This video interview is owned by Channel News Asia, and the original source can be found at https://youtu.be/U_Im05ClsN0
The United States Federal Reserve’s plan to ease its pace of interest rate hikes as soon as December would bring some relief for markets concerned about the central bank overtightening too quickly, Mr. Tony Nash, founder and chief executive of data analytics firm Complete Intelligence, told CNA’s Asia First.
Transcript
CNA: Federal Reserve chair Jerome Powell has signaled policymakers could slow interest rate increases starting this month. That sets the stage for a possible to downshift to a 50bps rate hike when Fed officials gather again in two weeks.
Powell: Monetary policy affects the economy and inflation with uncertain lags. And the full effects of our rapid tightening so far are yet to be felt.
Thus it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.
CNA: But it isn’t quite a dovish turn. The U.S Central Bank Chief also stressed that they have a long way to go in restoring price stability despite some promising developments.
Mr. Powell warns against reading too much into one month of inflation data saying that the FED has yet to see clear progress on that front. In order to gain control of inflation, the Fed chair says the American labor market also has to loosen up to reduce upward pressure on wages. Job gains in the country remain high at nearly 300,000 positions per month and borrowing costs are likely to remain restrictive for some time to tamp down rapid price surges.
This is where U.S interest rates stand after an unprecedented series of four 75 bps rate hikes. Policymakers projected earlier that this could go as high as 4.6 percent but Powell says they will likely need to keep lifting rates more and go beyond that level until the inflation fight is done.
The less hawkish tone from Powell Boyd U.S market stow and the S&P500 erased losses it searched three percent. The Dow gained two percent while the NASDAQ jumped more than 4.4 percent. the 10-year treasury yield also dipped as Bond Traders dialed back their expectations on how high the Fed may push interest rates while the U.S dollar retreated.
Tony Nash is founder and CEO of Complete Intelligence joining us from Houston, Texas for some analysis. Now Tony, just looking at Powell’s comments, the first differs in some way with what the Fed and its officials have been telling us earlier in the year and how we’ll get there fast to try to reach the terminal rate. But now it’s signaling that it will get there slower. What is this going to mean for businesses and consumers in the US?
Tony: I think what it means is we’re going to get to the same destination. It’s just going to take a little bit more time to get there. So the Fed has seen jobs turn around they’ve seen jobs aren’t necessarily slowing but the rate of rise in open jobs is slowing. We’ve seen mortgage rates go up. We’ve seen the rate of inflation rise slowly.
So the Fed is seeing some things that they want and they’re worried about over-tightening too quickly. Because what we’ve seen so far is really just interest rate rises. They really haven’t even started quantitative tightening yet. I mean they’ve done a little bit maybe a couple hundred billion dollars. But they have nine trillion dollars on their books give or take.
They haven’t even started QT yet. And they’re starting to see inflation and some of these pressures on markets at least slowed down a little bit. So I think they’re saying “hey guys we’re still going to get to a terminal rate of five percent or five and a half percent but we’re going gonna slow it down from here unless we see things accelerate again.”
CNA: When do you think we will actually see that five to five and a half percent?
Tony: You’ll see it in the first quarter. You know if we do say 50bps in December and maybe another 50 in January, we’ll see some 25bps hikes after that but I think what markets the cyber leaf that markets are giving right now is just saying. Okay, we’re not at 100 or 75 in December.
I think that’s a big size that you saw today and you know. It raising at 75bps per meeting just put some real planning challenges in front of operators people, who run companies. So if they slow down that pace and people know we’re still going to get to that 5 to 5.5%, it allows people to plan a little bit more thoughtfully, and a little bit more intelligently.
I think this does relieve some people of the worries of the Fed over-tightening too quickly and it also relieves worries that the Fed is only relying on monetary policy. They’re not relying on interest rates I’m sorry and they’re not relying on quantitative tightening. so the Federal balanced approach sometime in Q1.
CNA: Okay, you also mentioned before in our past conversations, the concern that the market has been having for this week especially since it’s China’s lockdowns and you see these restrictions ending gradually. What is that going to mean for Energy prices and inflation?
We see Energy prices say now they’re what high 70s low 80s somewhere in that range. We do see a rise of say crude oil prices by about 30 percent once China fully opens. We could easily be 110-120 a barrel once China fully opens. And so there will be pressure on global energy markets once China opens. Other commodity prices will see the same because we’re just not seeing the level of consumption in China that we expect.
What we also expect is for Equity markets to turn away from the U.S. and more toward Asia. So the US has attracted a lot of investment over the past year partly because of the strong dollar partly because of kind of a risk-off mentality consolidating in U.S markets. As China opens and there becomes more activity in Asia than we would expect, some of that money to draw down out of the US and go back to Asia.
CNA: Can you look at the jobs market in the US even as we expect this potential pivot towards Asia for stock market investors? The jobs market and the picture on wages there because the ADP data shows that there seems to be a cooling in demand for labor how soon do you think we can see a broadening out to the broader jobs market?
Tony: You would have broader cooling of demand in the jobs market I think, that’s definitely hidden tech. You’ve seen a lot of layoffs in technology over the past say three weeks. And that will cascade out. I don’t necessarily see think that you’ll see that in places like energy, but you will see that in maybe finance, some aspects of financial services. You’ve seen some of that and say mortgage brokers and this sort of thing so you’ll see that in some aspects of financial services. Some aspects of say manufacturing at the edges. but I do think there’s a lot of growth in U.S manufacturing as this reassuring narrative really takes uh gets momentum in North America. And so even though we may shed some manufacturing jobs in one area I think we’ll see growth in manufacturing jobs in other areas.
CNA: Okay, Tony. We’ll leave it there for today. Thanks for sharing your analysis with us. Tony Nash is founder and CEO of Complete Intelligence.
In this episode, we are joined by two special guests – Mary Kissel and Travis Kimmel – as well as our regular co-host Albert Marko. Mary is the EVP and senior policy advisor at Stephens. She was the senior-most aide to Secretary of State Mike Pompeo and was on the editorial board for Wall Street Journal. Travis Kimmel is a technology entrepreneur, market philosopher, and spicy tweeter.
First, we dig into the approach to getting out of the current stagflationary model. The Bank of England, the ECB, the Fed, and the BOJ are starting a managed decline. And the real question is, is that really necessary? Mary Kissel walks us through how the Fed may actually be making things worse.
We all know the Fed raised by 75bps and is expected to continue with at least 50bps in December. Raising rates has decimated tech names and made operations significantly more challenging. Travis Kimmel discusses the impact of the whiplash in interest rates on operators, on the people who run companies, and how they run those companies in this type of environment.
And then finally, with Albert, we talk about Brazil. We saw a big election result in Brazil this week with Lula declared the winner. Many Brazilians are not happy.
Also, note that Brazil is one of the largest emerging economies and a huge trade partner for China. Lula has already made comments in support of Russia in the war with Ukraine. What does this mean? Is Brazil a risk for US power in the western hemisphere, given China’s inroads in Venezuela, etc?
Key themes 1. Can we grow out of this stagflationary muddle? 2. Impact of Fed rates whiplash on operators 3. How big of a risk is Brazil?
This is the 40th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Tony Nash: Hi, and welcome to the week ahead. I’m Tony Nash, and I’m joined this week by Mary Kissel, Travis Kimmel and Albert Marko. You all know Albert well.
Mary Kissel is the EVP and senior policy advisor at Stevens. She was the senior-most aide to Secretary of State, Mike Pompeo. She was editorial board for Wall Street Journal. Mary is extremely well known. She doesn’t need an introduction.
Travis Kimmel is a technology entrepreneur, market philosopher and a spicy tweeter. So really glad to have you both today. I really appreciate it.
Before we get started, I’m going to take 30 seconds on CI Futures, our core subscription product. CI Futures is a machine learning platform where we forecast market and economic variables.
We forecast currencies, commodities, equity indices. Every week markets closed, we automatically download that data, have trillions of calculations, have new forecasts up for you Monday morning we show you our error. You understand the risk associated with using our data. I don’t know if anybody else in the market who shows you their forecast error. We also forecast about 2000 economic variables for the top 50 economies globally and that is reforecast every month.
Let’s move on. Thanks guys. Thanks very much.
So this week we’re going to move on to some key themes. First, there’s a really interesting concept that Mary brought up. Can we grow out of this Stagflationary muddle? And I really look forward to getting into that a little deeper.
We’re going to also with Travis talk about the impact of the whiplash in interest rates on operators, on the people who run companies and how they run those companies in this type of environment.
And then finally with Albert we’re going to talk about Brazil. We’ve had a big political change in Brazil and it seems more meaningful than we’re being kind of told. So I want to dig a little bit into that.
Mary, first let’s dig into kind of the approach to getting out of this Stagflationary model. So the UK, the Bank of England, the ECB, the Fed, the BOJ, they all seem to be, as you said, starting a managed decline. And the real question is, is that really necessary?
And I’ve got on the screen the balance sheets for the ECB, BOJ and BoE and the Fed of course.
And then we also have a graphic for the CPI versus the money supply. Looking at CPI change and what that is related to the money supply.
Do we in fact need to manage this? Decline I think is a real question and I guess who is growing out of this? I think it’s possible that China grows out of it. I think that’s the only card they have right now. But I’m really curious to hear
your thoughts on this.
Mary Kissel: Well, it’s great to be with you Tony, Albert, Travis, thanks for inviting me today.
Of course growing is the best option. It doesn’t necessarily mean that it’s the most politically salable option. But obviously it’s preferable to inflating away your debt and effectively ruining the savings of seniors and putting an enormous burden, particularly on the poorest and in our various economies. Do they developed or developing economies?
I hate to talk politics because I think it’s always easier for the street to say, “well, you know, we’ve got these neat models and economic forecasts and if you just pulled this lever or that lever, we could achieve X amount of growth.” But the reality is that you have to take politics into account and it’s just very difficult to take the kind of measures that we need to take to grow. And I think you saw that you mentioned the UK and your introduction. You saw that most clearly recently in the UK, where former Prime Minister Liz Truss and her chancellor Kwasi Khortang came out with really what was the only plan outside of Greece?
Greece is the only country that is focusing on growth. They’re looking to hit investment grade next year. But beyond that, the UK was the only country that had really put forth that formula that we know works, which is it’s not just about tax cuts and reducing that burden, it was about stimulating the supply side, opening up Britain’s energy reserves, fracking, going back to the North Sea, encouraging investment.
I mean, if you look at the UK and their economic statistics, it’s pretty shocking. I mean, the two decades prior to the Pandemic, they had growth less than 2% real wages were stagnant for 15 years. Their investment was terrible, even lagging behind their OECD peers. And yet you’ve had twelve years of Conservative governance there and they haven’t really turned the corner. Why? Because politically it’s just simply easier to tax and spend. And once you get on that track, it’s really hard to get off of it. So maybe I’m talking too long, you just one more time.
TN: No, this is a great point. But in talking about managed growth and you brought up politics, I feel like there’s this kind of fate accompli in most Western governments around. Well, we’re really on the downside of our opportunity and we’re a declining country, so we’re just going to manage ourselves that way. And when I think about things like the semiconductor investments and other things coming into the US.
I live in Texas, I don’t know what it’s like in other parts of the country, but it is really booming here. We have a lot of tech companies coming in, we have a lot of investment coming in. It’s a good investment climate. I mean, for anybody in New York or California, it’s terrible here, a lot of rattlesnakes and scorpions. But in terms of the economy, really great.
And so I want to talk about that a little bit in terms of kind of the fake company around. Well, we’re kind of past our prime. Is that kind of a baby boomer thing? I mean, millennials are as big as baby boomers. So is there this demographic assumption baked into that?
MK: Well, look, I mean, democracies get the leadership that they elect, period. And so, you know, I may not like what’s happening in Britain. I may think that they’re on the road to looking like France in terms of their, you know, permanently high double digit unemployment and lousy investment and lousy growth, lousy prospects for their young people. If they’re voting for that, that’s what they’re going to get.
