The Bank of England surprised markets by announcing that it would buy long dated government bonds in order to stabilise capital markets. Tony Nash, CEO of Complete Intelligence explains why and what does this mean for the Pound.
Transcript
BFM
Good morning. You’re listening to the Morning Run on Thursday the 29 September. I’m Shazana Mokhtar with Wong Shou Ning. Now, in half an hour, we are going to discuss the political future of Crown Prince Mama bin Salman, or MBS of Saudi Arabia, now that he’s been named the Prime Minister of the country. But as always, let’s kick start the morning with a look at how global markets closed.
BFM
Yesterday, US markets had a very good date was at 1.9%. S&P 500 up 2%, while Nasdaq was up a whopping 2.1%. Meanwhile, in Asia, it was all red. Nikkei was down 1.5%, hong Singh was down a whopping 3.4%. Shanghai and Times Index both down 1.6%, while our very own FBM KLCI was down 0.6%.
BFM
So for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us. I want to start off with moves by the bank of England that said it would move to buy long dated government bonds in order to stabilize capital markets. Can you talk us through what the BoE is trying to do and whether this will ultimately be successful?
Tony
Yes. So here’s what happened. You had some pension funds who bought debt, debt instruments called Guilt, and they used those gilts as collateral to borrow more money to buy more debt instruments. And they use that as collateral to borrow more money to buy more instruments. So they were many times leveraged on these government debt instruments. And when the value of those gifts declined, they had to provide collateral against the loans they had taken out to buy that debt. So it’s a very circular kind of series of events that’s happened. So because these pension funds got in trouble, the UK, the bank of England wanted to prevent their insolvency, of course, because many of them are government pension funds. So since the bank of England has nearly endless currency, they can help the government come to a relatively orderly decline. So is it ideal? No, but there was some messaging out from the new Prime Minister in Whitehall that was very disturbing to government bond investors and that triggered the sell off and then that triggered a multibillion pound rescue from the bank of England.
BFM
Okay, I want to stay on the topic of the United Kingdom, but us about the currency. They must be the only G seven countries still doing quantitative easing in some way. Where do you think the pound is heading? Dendu?
Tony
Well, because of the energy environment, they’re going to be spending more money on subsidies to help the British people through the winter and more pound? Denominated spending actually makes the pound stronger, but you have aggressive quantitative easing and you have a relatively stronger US dollar. It’s possible that we see the pound decline, say, 35% more, unless something dramatic happens, like another event like today or another event by the government that really erodes credibility, I don’t see a lot more decline happening, but it’s a weird year. It’s a weird few years that we’re having right now. Right. So I think on some level it’s really hard to tell. And the problem with losing credibility is that you lose credibility. And if they erode even more credibility, it could be worse than anybody thinks. So I think that’s a small chance. I think we’re probably in a range at this point.
BFM
And if we take a look over at the US, we have seen federal officials reiterate the very hawkish stance that they have. But San Francisco Federal Reserve Bank President Mary Daly said that the bank is resolute by bringing down high inflation, but wants to do so as gently as possible so as not to drive the economy into a downturn. Do you think it’s possible at this point to engineer a soft landing, or is a recession inevitable?
Tony
I think it’s possible to engineer a softish landing. I think the problem with the Feds facing as they were very slow to respond to inflation, and so now they’re trying to respond as quickly as they can, and they’re responding in a very kind of brutal kind of way. Mary Daily coming out with these as gently as possible comments are good. And that’s new. Neil Cashari yesterday said he’s another Fed governor. He said there is the risk of overdoing it on the front end, meaning that the Fed could raise rates too quickly. So some of these governors are getting out with messaging, trying to soften the Fed’s hard message over the last couple of months. So the wording from the Feds, ongoing wording generally from especially JPOW, has said that they’re going to be ongoing aggressive hikes, and that’s scaring people. So, like, the Fed needs to be less aggressively hawkish in their language. So that doesn’t mean they turn dovish. That doesn’t necessarily mean they start doing QE. They just need to be less aggressively hawkish. And that’s just toning down the language. I think it’s a little bit too little too late in as much as markets have fallen by, say, 23%, I think, since the highs.
Tony
But I think if they start inserting some less aggressively hawkish language, we can have a smoother glide path to balance, meaning higher interest rates, more moderate equity markets at a slower pace.
BFM
Okay, Tony, can you help us understand what happened today in markets? Because I’m a little bit confused in the sense that US ten year treasury yields fell the most since March 2020. On a day like this, equities shouldn’t go up, but it did. Why?
Tony
Well, I think equity investors are seeing what the bank of England did, and I think on some level they see equity markets versus central banks as a bit of a game of chicken. And the bank of England blinked. And I think equity investors are hoping that the Fed will slow down or blink. This is not a pivot. Meaning when people talk about the Fed and say a pivot, they mean pivoting to quantitative easing and pivoting to dovish language. I don’t see that at all, but I think equity investors are seeing a chance of the Fed becoming less aggressively hawkish, as I was saying. So I think that’s really what happened is just a quick breath think, oh gosh, maybe they’re going to slow down a little bit, which would be positive for equity markets.
BFM
And if you take a look at the Nordstream gas pipeline disruption, that does seem to have changed the energy calculus in Western Europe. How do you think it’s going to affect the dynamics of energy prices over there, especially with winter looming?
Tony
Yeah, I think it will affect, but there isn’t a lot of gas coming by Nordstream. There are other pipelines bringing gas to Europe, so it’s really, at the moment, more perception than reality. So Europe has a fair bit of gas and storage for winter. It’s 87% of their goal, so they’re in pretty good shape. They’re not in great shape, but they’re in pretty good shape. They can make it all the way through winter with what they have in storage, but they aren’t reliant on Nordstrom to fill their reserves further. So I think the kind of the gut punch on this is that it’s a pretty damaging leak and so it would be really hard to get it back online. If Russia say something happened with a resolution of UK, sorry, Ukraine, Russia, and there was optimism that Russia could turn on the taps again, that would be really hard to achieve. So it’ll be an expensive winter for energy in Europe. But Nordstream doesn’t really impact it all that much. It’s more, say, the long term hopes and expectations for Nordstream.
BFM
Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Really assessing what’s happening over in the UK with the actions by the bank of England overnight. That has helped somewhat to calm the plunge in the pound sterling that we’ve seen over the past few days. I think this pound has rallied, but how long this equilibrium will last, I think, is anyone’s guess.
BFM
Well, this morning pound against ringgate is 5.0260 at the lowest in the last two days, if I’m not wrong, 4.8. Right. So it has truly, truly recovered. But volatile markets ahead, I think still question marks about whether this trust economic policy makes any sense. Confusion over the tax cuts, how they’re going to pay for it, reverberating around global markets because we’ve seen actually global bond yields peak. Question about whether there will be more activities by central banks to intervene, to prop up their currencies or to restore come to their own respective markets, because we saw that in Japan. And apparently even South Korea says it plans to conduct an emergency born buyback program.
BFM
Indeed, we do see also that the yuan is coming under pressure, and China central bank has issued a strongly worded statement to warn against speculation after the currency dropped to its lowest versus the dollar since 2008.
BFM
I love the language. The language is released yesterday. Do not bet on one way appreciation or depreciation of the yarn, as losses will definitely be incurred in the long term. Can’t spell it out more clearly than that, right? Indeed.
BFM
716 in the morning. We’re going to head into some messages. And when we come back, what does long or need more? Another quarry or preservation of its forests? Stay tuned. BFM 89.9 you have been listening to.
Biden’s Saudi trip ended up being a disappointment and there really is no immediate spare capacity, which is a surprise to no one.
What does the appreciated USD mean? We’ve already seen a fall in Sri Lanka and other places which we’ve talked about for weeks, but where is that going and when will that end?
We also talked about the FOMC expectations. What will the Fed do, especially given CPI PPI data? We have to also keep in mind that we have an election coming up in November, so it’s really hard for the Fed to keep the heat on.
Key themes:
Biden’s Saudi Arabia trip 🛢️
USD🚀 rocket ship and fallout
FOMC expectations (CPI/PPI)
What’s ahead for next week?
This is the 26th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 0:49 Key themes for the episode 1:55 Biden’s trip to Saudi Arabia 3:23 PR game and disastrous foreign policies 5:00 The US President looks like he has no power? 6:17 US can be a marginal price setter for oil, but… 7:34 what happens to crude prices? 10:08 Why is USD pushing higher? 11:22 What’s happening in the Euro Dollar and why? 13:51 FOMC 19:00 What happened to the gasoline prices? 20:07 When will Yellen give up on the 2% inflation? 23:45 What’s for the week ahead?
TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. I want to thank Albert and Sam for joining us to take a look at The Week Ahead. Before we get started, please, please like and subscribe on this channel and please comment, ask us questions, let us know additional information you think we should have. We get back to every single one of those and we want to make sure that you guys are happy with what we’re talking about today.
So today there’s a lot that’s happened over the past week and even over the weekend that we want to get into. We’ve got three topics here, but there’s going to be a lot of overlap in these. So I’m just going to introduce these and then we’re going to have a pretty open discussion.
The first is Biden’s Saudi trip, ended up being kind of a disappointment and there really is no immediate spare capacity, which is kind of a surprise to no one, but it happened and we’ll cover it. Next is the US dollar, and what does the appreciated US dollar mean? We’ve already seen a fall in Sri Lanka and other places which we’ve talked about for weeks, but where is that going and when will that end? Next is FOMC expectations. What will the Fed do? Especially given CPI PPI data? And we have to also keep in mind that we have an election coming up in November, so it’s really hard for the Fed to keep the heat on when we have an election coming in November or that would be a normal election year.
So Albert and Sam, thank you so much for taking your Sunday afternoon to talk through to us. Let’s first get into Biden’s trip. Albert, can you give us a little bit of a kind of geopolitical backdrop for us? Help us understand what were the expectations and what actually happened?
AM: Well, I mean, the expectations were that Biden goes into the Saudi Arabians in the Middle East and cuts a deal for them to increase production and capacity and name your whatever little policy that they’re talking about. The reality was Biden wanted to get away from the PPI number and the CPI. They’re just atrocious. So he decided it’s a normal thing that politicians leave and go overseas so they don’t have to deal with it.
So he went over to Saudi Arabia meets MBS, which was already a problem considering the comments that he had for the election. But his goal for upping production by the Middle East and OPEC, it was a fantasy. It was nothing more than a PR gimmick in my opinion, that the Fed has been playing in futures and crushing the price of oil. So it was one of these, look here, this is what I’m doing on the grand stage and oil prices are falling, but in reality they weren’t really connected.
TN: So were there really expectations in the administration that there would be additional immediate capacity? Do they really think that that would be on the table?
AM: I don’t think so to be honest with you, Tony. Like I said, this is a PR game that they’re playing now specifically because, like you mentioned, elections are coming up and their intent is to save the Democratic majority in the Senate. The House is lost, but the Senate is what they’re eyeing up. So in my opinion, this is all PR games.
TN: Okay. But the PR game that is really hard for me to understand is the President, regardless of who it is, okay. The President going to a place that is an ally. Saudi Arabia is pretty much an ally to the US. And coming away with nothing. One would think that the Secretary of State and the Nat Sec guys, other guys would have gone in first to make sure that we could announce something positive and nothing happened.
