could be a more double dovish Fed chair coming in. So, we think the dollar is overshot just a little bit in the short term.
We don’t expect it to continue rallying at its current pace. We expect say the Euro has fallen quite a bit and depreciated quite a bit in the last say three weeks. It’s going to appreciate just a bit a couple cents over the next month or so. Asian currencies, we think the CNY will stay strong. We think CNY will remain strong through say March, April as they start a devaluation cycle to help exporters. We think the Singapore dollar is going to stay in the same range that it’s in about now. We don’t see much policy change in Singapore and we think with a stable dollar at these levels. We think the same dollar will stay at about the same exchange rate of Scott now.
CNA: All right. We’ll keep our eyes on those currency exchanges and who becomes the next Federal Reserve Chairman. Tony Nash thanks for joining us. Tony Nash there founder and CEO of Complete Intelligence joining us from Houston, Texas.
BBC Business Matters is joined by our founder Tony Nash for this episode to talk about US’s $3.5 trillion spending plans. Will it get approved before the G20 meeting in Glasgow? Also discussed are the energy crisis with very high gas prices and Russia’s use of energy as a political weapon against Europe. Has Houston changed because of the pandemic and discussion on climate change?
There are intensive discussions on Capitol Hill to try and break the deadlock over his proposed $3.5 trillion spending plans. Those plans have lead to deep divisions in his own Democratic Party. So how close to a deal are we? We get analysis from Natalie Andrews, Congress Reporter for the Wall Street Journal. And is Russia using energy as a political weapon? The question is frequently asked in Europe and it’s now being asked in Moldova, a former Soviet Republic that’s been trying to move away from Russia’s orbit and develop closer ties to the EU. It follows the decision by the Russian state-owned gas company Gazprom to reduce supplies to Moldova and to threaten to suspend them completely. Moscow correspondent Steve Rosenberg has been to Moldova to find out what’s behind the latest gas crisis. Also in the programme, we look at why has the iconic French fashion house Jean Paul Gaultier – known for cone-shaped corsets worn by Madonna for example – decided to allow people to rent some of its most iconic pieces? And Fergus Nicoll investigates what efforts are some cities making to combat climate change. And we’re joined throughout the programme by Tony Nash Tony Nash of Complete Intelligence in Houston, Texas and Jeanette Rodrigues, South Asia Managing Editor of Bloomberg in Dubai.
Show Notes
RT: Tony Nash, founder of the Complete Intelligence, is based in Houston in Texas. And I would imagine, Tony, that you’ve been watching a bit of baseball over the last few days.
TN: Just a little bit Rahul. Thank you.
RT: And if it’s been good for you so far.
TN: Well, up until last night, it was pretty good. It’s the World Series Baseball Championship. The Houston Astros are in the final two teams playing for the Championship.
RT: And the reason they didn’t go so well because I don’t think they won their first game that we may have talked to Tony a little bit more about that in the program.
Tony, can I come to you here first? Because we heard from the Moldova and government Minister. They’re saying, “Look, I can’t predict where gas prices are going to be in two months time.” As much as of the Northern Hemisphere goes into winter. Gone. Has the guest for us. Where do you think gas prices are going to be higher or lower than where they are now? Because they are very high, aren’t they?
TN: Gas prices continue to rise for at least the next two months, if not into, say, February. So we have tight gas supplies now. We have growing demand now. We have people, a lot of whom are in their house all day, so they have to heat their house where they would normally be in an office, those sorts of things. So it’s an issue that we haven’t really had to face for quite some time. At the same time, we’re seeing inflation in other areas hitting people’s pocketbooks. So I think it’s sensitive in a way that many, many people could not have seen.
RT: President Biden is leaving for the G20 summit in Rome. Then, of course, he’s coming to Glasgow. The COP26. Will you have a deal? Do you think, Tony before he departs American shores?
TN: I don’t think so. There’s a problem with paying for it. And it’s really strange to hear someone say that Democrats are saying they’ll literally vote for anything that goes to the floor, which tells me they’re pretty desperate for something. They’ve tried things like what they’re calling a billionaire tax, which is actually a tax on income of even things that are in your retirement account portfolio.
RT: But is that not a bad idea maybe to try and generate some money? A lot of our listeners will be thinking it’s quite surprising that America doesn’t have paid family leave already?
TN: Well, companies do offer people time off and paid time off when they have a child or something like that, or when there’s a sick family member or something like that. So it’s not something that doesn’t happen here in America. I think somehow it’s being portrayed that Americans don’t do that. It’s not 8 to 12 weeks or something like it is in Europe. But there is time off for that sort of thing. So we’re just in a different place in our social development and we prioritize different things thanEurope. So I think the US is not Europe. The US will never be Europe, or it’ll be a long, long time before it’s Europe. And American taxpayers aren’t willing to pay for that. So they have to find a way to pay for it. And the problem is they can’t find a way to pay for the programs that they want in the bill.
RT: So what’s the soultion going to be here because there will have to be that always is.
TN: A smaller bill. That’s it. I mean, it’s going to be a smaller bill. It’s going to be a trillion, maybe slightly more, something like that, which… I just want to repeat that and say it slowly, a trillion dollars. Okay. So let that sink in. This is not small money. Okay. And it’s a very political tactic to aim very high and then act like you’re disappointed when it comes in at a third of that. But it’s still a TRILLION dollars. Okay. That’s less than the entire bailout of the global financial crisis in the US economy, which was 860 billion or something like that. So it’s less than that entire bailout. So it’s huge money.
RT: It is a lot of money. Let’s look at where you are, Tony, because you’re in Texas, a region synonymous, really, with oil and with gas. As we see these prices increasing so dramatically, do you think that people within those industries, then look at it and think maybe they have a longer shelf life then some people thought they were going to do with that movement to renewables?
TN: Oh, yeah, I think they do. I don’t think hydrocarbons are going away, partly because every plastic that you use is made from hydrocarbons. When Greenpeace protested a vessel, they used a plastic boat to protest. Plastics aren’t going away. I think that the bigger issue that you raised is energy as a political weapon. And I think Russia using energy as a political weapon toward Maldova, toward Europe, toward China, toward other places, I think is a reality that we face when you face tight supplies.
