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QuickHit

The Death of Growth: Old & rich vs young & poor in 2030 & beyond (Part 1)

Our guest is Clint Laurent from Global Demographics, an amazing demographer, businessman and observer of global trends long before they really take hold. He shares surprising observations that he believes will happen in the next 5 to 10 years.

 

This is the first of a two-part discussion. Watch the second part here.

 

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 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: Over the last year or so, we’ve seen the pandemic. We’re now having this bullwhip effect with inflation and other things. But I guess this capping off in the last 20 years where we’ve seen China as the global growth market and the marginal consumer for almost everything. And it’s really forced me to think what’s next. You and I published a piece about a year and a half ago around China’s population topping out around 2023, 2024. And so I’m really curious, what do you see happening in the next 5 to 10 years that will really come as a surprise to people? What are some of your observations over the next decade?

 

CL: The world is actually as bizarrely almost on a bit of a cusp at the moment. The pandemic is almost irrelevant to what was going to happen. I mean, I know the pandemic caused a lot of economic disturbance, obviously affected some people’s lives quite significantly. But really, there was a lot of change that was about to start to happen anyhow, irrespective of whether or not the pandemic came along.

 

From a demographic point of view, the pandemic is not really very relevant. I’m currently based in the UK and the people who have unfortunately died from it, most of them would have died in the next two years anyhow because they had severe underlying health situations. And so, its effect on death rates has actually been very, very marginal.

 

Secondly, most deaths being over the age of 60, that means it doesn’t affect the labor force, it doesn’t affect the propensity to have children. So really, it will be a horrible little blip in the history of mankind. And hopefully we move on from it and the vaccines keep working. And so a little bit of hope there. But that aside, it was going to be a big change.

 

And if I can explain the change in the following ways.

 

Up to now, the world has perhaps been a little bit lucky in the sense to be, first of all, had what I call the Older-Affluent countries, and that’s Western Europe, North America and what I call affluent Asia — Japan, Taiwan, Australia. All of those countries, which are actually only 14% of the world’s population, account for a very significant proportion of the global consumption. As you know, it grew quite rapidly, which was really quite good. And that is really the first big change is going to  come into effect.

 

What’s already started to happen is people. The only growth in these countries is people over the age of 40. Every age group below that is in absolute decline. So even if they’re going up in affluence, the young affluent market is no longer a growth market. It’s more or less stable. Even if you add in increased incomes, which still occur, but at a slower rate. So you’re now looking at a 40+ age group, and in some countries, obviously, Japan is one, it’s 60+ that are the age group that’s growing.

 

So all of those societies, to some extent, are in a lot of trouble. They’re flattening out. They’ve moved from a pyramid population to a square, and that’s actually very good.

 

A lot of people say you should have a pyramid population with young people coming through and looking after the old. That’s actually the poverty trap. Because if young people come through, the dependance, first of all, will keep driving the society down. With a square, then the same number of people need education each year, the same number of people need health care each year. The capacity is there and it’s an improvement of quality rather than an increase of quantity.

 

TN: So you’re saying with these wealthy developed nations, Japan is an extreme example, consumption isn’t really the worry. It’s the growth that’s falling off. So the consumption is stable. It’s just not growing.

 

CL: Exactly. There’s one other big change to appreciate is what people say because they’re getting old, they’re going to run out of labor force. And here’s a statistic for you: In Japan, 25% of males, 70 to 74 are still in full-time employment. And you’re saying, “yeah, well, that’s Japan. It’s different everywhere else in the world.” You know, it’s exactly the same statistic in the United States.

 

The aged worker is a new phenomenon. In fact, the age worker is the fastest growing demographic. So these countries actually are not running out of workers. And the assumption that we all go decrepit and work after age 64 is just wrong. I am over 65, as you can probably guess. I don’t have a single friend who’s not in full-time employment at this point in time, enjoying it. It raises lots of issues.

 

So the labor force keeps going in these countries as well. So they don’t even need migrant workers to sustain these countries. So they are nice, comfortable niche. Growing steadily, not phenomenally. You’re talking about 1%, less than 1% growth in total consumer spending. Households are getting a little more affluent. Number of households is flattened out, which would have implications for the housing market. But it’s not going down, so it’s actually not too bad.

 

TN: So you say GDP is pretty stable, but what’s happening to GDP per capita in those countries? Does it continue to grow?

 

CL: It does, but just at a much slower rate. You’re talking 1% or even less than 1%, but it’s positive. And do remember, 1% of a hundred thousand US dollars is more money than the total income of households at the other end of the spectrum. Much of their spending power is quite significant. But a really important point to keep in your mind right now is that consumption expenditure will start to level out. It won’t hit that high growth rate anymore. It drops back to about 1% or even slightly lower.

 

Then the other big change you’ve got is what I call the next group of countries, which is older but not so affluent. And that obviously includes China. Now, let’s just put China to one side for the moment and look at the other countries in that group. You’re talking about Russia and the Eastern European countries. All of which have huge potential because like the previous group that I just talked about, they score really well on education.

 

And countries that score well on education, with the right capital investment, can lift the productivity. The countries that have weak education, it doesn’t matter how much capital you throw into them, they don’t lift their productivity. And there’s plenty of statistics to prove that. So these countries actually have a resource. I mean, Latvia, Romania. It doesn’t really matter. And that actually got the one thing that’s really hard to do. Good education.

 

Why is it hard to do? India has been really bad on education up to now. It finally has universal education. Every kid, 5 to 12 is now supposed to be in school. But it takes another 10 years before some of those kids come out of school and get into work. And it takes another 10 years before the workforce has become sufficiently skilled that the capital investment comes and lifts the productivity.

 

So these Eastern European countries and Russia are actually interesting from the QuickHit point of view. They start getting the fixed capital investment right, got the education right. They could actually be the next growth area. Only warning to you is they also are relatively old. So it’s a growth area of 40 pluses and 60 pluses. That is going to happen because they’re under earning at the moment. They can lift their incomes, obviously, buy bit of car, bit of clothing, all of those sort of things. But it’s a growth area of an older population, not a young population.

 

TN: And it’s something that nobody’s watching, Clint. Like, I don’t think anybody is really looking for that even as a possibility. A lot of people have written Russia off, see it as a petro state or whatever, and central and Eastern Europe is kind of just kind of a no man’s land in many cases. So some manufacturing there. There’s some services there in terms of globalization. But I don’t think there’s a lot of expectation to see rapid growth there and high productivity there. So I think that’s a really interesting question mark that most people aren’t even thinking about.

 

CL: That’s right. And if you go into these countries physically, you start to see some of the big brands starting to look at them. And you come across someone from XYZ Corporation there. We just have a little look. So some people are starting to see that it’s there. It’s just as you say, it’s not visible yet.

 

Let’s switch to China briefly. China slightly different and also very similar. First of all, remember 1989, China introduced the one child policy. That came under a huge amount of criticism. But ignoring how you feel about that, is one very simple thing it achieved. It levelled off the number of young kids needed to be educated. And subsequently started, it was 1979, they introduced. Such that by 1984, when they introduced compulsory education for all six to 12 year olds, they were talking of a relatively stable number of kids. So they could focus on the quality of education. And so every kid’s been going to school in such when you go to the year 2000, you’ve got this population still living in the rural areas. But who could read, write and do sums and all of those sort of things. Could get on their bike, go into town and get a job in a factory or an office or whatever.

And the differential between an urban worker and rural worker in China is 3.6. And that’s actually how China drove its growth and its productivity per worker and its influence. What it did is, it said, take all these people who are nice people, but not well-educated, not earning very much money, educate them, put them into job, let them earn lots of money, and have a good lifestyle. And that drove up the productivity and the whole success story of China.

 

 

TN: So urbanization and wage arbitrage, productivity gain for China. But is that running out in the next ten years or does that continue over that period?

 

CL: We’ve got it going through actually. It’s 20 million a year at the moment, which is a phenomenal number. That’s Australia, every year. It’s 20 million at the moment. We have it dropping down to about 11 million by 2040 because it’s still a lot of people moving there.

 

Now, this is the other big trick. Because some people have been saying, China’s population’s leveling out. And, you know, we thought it was 2023, where even the Chinese government agrees with us. Now, it’s 2023, and it’s leveling out. The working age population is starting to shrink. Oh, dear. That can have a decline in the workforce. No. They’re having a decline in the rural workforce. The rural workforce have in the next 20 years.

 

The urban workforce keeps growing for the next 10 years to 2030. The number of people working in urban jobs, which are highly productive, keeps going up. So for the next 10 years, China’s GDP growth still chugs along reasonably well. After 2030, the growth rate drops away and we have it down to about 1.3% by 2045, because it just isn’t the extra workers to keep growing the total GDP. So that’s the story there.

 

But again, coming back to the consumption side, China in the last 10 years in the urban area had this huge group of people, 220 million of them urban, aged 40 to 64 years of age, educated, earning quite good money by turning a stand and spending money on holidays and trips and things like that. And between 2010 and 2020, that went up to 100 million people. Think about it, a 100 million extra people with disposable income. It was no surprise that the retail side of China took off and tourism and all of that. It was those people. They’ve got a house. They’ve got a fridge, they’ve got a refrigerator. Let’s have some fun. That’s really what’s happening right now.

 

Now, the bad news is that now it flattens out. Every age group under 40 in China is already declining and will continue to decline in size. So don’t go after the kid market in China except on the wealthy and those sort of areas for education. The 40 to 64 age, what I call the working age optimist, it grows for a little bit, and then it flattens out. And it’s named the 65 plus, which in China is not like the other countries. The 65 plus at the moment doesn’t have great health, doesn’t have a great life expectancy. You get some extension of the workforce, but not a lot.

 

So China’s consumption is healthy as well. It’ll chugging along quite nicely. And to digress slightly, but I think we need to recover quickly here. The one child policy, it’s moved to three now. That’s totally and absolutely irrelevant.

 

TN: Yeah, it doesn’t seem like it’s going to do much. They’re too rich to want to have more kids, right?

 

CL: Exactly. And actually, it’s the birth rate that’s not the important point. It’s the number of women of childbearing age. And that goes down by a third. It drops 330 million now to about 220 million in 20 years time. And the birth rate can’t give up fast enough to compensate there. So births in 2019 are 14 million. It dropped to 10 million last year because of the pandemic, waiting to come back up a bit about to 14. It’ll be down to 11 million by 2030. And they can’t change that even with the three child policy. That won’t change.

 

TN: It’s not the three child policy, it’s the fact that there are not enough women to have babies. And those women are wealthy enough that they don’t want to have three kids.

 

CL: That’s really basically it. Just look at Singapore. They tried everything to get the birth rate up.

 

TN: I was there. They were paying people to have babies and it still didn’t work.

 

CL: Even send them on cruises. I mean, I volunteered.

 

And then you have, so that’s the second group. And the key point by the first group is nice and stable now, chugging along nicely, but no longer super growth in consumption. Nice growth in consumption is how I call it.

 

The third group, what we call the family stage. And that’s obviously dominated by India, Brazil, Indonesia all there. The bulk of populations is in that 25 through to 39, having children, at work, that sort of stage. So the working age population is still growing a bit, but not a lot. Education’s improving. It varies quite a lot across this group. India is at the weaker end. Indonesia is probably one of the better ends.

 

So, you’ve got a bit of a dichotomy there. But they’re generally in a position to be able to attract capital and generally in a position to be lifting their total consumption, but not dramatically. We’re still talking of relatively low incomes under 10 thousand USD for the average family per annum. So the growth is there.

