Complete Intelligence

Categories
Week Ahead

The Week Ahead – 21 Mar 2022

This week, we saw a Fed rate rise, crude came back from the stratosphere, and Chinese equities came to life.

As we said last week:

– Sam said “watch the 5 and 7 year” bonds, where we saw serious action.

– Sam also said “grip it and rip it” with equity markets.

– Tracy said that dramatic spikes in crude markets were priced out of the market for now

– Albert called for a volatile week thru the Fed meeting, although we didn’t see the lows he’d expected.

Sam walked us through the Fed decision and what’s happening in the bond markets. He also explained a bit more about his “grip it and rip it” comment and where the leaves us.

LME is talking about banning Russian copper on the exchange. What does that mean for global copper markets, as explained by Tracy? We’re also coming off the nickel scandal at the LME. Are there bigger problems with at the LME – mixing politics with markets?

We saw China equity markets perk up this week. KWEB, the China tech ETF, is up over 40% since Monday. What happened, what is Albert watching and what’s coming for Chinese equity markets?

Listen on Spotify:

https://open.spotify.com/episode/1yFipmQCs7XNHEXwj20bZf?si=5310245ccd1545d1

This is the 11th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

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

Transcript

TN: Hi, and welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Albert Marko, Sam Rines, and Tracy Shuchart. Before we get started, I’d like to ask you to like and subscribe to our YouTube channel.

So this week it’s been a really interesting week. We saw Fed rate rise. We saw commodities, especially crude, come back from the stratosphere and we saw Chinese equities come back to life. So it’s been kind of a really weird week.

Last Friday, Sam said to watch the five- and seven-year bonds where we saw some serious action. He also said rip it and grip it with reference to equity markets. So let’s dig into that a little bit today.

Tracy said the dramatic spikes in crude markets were probably priced out in the week before, which we saw bear out this week. And Albert called for an active week before the Fed. We didn’t see the low he expected, but I think very much in line with the volatility he expected this week.

So, Sam, to get started, can you walk us through the Fed’s decision and what’s happening in bond markets?

SR: Yeah. So I think the Fed’s decision is pretty simple to understand on a number of levels. It’s inflation, inflation, inflation and everything else is secondary. When asked multiple times what would knock them off of the call it the inflation war, they made it very clear there was very little that would knock them off that path. So you had a lot of action on seven-year, five-year and a little bit on 10? Not as much as I would have expected, really. But the basic reaction was the Feds going the Fed’s going very hard, very fast, probably would have done 50 if it weren’t for Ukraine and may do 50 at a coming meeting or two if the war in Ukraine doesn’t begin to really spiral into an employment issue in the US. It does not matter about a growth issue, matters about employment issue. So I think that’s really critical.

The two-year looks really well priced to me in light of that situation, quantitative tightening, whatever. That will happen in May. We know that.

TN: We’re convinced it’s happening in May.

SR: We’re convinced it’s happening in May. Yeah. The rhetoric from the Fed is pretty clear that they’re going to go early and they’re going to go fast on quantitative tightening. None of that is great for the longer end of the curve, starting at five s and ending at 30s.

If you want to kind of think about it in terms of ideal perspective, in terms of pricing, it’s probably pretty good. 5s, 7s, 10s, 30s have all priced a pretty interesting growth to inflation narrative that if you begin to have the growth narrative breakdown, if you begin to have the long term inflation embedded narrative breakdown, because the very fast, very good Fed, that’s going to change, and that’s going to push those yields down, prices up pretty dramatically, pretty quickly.

TN: Fantastic. So when you talk about QT in May, I think I bounced back and forth over the past, say month or two months where people are talking about QT, then they’re talking about the possibility of QE, then we’re talking about QT.

So the QT aspect of it, if that happens, which when you say I fully expect it to happen, the main point there is to take money out of circulation, is that right? What is the main point of QT?

SR: What is the main point of QT? Main point of QT is signaling.

TN: Okay.