I think that from an investment community. When I’m talking to Stephen’s clients, they’re saying, all right, well, where is there the opportunity for a political process to move us in the other direction? And that’s really just the United States over the next couple of years. I mean, that’s kind of it. Not going to happen in Japan, it’s definitely not happening in Australia, it’s not going to happen in continental Europe.
But the danger here is that the population, particularly the young people, get so mad that they realize that they have no opportunities left, that you see popular protests and you see a push to political extremes. So, look, protests are still going on in France. You’ve got protests starting to erupt in Britain. I wouldn’t be surprised if you saw that in more places across the continent as this energy inflation starts to hurt and as voters realize that this formula of price caps on energy, which isn’t going to solve any of the underlying supply problems of taxing and spending.
So it’s just a huge burden if you want to kind of start a business and get something going. No real move towards less red tape or the ability to kind of start a business and innovate. People are going to get upset at that. Again, I don’t think Populism is dead on the continent, and I think that the US, as these countries kind of go down, I think the US looks more and more attractive.
Albert Marko: No, I mean, Mary is absolutely correct. I’ve always been a proponent of looking at politics in terms of investing, just because things have been shifting so much, being in the United States, emerging markets, which is the rest of the world at the moment, like Mary said. Yeah, I mean, Populism
is absolutely not dead. With layoffs looming in the United States, we’re probably going to see more protests here in the United States gearing up to 2024.
But just like Mary said, I don’t see anywhere else in the world right now that you can actually invest in except for the United States. And I think it’s a little bit by design, by Yellen in them to force money to come out of those countries and into the United States. Although it’s a good thing for the United States in the short term, it’s destructive long term for the global markets.
MK: Sorry, just one more point. In order to get political change and to get back to that growth idea, you have to have real differences between the left and the right in democracies. And I think a lesson that came out of a place like, say, France, where Macron just sat himself in the middle, he destroyed the choice.
And you know, the Conservatives have done the same thing in the UK. They’ve sat themselves in the middle. They took a lot of the center left platform. So what are you going to do if you’re sitting in Manchester, right? Like, who do you like? Labor light in Rishi Sunak or do you just vote for labor? I mean, it doesn’t really matter, does it? You’re going to get the same outcome, right?
TN: So we’re going to do a little bit of what Tom Keen talked about regular. We’re going to kind of rip up the script here and I’m going to ask about you talk about inflation, talk about the leadership in places like Europe. And is it at all possible I know this is kind of a silly question, but is it all possible that in places like the UK or continental Europe that it’s possible to start fracking? That we start getting some of that upstream activity to ease the burden of energy crisis?
MK: No, you’re going to need a war.
TN: Okay? So the dirty upstream stuff, according to Europe, is other people’s problem. They just want cheap energy.
MK: Look, it took Putin slaughtering thousands of people in Ukraine for them to realize that, hey, maybe Russia isn’t a secure supplier and yet they’re still not welcoming fracking. They’re still not coming to the United States and saying, hey, how do we open up more LNG? What are you guys doing?
Right? I mean, this is unbelievable. What is it going to take?
TN: Something like Larry Tankers sitting off of Europe right now, waiting to unload because there’s not enough capacity?
AM: What it’s going to take is exactly what you said, political people, to the point where it just starts dripping over governments. And right now there’s been a push for Blinken to push leftist governments throughout the world right now that it’s just like the status quo everywhere. They’re not going to open up the franking. We’re not going to touch any kind of environmental issues over in Europe right now.
MK: Look at Rishi Sunak doing a U-turn and going to the COP conference. I mean, this has to be the most ridiculous grouping I’ve ever heard of. I mean, at a time when you’ve got like ten plus inflation and people can barely pay their bills or buy eggs or the rest of it, or fill up their car, they’re going to talk about climate change. Are you kidding me?
TN: China’s tripling down on coal.
MK: Yeah, I’m also clean climate too. I don’t care what kind of energy we use, as long as the market’s figuring it out and we’re letting innovation happen, period.
AM: Well, they’re going to start blaming Brexit. Even the Tories are going to be like, oh, maybe we should stay into the EU.
MK: Could Britain go back to the EU?
AM: Maybe? Yeah, they could.
Travis Kimmel: I think the thing that’s really challenging here is we just need coherent and stable frameworks for a lot of the stuff, whether it’s energy policy, monetary policy, like if you think about what the purpose of markets are, to take a really simple example, take a CSA. What is that? It’s a futures market. It’s done in a really small scale. You got a farmer who’s basically short forward produce, right, and you’re buying futures and then you’re taking delivery of whatever lettuce and cabbage and.
If you think about that as it’s a very simple example of what a market is designed to do, it’s designed to allow operators to derisk their business. A large futures market is no different. I mean, I work in tech. We’re sort of like extreme beta, right? And what we just went through here is we went through this period where everyone was looking at a massive boom as a result of policy. And so we all started hiring and there was the time we’re all trying to hire the same time. Staff up handles the influx of business and then in the middle of that staffing motion, your reverse course. So now you have these companies that are… You heard Stripe come out, they’re cutting 14% and just owning it. Like we missed-staff for the environment.
There was almost no way to navigate that properly for operators. And so what you have is you have this destructive policy impulse that is sort of like ruining the whole reason we have markets in the first place.
The reason we have markets is to allow for derisking. And speculators come in there and they provide liquidity and it’s awesome. Markets are awesome. But we’re removing the value that markets once had for operators. And if you’re out here in the economy running a business, it’s extremely hard to navigate that.
TN: Yeah, Travis, that’s a great segue. And let me put up your tweet that you put up earlier this week. Talking about Powell saying some of you losing your job is like little rays of sunlight to me and I think that’s great.
And talking about how do operators work in areas in times of rates whiplash like this, I think bringing it back to risk is, is it? Right. And I run a tech firm. You run a tech firm and it’s not about high rates or low rates. It’s about the magnitude of change for planning. Right. So we can plan for a high rates environment if we know that’s going to happen.
We can plan for a low rates environment if we know that’s going to happen. But that stability is what economies like the US are built on. Right? Yes.
You mentioned one word, “coherence.” And I’m afraid that that’s a little bit too much to ask from policymakers right now, especially when we have the push pull going on with the Fed and the Treasury right now, right?
TK: Yeah. I think we’ve been overdriving this thing for years now. Basically, you saw this in, think about the events that we tried to respond to policy with. You have basically volmageddon. They were like, oh, and they used policy to address that. So your policy takes two freaking years to come through. I mean, how can you respond to a pandemic via policy? I know people get really upset about the SPVs where they short up private credit, but I would say that was probably the smartest thing they did.
So this pandemic and it was like, oh, it’s a few hundred million, right? And so they shore up private credit. Like we’ll backstop that. Arguably, that is the original intent of central banking, is that motion. Of course, you’re supposed to do a higher interest rate and all that badge itself, but whatever.
So that tiny motion was sort of interesting and maybe well played, but flooring rates, making money free and then just jamming liquidity into the economy at the same time, and we’re basically, they generated this boom that we’re now on the back of.
Now we’re reversing that super hard. I just don’t think you can respond to this kind of stuff with monetary or fiscal policy. I don’t think you can respond to emergent events. It’s not an emergency thing. What these are designed to do is to tune structural weirdness like you could tune a demographic change because demographics aren’t going to change that much in a short period of time. And so you can apply a policy to that and wait for the policy to translate through. I think what I would have liked to see when they realized their error here is just set rates at whatever, 3%, leave the balance sheet slowly until you’re back to where you want to be. And don’t do much. All these extreme action where the Fed comes in, they’re like, we get an event we don’t like, whether it’s the coronavirus or inflation or whatever. And they’re like, we’re on it. We’re going to respond swift and hard. That’s the mistake. You can’t do that. So we’re now going to get this…
What I expect to see here is eventually they will solve inflation. But that solution is by the time it translates through, it’s going to have its own momentum and it’s going to be very destructive.
TN: Oh, yeah. I think the real irony is you have publicly traded companies that are expected to give market kind of insight twelve months out to the penny on the share level, right. But then you have Powell standing in front of the world saying, we’re not really sure what we’re going to do next month. It may be whatever, and it’s data dependent. It’s like, really? Like, how many people do you have, analysts do you have? And you don’t know what you’re going to do in 30 days? That’s crazy. Right?
MK: I think Travis is raising such a good point. And the underlying theme here is that is to do something right and to juice the markets on the monetary and the fiscal side. That’s why I put in a plug. If you haven’t read it. James Grant’s book on the 1921 crash, like The Forgotten Depression, such a great book because essentially it’s like do nothing in the market. It will take pain, but then we’ll come back up.
TK: I love you mention that example. It looks like we are generating that exact same, it looks like we’re
generating a depression. Not like the depression that everyone remembers, but that little, very short, swift, extremely difficult period of time. It’s like a couple years in 1920. We’re teeing up the same thing here. It’s really weird.
MK: People make it worse. I don’t know, Travis.
TK: Look, I’m not going to fail that.
MK: I think you could be in the 30s because they’re not going to do nothing, right? They’re going to cap energy prices. They’re going to do more programs to help people.
TK: You have to let the market achieve homeostasis. And the bond market is like, it’s the spine of the economy, and we just keep whipping it back and forth. So everything else is going to be high data.
AM: Yeah, but why are they whipping it? It’s because the political influences within the central banking system, whether they’re Treasury and the Fed. Right now, nobody is talking about the real civil war happening between conservative Powell and some of his members at the Fed, and Lail Brainard and Yellen, who are liberal that are trying to help Democrats by pumping these markets. They crush the bond market only to pump it up two points, like within minutes to pump the Nasdaq, and then the market starts running with it, and then they parade out all these liberal members of the Fed to counteract Powell’s speech yesterday.
So it’s like we can hope for stability, but until they depoliticize the Fed to the point where it’s actually acting properly, I think it’s just a pipe dream.
TN: Do you think Powell is overplaying because of the kind of politics inside the Fed?
AM: Oh, absolutely, because if you look at the Fed minutes in the FOMC releases, those are going to continue to be muted because it’s a cooperative process. Right. They have all the members talked about vote on issues and whatnot, and then Powell has to come out there and counteract that and say, listen, things aren’t working out like the minutes are reflecting, so I’m telling you we’re going to go 75 basis points next meeting. And then again today, they bring out another Fed member to say, oh, no, it might be 50, it might be 50, and then the market shoots up 100 points. This is absurd. Right? That’s an untradable market. It’s untradable market. Right? Yeah.
TN: Since we’re talking about policy fumbles, and Mary recommended a book. I don’t know if you’ve read, Ammonie Schlay’s The Forgotten Man, fantastic book about the 1930s, talking about policy error after policy error after policy error. FDR is proclaimed as this hero who got us out of the Great Depression, and he absolutely screwed up time and time and time again, and took what could have been a two-year recession and turn it into a twelve-year recession. Right? Yeah.
And so are we entering that again? That’s the real question. And it’s really easy for people to say, oh, we’re in the 30s again. I mean, I hear that so many times, it’s just tiring. Right. But we have to look at why the 30s happened. We have to look at why 1921 was so quick and then understanding what the implications for policy and the economy are.
Travis, what you brought up in terms of quick, sharp actions for specific events is exactly what we need. I think rate rises are stupid. Playing these stupid rate rise games, it freaks everyone out. It creates volatility, uncertainty, and nobody can plan. And then you get between now I think we talked about this two weeks ago, Albert, between now and the end of the year, we’re going to see so many layoffs in tech companies and they’re all going to get them just in time for Christmas, because that’s what happens all the time. Right?
TK: The thing that Albert highlights here is really interesting. It’s like, from a decision making perspective, we have the speed wobbles. You’re riding a bike and you get that thing, it’s like, you know you’re going down, you can’t pull out. We just have that right now. We’re whipping this thing back and forth. We’re being hyper reactive. And until we get to a place where we can just sort of chill for a while. Does anybody think that’s on the horizon? It doesn’t look like it. No.