RT: Do you think Europe was naive here in some respects, because if you look at it now, with so much of Europe and Europe dependent on Russian gas supplies, this was always going to be a possibility, if not a probability.
TN: Absolutely. Yes. So, look, I live in Texas. We sell oil and gas to the world. If we had a captive market, we would be tempted to charge higher prices. But we sell to markets all over the world in a competitive system. Europe locked itself into the agreement with Russia, and we could have a long discussion about this. But Europe locked itself in, and so they’re captive. And that’s a huge problem for Europe. And that’s one that Angela Merkel’s and others got Europe into. And conveniently, they’re not going to be around to get them out because they’re out of office. So it’s a really convenient agreement that they came to just in time for them to go out of office.
RT: Let’s go to Houston, Texas. And, Tony, are you seeing Houston change very much, whether that’s a consequence of the pandemic, whether that’s because of a debate about the climate?
TN: So we have obviously a lot of very large oil and gas firms here. And there is a lot of investment in alternative energy sources by those players. So you could argue that it’s just an ESG play for the equity markets. But I think there is sincerity within the companies to be the sources of energy, not necessarily just to be the source of oil and gas.
RT: What if they put in? Do you have no car zones in Houston? How would that go down with the public there?
TN: Houston is a pretty spread out town. So there are some streets that are no car streets, but it’s not large areas, and it’s in very small kind of old-ish parts of town. But other towns? Yeah, absolutely. Up in Dallas, other places, Austin, definitely. There are no car zones in those towns as well. Houston is just a very spread out town. And so it’s very hard to do here.
RT: Tony, let’s come to you first. Let’s ask you, what are you wearing at the moment, Tony, are you wearing a smoking tuxedo jacket? I hope you’re wearing something.
TN: I am head to toe couture. I mean, everything I wear every day is couture. I’m kidding. I’m just in a light blue shirt and jeans. Just came straight from work. But when I think about this business, your guest described negotiate Close as rich and sexy. That describes me perfectly. So of course, I’m going to be a customer.
RT: Okay, let’s get a bit more personal if you are married, if you don’t mind me asking, of course. What did you wear on your wedding day?
TN: Well, this was in the 90s. I wore a Hugo Boss tuxedo. My wife wore a custom dress. So we were married in Sausalito, California. It was a wonderful day.
RT: I’m sure it was. And I suppose you could afford to do that. But if you couldn’t have afforded that, would you now, if you’re going to get married again? Clearly, hopefully not. But would you consider renting something expensive that you couldn’t be able to afford?
TN: Yeah. Why not? Sure if I wanted to. I would absolutely do it.
RT: Tony, next time you’re on Business Matters, we expect you to be in your wedding suit and we expect pictures to be posted as well. Do you think it does? I know what you’re talking about, Jean Paul Gaultier. Do you think it does diminish the brand if they’re renting some of those close out? Does it lose a little bit?
TN: I think right now with kind of the borrowing culture that we have the renting culture, I really don’t think it loses anything. I think people want the experience of doing something nice, wearing something nice, eating something nice and I don’t think it diminishes at all. I think when I was in my 20s, owning it was necessary. Now I think people are happy to rent.
RT: That’s is a very good point. Thank you, Tony. Thank you, Jeanette. If you want to listen to something nice tune into Business Matters, we’ll be back. Same time. Same place tomorrow. Bye.
CEO Tony Nash joins CNA’s Asia First program to explain the logic behind the US market’s performance. Will the better-than-expected retail sales continue to the Christmas season? What is his outlook for Q3 and what’s hampering the economic recovery in the States? And what are at stake around the success of the $3.5T infrastructure bill?
CNA: Well, Wall Street closed mixed in the State overnight as the major indices fail to build on Wednesday strong performance, while for the session, the blue chip Dow closed lower by two tenths of 1%, and the S&P 500 fell by a similar percentage.
However, the Nasdaq managed to eak out second consecutive day of gains. Well, this after investors digested mixed economic readings released before with the opening Bell when August retail sales surprised the market and rose 0.7% from the month prior, with analyst expecting a decline. But on the downside, jobless claims rose from last week’s pandemic low.
Of course, to help us understand the logic behind all the market movements were joined by Tony Nash, founder and CEO with Complete Intelligence, speaking to us from Houston, Texas. Very good evening to you, Tony.
So we’re looking at the better than expected retail sales number. And do you expect that momentum to continue given that we are 100 days away to Christmas in the State side and 99 days away from here in Singapore side.
TN: And we certainly hope that continues. But it’s really uncertain, given some of the corporate outlooks and given some of the other indicators that we’ve seen: purchasing managers indices and the regional Fed reports, Fed Manufacturing reports.
The port hold-ups in Long Beach are not helpful either. It’s really hurt supply chain. So we could see that spending tick up. But we do expect prices to continue to rise. And so there’s really a trade off there in terms of the volume that’s sold and the value that’s sold. And when we’re looking at, say a 1% rise in value of retail sales, that’s quite frankly, not even keeping up with inflation.
CNA: In the meantime, we’re also seeing that the weekly jobless claims increased. And of course, before that, many economist with organizations like JP Morgan has downgraded their third quarter economic growth outlook. So what is your outlook there and what is hampering economic recovery over there in the State Side?
TN: Well, it’s really companies are not seeing great investment opportunities. So the demand for credit in the US, just like in China, and just like in Europe, the demand for credit is really declining.
So we’re not seeing companies spend on big ticket items. They’re not investing on new equipment, they’re not investing on new projects. And so that’s hurting everything downstream because there are impacts across the economic spectrum when companies decide to spend on big ticket items. This is hurting the US. It’s hurting China. It’s hurting Europe.
So between now and you mentioned the end of the year, we expect that corporate spending to have an impact, the damper in corporate spending. We expect the supply chain difficulties and inflation have impacts as well. And if unemployment continues to tick up like it did, we could have a very difficult Christmas season. And the Fed and city administration here in the US are really contending with that, because as they go into the last quarter of the year, they’d really like to see things tick up.
