This is the first 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.
Follow The Week Ahead experts on Twitter:
Tony: https://twitter.com/TonyNashNerd
Tracy: https://twitter.com/chigrl
Nick: https://twitter.com/nglinsman/
Albert: https://twitter.com/amlivemon
Show Notes
TN: Hi, everyone. Thanks for joining us for the week ahead. My name is Tony Nash. We’re joined today with Tracy Shuchart, Nick Glinsman and Albert Marco to talk about the markets for this past week and what’s going to happen this next week.
Guys, we saw a really dramatic market this week, a lot happening around the Fed announcements around inflation in Europe. We saw some real action around bonds. So can we talk about some of those things as well as what’s happening in energy markets? So, Tracy, could you actually get us started with what you’re seeing in energy markets?
TS: Well, obviously, we had big bounce this week in the energy markets, and a lot of that had to do with we had problems in Libya with some production offline 500,000 barrels. We also saw some big drop in Ecuador production and then Nigeria ongoing problems. And of course, we had Kazakstan, which these protests put potentially 1.6 million barrels at risk. So that was another geopolitical risk factor.
And then what we were seeing at home is because of weather, because of the cold snap we were seeing. We had Keystone down for about a day. And that brings Canadian crew to the United States. And then we’re also seeing production problems in the back end. So there were a lot of things going on in this market that propelled it higher.
TN: Okay. And what about the geopolitical problems with Europe and Russia? Is that still tightening? Do we see that still affecting gas prices in Europe?
TS: I think actually, we’ve actually seen a pullback ever since the US Calgary came with the initial 46 vessels. And then we’ve also seen countries such as the Netherlands come and say that they’re going to provide more gas, so the market is going to be volatile. It’s definitely going to remain volatile. But we have definitely seen it pull back off the highs.
TN: Good. Okay. Very good. Nick and Albert, can you talk to me a little bit about the Fed? What’s your view on the Fed remarks? And will they actually raise three times in 22?
NG: Well, actually, might be on the Fed remarks. Is it was nothing new. We knew absolutely everything. December the 15th, it was statement and then the press conference. It was very clear people just wanted to ignore it. So it’s come home to Roost. What was interesting that treasury market was already acting first day of trading and had a really good sell off. And it’s just carried on.
Now I’m wary of this Fed. Have they got the guts to actually take inflation on, or are they worried about the stock market? And there is obviously that correlation between the stock market and the economy. However, at this high level on the stock market, one wonders whether that correlation is a bit little bit looser because we have from a data point of view, whether it’s reality or not, it’s a booming economy.
And I actually had a conversation with a very well known economist on the street. It’s his own shop. And he said a couple of people he respects are talking about unemployment going sub 3% by their measure.
TN: But, Nick, that’s just a denominator function.
NG: I understand. We all know it’s not really less than 3%. But we all know that inflation is a 7.2% the forecast for next week. Okay. So I mean, this data has issues, and I’m very much aware of this issue. But the point is, if this carries on going that way and the seasonal adjustments accentuate the situation.
Plus, you’ve got to, you know, Albert mentioned this last year. There is a huge number of people retiring. So there’s a supply shortage of the labor side. It’s not just supply chains causing inflation, that labor has a supply shortage.
TN: We’ve been waiting for this for about a decade, right? For the baby to start. Really?
NG: They wanted a bit more inflation. They wanted a moving economy. They got it. Now the Fed has to show whether if the Fed goes all in on it to fight inflation, 170 is not the terminal rate on Fed funds. I think it’s going to be between two and a half or three and a half. Clearly, I’m just concerned about this Fed. In that respect, they’ve shown no willingness.
TN: Sure.
AM: I just want to add a real quick thing about that. Tony, I agree with what Nick is saying pretty much being clear on that. But from my perspective, the story is, are they going to go with inflation or are they going to have a recession? This is zero rates or rake hikes.
This market is realistically built on zero rates. Everybody knows this for them to hike. They would need some sort of stimulus program. And even then, you need lower job reports, which I think probably are coming. But even then, we have a physical flip coming in March that we have to address.