AM: Not as long as politics and inflation are taking hold and there’s elections to be won. That just can’t happen.
MK: I think investors, they go back to basics. They say, OK, where do we have a stable rule of law Where do we have any kind of predictability in the political process? Or even, you know, as I said, the US like the opportunity to have a more attractive business environment.
And where do we have resources? You know, human resource, mineral resources, you know, and so that’s essentially the Gulf in the United States.
TN: Don’t talk to Texas too much, Mary, please. Okay, perfect. Guys, thanks for that.
Let’s move on to Brazil. Brazil’s obviously a really big story this week, and Albert, we saw Lula declared the winner. This was very much a 50-50 election. Of course there were irregularities. There were irregularities in every election. We’ve seen five days of protest now. I’ve got a tweet up from Steve Hanke talking about tens of thousands of Brazilians out who are Bolsonaro supporters.
But what’s really interesting to me about this is not really who wins, but Brazil is a huge supplier of things like energy, frozen chicken, soybeans, these sorts of things to China. And so this type of disruption can hurt that type of trade. We’ve also had Lula already make supportive comments of Russia shortly after the results were announced. So, Albert, what does this mean? What do we need to be looking out for?
AM: Commodities, really. Soybeans, soybeans, corn, ethanol and everything tied into that. Now you’re looking at Brazil, which you’d mentioned is a big supplier to China for soybeans. And then he goes on and declares that Putin is right in Ukraine. It just smells so bad right now for the United States and the longterm interest in the region.
Like I mentioned before, these push for leftist governments, it’s just not wise. I mean, it’s shortsighted.
Long term, these leftist governments are really susceptible to Beijing and Russia at the moment. So, you know, you’re out there and Lula comes out and immediately declares, like, the World Economic Forum is correct, and we’re going to take on deforestation, which is obviously going to obviously going to depress the soybean crowd because it takes years.
How the soybean crops work is like, you clear land, and you got to let them sit there for two years, and then you start rotating in and out. So there will be a steady supply of soybeans that the Chinese eat up pretty much, I think, like 60% or 70% of their crop every year. So what are we looking at? Higher food prices across the board, everywhere in the United States is specifically a problem.
TN: So I’m interested in that regional political angle you mentioned. So if we look at Brazil, we look at Venezuela, we look at Colombia, the government’s coming into kind of our region, and the influence that China has on, say, Venezuela with the debt that’s owed to China Development Bank and then with Brazil on the trade side and so on, is that a regional political risk for the US?
AM: It’s an incredible risk. I mean, you’re looking at the Argentinians about to sell a naval base to the Chinese. So now they have Atlantic access. Bolivia was a problem with the lithium mines to the Chinese. Peru was starting to set up naval bases for the Chinese. I mean, it’s like, how do we overlook this? This is right in our backyard, and we’re sitting there overlooking leftist governments taking control and then flipping against us the very next minute. I don’t understand what Blinken and Jake Sullivan are looking at here. What plan do they have for US interests long term when these governments routinely act against us? Venezuela decided to go start talks with Colombia again. US friendly nation in any sense of the word. So it just boggles my mind at the moment.
TN: So, Mary, you’ve sat in the seat. What would you be thinking at this point?
MK: Well, the key to all of this is Cuba because none of these regimes, many of them, would not be in power were it not for the Cuban security services, which is not really talked about, but, you know, Maduro good examples, publicly available information. His private security officers are all Cubans. So I think Biden had a fantastic opportunity early in his term. All these Cuban people came out under the streets. We should have turned on the Internet and allowed them to determine their own fate.
But instead, where did that go? Nobody seems to care. I think Latin America today for the administration, is more about domestic political ends, and it is about thinking strategically about wait a second. Okay, we’ve got some pretty decently large markets, as Travis pointed out, right?
In Brazil, in Argentina, and Mexico is going way far away from us. That’s another huge story nobody’s talking about. Canada. Right? There’s a lot of opportunity within the hemisphere to create market openings and growth for all of us, but they’re not thinking about it. They really don’t care. It’s about talking about democracy in Brazil so they can talk about the state of democracy in the United States.
AM: Yeah, it’s just because Colombia was such a great US ally and the government was solidly behind the United States and a focal point for Latin American aspirations, and then you go and push for a leftist government that’s favorable to Maduro. I don’t understand what goes through their heads at the moment.
TN: Great. Okay, thanks for that, guys. Just one last question for all of you. Kind of don’t have to necessarily come in individually, but we’ve had all these economic announcements this week. We’ve got the elections, the midterms, US midterms next week. What are you guys looking for in the week ahead Generally? I guess, Albert, you have some specific ideas, but for Travis and Mary, what do you guys expect in the week ahead?
AM: For the midterms, it’s pretty much set in stone as the Republicans are going to take control of the elite the House most likely to Senate by two seats. So you know how the market reacts. Whether we start dumping is really going to probably depend on CPI. So that’s actually what I’m going to really watch, the CPI so we can solidify the 75 basis point rate hike in December.
TN: Okay, great. Travis, any thoughts.
TK: In the political sphere, I’m just kind of looking for individuals that make sense. I’m not really, I don’t really have team allegiances. I just want somebody who’s talking sense.
I think the CPI will be interesting. In terms of intraweek stuff, I try not to think of markets that way. I try to think of a little more defensively and where I want to end up. So if I had a position on, I want to be able to ignore it for a month or two while I just focus on doing my job. I’m a pretty defensive player here. Especially with all the whip.
MK: I think even if Albert is right, and I think he is, that Republicans take control of one or more houses, the regulatory state is going to grind on. So I’m really not looking so much at the federal level. I’m looking at governor’s races where like a Republican Lee Zeldin as Governor of New York could open up fracking in New York.
TN: Is that a real possibility, do you think?
MK: I think it could be, absolutely. Remember Cuomo shut it down himself, so why couldn’t Zeldin open it up?
TN: No, but do you think Zeldin being elected is a real possibility, do you think?
MK: Oh yeah. Really? Remember Giuliani, the pollsters went out and they were like, hey, you’re going to vote for Rudy? And everyone on the Upper West Side said, no, I’d never vote for that guy. Right. And then they looked at the crime in the mess, and then they went into the polling moves and they went yeah, exactly. Right.
TN: So it could be New York, could be Michigan, some of these other places that have had some polarizing governors kind of move more to the right or to the middle.
TK: Do you think that policy at a state level is sufficient to justify capex for energy companies?
MK: No. I mean, really, only the Feds can make a meaningful difference at the margin. I talk a lot to clients about the regulatory state, because we don’t talk about it a lot. But that really is what depresses investment.
It has been a terrible week in markets. It is not looking good for anybody, at least on the long side. A lot of that seemed to change when the CPI number came out. It’s like people woke up and terminal rate is going to be higher and just everything flushes out.
We talked through why the dollar is where it is and how long we expect it to stay there. Brent Johnson recently said that the USD & equities will both rise. And so we dived a little bit deep into that. We also looked at crude.
Crude’s obviously been falling. Tracy discussed how long is that going to last.
We also did a little bit of Fed talk because the Fed meets this week. And we want to really understand when does the Fed stop? After last week’s US CPI print, the terminal rate rose from 4% pretty dramatically. Does QT accelerate?
Key themes: 1. $USD 🚀 2. How low will crude oil go? 3. When does the Fed stop? 4. The Week Ahead
This is the 34th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Time Stamps 0:00 Start 1:20 Key themes for this episode 2:24 What got us to stronger USD and will it continue to rise? 8:29 Dedollarization 10:23 Intervention in the dollar if it gets too strong? 12:22 Both the USD and US equities will be rising? 14:18 Crude: how low can it go? 18:03 Look at the curves for crude 19:17 Slingshot in December? 20:18 How India and China buys Russian oil and resell 21:33 Restock the SPR at $80?? 22:57 When does the Fed stop raising rates? 29:33 What if Russia, Ukraine, and China don’t lock down anymore? 32:08 What’s for the week ahead?
Listen to the podcast version on Spotify here:
Transcript
Tony Nash: Hi everybody, and welcome to The Week Ahead. My name is Tony Nash. We’re joined today by Tracy Shuchart and Brent Johnson. So thanks guys for joining us, really appreciate the time to talk about what’s going on in markets this week and next week.
Before we get started, I want to remind you of our $50 promo for CI Futures. CI Futures is a subscription platform to get forecast for thousands of items: currencies commodities, equity indices and economics. The currencies commodities equities are refreshed every week. So every Monday you come in for a new forecast, economics forecast every month. That $50 a month promo ends on September 21. So please take a look now go in and check it out and if you have any questions, let us know, we’re happy to answer them. So thanks for taking the time to do that.
So, Brent and Tracy, it has been a terrible week in markets. It is not looking good for really anybody, at least on the long side. And so a lot of that seemed to change when the CPI number came out. It’s like people woke up and we’re like, oh no, the term rate is going to be higher and just everything flushes out, right. And earnings and a bunch of other stuff. So we can go into a lot of specifics. But one of the items that I’ve been really curious about for weeks, if not years, ever since I met Brent in 2018, 19, is the dollar. So we’re going to go a little bit deep into the dollar today.
We’re also going to look at crude. Crude’s obviously been falling. So we’re going to ask Tracy kind of how long is that going to last? And then we’re going to do a little bit of Fed talk because the Fed meets in the week ahead. And I want to really understand kind of when does the Fed stop.
So those are our key themes today.
So, Brent, welcome. Thanks again for joining us. I’d really like to talk through the dollar and we are where we are, which is amazing. And you have seen this years ago. On the screen, I’ve got a chart of our CI Futures forecast which shows a dollar continuing to rise over the next year. We’ve got some bumps in there, but for the most part we see a persistently strong dollar.
CI Futures provides highly accurate commodity, equity, currency and economics forecasts using advanced AI. Learn more about CI Futures here.
So I’m curious what got us here and what will continue to push the dollar higher?
Brent Johnson: Sure. Well, first of all, thanks for having me. I always enjoy talking to you, Tony. The reason I like talking to you is you’ll talk a lot about Asia, but you’ve actually lived there and you actually know what you’re talking about rather than people who’ve just read it in a book. And same with Tracy. So I’m happy to do this and happy to do it anytime you invite me.
But anyway, what’s really going on with the dollar is a function of the fact that it’s not only the Fed and it’s not only the US that has, for lack of a better word, idiotic leaders. The rest of the world does, too.
And I think over the last several years. At least in the retail investment world. There’s been this theme that the Fed is out of control. The government’s out of control. They’re going to spend all this money. The dollar is going to pay the price. And it’s going to get inflated away and go to zero. And the rest of the world is going to do great and we’re going to do poor.
And I understand that view if you just analyze the United States. But the problem is you can’t just analyze the United States because it’s a big world and everything is interconnected. And all of the problems that people have forecast to fall upon the US.
Dollar are currently happening to a greater extent in Europe and Asia. And the budget deficits, the printing of the money, the central bank support, the holding down of rates, all of that applies even more so to Japan and Europe than it does the United States. And that’s really what you’re seeing.
Over the last, let’s just call a year, you’ve seen the yen fall 20% versus the dollar. That is an incredible move for any currency, but it is an absolutely astonishing move for a major currency, specifically the third biggest currency in the world, or some would even argue the second biggest currency in the world. And then you’ve seen the euro over the last year is down 10% or 15%.
So these are very big moves. Again, the reason is because the Fed is raising rates. So on a relative basis, we have higher rates than those two big competitors. And on a relative basis, those two big competitors are doing more monetary stimulus or QE or extraordinary measures, however you want to define that central bank activity.
And you always because the globe runs on the dollar, there is a persistent and consistent bid for the dollar globally. And so it’s really a supply versus the demand issue. Now, everybody always focuses on the supply. Central banks are increasing the currency in circulation. They’re going to print all this money and so therefore the dollar falls or the currency falls. Well, that’s just focusing on the supply side.
