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Inflation in Asia and the US: The Week Ahead – 3 Oct 2022

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

In this episode, we talked about what’s happening with inflation in markets, and where it’s hitting, particularly in the US in different sectors. Mike walked us through the Asian contagion for inflation. Also, given where USDCNY has been over the past week or so, how vulnerable is China? Are they more concerned about inflation or export competitiveness?

Sam put out a couple of wonderful newsletters about central bank responses to inflation last week. The Fed seems – and is – unrelenting in their response, regardless of what happens with UK gilts. One area Sam raised last week is the car market versus mid-market dining: Cars vs Cracker Barrel. He walked us through the price and volume considerations with these two.

And then we looked at Meta’s move to freeze hiring and their warning about layoffs. Is that a broader signal for tech?

Key themes:
1. Inflation: Asian Contagion
2. US Inflation: Cars vs Cracker Barrel
3. Meta’s move: More to come?
4. The Week Ahead

This is the 36th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Mike: https://twitter.com/UrbanKaoboy
Sam: https://twitter.com/SamuelRines

Time Stamp
0:00 Start
0:49 Themes for this Week Ahead
2:47 How vulnerable is China? Are they more concerned about inflation/export?
10:23 China will not be the exporter of deflation anymore
13:28 Will China give in to devaluing CNY?
16:15 Cars VS mid-market dining
22:00 Price increases will continue?
24:26 Is this the beginning of the end of tech wage spike?
29:11 How does this current ad slowdown compare to the past?
30:20 What’s for the week ahead?


Listen to the podcast version on Spotify here:

https://open.spotify.com/episode/5HrIhlEwZMwIBDdFwBo5Ib

#inflation #asiainflation #usinflation #stockmarket #stockmarketnews #economy #economics #inflationrate #costofliving #effectsofinflation #comparingpricesinflation #metalayoffs #meta #layoffs2022 #investing #inflationinasiaandtheus

Transcript

Tony Nash: Hi, everybody. This is Tony Nash and welcome to The Week Ahead. Today we have a couple of very special guests. We’ve got Michael Kao. You would know him from Twitter as UrbanKaoboy. And we’ve got Sam Rines. And obviously you know Sam from previous shows. This week we’re going to talk about a lot about what’s happening with inflation in markets. We’re going to talk a lot about where inflation is hitting, particularly in the US in different sectors. And then we’re going to cover a little bit of tech.

So our key themes this week first is the Asian and contagion for inflation. And Mike’s going to jump into that in quite a bit of detail. We’re then going to look at US inflation. Sam put out a really interesting note covering kind of cars versus Cracker Barrel, although that’s not really the comparison, but it’s something in that range. And then we’re going to look at Meta’s move to freeze hiring and their warning about layoffs. Is that a broader signal for tech? And finally we’ll move into the week ahead.

So before we jump into this, please be aware that we have our product called CI Futures, where we forecast hundreds of commodities, currencies and equity indices as well as economic indicators. I was just going over our error for GDP USD for the month of September, and our area was about 2.23%, I think, for the month. So it’s a very relevant product even in these times. You can find out more on the link below. 

It’s $99 a month and you can see everything in the subscription there. We publish our error rates. We publish our forecast. You can download the data, you can download the charts and do comparisons. So please check that out. 

Michael, thanks for joining us. I really appreciate your time. I’ve heard you on a number of other podcasts and it’s just so great to have you here. I really appreciate it.

Michael Kao: Yeah, thank you. Great to meet both of you. Yeah, I appreciate you having me.

TN: Fantastic. Hey, there’s a tweet that you put out a couple of weeks or about a month ago actually looking at the Asian contagion and pretty much it was reflecting a tweet that you had put out in January, talking about your expectations for the year ahead and the set up for the year ahead.

So given where, say, CNY has been over the past week or so and the set up that you put out earlier in the week, how vulnerable is China? Are they more concerned right now about inflation? Are they more concerned about export competitiveness? What does that look like? And as you start talking, we’ll put up a chart of USDCNY as well.

MK: Sure. Before I answer that question, I just want to take a quick step and just outline for you, like where I kind of arrived at this Asian contagion thesis. Right? So about a year and a half ago, I’ve been invested in the oil patch for quite a while. And I’ve expressed my bet through a long term private equity plate because it’s my belief that years and years of underspend and then exacerbated by this worldwide ESG push right, and diversion of capital away from the sector and then of course, further exacerbated by all of this massive monetary and fiscal stimulus first created oil inflation way back. Right.