SR: In my opinion. QE is a pretty big signal to go ahead and buy everything. QT is a pretty good signal that the Fed is serious, right. It’s a seriousness issue. It’s not as dramatic, I think, as it might be interpreted by the financial media in terms of an actual translation to financial conditions or to equity markets, et cetera.

It does tend to knock down multiples, and it probably adds another 25 to 50 basis points worth of tightening this year. But I wouldn’t say it’s a shredding of cash. It’s a shredding of reserves. So reserves never made it in to the market in terms of real usable high power cash. That’s a big difference.

TN: Okay. So when we look at the environment right now versus what you’re expecting for QT in May, are we in kind of an interim opportunistic equity market right now? Are people just kind of trading until the inevitable comes? What’s happening, especially in US equity markets?

SR: What’s happening in US equity markets? That’s a tougher question to answer than you might think. A lot of short covering. That’s the first thing. Second thing is most of the risk seem to be priced as we exited last week. Right.

If you’re going to price the world for World War Three or some sort of big tail risk, that was the time to do it. And you simply didn’t have any of that come to fruition. You had a hawkish Fed, but you didn’t have a Fed that seemed to want to break something really quickly. And it’s pretty obvious that they’re willing to break something at this point, but they didn’t want to break it with a 50 basis point hike or call it three or 3 or 50 basis point hikes. That is one of the reasons why equity markets get a little bit of relief here.

The other side is that the ten year yield dropped. The ten-year yield dropping took some pressure off the Nasdaq for rate increases or interest rate increases that side of things. So Nasdaq outperformed S&P, that’s a pretty important signal. There was some risk on this week.

TN: Great. Okay, Albert, what’s your rate on US equity markets in light of what Sam is talking about with Fed action?

AM: Sam’s right. They want to break something, but they don’t want to be seen as breaking something. I mean, I was dead wrong on the sub 4,000. I completely forgot that Opex was this week. They were not going to pay out $4 trillion and put up just the people. It was just that they probably spent 100 to 150 billion this week to pump this market up and keep it stable up in the stratosphere up here.

I guarantee they spent about at least $100 billion doing that this week. And they just annihilated people. They kept equities up. They are signaling that they’re going to hit inflation hard and fast, just like Sam said. They have to because things are just getting silly at this point.

TN: Okay. And Tracy, in light of what Sam is talking about with QT and more hikes later in the year, do you expect that to have a material impact on commodities over the short to medium term, or do you think they’re still on this strong trajectory that you’ve expected?

TS: Yeah. I think that unfortunately, the Fed cannot subside this with rate hikes because we have, again, real supply demand issues. And so I think the commodities markets, the trajectory is going to continue higher. It doesn’t matter, especially when we’re looking at now we have this Ukraine Russia war, and now we also have 50 million people locked down in China again. And they just closed one of their major ports and manufacturing hubs this week. So supply chains that were sort of beginning to mend, right, after 2020 just got thrown into an entire tail spin once again.

TN: I have a friend in the manufacturing sector who because of the Shenzhen Port close and city close, he got several force majeure letters this week. So that stuff is cascading through industry. We’re not necessarily seeing it in markets yet, but it’s really cascading through industry really quickly. And I think we’re going to start to see that appear in financial statements of companies in the coming months.

AM: That’s important, Tony, because my contention has always been that they’re allowing inflation to run wild because it reduces the amount of rate hikes they actually have to do come May, they might be done with their last rate hikes at that point and start QT just simply on the basis that the supply chains and the economy is struggling.

TN: Right. One thing I want to go back to, Tracy, when you say bullish market and this is my understanding of your statements, but you’re bullish on commodities, you’re not talking about crude going to $140 again next week. This is a medium term play. Is that fair to say?

TS: It’s a medium to longer term play, which I’ve kind of always stated, granted, we had the Russian Ukraine factor come in that push prices to 130 WTI, which was a lot faster than I anticipated. I really liked the fact that we pulled back from that, got some of that geopolitical risk air out of the market, but we’re still on the same trajectory of $150 a barrel over the course of the next year or two.