But again, you have to remember that all central banks are increasing supply, but the demand is what makes the difference and that there is global demand for the dollar. Now, whether you think there should be, whether you think it’s the right thing, it doesn’t really matter. It just is. That’s the way the system works.
But there is not that same global demand for yen. There’s not that same global demand for yuan, there’s not the same global demand for euros or Reals or Florence or Liras or anything.
And so what you’re really seeing play out is Trifan’s dilemma. And so I’ve spoken about this before. But Trifon’s dilemma is an economic theory that states that if you have a single country’s currency that also serves as the global reserve currency, at some point the needs of the domestic economy for that global reserve currency will come into conflict with the needs of the global economy. And that’s what we have.
We have an inflationary pressure problem in the United States. The Fed is very embarrassed about it. They got it wrong and now they need to do something about it. And they’re bound and determined to try to bring it under control. And so they’re raising rates to counteract that. Well, when you raise rates, you’re tightening the monetary supply. And that’s happening. That’s fine for the US. But there’s many countries around the world that cannot handle that right now.
But that’s what’s happening. And so the needs of the domestic economy are in conflict with the needs of the global economy. And it’s going to be the global economy that suffers more than the domestic economy as a result. It doesn’t mean that the domestic economy won’t be hurt. It just means on a relative basis, you want to be closer to the money than far away from the money. And because we have the global reserve currency, we’re closer to the money.
TN: So it’s interesting when you talk about the dollar versus other currencies, and we often hear people say, oh, CNY is rising as a share of spend, which that’s debatable. But from my perspective, it’s not the dollar that’s kind of in the gladiator ring of currencies. It’s the yen, it’s the euro, it’s the British pound, it’s the aussie dollar, it’s these secondary currencies. They’re going to lose share before the dollar does. Is that wrong?
BJ: No, I think that’s absolutely right. And again, that’s a very good way to put it. I know gladiator walks into the ring and thinks, I’m not going to at least get a few scratches. It’s going to hurt. That’s just the nature of being a gladiator. But what matters is who’s standing at the end of the day, right? And so I think it’s these other currencies are getting hurt by the battle more so than the dollar. It doesn’t mean that we’re not getting hurt. It doesn’t mean it doesn’t sting. It doesn’t mean there isn’t going to be any pain involved. But at the end of the day, if you’re at war, you want to be the last man standing because of the way the system is designed, I believe that that will be the US dollar.
The other thing that I would just quickly point out is a lot of people say, why can’t you see it? It’s very obvious. The rest of the world wants to de-dollarize. They’re putting all of these trade deals in place, the dollars falling as a percent of reserves, etc. And the point I would make is, yes, I do see it. I agree with you the world would like to dedollarize, but it’s much harder to dedollarize than just saying, just because you put an announcement out there doesn’t mean you’re actually going to be able to do it.
I’d like to make the analogy that I’ve said I want to lose weight and get in great shape for 20 years. It doesn’t mean it’s going to happen. It hasn’t happened yet.
But that’s the headline versus reality, right? I just think that’s where we’re at. And the dollar, for better or worse, it’s a rigged game in favor of the dollar. And the US set it up that way is the global hegemon. They set it up that way. Now, it doesn’t mean they’re not trying. It doesn’t mean that the world doesn’t want to get away from it. It’s just very hard to do it.
The last thing I’ll say and I’ll shut up, but the other thing I would say is the process of de-dollarization, even if it is successful, will not be a calm transition. And the process of dedollarization is not necessarily, and in my opinion, not probable to be negative for the price of the dollar. I think the volatility and the lack of liquidity in dollars that would go along with de-dollarization would actually squeeze the price of the dollar higher.
And so it doesn’t matter to me whether de-dollarization happens or not. I think the dollar is going higher for all of these reasons.
TN: I think what’s funny there is people always put de-dollarization in this almost moralistic language. It’s a good or a bad thing. And it’s just not. It just is.
Tracy Shuchart: I just had a question for Brent. I mean, do you see at any point that there’s some kind of intervention on the dollar? The dollar gets too strong because it’s going to crush emerging markets? Do you think there’s any point in which Yellen kind of backs up?
BJ: I do think they will. And that’s why I think the dollar is going to go back to all-time highs before this is all said and done. I don’t think it’s going to be a straight line. It can’t be a straight line without absolute devastation. Doesn’t mean it can’t happen. But I think this is going to play out over several years rather than several weeks. It could play out over several weeks, but I think it will take longer. And the reason I think it will take longer is I think that they will interact or they will get involved, as you’re suggesting, Tracy.
I actually think right now the Fed and the Treasury want the dollar strong. I think they’re using it as a weapon or as a tool. It’s something that can be used very effectively. Again, whether you think it should be used or not, I don’t care. I just think it will be, and I think it is being and so I think that will continue.
But I think the Fed and the treasury, they want the dollar higher, but they want it done in a measured fashion that they can control. If it starts to get out of control, I think that they will rein it in. I think they want some of the other parts of the world to be an economic pain, but I don’t think they want the whole system to collapse. And so my guess is that we’ll get the dollar higher, maybe it goes to 115, 120, and then they’ll do something, it’ll pull back for six months, three months, whatever, and then it’ll get higher again and they’ll come out and do something.
So I think this will be a process, a little bit of a roller coaster, up and down, but I think that the general trend is higher and I think there’s more pain to come for the global economy as a result.
TN: Brent, real quick, before we get onto oil. You sent out a tweet earlier this week that said you think that we’re going to come to a point where both the dollar and equities and US equities are rising. Can you walk us through that just real quickly? I know there’s a very detailed thesis behind that, but can you walk us through that very quickly so we understand kind of what you’re talking about there?
BJ: Yeah, so the first thing I’ll say for anybody who’s just kind of passing through this conversation is that I don’t think this is happening right now. It could happen right now. In the short term, I expect US equities to go lower. I think that’s just kind of where markets are headed.
But as the pain develops throughout the global economy, I think we are going to experience a global sovereign debt crisis. And when the world, the US included, starts selling sovereign debt rather than buying sovereign debt, I think that money will have to go.
Now, some of the money will just be, it’ll just go poof. It’ll be gone. And so that money won’t have anywhere to go but the people who start selling the bonds looking for another place to go, I think the next best place to go will eventually be US equities. And I think US equities will be seen as the new… I don’t want to say new Treasuries.
That’s a little bit hard to say. But on a relative basis, the place where big global capital can go, that is the most advantageous to them. And so I think we will get into a point in the sovereign debt crisis where US equities will get safe haven flows and I think the whole world will potentially be printing more money, right.
So be sending more liquidity out there. And so I think that liquidity that is generated with little liquidity there is, I think we’ll find its way into the US and the US Dow, big blue chip stocks and I think they’ll go higher. I might be wrong on that, but that’s my working thesis as of right now.
TN: Let’s move on to crude oil. Obviously we’ve seen crude take some hits over the past few weeks and we’ve got a WTI chart on the screen right now.
So how low will crude go? Are we almost there? Are we headed to 65 where it was for a while? And what then pushes it higher?
TS: I don’t really want to forecast exactly where crude is going to go. I definitely think that we could see some more downside, but we have to look at what is weighing on price and sentiment right now. One, there’s more Russian barrels on the market than everybody anticipated.
Two, you’ve got never ending zero Covid China lockdown that haven’t seemed to let up yet. We also have EU recession, right? And then we had 160 million barrels of SPR thrown on the market. And so that’s really weighing kind of on the front end of the curve. Those are the things kind of weighing on sentiment right now. That’s why we’re seeing a lot of weakness.
That said, if we look at the fundamentals of the market, the market is still very tight. We’re still drawing globally. We definitely have a diesel problem that is global. And I think where we start to see kind of a change in this, I think when it comes to the end of October, when the SPR is done this with kind of been looking over the last couple of weeks, had we not had such large SPRs, we would have actually been drawing a regular stock.
So it’s not as if that oil is going piling up anywhere. So I think as soon as the SPR stops, I think after Midterms, because I think this administration is trying to do whatever they can to suppress the price of oil, thus, gasoline. And I also think that we have to see kind of what happens in China after the People’s Party Congress in the middle of October and trying to see what their policy is going to be moving forward.
Are they going to open up? I mean, they’re looking at they want 5.5% YoY GDP by the end of the year,
which…
TN: They’ll hit it. On the nose, we can guarantee that.
TS: But I think they’re going to have to start stimulating the economy a little bit more. And we kind of saw announcement Evergrande is going to start financing more inspection projects and whatnot going into starting at the end of September. So I think we’ll probably see the last quarter if we get a little stimulus and if they back on their policy because, that’s the big thing for oil right now, is that if that demand comes back because they’re down about 2.7% on the year and as far as consumption is concerned.
So I think if that demand comes rushing back, know that’s going to be a huge upside surprise for the market. I think over the long run, oil is going higher, but out looking out into 2023, I just think that’s just the trajectory of it. I’m not calling for $200 oil, anything crazy like that. I just think that we will see higher oil, and I think we’re poised to see higher for longer than the functionality of the market and the fact that we have no capex for the last seven years.
TN: So last month you said to look three to four months out, look at the curves three to four months out to understand kind of what the real oil price was or is going to be. And so that would be two to three months now. So that’s November. December.
TS: Look at those spreads are widening out or not, right. You want to see if we’re moving into more backwardation and even more backward dated market, right? So you kind of want to look at that.
TN: Okay, so I paid $2.88 a gallon for gas at my local last night. We’re the energy capital in the world. Yeah, I’m going to show it off. Anyway, that is kind of coming down. And energy has been the biggest upward factor in some of the inflation issues. That’s good news, at least until the election. Hey, I’ll take it while I can get it, right? And if it heads back up after the election, I think we’re all prepared for that on some level.
So I guess SPR, as he said, election happens, there’s no political reason necessarily to suppress these prices and so on and so forth. So do you expect to see almost a slingshot in, say, December, where things trend higher pretty quickly?
TS: I don’t think we’ll have… I don’t want to call it a slingshot because anything can happen in the oil market. I mean, we’ve seen $7 to $10 in a day before, so that’s not unheard of. But I do think we go higher, especially if you’re looking into the market, is going to get even tighter in December because of tax reasons. December 31 is the tax assessment date for the barrels that you have on hand. So they tend to pull back on production so they can move out inventory as much as they can, so they’re not taxed at the end of the year.
Usually we see a little decline in production anyway in December and the second half of December, we do see prices start to rebound off the seasonal for regular seasonal trend low. Okay, so that would be normal.
TN: Brent, I think you had a question for Tracy on crude markets as well.
BJ: Yeah, I actually had two quick questions. One, I wanted to get your thoughts on the fact that India and China are buying oil at a discount from Russia. And then there’s lots of stories about them selling that oil
on to Europe or other places. And so they’re making that spread. I just wanted to get your thoughts on that and logistically how that actually takes place.
TS: So if you’re looking at India, definitely they are buying discounted crude. What they do is they don’t
resell that to Europe. What they do is they blend it and they sell fuel. So that’s refined. So it’s really hard to trace what’s in… They don’t trace those barrels that way.
So that’s how that oil is kind of emerging back in Europe. It’s really by way of refined products. Now when we talk about China with the gas, really what they’re doing is they’re buying gas right now, literally half off from Russia, and they’re turning around and selling their own gas to Europe for the higher marked up. The gas they already have. So they’re selling the gas they already have? So that’s kind of how that’s working.
BJ: And then the other question I have for you quickly is I was surprised this week when the rumor was floated by whoever floated that they would restock the SPR at $80. It seems like they’re doing everything they can to get the price lower. And then to have that rumor come out and put kind of a floor under it was kind of surprising to me. So maybe nothing more than just the speculation, but did you have any thoughts on that?
TS: Yeah, I mean, basically they put a floor on it. Everybody’s calling it, the Biden put now. But the thing is that it’s all nice and well if they want to do that, they still got enough 60 million barrels that they need to release. And then by the time those contracts go through and you want to refill the SPR, I mean, that’s months away. We’re looking at months and months down the road. And who knows what oil price would be? To me, it was just another try to jaw bone market down lower.
