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The Week Ahead – 18 Jul 2022: Biden’s Saudi Arabia trip 🛢️

https://www.youtube.com/watch?v=HpcWVeE8mPY

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:

  1. Biden’s Saudi Arabia trip 🛢️
  2. USD🚀 rocket ship and fallout
  3. FOMC expectations (CPI/PPI)
  4. 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.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/samuelrines
Albert: https://twitter.com/amlivemon/

Time Stamps

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?

Listen to the podcast version on Spotify here:

https://open.spotify.com/episode/4cvisj39soBnXdia0S9bXv?si=4c2c9ffb0f6f4717

Transcript

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.

AM: Thanks, guys.

Categories
Podcasts

No Let Up in Fed Rate Hikes

This podcast first appeared and was originally published at https://www.bfm.my/podcast/morning-run/market-watch/us-federal-reserve-interest-rates-hike on July 7, 2022.

Despite weaker economic data, will the Federal Reserve continue their hawkish stance? Do the FOMC minutes offer any hints of their stance? Our CEO and founder, Tony Nash tells us whilst telling us the impact of rising rates on the banking and property sector.

Show Notes

WSN: BFM 89.9. You’re listening to the morning run is seven o’ 7, Thursday, the 7th of July there and keeping you company till 10:00 a.m. Is Shazana Mokda in an undisclosed location far, far away. And I’m Wong shining in the studio now in half an hour, we’re speaking to Manpreet Gill on fixed income and commodity the investment strategy for 2022. But let’s recap how global markets closed yesterday.

SM: So if you take a look over in the US, markets actually closed up despite Fed meeting minutes coming out signaling a more hawkish stance. The Dow was up 0.2%, the SP 500 and the Nasdaq was also up 0.4%. Looking over in Asia though, it’s mostly red. No, it’s all red really. The Naked and Hansi were both down 1.2%, the STI was down marginally by 0.01%, and the Shanghai Composite and FBM KLCI were both down 1.4%.

WSN: So for more on where international markets are hitting, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now so far the economic data coming out of the US shows a slight deceleration of the economy. So do you think that the Fed will then hold back on their hawkish pace of rate hikes despite June’s FYMC minutes indicating that they intend to keep raising rates?

TN: I think they’re definitely going to keep raising rates, I think until we see a marked slowdown in particularly commodity price inflation, but also other things like wage inflation. I think they’re going to keep accelerating. So it’s unlikely they’ll continue with a 75 basis point hike, but they will almost certainly have a 50 basis point hike and continue for the next couple of meetings at least.

WSN: I have another question though, Tony, in that when do you think interest rates will peak or when is the peak of the tightening cycle? Will it be early 2023 or you’re looking maybe later in 2023.

TN: Well, some people are saying that it’s possible they continue to hike until the end of the year, and then in 23 they have some rate cuts similar to what happened in the early 90s. That’s possible. I think it all depends on where the economy is at the time. But I think for now they’re just worried about inflation and the downsides of inflation and they’re looking at asset prices and where asset prices are, and it’s really troubling for them given yeah, the economy has definitely slowed down, but we still have wages rising, we still have very high commodity prices, and we also have an appreciating dollar at the same time. So anything imported should be cheaper on a relative basis, but those prices keep going up as well. So Fed continues to be worried, although they’re getting pressure from the outside because it is an election year and the party in power does not want there to be a recession going into the election. And so they’re getting huge pressure from the treasury and from other people to moderate their stance so that there is not a recession going into the election.

SM: Well, what do you think then, Tony? We know that economists at Goldman Sachs have put the risk of a recessionary slump in the US. In the next year at 30%. So they’re still looking at next year. Some consumers feel it’s already here, I guess. Where are you standing in this debate?

TN: Yeah, I think we have unemployment still falling in the US. So you don’t usually have a recession at a time when unemployment is still falling. We also have high inflation. So on a real GDP basis, you may have a negative real GDP number. Well, you have a positive nominal GDP number. And I know that’s a little bit confusing, but what that basically means is that the rate of inflation pulls the economic growth into a negative number simply because of inflation. So we’re in a place where it’s kind of hard to identify a recession because of the real and nominal difference. But when we still have jobs growing, when we still have investments and other things happening, it’s really hard for us to hand on heart say that we are in or entering a recession.

WSN: Okay, let’s get into the weeds then, with regards to the recent set rate hikes and how that might play out in certain sectors. And I want to look at the US. Banks. So how do you think they perform this quarter? Are you a bull or bear?

TN: Well, it’s a tough time for banks. They had mixed results in Q2, and I think higher interest rates obviously help their net interest margin. But borrowing cools off, and it’s things like mortgages. Other things have cooled off dramatically over the last same month or so. Banks will likely have a very tough Q3, and then when things stabilize, they’ll be better. But I think Q3 is going to be rough for them. I wouldn’t say I’m necessarily bearish on banks, but I would say I’m neutral on banks.

WSN: What about the property sector, Tony? I mean, we’ve heard, of course, a few months ago that whatever you put up in the market, it gets snapped up within the day. But is that trend continuing? Are you a bull or bear for property?

TN: You know what? It depends on where you are in the US. Where I am in Texas, things are really strong. But a lot of other places in the US. Things have slowed down dramatically, and mortgage applications nationally have come to a standstill as interest rates have risen. So I think a couple of weeks ago we may have talked about how a house that was purchased in January, the median price house purchased in January, if it were purchased today, it would cost $800 a month extra. And so the interest rates just had a dramatic impact on house prices. So mortgages have really slowed down.

SM: And can we turn to oil, Tony, because oil prices have dropped below $100 per barrel for West Texas. Does this level accurately reflect supply and demand for crude? And does this then invalidate the bullish forecast of $150 and above that analysts were predicting not too long ago?

TN: Yeah, I think we’re in a really strange place for oil right now. And if you look at the later months of crude oil futures that are being traded, they’re actually trading higher than the current month. So there’s something happening in the current month, like maybe somebody’s books blown up or something. But there’s something happening in the July future that rolls off in a couple of weeks. And I expect that we’ll see higher crude prices going into August and the rest of Q three, early Q four. So it’s going to be pretty choppy for the next few months in energy and commodities generally.

WSN: One last question for me, and it’s more long term economic question, and that’s about Biden’s infrastructure bill that was passed in November last year, but it’s gone really silent. Do you know what’s happening on that front?

TN: Nobody does. There’s been very little news about it. What’s happened partly is inflation has taken a bite out of it and it’s really caused a lot of projects to stall. So the problem with federal appropriations is the longer the money sits, the less money that gets spent, which is good for taxpayers. Right, but I think inflation is really forcing local and state governments to pause on their investment plans because they do have budget, but they don’t have enough budget to get the projects done that they want. So can they appropriate can the US. Congress appropriate more for the next fiscal year? It’s possible. It depends on who’s in power. So if the Republicans come into power in November, then they may not raise the appropriations level and we’ll be stuck with the level that we have, which it’s $500 billion, a massive amount of money. I don’t want anybody to mislead anybody, but the Democrats will likely want to raise that level if they remain in power after the November election. But to date, not a lot has happened. There has not been a lot of movements. We haven’t seen a lot of major announcements of new projects, these sorts of things.


And if it was successful, we would see a lot of major announcements of new projects.

WSN: All right, thank you for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his views on global markets, in particular the US. And whether the Fed will continue to raise rates until 2023. He says maybe, and then maybe they might even cut rates like they did in $2,000.

SM: That’s right. I guess one thing to note is the question is whether we’re going to see a recession sooner rather than later. Yeah, and Tony did point out the fact that labor unemployment is still at really low levels. Unemployment is decreasing so that’s really at odds with a recession and that’s what everyone is looking to see. I think if we start to see unemployment go up, that heralds that a recession is either here or coming.