So I started noticing this basically around the beginning of ’21 and I wrote a bunch of threads about it. And then during the year I started thinking what are the ramifications of this? Well, the ramifications are that it’s going to make our Fed more hawkish than the rest of the world earlier than the rest of the world. And so what are the ramifications of that? Well, given that currencies are mainly driven by interest rate differentials that would in turn create this what I labeled a USD wrecking ball effect.

And so as that thesis started kind of coming true and gathering steam throughout the year, the tweet that you referenced that I wrote at the beginning of this year was that I said, look, the setup is a scary one for this year because we have the makings of a stagflationary energy crisis not seen since the 70s. It’s going to create tightening ahead of the world, creating this USD wrecking ball. And then we have this everything bubble to boot on top of that. 

And this wrecking ball really reminded me of my sort of baptism by fire into the hedge fund business. In 1997, I joined a hedge fund here in LA called Canyon and we were value credit based investors and a lot of our idiosyncratic bets essentially got swamped by the macro, right? So what started as seemingly innocuous devaluations by a couple of EM countries in Southeast Asia metastasized over the course of a year and a half until full blown credit contagion. Except this time, what I wrote about in this thread is that what’s scary is that number one, the level of inflation that’s driving this US dollar racking ball is much higher than before.

And from my oil centric point of view, I think a lot of it is structural. And then the second thing is that the vulnerability point… I mean the EM countries are also vulnerable. But what’s scary this time around are the developed nation currencies like the Euro, the Japanese yen.

And now I come back to your question, the Chinese Yuan. Your question is a really interesting one that I actually tweeted about this week is China. China is in a box. Just like the Bank of Japan, just like the ECB. They’re all in a box because their respective economies are much weaker than ours.

I think the big question, and I don’t know when the US dollar wrecking ball is going to peak, maybe it already has. But I suspect though, my hunch is that maybe it’s still got some legs to go because until you reach a point where the macro fundamentals of those respective economic zones are strong enough to allow their central banks to essentially outhawk our central bank. Any interventions are going to basically be just a wasted burn of their reserves.

And so you saw that with the BOJ, right? They spent something like 20 billion of reserves defending their currency and that lasted two days. And we’re back to all time lows in the Yen.

So China is really interesting because China is such an export-driven economy. One would think that with their economy on the back foot from the property crisis, from zero COVID policy, one would think that as their neighbors are devaluing and becoming more competitive versus them, that they would be more worried about their current account getting hit, right, their current account surplus getting hit. And so you would think that they would want to let their Renminbi devalue.

What we saw instead, I think, was that yesterday that the PBOC had a pretty strong intervention in CNY. That tells me, I actually put a tweet out to exactly the effect that’s a big tell to me that they’re more concerned about inflation. And China, just like Japan, is uniquely vulnerable in that they are also net importers of something like 80% of their energy. They’re in a tough bind.

And the million dollar question is no one knows when… That day, when the BoE intervened and all risk assets rallied hard. I think that was the market kind of conflating that all these interventions are going to be exactly. It’s going to lead to the Fed also going to QE. And I put out another thought on Twitter saying that, you know what, I don’t know that you can conflate that because the Fed was happy to be the world’s plunge protection team in a world of where there was no structural inflation.

When you’ve got a world of structural inflation, it becomes kind of an every man from self dynamic where I don’t know that how much we can go help stymie the yen or stymie the Renminbi or stymie the Euros collapse by queuing here. Because that’ll just completely inflame inflation. And the big tell on that was on that risk on day. You know, what was really roofing also was oil. And so it comes back down to oil.

If the Fed actually blinks and goes back and pivots, the thing that’s going to moon and lead us right back to square one is oil, which is what started this whole cycle in the first place.

TN: So let me take a step back from what you said, because you just unloaded a lot, which is great, and I think Sam will violently agree with you on a lot of stuff. But what’s really interesting to me. If China is worried about inflation. Although this is somewhat like 2011. When they had the, or 2007 or whatever. When they had the pig flu and all this other stuff.

And there was inflation pressures but China has been the source of deflation for the last 25 or 30 years right and so if China is no longer the global exporter of deflation then it is a dramatic change in the structure of the global economy. Dramatic and I think so many people use this that this is not something that we’re not going back to 2019 prices ever. Right? But I don’t really hear people talking about China not being able to be the exporter of deflation anymore and that’s just one that’s come and gone that’s already gone right. 

