The CEO of Compete Intelligence, Tony Nash, was interviewed on BFM to discuss the current state of the US markets.
The S&P fell 1.6%, the worst decline in a month, and the tech-heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Nash suggests that this may be due to bad economic data, specifically PPI and retail sales falling, but also notes that consumer is still strong. Nash explains that the US economy is built on services, so people may be trying to confirm their downward bias in things, and when bad news is reported, a sell-off day occurs. Nash also mentions that if PPI falls, that should mean inflation is slowing, which should mean the Fed would ease a little and slow down on rate rises.
He also mentions that markets may be spooked by all the announcements regarding job cuts, such as Microsoft announcing they plan to cut 10,000 jobs and Bank of America telling their executives to pause hiring. Nash suggests that these job cuts are small in terms of the gap that we see in the US workforce, which is still missing millions of jobs in terms of the openings versus the available people.
Nash also mentions the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. He suggests that the BOJ is managing the yield curve to suppress borrowing costs and wants to keep it below 0.5%. Nash also mentions that Japan’s central bank is getting pressure from other central banks to keep their rates low, this means that if Japan lets their rates rise, then that would have a knock-on effect around the world and cause a repricing of government debt all around the world.
Nash concludes by saying that he expects a weaker yen, but doesn’t think we would necessarily hit those lows.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station. BFM 89.9. It’s 7:06, Thursday, the 19 January, and you’re listening to the Morning Run with Chong Tjen San and I’m Wong Shou Ning. And earlier on, we did ask our listeners how traffic is like and Roberto said traffic today really smooth and super low compared to just yesterday. He loves Chinese New Year in KL. And so do we. I just love Chinese New York because I like the feasting and I like the ang bao collecting.
BFM
I get the hint.
BFM
Yes, we’re all looking at you, Tjen San. But in 30 minutes, we will be speaking to Angela Hahn of Bloomberg Intelligence on the impact of China’s reopening to Markhouse gaming and hospitality sector. But in the meantime, let’s recap how global markets closed yesterday.
BFM
After a good run, all key US. Markets ended down yesterday. The Dow was down 1.8%, S&P 500 down 1.6%. The Nasdaq was down 1.2%. In terms of Asian markets, the Nikkei was up by 2.5%, Hang Seng up by 0.5%. The Shanghai Composite Index, it was unchanged, the Straits Times Index, it was up by 0.3%, and the FBMKLCI it was down by 0.3%.
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BFM
Why are we always again and again there’s a trend here for sure. But to tell us where international markets are heading, we have on the line with us Tony Nash, CEO of Compete Intelligence. Good morning, Tony. Help us understand what’s happening in US markets. Because the S&P fell 1.6% is the worst decline in a month. Tech heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Is this just really due to bad economic data?
Tony
Yeah, we saw PPI and retail sales fall today. The weird part is consumer is still strong. The US economy is really built on services, so I think people are trying to confirm their downward bias in things. And whenever we see bad news, we see a sell off day. So I’m not necessarily sure I would read that much into it, aside from just there was really nothing else going on. So people saw some bad PPI news and they were negative. So if we see downward PPI, that should mean inflation is slowing, which should mean the Fed would ease a little. Not ease, but would slow down on rate rises a bit. So that should have been positive news for markets. So it’s just kind of a weird read of some of that data.
BFM
Do you think markets are also spooked by all these announcements with regards to job cuts? Because Microsoft says they plan to cut 10,000 jobs. Amazon of course, made announcements last week, and even Bank of America is it telling their executives to pause hiring. Not great for the mood on Wall Street?
Tony
Well, maybe, but I think those job cuts are actually kind of small in terms of the gap that we see. So the US is still missing millions of jobs in terms of the openings versus the available people so I think there’s something like 7 million jobs open. We also had a million people post COVID not come back to work. So we have a gap in the workforce, just a status quo workforce of a million people, but we have something like 7 million open positions. So when Microsoft lays off 10,000 people or Goldman lays off 4000 people, sure, it’s tragic. It’s definitely tragic for those individuals. But in terms of the overall health of the economy, it really doesn’t make that much of a difference.
BFM
And Tony, the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. What possible reasons would the central bank have for keeping this status quo?
Tony
Yes, so the BOJ is managing the yield curve to suppress borrowing costs and they want to keep it below kind of 0.5%. There have been some hedge funds and some big investors who’ve been betting that they would tighten it. And the BOJ is just bigger. I mean, when they came back and they said, we’re going to hold the line at 0.5, they spent about $100 billion so far this month to defend that and they have plenty of resources to hold that. So the release issue is this is if Japan lets their interest rates rise, then Japanese, say, banks and pension funds and other investors would consider selling debt from other parts in the world and buying Japanese debt. Okay, so if Japan lets their rates rise, then that would have a knock on effect around the world and that would cause a repricing of government debt all around the world. So it’s not just the BOJ wanting to keep this for Japanese domestic reasons. They’re getting pressure from other central banks to keep their rates low.
BFM
Okay, Tony, but what does this then all mean for the yen? I mean, at its worst point, the yen was trading 150 against the US dollar. Today it’s 128. That’s a very wide range in just a few months. So what are your expectations?
Tony
It is yeah, certainly I would look for a weaker yen. I don’t know that we would necessarily hit those lows. But the BOJ has made their stance clear. The BOJ has a new head coming in in a few months. I would say they’re unlikely to dramatically change policy with a new head because they don’t want to make people nervous. So I think they’re going to aggressively defend the status quo. So I don’t necessarily think you see a yen appreciating dramatically from here. I think the bias is really toward the downside.
BFM
Okay, staying on the topic of currencies then, what’s your view on US dollar? We’re just looking at the Bloomberg Dollar Spot Index this morning. It’s already down 1.5% on a year to date basis. The era of King dollar, is it over?
Tony
Well, I think not necessarily. If you’re looking at the DXY, it’s really heavy on the euro. And so we’ve seen Europe do better than many people thought through the winter because we haven’t had a cold winter there and energy prices haven’t bitten as hard as many people thought they would. So I think Europe is doing better and the Euro is doing better than many people thought. And everything in Currencies is relative. China is opening, although it’s gradually. China is opening. And so that’s good for CNY. Again, in a relative basis, I think there is downward pressure on the dollar, but I don’t necessarily think we’re over on that. I don’t think we’re heading straight down to, say, 95. I think we’re going to see some back and forth over the next couple of months as we figure out what the forward trajectory of the dollar is. And a lot of that really has to do with what direction will the Fed take in terms of their rate hikes and their quantitative tightening. And it has to do with treasury activity from the US. Treasury. How will they spend, what will they do, how will they fund the US government?
BFM
Tony, some analysts are saying that without a recovery in the Chinese economy, a global recession is all but assured. But what are your thoughts on this?
Tony
I don’t necessarily think that’s the case. I think China will do okay this year, and I think regardless, Europe will likely dip into recession this year, although fairly moderate. In the US, you see a very strong employment environment. And so employment is one of the key considerations for recession. So I don’t believe the US. Will dip into recession really on the back of employment news more than anything else. And so once we see some of these layoffs with larger companies and we get through this as, say, equity valuations stabilize, I think we’ll start to see a renormalization in the US economy as the Fed kind of takes the foot off the brake of the US economy. Of course, the Fed will continue to raise rates, but they’ll do it at a much slower pace, and that will make people much more comfortable in doing things like investing capital and so on and so forth, that will help the US to grow.
BFM
All right, thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his outlook for the world economies and also markets in the coming weeks. I think very much the question everyone has on their mind is Fed rates. What is the terminal rate? Will they basically raise rates too much and then cause the US. Tip into a recession? But I see increasingly our guests, our commentators sounding a little bit less pessimistic, hinting that perhaps we’re going to have a soft landing rather than a hard landing.
BFM
Yeah, I think it’s really on the back of the really still strong employment in the US. I mean, he did mention there’s still 7 million jobs available in the US. And there are one million people post COVID that didn’t come back to work. And I think that really is his key point, that the US may not slip into recession, but it looks like EU will and China, it looks like they are really on track to a better recovery this year. I’ve seen some economists say that GDP growth could be like five to 6% as well.
BFM
I see that consensus figure that range is around there for China’s GDP for 2023. Now, turning our attention to corporate that released results they reported, which is Alcoa excuse me, which is aluminium company. They reported fourth quarter results earlier today, which saw losses narrow to $374,000,000. Loss per share as a result was $2.12. The loss included a 270 million charge related to tax expense. Revenue did decline 20% to $2.66 billion.
BFM
And Alcoa attributed the decline in revenue to lower prices for both Alumina and aluminium. Additionally, Alcoa will see some executive leadership changes effective February 1, including CFO William Oplinger reassignment to chief operations officer, in addition to his executive vice president role.
BFM
Okay, the street doesn’t really like this stock when you look at Bloomberg. Five buys, only seven holes, no sells. Consensus target price for the stock, $52.18. During regular market hours, the stock was already down one dollars. And now I think we need to talk about one of the world’s biggest companies, Apple. They are expanding their smart home lineup, taking on Amazon and Google. Are you surprised by this move?
BFM
Jensen not surprised at all. I think Apple is really the leader in terms of innovation, and we’ve seen it over the years, so no surprises there. So I think they’re launching some new devices. There’s a smart display tablet, there’s a HomePod. There’s a TV box and a MacBook and Mac mini using their cutting edge new processor, which is the M Two chip.
BFM
Are you going to buy any of these gadgets? You don’t even use an Apple phone. You haven’t joined a cult. You’re about the only one on the morning run. You and Philip sees that hanging on.
BFM
The iPad at home, but they’re quite old.
BFM
Okay, but will this make a dent to Apple’s earnings? Perhaps. I think they are trying to diversify their product range, because the iPhone, I think, hasn’t done as well as expected. If you look at Apple or Cost, still a darling on Wall Street. 36 buys, eight holes, two sells. Consensus target price for this to $169.24. At regular market hours, it was down seventy three cents to one hundred and thirty five dollars and twenty one cents. I, for one, will be curious as to what these products will be or how they’ll fare. Up next, of course, we’ll cover the top stories in the newspapers and portal. Stay tuned for that. BFM 89.9 you have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
I have adopted the position that when a central bank allows its government to overspend and abuse its currency, something has to give. You could say this is one of the unwritten laws of fiat currencies. Time and time again history has proven this to be true and it is the reason many people claim gold is the only true form of money that cannot be corrupted. In a world where everything seems subject to manipulation, this claim about gold is still up for debate.
The overspending by governments coupled with inflation has really started to affect the perceived value of currencies in relation to other currencies. As these relationships break the losers are the people holding the de-valuated currency. Of course, many factors feed into how we value a currency but the crux of this article is not about whether a currency is over or undervalued but rather what a country must do to defend its value if it comes under attack.
Brent Johnson of Santiago Capital is credited with coining the term the “Dollar Milkshake Theory.” It explains how our debt-based monetary system can cause the US Dollar to rise despite the increasing liquidity injections around the world. Whether this was a “grand master plan” or a situation that just developed over time, it is something that may bode well for the dollar. Johnson recently took part in a discussion that included subjects such as the future price of oil, housing, and the probability of a huge global huge recession.
Johnson conveys what many of us see as a truth that haunts fiat currencies. This is rooted in the fact that when the value of a currency falls, a country and its central bank cannot save both its currency and its bonds. In his “slightly edited” words;
“The problem is you cannot, and this is for every country, the US included, again, there’s a progression in how it’ll go, but you cannot save both the bond market and the currency market because they work at cross purposes. Whatever you do to save the bond market hurts the currency. Whatever you do to save the currency hurts the bond market. And every central bank in history has promised they won’t sacrifice the currency, and every central bank in history has ultimately sacrificed the currency.
