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How low will gasoline go? Recession worries & Japan hits 2% – The Week Ahead – 12 Dec 2022

Explore your CI Futures options: http://completeintel.com/inflationbuster

This Week Ahead is a special episode because it was recorded live, with guests Albert Marko, Sam Rines, and Mike Smith, together with host Tony Nash in a face-to-face conversation. It’s also the first time that we had a Twitter Spaces, joined by a few people and taking their questions.

Gasoline prices have continued to decline here in the US. Since June, RBOB has been pretty much one way, sliding from ~$4.30 to $2.16. That’s half. Of course, lower crude prices are a huge factor, but over the summer we were hearing all about refinery capacity. Is there more to it than the oil price? XLE vs crude – XOM closing in on 100, etc. How much of an impact is this having to help affordability given the broader inflationary environment?

Inflation is proceeding unabated, as we saw in Sam’s newsletter this week. Some Goldman guy was out this week saying there may be a recession in 2023. Sam looked at the terminal rate in his newsletter this week. How would accelerated inflation or steepening of recession worries affect the Fed’s actions?

We had BOJ head Kuroda (who has been in the job for a decade) begin talking about Japan hitting its 2% inflation target. If that were to happen, how likely would the BOJ be to scale back its ultra-loose monetary policy? Impact on Japan’s equity market, govt bonds, etc.

Key themes
1. How low will gasoline go?
2. Inflation/Recession worries
3. The day after Japan hits 2%

This is the 45th 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
Albert: https://twitter.com/amlivemon
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl

Transcript

Tony

I just want to say hi and welcome to The Week Ahead. I’m Tony Nash. We’ve got a couple of special items for this show today. First, Albert Marko is in Houston, Texas. So we’re doing a live in-person Week Ahead with Sam. Tracy will be on Spaces eventually. We also have a special guest, Mike Smith, who’s a partner at Avidian Wealth here in Houston. Second, this is our first Twitter Spaces, so this may be a little clunky and we may make some mistakes, so just bear with us, if you don’t mind.

So Mike, Sam and Tracy eventually, and Albert, thanks for joining us. I really appreciate the fact that you guys have come today.

We have a couple of key themes today. The first is how low will gasoline go? Gasoline prices I think nationally are around $2.99 are approaching that in the US. So we want to take a little bit of a look at that to understand what’s happening there. We also want to talk about inflation and recession worries. Sam will go into that quite a lot and we’ll try to figure out what’s happening with inflation.

And then we’ll talk about Japan post 2% inflation. So there have been some comments from Abe at the BOJ about Japan hitting 2% inflation, and we’ll talk about that a little bit.

Okay, so Albert just joined us. So let’s get started on gasoline prices. Guys, since June, RBOB has really come down from 430 to about 216. So it’s about 50% or 49 point something percent.

Of course, lower crude prices are a huge factor. We’ve seen crude prices come down in that time as well. So is there more to go on crude prices? On gasoline prices? Like I said, we’re waiting for Tracy, but she’s not joining. So I’m just going to throw it open to you guys. What’s your thought on gasoline? Because we’re entering the holiday season, it’s going to be a lot of driving. There’s a lot of inflationary pressures, which we’ll talk about in the next segment. But I’m just curious what your thoughts are on room for gasoline prices to fall.

Albert

Well, I think they guess some prices are going to fall because price of oil just keeps on going down. I think at the moment, whatever brokers, government entities or whatever we want to talk about is starting to drive down the price of oil because it’s beneficial to the political situation. So I think that oil, as it drifts down towards 60s, mid sixty s, the price of gasoline will also come down.

Tony

What are you hearing? We’re in Houston, energy capital of the world.

Sam

What are you going to yeah, it’s hard to make a call on the energy price kind of in its relation to gasoline for a couple of reasons. One, we really don’t know where any spare capacity can come from in terms of the ability to refine at this point.

You’re running at 96% utilization rates for refinery capacity, that’s pretty much peak. So if you have any sort of hiccup there, you’re going to have a problem on the gasoline front.

Tony

So hurricane season is over. Do you see any reasonable hiccups coming? Obviously may be unexpected, but when you’re.

