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The Week Ahead – 02 May 2022

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Sam Rines wrote a piece on business costs and uncertainty weighing on earnings this season. He talked us through what’s happening with interesting charts on Caterpillar and Old Dominion.

We saw Facebook turn dramatically this week and we saw KWEB up over 7% on Friday. At the same time, Amazon, Pinterest, and others with disappointing earnings. Tech isn’t really a sector-wide play as it was in 2020 and 2021. Alber Marko explains what should we be looking at in tech.

We’ve had a lot of action in Europe with Russia cutting off the gas in Poland and Bulgaria and a demand that oil and gas be paid in Rubles. Tracy Shuchart explains what it means for commodity prices and the market in general.

Key themes from last week

  1. Earnings: COGS in the Machine
  2. Earnings: Tech
  3. Europe-Gas-Ruble Chaos

This is the 16th episode of The Week Ahead in collaboration with Complete Intelligence and Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

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

Listen to the podcast on Spotify:

Transcript

TN: Hi everyone. This is The Week Ahead. I’m Tony Nash. We’re joined today by Tracy Shuchart, Sam Rines, and Albert Marko. Before we get started, I’d like to ask you to like and subscribe. Also, please note this is the last weekend for our CI future promo. $50 a month for thousands of assets reforecast weekly. So please go to completeintol.com/promo. Subscribe for $50 a month and you will get global market and economic information. Thanks for that.

So, guys, this week is a little bit exciting. We have a few key themes that we’re looking at this week. Two of them are earnings-related. One is COGS in the machine, which is related to a newsletter that Sam Rines put out today. The other one is tech. And the last thing we’re looking at is the Europe-Gas-Ruble chaos.

So, Sam, you wrote a piece today on business costs and uncertainty weighing on earnings. So can you walk us through this? We’ve got a couple of slides from your newsletter up. One is Caterpillar Earnings. Maybe you could walk us through that first and then we’ll go to the Old Dominion earnings and walk through why those are so important.

SR: I think it’s really interesting to kind of at least be able to get some real-world understanding of what’s happening on the ground. Right. We all know wages are going up. We know costs are going up. We know shipping costs are going up. But how that was going to be reflected through the earnings season was somewhat of an unknown. Right. We knew it was going to affect us, but we didn’t know to what extent.

The interesting part about Caterpillar and one of the reasons I like to point it out is that they had pricing power. They pushed prices pretty heavily down the system. The problem for them was that they couldn’t push the price as much as their materials and shipping costs went up. It was simply too big of a headwind, at least for the first quarter. Their orders are fine. The business itself is okay. But generally what we saw was pricing power. Not… There were a few, but pricing power was generally unable to keep up with the cost pressures overall.

The interesting one and kind of related to Caterpillar are Polaris. Polaris is one of the most interesting companies. It’s consumer-facing yet, it’s a manufacturer. It’s something you don’t need a new side by side typically. You don’t need it. Right. These aren’t needs. These are more of discretionary spending. They had a very similar problem to Caterpillar. But the end market user for these is very similar to Harley Davidson. There was another one that had issues.

The inventories are extraordinarily low. Right. Their inventory levels at dealerships are very low. So eventually when they can pick up their production, they’re going to be able to push up their production numbers pretty significantly just to be able to refill the inventory pipeline at their dealership. So while it’s a big headwind today, it’s worth watching call it nine to 18 months down the road when you begin to see signs of these material costs abating, the supply chains getting back to normal.

Those companies are going to be able to put up some pretty interesting numbers very quickly.

TN: So, Sam, will they leak in gradual price rises? Because it doesn’t sound like they’ve been able to do it all at once. But will they continue to raise prices even as, say, the primary factors of inflation start to abate a little bit?

SR: Oh, yes. That’s been a constant theme of this earnings season has been. We will continue to either try to find ways to squeeze costs out of the supply chain, and normalize those somewhat, but almost more emphasized was there will be price increases to offset all of this.

To your point on Old Dominion, they just tossed on fuel surcharges.

TN: Yeah.

SR: If you’re going to have problems with freight, fine. But we’re going to surcharge you on fuel. And they only pushed about 50% of their overall gain. And year over year was pure surcharge. So it was an interesting one.

TN: And fuel charges are sticky, right. They don’t take those off right when fuel prices go down, they keep those for a year after the prices go down, right?

SR: Correct. Right. It’s the interesting part about all of this is these price increases are not going to be reversed. Caterpillar is not going to take off their price increases. Polaris probably isn’t going to take off some of their price increases, Old Dominion is unlikely in the near term. These are going to be fairly sticky over time.

TN: Okay. So last week when both you and Tracy weren’t here and Albert and I did the heavy lifting to keep the show going, we talked about sticky prices and we talked about how we hit new pricing levels. Even if the rate of inflation slows down, we’ve hit new pricing levels. Is that semi-permanent? Is that permanent or is that transitory?

SR: It’s a step function, right. Okay. You step up and then you’re not going to step back down. You step up the price increases and then maybe you can trickle two or 3% inflation on top of that going forward. But step-functions do not reverse. And I would say that this is much more of a step function type deal.

TN: Okay, good news, Tracy. You were going to add?