BJ: It kind of reminded me of the ECB where they’re raising rates on one hand, but they’re buying bonds with the other. Biden wants his cap. He’s like got a collar on it. He’s trying to put a cap on it and a foot on it.
TN: Strategy. Let’s move on to a little bit more of kind of the Fed kind of Fed talk. There’s a Fed meeting next week, and when CPI came out this week, the terminal rate really rose very quickly. And that’s when we started to see equities fall pretty dramatically. And we’ve got on the screen right now expectations for the rates coming out of each meeting. So 75 in September, 75 in November, and another 50 in December. That has accelerated the expectations for the Fed by about 25-50 basis points?
When does the Fed stop, basically from where you are now, do you think this continues to accelerate in 2023 or given, let’s say, CPI? Of course on a year-on-year basis it looks terrible. But once we get to November, when CPI really started to accelerate, November 21, do we start to see some of those base effects in a year-on-year basis and the Fed starts to pull back a little bit and go, okay, wait a minute, maybe we’re okay with the plan we have when we stop at say 450 or whatever as a terminal rate.
The other complicating factor will add in there is University of Michigan came out, University of Michigan survey came out on Friday and it’s a bit lower than what was expected. And the Fed has really been looking to University of Michigan, which is kind of a semi-serious survey, but they’ve really used that to justify some of their decisions.
So we obviously have a mixed environment. But I’m wondering, with all of this stuff coming out this week, do we expect the Fed to keep marching pretty aggressively into 2023?
BJ: I’ll take that first. So I actually do expect them to keep marching higher into 2023. And I say that for a couple of reasons, and I’m going to qualify this and say that they will pivot when they have to pivot, but I don’t think they’re going to pivot until they have to pivot. And so I think a lot of people that are predicting the pivot are misunderstanding the Fed’s intentions and perhaps for a good reason. They’ve done a fantastic job of ruining their credibility. So it’s understandable not to believe them.
But in this case, I think you kind of have to believe them. And I’ll tell you why I think you have to believe them. Number one, I think they don’t mind the dollar being stronger. Again, I think that’s kind of policy that I spoke of earlier in conjunction with the treasury.
Number two, I think they want asset prices lower. So the fact that the stock market goes down I don’t think would bother them. I think if the Dow was at 28,000 and the S&P was at 3600, I think they’d say that’s totally fine. I don’t think they have a problem with that as long as it’s not collapsing. Right? Now, if it collapses, then they have to come in. And they will come in, but I don’t think they mind if the stock market is 10% or 20% lower than here.
The third thing I’d say is the Fed central banks in general, they’re always lagging. They’re a reactionary agency. They’re not a predictive agency. We all know that. They can’t predict anything anyway. I’m not sure I want them predicting things, but to me they’re always behind the curve because they always wait until they see it and then they react, right? They come in and they try to save the day. So when things get really bad, then they’ll eventually come in and provide support.
And when things are always too late to tighten as they are now, and then they try to make up for it. So I think they’re going to despite, like you said, the Michigan number starting to come down, Atlanta Feds already slash their GDP. So even though they’re getting these signals that things are slowing down, they’re not reacting to it yet. They will react to it late.
And then the fourth thing I’d say is that I think Powell is mad and he’s pouting, right? Not just Powell, but mainly Powell, but he got all this advice from all his staff and however many staff, PhD staffers they have at the Fed, and they all said inflation is transitory and it’s going to be fine. And then it wasn’t. Right? Now he’s mad.
TN: He’s a lawyer, not an economist.
BJ: And I’m going to do something about it. And if you don’t think that I can bring inflation down, well, then you just watch me, right? And I’ll take my ball and go home. And his ball is interest rate. So he’s taking them higher, and he’s taking them home, he’s taking them higher. And so it come hell or high water, and after the, I don’t know, the chink in their armor or the threat to their credibility that they’ve had over the last year or two, I think the last thing in the world that Powell wants to deal with is the fact that he slowed down or, God forbid, cut rates and then inflation kept going higher.
That would look even worse than waiting for it to crumble, right? So I think for all of those reasons, you kind of have to take them at their word. Again, I’m not saying not unless the markets force them to do it
and the markets might force them to do it. I’m not saying that that’s out of the possibility. The only thing I don’t like saying about this is this is the hole they’re going to hike until it breaks theory, right?
And I agree with that. The thing I don’t like about it is everybody else seems to agree with it now, too. That seems to be the common refrain, is that they’re going to hike until something breaks, and everybody says, yeah, that’s kind of what’s going to happen. Usually when everybody thinks something, it doesn’t happen that way. But as long as equity prices are higher and as long as inflationary prints keep coming in high, I think they continue hiking.
And think about it, inflation could fall by 30%, and it’s still at five or six, which is still two or three times higher than their goal. So is there a path to a pivot? Yes, I think there’s a path to a pivot, but every week, when people come out every week and, oh, they’re going to pivot, they’re going to pivot. I don’t think they’re pivoting next week, and I don’t think they’re pivoting in October unless they have to.
TN: Okay, Tracy, what do you think of that?
TS: Yeah, I absolutely agree. All the data coming in, there’s no way they’re not doing 75 next week. In my opinion. I could be wrong. Somebody will come back. I think that’s pretty much a lock.
TN: Yeah, I think short of, let’s say sometime in Q4, Russia, Ukraine ends, and China says we’re not going to lock down anymore, that would fundamentally change the Feds calculations, right?
BJ: Well, if they weren’t locked down anymore and it pushed demand higher and it pushed prices higher as a result of demand increasing, then to me, that would keep them on their path to hiking. The flip side. And the flip side is that if something breaks in China, and China has to devalue or revalue the yuan in order to deal with the real estate collapse or the internal problems, whatever it is, that could send a deflationary wave to the rest of the world.
So I’m not going to sit here and deny the inflationary pressures that we’re seeing, but I think to a certain extent, people have again dumped themselves into the inflation camp or the deflation camp, and I think we’re going to have periods of both.
I think if you fundamentally understand the design of the monetary system, the threat of a deflationary
wave is always there. But if you don’t admit that the inflationary pressures are here, I think you’ve also got your head in the sand. I’ve said this several times, but I will admit to a big mistake, and that is, for several years, I hated the term stagflation. I thought it was a cop out. I thought it was for people who just couldn’t decide if they were in the inflation or deflation camp. But I think that’s what we have, and I think we have it in spades. I think some assets and some prices are going to continue to rise and be higher, and I think others are going to collapse, and that’s what makes it so hard to deal with.
So to anybody I ever took a shot at for them using stagflation as a cop out, I apologize. I’m with you now. I got that part wrong.
TN: Brent, one of the things I admire about you is you’re not afraid to say you were wrong, right?
BJ: No. I mean, do you mind if I just make a comment on this really quick? I think too often in our business, people will make a call and then they’re just so afraid to change it. Or you’ll make a call, and then somebody else will call you out on it if you got it wrong. At the end of the day, our job is sort of to predict the future. And so anybody who thinks that they can accurately predict the future 100% of the time has the biggest ego in the history of the world.
The reason I don’t mind making predictions is number one. I don’t mind being wrong because I don’t think I’m the smartest guy in history. And if I get something wrong, then I’ll have to deal with it. But this idea that we’re always going to be right and we know everything, it’s ridiculous. So anyway, we’re all speculating at the end of the day.
TN: That’s right. Okay, real quickly, guys, what are you looking for in the week ahead? More the same. More the same disappointment, difficulties, headwind, all that stuff. Until the Fed meeting? Is that what we’re looking for until the press conference?
TS: Yeah, I think we’re the markets will be in limbo, definitely until the Fed. I mean, everybody expects 75. We get 75. Maybe we see a bounce in equity, actually, because it’s already done with, right. There’s no question anymore. So maybe we get a bounce after that.
TN: Slightly less hawkish language than is expected, right?
BJ: I think that’s right. Now we’ve got the potential of maybe 100 basis points, right. So if they come in a couple of weeks ago, although now there’s a path to pivot, they’re probably only going to do 50 basis points in September.
Well, then we got the CPI print and it’s 75. That’s 75 is going to happen. Then a couple of people go hundreds now on the table, right? So now if they only come out and do 75, maybe the market kind of breathes a little bit. At least it wasn’t 100. So my guess is that we would have some volatility leading up to the meeting. Maybe they do 75. Perhaps things get a little bit of a bounce as a breather.
But I don’t think markets are going to change a whole lot between now and the election. I think they’re going to be volatile. I think the Feds are going to keep hiking. And I think Market Powell said it himself. We had the boom and now we have to deal with the pain. This is the unfortunate side effect of what we have to do. So he’s telling you he’s going to cause pain. He just doesn’t want to collapse. So if it starts to collapse, it’s the sad truth.
TN: Guys, thank you so much for your time. Thank you so much. Have a great weekend and have a great week ahead.
The full episode was posted at https://www.channelnewsasia.com. It may be removed after a few weeks. This video segment is owned by CNA.
Federal Reserve Chair Jerome Powell just announced a 50 basis points hike in May. Tony Nash was called in to explain what will happen to markets when this happens.
Show Notes
CNA: Tony Nash joins us for chat now. He’s founder and CEO of Complete Intelligence. So, Tony, we’re getting Powell explicitly saying that a half-point hike is on the table for the May meeting. The Fed, as you said and pointed out during the break, getting really serious about aggressive tightening. How do you think markets are going to have to come to terms with it for the rest of the year?
TN: People say that it’s already priced into markets. It’s not really priced in until it happens. So there is an expectation that certainly May and June will be 50 basis point hikes. But we’re not really sure about July. But again, people will not necessarily price it fully until it happens. And we’ll see a pullback in equities when it happens, certainly in areas like tech. So we’re already seeing Netflix and other tech firms being punished because they’re an expansionary play, as you have say, rate rising and the balance sheet falling. Tech tends to fall as money is tighter.
CNA: Even if we see that half point rate hike each meeting from May, June, July, what’s it going to do to tamp down inflation, given how it is a supply side issue, not so much demand problem now.
TN: Right. What they’re trying to do is destroy demand. So in the early days of inflation, in 2021, it really was because of expansionary monetary policy and all the money that was dumped into economies as it went on. We saw supply chain issues get more complicated. And what we have now is really a supply driven inflation. You just can’t get enough out to markets. Really, the only thing the Fed can do is to try to kill demand and destroy demand. This is why they’re rising so fast, where people see things out of touch so they can’t borrow money to buy that house. They can’t borrow money to buy that car or whatever, because interest rates are rising too fast. That’s how they’ll destroy demand. That’s how they’ll create balance in the market where supply is constrained, particularly out of China. And demand right now is really too high for the supply that we have.
CNA: Okay. With regards to earnings news, you mentioned tech is in trouble, especially with the Netflix sell off. But we also see how Tesla and the Airlines seem to be posting upbeat guidance. How do you think the value lies for the rest of the year, as it’s very difficult now to find a company that hasn’t mentioned rising cost pressures or inflation in their guidance.
TN: Sure. Yeah. Rising costs are hitting everybody, right? And so what people will be looking for is those sectors that they believe can continue to gain value even as, say, consumption goes by the wayside, say, tech consumption, that sort of thing, or as say, the work from home thing, subside with Netflix, those sorts of plays. So continued value, even with rising costs. So who can pass costs on to their subscribers or their customers. So you’re looking at guys like consumer staples, you’re looking at finance. Those sorts of sectors will probably do well. We do expect China generally to do well once Shanghai and the other cities in China open. And once stimulus really starts, we believe that when stimulus in China starts, there will be a deluge of stimulus across China because they have to make things look good in time for that. Q four meeting.
CNA: Do you think that might change soon enough, though, because it looks like it’s unlikely to shift from a zero Covid policy. So we might see that stop start for later parts of the year?