So it seems to me that there is foreign policy disaster after foreign policy disaster with this administration. I don’t want to be putting my own view on it, but is it that, too?
AM: Of course, we’ve had just multiple disasters and foreign policy. But even from the Saudi Arabian perspective, who’s their biggest client? At the moment, it’s China. Why do they have to listen to Biden, who’s made the Biden administration has made unbelievable mistakes in foreign policy and actually risk their security more than anything else. He’s taking the foot off of the Iranians. The Saudis have to deal with that. The Russians are in their own little world of adventures, but there’s no real stability in the Middle East, and the United States under Biden doesn’t really show that there is anyone stepping up to the plate.
TN: Right. And that’s kind of a leadership issue. Whether or not the US is their main customer, the US has been their main advocate in the Middle East and around the world. Or one of their main advocates. Right.
AM: Yeah.
TN: So that’s the big loss that I see is you have a president going in, not getting an agreement with a huge entourage for agreements that should have been done before they arrived, and it just makes them look like they have no power. Sam, is that how you read it?
SR: Yeah. There’s two things that I think the US. Generally gave to Saudi Arabia, and that was global clout and weapons, right? Yes. And the second part is probably very important to the Saudis going forward because there’s only so many places that manufacture weapons that are decent, and that’s the US, to a certain degree, Russia, China and basically Turkey. So you can kind of buy weapons from those places. Guess what? That was a tool that really wasn’t flexed at all.
And if you’re going to flex policy power, that probably should have been flexed a little bit. And honestly, it doesn’t appear to have been at all. So I would say to Albert’s point exactly, we’re not the largest customer when it comes to oil by a mile. Right, that’s just true. But we are the largest supplier for their national defense.
TN: Here’s the thing that I don’t understand is, with US production, we can be the marginal price setter for global oil prices, but we pull that card off of the table by disabling our domestic manufacturers. Is that a fair thing to say?
SR: Well, I would say that that’s the muscle that we’re kind of flexing right now, right? To a certain extent
TN: Okay, tell me more about that. How are we flexing that?
SR: Well, we’re flexing it. I’m not saying it’s good flex. Right. We’re flexing it by not doing anything. So we are basically the ones holding up global price of oil. OPEC honestly has pumped exactly what they said they would pump with a little variability, and they don’t have much marginal capacity.
The marginal capacity was passed to fracking a long time ago. This is not a shocking revelation. So when you’re the global incremental supply that can flip on in a relatively fast manner and you say, we are not going to do that, period, and we’re not going to in any way supplement the regulatory overhangs and the capital overhangs, and guess what? You’re going to end up with a global shortage of oil and distillates, etc.
TN: Right. So what happens to crude prices with the Saudis saying, okay, maybe capacity in 2027? What do we see in the short term with crude prices? I mean, with a recession looming, supposedly, whether that’s real or not remains to be seen. Right. And we had a good retail sales figure on Friday, pretty strong.
So what do we see happen with crude prices in the short term? Is there upward pressure on crude prices or are we kind of in this range?
AM: I think we’re in this range of 90 to 115. Just simply because of the reality. I want to differentiate pre election versus post election. Right. Pre election, we’re definitely in a range of 90 to 115. The Feds not going to let the price of oil gets to the point where people are paying six, $7 a gallon to the tank. So that’s first and foremost.
After that, hands up. Who knows what’s going to happen then? Because Europe’s going through an energy crisis with gas. The price of oil is probably going to go up just because the green deals that the Biden administration are intent on passing are going to ramp up right at the election and just afterwards. So after the election, I could see 130, 140.
TN: Okay. Sam, any near term change in crude prices because of this? No?
SR: Well, near term, Albert’s point, $90 a barrel seems to be kind of the low here. I don’t think we’re going to go much lower. And that’s a combination of DXY at 108, which DXY at 108 is atypical to oil remaining elevated.
So if you begin to have a dollar breaking into the back half the year, that’s kind of the post election story. I think Albert would back me up on that part. You begin to see that breaking. Guess what? The scaling, that makes 130, 140 is relatively reasonable. But you call it 90 to 115. Absolutely not a problem here. And you probably creep back towards the upper end of that 150 because you’ve seen two things.
You’ve seen gasoline prices come down, which means demand is going to remain resilient, if not pick up on the margins. And guess what? That flows downhill. So I would say oil prices, gasoline prices, they look good right now. I saw a free handle on gasoline close to my house. That’s not going to last. That’s not going to beat the system.
TN: Right. Okay. So, Sam, you mentioned the dollar at 108. We hit 109 last week. Why is the dollar pushing higher, guys?
AM: I can tell you why. I’ve been adamant about this. Yellen tell the European counterparts that she was going to drive the dollar up to 110 and above. She’s done this in 2013 before. There’s nothing new under the sun. It’s part of her playbook. She knows what she’s doing. She can even go up another 10%. Now, what that does to emerging markets? Oh, God help them at the moment. But still, the dollar is the most effective tool in their eyes for inflation busting, at least short term.
TN: So how far are we going?
AM: I think we go up to 112 to 115.
TN: Okay, over what time horizon? The next month? The next three months?
AM: Yeah, I think it’s in the next month. I think they want to get this over and done with so they can pivot starting September. Stop the rate hikes. And on top of that, this is something for Sam that could talk about the Fed is I think that Powell probably loses the majority of votes in the Fed for Fed members come October.
TN: Okay, hold on, hold on, hold on. I want to talk about that. But let’s finish up with the dollar first. Okay? This is good. Okay, so with the dollar, help me understand what’s happening in the Euro dollar markets right now. Okay. We’ve seen the Euro dollar fall as the dollar rises. What’s actually happening there, and why.
SR: Not me?
AM: Okay.
TN: Yes.
AM: I’ve been adamant about this. Also, as global trade slows down, the need and use of Euro dollars becomes less so. And a lot of people sit there mistake that as the dollar is dying and gold is coming back and whatever name your crypto, that’s supposed to be the next reserve currency. But that’s just the reality of the moment, is they are purposely trying to kill demand. When you kill demand, the Euro dollar starts to fall because there’s less need of it. That’s just the most simple basic explanation that I can give you at the moment.
TN: Okay, so, Sam, that is non US demand in US dollars, right?
SR: Yeah. Dollar denominated non US debt.
TN: Okay. And so the largest portion of the euro dollar market. Is that still in Europe?
SR: No, it still flows through Europe. Right, okay. But it’s a much larger market than simply Europe.
TN: Okay. It tells me outside of the US, there’s a slow down generally. Is that fair to say?
SR: Yeah.
TN: And we’ve talked about this before. Europe has big problems. We saw China’s numbers last week, which are obviously overreported anyway, so Japan is having problems. So all the major markets are having issues. So the Euro dollar is just a proxy for what’s actually happening, those markets through trade and through the demand for actually US dollar currency spent outside of the US.
SR: Correct.
AM: Yes. Very simplistic terms, yes, that’s exactly right.
TN: Good. Anything else for the viewers here? Like, anything else that you guys want to add on Euro dollars just so they can pay attention to things?
AM: Not really. It’s a very good just simplistic, basic understanding of Euro dollars. I mean, we can get into the whole mechanics of your dollars, but it’s so big it’ll take up an entire episode.
TN: Okay, good. Very good.
SR: Very into the weeds very quickly.
TN: Good.
AM: Yeah.
TN: So if anybody’s watching has questions about Euro dollars, let us know. We’ll get Sam and Albert in on this and help them answer the questions. All right?
Okay. Finally, FOMC, okay. We saw CPI hit to the high side. We saw PPI hit to the high side last week. A lot of talk about 100 basis point hike. Sam had a newsletter out that said could be 100, could be 75. And Albert obviously thinks that there’s going to be a pivot in September. So Sam, do you want to kick this one off?
SR: Yeah, sure. I do want to point out that I said there’s a difference between should and will in the newspaper, and the notion was, should the Fed go 100 now? Will they? Probably, unless the University of Michigan survey comes in light. And it came in light. So you’re 75 basis points now. It’s that simple.
TN: Okay.
SR: Very straightforward. The Fed probably wanted to have flexibility for 100, but when they tied themselves to something so stupid as the University of Michigan survey and it falls I mean…
AM: You know what, Sam, the funny thing is that you say that is, that is exactly what they look at, for making their policy decisions. The only thing they look at.
TN: University Of Michigan.
SR: I know they look at it. The problem was they said it out loud. Like, you don’t say that out loud. That’s the mysterious parts of it. It’s a survey of a very small subsection that is basically never been tied to reality at all across any time frame whatsoever. And like yeah..
TN: It’s like making policy based on Atlanta GDP now. Right. It’s like a lot of these things are proxies of small survey sizes of whatever.
SR: Error terms that interact with each other, yes.
TN: Right. I think a lot of people who watch markets see these indexes, like the University of Michigan index come out and they think that it means something, but it kind of does, but it kind of doesn’t. And so I always recommend people, you have to understand these indexes. You have to understand what these releases mean. You have to understand the methodology. If you’re going to make investment decisions based upon these things, you have to understand what they are.
And as you dig down beneath these things like University of Michigan was put out what 30 years ago initially. The methodology hasn’t changed much since then. So if you imagine the technology and the capabilities 30 years ago and they carried that forward, it’s pretty light. It’s pretty light. A lot of these things are pretty light.
AM: Yeah, but they want it like that though Tony. They don’t want to update their stuff because they don’t want transparency. Seriously.
TN: It’s true.
AM: If you want to massage the numbers, you go with what you know, what you know is flawed and that’s what you go with.
TN: Right.
AM: I had a quick question for Sam. Like I said, I think that they’re going to pivot in September after 75 basis point rate hike now and whatever CPI coming in in August. But I don’t think this is the right decision for them to pivot this early because they’re expecting demand to come down and I see no demand coming down anywhere at the moment. So what happens if they sit there and try to pivot for September, October, November, election time and then January, December comes along and demand is sky high again? What does that do to inflation for 2023?
SR: I think it’s complicated, right? Because it’s kind of the goods versus services problem going into the back of the year. Right. We’ll have plenty of goods, print, crap on store shelves and Target for toys and whatnot because that part of the supply chain is solved.
What’s going to be persistent on the CPI price is going to be shelter, which we all know is six months lagged and is going to be a problem for the rest of the year. And there’s nothing they can do about that because their methodology is, again, stupid. So there’s nothing they can do on the prints from here out.
They’re going to have prints that are sitting at 30 basis points plus just because of shelter and it’s weight in core, that’s going to be a big problem for them on the CPI front. So if they pivot, they’re basically going to have to say that, you know, look at headline, it absolutely plummeted. Gasoline.
TN: Will we get a core rating, x Energy, Food and shelter? Will we start quoting that?
SR: Yeah. That’s what I started looking at for the exact reason of trying to find a pivot. Because eventually that will be the metric that they are forced to go to if they want to pivot. It’ll be SuperCore and guess what you call it supercore.