WSN: I suppose we are living in really weird economic times. None of the normal correlations that we see are making any sense. I think that’s a lot to do with the fact that during COVID-19, governments basically just took the let’s do whatever it takes attitude. There was so much money pumping into the system by every major central bank and the recession was extremely V shaped, sharp recovery. But then that also caused supply chain disruptions and we had the war in Ukraine. It was like the perfect storm of Black Swan events which has resulted in this current situation that we are in now. Very quickly, we’re looking at the Fed minutes that just came out now. Indications are that they are signaling another rate increase of between 50 to 75 basis points lightly in the July meeting. And this is the interesting part, they are willing to accept the price of a slower economy in order to tame inflation.

SM: And this is sort of a change from their soft landing rhetoric, right? So earlier they were trying to say oh, it’s not inevitable that there will be a recession, we can still avoid it, we want to get that sweet spot. But I think now they’re trying to navigate those expectations to go like hey, I think we need to kind of expect pain. There is going to be pain, but it’s better to have this short pay now rather than long term pain later. So I think the Fed is really trying it’s got itself in a pickle essentially in terms of trying to prime expectations of the public.

WSN: I think that’s on the back of the fact that they spend the whole of 2021 telling everyone that inflation is transitory, hey, no problem. And it didn’t turn out to be transitory, so there’s a need to rebuild back that credibility. But up next we’ll be speaking to Carmelo for little on malicious overnight policy rate. Stay tuned for that.

Categories
Week Ahead

The Week Ahead – 27 Jun 2022: The “R” Word

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Powell was out saying “I don’t think a recession is inevitable” but also admitted that rate hikes may be one of many factors that push the economy into recession. All of this while bank credit continues to grow, which we saw flatten in 2020 and decline in 2008. What’s happening? Is a recession inevitable at this point?

We talked about the dollar two weeks ago and the strength is still there. Are we pushing higher so commodities feel a bit cheaper to Americans? Is this temporary – mainly so Americans talk about cheaper gasoline over the July 4th holiday weekend? How far and how long do you expect the dollar to go? Why?

Can crude continue to rally into a recession?

Key themes:

  1. The “R” Word
  2. Geopolitical fallout
  3. Crude 💪 or 👎/ Dollar 🚀
  4. What’s ahead for next week?

This is the 23rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon/

Time Stamps

0:00 Start
1:03 Key themes for the week
1:48 Powell’s recession call
3:48 The catalysts that could whip growth
6:58 Geopolitics in EMs and related to the US
8:35 Is the ECB a risk as well?
11:00 Crude and the Dollar
16:00 Where do you expect the dollar to go?
19:00 The week ahead

Listen on Spotify:

Transcript

TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. We’re joined as always, by Tracy, Sam, and Albert. Thanks, guys, for joining us. Before we get started, please, like, please subscribe, please comment. We read all of them and try to respond to all of them. So please go ahead and do that while you’re here. Also, we are running a summer promo for CI Futures. This is our market forecast subscription product. You get three free months, so please go to completeintel.com/2022Promo and learn all about it.

So this week there’s a lot going on, a lot politically in markets, other stuff. We’re talking about three main themes this week. First is the R word. Second is geopolitical fallout of the R word. And third is crude and dollar activity. So I ran a poll earlier this week asking what is the most widely held consensus view that people are seeing right now? And that’s on screen, of course. So first is recession. People are seeing recession as a consensus view all over the place. Next is equities lower, followed by crude higher, followed by a stronger dollar. So we’re going to talk about all these things today.

Sam, let’s talk about that recession call. That recession consensus call. Powell is out this week saying, I don’t think a recession is inevitable after being really hawkish last week and driving people kind of to the edge of this. So what’s actually happening right now? We’re seeing credit continue to grow. And I know I showed you earlier this week. Bank credit continues to grow. Is that meaningful? And what are you looking at to know if we’re going into recession or not?

SR: Yeah, I mean, bank credit, is meh. But at the same time, are we going into a recession? Meh. I don’t really think so. It’s a booming summer. You have hotels full, you have bars and restaurants full. You have airlines unable to keep up with demand. I mean, that sounds like a small subset of the economy, but at the same time, that is a massive portion of the summer economy. It’s massive. So do I think we’re imminently in a recession? No. I actually think that’s one of the big narratives that kind of misses the bigger point, right? Do we make goods? No, we don’t make anything. What we do is we have services. That’s it. So we’re a service based economy. If services are booming, you’re not going into a recession. You’re unlikely to see some sort of huge move in unemployment because a recession technically is down on growth, down on employment.

If you don’t have the down on employment, you don’t have a recession. So maybe you have a slowing of growth. That’s somewhat probable. But a recession, no, not in the cards, at least until the back half this year. In the back half of this year, you have a number of catalysts which could really whip things the other way in terms of both growth.

TN: Okay, so what are some of those catalysts. And when you say back, you’re talking about October? November?

SR: Yes, October. November.

TN: My thinking is if we’re going to see it, we’re going to start seeing it maybe late September, October or something like that. But what are some of those catalysts you’re talking about? A couple of them?

SR: The catalysts then are actually to the gross side, which I think is where I’ll take the opposite side of a lot of people. Those catalysts are called a devolving of the Ukraine conflict. Number one, while that doesn’t take off sanctions in the near term, it does take off the incremental oops.

Then you have the beginning of the reopening of China, which is a big boost to growth in Europe, and secondarily, LatAm and the United States. So you put those pieces together and all of a sudden you’re looking at a back half of the year that has more upside catalysts, potentially. And it’s not like you can reset down China and it’s going to be a negative callus. It’s already in the numbers. It’s not like you can have another war in Ukraine that’s already in the numbers. If you begin to have those two come together, guess what? That’s positive. So I would say the rest of this year is shaping up to be oddly positive.

TN: Yes, but no, I’m kidding. Everyone’s so negative right now. Everyone wants to just find the downside. Russia is going to invade finland or something like that, right?

SR: Yeah. Here’s the play. I would say 3600 is a lot less likely than 43.

TN: I like that.

SR: On the S&P.

TS: I think what we’re going to see is kind of like a balance, right? Where we see services really big this summer, especially in the travel industry, hospitality industry, which we will see taper off this fall, which is not unusual. That always tapers off this fall. But we also see airline prices increasing, so people have booked their summer vacations in Q1. Those people are going to fall off. So I think we’ll see a push. We’ll see a pullback in that industry, but we could see growth in industries that Sam is mentioning.

TN: Great.

SR: Just to throw in there, we have to remember that at some point we have to refill supply chains on the drivable stuff, and those supply chains are at bone zero right now. It will require a whole bunch of employment, a whole bunch of production, and will actually have a fairly significant thrust to GDP. Our production has been zero.

TN: That’s great. My poll is wrong, which is awesome. I love that.

SR: I would bet against every single thing that your poll said.

TN: Perfect. I love that. Okay, so if you’re in the US, that holds. But let’s switch, Albert, to kind of say geopolitical risk and some other things. Obviously, Sri Lanka two months ago started falling apart and not started, but really fell apart. We’ve seen Ecuador and other places really start falling apart.

Albert, what are you seeing, geopolitically, and what are you seeing in EMs related to what’s happening in the US?

AM: I don’t really like focusing on EMs at this moment just because they’re not big enough to really cause a problem in the markets. In my opinion. I’m looking squarely at the European Union right now.

It’s suspicious that we come out with US bank tests and then we come out with EU bank tests and then literally a day later, the Germans come out and say, we could have a Lehman moment across the economy just because of these gas shortages that are happening.

TN: By the way, your tweet about the German Lehman moment up.

