In this podcast episode, BFM 89.9 Market Watch speaks with Tony Nash, CEO of Complete Intelligence, to discuss the current state of the economy and the stock market. Nash predicts that GDP growth will be around 1% this year, which is a downgrade from previous estimates. He suggests that, due to inflation, firms have been passing on their costs to customers, but with lower volumes expected, there will be a focus on efficiency in the latter half of 2024 and into 2025. Nash also notes that there is a lot of excitement in the tech industry surrounding generative AI, which could bring about efficiencies and revenue opportunities for companies. This has resulted in a rally in tech stocks, despite the lower GDP growth estimates. However, Nash acknowledges that it’s difficult to predict how long this rally will last and whether companies’ valuations will come back down to earth eventually.
Regarding the bond market, Nash suggests that it has historically been more accurate in predicting interest rates compared to central bank prognostications. Currently, bonds are indicating that a recession is coming, but Nash believes there is only a slowdown expected, not a full-blown recession. Furthermore, he suggests that the Fed may be late to respond to this slowdown, as central banks are typically reactive organizations. Nash also discusses the recent performance of safe-haven assets such as the yen, gold, and the US dollar, and suggests that this is due to concerns over the Omicron variant and rising inflation.
Overall, Nash predicts that there will be a focus on efficiency and cautious optimism in the stock market in the coming years. He also suggests that it’s important to remain cautious and vigilant in the current economic climate, as there are a number of uncertainties and potential risks.
Transcript:
BFM
This is a podcast from BFM 89.9. The business station.
BFM
BFM 89.9. 7:06 A.m. On Thursday the 30 March. Good morning. You’re listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning. In half an hour, we’re going to discuss whether the worst is over for the Sri Lankan economy after it secured a 3 billion U. S. Dollar bailout last week from the IMF th. But as always, we’re going to kick start the morning with a look at how global markets closed overnight.
BFM
It was almost perfect. Almost perfect because almost every market was upset one. So let’s name the guilty one. It was the Shanghai Composite Index, which was down 0.2%, but otherwise us all in the green. The Dow was up 1%, S&P 500 up 1.4%, Nasdaq up 1.8%. In fact, if you look at the Nasdaq, this is the shocking thing, right? I thought tech was dead. Growth is over. Well, it ain’t the case because the Nasdaq is up 14% on a year to date basis, this has been the stellar outperformer. Now, if we look at Asian Nikkei was up 1.3%, Hang Seng up 2.1%. Shanghai, like I said, was the one that was down 0.2%. Singapore Straits Times Index, up 0.2%. And our very own FBMKLCI currently up 0.8% to 1420 points.
BFM
All right, so for some thoughts on what’s moving markets we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks, as always, for joining us. Now, given recent performance in US. Equities, investors seem to be looking beyond the challenges in the financial sector and recognizing that US economic growth continues to be resilient. Could investors be headed for a rude shock, though?
Tony
Well, it’s a really interesting question. I think those investors who expect rapid GDP growth, I think will be disappointed. We expect GDP growth to be kind of around 1% this year. That’s downgraded from a couple of months ago. And so it’s not necessarily overall economic growth that will happen. There will be secural growth. And what we’ll see through the rest of, say, this year and into 2025 is a focus on efficiency. What’s been happening is, because of inflation, firms have been passing on their margins or been passing on their costs and more than their costs to their customers. Okay. And so with a lower volume. So we’re going to see a focus on efficiency in the back half of 2024 and into 2025. So you will see equity performance in pockets. But in general, we’ll likely see things sideways unless we see the Fed change footing dramatically, which is still not really expected.
BFM
Okay, so, Tony, is that pocket the Nasdaq? Because help me understand this. Right? Since December, it’s actually up 20%. And I thought growth is great. What’s going on?
Tony
Well, in tech right now, there’s a lot of excitement over generative AI. This is ChatGPT and the other kind of applications of generative artificial intelligence. And so investors are looking at companies everything from semiconductors to say, Meta and saying gosh generative AI, which is kind of the next milestone for AI, could really change these companies and could really bring about efficiencies and could really bring about these revenue opportunities. So there’s a lot happening in tech, of course, but in general, when you look at companies like Microsoft that has made the major investment in OpenAI and you look at Google and their new AI kind of chat item that’s out there and then other companies. It’s similar to I know you guys are too young to know this, but in 2000, whenever a company would release a website, their stock would get a bump. And so what we’re seeing right now is whenever companies release an offering or say they are implementing some sort of generative artificial intelligence or ChatGPT or something like that, they’re getting a bump in their equity price.
BFM
Okay, but how long can this rally kind of last? There seems to be a disconnect because you just told us GDP is 1% and then companies earnings probably aren’t going to be that great for the moment. Yet markets seem to ignore the news. Will they all come back down to earth eventually?
Tony
Well, it depends on how you define down to earth. Right? Is down to earth 2018 valuations and 2018 market levels maybe. Again, it really depends on how the market views, I think generally, how the market views activities by central banks and the Fed. So if the Fed has really isolated the banking crisis, which I believe they have, then the Fed can continue to raise rates and then they can continue to shrink their balance sheet. Now they just grew their balance sheet by a lot by bailing out banks. But they can shrink their balance sheet in certain areas, say mortgages, those sorts of things. So that can help to bring some of these valuations down to earth. But keep in mind, we’re going into a presidential election year in 2024. And so it’s really hard to determine, does the US administration not want a recession or do they want a terrible recession so they can be seen to be passing a fiscal stimulus plan. So I don’t know what their calculus is. They can either keep the economy steaming ahead or they can try to drive the economy into the recession so they can be seen to be passing massive stimulus packages.
BFM
Tony, in one of your panel commentaries, a suggestion was made that bond markets were more accurate in predicting rates compared to central bank prognostications. Why is that so? And what are they currently saying about future Fed hikes?
Tony
Well, the first thing kind of every amateur loves to be a central bank prognosticator, so those are rarely right. But bonds. So if you look at a year ago, bonds were telling the Fed that they needed to raise rates because inflation was coming and they waited until too late. Right now, bonds are saying that a recession is coming and the Fed is continuing to tighten and the Fed is always late. Central banks are typically always late because they are a reactive organization and that’s how they’re designed to be. Are bonds going to be absolutely right about a recession coming later in the year? I’m not really sure. Again, we think there’s a slowdown, but we don’t necessarily think there’s a recession. And when we use the R word, we also have to be careful because it can be defined any way we want. Right. Because we had two consecutive quarters of negative growth last year and nobody says that we had a recession last year. So a recession kind of is whatever we define it as today.
BFM
Okay, well in the last two, three weeks there’s been clear, three clear safe haven assets: yen, gold, and US dollar. Do you think these three asset classes still can be safe haven assets?
Tony
It’s really hard for the dollar and gold to be safe haven assets at the same time. For the yen, I think with the change of the governor, the chairman of the BOJ, and Japan of course is already doing this, but I think they have to be very careful. That happens in, I think late next month. And so if they can handle that transition in an easy, seamless way, I think we can probably continue to do that. Gold? I’m not entirely sure. I know there are a lot of people out there pumping gold right now, and there are a lot of people kind of naysaying the dollar right now. Trying to say that Saudi signed some agreement. Saudi Arabia signed some agreement to deal in US dollars, and Russia signed Chinese Yuan and Russia signed an agreement to deal in Chinese Yuan or whatever. But those are very small, nominally very small. So I do think the dollar will remain a safe haven in times of turbulence. Japanese yen probably because currencies are all on a relative basis. They’re all on a relative basis. Gold, I don’t think gold is going to fluctuate a lot, but I think gold investors can be very fickle. So I’d be really careful of that one.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Commenting there a little bit about the difference in market exuberance in tech sector compared with, I suppose the sentiment that perhaps the US could be heading towards a recession or at least markedly slower growth than what was anticipated early on.
BFM
But I think it’s interesting that Tony brought up the reason why, which is, it’s generative AI, well ChatGPT, right. So much excitement about it and I think questions about is it a disruption or is it an opportunity? But I think markets thinking, hey, which companies are going to get involved in this.
BFM
If you see a company that’s involved in AI, if they have their own AI bot or whatever, oh, that must.
BFM
Be a good thing.
BFM
It reminds me so much of the hype over the Metaverse not that long ago when Facebook or Meta decided to take that angle. And right now, there’s no no one’s talking about the Metaverse metabolism.
BFM
What are you talking about, Charles? Everybody’s forgotten about it. Right. So there are always trends that come and go. Let’s see who really can monetize it. That’s the thing at the end of the day.
The IMF says the risk of a global recession has increased as it lowers its growth forecast for the coming year. Its managing director, Kristalina Georgieva, said the gloomy outlook was fuelled by Russia’s invasion of Ukraine and the continuing impact of the Covid pandemic.
Hong Kong has relaxed several of its coronavirus restrictions in recent weeks. Now it’s giving away 500,000 airline tickets worth $250 million in a bid to boost visitor numbers. Will it succeed?
The Rooney Rule was adopted by NFL teams in the US in 2003, with the aim of creating equal opportunities for Black coaches. But there’s criticism that it hasn’t achieved what it set out to do. Gus Garcia Roberts from the Washington Post has been investigating and shares his findings with us.
Sam Fenwick is joined by Tony Nash, chief economist at Complete Intelligence in Houston, Texas and Zyma Islam from the Daily Star in Dhaka, Bangladesh to discuss these stories and the other big money and work issues of the day.
Transcript
Sam
Hello. You’re listening to the BBC World Service. I’m Sam Fenick, and this is Business Matters. Welcome to the program. Today we’re going to be talking about the risk of a global recession. It’s apparently creeping close. It’s the stark warning from the International Monetary Fund. We’ll be talking about what it might mean for businesses and consumers around the world. Why the price of oil affects more products than just the petrol in your car.
Tony
So natural rubber has gone up, oil prices have gone up, and therefore the tire industry margins, margins have come down.
Sam
And have you ever quit your job? Is it liberating? We’re going to be talking about that. We’ll be joined throughout the program with two from my two guests on opposite sides of the world. And pleased to say that Tony Nash joins us. He’s in Houston, Texas in the USA. He is the CEO at Complete Intelligence. Hi, Tony.
Tony
Hi, thanks for having me.
Sam
And Zyma Islam is a journalist at the Daily Star newspaper in Dakar in Bangladesh. Hi, Zyma.
Zyma
Good morning, Sam.
Sam
Hi. Good morning. It’s Friday morning with you. It’s Friday morning with us, but it’s still Thursday with Tony.
Tony
Yes, it is.
Sam
And have either of you ever quit a job?
Tony
Yes.
Sam
Have you?