SuperCore doesn’t look that great right now, but it could look pretty interesting if you begin to have gasoline coming down 40% month over month with what the next one is going to say or 25% month over month. So you’re going to continue to have some volatility on the headline CPI front, which is basically what the Fed is going to have to look at in order to pivot.
TN: Okay, so can I ask what happened with gasoline prices? We still have 94% or whatever utilization. Crude prices haven’t come down that much. So why have we seen a 30% fall in gasoline prices over the past three to four weeks?
SR: Recession fears?
AM: Yeah.
TN: That’s it. Okay.
AM: Yeah, pretty much exactly. It’s just the narrative of recessions coming and trying to kill demand based on that. It’s just like I said, PR games, nothing more.
SR: The one thing that I want to point out that I think is really important to kind of consider for Albert’s point of a pivot is equities tend to move in a six month precursor. And what you’ve seen since July 1 is an absolute rip in home builders and a relative squashing of utilities.
And if people were betting on a longer recession in a longer Fed cycle, XLU would be the buy and homebuilders would be the short. And that has simply not been the case so far.
TN: Very interesting, Sam Rines.
AM: When do you think that Yellen this is for both of you, when do you think that Yellen gives up on the 2% inflation number and says 4% is the goldilocks level?
TN: Sam Rines you first. It’s a great question.
SR: I don’t think they go 4%, but I think they say, and they’ve begun to do this, if you go back over the last six months of speeches that 2 to 2.5 is fine.
AM: Still it’s going to be higher.
SR: They’re creeping it up. Right. I don’t think it’ll be 4%. I think between two and 3% is a reasonable target, blah, blah, blah, given and they’ll go into things like because of the way that we measure CPI, 2 to 3%, blah, blah, blah. There’ll be some.
AM: Fun times.
TN: I think if they did that, Albert, I think it would be after the election.
AM: Oh, of course. They’re not doing anything that’s going to trip up Operation Save the Democratic Senate, you know what I mean? They’re just not going to do that. Right?
TN: Yeah. I think people are already really upset about inflation. Companies are starting to report or expected report numbers down, their earnings down, and so it’s hurting everybody.
AM: Yeah, but everything they’re doing is just going to make inflation worse in 2023. But it’s going to come back with a vengeance because unemployment is still unemployment is going to start ticking up, because…
TN: It’s not an election year. Nobody cares because it’s not an election year.
AM: Stimulus checks will flow again. It’ll be fun.
SR: The one thing, again this goes to Albert’s point on, will a potential September pivot be a mistake? Pepsi’s report this week showed a 1% organic volume growth and 12% pricing. They put 12% pricing and consumers and had volumes creep up 1%. Guess what? If companies can get away with that, they are going to all day long, and they will in fact, make a fortune on the back side of this.
AM: Of course.
SR: Paying attention to that demand destruction has not crept through yet. If you can push that kind of price and not have volumes fall, guess what?
TN: Well, the biggest thing, of course, and this is a no brainer, but prices are not going back to where they were. They are not going back to where they were. This is not a temporary inflation thing. And it may have started that way, but the way we responded to it was completely wrong. And it just baked in these supply side things that flowed all the way through to the retail side.
AM: Wage inflation alone. Wage inflation alone.
TN: Yeah. But I think we’re going to see more on the, say, low, medium side of wages. I think in order to keep up with a 12% price hike in Pepsi, you’re going to have to see more action on the wage side.
SR: Granted, that was mostly free online. That was mostly salty snacks. And it might have had something to do honestly, it might have had something to do with more frequent gasoline stops. You buy more chips. But I wouldn’t read too much into that. Right. I do think that their ability to push price is pretty good.
TN: Great.
SR: Yes. To your point, it’s a step function in pricing and therefore it’s a step function in inflation. Great. Okay, guys, 60 seconds. What do you see for the week ahead? Albert, go.
AM: Commodities. Rebounding commodities. I’m long wheat. I think there’s problematic globally for wheat. I want to see wheat prices start to track back up, to be honest with you. Same thing with oil.
TN: So soft and energy.
AM: Yeah.
TN: Okay. Sam?
SR: Yeah. Watching the inflation trade, honestly, and I think it’s very similar to Albert’s point on oil. And wheat, I’ll be watching the relative sector distribution pretty closely here, looking for those like XLU versus the housing guys versus some of the other trades to see what people actually putting money to work are really thinking, not just by them.
TN: Very good, guys, thank you so much. Thank you so much for taking your Monday afternoon. Thanks, everybody, for watching our late week ahead. And guys, thanks. Have a great week ahead.
We had a chop last week. And towards the end of the week, we had the CPI print, which put a damper on markets. In this episode, we’ll talk about CPI and peak inflation, which people have been talking about for months, but we haven’t quite hit it yet.
Of course, we’re going to talk about the hot dollar, and we’re going to talk about fuel inflation and things like refining capacity and even a nat gas plant explosion that happened here in Texas last week.
And then finally, what is going on in the week ahead?
Key themes:
CPI & “Peak Inflation” – Core CPE, hand off from goods to services, Fed policy and markets.
Hot dollar – DXY has only been higher in Feb 1985 and Jan 2002. Fed, Dollar, Yellen, etc.
TN: Hi everybody. And welcome to The Week Ahead. My name is Tony Nash. We are with Tracy and Sam today. Albert is in an undisclosed location, so he won’t be joining. But we’ll have a good show anyway. So before we get started, please like and subscribe. And as importantly, please comment. We really appreciate those. We respond to all of them. And it’s great to have the engagement.
This week. We had chop, as Sam talked about. And towards the end of the week, we had the CPI print, which really put a damper on markets. So we’re going to talk about a few things. First, CPI and peak inflation, which people have been talking about for months, but we haven’t quite hit it yet. Of course, we’re going to talk about the hot dollar, and we’re going to talk about fuel inflation and things like refining capacity and even a natgas plant explosion that happened here in Texas last week. And then finally, what is going on in the week ahead?
So first, CPE was all of the focus for the last half of the week. Sam put out an amazing note, a couple of amazing notes this week talking about inflation and what the Fed will do. So we’re looking at a chart right now on core CPI. And Sam, can you walk us through why the core matters and what’s happening there?
SR: Sure. The core matters because it strips out food and energy, and that’s what the Fed likes to look at. Right. That’s what the market looks at for underlying inflation dynamics generally. It’s kind of a quick and easy number. Luckily, it’s accelerated by some marginal amount on a month over month, year over year basis. Cool. Nobody should really care about that, because when you break apart the actual numbers, the entirety of the deceleration and core inflation was in the good side. We know that goods are coming down, particularly on a year over year basis. They want skyrocket and to the right, that’s just not sustainable.
TN: Is that because of the inventories that were accumulated at retailers and other folks.
SR: That’s part of it. Used cars as well. There’s airline fares are in there, too. So that’s going to be somewhat of a problem as we move forward.
The interesting thing to me is when you actually dig into it. Yeah. Core goods accelerated, but core services, which are far stickier and far more difficult for the Fed to kind of get a hold of accelerated.
TN: Right. So let’s put that up now and then. Yeah. So we’ve got your chart up now about the commodities, less food and energy and then services, less energy. So can you help us understand what that means?
SR: Yeah, sure. That’s just call it the core CPI broken into services and goods. Right. So it strips out food and energy from both of them. And then you kind of get a more of a feel of what’s really happening in the underlying economy. And there was always this big debate among economists about when this hand off from goods to services was going to happen and how that was going to affect the economy. And unfortunately for the Fed and for market participants, that hand off is happening.
You can see it in the data and you can see it in the inflation data in particular. It’s happening. The problem is that you don’t have goods coming down fast enough and you have services moving up way too quickly. And those two components are unlikely to give the Fed any sort of comfort in the next six to nine months.
TN: Okay. With services moving up, does that mean that wages, say on the lower end around things like hospitality and restaurants, does it mean that those wages are going up?
SR: Not directly. There’s some implied probability that you’re beginning to see some movement there, but you’ve seen quite a bit of movement at a leisure and hospitality in particular in terms of the wage gains there.
Unfortunately, the wage gains can be pretty large in magnitude, a 5 to 9 percent type acceleration year over year in leisure and hospitality wages. But it doesn’t really move the needle in terms of overall wage gains because those tend to be the lower end of the income scale.
TN: Okay. So I saw some data this week looking at credit capacity, and it looks like US consumers put record amounts on credit cards in April and May. Does that make you nervous? And I’m not talking about the high end of consumers. I’m talking about the middle and lower end of consumers because there’s a lot more of them. Right. Does that make you nervous?
SR: Yes. And it goes to the conversation that Tracy and I are going to have in a little bit here. A lot of it is due to gasoline. Right. You don’t go to a pump and typically pay with cash. I mean, you did that 10, 15, 20 years ago. You typically go to the pump and pay with a credit card.
So when you begin to have prices like this, move this quickly on the pump side of things and grocery side of things, you tend to have a move up in credit card usage that’s translating to debt because you simply don’t have wages keeping up. Yes, wages are ticking higher, but they’re not keeping up. So the lower end of the consumption, called the lower two quartiles, they are struggling with this, and that is going directly on the credit cards.
TN: I’ve talked to a few people this week about how wages in developed economies work. And if we were in an emerging economy, middle income economy, there would be more flexibility on wages because wages rise faster generally in those economies. But in, say, the US, wages really don’t rise fast.
So on some level, it’s a bit hard for people to understand that wages in the US are generally inflexible, especially at the lower and middle ends. And so it is kind of zero sum. Right. So as gas and food prices rise, that takes away consumption from other areas, right?
SR: It does. And the other thing that it leads to is more of a trend towards unionization and other forms of labor activism. And you’re going to continue to see labor activism if wages continue to trail this far behind inflation. That is an underlying trend that I think is going to be somewhat important for understanding how markets react because labor was fairly cheap, give or take for US businesses in particular.
If you begin to have more unionization, if you begin to have more of an activist labor movement, that is going to be a thing to corporate earnings, not just for the next year. That’s going to be a thing for corporate earnings going forward.
TN: Okay. So let’s talk about corporate earnings. As we look at, say, Q2 corporate earnings, it doesn’t look good, right? I mean, generally the expectation is that their margin compression, all this other stuff really starts to sting in Q2 Is that right?
TS: It depends on the industry as well, because what we’re seeing and what I’m hearing as far as obviously oil companies are going to do extremely well so are refiners right now. But we are also seeing the hospitality industry do extremely well as far as travel is concerned, because we’re seeing a lot of pent up demand where people are not spending retail spending, but they’re still spending for trips.
If we look at US air bookings, for example, there are 93% of 2019 levels for Europe. We’re at 95% for South America. We’re at over what we were in 2019 to the Caribbean. And we’re also seeing soaring hotel bookings right now, even with cost pushing higher and ticket prices higher. So I think that Q2 is going to be very good actually, for, say, oil and gas and the hotel industry. But then as we move into Q3, I think we’re going to see a big hangover in that area in the fall.
SR: And to Tracy’s point, hotel bookings are above 2019 levels and the average price of those rooms through the roof. So you multiply those two together to get your average room rate and Occupancy, those are some big numbers that we’re going to see over the summer. To Tracy’s point, there’s going to be a lot of people that blow it out of the water in terms of earnings, and there’s going to be a lot of people that surprise the downside.