And the reason they always choose the currency over the bond or the reason they always choose to sacrifice the currency over the bond market is for two reasons. One, the currency affects the citizens more than the government, and the bond market affects the government more than citizens. So they’re going to bail themselves out before they bail the citizens out. And the second thing is if the bond market blows up and the banking system blows up, there is no longer a distribution system for the government to raise money.
So they can’t let the bond market blow up because then they can’t get money anymore. And then if they can’t get money, they can’t operate. So this is a very long way of saying that I understand why the market moved the way it did. I think maybe in the short term it makes sense, but in the medium to long term, it doesn’t make any sense to me at all. Again, kind of watch what they do, not what they say.”
He later added “The problem, as we’ve kind of figured out and found out that it’s very hard to just get four for four or 5% inflation. It goes from 2% to 12% pretty quickly. They don’t have as much control as they think they do, right? And the problem with four or 5% inflation, you can kind of get away with it because it’s annoying and it is frustrating, but it’s not totally ruining your life. But with 8, 9, 10, 12, 15, 80% inflation, that starts to ruin the pledge life, as you mentioned. And that’s when they start to push back from a political perspective. And that’s what central banks and governments don’t want. They don’t want the populace revolting”
When you think about the true motivators driving this “system,” it is logical the government and central banks would throw the populace under the bus. This is about their survival. As to the question of equal pain, those in power justify taking raises to offset the impact of inflation under the idea we “need them” to steer things forward for the “greater good.”
While Johnson’s remarks were aimed at what is most apparent in the actions of Japan, this truth is problematic to all fiat currencies. For more on the Dollar Milkshake Theory see;
In the current Week Ahead, Harris Kupperman (Kuppy) of Praetorian Capital discusses his hypothesis that crude oil prices may reach $300 per barrel due to a decrease in supply resulting from environmental regulations, a lack of investment, and government actions. Kuppy also argues that high demand for housing in the US, driven by population growth and migration, will lead to a positive outlook for the housing market. However, he notes that high mortgage rates could impact the market, but a pause on interest rates or an acceleration of inflation could lead to a more favorable outlook. Kuppy suggests that the US housing market may see a shift towards lower-priced homes with fewer amenities in order to accommodate growing families. He also highlights the attractiveness of housing markets in emerging markets due to high interest rates and positive real yields on property appreciation.
Next, Brent Johnson of Santiago Capital discusses recent policy changes by the Bank of Japan (BOJ) and the market’s reaction to them. Brent argues that the changes, which included increasing the amount of quantitative easing (QE) and widening the range within which the yield curve control operates, were not a real policy change and that the market misread the situation. He suggests that the BOJ is trying to avoid a repeat of earlier this year, when rising interest rates caused chaos in the Japanese banking system and the market had to be halted. He also discusses the challenges central banks face in balancing the bond market and the currency market, and the impact of these challenges on the yen.
Finally, Tracy Shuchart of High Tower Resource Advisors talks through the relationship between oil demand and household savings during economic recessions, stating that past recessions have not significantly impacted oil demand. She also covers the potential long-term effects of declining population rates on global energy consumption, then comments on the potential for energy consumption to increase in the short-term, citing data from the International Energy Agency and discussing the impact of economic stimulus on household savings and consumption.
Hi, everyone, and welcome to the Week Ahead. My name is Tony Nash. Today we’re joined by Harris Kupperman. You may know him as Kuppy on Twitter. We’ve also got Brent Johnson and Tracy Shuchart. Kuppy is with Praetorian Capital. Brent Johnson, of course, is with Santiago Capital. And Tracy Shuchart is with High Tower Resource Advisors. So, guys, thank you so much for joining us. I think this is going to be a great discussion.
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We have some key themes here. The first, really looking at some of Kuppy’s discussions lately, looking at $300 crude, and kind of still with a question mark, bullish housing? I think that’s the first thing we’re going to jump into.
Then we’re going to look at Japan’s normalization. We had some news this week with BOJ Chair, kind of starting to normalize the Japanese money supply environment. So we’ll jump into that with Brent. And then we’re going to look at recession on oil demand elasticity with Tracy.
So, guys, thanks again for joining us. I’m looking forward to just a great discussion today.
So, Kuppy, you know, you have posted quite a lot about $300 oil in your newsletter and online. And, you know, there are a lot of, we had a show last week that was full of oil bulls. I don’t know that anybody particularly said $300. So I’m really curious about your $300 call. Can you walk through your thesis and just help us understand what you’re thinking?
Kuppy
Yeah, sure. I mean, overall, oil is just like all the commodities. It’s supply and demand. And since 2014, no one’s really invested and the supply side is really constricted. You have ESG mandates. You have lack of capital from institutional investors. You have banks that won’t lend. You have governments around the world that are canceling pipelines and canceling permits. And now you have UK talking about excess profits, taxes. That’s not an environment for guys to go explore and drill. And the thing about oil is that if you’re not drilling new wells, they decline over time. And so the question keeps being, where does the oil come from? People just think that the US. Shale, you can flip a switch and barrels show up. And maybe that was the case a decade ago, but that’s not how it works anymore. We’ve really hit the best acreage.
And from here on out, not only are you working mostly at tier two locations, but you’ve seen massive inflation in terms of oilfield services and those wells that everyone used to lie about and say it had 100 IRRs at 60, what we learned is they don’t break even at 60. And now you have massive oilfield inflation. I don’t know if you have decent IRRs at 80 or maybe even 100 in a lot of these places.
And I mean, it’s no secret why no one’s drilling. The numbers don’t work. And then, you know, you flip it to the other side on the demand side. Look, 6 billion people want the same standard of living and the same energy per capita utilization that all of us have. And you could have said this decades ago, but what’s changed is that they’re all in that part of the S curve where their per capita consumption explodes. I mean, look what’s happened in India. We’re having, I guess, a global recession this year, but demand is up teens.
You look all around the world, Africa, LatAM and demand is up. Even in the US demand is up. And so demand grows one or 2 million barrels every year. And where is the supply going to come from? What we’ve seen, like I said, is the supply is restricted. And even if you try to add supply, it takes a couple of years.
And so I think you’re going to have a massive mismatch. And what’s hidden that for the last year is that China has been offline. That’s two or 3 million barrels. The SPR is globally of about a million, million five. So you’re really looking at, let’s call it four and a half million barrels. That that’s been kind of like subsidizing the balances.
And, you know, you could debate, you know, exactly what the number is, and it moves around some. But for the most part, you’ve had this weird subsidy to the oil price, and I don’t think that’s going to be there next year. China has been pretty clear they’re opening and the SPR is empty. Meanwhile, Russian production is in free to fall after the US firms left. That’s another million. And like I said, global demand grows a million or two a year.
And I don’t think we can see much growth on the supply side. I think you’re going to have a four to 5 million barrel deficit, and that’s one of the biggest deficits in 40 years. And it may even be as large as we saw in World War II as a percentage of total consumption. And I think the price is going to scream out of control. I don’t think 300 is the clearing price long term, but I think you could get there in a super spike, especially given how much structured products out there that’s synthetically short. So that’s how I see it, and that’s why I’m so bullish.
Tony
Okay, so is your time frame for ’23 for the $300 price, or is that just kind of a longer term target?
Kuppy
I think it’s like the next year or two.
Tony
Okay.
Kuppy
Like I said, we’re going to have massive supply demand mismatch next year, and I think it’s going to scream out of control. There’s some things we could still do. They’re going to jump some more SPR. Maybe there’s some things around the margin they can do. But in the end, if you’re structurally short oil and there’s no oil to be had, I think the price goes crazy. And you always have a geopolitical kind of upside there to whatever happens to the price of oil, because it’s never really the downside, but it’s usually the upside if something crazy happens.
Tony
Right. Okay. We just had Zelensky speak to US Congress this week here in the US. And it doesn’t really sound like the war there is slowing down. Maybe it is, maybe it isn’t. I don’t know that we get a clear picture anyway, but I think there are a lot of assumptions that that will calm down next year for some of these guys who aren’t seeing super high oil prices. If that war intensifies, does that speed up your $300 price target, or does it affect it at all?
Kuppy
I don’t think it affects it at all. I mean, Russian oil is still making its way to the market. But US technology for the Russian oil fields isn’t. And so Russia is going to be in slow motion decline in terms of production, and I don’t really see what would change in the Ukraine situation. I think it’s very likely that as soon as the ground freezes there, those half million conscripts will be set loose behind the Ukrainian army and kind of surround them all. The only reason that Ukraine is still in the war is really just because it’s been kind of warm there. I think it doesn’t look very good, but that’s like more of a personal view. But I don’t think it really matters who wins this war. In the end, Russian production is rolling over.
Tony
Right, okay. And is there a possibility of, let’s say, a load of investment going into Venezuela in the short term and that volume that supply, hitting markets to save markets? I’m just trying to kind of figure out, is there a near term supply side solution?
Kuppy
Not really. I mean, who wants to invest in Venezuela? You can get a bunch of pieces of paper with guarantees, but the history…
Tony
Chevron does, of course.
Tracy
No, but it’s absolutely true. I mean, it would take billions. And it’s still the problem is geology there? And what’s going on…
Tony
Explain that. When you say the problem is geology.
Tracy
It’s not only their infrastructure which is decrepid after, it’s also geology. Right. They have very sludgy oil. It’s very hard to get out of the ground. So even with investments, you’re facing an additional challenge of the geology there being very, very difficult. And so that’s just going to add. So anybody thinking that Venezuela oil is going to change this dynamic is off base, in my opinion.
Tony
Okay, and then Africa supplies other stuff. There’re Brazil. There isn’t really anything that can be accelerated on the supply side. I’m just trying to poke through this, guys, just to get a better view.
Kuppy
I think you’re going to see an increase in offshore oil production around the middle of this decade. Guiana, Suriname, West Africa, Brazil, it’s all coming online. But it doesn’t come online fast.
Tony
Right?
Kuppy
Well, you have a lot of places that are rolling over or really struggling just to stand in place. I think we should look at is what’s happening in Saudi, where they’re frantically procuring every jackup that could be had globally. They’re going off into the Gulf. I mean, if their oil production was stable or they thought they had more onshore, which is the cheap stuff, they’d just be drilling more onshore. The fact that they’re going into the Gulf, it’s an increase in complexity and cost means that their existing fields are now getting old. And it’s obvious they’re old. They’ve been going for 70 years, but they’re finally seeing that water cut really pick up and they’re starting to panic. No, I think you have a lot of problems everywhere. Plus you have some swing places. Iraq, Libya gets cut off again from exports. You have a bunch of places where you could lose a million barrels in a hurry.
Tony
Okay. No, it sounds pretty ominous, actually. So I’m trying to find ways to push back on that. But again, we have some really smart folks last week, including Tracy, who had a similar thesis, maybe not 300, but a similar thesis. And I think what you’re saying, Kuppy, makes a lot of sense.
Kuppy
I think the pushback is really that something could happen on the demand side where you have a global economic crisis. They lock us down for monkey pox or the next pox they invent. Something like that is what I’d be looking at in terms of the wild card where demand falls off. But all it really does is postpone things. I mean, look, it’s December. 2023 budgets are being set at all the majors, and they’re being set in the context of mid 70s WTI. Do you think board of directors are going to approve an increase in spending? Like, I think 2023, and as a result of ’24 production, at least onshore US, is kind of baking the cake based on @75 price today.