Sam

Running at 96% capacity, it doesn’t take much to have a small problem. Right. And if you go from 96% to call it 90% because of an accidental outage, that could be something rather significant for the gasoline market. So while oil prices, you know, appear to be fairly volatile right now, it’s, it’s hard to translate that back into a gasoline price.

Mike

I know if 86 degrees here in Houston, but unpredictable winter can happen. I know it’s a little bit of a delay, but we don’t know. These weather patterns can happen. We could have a colder than expected winter and that could probably trigger as well.

Albert

Rail strikes is another issue. Talking about any kind of strikes in the transport industry, diesel prices making truckers, you know, trucking more. It’s not anything.

Tony

Right. I just saw Tracy pop in and then she popped out. So once she comes in, we’ll come back to her on this. Thank you. Okay, that’s great. And we’re seeing, we’ve seen XLE, the energy companies, the energy operators, we’ve seen XLE stay pretty elevated as crude prices have come down. There’s typically kind of a four to six month lead between crude prices coming down and XLE coming down. So when we look at some of these major operators, is there an expectation that those prices will come down? Or are we kind of I’m just inviting Tracy to co host. Okay. Hi, Tracy. Are you there? Sorry. Just back to XLE. Do we expect XLE, the traded operators like, say, ExxonMobil, those sorts of guys? ExxonMobile is about to break 100. They’re headed back down after topping out like 115, something like that. So do we expect their share price to follow the crude price directionally?

Albert

I would say no. Really? It’s tough. It’s a tough call, to be honest with you, because we just don’t know which way the markets are going to go. Crude prices is acting like bitcoin at the moment, just being up and down 10% per week. I can’t even give you an honest answer on that.

Sam

I mean, it’s certainly not going to be the same data that you would expect in a decade ago, but you’re likely to have the sentiment at least have some effect on XLE or XOP, whatever it might be. But the issue now is that you’re not going to have the same sort of capital expenditure catch up and overshoot that you did in previous cycles simply because investors have already said, we will punish you for that. And producers don’t want to be punished.

Sam

They’re making a lot of money at 50, 60, $70 barrel oil. I don’t think you’re going to see the level of beta to the underlying that you would normally expect.

Tony

Okay, great. So basically they’re using your old equipment at the current energy prices and they’re maxing it out. But when the capex cycle does come on, will it come on with huge force or will that trickle out? Like when will invest? Will investors decide at some point that they won’t punish these operators for capex?

Sam

No, they won’t. No. Okay. Why spend for something that has a five to seven year time rise? We’ve been told that the oil companies aren’t supposed to exist in a decade. So as a shareholder you want that return of capital. You don’t want that capital put back to the ground. And if you begin to see any sort of significant uptick in capital expenditures, you’re going to have it absolutely crushed from a stock perspective. Right. If Exxon announced that they were going to begin a significant capital expenditure program, that stock would get absolutely hammered and you can just go through any of the companies. It’s all about what are you doing for my dividend? How much stock are you buying back and maintaining output, not expanding because you talked about it.

Mike

We’ll be short or fast. I think it’ll be going to take a long time for that to happen unless some major catalyst happens that actually sparks that in.

Tony

When you think about how long it.

Mike

Is to legislate get permits, it’s a decade.

Sam

Yeah, absolutely.

Mike

So it’s got to be some major catalysts.

Tony

Tracy, are you there? I see you as a co host but I’m not sure if you can speak. Okay. Once you’re in Tracy, just speak up and I’d love to get you involved in this discussion. Sam, how much of an impact is having is say lower gasoline prices having on the affordability in broader inflationary environment? So basically are gas prices helping the inflation discussion much or is it just a relatively small thing since a lot of people are working from homes?

Sam

There’s kind of two ways to think about that. There’s the inflation dynamics, the actual inflation dynamics that lower gasoline does have that headline CPI narrative.

Tony

It’s a tax cut. I’m kidding.

Sam

The problem is that over time gasoline has become a much smaller portion of the wallet. The average person does not spend anywhere near as much on gasoline as they used to and that’s just a fact. So is it really helping people on the margin? Yes. Gasoline and groceries are the two things that you can kind of see and one you see in a big bull sign, the other you see every week when you go buy groceries. So gasoline, grocery prices coming down, it’s good for the consumer mentality. Is it good for the action and spending levels?