Tony
Yes.
Sam
Was it liberating? Worrying?
Tony
Well, I had a better opportunity in both cases, so I guess it was liberating.
Sam
Zyma, have you?
Zyma
Oh, I’m terrified by the very thought, even when I’ve had better opportunities.
Sam
Yeah, I’m with you. Maybe it’s a female thing. Well, we’ll be talking about that a bit later in the program. But first, shall we look at the global economic outlook? Because the International Monetary Fund warned on Thursday that the risk of a global recession is rising because of Russia’s attack on Ukraine and shocks caused by the COVID pandemic.
Sam
Tony, I think we should start with you on this because you are an economist. Some of the quotes that I was reading in the speech, which she gave greater uncertainty, higher economic volatility, geopolitical confrontations, more frequent and devastating natural disasters. It doesn’t sound great, does it? It makes for quite grim reading.
Tony
Yes. And if it’s going to be more volatile than the last two years, look out. I think part of this is obviously post pandemic. Part of this is the backside of a lot of the stimulus that we saw over the last two years. Part of it, of course, is because of the war. Part of it is because of the other side of supply chains. There’s so much that’s happened over the past couple of years and there’s always the other side of it. Right. And I think that’s what we’re seeing right now is the other side of all of this drama that we’ve all lived through over the past two years.
Sam
The IMF is going to downgrade the economic forecast for next year, 2023. Explain what that means.
Tony
Well, in civil terms, it just means things will grow slower or they’ll do the opposite of growing and they’ll contract. So that’s really what they mean by contracting economic growth.
Sam
And energy prices are a big problem here, aren’t they? You mentioned them. The war in Ukraine is really causing a problem with gas into Europe, but also oil prices.
Tony
Sure it is. Yeah. I mean, Russia has been selling that to Asia primarily, but it has disrupted, obviously, the flow of oil to Europe, and that’s just dislocated global prices. Of course. In the US, the president opened up the Strategic Petroleum Reserve, which put millions and millions of barrels on the market and alleviate prices somewhat. That will end in November. And so we should see some at least in the crude market, we should see energy prices rise toward the end of the year once that slack is cleared from the market.
Sam
We’ve discussed some of those inflationary pressures come from the rising cost of crude oil. Crude oil derivatives make up nearly half of the cost of producing vehicle tires. About seven gallons of the black stuff is used to produce a single tire. Apollo Tires is India’s largest manufacturer of tires. Their annual revenue is $2.6 million. But over the past couple of years, their prices have gone up by about 30 or 40%. The vice chairman and managing director of Apollo is Near Edge Canoe, and he told me that he’s had to put his prices of his tires up.
Sam
Tony, I just wanted to come briefly to you just off the back of that. Mr. Kamwa there was talking about how they try and reduce costs. But it takes a lot of infrastructure to get those costs down, isn’t it? A lot of capital expenditure. And then it’ll be a while before these businesses start to see the reduction in cost because of the investment that they’ve made.
Tony
Well, it could. I mean, some of it could just be changing processes. I think when things like the input costs like crude oil or natural rubber are cheap, there’s very little incentive to refine your processes. Right? And so I think those first steps, him talking about going to the factories and getting, say, the same output with less input in the factories, that sort of thing, those are obviously the first steps. And I think every business, if they’re honest, can probably ease out productivity gains. I don’t know. I wouldn’t estimate what percentage they could, but those are obviously first. But part of it could potentially be, as you say, investing in equipment, investing in automation, other things which could produce a lot more. But I think what I found really interesting about what he was talking about was you’re seeing the primary impacts of inflation, which is crude oil and rubber. The secondary impacts of inflation is the tire price, and that the tertiary what we call the tertiary impacts of inflation are the freight costs that he talked about. So in that interview, we saw three different phases of inflation impacting the economy. It was really interesting.
Sam
Great. Well, thank you very much. Well, we are going to now move to another update on Twitter. Billionaire Elon Musk, he says he aims to complete his purchase of Twitter by the end of the month, but the company will not take yes for an answer.
Sam
And Tony, I mean, so many countries have no travel restrictions for COVID at all now. That you tend not to go to places where there are restrictions, because why would you?
Tony
I’ll be honest, I really miss Hong Kong. I used to go there once a month when I was at The Economist. Our original headquarters was there and I was there a lot. But even with small restrictions, it’s just an inconvenience. And so there would have to be a serious incentive to go and put up with really any restrictions.
Sam
I was looking at the various different restrictions that have been kind of removed over the past few weeks. So, Japan, so from next Tuesday, the 11 October, there will be no border controls in Japan similar to the US. But the thing with Japan is that China was the largest source of tourism revenue before the Pandemic, and of course, people can’t leave the other parts of China.
Sam
Welcome back to Business Matters on the BBC World Service. We are live in Salford in the UK. I’m Sam Fenix. Thank you for your company. We’ve got Tony Nash with us. He’s in Austin, Texas. He’s an economist. And Zyma Islam is a journalist from Dakar and she joins us from Bangladesh. We’re going to start the second half of the program by talking about whether it’s a good idea to quit your job. It’s often seen as a negative thing to do, but it doesn’t have to be. One in five of us are expected to quit our jobs this year, according to PwC’s Global Workforce Survey.
Sam
So, Tony, you said earlier in the program that you have quit a job. Tell us about what happened.
Tony
So I got a job at one point with a company that I thought was fantastic. After a couple years there, I realized that kind of everyone who had worked there for more than five years had really just kind of settled and they stopped being excellent and the best at what they could do. So I told myself at the time that I would stay there for five years and then I would find another job. And I did. And I moved on to a job with quite a lot more money and less work to do, which was really nice.
Sam
Did you listen to your body like we heard in that clip?
Tony
I guess so. In a kind of a silly way, I guess so. I just knew that I wasn’t comfortable being mediocre, but I didn’t want to leave the job right away, so I had to stay there for a period of time, do my time, and then find something where I could do great work?
Sam
It doesn’t always look good on a CV, does it? To have lots of different jobs in very short space of time.
Tony
I don’t necessarily think that’s the case anymore. Look, my company is a tech company and in tech you stay at least in the US, you stay for a year and you move on. That’s pretty common with, say, developers in tech. So I think it depends on the industry. But I don’t think moving around jobs, say, every few years is necessarily seen as negative as it once was.
Sam
But you felt in that job you did have to stay there for a certain amount of time.
Tony
I did, and I wanted to stay there for a period of time because I wanted to make sure that my initial feeling wasn’t wrong. And I also wanted to make sure that I could get the most out of the job. You know, good experiences, great people, all that sort of thing. And I did. I enjoyed the next few years, but I also realized that it was time to go. And that’s something kind of early career, mid career, I think people need to do is when they come into a job, understand why they’re at that job, and then understand when it’s time to move on. And it’s not necessarily emotional, it’s just part of a growing process.
Sam
That’s the truth, isn’t it? Tony perhaps in the US, people are more likely to move around because there’s more job security, there are more jobs.
Tony
Possibly. I think especially in the US. Through the pandemic, there is so much work from home and so many people would switch jobs because it was just arbitrage. They could do the same work for more money and stay in their home. So I think that was a big factor in a lot of the job leaving in the US over the last couple of years. As things slow down, it’ll be really interesting as we enter recession or as things continue to slow down, it will be really interesting to see what happens with job leavers and job switching in the US to see if that slows down and what the expectations around jobs really are.
Sam
Well, I’m going to speak Tony.
Tony
It’ll happen. My company automates finance jobs, so highly educated professional workers in developed countries. So automation is going to happen to a lot of jobs where they’re not innovated. That’s just a fact. And so the entrepreneurs and the planning officials in Bangladesh should better get busy because automation of garment jobs is coming pretty quickly. And so.
Zyma
Absolutely, but there’s going to be a gender component to that, Tony. So when you start training garment workers for these more highly technical jobs, what happens is that women, they get cut out of the picture because they’re not as skilled graduating.
Tony
I spent most of my professional life in Asia. My son is South Asian. I understand the cultural issues around many of the workforce debates that happen in Asia. Deeply. I understand them deeply. And so that is a cultural issue that can only be solved by Bangladeshis in Bangladesh. It can only be solved by Bangladeshis in Baghdadesh. And so that’s not something that anybody else can solve. And I hope that there are people in Bangladesh who have the courage, your President is a woman. So I hope that people have the courage to solve that in Bangladesh.
Zyma
We’ll actually need to get our woman to start going to university. Because what happens here is that after high school, they drop out, they get married. When it comes to high school, we do have like an equal there’s, like a 50 50 balance when it comes to graduates. But the minute you go off to the treasury sector, you see fewer female graduates. So with fewer female graduates, they’ll be less eligible for the automated jobs. It’s easier for them to get these brick and mortar jobs involving, say, sitting in a supply chain line of some sort.
Tony
I’ll tell you what will happen with the automation around the garment sector. That won’t happen in Bangladesh. Because of supply chain issues, those automated garment factories will be put in Europe, or they’ll be put in the US or somewhere else closer to where they’ll be consumed. So, to be very honest, those jobs will disappear in Bangladesh if those higher level skills aren’t taught, and now is the time for that innovation to happen.
Sam
Do you see that happening? Any of that innovation, that education that Tony mentions?
Zyma
No, not at all. Absolutely not at all. I simply see women getting replaced in the menial workforce.
Sam
Well, Tony, we are actually on the eve of a big jobs data day, aren’t we? It’s a big day tomorrow in the US on Friday. Indications show that the jobs market might be slowing.
Tony
Yes, and we’re in a position in the US where kind of bad news is good news, I think, because the Fed is hoping that the rate of job growth slows so that they can ease up on interest rate rises. So Americans are kind of hoping that it’s a down number so that there’s less expectation or lowered expectations that the Fed will raise rates. So bad news is good news with that particular print.
Sam
Well, that’s a good thing for our listeners to look out for. Bad news is good news. When did you ever hear that? Thank you both very, very much for joining us. Tony Nash, economist with Complete Intelligence in Austin, Texas, USA. And Zyma Islam, a journalist with the Daily Star in Bangladesh. My name is Sam Fennick. You’ve been listening to Business Matters on the BBC World Service. Thank you to the producer, Hannah Mullane, and the team in the studio here in Salford. Join me again tomorrow at the same time, midnight GMT.
Tony Nash joins Daniel Lacalle in a discussion on the rise of the machines in a form of AI and machine learning and how Complete Intelligence helps clients automate budgeting with better accuracy using newer technologies like now casts. How GDP predictions are actually very erroneous yet nobody gets fired? And how about China’s GDP as well, and why it’s different from other economies? All these and so much more in markets in this fun discussion.