CNA: And talking about those spending of course, there’s one catalyst that investors are watching out would be the passage of the $3.5 trillion infrastructure bill. But given the situation that a Biden is facing now, do you think that this increasing likelihood that this bill can’t be get past?
TN: Yeah, I think you’re right. With the failed withdrawal from Afghanistan, Biden has really lost a lot of the support from Democratic moderates. And so he’s got the support of the extreme left Democrats. But a lot of the Democrats in the middle are really starting to say, “Hold on a minute. We need to be really careful about how much we support Biden,” because those guys have to be reelected in November of ’22. So from here on out, the voters in their respective districts will be paying a lot of attention to what they’re doing.
This 3.5 trillion infrastructure plan, only 1.2 trillion of it, I say “only” but 1.2 trillion of it is dedicated towards real hard infrastructure. The rest of it is a lot of social spending, a lot of pet projects, and that’s a lot of money. 2 trillion plus dollars.
So Americans are really tired of seeing big stimulus programs put out, and they’re really tired of seeing the pork going to people connected to politicians. So they’d much rather see the lower $1.2 trillion program. It’ll go direct to infrastructure. They’ll see it. It’ll be a very tangible spend.
One other thing to keep in mind is there is still $300 billion that haven’t been spent from the stimulus program that came out in Q1 of 2021. So a lot of Americans are asking, why do we need to green light another three plus trillion dollars in spending if we still have $300 billion that’s unspent?
CNA: All right, Tony, thank you so much indeed, for your analysis. Tony Nash, founder and CEO with Complete Intelligence.
Our CEO Tony Nash recently guested at the BBC Business Matters to share his thoughts on the lifting of the vaccine patent protections to help in manufacturing more vaccines faster. Is that fair specially in this time of need? Also discussed are the special case of Facebook and Twitter’s suspension of Donald Trump’s social media accounts, college football, and the growing industry of recycled furniture.
The US government has backed a temporary suspension of intellectual property rights for Covid-19 vaccines in a move likely to enrage the pharmaceutical industry, which strongly opposes a so-called waiver. Shares of the major coronavirus vaccine companies were hit by the announcement but is it just an empty gesture? We speak to Jorge Contreras, Chair of the Open Covid Pledge, a group that is lobbying organisations to share their patents and copyrights in relation to vaccine efforts. We also hear from Thomas Cueni, of the International Federation of Pharmaceutical Manufacturers & Associations. And there’s no status update for Donald Trump anytime soon; Facebook decides to uphold it’s ban of the former US president. We speak to Issie Lapowsky, Senior Reporter at tech site Protocol. Also in the programme, college sports in the United States are a big business, but the athletes taking part have typically been compensated through scholarships rather than salaries. But could that change? The BBC’s Will Bain reports. Plus, the Swedish furniture retailer Ikea has launched a scheme in the UK to buy unwanted furniture back from its customers, in a bid to save items from going to landfill. Hege Saebjornsen is the company’s sustainability manager for the UK and Ireland explains how it works. And we’re joined throughout the programme by Tony Nash, chief economist at Complete Intelligence in Texas and the writer, Rachel Cartland in Hong Kong.
Show Notes
VS: Tony, do you think, people in Texas will be as upbeat as George, our first speaker?
TN: Yeah, absolutely, I think people here are pretty happy about that. A couple of weeks ago, there was an uproar in India over Americans not sharing vaccines with India. Houston has a very large Indian community. And so we were very supportive of everything that could be done to help get vaccine components and vaccine intellectual property to India. So this is a positive development in every way.
VS: And so in terms of an anxiety of giving vaccines away before the population is fully inoculated, does that not exist in your experience?
TN: I don’t think so. There’s plenty of capacity, at least in Texas, if you want a vaccine today, you can sign up to get it. So it’s not really an issue here. I think India has the manufacturing capacity and the know how to do very good vaccines in India. So once the licensing is clear and the components are there, they can manufacture for India and for many parts of Asia, Middle East and Africa.
VS: Tony, what does this actually mean for Donald Trump? He’s not allowed to use social media at the moment.
TN: There are other social media channels, but I think it’s bigger than that. I think the real issue here is around what’s called section 230 in the U.S. government, which allows websites to not be considered publishers. And under Section 230, they are supposed to provide unrestricted access to posting content unless it’s a rules based system. This is clearly a personal deal. Whether you like Trump or not, this is this is making special rules for an individual. I think the bigger issue is around whether Facebook and Twitter and the other social platforms are abiding by Section 230 or whether they should be considered publishers. The BBC is a publisher there and certain things that the BBC has to adhere to that Facebook doesn’t. And so if Facebook was a publisher, they would have to adhere to the rules that the BBC abides by. So if they’re going to restrict postings like this, they should be a publisher. Otherwise, they need to have rules that they enforced regardless of the individual, regardless of the political party, regardless of the country someone from. I think they need to be applied consistently.
VS: So this idea of this board is a way of sort of perhaps circumventing that.
TN: But nobody does. I mean, nobody if you ask anybody in America, nobody actually believes this is an unbiased board. It’s just a fallacy so…
VS: Wide ranging from all around the world, different types of backgrounds. So you can kind of argue that they are a mixed background with lots of different worldviews.
TN: I run an artificial intelligence company. Nobody in the technology community, hand on heart. I actually believe this is an unbiased view. I’m sorry. It’s just not true. And it’s a big pretend game to act like this is unbiased. I’m not on Trump’s side here necessarily. But if you’re going to make rules personal, that really companies lose credibility as a result of that. And all I’m saying is that Facebook should be considered a publisher and they should abide by the rules that publishers like the BBC abide by.
VS: I’m sure it’s not going to last that we’re going to hear from this issue. And for those of us outside the United States, we don’t understand the significance of college football in everyday American life. Tony, you’re in Texas. Can you paint us a picture of that?
TN: Yeah, so college football is not professional and it’s kind of professionalizing, but by professional, I mean paid, right. So this California bill starts to professionalize college football. I think part of the problem with that step is that we have students who come out of high school effectively 17 or 18 year olds who have really raw talent. They’re not necessarily trained to play professionally. They typically spend time with high caliber coaches in universities to develop their skills in their craft over three to four years. Many of them go out early to try to go pro, but it’s over three to four years and then they’ll go into the professional leagues and make money.