If you were a work from home darling, that was expecting work from home and those dynamics to be permanent and you’re in trouble. Right. That’s the target problem. People aren’t buying goods. They’re going places. And the bifurcation there is going to become stark as we move through the second quarter and probably into the third quarter.
TN: Really interesting. Okay. And then I guess the question that is probably overanalyzed, but people are waiting for is what does this mean for the Fed? They’re still on target for 50 in June, 50 in July and 50 in September. Is that your assessment? And maybe 25 in November? I think.
SR: 50 in November, 50 in December.
TN: 50 in November, 50 in December? Wow. So we’re going back to the 90s.
SR: Basically fully priced in the market.
TN: Is there any chance that they will accelerate beyond 50? Like, would they front load any of that just to shock the system?
SR: No, because I don’t think they want to shock the system. The Fed already has a credibility problem. If you move from 50 to 75, you create more of a credibility problem because you forward guided 50-50, and now all of a sudden you’re telling the market you’re doing 75, the market is just going to stop believing and they’re going to push the Fed and they’re just going to push back and it’s going to be a huge problem.
So I don’t think they’re surprised on that front. They may tweak the balance sheet. That’s a little bit of an easier move to make. Right. You can speed up the MBS role. You can pick up a little bit of the front end roll on US Treasuries, you can tighten that way and have it not be as much of a shock to the system.
TN: Okay.
SR: But have it be pretty interesting on the tightening front.
TN: Okay. But let’s dig into that, though. I’m sorry to spend too much time on our first topic, but if they accelerate the MBS stuff, housing is already kind of at a standstill over a two month period. Two to three month period.
A lot of people have had wealth effects because of the rapidly inflated house prices. So if they accelerate MBS, that perception of housing wealth collapses even more. Right. And so does that have relatively like a multiplier effect on the deceleration of consumption?
SR: It does. But that transmission is pretty slow generally, and you had a significant amount of call it front running against the housing market to take out equity. So I would push back a little bit on a collapse in transactions is going to have a big effect. What you really need to see is pricing actually coming down because it’s about pricing.
TN: Pricing coming down.
SR: Yeah. And pricing. The data is so delayed that it’s almost worthless.
TN: Nominal housing prices.
SR: Yes. But you’re still seeing housing prices hold up pretty well for most of the country. So until you really begin to see a crack there, I don’t think the wealth effect really takes hold from houses.
But you’re probably talking about a September, October type time frame for home prices to be weighing on people’s minds.
TN: Okay. It feels like over the past few months things have changed pretty dramatically. Expectations and these sorts of things. I know you’ve been talking about this for months, but I think the world is just catching up to it. And two months ago everyone said, oh, it’s all priced in. And then we get a day like Friday where obviously it’s not priced.
SR: I’ll stop after this but the interesting part about Friday was it wasn’t just call it the November December meetings getting priced higher for Fed rate hikes. It was March and May of next year that also saw pretty significant volumes and saw the pricing of the Fed movement get pushed pretty hard. So you’re seeing movement across a very long time horizon.
You’re talking twelve months out is kind of what people are pushing on now. So that really creates a different dynamic. But it’s a different dynamic to have eight or ten basis points priced in in September or November. It’s a bigger deal to have quite a bit of tightening priced in for December and March. Those are some out months those begin to really move markets on the margin.
TN: All of this in a midterm year. All of this in the midterm election year.
SR: It’s really painful all around, right? It’s painful all around. But I think the Fed kind of plays second fiddle to Tracy’s point on energy and how that flows through the consumer and the consumer psyche because that is critical at this point.
TN: Okay. So speaking of second fiddle let’s move on to the hot dollar and Fed playing second fiddle to Janet Yellen as Tracy has said before. We’re looking. At DXY that is the third highest it’s been ever it was very high in the mid eighty s it was very high in I think February 2002.
We’ve got that chart up now and now it’s hitting rates that it hasn’t hit for years so we have the Fed doing certain things to tame but we also have things like crude and other commodities that are rising in dollars. Terms. And it looks like the dollar is being pushed up to fend off some of that. So, Tracy, can you talk us a little bit through your view of kind of Yellen and her dollar bias and then impacts that you expect to see.
TS: She said since the beginning she wanted a strong dollar. Right. The problem is that right now this is a disastrous recipe for emerging markets right now with high energy prices and high dollar. And it’s no wonder we’re seeing huge outflows in emerging markets right now as far as investments are concerned. And so really that’s who’s going to feel the pain the most that could throw us to a global recession, for sure.
TN: Right.
SR: To that point, Europe is in a lot of trouble, and the Dixie is basically a measurement of euros and yen. That’s right. If you want to talk about a central bank that’s lost credibility, there’s none better than the ECB and Madame Lagarde and that wonderfully stupid speech that she gave this week, it was spectacularly bad.
TN: It’s what happens when you have a lawyer running monetary policy.
SR: They’re raising rates, and we have them, too. Anyway, moving on. So there is an interesting kind of dynamic there where you basically had the ECB for the first time in forever, say we’re going to raise rates like they just told us straight up they were going to do it and they got the wrong reaction across markets.
The currency didn’t go up. The currency didn’t strip. The currency looked pretty ugly that day. And then you’ve got yen sitting at 135 because they’re still doing yield curve control and it doesn’t look like they’re ever going to end it. So you have the Fed going in the exact opposite direction or much quicker than the rest of the world. In the DM world in particular.
That’s a recipe for a stronger dollar. And until you either get the ECB to smarten up or you get YCC brackets moved, yield curve control brackets moved by the bank of Japan, there’s no stopping the Dixie from moving higher. Right. It’s a two currency, two currencies basis.
TN: Remember Abenomics, when they were fighting to get 2% inflation in Japan.
SR: Yes.
TS: They’re still fighting. That’s why you can’t see inflation, it’s incredible.
TN: Yeah. Tracy, if we continue to see the dollar strengthen, do you think that has much impact on, say, crude prices and fuel prices?
TS: I know that everybody likes to think it’s a one to one correlation. Right. We think stronger dollar commodities. But it’s really not a one to one correlation, especially when you’re talking when you have actual supply demand issues. Right. Like we have a supply deficit across. So a stronger dollar is not going to hurt oil prices when you have real supply demand issues. Whereas if you look at something more like gold, the stronger dollar is not necessarily great for gold right now.
TN: Yeah. So I love it when people like talking about correlations of oil and dollar because many of them don’t realize that actually the positive correlation between oil and dollar is more frequent than many people want to admit, and it’s more persistent than many people want to admit.
So the kind of go to there’s a negative .9% correlation between oil and the dollar. It’s just not true. It’s a fiction.
SR: And the dynamic changed when the US became a major producer of oil.
TN: Right.
SR: That completely changed the dynamic. So if you’re not paying attention to the structural breaking system where the US became the world’s largest producer of hydrocarbons, you don’t know what you’re doing.
TN: Right. So who hurts the most? I think we mentioned EMs, but kind of who hurts the most, aside from Sri Lanka, which we already know? Is it like North Africa, those types of places? Is it Southeast Asia? Just off the top of your head, we didn’t rehearse this, so I’m just curious, what do you think hurts the most?
TS: I think you’re going to see a lot of problems in Africa for certain only because a lot of the OPEC producers there are struggling themselves already. Right. All of those people are the ones that are contributing majorly to the quota misses right now. So I think you’re going to see real pain there over Asia, I would say.
TN: Okay, Sam?
SR: Yeah, I would agree with Tracy. North Africa, East Africa, those look very vulnerable, particularly when you combine food costs with gasoline costs and oil. It’s kind of a toxic mix because if you have oil at 125 Brent, there’s an incentive that you want to pump and the people expect you to pump and buy them food. And if you can’t pump and buy food, then you’re basically an illegitimate government in North Africa.
TN: Right. Which is just trembling all around. Okay, let’s move on to energy prices and gasoline and petrol prices. Of course, we just hit this week again, I think three or four times this week we hit record prices for gasoline. And of course, that’s happening all around the world.
I think in the UK it’s £2 a liter or something like that. In the US, it broke $5 a gallon on average. I think 5.01 this morning, Patrick Dejan was saying that. Tracy, can you walk us through? We’ve mentioned this a couple of weeks ago, but in a bit more detail about what’s happening with refining capacity in the US and why this is such a big deal?
TS: Right. The last largest Greenfield project that we had was 1977. We’ve had a lot of brownfield projects, meaning adding to capacity to already existing refining facilities. However, right now we sort of peaked in 2018 and 19 as far as refining capacity is. And now we’re starting to come down again because we’re starting to see more closures, we’re seeing more unplanned outages.
These facilities are very old. So the operable capacity has been on the decline for the last few years. And if you look at Europe and Europe, it’s even worse. Right. So, I mean, Europe already has a problem, too, and that’s why they buy most of their diesel from Russia, which is going to affect them, because the diesel that they buy from them is seaborne. Right. All of it, which it falls under sanctions.
TN: And they can’t get insurance for those vessels.
TS: Yeah. And so they’re going to have a lot of problem. just to put a little tangible example, there’s a news here in Houston this week that I think it’s a Lyondell refinery that’s being closed, and that refinery is over 100 years old. Yes, our refineries are old. They’re aging facilities. They need a lot of maintenance. And we just really haven’t built out enough capacity for the amount that is coming offline over the last few years.
TN: So, Tracy, I know this is a little bit of a request, but we’re sending $40 billion to countries around the world to do different things. Would it not make sense to have some sort of government incentive for midstream companies to actually build refineries?
TS: Well, yeah, absolutely. I mean, infrastructure projects as far as the oil industry is concerned. If you look at the government’s complaining about oil companies are making so much money. However, where were they when they were in the red and racking up the debt? They were nowhere. How many times do we bail out the Airlines and the auto industry? The oil industry never got any help.
TN: Because they’re bad, tracy, oil companies are bad. They’re all my neighbors. But you would think they’re all bad, evil people.
TS: This is causing… Where our refinery operable at capacity? We’re at 94.2% refining right now, which is off the charts. Good. That means good news for your refining stocks if you own any. But we’re pushing it. We’re using it as much as we’re producing. Right.
TN: Let’s say somehow people came to their senses and said, look, we need to incentivize new refineries. How much just off the top of your head? Ten, $20 billion. Is it $100 billion? Just to get things started? How much do you think that would cost? Since we’re throwing money around.
TS: Since we’re throwing money around, I think if you could throw 10 billion, 20 billion at it, you could get some good projects going or tax incentives or something like that for current refineries to be able to build out or upgrade things of that nature. There’s a lot of things the government could do to help boost refining capacity.
TN: Okay. So while we’re throwing money around, would it make sense to reconfigure some of those refineries to refine light sweet Texas crude instead of, say, I don’t know, Venezuelan crude?
SR: Yes, it’s pretty simple. We built the right type of refining for a certain point, but we didn’t build the right type of refining for now. Yes, we would need to upgrade all of them, and it’s going to be a pretty significant issue.
The other really important thing that I think gets overlooked a lot is that even if you begin these projects now. It’s not a solution for several more years. By several more years, three to four at a minimum, kind of where you would expect these to begin to come online.