TN: Right. Okay. Now, while we’re on Russia Ukraine, the LME came out with some news about copper this week and we’re showing that on the screen right now talking about the LME potentially banning Russian copper on the exchange. Can you talk us through that? And what does that mean for global copper markets?

TS: All right, so this is, the LME Commission basically suggested that they ban Russian oil. This has to be presented to the internet. Copper. You said Russian oil.

TN: You meant copper, right?

TS: Copper, yes. Sorry. This has to be presented to the international community for this to actually go through. The problem here is Russia is the 7th largest producer of copper. They account for about 4% of global production. It’s a role on the LME exchange is more significant because they are the third largest exporter of refined copper metal and this is deliverable to the exchange. So this really would send LME markets into chaos. Literally.

TN: Okay, so let’s kind of somehow link that to the LME nickel issues that we saw last week. Okay? Could this, as an exchange, could actions like this impact the credibility of the LME or what does this mean kind of political actions and by “political actions”, I mean there was intervention on behalf of a Chinese entity for the nickel market last week.

There’s potential intervention as a result of geopolitical issues with Russia in the coming weeks. So will we see exchanges get more political and will that impact impact their credibility as an exchange?

TS: Well, that’s the problem, yes. And I do think that it will impact their credibility. The nickel market is essentially broken at the LME rights now, right. They reopened again on Tuesday. They set daily limits at 5%, limit down. They were limited down right away. They raised it to 8% on Thursday, limit down right away, 12% on Friday, limit down right away.

And basically, that’s not because of the fundamentals of the market. That’s because people are running for the hill. They just want out of that contract. Right. And so that is definitely going to be a problem for the LME market going forward.

TN: Are there dangers and we don’t necessarily need to name other markets, but are there dangers of other we’ll say developed market exchanges to kind of make these types? Could we see CBOT or CME or some of these guys start to play these games, too?

TS: I think that’s a difficult question to answer. I do not think that you will see CME do that unless you have some other foreign markets do that first.

TN: Unless a big Chinese state owned entity lose a lot of money.

TS: If we see SHFE do something like that, then I think the United States will. But I do not think you’ll see the CME market actually.

TN: Okay. Yeah. I mean, I’m not sure that some people understand that these exchanges are actually businesses and they have to make business decisions. Right. And some of these business decisions, they’re not completely neutral market participants. Right. In some cases, they get involved in these trades.

TS: They’re there to make money. Right.

TN: They are there to make money. But when politics inserts itself into markets, these exchanges that people think are kind of arms length to the trades, it starts some people wondering about the price. Are they actually getting the right price? Is there really a true market there?

TS: Well, exactly. And that’s exactly what we’re seeing at the LME right now. At the command, so far, we have not seen that at CME yet. But that is to be determined.

TN: Right. Albert, Sam, what do you guys have to say on this?

AM: From my perspective, I can’t really add much to what Tracy said. She’s right on the ball. When it comes to systemic issues, politics gets in the way and protects it. That’s just the way it works. And unfortunately, just seeing what you’re seeing today, which is undermining, it undermines the trust in the entire market overall.

TN: Yeah. It just seems like a problem that’s really hard to get over. Right. Like how long will it be broken and when it’s back, will it snap back? I just don’t know. Sam, do you have any thoughts on this?

SR: My only thought is very similar to Albert’s, in terms of I don’t think anybody’s going to actually trust the LME anytime soon. If you’re going to make a significant trade in a metal, I highly doubt you’re going to want to do it through the LME without having some sort of backup to that position.

TN: Okay, great. Let’s move on to Chinese equities. Albert, we saw China equity markets forgot this week, KWEB, for example, which is a China tech ETF, is up over 40% since Monday. So what happened and what are you watching?

AM: Again, the systemic issues that China is facing in the market, I mean, Hong Kong was about 5% away from just absolutely imploding. They had a new problem where it wasn’t just the foreign money that was leaving the system, but actually the mainland mainland Chinese investors were taking money out, which was something new. And it was to the point where the peg might have even broken. So they had to shore it up by liquidity injections. And the Xi had come out and made those comments citing Hong Kong twice. But I was on Twitter and I was saying, this just can’t happen.

