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BBC Business Matters: US Budget Row

BBC Business Matters is joined by our founder Tony Nash for this episode to talk about US’s $3.5 trillion spending plans. Will it get approved before the G20 meeting in Glasgow? Also discussed are the energy crisis with very high gas prices and Russia’s use of energy as a political weapon against Europe. Has Houston changed because of the pandemic and discussion on climate change?

 

This podcast was published on October 28, 2021 and the original source can be found at https://www.bbc.co.uk/sounds/play/w172xvqltqn8n2y.

 

BBC Business Matters Description:

There are intensive discussions on Capitol Hill to try and break the deadlock over his proposed $3.5 trillion spending plans. Those plans have lead to deep divisions in his own Democratic Party. So how close to a deal are we? We get analysis from Natalie Andrews, Congress Reporter for the Wall Street Journal. And is Russia using energy as a political weapon? The question is frequently asked in Europe and it’s now being asked in Moldova, a former Soviet Republic that’s been trying to move away from Russia’s orbit and develop closer ties to the EU. It follows the decision by the Russian state-owned gas company Gazprom to reduce supplies to Moldova and to threaten to suspend them completely. Moscow correspondent Steve Rosenberg has been to Moldova to find out what’s behind the latest gas crisis. Also in the programme, we look at why has the iconic French fashion house Jean Paul Gaultier – known for cone-shaped corsets worn by Madonna for example – decided to allow people to rent some of its most iconic pieces? And Fergus Nicoll investigates what efforts are some cities making to combat climate change. And we’re joined throughout the programme by Tony Nash Tony Nash of Complete Intelligence in Houston, Texas and Jeanette Rodrigues, South Asia Managing Editor of Bloomberg in Dubai.

 

Show Notes

 

RT: Tony Nash, founder of the Complete Intelligence, is based in Houston in Texas. And I would imagine, Tony, that you’ve been watching a bit of baseball over the last few days.

 

TN: Just a little bit Rahul. Thank you.

 

RT: And if it’s been good for you so far.

 

TN: Well, up until last night, it was pretty good. It’s the World Series Baseball Championship. The Houston Astros are in the final two teams playing for the Championship.

 

RT: And the reason they didn’t go so well because I don’t think they won their first game that we may have talked to Tony a little bit more about that in the program.

 

Tony, can I come to you here first? Because we heard from the Moldova and government Minister. They’re saying, “Look, I can’t predict where gas prices are going to be in two months time.” As much as of the Northern Hemisphere goes into winter. Gone. Has the guest for us. Where do you think gas prices are going to be higher or lower than where they are now? Because they are very high, aren’t they?

 

TN: Gas prices continue to rise for at least the next two months, if not into, say, February. So we have tight gas supplies now. We have growing demand now. We have people, a lot of whom are in their house all day, so they have to heat their house where they would normally be in an office, those sorts of things. So it’s an issue that we haven’t really had to face for quite some time. At the same time, we’re seeing inflation in other areas hitting people’s pocketbooks. So I think it’s sensitive in a way that many, many people could not have seen.

 

RT: President Biden is leaving for the G20 summit in Rome. Then, of course, he’s coming to Glasgow. The COP26. Will you have a deal? Do you think, Tony before he departs American shores?

 

TN: I don’t think so. There’s a problem with paying for it. And it’s really strange to hear someone say that Democrats are saying they’ll literally vote for anything that goes to the floor, which tells me they’re pretty desperate for something. They’ve tried things like what they’re calling a billionaire tax, which is actually a tax on income of even things that are in your retirement account portfolio.

 

RT: But is that not a bad idea maybe to try and generate some money? A lot of our listeners will be thinking it’s quite surprising that America doesn’t have paid family leave already?

 

TN: Well, companies do offer people time off and paid time off when they have a child or something like that, or when there’s a sick family member or something like that. So it’s not something that doesn’t happen here in America. I think somehow it’s being portrayed that Americans don’t do that. It’s not 8 to 12 weeks or something like it is in Europe. But there is time off for that sort of thing. So we’re just in a different place in our social development and we prioritize different things thanEurope. So I think the US is not Europe. The US will never be Europe, or it’ll be a long, long time before it’s Europe. And American taxpayers aren’t willing to pay for that. So they have to find a way to pay for it. And the problem is they can’t find a way to pay for the programs that they want in the bill.

 

RT: So what’s the soultion going to be here because there will have to be that always is.

