In this podcast episode from BFM 89.9, the hosts discuss the latest updates on global markets and dive into the US debt talks. They are joined by Tony Nash, CEO of Complete Intelligence, who shares his perspective on the debt ceiling and its potential impact on the markets. Tony believes that a US debt default is unlikely and views the current concerns as overblown political maneuvering. He highlights that the debt ceiling issue arises regularly and is often resolved at the last minute, causing frustration among Americans.
The conversation then shifts to the state of the US economy, particularly the labor market. Tony notes that there is fatigue in jobs growth, with ongoing layoffs in various industries, including tech companies. The hosts also discuss the recent rise in the US April services PMI, indicating a shift from goods to services and suggesting continued growth in the services sector.
Nvidia’s quarterly results become the focus of the discussion, as the company outperformed expectations and experienced significant stock price growth. Tony explains that Nvidia is a key player in the AI infrastructure space and has benefited from the increasing adoption of AI and machine learning technologies. However, he cautions that the high valuation and potential impact of a recession on corporate infrastructure spending could affect Nvidia’s future performance.
The podcast concludes with a recap of Nvidia’s financial performance and analyst expectations, noting the positive sales figures and high target price. The hosts question whether a company involved in AI deserves the current forward PE ratio of 66 times.
Overall, this podcast provides insights into the US debt ceiling issue, the state of the labor market, and the performance of Nvidia in the context of the broader market trends.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station. BFM 89.9. It’s 7:06 A.M. On Thursday the 25 May. You’re listening to the Morning Run. I’m Shazana Mokhtar, with Wong Shou Ning and Mark Tan. In half an hour, we’re going to be discussing the outlook for Netflix and the US streaming services. But as always, we’re going to kick start the morning with a recap on how global markets closed overnight.
BFM
The markets are all red, probably thanks to the jitters surrounding the US debt talks. In the US markets, the Dow Jones was down 0.8%, S&P500 down 0.7%, and Nasdaq down 0.6%. Over here in the Asian markets, Nikkei down 0.9%, Hang Seng down 1.6%, Shanghai Composite down 1.3%, STI down 0.1%, and our own FBM KLCI down 0.1%.
BFM
All right, so for more insights on what’s moving markets we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. So let’s start with what seems to be keeping markets on tenterhooks. In recent commentary, though, you’ve opined that a US debt default really isn’t on the table. So why do you say that? And why are current concerns of a debt default overblown, in your view?
Tony
Yeah, so the debt ceiling literally happens every other year in the US. And it’s happened for the past 15 years. So I’ve said this many times. This is shameless partisan positioning intended to show politicians coming to the rescue of a crisis that they created themselves. So they’ll get media attention. Then at the last minute, probably after the deadline, they’ll miraculously find a solution when everything seems the most chaotic. So this is something that most Americans are really frustrated by. It’s like we know they’re not going to default. If they do, it’s ridiculous, and it’s just shameless partisanship. So are people here worried? To be honest, not really. I think a bunch of portfolio managers are being very careful in markets, but on a personal level, I seriously doubt that many people are all that worried.
BFM
So, putting aside the political shenanigans, of much greater importance to global markets is the state of the US economy, particularly the labor market. Is there a sense of fatigue in jobs growth or more room for expansion?
Tony
There’s definitely fatigue. If we look at the data since the end of COVID there’s a metric that the Fed…
Tony
Okay, we’re going to try and get Tony back to talk more about what’s happening with the US labor market. But as he said earlier about the debt ceiling, he’s taken a little bit of a, I guess, sanguine tone on it. He’s less worried that debt default will actually have long term implications. He thinks things will be resolved, just that it’ll take a lot of drama to get there.
BFM
Yeah, but the consequences are already being felt. I mean, I’m seeing this headline on Bloomberg, United States may be cut by Fitch on debt limit fight because US ratings have been placed on Watch Negative from Outlook Stable by Fitch. So the rating watch reflects the increased political partisanship that is hindering reaching a solution to race or suspend a debt limit despite the fast approaching, as we call it, X State. This is the first rating agency that has already given them some warning snakes, right? And once this happens, what this means is that the cost of borrowing is going to rise quite significantly on top of the fact that the interest rate in the US is already 5.2%. I mean, the Feds have raised it what, ten times since last year?
BFM
There’s a lot of moving parts to this picture, and I think there’s also discussion on what is it that other stakeholders in the US government can do if Congress can’t get its act together, what can the Treasury do? Can the Fed do anything? In any case, I think the Treasury will probably try to prioritize the debts that it owes, which means that some people will may not receive their bills. I think looking at Social Security and Medicaid and Medicare, hospitals, roads, who’s going to maintain all that?
BFM
Well, I do think that we have Tony back on the line. Tony, can you hear us?
Tony
Hi, guys. There you go. Sorry about that.
BFM
No worries.
Tony
On the debt ceiling. What’s interesting what’s happened is this week people in Congress asked Janet Yellen how she did her calculation on finding that X date. So it’s a kind of mysterious calculation and nobody knows. So people are trying to dig into that to understand when actually is the date, because nobody’s showing any math, nobody’s showing any data around it. And again, it seems like this is being hyped as a political ploy. So what you rightly point out about if it does come, the US government will have to prioritize payments. Right? And that’s fine. But again, voters and legislators don’t actually know how she’s coming up with that X date and a lot of people just don’t trust her.
BFM
Well, coming back to the point we were discussing earlier on the labor market, Tony, what’s your sense of how jobs is doing there?
Tony
Yes, jobs are in a rough spot. So there’s a metric called continuous unemployment claims and they’re at their highest level since the end of 2021. So I know that isn’t a long period, but stimulus is worn off, consumer credit levels are rising really fast, and tech companies are still laying off staff. So Verizon, a big telecom carrier here, just announced today that they’re going to be doing layoffs. So we’ve seen the Amazon and Facebook. Facebook yesterday announced another layoff. And so what’s happening now? That those initial layoff announcements were made to give a boost to stock prices. But now that that boost is largely expanded, people are simply not hiring. So they’re choosing not to hire for open jobs as a way to contain their workforce through just retirements and quits and that sort of thing.
BFM
Now, Tony, the US April services PMI rose from 55.1 from 53.6, surpassing the market expectation of 52.6. Isn’t this further evidence that at least in this sector, growth hasn’t been tempered by inflation or the rate hikes?
Tony
Yeah, well, certainly I think what it’s showing is an ongoing shift from goods to services. So during COVID everyone loaded up on goods. For the past twelve to 18 months, we’ve seen a trade off of goods purchases to services purchases. That services PLI will likely continue for the next two to three months, partly because the summer here in the US is holiday season, it’s vacation season, and so services will continue to thrive through that period. So we would expect a services PMI decline, maybe not necessarily contraction, but at least decline in Q3, probably mid Q3.
BFM
Okay, Tony, can we talk about one results, one set of results that came out last night, and that’s Nvidia. Right. They really beat street expectations up 20 over percent stock price. This is one tech stock that has done exceptionally well, I think a lot to do with AI. Are you bull on this name?
Tony
Well, Nvidia has done very well, and definitely top line growth surpassed expectations. So Nvidia is to the AI boom, which Cisco was to the Internet boom 20 plus years ago. Right. So they’re selling the infrastructure for AI and machine learning and a lot of these new capabilities, and people need them. And that same infrastructure is used for crypto mining and other things. So they planned extremely well, and they’re kind of reaping the profits of that right now. So as long as we continue to see companies adopting and expanding AI and machine learning capabilities, the value in Nvidia should be there. I don’t necessarily want to make a prediction on the stock price where it is right now. It’s a pretty high price in terms of valuation and other things. But I think in terms of corporate performance, it’s certainly strong and will remain strong.
BFM
So do you think any stock that has an edge or have first mover advantage when it comes to AI deserves a premium? Just pretty much like Tesla when it comes to electric vehicles?
Tony
Well, I think when you’re looking at a stock value, you have to look at the forward expectations. And so do you believe, or does an investor believe that that company that provides either AI software or AI hardware or something like that, do they believe there’s growth in that area? And if they believe there’s growth, so what’s the multiple on that growth and how quickly will it come? That’s how people come up with those price expectations.
BFM
Yeah, because when I look at Nvidia, the Bloomberg showing a PE of 66 times forward PE. So it looks like markets are really expecting a lot of growth.
Tony
Oh, yeah, they do. And I think part of the problem is people really load up on hardware first. And so that growth may very well continue at that same pace. But it really all depends on what happens to corporate infrastructure spending. And if that corporate infrastructure, meaning IT infrastructure spending continues, then it’s really good news for Nvidia. If we do hit a recession, then corporate infrastructure spending could be hit and that could hit Nvidia in a negative way.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, talking to us about some of the trends that he sees moving markets in the days and weeks ahead. Capping the conversation there with just some thoughts on how Nvidia has performed. And we do have their results coming out overnight, right? They did really well, performing well beyond Wall Street expectations. Their sales in the three months ending July will be about $11 billion, which is 53% higher than what analysts were foreseeing.
BFM
Revenue for the first quarter was $7.2 billion versus 6.5 expected, while earnings per share was $1.9 adjusted versus the $0.92 expected.
BFM
Okay. Sorry.
BFM
Net income was $2.5 billion versus $1.62 billion from the same period last year.
BFM
Okay. I’m so excited to tell you how many analysts cover this. Well, a lot. 44 buys, 13 holds. No sells at all. At all. Okay. So consensus target price, $307, which is already very, very close to the regular market hours share price, which was down one dollars. And but I know aftermarket hours, the stock boomed, shattered by ceiling by going up by 20%. So I won’t be surprised if a lot of the analysts actually rush out to upgrade. But the ceiling to me is the fact that PE forward PES are 66 times. Do you think a company involved in AI deserves 66 times? Which was my question for Tony.