AM: Yeah. And this goes back to just the topic we were just talking about, recession. You really need some kind of catalyst or something to break. And the only thing that I could even contemplate of breaking and causing a “recession” would be the European Union going through another financial crisis. You have a contagion that probably leaks over to the United States financial markets and the Putin price hikes become a thing again, justifies any kind of QE that the Federal want to do, probably in Q four this year. Geopolitically, the EU is my target right now to look at.

TN: Okay. It’s energy supply chains. Is the ECB a risk as well? Is there a risk that they tighten too fast or too much or anything?

AM: How are they going to have to I mean, the inflation over there is climbing just as fast as the United States and it’s causing problems across the board.

SR: I would double down on that and say that Qatar, right after we had the train go down in Corpus Christi, came out and said, yeah, we’ll send gas to the European Union. Just sign a 20 year deal.

TN: Right. And they did. Right?

SR: European Union is not going to do that. I mean, nobody in Europe is going to do that. It was kind of like, we got your back, but give us a long term agreement and we’ll do it.

The irony of it is that you have a crisis going on in Europe. There was a dragon moment of do whatever right, anything.

TN: Sorry, Tracy. What’s that?

TS: Self imposed crisis? Their energy crisis is literally self imposed.

TN: Yeah. Okay.

AM: There’s no question that is self imposed. The European Union’s leadership has been atrocious. I mean, they’ve had the worst energy policy you could possibly think of that hampers their economic engine for the last two, three decades. I mean, you can just throw a dart at the board and pick whatever policy they’ve come up with. It has been an absolute disaster.

TN: Why is that? Why are they making such stupid well.

AM: They’ve made such a big swing to the left, the leftist voters, and they’re just climate Nazis. They won’t even discuss nuclear.

SR: We’re literally talking.

AM: They won’t even discuss nuclear power, which is absurd. They’re like, what if something goes bad like Fukushima? Oh, yeah. What if a dam breaks? Or what if a coal plant blows up? Or, God forbid, what if 10,000 Germans freeze to death because you don’t have gas stored because you didn’t have any proper management? I mean, they’re really bad at managing what’s going on without the United States holding their hand and directing what to do.

TN: Well said. Fantastic. Okay, so since we focus a little bit on energy there, Tracy, let’s swing to talk about crude and the dollar. So, our friend Josh Young posted something about kind of energy could potentially outperform this sort of stuff and really kind of looking back to the 1970s.

So it really looked like we were heading there until this week, and then we saw things really come down this week, in terms of, say, WTI, natural gas, other things. What’s going on there?

TS: I think it depends on what you’re looking at. If you were looking at frontline crude oil price, that’s one thing where a lot of speculators are involved in. If you’re looking at the spreads, it’s you’re looking at the crack spreads that are still exploding. If you’re looking at calendar spreads that are up again this week, that pretty much tells you that we put a floor under front month crude price, regardless of who is involved in what specs are involved in the industry right now. Because the spreads are really what I consider will tell you really where things are going. Right.

So we kind of have a floor night. Yes, oil had a bad week. We saw a lot of selling on downtime in markets and things of that nature. I don’t think that doesn’t change the overall fundamentals of the market. Right? I mean, we’re still fundamentally structurally undersupplied.

TN: So I’m going to ask a really dumb question here. I’m sorry if I may hear it.

SR: But we know.

TN: So are we seeing a short term sell off? Is it politically driven so that when Americans get together on July 4, they can say, gosh, gas is really down this week, and then you have a three day weekend where people are talking about that and then it rocket ships up after the fourth?

TS: Well, I think it’s a combination of most things. I think this week recession scares, we’re really the big driver for that market because everybody’s thinking we’re going to have a recession.

SR: That and the potential of having an export ban.

TS: Right.

TN: Recession, export ban, and July 4th.

TS: An export ban. That said, and I kind of tweeted this out, having an export ban, especially a fuel export ban, would make things obviously worse.

First of all, it’ll raise prices for the EU prices abroad, which after all of this with Ukraine, do we really want to hurt the EU that much? Because we supply them with one to 1.3, 1.5 million barrels per day of diesel, which they are having a huge problem. So really, are we going to abandon the you at this point? Also…

TN: My Texas friends would love to have more diesel to power their ram trucks.

TS: But the thing is that what happens is the fuel flows get so disrupted is that we’re going to have to see refineries cut run significantly in the US. Which is going to ultimately raise prices. We may see deepen prices initially, but you’re going to see higher prices ultimately.

SR: I’ll push back on that because you have a lot of storage, but you didn’t have a lot of storage before. So you don’t have to cut back on runs. You can put into storage at a pretty profitable rate because of forward selling basically all of your inventory right now. I would push back on you have to cut runs at this point.

TS: And I’m going to push back on that. We have to look at the east coast. Right. And so that’s looking at gasoline runs to make a barrel. Diesel requires a lot more oil than it does say to make gasoline. And so if we see a diesel problem, we’re going to have to cut back on this runs. I think it depends on what coast you’re looking at and what area you’re looking at.

TN: All we care about is Texas and Florida. Right.

SR: You have a lot of places to store gasoline. I mean, it’s not like we have an oversupply gasoline at the moment.

TN: It’s true. Our bob’s down this week too, right. So it’s tight.

AM: It’s interesting, Tony, it’s funny. One thing that you said July 4 and one thing that Tracy said, thinly traded is that hilariously every time we need a rally in the market during the thinly traded holiday hours, crude goes down, dollar goes down and the market goes up almost by magic on the thinly traded holiday hours. Something you should watch.

SR: University of Michigan. Come on.

TN: It’s a big driver. University of Michigan. Okay, so let’s move on. You mentioned the dollar, Albert, and so if we look at the dollar, obviously it’s near highs for the decade and that’s great if you’re in the US buying dollar denominated commodities. But elsewhere in the world it’s really hard. Right. So where do you expect the dollar to go? I can’t remember what you’ve said your expected target is. Possibly? 110. Possibly 120. So if it hits 120, Japanese Yen is at what, like 160? 170? something like that?

AM: 163,164? My calculation… This is something Yellen has done in 2012. It’s nothing new. She’s driven the dollar up. She’s out into Europe talking that she’s going to take the dollar up to 110. So this is nothing new. Everyone knows what’s going to happen. Everyone’s watching it. So we’re at 104 something today, just sitting there and hasn’t really done anything. Last day or so. Another 5% up is not a big deal for the dollar.

TN: So you see Yellen driving a stronger dollar. Sam, what do you see?

SR: I would say that I hate taking the other side. I’m going to take the other side.

TN: Great.

SR: I’m going to say that Yellen’s ability to control the dollar is de minimis at this point, mostly because the Fed is tapped out. But you already had a 4% terminal rate for Fed funds priced in two weeks ago. Today you’re sitting at basically 3.65%. So you’ve got the peak, in my opinion, priced in for the FOMC hiking cycle and now you’re on the other side of that. So I would say JPY, you’re probably looking at above 10.

TN: Oh, wow, okay, great.

SR: And you’re probably looking at a Euro at 108. 109. And it doesn’t really matter if they go into a recession because they’re… Right. The US is going to back off in incremental steps the long end of the hiking cycle and…

TN: Perfect.

SR: The dollar prices is long end of the hiking cycle and Yellen can do a lot of things. What she can’t do is increase the internal rate.

TN: That’s great.

AM: The thing is, the treasury sets USD policy, so she can certainly drive it up. I don’t know how much ammo she has left because it’s gone up. But we’ll see.

TN: Okay, perfect. That’s great. So we’ve covered almost everything in that survey and almost everything was wrong.

SR: I told you everything was I would take the other side of every single one of those.