TN: We might. I’m not thinking that they will. I think once they get through this, they’re realizing the pain that they’re causing their own economy, but they’re realizing also the pain that they’re causing the rest of the world. So I think they’ll get through this. They’re gradually open. And once they do open, they’ll likely stay open because the rest of the world is pretty much committed to Covid being endemic and China is really kind of slow to adopt it. Once they adopt it, then the world economy should be humming again, but it’s going to take some time to get back on track.
CNA: All eyes on the Asian giant, Tony, thank you for sharing your announcement with us, Tony Nash of complete intelligence.
Geopolitics experts Albert Marko and Nick Glinsman are back on QuickHit for a discussion on the Federal Reserve, the ECB, and central banks. What are they thinking right now?
Albert Marko advises financial firms and some high net worth individuals on how politics works in D.C.. He worked with congressional members and their staff for the past 15 to 20 years. In his words, Albert basically is a tour guide for them to figure out how to invest their money.
Nick Glinsman is the co-founder and CIO of EVO Capital LLC. He does a lot of writing and some portfolio management. He was a macro portfolio manager in one of the big micro funds in London for quite a few years. Prior to that, Nick was with Salomon Brothers. Now, he concentrates on providing key intel, both economics and politics on a global level to finance managers and politicos.
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This QuickHit episode was recorded on July 29, 2021.
The views and opinions expressed in this The Fed & ECB Playbooks: What are they thinking right now? (Part 1) QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest 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 central banks and given where we are in “the cycle”, whatever that means at this point, post or late Covid, we’ve had waves of support coming from finance ministries and treasuries and central banks around the world. Central banks seem to be in a very weird position right now. So I’d really love to understand your point of view particularly what the Fed and the ECB thinking about right now and what are some of the biggest dilemmas they have? Nick, if you want to go first and frame that out a little bit and then Albert, will obviously go to you.
NG: Well, given how long I’ve been doing this, I’m more of a traditional, black coated central bank watcher. And I would say a couple of key comments to make right now is I think they’ve lost their independence to a large extent. Harder for the ECB to lose its independence. But with the commission, you have that loss.
I also think that we are, defective monetary financing. And again, I’ll go back to the ECB, who literally for the last month, for everything that was issued in Europe and this reluctance by the Fed to, even they admit talking about talking about tapering, but this reluctance to even consider a pullback on the mortgage-backed securities. The jest, pretty much the same, and it’s very clear with a lot of the actions that I’m in, my interpretation is, one, they’re working in cahoots with the political arm.
So treasury in the US, commission in Europe. Bank of England is a slight exception about to happen, but we can cover that later. So that’s clearly going on. And I think now Albert might do a lot of work together and I think this Albert came out with a comment a while back saying Yellen wants six trillion dollars fiscal. And the excuse that was given, aside from the political bias, was the Treasury market needs it.
And interesting enough, we saw the change to the Repos yesterday. This was after criticism by a committee that was published in the F.T. yesterday. And even Bill Dudley’s commented on Today suggesting that a lot more work needs to be done to ensure that the normal functioning of the plumbing behind the form of safe assets.
So it’s clear to me that things are being worked on in a politically coordinated way that impacts monetary policy. Now, I think they’ve got themselves into an economic or policy black hole. I think the mind set, and it’s been like this since probably ’08, which is they’re not prepared to accept the economic cycle anymore.
So back to one of my previous appearances on on your pod, the Fed not doing anything? Yeah, it seems to me that that’s an acceptable process, regardless of inflation is way above their forecast. And forecasting that’s a whole ‘nother bad area for the… Fed’s forecasts are terribly wrong. The ECB’s forecasts have been wrong for, you know, since time immemorial.
The ECB is more dangerous because they have a bias that keeps them on their policy’s wreck.
TN: So first on forecasts, if any central bankers are watching, I can help you with that. Second, when you say they don’t believe in the business cycle anymore, do you mean the central banks or do you mean the political folks?
NG: The central banks and government. I mean, funnily enough, I’m reading a biography on Jim Baker right now. And when you look at Reagan, when he came in and Volcker, economic data was pretty bad back at the beginning of the 80s. That. No way, no politician is prepared to accept that anymore. To be honest, I think the central bankers are prepared to accept that anymore. Any of the people leading the central banks being political appointees, of course.
TN: So this is kind of beyond a Keynesian point of view, because even Keynesians believed in a business cycle, right?
NG: It’s a traditional Keynesian point of view. The modern day, neo Keynesian, yes, you’re right. Way beyond what they’re thinking.
TN: There’s a lot of detail in that, and I think we could spend an hour talking about every third thing you said there. So I really do appreciate that. Albert. Can you tell us both Fed and ECB, what are they thinking about right now? What are the trade offs? What are the fears they have?
AM: We’ll start with the ECB. The ECB is not even a junior player right now in the central bank world. I know people want to look at the EU and say, oh, it’s a massive trading bloc, so and so. But the fact is, that it’s completely insolvent. Besides the Germans and maybe the French in some sectors, there’s nothing else in Europe that’s even worth looking at at the moment.
As for the ECB’s standpoint, you know, they’re still powerless. I mean, the Federal Reserve makes all the policy. They first will talk to the Anglosphere banks that are on the dollar standard basically. I mean, the Pound and the Australian dollar and whatnot. They’re just Euro Dollar tentacles. But, for the ECB, they’re frustrated right now because they see that the Euro keeps going up and their export driving market is just taking a battering at the moment. But they can’t do anything because the Fed goes and buys Euros on the open market to drop the price of the Dollar to promote the equities in the United States. And that’s just happening right now.
When it comes to the Fed, we have to look at what is the Fed, right? Normally what everyone is taught in school is that they are an independent entity that looks over the market and so on and so forth. Right. But these guys are political appointees. These guys have money and donors. They play with both political parties. Right now, the Democrats have complete control of the Federal Reserve. And everyone wants to look at Jerome Powell as the Fed chair, but I’ve said this multiple times on Twitter, the real Fed chair is Larry Fink. He’s got Powell’s portfolio under management of BlackRock. He’s the one making all the moves on the market, with the market makers and coordinating things behind the scenes. He’s the guy to look at, not Jerome Powell.
I mean, have anyone even watched Jerome Powell’s speech yesterday? It was appalling. He was overly dovish. That’s the script that he was written. He’s not the smart guy in this playing field, in this battleground.
TN: He needs a media training, actually. I think.
AM: He’s being set up to be scapegoated for a crash. He’s just no one to show. He’s a Trump appointee. So next time there’s a crash, whether it’s one week from now or one month from now, it’s going to be pointed on him that, you know, he’s the Fed chair. Look at the Fed chair. Don’t look at everything else that the political guys have made and policies in the past four or five years that have absolutely just decimated the real economy.
TN: This time reminds me, and I’m not a huge historian of the Fed, but it really reminds me of the of the Nixon era Fed where Nixon and his Fed chair had differences and they were known, and then the Fed chair ended up capitulating to do whatever Nixon wanted to get back in his good graces. Does that sound about right?
AM: No, that’s a perfect example. I mean, this idea that’s floated around by economists that economics and politics are separate entities is absolute fantasy. And it just it doesn’t exist in the real world.
NG: Just to pop in on this one because actually there is a new book out which I started three days at Camp David. Because it’s coming up to 50 years since that decision of the gold standard. Now, it’s just interesting you brought it up, because if you think of one of the rationales for coming off the gold standard, there’s several, but one that struck me as I was reading actually the review, the back cover show Percy.
This enables the government to stop printing in terms of fiscal, fiscal, fiscal. That’s what it did in effect. First of all, that’s one of the biggest arguments against people who argue for a return to the gold standard because that would decimate things or cryptos being in a limited supply of crypto as the new reserve currency because the gain that would be pulling against the elastic and you wouldn’t get, the economy would just boom. Right.
So that’s where I think it’s just huge, you know. I’ve always said that actually what we have is what we’re going to ultimately see is exactly the same cost that came with Lyndon Johnson paying for the Vietnam War, Covid. And then the Great Society, which is Joe Biden’s what I call social infrastructure and green ghost plan. So. Going back to that, Nixon was paying part of the price for all of that. With Volcke right. So I actually sit there thinking, well. There are similarities right now, and we’re seeing effectively a central bank and the Treasury, wherever you want to look, untethered from what used to be, well before I started in this business, to be part of the discipline. But even when they came off the gold standard, there was discipline. As you referred earlier, to, traditional Keynesians believed in the economic cycle of boom, bust. You know, boom, you tap the brakes a little bit, take the punch all the way. That’s gone.
That is to me what’s gone on recently, I don’t know whether you would say since the 08 or more recently is the equivalent of that ’73 meeting where they came off the gold standard. People just said no more cycles. Tapping the brakes and now the central banks are in a hole and politicized, they’re not independent because there are no.
AM: Yeah, yeah, that that’s real quick, Tony. That’s exactly right. I mean, even like, you know, I was on Twitter saying we’re going to go to 4400. We’re going to go to 4400 and people are like “No way. We’re in a bear market. This thing’s going back down 37, whatever charts and whatever Bollinger bands they want to look at. But the fact is because of the politics has a necessity to pump the market and then crash it to pass more stimulus packages. The only way was to go up to 4400 plus, right.
TN: Right. OK, now, with all of that in mind, Nick, you did a piece recently about the Fed and housing and some of the trade offs that they’re looking out looking at with regard to the housing market. Now, housing is an issue in Australia. It’s an issue in the UK. It’s an issue in the US and other places. Can you walk us through a little bit of your kind of reasoning and what you were thinking about with regard to the Fed and housing?
Tony Nash joins BFM 89.9 and explained where markets are headed in the context of rumors that dovish Fed chief Jerome Powell might stay a second term, even as corporate earnings and cash-rich US tech giants might boost gains with share buybacks. He was also asked whether the US market is bullish right now — and what sectors should investors look at? Also discussed is the EU economy amidst the recent lockdowns.
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Show Notes
SM: BFM 89.9. You are listening to the Morning Run I’m Shazana Mokhtar together in studio with Wong Shou Ning and Khoo Hsu Chuang as we always do in the early morning, we recap how global markets ended the trading day.
WSN: Yes, it was an excellent day in the U.S. The Dow and S&P 500 were up zero point eight percent. Nasdaq was actually up 0.9%. Nikkei 0.6%. Shanghai is up 0.7%. Hong Kong was down 0.1%. Singapore is up 0.3%. And week Abkhasia were down 0.2%.
SM: OK, then to get some insight into where global markets are headed, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Let’s start with the markets. They seem to be toggling between risk on and risk off. Which direction is it in? Is it a long bull or one that’s plateauing?
TN: It really all depends on the Fed. I think we expect to see things continue to rise through Q3. Well, they should continue to rise gradually. Doesn’t mean we won’t see volatility. We do expect to see further fallout. But by the end of the quarter, we expect things to continue to march higher, even through the volatility and some of the uncertainty. The Fed meeting in August in Jackson Hole really should give us a bit of clarity around what some of their future plans are. But beyond that, we do expect the Fed to be pretty calm and markets to proceed accordingly.
KHC: There’s some news, of course, unconfirmed at this point in time that Jerome Powell might seek a second term. What might that mean for markets and investors, given that he’s more of a dove than a hawk?
TN: I think it’s continuity, I think the White House has talked about other people to take that role, but I think keeping Powell right now is actually important for continuity because a really tricky situation. So I actually think I’m not a huge Powell fan, I’m not a huge detractor, but I actually think it would probably be a good idea to keep him in order to to reassure the markets with continuity.
WSN: Meanwhile, its results season. So far so good, except maybe for financials and Netflix. But we already see some strategists upgrading the S&P 500 year end targets. Do you think they’re a little bit too premature?
TN: No, I don’t think so. I think we’ll continue to march higher. We’ll have a few scares before the end of the year. But I think we will continue to march higher. The thing that I think is will be a little bit worrying for people toward the end of the year will be, you know, will the risk of keeping things in be enough? You know, will you get enough reward for keeping your money in the market?