The video above is published by Daniel Lacalle – In English.
Show Notes
DL: Hello everyone and welcome to this podcast. It is a great pleasure to have somebody that you should actually follow in social media on Twitter, Tony Nash. He is somebody that you definitely need to need to look for because it has very very interesting ideas. Tony, how are you?
TN: Great, thanks Daniel. Thanks so much for having me today.
DL: It’s a tremendous pleasure as I said I was very much looking forward to to have a chat with you. Please introduce a little bit yourself. A little bit to our audience and let us know what is it that you do.
TN: Sure, thanks Daniel. My name is Tony Nash. I live in Houston, Texas. I’ve spent actually most of my life outside of the U.S. I spent most of my 20s in Europe, North Europe, the UK, Southern Europe and from my 30s to almost the end of my 40s I was in Asia. And so you know being in the U.S., Europe and Asia has really given me personally an interesting view on things like trade economics markets and so on and so forth.
During that time I was the global head of research for the economist out of London, I was based in Singapore at the time. Led the global research business. I moved from there to lead Asia consulting for a firm called IHS Markit which is owned by S&P now.
And after that I started my current firm Complete Intelligence which is a machine learning platform. We do global markets currencies, commodities, equity indices, economic concepts. We also do corporate revenue and expense forecasting so we’ll automate budgeting for large multinational firms.
DL: Wow! amazing. Truly amazing. You probably have a very interesting viewpoint on something that a lot of the people that follow us have probably diverging views. Know the situation about the impact of algorithms in the market the impact of high frequency trading and machines in markets.
We had a chat a few months ago with a professor at the London School of Economics that he used to invite me to his year-end lectures to to give a master class. And he mentioned that he was extremely concerned about the almost the rise of the machines. What is your view on this?
TN: I think so an Algo is not an Algo, right? I mean, I think a lot of the firms that are using Algo’s to trade are using extremely short-term algorithmic trading say horizons. Okay? So they’re looking at very short-term momentum and so on and so forth. And that stuff has been around for 10 plus years, it continues to improve. That’s not at all what we do we do monthly interval forecasts, Okay?
Now, when you talk to say an economist they’re looking at traditional say univariate and multivariate statistical approaches, which are kind of long-term trendy stuff. It’s not necessarily exclusively regression, it gets more sophisticated than that.
When we talk to people about machine learning, they assume we’re using exclusively those kind of algorithms. It’s not the case. There’s a mix we run what’s called an ensemble approach. We have some very short-term approaches. We have some longer-term traditional say econometric approaches. And then we use a configuration of which approach works best for that asset or that revenue line in a company or that cost line or whatever for that time.
So we don’t have let’s say, a fixed Algo for gold, Okay? Our algorithm for the gold price is continually changing based upon what’s happening in the market. Markets are not static, right? Trade flows economics, you know, money flows whatever they’re not static. So we’re taking all of that context data in. We’re using all of that to understand what’s happening in currencies, commodities and so on, as well as how that’s impacting company sales. Down to say the department or sub department level.
So what we can do with machine learning now. And this is you know when you mentioned should we fear the rise of the machines. We have a very large client right now who has hundreds of people involved in their budgeting process and it takes them three to four months to do their budgeting process. We’ve automated that process it now takes them 72 hours to run their annual budgeting process, okay? So it was millions of dollars of time and resources and that sort of thing. We’ve taken them now to do a continuous budgeting process to where we churn it out every month. So the CFO, the Head of FP&A and the rest of the say business leadership, see a refresh forecast every month.
Here’s the difference with what we do, compared to what a lot of traditional forecasters and machine learning people do, we track our error, okay? So we will as of next month have our error rates for everything we forecast on our platform. You want to know the error for our gold price forecast, it’ll be on there. You’ll know the error for our Corn, Crude, you know, JPY whatever, it’s on there. So many of our clients use our data for their kind of medium term trades so they have to know how to hedge that trade, right? And so if we have our one, three month error rates on there, something like that it really helps them understand the risk for the time horizon around which they’re trading. And so we do the same for enterprises. We let them know down to a very detailed level to error rates in our forecast because they’re taking the risk on what’s happening, right? So we want them to know the error associated with what they’re doing with what we’re doing.
So coming out of my past at the economist and and IHS and so on and so forth. I don’t know of anybody else who is being transparent enough to disclose their error rates to the public on a regular basis. So my hope is that the bigger guys take a cue from what we’re doing. That customers demand it from what we’re doing. And demand that the larger firms disclose their error rates because I think what the people who use information services will find is that the error rates for the large firms are pretty terrible. We know that they’re three to seven times our error rates in many cases but we can’t talk about that.
DL: But it’s an important thing. What you’ve just mentioned is an important thing because one of the things that is repeated over and over in social media and amongst the people that follow us is well, all these predictions from the IMF, from the different international bodies not to the IMF. Actually the IMF is probably one of the one that makes smaller mistakes but all of these predictions end up being so aggressively revised and that it’s very difficult for people to trust those, particularly the predictions.
TN: Right. That’s right.
DL: And one of the things that, for example when we do now casts in our firm or when with your clients. That’s one of the things that very few people talk about, is the margin of error is what has been the mistake that we have made in the in that previous prediction. And what have we done to correct it because one might probably you may want to expand on this. Why do you think that the models that are driving these now cast predictions from investment banks in some cases from international bodies and others? Are very rarely revised to improve the prediction and the predictability of the of the figures and the data that is being used in the model.
TN: It’s because the forecasters are not accountable to the traders, okay? One of the things I love about traders is they are accountable every single day for their PNO.
DL: Yeah, right.
TN: Every single day, every minute of every day they’re accountable for their PNO. Forecasters are not accountable to a PNO so they put together some really interesting sophisticated model that may not actually work in the real world, right? And you look at the forward curves or something like that, I mean all that stuff is great but that’s not a forecast, okay? So I love traders. I love talking to traders because they are accountable every single day. They make public mistakes. And again this is part of what I love about social media is traders will put their hypothesis out there and if they’re wrong people will somewhat respectfully make fun of them, okay?
DL: Not necessarily respectfully but they will.
TN: In some cases different but this is great and you know what economists and industry forecasts, commodity forecasters these guys have to be accountable as well. I would love it if traders would put forecasters up to the same level of criticism that they do other traders but they don’t.
DL: Don’t you find it interesting? I mean one of the things that I find more intellectually dishonest sometimes is to hear some of the forecasters say, well we’ve only made a downgrade of one point of one percentage point of GDP only.
TN: Only, right. It’s okay.
DL: So that is that we’ve grown accustomed to this idea that you start the year with a prediction of say, I don’t know three percent growth, which goes down to below two. And that doesn’t get anybody fired, it’s sort of like pretty much average but I think it’s very important because one of the things. And I want to gather your thoughts about this. One of the things that we get from this is that there is absolutely no analysis of the impact of stimulus packages for example, when you have somebody is announcing a trillion dollar stimulus package that’s going to generate one percent increase in trendline GDP growth it doesn’t. And everybody forgets about it but the trillion dollars are gone. What is your thoughts on this?
TN: Well, I think those are related in as much as… let’s say somebody downgraded GDP by one percent. What they’re not accounting for, What I think they’re not accounting for is let’s say the economic impact kind of multiplier. And I say that in quotes for that government spending, right? So in the old days you would have a government spending of say you know 500 billion dollars and let’s say that was on infrastructure. Traditionally you have a 1.6 multiplier for infrastructure spend so over the next say five years that seeps into the economy in a 1.6 times outs. So you get a double bang right you get the government spending say one-to-one impact on the economy. Then you get a point six times that in other industries but what’s actually happened.
And Michael Nicoletos does some really good analysis on this for China, for example. He says that for every unit of say debt that’s taken out in China, which is government debt. It takes eight something like eight units of debt to create one unit of GDP. So in China for example you don’t have an economic multiplier you have an economic divisor, right?
DL: Exactly.
TN: So the more the Chinese government spends actually the less GDP growth which is weird, right? But it tells me that China is an economy that is begging for a market. A real market, okay? Rather than kind of central planning and you and Europe. I’m sure you’re very familiar with the Soviet Union. I studied a lot of that in my undergrad days very familiar with the impact of central planning. China there’s this illusion that there is no central planning in China but we’re seeing with the kind of blow-ups in the financial sector that there is actually central planning in China.
And if you look at the steel sector you look at commodity consumption, these sorts of things it’s a big factor of china still, right? So but it’s incredibly inefficient spending. It’s an incredibly inefficient way and again it’s a market that is begging for an open economy because they could really grow if they were open but they’re not. They have a captive currency they have central planning and so on and so forth.
Now I know some of the people watching, you’re going to say you’ve never been to China, you don’t understand. Actually I have spent a lot of time in China, okay? I actually advise China’s Economic Planners for about a year and a half, almost two years on the belt and road initiative. So I’ve been inside the bureaucracy not at the high levels where they throw nice dinners. I’ve been in the offices of middle managers for a long time within the Chinese Central Government so I understand how it works and I understand the impact on the economy.
DL: Don’t you think it’s interesting though that despite the evidence of what you just mentioned. And how brutal it has been because it’s multiplied by 10. How many units of debt are required to generate one unit of GDP in a little bit more than a decade? Don’t you find it frustrating to read and hear that what for example the United States needs is some sort of central planning like the Chinese one. And that in fact the the developed economies would be much better off if they had the type of intervention from from the government that China has?
TN: Sure, well it’s it’s kind of the fair complete that central bankers bring to the table. I have a solution. We need to use this solution to bring fill in the blank on desired outcome, okay? And so when central bankers come to the table they have there’s an inevitability to the solution that they’re going to bring. And the more we rely on central bankers the more we rely on centralized planning. And so I’ve had so many questions over the last several years, should the us put forward a program like China’s belt and road program, okay?
We know the US, Europe, the G20 nobody needs that, okay? Why? Because Europe has an open market and great companies that build great infrastructure. The US has an open market and although European infrastructure companies are better. The US has some pretty good companies that build infrastructure in an open market. So why do we need a belt and road program? Why do we need central planning around that? And we can go into a lot of detail about what’s wrong with the belton road and why it’s not real, okay? But that type of central planning typically comes with money as the as kind of the bait to get people to move things. And so we’re already doing that with the FED and we’re already doing that with treasure with money from the treasury, right?
And if you look at Europe you’re doing it with the ECB. You’re doing it with money from finance ministries. The next question is, does the government start actually taking over industries again? And you know maybe not and effectively in some ways they kind of are in some cases. And the real question is what are the results and I would argue the results are not a multiplier result they are a divisor result.