 

TN: So Indonesia, India, Brazil and so on, the 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. As they get the education right and they’re working on it, most of these countries 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: And what time scale are we talking about for that consumption to come in a really notable way to take the place of the under 40 Chinese consumption or the under 40 Western Europe or American consumption?

 

CL: Well, that’s the bad news.

Categories
QuickHit

Ag’s Perfect Storm: Tight Supply, Strong Demand and Weather Uncertainty

Joining QuickHit for the first time is the commodities expert Kevin Van Trump of The Van Trump Report, helping us understand ag’s supply, demand, and clarifying uncertainties. Why are we seeing so much attention to agriculture right now? What’s contributing to the tightness in the ag market? How long will the corn rally last? How about wheat? What can we expect for the foreseeable future? And protein, how delicate is this with all that’s happening with ASF, cyber attacks, etc.?

 

The Van Trump Report, a very large agricultural newsletter and analysis service. Kevin Van Trump started trading in the 90s in Chicago. Switched over, traded Notes, 10 years, five years. And then really got more heavily into ag. He’s from a small rural town outside of Kansas City and I was really interested in corn, beans, wheat, cattle, livestock. They started putting together a newsletter 10, 15 years ago when ethanol started to become more prominent and it started to travel around the circuits with some of the bigger hedge funds and some of the bigger money managers.

 

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This QuickHit episode was recorded on June 2, 2021.

 

The views and opinions expressed in this Ag’s Perfect Storm: Tight Supply, Strong Demand and Weather Uncertainty 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: There’s a lot of attention on ag right now. And can you just kind of give us a little bit of a set up of what’s happening in the ag markets, everything from the volatility of corn to, you know, what’s happening in wheat, a little bit of kind of protein, a little bit of beef activity. And that sort of thing. Can you tell us just generally why are we seeing so much attention on ag right now?

 

KVT: Well, I think you see the funds take a more proactive risk on approach. You know, just in commodities in general, we’re seeing location from Covid and things of that nature. And most people thought as we ramp back up, we’re going to have a pretty strong demand for, like you said, proteins bring in some of the livestock back on, just demand in general.

 

So we’ve seen more fund interest and more money flow into the space. Like you’ve seen the rebound in crude. You’ve also seen this rebound and in the ag and the commodity world. So China’s got a big appetite. They’ve been a huge, huge buyer of corn and have led the way. Beans as well on the protein side, as you and I will discuss here in a little bit. But yeah, basically, you know, we’ve we’ve gone from a oversupplied market for the last four, five years to all of a sudden we’ve got tight supplies. We’ve got record strong demand and some uncertainty into weather. So, you know, everything all said ripe for a possible rally.

 

TN: And is that tightness? Is that on, say, processing? I know with some of the protein, it’s processing concerns. But what is that tightness? Is it say, weather, drought in Brazil, that sort of thing, too much weather, too much rain, in the Midwest or what’s contributing to that tightness in the market?

 

KVT: Yeah, I think you had, you know, we really rarely get good numbers out of China from a supply or demand, especially a supply standpoint. They were supposedly sitting on a ton of corn and a ton of supply. All of a sudden they come online as a big, big buyer, you know, whether it’s maybe lack of quality with the storage of their corn, maybe the numbers just weren’t there all along. Maybe the supply wasn’t there. But it feels like they want to import the corn down into the southern part of China, maybe get away from.

 

We think Covid really exposed the rail dislocation. And when they had that rail shut down and dislocate, it probably crimped a lot of movement of corn supply and the Chinese government is looking at that and saying, hey, we can’t have that happen again if we’re going to see more possible problems. So they want to be a big buyer of corn from the US. They want to buy as much beans as they can from South America. And so so here we sit trying to juggle that. I think the world wasn’t really prepared for the size of buying that they were going to step in and do.

 

TN: OK. And how long specifically with corn, how long do you think that buying lasts? Is that kind of a three month phenomenon or does that go, say, for years?

 

KVT: Well, Tony is kind of how it played out for us in the soybean market years ago. China was what we would call a price buyer of beans. They would buy beans on the breaks and then they became a quantity buyer of beans, where it didn’t matter if soybeans were traded in five or six dollars a bushel or sixteen or eighteen dollars a bushel. They were going to buy beans every month. And so we see China as a quantity buyer of soybeans.

 

And we’ve predicted… Now, I hate to say this because we’ve made this call before. It’s OK. Own it. That China was going to become a quantity buyer of corn eventually. And like I said, we’ve heard guys in the market say this for the last 20 years and it never really came to fruition. They’ve continued to be a price buyer of corn.

 

We feel we’re at a tipping point and we believe they’re going to continue to be a quantity buyer of US corn for the foreseeable future as they try to transition, open more ethanol facilities, try to transition to cleaner energy. And some of those types of place, I think they’re buying corn longer term.

 

TN: So we’ve hit. It sounds to me like we’ve hit almost a semi-permanent new price level. Is that, would that be fair to say?

 

KVT: Probably not, I would say, how would you say? The grain markets in general and farmers in general. They’re going to plant from fencerow to fencerow. They’ll be planting acres on their back patio if they can, and they’re going to roll out more acres in South America. And so you’re going to see a lot of supply really come on with technology changes that can come on fairly quick.

 

 Even though I think China, you know, is going to be a continued buyer and demand is going to remain strong. I bet we really start to increase some of this production and we’ll probably balance it back out here. So that’s you know, they’ve caught us a little offsides right now. You got the price of corn at seven, close to seven dollars. And then we, barring any weather incidents or craziness that would really upset production, we probably trade here well, and then we start to ramp up supply and balance or back out.

 

TN: Very good. OK, interesting. Can we move on to wheat for a little bit? There’s been you know, we saw wheat come on strong and then come off and there’s expectations of wheat prices rising again. And you’ve covered this in detail in your daily newsletter. Can you talk a little bit about the wheat market dynamics and kind of what you’re seeing there?

 

KVT: Yeah, you know, wheat has become a big follower of corn, so to speak. We’ve seen, especially in China, you’re seeing a lot more wheat substituted into feed rations. So you’re getting a, you’re getting a bigger demand for wheat as a feed ration, but of corn, more to fizzle out. We probably see wheat drop off as well just because its demand is kind of correlated right now to being substituted in for the higher prices and corn. There are some pockets where we have some weather stories.

 

Spring wheat seems to be in short order here in the US. Some of those acres didn’t get planted, probably were planted to corn. You’re seeing those conditions problematic in, say, North Dakota, which is our biggest spring wheat producing state. They’re having problems with the drought and dry conditions. You’re having some pockets of some concern in parts of Canada, Canadian prairies, southern prairies, where also big spring wheat producing areas. So that, you know, spring wheat, maybe a little hot right now. But we see wheat is mainly a follower to corn at the moment.

 

TN: Very interesting. OK, let’s move on to proteins, because I think that’s a really interesting story. We had this cyber attack on the largest beef or one of the largest beef processors in the US this week. And we already had some tightness in the beef market. The inventories, the frozen inventories, from what I learned from your newsletter, were already low, other things. So how delicate is that market and will we see that follow on effects come later into the market or will that be sooner?

 

KVT: No, I think, you know, there’s going to be, there’s massive dislocation right now across the board still, and I think you can see that and we could talk about. I’m sure your follow up into the hog space. But I mean, you’re seeing that with both cattle and hogs. If you recall, back early in Covid, they had to shut down a lot of processing plants because workers were getting sick and they had to take precautions.

 

Now, on the hog and poultry side, as I’m sure as we were going to discuss, those shutting of the plants, whether it be a Tyson or whoever it may have been at the time. I mean, that really backed up supply or the herd. Now, you had producers had to call the herd and they pulled back and reduced the size of the hog or quite a bit or with cattle or things of that nature. Well, then all of a sudden, corn prices and feed prices take off to the upside. And you have a producer or rancher who just really doesn’t want to expand his herd because he’s not certain about the processing plant if they’re going to stay in his local area because it Covid and now he sees corn take off and the feed take off to these extreme highs. You’ve got them caught where there were a little bit short supply and all of a sudden demand coming back like gangbusters.

 

All the restaurants, or people around the world are starting to try to get out and about more. And so, like you said, you guys, you got surging demand right here and you got the supply pipeline dislocated a little cut off size.

 

TN: And then when we see things like ASF, African Swine Flu in China and the calling of the even the breeder hogs, that sort of thing, how global is that dynamic? Does not present pressure on, say, US pork prices or or is that really just a regional Chinese pork price phenomenon?

 

KVT: No, we think it does. I mean, we’ve seen as it creates ripples in China and they try to get on top of it. I mean, it’s a crazy dynamic. They cut their hog order in half. But as they tried to get on top of it, they’ve had to be bigger buyers of importing of pork and the United States has been a beneficiary. And I think that could continue to be the case. You know, God forbid that we were to get a case here in the United States that’s always kind of the last few years, the big wild card in the mix.

 

If we were to spot something like that here in the US, know probably the knee jerk immediately as to the downside. Just because prices probably break because people are going to want to eat the hogs. You’re going to kill a lot. But I think longer term, that creates a supply shortage and we rebound back in the opposite direction. So it could be a double edged sword.

 

TN: OK, so we’ve seen a lot of volatility in these markets. What are you looking for kind of for the remainder of 2021. Do you see these prices elevated, say, until Q3? Do they come off in Q4 or do you see these, the kind of the volatility and elevated prices continuing through the end of the year?

 

KVT: You know, kind of like we talk in crude, we probably see demand outpace supply through Q3, Q4, maybe even a little later if you get some dislocation. In our sector, if you’re talking corn, beans, wheat, things like that, it’s really right now about US weather.

 

In Brazil, they’ve had some real rough patches of dry, dry and hot weather and we continue to see their corn crop get smaller in size. The USDA was talking they had lowered it down to one hundred and two million metric tons for corn. Now they’re talking some guys in the 95 to 90 million metric tons. And so that that’s going to take more corn out of the supply pipeline or are available for exports. And now here in the US, we’ve got the drought that’s lingering and could, it just sit, we’re just right here on this tipping point, Tony, where if it turns hot and dry within the next 60 days, corn, beans and we take off. I’m talking we’ll probably go all time record highs. If you see what I’m saying.

 

So and you remember back to the 2012 drought, the USDA had the crop rated about the same condition as it does right now. Things were similar, but all it takes, Tony, and corn, is for you to get really hot and dry right around the pollination period, which will be the end of June, first week of July somewhere in there. And boy, I tell you what, the market will add a ton of risk premium and, you know, a lot of fireworks take place.

 

So that’s kind of what we positioned ourself for. If we get that story, we take off to the upside because demand’s so strong. OK, so we’re looking for hot and dry potentially in late June, early July. And that would really set things on fire and in ag markets.

 

TN: Right. Very good. Kevin, thank you so much for your time. I really appreciate this. This is a real pleasure to have you here. You know this stuff inside and out and we’re really grateful for all of the insights you’ve given us today. Thanks so much. For everyone watching, please like the video, please subscribe. That helps us out a lot. And we’ll see you on the next one. Thanks very much.

 

KVT: Thanks, Tony. Appreciate it.

Categories
QuickHit

Crude oil: New super cycle or continued price moderation? (Part 2)

This is the second part of the crude oil discussion with energy markets veteran Vandana Hari. Tony Nash asked if the political tensions in the Middle East will affect oil prices in this environment, and how soon can we see the effect in oil prices if the Iran agreement is made? She also discussed her views on the Texas shale industry and when can we see a bounce back, or if we’ll ever see one.