China is completely about to fail market wise. So let’s start picking things, pick the best ETF, pick the best companies out of China. And I mentioned KWEB with you guys, GDS, Chindata, you can throw a dart and pick your Chinese name last week and it went up 40% to 80% at some point.

Same thing. Now I’m kind of trimming my position back, but Chinese housing is at that point right now, where the housing sector accounts for 75% of China’s wealth. They can’t just simply let it deteriorate into nothing where the banks are taking it over. That can’t happen. I mean, Xi would be out in his ass. Sorry about the commentary, but Xi would be out within months if that happens. So I’m going to pick top three Chinese housing names and go for it.

TN: It’s a brave call. It’s a really brave call.

AM: All right.

TN: Do you think there’s room to run with some of these Chinese tech companies or even the broader China market, or do you think the opportunity is really limited to real estate?

AM: Well, no, they can run. The problem that we have now is the Biden administration is starting to target China, assisting Russia and whatnot. So then now you have the geopolitical risks come into the equation and you see these things surge 40% one day, you can easily see a 20% retracement the next day or even more. So that’s why I’m just trimming you take your 60% and be happy with it.

TN: Right. So we talked about Chinese fiscal stimulus, Chinese monetary stimulus. We talked about devaluation. Do the events of the last week move up the time clock for the economic planners in China to get this stuff out the door?

AM: Absolutely. I think they have to even in conjunction with the US, because the US has no fiscal coming so the Chinese have to step up to simulate the economy. Otherwise the entire globe is going into a depression. It’s as simple as that.

TN: Yeah. It’s really. I remember over the past ten years, all the talk about coordinated economic stimulus and all this other stuff since 2008, 2009. And right now we’ve got the Fed pulling back and we’ve got China aggressively moving forward. It’s just a little bit strange. Sam, I guess from a macro perspective, can that work?

SR: It can work depending on how much stimulus is actually put into the system and how it is put into the system. The how is very important in terms of how impactful it will be. Not just domestically for China. But also how impactful it will be beyond their borders.

And what you’d be really concerned about from a macro perspective is how far beyond the borders does that stimulus actually get? That’s where I get interested in it, because if it does begin to move beyond the borders, it’s very positive for Europe. That’s very positive for some US companies. But you have to have a stimulus that isn’t just a transfer to businesses.

You have to have it actually hit the Chinese consumer and hit the Chinese consumer quickly.

TN: Okay. So we’re not just talking about a couple of RRR cuts, which is what they do all the time. It’s kind of the go to. This is the reserve requirement, right?

SR: Yeah. I don’t care if they do RRR cut.

TN: I don’t think many people do, although I think they kind of have to phone that in to show that they’re doing something. I would think it’s more aggressive on the fiscal side, on the TSF, the total social finance side, where they just need to churn the cash out to SMEs, SOEs, big multinational companies, that sort of thing to almost get them to the point where they’re exporting deflation again, of manufactured goods. Does that make sense as an approach, Sam?

SR: I mean, it makes a lot of sense as an approach, but at the same time, you’re locking down due to your COVID zero process or policy. So that process would be really interesting and intriguing. But it’s a question of whether or not it would be effective given the health policy on the other side. So, yes, it would be great, but it would be probably great in three to six months.

TN: Okay, so guys, this is a great point. The COVID zero policy, it feels like much of the rest of the world has come out of this. Right. And China has gone back into lockdowns. Do you think there’s a point at which other markets have an uncomfortable call with China and go, guys, you got to open up because you’re killing the rest of us.

SR: I think they had it. I think they had it. If you look at the way they’re handling the current lockdown, they’re busting people to factories.

There’s a closed loop factory policy. While you have a COVID zero policy and “these places are locked down,” they are busing people to the factories. So I think there’s been a little bit of a let’s move on here.

TN: Okay.