MK: And it’s not just China. It’s Eastern Europe, too, right, because I wrote a thread that basically borrowed some of the thoughts from Professor Goodheart’s paper about how this was kind of a once in a lifetime demographic dividend that allowed the world and the Fed to basically pay for over every financial crisis of the last four decades with aggressive monetary policy because there were never any inflationary repercussions. But as you so validly pointed out, that was due to like a once in a lifetime sort of demographic dividend that is now in secular reversal.

Sam Rines: To this point… I want to jump in and just reinforce this point here because I think it’s a really good one that China was a massive source of goods deflation globally along with East Germany, Poland. Etc. as they joined in following fall of the Berlin Wall. 

But I think  there’s something really intriguing here is that it doesn’t even matter if they still continue to export some goods deflation over time. Their commodity inflation tailwind is going to be problematic. The only thing that has really saved them with a Renminbi north of seven is that they haven’t had to import anywhere near the amount of commodities that they would typically have to. If you’re locked down, they have the longest commute times on average in the world in China. That is a tremendous tailwind to gasoline. Food. Et cetera. When you begin to reopen and have China’s economy going full bore, that is a tremendous issue for the commodity complex in general in an environment where it’s already broken. It’s going to be a tremendous amount of pressure on that system and I don’t think people are prepared for that either. That China is now the exporter of an incredible amount of commodity inflation over the next half decade or so.

MK: It’s actually really insightful because commodities which they have to import. They’re super afraid of that and that oil is basically the primary factor of production for everything under under the sun. Yes, everything.

TN: Back to CNY do you think they’ll kind of give in to devaluing or do you think they will continue to fight this, which is a battle that everyone loses eventually?

MK: That’s such a hard question to answer because if anybody can fight it, it would be China right?Because they have a non convertible currency, right. So I think, for instance, Japan is much more vulnerable because I don’t see Japan imposing capital controls and I don’t see Japan relaxing on their yield curve control. So the only exit valve there is the Yen devaluation. Right.

But in China’s case, they have capital controls. I spoke on an interview earlier this week with Mike Nicoletos, and we were discussing about whether or not there’s a porosity through the Hong Kong dollar. Right. I think they have to clamp back down, too, right? Because. If they really want to manage the pegs, they need to really like stymie capital controls. Otherwise, I think capital just going to flow out.

TN: So will we see a divergence between CNY and CNH? 

MK: What is the divergence? I mean, it’s tiny. Two or something. 

TN: Okay, great. I’m just wondering if CNH is trading offshore and that’s allowed to freely trade or relatively freely trade? Maybe. Sam, you have a better idea? I’m not entirely clear on what the restrictions are on CNH trading because I don’t think it’s completely for all. Otherwise that divergence would be much bigger, I think.

TN: Well, it’s a spread, right? It’s a proxy of a spread. And so you can see pressure on that, and you can see that pressure pushing the expectation of seeing why potentially devaluing if they don’t handle it. Like PBOC, they’ve got a lot of smart people, but policy wise, they make a lot of mistakes. Don’t think they’ll elegantly.

MK: I was just going to say that I actually think that if they let CNY or CNH freely float, it would have a nine handle on it. At least, I think that’s where it goes.

TN: Yeah, at least. Okay, very good. Thanks for that, Mike. I really appreciate that. Let’s move on to Sam. You put a note out earlier this week talking about inflation and central bank responses to inflation. And the Fed obviously seems unrelenting in their responses. Mike mentioned, as you mentioned in your newsletter and here several times, but one area you raised in your newsletter this week is kind of cars versus mid market dining.

So you talk about cars, Carvana versus Cracker Barrel. Can you kind of walk us through that? And I’ve got a couple of shots from your newsletter. One is on the Carvana release, and the other one is on Cracker Barrel. Actually, we only have the one on Cracker Barrel to show the group. But do you mind walking us through that?

SR: Sure. So the impetus behind the note was really to kind of make the point that Mike made earlier, that the Federal Reserve does not care about what’s going on in the Gills market. It is not going to come save the Bank of England and Downing Street from what they’ve done. That’s not their problem. That’s a domestic issue. And when you decide to have a massive fiscal tailwind and a monetary policy that was being highly restrictive and going to sell bonds, your currency is going to fall. And that’s your own problem. That’s the way that the Fed viewed it. And then a bunch of Fed speakers came out and said basically exactly that, but in a little kinder tone.