Brent
Hey, Tony, I typically would defer, and I will defer on all things oil to Kuppy and Tracy, but I would say that to be completely truthful, I actually shorted a little bit of oil this morning. And it’s just a tactical thing. It’s not a huge deal. If it goes against me, we’ll stop out and it’ll be fine. But what Kuppy just said, I think could happen. The interesting thing is I think it’s possible we do get this demand shock right, and we get some kind of a global slowdown in the first half, which could potentially push oil a little bit lower. But if that were to happen, I would then, well, I already do agree with Kuppy’s thesis kind of medium to longer term. I think he’s kind of nailed the overall structural issues and why it is. And I would just say that if we do get kind of a short term demand drop that pushes the price lower, that could actually help to cut supply even more because firms go bankrupt or they can’t invest or whatever it is, and then it constricts supply even more, and then you get a military action. And in my opinion, that’s how you get oil at $200 or $300. I tend to agree with the Kuppy’s overall position.
Kuppy
You’re just talking about the slingshop, right?
Brent
Yeah, that’s exactly right.
Tracy
Absolutely. And you have to realize that if we have the lower oil prices we have and gasoline prices we have, that increases demand in a supply side constricting environment. So that’s where you get your selling shot. So it really depends on, I think, how you’re trading this definitely depends on your time frame. If you’re longer term, that’s one thing. If you’re shorter term, I think oil is going to be volatile for the next few quarters.
Tony
So because we’re actually talking about $300 oil, I think it’s Citi who always does the extremes in crude. So now we’re going to have a Citi report that says $500 oil. Right. Thank you.
So, Kuppy, you also had a very interesting call on housing. And when I sent out the Tweet about this recording, I had some questions about your housing call, your bullish housing call. And I want to ask, are you still bullish housing? And can you go into that thesis a little bit either way? What’s your thinking on US housing now?
Kuppy
I’m bullish US housing. Structurally, you have a shortage of 5 million homes. This is population growth, especially people my age a little younger that are starting families and they need homes. And there’s been a lot of migration in the US. And so you need a lot of homes in Texas and Tennessee and Florida and not where these people are fleeing from. And so as a result, there’s just strong demand for homes. At the same time, if you take mortgages up to 7%, no one could afford a home.
And so we’re having a bit of a pause as the Federal Reserve kind of intercedes in the housing market. And it’s kind of like a Brent Slingshot in oil. All you’re going to do is make the problem worse if you’re not building enough homes for the demand. Because the demand keeps growing, the population keeps growing and so they’ve kind of postponed us a little. You’ve seen rent spike out of control, though. That’s kind of stabilizing a little just with the economy kind of slowering. But no, I think the housing market is going to do very well, but it’s going to need a pause on interest rates or an acceleration on inflation.
I mean, you could look at a lot of emerging markets where you can’t borrow for 30 years, you can’t maybe get five years and you’re going to pay 15% interest rate on that. But you know what? They’re having huge demand for housing because if inflation is 20 and you fund it at 15 and you get put a couple of terms of debt on that, well, you’re making 20 30% on your equity. That’s a good place to be as a 25 year old guy or 30 year old guy with a family trying to get a home.
Tony
Yeah. When people don’t understand why real estate is so attractive in Asia and why, say, Hong Kong homes or Chinese homes or whatever, why you always have this inflationary environment in real estate in Asia? What you talked about, Kuppy, is exactly why. I think it’s very hard for people in the US particularly to understand why real estate in Asia is so appealing. And it’s exactly for that reason.
Kuppy
Yeah, LatAm and Africa too, where interest rates are high, but you still have a positive real yield on owning your property because it’s appreciating.
I think the other thing I’d say in the US and I think people kind of lost the narrative here. Guys are complaining that when their parents, like my parents were buying homes, it used to cost two or three years of salary and now it’s eight years or ten years of salary. And they say homes are really expensive.
Yes, homes are really expensive. But the guys got buying a McMansion today. It’s like a 4000 square foot home in the suburbs. If you look at what the people were buying in the 70s and 80s, it was like 1200 square feet, it was a two bedroom with a little kitchen. Now the kitchen has $200,000 of appliances in it. Like right. The reason these things got really expensive and, and unaffordable.
I think you’ll see some reversion back to a lower price point home with, with less amenities because you got to put people into homes as they were to put them. And so, big picture, I’m super bullish you know, you, you can’t go indefinitely with, you know, having a family with three kids and they’re in a two bedroom that’s 1200 sqft.
They need space, but that’s going to take until rates come back and as soon as rates peak out and start dropping or when inflation accelerates again, I’m going to be all over housing.
Tony
Great. Okay, that’s good. Thanks for that clarification. I think that’s really interesting, but in the near term you’re not necessarily bullish on housing in the near term, while rates are rising?
Kuppy
I think housing is going to do just fine because the tailwind is so strong, but at the same time, I think there’s better stuff to own. I’d much rather be in things that are pro inflation. I really just want to stick with energy. Uranium. I think those are trends that do well really in either market environment, but just because of the supply demand imbalances of the next year or two, I think they just work idiosyncratically no matter what. And I don’t know, I just think it’s easier trades.
Tony
Great. Okay, we did have some questions actually about emerging markets, so I just want to ask you first Kuppy, but then the rest of you guys, what emerging markets are you looking at and why?
Kuppy
I’m not really looking at any, so I can’t say. I will say I have a lot of friends that specialize in emerging markets, and they could show me a bunch of metrics that say emerging markets haven’t been this cheap in a very long time on cash flow, book value dividend. And there’s some reasons why maybe they deserve to be cheap. But those things come and go in terms of the why. But you buy cheap assets, things usually happen to you that are beneficial over time. I see Brent laughing, so explain.
Brent
Okay, to be clear, I’m not laughing at Kuppy’s answer. I tend to agree with, if his friends are telling him these things, I’m sure that’s true because they tell me the same thing. I just kind of laugh because I feel like every year for the last seven years, the trade of the year at the beginning of the year is to short the dollar and go long EM. It’s always the trade, it’s always the big idea, and to me it just never plays out. And I don’t think it’s going to play out right now.
I personally am not looking at any EM other than to stay away from it or perhaps to go on vacation to it. I don’t want anything to do with it from an investment perspective. Probably, not surprisingly, I don’t think the move in the dollar is over. And I think if we get a slowdown in the first half, which I think we will, I think that will play out in the Euro dollar market, and the emerging markets just as much, if not stronger than it will in the US markets. I don’t see an environment where EM outperforms the United States right now
Tony
In dollar terms.
Brent
In dollar terms. Yeah. Maybe in local terms. In local terms, that could easily happen. I mean, take a look at Turkey, right?
Tony
Right.
Brent
Turkey stock market has gone up two or 300% in the last 18 months, but they’ve got 80% inflation in local terms.
Tony
Right. So you have to.
Brent
So you have to yeah, right.
Tony
So Brent, can you talk us through you mentioned the dollar and you know, everyone always wants to know what your thoughts on the dollar? Can you walk us through what you’re looking for, say, over the next three to six months with the dollar?
Brent
Yeah, so, I mean, over the next three to six weeks or a couple of months, I don’t know, maybe it just goes sideways. But I think by, if not the end of Q1, beginning of Q1, kind of April-May time frame, I think the dollar is much higher than it is right now because I think that, you know, I sent out a tweet earlier today where because I, was kind of laughing.
I was talking to somebody and they said, well, rate hikes are over, so the dollar is done. And I was like, well the, the dollar can go up for reason other than rate hikes. And he was like, what are you talking about? And here’s the thing. From 2008 to 2019, the dollar went up 20% and there weren’t any rate hikes. I mean, there was a few in 2018. And in 2014, in 2014 and 2015, the DXY went up 25%. There were zero rate hikes. It’s because there was a global slowdown, right.
And when dollars aren’t circulating and the world needs dollars, there’s a dollar shortage. Supply, demand, it pushes the dollar higher. And so I feel like the move of the dollar in 2020, I’m sorry, in 2022 was all about rate hikes. Interest rate differentials, right. And maybe that is potentially over.
But the dollar can move for reasons other than interest rate differentials. And I think people have forgotten that if we go into a recession or if we go into a global slowdown, all that debt that is issued in dollar still needs to be serviced. And so I think perhaps the run in the dollar due to rate hike differentials is over. But I don’t think the run due to dollar shortage, due to a global slowdown and the need to service dollar debt is over.
Now, if I’m wrong, I don’t think that the Fed will come out and totally flip until they’re forced to do it. And the only reason they would be forced to do it is if the dollar was higher and all these asset prices were lower. So is it possible by the end of 2023 the dollar is lower? Sure. But I think at some point in 2023 we’re going to get another run in the dollar. And I think it’s probably in the kind of the March to April-May time frame.
Tony
Well, I think what people also forget is that the Fed has eight plus trillion dollars on its balance sheet, and if they start to sell it off in any sort of volume, that takes dollars out of circulation, right?
So that’s a big assumption because they’re shrinking it on a small basis now. But if they accelerated that, that would take dollars out of circulation. That’s bullish dollar as well, right.
Brent
Well, the other thing I want to make this point because I think this is a critical point. And I was speaking to, I went to a conference in October, and I’m not going to pick on this conference because it’s happened at every conference I’ve gone to. And I had so many people come up and me and say, what’s going to happen with the Fed? How’s the Fed going to get out of this? How’s the Fed going to get out of this? They’re trapped. Nobody has ever come up and asked me how the ECB is going to get out of it.
Nobody’s ever come up and asked me how the bank of Japan is going to get out of it. Nobody’s ever asked me how the Bank of England is going to get out of it. And the thing is, they’re in worse shape than we are. I hear you, and I understand all the problems associated with the dollar. Listen, it’s a horrible currency. It’s just better than the other three jokers.
Tony
Gold or CNY, Brent. Gold and CNY solves everything.
Brent
Exactly. So my views on the dollar are not just based on what the Fed is going to do. A lot of it’s based on what these other central banks are going to do. And I just don’t think their leaders are any smarter than ours.
Tony
Perfect.
Brent
And I think they’re trapped even more than we are. So anyway, not to go off on a whole tangent, but that’s why I don’t want to have anything to do with emerging markets.
Tony
That is not a tangent. In fact, that’s a segue to our Japan normalization discussion. Right.
So thanks for that. So we saw Kuruda come out, talk about changing policy a little bit, and markets reacted with a stronger yen and yada yada. Right.
So is this, do you see this as a real change? I see this tweet that you sent out earlier this week saying if you think happened to think today’s move in the BOJ is going to work out for Japan, it’s not.
So can you talk us through? Is it just preparing for the next BOJ chair to reduce risk if they change policy? Is it a real policy change? Is it going to work out? What do you see there?
Brent
I don’t really think it’s a policy change. And if you actually look at a lot of people, just see the headline and just react, and they don’t even think about what the headline means. And I think the market has got into a habit, and people in general have got into a habit of reading into it what they want to read into it. So I think very much the world wants Japan to get out of this, and they want the dollar to go down. And so anything that shows that another central bank is going to outperform the dollar, they ultimately want that to be true, whether it is or not.
If you read what they actually are doing, they’re actually increasing the amount of QE that they’re doing. So if you just read that sentence, you’d say, holy cow, the end is going to go even lower. Because not only did it have a horrible year this year, but now they’re going to increase QE. But at the same time, what they said is that we’re going to let the bond, the yield curve control, the band with which in yield curve control moves, we’re going to widen that.
So we could have interest rates in Japan go up to 50 basis points rather than 25 basis points. And so the market kind of interpreted that as, okay, they’re actually moving towards rate hikes. Now, they didn’t say they’re moving towards rate hikes. They didn’t do a rate hike. But everybody wants to believe that they’re going to raise rates.
But here’s the thing. Earlier this year, and I think it was March or April, interest rates in Japan, because of inflationary pressures, are now actually even hitting Japan. Long term rates in Japan moved up 25 basis points. And because the two to five to ten years prior to that, they were doing QE and negative rates. The banking system is chock full. And when I say the banking system, the banks, the hedge funds, the endowments, the all the institutions in Japan have all these zero yielding bonds, Japanese bonds on their banks, and because, and they’re long term bonds.