BFM
That’s right. And I think AI is going to be driving a lot of investor interest in these kinds of stocks. But let’s turn to another stock in the tech sector that hasn’t been doing so well or hasn’t done so well recently. Then that’s snowflake. Their sales outlook for the current quarter fell short of analyst expectations, and this did lead to a share downturn. Snowflake software helps businesses organize data in the cloud, and their quarterly revenue is expected to be growing at 34%, but well below Wall Street expectations.
BFM
Snowflake also cut its outlook for the fiscal year, saying product revenue will be about $2.6 billion versus 2.7 it predicted early in March. Analysts had feared that a slowdown demand for cloud services would dance. Snowflake’s pay as you go model.
BFM
Okay.
BFM
But still quite popular with analysts. 29 buys, 13 holds, two sells, albeit not as popular as Nvidia. Consensus target price for the stock, $188. Last time, priced during regular market hours, it was up all right at 718 in the morning.
BFM
We’re going to take a quick break, but we’ll come back to cover more top stories in the newspapers and portals this morning. Stay tuned BFM 89.9.
BFM
You you have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
In this episode of “The Week Ahead,” host Tony Nash is joined by Brent Johnson, CEO of Santiago Capital, and Tracy Shuchart, a commodities trader at Hilltower Resource Advisors, to discuss the most pressing economic themes for the upcoming week.
One of the key topics of discussion is the Federal Reserve’s “Q2 Danger Zone,” which Brent believes could be a potentially scary time for the economy. He notes that we are still less than a year away from the first rate hike, and it often takes 12-18 months for rate hikes to show up in the economy. By the summer of 2022, we will be right in the heart of that time period, coinciding with YoY inflation numbers that should come down due to the crazy comparisons from the previous year. Brent warns that even if inflation remains somewhat sticky, we could see a bunch of disinflationary prints at the same time, which will make it challenging for the Fed. Moreover, by that time, Owner Equivalent Rents are expected to fall, adding to the Fed’s challenges.
Tracy then delves into the topic of oil production and cuts, specifically Russia’s decision to cut 500k barrels. She explains what this means for the market, how it could impact crude prices, and who will be hurt the most – Asia or the West. Tracy also raises an interesting point about Russia’s decision to smuggle oil through Albania despite the cuts, leaving us with questions about their motivations.
Finally, the discussion turns to commercial and industrial loan growth, which saw a sharp rise after rate hikes started. Tracy explores why this is happening, and what it means for the economy. She believes that companies are taking out loans to fund capital expenditures, which is good news for the economy as it indicates that businesses are investing in themselves and their future growth.
Key themes: 1. The Fed’s Q2 Danger Zone 2. Capex & C&I Loan Growth 3. 500k fewer Russian barrels
This is the 55th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Brent Johnson and Tracy Shuchart. We may be joined by Albert Marko at some time, but we’re just going to focus on Brent and Tracy right now. Guys, thanks so much for taking the time to join us. I really appreciate it.
https://youtu.be/yYom7Zqezio
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We’ve got a few key things, themes we’re going to cover today. First is the Fed’s second quarter danger zone. There’s a lot setting up for Q2, and Brent’s going to talk us through that. Then we’re going to get into Capex and CNI, commercial and industrial loan growth. And then finally, we’re going to talk about those Russian barrels that are coming off the market this month, and Tracy will talk us through the impact there.
Okay. Guys, thanks a lot for taking the time. Brent, when I asked you what you want to talk about, you really want to talk about this kind of Q2, potentially Q3, these issues that we may see in markets in that time. Can you help me understand or help us understand what are you looking for there? Because there’s a lot going on, of course, and you can talk us through a number of items. But I have a tweet from Daniel Lacalle, who’s joined us a few times talking about the ECB under pressure for faster rate hikes.
We’re seeing similar stuff in the US. But markets keep going up. What are you thinking?
Brent
Well, I think there’s a couple of very, I guess, poignant and competing narratives fighting each other right now. And they’ve been fighting each other for a while. And I’ll explain why I think they’re fighting each other. But I’ll also explain a little bit about why I think Q2 and Q3 have the potential, again, there’s no guarantee. We’re all speculating here. But has the potential for one of these narratives to kind of come to the fore or something to change dramatically in Q2 or Q3. So I think the first narrative that has been around for a year now, so we’re almost still not yet, but very close to now, the one year anniversary from the first rate hike. And I think a lot of people forget that it hasn’t even been a year yet since they started raising rates. And typically when you raise rates, it doesn’t have an immediate impact in the economy. Sometimes it takes nine months, twelve months, 18 months for those rate hikes actually kind of work there through the economy and have the full effect of them show up. So we’re not even to a year yet, but in another three or four months we’ll be in the 12- to 18-month range when they typically start to show up.
Now, in the meantime, we continue to have inflationary prints that are stickier than some people have expected. Again, part of the reason markets have been pretty favorable for the last two, three, four months is the expectation that rate hikes would slow and potentially even reverse and maybe we even get to a cutting cycle. And as a result, the markets are front running that. But now in the last couple of weeks and so at the beginning of the year, we had a big rush up in bond prices as rate hike expectations came down, and stock prices and commodity prices. But for the last month, let’s call it since the, to the last week of January, 1 week of February, I’ve kind of turned it violently sideways. We’ve gone up and down and up and down and up and down, but kind of just treaded water. And actually if you look back two years, we’re kind of where we were a couple of years ago. We’ve gone up and we’ve gone down, but we’re kind of where we were two years ago. But because of the stickiness, the relative stickiness of the inflationary prints, this idea that rate hikes are now going to go the other way is starting to get a little queasy.
And maybe they’re going to have to go back to 50, maybe they’re going to have to go longer, maybe they’re going to have to go higher for longer. And so now markets are trying to figure this all out. And so the reason I think once we get into Q2 and Q3, it gets very important is for two reasons. One, if things stay sticky in the meantime, the Fed may have to either keep hiking or continue to message higher for longer. And then if at the same time all of the previous interest rate hikes start to show up in the economy and then at that point we are going to be in the heart of the year-over-year inflationary prints. And those will most likely show negative. Even if inflation is still high, it’s probably, you know, I think was it last June or last July we had the 9% print in inflation. So even if this year it comes in at 7%, it’s going to show a negative two year-over-year. And so that puts the Fed in the position, okay, inflation is starting to come down, we’re making progress. But you still have high inflation.
So does that mean that they stop or do they start? And it’s going to be at the same time where all the previous rate hikes are going to be showing up in the economy. Right.
Tony
Sorry, go ahead.
Brent
No, but my point is we’re getting to the point where a lot of the decisions that have already been made would naturally start showing up in the economy, but we’re not quite there yet. In the meantime, the Fed is in a tough spot as to whether to continue rate hikes or to slow them down because we are seeing some disinflationary pressures. Right. And so they’re in a tough spot right now.
Tony
Yeah. When Powell spoke, gosh, I think it was in the last meeting, he talked about the lag effects of Fed policy, and it was almost in a defensive way, saying, hey, it may not look like much is going on, but there are serious lag effects to our policies and you better watch out. And I think that’s when they rolled out the 25s or they started rolling out the 25s.
I’m not sure that at this point I see an end to 25s. Sam Rine’s on the show talks several times about how it’s at least 25s until mid-summer. Right.
Brent
I think so.
Tony
And I think we’re starting to get some nervousness from the pace of inflation in Europe. And I think that’s kind of bleeding over here a little bit because people are seeing the prints in Europe and saying, gosh, is that coming our way too? The ECB is going to have to hike faster. And so what’s that going to do to say, the dollar and other things as well? And when we have a relatively strong dollar, the impact that’s having on commodity prices, it mutes them. Right?
Brent
So now you just touched on something else that’s very important to understand. Okay. So if Europe is pressured to keep hiking, or at least hiking more than expected, that has the potential, again, no guarantee. Not everything trades on rates, but it has the potential for the dollar to fall more. That’s why the dollar has fallen for the last four months, is the pace of rate hike expectations. So if we already have sticky inflationary data and then the dollar starts to fall in price again, that can actually provide a tailwind for the inflation that the Fed is trying to counteract. Right. So again, it puts them in this tough spot. The other part that you just mentioned is, and this is where it gets tricky as well, is if you look over the last year, but not just last year, if you look over the last ten years, oil is about where it was a year ago and about where it was ten years ago. Natural gas is below where it was a year a you go. Huge drop off in about where it was ten years ago. Corn is about where it was ten years ago.
Wheat’s about where it would… Copper? You look at all these commodities, they’ve actually come down quite a bit from a year ago. But what has remained the stickiest is the wage data or sorry, wage inflation. Those costs, I know we’re going to talk about that at some point as well. And that could be more to do with a structural issue that the Fed has really no control over. Right. If people have, they’re retiring, they’re moving out of the workplace and they’re just not coming back. And so you have a demographic issue where there’s just not enough supply of labor. It pushes up the price of labor. That is something the Fed could influence, but not as easily as they can influence asset prices. And so, again, you get into this situation where I think everybody knows the further down the road we go, the higher the likelihood we have some kind of an event, right? Whether that’s a crash or just a volatility explosion or whatever it is, I think everybody knows that something down the road is not going to be good. Now, whether that’s six days or six months or six years from now, that’s the debate.
But I think we all know that there’s the potential for this great event. And again, if we get into Q2 or Q3 and it hasn’t happened yet, and you have this confluence of all these events that I’m talking about and in the meantime, asset prices have gone higher or at least held where they’re at, you have the potential for this bursting of this bubble, for lack of a better word.
Tony
Right? Go ahead, Tracy.
Tracy
Sorry, I had a question. So we’re seeing that two-year and five-year inflation expectations start to rise again. So what do you make of that? And what does that mean for the Fed and the Fed’s decision? Right?