Tony

Okay, great. Okay guys, just so you know, this is a live spaces. We are recording this and we’ll upload on the YouTube channel probably tomorrow. Tracy has joined us. Tracy, if you’re there and you want to chime in please join. Okay, let’s move on to the next topic for inflation and recession worries. So inflation is proceeding pretty much unabated salmon, and we saw this in your newsletter this week and I’d love to talk more about that. We also had some Goldman guy, I can’t remember who it was yesterday, saying there’s probably going to be a recession in 2023. And all these people are coming out saying maybe back half of 2023 there’s a recession, which it’s a convenient time to say that right? Right now to say something’s going to happen in the back half of 23. So you look at the terminal rate in your newsletter.

So how would, say accelerated inflation, if that’s actually coming or the steeping of recession worries affect the terminal rate from the Fed?

Sam

I think you have to divide that into the first part. That is, what would inflation call it a deceleration in inflation pressures mean for the Fed? Unless it’s significant? Not much. Does a recession matter for the Fed? Not if it doesn’t come with disinflation. Does the Fed care if we have real GDP decline? No. I mean we have real GDP decline, q One, q Two. They got their mandate, they did not care. Right. You currently have north of 7% CPI and you have an unemployment rate of 3.8, maybe percent. It’s really hard for me to see which one of those metrics is comforting to the Fed at this point. So does it affect the Fed’s trajectory? Maybe it’ll take a 25 out of the terminal rate, but that’s about it. You’re simply not going to have this type of immediate Fed pivot with inflation at north of 6% and this type of unemployment rate, it’s just not going to happen.

Tony

Okay, great. Now for you guys on spaces, if you have a question or want to put up your hand, put a question in the channel or put up your hand. We’ll take some questions later on in the podcast.

Albert

That inflation is just so sticky right now. We spoke about it earlier for podcast about wage inflation just sitting there, you know, just rising every single month. Politically, it’s a great thing for people to wait 40 years to get wage inflation, but I just, I can’t see how all these consumer prices are going to come down and talk about this inflation or wage inflation is just going to stay elevated for the next 1015 years.

Tony

Yeah, that’s a good point. So I get that there’s this expectation out there where people expect prices to come down to say, 2019 levels at some point. And, you know, we were talking about this, Sam, that do you expect prices to go back down to 2019 levels? We’ve seen a dramatic rise in a lot of different areas. So do you expect that to fall back down to what it was two, three years ago?

Sam

No, I don’t even think that in the best of all possible worlds, that’s not one of the worlds.

Albert

The only people talking about that are the political people that are trying to sit there and trying to gain votes because people are struggling at the moment. But the economic guys exactly. It’s only what you want to hear, but the economic guys are looking at the numbers and, like, we have never seen I mean, why would why would companies bring the prices back down that much when they know they can get away with it?

Sam

I mean, Cracker Barrel expects wages in the coming year to be up five, 6%, right?

Tony

Those of you who aren’t in the US.

Sam

Year, right?

Tony

For those of you who aren’t in the US. Cracker Barrel is a very kind of middle America restaurant comfort food, right? It’s biscuits and gravy. It’s fried chicken, that sort of thing. And so this is not the high end yet. It’s not McDonald’s. It’s very much the middle market in the US. And so Sam’s done a very good job in his newsletter over the last couple of years covering price hikes at Pepsi, at Home Depot, at Cracker Barrel, at other places. So many of these companies have raised prices by, like, 8% to 10%, generally, or more. Who’s raised more?

Sam

So Campbell Soup this morning came out with earnings, and they divide them into two categories. They divide it into soup and kind of prepared meals type deals and then snacks.

So think Snyder’s Pretzels is one of the brands. The prepared meals, which include soup, they increased pricing, 15% from last year, and they increased on snacks, 18. And that was price that they pushed. Volumes were slightly negative, but negative 1% and 2%. Okay, you’re talking almost no budge on volume and a huge move in pricing, and that is for the most boring of all commodities. This is soup we’re talking about.

Tony

And I want you guys to understand what Sam is saying. Campbell Soup has raised their prices between 15 and 20%, and their volume declined 1%. So do we ever expect Campbell Soup to reduce their prices by 18%?