So there is a very large investment that universities are making into those athletes. And what happens at the university level is, when students come to a university, they do get a scholarship. The athletic dorms are not normal dorms. They are first class dorms. The food they eat is first class food. I’ve been in their cafeterias. It’s amazing. So they are not treated like normal students. So they do get a lot of advantages above a scholarship, but there’s this huge investment in their skill. And so, the other side of this is if students want to get paid when they leave high school, they’re welcome to try to go pro after their senior year in high school when they’re 18 years old.
And so if there’s a problem with them getting paid, they’re welcome to to try to join the draft and go through that process. They can do it at any time. They could go pro at 18 years old. I doubt many of them, if any of them, at least in football, would would qualify, would get drafted by a team.
VS: As you say and say presumably then, sports is encouraged at quite a young age, given how lucrative it can can be.
TN: Sure. And so they can try to do that, LeBron James actually went into the NBA out of high school, he never went to university. So there are kind of phenoms who can do that and, more power to those guys. They’re welcome to do it. But university, so the school where I went, where I did my undergrad is Texas A&M University. It has the largest revenue sports program of any university in the United States, very large. But the facilities that Texas A&M has for their student athletes are amazing. They rival any pro facility. And so what’s happened over probably the past 20 years, I would say, is a dramatic kind of upskilling and a dramatic improvement of not just the facilities, but the coaches.
And so there are coaches who go from college level to pro and back because the skills that they impart on the students are are amazing. So, the path to getting paid for your sport is one that is always there. They can always go pro straight out of high school. LeBron James did it, other athletes to it. But it’s a very, very, extremely rare process, I think, paying student athletes. Part of the reason I like college football, I prefer college football to pro because you root for a team in college football, you don’t root for an individual in pro football, really. It’s rooting for individuals. And it’s not really a team sport as much as it is at the college level. So I think a lot would change. I really do think a lot would change.
VS: When we heard that about Rachel’s lockdown project. Lack of. And are you cycling anything?
TN: Always, you know, so we just moved back to the U.S. about three years ago, so we’re not recycling much, but when we lived in Asia, we would regularly recycle as my kids grew up, as we worked through furniture, we would regularly, regularly recycle in Singapore.
There’s a guy named the current goony man in every neighborhood who would come and take your recycled materials. And so we would work with with him and he would donate it or something like that. So, you know, every community has its own way of dealing with these things.
VS: Do you sell on furniture that you don’t know because of these websites these days? You can do that well now.
TN: We do that as well. And it’s pretty common. I mean, there are loads of websites where we can do that. So it’s pretty common. We don’t really throw away much big stuff there. We had my son, my son’s bunk bed here. We just sold it on one of those sites about six months ago. So, yes, it’s very common.
VS: Costly to these sites around. Don’t say I wonder if if a company or a retailer decides that they’re going to buy back things. They’ve actually got quite a bit of competition, haven’t they?
TN: Yeah, I mean, I think they’ve probably done that calculation, it’s a pretty crowded market, so, you know, people will dispose of it in a pretty economic way and make money where they can. So I don’t know that everything will be coming back to them.
That’s probably just a small, small fraction that will actually.
VS: Thank you very much, Rachel and Tony, for joining me today.
Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation, part two, where we start looking into things like raw materials cost versus processing and manufacturing bottlenecks. Also discussed are the wage inflation and labor availability and how long these impacts will last. And finally, we start talking about central banks. What will the Fed do? Will it do anything? When will it do it?
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This QuickHit episode was recorded on April 28, 2021.
The views and opinions expressed in this nflation: Buckle up, it may get worse QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
Show Notes
TN: What the people in the middle. So the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things, or are they passing that directly along?
NG: Sorry, Sam. I’m jumping in here. The beauty of that question right now is there was a major headline, the Financial Times talking about margin compression of how US corporates are going to be increasing prices. It was today. You have the likes of Chipotle. We’ll go on to that. That’s a labor cost issue. But the other company, you know, J&J, various bare necessities manufacturers for nappies for kitchenware also they’re saying they’re going to have to put price pressure through to the consumer and as we were discussing just before we started, there’s the elasticity of price increases is very high.
The elasticity of price decreases is extremely low. And I would contend that this becomes a rolling, snowball effect as these prices get passed through to the consumer. There are other costs that will be passed through to which we can talk about later on labor side. But this clearly, one of the signals that our well worth watching, on the margins in the corporate reporting, and all of them are suggestive of higher prices to the consumer.
Then you look at the ISM prices paid. I have a chart, a model that looks at that versus the CPI. And if that sticks to what it’s done over the last couple of decades, it’s indicative of CPI, actually, the big figure having a getting up to somewhere around four, maybe even higher.
TN: Which was kind of a China 2011 scenario of four to six percent CPI.
NG: Correct. But also also the the process of decoupling, as long as it may be, that process has created a demand because of the supply shock.
There’s a supply shock in the system. The demand is adjusting there, too, so that work as additional demand to fill in the gaps, so if the decoupling replacement process is long standing, the demand is still there, it’s a matter and then catching up. There’s a price disparity caused by that.
TN: Yeah, we definitely have a mismatch, at least in the short term. And will those supply chains catch up? That’s a real question. Sam, what’s your view on that in terms of manufacturers being able to absorb these cost and margin pressures?
SR: So I’ll jump to the housing market as my example, which I think is one of the more interesting ones filtering, filtering through down into lumber.
A very close friend of mine in Houston is delaying the start of one hundred and ninety homes that were supposed to be going into, well… He has the pads laid. He won’t build those homes until lumber prices go down. It’s the largest backlog he’s ever had. And that got us talking and kind of working through the market. And when you look at the market for pine studs in the US, it’s an intriguing look into kind of where the cost pressures are coming through, where mills are making mills that make the two by fours are making an absolute fortune off of the disruption.
But if you own a pine stand of several thousand acres, the tree that you are cutting off of it is the exact same price that it was a year ago. You have seen none of the prices at all.