TN: Right. But, Albert, we would need a stimulus program with hikes just to stay neutral.
AM: Of course.
TN: Here’s what I don’t understand. Okay. And maybe you guys can fill me in. But the Fed has a massive balance sheet. Why even mention rates when there’s so much they can do with the balance sheet in terms of tapering being neutral and then tightening that on its own is a massive task. It seems to me that interest rates were kind of premature for that.
NG: I think they’re fearful of tantrums. My view on the tantrum side of things is either the Fed does deal with inflation. So you get then risk assets like equities will have a tantrum. It’s quite possible. And people wouldn’t expect that the bond market will have a tantrum, but it will be an inflation tantrum.
You’re right on QT quantitative tightening. I mean, they’ve got so much in the short end if they just let it roll off that’s $3 trillion in two years off the balance sheet. But then that would cause problems in the short end of the market.
TN: Yes. Previously, they didn’t start tightening for four years, right. QT didn’t start until four years after 2011 or whatever. So it was a long time, and I wouldn’t expect them to start selling off the balance sheet for an extended period of time. It’s just a matter of stopping the flow onto the balance sheet.
NG: This is the biggest hedge fund leveraged in the world.
TN: Yeah, it is. Okay. Speaking of funds, we’ve seen a little bit of rotation start in the market this week. So can you talk to us a little bit about that? And, Tracy, can you guys both talk a little bit about the rotation that’s underway in markets and how far will it go?
AM: It’s pretty clear that we’re rotating out of the US markets and out of tech going into China, possibly even Indonesia. The US market is nearing almost 60% of the entire global market. And that’s simply absurd. And just can’t go on.
Some are talking about disinflation, but the wage inflation continues to rise and the supply chain stress isn’t really getting any better. So where does the money go? Really, in my opinion, it goes to China right now. The European Union is a mess. Can’t go there. Indonesia is a likely candidate. But unless the Fed, they can’t hike rates, they need massive stimulus, everything’s rotating out of the United States and out of tech for the time being. I don’t know how long it’s going to last. I mean, I think the tech sales are maybe a couple of weeks.
The Fed needs that to pump the markets via Nasdaq. So I give it a couple of weeks, Max.
TN: Okay. Tracy?
TS: I’m looking at the rotation within just the US market and not the global markets. But we are kind of seeing a rotation from the tech sector from growth to sort of more value real assets. Right. So all week, we’ve seen the Nasdaq pull back. But oil and banking have remained very strong all week.
So I think that’s kind of where just internally where we are seeing the markets, the commodity markets have done really well this week. Metal is included.
TN: And how long does that last? Is that something that’s just a couple of weeks, or is that something that we see happening through Q1?
TS: I mean, I think it really depends on what the Fed decides to do. So if they decide to raise rates, that’s going to kill the tech market. Right. So that’s why I am of the opinion it’s going to be a one and done, because what do you sacrifice? You sacrifice the market. Right.
And are you going to do that? Is the Biden administration going to allow that sort of to happen during an election year? Right.
AM: Tracy is absolutely correct. They’re not going to let that happen. I mean, right now, the entire perception of the economy is doing well is based on the market performance for them to raise rates or rotate. And right now they’re rotating into reflationary names. I mean, that helps now, but they need the market to act. It is solid.
NG: There is a dark with that view because, as I said, either you get a tantrum equities, particularly on growth, or you get a tantrum in bonds, which then feeds into account. Because if they don’t deal with inflation, everybody’s saying, well, January base effects are fantastic. They’re high, but we’re going to benefit from thereafter.
And I’ve got this and Tracy, but I think we will attest to this. And Alberto, there is this point that as things get normalized, crude oil is going to go up because jet fuel will be in huge demand and people are going to be out moving.
In Europe, there’s no normalization of energy prices. They’re already way above normalization. You’re looking at five to six times the price of energy from last year. So this is all going to feed through the system. It goes. Fee through manufacturing services and comes out as core CPI as opposed to full CPI.