Sam

No. That’s the beautiful part if you were corporate America right now, is you get a free pass to really find the elasticity in the market for your product by raising prices until you begin to see pushback from consumers, and you just haven’t seen a significant pushback from consumers. And to the narrative of inflation peaking. Inflation is peaking. If you look at the last four quarters of price increases from Campbell Soup, it was something like 6%, 11%, 11%, 16. Right? So maybe the second derivative is negative, but the first derivative isn’t.

Tony

And it’s positive in not a small way.

Sam

Correct.

Tony

We’re not talking about 2% price rises. We’re talking about 18% price rises, which.

Mike

Is we’re seeing that for consumers, the biggest increase. But, I mean, I guess in future years, that probably somewhat levels off. And then on top of raising prices, I’m sure all of you have noticed the shrinkflation, the items have less in it and we’re paying more for it on top of everything else.

Sam

Well, that is part of the pricing element. Right. So when they take packaging down a couple of ounces that shows up in the pricing mechanism.

Albert

It’s incredible that Campbell Soup and all these other companies raised their prices by 16% to 19% because that is actually the true inflationary number. When you go back to what they used to do it in the 1990s, it’s 18 19%, not the 7% that the Fed tells you. CPI.

And on top of that, these inflationary numbers give you a tailwind for earnings. So all these companies that surprise earning beats, if you look at them, what inflation has done into their products, it’s not a surprise that they beat.

Sam

Yeah, right. And it’s somewhat stunning because if you think about it from a 23 24 perspective, if you have your input costs begin to move lower, or at least decelerate, and you’re holding your prices at these current levels, or even increasing slightly from here, or increasing from here, all of a sudden you begin to think about what that does to a bottom line. That is an extremely attractive thing for a business. As we begin to move into the latter part of the margin expansion that everybody kind of thought was over after COVID, that really might return to some of these boring, staid old stocks.

Tony

Right. So guys, just, just to be clear, what we’re saying here is prices are not going to go down or they’re highly unlikely to go down to what they were two or three years ago. We’ve hit an inflation level, it’s a stairstep. And companies are comfortable seeing reduced volumes, but they’ve compensated that with higher price and consumers are generally accepting higher price. Right. So as an aside, I’ll be shameless here and say complete intelligence does cost and revenue forecasting. If you guys need any help with that, let us know. Okay? So, terminal rate, you’re still looking at five to five to five somewhere in there.

Sam

Well, I think it’s probably closer to five and a half to somewhere between, I would say five and a half to six because you have the stickiness in wages, right? And the stickiness in remember this is important, that Powell, week ago at the Brookings Talk pointed out one thing, and that was Core Services Ex shelter. In other words, they, they are already throwing shelter out. Even when shelter decelerates, they’re not going to pay attention to it. And he also made it very clear that Core Services X Shelter, the main input cost for many of these businesses is wages and personnel. So while you have these wage pressures, building the Fed is not your friend in any meaningful way. So I’m much more on the give it five and a half to six. There’s this idea maybe we get 50 50 25 then done. Or 50 50 done. It’s more like 50 50. 25 and 25 and 25. It’s just slower.

Tony

You said this a month or so ago. It’s a matter of the number of 25 that we get.

Sam

Yes, it’s 25 delays.

Tony

Okay. So it’s not over, guys. We’re going to continue to see the Fed take action, and they haven’t even really started QT yet. And we’ve talked about that for some time. And when they start QT is really when markets feel is that fair to say? Yeah, depends on the market, of course.

Sam

Yeah, they’ve started QT It’s just a small 200 billion or something that’s still QT. They’re not going to sell them.

Mike

I think one of the things he said is the Fed is not your friend. And just think about that statement for a minute. For two decades, all investors we’ve all come to known as the Fed is our friend. Anytime the market was down, they’re out there doing press conferences. But I think it’s critical for people to understand we’re not going to see a return of that for a significant amount of time.

Tony

Right. You’re not public servants. Right. Exactly. They don’t like you.