TN: Perfect. Okay, let’s talk about the week ahead. We have month end and quarter end coming next week, right? So what does that mean for the week ahead? Everyone else.

TS: Can I go?

TN: Yes, you go Tracy.

TS: I don’t know. What I’m looking at for the week ahead is the last week of the month. Of the month and the quarter. Right. So we have roughly about $100 billion of US equities that need to be purchased over the next five trading sessions. We have a rebalance in the RTY. So we should see a lot of inflows, roughly 5.98 point billion of inflows into the US equity markets just because of the rebalance factor.

We should probably see outflows in the bond market and then that’s walking into a backdrop of negative dealer gamma. So we have the potential of a shot higher in the market.

TN: Sam? Sam?

SR: Yeah. I would say everything Tracy said in terms of the risk seems to be to the upside. I would also say it looks pretty scary when you walk into the end of the month in terms of the way the dollar chart looks right now.

You walk into the end of the month with a dollar chart looking like it’s ready, looking ready to gap down, and you have oil where it’s at. You could have a very interesting quarter end in terms of risk assets. You have a weaker dollar. You have a big buy on SPY, RTX, et cetera, or SPX, not SPY. You begin to put those pieces together and you begin to have a pretty risk on into the quarter that could be very interesting very quickly.

You get any positive headlines out of China in terms of lockdowns, you get any positive headlines out of Ukraine in terms of ceasefires, whatever BS they want to leak. Then all of a sudden you’re more upside. So I would say skewed to the upside through the beginning of July.

TN: Sam, you’re optimistic today. That’s amazing.

SR: I know. And contrarian.

TN: Optimistic and contrarian. I love it. Okay.

AM: Yeah, I mean, I agree mostly with Sam. I think just because the market is so thinly traded, the dollar should be chopping around probably on the downside a little bit, just for the week up until July 4 weekend, so long as the Europeans don’t come out and start saying any more Lehman things, Lehman crash things and all of a sudden dollar shoots up just because of fear factor out of the European side. But I don’t think that’s going to materialize over the next week, probably next couple of weeks.

After that, I think 30 days, we’re starting to look at possibly something that happened in the European Union. But for the week ahead.

TN: Fantastic. So the past three days carries into the next week. Fantastic.

AM: Yeah.

TN: Okay, guys, thank you very much. Thanks for your time. Thanks for all the stuff you passed along, and have a great week ahead. Thank you.

AM: All right, thanks.

TS, SR: Thank you.

Categories
Week Ahead

The Week Ahead – 07 Feb 2022

In this episode, we talked about some really interesting tech earnings like of Facebook and Amazon, crude and natgas prices, and the bond market. How does the NFP data affect the bond market? Also discussed central bank’s reaction to inflation and why you should be keeping your eyes on the CPI?

This is the fifth 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.

For those who prefer to listen to this episode, here’s the podcast version for you.

https://open.spotify.com/episode/3DmO9AkU7cHG3MP1wEjuej?si=b9cd41abf47f422d

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, and welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Tracy Shuchart, Nick Glinsman, and Albert Marko. Before we get started, I’d like to ask you to subscribe to our YouTube channel. It helps us a lot get visibility, and it really helps you get reminded when a new episode is out so you don’t miss anything.

We had a lot this week. We had tech earnings, some really interesting tech earnings and market activity as a result. We had crude really ripping this week. And we had bonds raging at the end of the week. So really a lot happening across sectors, NASA classes.

So let’s start with the bond market, Nick. We seem to have gotten pretty much what you mentioned on last week’s show. So can you go into kind of what’s happened and what’s happening in the bond market right now?

NG: Yeah, we’ve basically been ambushed by inflation. That’s what’s happened. You saw yesterday out of the ECB, which was a hawkish twist, possibly one of the worst press conference performances I’ve ever seen in my life. But the facts of the matter are you’ve got five, six, 7% inflation in various countries of the EU. In Lithuania, you’ve got 12%. Okay. So they are failing at their predominant original mandate, which was inflation per the Bundes back from what I’ve been told, there were several members of the MPC.

TN: Sorry. When you say she, you mean Christine Lagarde?

NG: Christine Lagarde. Several members of the NPC wanted to get moved yesterday. Not going to happen but it’s reasonable to think perhaps two hikes this year, but that will still take us to -20 basis points. It will still be negative. Okay. And then that upset the European bond markets.

You have the Bank of England go first with 25 basis points, four dissenters wanting half a point. That started to rock the bond markets a little bit. Then the press conference out of the ECB, and you basically had, goodness how many Sigma move it was in two-year bubbles, two-year German government bonds. But they basically went up over 20 basis points in a couple of hours, terminating early this morning, and they’ve stayed elevated.

And then you had this non farm payroll data. Everybody got it wrong. And the thing is, if you think this month’s figures are nonsense, well, look at the revision.

TN: Sorry, when you mentioned the NFP data, what’s important about the NFP data? Because I think some people looked at the headline employment numbers, some people looked at the wage rate. So can you tell us what’s important there?

NG: Two things. One is nobody was expecting a non farm payroll at like this. Some people will say, well, it’s always going to be revised. Well, okay, then look at the near $400,000 upward revision for December. It’s. All their data. The way it’s coming out. The BLS isn’t necessarily the best, but everything that they look at is strong labor market.

The thing that really upset the bond market was the average hourly earnings. 5.7%. To Albert’s point last week. Wage inflation is here to stay. So having been inundated with calls this morning, that really affects what the Fed… The Fed actually are fighting for their credibility.

TN: When you say wage inflation is here to stay, but it’s really, is the Fed trying to break the back of wage inflation?

NG: Well, that’s something they could impact. Right. By increasing the demand side of the market. We’ll have another idea on inflation next week. The CPI. And the lowest forecast is 7%. The highest is 7.6%. They’re not getting the favorable comparisons because oil has continued to move up. Energies continue to move up. Right.

So assuming we’ve got a seven big handle and heaven help us if we haven’t hit the 8 handle at all, this Fed has no choice. Because as you can see with the bond market, the bond market is going to do the Fed’s job if they don’t do, it.

So every time we get to what you had over the last couple of days with a bit of pullback before the ECB had a bit of pullback by some of the Fed members, the FMC members, and the yoke of, steepened.

AM: I got a question for you, Nick. Can you buy bonds if oil goes vertical? Because I think we both think that oil is going 120 north.

NG: Yeah. Well, no. I think that’s another reason why you can’t be long bonds at the moment and the bond market will adjust to it.

Everybody said the bond vigilantes are dead. When you look at the percentage moves and the price of the bonds, they’re not these are big moves going on.

TS: Nick, can you address a little bit about what will happen to the credit markets as far as the bond movement?

NG: High yield seem to do okay today, which investment grade, fine. Historically, in rising rates, you should see investment grade is somewhat better. High yield, no. High yield. I mean, if these rates are going to start moving up and some of the stuff I heard today tells me “one and done” is not going to happen. It’s going to be more and they’re not going to have a choice.

And the central banks have been basically what you had in the last seven or eight days is the central banks admitting they made a policy error or two last year. And now they’re fearful of making further policy errors. So they’ve got to be seen to do.

And again, to Albert’s point last week, clearly the Biden administration is, had their backs on the inflation front. And I suspect from what I was being told, we’re going to be quite surprised at potentially how aggressive this Fed could be. Not 50 basis points in March. That will be too quick. Too much, too quick. But May, June could well be in play because these numbers aren’t coming down. They’re just not coming down.

TN: Okay. So regardless Q2 is when things start to happen on the interest rate front, on the rates front, right?

NG: Yeah. In terms of QT, I was told the second half, beginning of the second half. Second half.

TN: So does that mean July or November?

NG: Probably means July. Okay.