AM: Yeah, but I mean, this week, Nick, we’ve seen a 4.5 wage gain causing issues in the market. There’s…
NG: Actually my fault on the date of the day was it was actually the unemployment. They have said the natural rate is 3.6%. If you look at what happened the last time we had unemployment here, we had inflation at I think it was 4% ten year yields with 270%.
AM: Yeah, I understand that, Nick, but everyone right now is talking about disinflation thinking that inflation is going to come down because the bet is going to help push it down. But how do you get rid of wage inflation? There is no way you can sit there and take…
TS: You’re not going to get rid of supply chain issues either.
NG: Push inflation. This is where it’s changed. And I don’t think these central bank staff has realized have accepted this that everything prior to the pandemic was demand poor cost push. So whole different ballgame. They’ve already said they can’t control price of commodities.
Actually, they can because they can. That’s the point. But the point I’m making is we’ve crossed the Rubicon from something that I’m not saying demand hall has gone away. But we’ve crossed the Rubicon from something that would be affected by monetary policy and financial tightening to something that is not going Redux is rough to charge.
TN: Okay. Before we go on there, there are two questions. First, Nick, you said either there’s an equity side tantrum or there’s a bondside tantrum, which is worse.
NG: Oh, the bondside tantrum. Okay. That will also be feed through to the equity market.
TN: Right. Okay. So the bondside tantrum is worse.
NG: For everybody that Feds behind the curve and London control.
TN: Right. And I think that’s well understood. The other question I have is Tracy mentioned one and done. Do we all think the Fed is kind of going to do a one and done? I mean, that’s my view. It sounds like it’s Tracy’s view, Albert, is that what you think?
AM: So I absolutely think so. They can’t let this thing melt down. They’ll bring it down to, like 4400, but that’s it.
TN: Okay. Nick, do you think it’s one and done?
NG: I’m putting my old hat on as a bond market person. Yeah, because they’ll then have to do QE because the bond market won’t sit there.
AM: They will do QE. They will absolutely do QE. They haven’t signed up and they control the bond market as it is anyway, so they can do whatever they want right now. There’s nobody else in the world that can hold us accountable for what they do.
TN: Are you saying QE and Q two? Do you expect QE and Q two?
AM: Absolutely.
TN: Okay. That’s very interesting. All right. I like that. I think that as a thesis is very interesting.
NG: By the way, the rest of the world may need it.
TN: Absolutely. I think they will.
AM: Of course they do.
NG: I’ve got a great piece of trade Union wage claim in Europe. This is hysterical. So the ECB says inflation is going to trend back to the forecast. 2%. It’s all transit free. The guard still on holiday, but she’ll never die by that.
Every person at the ACB by the governors is a member of the ECB trade Union. Do you know what their claim is right now for this year?
TN: They need wage acts.
NG: I think that’s a tell. Oh, yeah, it’s a tell, right. I think other countries may need the Fed’s help. That’s where I veered back towards Albert. In that respect, I don’t know my traditionalist central bank.
TN: Yes, I don’t doubt that at all. Okay, let’s start looking ahead to kind of next week. We’ve got wholesale inventories, NFL, small business, CPI. We’ve got retail sales coming on. What do you expect to happen next week?
Do we expect, say, retail sales to kind of be moderate or do we expect the CPI to moderate, or do we think things will continue as they have been?
NG: I’m an inflation. So I think CPI will be problematic and we’ve seen this inflation data. The estimates have been lower than the actual. So I’m sort of expecting that to occur.
Retail sales. I’ve not really got a view. To be honest.
AM: I think retail sales are going to come in a little bit higher than most people think. I think the luxury market right now is just absolutely on fire. A lot of free money has just been floating around the system and people have been buying things left and right.
I mean, even the credit card data show that consumers have just used more credit. It’s pretty clear.
NG: Okay, so we’re 2% ten year yield. It’s a possibility next week there.