TN: So there’s not a supply, a raw materials supply issue. It’s a processed materials issue.
SR: Yes. Exactly. So it’s the supply chain breaking down. You didn’t have enough. You didn’t have the mills up and running for a couple of months. You had about 40 percent of the capacity offline. And that created a shock to the system that eventually will be sorted out at some point.
We didn’t destroy any capacity for two by fours. We’re building even at the current rate, we’re building one point seven million homes. That’s nowhere near what we were doing in 2005. And yet lumber is four times where it was. So, yeah.
NG: May I ask a question because you’re obviously in touch with that level on a micro basis? So one of the things that I’ve been told by several different sources is they don’t disagree with your number coming down eventually. The problem the homebuilders now have is labor shortage.
SR: That might be a problem in the northeast. That might be a problem in a kind of coastal problem in the US, where I have fewer contacts in construction. But in the south, there’s no labor shortage. Wages are still very strong. You have some projects that were delayed for large oil which created a supply of able bodied plumbers, electricians, where there’s a shortage elsewhere. So I would say that’s probably very true for parts of the country.
There’s anecdotally, Beth. Beth Iron Works? One of the major boat docks in the north, northeast is driving around an RV trying to recruit people to come, trying to recruit welders. That was a problem before Covid that was and will remain a problem. The trades will be a big issue. Common labor, particularly in the South, does not appear to be an issue. That is an issue in the north.
NG: I’ve heard it’s an issue in Florida, actually, which is back to you point about coasts. Sorry, I interrupt.
TN: We’re in Texas. It’s the Promised Land. I mean, I think you…
NG: Would agree with you on that one.
TN: OK, so we’ve gone long. I know these are very detailed issues, but I’m going to ask another question. I did ask for some questions over Twitter.
So one of them came in from Brent. This was around supply chain disruptions, which we’ve already talked about. There’s another from Jerrett Heath. He says, “Will it be velocity or magnitude that causes the Fed to react to inflationary pressures?”
So what do you guys think? Are we going to see kind of the magnitude inflation push the Fed to react or what’s going to push the Fed to react to start to taper a little bit, if they do at all?
NG: I would say both at the same time. My great fear is that there is, and this was actually covered by the Wall Street Journal, but I’ve written and spoken about this as well. I sit there looking at the Fed becoming reactive rather than proactive, and the punch bowl analogy is gone, and that worries me enormously because they have great confidence in something that they’re forecasting as transitory and we know what their forecast record is, and if you really want a bad forecast record, just go to Frankfurt and see what the ECB is all about.
Now, it’s interesting to me that the conventional wisdom, the consensus forecast is for tapering to the end of this year as opposed to next year. It seems like the more people talk about the inflation pressure, the greater it is. But I wonder whether we will get tapering. That’s what worries me about the Fed.
I’ve been really working hard on looking at what Claudia Sahm has written and said over the last couple of weeks. She wrote an op ed in The New York Times and Bloomberg. She’s said… She’s an ex-economist for the FOMC and the Board of Governors, actually. And you get the feeling that the priorities are unemployment with equity, racial equity as opposed to equality. Furthermore, you get the feeling that financial stability… Both of those more important than inflation.
Now, if that’s the case and we start to see any signs of a taper tantrum, I worry that this Fed is going to do a proactive. Either stop the idea of tapering or do a twist or something that eases this market. I think they’ve got themselves, we have a very political Fed that, if it’s reactive by nature, it could be procyclical by action. And that’s where I find I really worry about it.
Then, we’ve got Powells term expiry February. Well, Lail Brainard is one of Janet Yellen’s favorite people. And if she gets in, we’re going full MMT. So those are my concerns about the tapering, its focus on financial stability and the risk that reactive policy will be procyclical.
TN: Interesting. OK, that’s great. Thank you. Sam. Help me understand, what’s your point of view on this? What gets the Fed to react and how do they react?
SR: Yeah, so I would go with neither of those will get the Fed to react. It’s not a question of should they or, you know, what they think they should do. But it’s a question of will they. And they won’t react to inflation. They do not care about the magnitude. They do not care about the velocity. And they won’t care for at least another nine months because we know the combination that they’re going to look through, the combination of basic facts and supply chain disruptions, at least through the end of the third quarter. They do not care. And then they will start the clock on their four quarters of inflation above or at two percent, and they want full employment before they raise. That’s four percent at least on measured unemployment.
So I would say, it, whatever you want to look at for inflation numbers, they don’t care. And maybe they should, but they don’t.
TN: So they don’t care yet. Or they don’t care period?
SR: They don’t care, period, until it’s been until it’s been a year of around 2 percent in this summer and fall don’t matter to them.
NG: Let me add one or it’s too late.
SR: Yes.
NG: I’m with you. You and I seem to agree. I mean, that is exactly the impression I got from Claudia Sahm’s words. I mean it was just straight up. And that’s where I worry, you know, I have a huge respect for Lail Brainard. She is a very, very accomplished economist. But she’ll go full MMT is what Janet Yellen wants. It’s what the Democrats want and I really worry about that.
Plus, you combine this with here we go back to Larry Summers. You combine this with this fiscal effort and one thing that, so in American terminology, progressive policies typically have historically been inflationary. In English terminology, is what I am, these socialist policies have a history of inflation. More government intervention, more pushing against the string of inefficient allocation of resources. Labor restrictions, minimum wage, universal basic income. It all leads to in one direction.
So I agree with you, Sam. I think the Fed doesn’t care and I think, hence, the reactive. When they react, it’s going to be, in my view, potentially too late. It’s already started.
TN: So I just sent out on Twitter a chart that Sam published about three weeks ago from another source on the negative impact of fiscal stimulus, and as we end up ’21, like in Q3, Q4 of ’21, that fiscal stimulus starts to have a negative impact. And certainly in ’22, the US fiscal stimulus has a negative impact.
So, you know, there are a number of things to worry about, not just with inflation, but with the efficacy of some of this fiscal stimulus that’s going into the market.
So with that, I want to thank both of you guys. Honestly, we could talk about this for hours. I would love to have this discussion with you guys again, you know, even in a couple of weeks to talk about other issues. So let’s see where this goes. But thank you so much. Thank you very much for your time on this. I really appreciate it.