And the question is, what does the oil market look like at that point? What kind of mix do we have? So you have to make some fairly large assumptions about what your input mix is going to be down the road. So, yeah, I do think that it would be worthwhile to at least upgrade the current refineries, but I think that’s kind of a pipe dream.
TN: Okay. So while we’re throwing $40 billion overseas, we could take half of that and build new refineries and reconfigure refineries with American crude oil. Am I misunderstanding this?
SR: No.
TN: I just want to hammer the point home again. Okay, great. Thank you, guys. We had a really choppy week. We had a lot of kind of bad news come out. What are we looking forward to next week? Is it kind of more the same? Are we still in a really rough place and the Fed meetings this week, some announcements. I don’t think it’s going to surprise anybody, but what else are you looking for this week?
TS: Pretty much the same. I think we’re kind of stuck in this market low for a while now. So I figure you still see chop, you probably see oil sideways to up again. I expect that trend to pretty much continue into the summer until we really start to see some demand destruction, which we’re just not seeing enough yet.
So I think headed into fall, we have a better chance of seeing oil prices come down because again, I think that we’re sort of going to have a travel hangover and everybody’s going to get home and they spend a bunch of money on their credit cards and the economy is not that great. So that’s what I’m looking at. And again, for the week ahead, I think more of the same.
TN: Sam?
SR: Yeah, you have a million meetings next week of central banks. I think that’s really what the markets are going to key off of. And it really depends who says the most dumb stuff. And it’s going to be a competition because you have Powell and then you have the Bank of Japan. So we’ll see if maybe you get a little bit of a bracket move on yield curve control that would make things a little more spicy across markets. And we’ll see what Powell is capable of messing up when it comes to forward guidance during the press conference.
So I would say it’s more the same, but there’s a likelihood that markets are about as hawkish as they can be going into the meeting and that Powell doesn’t want to push markets more. So there may be a little bit of a rally off Powell just not being an uberhawk, and that might be positive, but I would say you’re in for some serious chop, particularly across the rates markets, currency markets.
And when it comes to equity markets, I think it’s going to be exactly what Tracy and I talked about earlier. It’s going to be the story of travel over retail.
TN: Okay? So next week, let’s talk about who said the stupidest central bank statement. Okay?
SR: Perfect.
TN: You got it.
SR: Does that work?
TN: Very good. Okay. Thanks, guys. Thank you very much. Have a great weekend. And have a great weekend.
This past week, we had a flat S&P 500. Nasdaq was up slightly. Bond yields were up slightly. It was a summer stall this week. Not a lot happening from the beginning to the end of the week. In this episode, we’re going to focus on geopolitics.
Key themes:
Is India a geopolitical trendsetter?
China, MBS & Biden – BFFs?
What does Turkey get out of halting NATO expansion?
What’s ahead for next week?
This is the 21st episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 1:36 India as a geopolitical trendsetter now? 3:55 US is frustrated with India? What’s going? 7:35 Is India being ridiculously nationalistic? 8:00 China, MBS, and Biden as BFFs? 10:08 How does MBS look at Biden with China opening up? 11:31 Awkward and Desperate: Is the US-Saudi a short-term diplomatic issue? 14:45 Is there any place they can go for energy supply? 16:00 What does Turkey get out of halting the NATA expansion? 20:20 What impacts on some countries by opening the Bosphorus. 21:22 What is DC thinking and do out of the gun discussions? 24:24 What to expect for the week ahead?
Listen to the podcast version on Spotify here:
Transcript
TN: Hi, and welcome to The Week Ahead. I’m Tony Nash. And as always, we’re joined by Sam, Albert, and Tracy. Before we get started, could you please like and subscribe? It’s very important. But here’s what’s more important today. If you could comment on the episode, we would appreciate it. We check that stuff every week. If you disagree with us, if you think we’re full of it, let us know and let us know why. Okay.
So this week, this past week, we had a flat S&P 500. Nasdaq was up slightly. Bond yields were up slightly. Kind of a summer stall this week. Not a lot happening from beginning to end of the week. So we’re going to focus on geopolitics this week.
We’re looking at a few things. Is India a geopolitical trendsetter now? That’ll be a really interesting discussion. Second, we have China, MBS, and Biden as BFFs. So let’s see what’s there. What does Turkey get out of halting NATO expansion? Really, Turkey becoming a real geopolitical linchpin. And then we’ll have a quick chat on what we expect for the week ahead.
So first is India as a geopolitical trendsetter. India recently has halted some commodity exports. They’ve done some deals with Russia for energy, and they’ve been really independent. And India’s typically independent with foreign policy. But I’m curious if we can look at, say, the energy deals first, Tracy, can you help us understand a little bit about that, and what is India doing there?
TS: Well, I mean, absolutely. First of all, India has been complaining about oil price and saying that it’s unsustainable for them for months now, right. As we’ve been over $100. And so when they were typically not really buying anything from Russia.
However, after the Ukraine invasion, then we had that discount. The Euro to Brent discount fell to almost $40 at one point. So India started buying a lot of oil from Russia, obviously, because it’s less expensive. And they said outright energy security is more important to us right now than anything else because they are also having issues with coal. And whatnot really that’s their focus right now.
And so what we think is that likely they’ll probably become a semi permanent customer of them and probably will take in about 500,000 barrels per day going forward. So what is coming off of the European market is actually going to India and China.
TN: A lot of Westerners don’t understand that India and Russia or the former Soviet Union have had a long political ties, longtime political ties, and those long term political ties tend to come up when people need friends. There is a connection between India and Russia that a lot of Westerners don’t understand.
Albert. I guess the US tends to do this very binary. You’re with us or against us. And I would imagine that the White House and State Department, if we actually have a State Department, that they’re a little bit frustrated with India. What’s going through the US’s mind with the India relationship right now?
AM: Well, this is basically goes back to Obama, actually, with his animosity towards Modi. But the Biden, State Department and the DoD just have this naive idea of how things work in the world. India, like you said, the Russian ties with India are long standing because they use them as a counterbalance against the Chinese aggression. Right.
If you look at a map, because I always say this on Twitter, look at a map before you start talking about geopolitics. India’s surrounded by Pakistan, China, all these other proxies to China and Russia. So they can’t afford they can’t afford to sit there and poke the Hornets nest in the region because it’ll just come back at them. I mean, Pakistanika starts things in Kashmir.
The Chinese have been building mountaintop air bases to stress India over the watershed in the Himalayas. There’s so many issues that the Indians have to deal with and balance that with their Western counterparts, animosity with the dealings with Russia. It’s not that complex if you sit there and talk about it for 15 minutes. But for some reason, our State Department just can’t come to grips with that. And it’s actually causing quite the damage of the state relations of United States and India right now.
And you can talk about the Chinese component and how they stress India because they’re a major competitor in the manufacturing sector.
TN: Right.
SR: And not to mention that India has always been a very large importer of energy. And it’s a critical part of their development going forward. And they’re a 1.1 billion population. If you begin to have significant problems with energy prices and food prices, that’s a big problem for a democracy in that part of the world.
And not to mention, I think it’s somewhat hypocritical for the US government to be so mad about them buying 500,000 barrels a day when you still have Europe buying oil and gas every single day and being like, well, maybe we’ll be done by the end of the year.
TN: Right.
SR: The number of hypocrites that just keep coming out. Is India really our friend? It’s like, well, it’s Germany, it’s France, Italy.
TN: Those are valid questions.
SR: I mean, to me, it’s a little bit insincere for us to continuously be pounding on India for trying to survive as a democracy. It doesn’t make a lot of sense.
TN: Well, you conveniently overlook the fact that India regularly imports energy from Iran. Korea places like Korea regularly import energy from Iran. The State Department and White House regularly just overlook things conveniently because they want to. Right. But when it comes to Russia, for some reason, it’s a major issue.
So one quick thing I want to talk about with regard to India, and this has happened with some other Asian countries where India stopped exporting sugar and a few other commodities. We saw Indonesia stopped exporting, say, palm oil and a few other things. So this has been kind of painted as some sort of nationalistic action.
My contention has been, look, a nation state has the kind of obligation to look after their own people first. What do you guys think about that? Is India being ridiculously nationalistic by not exporting sugar and a few other things?
AM: Absolutely not. I mean, this is a case of survival, not just for India, but for multiple countries. Egypt recently, Morocco and all the other North African countries are following suit. I mean, they got to feed their own people. You can’t have your own citizens miss meals because pitchforks and torches start coming out.
TN: Yes, I think that’s a perfect way to say it. Okay, let’s move on to kind of a little bit of a crazily, delicately balanced series of relationships with China, MBS in Saudi Arabia, and Joe Biden. There’s been talk of a trip of a Biden trip to Saudi Arabia, which is a little bit awkward given the fact that MBS wouldn’t take his phone call last month. And then we’ve got China as energy importer. There are a number of levers there.
So, Sam, actually, Tracy, can you take us down that path a little bit on the energy side of what happens there and why that is so important?
TS: Well, I mean, I think it’s a thing. Relations have already been strained. Right. So I think it’s too little, too late. And second of all, to go ahead and think that Saudi Arabia or OPEC, for that matter, can lower oil prices in the US or lower gasoline prices in the US is completely misguided. We should be focusing domestically on what we can be doing here instead of banking other countries.
TN: Let me stop you right there and ask the refinery capacity is like the highest it’s been in 20 years or something, right? 92.4% or something.
TS: Yeah, it was 92.7% this week. The prior week was we were at 93.4%. So we’re pretty much at we’re cranking it out. We definitely need more refining capacity going forward. We haven’t had a major refinery built since 1977. Brownfield projects, but not real Greenfield projects.
TN: Okay. Going back to the Biden-Saudi visit, Sam, what are your thoughts on that? And if you can throw a little bit of China analysis, if China is actually opening up. How does MBS look at Biden with the potential of China opening up more aggressively?
SR: I think he looks at it as a little bit desperate. Right. And probably wants quite a bit out of doing anything. And to begin with, Sunny doesn’t have that much fair capacity. There’s not a whole lot they can do very quickly, maybe release some stocks, et cetera, but there’s not a whole lot they can do to get oil on the market quickly. And there’s a lot less that they can do to magically make diesel.
We don’t have the amount of diesel out there that we need. And we are building a refinery, and a refinery takes three to five years to build. So good luck with that. So I think it’s going to smack is a little bit desperate to MBS, and I think there’s going to be a pretty good bargaining spot for him to be in, given that China has largely shut down for a month and a half to two months, maybe reopening, and that’s going to be another tailwind to oil consumption.
And if you all of a sudden have higher oil consumption coming out of China, that’s going to be a problem for oil prices, even from $1.20, $1.15 where we’re sitting right now. That’s a tailwind that I think MBS kind of has a little bit of a grin on his face saying, hey, nothing I can do here.
TN: Right? And tell me a little bit more about the political dynamics there. Does the US and Saudi Arabia, is this kind of a short-term, say, diplomatic issue, or is it something longer term?