Brent
Yeah. Well, I think this gets to everything we’ve just been taught it puts them in a tough spot because they’ve already… They have very clearly started to slow, right? Now, they have said we’re going to maintain and we’re not cutting and we could be higher for longer. But there’s no question that they have, at least for the last four months, have not been hiking at the same pace that they were last summer. But the worst thing for the Fed is if they’re back at 25 basis points now, or if they were to indicate that maybe we’ll have one more hike of 25 and then we’ll be done. But then you get inflation starting to rise again. I mean, that’s horrible for that. That’s the worst possible thing for the Fed and it throws their whole object not objectivity. It’s not that their repu… Not that their reputation is great anyway, right? But after getting the last couple of years so wrong, for their credibility to be challenged again is a really tough thing. And I’ve mentioned this before, you cannot underestimate, in my opinion, you cannot underestimate the influence of getting it wrong would have on Powell’s legacy. And I think he’s been very clear that he doesn’t mind having asset prices lower.
In fact, I think he wants asset prices lower. And so while I completely understand the argument for they’re going to have to cut, I don’t think he can personally take the risk of stopping hikes too soon because the risk of stopping too soon is extremely high for him personally.
Tony
I want to go back to your wages point for a minute. So, you know, when we have a company like Walmart make their minimum wage $15 and then that cascades through the economy because it doesn’t hit everyone immediately, you know, there’s a lag to that hitting the economy too, right. What you talk about? And it doesn’t just hit people making below $15. Those people who are making $15 are like, wait, I was making 15. Now everyone’s making $15. So it cascades up a little bit, right. And it cascades out. And so that takes months to hit also. Right. So that just happened in January, this impact on wages, at least for the next couple of months, right, or do you think it happens?
Brent
I think so. And again, when we get to an event, let’s call it either a credit event or a contraction in the money supply or a bursting of an asset, whatever, when we get to an event and things turn the other way quickly, then that stuff can change quickly. But until that happens, there is a tailwind for them to get worse or for the structural wage inflation for them to work themselves through the economy. And the other thing that I think many people forget this is that and I got to be careful how I say this because… I don’t want to confuse people and I don’t want people to think that I’m just absolutely bullish, because I’m not. I do think we’re going to have one of these credit events, and I do think disinflation is more likely than runaway inflation. But until we get that event, there is an inflationary tailwind, not just because of the things we’ve already talked about, but because of the higher rates. And what I mean by that is, as long as the banking system doesn’t contract and there’s not a deflationary crash, the higher rates are actually pumping more money into the economy.
Right. It wasn’t that long ago you had to go out ten years on the yield curve to get anywhere close to 4% return on your money. Now you can put your money in the closest thing to cash and get 4% on your money. So the people who have the money in their accounts are getting more money pushed into it because the Treasury has to pay higher rates. And that’s just now, kind of, again, the federal funds rate has been slowly ticking up, but some of those rates that people receive are just now resetting higher or have just started to reset higher in the last couple of months. And the further we go along without this “event”, more money gets put into their account in the form of interest payments. And that’s a tailwind because now you have more money to spend.
Right. No, the point that I just want to make is that I believe that we’re going to have this event and I think we’re going to have it sometime this year. But until we have it, there’s a tailwind. So it’s almost like it’s going to be speeding up into the wall.
Tony
How much of that tailwind, Brent, is… People have put on pretty easy trades for the past few years? And how much of that tailwind is people who have a little extra money in their account who just want to make that one last trade, right?
Brent
I think there’s a lot of that. I think there’s a lot of that. And that’s typically why it ends badly, right. If you think about an exponential curve, it goes up and up and up and up and up and up, and then it crashes and it’s because those last people are trying to get that last little trade in. And the other thing that I’ll say is I think this is really important to understand and we were talking about it a little bit before, so it’s repetitive but for the people on the show. It was last summer Q3 of last year where the yield curve inverted. Actually, it inverted just slightly in Q2 of last year. But then the real inversion took place in Q3. And at the end of Q3, we had a point where the stocks were at their lowest level in two years. The VIX was at its highest level in two years. The dollar was at its highest level in two years. And I actually at that point, I even sent out a tweet that said to probably do for the dollar to pull back. And I bought, I took off all my equity hedges and I actually bought equity calls and people were like, why the hell are you doing this?
And I said, Because the yield curve is inverted. And they said, that means there’s going to be a recession. And I said, yeah, but usually that takes twelve to 24 months to show up. And historically in that twelve to 24 months, between the time the inversion happens and the recession arrives, you typically get a run in equities. And so that it kind of goes counter. Everybody thinks higher rates, you don’t want to own equities that’s bad for growth, but in actuality it ends up that way. But in the short term it’s actually typically, historically good for stocks. And so to be honest, and I fully admit it, that trade worked, but I sold it way too soon. I chickened out because I see this wall coming, right? But had I held it for this last six months. It would have been a monster trade, but I sold it after, like, one month because I chickened out on it, to be quite honest. But that’s something that’s very important to understand. And here’s the other thing, and I’ll give you some historical context and it’ll explain two things. It’ll explain the magnitude of the run that can happen, and it’ll also explain the horrendous result that can come up afterwards.
And that is it. From 1926 to 1929… Let’s call it, from 1920 to 1926, you had seen stock prices run very high. It was like the Roaring 20s, right? And then in 1926, the yield curve inverted and it stayed inverted until 1929. And in that time period, from 1926 to 1929, the long-term US Treasury fell 30%. So if you were invested in bonds during that yield curve inversion, you lost a lot of money, just like last year, right? But guess what stocks did over that three-year period? They more than doubled. They went up 150% with the yield curve inverted for three years. And now we all know what came after 1929, right? After that last trade, to your point, pushing that last trade into the market, then you had the huge fall. We could very easily have something like that again. Now, I personally am not in the camp that we’re going to go into another Great Depression. I don’t think it’s going to play out that way, but I can’t rule it out. But it’s all of these cross currents.
It’s because I understand the tailwinds and it’s because I see this massive wall that we’re racing towards that I think right now is the hardest environment I’ve ever seen to be an investor, or at least to be an investor with conviction, I think it’s very hard. The good news, and I would encourage people to think about this, the good news is that in the last ten years, if you didn’t have conviction, it was very hard to sit on the sidelines because you got no return in your account. Interest rates were zero, but you can now sit on the sidelines, wait for clarity and get paid 4 to 5%. That’s not a horrible idea. Right. So, anyway, that’s kind of my soapbox moment.
Tony
These are all great points for it. I guess it’s just time for people to be careful. I don’t think you’re saying the sky is falling today. I think you’re saying, just don’t hold the bag. Yeah.
Brent
And I’m not saying you can’t make money. I’ve used this analogy with clients a few times to explain what I mean, because I said, Couldn’t stocks run another 15 or 20%? And I say, yeah, absolutely they can. I said, It’s like when Evel Knievel jumps over the fountains at Caesars Palace and then his son does the same thing. Well, Evel Knievel crashed and broke every bone in his body. Robbie Knievel landed the jump and was fine. Got a lot huge glory, but they did the same jump. So whether you landed well or land poorly, if you took the same amount of risk. So I’m not saying you can’t make money over the next six months by being in the stock market. I’m just saying you’re taking a lot of risk in order to do it. And if you don’t want to take that level of risk, you can sit in T bills and get 4.5%. That’s not a horrible that’s not a horrible sideshow. Right?
Tony
Right. Yeah. And just for people who aren’t familiar with Brent, I don’t know who isn’t? But he’s not a total doomer. Right. You’re not this, you know, permabear.
Brent
And I try not to be.
Tony
I just don’t want people to think you’re kind of a permabear coming on and try to spread kind of the permabear gospel. You do change your views as markets change, and this is just kind of a sober view on kind of where we are.
Brent
I own a lot of equities for my clients right now. We have participated in the run, but we have not been levered on it. And I’m not all in on that trade, but we own stocks in our portfolio. We think it’s time to be careful. We think you should have some hedges, we think you should have some cash. But we’re not sitting in our bunker just waiting for the sky to fall.
Tony
Great. Okay, that’s all good to know. Time to be very, very sober about things. You mentioned loans and interest rates, and Brent, you were mentioning some things about commercial and industrial loans. And Tracy, you’ve talked about capex, especially in energy, pretty regularly. And Brent, you were saying something about the CNI loans have risen over the past year, even as interest rates have gone up. Can you talk us through that?
Brent
Yeah. So this is kind of another part of the narrative. The combating narratives that I think people forget is many people didn’t think the Fed would ever be able to raise rates. But not only did they raise once, they’ve been raising them for a year now, and they’ve raised them aggressively. And the markets have not collapsed, to many people’s chagrin and many people said, well, as soon as the Fed starts raising rates, they’re no longer going to be increasing the money supply. Okay, that’s fair. And I know a lot of people think that the central banks just print money and flood the market with money. But where the real printing of money comes from, where the real creation of money comes from is when banks loan money. When you go down to your bank and you take out a loan, they don’t and let’s say you take out a million dollar loan, they don’t take somebody else’s million dollars and give it to you. They create it out of thin air. That’s rational.
Tony
Million dollars?
Brent
That’s right. That that’s a new million dollars that’s now in the economy that wasn’t there before. And so a year ago, loans had been coming down aggressively since COVID so they’ve been ramping up, I want to say, like in 2020, it was around $2.4 trillion. And then after COVID, they did all these PPP loans and it spiked to like $3 trillion. And then since the PPP loans, it’s just been steadily every month down, down, down. But I think it was last March or April, it stopped going down and it actually started to tick up. And now it’s been going up for a year, and so it’s up about 10% or 15% from the bottom. So that’s the creation of new money. And despite the fact that the higher rates have not yet caused anybody to go bankrupt, it’s starting to happen. And BlackRock had this happen to them with one of their funds recently. But despite the raising rates, you haven’t seen mass bankruptcies yet. And not only that, you see new loans being taken out. The existing supply of money is still there because we’re not getting the big credit contraction, and new money is being created through new loans.