And so when yields even go up 25 basis points, the convexity makes the balance sheet of all these institutions go upside down. And so when interest rates went up 25 basis points in April, it caused all kinds of chaos in the Japanese banking system, and the market had to be halted, and the Bank of Japan had to come in and promise to do more yield curve control in order to keep it from blowing up.
And two days ago, or three days ago, whenever that announcement was, they made that announcement, the market took it as an interest rate hike. And guess what happened? They had to halt the Japanese bond market again. So I understand if they do raise rates, that would strengthen the yen.
But the problem is you cannot, and this is for every country, the US included, again, there’s a progression in how it’ll go, but you cannot save both the bond market and the currency market because they work at cross purposes. Whatever you do to save the bond market hurts the currency. Whatever you do to save the currency hurts the bond market. And every central bank in history has promised they won’t sacrifice the currency, and every central bank in history has ultimately sacrificed the currency.
And the reason they always choose the currency over the bond or the reason they always choose to sacrifice the currency over the bond market is two reasons. One, the currency affects the citizens more than the government, and the bond market affects the government more than citizens. So they’re going to bail themselves out before they bail the citizens out. And the second thing is, if the bond market blows up and the banking system blows up, there is no longer a distribution system for the government to raise money.
So they can’t let the bond market blow up because then they can’t get money anymore. And then if they can’t get money, they can’t operate. So this is a very long way of saying that I understand why the market moved the way it did. I think maybe in the short term it makes sense, but in the medium to long term, it doesn’t make any sense to me at all. Again, kind of watch what they do, not what they say. I think the yen is going much, much lower.
Tony
Okay, interesting. How long do you think it will take before markets call their bluff, is that?
Brent
Maybe a couple of months?
Tony
Really?
Brent
Again, I think we’re going to have a lot of problems by the end of Q1 all over the world, not just in Japan, not just in the US, not just in Europe, but everywhere. I think we’ve been slowly moving towards this crisis, and I think we’re almost there.
Kuppy
Brent, I think a lot of the move in the yen over the past couple of weeks is really just guys degrosing. That was the funding currency for all the risk assets, and risk assets went no bid, basically all year, and guys are finally getting redeemed from their hedge funds, and it’s year end redemptions. You got to pay it out. It’s got to unwind your yen to unwind your Tesla, which is also in free fall.
Brent
That plays into it as well. Yeah, I see your Tesla queue there. That’s a good timing.
Kuppy
I’ve had this, what, five years? Six years. It’s probably coming due today.
Tony
When is the Twitter Q month coming?
Kuppy
I don’t know.
Brent
Oh, they should have one of those, shouldn’t that’s a good idea. We should start selling those.
Kuppy
I’m a little conflicted here because I feel like Elon might be doing the right thing on the Twitter side, whereas Tesla is still like the evil empire. So I don’t know.
Tony
Okay, we’ll have another discussion about that at some point. Brent, you talk about things coming in Q1. Can you share a little bit of your thoughts there around markets, potential recession that might…
Brent
Well, yeah. I mean, in general, it’s kind of amazing. Now, let’s reverse ten days ago to the Fed meeting. At that time, the Fed had raised four and a half, almost 4% for the year, and markets were down, but they weren’t down that much. Now, since then, they’ve sold off another 5% or 10%. So now they’re getting close to the lows of September again.
But this is what I think. I think a lot of people are surprised that the market hasn’t crashed more than it has based on the four and a half percent or, or 4% rate hikes. And I think what sometimes people forget is that we may not even be feeling the effects of the very first rate hike yet, because oftentimes rate hikes take nine months to a year to actually.. The effects of the rate hike to show up in the economy and work their way through the economy.
Tony
Powell talked about that a lot in his last…
Brent
Well, no, exactly. And the first rate hike was nine months ago. It was in March. So it really wasn’t that long ago. Right. And now they’ve raised four times since then. So I just feel like by the time we get into February, March, that stuff is going to have started to show up, perhaps dramatically. And I think the Fed is going to continue raising until they just can’t raise anymore.
Now, whether they should or not, whether you believe Powell or not, again, that’s kind of a separate subject. I just think he’s going to do it because he wants to do it, and the last thing he wants is for inflation to reaccelerate on his watch. Right. And if he crashes the market, then everybody will be begging him to do QE and he can go do QE and be the hero. So I just kind of see that that’s how it’s playing. And I think that probably a lot of people agree with me on that. I don’t think that’s any kind of a crazy view right now. I think a lot of people think he’s going to hike until it crashes the economy, but I don’t see him slowing down until he has to.
Kuppy
Brent, I got a question. Lagarde has been super dovish for a very long time. Depending which country in the Eurozone you’re at teens, maybe even high teens inflation all of a sudden, last week, she just came out swinging.
Brent
She did.
Kuppy
And what do you think changed? Did someone just whisper in her ear? Did she look at a debt bad data point? Did a politician be like, hey, the peasants are upset about the price of bree? Like, what happened?
Brent
I think it’s a little bit of that latter. I’ve talked about this before. I think we all know that financial repression is the name of the game for governments. That’s how they get out of these big debt, these big debts that they, you know, they want to inflate it away over time. The problem, though, is what they would ultimately like to do is to get very steady rate of inflation at four or 5% a year for ten years right. And inflate away 50% of the debt. The problem, as we’ve kind of figured out and found out that it’s very hard to just get four for four or 5% inflation. It goes from 2% to 12% pretty quickly. They don’t have as much control as they think they do, right?
And the problem with four or 5% inflation, you can kind of get away with it because it’s annoying and it is frustrating, but it’s not totally ruining your life. But with 8, 9, 10, 12, 15, 80% inflation, that starts to ruin the pledge life, as you mentioned. And that’s when they start to push back from a political perspective. And that’s what central banks and governments don’t want. They don’t want the populace revolting. But when you’re cold and you’re hungry, that’s when you revolt. Nobody revolts when they’re full and warm and have a great job and going on vacation. Why would you revolt in that environment? But when things are going against you and they start pushing back politically. And so I think that the pressures in Europe are a little bit just too much for them to not at least acknowledge it publicly. Now, whether they actually do anything and follow through on it, that will be interesting to see because, again, ultimately, I think they will save the currency rather than save the bond market, or I’m sorry, they will save the bond markets rather than save the currency. But I do think it’s a little bit of why Lagarde came out as strong as she did.
Kuppy
Do you think she follows through or?
Brent
No, she’ll try again. And it’s like Powell. Powell will keep trying it. Well, eventually the markets will push back on them and won’t let them, but I think she might try. But I think Europe is just screwed for lack of a better word.
Tony
So let me ask you guys and Europe, are we in a position where we have to approach what Japan is doing, where eventually the central bank will come in and buy up equities and they’ll buy their debt? And this is a cycle that just can’t stop? Is that what’s going to happen in the US and Europe as these central bankers are put in a quarter? And are we getting closer and closer to kind of D Day?
Brent
I think we probably are. Now, and I think there’s many people who believe that there’s nothing that central banks can do to squash inflation. I actually think that’s wrong. I think they could cause a depression which would have put a damper on inflation. Now, I don’t think that they can engineer a soft landing, but I think that’s what could happen at the end of kind of Q again, Q1, Q2. I think we could get some deflationary pressures coming through the markets due to the rate hikes that central banks have been trying and we’ll force them to U turn.
The biggest question I have, to be really honest, I’m not sure how this plays off, is whether or not we can get one more cycle of QE of risk on before they have to kind of reset the whole system. I could see a thing where we just have a couple maybe things just go down from here and a year from now they have to reset everything. But I could also see a scenario where we again have a bad first half of 2023. They reverse everything, we get another QE cycle that takes us into 2023 through the election five.
Yeah, exactly. And I don’t really know how that one plays out. I could see it kind of going either way. But ultimately to your point, Tony, I think the central banks will have to reverse.
It was funny. For several years, we were in a currency war where everybody was cutting rates to weaken their currency. Now, in the last couple of call a year, they’ve been raising rates to kind of strengthen their currency to try to fight against the inflationary pressure. So now the currency wars, who can outhawk the other one? It’s all going to end in tears.
Tony
Sadly. I think you’re right. Speaking of tears, Tracy.
Brent
No. Are you going to cry?
Tony
As we talk about difficulties
Tracy
every day?
Tony
…Recession and consumption and Kuppy started talking about oil at the start and oil demand. You posted a chart about looking at oil demand elasticity and household savings as central banks take different actions. Of course, that changes as stimulus have stopped. If it doesn’t come back on, there are changes to household savings, these sorts of things. So you posted a really interesting chart about household savings and can you talk us through a little bit of that and a little bit around oil demand elasticity?
Tracy
Yeah. What I think, I think there is a misconception that when there is a recession, that oil demand suddenly falls off a cliff. Right. Everybody has a very short memory and they look at COVID when we literally shut down the planet, but that’s not the reality. So if you look at past recessions in general, 2008, the most recent one, great financial crisis.
Now, we did see a dip in demand, but it was only about 2%, and it was only about 2% for two quarters. And then by the third quarter, demand increased over what it was before the great financial crisis. And so when I talk about the fact that everybody talks about savings, rates are going down, credit card rates are going up, nobody’s going to be able to afford oil, everything’s going to shut down, there’s a lot of fears running around. We’re going to have this global recession and nobody’s going to use oil anymore. And that’s kind of been the prevailing narrative. And we’ve seen this in open interest.
We’ve seen many funds sort of lose interest over oil. That’s been a great year for them. They shed their positions. But this prevailing narrative that we keep hearing in the media, “oh, it’s a global recession. Nobody’s going to use oil again.”
It’s just not a fact. We look at the data, we look at every recession. Recessionary pressures really have not taken much demand off the market. And every time that demand has been taken off the market within a very relatively short period of time, we’ve seen demand increase over that prior level. And so to use this kind of as a narrative, I think is not correct if you actually look at the data.
Tony
Okay, so we had this weird kind of almost recalibration of expectations with COVID where really everything came to a stop, right? So demand just cratered compared to, say, 2008, 2009 crisis. And so kind of the base effect of demand coming back has been really impressive, kind of year on year growth each time, right? And then we’ll continue to see that as China comes back.
But there are some real concerns for example. China’s population peaks out, peaked out in 2022 or ’23 or something like that, right? So their population is peaked out, and it’s all downside from here, right? Unless there’s real growth in their consumption. Europe’s pretty peaked out. Japan’s peaked out. The US hasn’t peaked out.
But we have some of those long term trends, and we have a recession. I’m just trying to play a little bit of devil’s advocate here. How much of an impact do you think those have on consumption, on the consumption dynamics, particularly with regard to savings and how, if people don’t have rising incomes and their saving rates decline just to make ends meet, which wasn’t necessarily the case in say, 2010 eleven. Can all of those things come together to really impact kind of the overall consumption trend or is that just not really a concern?
Tracy
I think there’s two separate things. If we’re talking about declining population rates, that’s sort of a long term view. We’re looking 20-50 years out, does that trend continue? And of course, at that point, you’re talking about global energy consumption decelerating, obviously.
Tony
And we’ll have nuclear powered flying cars right by then. So.
Tracy
Absolutely. But if we talk about, you know, shorter term things or near term things, things that we’re looking at, you know, over the next, say, you know, year to five years to ten years, I mean, there are still, regardless of a recession, we still are seeing year to year global consumption increasing. And in fact, we just had IEA, which I know is a WEF show, but we just had them completely revised their whole global oil growth demand system going back to 2014. They redid their entire numbers and added millions of barrels. And the media really likes to use that IEA data. They just repackage it and whatever. And they’ve been completely wrong at that point.