 

The first part of this discussion can be found here.

 

Vandana Hari is based in Singapore. She runs Vanda Insights and have been looking at the oil markets for about 25 years now. She launched Vanda Insights about five years ago. The company provides timely, credible, and succinct global oil markets, macro analysis, mostly through published reports.

 

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📺 Subscribe to our Youtube Channel.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on May 19, 2021.

 

The views and opinions expressed in this Crude oil: New super cycle or continued price moderation? QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

VH: And then, of course, we have Iranian oil and we could talk about that separately. So there’s plenty of supply.

 

TN: Let’s move there. So let’s talk a little bit about the Middle East with. First of all, with the political risk around Israel Palestine. Is that really a factor? Does that really impact oil prices the way it would have maybe 20, 30 years ago?

 

VH: OK, so with regard to the Israeli-Palestinian conflict that we’ve seen flare up in recent days, the short answer is no. Oil, it’s not even a blip on the radar of the oil complex. Now, obviously that’s because those two countries are neither major producers or consumers of oil. It is also not affecting shipping, the kind of fear that was in the markets, for instance, when ships were attacked in the Strait of Hormuz or the Red Sea.

 

But having said that, generally the oil market is keeping an eye on how that region, the tensions have been escalating. The Iranian and Arab tensions have been escalating. We have seen more attacks over the past few months. It seems to have died down a little bit recently, but more attacks from by the Houthi rebels just managing to miss white facilities in Saudi Arabia. So, yes, it is an area of concern. But somehow the oil market, maybe because there is enough oil available against demand, but the oil market has sort of almost gotten into this pattern of, that’s a knee jerk reaction. Every time, it looks like a supply might be affected from that region. But the oil complex has just been generally reluctant to price in on a sustained basis of geopolitical fear premium.

 

TN: Yeah, I can see that. That’s very evident. With the JCPOA, with the Iran agreement, how much of a factor would that be to supplies and over what timeframe would it be a factor? Would it be an immediate factor? Would it be something in six months time from if an agreement is made?

 

VH: We know the indirect talks that have been going on between the US and Iranians the past few weeks, and then there’s been a bit of confusing signals as well in terms of news emanating earlier this week. We had a Russian diplomat say that, oh, it’s on the verge of a breakthrough and then retracted so it doesn’t help the oil market of anybody as opposed to have that adding to the confusion. The oil market has made its calculations.

 

First of all, Iranian oil production as well as exports have been edging up. That’s a fact. Now, obviously, there’s no clearly transparent data, but there’s plenty of ship tracking companies, all of which have very clear evidence that there’s more oil going into China.

 

So to some extent, you could argue that crude prices today have factored in a little bit of extra Iranian oil coming back into the market. Just to remind our viewers that it never went down to zero. There was always Iranian in oil flowing into and we’ll not go into the details of that. But basically it’s sort of bypassing the US sanctions. So the question now is how much more Iranian oil can come into the market and when it could come into the market?

 

And I would add a third point to that is that what will OPEC+ do to that if it ends up pressuring prices? So how much more oil could come into the market? An estimated 1.2 million barrels per day additional oil could come if the sanctions are removed. When it could come back into the market? I’m no more privy to what’s going on behind closed doors in the discussions than the next person. But my personal feeling from reading what’s coming out of these talks is that it’s a very complex set of issues.

 

There’s a lot of politics going on when people come out and say, oh, we’ve made progress and so on. But it’s a complex web. It’s multilayered. I personally don’t expect sanctions to be removed before next month’s Iranian elections. So sometime this year, yes. But not right away.

 

And here’s the point I would make as well, is that I don’t think OPEC-non OPEC alliance will sit on their hands and see, especially if crude starts spiraling downwards with the Iranian oil more than Iranian oil coming back into the market. I think they will make adjustments accordingly. If the market can absorb it without a big hit to oil prices, well then good, you know, which is what was the case with Libya last year. But if it can’t, I think they’ll just redistribute that sort of cut back a little bit more or taper less basically. So either way, I don’t see that putting a huge downward pressure on crude.

 

TN: I’m in Texas and so we haven’t really seen a lot of new capacity come online with the with the Texas plays over the past few months as prices have risen. So what will it take for Texas to kind of install new rigs or re-open rigs and get things moving here? What are you looking for and what do you think the magic number is? I mean, if it hasn’t been hit already? What do you think needs to happen for Texas to kind of reopen some of these fields?

 

VH: Yes, we saw oil rigs across the US, which is a very crucial measurement of the activity in the shale patch, especially. We saw that number crash last year. And I look at the fracturing fleet count as well, which tells you exactly how much oil is being drilled out of those wells. But not just how many wells are being drilled. So both of those have been creeping up from from the crash of last year. I think since about August last year, they they have been moving up. But if you compare year on year still, that the total rig count is just half of the levels before Covid last year. Overall, US oil production and shale is the lion’s share of it has dropped from about nearly 13 million barrels per day to about 11. Two million barrels per day of capacity has basically disappeared from the shale patch.

 

And for OPEC, as well as for the oil market, I think it’s a key area to keep an eye on because we have seen in the previous boom and bust cycles and oil price up and down cycles, that shale was very quick to respond to oil price recovery. I think the story is very, very different this time. There’s a few influencing key factors, which are all pulling in the same direction.

 

So first of all, on a very sort of global level, we know that generally, funding is drying up in fossil fuels. OK, so that’s a baseline. That’s affecting conventional fuel. It’s affecting shale equally. The second is that we see and this has been an ongoing trend over the past few years, more and more majors have made inroads into majors are now independent players still produce the majority of the tight oil from the US shale. But the majors have become quite significant players as well. And almost every major that you tune into is saying that we are going to be very, very cautious in… We’d rather return money. We’d rather pay down debt, cash discipline, essentially. We would rather return money to our shareholders than invest in just growth at any cost. That’s happening.

 

When it comes to independence. I think they’re going their own ways, basically. You can’t say all independents have the same philosophy. But again, when I listen to the major independent players, they pretty much are also into cost discipline strategy. If you aren’t, are going to just have a tough time, far tougher time than than the previous down cycles in getting funding. So we generally see that funding for the shale sector is also starting to dry up.

 

I suppose banks and lenders and shareholders probably just seen enough of that, how sales fortunes go up and down. If you’re a long term investor, it’s not really an area of stability. So all of these put together to lead me to conclude that the EIA thinks shale production will creep up a little bit this year. But of course, compared with 2019, they’ll still remain low. It’s predicting quite a big bounce back in ’22. But I’m not that sure about it. I have a feeling that it’s probably going to sort of plateau from here on.

 

TN: OK. Really interesting. So it sounds like kind of that marginal barrel that would come from shale to be honest, isn’t really that necessary right now given the cost that it would take to reopen the rig. Is that fair to say?

 

VH: Yeah. And then you have to remember that the OPEC is sitting on that marginal barrel of supply as well. And that has to come back into the market. And you have to see prices supported, let’s say WTI, well above sixty dollars. And then ask yourself that have any of these, the three conditions that I outlined earlier changed substantially enough for shale to go into a boom again? So I think the answer is pretty clear.

Categories
QuickHit

Crude oil: New super cycle or continued price moderation? (Part 1)

Energy markets expert Vandana Hari is back on QuickHit to talk about crude oil. Brent is nearly at the $70 psychological mark and is also a 2-year high. However, demand has not picked up to the pre-Covid levels. Vandana explained what happened here and what to look forward to in the coming year. Also, is crude experiencing supply chain bottlenecks like in lumber and other commodities and how oil demand will pick up around the world?

 

Vandana Hari is based in Singapore. She runs Vanda Insights and have been looking at the oil markets for about 25 years now. The majority of those were with Platts. She launched Vanda Insights about five years ago. The company provides timely, credible, and succinct global oil markets, macro analysis, mostly through published reports. They are also available for ad hoc consultations and research papers.

 

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This QuickHit episode was recorded on May 19, 2021.

 

The views and opinions expressed in this Crude oil: New super cycle or continued price moderation? QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: I want to talk about crude oil, because if we looked a year ago and we saw where crude oil prices were a year ago because of the Covid shock and we look at where crude is today, it’s something like two-year highs or something like that today. And we still have kind of five or six million barrels, we’re consuming about five or six million barrels less per day than we were pre-Covid. Is that about right?

 

VH: Yeah, absolutely. So we have had a Brent flood with the $70 per barrel psychological mark, it has not been able to vault it in terms of, you know, in the oil markets, we tend to look at go-buy settlements. So we’re talking about ICE Brent Futures failing to settle above 70 dollars a barrel? But it has settled a couple of times so far this year, just below, which was two-year highs.

 

And the man on the street, as you quite rightly point out, does end up wondering. And I’m sure people at the pump in the US looking at three dollars a gallon prices that hang on like the global demand is yet to return anywhere close to pre Covid. So why are prices going to two-year highs?

 

So two fundamental reasons. If you talk about supply and demand in the oil markets, the first one is the OPEC – Non OPEC Alliance is still holding back a substantial amounts of oil from the markets. If you hark back to last year when they came together in this unprecedented cutback, almost 10 million barrels of oil per day, cumulative within that group, they said they’re going to leave it in the ground because of the demand destruction.

 

Now, starting January this year, they have begun to so-called “taper.” Yes, people borrowed that as well in the oil market. All over the place. Yeah. So they’re tapering. But they’re doing it very, very cautiously.

 

So where do we stand now? They are still holding back almost six and a half million barrels per day. So basically two thirds of the oil that they took out of the market last year is still, they’re still keeping it under the ground. So that’s one main reason.

 

The second one is a bit, of course, demand has been picking up as countries and globally, if you look at it, I mean, we can talk about individual countries, but globally, you know, the world is starting to cautiously emerge out of Covid-related restrictions.

 

Economies are doing better. So oil consumption is moving up. But but some of, it’s not entirely that. I would say some of the the buoyancy in crude of late, and especially when it was, you know, Brent was a two-year highs, is because of a forward looking demand optimism. And when it comes to that, I think it’s very, very closely connected or I would say almost entirely focused on the reopening of the U.S. economy.

 

TN: OK, so. So this is a forward looking optimism, is it? I know into other areas, like, for example, lumber, which has been there’s been a lot of buzz about lumber inflation is because of the sawmills and with other, say, commodities, there have been processing issues and with, you know, meat and these sorts of things that have been kind of processing issues and bottlenecks in the supply chain. But with crude oil to petrol, it’s not, it’s not the same. Refineries are doing just fine. Is that, is that fair to say?

 

VH: That’s a very good point, Tony, to to just kind of unpick a little bit. Because what happens is when you hear talk of super cycles, commodities, bull run, and then, of course, we have a lot of indexes and people trade those indexes, commodity index, we tend to lump together, you know, commodities all the way from copper and tin, lumber and corn all the way to crude oil and gasoline and gas oil and so on.

 

But, you know, here’s what. You know. We could spend hours talking about this. But, but just very quickly to dissect it, I would say look at it in terms of you have commodities. And I would sort of lump metals and to some extent agricultural commodities in this one Group A and Group B.

 

So as I mentioned earlier, Group B, which is which is oil. Well, crude oil and refined products, to a large extent, the prices are being propped up by OPEC, plus keeping supply locked out of the markets. It’s very different from, as you mentioned, what’s happening in metals and ags and these kind of commodities where it just can’t be helped. So there’s supply chain issues, this production issues all the way from from Chile, where copper production all the way to even here in Malaysia, you know, palm oil, because workers are unable to return fully. Or in terms of even the the packaging, the storage and the delivery of it. So I think there’s a major difference there.