TN: So also the small business survey, the small businesses that I know from auto manufacturers to other things. They’re having a really hard time. So do you think NFIB is going to continue to be positive, or do you think it’s going to trend out?
AM: I think we’re going to go down. I think the entire reason that they’ve been talking about a new business stimulus program in DC.
TS: Exactly 100%. I think we’re definitely going to go see that slowing down, slowing economy.
AM: They need it because they need stimulus anyways in March. So might as well start throwing money around everywhere.
TN: Right. So build back better. Is that dead, or are they going to try to take another run at it this month?
AM: They’ll take another run at it, but it’ll be toned down and probably separated into different pieces.
TN: Okay. Do you think it will ultimately pass and be one and a half trillion or something like that?
AM: I think it’ll be a part of a stimulus hybrid program of build back better with business stimulus program in mind. So it’ll probably be around two and a half trillion.
TN: Two and a half trillion. Okay. Anybody else have a view on that?
NG: With the emphasis on the stimulus as opposed to the build back better.
TN: I think you’re right now.
TS: Yeah, I personally don’t think build back better is going to pass anytime soon.
NG: Great question for Albert Finabaster won’t be broken with it.
AM: No, they’d be absolutely insane for them to try to do that. They know the GOP is going to have the House and the Senate for them to sit there and break the filibuster. It would just lead to absolute chaos for a lot of different policies.
TN: Bad news. That’s really bad news.
AM: If they get rid of the filibuster and they pass that voting law, the next thing that’s going to happen is the GOP is going to use the same method to have voter ID for the entire country and under the same reason and why they want to get rid of the filibuster. It’s a car bout. Really. It’s not an entirely.
NG: Voter ID in Europe is good to go. Everybody has it.
AM: Yes, I know. But this is the United States. I mean, nowhere in the world does about the United States. So we have to differentiate what happens in Europe.
TN: Yes, we do. All right. So what are you guys expecting to see next week? Are we expecting to see this rotation intensify. Nick, what are you expecting to see in say, bonds? Do you see further action in bonds or are we kind of at two for now?
NG: Well, look, I think think we ten years can go from. I always look at the ten year and in fact, many institutions is five. But the ten years gives you enough of the long bond and the inflation out of it. We’re at 176. 77 today close. If the data is strong, we go to two. Yeah. That becomes very interesting.
I mean, we travel a long way this week, right?
TN: Yes.
NG: And if you look at the CFTC data, the market is not short. A lot of blood was built for cause of last year people slowly stepping themselves in where I’m really interested. I mean, if that happens, we continue to see growth to that value.
What I’m interested in is I think the dollar rebounds on Monday. The dollar seems to have days with that lag to what the interest rate markets do. Albert and I have been speaking about this, but I’m interested to see, even with dollar strength, we’ve seen strength in the commodities market. And this is one of our thesis is China is going to be replaced by the Green Revolution.
We found a wonderful study in France that was reported in one of the French dailies that was talking about 60% of copper will be used up in about two or three years. And then he went through all the other key metals for the metal. I think actually, copper go quicker because of the new left winger in Chile.
TN: So you think dollar appreciation and commodities at least industrial metals appreciation for the, say foreseeable future.
NG: I think the whole complex crazy, and that’s where this time around will be rather like people’s disbelief in equities. How can we keep going this time around? We can have the whole commodity complex elevated.
TN: That’s really scary.
TS: I absolutely agree. Absolutely. Well, I mean, my three main themes in the commodities markets since last year and going into at least 2025 is metals, oil and gas and agriculture.
TN: Fantastic. Okay.
AM: I actually think the tech market is going to make a rebound next week just because the Fed is probably defending the 50 day moving average. I think we see a rebound up until the middle of the week next week.
TN: Wonderful guys. Thanks so much for this. Look forward to doing it again next week for everyone watching. Please, like our Twitter page or our YouTube page. Sorry. So you can get alarms for next week. All right.
Thanks, guys. And have a great week ahead.
TS , AM, NG: Thank you.