DL: Absolutely. Absolutely it is we saw it for example. I think it’s, I mean painfully evident in the junk plan in Europe or the growth and jobs plan of 2009 that destroyed four and a half million jobs. It’s not easy to to achieve this.
TN: You have to try to do that.
DL: You have to really really try it, really try.
I think that you mentioned a very important factor which is that central banking brings central planning because central banks present a program of monetary easing of monetary policy. And they say well we don’t do fiscal policy but they’re basically telling you what fiscal policy has to be implemented to the point that their excuse for the lack of results of monetary policy tends to be that the that the transmission mechanism of monetary policy is not working as it should. Therefore because the demand for credit is not as much as the supply of money that have invented. They say, well how do we fill in the blank? Oh it has to be government spending. It has to be for planning. It has to be so-called infrastructure spending from government.
You just mentioned a very important point there is absolutely no problem to invest in infrastructure. There’s never been more demand for a good quality infrastructure projects from private equity, from businesses. But I come back to the point of of central banks and a little bit about your view. How does prolonging easing measures and maintaining extremely low rates affect these trends in growth and in these trends in in productivity?
TN: Well, okay, so what you brought up about central banks and the government as the transmission mechanism is really important. So low interest rates Zerp and Nerp really bring about an environment where central banks have forced private sector banks to fail as the transmission mechanism. Central banks make money on holding money overnight, that’s it. They’re not making money necessarily or they’re not doing it to successfully to impact economies. They’re not successfully lending out loans because they say it’s less risky buying bonds. It’s less risky having our money sit with the Fed. It’s less risky to do this stuff than it is to loan out money. Of course it’s less risky, right? That’s goes without saying.
So you know I think where we need to go with that is getting central banks out of that cycle is going to hurt. We cannot it… cannot hurt, well I would say baby boomers in the West and and in Northeast Asia which has a huge baby boomer cohort. Until those guys are retired and until their incomes are set central banks cannot take their foot off the gas because at least in the west those folks are voters. And if you take away from the income of that large cohort of voters then you’ll have, I guess I think from their perspective you’ll have chaos for years.
So you know we need to wait until something happens with baby boomers. You tell central banks and finance ministries or treasuries will kind of get religion and what will happen is behind baby boomers is a small cohort generally, okay? So it’s that small cohort who will suffer. It’s not Baby Boomers who will suffer. It’s that small cohort who will suffer. It’s the wealth of that next generation that Gen x that will suffer when central banks and finance ministries get religion.
So we’re probably looking at ten more years five more years of this and then you’ll see kind of… you remember what a rousing success Jeff Sax’s shock therapy was, right?
DL: Yeah.
TN: So of course it wasn’t and it’s you know but it’s gonna hurt and it’s gonna hurt in developed countries in a way that it hasn’t hurt for a long time. So that kind of brings to the discussion things like soundness of the dollar, status of the Euro that sort of thing. I think there are a lot of people out there who have this thesis. I think they’re a little early on it.
DL: Yeah, I agree.
TN: So economists you know these insurance people see it from a macro perspective but often they come to the conclusion too early. So I think it’s a generational type of change that’ll happen and then we start to see if the US wants the dollar to remain preeminent. They’re going to have to get religion at the central bank level. They’re going to have to get religion at the fiscal level and really start ratcheting down some of the kind of free spending disciplines they’ve had in the past.
DL: Yeah, it’s almost inevitable that you’re in a society that is aging. The net prison value of bad decisions for the future is too positive for the voters that are right now with the middle age, in a certain uh bracket of of age. Me, I tried the other day my students I see you more as the guys that are going to pay my pension than my students. So yeah…
TN: But it’s you and me who will be in that age bracket who will pay for it. It’s the people who are 60 plus right now who will not pay for it. So they’ll go through their lives as they have with governments catering to their every need, where it’s our age that will end up paying for it. So people our age we need to have hard assets.
DL: Absolutely.
TN: You know when the time comes we have to have hard assets because it’s going to be…
DL: That is one of one of the mistakes that a lot of the people that follow us around. They they feel that so many of the valuations are so elevated that maybe it’s a good time to cash in and simply get rid of hard assets, I say absolutely the opposite because you’ve mentioned a very important thing which is this religious aspect that we’ve that we’ve gotten into. And I for just for clarity would you care to explain for people what that means because…
TN: I say get religion? I mean to become disciplined.
DL: I know like you because that is an important thing.
TN: Yes, sorry I mean if anybody but to become disciplined about the financial environment and about the monetary environment.
DL: Absolutely because one of the things that people tend to believe when you talk about religion and the the state planners religion and and central bank’s religion is actually the opposite. So I wanted to write for you to very make it very clear. That what you’re talking about is discipline you’re not talking about the idea of going full-blown MMT and that kind of thing.
TN: No. I think if there is if there is kind of an MMT period, I think it’s a I don’t think it’s an extended period. I think it’s an experiment that a couple of countries undertake. I think it’s problematic for them. And I think they try to find a way to come back but…
DL: How do you come back from that because one of the problems that I find when people bring the idea of well, why not try. I always, I’m very aware and very concerned about that thought process because you know I’ve been very involved in analyzing and in helping businesses in Argentina, in Hawaii, in Brazil and it’s very difficult to come back. I had a discussion yesterday with the ex-minister of economy of Uruguay and Ignacio was telling me we started with a 133 percent inflation. And we were successful in bringing it down to 40 and that was nine years.
TN: Right. So, yeah I get how do you come back from it look at Argentina. look at Zimbabwe. I think of course they’re not the Fed. They’re not you know the EU but they are very interesting experiments when people said we’re going to get unhinged with our spending. And we’re going to completely disregard fundamentals. Which I would say I would argue we are on some level disregarding fundamentals today but it’s completely you know divorced from reality. And if you take a large economy like the US and go MMT it would take a very long time to come back.
DL: Absolutely.
TN: So let’s let’s look at a place like China, okay? So has China gone MMT? Actually, not really but their bank lending is has grown five times faster than the US, okay? So these guys are not lending on anything near fundamentals. Sorry when I say five times faster what I mean is this it grew five times larger than the bank lending in the US, okay? So China is a smaller economy and banks have balance sheets that are five times larger than banks in the US. And that is that should be distressing followers.
DL: Everybody say that the example of China doesn’t work because more debt because it’s growing faster what you’ve just said is absolutely critical for for some of our followers.
TN: Right, the other part about China is they don’t have a convertible currency. So they can do whatever they want to control their currency value while they grow their bank balance sheets. And it’s just wonderland, it’s not reality so if that were to happen there are guys out there like Mike Green and others who look at a severe devaluation of CNY. And I think that’s more likely than not.
DL: Yeah, obviously as well. I think that the the Chinese government is trying to postpone as much as it can the devaluation of the currency based on a view that the imbalances of the economy can be sort of managed through central planning but what ends up happening is that you’re basically just postponing the inevitable. And getting a situation in which the actual devaluation when it happens is much larger. It reminds me very much. I come back to the point of Argentina with the fake peg of the peso to the dollar that prolonging it created a devastation from which they have not returned yet.
TN: Right. And if you look at China right now they need commodities desperately, okay? Metals, they need energy desperately and so on and so forth. So they’ve known this for months. So they’ve had CNY at about six three, six four to the dollar which is very strong. And it was trading a year ago around seven or something like that. So they’ve appreciated it dramatically and the longer they keep it at this level. The more difficult it’s going to be on the other side. And they know it these are not stupid people but they understand that that buying commodities is more important for their economy today because if people in China are cold this winter and they don’t have enough nat gas and coal then it’s going to be a very difficult time in the spring for the government.
DL: And when you and coming back to that point there’s a double-edged sword. On the one side you have a currency that is out to free sheet are artificially appreciated. On the other side you also have price controls because coal prices are limited by the government. And therefore you’re creating on the one hand a very big monetary hole and on the other hand a very big financial hole in the companies that are selling at a loss.
TN: That’s true but I would say one slight adjustment to that things like electricity prices are controls. When power generators buy coal, they buy that in a spot market, okay? So coal prices have been rising where electricity prices are highly regulated by the government this is why we’ve seen blackouts and brownouts and power outages in China. And why it’s impacted their manufacturing base because they’re buying coal in a spot market and then they’re having to sell it at a much lower price in the retail market.
And so again this is the problem with central planning this is the problem with kind of partial liberalization of markets. You liberalize the coal price but you keep the electricity price regulated and if you don’t have the central government supporting those power plants they just blow up all over the place. And we’ve seen the power generators in the UK go bankrupt. We saw some here in Texas go bankrupt a couple years ago because of disparities like that and those power generators in the UK going bankrupt that’s the market working, right? So we need to see that in China as well.
DL: Yeah, it’s a very very fascinating conversation because on the other hand for example in Europe right now with the energy shortage we’re seeing that a few countries Spain, France, etc. are actually trying to convince the European Union, the European Commission to try to get into a sort of intervened market price in the in the generation business. Which would be just like you’ve mentioned an absolute atrocity very very dangerous.
TN: This creates a huge liability for the government.
DL: It creates a massive liability for the government. This is a key point that people fail to understand the debate in the European union is that, oh it’s a great idea because France has this massive utility company that is public. And therefore there’s no risk it had to be bailed out twice by the taxpayers. People tend to forget that you’re paying for that.
TN: But again this is what’s that block of voters who doesn’t really care about the impact 10 or 20 years down the road. That’s the problem. There’s a huge block of voters who don’t really care what the cost is because the government’s going to borrow money long-term debt. And it’s going to be paid back in 10 or 20 years and the biggest beneficiaries of this and the people on fixed incomes they actually don’t care what the cost is.
DL: Yeah, yeah exactly, exactly. There’s this fantastic perverse incentive to pass the bill to the next generation. And that obviously is where we are right now. Coming back to the point of the infrastructure plans and the belt and road plan. What in your view are the the lessons that we must have learned or that we should be learning from the Belgian road initiative?
TN: So here’s a problem with the Belton road and I had a very candid discussion with a senior official within China’s NDRC in probably 2015 which was early on, okay? And this person told me the following they said the Belgian road was designed to be a debt financed plan. What’s happening now, and again this was six or seven years ago, very early on in the in the belts and road dates. They said the beneficiary countries are pushing back and forcing us to take equity in this infrastructure, okay?
Now why does that matter well the initial build out of infrastructure is about five percent of the lifetime cost of that asset, okay? So if you’re if China is only involved in the initial build out they’re taking their five percent, it’s a loan and they get out. If they’re equity holders in that let’s say they’re 49 equity holders in an Indonesian high-speed rail then they become accountable for part of that build-out. And then they have to maintain the other 95 of the cost for the next 30 to 50 years. So they thought they were going to be one and done in and out. We do this infrastructure we get out they owe us money and it’s really clean what’s happened is they’ve had to get involved in the equity of those assets.