AM: And also want to point out is these lockdowns came suspiciously close to the talks with the US, both with Biden and our glorious blink or Sullivan, the genius Sullivan that we have. But I think it might have been a little bit of a negotiation tactics like if you decide to play hardball with us over Russia, we can just shut down and ding our economy. So I think there was a little bit of that also sprinkle in there, right. A little bit of real politics.

TN: Yeah. Okay, guys. So as we come out of this weird week, what do you expect for the week ahead? Tracy, what are you looking at for the week ahead?

TS: So I think in the commodity markets, we’re still at that point where we’re kind of coming down after that initial knee jerk reaction to Russia, Ukraine. So I expect a little bit of consolidation across markets. Depending. It’s kind of what we’re seeing. So I think the market still be volatile, but like less volatile. I think we’re kind of like at that ripple point where the ripples really big and then we kind of get smaller and smaller.

TN: I think you’re Right. I think the consolidation makes sense. Albert, what are you looking For? It seems to me on the geopolitical side, we’re almost going through almost a geopolitical consolidation a little bit. We’ve had so much drama over the past few weeks, but I almost feel like it’s coming down a bit.

AM: It has been coming down and that’s one of the reasons they’re able to sit there and pump the market so high. I think it was overbought, to be honest with you. I think this market even considering going back to 4500, you’re just going to have every fund out there shorting the heck out of it. So I would see them try to test 4470, 4480, 4490, maybe 4500, but after that, it’s probably downside from there.

TN: Okay. Great. Sam, what are you looking at?

SR: I’m looking at the five-year I think it’s a pretty interesting place to be and I think it’s going to be highly volatile. But that’s the one to watch with inflation and growth expectations beginning to be a little wobbly.

TN: Great. Guys, thanks so much. I really appreciate it. Have a great week ahead.

AM, SR, TS: Thanks.

Categories
Podcasts

Could Stagflation Be a Worry?

The Fed has finally increased interest rates hikes for the first time since 2018 by 25 basis points, but what are the implications for the market? Tony Nash, CEO of Complete Intelligence shares his thoughts on this

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/could-stagflation-be-a-worry on March 17, 2022.

Show Notes

SM: BFM 89 Nine. Good morning. You are listening to the Morning Run. It’s 706:00 A.m. On Thursday, the 17 March. I’m Shazana Mokhtar in studio today with Tan Chen Li and Wong Shou Ning. It’s looking quite foggy outside our studio windows here. So if it’s raining out there, we hope you stay safe on the road as always at this time of day. Let’s recap how global markets closed.

WSN: Yesterday in US, Dow was up 1.6%, SMP 500 up 2.2%, Nasdaq up 3.7%. Asian markets actually quite happening there. Nikki up 1.6%, Hong Kong and up 9%, and Shanghai Composite up 3.5%, STI up 1.7%. FBM KLCI up zero 9%.

SM: So I think we can see that the Asian markets are really rallying on the back of some news coming out of China, the fact that Chinese authorities are going to intervene to kind of support the market after this historic route that we’ve seen over the past few years.

TCL: So basically they came out with a statement with very positive market measures, one of which is that they’re going to emphasize financial stability. They’re not going to go after the technology companies. So as a result, all US China listed stocks actually sought the most. In fact, NASA Golden Dragon jumped 33% on Wednesday.

SM: All right, well, not only are we seeing announcements coming out of China, but we also saw the Fed make an announcement yesterday about the raising of rates. So joining us for some thoughts on where markets are headed, we have on the line Tony Nash, the CEO of Complete Intelligence. Tony, good morning. Thanks for joining us today. So let’s talk about the Fed announcement. After much anticipation, the Fed has finally increased rates for the first time since 2018 by 25 Bips. They also signaled six more hikes for this year. So markets seemed really relieved. We see the green rally across US markets. But has this truly been priced in?

TN: Well, I think people feared worse, but what you need to know is they raised by 25, but it was a range of 25 to 50, so there will be movement in that range over time.