TS: I was just going to add I mean, the business survey. The Fed business survey came out small business survey came out this week and they were looking at it in four out of ten small businesses said they were looking at price increases of 10% or more. So this is across the board, not just for mega-cap companies.

TN: Right. Yeah. And even since I talk about coffee so much, even one of the small coffee roasters who I know, said his costs had risen 50% over the last year and he was only able to put in a 20 to 25% price rise. But I’m certain that he’s going to continue to gradually work price rises over the next year or two as we’ve hit this kind of plateau, or at least step function in price rises. So good news all around. Right.

So as we stay on COG, Sam, you had a portion in your newsletter talking about Meta, and we’ve got that on-screen talking about their G&A increase. Can you talk us through that?

SR: Yeah. So I thought it was pretty interesting. They increased their employee base by 28% year over year. I mean, this whole idea is that hiring is tough. It wasn’t for Meta. But the funny part is, or not funny. But G&A was up 45, so you hired 28% more people, but G&A popped 45. Again, that’s a step up that probably isn’t going to step down any time soon unless they’re going to begin laying people off. Right. Maybe it’ll roll out of earnings next year, but it’s not going well.

TN: We’ve seen some tech layoffs, right.

SR: Some.

TN: Announced over the past week. It’s not like it’s not a huge trend yet, but we’ve seen a few.

SR: Yeah. And the other important part that I think was overlooked was Snapchat, Facebook, or Meta, whatever you want to call it, when they announced earnings, they cited that, listen, when you have inflationary pressures, wage pressures and you’re a small business, guess where the discretionary spend is, that’s marketing budgets.

Marketing budgets will get cut and get cut fairly dramatically and fairly quickly if you continue to have this. And not to mention if you don’t have the stuff to sell and you continue to have supply chain issues, it doesn’t make a whole lot of sense to spend a lot of money on marketing. So I think those two raised some red flags, I think we’re subtly overlooked by a lot of people sitting on.

TN: We talked about this last week and how a lot of ad inventories are likely to come online soon. So there’s a supply problem and a demand problem with those companies going forward. I think the names that come to mind will probably do fine. The smaller names are probably going to suffer. So it might be tough.

Albert, on that, we saw Facebook turned dramatically this week in the last half of the week after they reported earnings. KWEB was up 7% today, a stock that we talked about here a few weeks ago. But at the same time, Amazon, Pinterest, and others are disappointed. So tech was a sector-wide play in ’20 and ’21. It’s not that anymore, is it?

AM: Yes and no. The problem with tech is that there are about a dozen names that the Fed uses to pump the market. So forget about Pinterest. That’s too small of a company. We’re looking at Google, Facebook, Meta, whatever you want to call it. Not so much Amazon, but the other ones like AMD and whatnot? So they’re going to yoyo those earnings in those pumps. So what they’ll do is they’ll wait until Netflix…

They know that Netflix will miss and they’ll pump the market to soften the blow and then they know that Apple is going to beat so they’ll let the market sell-off and use that to drive up the market. So this is just a cat and mouse game by the Fed to just manipulate the markets until what they’ve been saying is a soft landing.

The tech earnings are just playing right into that narrative of theirs. They know what the earnings are beforehand and they just play the market like that. So going on with tech earnings? Yeah, I mean they are weak. We can see that they are incredibly weak.

Will they be weak for the whole year? I don’t know. They do like the Nasdaq. So I wouldn’t want to be short tech going into the summer. But that’s just my personal opinion. But then you see KWEB surge because the Chinese start talking…

TN: Ion subsidies. Right. And government activity.

AM: It is what it is and you never know what type of government contracts Meta, Google, or whatnot will start popping into their bookkeeping. It’s a really dangerous game to short tech in my opinion.

TN: Yeah, well it’s interesting to me to see the user’s numbers like aint Netflix and I know there’s a couple of weeks old now but Netflix goes down. Pinterest goes down, Snapchat. These sorts of things. Amazon was kind of tepid but Facebook was really good. So I think we’re seeing almost some elasticity in some of these markets as we see people going back to work and we see other things happening. We’re finding out who’s going to be there no matter what and whose demand is a little bit flexible.

AM: Yeah. And then you’ll also find that some of these tech companies will look to acquisitions to boost their user numbers going into the fall. So this is why I don’t like the short tech at this level.

TN: By the way, if anybody is looking for a tech acquisition. Right here.

AM: Yeah, cool. 46 billion. Cool 46 billion will do it.

TN: Okay. Let’s move on to commodities. Tracy, there have been a lot of issues in Europe with the ruble as we’ve seen more countries decide to pay for oil and gas in rubles. We’ve seen some interesting action with the Euro and the ruble and with gas prices. Can you talk us through what’s going on there? And really, what does it mean? Because we’ve seen the price action. But what do you see its kind of meaning going forward?

TS: I mean what it means is Europe’s not directly paying in rubles. Right. What they’re going to do is they’re going to set up an account at Gasprom Bank. They will continue to pay in Euros, dollars, and local currency. In turn, Gasprom Bank will convert that currency into a separate account. So it’s not technically against sanctions. It’s a workaround. Right.

The interesting thing is EU didn’t have a choice, to be quite honest. They’re dependent on Russia for 67% of their natural gas. They don’t have LNG storage facilities built out. Those are going to take at least two to four years. I don’t care what they say next year, it’s not going to happen. Those things take a very long time.