AM: Well, you and Sam said two key words, “awkward” and “desperate.” At the moment, Biden going to Saudi Arabia to meet with the King, which was rejected, so they’re actually pushing them off to MBS is such a black eye to the United States foreign policy. Unbelievable. I mean, at this point, you’re going to have Joe Biden go meet with MBS, who Biden’s cabinet brought up Khashoggi not too long ago, which prompted the phone call to be not even taken by the Saudi, leader of a US President. I can’t even remember when last time US President was ignored by the Saudi Arabians. I mean, it’s a disaster in the making that will probably take a good ten to 15 years to rectify.
The Saudis, what are they really going to do? A couple of hundred thousand barrels extra in a pump just to make Joe Biden happy? It’s not going to do anything. I mean, swallowed up by demand almost instantly. But when it comes to the political stuff, you have a realignment between Saudi Arabia, Russia and China happening right under our noses. And it seems to be just completely missed by the State Department of Biden administration.
SR: And to Albert’s point here, and I think it’s an extremely, extremely important point. Saudi doesn’t need the US anymore. Saudi needed the US for a while. We were their biggest customer. We are not their largest customer by a mile, and we’re unlikely to be their largest customer ever again.
So their pivot towards Asia and away from the US makes strategic sense for them. And that, to me, is an understated long term fundamental issue facing the US-Saudi relationship.
AM: That’s exactly right, Sam. And the only other component that actually contradicts that is because of the security situation between Iran and Saudi Arabia, the Saudis need US armaments, they need the relationship with Israel, and they need to re-mend relationships with Turkey. But if Russia at this point, if they’re not poking the Iranians to mess with the Saudis, there’s really no real desperate need by the Saudis for the US defense umbrella at the moment and they can just be free to sell to the Chinese, the Asians and whoever else. And remember that Biden attempted to go to Venezuela to try to get them to pump more, but then realized that while their refinery is broken down and can’t really produce anything at the moment.
SR: So the Arabians went to fix it.
TN: Yeah.
AM: There’s a lot of hypocrisy and a lot of awkward things that’s coming out of the Biden administration right now for geopolitical issues concerning the Saudis.
TN: It’s amateur hour, guys. Lincoln is a joke, often as a joke. I can’t believe it’s embarrassing where we are right now. Tracy, is there any place else they can go for supply right now?
TS: If you look at OPEC, OPEC can’t even produce what their current quote is, right? Because you have too many, too many laggards. So it doesn’t really matter. I mean, they’re 2 million barrels plus below quota last month. So it doesn’t matter if they keep raising or not. They just don’t have the spare capacity. And a lot of the smaller countries are having problems with production.
There’s nowhere else to go. Right. Especially if you’re trying to push Russia out, which is, depending on the month, the second or third largest producer. Right.
TN: Okay. And I think we can all agree that if we just buy electric cars, that would solve everything.
TS: Oh, absolutely. With the announcement that we’re going to have rolling blackouts in the Midwest this summer, I’m sure that rush right out and get EVs should help us.
TN: Right? Exactly. Okay. Let’s move on to Turkey and get really interested in the power dynamics with Turkey right now and their veto power over NATO expansion and some of their control of energy going through the Bosphorus. Turkey has really emerged as a real regional power.
I remember reading about this with George what’s his name’s book the next 100 years, reading that Turkey would be really powerful. This was a 20 year old book. Right. George Freedman. Right. And so it hasn’t happened exactly as he thought. But at the time I thought, “no, Turkey can’t reemerge.” And it’s happening right now. Right.
Albert, can you talk us through what does Turkey get out of halting NATO expansion?
AM: Well, a few things actually, quite. They really want to stop the Kurdish money system support system coming out of the Scandinavian countries because that’s where a lot of the money and support groups based themselves out of Stockholm and parts of the Baltic area. So they really want to stop that. Right. But that’s not really what they’re after because the Scandinavians put a block on their sales of arms. Right. So the Turks obviously want to sell their drones.
They want to sell some military equipment to the EU and to other players in the region. The Turks, they have a big economic problem. Right. And so they’re using every point of leverage they possibly can use. They’re trying to press the EU to give more loans, trying to stress the refugee situation, trying to stress the energy situation, trying to stress the food situation through the Bosphors. And I’ll let Sam and Tracy touch on that.
But for them right now, if you look at it like I said, with India, look at a map. Turkey right now is arguably the most geostrategic position in the entire world right now with concerns to wheat, gas, oil, refugee status. You can just pick a topic and Turkey is pretty much top five.
TN: Okay. Sam talked us through kind of from a macro perspective. What does that mean? What opportunities does that bring up?
SR: I mean, it brings leverage, right? It brings incredible amount of leverage, particularly as you begin to have Sri Lankan type issues. Go to North Africa. The easiest way for North Africa to solve its problems is for Turkey to solve the problems very quickly by opening the Bosphorus or doing something along those lines. So I think from a macro perspective, it’s really about leverage and what type of leverage they want. Right.
They actually manufacture really good, fairly cheap drones. That’s a pretty easy thing for NATO, the EU, to kind of give them a pound on the back and say, okay, yeah, go. Right. That’s something that they can actually do. And quite frankly, if you’re Sweden and Finland, guess what? You don’t really have a choice.
Turkey is going to be selling drones. Turkey is going to have some leverage on what they get to do, and you’re not going to be able to veto it or you’re going to be sitting there like a sitting duck for the next time that Putin decides he wants a little extra territory.
TN: Right. Okay.
AM: And to expand on that, Tony, the Turks, in sort of cooperation with the Iranians and the Russians, have been moving into Africa using old Ottoman trading post colonies, I mean, through West Africa, North Africa, Horn of Africa, everywhere. And there’s been absolutely no talk about it, no counteraction against it. They’re acting as if they were a major superpower with no one really putting them in their place.
TN: Well, this potentially could turn into I don’t know how much you guys know about Ottoman history 1860s, 18870s, debt load that the Turks had and the refinancing that the British and French came in to do it. And I wonder if that’s where we’ll be in five or ten years. It’s really interesting to see how that Ottoman history played through and see if that happens again with Turkey. I hope it doesn’t, because that ended up leading to World War One. But this could be really interesting.
Tracy, they opened the Bosphorus. What impact does that have on some of these countries, like Egypt and North African countries and say, Lebanon and some of these other countries that are really desperately waiting for some things out of Russia and Ukraine?
TS: Yeah. I mean, obviously that’s going to help. We’re going to get some wheat out. It looks like that is going to happen and that we are starting to see shipments flow that’s obviously going to ease tensions. Hungry people tend to revolt. So something needed to be done, in other words. And so it looks like that’s starting to happen, which is obviously a good thing.
TN: Great. Okay. I want to spring a kind of a surprise topic on you guys just really quickly. It’s a big debate in the US since we’re talking geopolitics. Guns on top of everyone’s mind. Some shootings in the States over the past few weeks.
Albert, I know, you know, DC probably better than all of us. So can you walk us through really quickly? Excuse me, what is DC thinking? What will likely happen in DC out of all of the gun discussions?
AM: Well, because it’s an election year, probably nothing. And I’ll tell you what. In politics, you cannot take a singular issue, isolate it and solve the problem. It doesn’t work like that. So, for instance, and this is something I always stress about. When you look at guns, you have to look at it as what voters intentions are and feelings are with the guns because they’re electing their members. Right.
When you have guns, they’re typically rural Americans that are religious, that have views on abortion and are farmers. Right. What’s under farmlands? Oil. So not only do you have to tackle the religious voter, the anti abortion voter, the rural farm voter, but then also big oil that actually funds all these people. So you can’t take guns alone and say, I’m going to solve it without agitating another 40 million Americans and Senate races are completely dependent on rural voters, not so much urban because that tends to go Democratic anyways. But there is actually swing cities and swing areas on top of the conservative areas that there’s a political calculation and numbers game that has to be played.
So for this year, I don’t see anything happening with guns at all. Maybe something extremely minor, but nothing that would actually be effective.
TN: For people who are non Americans, what do people outside of America not understand about the gun discussion in the US?
AM: It’s a cultural thing. The United States prides itself on being a system of checks and balances. Right. And for guns, Americans tend to think we are not going to let our government intrude and overtake us. That’s our checks and balances to dictatorships. Right. Authoritarian systems.
As other issues come up from the left and come up from the right, just everyone’s going to get more pulverized on this. There’s never going to be 100% solution. The Europeans are definitely not going to understand why Americans love their guns. But it’s just…
TN: Europeans, Australians, Asians, they don’t actually some in Asia get it.
AM: Some in Asia get it. The Swiss hilariously get it. They’re mandatory. They have Pentagon, everyone’s. And it’s unfair for the rest of the world to compare a small country of like, say, 10 million people statistically to the United States that has 350,000,000 plus people out there, the giant system.
TN: Yeah.
AM: We’re doing our best and nothing is a perfect system and we’re getting towards it. But it’ll take decades.
TN: Yes. Okay, good. I just wanted to cover that off since it’s been such a big topic lately. Okay, guys, the week ahead. We had a kind of a lackluster week this week. Tracy, what do you see happening in the week ahead? Crude actually had a fantastic week. What do you see going on next week in, say, energy and commodities?
TS: I’m still bullish energy and commodities. From a technical standpoint, we broke out of a technical pattern. Right. I don’t see anything changing, in other words, in the physical landscape, I mean, markets are tight. We have a structural deficit. The whole complex is in bacridation. So I expect energy prices to stay high. Really? I don’t think Biden’s meeting is going to do anything.
TN: Right. Okay. Very good. Shannon, what are you looking for?
SR: More chop. A lot more chop. I think the jobs report on Friday, there was a quote that it was goldilocks-ish it was not goldilocks-ish if you’re the Fed. The Fed saw a lot of jobs created. It’s a participation tick up and it’s average hourly earnings still sitting at 5.5% for everyone on a year over year basis. Those are three things that they don’t really want to see sitting that high.
TN: Right.
SR: It’s that simple. They would be much happier with 100,000 jobs created or lower. I think they want a couple of negative prints. An average hourly earnings that’s closer to 2% year over year. That means that the wage price spiral isn’t happening. And they really want an awful lot of call it pain in the inflation space. So you’re not really seeing anything to knock the Fed off of its current path. And if anything, you probably gave it a little bit of a tailwind to some more hawkish rhetoric.
Brainard being a Hawk? That should scare everyone. Because when Brainard comes out as a Hawk, that’s a signal.
TN: That’s weird.
SR: That’s a signal that they’re going and they’re going hard.
TN: Yeah, that’s upside down world weird. And then was it May said out yesterday saying they could do another fifty in September?
SR: Yeah. After the print on Friday, guess what, this is the best part about the Brainard statement is she said in order to have a better balance in the labor market, they need to see job openings decline.
This is critical, though. Job openings are reported a month lagged to everything else. Right. So in September, they’re going to be looking at maybe August.
TN: Let me ask you this. Elon Musk was out this week saying, hey, if you’re not going to come back to the office, we’re going to consider that you resigned. Are we going to see more CEOs do that? And could that potentially have an impact on the jobs numbers?
SR: Not really. One, Musk, then he said we’re over staffed by 10% across salaried workers. So the statement for Musk was probably more to get some natural attrition. So we didn’t have to actually lay off people because it’s a lot cheaper when people quit than it is when people get laid off. And Musk needs a couple of headlines because his Twitter deal was a really dumb idea.