But the idea there kind of pulling that together is that the US domestic economy is still doing well. So the CarMax report was really interesting because CarMax has used autos, right? That’s what they sell. And all the headlines about inflation and used autos, their volumes got absolutely trashed in the past quarter. And that makes sense, right? People?

There’s a drawback from interest rates moving higher. It’s one of the most direct things that is affected housing and car financing. But the interesting part about it was while the volumes were down, they still had revenues up on their retail segment because prices were higher 25% year over year, their average selling price. So they did a really good job of kind of managing their revenues.

But that speaks to the inflation problem, right? The Fed doesn’t care about volumes going down. If the prices are still higher. Then you kind of go to Cracker Barrel, right? Middle America in my mind is you can encapsulate middle America in a Cracker Barrel I mean, it’s kind of perfect. And when you look at their release, it’s pretty clear that they called out 65 and over dining down. Guess what? That’s highly sensitive to inflation. They cited lower income individuals dining out less. Again, highly sensitive to inflation. And they still had their comp store sales up 6%, which is pretty good. And then you read a little further in the same sentence and they’re like, and we had pricing higher by 7%, so traffic was down. So they had negative traffic at higher prices. So that is again, they’re giving up volumes to be able to push the price and grow reps.

I think this is kind of a microcosm of the US economy, right? It is a strong economy. If you can continue to push price like that on the consumers. If you can grow revenues while pushing price at those levels, that’s pretty incredible. And then it’s pretty interesting to me because there’s this whole idea that corporate America is going to slow down their price increases. Cracker Barrel basically shot that idea right in the foot by saying, hey, listen, we think wages are going to inflate 5% over the next year. That’s september to September. And then if we’re going to have comparable store sales up, right?

So guess what? They’re going to continue to push price. And that’s where I think we kind of need to take a step back and realize these inflation pressures are broadening out and they are beginning to become embedded. Their food costs, when they forecast that, I believe that number was 8%. These are significant figures, right? These are not things that we would have thought were possible five or six years ago. They’re becoming embedded. I mean, that’s 2023 that these guys are thinking that.

And just one more point going back to the CarMax report, their SG and A, their cost of doing business, we’re up 16% year over year because they hired more people and they paid them more. So you think about you grow revenues at 3%, but your costs are up 16%. I mean, that’s a pretty big problem. Again, it goes back to the two things that the Fed really wants to get under control, including inflation is two things, right? They talk about the vacancies to unemployment ratio. They need less hiring to happen and they need wages to begin wage growth, to begin to subside a little bit because that’s a tailwind consumption.

So I think you’re having a number of pieces working against the Fed that might not be showing up in the data, mostly because I think the data is kind of crap. But the best part is if you’re kind of willing to go to that microlevel  to get the macro and pull the macro out of it, these trends are not going anywhere anytime soon.

TN: So what I get out of that is I hope Cracker Barrel has digital menus. If not, I want to be their menu printer because every time I go into a restaurant, I wonder how often they change their prices, right? And basically, from what you’re saying, it sounds like they’re going to continue to push up, I don’t know, quarterly, semi annually, but they’re going to continue to push these prices up based on what’s happening in the market, and I suspect they’re not going to come back down. Oh, no.

SR: There are other ways to do it, right. You can push price by pushing less food on a plate, too. Right. So you can do some creative things on multiple fronts. Shrinkflation. The shrinkflation. But I do think that you’re not going back to anything like 2019. Right?

MK: I just want to riff off that for just a second because I participated in a real estate panel a couple of weeks ago and listening to these asset managers from around the world present. One big asset manager was basically saying that they’re still seeing essentially. Even though the rent growth is slowing down. It’s still growing for Q3 of this year where you would think that the hiking has already kind of worked its way into the system. That rent growth is still annualizing at a 10% click. So you talk about sticky.

I’ve had this thesis that it started with commodity inflation. Commodities have abated somewhat and certainly will abate more if there is an Asian contagion. Right. But the core stuff, which is what Sam is talking about, and also rents, that’s really sticky. But here’s the problem. When that stuff starts curling over, I really agree with you that if China reopens, you’re going to see a resurgence in commodity stuff again. So I call this sort of like the core energy tag team. And I think we’re going to see this tag team effect possibly for years.