 

TN: A smaller bill. That’s it. I mean, it’s going to be a smaller bill. It’s going to be a trillion, maybe slightly more, something like that, which… I just want to repeat that and say it slowly, a trillion dollars. Okay. So let that sink in. This is not small money. Okay. And it’s a very political tactic to aim very high and then act like you’re disappointed when it comes in at a third of that. But it’s still a TRILLION dollars. Okay. That’s less than the entire bailout of the global financial crisis in the US economy, which was 860 billion or something like that. So it’s less than that entire bailout. So it’s huge money.

 

RT: It is a lot of money. Let’s look at where you are, Tony, because you’re in Texas, a region synonymous, really, with oil and with gas. As we see these prices increasing so dramatically, do you think that people within those industries, then look at it and think maybe they have a longer shelf life then some people thought they were going to do with that movement to renewables?

 

TN: Oh, yeah, I think they do. I don’t think hydrocarbons are going away, partly because every plastic that you use is made from hydrocarbons. When Greenpeace protested a vessel, they used a plastic boat to protest. Plastics aren’t going away. I think that the bigger issue that you raised is energy as a political weapon. And I think Russia using energy as a political weapon toward Maldova, toward Europe, toward China, toward other places, I think is a reality that we face when you face tight supplies.

 

RT: Do you think Europe was naive here in some respects, because if you look at it now, with so much of Europe and Europe dependent on Russian gas supplies, this was always going to be a possibility, if not a probability.

 

TN: Absolutely. Yes. So, look, I live in Texas. We sell oil and gas to the world. If we had a captive market, we would be tempted to charge higher prices. But we sell to markets all over the world in a competitive system. Europe locked itself into the agreement with Russia, and we could have a long discussion about this. But Europe locked itself in, and so they’re captive. And that’s a huge problem for Europe. And that’s one that Angela Merkel’s and others got Europe into. And conveniently, they’re not going to be around to get them out because they’re out of office. So it’s a really convenient agreement that they came to just in time for them to go out of office.

 

RT: Let’s go to Houston, Texas. And, Tony, are you seeing Houston change very much, whether that’s a consequence of the pandemic, whether that’s because of a debate about the climate?

 

TN: So we have obviously a lot of very large oil and gas firms here. And there is a lot of investment in alternative energy sources by those players. So you could argue that it’s just an ESG play for the equity markets. But I think there is sincerity within the companies to be the sources of energy, not necessarily just to be the source of oil and gas.

 

RT: What if they put in? Do you have no car zones in Houston? How would that go down with the public there?

 

TN: Houston is a pretty spread out town. So there are some streets that are no car streets, but it’s not large areas, and it’s in very small kind of old-ish parts of town. But other towns? Yeah, absolutely. Up in Dallas, other places, Austin, definitely. There are no car zones in those towns as well. Houston is just a very spread out town. And so it’s very hard to do here.

 

RT: Tony, let’s come to you first. Let’s ask you, what are you wearing at the moment, Tony, are you wearing a smoking tuxedo jacket? I hope you’re wearing something.

 

TN: I am head to toe couture. I mean, everything I wear every day is couture. I’m kidding. I’m just in a light blue shirt and jeans. Just came straight from work. But when I think about this business, your guest described negotiate Close as rich and sexy. That describes me perfectly. So of course, I’m going to be a customer.

 

RT: Okay, let’s get a bit more personal if you are married, if you don’t mind me asking, of course. What did you wear on your wedding day?

 

TN: Well, this was in the 90s. I wore a Hugo Boss tuxedo. My wife wore a custom dress. So we were married in Sausalito, California. It was a wonderful day.

 

RT: I’m sure it was. And I suppose you could afford to do that. But if you couldn’t have afforded that, would you now, if you’re going to get married again? Clearly, hopefully not. But would you consider renting something expensive that you couldn’t be able to afford?

 

TN: Yeah. Why not? Sure if I wanted to. I would absolutely do it.

 

RT: Tony, next time you’re on Business Matters, we expect you to be in your wedding suit and we expect pictures to be posted as well. Do you think it does? I know what you’re talking about, Jean Paul Gaultier. Do you think it does diminish the brand if they’re renting some of those close out? Does it lose a little bit?

 

TN: I think right now with kind of the borrowing culture that we have the renting culture, I really don’t think it loses anything. I think people want the experience of doing something nice, wearing something nice, eating something nice and I don’t think it diminishes at all. I think when I was in my 20s, owning it was necessary. Now I think people are happy to rent.