And so again, you have this tailwind that’s actually speeding things up towards this wall that I believe we’re heading towards. It’s kind of part of the same thing we’ve already been talking about, but it’s just another facet of it.
Tony
No, it’s good. Some economists are going to ride in and say “that’s not technically new money.” But it is new money, right, because it’s circulating in the system and people are using it. Okay, so what drives that? I mean, it seems to me that when you have interest rates kind of steady for a long period of time, people tend to say, well, I can always put that investment off until tomorrow. But then when you see interest rates start to rise, people wake up and go, whoa, wait a minute, I better make that investment before it rises even more. Is that what’s happening?
Brent
I’m actually not an expert on this, and I don’t know for sure, but here’s my theory on it. And so I’m sure we’ll get a lot of people that tell me I’m wrong, but this is kind of how I think about it. I’ve been on record in the past as saying low rates are deflationary for the reason you just explained. If the market condition is so bad that the Federal Reserve has to resort to these extraordinary measures and pull interest rates to zero, is that really an environment where you want to go borrow a million bucks? Maybe, but that’s kind of scary, right? And so I kind of feel like low rates keep people from borrowing money and keep people and it’s borne out, if you look at these reports, that’s typically what’s happened. But if you are in an industry and you are competitive in that industry, and you want to remain in that industry, and you have not taken out that loan. But then let’s pretend as an example, you own a shoe store in Dallas, right? And you compete with a couple of the malls and a couple of the other independent sellers.
And a year ago, they took out a loan and bought more inventory and increased the size of their showroom or whatever it is. And you didn’t. But now we’re a year ahead. Market is holding up. Everybody’s going to those new stores to buy shoes. They’re not coming into your store as much. And in order for you to compete with them, you need to build a bigger showroom. You need to buy more, whatever it is. Well, now your loan costs two or 3% more than it did a year ago. And so now your question is, if I want to remain in this business and the crash doesn’t come in the next two months, if I wait another three or four months, our rate is going to be 2% higher? And so they’re kind of behind the eight ball. And so what I think happens is, as interest rates start to rise, if you need the money, you will borrow it. And we get into…
Tony
A friend who is doing a restaurant franchise who’s going who went through that exact process in terms of deciding when to take out money. It was extremely low. Interest rates started to rise and he felt urgency to get his loan locked in and got it locked in because of the change of rate, right? And the perception of the future change of rate made him so those expectations play.
Brent
I did the same thing. I bought a place in Puerto Rico last summer, and I think our mortgage is around 5%. It had been like 3%. If I’d have done it three years ago, we did it at five, and now I think they’re at six or seven. But that was part of my calendar calculation. It’s possible that rates will go higher. Now, it’s also possible that they’ll crash the three, in which case I refinance and I’ll be fine. But the point is, as money gets more expensive, if you’re going to stay in business, you need money. And so we get into this other theoretical thing where money is a gift. And I say money is a gift and good. And a gift and good is something that typically when something rises in price, the demand falls. But not with a gift and good, with a gift and good is as demand rises, price rises. Or as price rises, demand rises as well. And it’s because you just need it. It’s like this drug you just have to have. And as interest rates start to rise, you will pay more and more and more. And people say, well, if it gets too high, they won’t pay.
And I always say, okay, maybe but if high interest rates keep people from borrowing, then explain to me why Visa is in business and why loan sharks exist. They exist because even though they have rates, people need money and they will borrow at high rates. And so I think that’s kind of what we’ve seen as well. Again, I think this is all going to end, but all of this contributes to where we see markets at today.
Tony
Yeah, I think you’re exactly right. Tracy, can we change this focus of capex to energy? Because it’s pretty well known and you’ve talked about several times that energy hasn’t invested in the upstream since 2014 or something, right? So do you think that rising interest rates and there is some change in the tone of ESG speak in the US over the past couple of months? Do you think the rising interest rates may push some of these companies to start investing in the upstream, or is that just completely ridiculous?
Tracy
I’d be hesitant to say, yeah, I think oil companies are going to jump on board with this because we still have this rhetoric in the west saying that we’re phasing you out in ten years. We want you gone. And so oil companies are therefore they just don’t want to spend the money. And it doesn’t really matter what rate it is at. It’s good news. We’ve seen Vanguard leave the Zero Alliance, and we’ve kind of seen a lot of these banks kind of push back and a lot of these investment funds kind of push back on this ESG narrative. But I just don’t think that’s quite enough until we see governments really focus more on ESG. And even though, say, for example, and it seems hypocritical, we’ve seen Germany, for example, their coal usage skyrocketed in 2022 as they’re closing nuclear plants. Meanwhile, they’re pushing this green initiative. The problem is that since natural gas prices have come back down to prices that they were pre-summer of 2022, I think that they’ve become very complacent. This is how natural gas prices will stay, and natural gas prices are going to stay low.
But that’s looking at the European economy, on the other hand, the damage has already been done. We’re already seeing some deindustrialization in Germany. You have BASF leaving forever. You have a lot of smelters across the whole of EU that are just not going to come back online when they had to. In fact, a lot of them started shutting down in fall of 2021 before the Ukraine invasion. And the thing is, you can’t just reignite those glass furnaces. It takes a lot of money. You have to keep them running 24 hours, 24/7. You know, we’re just not seeing that industry come back, unfortunately. And the ironic thing is if we go back to BASF in particular, they are moving to China, who is buying cheap Russian oil.
Brent
Crazy, right?
Tracy
Because it’s cheaper to do business over there in general. But so I think at this point and we’ve also at one of that, we’re also seeing companies, oil and gas companies, in the UK, sort of because of their windfall taxes. That’s affecting business as well. And so they have decided to either leave the UK altogether we just had Suncor in Canada sell all their assets in their joint venture to BP. And we heard from Shell, Equinor, and BP all said that whatever we wanted to invest in UK, we’re not going to do that anymore because of these windfall taxes. I think that we’re running up against a lot of problems here that are more government-oriented, bureaucratic-oriented than our state central bank oriented, rates oriented.
Tony
We have had some state governments in the US push back on ESG. Right. And we did have a bill in Congress that passed that was pushing back on ESG, but there’s a veto coming or something on that bill, is that right? Governments are getting involved to some level.
Tracy
Absolutely. We have 20 states right now, basically, that are pushing back on the ESG narrative, saying, we do not want our pension funds investing based on ESG. We want our pension fund, our state pension funds, investing on what we think is going to make us money.
Brent
That’s going to make money. Imagine that. Right?
Tony
That would be a good focus.
Tracy
So there are 20 states involved in that. Texas is one of them. Florida is one of them. So that’s still kind of going through the court system at this point. And as far as this new, the amazing thing is this ESG legislation that will likely get vetoed was that it passed the House and the Senate. That’s huge. That’s a huge shift, right? Not by a small margin, I mean, relatively speaking, when we’re talking about other pieces of legislation. So the narrative is shifting in the US. So I think it’s too early to say where this is going to go, but it is definitely something worth keeping your eye on.
Tony
Great. Okay. All right, that’s good. Let’s talk about the Russian supply cuts going into this month. They’re going into this month, Tracy, what does that mean? Can you kind of put that in perspective of their overall supplies?
Tracy
Yeah, I think in general, what people expected was when they announced this and they announced this in a month ago, that oil prices were going to skyrocket. But I don’t think they were doing that to raise oil prices and stick it to the west, right. And raise oil prices that they wanted to see. What they wanted to do is narrow that spread between urals and ESPO, which are their two main crude grades with respect to Brent, because that’s how the prices quoted, European oil prices are quoted in Brent minus whatever the spread is. Right. So what they wanted to do is they wanted, after the price caps and all of the sanctions, et cetera, they wanted to, we saw those prices, those front month prices in those particular grades fall dramatically. And so I think what they want to do is narrow the spreads. And so really, that’s what I think that whole thing, that whole decision was aired for.
And then you also have to understand that Russia includes condensates, which is those lighter oils within their total oil production, whereas the rest of the world does not. And so we don’t really know exactly where that 500K is coming from. Are they those like NAFTA, or is it pure crude? And where that really remains, just so people kind of understand the market over there.
Brent
I think Tracy and I might be wrong, but you’re the expert here, but I think another contributing reason that they cut production is, to your point, in order to get that spread closer, right? Because the discount was pretty significant. Right. And a month ago, I think they announced the production cuts, and a month ago, they announced that tax revenues were falling and as a result, they were going to have a budget deficit this year. But what I didn’t see until kind of a couple of weeks ago was that as a result of the production cuts and as a result of the tax revenues falling so severely in Russia that they are changing the way taxes are calculated on Russian producers.
Tracy
Exactly. Exactly.
Brent
And they are doing and this is not going to be in favor of the Russian producers, they’re going to increase the taxes on the Russian producers to try to alleviate that budget deficit. So I don’t know that they were 100% correlated, but I don’t think that they’re unrelated. Right? In other words, if they’re going to tax Russian producers at a higher rate, and it is taxed on the difference of the spread between the west and Europe, they not only want to get the spread closer or the price higher, the discounted price higher, and then tax at a higher rate. So it’s kind of a double whammy on the producers.
Tracy
It’s a double whammy on the producers, but it’s income for the government.
Brent
Right, exactly. No, exactly.