 

Now, the commonality here is, of course, all of these are seeing demand rebound. You know, that I agree as a commonality. Demand is rebounding. But I think it’s very important to remember. And why is it why is this distinction important is that you could argue that, well, if demand continues to sort of go gangbusters in terms of copper, tin, lumber, it will, for the foreseeable future, meet against supply constriction. So you cannot.

 

So accordingly, you can assess what might be the prices of these commodities going forward. They may remain elevated, but it would be wrong, I think, to sort of draw a parallel between that and oil, because in oil, I do believe OPEC non-OPEC are waiting. In fact, I don’t think they can hold their horses any longer, waiting to start putting that oil back into the market. So, you know, keep that distinction in mind.

 

TN: So there’s an enthusiasm there. So let’s say we do see demand kind of come back gradually, say, in the U.S., a little bit slower in, say, Europe. But China is moving along well and say Southeast Asia, east Asia is coming along well. The supply from the OPEC countries will come on accordingly. Is that fair to say?

 

VH: Absolutely. And when you talk about demand, again, I think there’s a sort of a bias in the crude futures markets, which tend to be the leading the direction for the oil complex in general, including the Fiscal markets, is that there’s definitely a bias to looking towards what’s hot right now, at least looking towards what’s happening in the US and getting carried away a little bit. Because when you look at the US, it’s a completely positive picture, right?

 

You base that, you see things around, you see how people are just kind of moving away. You’re removing mask mandates, people are traveling. And, of course, we’re getting a lot of data as well. The footfall in your airports. The other thing about the US is you have good data, right. Daily, weekly data. So that continues to prop up the market. But if you just cast your eye, take a few steps back, look at the globe as a whole. And, you know, sitting here in Asia, I can shed some light about what’s happening here.

 

No country is opening its borders in Asia, OK? People are, for leisure. If people are even not even able to travel to meet their family, you know, unless it’s in times of emergency, unfortunately. So nobody’s traveling. The borders are sealed very, very tight.

 

There is an air bubble, travel bubble between New Zealand and Australia. But, you know, nobody’s bothering to even check what that’s doing to jet demand. What do you think it will imagine? You imagine it will do.

 

And then you have Europe in between, which is, yes, again, it is reopening very cautiously, though. We’ve had the UK Prime Minister, Boris Johnson, cautioning that the travel plans for the Brits might be in disarray because of this so-called Indian variant. I don’t like to use that term, but this virus more transmissible virus variant. So it’s a very patchy recovery. It’s a very mixed picture, which is why I’m not that bullish about global oil demand rebound as a whole. You know, at least the so-called summer boom that people are talking about.

 

TN: Do you do you see this kind of trading in a range for the next, say, three or four or five months or something? Demand come, supply come, demand come, supply comes something like that.

 

So there’s not too much of a shortfall for market needs as kind of opening up accelerates?

 

VH: Very much so. I think, first of all, unfortunately, I mean, as individuals, of course, we like to be positive and optimistic. But with an analyst hat on, we need to look at data. We need to use logic. We need to overlay that with our experience of this pandemic, the past one and a half years.

 

Somehow, we’ve had a few false dawns, unfortunately, during this pandemic. We’ve seen that right from the start. When you remember the first summer, 2020 summer, some people said, oh, the heat and all that, the virus will just die away.

 

So, again, I think we need to be very, very cautious. I do think, unfortunately, that this variance and as you and I were discussing off air earlier, this is the nature of the virus. So I think there’s going to be a lot of stop, start, stop, start. The other thing I see happening is that it’s almost like, I imagine the virus sort of it’s moving around. And even if you look at India now, it’s just gone down in the worst hit states of Maharashtra and Delhi. But now it’s sort of moved into the rural area.

 

So I think sort of, unfortunately, is going to happen globally as well. The other important thing to keep in mind is, is vaccinations, of course, is very, very uneven. You know, the ratio of vaccinated people in each country so far, the pace at which the vaccinations are going and, you know, not to mention the countries, the poorer, the lower income countries.

 

So we’re probably going to see, you know, maybe a bit of start. Stop. Definitely. I don’t think we’re going to see national boundaries opening up to travel any time soon. And then exactly as you pointed out, we have this OPEC oil and then, of course, we have Iranian oil and we can talk about that separately. So there’s plenty of supply.

 

TN: So let’s talk a little bit about, let’s talk a little bit about the Middle East with, you know, first of all, with political risk around Israel Palestine. Is that really a factor? Does that, does that really impact oil prices the way it would have maybe 20, 30 years ago?

Categories
QuickHit

Inflation: Buckle up, it may get worse (Part 2)

Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation, part two, where we start looking into things like raw materials cost versus processing and manufacturing bottlenecks. Also discussed are the wage inflation and labor availability and how long these impacts will last. And finally, we start talking about central banks. What will the Fed do? Will it do anything? When will it do it?

 

For those who prefer to listen to a podcast, here’s the Spotify link for you: https://open.spotify.com/episode/3CK3SNwMK97oWLy1DMRQnD?si=uV1As8VsTxSVrQNE0iYuiA You can also find us in other podcast audio streaming services. Just search “QuickHit”. Thank you!

 

Part one covered a lot around specific commodity inflation and why it’s happening.

 

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This QuickHit episode was recorded on April 28, 2021.

 

The views and opinions expressed in this nflation: Buckle up, it may get worse QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: What the people in the middle. So the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things, or are they passing that directly along?

 

NG: Sorry, Sam. I’m jumping in here. The beauty of that question right now is there was a major headline, the Financial Times talking about margin compression of how US corporates are going to be increasing prices. It was today. You have the likes of Chipotle. We’ll go on to that. That’s a labor cost issue. But the other company, you know, J&J, various bare necessities manufacturers for nappies for kitchenware also they’re saying they’re going to have to put price pressure through to the consumer and as we were discussing just before we started, there’s the elasticity of price increases is very high.

 

The elasticity of price decreases is extremely low. And I would contend that this becomes a rolling, snowball effect as these prices get passed through to the consumer. There are other costs that will be passed through to which we can talk about later on labor side. But this clearly, one of the signals that our well worth watching, on the margins in the corporate reporting, and all of them are suggestive of higher prices to the consumer.

 

Then you look at the ISM prices paid. I have a chart, a model that looks at that versus the CPI. And if that sticks to what it’s done over the last couple of decades, it’s indicative of CPI, actually, the big figure having a getting up to somewhere around four, maybe even higher.

 

TN: Which was kind of a China 2011 scenario of four to six percent CPI.

 

NG: Correct. But also also the the process of decoupling, as long as it may be, that process has created a demand because of the supply shock.

 

There’s a supply shock in the system. The demand is adjusting there, too, so that work as additional demand to fill in the gaps, so if the decoupling replacement process is long standing, the demand is still there, it’s a matter and then catching up. There’s a price disparity caused by that.

 

TN: Yeah, we definitely have a mismatch, at least in the short term. And will those supply chains catch up? That’s a real question. Sam, what’s your view on that in terms of manufacturers being able to absorb these cost and margin pressures?

 

SR: So I’ll jump to the housing market as my example, which I think is one of the more interesting ones filtering, filtering through down into lumber.

 

A very close friend of mine in Houston is delaying the start of one hundred and ninety homes that were supposed to be going into, well… He has the pads laid. He won’t build those homes until lumber prices go down. It’s the largest backlog he’s ever had. And that got us talking and kind of working through the market. And when you look at the market for pine studs in the US, it’s an intriguing look into kind of where the cost pressures are coming through, where mills are making mills that make the two by fours are making an absolute fortune off of the disruption.

 

But if you own a pine stand of several thousand acres, the tree that you are cutting off of it is the exact same price that it was a year ago. You have seen none of the prices at all.

 

TN: So there’s not a supply, a raw materials supply issue. It’s a processed materials issue.

 

SR: Yes. Exactly. So it’s the supply chain breaking down. You didn’t have enough. You didn’t have the mills up and running for a couple of months. You had about 40 percent of the capacity offline. And that created a shock to the system that eventually will be sorted out at some point.

 

We didn’t destroy any capacity for two by fours. We’re building even at the current rate, we’re building one point seven million homes. That’s nowhere near what we were doing in 2005. And yet lumber is four times where it was. So, yeah.

 

NG: May I ask a question because you’re obviously in touch with that level on a micro basis? So one of the things that I’ve been told by several different sources is they don’t disagree with your number coming down eventually. The problem the homebuilders now have is labor shortage.

 

SR: That might be a problem in the northeast. That might be a problem in a kind of coastal problem in the US, where I have fewer contacts in construction. But in the south, there’s no labor shortage. Wages are still very strong. You have some projects that were delayed for large oil which created a supply of able bodied plumbers, electricians, where there’s a shortage elsewhere. So I would say that’s probably very true for parts of the country.

 

There’s anecdotally, Beth. Beth Iron Works? One of the major boat docks in the north, northeast is driving around an RV trying to recruit people to come, trying to recruit welders. That was a problem before Covid that was and will remain a problem. The trades will be a big issue. Common labor, particularly in the South, does not appear to be an issue. That is an issue in the north.

 

NG: I’ve heard it’s an issue in Florida, actually, which is back to you point about coasts. Sorry, I interrupt.

 

TN: We’re in Texas. It’s the Promised Land. I mean, I think you…

 

NG: Would agree with you on that one.

 

TN: OK, so we’ve gone long. I know these are very detailed issues, but I’m going to ask another question. I did ask for some questions over Twitter.

 

So one of them came in from Brent. This was around supply chain disruptions, which we’ve already talked about. There’s another from Jerrett Heath. He says, “Will it be velocity or magnitude that causes the Fed to react to inflationary pressures?”

 

So what do you guys think? Are we going to see kind of the magnitude inflation push the Fed to react or what’s going to push the Fed to react to start to taper a little bit, if they do at all?

 

NG: I would say both at the same time. My great fear is that there is, and this was actually covered by the Wall Street Journal, but I’ve written and spoken about this as well. I sit there looking at the Fed becoming reactive rather than proactive, and the punch bowl analogy is gone, and that worries me enormously because they have great confidence in something that they’re forecasting as transitory and we know what their forecast record is, and if you really want a bad forecast record, just go to Frankfurt and see what the ECB is all about.

 

Now, it’s interesting to me that the conventional wisdom, the consensus forecast is for tapering to the end of this year as opposed to next year. It seems like the more people talk about the inflation pressure, the greater it is. But I wonder whether we will get tapering. That’s what worries me about the Fed.

 

I’ve been really working hard on looking at what Claudia Sahm has written and said over the last couple of weeks. She wrote an op ed in The New York Times and Bloomberg. She’s said… She’s an ex-economist for the FOMC and the Board of Governors, actually. And you get the feeling that the priorities are unemployment with equity, racial equity as opposed to equality. Furthermore, you get the feeling that financial stability… Both of those more important than inflation.

 

Now, if that’s the case and we start to see any signs of a taper tantrum, I worry that this Fed is going to do a proactive. Either stop the idea of tapering or do a twist or something that eases this market. I think they’ve got themselves, we have a very political Fed that, if it’s reactive by nature, it could be procyclical by action. And that’s where I find I really worry about it.

 

Then, we’ve got Powells term expiry February. Well, Lail Brainard is one of Janet Yellen’s favorite people. And if she gets in, we’re going full MMT. So those are my concerns about the tapering, its focus on financial stability and the risk that reactive policy will be procyclical.