SR: Oh, yeah. To rip off that I called it the COVID earthquake is going to have more aftershocks than anybody really wants to admit. 

TN: Yes, there was so much intervention. You can’t just earn it out in six months, right. Or a year. It takes so long to work that out. So that makes a lot of sense. Guys, staying on this inflation theme and Sam, you mention SG and A and wages. Meta announced yesterday that they are imposing a hiring freeze and they’re warning their employees about restructuring. 

So obviously now that as of yesterday, they’re the second most valuable company in the world with Exxon taking over. But if Meta is instituting a hiring freeze and Sam, you talked about Carvana hiring a bunch of people last quarter and their costs going up, what does that signal for tech?

I think, Sam, you showed me the site layoffs.fyi or something like that to look at layoffs in tech, there are a couple of issues which we covered with Mike Green before and you’ve talked about up befor Sam, where ad space is becoming almost infinite and these guys who are ad based have a lot of headwinds and Meta is no different. And so that’s obviously one of their headwinds.

But the SG&A cost is huge. Right. What do we need to be looking for with Meta and companies like Meta? And is this the beginning of the end of the tech wage spike?

SR: I’ll take part of that. Okay, good. Is it the end of the tech wage hike? I don’t know that is going to be the case simply because we don’t have enough people with those skills, even if we do have a pullback in the number of hires. Right? On the marketing side, yes. But on the tech hiring front of people with programming skills, et cetera, I don’t think that’s going to slow down or those are going to slow down anytime soon, at least until we have enough of them.

But maybe on the marketing side, et cetera, I would say that the Meta announcement is far more indicative of a slowdown generally in Silicon Valley startup ad spending on the marketing. That’s a problem for Meta on the margin. A significant amount of their ad revenue comes from startups.

It’s a much larger problem for a company like Snapchat. Right. There is a hierarchy of where you go to advertise and when you’re going for eyeballs. So if it’s a problem for Meta, it’s probably a much larger problem for a Snap in some of those smaller, less ubiquitous platforms. 

But yeah, it’s always going to be a question of where is Meta putting its incremental dollars, because it is making a pretty big push into the Metaverse. It’s unlikely that people are getting slashed, jobs are getting slashed there. It’s more likely that what you’re going to see is a reduction in places. They’re simply not seeing the returns that they want to see and they’re going to continue to grow the hiring base on something that’s important to them, like building out the Metaverse side of the business.

TN: Sure. Yeah. Mike, what are you seeing with tech?

MK: I don’t follow Idiosyncratic tech as much, so yes and no. I’m actually, ironically, one of my Idiosyncratic positions is actually a dyspacked ad tech company that’s in the ad arbitrage business. That’s a different type of a different type of play, but I haven’t been as focused. So I’m very interested to hear your sort of microcosmic views. Really interesting.

TN: Yeah, I think everything Sam says is spot on. I do think that in terms of the core coding skills, there’s a lot of slack there. So for example, as we talk around, because we hire developers. Some of the developers who work for some of the very large tech companies who make mid six figures, something like that, their daily code commit is something like eight lines of code. That’s it. 

Okay, so these guys are not sweatboxing code. It’s a very minimal amount of code they have to put in every day. So I think there are major productivity gains to be made on the developer side within these large tech companies. So maybe it’s not hitting yet, but I think it will hit soon as it always starts with marketing, right? It always starts with traveling expenses and then it goes further. And so I think give it a few months and we can see it go further into development.

MK: I’m curious, Sam, if what you’re seeing in the sort of tech ad slow down, how does this compare to past downturns, past cycles?

SR: It’s hard to say because we haven’t seen many significant down cycles. Because COVID wasn’t a down cycle for ad spending. It was kind of strange. Right. Social media did very well during that time frame, and social media was so young in ’08, ’09 that it’s hard to really get a read there, except you can kind of extrapolate Google. Google did pretty well in ’08 ’09. They took a lot of market share from traditional media, but that was a different age. So I would say it’s pretty hard to look back and say it’s going to be similar this way or not similar.

MK: But wouldn’t you say, though, that the ad slowdown is just across the board? It’s not as if traditional ad spending is going to start eating their lunch across the board.