Tracy
You know what I mean? And this is the same thing I was kind of talking about earlier on another podcast. What is interesting is that Russia is suddenly buying this huge fleet of vessels, right? So they own the vessels and they’re now insuring themselves. So the government’s making money no matter what. They’re just paying themselves. So Russia is not really losing money on this, even with the price cap and with that spread being lower. Now, if you look at and moving on to that, there was just an independent study done that assessed the international sanctions impact on Russian oil imports. And I think it was researchers from Columbia University, University of California, and the International Institute of Finance. And what they discovered is really that Russian crude oil is really selling for $74 right now, all is said and done, which is well above the $60 price cap. All we hear from mainstream media is they’re losing money, they’re losing money. But in reality and I read this paper, and I’ll post it on Twitter later if anybody wants to read this paper. It’s very interesting and it’s very well done. They essentially are selling oil above the price cap, and there’s no way to stop. There’s no way to stop.
Tony
Yeah, sanctions are great, but if there’s no enforcement mechanism, they don’t mean anything. And the Russians know that. Russia, Iran, China, they all know how to circumvent.
Tracy
Iran is the most sanctioned country in the entire world as far as the oil industry is concerned, and they’re still making money, and they’re still able to export, so.
Brent
Shows you how powerful oil is.
Tony
Right, exactly. So, Tracy, who does the 500,000 cut hurt? Is it hurting Asia more, or does it hurt markets generally, globally, just because it’s crude oil?
Tracy
Well, I think, again, it’s very hard to decipher because we don’t know what 100% is being cut. Is it all oil, or is it just these light condensates? And so I think in general, I don’t think it hurts anybody in particular, because if the markets were that worried about it, well, it would be at $100 right now, easy. Right? And so I don’t think markets are that worried about it. I also think markets are kind of let’s wait and see what this actually is. And that brings to a second point, is that right now what’s happening is that we’re having a bifurcated market, right? So the oil market, which did its thing for 30 years, 40, 30 years very nicely, trade routes were settled. We were in this crew. Now we have literally a gray market. I mean, we always had a black market in the gray market, but, I mean, now we’re talking 10 million barrels a day in the gray market, not a few million barrels wherever else. So we’re talking about a large 10 million barrels, which is approximately Russia. And this is a gray market right now, right, because they have their own vessels again, their own insurance. They’re doing ship-to-ship transfers. They’re doing all these shady stuff offline to kind of mitigate and get around Western sanctions in any way possible. And so we really are seeing this market where it’s going to be harder and harder if you’re a barrel comes here, it’s going to be harder and harder to actually track these barrels because that gray market has exploded in volume.
Tony
Interesting, you tweeted a story about some Russian crude being seized in Albania. So that’s one of the, I guess, paths to circumvent. Can you talk us through that and why that’s important?
Tracy
Well, I think that it was interesting because this is not something that, you know, again, there are offshore ship-to-ship transfers going everywhere. You know, particularly if you look off, Spain is a very big on ship-to-ship transfers, right, in Greece. I just thought that was interesting because my first thought was five minutes later, it’s going to be on the black market via the Albanians.
Tony
Sure.
Tracy
But yeah, I mean, they just happened to get caught and too bad that Albert’s not here. He could probably better explain the Albanian relationship.
Brent
It was probably him.
Tony
Okay. I guess the message that I’m getting pretty consistently and tell me if I’m wrong, these are sanctions put on by Europeans, but through Albania, through Greece, through Spain and other places, they’re circumventing the sanctions. When I say “they”, I mean people in Europe are circumventing the sanctions that their own governments put on. Have I misread that?
Tracy
No. I mean, I think that everybody’s trying to kind of find a way around the sanctions right now. And you have to remember, this only applies to seaborne Russian crude. I mean, we still have gas pipes into Europe and we still have oil pipes into Europe right now. So it’s really only seaborne crude.
Tony
So when it’s piped, it’s fine.
Tracy
Yes.
Tony
That’s amazing. Really amazing. Okay, great. Hey, guys, listen, let’s just take a quick look at what you guys are expecting in the near term. What are you guys looking for, say, for the next week? What’s ahead? Tracy it sounds like energy markets are kind of sideways for a while.
Tracy
I think we’re kind of stuck in this $70-80 range right now in WTI. OPEC is very comfortable at $80-90 range for right now in Brent. And so, you know, I think that as we move closer to, say, high demand season and we get more clarity on China and what their domestic demand is going to really look like, I think we could definitely see a push to the upside. But for right now, I think markets are very comfortable where they are, and I think OPEC is very satisfied where markets are right now.
Tony
Okay, great. That’s what events happen, though, right?
Tracy
When everyone’s coming, right? Exactly. You never know what could happen. You had what the story this morning from The Wall Street Journal say EU is leaving. I was like, what? No, they’re not. And they retracted the statement.
Tony
You leaving OPEC and all that stuff? Yeah. Crazy. Brent, what are you looking for in the next week or so?
Brent
I kind of think we’re going to continually have this violent sideways. I think markets are going to go up one day and they’re going to go down the next. And I think in general, I don’t think we’re going to get real clarity in one direction or the other until at least the Fed meeting. Possibly. We do have CPI that comes out a week before the Fed, so that will have a big impact, no doubt, unless it comes in right on the number, which in which case it will be violent sideways again. But I’m trying to just be nimble right now. Again, I don’t have any huge convictions either way right now. I kind of have my long term view while I understand the short term tailwinds, but I think it’s a time to be prudent rather than a time to try to be brave. So that’s kind of a cop out answer, but that’s kind of the truth right now.
Tony
No, I think that’s a great way to put it. Time to be prudent rather than time to be brave. I love it. Okay, guys, thank you so much for your time. I really appreciate it. This is great, great insights. So I appreciate it. Have a great weekend. And have a great weekend. Thank you, thank you.
The Week Ahead with Tony Nash brings together experts Tony Greer, Albert Marko, and Tracy Shuchart to discuss the key themes affecting the markets. In this episode, the focus is on Inflation 2.0, Market Chaos, and Russian Supply Caps.
Albert Marko leads the discussion on Inflation 2.0, and explains his view that inflation will re-accelerate this year. He talks about how various factors such as the Federal Reserve, a potential recession or slowdown, and war could impact his thesis. He also mentions the upward revision of December Consumer Price Index (CPI) and the upcoming release of the January CPI.
Tony Greer then takes the lead on Market Chaos and explains why he is bullish on metals and oil. He discusses his views on copper and explains his outlook on crude oil, which he tweeted about in January.
Tracy Shuchart focuses on Energy and the Russian supply caps. She talks about Russia’s announcement to cut production to 500k barrels per day and what this could mean for crude quotas and price caps. She also discusses the impact on natural gas.
Finally, the experts provide their expectations for the Week Ahead.
Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. And today we’re joined by Tony Greer. Tony is with TG macro. He does the morning navigator newsletter. He’s an OG with RealVision and he’s just very, very popular and we’re really lucky to have him today. We have Albert Marko, of course and Tracy Shuchart. We’re very fortunate to have both of them today. So thanks guys, for taking the time to talk with us today. I really appreciate it.
Tony Greer
My pleasure. Thanks for asking.
Tony Nash
Great. So we’re going to start today with Albert. We’re going to be talking about inflation. Albert, you’ve said several times over the past several months that we’re going to have kind of a re-acceleration of inflation this year. And we just had an upward revision of the December CPI. And of course, we have another CPI, the Jan CPI is out on Tuesday. There was a viewer question talking about kind of your Inflation 2.0 thesis.
Can you talk us through that? What are you thinking of when you think through that and when do you think it’ll materialize?
Albert
I’m looking at multiple variables at the moment. Russia probably reactivating some of the military operations in Ukraine, which I think we started to see the last couple of days a little bit. We have China reopening. The Europeans have been in a zombie state, so they’re technically reopening, so their demand is coming back. All that’s going to be inflationary, in my opinion. But the biggest factor that I see has been Yellen’s use of the TGA to offset QT.
Tony Nash
What’s the TGA?
Albert
Well, the treasury general account. So she has a big slush fund of money where she can place wherever she wants. And what that’s been doing has been helping rally the markets purely out of political reasons. And when you have a net zero quantitative tightening cycle, it’s like, what do they expect that to happen at the moment?
Tony Nash
Let me back up just for people who aren’t… So we had a Fed meeting last week. They raised by 25, they’re continuing QT incrementally. Right. And so what you’re saying is that Yellen is offsetting that QT with spending from the TGA?
Albert
Yeah, it’s exactly what I’ve been saying. I’ve been at this for quite a long time. She’s gone hog wild on the treasury bills in the recent months and that’s pretty much the reason we got a stock rally. You’re looking at the duration of liquidity, which is very, very important and nobody really wants to talk about that at the moment. So I mean, these stock rallies have gives a perception of a solid market and overall economy aiming to help the Biden administration for purely political reasons. Right. And this revision, yeah, it was revised and people think it’s an incremental revision, but it’s a 33% rise and CPI from the for the previous data, so it’s not incremental whatsoever.
Tony Nash
Yeah, month on month it’s, it’s a little bit elusive for people to understand how big of a revision this is. Whenever economic data come out, anybody who follows me knows I always say wait for the revision. Right. Especially with OECD countries, wait for the revision because they hide stuff and they leak it out in previous data, other things. And so, as you just said, Albert, there was a 33% revision in the December CPI. That’s massive, right?
Albert
Yeah. Wage inflation is spiraling out of control. We have not just the United States, but now you have the Bank of Japan reporting more inflation from their side. In fact, the Australians did the same thing. They’re having hot CPI numbers. I mean, if we have a hot CPI number coming Tuesday, I mean, it’s just not going to be pretty for equities, in my opinion. And I think that’s why Jerome Powell would soft last week, just because he sees the data and he knows what’s coming.
Tony Nash
So what is a hot CPI number to you?
Albert
I think anything above what the consensus is, whether it’s even 0.1 or .2, anything that’s sticky in the core CPI is going to be hot.