 

TN: Interesting. OK, that’s great. Thank you. Sam. Help me understand, what’s your point of view on this? What gets the Fed to react and how do they react?

 

SR: Yeah, so I would go with neither of those will get the Fed to react. It’s not a question of should they or, you know, what they think they should do. But it’s a question of will they. And they won’t react to inflation. They do not care about the magnitude. They do not care about the velocity. And they won’t care for at least another nine months because we know the combination that they’re going to look through, the combination of basic facts and supply chain disruptions, at least through the end of the third quarter. They do not care. And then they will start the clock on their four quarters of inflation above or at two percent, and they want full employment before they raise. That’s four percent at least on measured unemployment.

 

So I would say, it, whatever you want to look at for inflation numbers, they don’t care. And maybe they should, but they don’t.

 

TN: So they don’t care yet. Or they don’t care period?

 

SR: They don’t care, period, until it’s been until it’s been a year of around 2 percent in this summer and fall don’t matter to them.

 

NG: Let me add one or it’s too late.

 

SR: Yes.

 

NG: I’m with you. You and I seem to agree. I mean, that is exactly the impression I got from Claudia Sahm’s words. I mean it was just straight up. And that’s where I worry, you know, I have a huge respect for Lail Brainard. She is a very, very accomplished economist. But she’ll go full MMT is what Janet Yellen wants. It’s what the Democrats want and I really worry about that.

 

Plus, you combine this with here we go back to Larry Summers. You combine this with this fiscal effort and one thing that, so in American terminology, progressive policies typically have historically been inflationary. In English terminology, is what I am, these socialist policies have a history of inflation. More government intervention, more pushing against the string of inefficient allocation of resources. Labor restrictions, minimum wage, universal basic income. It all leads to in one direction.

 

So I agree with you, Sam. I think the Fed doesn’t care and I think, hence, the reactive. When they react, it’s going to be, in my view, potentially too late. It’s already started.

 

TN: So I just sent out on Twitter a chart that Sam published about three weeks ago from another source on the negative impact of fiscal stimulus, and as we end up ’21, like in Q3, Q4 of ’21, that fiscal stimulus starts to have a negative impact. And certainly in ’22, the US fiscal stimulus has a negative impact.

 

So, you know, there are a number of things to worry about, not just with inflation, but with the efficacy of some of this fiscal stimulus that’s going into the market.

 

So with that, I want to thank both of you guys. Honestly, we could talk about this for hours. I would love to have this discussion with you guys again, you know, even in a couple of weeks to talk about other issues. So let’s see where this goes. But thank you so much. Thank you very much for your time on this. I really appreciate it.

 

We’ll get this out as quickly as possible. Thanks to everyone who’s watching this. Thanks for everyone who submitted questions. For those who did submit questions, for the questions we used, we’ll give you guys a month of CI Futures and look forward to the next time. Thanks for joining us.

 

Categories
QuickHit

Inflation: Buckle up, it may get worse (Part 1)

Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation. Where are we in the inflation and what is the horizon? Both guests have different views and they explain exactly why they have such views. And what about China’s manipulation of CNY through hoarding metals and commodities? Is that a valid way of looking at inflation?

 

Part 2 of this discussion can be found here: https://www.completeintel.com/2021/05/06/quickhit-inflation-part-2/

 

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This QuickHit episode was recorded on April 28, 2021.

The views and opinions expressed in this nflation: Buckle up, it may get worse QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Today we’re talking about inflation. It’s been on everyone’s mind for the last couple months and we’ve got two macro geniuses to talk to us about it today. We’ve got Nick Glinsman from EVO Capital and we’ve got Sam Rines from Avalon.

 

We look at copper. We look at a lot of these indicators of inflation and it’s been on everyone’s mind over the last few months. A year ago, people were worried about deflation. Now the worry is inflation. Obviously we’ve seen a lot of monetary and fiscal policy in the interim.

 

So, Nick, can you give us your view on where we are with inflation and what that looks like over what horizon? Is it months? Is it five years? Is it, you know, how does this play out?

 

NG: The horizon is a little bit tougher. But my my thesis is based on looking back at historical precedence and I focused on the LBJ Vietnam War spending, combined with his great society fiscal spend, which ultimately led in the early 70s Paul Volcker’s fame containing huge inflation there was at that period.

 

And I’m sitting here having spent the last year but actually building this thesis up for a couple of years thinking that the equivalent of the Vietnam expenditure is Covid and the relief spending that’s been has combined Trump and now Biden, and then the great society equivalent would be Biden’s green infrastructure spending which, I slightly tongue-in-cheek called the green ghost plan, which is enormous. Amazing.

 

When I find myself agreeing with Larry Summers on inflation. I think his odds of a third in terms of this creating inflation, I would suggest a higher. In terms of timeline, it took five to seven years for the inflation to really kick in during the 60’s leading to Volcker. I think this time around, it will be much quicker due to the differences, a lot of globalization and supply chain management.

 

TN: Sam, can you kind of give us your view of where we are in inflation and what’s the duration that you kind of expect this to play out?

 

SR: I have a very different view. If you look at the lumber market, copper, et cetera, these are things that tend to sort themselves out rather rapidly. Being in Houston, the best cure for high prices and energy is high prices. We will pump more if oil ever goes to 80. It’s very similar with lumber and copper. Most of the mills are becoming much more efficient in lumber, for instance.

 

So we will see that begin to roll over and that will roll over in a very meaningful way as we begin to work through these supply chain issues that we know are coming in the summer and we know are probably going to persist in the fall. But as we get into the fall and we get into early 2022, even if we have a couple trillion dollars infrastructure, it’s going to be spread over the better part of 10 years infrastructure.

 

It’s not a fast spend and it will not save us from the fiscal cliff. It will not save us from the lower employment numbers that we’ve been seeing on an overall basis. Yes, unemployment is moving lower, but employment is not keeping up with the employment figures.

 

Once the economy begins to have to stand on its own two legs, even if it has a touch of a tailwind from the government, it’s still going to be very difficult to continue to see consumption going through the roof, continue to see the types of disruptions that we’ll see for the next six to nine months in terms of supply chain that will have one-off price implications.

 

But that to me says we’re probably getting towards the peak of the sugar high as we get into the summer and the other side of the sugar high is going to be very painful in terms of going back to a one and a half to two and a half percent growth rate in the US inflation that will be very difficult to get higher simply because it’s difficult to have sustained disruptions in supply and demographics that aren’t changing anytime soon. So we will continue to have a number of those headwinds. And I think that’s what the US 10-years is telling you, US tenure at 1.5 is telling you that the market’s looking through this summer and saying the next decade doesn’t look as good as the last decade in a lot of ways.

 

It’s something to at least keep in the back of our minds that the Fed doesn’t have great control over the 10-year. The fed has great control over zero to two-year timeframe. But nothing beyond that.

 

TN: Okay, so let’s look at common areas. It seems to me that both of you see inflation continuing to rise maybe not in terms of the rate of rise but certainly continue to rise until, let’s say say Q3 Q4? Do we at least have comic around there?

 

SR: Yeah.

 

NG: Yes, absolutely.

 

TN: When we look at some of the the pressures in inflation, part of my assertion has been, and I’m sure you’re both going to tell me I’m wrong, but as we’ve seen the CNY strengthen, my hypothesis has been with a strong CNY, Chinese manufacturers are stocking up on industrial metals, food, other things because it’s in dollar terms. They can get it pretty cheaply and they’re waiting for CNY to devalue again when their buying power will decline.

 

What I’m hearing is that a lot of these things are really going to China to be hoarded and as a play on a potentially devaluing CNY. What do you think of that hypothesis aligned with a lot of the central bank easing? Is that a valid way of looking at inflation? Meaning this is stockpiling more than it is demand pull?

 

NG: My view on China is that, if you look at food firstly, there is a food shortage crisis. And we all know what the CCP are most scared of, which is society unrest. And we can take the examples of the Arab Spring, food is the key. But I also wonder whether the Chinese are stockpiling in anticipation of decoupling? I think of rare earths, of which they have a large control of the refining thereof being problematic. Semiconductors, there is an issue there.

 

So if I extrapolate further, my view is I think the supply chain issues are much longer standing now because of various geopolitical forces creating a decoupling with China for sure. And we have this Anglosphere grouping that’s clearly beginning to take shape, which now looks like that will include India because of the health crisis there.

 

If we look at that, then the question is what happens with Europe? Again, I think that’s part of the supply chain problem whilst they decide which site they go to. Is it china-centric or is it anglers-centric?

 

So I think the supply chain issue is much longer standing, hence I suspect that we’ve got China positioning, because nothing goes on which in China without the government knowing about it, quite frankly. In terms of anticipating a supply chain issue, because all the commodities they’re importing they’re short off.

 

TN: Okay, Sam, first of all, what do you think about my hypothesis and then Nick’s qualification around the supply chain issues being much longer term on the back of decoupling?

 

SR: I would take the argument that decoupling isn’t an action. It’s a process, and the process takes a very, very long time. And that creates in my mind a much longer time frame for the United States to build out its portion of the supply chain, for instance semiconductors, et cetera. So I would say I don’t disagree that there is a decoupling underway. In my opinion or my argument would be that it will take much longer than a few years to really get that process to move and it’ll be particularly under this administration a much more diplomatic and less blunt force tools than we’ve seen in the past being used. So I don’t disagree with the supply chain eventually being at least somewhat disentangled from China. I would just argue that it will take quite a while to really begin to become an issue unto itself.

 

On your point that China stockpiling, that does appear to be happening. It does appear to be a hedge against a weaker CNY to come including with lumber. One of the reasons that lumber prices are spiking is because China’s buying a lot of lumber in the US. That is a significant problem. And I would point to, when they stop stockpiling, that tends to have a significant effect on the price of commodities in the opposite direction. We’ve seen that with copper a couple of times during their infrastructure builds.

 

The interesting thing right now is you’ve actually seen a pullback from infrastructure spending. From the peak in China, they’ve begun to do their form of policy tightening on that front already. Suspected will continue at least on the margin and that will be a significant headwind for those commodities that have been stockpiled when less of them are being used on the margin as well. So that that does play into a 2022 disinflationary type environment versus 2021.

 

TN: Given that we have all these different pressures, whether it’s supply chains, whether it’s stockpiling, whatever it is, what the people in the middle, so that the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people, when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things? Or are they passing that directly along?

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QuickHit

QuickHit: The Anglosphere and the Multi-Speed Recovery

Macro specialist, geopolitics and history commentator Nick Glinsman joined us for the first time on QuickHit to discuss how the Anglosphere compares to the world in this multi-speed recovery in the wake of Covid.

 

Nick is based in Brazil and he brings decades of experience to macro, markets, and politics. His background is basically London and New York with a bit of Europe and, Australia and Hong Kong. He worked with the Salomon Brothers and Merrill Lynch. He’s doing a lot of advisory work and the ability to express views on the markets, geopolitics and macroeconomics in the market.

 

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This QuickHit episode was recorded on April 8, 2021.

 

The views and opinions expressed in this The Anglosphere and the Multi Speed Recovery? QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Nick, for a while you’ve talked about this concept called the anglosphere. Can you help us understand what you mean by the anglosphere?

 

NG: I’ll dig into it. I like the fact that you’re talking about the link between geopolitics and economics because with Trump and Brexit, that’s where what was a very boring macro environment suddenly started to become differently exciting. The politics would start to drive some of the macro markets and actually what’s interesting is  Brexit and Trump, part of the anglosphere. Not the formative part of the anglosphere.