This goes back to when we had missing barrels and everybody was talking about that back in 2014. But the fact is that by any measure, global consumption is rising, right? Because you still have emerging markets that are trying to get out of the darkness. You look at countries like India, which they’ve had the strongest global demand increases so far this year. So there is always demand coming from somewhere, and the problem always goes back to supply.
In fact, we just don’t have the supply catching up with the demand. So even if we look at the Western world and even perhaps China years out, I mean, you still have to understand they’re still increasing demand, even though they’re absolutely even if their population is elderly and declining, their consumption energy wise is still on the uptrend.
So we still have these huge markets that are still on an uptrend. We’re going to see this in emerging markets. We’re going to see this in India, we’re going to see this in South America. We’re going to see this in Africa in particular, because BRI, suddenly they got a lot of money from China. They can build out this infrastructure, and they need, there is more demand there. So even though the west may be looking towards this green energy transition, we have to realize that that green energy transition also has not been working out. We just saw the biggest increase in coal demand in the EU in ten years this year.
Tony
Yes.
Tracy
Incredible that energy policy is not.
Tony
Reporters on sarcasm. Green energy transition. It’s on sarcasm.
Tracy
Really what we have to boil this all down to, long and short of I know I always talk in, like, broad picture, but really it all boils down to the data. What is the supply coming online? What is the demand going forward? And so far, demand outstrips supply. There is no way around that right now.
Tony
Okay. And it’s fairly inelastic it sounds like.
Tracy
It is fairly inelastic, even if you have, you know, again, look at the data. Anytime we’ve had a recession, demand is bounced back very quickly, and we’ve only seen a 1 to 2% pullback in demand. It’s not like COVID where everything crashed.
Tony
Okay, so we started and ended with crude. And I usually finish up guys with kind of, what do you see for the week ahead? But I’m going to change it up a little bit. As we go into 2023, with regard to markets, what keeps you up at night? What is that thing that you think about and you’re like, well, Account Odd sees this, and it’s obvious to me. What is that thing that keeps you up at night, Kuppy? I know you’ve got some amazing things in there. So what is that thing? And I know none of us see what you see.
Brent
You can’t say bourbon. That’s not a legitimate answer.
Kuppy
I think next year is the year that oil matters. We’ve lived in this world where oil has been sort of range bound, really for eight years. And people just got used to energy being cheap. I mean, we had a little bit of an energy scare in Europe, and I say “little” because that should have been the wake up call. And instead, I think you’re about to see the big one and you’re going to see energy as a percentage of GDP go to some crazy level like in the 1970s. And I think as a result, most of the Q sips on my screen are going to get smashed and everyone’s worried about JPowell. But in the end, JPowell is not the world central banker, oil is. And JPowell is going to chase oil higher on the screen for a while. He effectively has been chasing oil higher on the screen. And when oil rolled over from the summer onwards, that’s what cooled off the inflation. It’s not Fed funds rate that kind of helps. It’s really just oil. And as oil reaccelerates, JPowell is going to chase it higher on the screen and it’s going to get to a price where he’s going to have a dilemma.
He could either keep chasing oil higher or he could bail out the real economy with the rest of the economy. And I think he’s going to bail out the rest of the economy by cutting rates and sending oil parabolic. I think that’s how you get to my 300 number. And I don’t think people realize that oil at 90. Who cares? Oil got to 120 for a couple of weeks this summer. Who cares? What if oil is consistently in the high 100 and it just stays there? I think it just dramatically changes the arithmetic for every other QSIP on the screen. Absolutely. Aren’t plugging that in.
Tony
Okay, good. Thank you. Tracy, what keeps you up at night?
Tracy
I actually think that looking at 2024, I think that the metals markets are going to make a huge comeback. I’m not talking precious metals, I’m talking basin industrial metals only because I think that oil plays a part in that. If we have higher oil prices, we’re going to have higher metals prices. And because the west, in particular the EU, does not seem to want to be giving up on this green energy policy. We’re going to need a lot of metals, we’re going to need a lot of copper, we’re going to cobalt, nickel, whatever, if they want to continue down this path.
Tony
Sorry, you’re saying you need more industrial metals for batteries and other infrastructure for the green transition?
Tracy
More than we’re currently. In fact, we don’t even have the known reserves to get to the 2030 goals right now. If we were talking about copper. And certainly the mining industry has suffered the same problem as the oil industry has a lack of capex for the last seven years. And so we simply just don’t have that. So what I’m looking at, I think that oil is a big story and will continue to be a big story in 2021, 2022, but I think metals are going to start to come into play in 2023 and ’24. And what I’m worried about is we literally, again, no capex, and we don’t even have proven reserves anywhere. So that’s what I worry about. The metals based in industrial metals.
Tony
Okay, so so far it’s commodities keeping you guys up at night. Brent, wrap us up. What keeps you up?
Brent
It’s kind of interesting. I think that the underappreciated risk, even though the dollar made a hell of a run this year, is that we could have a funding market problem in the euro dollar market. And to be honest, it doesn’t keep me up at night because I’m kind of ready for it. I’m expecting it.
You know what keeps me up at night is these guys in Washington and Frankfurt and DC, and Tokyo and Beijing figuring out how to extend this game because they’re masters at keeping the plate spinning. And I’m always trying to figure out what are they going to do next to keep this whole house of cards going. And to me, that’s the wild card. I feel like I can kind of figure out markets. If markets are just left alone, I can kind of figure them out. The wild card is when the masters of the universe are the powers that be, however you want to describe them, come in and start messing with things, because that can change things, at least for a day or a week or a month, and sometimes that’s enough to wipe you out.
Tony
Yeah. Okay, guys, thank you so much. This has been really enlightening. I really appreciate the thought we put into this. Want to wish you all the best for the holidays and a fantastic 2023. Thank you so much.
The spread between the 2-year and 10-year US treasuries has widened with markets saying that a Powell recession is here. We speak to Tony Nash, CEO of Complete Intelligence as to whether he agrees. We also ask him if the recent aggressive job cuts by the tech and now finance sector will be part of the Federal Reserve’s decision-making process at the next FOMC meeting.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station. The World Market Watch is brought to you by CMB Preferred.
BFM
BFM 89.9. 7:06 Thursday, eight of December. And of course, you’re listening to the Morning Run with Chong Tjen San and I’m Wong Shou Ning. But in the meantime, let’s recap how global markets closed yesterday.
For US markets, the Dow closed flat, the S&P 500 was down by 0.2%. It’s the fifth consecutive day of declines and the Nasdaq was down 0.5%. In Asian markets, they were all in the rip. Nikkei was down 0.7%, Hang Seng was down 3.2%, the Shanghai Composit was down 0.4%, the Straits Times Index was down 0.8% and the FBM KLCI was down 0.3%.
So joining us on the line to tell us where markets are heading, we have Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Always good to speak to you. I want to start with Treasuries for a change, and the two-year and ten-year treasury rate spread is currently very wide. Is the bond market already telling us that a Powell recession is here?
Tony
Well, yeah, I think that’s part of it. I think that’s contributed to a lot of the discussion around the kind of perceived inevitability of a recession in 2023. And what we’ve been saying for months is we’re already there. We already saw negative GDP numbers in the US in the first two quarters of this year. The holdout is jobs. And now that we’re starting to see, some say, turnover in the jobs front, meaning it’s still strong, but it’s not as strong as it was two months ago, there is a feeling that we’re definitely headed in that direction.
BFM
And Tony, I like to tap your expertise on all market. The market is quite divided as to what the G7 price cap and the EU ban on Russian seabourn all will do to oil prices and crude supplies in the coming months. Can you give us some insights?
Tony
Yeah. So what’s happening actually today, Xi Jinping landed in Saudi Arabia for a meeting with GCC leads and Saudi Arabian government. So what’s happening in the oil market is the OPEC countries are being very open about the fact that China is the main price setter for global oil markets. And that really is kicking off with that meeting in the Middle East today. That’s been known for some time, but it hasn’t been as explicit and overt as it is today. We’re seeing more supply with things like Venezuelan crude coming on for the US. But we’re also seeing the price cap for Russia and which we know, pretty much know won’t work. Europeans will find a way to circumvent it, Russians will find a way to get crude on the market. And so that’s why we’re seeing weakness in crude prices.
BFM
But at the same time, Tony, we are seeing more positive news coming out of China. They are easing a range of COVID restrictions, including allowing people to quarantine at home rather than in centralized camps, suggesting that the economy is slowly easing out of the Zero COVID policy. Shouldn’t that be a reason for all prices to go up then?
Tony
Well, I think it will. And if you look at futures I looked a few days ago and a few months out, there’s definitely expectations for higher oil prices. But right now, if we’re looking at spot markets, there really isn’t that much expectation of things moving. So when you look beyond February, for example, there is an expectation that China opens. And yes, that is very positive for crude prices and that is one of the most important economic events in the world. We’re waiting for it, we all need it, whether you’re in Asia or the US or Europe. China opening is good for everybody, but it will be positive commodity prices and it will push those prices up.
BFM
Okay. How else can we position for this eventual reopening in terms of our portfolio? What should we be looking at?
Tony
Well, if we look at things like industrial metals, like copper, we’ve seen some really interesting action copper over the past few days on expectations of China opening up. Over the past, say, probably three or four days, we’ve seen some interesting action in Chinese tech and there’s expectation that Chinese tech and consumer goods will be very positive in the coming months. So we’re seeing that in equity prices right now. So those are some areas that I would look at and be paying attention to because they’ve already proven to have some positive traction. But that will likely improve as China’s opening accelerates.
BFM
And Tony still sticking to the topic of oil and energy commodities, the UK instituted a windfall tax on oil and gas recently. Why have they decided to go down that route? And what effect will that have on energy companies with major investments there?
Tony
Yeah, this came right after the COP meeting and it was a very populist move by the UK government, very populous move by the UK government. It didn’t make any sense commercially and it doesn’t make any sense in terms of energy strategy. We’ve already seen companies like Total and Shell pull back on announced investments that they plan to make in the UK and it’s already making energy prices higher in the UK. So I think the UK government’s calculation there was, we’re going to make a populist move and get some voters behind us, but it was really a really stupid move and they’re going to have to do an about face on that within a few months.
BFM
Okay, let’s talk about job cuts or the possibility of it. Yesterday we saw a raft of top US bankers warning of layoffs and freezing when it comes to hiring. What does this then mean for the US labor market?
Tony
We already saw this start in tech a couple of months ago and it’s just kind of cascading out to other industries. Right. And so first they announced job freezes. Then they announced job cuts, usually, right? And it’s in things like in banks, it starts in mortgages because house buying has slowed. And it’ll go into other areas, of course. And we’ve seen this in media, too, with BuzzFeed, and there are issues at other media companies because they’re having to compete in those CPM rates, meaning those advertising rates are declining because places like Facebook and Netflix and other places are getting more competitive on advertising. So it just means that companies have to get more productive.
So whether they’re tech companies or banks or media firms, companies are having to get more productive. What we saw through COVID generally, was margin expansion for companies. A lot of companies profits through, say, mid 2020 continued to expand because companies didn’t have to pay for certain things, but they could charge higher prices because people were working from home. They didn’t have to pay for certain things, but yet they could charge higher prices. What we’re seeing now is with wages rising as fast as they are and staying there, companies are having to pay more all around.
And the markets like mortgages or advertising or tech or whatever, they’re not where they were a year ago. So they’re having to cut heads. And you look at Facebook cutting like 13, 14% of their workforce. Look at what these other guys are doing. They’re realizing they’re way overstaffed given where we’re going in 2023.