We’ll get this out as quickly as possible. Thanks to everyone who’s watching this. Thanks for everyone who submitted questions. For those who did submit questions, for the questions we used, we’ll give you guys a month of CI Futures and look forward to the next time. Thanks for joining us.
Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation. Where are we in the inflation and what is the horizon? Both guests have different views and they explain exactly why they have such views. And what about China’s manipulation of CNY through hoarding metals and commodities? Is that a valid way of looking at inflation?
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This QuickHit episode was recorded on April 28, 2021.
The views and opinions expressed in this nflation: Buckle up, it may get worse QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
Show Notes
TN: Today we’re talking about inflation. It’s been on everyone’s mind for the last couple months and we’ve got two macro geniuses to talk to us about it today. We’ve got Nick Glinsman from EVO Capital and we’ve got Sam Rines from Avalon.
We look at copper. We look at a lot of these indicators of inflation and it’s been on everyone’s mind over the last few months. A year ago, people were worried about deflation. Now the worry is inflation. Obviously we’ve seen a lot of monetary and fiscal policy in the interim.
So, Nick, can you give us your view on where we are with inflation and what that looks like over what horizon? Is it months? Is it five years? Is it, you know, how does this play out?
NG: The horizon is a little bit tougher. But my my thesis is based on looking back at historical precedence and I focused on the LBJ Vietnam War spending, combined with his great society fiscal spend, which ultimately led in the early 70s Paul Volcker’s fame containing huge inflation there was at that period.
And I’m sitting here having spent the last year but actually building this thesis up for a couple of years thinking that the equivalent of the Vietnam expenditure is Covid and the relief spending that’s been has combined Trump and now Biden, and then the great society equivalent would be Biden’s green infrastructure spending which, I slightly tongue-in-cheek called the green ghost plan, which is enormous. Amazing.
When I find myself agreeing with Larry Summers on inflation. I think his odds of a third in terms of this creating inflation, I would suggest a higher. In terms of timeline, it took five to seven years for the inflation to really kick in during the 60’s leading to Volcker. I think this time around, it will be much quicker due to the differences, a lot of globalization and supply chain management.
TN: Sam, can you kind of give us your view of where we are in inflation and what’s the duration that you kind of expect this to play out?
SR: I have a very different view. If you look at the lumber market, copper, et cetera, these are things that tend to sort themselves out rather rapidly. Being in Houston, the best cure for high prices and energy is high prices. We will pump more if oil ever goes to 80. It’s very similar with lumber and copper. Most of the mills are becoming much more efficient in lumber, for instance.
So we will see that begin to roll over and that will roll over in a very meaningful way as we begin to work through these supply chain issues that we know are coming in the summer and we know are probably going to persist in the fall. But as we get into the fall and we get into early 2022, even if we have a couple trillion dollars infrastructure, it’s going to be spread over the better part of 10 years infrastructure.
It’s not a fast spend and it will not save us from the fiscal cliff. It will not save us from the lower employment numbers that we’ve been seeing on an overall basis. Yes, unemployment is moving lower, but employment is not keeping up with the employment figures.
Once the economy begins to have to stand on its own two legs, even if it has a touch of a tailwind from the government, it’s still going to be very difficult to continue to see consumption going through the roof, continue to see the types of disruptions that we’ll see for the next six to nine months in terms of supply chain that will have one-off price implications.
But that to me says we’re probably getting towards the peak of the sugar high as we get into the summer and the other side of the sugar high is going to be very painful in terms of going back to a one and a half to two and a half percent growth rate in the US inflation that will be very difficult to get higher simply because it’s difficult to have sustained disruptions in supply and demographics that aren’t changing anytime soon. So we will continue to have a number of those headwinds. And I think that’s what the US 10-years is telling you, US tenure at 1.5 is telling you that the market’s looking through this summer and saying the next decade doesn’t look as good as the last decade in a lot of ways.
It’s something to at least keep in the back of our minds that the Fed doesn’t have great control over the 10-year. The fed has great control over zero to two-year timeframe. But nothing beyond that.
TN: Okay, so let’s look at common areas. It seems to me that both of you see inflation continuing to rise maybe not in terms of the rate of rise but certainly continue to rise until, let’s say say Q3 Q4? Do we at least have comic around there?
SR: Yeah.
NG: Yes, absolutely.
TN: When we look at some of the the pressures in inflation, part of my assertion has been, and I’m sure you’re both going to tell me I’m wrong, but as we’ve seen the CNY strengthen, my hypothesis has been with a strong CNY, Chinese manufacturers are stocking up on industrial metals, food, other things because it’s in dollar terms. They can get it pretty cheaply and they’re waiting for CNY to devalue again when their buying power will decline.
What I’m hearing is that a lot of these things are really going to China to be hoarded and as a play on a potentially devaluing CNY. What do you think of that hypothesis aligned with a lot of the central bank easing? Is that a valid way of looking at inflation? Meaning this is stockpiling more than it is demand pull?
NG: My view on China is that, if you look at food firstly, there is a food shortage crisis. And we all know what the CCP are most scared of, which is society unrest. And we can take the examples of the Arab Spring, food is the key. But I also wonder whether the Chinese are stockpiling in anticipation of decoupling? I think of rare earths, of which they have a large control of the refining thereof being problematic. Semiconductors, there is an issue there.
So if I extrapolate further, my view is I think the supply chain issues are much longer standing now because of various geopolitical forces creating a decoupling with China for sure. And we have this Anglosphere grouping that’s clearly beginning to take shape, which now looks like that will include India because of the health crisis there.
If we look at that, then the question is what happens with Europe? Again, I think that’s part of the supply chain problem whilst they decide which site they go to. Is it china-centric or is it anglers-centric?
So I think the supply chain issue is much longer standing, hence I suspect that we’ve got China positioning, because nothing goes on which in China without the government knowing about it, quite frankly. In terms of anticipating a supply chain issue, because all the commodities they’re importing they’re short off.