So right now, they’re kind of being held hostage by Russians. So they’re going to have to pay as much as they don’t want to. Now they can wean themselves off of Russian oil a lot quicker because you can have the Middle East pick up that slack and they don’t import all that much. Right. It depends on the country. But Europe is not a huge source of oil exports for Russia. So that can happen.

And so for what I foresee, they’ll probably do that just so that they say we’re getting rid of Russian energy. Right. So I think you’ll see Russian oil cuts, I think that can be done relatively quickly. But as far as nat gas, I think it’s going to take a lot longer than most think. Even though they said they wanted two-thirds off by the end of 2022 and then completely out of Russian gas by 2027.

Again, I think that’s going to take a lot longer than they anticipate.

TN: Yeah. Can you imagine the conversion fees that Russian banks are charging for Euro to ruble? We’ll never know. Right.

TS: Banks are going to make money. It’s good for Russia. Right. That keeps the currency stable and it keeps their economy stable. And so, I mean, it’s kind of a win for Russia on this because the banks are winning and their currency and economy are winning on this one.

TN: Yeah. So we also had an emergency kind of this week with Russia saying they would turn off gas to Poland. And they did. But Poland has taken other measures since the war started to get other sources of gas. So it didn’t hurt them all that much, did it?

TS: Yeah, no, not at all. I mean, it was Poland and Bulgaria. They’re very adamant from the beginning to get out of Russian gas. They also don’t rely on it as much as, say, Germany does. Poland already built out an LG storage facility tank that’s completed.

They also produce a lot of coal and they use a lot of coal. And so that was not a surprise to me, nor did it hurt those countries very much.

TN: Right. What country do you think is in the most difficult position right now? Is it Germany?

TS: Germany hands down. A lot of the reasons are because they don’t have any other pipelines into Germany except Russia. So they’re definitely in the weakest position right now.

TN: Okay. So, guys, what do we expect, like, with the ruble going forward? It’s hit its pre-war levels. Do we expect the ruble to strengthen?

TS: Right now, yes, I think that it probably will continue to strengthen just because they’re asking for payments of commodities in the ruble.

TN: They’re not asking.

TS: Well, yes, they’re holding hostage. But it’s not just in other words, it’s not just the energy complex. It’s metals, agriculture, et cetera. So I think that we’ll probably see that continue to strengthen.

TN: Okay. Hey, I also wanted to ask you about fertilizer. I saw some of the Fertilizer stocks come off a bit this week. I know that we’ve talked about fertilizer before. Is it still as urgent of an issue as it was, say, three weeks ago? And if it is, why are Fertilizer stocks coming, falling this week?

TS: Well, I think partially because we saw kind of natural gas pullback a bit. Right. That kind of alleviated the pressure. We also saw the broader market sell-off, which means sell what you have to if you get a margin call. Right. And you had something like IPI, whose earnings were not as good as they could have been. Right. Considering. So it’s kind of a combination of everything.

SR: Yeah. And you are beginning to see signs of demand destruction as well. There was an announcement by a Brazilian farming giant that they were going to cut their fertilizer usage by 25 or more percent this year. So, yeah. Yields down, fertilizer up.

AM: Not to mention the good old dollar looking like it’s going to go to 110 on the Dixie causing problem everywhere.

TN: What do you think about that, Albert? What’s the time horizon for 110?

AM: I think we get that within the next two months. Yellen is on a mission to destroy emerging markets. She’s going to do with the dollar. She did this in 2013 when she was Fed chair. So, I mean, it’s the same playbook. It’s nothing new.

TN: So if the dollar does hit 110, does it stay there for some time, or is it just kind of marking territory, saying, we can do this again if you don’t behave?

AM: I think it’s a moment in time. Keeping the dollar at 110 is going to cause really big problems across the world. So they can’t keep it there too long. But they can… Even China talking about the stimulus, 109 causes a problem for China. It’s quite an event to see that happen.

SR: Yeah. Into Albert’s point, and I think this is incredibly important, china has to buy food. Right. And they’re buying, you’ve seen the rip lower on RMB, CNY, that thing has gotten crushed over the last week. And they’re still buying corn and soybeans from the US en masse. And that’s getting much more expensive very quickly. That’s going to be a problem.

TS: The only thing that’s helping them right now is that their entire country is locked down. Right. I mean, that’s the only thing that’s helping slow the blow and kind of making these commodities pull back a bit so they’re not as expensive.

TN: But Xi has got to make some money to feed his people. Right. Otherwise, you’re going to have Mao 1961 all over again.

TS: What he’s doing is insane. Don’t starve your people. So obviously ulterior motives are going on there.

TN: Yeah. So we’ll talk more about China next week. Okay, good. Let’s have a week ahead lightning round, guys. What are you looking at? Kind of most Interestingly for the week ahead? Sam, if you can go first, what’s at the top of your mind right now for the week ahead?

SR: Top of my mind is going to be energy company earnings and what they’re saying about their production, whether they’re upping premium, where they’re getting production from, how they’re doing it if they’re doing it, whether or not Capex budgets are moving higher, how they’re moving higher and where. And then any comments on labor pipe concrete, et cetera, I think will be very interesting as we go through next week.