TN: Real quick before we wrap up, if you can, in ten to 15 seconds, what are you looking for for the week ahead? Mike, what are you looking for next week to watch?

MK: Well, this has been a very confusing week in that I think there have been a lot of quarter inch shenanigans and window dressing. I’m still macro pretty bearish. Okay. I’m concerned that I think after the window dressing is done, I think some of the supports from the market may actually not be there. I watch bonds and commodities a lot.

TN: That makes sense. Yes, Sam?

SR: I’m just watching the Euro and what happens with TTF next week. I think that’s really important after we get through the quarter close.

TN: Absolutely. Guys, thank you so much. I know this is quick. I wish we could talk for two more hours.

I guess we got cut off at the very end there, so I really apologize for that. I just wanted to thank Mike Kao and Sam Rines for coming on The Week Ahead. Thanks, guys, so much for all that you contributed this week. And thanks to everyone for watching. Have a great weekend.

Categories
QuickHit

Inflation: Buckle up, it may get worse (Part 1)

Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation. Where are we in the inflation and what is the horizon? Both guests have different views and they explain exactly why they have such views. And what about China’s manipulation of CNY through hoarding metals and commodities? Is that a valid way of looking at inflation?

 

Part 2 of this discussion can be found here: https://www.completeintel.com/2021/05/06/quickhit-inflation-part-2/

 

Want the audio version? Play this on Spotify or find us in other podcast players. You can also find us in other podcast audio streaming services. Just search “QuickHit”.

 

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This QuickHit episode was recorded on April 28, 2021.

The views and opinions expressed in this nflation: Buckle up, it may get worse QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Today we’re talking about inflation. It’s been on everyone’s mind for the last couple months and we’ve got two macro geniuses to talk to us about it today. We’ve got Nick Glinsman from EVO Capital and we’ve got Sam Rines from Avalon.

 

We look at copper. We look at a lot of these indicators of inflation and it’s been on everyone’s mind over the last few months. A year ago, people were worried about deflation. Now the worry is inflation. Obviously we’ve seen a lot of monetary and fiscal policy in the interim.

 

So, Nick, can you give us your view on where we are with inflation and what that looks like over what horizon? Is it months? Is it five years? Is it, you know, how does this play out?

 

NG: The horizon is a little bit tougher. But my my thesis is based on looking back at historical precedence and I focused on the LBJ Vietnam War spending, combined with his great society fiscal spend, which ultimately led in the early 70s Paul Volcker’s fame containing huge inflation there was at that period.

 

And I’m sitting here having spent the last year but actually building this thesis up for a couple of years thinking that the equivalent of the Vietnam expenditure is Covid and the relief spending that’s been has combined Trump and now Biden, and then the great society equivalent would be Biden’s green infrastructure spending which, I slightly tongue-in-cheek called the green ghost plan, which is enormous. Amazing.

 

When I find myself agreeing with Larry Summers on inflation. I think his odds of a third in terms of this creating inflation, I would suggest a higher. In terms of timeline, it took five to seven years for the inflation to really kick in during the 60’s leading to Volcker. I think this time around, it will be much quicker due to the differences, a lot of globalization and supply chain management.

 

TN: Sam, can you kind of give us your view of where we are in inflation and what’s the duration that you kind of expect this to play out?

 

SR: I have a very different view. If you look at the lumber market, copper, et cetera, these are things that tend to sort themselves out rather rapidly. Being in Houston, the best cure for high prices and energy is high prices. We will pump more if oil ever goes to 80. It’s very similar with lumber and copper. Most of the mills are becoming much more efficient in lumber, for instance.

 

So we will see that begin to roll over and that will roll over in a very meaningful way as we begin to work through these supply chain issues that we know are coming in the summer and we know are probably going to persist in the fall. But as we get into the fall and we get into early 2022, even if we have a couple trillion dollars infrastructure, it’s going to be spread over the better part of 10 years infrastructure.

 

It’s not a fast spend and it will not save us from the fiscal cliff. It will not save us from the lower employment numbers that we’ve been seeing on an overall basis. Yes, unemployment is moving lower, but employment is not keeping up with the employment figures.

 

Once the economy begins to have to stand on its own two legs, even if it has a touch of a tailwind from the government, it’s still going to be very difficult to continue to see consumption going through the roof, continue to see the types of disruptions that we’ll see for the next six to nine months in terms of supply chain that will have one-off price implications.