AM: I honestly think it’s a possibility we do that beforehand just because fiscal cliff is coming in March.

TN: How do they go from QE to QT? Just like that? They shouldn’t be doing QE right now anyway. That’s true. It’s still doing QE. So they missed a beat there.

AM: How do you taper if you’re doing QE still? Why doesn’t anybody ask that question or answer?

TN: I ask it every week.

AM: Tony, I was on this thing with Andreas and “we’re going to taper.” I’m like, “okay, sure.” On paper. But the reality is you’re not because the QE is continuous.

TN: I don’t know. It seems to me from what Nick is saying, it may not be continuous. It seems like that has to stop because the policy position is going to stop in March. Right?

NG: Exactly. Which is why I think 25 basis points, not 50. However, I think right now, until they’ve caught up somewhat forward guidance is not going to be with clarity.

They want to get back to normal so they can be forward guiding according to what we were used to in the deflationary times. Pre-Covid. Okay.

TN: Okay. So when you say pre-Covid, you mean pre-Covid in terms of interest rate and balance sheet?

NG: Yeah. I think it’s exactly what I’ve been told this morning. They want to get back to the interest rate level that was prevalent then. They want their balance sheet back at that level.

TN: Okay.

NG: And I think that what’s happened is not only have they been shocked by inflation, they shouldn’t be shocked by the false-ty of their forecast, but I think they were shocked by the fact that we’ve got a lot of bubbles going on.

Equity market value, housing market, NFT, crude oil. Crude oil’s not a bubble. Bonds have been a bubble. So I think we’ve got some surprise. And of course, that will then feed it.

Remember I said originally, there’s either a riot in the bond market or riot in equity market.

TN: That’s right.

NG: One or the other. It started with bonds, and then we got a bit of an equity riot yesterday, which was more earnings related. But the thing about it is if you look at interest rates as gravity, zero interest rates with basically zero gravity. So you’re on the moon. Equity starts have been up here. If they’re raising rates, they’re increasing the level of gravity. News and law means that something starts to fall.

I was also told if it’s not a cascade, if it’s orderly, sort of down 20% from here, they’re okay with it.

TN: Okay. That puts us at what, 36?

NG: 35, 36,000, which is still above where we were before Covid. Right?

TN: Right.

NG: Fed will be happy with it. This put, is not, there’s no clarity on the put anymore.

TN: Okay. Is it safe to say that your view by the end of the year is sometime between now and the end of the year will hit 35, $3600?

NG: Look, the Fed. These rate markets will carry on. Any mistake by the Fed, any hesitation, it’s going to be punished by rates. And you’ve seen what’s happening, and it happens. It crosses over. You saw what happened in the European bond market as well this Thursday. Bank of England. You saw Gilts market also adjust, and that flowed through to the US market and it continued today.

TN: So do you think the ten-year crosses 2% next month?

NG: Oh, yeah. My target on the ten-year for this year is 260.

TN: Okay, great. So let’s take that and a central bank’s reaction, inflation. Tracy, we’re seeing crude prices just kind of a rocket ship. So can you talk us through that and let us know how does that contribute to next week’s CPI? And Nick mentioned CPI, but what do you expect for that as well?

TS: Well, I mean, I expect CPI to be high. However, the Fed doesn’t really include energy and housing in there and food in their metrics. So that doesn’t necessarily play into that.

That said, I think what we saw today was a lot of shorts being squeezed out of the market. That said, still expecting higher crude prices later this year into Q3.

The reason being because the global oil inventories just drew another 8 million. We have OPEC that just announced another 400K increase for next month this week. Right. And they haven’t even been able to keep up with their production increases. I mean, their compliance is over 132% right now. They just don’t have the spare capacity to move forward. US products consumed last week hit 21.6 million barrels. That’s over 2019 levels.

So globally, we’re seeing higher demand with lower supplies. So this market is likely to continue higher just because of actual supply and demand issues, which I’ve been talking about week over week.

What’s also interesting today is that nobody’s really talking about is that Saudi Aramco just announced that they’re mulling another 50 billion equity stake sale. Right. And so it would be a good thing to keep kind of oil prices higher and inventory is kind of lower. Right?

TN: Sure.

TS: There’s a lot going on in the market right now.

TN: Okay. And as we see this cold front come through different parts of the US, of course, it’s winter. But do you expect, say, Nat gas to continue to rally or say, for the next couple of weeks or next couple of months, or do you expect that we’re kind of in the zone where we’re going to be through the winter?

TS: I mean, I think we’re kind of in the zone. US nat gas prices are not as subject to the volatility or the constraints that say European nat gas prices are concerned. I mean, we have an overabundance of Nat gas, we tend to flare it.

We’re going to be this year the world’s largest exporter. Right. But that’s not necessarily going to bring I mean, you have to look at our gas prices trading at four or $5 compared to nat gas prices in Europe trading at $40. So I think we’re at a sideways market right now just because of the oversupply that we have.

What we are saying is depending on what area you live in, then natural gas prices tend to vary. So we’re looking at the North East, for example, where we have this cold front. Nat gas prices are at $11. Right. But Henry Hub, which is what everybody’s trading is still at 4 to 5. We’re going to see not gas prices rise in Texas right now because we have a cold front coming through. But again, that’s a regional market.

TN: I was just complaining about gasoline prices being $3 here in Texas earlier today, so I just can’t deal with it. Where is it where you guys are?

AM: $4.25 in Tampa.

TN: $4.25?! Holy cow. What about you, Tracy?

TS: $3.99 in the Northeast.

TN: We’re right at $3, and I can barely stand it.

Okay, let’s move along with the geopolitical stuff. So, of course, Ukraine is on everyone’s mind. And we’ll put a link to this in the show description, the video from the State Department spokesman and the AP diplomacy reporter. Albert, can you talk us through a little bit of that kind of what’s happening there and what is that doing to the situation to find a diplomatic solution?

AM: Well, simplistically, I mean, you have the Biden administration trying to amp up the rhetoric and make it more dramatic, basically to distract from what’s going on domestically in the United States from inflation and social issues, and SCOTUS picks down the list of the problems that are facing the Biden administration. That exchange was unbelievable.

You had an AP reporter just taking him to task and saying “where’s the declassified information? And his response was, “I’m telling you verbally right now, and that’s the declassified information.” That’s unbelievable. You’re not going to get away with that.

This is just more of a symptom of the ineptitude of Anthony Blinken as Secretary of State. He shouldn’t even be called “Secretary of State” anymore. It should be “Secretary of statements,” because that’s all he does. He doesn’t do anything else. And when it’s concerning with Ukraine and his method for, “diplomacy”, he’s a non factor. The United States is a non factor, right now.

They’re behind the eight ball where they keep talking up this rhetoric and putting their allies in Europe behind the black ball here. What do we do here? We need support from the United States to show strength, but realistically, we can’t stop them going into Ukraine.

TN: Okay. Yeah. So let’s just go onto a viewer question here from @SachinKunger. He says, what will happen if there is an actual escalation between Russia and Ukraine? What’s the likelihood of actual escalation and what do you think would happen? Both you and Tracy? Part of it is commodity prices. Is there an impact on commodity supply chains, meaning wheat and gas and other stuff to Europe or other places, or is that not necessarily a huge issue?

AM: Well, I believe we’re about 75% that they’re going to have some sort of incursion into Ukraine. I mean, you don’t mobilize that many people and create supply chain logistics to not do anything. That question really depends on the level of incursion. Right. Because if it’s just ten, 20,000.

TN: It goes back to Biden’s minor incursion.

AM: That’s the Pentagon’s working model. And that’s my working model. 10, 20 thousand, you go in the same place as you were before, you loot the countryside, cause a little disturbance. The west looks weak. You leave after a month or so. Right. That’s the likelihood situation.