TN: Okay, Sam, first of all, what do you think about my hypothesis and then Nick’s qualification around the supply chain issues being much longer term on the back of decoupling?
SR: I would take the argument that decoupling isn’t an action. It’s a process, and the process takes a very, very long time. And that creates in my mind a much longer time frame for the United States to build out its portion of the supply chain, for instance semiconductors, et cetera. So I would say I don’t disagree that there is a decoupling underway. In my opinion or my argument would be that it will take much longer than a few years to really get that process to move and it’ll be particularly under this administration a much more diplomatic and less blunt force tools than we’ve seen in the past being used. So I don’t disagree with the supply chain eventually being at least somewhat disentangled from China. I would just argue that it will take quite a while to really begin to become an issue unto itself.
On your point that China stockpiling, that does appear to be happening. It does appear to be a hedge against a weaker CNY to come including with lumber. One of the reasons that lumber prices are spiking is because China’s buying a lot of lumber in the US. That is a significant problem. And I would point to, when they stop stockpiling, that tends to have a significant effect on the price of commodities in the opposite direction. We’ve seen that with copper a couple of times during their infrastructure builds.
The interesting thing right now is you’ve actually seen a pullback from infrastructure spending. From the peak in China, they’ve begun to do their form of policy tightening on that front already. Suspected will continue at least on the margin and that will be a significant headwind for those commodities that have been stockpiled when less of them are being used on the margin as well. So that that does play into a 2022 disinflationary type environment versus 2021.
TN: Given that we have all these different pressures, whether it’s supply chains, whether it’s stockpiling, whatever it is, what the people in the middle, so that the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people, when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things? Or are they passing that directly along?
Can Hyundai, Kia, Volkswagen, GM make better electric cars than Tesla? Last year, sales of electric cars surged 44.6% despite the general downturn of car sales in the global market. In early 2021, a number of automobile giants announced plans to go fully electric within the next ten years. Can they beat the likes of Tesla and offer innovative rides for consumers?
Show Notes
SO: Last year sales of electric cars surged 44.6 despite the general downturn of car sales in the global market and that trend looks set to accelerate in early 2021. A number of automobile giants including Volkswagen, General Motors and Volvo announced plans to go fully electric within the next 10 years but can they beat the likes of Tesla and offer innovative rides for their customers?
For insights on this we turn to Tony Nash, CEO and founder of Complete Intelligence based in Houston, Texas and Jason Salvucci, national manager of the Overseas Military Sales Group based in Seoul but currently in Okinawa. Well, a very warm welcome to you both and well Tony good to see you again.
I think it’s our first time connecting this year but well we’ve seen we’ve heard some very exciting news coming from these automakers and the likes of Volkswagen and General Motors. They’re going all electric they’re really moving away from this at the main business that they’ve been building over the decades based on combustion engines.
What’s led them to take this risk and do you think it’s the right move?
TN: I think, it’s a move that they have to make. Whether or not it’s a move that they want to make. I don’t think there’s really a lot of debate there but I think their equity market valuation they have to catch up well.
I don’t know that they will but they’ll try to catch up with say Tesla or something within terms of the equity market valuation but the customer perception they’re actually making viable EVs that they want is really critically important especially with younger customers. But from a balancing perspective at least in the US for example there are emission standards and the more electric vehicles they produce that also allows them produced to produce other larger vehicles SUVs and other high polluting vehicles. So as long as on an average basis they keep it down to the emission standards.
They can produce EVs to allow them to produce say the SUVs that other say consumers want. So, it’s both perception and equity market valuation as well as balancing out the regulatory aspects.
SO: So, they’re wearing the different sort of costs and risks here. Well, Jason, what’s your thoughts on this? I mean the world’s biggest legacy automakers scrapping their combustion engines. Do you think they’re making the right move?
JS: You know, I kind of got to agree with Tony that this is electric is the future. I mean, they have no choice. It’s not just the standards. Electric cars are easier to maintain. They’re quieter. They’re cleaner. They’re more efficient. I mean, the power is better it’s the way everything’s going. I mean, we don’t really have much choice in the matter. While it may not be 100 electric tomorrow. We’re getting there.
The big manufacturers if they want to, they want to play with you know companies like Tesla, they have no choice. That’s where the future is.
SO: And the force Tony, Tesla is without a doubt the world’s most iconic electric car company but do you think it’s leading the global market is going to last with all these other competitors now coming into the market these giant auto businesses? And are these car makers catching up quickly enough in terms of battery technology and other key technologies?
TN: Well obviously, they have a lead but will they be able to keep it as the real question. I think they may be able to keep it for a few years but I’m not sure that they can keep it say over the medium to long term.
So, Tesla has a lead but that gap is closing. And with technology they can use external, say sources to either acquire or develop the battery technology that they need to compete with Tesla. So, I think really at the end of the day it comes down to: can you produce a quality vehicle? Can it perform like consumers want and does it drive like consumers want?
So, the novelty of an EV is wearing off. And as it goes broad-based that first user advantage or first user interest wears off. And the broad market really just wants a functional car that is electric. And so, you have the segmentation and other things but I think Tesla is going to have a tougher job going forward to keep the lead that it’s got.
SO: Well, Jason is it as straightforward as one might think for these giant automakers to transition into all EV?
I mean, what are the major differences that traditional car makers are going to have to adapt to and really face as they transition into all electric?
JS: Well, the manufacturing process for one, you know, the number of components in a combustion engine vehicle, compared to an electric car, it’s night and day. I mean it goes beyond the manufacture of the vehicle. It’s the maintenance of the vehicle it’s really everything.
The shell may look the same but when you transition to, you know even a mild hybrid to a all-electric vehicle. It’s completely different. Not only will the way the cars are sold have to change but also because how the customers buy the cars. How they maintain. How they operate the cars everything changes. It’s not as simple as just shifting from one to the other.
So, I think that the manufacturers have quite a task ahead of them. They are really playing catch up, if they want to grow in this and be industry leaders as they have been for years like Volkswagen, Toyota, Ford. They were industry leaders for years and they’ve surrendered that position to a startup company like Tesla.