 

RT: That’s is a very good point. Thank you, Tony. Thank you, Jeanette. If you want to listen to something nice tune into Business Matters, we’ll be back. Same time. Same place tomorrow. Bye.

 

Categories
QuickHit

EM Meltdown: China, Turkey & Russia (Part 2)

In this second part, emerging markets expert Michael Nicoletos discussed Turkey and Russia. What are the major issues that Turkey is facing, specially around its FX reserves? They have an energy problem as well, and will soon need to choose between the US and Russia. And how about Russia’s love-hate relationship with Europe? How does Nicoletos see it will end up?

 

Please watch Part 1 first, if you have not already. Michael talked about China’s household debt and how much is that? Can they ever recover from the Evergrande disaster? And how they got into it in the first place? Is CNY still valuable? How do the Chinese get dollars now with their very limited FX reserve? Should you use the digital Yuan? How much is China spending right now to up its GDP?

 

Michael Nicoletos have spent most of his life around markets, and I used to run a hedge fund for more than 10 years on emerging markets. He shut it down in 2019 to take a sabbatical and Covid 19 hit the world. Now, he is doing a lot of research on emerging markets and trying to see what the next steps will be in terms of the investment world. But in the meantime, he is also advising a few firms on their investment.

 

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This QuickHit episode was recorded on October 20, 2021.

 

The views and opinions expressed in this EM Meltdown: China, Turkey and Russia (Part 1) Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Talking about EMs, and we talked about reserves, and you mentioned Turkey. Let’s talk about Turkey for a minute because you’ve made some really interesting statements about Turkey, and I’d like to really understand your perspective.

 

MN: Turkey faces some other issues. Turkey faces high inflation. More than 20% rates are around 19% of negative yields. The Lira has fallen more than 50% in the past few years. So you might see nominal GDP in Turkish Lira going up. But if you put it in dollar terms, it’s actually flat for the last ten years. It’s not flat, it’s flat-ish. So in Turkish Lira, the last ten years, the Turkish GDP has gone up 350%, which is a wow. But if you put it in dollars, it’s not flat, but it’s not something meaningful.

 

Turkey GDP in Lira and USD

Now, if you look at Turkey and the devaluation, the President of Turkey, Tayyip Erdoğan, has tried to stop the Lira from falling. Right now, it’s I think at its all-time lows around 920 versus a dollar. But if you look at the FX reserve, which is very tricky and this is very interesting for Turkey, you’ll see that, okay, the number is ambiguous because depending on what source you see, you’re going to see another number. But let’s say it’s around $18 billion. Now, this is the gross number. If we deduct gold and all the other stuff and we also deduct the swap lines, and I will explain what the swap line is, this number falls around to $20 billion. And this could be negative according to some sources because the dollars are not there.

 

What has Turkey done? Instead of using its dollars to protect the Lira from falling, I’m not an advocate that you should do that, but that’s what they’ve been doing. They went to the banks and did swap lines with the banks. And the banks are using depositors dollars to buy back the Lira. So depositors right now don’t actually have those dollars in their account.

 

Turkey FX Reserves

 

MN: Because the Turkish banks have made agreements with the central bank with swap lines, which okay, when your central bank gives you a swap line, it’s a guarantee if you’re a bank. And instead of, if you go and you see the headline number of the Turkey central bank, you won’t see it falling. But if you understand that they’ve been using depositors’ dollars to cover for it, you need to subtract that. So the number could be close to 20, maybe there are some allegations that it could even be negative. So if it’s negative, imagine. FX reserves in Turkey are pretty horrible.

 

You have, let’s say, $18 billion of gross FX reserve, and you have $130 billion of short term liabilities, within the next twelve months, Turkey has 130 billion of foreign claims. So again, this metric is not really good. Now, Turkey is estimated to grow around 8 or 9% this year. Again in Turkish Lira.

 

MN: If we take the Lira is down 25% this year. So this is an issue. Another issue is in Turkey, 60% of its current account is energy. They don’t have domestic energy, so they need to import energy and we know what’s been going on with the energy crisis and natural gas and oil going higher. So all these are main problems for Turkey right now, which I think will be forced to find a drastic way to… They don’t want to go to the IMF or the World Bank, but I think at some point they’ll have to go. And again here geopolitics come to play why they say geopolitics is because Turkey is in NATO. It’s the second biggest force in NATO. The US wants to keep it in NATO because wherever US doesn’t send military, Turkey does. Not many NATO allies send military forces wherever they go.