No, I mean, I was hoping for a specific magnitude, you know what I mean? As a trader, I’m like, how much higher is he expecting? And he was anything higher and I was like, 8%, 9%, 10%, what do we like? That’s all. I’m very interested. I think he’s on the absolute right track.
Albert
It’s hard because the VLS has been using different calculations and methodologies to calculate CPI. They just changed the way they weigh it, so they’re trying to keep it within a reasonable amount. But when you’re looking at fertilizers and fertilizer companies like Mosaic, and then you have nat gas spiking and then wheat spiking today, either that’s Russia ramping up military affairs in Ukraine, or there’s a hot CPI number coming, my opinion, or both.
Tony Nash
Okay. How much of a factor is like the earthquake in Turkey? Or is any of that a factor?
Albert
That’s a huge factor, Tony, because that’s going to start cutting off, that’s going to start up cutting oil supply, and that’s one of the prime components of inflation. And I’ll let Tracy get onto the details of that. But that’s one in many variables that we’re going to start looking at.
Tony Nash
Okay, when you say inflation 2.0 is coming, are you looking at say, Q2 or something when that will kind of reemerge or what’s your timing on that?
Albert
I’m thinking Q2 at this point. Originally I thought it would be in September or October, but I think the timeline definitely come faster.
Tony Nash
Okay, so what’s driving that is largely kind of energy and ag? Is that..
Albert
Energy, ag, and specifically just the market just being just rallying relentlessly, it just won’t go down. And that’s spurring commodities. Copper, oil, you name it, wheat, grains, everything.
Tony Nash
Okay, if I understand you correctly, just to reiterate what you said. We have more money going into the money supply because of the spending from the TGA that’s offsetting QT. And that money in the money supply is going to people who are driving up commodity prices, driving up equity markets, and potentially driving up real estate. Right. Because we saw some real estate numbers this past week that were not discouraging. Right. I mean, real estate isn’t dying like many people thought right now. And mortgage rates are generally kind of going down. So it seems like we have money going into those things, which is kind of the opposite of what the Feds here are trying to achieve.
Albert
Yeah, the mortgage rate ticks down just a little bit and all of a sudden the spurs on buying. So everything that the Fed has been trying to do is just not happening. Labor, housing, stocks, everything, literally everything.
Tony Nash
Okay, and so how much longer can Yellen use the TGA, does she have unlimited capacity there?
Albert
No, she doesn’t. And Congress can definitely put on oversight on that. But she started off in… Well started off, but she had about 160 billion per month just prior to the midterms. But now she’s down to about 50, 60. Yeah, but that’ll get replenished in April when the tax money comes in for the use.
Tony Nash
Okay, so it will be muted in Feb-March. But she can go guns blazing again in April.
Albert
And this is part of the negotiations with the budget, with the Republicans and the Democrats is trying to limit what she can do with the TGA at the moment. They won’t say it publicly, but they’re certainly trying to.
Tony Nash
Okay, very interesting. Okay, so for those of you guys out there, check out the treasury general account and just see what’s out there, I think that would be really interesting to look into. Okay. Anything else on this, Albert? Is inflation 2.0? Is it going to hit the US or hit, say, Europe or Asia or where do you think?
Albert
I think Asia and Australia is up first for inflation and then leaking over the United States. Obviously I don’t think we’re going to see 9.9 prints on the CPI, but steady 6-7. We definitely see that.
Tony Nash
Okay, great. All right. And then do you think that tapers off in say, Q4 or something like that?
Albert
I think so. I think it’ll start tapering off again. I think it’s going to be in a cycle.
Tony Nash
Okay, great. All right, so we just put out our I just tweeted out our Complete Intelligence CPI print expectations for the year and we think on average we’re going to be about 5.3% for the year. So we’re probably a little bit below your expectations. All right, Albert, thanks very much. I really appreciate that.
Albert
Thanks.
Tony Nash
Tony, let’s move on to you. When we spoke before this discussion, you talked about market chaos like you enjoy it. Are you having fun with this?
Tony Greer
Yeah, I am. This is the kind of trading that benefits, a more active trader, I think, like me, and somebody that’s not afraid to get flat things and take advantage of what looked like absurd price opportunities in the immediate term and things like that. So, yeah, I’m having a good time with this, Tony. I really am.
Tony Nash
That’s great. Can you talk us through kind of… You seem to indicate that you’re pretty bullish on metals and oil, so can you help us through that? And let’s look at metals first. I’ve got a chart for copper up and that price has obviously come down recently. But why are you so bullish on metal? Is copper included?
Tony Greer
Yeah. So let’s go right into it, Tony. The copper is definitely included. What got me so bullish was last year, I remember spending the whole entire second half of 2022 watching copper pound 6500 on the LME. Right? And for me, that equates to the 2017 and 2018 peak in copper, from which point it failed and faded lower and then traded down below 5k during the lockdown. So we saw the big spike to 11k, where everybody thought copper was going to the moon.
Tony Greer
All of that was essentially the lead in to the Biden Administration. That was the lead into the Biden administration. The pivot to electronic vehicle was that big copper rally to 11k and it consolidated there for the entirety of 2021. Then in 2022, copper backed off and pounded the highs from 2018 at 6500, held, and got back up above its moving averages. So when you see that and it coincides with another fairly tight physical market, another backward dated commodity, another commodity where inventories are nosediving, so you’ve got the supply side really on your side. The sort of argument against that is that China is storing and taking a lot of copper off of inventory.
Tony Greer
And my response to that is if they’re taking it off inventory, they’re probably not going to sell it anytime soon, so I don’t have to worry about it. That’s kind of the sort of one basic slant of my metal bullishness, right?
Tony Greer
And the other side of it I have in my mind, I’m fairly convinced that the dollar is going to be on a path lower this year. If you notice last year, she peaked at the Bank of England intervention when the guilt market came apart, and then she formed a lower high when Dollar-Yen got to 150 and the Bank of Japan showed up and said, “hold on, hold on, hold on. You guys kill it.” You know what I mean? That was an absolutely inexplicable FX rally that people haven’t seen in decades.
Tony Greer
So with those two central banks at the top, Tony, a curl down below the moving averages, and coincidentally, with the backdrop of two stories, number one, central bank digital currency story seems to be gaining traction. Whether we like it or not, whether it’s good for us or not, I feel like we’re going to have those and that’s going to detract from the purchasing power of the dollar again.
Tony Greer
And then you’ve got the story where it seems like Russia, Saudi Arabia, China, the rest of the BRICS are very interested in starting their own commodity markets, priced in their own currencies.
Tony Nash
Don’t get Albert started on that.
Tony Greer
Yeah, exactly. I was going to say, I don’t know if that’s a fair topic for discussion and maybe he may be a perma petrol dollar and that’s fair too. I don’t know. But I see that as a story, as sort of deteriorating credibility in the dollar, certainly. And that’s just the way I’m leaning. And it’s not something my money is where my mouth is. The dollar for me is a barometer that tells me how much wind am I going to have in my commodity sales. So I do not have any risk on in the dollar.
Tony Nash
Okay, we should actually come back and talk about that at some point in detail. Sorry, Tracy. You were saying?
Tracy
I was going to say we should also factor into this conversation the fact that we’ve had the lack of capex in the mining industry as far as the metals are concerned. That is equal to the same lack of capex that we’ve had in, say, the oil industry. So that definitely factors into the situation as well when you’re trying to transition to EVs, EV charging stations and all of these metals, even windmills as far as copper is concerned, et cetera. The mining industry again, I don’t know how you feel about that, but I just want to kind of throw that in there.
Tony Greer
Couldn’t agree more.
Albert
The only thing I have to say about the dollar moved down and up is I do agree with Tony that I think the dollar will probably go down a little bit, probably 97, 98. Right. But unfortunately, if inflation comes back, they’re going to have to use the dollar to kick it in the rear so we could see a 97-96 and then go right back up to 105 as they try to fight inflation again. It’s certainly possible. This is going to be a topsy turvy of a year no matter which way you look at it, whether it’s going to be dollar up, dollar down, commodities up, down. It’s just going to be all about the Fed and what intervention they do with inflation.
Tony Greer
It’s nonlinear chaos. Right. The curve.
Tracy
Yeah.
Albert
But this is great for a trader, for a trading. You want to see volatility.
Tony Nash
Very good. Okay, Tony, let’s let’s move into oil then. You’re also seem to be very bullish crude and and we have a tweet from you from Jan. 17 talking about crude going through its 50 day moving average and so on and so forth, talking about some serious muscle in crude markets. So can you talk us through that as well?
Tony Greer
Yeah, so that’s strictly a technical look. And to me, oil continues to make bottom formations and fail. Right? That’s what it keeps doing. We keep seeing an inverted head and shoulders, and then it kinda break the moving averages, and then we see another inverted head and shoulders. That’s even shallower than the last one because they can’t pound it any lower, and that can’t break the moving averages and we back off. And now we’ve got another situation where we’ve got another pattern that’s extremely bullish, where we just had the recent low fall between the last two lows, Tony.
Tony Greer
And that’s a little bit of tea leaves, but that formation is called a wiggle, and we haven’t traded lower since we put in that low. That was between those two lows, if you notice. And so now we’re attacking the 100 day moving average. I mean, this could be it. I walked into this year saying technically, I’m not going to miss out on the trade where crude oil goes through the 50 day, the 100 day, the 200 day, and keeps going, right? That’s the trade I’ve got a bullseye on. And if I have to stop myself out of it ten times, I’m going to be in the 11th time, I can guarantee you. So that’s how I’m looking at the world.