And so I’ve since had some uh government officials from say Africa ask me what do we do with the Belton road with china? Very simple answer force them to convert the debt to equity, okay? They become long-term involved on a long-term basis. They become involved in those assets and then they’re have a different level of interest in them in the quality maintenance and everything else but they’re also on the long-term basis accountable for the costs.
So they don’t just build a pretty airport that and I’m not saying this necessarily happens but they don’t just build a pretty airport that falls apart in five years, okay? They then have to think about the long-term impacts and long-term maintenance costs of that airport, right? And so but you know the original design of the Belton road was debt financing. Mobilizing workers and so on and so forth what it’s become is a mix of debt and equity financing. And that’s not what the Chinese government has wanted.
So I’ve been telling people for three or four years the Belton road is dead, okay? And people push back me and say no it’s not, you know think tank people or whatever. But they don’t understand the fundamental fact of how the Belton road was designed it was designed as a one-and-done debt financed infrastructure build out it’s become a long-term investment all around the world. So it’s a different program. It’s failed, okay?
They’re not going to make the money they thought yes they’ll keep some workers busy but they’re not going to make the money they thought. All of those assets, almost all those assets are financed in US dollars, okay? So they’re not getting their currency out. It’s not becoming an international unit like they had hoped. They’re it’s not they’re not clean transactions and so on and so forth. So this is what’s happened with the Belgian road. So the lesson learned is they should have planned better. And they should have had a better answer to you become an equity owner. And uh
I think you know if any western governments want to have kind of a belt and road type of initiative. They’re going to have to contend with the demand from some of these countries that they become equity owners. And I think that’s a bad idea for western governments to be equity owners in infrastructure assets so you know this is this is the problem.
Japanese have taken a little bit different because of where the Yen is and because of where interest rates are in Japan. Japanese have basically had kind of zero interest or close to zero interest on the infrastructure they’ve built out. And so they haven’t gone after it as aggressively as China has. They’ve had a much cleaner um structure to those agreements. And so they’ve been, I think pretty successful in staying out of the equity game and staying more focused on the debt financing for their infrastructure initiatives.
DL: Oh, absolutely big lesson, big lesson there because the we see now that the vast majority of those projects are impossible to the debt is impossible to be repaid. There’s about 600 billion dollars of unpayable debt out there. And we also have the example from from the internationalization of the French, Spanish, Italian companies into Latin America that they fell into the same trap. They started with a with a debt-financed infrastructure build type of clean slate program that ended up owning equity. And in some cases with nationalizations hopefully that will not…
TN: And watch for debt to equity conversions in these things. It’s good. There’s going to be huge pressure because the Chinese say the exit bank the CDB. A lot of these organizations are going to be forced to convert that debt to equity and then unload it on operating companies in China. They’re not going to want to do it but we’re going to start to see more and more pressure there over the next couple of years.
DL: Great! Well I’m absolutely convinced that will happen. Tony, we’ve run out of time so it’s been an incredible conversation lots of things that are very very interesting for our followers. We will give all the details to follow you and to get more information about your company in the details of the of the video. And thank you so much for your time. I hope that that we will be able to talk again in a not too distant future.
The IMF has upgraded its GDP forecasts for developed economies but what is the outlook like for developing economies in South-East Asia? The Morning Run asks Tony Nash, CEO of Complete Intelligence. They also get into insights from the earnings out of JP Morgan and Goldman Sachs, as well as how traditional automakers will have to adapt in light of the EV boom.
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Show Notes
LM: The IMF has upgraded its GDP forecasts for developed economies, but what is the outlook like for developing economies in South East Asia?
TN: It’s actually not bad to look at this IMF report. We had such a pullback in economies in 2020 that we really have to look at the growth rates in 2019, 2020, and 2021. To understand it in context, Southeast Asia looks to be doing pretty well when we average those three years out. There’s growth in just about every country except Thailand, now with a slight pullback over that time. And so what that means is Thailand will not necessarily back up to the 2019 levels unfortunately, but Malaysia is 1.7%. In Asia, 2.4%. Singapore, 0.38%. So Southeast Asia is growing. Europe, on the other hand, there is only one country that shows growth over that period, which is the Netherlands within the Eurozone. So Europe has a bit of a problem. The US continues to grow, though around 1%.
NL: Meanwhile, is the sharp rise in March, U.S. CPI prices compared to February a good sign or something to be concerned about?
TN: We didn’t see long term inflation effects and a lot of kind of buzz about long term inflation affects or medium term inflation affects in the US. But our view is that this is two factors. One is the base effect, meaning we saw so much disinflation or deflation in 2020 that we’re seeing a base effect on that. The other one is supply constraint. So we’re seeing hold back in supply chains or we’re seeing supply chains catch up from closure.
There is a constrained supply which is driving up prices as supply chains continue to equalize and balance out. We should see those prices return to normal. If we go back to the IMF forecast, we don’t necessarily see rousing growth for 2021 compared to, say, 2019. So we have the manufacturing capacity in place. So I don’t necessarily see demand outstripping supply to create the inflation that many people are talking about.
NL: When do you expect the situation will normalize?
TN: It really all depends on when countries open up and and that sort of thing. I would do three of twenty one is when we start to see things more normal, I think it’ll work out in between now and then. Of course, currency dynamics have a lot to do with that, but we’ll have to see what happens with the dollar with CNY and the euro to really understand how that will shake out. But we think we’ll see normalization in Q3.
RK: The big Wall Street banks have kicked off earnings season with numbers from JP Morgan, Goldman Sachs and Wells Fargo. They beat estimates, but are these numbers sustainable or just a one off blip following a what was really a tough year?
TN: They both did really well in terms of return on equity. And that’s really one of the major requirements for banks. The real question is around loan. So we saw a spike in loans in the middle of 2020 in the US, largely on the back of small business loans and very low interest rates and government programs to push loans out. Loans are down in Q1 of ’21. There is an expectation that loans will perk up again in the second half of ’21. I’m not quite convinced we’ll see the loan growth that was talked about today with JP Morgan’s call. I think we’ll see loan growth in the second half of ’21, but I’m not necessarily sure that we’ll see the spike that we discussed on the call.
LM: So Tony, Legacy Cockburn’s and IT companies are both rushing into the electrical electric vehicle space out of these two, who’s likely to come out in front?
TN: I think it’s a combination. Car brands make really good hardware, but they’re really not great software makers. So I think there’s going to be a combination of the car brands relying on battery makers and relying on software to make great electric vehicles. There are a lot fewer parts in EVs. And so these supply chains that the car manufacturers had to have for internal combustion engines change pretty dramatically for EVs. They’re going to have to rely on battery makers and software makers.
I think the real question for the auto manufacturers is what is that business model going forward? I think they may learn from software makers with the recurring revenue model. So we may take a car and pay a monthly charge for that car, almost like combining finance and the car itself. So carmakers have a recurring revenue model with regular upgrades similar to the way maybe some mobile phone carriers operate, those sorts of things. I think it’s a stretch to have the one time payment. I think carmakers see that finance revenue go to other people and they may want to do that themselves with EV.
RK: Out of curiosity, do you have any thoughts on what will define whether a legacy car brand is going to succeed in the new car world? Because a lot of them have been hesitant to move. They’re going to have to make partnerships with the battery mate because they’re going to have to make partnerships with software makers is going to be the two defining parts who they’re putting on the battery and the software name.
TN: Yeah, I think it depends on, you know, the first mover is not necessarily the winner. So I think Tesla ultimately, they’re a great company. They make fine cars like every car company. They have problems. But I think they’re fine. It doesn’t necessarily mean they’re going to be the winner. I think with Volkswagen announcing, you know, big moves in the market a couple of weeks ago, say if Toyota really I mean, of course, they’re going after it already. But if there are real moves in that direction, I think the very, very large scale carmakers will ultimately win.
A lot of this has to do with regulatory and subsidy regimes within the consumption countries. So it is more expensive to buy an electric car. There is not the infrastructure necessarily to have electric cars to drive long distances. So the subsidies that national governments put out to push that market forward are going to have a major impact on the adoption of those cars.
The real danger, I think, is it’s going to take a long time to rollout that infrastructure and other things. So the real danger for the guys who invest in EVs in a big way is a different type of technological change that could come around. I don’t know what that could be. It could be a more efficient internal combustion engine. It could be, you know, I don’t know, a different type of fuel or something that’s a lot cheaper and a lot easier to use.
So there are a lot of question marks around the rise of EVs. I don’t necessarily think that it’s guaranteed that EVs will take over and the big car companies are going to go on a percent to electric vehicles.
RK: The large scale makers like Volkswagen, Toyota, they’ve got they’ve got essentially a conglomerate of other brands within them. Do you expect to see more consolidation, especially as this? Because the car industry hasn’t been doing well that great over the last few years and we’ve seen more M&A. We should we expect more consolidation, especially after last year?
TN: I don’t know how much more there is to consolidate. I think it may get specialized boutique. When you have technology changes in an industry, you always have specialized boutique companies that come around. We saw this in mobile phones, say, 10 or 15 years ago, and those ended up being purchased. So I think we’ll have an era where we’ll have even more TV companies, small ones that end up being bought by the larger guys. So, you know, a technological change really pulls a lot of innovation. Big companies are really not good at innovation, so they typically have to acquire it. Will it Tesla be acquired? Probably not, at least not at this valuation. But other small companies, early stages could potentially if they have very good tech. So I think that’s the way they leapfrog. I don’t think it’s the massive processes that they have internally, like a Volkswagen today. I don’t think that’s the way they leapfrog.
LM: Thanks so much for joining us this morning. Tony, that was Tony Nash, CEO of Complete Intelligence, giving us some insight into what’s happening in global markets.
RK: So we are talking about cars very quickly. I see this headline here that Jilly’s Lotus cars, miles, raising four billion ringgit.
And they’re only doing this to help the iconic British sports and racing automobile brand to expand into the IV market in China, according to people familiar with the matter. And this is a story from Bloomberg. So Geely is working with advisers to slander potential investors interested in funding the round. And that could see that would value good value lotus operations at about five billion U.S. dollars. This is going to be interesting because this is, of course, was formerly part of the Proton Group, which was then bought by Geely.
LM: And so so we’re going to be heading into some messages now and then. Up next, taking a look at Mithras financing with financial columnist Pankaj Kumar. Stay tuned. BFM eighty nine point nine.
Macro specialist, geopolitics and history commentator Nick Glinsman joined us for the first time on QuickHit to discuss how the Anglosphere compares to the world in this multi-speed recovery in the wake of Covid.