TCL: Okay. But the Feds also said that they will be starting to shrink its US. 8.9 trillion billion balance sheet. Do you think that’s going to shape markets more than the height which have been talked about a lot?

TN: Yeah, I think the shrinking the balance sheet will have a big impact on the available currency in the market. Inflation is already killing available money. It’s eating people’s purchasing capability. But shrinking the balance sheet takes money out of circulation and so that will make the economy feel higher.

WSN: The US PPI numbers jumped 10% while the New York State manufacturing index recorded a steep drop in economic activity. Are we looking at possible staff stationary signs in the US economy?

TN: Yes, I think that’s a very real worry with the labor market where it is with elevated salaries, with inflation, the 10% CPI there or the PPI there. Sorry. And with manufacturing sluggish, really, supply chains are hurting manufacturing still, and that’s hurting available inventory. So we are really looking at a stagnationary environment.

SM: And Tony, oil prices have been on a roller coaster from a peak of $130 to below $100 a barrel. Now, can you give us some insight into the current supply demand dynamics underpinning these price levels?

TN: Yeah. Obviously, things are tight with the embargoes on Russia, not necessarily as tight in AMS, as crude as being sold in China and other places, but it’s certainly tight in Western markets. And we don’t necessarily see that alleviating anytime soon.

TCL: And just curious, right. About the Russian bond situation. Do you see that deteriorating? Perhaps.


And even the rubber coming under increasing pressure. It’s already down more than 40%.

TN: Yeah. And the rubber appreciated just a little bit. But the debt issue is a real problem, and I think that’s going to get worse before it gets better.

TCL: But will there be a contagion effect on global markets if the Russian bonds actually default?

TN: There would be. You’re already seeing impact on European banks, which are the banks that own the most Russian debt. So we’ve seen a lot of pressure there, but some of that has been alleviated in recent days, but still, that real debt pressure is there mostly for European banks.

SM: Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us some quick takes on some of the trends that are affecting markets, from the Fed raising of rates to what’s going to happen to Russian bonds, whether they’ll be able to make those payments.

TCL: Yeah, but staying on the topic of the Fed, I think the 25 Bips was pretty much anticipated. It was probably priced in. But what I find interesting is that they are continuing on their policy normalization, which is six rate hikes for the rest of the meetings this year. And they’re also launching a campaign to tackle the fastest inflation in four decades, even though I think there are concerns that global growth might be slowing down as a result of this Ukraine Russian war, not helped by the fact that China is actually some key cities like Sunshine and Shanghai are in lockdown. So clearly impacting the global supply chain.

WSN: And the Fed also said that they are going to allow the 8.9 trillion balance sheet to shrink at the coming meeting, but they didn’t elaborate more about this.

TCL: Yeah. The question is, can they engineer a soft lending to the world’s economy? Because you always have this concern that the Fed will over tighten, and when they over tighten, that might cause global markets to kind of crash. It’s a very delicate balance because inflation is extremely high, so it’s probably going to come in above 8% at the next reading.

WSN: Yes. CPI is about I think the last one was 7.9% in terms of inflation. Fed actually have a projection on it, and it’s 4.3% this year, which is still coming down to 2.3% in 2024.

TCL: I think this 4.3% is a bit like Malaysia CPI official figure of 2.5%. If you tell anybody that, they’ll start laughing.

WSN: Yeah, I think this is an inflation number, not the CPI number, though.

TCL: No, I know. But you have official numbers and unofficial numbers, right?

SM: That’s right.

TCL: But other I think interesting news Is coming out of China because we mentioned earlier the NASA Golden Dragon index hit a high of actually went up 32%, closing and even hang Seng yesterday closed up 9%. That’s a Whopper jump on a one day basis. And that’s very much driven by the fact that China came up with some key announcements to keep the markets going. And this was on the after a top financial policy committee Led by Vice President Yuha, who is the top economic official. So he made some promises, Stabilized better financial markets, Ease regulatory crackdown, Support property and technology companies While stimulating the economy.

WSN: But a lot of investors are also wondering, are they just words? What exactly are they going to do? They need more than just words. They need more action.