Tony Greer
From the supply side, the driver to me has been gasoline demand. Quite honestly, gasoline demand globally is sort of everybody’s concerned about the recession now. Not concerned about recession. I’ve traded through dozens of recessions and I have noticed that many of them don’t put a major dent in gasoline demand. So I feel like we’re set up for that type of move again, where we have steady gasoline demand. We’re able to keep this crack spread elevated at a $30 to $50 level, where they used to be eight to $12. Right. That’s the margin that a refiner makes for splitting barrels of crude into jet fuel and diesel. So with that crack spread and remaining elevated, the rest of the curve remaining backwardated, although that’s another trip that’s going to be non linear and wacky. But with inventories largely diving below five-year average inventories across the board, the demand for diesel, the demand for jet fuel. Demand for diesel was last year. This year, it seems like demand for jet fuel is really coming back quite a bit. So I just see a great supply side story, a fairly good demand side story, and I see resource nationalism everywhere I look, and that’s generally positive for crude oil.
Tony Greer
So when you line all of that up, the stars align with the technical picture. When we do eventually go skipping through those moving averages, the stage is set for it not to come back. I don’t know if that’s going to happen, but as a trader, I’m going to put my chips in that circle and see what happens.
Tony Nash
Sounds very solid. Tracy, I see you agreeing pretty violently. What else do you have to add there?
Tony Greer
Yeah, I want to hear what you’re adding, Tracy.
Tracy
No, I absolutely agree. When we talk about the supply side and the demand side, we really have to take a look at China. And I know we keep talking about the China opening story, but if we do really look at mobility data and I posted a couple of charts on this today, mobility data is up. Right. And then you also have what I think is more important is if you look at flight data and jet fuel demand, which is up once again, because we know that for Chinese New Year, we had a lot of domestic demand increase, but what we’re really looking for is international demand increase. Right. And so we’ve recently seen China flights to Hong Kong increase in full because that flight pattern was shut down. And so I think this is going to be a major forecast, and we have to realize that China has been drawing down on their stocks locally. Right? And so eventually they’re going to have to rebuy on the international market. If they’ve been depending on the stocks that they accrued since they’ve been shut down over the last year, if they’re pulling down those stocks. China is one country that is not the US.
Tracy
Let’s put it that way. They do not want their SPR to go to zero, all right? They really depend on this. And so because they’ve had to draw down on their domestic stocks, I would be looking for them to start buying on the international market again, especially when they’re getting really cheap crude oil right now from Russia. They would start buying.
Tony Nash
When do you think that is?
Tracy
I think now. They are buying now. I’ll post some charts on Twitter again, but according to Bortex data, there is a lot of seaborne crude going to China right now. We know that they get a lot of natural gas domestically through pipeline, and they’re expanding those pipelines, but realistically, crude oil is still seaborne, and so we can track that.
Tony Nash
Okay, interesting.
Albert
Yeah. Tony a lot of people sit there and criticize it like, well, China has been open and they’re not doing anything, and blah, blah, blah. But it’s not a black or white thing with China. I mean, they’re staggering their opening. They’re not dumb, because if they open just full speed ahead, they’d have a commodity inflation issue even worse than the United States would. So they are buying. And I agree with Tony with the oil bull market case, and I agree with Tracy. The supply side demand side is heavy. The Chinese are reopening and buying still. And I think oil goes to minimum 110 this year. Minimum.
Tony Nash
I love it when ours says, I agree with Tony because I’m not used to hearing that. But I know he’s talking about you, Tony Greer.
Tony Greer
That’s fine looking, Tony. Beautiful part. Yeah. The beautiful part about this market, Tone, is that you can find the opposite side of your trade. You just got to open your eyes and ears, right?
Tracy
That’s what you really need to do, because if you have a thesis, you really want to hear the opposite side. Right?
Tony Nash
Tell me about that. What is the downside thesis for oil? What is that downside thesis?
Tony Greer
Drill, baby, drill.
Albert
That’s not politically viable.
Tracy
Which is not going to happen. Which is not going to happen.
Tony Greer
Right. So that’s why you say you can get annoyed at what’s going on or you can make moves in the market, right. You can buy the energy complex and buy oil because that’s the direction it’s naturally going to go if they’re going to try to put this electric vehicle squeeze on by 2030. Right? I mean, that’s almost necessary. And almost the necessary trade is for the Bloomberg Commodity Index to go up 40% from here. If we’re going to fill all these orders to build battery packs and battery power all over the world.
Albert
The only the only other downside for oil is if the government starts playing around in oil futures and trying to sell it down just to keep it relatively safe on the inflation front, which they did.
Tony Greer
It was remarkably effective. It was remarkably effective. What they did with the SPR, you have to say, whether we like it or not, they knocked 30, $40 off the price.
Albert
It wasn’t just the SPR, though. They were sitting there selling down in oil futures in the market.
Tony Greer
They have a president’s working group that’s allowed to do that. I’m sure they are.
Albert
They do.
Tony Nash
Free market capitalism. You got to love it, right?
Albert
Yeah.
Tony Greer
Well, free market, political-driven capital.
Albert
Well, this is what Tony was mentioned this is what Tony was talking about when he said nationalizing commodities and whatnot. Of course they’re inflationary effects, but the governments only care about short term. What’s going to make my voters happy for the next election in six months? That’s all they care about.
Tracy
It’s kick the can theory, right? The Fed does this all the time. We see central banks do this all the time. Why not governments, right?
Tony Nash
Yes. Okay, guys, let’s move on to crude oil, specifically. Tracy, on Friday, we saw Russia announce plans to cut production to 500,000 barrels a day. Brent rose on the news. And I’m really curious. What is Russia producing right now? So are they at that volume capacity? And what does that mean for the crude quota and the price cap?
Tracy
Well, Russia is already producing at their quota according to the OPEC. The thing is, their OPEC quota and I won’t get into the logistics of this, but their OPEC quota is a lot of condensate oil, not straight oil. But aside from those details, we have to go in fact, Russia Euros is trading literally between $40 and $45 right now as we are speaking today on Friday. The the what date is this? I just want to make sure some people the 10 February. And so I think that you have to you know, I think what Russia is trying to do right now is try to bump up the price of oil for themselves, because I think if oil prices are higher for them, even though they are supplying less, they’re going to make more money regardless. I also think that this puts a thorn in the side to the west, because they’re trying to bump up oil prices. When Western nations are trying to push down oil prices. Right. They don’t want to see inflation go higher. And energy is a big part of that, even though central banks don’t realize that. But we have to, you know, it is a big part of the inflation factor.
Tracy
And so what I think they’re trying to do is basically say, I’m going to be a thorn in your side. We’re going to kick up oil prices. I’m also going to benefit myself because oil prices are going to go higher for me. And maybe they reach the cap $60. They’re well below then. You know, they’re still making more money with reduced volumes.
Tony Nash
Okay, so Euro trades at $20 discount, right, at this point.
Tracy
To the price cap.
Tony Nash
Right. But who are they hurting, aside from, say, India and China and a few other countries that are their traditional allies?
Tracy
Well, even if that price went up of your rails, at this juncture, China and India are still getting great deals, right? At $60 a barrel, you’re still getting a great deal. Right. You’re $20, $30 below what Brent and WTI are trading at. And so I don’t think that really matters to them. As far as am I going to lose China and India as customers, I don’t think that’s even a concern of theirs because they realize that their oil is trading well below everybody else.
Tony Nash
So I guess if they’re going to have the same customers, the China India customers generally, why does it matter? Aside from… Why does it matter to Brent that Russia has raised or capped off their production? If it’s going to go to the same markets anyway? I’m just curious. Why does it matter to the non-Euros crude?
Tracy
Because you’re taking barrels off the market, and that is the only thing the market looks at. How many barrels are you taking off the market? If you’re taking 500,000 barrels per day off the market, then these other that’s 500 barrels per day off the market.
Tony Nash
Sorry, what do they have said this before? What are they producing now?
Tracy
They’re at about 10.5, but again, that includes condensate. It’s not exactly 10.5 million barrels of oil per day.
Tony Nash
Okay.
Albert
Basically, how’s the earthquake in Turkey affecting things on the supply side?
Tracy
All right, so if we look at saline ports, we’ve taken 8885 barrels per day off the market as well. Almost a million barrels per day off the market from that specific port. That specific port was supposed to be down for two to three days. That’s looking like a lot longer at this junction.
Tony Nash
Okay.
Tracy
That’s also affecting global markets.
Tony Nash
Okay. So between Russia and the Turkey earthquake, there’s a real impact on markets?
Tracy
Absolutely.
Tony Nash
Okay.
Albert
And of course they’d probably take advantage of it. Yeah, that’s the way things work in that part.
Tony Nash
Of course. Of course. Tracy, we had some viewer questions about natgas. There were probably four of them on Twitter. What new insights do you have in natgas over the last couple of weeks?
Tracy
Well, as far as natgas is concerned, everybody’s asking when is this market going to bottom? Right? Because it’s been just a disaster since summer. We’ve seen like over 40% decline and in my opinion, really what we should be looking at right now, I think we’ll probably consolidate down here for a while. I think what we should be looking for is going into summer because what I think it’s going to happen is that we’re going to see China demand increase because they’re coming back online and cargoes that were bound for the EU will probably go to China now. They’ll outbid the EU because EU is basically full at this juncture, right. So they don’t really need the cargoes. Those cargoes can move to Asia. But during the summer, what we may see happen is increase. And we got very lucky with the EU as far as winter was concerned. And what I think will happen is during summer, if we have a particularly hot summer, air conditioning rises, that means nat gas increases. And so what I think we could see is somewhere this summer we see an increase in prices again because you have to realize that last year EU still had 50% of their capacity filled from Russia before everything went offline. That’s gone.
Tony Nash
Right.
Tracy
I would be looking towards, more towards this summer if you’re looking for kind of price increase. And generally right now I think that we’re probably going to see some consolidation down in this 2, 2.50 area, which is where it’s traditionally traded.