Of course, the markets are going to freak out in day one.

TS: That’s exactly what I was going to say. I mean, obviously you’re going to see a reaction in the commodities markets just because we’ve had four years of really not much geopolitical risk factored into a lot of these markets, the agricultural markets, the energy market. Right. Pretty much after Libya had a ceasefire in 2020, all that risk premium kind of came out of at least the energy markets and the agricultural markets, we haven’t really seen a lot of geopolitical risks.

So of course, the markets will freak out. I totally agree with Albert on this point. Whether that’s going to last or not, that’s a totally different story.

TN: Yeah. I also think that we’ve had so much money supply that that cushions geopolitical risk on some level. And interest rates have been so low that that cushions geopolitical risk as well. So as we’re in this interest rate cycle and this balance sheet cycle, geopolitical risk counts for more. It’s more costly for companies, it’s more costly for countries and investors.

NG: I would add one other thing. These markets are not trading liquidly. So these moves on geopolitical risk could be exaggerated. Right?

TS: Exactly. My point is that geopolitical risk will be exaggerated at this point.

NG: You can see there’s no liquidity, right?

AM: Yeah. To be fair, any kind of event right now just makes the markets look like it’s a crypto exchange. 30% up, 30% down 300 points on the ES. That’s insane.

TN: On that, Albert, let’s move to some tech earnings and let’s talk about Facebook and Amazon. So if we want to talk about big moves, everyone kind of knows this, but can you talk us through a little bit of that? But I’m more interested in why it’s happening. Why is everyone negative on Meta and why are they positive on Amazon?

AM: Well, from my perspective, the Fed and their cohorts use maybe a dozen companies to pump the markets. Right. They’re mainly tech. Right. They’ve expanded out into a few other things, but it’s mainly tech, Facebook being one of them, Amazon being another. AMD and Google and all these guys. Right. All these big tech names.

Now when you see Facebook miss and a couple of other miss, and the markets start to get weak, there’s a point to where… This goes back to what Nick says about different levels in the markets and whatnot. He always stresses that with me. There’s a point to where if they break this level, we’re going down to 4100 or 4000 or God forbid, 3900. Right. So that lined up right when Amazon’s earnings were coming up. And I’m looking at the market and I’m looking at these levels and I’m like, there is absolutely no way they’re going to allow Amazon to miss. Whether they let them look the books or say something in guidance or whatnot. And lo and behold, what happened? Amazon beat. Did they really beat? Probably not. You know what I mean? Yeah. And then Pinterest that nobody cares about beats and then Snapchat. I don’t even know what the hell why they’re a company. They beat unbelievably. I think they were up like 50, 60% and after hours. Right.

So now they have their juice to pump the markets back up to 45, 30 or even maybe 4600 next week before the fiscal cliff becomes a problem.

TN: Okay.

TS: You also have to look at the bond market. Right? I mean, the more the ten-year tanks, the more that’s going to drag on tech.

TN: Right. So what does that tell us about the next couple of weeks, specifically next week? But the next couple of weeks? As we’ve seen, say Meta come down, Facebook come down. But we’ve seen these other things really rally. Where is tech as a sector?

AM: It’s a pump sector. That’s all it is right now. There’s nothing really behind it. It’s built on zero rates. Well, we know we’re going to get rate heights. So what are you betting on at the moment?

TN: Right. And that’s the basis of my question. If tech is a deflation play and we’re in inflationary environment and we’re going to have rate rises, what does that mean for tech in the near term? So are we at the kind of tail end of tech? That’s my real question.

NG: We’re at the tail end whilst we have to see these interest rate rises come through. And actually, you don’t necessarily have to see the central banks officially raise because if they don’t, the bond markets are… And then there’ll be a catch up. This is the problem. If they Underperform in their credibility catch up because they’ve already implicitly admitted their errors of policy, bond market will adjust and they have to catch up again.

Now, if they do something surprising on the rate side. So yesterday was an ECB shock, right? Today, there was nothing to do with the Fed. It was the data. Well, we’ve got that CPI date next week. Right. That’s going to be very interesting because I agree with Tracy. Core is at a certain level which is still too high. But it’s the full Monty, the full CPI that labor uses when they’re discussing their wage claims. Practically, that’s the behavior of economy.

TN: CPI is the single biggest event next week. Is that fair to say?

TS, AM, NG: Yes.

TN: Okay, so let’s look at that. What if it is, say seven, which is kind of the expectation, I guess the lower bound of expectation kind of. Right? So let’s say it’s seven or let’s say it’s even five. What does that mean for us? Does that mean continued, easy Fed? Or does that mean you have the same assumptions and that’s just kind of a milestone or something that we’re passing along the way to higher rates anyway?

NG: We’re on the way to higher rates anyway.

TN: Okay.

TS: I mean, if it’s five, the market, temporarily if it’s five, the market temporarily will probably rally because that lessens the effect that Fed is going to raise. Right. That percentage will probably go down. But that’s a temporary. If we’re just talking about market reaction on the data release, I don’t really see that happening. I don’t see 5% coming in. I don’t see that a possibility.

TN: But then let’s look at the other side. What if it’s eight and a half? What happens then?

NG: Well, then in the old days, it would have been an inter meeting rate hike.

TN: Okay. Right.

NG: And the bond market will just, it’ll be another riot. Even if the core is steady. Big figure eight on the full CPI? that would shock a few people. Like people were shocked today with the non- farm payroll data.

Literally, if you could watch Bloomberg TV, it was like. They couldn’t believe what was going on.

TN: So we’re in that place in the market where the porridge has to be just right. Is that fair to say?

TS: I think we’re in for volatility. Right? I mean, we’ve been experiencing volatility for the last month or so. I think this will continue until March, until we have some resolution of whether the Fed is going to raise rates or not.

In between, it’s going to be volatile because everybody’s looking at intermittent data saying, does this mean the Fed is going to raise rates? Does this mean the Fed is going to look do you know what I mean? So I think we’re in that pushbull thing, and I think that volatility will continue into next week. I think that volatility will continue until actually the March meeting, until we get some resolution on whether the Fed is going to raise rates and by how much.

TN: Okay. So if I just a couple of things for you to agree or disagree with, just short yes, no. Next week volatility in equities with downside bias, you agree or disagree?

AM: Disagree.

TN: Disagree. Nick, you agree or disagree? Downside bias, you agree. Tracy, equities, agree or disagree?

TS: I think it depends on the sector. Okay. Give me one or two. I think we’ll see, my downside bias is in tech and then obviously, yes, because it’s heavy tech. Right. And so I think we see sideways markets in the Dow and the Russell.

TN: Okay, then let’s do the same exercise for commodities. I know there’s a lot of companies out there, but generally commodities. Choppy with an upside bias. Agree or disagree?

TS, AM: Agreed.

NG: That’s a dollar call.

TN: Okay. Explain that.

NG: Yesterday because of the dollar’s weakness against the Euro and the Dixie, I tend to agree with you. I think it’s going to be choppy until we see the color of the CPI number.

TN: Okay. Very good. Anything else to add for the week ahead?

NG: Just keep your eyes on the bond market. My mantra.

TN: Very good. Okay.

TS: Keep your eyes on B come.

TN: Thanks guys. Thanks very much. Have a great weekend. And have a great week ahead.

TS: Thank you.

TN: I don’t know the left side of my screen is the pineapple people.

AM: We’re going to call Nick Luke for the episode today.

NG: The professional version of Luke.

AM: Okay. Anyways, I’m done joking. Let’s get this thing on the road. Okay.

TN: Good. Alright.