 

So what we mean by the anglosphere is looking at countries that are historically tied via culture but critically also via common law, legal system, because that defines how the economy and how commerce can run. If you go back in history, there is a big difference between common law countries and roman law countries. Common law countries think of European Union countries and that construct. So what we mean by the anglosphere is being, better start with the UK because it is the mother country, it’s still the mother country for where you are currently still. If the US were now part of the commonwealth. You’re looking at an anglosphere. Now typically when I refer to it, I’m talking about UK, US, Canada, Australia, New Zealand. Five Eyes.

 

You could loosely add two countries. One of which has an anglo-saxon common law — India. The other one works much closer as a defeated entity country in World War II — Japan. So you’re getting the quad, which I would maintain is part of an angular influence, at least, if not anglosphere entity.

 

Let’s stick with that grouping. You’re looking at countries that have a similar legal system, similar financial structure, they have banks, central banks that are lenders of last resort and traditional backups, concept. Remember the European Union doesn’t have banks.

 

Back to common law. Common law also in this environment. This is where it’s getting critical. So Five Eyes is I would posit it’s the ultimate defense alliance.

 

TN: Even New Zealand, still? Ah, you know. Long discussion. That’s so much sarcastically.

 

NG: I know what you’re saying. Although she has the relation in the State of Victoria in Australia, who is actually not known as Kim Yong Dan. But if you look at what they’ve just done with the central bank, there is still a similarity there. And of course the travel corridor that’s about to open on the 16th I think it is, is between Australian and New Zealand. So as much as she kowtows to the panda in Beijing, they are still part of that structure.

 

So back to the common law and the financial. So you’ve got countries with central banks that act as lenders of last resort with independent monetary policy, you have independent fiscal policy and I would include of course in both these, Bank of Japan, RBI in India and so on so you’ve got independent fiscal policy, independent monetary central bank, which you don’t have in Europe.

 

There’s been no Hamiltonian moment there. So you have that flexibility and you can see that flexibility. You also have much more, common law enables Schumpeter’s creative destruction and thus reconfiguration. Much easier chapter 11 in the US or bankruptcy and start again. Right. Not so easy to either stop or start on the roman law. So that when you think of where we are now, you’ve gone through a pandemic where inexplicably a lot of countries have remained closed, the reopening is going to need that reconfiguration.

 

You’ve also been the countries that are advancing with the vaccine quickest of those that took a very commercial view as governments in terms of getting them… so you had operation walk speed in the US and you had a vc person take over the procurement policy and the vaccine policy in the UK. Private Sector innovation. And in fact, in the UK, you have that triangle, Oxford, Cambridge, London, that’s without biotech and so on and so forth, very flexible. You even have a situation where the famous Astrazeneca factory in Holland was financed by the British. Not by the Dutch.

 

We can get into that on another episode of the great vaccine debacle. But I think that’s part of the precautionary Roman Law System that the EU runs versus the go get innovative system that comes with the anglo-ceric countries, the common law system and the structure of finance business so and so forth.

 

TN: Okay. So it sounds to me like when you talk about the anglosphere and you look at it kind of post pandemic or at least post first wave of disaster in the pandemic as we enter a recovery, it sounds like you see a widening divergence between those with say common law and relatively independent central banks versus the other law formed be it roman and in independent fiscal policy as well.

 

So help me understand the… so we just had this IMF report come out earlier this week about 5.1% growth or whatever this year and everything’s amazing and which we know, given, it’s all base effects and if you do a three-year average, it doesn’t look good at all. In Europe, the only one, over that three years, the only one with positive growth is The Netherlands. Not even the UK. But I would argue there, they lean toward you know more of a British style than other styles.

 

So if we’re having a two-speed or multi-speed recovery, would it be fair for me to say that you believe the anglosphere will recover faster than the other spheres?

 

NG: Absolutely. Absolutely. You’re better expert on sinosphere than I would be. But I think the growth is going to disappoint because they’ve pushed so hard on the string of debt. Okay.

 

In terms of the Euro, Europe, I think there’s a very simple way of looking at things. It’s extent of vaccination and compare those and what does that mean? It’s now being said out of UCL, University College of London. UK’s herd immunity on Monday, 73%.

 

You can see there’s data coming out of the UK that is explosive as there is in the US. People are looking at the European and thinking, okay let’s close until August or beyond because this vaccine debacle is even worse. Everybody’s going to take Astrazeneca in Europe even though for the young women of age below 30, the chance of getting a blood clot is 1 in 600,000. Where the child’s getting Covid is substantially greater.

 

Because Europe and the Roman legal system has this precautionary black bent. It’s clear that this whole debacle in Europe has delayed that coming out of meltdown. The European summer season as the Germans would say is kaput.

 

TN: If we have this kind of two-speed recovery or multi-speed recovery, and let’s say Japan is part of the anglosphere, would you say Japan would be leading Asia out instead of China? Now I’m talking about real data. I’m not talking about Chinese 8.1% growth numbers like fictional. I’m talking about actual real performance with actual real usable output and you know all this other stuff.

 

NG: I’ve got so that’s going to be the case actually. I really do have that sense and I also, given the belligerence of the Chinese regime right now. You’ve got vocal and slightly belligerent actions against Taiwan, of course, which I’m with Albert on that. They’d have already invaded if they were going to do it. And you’ve got what’s going on in the Philippine islands with all these ships tied together.

 

I remember a very famous situation where chief ancient China economist from HSBC came into the office and talking about China and then we asked coming into that particular office, name unmentioned, always an aggressive to and fro Q&A, and then we have one of us asked about China, how’s the recovery going after Fukushima. Blood was coming out of this chad’s mouth having to talk a bit about China.

 

And we know that there is a much more passionate… we have passion against Germany or France as a Brit or as an Englishman come soccer. But, we love each other.

 

TN: Maybe that’s a bit strong. But we’ll use that.

 

NG: Maybe strong for Germans but with the French, there is a deep passion there and somebody keeps reminding the agent. But in the Far East, there has been that, you see that tension with the South Koreans and Japanese. However, the Chinese are forcing people out away from some of this stuff.

 

Japan with Australia and India will enable a lot of these countries to look elsewhere. Isn’t it ironic going back to the anglo-sphere link and that publicly is United Arab Emirates who are being given credit for getting India, Pakistan talking together. I have no doubt behind the show, the English are very active there because you’ve got a cricketer in charge. She made this game… So there’s stuff going on that gives you signals as to what could be happening.

 

It was rather like a mutual friend of ours, we were discussing India in terms of trade and I was saying, the UK and India are going to have a free trade deal as soon as it’s possible once they’ve overcome some of the agricultural stuff. And that person said India will do a trade with the EU well before they do it with the UK. And I’m saying hold your horses. No way!

 

TN: It’s familiar.

 

NG: One, it’s familiar. Two, one of the problems that the EU’s have with trade deals with anglospheres countries is legal interpretation thereof. And you know, I think they’ve been discussing it for 8, 10 years, EU and India, they’ve got a sub agreement already in the UK after several months.

 

TN: Just coming back to this kind of overall topic of the anglosphere and the multi-speed recoveries, so it does sound like you almost have this triangulated recovery from your perspective from India, Japan and Australia that’s leading the way in Asia. You have the UK, which is leading the way for Europe and then you have the US that’s kind of leading the way for the Americas. Is that kind of how you see things?

 

NG: I tend to think that’s the case. But I wonder whether one can justify the idea of UK leading the way for Europe given the tensions between the UK and the EU.

 

TN: I think the EU will play through… The EU will feel pain until they get tired of it and then they’ll relent, I think.

 

NG: There’s one big problem and this came up yesterday there was a meeting of the EU commission about article 122 vaccine export ban. Belgium, Holland, Sweden and Ireland said no way. All the others were saying we’re okay with it. With Germany covering itself with a few conditions. The damage to Europe’s role in the global supply chain is irreparable. They will not be able to go back to this.

 

And there’s another little fact of it which makes me wonder what will happen with Ireland because there’s tension building up in Northern Ireland again. Article 122, that export ban is specifically aimed at UK, US, Canada, Australia. They’ve stopped shipping to Australia already. US, UK, they’re saying well you’re not exporting anything. Paid for everything but not exporting everything. Canada just gets lumped in with the US and the UK.  So I think that’s really shattered the role of Europe in the global supply chain.

 

You’ll have people producing goods for Europe from European input but how can you possibly? Now going to Ireland where the UK has already said we’ll give the Republic of Ireland 3.7 million vaccines because it’s secures Northern Ireland in the coming out of lockdown. That’s an interesting overthought process.

 

Because you have a situation where Ireland is under attack like the Netherlands and Switzerland from Joe Biden’s global tax. If they come out, I would not be funny.

 

TN: It seems to me that what you’re also saying is there’s likely some kind of regionalization or re-regionalization that may emerge from this. Am I putting words in your mouth or is that?

 

NG: I would go and say US and commonwealth EU for as long as it stays stable, which may be problematic and then as you say Asia.

 

TN: Okay. Yeah, I mean I think that we’re coming to a place and I’ve been talking about this since about 2015, where you have global supply chains for goods that are long-term commoditized goods and then you have regional supply chains for the higher value goods.

 

NG: And that’s consistent with the decoupling that’s got to take place against China. And then you have that floater which you and I touched on before we got online, which is Russia and I have a slightly different view of where I can go, which will be, you know.

 

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QuickHit

Future of the US Dollar: Weaker or Stronger?

Commodities expert Tracy Shuchart graced our QuickHit this week with interesting and fresh insights about USD, CNY, oil, and metals. Will USD continue on the uptrend with Yellen on board? What is the near-term direction of CNY? Will metals like copper, aluminum, etc. continue to rise, or will they correct? Will crude continue the rally or is it time for a pause? Watch as Tracy explains her analysis on the markets in the latest QuickHit episode.

 

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This QuickHit episode was recorded on March 12, 2021.

The views and opinions expressed in this How robust is the global financial system in the wake of Covid? QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: I’ve been focused for the past few weeks on the Dollar and Chinese Yuan and on industrial metals. Can you talk to me a little bit about your view on the Dollar? What’s happening with the Treasury and Fed and some of their views of the Dollar and how is that spreading out to markets?

 

TS: Right now, we have a little bit of mixed messaging, right? So, we have the Fed that wants a weaker Dollar. But then, we have Yellen who’s come in and she wants a strong Dollar policy. So, I think that markets are confused right now. Do we want a weaker Dollar or do we want a stronger Dollar? And so, we’re seeing a lot of volatility in the markets because of that sentiment.

 

TN: So who do you think’s gonna win?

 

TS: I think that Yellen’s going to win. I think we’re probably going to get a little bit of a stronger Dollar. I don’t think we’re going to see a hundred anytime soon again. We’ve seen stronger Dollar when she was at the Fed. She’s come in right now and said that she wants a stronger Dollar. We would probably have at least a little bit more elevated than the low that we just had, like 89.

 

TN: I think things are so stretched right now that even a slightly marginally stronger Dollar, let’s say to 95 or something like that would really impact markets in a big way.

 

I’ve been watching CNY. I watch it really closely and, you know, we bottomed out, or let’s say it appreciated a lot over the last six months. It feels like we bottomed out and it’s weakening again. What does that mean to you? What is the impact of that?