Albert

It’s important that as Sam mentioned, that 50 50 and then the repetitive 25s correlates with their rhetoric of soft landing that they keep talking about whether they can actually achieve a soft landing. Well, that’s another debate that we talk about. But that’s exactly what their intentions are. Those are 25 US to the end of their they get to where they want to be.

Tony

Right. Okay, very good. Let’s move on to Japan. Bank of Japan Chairman Corona was on the wires this week talking about Japan hitting the 2% inflation rate, which they’ve been trying to hit for 30 years or something. And then they made a policy with Avionics in 2012, and they still have been able to hit it. And now that we have crazy inflation globally, they’re going to claim the win. Right. And they’re going to say, we hit it and abe nomics. Although Avi is not empowering where it was ultimately successful. So, Albert and Sam, I’m just curious, what does that mean if Japan hits 2% inflation and they tail off their quantitative easing, their kind of QE infinity and they stop buying government bonds, all this stuff. First of all, do you think that’s going to happen? Okay. And second, if that does happen, what did Japanese markets look like? And then what does the yen look like? I realize they just threw a bunch of stuff out there, so just take it away. So you might like jump in here. Sure.

Albert

The fiscal monetary setup is quite favorable, right. If they do whatever they’re going to say they’re going to do quite favorable. There are only headwinds that I can see is the US. Stock market equities. If the US equities fall, without a doubt it will affect the Asian market, specifically Japan. It’s a tall order for them to sit there and get their 2% inflation target. So I don’t even know if that’s even a valid discussion, but I guess we’ll sit there.

As much as a set up as favorable for Japan, they’re combating China. And I still think that China, because they don’t have as much connection to the US. Equity market, is a little bit more favorable. I would go China over Japan right.

Tony

Now, yes, but I’m tired of talking about it.

Albert

I know not to talk about China when Japan is so interconnected with China, so everything is interconnected in that region. But I do think that the fiscal monetary set up for Japan is favorable.

Tony

Okay, sam, what do you think?

Sam

Like Albert said, theoretically, it’s really interesting. It’s intriguing. The one thing that I think is important to remember about Japan is that every time they seem to have the monetary policy setting correct and they were heading to actually hit their 2% target, they always seem to raise taxes or do something to make sure that they missed it. Was MMT on steroids? Very good example of MMT actually working. Right. You can do as much monetary policy as you want as long as every time you’re close to an inflation target, you just race to that or taxes. So I think that’s something that I’m always somewhat skeptical of Japan doing. If they begin to lift yield curve control on Japanese government bond yields, I think it’ll do two things. One, it will make for an interesting market in Japanese bonds. The BOJ owns such a large amount of that market that is almost difficult to fathom that it actually has a functioning market. It doesn’t really have a functioning yield market. So that’s kind of the first thing is we’ll finally get a feel for how that market actually functions. The second one is that you’ve had a 2% inflation win with the yen sitting between 130 and 150, a very weak yen.

That’s a tailwind to inflationary pressures. If they do lift YCC, it doesn’t matter what else they do. If they raise interest rates, whatever it might be, the yen going back to 120 is going to undo a lot of that inflation pressure in and of itself. You’re going to really bring that in. It’s also probably a positive. Having a stronger yen in this environment when you’re at an energy shortage globally is a positive for the Japanese economy because they import so much energy. Having that stronger yen makes it cheaper in domestic terms from that perspective. So I think there’s a number of things that could line up pretty well, and there’s always the opportunity for the Japanese government to mess it up somehow. Of course, I do think that it’s a very interesting market, particularly if you can do it on a call it an outright basis investing and get some of that currency dynamics mixed in with your investment, that could be a very interesting opportunity going.

Albert

You know, what’s interesting is what you’re saying about MMT on steroids. It’s like, you know, you’re making all these descriptions of what’s going on in Japan, and I just look at the fed, and I’m just like, well, oh, my God. We’re starting to be on the verge of Japanification at the moment right now, because the 30 year bond from who I talked to the 30 year is.

Sam

Completely controlled by the federal government.

Albert

And at the moment, it’s completely controlled. And if they can sit there and pump those bonds and pump the markets, you got Japan right here in the United States with MMT and Leil Bernard and yelling, doing whatever they want to do.

Sam

You just have to raise taxes.

Albert

Yeah. So so masters at that. Yeah.