 

So Turkey is trying to play both sides right now. Trying to be the good guy with Russia, good guy with NATO. Trying to get the most out of both sides. But I think time is ticking and they will be forced to take some form of decision on what they want to do in the future because they’re running out of time in terms of their FX reserves.

 

TN: Yeah, it sounds like it’s pretty short time. Wow. Okay. So looking at the energy issues, not just what Turkey faces, but that Europe faces, I want to spend a little bit of time talking about the Russia-Europe relationship and what you’re seeing there. Will Russia provide sufficient gas to Europe this winter? And, from a financial perspective, how much will Russia benefit from that? Just generally.

 

MN: Yeah. Okay. But the thing is here the following: Europe trying to transition to a more green related economy. The planning was pretty horrible. I would say they wanted to do it fast and they wanted to say “blackmail” corporations to go to more green energy. What did they do then? They created the CO2 emissions credits. So if you were polluting above a level, you were forced to buy CO2 credits in order to cover for that. And that was like an indirect tax, making it less efficient for corporations to use that form of energy so they would be forced to go to other forms of energy.

 

Now, from going to coal to, let’s say, totally green. It takes some time to create the wind turbines and the sun. And actually Germany shut down all its nuclear reactors because of Fukushima.

 

TN: They have a lot of low-end Taiwanese fabs transition to photovoltaics with all of the incentives they were providing. I mean, for a long time, low-end fabs across Asia were just doing a very quick transition to a PV, and it was just a kind of back up the truck moment where they were just taking all the dollars they earned or Euros or whatever currency they could because Germany and all these other places were incentivizing them to do it. And they were low-end PVs. They weren’t high-end. They were just bog standard photovoltaics.

 

MN: No, no. Okay, but besides that, what did the European Commission do? There are auctions every now and then of CO2 credits. But the auctions are arbitrary. So the Commission, whenever it wanted the prices to go up, they did not do the auctions. So then the supply of credits was less and less. CO2 credit emissions went through the roof. So suddenly, if you use natural gas as an energy, it went even higher. And this created the viscious loop, creating the natural gas prices to go even higher.

 

In the meantime, Europe was negotiating with Russia about Nordstream, too. So Russia, which is a pretty good strategic and geopolitical player, realized that Europe was going back as being back in the corner and said, unless you sign whatever I want, let me put it in layman’s terms. I’m not going to pump anymore natural gas. Europe says, no, we have to sit down. We have to discuss. Okay, I’m not pumping. So one brings to another. And every time that Europe trying to play hardball, Russia says, okay, there’s no such a problem. I’m not going to be pumping and prices go higher and higher.

 

So I guess that at some point Europe will need to sign anything Russia wants at this moment. And will try to negotiate some form of an agreement which will be obviously not, it won’t be good. But it will be much better than the current prices that we’re seeing now. And because of the energy prices going higher, Russia is benefiting on a macro level, benefiting on a geopolitical level, and it’s gaining a lot of strength in the region.

 

TN: Hugely. Yeah. Hugely.

 

MN: So the two are interconnected. It’s not one or the other. So the energy crisis has helped Russia, and Russia has exploited Europe’s inability to act smoothly and fast.

 

TN: It’s very interesting. Okay. Just to close this out because I know we’ve been going on for a while. I’m just curious about Russia’s position with Europe, say, over the medium term. Do you see Russia and Europe growing closer? Do you see that relationship becoming tighter, or do you see that eventually becoming an antagonistic relationship? Are there substitutional energy sources that Europe can utilize and that eventually becomes an antagonistic relationship again? Just in general terms. I don’t necessarily political specifics. But how do you think that plays out?

 

MN: Well, I’ll use Henry Kissinger’s famous quote that was back, like 40 years ago. He said, “When I called Europe, who do I call?” So right now, you have, in Germany you just had elections. They haven’t formed the government. It might take months before they form a government.

 

In France, there are elections in April. It seems that the right could be a threat to Macron. And we don’t know what the “right’ means in France. It could be Le Pen or it could be someone else, but it could be anything right now. So right now, I don’t see a leader. If Macron wins, he could be the next leader of Europe. But right now, there’s a leadership problem within Europe.

 

So as long as there’s a leadership problem within Europe, in my view, there’s a vacuum. And I think Russia will exploit it to gate as much influence as it can. And I cannot foresee the future. But in the next six to eight months, I think Russia will try and get as much influence as it can and try to exploit that vacuum.

 

TN: I think you’re right. They’re very smart. They’re very smart political players.