 

TS: The impact obviously will have a lot to do with manufacturing, with exports, and things of that nature. So if their currency starts depreciating, and they’re going to export that deflation to the rest of the world, it’s just starting to bounce over the last week or so. Unless we have another trade war, I don’t think we’re probably gonna see like seven, seven plus. I remember last time we were talking about it, we were talking about it’s going to be 7.20 and you nailed that. It’s definitely something to keep an eye on obviously, because they’re such a big purchaser and because they’re such a big exporter.

 

TN: We’re expecting 6.6 this month, and continue to weaken, but not dramatically. We’re expecting a pretty managed weakening of CNY barring some event.

This China discussion is from our Telegram Channel. Join us here: https://t.me/completeintelligence

 

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What I’ve been observing as we’ve had a very strong CNY over the past six months is hoarding of industrial metals and we’ve seen that in things like the copper price. Have you seen that yourself? And with a weaker CNY, what does that do to some of those industrial metals prices in terms of magnitude, not necessarily specific levels, but what do you think that does to industrial metals prices?

 

TS: We’ve been seeing that across all industrial metals, right. It hasn’t just been copper. It’s been iron ore. It’s been aluminum. It’s been nickel. We’ve seen that across all of those. China likes to hoard. So when everything was very cheap like last summer, when everything kind of bottomed out, they started purchasing a lot. Then we also had problems with supply because of Covid. So prices really accelerated and then suddenly we just had China’s currency pretty much strengthened. We’ll probably see a pullback in those prices. It’ll be partly because of their currency. If they allow that to depreciate a little bit. And then also, as extended supply comes back on the market.

 

But it’s even getting to the point now where if you look at oil, oil prices are getting really high too. We’ll likely see China scale back on purchases, probably a little bit going forward just because prices are so high. Or we will see them, which we’re seeing now, is buy more from Iran, because they need the money. They get it at a great discount. It’s cheap. If they start buying more from Iran, that takes it away from Saudi Arabia and Russia, who are the two largest oil producers.

 

TN: When I look at Chinese consumption, at least over the past 15 months, there’s been almost an adverse relationship of CNY to USD and say industrial metals prices. It looks like a mirror. Crude oil doesn’t look that way. It’s really interesting how the crude price in CNY there really isn’t that type of relationship.

 

One would expect that if CNY devalues, they’ll necessarily cut back on purchases. I would argue and I could be wrong here, that it’s not necessarily the currency that would cause them to cut back on purchases. They’ve hoarded and stored so much that they don’t necessarily need to keep purchasing what they have been. Is that fair to say?

 

TS: They still like to hoard a lot. Between January and February, they were still up 6% year over year, where January was very high, February was lower because they have holiday during February. Oil, that is different. It’s not really related so much to their currency because you have outside factors such as OPEC, which has really taken eight percent off the market and they’ve held that over again for another month. And the fundamentals are improving with oil. I’ve been seeing a lot of strength in the market over the last eight months.

 

US is the world’s largest consumer. Whereas you look at something like industrial metals, they are the world’s largest consumer. When we were talking about crude oil, because that’s spread out so much, they don’t really have that much pull on the market per se that they would in metals markets.

 

TS: And I’ll remind you. I’m sure you remember this. When we spoke in Q2 of 2020, you said it would be Q2 of ’21 before we even started to return to normal consumption patterns for crude and downstream products. I think you hit that spot on. And it’s pretty amazing to see. I had hoped that it would return sooner, but of course it didn’t.

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QuickHit

QuickHit: How robust is the global financial system in the wake of Covid?

This week, we are joined by Seth Levine of the Integrating Investor, a professional investor and investment market blogger, sharing to us his thoughts on the current financial system, central banks, and debt cycles.

 

Seth Levine is the author and creator of the Integrating Investor Blog. Seth is also an avid coffee roaster, who influenced Tony Nash into roasting as well.

 

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📺 Subscribe to our Youtube Channel.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here. simplify financial planning.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on February 19, 2021.

 

The views and opinions expressed in this How robust is the global financial system in the wake of Covid? QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: We have a new administration in the U.S. We have Jerome Powell, Central Banker who’s been there for a while. We have Janet Yellen coming in as a treasury secretary. But we’re also late in this Covid cycle with a lot of overhang and bad policy decisions. Some people may like them. But we’ve got a lot of things that need to restart. At the same time, we have Europe that is still shutting things down and the ECB and we have demographic issues in Europe. All those sorts of things.

 

I’m really curious about in the financial system, but more specifically, central banks and treasury. What are your thoughts on where we are and where we’ll likely go in the next year or so with those financial system central banks and treasuries, what does it look like from your perspective?

 

SL: The financial system is just a really interesting topic all together because it is a very big word, a very big concept. And it’s an abstraction that a lot of people grasp onto, and some of the work I’ve done a couple years ago, I really tried to untangle that abstraction and concretize it and what I found is that, when we say “financial system,” we’re really just talking about a system of interconnected banks.

 

So at its base, we’re talking about very simple banking. Banking is complicated. But when I think about banking at its core, what is it? It’s really just a carry trade. If you have bank XYZ, you take in deposits and then you try and invest those and earn an asset yield that’s an excess of your deposits. And you keep a little bit in your deposit and you keep a little bit behind for reserves, i.e. liquidity.

 

It’s a leverage system. When we talk about the global financial system, we’re really talking about a leveraged system of interconnected, financial services companies. And that’s what we see on the screen. They’re in the markets for bond stocks, derivatives, all sorts of things and it is giant. Because we not only we have Central Banks. We also have what’s called the shadow banking system. Or some people call it the Euro-Dollar system.

 

So we look at what has happened over the course of my life. I really see this carry trade being squeezed in one direction. The funding side has perpetually been squeezed lower. And what’s that done? The asset side has come down as well. But I see all these like market events, whether it be Covid or the bombing event of a couple years ago or any number of market sell-offs. That is a signal that the market is trying to deleverage.

 

There’s been asset mis-pricing on the market and because we’re levered, again the impact is so much greater so the response out of policy makers has always been to lower the funding costs. If the asset yield is coming down, the funding cost has to come down too to keep that carry trade together. And now as asymptotically reach zero, maybe even going the other way, it’s really interesting to see what’s going to happen with that asset yield because again if there’s a mismatch of any sort, that’s when we can start hitting some turbulence.

 

TN: Do you think we’re hitting that mismatch point? We have a lot of precarious events like right now, whether you’re looking at big events like the demographic handoff from baby boomers to millennials, or if you’re looking at Covid or if you’re looking at some specific corporate events or even cryptocurrencies. There are so many different things happening right now that could mess with that carry trade.

 

SL: If you want to talk about cryptos, that’s a separate conversation. It depends on your time frame. If you look long-term, it’s the millennial taking over from the baby boomer and just a giant debt burden that we’ve amassed and I’ll claim it squarely on the fiat currency regime because again if you look at all fiat currency regimes they tend to go in this direction where the spending gets and the debt load tends to overwhelm the productive capability of the current economy and that is an issue that I think has to resolve and how that resolves, I’m not going to say anything unique here, but I believe there’s only three ways out.

 

You can either inflate it away. You can either restructure the debt or the obligations and in this case would probably mean restructuring social security and medicare benefits or you can repay it or default on it, right, which I think repayment is going to be difficult. And default, I’m not sure we need that considering that it’s a fiat currency and we could print it ourselves and that actually leads into what I think is the war of MMT right now and again, if bitcoin is one bottle of tequila I think MMT is a bad case of it.

 

That’s the draw of that because people are trying to find a way out of this and that’s longer term. If we go back to the more near-term view, I think inflation is really an interesting development here. And when we say inflation, I mean we’re specifically talking about CPI growth.

 

So we get to a point where the CPI is going up and bond yields for whatever reason follow CPI growth up, then let’s go back to that carry trade. Now we’re talking about our funding costs going up and asset yields don’t go up. That’s going to be a problem for the financial system and keeping that carry trade together.

 

However, it’s also how to get the asset yields up. Well the price has to come down. So that I think is a pretty interesting potential risk that we may be facing in the economy unless we can really generate the growth so we can get the asset yield up to match the increase in funding costs.

 

TN: I believe we’re in that very precarious position right now as we look at bond yields rising we look at other things. There’s a lot happening right at this very moment and so if you are a Janet Yellen or a Jerome Powell, what are you thinking about, I mean aside from these big problems we’ve talked about, what kind of tools do you think you’re looking at aside from dump trucks of trillions of dollars? Like, is there a lot… Do they have other options, really?

 

SL: I’m gonna answer this in some really different ways. The stimulus route that most people would like to go to, I actually think that’s counterproductive because I think about stimulus right, as opposed to say QE for example, you’re actually giving money in the hands of citizens. These are not institutions. These are actual citizens who are going to go out and purchase things.

 

So that actually I think puts upward pressure on CPI growth in a way that QE just simply did not, just from a pure mechanical perspective. So if that’s the case, we start seeing… So if you go and unleash some stimulus and then you start seeing CPI growth and then you start seeing bond yields go up, I mean you’re actually exacerbating the problem, right.

 

So my preferred method as a pure capitalist here, if I’m Jerome Powell, if I’m Yellen, I’m thinking of ways to get the asset yield up and I mean like bona fide get the asset yield up and from my perspective that’s purely deregulation and going to as free market and economy as possible. But that to me would be the only way of really getting the asset yield up and the growth up that we need to grow our way out of out of the debt load that we’ve created.

 

TN: Okay, interesting. So what are some of those deregulation paths you’d go down? Like again, the broad swallows of them and and how would you sequence that to not have immediately negative impact on the on everything? What would you focus on and how and when would you focus on it?

 

SL: So this is gonna sound like a punk, but it’s not. I think this is a very specialized issue and there are and they’re probably like really good policy makers, policy experts who can actually opine on this. But the way how I like to think of these problems and I get a lot of criticism for this, but it’s really to me the only way, the best way that I know to think about them is think of the end state, think about where we are now.

 

Like, let’s devise the ideal end state and then once we agree on the ideal end state then we could talk about the strategy to get us from here to there in the least disruptive way possible. So I mean ultimately my end state would involve going to a free banking regime. We’ve tried this throughout history. There’s been periods of it in the US. There’s been, it’s been tried best probably in Scotland. There’s also some in Canada.

 

If you’re looking for resources on free banking, I highly recommend the work of George Seljun and Larry White, definitely the foremost experts on the topic. If I were Jerome Powell, the way how I would go. I would try and think of how to put myself out of a job in a sense, which we know is probably unrealistic and probably doesn’t have a lot of consensus behind it but, that’s the way forward I see. These prescriptions that we’re talking about are going to be financial because we are talking about Jerome Powell who’s the head of the central bank. So he is a banker in the financial system.

 

And Janet Yellen is treasury secretary. I don’t really know how much power she has because she’s just trying to fund the government. If I’m Janet Yellen, I’d probably have to get a little bit shorter and then, maybe try and try and lobby for some deregulation angle and take some of that pressure off me to actually to have to fund a large government with that has a very big reach.

 

TN: Sure. Okay and so when we look at going down that path and we look at say the US Dollar as, like it or not, as a global currency, how do other say central banks or financial systems interact with the US as we would potentially move down that path?

 

SL: Sure. So the dollar is very important in the global financial system. It is the base reserve currency. But right now, all currencies are floating right. So I think perception probably has a lot more to do with it than anything else. At least from a fiat perspective, it ultimately, the buck is going to stop with the strength of the US economy. And it’s going to and that’s with any currency.