Because I think things will get riskier the further way we go along in the year. All of this is assuming there isn’t more Covid aid and Fed stimulus and all this other stuff like increased rate of stimulus. But assuming everything is the same as it is now, we’ll hit toward the end of the kind of benefits of that stimulus toward the end of the year, at least the perceived benefits. And I think people really start to wonder whether the reward is there for them to to keep their money in the markets.
WSN: But, Tony, if I ask you to look into your crystal ball, what sectors do you think might surprise on the upside then?
TN: I think we’ll start to see things like travel and tourism do well. There are mumblings of efforts in the US that certain people want to close down parts of the economy. Again, we’ve seen California start to take some steps in that direction. But I just don’t think that anybody here wants things closed down again. Texas has said today that he will not reinstate a massive mandate in Texas.So Americans really want to get out. They want to travel. They want to see other parts of the country in the world. So I think we’ll see some things in tourism and travel do really well.
KHC: What you’ve just mentioned obviously reflects the economic fundamentals and a reflection in terms of those sectors. But JP Morgan, I think a couple of days ago talked about the S&P hitting 40, 600 points, is about 200 of the plus points from here on, and not because of the economy returning, but because of the share buybacks. What do you think about that particular development?
TN: Look, companies have a lot of spare cash and and how are they going to get EPS growth if they don’t buy back shares? The economy is awash with cash right now. If you’re the CFO for a publicly traded company and you have a lot of cash on the side, you really have to do that calculation to understand how is it going to hit your share price if you do buybacks. I think that’s definitely a part of the equation, at least of the end of the year, if not in the second half of ’22.
KHC: So names wise, who pop out obviously Berkshire with over 200 billion and Apple a notable cash hoarder’s, what are the names pop out to you.
TN: I can’t think of any right now to be honest, but I think it’s just a matter of looking at balance sheets and looking at who has that cash and then also, doing some research on the CFO and the board and look at their previous behavior. Some companies want to sit on cash or they want to say invest it. Others want to do share buybacks are typically technology companies do a lot of share buyback services. Companies do a lot of share buybacks. So I think those are the sectors that you would want to be looking at, banking, services, technology, those sorts of things.
SM: All right, Tony, let’s squeeze in one more question. Looking across the pond to Europe in 2020. Europe’s economy struggled with the pandemic. What’s your outlook on the E.U. this year, particularly in terms of an export led recovery?
TN: You’re getting a lot of pushback among EU citizens around lockdown’s, especially with the current variant that’s going through. And there’s a lot of discussion about the efficacy of the virus. And, you know, all this a lot of public health debate. But the problem of Europe has is well, on its on the plus side, China will likely keep the CNY strong into 2022, so that should help European exports. But when you look on the down side, Chinese PMI and consumer spending really haven’t been aggressive in recent months and we don’t really expect that to come roaring back in the next six months or 12 months.
So China is going to have some real pressure. Europe is going to have some real problems with goosing exports into China. I think the U.S. is fine and number two, export market for Europe. But I think there are some difficulties between the U.S. and Europe right now. And it may not necessarily outside of maybe automotive, it may not necessarily be a roaring market for Europe. So I think they have some serious headwinds and I think they’re going to struggle.
SM: All right, Dan, thank you so much, Tony. That was Tony Nash of complete intelligence, giving us his outlook for European exports and not looking particularly rosy at this point.
WSN: Yeah, but still very bullish on the U.S. markets. Right. He does suggest that S&P 500 might inches we up, but the risk of what may be the easy money has been made. So it’s not going to see some stellar jumps. But he likes tourism and travel. He thinks that Americans don’t stay home anymore.
KHC: No brainer. I mean, people have been stuck at home for 15 months, right? They want to go traveling.
WSN: But I don’t know if your infection cases rise. I mean, will you curb your own behavior? You might write especially I think in America, Delta is now 80, 80 percent of all the infections.
KHC: Don’t forget, America is the land of the free and the brave, the brave.
WSN: I like that word.
KHC: be the first of the Marcellus. And then, you know, Bob’s your Uncle Gene. I mean.
WSN: OK, well, we’ll watch this space, but I think its results season.
SM: That’s right. We’ve got a few results on our docket to look at this morning. Let’s start with Coca Cola’s. Coca Cola reported a second quarter revenue that surpassed twenty nineteen levels, prompting the company to hike its full year outlook. So Coke reported a net income of two point six billion dollars. That’s up forty six percent on year. Of course, there was a low base last year. Net sales rose forty two percent to ten point one dollars billion, topping expectations of nine point thirty two billion dollars.
WSN: Well, the. Good news is that the company said that the away from home channels, so like restaurants and movie theaters were actually rebounding in some markets like China and Nigeria. However, India and Southeast Asia were the only areas that did not see any sequential volume acceleration on a two year basis this quarter. Surprise, surprise, because I think India, particularly by covid-19 in Southeast Asia, was still in some form of lockdown, especially Malaysia. But all is doing segments reported double digit volume growth for the quarter.
Sparkling soft drinks units, including, of course, its namesake soda did particularly well.
KHC: I saw net sales rise by 42 percent. That is incredible. You know, this is a 245 billion dollar company, right, for net sales in one quarter. The rise with 40 percent. You know, I think lest we forget, a lot of people, they don’t care about diabetes. You know, they don’t care about high blood pressure.
WSN: No, but I think that’s why Coke is venturing into other drinks. So you do see high drinks. They do like growing five percent and even coffees significantly.
KHC: So there’s a developed market bias, which is obviously to grow more healthy. And there’s an emerging market base which is aspirational. Coca-Cola is aspirational. You cannot I mean, for people who have grown up on Cichon and warm water, right. They want to have Coke.
WSN: By the way, for those who are wondering what says is Chinese to eat.
KHC: Yeah, the chips drink you can find in a coffee shop.
I should know I’m from Penang.
WSN: But the street clearly loves it, right? I mean, when I’m looking at Bloomberg, the consensus price target is sixty U.S. dollars and twenty six cents. Current share price is fifty six dollars and fifty five cents. Still nineteen buys nine holes five times current earnings.
SM: Well when you think about it, this is probably super cash generative. So not surprising. It’s perfect. Right.
WSN: All right. I’m looking at another company that has its earnings out. Johnson and Johnson reported earnings and revenue that beat Wall Street’s expectations. Revenue rose up twenty seven percent to two point three billion U.S. dollars, beating the twenty two point two billion expectations.
Well, this is the pharmaceutical industry business, right? They developed the single shot covid-19 vaccine generating twelve point six billion in revenue, a seventeen percent year on year increase. Global sales just this quarter, 164 million. And I think that’s just just the beginnings of it, right?
KHC: Yeah. I mean, I recall a few weeks ago Pfizer talked about how they’ve seen they expect billions and billions of decades of billions of dollars in top line. And Pfizer’s it’s a very long tail. Pharmaceutical sales.
SM: There we go, 719 in the morning. Up next, we’re going to bring to you the major headlines in today’s papers and portals. Stay tuned. BFM eighty nine point nine.
This week, we are joined by Seth Levine of the Integrating Investor, a professional investor and investment market blogger, sharing to us his thoughts on the current financial system, central banks, and debt cycles.
Seth Levine is the author and creator of the Integrating Investor Blog. Seth is also an avid coffee roaster, who influenced Tony Nash into roasting as well.
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This QuickHit episode was recorded on February 19, 2021.
The views and opinions expressed in this How robust is the global financial system in the wake of Covid? 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: We have a new administration in the U.S. We have Jerome Powell, Central Banker who’s been there for a while. We have Janet Yellen coming in as a treasury secretary. But we’re also late in this Covid cycle with a lot of overhang and bad policy decisions. Some people may like them. But we’ve got a lot of things that need to restart. At the same time, we have Europe that is still shutting things down and the ECB and we have demographic issues in Europe. All those sorts of things.
I’m really curious about in the financial system, but more specifically, central banks and treasury. What are your thoughts on where we are and where we’ll likely go in the next year or so with those financial system central banks and treasuries, what does it look like from your perspective?
SL: The financial system is just a really interesting topic all together because it is a very big word, a very big concept. And it’s an abstraction that a lot of people grasp onto, and some of the work I’ve done a couple years ago, I really tried to untangle that abstraction and concretize it and what I found is that, when we say “financial system,” we’re really just talking about a system of interconnected banks.
So at its base, we’re talking about very simple banking. Banking is complicated. But when I think about banking at its core, what is it? It’s really just a carry trade. If you have bank XYZ, you take in deposits and then you try and invest those and earn an asset yield that’s an excess of your deposits. And you keep a little bit in your deposit and you keep a little bit behind for reserves, i.e. liquidity.
It’s a leverage system. When we talk about the global financial system, we’re really talking about a leveraged system of interconnected, financial services companies. And that’s what we see on the screen. They’re in the markets for bond stocks, derivatives, all sorts of things and it is giant. Because we not only we have Central Banks. We also have what’s called the shadow banking system. Or some people call it the Euro-Dollar system.
So we look at what has happened over the course of my life. I really see this carry trade being squeezed in one direction. The funding side has perpetually been squeezed lower. And what’s that done? The asset side has come down as well. But I see all these like market events, whether it be Covid or the bombing event of a couple years ago or any number of market sell-offs. That is a signal that the market is trying to deleverage.
There’s been asset mis-pricing on the market and because we’re levered, again the impact is so much greater so the response out of policy makers has always been to lower the funding costs. If the asset yield is coming down, the funding cost has to come down too to keep that carry trade together. And now as asymptotically reach zero, maybe even going the other way, it’s really interesting to see what’s going to happen with that asset yield because again if there’s a mismatch of any sort, that’s when we can start hitting some turbulence.
TN: Do you think we’re hitting that mismatch point? We have a lot of precarious events like right now, whether you’re looking at big events like the demographic handoff from baby boomers to millennials, or if you’re looking at Covid or if you’re looking at some specific corporate events or even cryptocurrencies. There are so many different things happening right now that could mess with that carry trade.
SL: If you want to talk about cryptos, that’s a separate conversation. It depends on your time frame. If you look long-term, it’s the millennial taking over from the baby boomer and just a giant debt burden that we’ve amassed and I’ll claim it squarely on the fiat currency regime because again if you look at all fiat currency regimes they tend to go in this direction where the spending gets and the debt load tends to overwhelm the productive capability of the current economy and that is an issue that I think has to resolve and how that resolves, I’m not going to say anything unique here, but I believe there’s only three ways out.
You can either inflate it away. You can either restructure the debt or the obligations and in this case would probably mean restructuring social security and medicare benefits or you can repay it or default on it, right, which I think repayment is going to be difficult. And default, I’m not sure we need that considering that it’s a fiat currency and we could print it ourselves and that actually leads into what I think is the war of MMT right now and again, if bitcoin is one bottle of tequila I think MMT is a bad case of it.
That’s the draw of that because people are trying to find a way out of this and that’s longer term. If we go back to the more near-term view, I think inflation is really an interesting development here. And when we say inflation, I mean we’re specifically talking about CPI growth.
So we get to a point where the CPI is going up and bond yields for whatever reason follow CPI growth up, then let’s go back to that carry trade. Now we’re talking about our funding costs going up and asset yields don’t go up. That’s going to be a problem for the financial system and keeping that carry trade together.
However, it’s also how to get the asset yields up. Well the price has to come down. So that I think is a pretty interesting potential risk that we may be facing in the economy unless we can really generate the growth so we can get the asset yield up to match the increase in funding costs.
TN: I believe we’re in that very precarious position right now as we look at bond yields rising we look at other things. There’s a lot happening right at this very moment and so if you are a Janet Yellen or a Jerome Powell, what are you thinking about, I mean aside from these big problems we’ve talked about, what kind of tools do you think you’re looking at aside from dump trucks of trillions of dollars? Like, is there a lot… Do they have other options, really?