BFM
Okay, so how does this then inform the Fed decision when they meet this month for the FOMC meeting? Because employment is another indicator that they watch is part of their twin mandate, isn’t it?
Tony
It is. It’s one of their mandates. So there are a couple of things that I’m watching. So first, last week we saw the jolts. This is the job openings, okay? And with jolts, we saw that really turn over, meaning the job openings has declined. Now, it’s still strong, but it’s really turned over in terms of we’re not the highest anymore. That was probably two months ago. So we’re starting to see a decline in the number of job openings and the rate of growth of job openings. And when you look at the employment data that came out, the strength in jobs is really in, say, lower level services and health care. Okay? So it’s not necessarily in the higher level, higher earning jobs as it was, say, a year ago. So we’re seeing I’m sorry to put it this way, but kind of lower quality jobs come through, and that’s when we can tell that it’s weakening. Those are the last to be strong before going into recession. They’re the first to be strong as you’re coming out of it. So what is the Fed looking at? Well, Powell talked about the lag effects of monetary policy at his Brookings speech last week.
And so I think the Fed is being really sensitive to the lag effects of their policy, and they’re likely going to still go with 50 basis points this month and next month.
BFM
All right, thank you very much. That was Tony Nash, CEO of Complete Intelligence, telling us at least forecasting what the Fed is going to do at the next FOMC meeting.
But very quickly, I want to talk about one stock that was really a bit of a COVID pandemic winner, and that is Gamestop. So their fiscal third quarter sales declined while its cash pile sharply dwindled as the brick and mortar retailer had been working to expand its digital presence. Now, for no reason, this stock actually went up. A lot to do with retail investors who just wanted to like, very bullish on this counter. But although the fundamentals weren’t great, there.
Was a documentary on this Gamestop, actually on Netflix. I watched. It was really interesting. So if you’re interested to see what really happened and how they actually lure retailers in and the retail battle between institutional investors and all the renowned hedge funds and how retailers actually trumped in the end, but maybe not in the end, for the moment, it is actually a very interesting documentary or show to watch on Netflix.
Well, because it’s one of those odd stocks, there isn’t much coverage. There’s actually three analysts, they all have a sell on this. Target price is $6. This morning. During regular hours, the stock was actually down one dollars and $0.13 is $22.26. And if you’re wondering whether who won in the end, don’t think the retailers won because on a year to date basis, the stock is down 40%. But up next, we’ll cover the top stories in the newspapers and portals. Stay tuned for that. BFM 89.9 the world market watch, is.
Brought to you by CMB preferred moving forward with you, visit CMB preferred.com dot my for their preferential services. Be banking.
You have been listening to a podcast from BFM 89 nine, the business station. For more stories of the same kind, download the BFM app.
This Week Ahead is a special episode because it was recorded live, with guests Albert Marko, Sam Rines, and Mike Smith, together with host Tony Nash in a face-to-face conversation. It’s also the first time that we had a Twitter Spaces, joined by a few people and taking their questions.
Gasoline prices have continued to decline here in the US. Since June, RBOB has been pretty much one way, sliding from ~$4.30 to $2.16. That’s half. Of course, lower crude prices are a huge factor, but over the summer we were hearing all about refinery capacity. Is there more to it than the oil price? XLE vs crude – XOM closing in on 100, etc. How much of an impact is this having to help affordability given the broader inflationary environment?
Inflation is proceeding unabated, as we saw in Sam’s newsletter this week. Some Goldman guy was out this week saying there may be a recession in 2023. Sam looked at the terminal rate in his newsletter this week. How would accelerated inflation or steepening of recession worries affect the Fed’s actions?
We had BOJ head Kuroda (who has been in the job for a decade) begin talking about Japan hitting its 2% inflation target. If that were to happen, how likely would the BOJ be to scale back its ultra-loose monetary policy? Impact on Japan’s equity market, govt bonds, etc.
Key themes 1. How low will gasoline go? 2. Inflation/Recession worries 3. The day after Japan hits 2%
This is the 45th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
I just want to say hi and welcome to The Week Ahead. I’m Tony Nash. We’ve got a couple of special items for this show today. First, Albert Marko is in Houston, Texas. So we’re doing a live in-person Week Ahead with Sam. Tracy will be on Spaces eventually. We also have a special guest, Mike Smith, who’s a partner at Avidian Wealth here in Houston. Second, this is our first Twitter Spaces, so this may be a little clunky and we may make some mistakes, so just bear with us, if you don’t mind.
So Mike, Sam and Tracy eventually, and Albert, thanks for joining us. I really appreciate the fact that you guys have come today.
We have a couple of key themes today. The first is how low will gasoline go? Gasoline prices I think nationally are around $2.99 are approaching that in the US. So we want to take a little bit of a look at that to understand what’s happening there. We also want to talk about inflation and recession worries. Sam will go into that quite a lot and we’ll try to figure out what’s happening with inflation.
And then we’ll talk about Japan post 2% inflation. So there have been some comments from Abe at the BOJ about Japan hitting 2% inflation, and we’ll talk about that a little bit.
Okay, so Albert just joined us. So let’s get started on gasoline prices. Guys, since June, RBOB has really come down from 430 to about 216. So it’s about 50% or 49 point something percent.
Of course, lower crude prices are a huge factor. We’ve seen crude prices come down in that time as well. So is there more to go on crude prices? On gasoline prices? Like I said, we’re waiting for Tracy, but she’s not joining. So I’m just going to throw it open to you guys. What’s your thought on gasoline? Because we’re entering the holiday season, it’s going to be a lot of driving. There’s a lot of inflationary pressures, which we’ll talk about in the next segment. But I’m just curious what your thoughts are on room for gasoline prices to fall.
Albert
Well, I think they guess some prices are going to fall because price of oil just keeps on going down. I think at the moment, whatever brokers, government entities or whatever we want to talk about is starting to drive down the price of oil because it’s beneficial to the political situation. So I think that oil, as it drifts down towards 60s, mid sixty s, the price of gasoline will also come down.
Tony
What are you hearing? We’re in Houston, energy capital of the world.
Sam
What are you going to yeah, it’s hard to make a call on the energy price kind of in its relation to gasoline for a couple of reasons. One, we really don’t know where any spare capacity can come from in terms of the ability to refine at this point.
You’re running at 96% utilization rates for refinery capacity, that’s pretty much peak. So if you have any sort of hiccup there, you’re going to have a problem on the gasoline front.
Tony
So hurricane season is over. Do you see any reasonable hiccups coming? Obviously may be unexpected, but when you’re.
Sam
Running at 96% capacity, it doesn’t take much to have a small problem. Right. And if you go from 96% to call it 90% because of an accidental outage, that could be something rather significant for the gasoline market. So while oil prices, you know, appear to be fairly volatile right now, it’s, it’s hard to translate that back into a gasoline price.
Mike
I know if 86 degrees here in Houston, but unpredictable winter can happen. I know it’s a little bit of a delay, but we don’t know. These weather patterns can happen. We could have a colder than expected winter and that could probably trigger as well.
Albert
Rail strikes is another issue. Talking about any kind of strikes in the transport industry, diesel prices making truckers, you know, trucking more. It’s not anything.
Tony
Right. I just saw Tracy pop in and then she popped out. So once she comes in, we’ll come back to her on this. Thank you. Okay, that’s great. And we’re seeing, we’ve seen XLE, the energy companies, the energy operators, we’ve seen XLE stay pretty elevated as crude prices have come down. There’s typically kind of a four to six month lead between crude prices coming down and XLE coming down. So when we look at some of these major operators, is there an expectation that those prices will come down? Or are we kind of I’m just inviting Tracy to co host. Okay. Hi, Tracy. Are you there? Sorry. Just back to XLE. Do we expect XLE, the traded operators like, say, ExxonMobil, those sorts of guys? ExxonMobile is about to break 100. They’re headed back down after topping out like 115, something like that. So do we expect their share price to follow the crude price directionally?
Albert
I would say no. Really? It’s tough. It’s a tough call, to be honest with you, because we just don’t know which way the markets are going to go. Crude prices is acting like bitcoin at the moment, just being up and down 10% per week. I can’t even give you an honest answer on that.
Sam
I mean, it’s certainly not going to be the same data that you would expect in a decade ago, but you’re likely to have the sentiment at least have some effect on XLE or XOP, whatever it might be. But the issue now is that you’re not going to have the same sort of capital expenditure catch up and overshoot that you did in previous cycles simply because investors have already said, we will punish you for that. And producers don’t want to be punished.
Sam
They’re making a lot of money at 50, 60, $70 barrel oil. I don’t think you’re going to see the level of beta to the underlying that you would normally expect.
Tony
Okay, great. So basically they’re using your old equipment at the current energy prices and they’re maxing it out. But when the capex cycle does come on, will it come on with huge force or will that trickle out? Like when will invest? Will investors decide at some point that they won’t punish these operators for capex?
Sam
No, they won’t. No. Okay. Why spend for something that has a five to seven year time rise? We’ve been told that the oil companies aren’t supposed to exist in a decade. So as a shareholder you want that return of capital. You don’t want that capital put back to the ground. And if you begin to see any sort of significant uptick in capital expenditures, you’re going to have it absolutely crushed from a stock perspective. Right. If Exxon announced that they were going to begin a significant capital expenditure program, that stock would get absolutely hammered and you can just go through any of the companies. It’s all about what are you doing for my dividend? How much stock are you buying back and maintaining output, not expanding because you talked about it.
Mike
We’ll be short or fast. I think it’ll be going to take a long time for that to happen unless some major catalyst happens that actually sparks that in.
Tony
When you think about how long it.
Mike
Is to legislate get permits, it’s a decade.
Sam
Yeah, absolutely.
Mike
So it’s got to be some major catalysts.
Tony
Tracy, are you there? I see you as a co host but I’m not sure if you can speak. Okay. Once you’re in Tracy, just speak up and I’d love to get you involved in this discussion. Sam, how much of an impact is having is say lower gasoline prices having on the affordability in broader inflationary environment? So basically are gas prices helping the inflation discussion much or is it just a relatively small thing since a lot of people are working from homes?
Sam
There’s kind of two ways to think about that. There’s the inflation dynamics, the actual inflation dynamics that lower gasoline does have that headline CPI narrative.
Tony
It’s a tax cut. I’m kidding.
Sam
The problem is that over time gasoline has become a much smaller portion of the wallet. The average person does not spend anywhere near as much on gasoline as they used to and that’s just a fact. So is it really helping people on the margin? Yes. Gasoline and groceries are the two things that you can kind of see and one you see in a big bull sign, the other you see every week when you go buy groceries. So gasoline, grocery prices coming down, it’s good for the consumer mentality. Is it good for the action and spending levels?
Tony
Okay, great. Okay guys, just so you know, this is a live spaces. We are recording this and we’ll upload on the YouTube channel probably tomorrow. Tracy has joined us. Tracy, if you’re there and you want to chime in please join. Okay, let’s move on to the next topic for inflation and recession worries. So inflation is proceeding pretty much unabated salmon, and we saw this in your newsletter this week and I’d love to talk more about that. We also had some Goldman guy, I can’t remember who it was yesterday, saying there’s probably going to be a recession in 2023. And all these people are coming out saying maybe back half of 2023 there’s a recession, which it’s a convenient time to say that right? Right now to say something’s going to happen in the back half of 23. So you look at the terminal rate in your newsletter.
So how would, say accelerated inflation, if that’s actually coming or the steeping of recession worries affect the terminal rate from the Fed?