TN: I think you stole Tracy’s answer, though, right?

TS: Exactly what I’m looking at. I expect to look at production probably has not increased that much because I think they’re having labor issues and supply chain issues have not gotten any better, if not ten times worse. So that’s what I’m looking forward to.

Also always keep an eye on China. Beijing is just locked down or partially locked down. So how many more cities are we going to have, how many more States we’re going to have, and how many more people are going to be locked down for how long? Because that’s going to affect the commodities market in the midterm. But that said, if you look at the commodities complex, we’re still over 100, like 104.

So it’s still holding strong, even though we’ve had a lot of demand. They say about a million and a half barrels per day of China demand is kind of off the market right now.

TN: Yes. So if they come back online, it’s game on, right?

TS: Yes.

TN: All right. And Albert, what are you looking at for the weekend?

AM: Probably the most dovish sounding 50 basis point rate hike you’ll ever hear from the Fed. Like we did this and we’re sorry. If they want to break this market down sub 4000, go ahead and try to talk hawkish but I don’t think they want to do that. So Jerome will just put his foot in his mouth like usual and say something stupid but it’ll be dovish that’s what I’m watching.

TN: Sam, Fed guy? What do you think, Sam?

SR: I think the same. Listen, I think they’re going to try to avoid talking too much about another 50 basis points hike. They’re going to try to get away from providing clear forward guidance and be incredibly vague because if they’re vague about what they’re going to do then it’s going to be perceived as dovish. So agree with Albert, right? You get a 50 basis point hike and then we’re not sure what we’re going to do next, right?

TS: Somebody brought up like 75 basis point hike this week and the Fed was like, no, we’re not even considering that.

TS: Yeah, exciting. Sounds exciting. Okay guys, thank you very much. Have a great weekend. Thank you very much.

AM: Thank you.

TS: You too.

SR: Thanks.

Categories
Podcasts

Gazprom To Halt Gas Supplies To Poland

This podcast first appeared and was originally published at https://www.bbc.co.uk/sounds/play/w172ydpb2k5rfjd on April 27, 2022.

Russian company Gazprom says it will halt gas supplies to Poland and Bulgaria from Wednesday morning. Poland currently depends on Russian imports for around half of its gas. The country’s deputy foreign minister Marcin Pzydacz tells us his government was already been prepared for this move. Plus, the World Bank’s latest commodities report makes sobering reading, suggesting that high food and fuel prices could blight the global economy for years to come. We hear from its author, World Bank Senior Economist Peter Nagle. With Elon Musk poised to take over at Twitter, the European Union’s Commissioner for the Internal Market Thierry Breton tells us that the firm will be welcome to operate in the EU under new management, providing it adheres to the bloc’s rules. As Delta Air Lines reveals that cabin crew will be paid for boarding as well as flight time in a landmark announcement, the president of the Association of Flight Attendant Sara Nelson says unionization efforts by airline staff forced the company’s hand. And the BBC’s Ivana Davidovic investigates urban mining, the process of reclaiming raw materials from spent products, buildings, and waste. Throughout the program we’re joined live by Zyma Islam, a journalist with The Daily Star newspaper in Bangladesh, and by Tony Nash, chief economist at AI firm Complete Intelligence, based in Houston, Texas.

Show Notes

EB: Joining me today to help discuss all of this to guests from opposite sides of the world, Tony Nash, chief economist at the AI firm Complete Intelligence in Texas. Hi, Tony.

TN: Hi, Good Evening.

EB: Good to have you with us. Tony Nash in Texas, what do you think is interesting, isn’t it, because this could I don’t know, it could go two ways, just politically. It’s an interesting move from Moscow to, if you like, preempt European sanctions against Moscow by cutting off the supply to Europe.

TN: Yeah. I think the further this goes along, the more I like people buying oil and gas from Texas, since that’s where I live. So we’ll take that. But for Poland, less than I think, about 10% of their electricity mixes from gas. So it wasn’t a majority gas driven market anyway. So they were very smart to put resources in place, alternatives in place. And, of course, it hasn’t been cost free. It’s taken a lot of resource to get that in place, but it’s good for them. And being on the border with Russia, they have to be prepared for anything.

EB: Yeah. I mean, gas is obviously very important during the winter months and we’re entering spring. So maybe European countries are feeling the crunch a little bit less strongly. Nonetheless, the question does remain, is Germany especially willing to cut off the oil? The oil is by far the bigger element, isn’t it, in terms of Russian revenue from its energy exports? And that’s the thing that Europe is resisting so far. Do you think we are pushing in that direction?

TN: I think if the fighting continues, they’ll have to. The problem is they don’t really have alternatives right now. And so that’s their dilemma is Europe did not diversify when they should have, and now they’ll pay much, much higher prices. So that will eat into European economic growth and it will really hurt consumers. So I think Europe is in a very difficult position. That’s obvious. But a lot of it is on some level, I wouldn’t say completely their own making, but they had opportunities to diversify, which they didn’t take.

EB: Yeah. I mean, Tony, everyone wants to get their LNG from Qatar and they all from the United States. There are going to be some pretty wealthy Qatari and American exporters of LNG, even if they can meet the demand next year.