TN: Yeah. And also I kind of preempted Musk by two years. I told my staff in June of 2020, but if you don’t show up, you could resign. So I was early on that boat. So Albert, what do you expect in the week ahead.
AM: Everyone saw Yellen come out and say I missed the inflation and how bad it’s going to be. That’s her getting ahead of the CPI print. It’s going to be a bad one. I think it actually could get close to 9% which would be not good for the markets.
On top of that Opex Fed minute coming up, I think we’re going to be like Sam said, I think there’s going to be some chop. They’re doing their best to keep this thing above 4200. So I think we’re going to be looking at probably push 4250 which is a bull bear line this week until CPI print comes in and then Armageddon.
TN: That’s what you said last week.
AM: That’s a 4200 on that Monday on futures.
TN: Okay.
AM: They tried but they sold it. Everyone’s just selling.
TN: Okay. So we have another chance this week.
AM: Yes.
TN: Great guys. Thank you very much. This has been a great discussion. Thanks so much and I really appreciate this. Have a great week ahead.
This week, we saw commodities skyrocket then drop off. We saw crude oil hit levels not seen since 2008, with gasoline and home heating prices on everyone’s minds. The nickel market broke the LME. Chinese tech and real estate bloodbath. And – despite all of this – Janet Yellen assured us there will be no recession in the US. Quite a week.
As we said last week:
– Tracy called for commodity price volatility – across sectors
– Downside bias in equities with high volatility. Albert predicted 4200-4250 and pretty much nailed it.
– Sam said a Fed rate rise would become boring and talk of QT would disappear.
This episode we talked about mostly the energy commodities with the continuing Russia-Ukraine conflict. Can the US use other alternatives like the West African oil to replace Russian oil? What are the politics around Venezuelan oil and why is it the same as getting Russian oil?How about uranium — and can the US produce it and will the conflict affect rare earths? Is this war the reason for the US’s inflation? How will inflation actually play with voters in this year’s US election? Lastly, what’s happening in Chinese tech and real estate and why there’s a bloodbath and for how long will this continue?
This is the tenth episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I appreciate if you could like and subscribe to our YouTube channel. And also please know that we have a special offer for Week Ahead viewers for CI Futures, which is our market data and forecast platform. CI Futures has about 800 assets across commodities, currencies and equity indices and a couple thousand economic variables. We track our error. We have very low error rates. So we’re offering CI Futures to Week Ahead viewers at a $50 a month promotion. You can see the URL right now. It’s completeintel.com/weekaheadpromo. That’s a 90% off of our usual price. So thanks for that.
So these week, guys, we saw commodities skyrocket and then drop off. We saw crude oil hit levels not seen since 2008. With gasoline and home heating prices really on everyone’s minds. The nickel market broke the LME, Chinese tech and real estate. We saw a blood bath there. And despite all of this, Janet yelling assured of us that there will be no recession in the US. So it was quite a week.
So let’s look at last week. Tracy called for commodity price volatility across sectors. So it wasn’t just an oil call, it was across sectors. And we saw that in spades. We talked about a downside bias in equities and high volatility. Albert predicted a 4242 50 range, and he pretty much nailed that. And then Sam said that a Fed rate rise would become pretty boring and talk of QT would kind of disappear. And we’ve really seen that happen over the past week. So, well done, guys. I think we need to really focus on inflation this week. Inflation and quantity prices are on everyone’s mind. Energy is the first kind of priority, but it’s really come across, like we said, nickel and other things.
So, Tracy, let’s start there. We have a viewer question from At Anton Fernandez, Russian oil, if you don’t mind helping us understand the environment for Russian oil and what’s happening there and some of the alternatives, which we’ve covered a little bit before, but also West Africa. Is West Africa viable within that? So if you don’t mind talking to us a little bit about what’s happening in the crude market and also help us with a little bit of understanding of the context of West Africa.
TS: Yeah. So if we look at the crude market in general, what we have been seeing, we’ve seen sanctions from Canada, which is basically political. They haven’t bought anything since 2019. We also saw Australia sanctioned oil, but they had only bought a million barrels over the last year. It’s nothing. The US only 600,000 bpd. That is nothing. And UK is going to take a year to get off oil because it’s 11% of their imports as opposed to 2% of our imports. That said, what we are seeing in this market is a lot of self sanctioning. Right.
So we’re saying we have nine Afromax Russian oil tankers basically sitting aisle because they can’t get insurance and nobody wants to pick up oil right from them. Actually, what is most surprising right now, I have to say, is that looking at Asian buyers, everybody thought that Asian buyers because it would be offered at such a discount, they would be buying this stuff up like crazy. But there was just an auction for SoKo, which is a very popular grade with South Korea, China, Singapore and Hawaii, and there was literally zero bids.
TN: Really? Wow.
TS: The next auction that we need to be looking for is ESPO, which is the most popular grade for China refiners. But if we see a zero bid there, that would be indicative of saying that we’re taking a lot of brush and barrels.
TN: Chinese we’re not seeing any interest there, at least so far.
TS: Right. Which is quite incredible because the Chinese have always decided to be apolitical. Right. And they don’t recognize Unilateral sanctions and they have stressed that. So whatever sanctions that the west has, China says we don’t care about that. We saw that with Iran as well.
TN: Right.
TS: But it’s pretty incredible to see this particular auction go at zero bid. Right. In regards to looking at West Africa, I’ve been talking about this since 2020. Niama is a very interesting place. There’s been a lot of offshore activity there. And so I think that is a place to be looking for. The problem is that looking at offshore projects, they take it’s a seven to ten year timeline, as opposed to something like Shell, which is six months to 18 months. But yes, there’s definitely opportunity.
TN: So is West African crew substitutional with Russian crude?
TS: No, it is not.
TN: Okay. So is it lighter, that sort of thing?
TS: It’s lighter. It’s lighter crude oil, what we’re looking at right now. And this is exactly why the US went to Venezuela and said, we’ll be willing to lift sanctions with you as long as you only sell us oil.
TN: Right.
TS: And the funny thing is that they have a very good relationship with Russia. The problem with this sort of relationship is that we could inadvertently be buying from Venezuela that is actually Russian oil.
TN: Sure. Exactly. So it’s an interesting point on Venezuela. Albert, what are the politics around that we just pick up the phone. Does Lincoln just have a conversation with Venezuela? We send a deputy sect down there, do a deal. How does that work? And is that palatable?
AM: No, it’s not palatable. It’s an absolute joke. Like Tracy said, the Russians have their tentacles all over Venezuelan oil, that you would be self sanctioning yourself from Russian oil globally, but then buying from Venezuela, which is going to be mixed because everybody in the industry knows that if you want to mix oil, you do it in the Caribbean, especially from sanctioned oil from overseas. So it’s not palatable. It’s a joke. I don’t understand what they’re trying to do. It’s just a Wally world at this point.
TN: I guess the thing that I’m continually astounded by is the diplomatic actions of the US administration from Anchorage through this week with Venezuela. They just seem to be tripping all over themselves. What am I missing? Like they just seem to be eroding credibility by the day. Is that fair to say?
AM: It’s more than fair. They’re throwing spaghetti at the wall and seeing what sticks based only upon their little echo chamber of ideology. And it’s extremely naive ideology when it comes to geopolitics or what they’re doing right now.
You can try to erase Russia and go play and then think that you can go to Iran and cut a deal with Iran, not understanding that Russia is going to sabotage that deal. Right. Like they did just today.
TN: Tight diplomatically. While we’re on this this week, the headline said that the UAE and Saudi declined having talks with Joe Biden this week. Is that true? Is the headline the reality of it? And from the time Biden came into office, he was not friendly to Saudi Arabia. So is this payback from that?
TS: No, I don’t think so. Sorry.
AM: Actually, I think it is that it is payback because you have the Saudis and the UAE that have security concerns with the Houthis and the Iranians. And if you’re sitting there approaching the Iranians playing all nice with them, what do you think MBS is going to do?
TS: I agree with Albert on that respect. I just want to interject that the OPEC + Alliance has mainly tried to stay apolitical. Right. So just because the United States says OPEC produce this much more, Saudi Arabia and UAE, which are both the producers that can produce more than the rest, had come out this week and said no, we’re in this alliance and this is how it is, which is totally understandable.
AM: Yeah, but Tracy, but the problem is OPEC saying that is one thing but not taking his call.
TS: No, I agree with you. I agree with you that we have burned bridges. I’m not disagreeing with you here whatsoever. I’m just taking a different kind of look at this.
TN: Sam, what’s your view on that? I’m not hearing you.
SR: Can you hear me now?
TN: Yes, sir.
SR: I would say the naivety of believing that you’re going to have a JCPOA deal or you’re going to be able to have some sort of comeback in terms of Venezuela. So you add the two of those together and who cares relative to what you need to replace Richmond Oil? I mean, it would be great and fine, whatever, but it’s nowhere near enough simply. Right. But it’s also a political naivety to believe that you’re going to have that type of dialogue and you’re going to have it quickly.
TN: Right.
SR: On the front of Saudi and UAE, I would say it is both an OPEC Plus. We’re not going to blow this up before it blows up on its own from the call it the allies of OPEC. Plus.
It’s also the UAE and Saudi is saying, remember, you want to be friends with us, US.
TN: Yeah.
SR: Don’t pretend you don’t want to be.
TN: Right.
SR: So I would say it’s politics in the best possible way on that front. And on Iran, JCPOA, and Venezuela, it was wishful thinking to think that the Russians were going to say no on both fronts.
TN: Well, and the Chinese. Right. I think there are a number of Venezuela has relationships with both Russia and China.
TS: That’s all I was saying is that OPEC is not going to give up that plus alliance. They’re going to try to stay apolitical. Right. Whatsoever. Do I think that the United States is pushing OPEC to Russia and China? Absolutely. Do you see the huge deal that Saudi Arabia made today? Absolutely. Right.
So they’re looking at investing further into China because they are being pushed away from the United States. So agree on that aspect. But I’m just trying to say that they do try to stay apolitical. If you look at the history of OPEC, Iran and Saudi Arabia have been able to subsist cohesively in the OPEC alliance, regardless of the years of them being enemies and having proxy wars against each other. That’s all I’m saying.
TN: Okay. Let’s move on to the next thing. There are a couple of questions about commodities, Tracy, and let’s just cover these really quickly. We have a question about uranium from @JSchwarz91. Will the US ban or will Russia restrict its uranium and could the US actually start producing uranium on its own? Is that a possibility?
TS: The US won’t restrict uranium. It hasn’t restricted uranium because we actually buy a significant amount of uranium from them. It’s easy to say we can skip 600 barrels per day of oil, but not as easy to do with uranium. We’ve stayed away from that.
Will Russia decide to not sell to us? Again, it’s about money, so probably not unless we really push a button in there. Can we produce that amount of uranium in the United States? Absolutely not.
TN: Interesting. Okay. Let’s also move on to rare Earth. So we have a question from @snyderkr0822. He’s asking about the impact of Russia and Ukraine on the availability of rare earths. Is that a factor or is rare Earth more of a China thing?