Sam
I think you have to divide that into the first part. That is, what would inflation call it a deceleration in inflation pressures mean for the Fed? Unless it’s significant? Not much. Does a recession matter for the Fed? Not if it doesn’t come with disinflation. Does the Fed care if we have real GDP decline? No. I mean we have real GDP decline, q One, q Two. They got their mandate, they did not care. Right. You currently have north of 7% CPI and you have an unemployment rate of 3.8, maybe percent. It’s really hard for me to see which one of those metrics is comforting to the Fed at this point. So does it affect the Fed’s trajectory? Maybe it’ll take a 25 out of the terminal rate, but that’s about it. You’re simply not going to have this type of immediate Fed pivot with inflation at north of 6% and this type of unemployment rate, it’s just not going to happen.
Tony
Okay, great. Now for you guys on spaces, if you have a question or want to put up your hand, put a question in the channel or put up your hand. We’ll take some questions later on in the podcast.
Albert
That inflation is just so sticky right now. We spoke about it earlier for podcast about wage inflation just sitting there, you know, just rising every single month. Politically, it’s a great thing for people to wait 40 years to get wage inflation, but I just, I can’t see how all these consumer prices are going to come down and talk about this inflation or wage inflation is just going to stay elevated for the next 1015 years.
Tony
Yeah, that’s a good point. So I get that there’s this expectation out there where people expect prices to come down to say, 2019 levels at some point. And, you know, we were talking about this, Sam, that do you expect prices to go back down to 2019 levels? We’ve seen a dramatic rise in a lot of different areas. So do you expect that to fall back down to what it was two, three years ago?
Sam
No, I don’t even think that in the best of all possible worlds, that’s not one of the worlds.
Albert
The only people talking about that are the political people that are trying to sit there and trying to gain votes because people are struggling at the moment. But the economic guys exactly. It’s only what you want to hear, but the economic guys are looking at the numbers and, like, we have never seen I mean, why would why would companies bring the prices back down that much when they know they can get away with it?
Sam
I mean, Cracker Barrel expects wages in the coming year to be up five, 6%, right?
Tony
Those of you who aren’t in the US.
Sam
Year, right?
Tony
For those of you who aren’t in the US. Cracker Barrel is a very kind of middle America restaurant comfort food, right? It’s biscuits and gravy. It’s fried chicken, that sort of thing. And so this is not the high end yet. It’s not McDonald’s. It’s very much the middle market in the US. And so Sam’s done a very good job in his newsletter over the last couple of years covering price hikes at Pepsi, at Home Depot, at Cracker Barrel, at other places. So many of these companies have raised prices by, like, 8% to 10%, generally, or more. Who’s raised more?
Sam
So Campbell Soup this morning came out with earnings, and they divide them into two categories. They divide it into soup and kind of prepared meals type deals and then snacks.
So think Snyder’s Pretzels is one of the brands. The prepared meals, which include soup, they increased pricing, 15% from last year, and they increased on snacks, 18. And that was price that they pushed. Volumes were slightly negative, but negative 1% and 2%. Okay, you’re talking almost no budge on volume and a huge move in pricing, and that is for the most boring of all commodities. This is soup we’re talking about.
Tony
And I want you guys to understand what Sam is saying. Campbell Soup has raised their prices between 15 and 20%, and their volume declined 1%. So do we ever expect Campbell Soup to reduce their prices by 18%?
Sam
No. That’s the beautiful part if you were corporate America right now, is you get a free pass to really find the elasticity in the market for your product by raising prices until you begin to see pushback from consumers, and you just haven’t seen a significant pushback from consumers. And to the narrative of inflation peaking. Inflation is peaking. If you look at the last four quarters of price increases from Campbell Soup, it was something like 6%, 11%, 11%, 16. Right? So maybe the second derivative is negative, but the first derivative isn’t.
Tony
And it’s positive in not a small way.
Sam
Correct.
Tony
We’re not talking about 2% price rises. We’re talking about 18% price rises, which.
Mike
Is we’re seeing that for consumers, the biggest increase. But, I mean, I guess in future years, that probably somewhat levels off. And then on top of raising prices, I’m sure all of you have noticed the shrinkflation, the items have less in it and we’re paying more for it on top of everything else.
Sam
Well, that is part of the pricing element. Right. So when they take packaging down a couple of ounces that shows up in the pricing mechanism.
Albert
It’s incredible that Campbell Soup and all these other companies raised their prices by 16% to 19% because that is actually the true inflationary number. When you go back to what they used to do it in the 1990s, it’s 18 19%, not the 7% that the Fed tells you. CPI.
And on top of that, these inflationary numbers give you a tailwind for earnings. So all these companies that surprise earning beats, if you look at them, what inflation has done into their products, it’s not a surprise that they beat.
Sam
Yeah, right. And it’s somewhat stunning because if you think about it from a 23 24 perspective, if you have your input costs begin to move lower, or at least decelerate, and you’re holding your prices at these current levels, or even increasing slightly from here, or increasing from here, all of a sudden you begin to think about what that does to a bottom line. That is an extremely attractive thing for a business. As we begin to move into the latter part of the margin expansion that everybody kind of thought was over after COVID, that really might return to some of these boring, staid old stocks.
Tony
Right. So guys, just, just to be clear, what we’re saying here is prices are not going to go down or they’re highly unlikely to go down to what they were two or three years ago. We’ve hit an inflation level, it’s a stairstep. And companies are comfortable seeing reduced volumes, but they’ve compensated that with higher price and consumers are generally accepting higher price. Right. So as an aside, I’ll be shameless here and say complete intelligence does cost and revenue forecasting. If you guys need any help with that, let us know. Okay? So, terminal rate, you’re still looking at five to five to five somewhere in there.
Sam
Well, I think it’s probably closer to five and a half to somewhere between, I would say five and a half to six because you have the stickiness in wages, right? And the stickiness in remember this is important, that Powell, week ago at the Brookings Talk pointed out one thing, and that was Core Services Ex shelter. In other words, they, they are already throwing shelter out. Even when shelter decelerates, they’re not going to pay attention to it. And he also made it very clear that Core Services X Shelter, the main input cost for many of these businesses is wages and personnel. So while you have these wage pressures, building the Fed is not your friend in any meaningful way. So I’m much more on the give it five and a half to six. There’s this idea maybe we get 50 50 25 then done. Or 50 50 done. It’s more like 50 50. 25 and 25 and 25. It’s just slower.
Tony
You said this a month or so ago. It’s a matter of the number of 25 that we get.
Sam
Yes, it’s 25 delays.
Tony
Okay. So it’s not over, guys. We’re going to continue to see the Fed take action, and they haven’t even really started QT yet. And we’ve talked about that for some time. And when they start QT is really when markets feel is that fair to say? Yeah, depends on the market, of course.
Sam
Yeah, they’ve started QT It’s just a small 200 billion or something that’s still QT. They’re not going to sell them.
Mike
I think one of the things he said is the Fed is not your friend. And just think about that statement for a minute. For two decades, all investors we’ve all come to known as the Fed is our friend. Anytime the market was down, they’re out there doing press conferences. But I think it’s critical for people to understand we’re not going to see a return of that for a significant amount of time.
Tony
Right. You’re not public servants. Right. Exactly. They don’t like you.
Albert
It’s important that as Sam mentioned, that 50 50 and then the repetitive 25s correlates with their rhetoric of soft landing that they keep talking about whether they can actually achieve a soft landing. Well, that’s another debate that we talk about. But that’s exactly what their intentions are. Those are 25 US to the end of their they get to where they want to be.
Tony
Right. Okay, very good. Let’s move on to Japan. Bank of Japan Chairman Corona was on the wires this week talking about Japan hitting the 2% inflation rate, which they’ve been trying to hit for 30 years or something. And then they made a policy with Avionics in 2012, and they still have been able to hit it. And now that we have crazy inflation globally, they’re going to claim the win. Right. And they’re going to say, we hit it and abe nomics. Although Avi is not empowering where it was ultimately successful. So, Albert and Sam, I’m just curious, what does that mean if Japan hits 2% inflation and they tail off their quantitative easing, their kind of QE infinity and they stop buying government bonds, all this stuff. First of all, do you think that’s going to happen? Okay. And second, if that does happen, what did Japanese markets look like? And then what does the yen look like? I realize they just threw a bunch of stuff out there, so just take it away. So you might like jump in here. Sure.
Albert
The fiscal monetary setup is quite favorable, right. If they do whatever they’re going to say they’re going to do quite favorable. There are only headwinds that I can see is the US. Stock market equities. If the US equities fall, without a doubt it will affect the Asian market, specifically Japan. It’s a tall order for them to sit there and get their 2% inflation target. So I don’t even know if that’s even a valid discussion, but I guess we’ll sit there.
As much as a set up as favorable for Japan, they’re combating China. And I still think that China, because they don’t have as much connection to the US. Equity market, is a little bit more favorable. I would go China over Japan right.
Tony
Now, yes, but I’m tired of talking about it.
Albert
I know not to talk about China when Japan is so interconnected with China, so everything is interconnected in that region. But I do think that the fiscal monetary set up for Japan is favorable.
Tony
Okay, sam, what do you think?
Sam
Like Albert said, theoretically, it’s really interesting. It’s intriguing. The one thing that I think is important to remember about Japan is that every time they seem to have the monetary policy setting correct and they were heading to actually hit their 2% target, they always seem to raise taxes or do something to make sure that they missed it. Was MMT on steroids? Very good example of MMT actually working. Right. You can do as much monetary policy as you want as long as every time you’re close to an inflation target, you just race to that or taxes. So I think that’s something that I’m always somewhat skeptical of Japan doing. If they begin to lift yield curve control on Japanese government bond yields, I think it’ll do two things. One, it will make for an interesting market in Japanese bonds. The BOJ owns such a large amount of that market that is almost difficult to fathom that it actually has a functioning market. It doesn’t really have a functioning yield market. So that’s kind of the first thing is we’ll finally get a feel for how that market actually functions. The second one is that you’ve had a 2% inflation win with the yen sitting between 130 and 150, a very weak yen.
That’s a tailwind to inflationary pressures. If they do lift YCC, it doesn’t matter what else they do. If they raise interest rates, whatever it might be, the yen going back to 120 is going to undo a lot of that inflation pressure in and of itself. You’re going to really bring that in. It’s also probably a positive. Having a stronger yen in this environment when you’re at an energy shortage globally is a positive for the Japanese economy because they import so much energy. Having that stronger yen makes it cheaper in domestic terms from that perspective. So I think there’s a number of things that could line up pretty well, and there’s always the opportunity for the Japanese government to mess it up somehow. Of course, I do think that it’s a very interesting market, particularly if you can do it on a call it an outright basis investing and get some of that currency dynamics mixed in with your investment, that could be a very interesting opportunity going.
Albert
You know, what’s interesting is what you’re saying about MMT on steroids. It’s like, you know, you’re making all these descriptions of what’s going on in Japan, and I just look at the fed, and I’m just like, well, oh, my God. We’re starting to be on the verge of Japanification at the moment right now, because the 30 year bond from who I talked to the 30 year is.
Sam
Completely controlled by the federal government.
Albert
And at the moment, it’s completely controlled. And if they can sit there and pump those bonds and pump the markets, you got Japan right here in the United States with MMT and Leil Bernard and yelling, doing whatever they want to do.
Sam
You just have to raise taxes.
Albert
Yeah. So so masters at that. Yeah.
Tony
So I used to go to Japan a lot, and in the late, say, 2010, 2011, when the yen was at, like, 75, when I would go to Tokyo and I would go down to breakfast in the hotel, I was the only one there. And I remember when Abe was elected and even pre election, the yen started to weaken him taking office. The yen started to weaken. Right. And I remember the first time I went down to the hotel lobby and there was a line to get to breakfast rather than just it being wide open for me. So a devalued yen means a huge amount of power for the Japanese economy. So when you say JPY going back to 120, I remember in 2010 eleven. When people would say, gosh, if we just had a yen at 95, we’d be happy. Right. And now it’s at 145, or whatever it is.