Nick is based in Brazil and he brings decades of experience to macro, markets, and politics. His background is basically London and New York with a bit of Europe and, Australia and Hong Kong. He worked with the Salomon Brothers and Merrill Lynch. He’s doing a lot of advisory work and the ability to express views on the markets, geopolitics and macroeconomics in the market.
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This QuickHit episode was recorded on April 8, 2021.
The views and opinions expressed in this The Anglosphere and the Multi Speed Recovery? 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: Nick, for a while you’ve talked about this concept called the anglosphere. Can you help us understand what you mean by the anglosphere?
NG: I’ll dig into it. I like the fact that you’re talking about the link between geopolitics and economics because with Trump and Brexit, that’s where what was a very boring macro environment suddenly started to become differently exciting. The politics would start to drive some of the macro markets and actually what’s interesting is Brexit and Trump, part of the anglosphere. Not the formative part of the anglosphere.
So what we mean by the anglosphere is looking at countries that are historically tied via culture but critically also via common law, legal system, because that defines how the economy and how commerce can run. If you go back in history, there is a big difference between common law countries and roman law countries. Common law countries think of European Union countries and that construct. So what we mean by the anglosphere is being, better start with the UK because it is the mother country, it’s still the mother country for where you are currently still. If the US were now part of the commonwealth. You’re looking at an anglosphere. Now typically when I refer to it, I’m talking about UK, US, Canada, Australia, New Zealand. Five Eyes.
You could loosely add two countries. One of which has an anglo-saxon common law — India. The other one works much closer as a defeated entity country in World War II — Japan. So you’re getting the quad, which I would maintain is part of an angular influence, at least, if not anglosphere entity.
Let’s stick with that grouping. You’re looking at countries that have a similar legal system, similar financial structure, they have banks, central banks that are lenders of last resort and traditional backups, concept. Remember the European Union doesn’t have banks.
Back to common law. Common law also in this environment. This is where it’s getting critical. So Five Eyes is I would posit it’s the ultimate defense alliance.
TN: Even New Zealand, still? Ah, you know. Long discussion. That’s so much sarcastically.
NG: I know what you’re saying. Although she has the relation in the State of Victoria in Australia, who is actually not known as Kim Yong Dan. But if you look at what they’ve just done with the central bank, there is still a similarity there. And of course the travel corridor that’s about to open on the 16th I think it is, is between Australian and New Zealand. So as much as she kowtows to the panda in Beijing, they are still part of that structure.
So back to the common law and the financial. So you’ve got countries with central banks that act as lenders of last resort with independent monetary policy, you have independent fiscal policy and I would include of course in both these, Bank of Japan, RBI in India and so on so you’ve got independent fiscal policy, independent monetary central bank, which you don’t have in Europe.
There’s been no Hamiltonian moment there. So you have that flexibility and you can see that flexibility. You also have much more, common law enables Schumpeter’s creative destruction and thus reconfiguration. Much easier chapter 11 in the US or bankruptcy and start again. Right. Not so easy to either stop or start on the roman law. So that when you think of where we are now, you’ve gone through a pandemic where inexplicably a lot of countries have remained closed, the reopening is going to need that reconfiguration.
You’ve also been the countries that are advancing with the vaccine quickest of those that took a very commercial view as governments in terms of getting them… so you had operation walk speed in the US and you had a vc person take over the procurement policy and the vaccine policy in the UK. Private Sector innovation. And in fact, in the UK, you have that triangle, Oxford, Cambridge, London, that’s without biotech and so on and so forth, very flexible. You even have a situation where the famous Astrazeneca factory in Holland was financed by the British. Not by the Dutch.
We can get into that on another episode of the great vaccine debacle. But I think that’s part of the precautionary Roman Law System that the EU runs versus the go get innovative system that comes with the anglo-ceric countries, the common law system and the structure of finance business so and so forth.
TN: Okay. So it sounds to me like when you talk about the anglosphere and you look at it kind of post pandemic or at least post first wave of disaster in the pandemic as we enter a recovery, it sounds like you see a widening divergence between those with say common law and relatively independent central banks versus the other law formed be it roman and in independent fiscal policy as well.
So help me understand the… so we just had this IMF report come out earlier this week about 5.1% growth or whatever this year and everything’s amazing and which we know, given, it’s all base effects and if you do a three-year average, it doesn’t look good at all. In Europe, the only one, over that three years, the only one with positive growth is The Netherlands. Not even the UK. But I would argue there, they lean toward you know more of a British style than other styles.
So if we’re having a two-speed or multi-speed recovery, would it be fair for me to say that you believe the anglosphere will recover faster than the other spheres?
NG: Absolutely. Absolutely. You’re better expert on sinosphere than I would be. But I think the growth is going to disappoint because they’ve pushed so hard on the string of debt. Okay.
In terms of the Euro, Europe, I think there’s a very simple way of looking at things. It’s extent of vaccination and compare those and what does that mean? It’s now being said out of UCL, University College of London. UK’s herd immunity on Monday, 73%.
You can see there’s data coming out of the UK that is explosive as there is in the US. People are looking at the European and thinking, okay let’s close until August or beyond because this vaccine debacle is even worse. Everybody’s going to take Astrazeneca in Europe even though for the young women of age below 30, the chance of getting a blood clot is 1 in 600,000. Where the child’s getting Covid is substantially greater.
Because Europe and the Roman legal system has this precautionary black bent. It’s clear that this whole debacle in Europe has delayed that coming out of meltdown. The European summer season as the Germans would say is kaput.
TN: If we have this kind of two-speed recovery or multi-speed recovery, and let’s say Japan is part of the anglosphere, would you say Japan would be leading Asia out instead of China? Now I’m talking about real data. I’m not talking about Chinese 8.1% growth numbers like fictional. I’m talking about actual real performance with actual real usable output and you know all this other stuff.
NG: I’ve got so that’s going to be the case actually. I really do have that sense and I also, given the belligerence of the Chinese regime right now. You’ve got vocal and slightly belligerent actions against Taiwan, of course, which I’m with Albert on that. They’d have already invaded if they were going to do it. And you’ve got what’s going on in the Philippine islands with all these ships tied together.
I remember a very famous situation where chief ancient China economist from HSBC came into the office and talking about China and then we asked coming into that particular office, name unmentioned, always an aggressive to and fro Q&A, and then we have one of us asked about China, how’s the recovery going after Fukushima. Blood was coming out of this chad’s mouth having to talk a bit about China.
And we know that there is a much more passionate… we have passion against Germany or France as a Brit or as an Englishman come soccer. But, we love each other.
TN: Maybe that’s a bit strong. But we’ll use that.
NG: Maybe strong for Germans but with the French, there is a deep passion there and somebody keeps reminding the agent. But in the Far East, there has been that, you see that tension with the South Koreans and Japanese. However, the Chinese are forcing people out away from some of this stuff.
Japan with Australia and India will enable a lot of these countries to look elsewhere. Isn’t it ironic going back to the anglo-sphere link and that publicly is United Arab Emirates who are being given credit for getting India, Pakistan talking together. I have no doubt behind the show, the English are very active there because you’ve got a cricketer in charge. She made this game… So there’s stuff going on that gives you signals as to what could be happening.
It was rather like a mutual friend of ours, we were discussing India in terms of trade and I was saying, the UK and India are going to have a free trade deal as soon as it’s possible once they’ve overcome some of the agricultural stuff. And that person said India will do a trade with the EU well before they do it with the UK. And I’m saying hold your horses. No way!
TN: It’s familiar.
NG: One, it’s familiar. Two, one of the problems that the EU’s have with trade deals with anglospheres countries is legal interpretation thereof. And you know, I think they’ve been discussing it for 8, 10 years, EU and India, they’ve got a sub agreement already in the UK after several months.
TN: Just coming back to this kind of overall topic of the anglosphere and the multi-speed recoveries, so it does sound like you almost have this triangulated recovery from your perspective from India, Japan and Australia that’s leading the way in Asia. You have the UK, which is leading the way for Europe and then you have the US that’s kind of leading the way for the Americas. Is that kind of how you see things?
NG: I tend to think that’s the case. But I wonder whether one can justify the idea of UK leading the way for Europe given the tensions between the UK and the EU.
TN: I think the EU will play through… The EU will feel pain until they get tired of it and then they’ll relent, I think.
NG: There’s one big problem and this came up yesterday there was a meeting of the EU commission about article 122 vaccine export ban. Belgium, Holland, Sweden and Ireland said no way. All the others were saying we’re okay with it. With Germany covering itself with a few conditions. The damage to Europe’s role in the global supply chain is irreparable. They will not be able to go back to this.
And there’s another little fact of it which makes me wonder what will happen with Ireland because there’s tension building up in Northern Ireland again. Article 122, that export ban is specifically aimed at UK, US, Canada, Australia. They’ve stopped shipping to Australia already. US, UK, they’re saying well you’re not exporting anything. Paid for everything but not exporting everything. Canada just gets lumped in with the US and the UK. So I think that’s really shattered the role of Europe in the global supply chain.
You’ll have people producing goods for Europe from European input but how can you possibly? Now going to Ireland where the UK has already said we’ll give the Republic of Ireland 3.7 million vaccines because it’s secures Northern Ireland in the coming out of lockdown. That’s an interesting overthought process.
Because you have a situation where Ireland is under attack like the Netherlands and Switzerland from Joe Biden’s global tax. If they come out, I would not be funny.
TN: It seems to me that what you’re also saying is there’s likely some kind of regionalization or re-regionalization that may emerge from this. Am I putting words in your mouth or is that?
NG: I would go and say US and commonwealth EU for as long as it stays stable, which may be problematic and then as you say Asia.
TN: Okay. Yeah, I mean I think that we’re coming to a place and I’ve been talking about this since about 2015, where you have global supply chains for goods that are long-term commoditized goods and then you have regional supply chains for the higher value goods.
NG: And that’s consistent with the decoupling that’s got to take place against China. And then you have that floater which you and I touched on before we got online, which is Russia and I have a slightly different view of where I can go, which will be, you know.
This podcast from BBC Business Matters discussed how rich countries are recovering faster than expected — and is it for real based on data? How about the world’s billionaires suggesting Americans to pay more taxes, is it fair? Also discussed are the NFTs or non-fungible tokens — do they have values or are these just a fad? Lastly, how the workplace changed since the 1980s in terms of safety and gender equality?
The IMF says that the rich world is recovering faster than expected from the downturn resulting from the pandemic. But what about the developing world? Jubilee USA campaigns for debt relief for developing countries – we speak to its executive director, Eric Le Compte.