TS: That’s more of a China thing. We all have to watch to see if China sides with Russia and see how that market ends up. But really, they’re the largest producer in the world, and that’s who we are largely dependent on for rare earths.
TN: Okay, great. Thanks for that.
Now let’s move on to kind of this war driven inflation narrative that we’ve seen over the past a couple of weeks. We had February inflation come out today, and I feel almost as if we’re being tested as a trial balloon for an inflation narrative that inflation is kind of Russia’s fault.
So, Sam, can you talk us through some of the economics of this? Is inflation a new thing like did it just happened two weeks ago?
SR: No. So the inflation narrative going forward, there’s some validity to Russia being the reasoning behind an increase over a base case. Whatever you want to decide that base case is. But in February, January. December and November, those are not in any way related to Russia generally.
What’s interesting to me is how many people are kind of forgetting that, we kind of had a little bit of a log jam breakup in supply chains beginning to occur. It looks like we were going to get a little bit of respite from that narrative. But now if you looked at what’s going on in the neon market, if you look kind of six to twelve to 18 months down the road, it looks a lot less like we’re going to have that log jam broken up and a lot more like we’re going to have somewhat persistent inflation that there is no way for the Fed to solve. There’s no way for the ECB to solve BOJ, et cetera. You’re just going to have to continue to have this hawkish language to try to tamp down those longer term expectations.
TN: Demand destruction.
SR: Demand destruction. But it’s really hard to destroy demand for semiconductors when they’re in everything from my daughter’s doll to my laptop. It is very difficult to destroy that much demand and create an inflationary environment that is less toxic to the Fed or to the ECB without breaking something.
So if the Fed isn’t willing to break something in the next call it six months. They’re not going to break inflation. And if you print out six months from now, you’re breaking something into a midterm election.
TN: Right.
SR: So I’m so much skeptical on the Fed’s ability to do anything at this point.
TN: Right. That’s a great transition to Albert. So how is inflation playing with voters?
AM: Oh, it’s absolutely nuclear football. Allowing inflation to go this high is just going to be devastating to the Democratic Party and Joe Biden. But I want to go back because I have a couple of contentious things to say. Right.
TN: Please do.
SR: Oh, God! Right.
AM: So everyone is pricing in five, six, seven hikes at the moment. Right. But inflation at the moment has probably taken three of them out of the equation because the money’s gone. It’s erasing money left and right at the moment, from the federal point of view, it’s like, why really get rid of it all? That why really attack it when it’s doing our job for us where we only now have to hike three times. Right.
And on top of that, something even more contentious is everyone knows that once the VIX gets to a certain price, somebody sells it off. Right. Somebody industry. Right. But everybody knows that. And when everyone knows that, the house casino usually moves to a different area. What about oil? What if somebody with a big account has bought oil futures and every time it gets to the 120s or 130s, they just crush it for $1015 and the market rallies again.
So this artificial inflation that obviously we have real inflation just because of wage inflation and supply chain. But there’s a little bit of artificial, artificial aspect to it that I think the Fed has been using. Politically, it’s going to be extremely damaging. But for their point of view is if they can get over it and then get the rate hikes out of the way and then maybe probably start QE later in the summer, They could suck their voters at the beginning of the economy back on track again. I don’t think it’s going to work.
TN: Let’s say a month or so ago there was suspicion that we would be doing QT in say June, July. That’s off the table now because of the money that inflation is taken out of the market, right?
AM: Absolutely.
TN: But we’ll do rate hikes and have QE potentially?
AM: That’s right. That’s my point.
TN: You’re in an insane phase of economic history.
AM: It’s just look around, Tony. What’s not insane at the moment?
TN: Undoing this.
TS: That’s 100% fact.
TN: Undoing this is going to be insane. Okay, speaking of undoing crazy stuff, the Chinese techs and real estate stocks really have some problems this week.
So Albert, Sam, can you guys talk a little bit about that? And we have a tweet showing some stocks from Tencent, Alibaba, JD, other ones down 50, 60, 80%. So what’s happening with the tech blood bath in China?
SR: I’ll just do a quick start. Did you see the numbers coming out of JD? They were horrible. I mean, they were absolutely atrocious. So, yeah, you’re going to get a sell off in tech broadly across the board in China. When your numbers are horrible, then you’re going to have additional pressure put on the potential for delisting in the US and the general call it risk off move in markets. So you’ve got the trifecta of horrible for Chinese tech in a nutshell.
But the JD numbers were absolutely atrocious on a revenue growth line. And there’s no way to save Chinese tech if you’re going to have numbers like that. If you continue to have numbers like that, guess what? Look out, because the bottom is not in.
On the Chinese real estate front, I think Albert has a much better view on this than I do. But I would say if you’re going to have a risk off in tech, good luck having a risk on in real estate.
TN: Sorry. Let me stop you before I move on to real estate. So the tech story, what I’m pulling away from there is that it’s potentially disposable income story at the retail level, at the consumer level, and tells me that China is way overdue with its stimulus. Is that fair to say?
SR: That’s harder to say.
TN: Okay.
SR: I would be very careful in saying that the Chinese consumer is not there. China is coming with stimulus. If you’re trying to hit 5.5 by the end of this year and you’re going into a plum, guess what? You got to hit the pedal.
TN: Well, they better hurry up.
SR: They’ve got time, but they’re going to hit the pedal. And the question is how do they hit the pedal? And it’s got to be the consumer because they’re not going to hit it on real estate.
TN: No, they’re not. Going through some of the real estate.
AM: Yeah, well, I have a couple of points to make on. I have a couple of points about the tech. China tech. What was interesting is Sam is right. JD numbers were horrible. Right. This SEC Delisting thing pointed out five companies. Right. Just five. And the big ones. Gamble is a big one. And whatnot. But why only five? It happened to be the only five that actually did their accounting and submitted their accounting numbers. Right. And would that actually let a snowball effect out to say, Holy crap, they will take down every single Chinese number, Chinese company in the market. That’s why a lot of this actually sold off harder than you think it would sell off.
Going to the real estate market. I mean, 75% of China’s fault is real estate. So unless Xi wants pitchforks and torches coming after him, he’s going to have to stimulate the economy, something to support the real estate market.
TN: Yeah. It seems like it’s going to have to come hard and fast. I could be wrong. But, you know, with.
AM: I think by June. I think by June he’s got to do something. He has to.
SR: Hit through the middle.
AM: Absolutely.
TN: Good. And do you guys have any ideas on what exact forms that’s going to take? I mean, of course they’re new triple R, of course, taking a new infrastructure spending. They do the stuff. They announce it every other year. Are there other forms that you have in mind that will take that?
AM: I don’t, to be honest with you, that is $64 million question. To be honest. That’s a big question. That’s very complex.
SR: Yeah. And if I had the answer to that question, I probably wouldn’t be on this call.
TN: Come on, Sam. We know you would.
SR: I would be on a yacht somewhere.
TN: Yeah, that’s right.
TS: It’s interesting about that. If you look at the energy perspective, they just had a meeting and they totally decided that they’re going back to coal other than anything else. So that to me that signifies we have stress in other markets. Right. We cannot spend the money in other places. So we’re going to go back to what we do best, what we know best. And they also offered, if you look at internal documents that are offering huge discounts for going back into the coal industry or whatever. I just like to.
TN: So there’s still 73% coal for their power generation, something like that?
TS: Yes. So for them, they backtracked on COP. They need the money right now, in other words.
TN: Right. So the whole Paris agreement is a convenient agreement, is that what you’re saying?
TS: Correct.
TN: Okay, very good. It’s good to know that we’re all committed to the future. Okay. So guys, speaking of the future, finally, what do you view for the week ahead? Albert, let’s start with you. Maybe with China. Do you think there’s more to come with the blood bath in China?
AM: I think there’s another week or two to come with China blood bath. And I think that’s going to obviously lean on our equities going into Fed week.
TN: Right.
AM: So yeah, I think we’ll be another down week.
TN: Okay. And guys, what about US equities? Are we on a steady decline down to some number 4300 whatever it is, or are we kind of about there? What do you feel is going to happen over the next week?
AM: I think we’ll be sub 4000 by the end of the week at some point.
TN: Okay.
SR: Yeah. I wouldn’t be anything other than market neutral until immediately following the Fed meeting and then you just rip it to the upside.
TN: Okay.
AM: Yeah. The only thing that I have a concern about is we still have this Ukraine war going on which is giving outrageous headlines and then if the Fed hikes 25 basis points and then extremely hawkish tones while Putin is shelling Kiev.
TN: Right.
AM: It’s hard to rip until after that’s all settled.
TN: So sorry, Sam, in your scenario, are you saying the first half up until say Wednesday we have a pretty quiet market, then Thursday and Friday, things are pretty active to the?
SR: Oh no, I am not saying that you have a quiet market until the Fed. I’m saying you don’t want to take a position period until the Fed and then you either want to grip it or rip it one or the other.
AM: I agree with that one wholeheartedly.
TS: These markets will continue to be volatile until we have some resolution with this Ukraine Russia situation just because of all every day we’re seeing new sanctions against Russia and against commodities within Russia, at least for the commodity sector. I think we’ll continue to see volatility, but over the long term I’m still very bullish commodity.
TN: Okay. So Tracy, Sunday night, futures open, crude traded very high. Do you think there’s a possibility of us seeing another dramatic spike like that in the next week or two?
TS: I think that mostly been priced out of the market. I think that was priced in right. We saw a lot of that risk premium come out of the market, which I was very glad to see. I would personally be happy if we saw it traded in the 90s again before going into high demand season because I do think that we will trade higher on fundamentals. But it scares me when we have these big kick ups due to headlines and geopolitical risk.
So for me right now I would like to see this market come down a little bit. I’d like to see it pull back some and hopefully things will resolve quicker than sooner with this situation. But still going forward, I’m still very bullish this market.
TN: Okay. We didn’t talk at all about nickel and metal’s markets, but we saw the LME close today because of a nickel trade supposedly. Will we see those markets reopen and will we see nickel trade? Is it scheduled to trade again on Monday and is there the potential for commodity specific disruption and markets closing over the next week or two because of the volatility.
TS: There’s been a very high contention discussion right now, especially within the commodities industry. I would just say that it was kind of unprecedented what we saw there and the fact that they canceled all the trades. I would say that hedge funds are kind of backing away from that market right now because they’re skeptical of that market right now. But again, it’s not like I don’t want to say this is going to be the norm or anything like that.
TN: Okay.
TS: I think this was a one off crazy thing. It happened in the aluminum market years ago and you can even look it up on Wikipedia, right.
TN: Okay. Last thing week ahead with bonds. Sam, what are you thinking about bonds? We’ve seen the ten year go back up to about two. Are we going to see that continue to take up?
SR: I don’t know. I think the ten year is a little less interesting than the five year and the seven year.
TN: Okay.
SR: The five year and the seven year are really what you want to watch because if the fed goes 25 and goes really hawkish, it’s the five and the seven that you’re going to get the juice from and the ten and the 30 you’re going to get a little less so watch the five and seven. I think the five and seven are really interesting here. If you want to take a bet on a really hawkish Fed.
TN: Fantastic. Okay, guys. Thanks very much. Really appreciated. Have a great week ahead. Thank you very much.