Tony

So I used to go to Japan a lot, and in the late, say, 2010, 2011, when the yen was at, like, 75, when I would go to Tokyo and I would go down to breakfast in the hotel, I was the only one there. And I remember when Abe was elected and even pre election, the yen started to weaken him taking office. The yen started to weaken. Right. And I remember the first time I went down to the hotel lobby and there was a line to get to breakfast rather than just it being wide open for me. So a devalued yen means a huge amount of power for the Japanese economy. So when you say JPY going back to 120, I remember in 2010 eleven. When people would say, gosh, if we just had a yen at 95, we’d be happy. Right. And now it’s at 145, or whatever it is.

Sam

I haven’t 130 yet.

Tony

136. So, you know, it’s you know, it’s a completely different environment and puts the Japanese economy in completely different context. But you have nationalization of bond markets, you have nationalization of ETF markets. Is it really an open, competitive economy? It’s certainly a highly centralized economy. Right. And that’s really dangerous. But they love to use demographics as the justification to intervene in markets, right?

Albert

Yes.

Tony

Okay, guys, if anybody has a question, raise your hand. Or I’m not exactly how this works. Again, this is our first time to do a spaces. So put something in the messages or raise your hand or do whatever, and we could potentially have you come on and ask your question. I’ll be very honest. If you have an anonymous Twitter handle and we don’t know you, I’m not going to let you speak. So don’t waste your time. But if you’re someone we know, then we’re glad to have you on. So I guess while we wait for people to come in with questions, we’re pre Christmas holidays here in the US. We’ve got a Fed meeting coming up, the expectations for a 50 basis point hike. What do you guys expect? We’re seeing equity markets really kind of gradually move lower. What do you guys expect for the next week? Or so in the US before the Christmas holiday.

Albert

I think the CPI is actually going to be a little bit less than consensus and probably get a rally going to the end of the year, to be honest with you. I think everybody knows it’s going to be 50 basis points. The question is what’s the guidance after that? What do they say? If it’s a good CPI number, well, then you can have this dough stock for another month.

Mike

Sentiment has been so low and kind of got your seasonality right now. I think that probably prevails here.

Sam

If you think about it, a few.

Mike

Months ago everybody was kind of in this panic, Seymour. People kind of there’s this nice little calm right now everybody’s just kind of floating around waiting to see what’s next. And what’s your point? I think everyone expects to raise another.

Albert

50 basis point, which is amazing, because 50 basis points is not dovish. I guess everyone’s expecting 75 or 100 about a month ago, you know, their.

Mike

Condition as to.

Sam

No, I would say there’s there’s a couple of interesting things about the Fed meeting it into the back half of the year. One is what does the dollar actually do here? Because if you begin to actually have a significant move in CNY stronger right lower on this chart. But if you get a significant move back towards the 650 area on CNY, that is going to have a spillover effect. To a stronger Euro continued strength in the British pound you could begin to have a number of dynamics that are somewhat negative dollar and therefore pretty bullish on the risk asset front that I think could catch some people off guard simply because of the spillover effects. But the Fed, the one thing to remember about this meeting is it’s not just a 50 basis point height. It’s also that stupid dot plot that they do that actually has some pretty serious potential consequences because if 23 comes out with higher than expected dots and 24 dots move higher, the terminal and the long term rate begins to creep a little bit higher. If you begin to have that hawkishness, I kind of want to say this, so going to, if you begin to have the hawkishness become less transitory in the dot plot, that could become somewhat problematic for markets that could take some of the sales out of what we’ve seen to be a moderating dollar effect.

So I think, I think it’s worth being a little careful until we see that dot plot and begin to hear how Powell is approaching 2023 because I think they’re somewhat aggravated about the way that the Brookings Institution, the Brookings speech was received by markets they did not want a significant asset rally going out of that right. That was counterproductive to what they want. So I think they’re going to be very careful about the rhetoric into the.

Tony

Back half of the year because they would just. Not be so jerky in their communication. They’re super bearish. They’re bullish. They’re super bearish. They’re bullish have a consistent message.

Albert

Yeah, but it depends on what’s going on behind the scenes, what data they see. All this data, they see all the CPI and the jobs numbers a week or two heading for anybody else. Don’t kill yourselves.