 

In order to keep the US Dollar as reserve currency, we need the strongest currency possible. That also means honoring the obligations possible. So that puts a lot more pressure on the inflation prescription and on the default prescription. And really I think leaves you with the growth angle as a way to maintain the Dollar’s importance in the system.

 

TN: It sounds to me like you’re fairly concerned about inflation in the coming years. Is that fair to say?

 

SL: I am sort of a secular deflationist and I am for a couple reasons, and it’s probably none that you’ve ever heard before. One I’m just pro, I’m a big believer in human ingenuity and a lot of this has to do with definition, right.

 

If we’re talking about inflation’s definition, right, it’s… Today, people are talking about CPI growth, right. The rate. So that is just the price of consumer goods and services. Right, I mean, that should fall over time. I mean just no… that is, I mean, that is the way of human prosperity. In fact, the only way CPI growth increases are times during shortages and tough times actually, if you look at the inflation we’re seeing now, right? The CPI growth that is like coming because we are seeing shortages throughout the supply chains, right. And that’s okay.

 

TN: So let’s stop there and let’s talk about that in terms of shortages. Do you think we’ll continue, like are those shortages something that are here to stay, let’s say in the short to medium term? Because like you, I’m a technologist.

 

I started technology for a reason mostly because I’m an optimist. So over the long term I certainly believe that prices go down generally because of innovation. But these supply shocks will say almost, a generalized supply shock, that we’re seeing in the wake of Covid, do you think that will be with us for a sufficient amount of time to have an impact on short to medium term CPI and provide a disruption to that balance that you’ve talked about?

 

SL: That’s an interesting question. I think it’s a matter of time frames because I think longer term, right I mean, you’re in business, I’ve been a bottoms-up analyst for 17 years here. And if there’s one takeaway is there’s no better cure for high prices than high prices. And why is that? Well that’s because businessmen and women innovate, they do bottleneck processes and they find a way to improve productivity and bring those prices down.

 

These Covid shortages I believe are temporary because I believe that we’re gonna see business people innovate and try and meet the demand with as much supply as possible for as low as price as possible and to make simply as much profit as possible for them as well.

 

So I think it’s short-term. I don’t have a way to really gauge how long that’s going to be because quite honestly it’s going to be a very micro-analysis. Are you talking about meat supply or talking about the chip shortages, and you know chip shortages that we’re seeing or are we talking about, you know, what what industry?

 

TN: So right. But in general, you think, it’s pretty short-lived. So we may see a short shock but for the most part where that equilibrium that you talk about can remain.

 

SL: Let’s go back to the financial system right back. How quickly is the bond market going to react? I think that’s probably the most interesting part of this conversation.

 

TN: Treasuries have risen like 33% since feb 1.

 

SL: Treasures have more than doubled, right.

 

TN: Exactly. Yeah. Doubled from zero, right.

 

SL: So from a pretty low base, yeah, the ten years specifically. Investors are forward looking and the question is how are people going to react to the perceived rise in CPI growth? How far will this take it? What are also supply demand imbalances within the financial system?

 

These are very complicated systems with a lot of inputs and I think we all tend to fall for this. We try and we oversimplify these because we hang on to a narrative. Let’s just be blunt. Like, I have no idea where else we’re going to go.

 

TN: I think everybody does. We make this stuff up as we go along, right. So bringing this back to say Yellen and Powell and central bankers, the tools that they have, they’re facing the dilemma of stimulus versus let’s say near-term say CPI inflationary activities. Do you see an easy path for them in the near term?

 

SL: I don’t see them as the main players in this argument at all. The central banker’s job, if you go back to the early central banks, it is just simply to try match the assets and liabilities and keep everything together. How much power does he have to juice the asset yield of the economy, and I would say very little. The proof is in the pudding. When look at how economies have performed over the past couple years, no matter how low they’ve taken, treasury yields, you haven’t really seen,  a boom in GDP at all.

 

It’s completely elusive. That’s just because that’s not within his power even though there’s just this belief out there that if you control the liability side cost then, all of a sudden you can control the asset costs and the only lever in there that gets tweaked with is actually the leverage and I think that’s probably the most dangerous thing.

 

TN: So in the short term, we’ll live belong, it sounds like, as usual. Okay. But in the longer term and I want to wrap this up fairly quickly, it sounds like we have to transfer liabilities from baby boomers onto millennials. Do you see any feasible tools for them to do that in a way, you know, that can happen in an organized, won’t be painless, but a relatively organized way. Or will it have to be some sort of disruption?

 

SL: I think the only organized way to do it is through growth, right. You need to come up with policies and again my biases as a capitalist for many reasons, we may need tothrow an extra case of tequila on the truck to get down that path. So that is a tool set that I think is necessary to tackle these problems.

 

If you don’t bring up the asset yield, then you have to deal with the funding costs and again you’re left with three issues and I think they’re all pretty ugly.

 

TN: Great. Seth, on that optimistic note, we’ll wrap it up. Thanks to everybody for tuning in for this QuickHit. Please subscribe below on the page and we’ll see you for the next QuickHit. Thanks very much, Seth. Thanks.

Categories
QuickHit

QuickHit: Can Western companies solve the China dilemma?

This week’s QuickHit, we have Isaac Stone Fish of Strategy Risks to talk about how western companies and other companies around the world should deal with China and compromises that you need to do for that. He also shares the status of Hong Kong as a gateway to China. How about the environmental and human rights violations of China and how the US companies can make sure they are running an ethical business? And what is the status of non-profit organizations in China, especially those that are environment and human rights focuses?

 

Strategy Risks quantifies corporate exposure to Beijing. This was started because Isaac got frustrated at the way that ESG environmental, social and corporate governance providers were ranking Chinese companies and US companies that had exposures to China. Isaac thought it would be fun and interesting and hopefully very useful to have a different way of measuring and quantifying this exposure.

 

Isaac grew up in Syracuse, a nice little place but basically about as far away from the center of anything as possible. He started going to China when he was 16 for something different. He started in Western China and ended up living in Beijing for about six years. He also worked in journalism mostly, it was the Asia foreign policy. Spent a few years doing a mix of public affairs, commentating, bloviating, writing, and then started Strategy Risks roughly six months ago.

 

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This QuickHit episode was recorded on February 3, 2021.

 

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

 

Show Notes

 

TN: It’s really interesting looking at ESG and public markets and I think we’ve seen over the past few years a lot of tensions between China and the U.S. They’ve been there for 10 years but they really took shape over the last few years. If you’re a publicly traded company today in the U.S. or traded on a U.S. exchange, what are the things that you need to really think about with regard to China? What are the biggest risks and biggest considerations that you’re talking to your clients about?

 

ISF: One thing that people overlook is the risks of their China strategy. Not in China itself but globally and especially in the United States. The rules for engagement in China are so different for these corporations in China than they are in the United States. And the U.S. is drawing some pretty thick regulatory lines especially around Xinjiang, the region of northwest China where there are roughly a million Muslims in concentration camps. That a lot of times, these major corporations, their China offices will ignore or overlook or not put nearly enough attention on.

 

The messages that we’re communicating and the things that luckily are starting to bubble up into these board rooms is the understanding that to have a China strategy, you need to have a global strategy that is very aware both of what Beijing wants but also what the Biden administration and many American people want.

 

TN: For the last 15, 20 years it almost seems like companies have had a global strategy and then they’ve had this China strategy off to the side because it was such a big market, growing so fast. It seems to me like you’re talking almost about the normalization of China in terms of performance expectations, social expectations, those sorts of things. Is that right? Is that kind of what you’re implying?

 

ISF: One of the smartest ways of the Chinese communist party, which has ruled China since 1949, were the smartest things they have done is made it seem like their country was a normal country. And there’s nothing aberrant about China or the Chinese people. But there’s something quite apparent about the Chinese Communist Party.

 

And the rules for playing in China are quite different than they are in basically everywhere else. What we’re starting to see is the realization that companies need to do something to limit the influence of Beijing on their corporate headquarters, on their products and on their decision making.

 

TN: But can you do that actually? Because if you’re saying an automotive company and most of your revenues come from China, and the Chinese government says something, it seems really hard. And companies have been awkward about doing that for the past say 10, 15 years. Really changing how you help companies treat them like any other country? I think what you raised about what the CCP has done since 1949 is amazing. It’s great perspective. But can the CCP understand that they’re being normalized as well?

 

ISF: The CCP are doing this as an active strategy in as much as such a complex institution has a single strategy. They’re certainly trying to make people think that they are normal in our sort of western liberalism definition of that. Most of the companies that we talk about in this space, the U.S. is a far more important market for them than China. NBA is a great example.

 

China is its growth market. The USA is its most important market and what companies are starting to realize is that what happens to them in China and what touches China doesn’t just touch on their business in China but affects their business in the United States as well.

 

What we do at Strategy Risks is less working with the companies like the NBA that are having these problems, but work with other people in the financial chains, institutional investors, pension funds, endowments and explain to them the different risks and exposures that they’ll have with the companies in their portfolio and some of the problems they might have with being overweight in certain companies about Chinese or American that are complicit in Chinese human rights abuses.

 

TN: From a portfolio investor’a perspective, until very recently, you could park a whole lot of money in Hong Kong and then dip into China as needed. But it seems that that’s becoming less of an easy strategy since the crackdown in Hong Kong last year. Is that the case or is Hong Kong still in a pretty good place to take advantage of mainland stuff?

 

ISF: From a pure markets perspective, Hong Kong is still an excellent place for that. What’s really changed is the safety and the rule of law and the feeling of security for people doing deals in Hong Kong. Hong Kong is still an excellent window into China and we’re seeing Shenzhen and Shanghai supplanting a lot of what Hong Kong is doing in Seoul to agree. But the issue with Hong Kong is much more for the people there as opposed to the people who are using it as a conduit.

 

TN: That’s really interesting what you say about Shenzhen, Shanghai, and Seoul because I’ve been seeing that take shape over the last five or six years and it’s interesting that it’s getting a lot of traction.

 

With Xinjiang and with other things happening socially in China, what about things like non-profits? Issues that they have to raise in China? How can you operate a non-profit in China and stay true to your mission if it’s kind of awkward with Beijing or with the CCP, which are one and the same?

 

ISF: Most times, you can’t. What’s been happening is that a huge amount of western nonprofits have, sometimes it’s this evangelical view and sometimes it’s just well this is a very important country filled with a lot of lovely people and we want to come here and do good. But they find that knowingly or unknowingly, their message and their mission gets corrupted because they need to work with their government partners. And sometimes, their mission is totally at odds with the mission of the party. And so, they have to make sacrifices that I would say perverts what they’re doing.

 

We see this perhaps most intently in both the very human rights focused nonprofits and in the environmental focused non-profits. A lot of whom have found themselves being very praiseworthy of what Beijing is doing even though China’s far and away the worst polluter and the worst carbon emitter. They take signs coming from top leaders that Beijing is committed to making these changes even though the changes often don’t get made. But they are finding themselves in a position where in order to be there, they have to sacrifice some of their credibility. A very heartening sign I’m seeing is people saying, maybe I don’t actually need to be in China in order to do something that’s positive for the world.

 

TN: Do you see a path to China having that type of environment in 5, 10, 20 years time? Or do you think we’re kind of on this this really is it slower than that?

 

ISF: It’s such an important question and I wish I had some good way to answer it. In China, as Chinese officials love to say, has 5,000 years of history. The Communist Party has been in power for what, one and a half percent of that time. At some point, in the near future, the party will no longer rule China. Will that be next year? Will that be 30 years? Will that be 200 years? It’s so hard to say, but it’s certainly not inevitable.