Categories
Podcasts

Impact Of PBOC (China’s Loose Monetary Policy)

BFM 89.9 asks Tony Nash from Complete Intelligence on how China’s PBOC adoption of looser monetary policy will affect the yuan and the broader Chinese economy. 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/impact-of-pboc-chinas-loose-monetary-policy on December 24, 2021.

Show Notes

SM: BFM 89 nine. Good morning. You’re listening to the morning run. I’m Shazana Mokhtar are together with Philip See. It is Christmas Eve, Friday, the 24 December 9:06 in the morning. But in the meantime, let’s take a look at the activity on Bursa Malaysia.

PS: It’s flat like Coke without any bubbles.

SM: Oh, no, that’s the worst kind of flat.

PS: Yes, the foot sabotage. Malaysia is flat slightly down .09% at 1515.

SM: So still above 1500.

PS: Still above 1500.

But it’s been yoyoing a bit green and red so far. But the rest of the markets across Asia are in green territory. The Straits time is up at 3100. Cosby also up 58% at 3015. Nikkei also up zero 6%, 28814. Now, just to bring your attention, looking at the crypto Bitcoin 5998.65 above the 50,000 mark. Theorem also uptrend 4114115.184. Now, if we shift over to the currencies, ring it to US dollar 4.11988. You’re seeing some strengthening there. But across the other two currencies pound and sing dollar, we’re seeing some weakness there.

Ring it to pound 5.62967. Ring it to Sing dollar 3.0922. Now, looking over to the value board. Really. Smattering of small caps actually driving it, but cost number one Ata IMS at .72 cent unchanged, followed by SM Track up 13% at .13, followed by Kajura Tran asphas flat at .26%.

SM: Okay, so that is the snapshot of Bursa Malaysia at 9:09 this morning. We’re taking a look now at how global markets closed yesterday.

So if we look at the US markets, they closed in the green. The Dow was up 0.6%. The S&P P 500 was up zero 6% as well. The Nasdaq was up zero 9%. So a lot of optimism going into the Christmas weekend. Joining us on the line for analysis on what’s moving markets. We have Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us today. Now 2022 is just a week away. And given the triple headwinds of Fed tapering, Omicron and a China slowdown, will there be a difference in how developed and emerging markets in Asia are going to be impacted?

TN: I think with the tightening in the Fed and with what emerging markets are going to have to do, meaning in the near term, like China is going to have to loosen. So I think you’ll have a strengthening dollar and more of a rush for capital into the US, so that should at the margin, kind of help US markets stay strong across debt and equity. Other things. I think in emerging markets it could eventually China loosening. The PVC loosening could help demand in emerging markets, but it’s going to be hard to get around the hard slowdown that started in China around Omicron.

PS: I see.


And so when you contrast that to the Fed tightening, right. You said China PBOC is adopting a looser monetary policy. How will this affect the UN in relation to those Asian currencies in which there’s a lot of trade between these two countries?

TN: Yeah. CNY has been strong for a protracted period, and it’s made sense on one level, so China can import the energy and food, particularly and some raw materials that it needs in a time of uncertainty. So the PVC has kept it strong through this period. What we’ve expected for some time. And what we’ve shown is that after Lunar New Year, we expect the PPOC to begin to weaken the CNA. We don’t think it’s going to be dramatic, but we think it’s going to be obviously evident. Change of policy, Chinese exporters, although they’ve been producing at not capacity, but then producing pretty.


Okay. China is going to have to devalue the CNY to help those exporters regain their revenues that they’ve lost over the last two years. So we’re in a strange period globally of moving from kind of state support back to market support, whether it’s the US, Europe, Asia, we’ve really had state supportive industries, state supportive individuals as we move beyond covet. Hopefully we’re moving more into a market orientation globally, and there will be some volatility with that.

PS: Yeah, but I was wondering for China, especially, I’m interested to know what the state of the Chinese consumer will be in 2022 because the government is worried for slow down. Right. And wouldn’t they want to expedite and give a bit more ammunition to the Chinese consumer?

TN: They would. But the problem is with Chinese real estate values declining, a lot of consumer debt is secured against real estate. And so the ability of Chinese consumers to expand the debt load that they’re carrying. Is it’s pretty delicate? It’s a fine balance that they’re going to have to run. So either the economic authorities in China push real estate markets up to allow Chinese consumers to keep debt with their real estate portfolios, or they make other consumer debt type of rules that allow Chinese consumers to hold more debt.

Real estate is the part that’s really tricky in this whole equation in China, because if real estate values are falling, the perceived wealth of those consumers is falling pretty rapidly as well, and the desire to consume excessively, it’s just tempt out.

SM: And I suppose still sticking to our view of China looking at metal commodities, what metals have been affected by the slowdown of demand in China? And do you foresee a recovery for them in early 2022?

TN: Yeah. We’ve seen industrial metals like copper and steel, and those sorts of things really slow down dramatically compared to where they were earlier in 2021. We’re seeing reports of, say, copper shortages at the warehouse level at the official warehouses in China, but that’s not real. What we’re seeing and I speak to copper producers in Australia and other places. What they’re telling us is that those copper inventories are being shifted to unofficial warehouses to create a perception of shortage. So we may see a run. We may see an uptick in, say, industrial metals prices in early 22, but we don’t expect it to last long because the supply of constraint is not real.


So until demand picks up for manufacturing and goods consumption. And the other thing to remember is we’ve had a massive durable goods wave through covet. Everyone’s talked up on durable goods. Okay, so there is almost no pent up demand for durable goods. And this is the stuff that industrial metals go into on the demand side, there are some real problems on the supply side. There seems to be plenty of supply in many cases. So we don’t necessarily see the pressure upward, at least in Q1 of 2022 on industrial metals.

PS: And that’s why I’m quite interested where you say that this demand is, I think slowly going to dissipate because yesterday key US inflation gauge sharpest rise in nearly 40 years, right? Personal consumption expenditure surged 5.7% in November. How long do you think this elevator level will last?

TN: Well, US consumers are pretty tapped out. So I think inflation happens for a couple of different reasons. Some people say it’s only monetary. Not necessarily true. We’ve seen real supply constraints that contribute to inflation. We’ve seen demand pulls because of overstimulating economies, and those two things together have accelerated inflation. And so we have to remember at the same time in 2020, we saw prices. If things go down pretty dramatically around mid year, say a third of the way through the year to mid year to just after mid year.

Some of these inflationary effects have been a little bit base effects because prices fell so hard in 2020. But we have seen consumption ticking up because of government stimulus. And we have to remember if the Fed is tightening things like mortgage backed securities, their purchases of mortgage backed securities will slow. Okay, so if people can’t refinance their house or buy new houses again, those wealth effects dissipate if you have a home. If your home price is rising, whether it’s the US or China or elsewhere, the wealth perception is there and people have a propensity to spend.

But if the Fed is pulling back on mortgage backed securities, then you won’t necessarily have that wealth effect that will dissipate. So government spending will decline marginally because build back better didn’t pass. We won’t have that sugar rush of government spending flowing into the economy early in 2002, although we may see something later. I believe governments love to spend money. So I believe the US government will come with some massive package later in the year to bring government spending back up.

SM: Tony, thanks very much for speaking to us. And an early Merry Christmas to you. That was Tony Nash, CEO of Complete Intelligence, giving us a quick take on what he sees moving markets in the final year. In the final weeks of 2021. Looking ahead to 2022.

Categories
Podcasts

BBC Business Matters: Vaccine mandates announced

Biden just announced that all Federal employees are required to be vaccinated. What does this mean to the US and especially the private sector? Tony Nash joins the BBC Business Matters for a discussion on this. Also discussed are the BRICS and how they are catching up to the world’s major economies and will the environment be a big priority in the next US election?