TN: All of my neighbors in Houston are benefiting. I’m not in the oil and gas sector, but they are certainly benefiting from this.

EB: Let me bring in Tony there. I mean, we saw a story this week, Indonesia, for instance, banning the export of some palm oil food protectionism could be a thing. We’re not really talking about that yet. But those countries I mean, Bangladesh neighbor, India, will it start cutting off its exports when it starts to see global prices rising and perhaps being more pressure on its domestic supply?

TN: Yeah, it’s possible. And we also have a situation where the US dollar is strengthening and emerging market currencies are weakening. So these ad commodities are becoming more expensive in US dollar terms for sure. But it’s an accelerated inflation rate in emerging market currencies. So one would hope that, say countries like China, who are suffering with this, who devalued their currencies in a big way over the last week, would start to put pressure on Russia to resolve the conflict so that both Russia and Ukraine can start exporting food commodities again.

EB: Tony Nash, what do you think? I’m forgetting the unicorn thing. Could officials come down that hard on Twitter, a new, less regulated Twitter platform under Elon Musk?

TN: Well, let’s assume that he obviously doesn’t understand the technology is regulating 100 million Europeans could turn on their VPNs tomorrow and access Twitter from a pop outside of Europe in 5 seconds. It would be no problem at all. So Twitter could unilaterally shut down in Europe and they’d still have 100 million customers on the European mainland. So he has a fundamental misunderstanding of the technology that he’s supposedly regulating. But what I don’t think he also understands is Twitter has people like Rouhani from Iran and Vladimir Putin and Chinese people who deny that they have a million Muslims in prison and all this other stuff. So why is he not cracking down on Twitter for allowing those guys to have a voice when he’s worried about Elon Musk, who is a loud guy, but he’s a pretty middle of the road guy, seemingly. So I just don’t understand why there’s so much hyperventilating about Elon Musk. I don’t get it.

EB: So you’re along with, I guess certainly a large number of Republicans in Congress right now who are saying bring it on. We’re delighted that this takeover is happening because we imagine we’re going to see a much less regulated platform.

TN: Let’s take another view. Let’s take Jeff Bezos, who owns The Washington Post. Right. It’s a media platform, and it’s had some really questionable practices over the past few years. So why aren’t media regulators in Europe looking at The Washington Post? They’re just not. And so I think if Musk is really going to have Twitter be in the center and not moderate except for things that are illegal, then more power to them. It’s in the spirit of the US law from the 1990s that said that internet content publishers can’t be sued because they’re not Editors. They’re only publishers. So I think it’s more in the spirit of the 1990s Internet regulation than anything that’s out there today.

EB: Tony Delta in Atlanta, that’s not a million miles from where you live, is it? Do you have sympathy for the flight attendants here?

TN: Yeah. It’s insane. I never knew about this. So no wonder the flight attendants are less than cheerful when we arrive on board.

EB: Especially for the check in bid, right?

TN: Exactly. It’s just insane. They’re in uniform, they’re working. Why they’re not paid. I just think that’s insane.

EB: The unionization drive does seem to be gathering a bit of pace in America, doesn’t it, right now. And we mentioned we’ve referenced all those other companies. It’s the mood of the moment. Yeah.

TN: Well, labor has the strong hand right now, and wages are rising. And when labor has the strong hand, you see more unionization. So it’s just a natural course.

EB: But it has been decades during which Union participation in the state certainly has gone down, isn’t it? I mean, since I’m in the 70s wasn’t right.

TN: But if we look at the rate of baby Boomer retirement, we have a lot of people going out of the workforce right now. And so we do have tight labor markets because of it. And that’s really part of what’s pushing the strength on the side of labor. And so this stuff is demographic.

EB: And it’s typical when it comes to technology. I mean, I have a personal take on this. I went to Acra in Garner in 2015 to the famous Agbog blushy central dump there, which is an extraordinary place. It’s one of the largest of its kind in the world. Miles of waste, all kinds of things. They’re burning cables just to extract the copper from the tubing and the wiring. But the air, I mean, it took me 24 hours just to feel my lungs clear from that place. It’s an extraordinary thing, isn’t it, Tony Nash, don’t you think it’s strange that the market around the world, the free market, hasn’t found a system whereby the value of old units is recycled efficiently?

TN: Yes. So if I want to recycle electronics here in my local town, I take it to a center and I have to pay them to take it. So they’re taking gold and platinum and other great stuff out of there, but I have to pay them to take my recyclable electronics.

EB: Is that why? I mean, do you understand the economics of that? Because you’d think that supply and demand would suggest that if there were a competitive value in the goods that they’re extracting, there would be competition and therefore there would be people offering lower prices or perhaps even paying you for your old stuff?

TN: Yeah, I understand the competition of it, but I think I just want to get rid of the stuff. And I think that’s what they realize is they can charge people just to get rid of old computers or phones or whatever, and then they get money on both sides.

EB: The big corporations, Tony, have a bigger responsibility here. I mean, they’re the ones producing the stuff. They’re the ones, I guess, I don’t know, paying for the extraction of some of these rare Earth metals and everything else. Some of the toxic stuff coming from places like Russia, Latin America, the DRC, and those are the things that are then being spat out and causing all kinds of pollution.