Tony Nash
My neighbors in Texas need more money, so let’s get that pumping.
Tracy
But the thing is that at this, the producers in Texas that their costs are higher, that production is going to drift if we stayed up long enough. So you have to think about that as far as production is concerned anyway, I mean, we are in surplus right now, but that may not last forever.
Tony Nash
Great. Okay. Very good. That’s really good. Thank you for that. Hey Tony, what does next week look like for you? I know we’ve got CPI coming out. What are you looking at for the week ahead?
Tony Greer
I’m thinking like Carl icon, to be honest with you. Tony. No, I’m serious. If you saw his options play, I guess he’s got, I guess it’s 5 billion notional of options that are struck at 40, 50 for next Friday. If you ask me, he’s looking at number, he’s looking at a couple of things. He’s looking first at I think the bond market, the credit markets in terms of the bonds and break evens in terms of yields and break evens trading higher in the last week, they have both vaulted off of the lows. So there’s been a clear turnaround in market based inflation perception. So I think that he sees that and looks on the calendar and sees CPI and PPI next week, knows that inflation is not linear in any direction and maybe is making a bet on and maybe it’s just a hedge, but maybe investing that money on the idea that we have an upside surprise in any of the economic data. The bond market tanks, stocks tank. If rates go higher, they’re going to mash big tech again and he’s probably going to be in the money and his 40-50 puts.
Tony Greer
So that’s how I’m looking at it. I’m looking to see if my portfolio of trades that I’ve got on can weather that type of storm and if I’m out of the way in certain places, if I should join him in certain places. That’s the way I’m thinking about next week, man. I’m trying to stay alive.
Tony Nash
Sounds very exciting. Tracy, what are you looking for next week?
Tracy
Continue, obviously watching the commodities markets, metals, energy, watching China data, the mobility data, flight data, see how this is moving along and we’ll see how that.
Tony Nash
We see a higher CPI, what does that do for crude prices, do you think? Do you think there’s a direct impact?
Tracy
I think you’re going to see crude prices go higher, yeah.
Tony Greer
Tone, what, the dynamics…
Tracy
Counterintuitive, right?
Tony Greer
Yeah. It’s kind of like the market speak to each other, right. Like a dynamic that we definitely saw along the way of the commodities rally as rates went higher last year. Right. Call it the whole period going into the Russia Ukraine invasion, right. It was oil straight up, but it was kind of like the credit market. I called two year yields last year the bat signal, and I named them that because they were getting out ahead of commodity inflation. We were having weeks where the bond market was getting shellac and there wasn’t much going on in the commodity markets, but all of a sudden they would pick up at the end of the week. And I think it was a lot of the time, like the bond market signaling inflation here. The commodity markets are going to go up. And I think that that’s kind of a sort of a cadence that established itself. And so it’s going to be really interesting to see how that unwinds.
Tony Nash
Fantastic. Okay. That’s a really great explanation, Tony. Thank you. Thank you so much. I really appreciate your time. Thanks so much. Have a great weekend and have a great week ahead. Thank you.
A returning guest joins us for another QuickHit talking about how the current market unknowns are affecting the economy, and what are these “unknowns” anyway? Independent trader Tracy Shuchart discusses with Tony Nash about the “buy-everything” market and why is it happening despite the worries and crashes of economies because of COVID. We’ve also looked at the crude oil market and whether it will recover or not and how? She also shares what she thinks about the regionalization and shifts in supply chain.
This QuickHit episode was recorded on August 14, 2020.
The views and opinions expressed in this 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: It feels like the markets have taken a breather this week. Is that what you’re seeing and also what are we waiting for?
TS: You notice all this entire summer, actually, that it’s been a buy-everything market. Bonds are up, equities are up, gold’s up, crude oil’s up, across the board, everything was up. Commodities, equities, fixed income, and then just starting in August about a week, week and a half ago, we started seeing some of that error let out of those sales.
Equities are still grinding higher but gold futures reached 2,089 dollars, and then came off to 200 dollars really quickly. It has stalled out over the last couple of days.
Crude oil in general, this summer has been stuck in a range. So, I guess you could say OPEC did their job. They wanted to stabilize the oil market. They did that.
Then this week we’ve seen some of the air come out of bonds. So I think, right now, it was kind of buy-everything. We had all this government stimulus, we had central bank stimulus and now we’re at the point where the government stimulus is out. The extra unemployment, PPP loans, there’s no more checks things like that. And then we have the election come up. The markets are waiting to see what’s going to happen.
TN: And RobinHood closed their api. So, we don’t know what the Robinhood traders are doing anymore.
TS: Yeah, so it just seems like there’s a lot of things that are unknown. If you look at the vix curve structure you see the kink in that November area. So, the markets are forward looking at that as an unknown. So, these next couple months might be either going to be flat until we find out or it’s going to get really volatile.
TN: Right, the one that really told me that we are in a pause is when gold turned around. When we started to see gold turning around and we’ve seen it paused where it is now, that’s really what showed me that things have changed or things have at least slowed down. And so, are we waiting for clarity around stimulus? Because I don’t think it’s earnings or anything like that that we’re looking for. It really does, as you said, kind of a stimulus-driven market. Is that really the next thing that we’re looking for?
TS: I think it’s a combination of things. Fed purchases have curtailed a tiny bit. We still have an unknown about what’s going to happen and congress just adjourned for recess without a decision. So, we won’t find out what a decision is really probably until September. That leaves a whole unknown, especially, when you’re talking about that extra unemployment.
The big thing is the election because we don’t know what the market’s going to do. If there’s a Biden win, that will only be a sector rotation in my opinion, because of what their agenda is. Everybody’s just very apprehensive right now. They are pulling back on, their involvement in the market being that there are a lot of big unknown factors out there right now.
TN: It’s really one of the only recessions where incomes have actually grown during the recession, which is weird. We’ve seen retail sales and industrial production in recent months come in and they’re actually okay. It seems like the breaks are put on that with stimulus stopped as well. The question really about being stagnant or rising? Or is there a possibility that we tip over and start to decline if stimulus isn’t forthcoming by the end of August or early September?
TS: That’s a possibility that we see a pullback in the markets absolutely. I don’t think you’re going to see anything, like we saw obviously back in February. But I could definitely see a market pull back just on people’s apprehensions of the unknown.
TN: As you mentioned OPEC and that crude oil has settled and it’s been horizontal for the past couple months. What would move that either way? Do you see airlines coming back online? Do you see major events happening that would really push the oil price up? Or do you think we’re just also in a waiting pattern there?
TS: We’re in a waiting pattern. But from what I’m seeing, the fundamentals are improving. Even though people don’t really want to see that. I look at driving patterns not only in the States but driving patterns in the world. I look at airlines and things of that nature and we are seeing a slight improvement. Everybody’s looking for a big crash in oil prices again but I don’t foresee that at this point. Unless, obviously, something fundamental changes, like the whole world goes on a lockdown again or some unforeseen event happens. But right now, the crude oil market looks pretty strong. We’re still over supply but we’re working off that oversupply. Especially going forward into 2021, when that supply really starts to be worked off, then we have a Capex problem. We’re gonna have a supply problem. I can forsee the oil prices even going higher into next year. But right now, I would say we’re stable to drift higher at to the end of the year. We are hitting that soft season. But again, I don’t see the oil market really pulling back that much at this point.
TN: Is the back-to-school factored into your expectation of rising oil prices or would that accelerate it?
TS: I believe that people will be apprehensive to send their kids on a school bus. So they’ll probably be driving them to school. That’s actually oil demand positive for me.
TN: Our view is to see oil grind higher into the end of the year. As of August 1st, that was our view as well. I’m also curious about your views on the dollar. Do you see any dramatic movements either way in the dollar or are we in the low 90s for the next few months?
TS: The market is so oversold at this point and everyone is so leaning bearish. I wouldn’t be surprised in he next couple of months if prices don’t go lower that people start to unwind those short trades and we could see not a huge spike in the dollar. But just a general unwind of that shortness.
TN: Great, okay, is there anything out there that you’re seeing that’s really interesting that we should know about? It’s late summer. People are tired. They’re not really all into work. Is there anything that you’re looking at that we’re not really paying attention to?
TS: The lumber market. I sent out a few tweets about that. I think that’s definitely something to watch because the housing market is doing better than anticipated. However, we don’t need things like extra ten twenty thousand dollars added on housing costs for new home builds. So, that’ll put a very big strain on the market and on home builders. So that’s definitely something to watch at this point.
TN: I noticed if you go to home depot, the lumber section is empty. That’s not where home builders go, but that’s what I see as a consumer is. It’s just empty. There look to be seriously obviously. There’s demand pulled but there really seems to be some sort of supply issue there as well.
TS: Yeah, there’s a supply issue. A lot of the mills have been closed like they’ve been closing for the last couple of years because the demand hasn’t really been that high, well at least in British Columbia. But with this new surge, I’m hearing that tons of mills are back up and running shifts 24/7 now. Even smaller mills that you used to do little to no business are back up and running. So, I think that looking forward October, November, we should see some more supplies.
TN: What we’ve seen since COVID from toilet paper to meat processing to lumber is real stress put on supply chains. And from your perspective as a portfolio manager and a trader, do times like this make you concerned about the stability of the U.S. economy or do these tests make you feel like the people participating in that economy are making their supply chains more resilient? Do you think people are actually investing to make those things more resilient or do you think they’re just getting through and they’ll forget about it within a few months?
TS: No, we are seeing some improvement on supply chains and moving forward. There are companies that are diversifying out of China. It’s in supply chains closer to the U.S., Mexico, Latin America. This particular incident, this COVID really made people rethink and reassess things and I think we are seeing changes. It’s not easy to move supply chains obviously, right? So, it’s just going to take some time but I definitely see in the markets where companies are changing.