 

This podcast was published on September 10, 2021 and the original source can be found at https://www.bbc.co.uk/programmes/w172xvqj8vfxhr5.

 

BBC Business Matters Description:

US President, Joe Biden, has announced that all federal workers have to be vaccinated against Covid-19. He’s also instructing the Department of Labor to draft a rule mandating that all businesses with 100 or more employees require their workers to get vaccinated or face weekly testing. And as the BRICS leaders meet, is the loose alliance of Brazil, Russia, India, China and South Africa working? We hear from Professor Miles Kahler, a Senior Fellow at the Council on Foreign Relations in Washington DC. Facebook has been accused of breaking UK equality law in the way it handles job adverts. The campaign group Global Witness said the social network failed to prevent discriminatory targeting of ads, and its algorithm was biased in choosing who would see them, as Naomi Hirst from the organisation explains. Also in the programme, we find out why the issue of climate change has become such a dominant theme in the upcoming German federal elections. And the American car giant, Ford will stop production in India; we get analysis from Nikhil Chawla, a business journalist and proud Ford owner based in Delhi. We’re joined throughout the programme by Jyoti Malhotra, National & Strategic Affairs Editor at The Print; she’s with us from New Delhi. And Tony Nash, co-founder and Chief Economist at Complete Intelligence, is with us from Houston, Texas. (Photo of President Joe Biden by Kevin Dietsch/Getty Images).

 

Show Notes

 

FW: It’s good to hear you, Tony. Back last summer, when the vaccine was a fantasy, we didn’t know how far they were getting and how fast they were working. I remember an astute commentator on this show saying it answers the question, should the federal government get involved in forcing people to have it, if and when it becomes available said, “no way, no way, because it’ll polarize opinion. Leave it to business.” Is the President going too far with this?

 

TN: I do think he is. I think forcing this through the private sector as an enforcement vehicle is polarizing, will say that much. I think this will drive a political wedge, like very few other things, and I think it’s somewhat intentional. I’ll say I don’t necessarily believe that public health is the guideline. I’m looking right now at COVID figures for Texas, and the fatality rate is something like 40% lower than it was during the cycle we had in Q1 in February.

 

So I think people are looking at the data we’re accustomed to COVID, and we’re accustomed to these data, and I think he sounded quite a lot like he was lecturing and talking down to people. And the folks that have not been vaccinated wouldn’t really appreciate that. So it’s politically polarizing. There will be more States rights issues that come out of this than I think he had intended.

 

FW: Okay, that’s an interesting thing that we’ll be watching. Is it not the case or there are those who may disbelieve the figures, the assertion being that 97% or so of those in hospital with COVID have not been vaccinated, and that would suggest that the president’s got the message exactly right. These 80 million, whatever their reasons, they are the most vulnerable.

 

TN: So, I haven’t seen those data divided at the state level, and those data differ dramatically from what we see out of Israel, which is one of the only governments that’s got very transparent data on who is vaccinated, at what stage they’re vaccinated and so on. So the data from Israel tell us very differently than 97%. So whether I’m vaccinated or not isn’t necessarily a part of this discussion. I think what really matters is we have to look at data, and the American system is one where if you look at American health care, if you look at American public health, for the most part in our history, individuals have been able to decide on the course of their own treatment and what has happened with American government that’s happened under Trump. This is happening under Biden. This has happened at some state levels where governments are telling people how they have to manage health care, and it’s not left up to them. So, again, this is translated by a number of Americans, not as a public health policy. iIt’s translated as an individual and States rights policy. So we’ve already had a number of governors, Oklahoma, Georgia, Missouri, other places, Florida and Texas will come out soon, basically saying this will not be enforced in my state and this is a state rights issue.

 

FW: Very interesting. Let’s go a very quick one if you would have both of you about the corporate side. Seems to me we discussed this a bit on the show, Tony, that in America, a company has immense power to tell its employees and fire them. We talked to one instance about CNN firing three employees who haven’t had the jab. Is that something that the President can count on?

 

TN: Can you count on companies to do that? Yeah. I think you’ll have plenty of companies who will not do it. So it will likely come the Federal through OSHA, which is a health and safety Department in the US government, and they’ll issue mandates. The question is around enforcement mechanisms. I think the main problem with this is the forcing it on smaller companies. The expectation is that it would be on bigger companies, but it’s companies down to 100 staff. And you’ve got a lot of very independent, very willful heads of smaller companies who will outright refuse to do this. I think larger kind of corporate America folks, no problem. They’ll get it done

 

FW.  From a US perspective. Tony, thanks, Joy. From a US perspective, is this a kind disaster for Ford, or is he just a really hard nose business decision that has been made by Jim Farley and 2 billion for Ford? It’s affordable. Yeah.

 

TN: I think it’s just a business decision. I think Americans obviously want to expand overseas, but in markets where the difficult people understand. So I just think it’s seen as a business decision.

 

FW: And that moved to China. That Jose said that is the business decision.

 

TN: It is. Yeah. And for got some catching up to do with General Motors there as well. So I think that’s the bigger priority.

 

FW: Tony, react to that if you would, because there’s a suggestion and I might be taking this too far from what Jody was saying. But when we had the professor talking about these constant ideas of reforming the multilateral system and redefining a multipolar world, it sounds what Jet is suggesting is actually this is all a bit hypocritical because it’s going to be mono, polo or unipolar. It’s just going to be China, that’s all.

 

TN: Well, I think that’s possible. But I also think that if we look at the three most active participants in BRICS, Russia, India, China, they’re strategic competitors. Yes, they’re rising fast, but their strategic competitors and they’re neighbors. So I think BRICS is a really interesting organization, kind of to ensure that they don’t become competitors or aggressive competitors too quickly to be able to cooperate in finance, cooperate and kind of cross border things. Other social programs, investment, that sort of thing. I think I remember when BRICS was announced, and I think it was kind of a neat thing to have, but there wasn’t an understanding of how important these economies would actually be. Now that they’re there, of course, as Jose mentioned, Brazil in South Africa just haven’t kept up in terms of relevance and importance. But the Russia, India, China part of BRICS really has, it really has. And I think it’s necessary to keep the kind of temperature low between those countries. I think there’s a lot of friction between the or potential friction between those countries.

 

FW: So just to pick up on that. From a DC perspective, does the State Department watch a BRIC summit and think the three primarily, China, Russia, India, these are countries need to be following closely in what they do in their internal relationship because we have to watch them all for different reasons.

 

TN: Will the State Department watch the brick summit. I think they would. I am not sure what they would do with it, because I think the US has opportunities to apply diplomatic carrots and sticks in different ways outside of multilateral, because it’s one of the leading economies and one of the leading powers. It has opportunities outside of multilateral environments to do that. So what we have with BRICS is some countries that were, I guess, economically considered kind of small countries 15 years ago when it was formed. Now they’re actually big countries, and so they needed the multilateral environment in those days to get things done.

 

Now, they don’t necessarily need the multilateral environment as much. They can do more on their own. I would argue that any one of those top three BRICS countries potentially has more diplomatic ability than many countries in Europe. Whereas 1520 years ago, you couldn’t say that. So it’s really the countries themselves are a lot more powerful than they were. So I think it could potentially be an important organization to keep them somewhat aligned.

 

FW: Equipped Tony to you. Cop 26, just coming up in November. I guess that’s a full year ahead of the next midterms in the US. Would the environment play at all in the campaign?

 

TN: I think it will. I think it will be marginal. I think things like COVID and some social issues and the business cycle, to be honest, will be bigger issues than the environment. But of course, it’ll hit certain cities and certain demographics, but I don’t think it will be a major issue.

 

FW: Well, thank you both. It’s great having you with us. We’re off for now. Bye bye.