TN: Sure. I would think, for example, the phone manufacturers and the mobile carriers would have an incentive to collect the old phones from people.

EB: Yeah, but do you think regulators should be doing more here?

TN: I don’t really know. I think regulation tends to kind of contort things like this, And I think for something like this would potentially create an unintended economic opportunity. So we heard about the person in Bangladesh who collects used items in Singapore. I lived there for 15 years. We had somebody called a Karen Gunn person who would collect used electronics and other things and buy our house. So whether it’s that local person or whether it’s an Assembly Or a disassembly location, say, near my house, Those are people who are focused, who are specialized on what they’re doing. I do think, though, that the people who create this actually should have some sort of incentive, not from government, but from their customers to collect this stuff Once they’re finished with it, because it’s costing me money to get rid of it, but I’m paying them for it.

EB: Okay. A couple of minutes left in the show. I’m going to ask you both now for a quick thought about the things that have caught your eye most in the area, the news stories that have caught your attention. Tony, tell us in Texas what’s catching you up there?

TN: It’s really hard to follow that. So in Texas, one of the things that’s happening and this is not new, but it’s becoming more and more common is if you take your car out somewhere, Even in just a normal neighborhood, to, say, a shopping Center, It’s pretty common for someone to come even in the middle of the day and steal the catalytic converter off of your car. You go into a restaurant or a shop and you come out and someone has taken the catalytic converter off your car, which is a key part to muffling sound, and they do it for the precious metals in that piece. So that’s becoming very common here again. It’s happened for years, but it’s becoming much more intense Because of the prices of precious metals.

EB: Yeah, unauthorized recycling. We can full circle Tony Nash and Zimmer Islam in Texas and Bangladesh, respectively. Thanks to you both and thanks to you all for listening. This has been business matters as my name’s Ed Butler. Take care. Bye.

Categories
QuickHit

The Death of Growth: Old & rich vs young & poor in 2030 & beyond (Part 2)

The world’s birth rate is changing. Clint Laurent from Global Demographics shares surprising discoveries that he believes will happen in the next 10 years and how this will shape the world?

 

This is the second part of this discussion. Go here for part one.

 

Clint started Global Demographics in 1996 and cover 117 countries throughout the world and China. They do that right down to county level of 2,248 counties. Clint believes that demographics are better than financial data from the point of view of forecasting  because they tend to be stable trends.

 

Global Demographics is able to come up with reliable forecasts at least 15 years out. After 15 years, reliability goes down and they are typically never more plus or minus 5% error in our long-term forecast. Their clients are mainly consumer goods companies, infrastructure backbones and things like that.

 

 

 

 

 

 

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This QuickHit episode was recorded on June 17, 2021.

 

The views and opinions expressed in this QuickHit Clint Demographics Part 2 QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: So Indonesia, India, Brazil and so on, so capital formation, capital investment is the real weakness there and it seems to me that’s a function of largely education. Is that fair to say?

 

CL: That’s exactly what it is. I mean, they you know, as they get the education right and, you know, they’re working on it, most of these countries that have been quite responsible in that area. And as they get that right, so the investment comes in, so the consumer gets more affluent and becomes a virtuous circle.

 

TN: OK, well, what timescale are we talking about for that consumption to come in a really notable way, for example, to take the place of, say, the under 40 Chinese consumption or the under 40, say, Western Europe or American consumption?

 

CL: Well, that’s the bad news. I mean, when you take India at least 15 years to get there. Because the education is only just coming right. And again to pick on India. India’s urbanization, 10 years ago, it was 30% of the population. Today, it’s 33% of the population.

 

TN: OK. So it’s not happening nearly fast enough.

 

CL: No. When you’re an uneducated girl in a village, why would you go to a slum somewhere of a big city? Your lifestyle would be actually worse, not better. And so they hadn’t been able to get that China effect of moving people from the low productivity agriculture into high productivity urban type of work.

 

TN: Yeah, but I think a lot of the, particularly the Westerners who are watching this would say, yeah, but I’ve been to Gurgaon and I’ve, you know, I’ve been to that kind of tech hubs in India. And I see, you know, a lot of women coming up in those hubs or have come up in those hubs over the last 10 or 20 years. But is not just such a small percentage that it matters, but it’s not making a huge difference?

 

CL: Exactly. It’s a small percentage. I mean, remember India is just behind China in terms of total population now. And by 2045, there’s 1.5 billion people. Because they’ve got the birthrate right under control as well. It’s dropping. But again, they’ve got an inertia of more women of childbearing age coming through. So total births keep going up. So they’ve got this problem of just too many people looking for jobs, which keeps the wage rates down. And that. And that’s what’s frustrating the education system, too, is they have to keep growing the number of school places to stand still, let alone expand. But they’re getting that right. So I don’t want to sound negative about that. All these countries are doing quite nicely on that, some positive.

 

And so but one important point to make is the demographic dividend hasn’t been collected. There’s was a lot of talk about India having a demographic dividend because there are always young people entering working age. But the trouble is they weren’t well enough educated, so they didn’t find jobs. In 2010, the propensity of a working age person to be in work was 58%. It’s now 50%. In other words, they couldn’t find the jobs for these people, so the dividend never paid off.

 

TN: OK, so jobs lead to consumption, of course.