 

But that to me says we’re probably getting towards the peak of the sugar high as we get into the summer and the other side of the sugar high is going to be very painful in terms of going back to a one and a half to two and a half percent growth rate in the US inflation that will be very difficult to get higher simply because it’s difficult to have sustained disruptions in supply and demographics that aren’t changing anytime soon. So we will continue to have a number of those headwinds. And I think that’s what the US 10-years is telling you, US tenure at 1.5 is telling you that the market’s looking through this summer and saying the next decade doesn’t look as good as the last decade in a lot of ways.

 

It’s something to at least keep in the back of our minds that the Fed doesn’t have great control over the 10-year. The fed has great control over zero to two-year timeframe. But nothing beyond that.

 

TN: Okay, so let’s look at common areas. It seems to me that both of you see inflation continuing to rise maybe not in terms of the rate of rise but certainly continue to rise until, let’s say say Q3 Q4? Do we at least have comic around there?

 

SR: Yeah.

 

NG: Yes, absolutely.

 

TN: When we look at some of the the pressures in inflation, part of my assertion has been, and I’m sure you’re both going to tell me I’m wrong, but as we’ve seen the CNY strengthen, my hypothesis has been with a strong CNY, Chinese manufacturers are stocking up on industrial metals, food, other things because it’s in dollar terms. They can get it pretty cheaply and they’re waiting for CNY to devalue again when their buying power will decline.

 

What I’m hearing is that a lot of these things are really going to China to be hoarded and as a play on a potentially devaluing CNY. What do you think of that hypothesis aligned with a lot of the central bank easing? Is that a valid way of looking at inflation? Meaning this is stockpiling more than it is demand pull?

 

NG: My view on China is that, if you look at food firstly, there is a food shortage crisis. And we all know what the CCP are most scared of, which is society unrest. And we can take the examples of the Arab Spring, food is the key. But I also wonder whether the Chinese are stockpiling in anticipation of decoupling? I think of rare earths, of which they have a large control of the refining thereof being problematic. Semiconductors, there is an issue there.

 

So if I extrapolate further, my view is I think the supply chain issues are much longer standing now because of various geopolitical forces creating a decoupling with China for sure. And we have this Anglosphere grouping that’s clearly beginning to take shape, which now looks like that will include India because of the health crisis there.

 

If we look at that, then the question is what happens with Europe? Again, I think that’s part of the supply chain problem whilst they decide which site they go to. Is it china-centric or is it anglers-centric?

 

So I think the supply chain issue is much longer standing, hence I suspect that we’ve got China positioning, because nothing goes on which in China without the government knowing about it, quite frankly. In terms of anticipating a supply chain issue, because all the commodities they’re importing they’re short off.

 

TN: Okay, Sam, first of all, what do you think about my hypothesis and then Nick’s qualification around the supply chain issues being much longer term on the back of decoupling?

 

SR: I would take the argument that decoupling isn’t an action. It’s a process, and the process takes a very, very long time. And that creates in my mind a much longer time frame for the United States to build out its portion of the supply chain, for instance semiconductors, et cetera. So I would say I don’t disagree that there is a decoupling underway. In my opinion or my argument would be that it will take much longer than a few years to really get that process to move and it’ll be particularly under this administration a much more diplomatic and less blunt force tools than we’ve seen in the past being used. So I don’t disagree with the supply chain eventually being at least somewhat disentangled from China. I would just argue that it will take quite a while to really begin to become an issue unto itself.

 

On your point that China stockpiling, that does appear to be happening. It does appear to be a hedge against a weaker CNY to come including with lumber. One of the reasons that lumber prices are spiking is because China’s buying a lot of lumber in the US. That is a significant problem. And I would point to, when they stop stockpiling, that tends to have a significant effect on the price of commodities in the opposite direction. We’ve seen that with copper a couple of times during their infrastructure builds.

 

The interesting thing right now is you’ve actually seen a pullback from infrastructure spending. From the peak in China, they’ve begun to do their form of policy tightening on that front already. Suspected will continue at least on the margin and that will be a significant headwind for those commodities that have been stockpiled when less of them are being used on the margin as well. So that that does play into a 2022 disinflationary type environment versus 2021.

 

TN: Given that we have all these different pressures, whether it’s supply chains, whether it’s stockpiling, whatever it is, what the people in the middle, so that the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people, when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things? Or are they passing that directly along?

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