SO: Right and there was some news this week that Volkswagen might be changing its name in the US to Voltswagen. So, really goes to show. It’s not as easy or straightforward as simply changing the name and probably…
JS: That’s an April fool’s joke by the way. Yeah, it was April fool’s joke. I fell for it too. Voltswagen is their April fool’s joke.
SO: It was a bit too early for April fool’s day but well thankfully yes, they’re retaining the Volkswagen brand. And well Tony, internet companies like Apple and Google and apparently Xiaomi now and Huawei. They’re working on electric vehicles as well and it’s clearly not going to be such an easy ride. So, what’s really in it for them? And what kind of innovations do you think they’re going to bring to the market as tech companies?
TN: Well, that’s a great question. Jason brought up a great point about the business models and as you move into the more software-based business models that EVs are you move into a different ability. In a different way for consumers to pay for things. And you know, I think it’s possible for kind of that big expense of a car that a consumer would buy instead of it being financed. It could be a service fee that’s put over a period of time. I don’t really know what that model looks like but these software companies are companies that really balance out especially Apple. A hard asset like a phone plus monthly recurring software fees.
And so, these guys will come into the market. Understanding the risk associated with making hardware and balancing that out with software fees. Whereas automakers traditional automakers at least are accustomed to one big transaction that gets financed by a third party. So, it’s a fundamental change in the business model.
SO: And Jason, now South Korean car makers, Hyundai and Kia. They currently set fourth place in the global EV markets and of course Kia having unveiled its EB6 this week. And Honda continuing to expand this EB lineup, of course.
So, how competitive are these South Korean car makers products? And do you think they’re really going to have to step up the game? Now as market leaders global market leaders Volkswagen GM they’re going out all electric?
JS: I’ve been in South Korea 20 years and the way cars have improved in the last 20 years is phenomenal. When I first got to South Korea. Korean cars were far behind but now the fit, the finish, the quality is amazing.
I think the larger auto manufacturers are going to get a run for their money by the likes of Hyundai and Kia when it comes to electric vehicles. I really do.
SO: So, what kind of… I suppose, what kind of advantages or what kind of features do you think they offer Jason that might really help them really engage in the competition especially as all these car makers go electric?
JS: It seems to me the… not just the quality but the design of the Korean cars is a little more exciting than some of the other manufacturers. That’s what I’ve noticed over the last couple of years, is that they’re good-looking cars and they’re reliable. And the price points are, well, I mean they’ve significantly come up in cost in the last 20 years, that’s for sure but they’re nice. And I see a future of like a subscription type of service for electric cars because you know the United States every three years to 39 months. Americans are trading their vehicle up trading in one car for another car. And we have a traditional dealer manufacturer, dealer model that we have to require our customers to go through a subscription service in the future.
It is definitely, in the makes for electric cars because you’ll trade out of them much more frequently.
SO: So, it’s not just the hardware but also the software that’s going to bring about a lot of changes in how we consume electric vehicles, as well. And of course, everyone cares about the design too. And well Tony, it seems that EVs really are the future but it looks like for now the stock market is quite confused about the prospects they’ve been fluctuating. They’ve been declining over the last few weeks. And of course there was a boost on Wednesday after the Biden administration announced its plans to really ramp up green vehicles and infrastructure but what do you make of these market fluctuations? And how does Complete Intelligence really project the demand or market for electric vehicles in the near future?
TN: Sure, obviously there’s a healthy market ahead. I think the equity market fluctuations over the last few weeks are really just, that its markets searching for the right price. And there are so many different variables with bond prices. And currencies. And equity markets that are going into the calculations around the stock market prices for these companies but I do think that those companies that will not only crack the battery technology. And the value proposition for the market but also the business model, as Jason mentioned. Those companies are the ones that the equity analysts. And the investors will really want to follow.
So, Tesla is a high visibility leader, early leader in electric cars. And I think they’ll remain a leader but the volume of cars that they produce compared to say a Volkswagen on an annual basis is tiny. And so, the scale that a Volkswagen or a Hyundai or somebody can bring to this market can overwhelm almost an artisan car maker like a Tesla.
That’s I don’t mean that as an insult to Tesla at all they’ve done some amazing groundbreaking work but they just don’t have the scale that a Volkswagen or Hyundai has.
SO: Well, the likes of Volkswagen and Volvo. They’re going all electric Jason but Hyundai seems to be putting its eggs in multiple baskets. It’s been betting on hydrogen cars as well. Which right now are considered a bit less economical. And there’s also a lack of supportive infrastructure in most parts of the world.
Do you think this investment is going to pay off for the company?
JS: I think the future is multi-faceted. I don’t necessarily see the entire replacement of the combustion engine, anytime soon. I mean, they’ll definitely be hybrid vehicles, will be mild hybrid plug-in hybrids. There’ll be some hydrogen fuel cell vehicles. I think that there’s multiple avenues that manufacturers will have in the future.
So, that we can kind of have something for everybody. I don’t know that the investment in the infrastructure for hydrogen pays off because right now extracting the hydrogen requires fossil fuels. That’s a bit of a problem until they can crack the hydrogen extraction of via solar or something like. That it’s a bit of an… it’s not there yet. I don’t think.
SO: And Tony, before we go now there’s a massive EV market in China. And recently, Huawei technologies. They’ve come out and said they’re going to invest billions into that market.
How do you see the prospects and do you see China sort of leading the global market in terms of EVs just with the massive number of consumers they have?
TN: Sure, I think, Yes. I think China’s challenge is moving their vehicles beyond China and beyond Asia. There’s so much intense competition from Korea, Japan, the US, Germany and so on and so forth, that I think their challenge will be taking an electric domestic, electric vehicle market that will be massive. And moving that into other countries whether it’s safety standards or features or business models.
I think, there is something especially with technology that is specific to China that is very difficult to move beyond Asia. And so, if there is a Chinese EV maker, who can move beyond China and beyond Asia. I think they’ll do very very well.
SO: See, well, this is all we have time for today but that was Tony Nash, CEO and founder of Complete Intelligence and Jason Salvici, national manager of the Overseas Military Sales Group.
Thank you both so much for your insights today. And to our viewers, as always, thank you for watching.