 

CL: That’s right.

 

TN: But I guess. So it’s going to take these countries 10 to 15 years or more to get the quality of jobs that are needed.

 

CL: Yeah.

 

TN: So, you know, that growth that we’ve lazily relied on, say, China for the last 10 or 20 or 20 to 30 years, is there a gap between now and 10 to 15 years from now in terms of the rate of growth for, say, consumer goods and say, economic kind of new market entry, that sort of thing?

 

CL: Yeah, well, this is the crisis that’s coming. Because if we take, again, the kind of what I call the family stage countries, India, Brazil, etc, they actually need around about 250 million extra jobs in the next 25 years to get, to maintain their existing level of employment. Not lift it. Just maintain it. And that gives them a reasonable level of income. Not great, but hopefully with education situation, the earnings go up.

 

But let me put another layer on the cake, so to speak. This is fourth group of countries, which I call young and poor. I call them young because the median age of all of the countries in this group is 20 and some of them have a median age of 14. Mali and Niger, they both have a median age of 14.

 

That means half the population in those countries is under the age of 14 today. Yeah, and their birth rates are high. The average birth rate, an unweighted across these countries is 130 per thousand women. Most countries are at 40 elsewhere in the world. And the number of women of childbearing age, of course, are going up dramatically because of that as well. So even though the birthrate is starting to come down, it goes up dramatically. And it has a seismic effect.

 

First of all, is roughly a billion people in this part of the world at the moment. In 25 years time, there’s two billion of these people. In other words, in twenty five years, they add a billion people to their populations. And if I can just go on and to take Nigeria, for example, at the moment, has 45 million school age children, irrespective whether they are going to school, most of them are not. 45 million. It’s 90 million in 25 years time. Just to stand still on education, they have to double their education budget. And so, little own issues need improving.

 

TN: OK, so governments take, need tax revenue to grow their budgets. So will there will there be the incomes to allow them to grow those budgets just to keep up with where they are? And further, will they be able to accelerate the job growth to make sure they have those incomes, to keep their education, to improve their education like, say, India or Indonesia is doing well?

 

CL: Well, this is the crisis that’s coming because the answer simply is no. And it’s no for the simple reason that up until now, this is really what I was saying we were at a cusp. Up until now, the growth in consumption by the older affluent or the older countries generally, which includes China, has been such that it’s kept relatively full employment throughout the world.

 

There’s been enough jobs for those who are looking for jobs. And that doesn’t sound a bit. But even the young, poor countries have been trotting along at about 55% of working age people employed, which seems to work out quite well. But suddenly that whole relationship changes. As I said, the countries that account for, well, the old affluent account for 63% of global consumption. The other old add another 14% say up to 77% or 80%, chuck in a bit of India, 80%, which is also flattening out. So the countries account for 80% of the money that’s spent by households now flatten out in growth in their demand.

 

Layer on top of that, there’s a continuous increase in productivity per worker. The amount of number of workers needed to meet the new additional demand over the next 25 years is 300 million. And as I told you earlier, this 740 million people that are going to be looking for an extra job.

 

It’s going to be roughly 400 million people, mainly in the poor countries, are in a little bit in need, family stage countries, who are at working age, would like to have a job, but can’t get a job. That’s 400 million.

 

TN: That’s astounding. OK, so that’s as big as, say, the EU, right?

 

CL: Yeah, well, bigger.

 

TN: So if everyone in the EU didn’t have a job but they wanted a job. Man, woman and child couldn’t get a job.

 

CL: That’s right.

 

TN: So that’s terrible. So what do you think those people will do? What do you think some of the effects will be of this? First of all, where is this, kind of generally, geographically? Is this the kind of Bangladesh, Nigeria, kind of those types of countries?

 

CL: It’s based of the African continent and what we call South India, but not including India or Sri Lanka, which will be in Tibet, out there.

 

TN: So Bangladesh, Pakistan, Central Asia generally.

 

CL: And there’s a few small countries, obviously, in South America or Central America that are falling into this category as well. So it’s reasonably concentrated geographically. And it’s a real worry. And I think of myself. If I was turning, well, let’s say 20 and I cannot get a job. I’m scrambling for food. I’m scrambling for water, in some places in the world. What do I do? I’ve got nothing to lose. And that’s what something dramatic, I would rot and just die miserable, which is terrible.

 

So I think the world has a fairly major migration problem coming. These people are going to walk north. I would. So I don’t blame them. But it’s a desperate situation. So much so that in my own mind, it’s all very well to donate money to buy mosquito nets and things like that. I actually think would be better to donate money for a TV and an Internet connection so we could educate the kids. Because we could deliver education quite cheaply using modern technology. And if you could educate them, then they could do more productive things and then and so on and so on. You get the part of that. But there’s no easy solution to this one.

 

These people are largely alive today, will be alive in the next 10 years. And the consumption trends, well, they’re there too. The people with the money are getting older and saving. So the drawbridges are coming up. So this is.

 

TN: So migration. The migration issues we’ve seen over the last, say, 5 to 10 years sounds to me that they only intensify over the next, say, 15 to 20 years.

 

CL: Oh, incredibly so.

 

TN: And Europe is really the focal point. Yes. The US has some issues and maybe India, China have some issues. But it really seems to me that Europe is the major focal point there.