And in a world struggling to pull itself out of a pandemic, lockdowns and recession, why are there quite so many billionaires? We hear from Kerry Dolan, Assistant Managing Editor of Wealth at Forbes about their latest rich list.
Credit Suisse replaced two key executives and cut bonuses amid the fallout from two major business relationships; Peter Hody from Finnews.com in Zurich analyses what went wrong. And we’re joined throughout the programme by Mehmal Sarfraz, journalist and co-founder The Current in Lahore, Pakistan; we’re also joined by Tony Nash, chief economist at Complete Intelligence in Houston Texas.
Show Notes
JR: OK, well, let’s get the picture from the economy, which is going to swell, it would seem, according to the IMF, over the next year or so Tony. How are things in Texas?
TN: You know what’s interesting about the about Pakistan to kind of follow on what I said? What I find interesting about these numbers is you really have to average out 2019, 2020 and 2021 to really see how a country is doing. And so if you average out Pakistan for 19, 20, 21, there’s a 1% average growth rate that’s better than almost every other OECD country. The only country in Europe that actually shows growth over that period is the Netherlands. Germany, France, U.K., Italy and so on, they’re all negative average for the last three years. So for the U.S., it’s just over 1% average for the last three or so. So this may look like stellar growth, but it’s not because it’s using what’s called a base effect, meaning the U.S. economy is estimated to decline 3.5% in 2020. So a 5.1% growth rate on top of a 3.4% decline really is not stellar. So we’re struggling to get back to 2019 levels. And the message I would take away from here is countries are struggling to get back to 2019. Much of Europe will not be back at 2019 levels by the end of 2021.
JR: Tony, is Credit Suisse a typical bank, do you think, or a typical bank in the circumstances?
TN: I think they’re in a typical bank that got caught doing things that banks do pretty regularly. We have to be aware that these banks have risk management teams who look at the investments and evaluate how much of their capital is at risk when they make investments. I don’t doubt that banks make very risky risk management decisions on a regular basis. Credit Suisse. This problem is they didn’t get out in time. There were other banks that had built capital who got out earlier. So they made similar bets, but they got out of the trade earlier than Credit Suisse did.
JR: Do you think even Mr. Bezos thinking perhaps he should be doing a bit more taxes at a bit of a relief to us?
TN: Well, it’s it’s interesting. Nothing is stopping billionaires from paying more money to the Internal Revenue Service in the U.S. So if they want to pay more money, if companies want to pay more money, they’re welcome at any time to pay more money. So if Bezos personally or through Amazon wants to pay more money to the U.S. Treasury, they’re welcome to do that. There’s nothing in law that stopping them from contributing more to the U.S. Treasury.
JR: So I suppose in many ways this story is a kind of a sort of reflection of our earlier story, which is really about sort of rich rich countries and poor countries and how they’re coming out of this pandemic and the problems of inequality and whether it causes resentment, which we talked about in that report. Do you see resentment over this, do you think, in the United States?
TN: Well, I do. Warren Buffett has said the same. Americans should pay more tax. Your average middle class or higher American who here, a billionaire, say that people should be paying more tax, people get really resentful about it because, again, everyone knows that if someone wants to pay more tax, they can just write the check or send the wire and do more. So I think it is the the resentment is growing. The gains in equity markets are strange. They’re at strange highs. Central banks are enabling that. And the people who gain disproportionately from that are the ultra wealthy, not just the wealthy, but the ultra wealthy.
JR: Tony, when I listen to that report, I kept on thinking of tulips for some reason or another, and I kept thinking of bubbles. Do you feel the same way or are you convinced?
TN: It really depends on what you want to do with it. So if you actually own that image and you can license it and make money off of that image, then fine. That’s really interesting. Or if you want to own that image for the inherent value of that of owning that image like, let’s say a digital Mona Lisa, that’s fine. But I’m not sure that the kind of demand for that is there, meaning my kids of 19 year old twins, they’ll go out and copy images or whatever and throw them into presentations. I’ll do the same. Actually, I don’t know that there is an appreciation of the value of a digital image. And this is really the problem, right? When you have physical artwork, there is limited supply. When you have a digital image that can just be copied and pasted and then you have infinite number of those images. It’s difficult because there’s never a tangible, supply constrained number of those images, if that makes sense. So I I’m like you when I hear it. I think this doesn’t really make sense unless you’re using it to license. Let’s say there’s a logo for a company like Amazon and somebody owns that intangible property. How much is that logo image worth that?
JR: OK, so it’s actually quite close to a currency really isn’t it, or it’s close to an intangible thing like sort of a money, a unit of money, a unit of cash.
TN: Well, there’s a difference between money and an asset, right. If you hold let’s say gold, gold is really an asset. You don’t go down to your corner shop and spend gold. In the crypto world, these things aren’t really currencies because you can’t really spend them freely. Of course, you can always barter gold for something. You can always barter a crypto asset for something, but it’s not readily accepted in many, many places. So these things are really assets that you hold onto and wait for a buyer who appreciates the asset more than you to buy it.
You’re not going out and buying your groceries or a new car or anything with that asset. You can’t do that with this artwork. You can’t spend it. So it’s questionable. I’m not saying it’s nothing, but it’s questionable. It’s not really the market fit. I don’t really understand it. Maybe this is genius, but it just doesn’t seem like it right now.
JR: Tony, thanks very much indeed. I still keep on thinking of tulips anyway. Tony, I was just going to ask you whether you had a lot of similar experience, but experience of unpleasantness, London.
TN: Sure. Absolutely. In my 20s, I was with a retailer in their headquarters and and then again later in my career. You know, this is it’s not anything that is rare. I don’t think. Well, maybe it is more rare now, but it’s terrible for everyone involved.
JR: And it doesn’t seem to go away even in the virtual world. That’s where we got time for on business matters. Thank you very much indeed for listening. And thank you, Tony. Thank you so much for being my guest on Business Matters. Goodbye.
Here’s another guesting of our founder and CEO Tony Nash in BFM Malaysia, talking about trade war between US and China. Can these two countries actually decouple? Or is the current supply chain too dependent to do that? Can the economy have the V-shaped recovery that everyone is dreaming of, or is it just an illusion? What can the policymakers do to improve the economic outlook for this year? What can his firm Complete Intelligence see happening based on the algorithms and AI?
We also discussed regionalization of supply chain as a result of the Trade War in this QuickHitQuickHit episode with Chief Economist Chad Moutray of National Association of Manufacturers.
BFM Description:
The trade wars between the US, China and the Eurozone seem to be gaining momentum. Tony Nash, CEO, Complete Intelligence, offers some insights, while also discussing European industrial activity.
This is a download from BFM eighty nine point nine. So is the station. Good morning. This is BFM eighty nine point nine. I’m considering that I’m with one shotting bringing you all the way through the 10:00 o’clock in the morning and Rano 76. We are talking about markets, but well above 50 bucks sort of because of that with about 15 minutes time, we’re talking to call you. Ling was an independent panel, a political economist at Ciggy and I’m advisers will be discussing palm oil.
BFM: So last night in America, the stock market slumped. Investors are cautious, right How did the markets do?
Not so well, because there’s been clearly a resurgence in virus cases in multiple states, which puts into question the economic recovery. So, unsurprisingly, the Dow closed down three percent and S&P 500 closed down 2.6 percent, while the Nasdaq closed down 2.2 percent. Meanwhile, in Asia yesterday, only Shanghai was up, which was up 0.3 percent, while the Nikkei 225 closed down marginally by 0.07 per cent. Hang Seng was down 0.5 percent, Singapore down 0.2 percent, and KLCI was down 0.3 percent.
So for more clarity into the whys and wherefores of markets, we’ve got it on the line with us Tony Nash, who is the CEO of Complete Intelligence. Now, Tony, thanks for talking to us. Trump’s getting tough on China rhetoric highlights, well, obviously, the American’s concerns about being too reliant on China. And, of course, we can see that being manifested in the list of 20 companies, which is deems suspicious. In your opinion, can the two economies decouple or other interests in supply chains too heavily aligned?
TN: Well, I don’t think it’s possible to completely decouple from China. I think the administration are really being hard on each other. And I think the hard line from the US, you know, it’s relatively new. It’s a couple years old. But I don’t think it’s possible, regardless of the hard line for those economies to decouple and for the supply chain to decouple. We had some comments over the weekend out of the U.S. saying that they could decouple if they wanted to. But that’s just the hard line and unaware of the possibilities. We’ve been talking about, for some time, probably two and a half, three years, is regionalization of supply chains. And what we believe is happening is the US-China relations have just accelerated regionalization. It means manufacturing for North America, moving to North America. Not all of it, but some of it. And manufacturing for for Asia is largely centered in Asia. Manufacturing for Europe, some of it moving to Europe. And that’s the progression of the costs in China. And some of the risks are relative risks to supply chains highlighted by COVID} coming to the realization of manufacturers.
BFM: U.S. markets corrected sharply last night. So is the market actually now waking up to the reality that COVID 19 is going to be a problem for economic recovery? And this V-shaped that what many investors thought is probably a pipe dream?
TN: I think what markets are realizing is that it’s not a straight line. Well, we’ve been saying for a couple months is that end of Q2 or early Q3, we would see a lot of volatility. Then people started to understand how the virus would play out. Until we’ve had some certainty around the path, we will have days like today. And we’ll have a danger with an uptick as optimism comes back, what’s happening is markets are calibrating. People are trying to understand not only the path of COVID, but what those actors mean—the governments, the companies, the individuals—will do to respond, how quickly the markets come back. But what are people going to have to do? What mitigations that we’re going to have to take? What monetary and fiscal policies will governments take as well? We’re not done in that respect. So more of that’s to come, but we don’t know what’s to come there exactly. Markets have moved a lot on new case count. I don’t believe that it’s the case counts itself because a lot of these are are really mild cases. It’s just the uncertainty around how long it will last. The magnitude and the mitigation that people will take around it. There’s more of this volatility to come.
BFM: Tony, you might have seen the IMF‘s growth forecast, which was just announced a few hours ago. They’ve now said that global growth will shrink 4.9 percent for 2020. That’s nearly two percent worse than what they originally thought. And I think the U.S. also marked by an expectation of a negative 8 percent, down from negative 6o.1 percent. Do you think this might cause the policymakers to have an even more vigorous policy response and liquidity into the system?
TN: It might. I think the U.S. has shown that it’s not really afraid to be pretty aggressive. I think you may see more aggressive policy responses in other places. Obviously, Japan is very active on the monetary policy side. But we need to see more actual spending and more direct support of individuals and companies to make it through this. So, I do think that, obviously, IMF’s forecast concern people and get policymakers attention. I do think that they’re probably a little bit overblown to the downside, though. So I wouldn’t expect 8 percent decline. I wouldn’t expect a global decline as acute as they’ve stated today.