So I guess it comes down to what is going on behind the scenes and what they don’t want to break. I mean, Blackstone came from what I heard, blackstone was $80 billion in the hole and having problems, and they went to the Fed, and that’s what triggered Powell to be slightly dovish.

Tony

And I thought they were the fed.

Albert

Well, whenever you guys Powell’s portfolio sitting there in your grasp, you are the.

Tony

Fan of that one.

Albert

But I guess it goes down to what is happening behind the scenes and what could potentially break is why they’re coming on this roller coaster ride of rhetoric.

Tony

Yeah. Okay, I’m going to see if Valena wants to come in she’s attending. And see if she wants to come in to see what? Invite her to speak and see if she wants to Valena, are you there? If you want to come in and let us know what you’re thinking is going into the end of the year and 2023, you have an invite to speak. You’re welcome to.

Albert

Molina is sitting there in Austria, vienna, Austria. And I know the European markets are now looking quite interesting to me. A little luxury market in Europe is absolutely exploding, and it’s just unreal that. It’s just so resilient. I mean, there’s two brands that I personally liked, laura Piano and Brunello Cucinalli, which I have a tremendous amount of polls. Brunello Cucinalli didn’t care anything about the Russian sanctions or anything. Just kept on selling, and they just blew out earnings yesterday or as of today, they were up like 7% this month. Really, the luxury retail market, luxury jewelry market is just it doesn’t stop great. And it’s counter to what everybody is saying. Recession this, recession that. You go to gucci stores, lines out the door, Louis. The time you need an appointment, it’s just resilient. It’s just actually quite amazing.

Sam

It is really similar to if you look at our markets, right, particularly the masters plotted against the price of oil. If you do a six month delay, guess what? It’s almost it’s a really interesting kind of windfall type chart. You can kind of see the oil money flowing in there. And you even had China relatively shut down, and that was a huge driver, a tremendous driver of European luxury, particularly for LVMH. Even with China shut down and not really having the tourism, you had a lot of tourists from Middle East, et cetera, really put in some of the South American countries that are doing fairly well, particularly at the higher end. A lot of that is driving this kind of underneath the surface. You had tech, then you had energy. And the question is, now you have the China reopening. Is that the next leg for a lot of these lectures?

Tony

Okay. So let’s talk China.

Albert

I wasn’t going to do that.

Sam

Tracy.

Tony

You’Re as a speaker as well. So if you want to come in, you can come in any time. Okay, so let’s talk about China, even though I didn’t want to COVID that. So let’s talk China. What’s happening, Albert, with the reopening? Like, what do you see the next two months happening with the China?

Albert

Just as we spoke about a week ago on China, those riots and the reason the Chinese even let you see these riots happen on the social media was a signal that they were going to reopen, and in fact, they did. Days later, we’re reopening in stages. And that’s just it. And get your house in order, everybody, because inflation is going to happen. I think I think copper was up, like, two and a half percent this morning. And this is this is it just barely reopened right now, manufacturing, because the odors were down I think Western odors were down 40%.

Tony

But kind of everyone told me on Twitter that democracy came to China.

Albert

Yeah.

Tony

Okay.

Albert

Those are people that have never been to China or stayed at five star hotels or actually step foot outside of Beijing.

Tony

So let’s go there a little deeper. And Xi Jinping is in the Middle East either today or over the weekend at an Arab China summit. Right. And so, first of all, him leaving China right after there were protests, what does that say to you, Albert?

Albert

Safeguard, he’s done any kind of opposition that was pushing against Xi’s Party congress moves eroded, and then these street protests are just street protests. I get it, people are upset and their livelihoods and check down the list of whatever you want to say, but realistically, they never work unless they get violent. And they never got violent.

Tony

Right. So you kind of have to let the steam come out of that valve, I think is probably what you’re saying. Right? The CGP is saying that now with CGP going to the Middle East, sam, they are the premier buyer. China is the premier buyer from OPEC clubs now. Right. It’s not the US. And this isn’t new for people who have been paying attention. The Saudis and other people in the Middle East have been spending a lot more time in Beijing for probably six, seven years. And so and and it’s been longer, but it’s been really, really visible for the last six or seven years. So what does what does that tell you about, let’s say, OPEC’s desire to, please say, a US president going to the Middle East to try to bully them, to pump more? Is that effective anymore?