 

CL: But it’s the easy one to get to.

 

TN: Sure. Yeah.

 

CL: But there’s some other dimensions of migration, too, which is starting to come under stress. And I mean, for example, let’s take the U.K. It has one nurse for every 440 people in the population. So if you get sick, your access to a nurse is pretty good. But the UK hires nurses who have been trained and educated in the Philippines where there’s one nurse for every 4000 people in the population. Is that morally correct? Should affluent countries take skilled workers, from developing countries?

 

TN: But can you blame that worker for wanting to go to UK?

 

CL: Not at all. If I was the nurse, I’d be on the plane. I mean, basically, you’ve got the individual motivation and you’ve got the moral issue, and you’ve got the need. And then even if you take a country like Greece, which everyone says, oh, that’s nice and comfortable.

 

Greece’s population has dropped by one million people in the last 10 years. And that one million that are gone are skilled workers who got on a train and went north to Germany because under the EU, they can move.

 

TN: What percentage of the population is that? One?

 

CL: About 10%.

 

TN: 10% of the population?

 

CL: Well, you know, it’s a big drop. And again, you don’t blame the skilled plumber or electrician or whatever because he or she can earn 2 to 3 times as much going to Germany or getting across to Britain, which they could do perfectly legally. And then in 5 years time, the wife is with them, the kids are going to school, that kids speak German now, they never go back.

 

TN: So does this change, does this, you know, let’s say the education deficit issues and the jobs deficit issues in Africa, does it change immigration policy in Europe, for example, in the way Australia has the checklist of skills and those sorts of things to to migrate?

 

Does Europe come more to that type of migration policy to where they incentivize people, let’s say, in parts of Africa before coming, meaning get educated, you know, these sorts of things. And you can definitely come in. I mean, it certainly sounds like something that would be really helpful for places like Greece.

 

CL: Yeah, but not too helpful for places like Nigeria.

 

TN: Right.

 

CL: They’re losing the skilled worker. And the ability to lift the Nigerian economy is going to be a function of having skilled people. And if Greece takes them, that’s actually not that great. Right. So, yeah, you sort of resolve the great problem, but you don’t resolve the core problem, which is the change so to speak. Yeah. So it’s interesting because Greece, with its drop in population, its household values are dropping because the number of households is going down. And that’s the core asset of many households. So it’s trying to create some economic problems as well because the asset they could borrow against is going down in value, not going up in value. But that’s not just Greece. It’s Italy, Spain. It’s Romania, it’s Poland. And that being, you know, some of the talents are being sucked out. And that’s not good.

 

TN: So in sum, let me try to sum this up, because this has been a great conversation and it’s really opened up a lot of things I haven’t really thought about before. So so global consumption generally for, let’s say, the next 10 years or so is relatively stable.

 

We won’t see the rapid expansion that we saw in places like China over the last 10 or 20 years. So let’s say the pull on commodities right now, the inflation we’re seeing, the, you know, this sort of thing, that stuff really tamps down pretty quickly and really stabilizes for maybe a decade or so.

 

CL: Exactly.

 

TN: Once that stabilizes, then we see real disparities as these kind of young, poor countries explode in population. But the wealthy countries are pretty stable and continue to be pretty rich. Right. So we kind of have a status quo for the next decade or so. But then after that, there’s a real danger that emerges from global disparity.

 

CL: That’s right. You start to have a major, what I’d call a population crisis.

 

TN: Wow. OK. It’s a little bit dire. But this is great. Before we go, can you talk about, I know you have a couple of books coming out. Can you tell us what they’re about? I know they’re a little bit from coming to press, but I think it would be really helpful for people to understand what you’re writing about.

 

CL: Right. Well, one of the two books is basically called 2045: The Growing Demographic Crisis. And it’s pretty much along the lines that I’ve just discussed, the difference is, all the data is there. And you’ve got the data, if you like, at the segment level, which also go to by country level. And you can see how the numbers play out. It’s not something that we’re making these numbers up. They’re actually there. They’re pretty solid. And the core source, of course, is the World Bank and the United Nations that you can’t really argue with that. And it’s all old numbers behind what I’ve just discussed.

 

And the second book coming out is called China: 2040. Similar sort of theme. And what I have done that is China is going through a lot of changes that I’ve explained and China will continue to be important economically and politically for the next 10 years at least, if not longer. We know that.

 

So it’s actually quite important that people have a better understanding of what China is like demographically. And it’s not one country, it’s at least thirty one countries. The differences in consumption within that, it’s quite diversified.

 

This book is, if you like, the primer for someone that’s either doing business, thinking of doing business, investing in, whatever, into China. If you haven’t read it and you don’t know China, then you’d be dealing somewhat riskilly. If you read this, it’ll help you focus where the opportunities potentially are. Thanks for the opportunity to mention.

 

TN: Of course. Thank you so much for your time. You’ve been very generous and I think we’ve taken it a lot. I think of it to watch this two or three times before I kind of fully take it in. So I really appreciate it.

 

Further watching, please. We’d really appreciate if you’d like the video. We’d love it if you’d subscribe to our YouTube channel. And we’ll see you next time. Thank. Thanks very much.

 

CL: Thank you.