TCL: Yeah, but you just want to say this to calm markets down. It’s not the first time he’s done it. In 2008, this exact official said the same thing. It wasn’t really followed by a lot of action, but it’s a signal to the market that maybe they will ease off in terms of any crackdowns, which they did last year, Especially for the technology companies, Gaming companies, Healthcare companies, Education companies, when trying to pursue this common prosperity model. So I think they said, okay, we’re done with what we want. So you investors, maybe you don’t have to worry so much about policy risk.

SM: I think.

TCL: Yeah.

SM: So it’s going to be interesting to see whether this will actually put an end to the route. This could just be the calm before the storm, as some analysts say.

WSN: But they actually address all the five major issues that’s actually plaguing the market. They want to keep the stock market stable. Tech crackdown will be nearing an end, which you said resolve property risk support, overseas listings and also on us goods dialog on ADRs. So these are the things that have been plaguing investors, and they try to address all these concerns.

TCL: We will be asking Brock silvers These exact questions. He’s the chief investment officer Of Kayan capital to do tune in at 915. Maybe he might give us an indication of what to buy, actually, in regards to anything China related.

SM: All right. Well, it’s 7:14 in the morning. Stay tuned to BFM 89.9.

Categories
Week Ahead

The Week Ahead – 14 Mar 2022

This week, we saw commodities skyrocket then drop off. We saw crude oil hit levels not seen since 2008, with gasoline and home heating prices on everyone’s minds. The nickel market broke the LME. Chinese tech and real estate bloodbath. And – despite all of this – Janet Yellen assured us there will be no recession in the US. Quite a week.

As we said last week:

– Tracy called for commodity price volatility – across sectors

– Downside bias in equities with high volatility. Albert predicted 4200-4250 and pretty much nailed it.

– Sam said a Fed rate rise would become boring and talk of QT would disappear.

This episode we talked about mostly the energy commodities with the continuing Russia-Ukraine conflict. Can the US use other alternatives like the West African oil to replace Russian oil? What are the politics around Venezuelan oil and why is it the same as getting Russian oil?How about uranium — and can the US produce it and will the conflict affect rare earths? Is this war the reason for the US’s inflation? How will inflation actually play with voters in this year’s US election? Lastly, what’s happening in Chinese tech and real estate and why there’s a bloodbath and for how long will this continue?

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

For those who want to listen on Spotify:

https://open.spotify.com/episode/35aHRd7oVfj7zPvgZjyQXg?si=d74bba8f8d094e29

Follow The Week Ahead experts on Twitter:

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

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I appreciate if you could like and subscribe to our YouTube channel. And also please know that we have a special offer for Week Ahead viewers for CI Futures, which is our market data and forecast platform. CI Futures has about 800 assets across commodities, currencies and equity indices and a couple thousand economic variables. We track our error. We have very low error rates. So we’re offering CI Futures to Week Ahead viewers at a $50 a month promotion. You can see the URL right now. It’s completeintel.com/weekaheadpromo. That’s a 90% off of our usual price. So thanks for that.

So these week, guys, we saw commodities skyrocket and then drop off. We saw crude oil hit levels not seen since 2008. With gasoline and home heating prices really on everyone’s minds. The nickel market broke the LME, Chinese tech and real estate. We saw a blood bath there. And despite all of this, Janet yelling assured of us that there will be no recession in the US. So it was quite a week.

So let’s look at last week. Tracy called for commodity price volatility across sectors. So it wasn’t just an oil call, it was across sectors. And we saw that in spades. We talked about a downside bias in equities and high volatility. Albert predicted a 4242 50 range, and he pretty much nailed that. And then Sam said that a Fed rate rise would become pretty boring and talk of QT would kind of disappear. And we’ve really seen that happen over the past week. So, well done, guys. I think we need to really focus on inflation this week. Inflation and quantity prices are on everyone’s mind. Energy is the first kind of priority, but it’s really come across, like we said, nickel and other things.