Sam

No, not at all.

Tony

Hi, Tracy.

Speaker 5

Hi. Sorry, I was having technical difficulties, and for some reason I couldn’t all gone earlier.

Tony

Welcome. No apology necessary. We’re just talking about China and with Xi Jinping in the Middle East for a summit with the Saudis and the GCC members and what that means for the ability of say, a US president to kind of bully OPEC into reducing oil prices going forward. Is there really any strength there? Do you see.

Speaker 5

That’S? Absolutely done. What I would expect she landed in China today. I would expect him to get the full lavish welcome. Right. And we want to be looking at who he brought with him as far as national heads of corporations. And I would expect this to be completely opposite of what we saw the Biden meeting with and more akin to what we saw the Trump meeting with, where they I would expect that.

Tony

So they’ll touch the crystal ball.

Speaker 5

Maybe they might bring out the ball. Yes. And I expect billions and billions in new deals as far as economic, military, energy in particular, et cetera going on at this point. Again, they’re having a conference where they’re going to have multiple leaders in the Gulf nations in Saudi Arabia. So I mean they’re really going to try to rue China on this trip big time.

Tony

Right. So when you talk about military deals, what do you think about that? Albert?

Albert

I’m not really sure Saudi Arabia will.

Tony

Do major military deals with China.

Albert

I mean maybe a few just for show up for optics theatrics but the US military hardware is the best in the world and realistically Saudi Arabia is under the US defense umbrella. Whether the left or the right likes it or not, that’s just the reality of it. And as long as Iran is not poking or poking trouble from the east and Yemen not from the south, southern regions have an easy ride. So their military deals aren’t really they’re not at the forefront at the moment. But anytime that Russia wants to string that relationship, they can certainly call up Tehran and say lob a few missiles over and things go right to elegant.

Sam

To Albert’s point, I don’t think Saudi is going to work. KSA is going to become the next India where they split their arms deals among the three major powers of arms anytime soon. I mean that’s just not going to happen.

Albert

No, there will be a little bit, yeah. India is a completely different ballgame. India has got counterbalance, they need to counterbalance Russia with China and Pakistan and it’s the old mess over there and they need to do what they’re doing.

Sam

Well Nksa is also trying to hold together their market share in a world of Russia really having to begin sending almost all their stuff to call it China India.

Tony

Right.

Sam

So if you had were the two largest pieces of growing market share for Saudi Arabia over the past decade, that was India and China. And now you have the other major energy player in the region coming after your market share. There’s got to be a little handshaking here to keep everybody happy and selling at $55 a barrel.

Tony

You don’t hate that, right?

Sam

If you’re trying to. I mean, it’s the perfect time to reopen. You’re getting cheap energy. You have supply chains that have fixed in the rest of the world. So I think this is very much a visit to make sure that they can continue reopening, get those long term energy deals in place, and then move forward.

Tony

Right. Okay, so we do have a question for Tracy, and you guys jump in. So, Tracy, there’s a listener named Rasul, and he’s asking, when China opens up, is it possibility that it could use its own SPR, like in November 21, to reduce its oil cost? Is that something they would consider doing?

Speaker 5

I think not at this juncture, right now, because, first of all, they’ve already drawn it down. Right. And they’re still worried about long term energy security, as is everybody right now. In addition, they’re also getting really cheap Russian oil, so I don’t think that would be something that they would do right now.

Tony

Okay.

Albert

No, they wouldn’t do that.

Tony

Right.

Albert

There’s no absolutely no need to do that. The US. Only did that because of Midterm economics, and that’s just that China had no intention of doing that.

Tony

Great. Okay, good. All right. Well, guys, I think we’ve covered it. We’ve been here for about 40 minutes, and the hotel we’re in has threatened to call the police if we don’t leave. So I want to thank you all for joining us for this week ahead, and we’ll get this posted on our YouTube channel within a day or so, okay? So thanks for joining us, and look forward to seeing you on the next one. Thank you.

Categories
Week Ahead

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?