SL: I’m gonna answer this in some really different ways. The stimulus route that most people would like to go to, I actually think that’s counterproductive because I think about stimulus right, as opposed to say QE for example, you’re actually giving money in the hands of citizens. These are not institutions. These are actual citizens who are going to go out and purchase things.
So that actually I think puts upward pressure on CPI growth in a way that QE just simply did not, just from a pure mechanical perspective. So if that’s the case, we start seeing… So if you go and unleash some stimulus and then you start seeing CPI growth and then you start seeing bond yields go up, I mean you’re actually exacerbating the problem, right.
So my preferred method as a pure capitalist here, if I’m Jerome Powell, if I’m Yellen, I’m thinking of ways to get the asset yield up and I mean like bona fide get the asset yield up and from my perspective that’s purely deregulation and going to as free market and economy as possible. But that to me would be the only way of really getting the asset yield up and the growth up that we need to grow our way out of out of the debt load that we’ve created.
TN: Okay, interesting. So what are some of those deregulation paths you’d go down? Like again, the broad swallows of them and and how would you sequence that to not have immediately negative impact on the on everything? What would you focus on and how and when would you focus on it?
SL: So this is gonna sound like a punk, but it’s not. I think this is a very specialized issue and there are and they’re probably like really good policy makers, policy experts who can actually opine on this. But the way how I like to think of these problems and I get a lot of criticism for this, but it’s really to me the only way, the best way that I know to think about them is think of the end state, think about where we are now.
Like, let’s devise the ideal end state and then once we agree on the ideal end state then we could talk about the strategy to get us from here to there in the least disruptive way possible. So I mean ultimately my end state would involve going to a free banking regime. We’ve tried this throughout history. There’s been periods of it in the US. There’s been, it’s been tried best probably in Scotland. There’s also some in Canada.
If you’re looking for resources on free banking, I highly recommend the work of George Seljun and Larry White, definitely the foremost experts on the topic. If I were Jerome Powell, the way how I would go. I would try and think of how to put myself out of a job in a sense, which we know is probably unrealistic and probably doesn’t have a lot of consensus behind it but, that’s the way forward I see. These prescriptions that we’re talking about are going to be financial because we are talking about Jerome Powell who’s the head of the central bank. So he is a banker in the financial system.
And Janet Yellen is treasury secretary. I don’t really know how much power she has because she’s just trying to fund the government. If I’m Janet Yellen, I’d probably have to get a little bit shorter and then, maybe try and try and lobby for some deregulation angle and take some of that pressure off me to actually to have to fund a large government with that has a very big reach.
TN: Sure. Okay and so when we look at going down that path and we look at say the US Dollar as, like it or not, as a global currency, how do other say central banks or financial systems interact with the US as we would potentially move down that path?
SL: Sure. So the dollar is very important in the global financial system. It is the base reserve currency. But right now, all currencies are floating right. So I think perception probably has a lot more to do with it than anything else. At least from a fiat perspective, it ultimately, the buck is going to stop with the strength of the US economy. And it’s going to and that’s with any currency.
In order to keep the US Dollar as reserve currency, we need the strongest currency possible. That also means honoring the obligations possible. So that puts a lot more pressure on the inflation prescription and on the default prescription. And really I think leaves you with the growth angle as a way to maintain the Dollar’s importance in the system.
TN: It sounds to me like you’re fairly concerned about inflation in the coming years. Is that fair to say?
SL: I am sort of a secular deflationist and I am for a couple reasons, and it’s probably none that you’ve ever heard before. One I’m just pro, I’m a big believer in human ingenuity and a lot of this has to do with definition, right.
If we’re talking about inflation’s definition, right, it’s… Today, people are talking about CPI growth, right. The rate. So that is just the price of consumer goods and services. Right, I mean, that should fall over time. I mean just no… that is, I mean, that is the way of human prosperity. In fact, the only way CPI growth increases are times during shortages and tough times actually, if you look at the inflation we’re seeing now, right? The CPI growth that is like coming because we are seeing shortages throughout the supply chains, right. And that’s okay.
TN: So let’s stop there and let’s talk about that in terms of shortages. Do you think we’ll continue, like are those shortages something that are here to stay, let’s say in the short to medium term? Because like you, I’m a technologist.
I started technology for a reason mostly because I’m an optimist. So over the long term I certainly believe that prices go down generally because of innovation. But these supply shocks will say almost, a generalized supply shock, that we’re seeing in the wake of Covid, do you think that will be with us for a sufficient amount of time to have an impact on short to medium term CPI and provide a disruption to that balance that you’ve talked about?
SL: That’s an interesting question. I think it’s a matter of time frames because I think longer term, right I mean, you’re in business, I’ve been a bottoms-up analyst for 17 years here. And if there’s one takeaway is there’s no better cure for high prices than high prices. And why is that? Well that’s because businessmen and women innovate, they do bottleneck processes and they find a way to improve productivity and bring those prices down.
These Covid shortages I believe are temporary because I believe that we’re gonna see business people innovate and try and meet the demand with as much supply as possible for as low as price as possible and to make simply as much profit as possible for them as well.
So I think it’s short-term. I don’t have a way to really gauge how long that’s going to be because quite honestly it’s going to be a very micro-analysis. Are you talking about meat supply or talking about the chip shortages, and you know chip shortages that we’re seeing or are we talking about, you know, what what industry?
TN: So right. But in general, you think, it’s pretty short-lived. So we may see a short shock but for the most part where that equilibrium that you talk about can remain.
SL: Let’s go back to the financial system right back. How quickly is the bond market going to react? I think that’s probably the most interesting part of this conversation.
TN: Treasuries have risen like 33% since feb 1.
SL: Treasures have more than doubled, right.
TN: Exactly. Yeah. Doubled from zero, right.
SL: So from a pretty low base, yeah, the ten years specifically. Investors are forward looking and the question is how are people going to react to the perceived rise in CPI growth? How far will this take it? What are also supply demand imbalances within the financial system?
These are very complicated systems with a lot of inputs and I think we all tend to fall for this. We try and we oversimplify these because we hang on to a narrative. Let’s just be blunt. Like, I have no idea where else we’re going to go.
TN: I think everybody does. We make this stuff up as we go along, right. So bringing this back to say Yellen and Powell and central bankers, the tools that they have, they’re facing the dilemma of stimulus versus let’s say near-term say CPI inflationary activities. Do you see an easy path for them in the near term?
SL: I don’t see them as the main players in this argument at all. The central banker’s job, if you go back to the early central banks, it is just simply to try match the assets and liabilities and keep everything together. How much power does he have to juice the asset yield of the economy, and I would say very little. The proof is in the pudding. When look at how economies have performed over the past couple years, no matter how low they’ve taken, treasury yields, you haven’t really seen, a boom in GDP at all.
It’s completely elusive. That’s just because that’s not within his power even though there’s just this belief out there that if you control the liability side cost then, all of a sudden you can control the asset costs and the only lever in there that gets tweaked with is actually the leverage and I think that’s probably the most dangerous thing.
TN: So in the short term, we’ll live belong, it sounds like, as usual. Okay. But in the longer term and I want to wrap this up fairly quickly, it sounds like we have to transfer liabilities from baby boomers onto millennials. Do you see any feasible tools for them to do that in a way, you know, that can happen in an organized, won’t be painless, but a relatively organized way. Or will it have to be some sort of disruption?
SL: I think the only organized way to do it is through growth, right. You need to come up with policies and again my biases as a capitalist for many reasons, we may need tothrow an extra case of tequila on the truck to get down that path. So that is a tool set that I think is necessary to tackle these problems.
If you don’t bring up the asset yield, then you have to deal with the funding costs and again you’re left with three issues and I think they’re all pretty ugly.
TN: Great. Seth, on that optimistic note, we’ll wrap it up. Thanks to everybody for tuning in for this QuickHit. Please subscribe below on the page and we’ll see you for the next QuickHit. Thanks very much, Seth. Thanks.
Tony Nash joins BFM 89.9 The Business Station for another look at the global markets and to get a sense of whether this is the end of the bull run. Also discussed how September is expected to be a volatile month. Will there be a fiscal stimulus for small businesses? Will banks and other financial institution get the next round of stimulus? And how about the oil prices — where is it going?
Speculation is rife over whether US lawmakers will be able to come to agreement over a new stimulus package, as deadlines loom. Federal Reserve Chairman Jerome Powell also warned that more stimulus will be needed, and all the uncertainty took its toll on US equities overnight. To get a sense of whether this is the end of the bull run, we speak to Tony Nash, Chief Economist and CEO of Complete Intelligence.
Produced by: Mike Gong
Presented by: Roshan Kanesan, Lyn Mak, Noelle Lim
Show Notes
LM: BFM eighty nine point nine. You’re listening to the morning run with Lyn Mak, Roshan Kanesan and Noel Lim, 707 a.m. Thursday, the 24th of September. And in round about 15 minutes, we’re speaking with Paul McManis, chief enterprise business officer at Maxus, to discuss how companies can best adapt to a post covid-19 business environment. But before that, we’re taking a look at the markets.
RK: Well, the markets were in the red, actually. The Dow was down two percent. The S&P 500 was down two point four percent, and the Nasdaq was down two point seven percent. How did Asia do?
NL: Well, Nikkei index down point zero six percent. The Shanghai Composite was up 22 percent. Hang Seng marginally point one percent of the Cosby eight point zero three percent stay up point seven percent. The FBI. CIA, however, was down one point six percent. And I guess that’s on the back of some very important news at 12:00 p.m. yesterday.
RK: Yeah, it’ll be interesting to see how all these markets open today on the back of the US market closing.
LM: Absolutely. So for more on international markets this morning, we have Tony Nash’s chief economist and CEO of Complete Intelligence on the line with us this morning. Tony, thank you for joining us. Now, U.S. equities retreated sharply last night as Jerome Powell warned that more stimulus is needed. While it seems more likely that lawmakers will be able to agree to this. Is this the end of the rally and perhaps the reality check that market’s needs?
TN: Well, I don’t know if it’s the end of the rally, but I know we had a conversation on August twenty sixth. I think it was when I caution you guys that September would be a really rough month and very volatile. And I think we’re certainly in the middle of that. So how much further will it go? We think it has a little ways to go, but so we don’t necessarily think there’s a huge rally coming. But the caveat to that is stimulus.
So if stimulus comes out this week from the U.S. Congress, which there has been a bill going through and there may be some reconciliation in in some of the committees to get some stimulus out, that could help. But I think the Fed I think what what the Fed has said is, you know, they’re out there doing their work. They’re getting loans out to larger companies. But really, fiscal stimulus has to take place for smaller companies until we have that.
I think markets are pretty upset.
RK: And if we take a look, sorry, OK. And as we take a look at some of the banks like HSBC and others, they’ve taken a bit of a beating from the Vincent report. Will this have a an impact on the rotation of play into the finance sector, do you think?
TN: I think it will certainly for those banks that have had issues around laundering money and other things, allegedly. Yeah, I think it’s a big problem because investors don’t want to invest in risk. There’s enough risk in their daily life. But for those banks who aren’t flagged, I think there’s a real opportunity for them. Unfortunately, the sector itself is having difficulties today. But you did see some movement in things like insurance and other things where you do see money moving in and looking at oil prices rising.
NL: U.S. oil inventories are keeping oil prices fairly subdued. Where do you see oil prices heading in the short term?
TN: We don’t see a lot of movement. You know, we see WTI in the high 30s, low 40s. We see Brent around the mid 40s. The problem is we just haven’t had that consumption rebound that’s needed to drive oil prices higher. There is a lot of discussion about a supply side issue going into the first half of next year that might push prices higher. I’m not entirely sure that that may happen. But even when we look at things like petrol prices, they’re probably 30 percent off of where they were a year ago.
And we really don’t expect that to change for six to 12 months.
LM: Thank you very much for speaking with us this morning, Tony. That was Tony Nash, chief economist and CEO of Complete Intelligence