BFM: If you look at oil prices declined last night and I think this is on the back of U.S. crude inventories increasing. But is this also a function of COVID-19 fears in terms of how that may impact the economy’s going forward and consumption of oil again?
TN: Yeah, that’s interesting. The oil price is our… I think there are a number of things. The storage, of course, as you mentioned. But there’s also how much are people starting to drive again? What do traffic patterns look like? Also, how much are people starting to fly again? We really need to look at like Google Mobility data. We need to be looking at flight data. We need to be looking at looking to really understand where those indicators are headed. So when we compare a $40 a barrel of oil at $39 s barrel for WTI today, compared to where it was a month ago. The folks in oil and gas are really grateful to have that price right now. And it’s a real progress from where we were a month or two months ago. So I think what people are looking at today is the progress and then the expectation. They’re not even necessarily looking at the real market activity today. It’s all relative to a couple of months ago and it’s all expectations about a couple of months from now.
BFM: Last question on perhaps the data that your algorithms generated, Complete Intelligence. What kind of signs and indicators does our technology and the AI tell us about the direction the market’s going forward?
TN: Yeah, well, this is where we we pulled our assertion of volatility. We we really expected things to be pretty range traded for some time. So, you know, crude oil is a good example. We were saying back in February, March, the crude oil would end the quarter in the low 40s. This is WTI and here we are. So, with volatility, we’re not necessarily trying to capture the high highs and the low lows. We’re just recognizing that the markets are trying to find new prices. So it’s interesting when you look at things like the dollar. The dollar is a relative indicator for, say, emerging market‘s uncertainty and troubles as well. We did expect a dollar rise toward the end of Q1, early Q2, as we saw. But we haven’t expected the dollar to come back to strengthen until, say, September. So there are a number of indicators around trade or on currencies. And what we’re finding generally with our client base, for global manufacturers generally, are the algorithms… We’ve found that our average-based forecasting has an error rate that is about nine percent lower on average than consensus forecasts. So when we had all of the volatility of the last three, four months, consensus forecasts in many cases were 20 to 30 percent off. Ours were about nine percent better than that. Nobody expected the COVID slowdown. If we look at that from a few months ago, the bias that’s in normally of doing things, negotiating, procurement, supply chain, the revenue, that sort of thing. We take that out and this passionate… I would suggest that there is a lot of passion in the analysis from day to day when you look at three percent fall in markets today, but you can’t extrapolate today into forever. And what we can do with AI is taking emotion out of this, take a rational view of things. And really remove, not all of the error, of course, nobody can remove the error. There area a lot of the error from the outlooks in specific assets, currencies, commodities and so on.
BFM: All right, Tony, thanks so much for your time. And that was Tony Nash, chief executive for Complete Intelligence talking from Texas, USA. Interesting that this kind of stuff that he does at his business, tries to remove the emotional, the emotive side of the markets and give something a predictor over the future. But I think that sometimes you can’t discount too much of human emotion because it’s all driven by essentially two emotions, right? Greed and of fear.
But you know, basically his nugget is it’s going to be volatile. Right. Hang onto your seats. Right. Because we really don’t know. There’s too much uncertainty out there at the moment. This is a scene where it’s for oil prices or even for equity markets.
BFM 89.9 discusses with Tony Nash about why bank stocks are falling — the US markets were dragged down by financial stocks as big banks JP Morgan, Wells Fargo and Citigroup reported their first-quarter earnings.
BFM: Right now, taking a look at the wider global markets, we speak to Tony Nash, CEO of Complete intelligence. Tony, thank you for taking the time to speak to us today. The Fed book was released showing that almost all economic data activity has stopped and the question is how difficult will it be to restart it? Do you expect even more contraction?
TN: Very difficult. I mean, as we’ve talked about before, this is a government-mandated shut down, so it’s going to take a lot of fiscal stimulus to get things restarted. That’s why you’ve seen governments come out with such large stimulus programs. We don’t believe it’s a situation where central banks can wave a magic wand and use monetary policy to get things started. It’s not that kind of problem. This is a problem that has to be addressed with fiscal stimulus and direct spending from governments.
BFM: Is there enough fiscal stimulus so far?
TN: No. We’re two weeks into the second quarter, and when we look at all of the country, where the orders to not work are in place, it’s going to be at least two to three to four, maybe six weeks before some countries are up and running. And because a this is government-mandated order, those governments have to find a way to compensate individuals and companies for those close-down orders. Otherwise, we’d have catastrophic economic contraction. Spending is a key component of the GDP calculation. So if you count “don’t spending” as a substitutional factor to consumption and investment, you can still grow your economy or have it not contract as much as it would. Governments are feverishly trying to find find where they can spend, but I think many governments don’t really have the money. They accumulated so much debt over the last 10 or 20 years, they don’t have the money to be able to stimulate the way they need to.
BFM: Tony, Mexico’s been downgraded by Fitch to just one or just one level of Junk. Do you think this portends a rash of similar downgrades by other agencies?
TN: Oh, sure, absolutely. I think emerging and middle income markets are going to have a tough year. And that’s the case because we have a strong US Dollar and are likely going to have a stronger US Dollar. And on a relative basis, emerging market currencies are going to have a real uphill battle. So those emerging markets that are export-dependent will have a tough time, as well as we see consumption collapse. So I don’t want to sound entirely pessimistic, and it’s actually quite hopeful once we hit, say, July or August. But, Q2 is a very, very difficult situation. And the quicker governments can get their countries moving from an economic perspective, the better off we are.
BFM: So Tony, let’s move back to the US for a bit. The banks, the big banks, have started releasing the Q1 results with JP Morgan, Wells Fargo, Goldman Sachs, Bank of America and Citi or reporting significantly lower profits and more particularly huge provisions there, some as five times more than usual. What does this tell you about the broader economy? What are they expecting at least?
TN: Well, we’ve been trying to tackle all the bad news now. That’s for Q2. They can say, we accounted for that before and they can report better numbers in Q3. And this is all relative. A lot of companies are going to report horrific numbers for Q2. But, you know, the government is coming in and encourage loan repayment to be delayed and backed up the number of loans as well.
So should these provisions be larger than they are or as large as they are? Maybe that’s a prudent thing to do. But it looks really like there, you know, these provisions should have been in Q2, not necessarily in Q1. So I think they’re being conservative and I think that’s fine. But I think to some extent it’s really you just tacking all the bad news or what they expect to be the bad news into Q1 so that they can look better later in the year.
BFM: Yeah, that’s always what this was about to ask you, actually, Tony. Do you think they’re trying to pack as much bad news in this quarter as possible? Yes. But I think on on the call yesterday with Bank of America’s chief financial officer, he also seemed a bit, well, at sea in terms of really putting a finger on exactly what kind of quantums provisions might lead to the next quarter. Do you think they really know what’s happening around the corner, do you think?
TN: I don’t think they know. And I know that, the US banks are really, say take serious problems with like with PPP, these are small business loans. They’re just overwhelmed with the number of applications for these small business loans. That loan processing is truly inefficient and it’s not all the banks’ fault because it was, the US department pretty pretty quickly. So they’re kind of doing the best they can, but those are not their most efficient operations and we’re having to just adjust to where the attention is.
So I think they don’t know how bad it is. Until we know when some of these stay at home orders will be lifted, nobody really knows. And it’s the same thing in Asia as it is here. You’d see all these kids schooled, and it’s a problem, and so until it’s lifted, we really don’t know the full extent of the economic damage.
BFM: Well, speaking about Asia, even after better than expected March trade figures, People’s Bank of China cut medium term lending rates by 20 basis points. What do you read from what they just did?
TN: Honestly, guys, a 20 basis points isn’t going to do anything. I mean, nobody is going to take a loan out because it’s 20 basis points cheaper. What China needs is a very large fiscal stimulus package to make sure that their factory workers and other certain workers are given, maybe not a full wage, but enough of a wage to continue to get by. Our major worry for China this year is a very sharp contraction of industrial production, meaning manufacturing. We’re looking for contraction in exports starting in February, going through March and April, May, simply because the consumption markets are not there.
There is a global demand problem. So there is a demand problem domestically in China, but there’s also a demand problem in the rest of the world. So how can China, which is an assembly point and a maker of finished goods, how can China have kind of relatively normal export data when the rest of the world isn’t buying. It’s just not possible. So, you know, what we’re worried about is the industrial production contraction in China and we’re worried about deflation in China.
We think deflation will be worse in China than in any other parts of the world because of the dependence on manufacturing. So it’s manufacturing insures on making stuff, their workers aren’t working, and so they don’t have the money to buy stuff. And so that creates a huge gap in demand, which is likely deflationary, which is a big, big worry for us.
BFM: I’m wondering, though, I mean, if it’s not likely to move the needle by too much, why would it cut interest rates?
TN: I think a lot of central banks right now are going through the motions, hoping to kind of ride on the coattails of the big moves at the ECB, BOJ and Fed are doing, right? PBOC is is taking some big moves. So I’m not saying that they’re not doing their part. They’re definitely playing a part. But little moves like this, I think with what we’ve seen is generally a big action is taken. We saw this with the first Fed action and so does in the central bank with the OPEC move over the weekend, right? A big action is taking, and the markets really just going on, they don’t care that a big action has been taken. But what happens is a series of smaller actions are then taken, and markets take notice. So if anything, I think there’s 20 basis point cut is in one action among many that the PBOC is planning so that they can gradually feed that market expectation.
But again, the markets are really bored and not satisfied by a single big move. They’re looking for a series of moves, can be satisfied and to gradually kind of re-course positive expectations into markets. But 20 basis points is not going to do it, especially when you’re looking at a fall in manufacturing or fall in wages, a fall in consumption, and potential deflation. Nobody is going to take out a market rate loan when they have all these other worries to tick down the list.
BFM: All right. Thank you so much for spending some time with us this morning. That was Tony Nash, CEO of Complete Intelligence.
There is no direct US legal provision linking currency manipulation with more tariffs, but it does free the US president up to take more unilateral action. Other courses of action include a ban on US government procurement from China, an end to trade talks and an investigation by the International Monetary Fund
Tony Nash, the CEO of research firm Complete Intelligence, said that Trump is unlikely to change trajectory at this point and that the issue is “not about Chinese yuan in isolation”.
“You are talking about subsidies, non-tariff barriers, currency, everything, and everything [Trump’s] talking about is related to the well-being of American workers,” Nash said. “Trump has started bundling things that you cannot unbundle.”