Sam
I haven’t 130 yet.
Tony
136. So, you know, it’s you know, it’s a completely different environment and puts the Japanese economy in completely different context. But you have nationalization of bond markets, you have nationalization of ETF markets. Is it really an open, competitive economy? It’s certainly a highly centralized economy. Right. And that’s really dangerous. But they love to use demographics as the justification to intervene in markets, right?
Albert
Yes.
Tony
Okay, guys, if anybody has a question, raise your hand. Or I’m not exactly how this works. Again, this is our first time to do a spaces. So put something in the messages or raise your hand or do whatever, and we could potentially have you come on and ask your question. I’ll be very honest. If you have an anonymous Twitter handle and we don’t know you, I’m not going to let you speak. So don’t waste your time. But if you’re someone we know, then we’re glad to have you on. So I guess while we wait for people to come in with questions, we’re pre Christmas holidays here in the US. We’ve got a Fed meeting coming up, the expectations for a 50 basis point hike. What do you guys expect? We’re seeing equity markets really kind of gradually move lower. What do you guys expect for the next week? Or so in the US before the Christmas holiday.
Albert
I think the CPI is actually going to be a little bit less than consensus and probably get a rally going to the end of the year, to be honest with you. I think everybody knows it’s going to be 50 basis points. The question is what’s the guidance after that? What do they say? If it’s a good CPI number, well, then you can have this dough stock for another month.
Mike
Sentiment has been so low and kind of got your seasonality right now. I think that probably prevails here.
Sam
If you think about it, a few.
Mike
Months ago everybody was kind of in this panic, Seymour. People kind of there’s this nice little calm right now everybody’s just kind of floating around waiting to see what’s next. And what’s your point? I think everyone expects to raise another.
Albert
50 basis point, which is amazing, because 50 basis points is not dovish. I guess everyone’s expecting 75 or 100 about a month ago, you know, their.
Mike
Condition as to.
Sam
No, I would say there’s there’s a couple of interesting things about the Fed meeting it into the back half of the year. One is what does the dollar actually do here? Because if you begin to actually have a significant move in CNY stronger right lower on this chart. But if you get a significant move back towards the 650 area on CNY, that is going to have a spillover effect. To a stronger Euro continued strength in the British pound you could begin to have a number of dynamics that are somewhat negative dollar and therefore pretty bullish on the risk asset front that I think could catch some people off guard simply because of the spillover effects. But the Fed, the one thing to remember about this meeting is it’s not just a 50 basis point height. It’s also that stupid dot plot that they do that actually has some pretty serious potential consequences because if 23 comes out with higher than expected dots and 24 dots move higher, the terminal and the long term rate begins to creep a little bit higher. If you begin to have that hawkishness, I kind of want to say this, so going to, if you begin to have the hawkishness become less transitory in the dot plot, that could become somewhat problematic for markets that could take some of the sales out of what we’ve seen to be a moderating dollar effect.
So I think, I think it’s worth being a little careful until we see that dot plot and begin to hear how Powell is approaching 2023 because I think they’re somewhat aggravated about the way that the Brookings Institution, the Brookings speech was received by markets they did not want a significant asset rally going out of that right. That was counterproductive to what they want. So I think they’re going to be very careful about the rhetoric into the.
Tony
Back half of the year because they would just. Not be so jerky in their communication. They’re super bearish. They’re bullish. They’re super bearish. They’re bullish have a consistent message.
Albert
Yeah, but it depends on what’s going on behind the scenes, what data they see. All this data, they see all the CPI and the jobs numbers a week or two heading for anybody else. Don’t kill yourselves.
So I guess it comes down to what is going on behind the scenes and what they don’t want to break. I mean, Blackstone came from what I heard, blackstone was $80 billion in the hole and having problems, and they went to the Fed, and that’s what triggered Powell to be slightly dovish.
Tony
And I thought they were the fed.
Albert
Well, whenever you guys Powell’s portfolio sitting there in your grasp, you are the.
Tony
Fan of that one.
Albert
But I guess it goes down to what is happening behind the scenes and what could potentially break is why they’re coming on this roller coaster ride of rhetoric.
Tony
Yeah. Okay, I’m going to see if Valena wants to come in she’s attending. And see if she wants to come in to see what? Invite her to speak and see if she wants to Valena, are you there? If you want to come in and let us know what you’re thinking is going into the end of the year and 2023, you have an invite to speak. You’re welcome to.
Albert
Molina is sitting there in Austria, vienna, Austria. And I know the European markets are now looking quite interesting to me. A little luxury market in Europe is absolutely exploding, and it’s just unreal that. It’s just so resilient. I mean, there’s two brands that I personally liked, laura Piano and Brunello Cucinalli, which I have a tremendous amount of polls. Brunello Cucinalli didn’t care anything about the Russian sanctions or anything. Just kept on selling, and they just blew out earnings yesterday or as of today, they were up like 7% this month. Really, the luxury retail market, luxury jewelry market is just it doesn’t stop great. And it’s counter to what everybody is saying. Recession this, recession that. You go to gucci stores, lines out the door, Louis. The time you need an appointment, it’s just resilient. It’s just actually quite amazing.
Sam
It is really similar to if you look at our markets, right, particularly the masters plotted against the price of oil. If you do a six month delay, guess what? It’s almost it’s a really interesting kind of windfall type chart. You can kind of see the oil money flowing in there. And you even had China relatively shut down, and that was a huge driver, a tremendous driver of European luxury, particularly for LVMH. Even with China shut down and not really having the tourism, you had a lot of tourists from Middle East, et cetera, really put in some of the South American countries that are doing fairly well, particularly at the higher end. A lot of that is driving this kind of underneath the surface. You had tech, then you had energy. And the question is, now you have the China reopening. Is that the next leg for a lot of these lectures?
Tony
Okay. So let’s talk China.
Albert
I wasn’t going to do that.
Sam
Tracy.
Tony
You’Re as a speaker as well. So if you want to come in, you can come in any time. Okay, so let’s talk about China, even though I didn’t want to COVID that. So let’s talk China. What’s happening, Albert, with the reopening? Like, what do you see the next two months happening with the China?
Albert
Just as we spoke about a week ago on China, those riots and the reason the Chinese even let you see these riots happen on the social media was a signal that they were going to reopen, and in fact, they did. Days later, we’re reopening in stages. And that’s just it. And get your house in order, everybody, because inflation is going to happen. I think I think copper was up, like, two and a half percent this morning. And this is this is it just barely reopened right now, manufacturing, because the odors were down I think Western odors were down 40%.
Tony
But kind of everyone told me on Twitter that democracy came to China.
Albert
Yeah.
Tony
Okay.
Albert
Those are people that have never been to China or stayed at five star hotels or actually step foot outside of Beijing.
Tony
So let’s go there a little deeper. And Xi Jinping is in the Middle East either today or over the weekend at an Arab China summit. Right. And so, first of all, him leaving China right after there were protests, what does that say to you, Albert?
Albert
Safeguard, he’s done any kind of opposition that was pushing against Xi’s Party congress moves eroded, and then these street protests are just street protests. I get it, people are upset and their livelihoods and check down the list of whatever you want to say, but realistically, they never work unless they get violent. And they never got violent.
Tony
Right. So you kind of have to let the steam come out of that valve, I think is probably what you’re saying. Right? The CGP is saying that now with CGP going to the Middle East, sam, they are the premier buyer. China is the premier buyer from OPEC clubs now. Right. It’s not the US. And this isn’t new for people who have been paying attention. The Saudis and other people in the Middle East have been spending a lot more time in Beijing for probably six, seven years. And so and and it’s been longer, but it’s been really, really visible for the last six or seven years. So what does what does that tell you about, let’s say, OPEC’s desire to, please say, a US president going to the Middle East to try to bully them, to pump more? Is that effective anymore?
Sam
No, not at all.
Tony
Hi, Tracy.
Speaker 5
Hi. Sorry, I was having technical difficulties, and for some reason I couldn’t all gone earlier.
Tony
Welcome. No apology necessary. We’re just talking about China and with Xi Jinping in the Middle East for a summit with the Saudis and the GCC members and what that means for the ability of say, a US president to kind of bully OPEC into reducing oil prices going forward. Is there really any strength there? Do you see.
Speaker 5
That’S? Absolutely done. What I would expect she landed in China today. I would expect him to get the full lavish welcome. Right. And we want to be looking at who he brought with him as far as national heads of corporations. And I would expect this to be completely opposite of what we saw the Biden meeting with and more akin to what we saw the Trump meeting with, where they I would expect that.
Tony
So they’ll touch the crystal ball.
Speaker 5
Maybe they might bring out the ball. Yes. And I expect billions and billions in new deals as far as economic, military, energy in particular, et cetera going on at this point. Again, they’re having a conference where they’re going to have multiple leaders in the Gulf nations in Saudi Arabia. So I mean they’re really going to try to rue China on this trip big time.
Tony
Right. So when you talk about military deals, what do you think about that? Albert?
Albert
I’m not really sure Saudi Arabia will.
Tony
Do major military deals with China.
Albert
I mean maybe a few just for show up for optics theatrics but the US military hardware is the best in the world and realistically Saudi Arabia is under the US defense umbrella. Whether the left or the right likes it or not, that’s just the reality of it. And as long as Iran is not poking or poking trouble from the east and Yemen not from the south, southern regions have an easy ride. So their military deals aren’t really they’re not at the forefront at the moment. But anytime that Russia wants to string that relationship, they can certainly call up Tehran and say lob a few missiles over and things go right to elegant.
Sam
To Albert’s point, I don’t think Saudi is going to work. KSA is going to become the next India where they split their arms deals among the three major powers of arms anytime soon. I mean that’s just not going to happen.
Albert
No, there will be a little bit, yeah. India is a completely different ballgame. India has got counterbalance, they need to counterbalance Russia with China and Pakistan and it’s the old mess over there and they need to do what they’re doing.
Sam
Well Nksa is also trying to hold together their market share in a world of Russia really having to begin sending almost all their stuff to call it China India.
Tony
Right.
Sam
So if you had were the two largest pieces of growing market share for Saudi Arabia over the past decade, that was India and China. And now you have the other major energy player in the region coming after your market share. There’s got to be a little handshaking here to keep everybody happy and selling at $55 a barrel.
Tony
You don’t hate that, right?
Sam
If you’re trying to. I mean, it’s the perfect time to reopen. You’re getting cheap energy. You have supply chains that have fixed in the rest of the world. So I think this is very much a visit to make sure that they can continue reopening, get those long term energy deals in place, and then move forward.
Tony
Right. Okay, so we do have a question for Tracy, and you guys jump in. So, Tracy, there’s a listener named Rasul, and he’s asking, when China opens up, is it possibility that it could use its own SPR, like in November 21, to reduce its oil cost? Is that something they would consider doing?
Speaker 5
I think not at this juncture, right now, because, first of all, they’ve already drawn it down. Right. And they’re still worried about long term energy security, as is everybody right now. In addition, they’re also getting really cheap Russian oil, so I don’t think that would be something that they would do right now.
Tony
Okay.
Albert
No, they wouldn’t do that.
Tony
Right.
Albert
There’s no absolutely no need to do that. The US. Only did that because of Midterm economics, and that’s just that China had no intention of doing that.
Tony
Great. Okay, good. All right. Well, guys, I think we’ve covered it. We’ve been here for about 40 minutes, and the hotel we’re in has threatened to call the police if we don’t leave. So I want to thank you all for joining us for this week ahead, and we’ll get this posted on our YouTube channel within a day or so, okay? So thanks for joining us, and look forward to seeing you on the next one. Thank you.