So, Tracy, let’s start there. We have a viewer question from At Anton Fernandez, Russian oil, if you don’t mind helping us understand the environment for Russian oil and what’s happening there and some of the alternatives, which we’ve covered a little bit before, but also West Africa. Is West Africa viable within that? So if you don’t mind talking to us a little bit about what’s happening in the crude market and also help us with a little bit of understanding of the context of West Africa.

TS: Yeah. So if we look at the crude market in general, what we have been seeing, we’ve seen sanctions from Canada, which is basically political. They haven’t bought anything since 2019. We also saw Australia sanctioned oil, but they had only bought a million barrels over the last year. It’s nothing. The US only 600,000 bpd. That is nothing. And UK is going to take a year to get off oil because it’s 11% of their imports as opposed to 2% of our imports. That said, what we are seeing in this market is a lot of self sanctioning. Right.

So we’re saying we have nine Afromax Russian oil tankers basically sitting aisle because they can’t get insurance and nobody wants to pick up oil right from them. Actually, what is most surprising right now, I have to say, is that looking at Asian buyers, everybody thought that Asian buyers because it would be offered at such a discount, they would be buying this stuff up like crazy. But there was just an auction for SoKo, which is a very popular grade with South Korea, China, Singapore and Hawaii, and there was literally zero bids.

TN: Really? Wow.

TS: The next auction that we need to be looking for is ESPO, which is the most popular grade for China refiners. But if we see a zero bid there, that would be indicative of saying that we’re taking a lot of brush and barrels.

TN: Chinese we’re not seeing any interest there, at least so far.

TS: Right. Which is quite incredible because the Chinese have always decided to be apolitical. Right. And they don’t recognize Unilateral sanctions and they have stressed that. So whatever sanctions that the west has, China says we don’t care about that. We saw that with Iran as well.

TN: Right.

TS: But it’s pretty incredible to see this particular auction go at zero bid. Right. In regards to looking at West Africa, I’ve been talking about this since 2020. Niama is a very interesting place. There’s been a lot of offshore activity there. And so I think that is a place to be looking for. The problem is that looking at offshore projects, they take it’s a seven to ten year timeline, as opposed to something like Shell, which is six months to 18 months. But yes, there’s definitely opportunity.

TN: So is West African crew substitutional with Russian crude?

TS: No, it is not.

TN: Okay. So is it lighter, that sort of thing?

TS: It’s lighter. It’s lighter crude oil, what we’re looking at right now. And this is exactly why the US went to Venezuela and said, we’ll be willing to lift sanctions with you as long as you only sell us oil.

TN: Right.

TS: And the funny thing is that they have a very good relationship with Russia. The problem with this sort of relationship is that we could inadvertently be buying from Venezuela that is actually Russian oil.

TN: Sure. Exactly. So it’s an interesting point on Venezuela. Albert, what are the politics around that we just pick up the phone. Does Lincoln just have a conversation with Venezuela? We send a deputy sect down there, do a deal. How does that work? And is that palatable?

AM: No, it’s not palatable. It’s an absolute joke. Like Tracy said, the Russians have their tentacles all over Venezuelan oil, that you would be self sanctioning yourself from Russian oil globally, but then buying from Venezuela, which is going to be mixed because everybody in the industry knows that if you want to mix oil, you do it in the Caribbean, especially from sanctioned oil from overseas. So it’s not palatable. It’s a joke. I don’t understand what they’re trying to do. It’s just a Wally world at this point.

TN: I guess the thing that I’m continually astounded by is the diplomatic actions of the US administration from Anchorage through this week with Venezuela. They just seem to be tripping all over themselves. What am I missing? Like they just seem to be eroding credibility by the day. Is that fair to say?

AM: It’s more than fair. They’re throwing spaghetti at the wall and seeing what sticks based only upon their little echo chamber of ideology. And it’s extremely naive ideology when it comes to geopolitics or what they’re doing right now.

You can try to erase Russia and go play and then think that you can go to Iran and cut a deal with Iran, not understanding that Russia is going to sabotage that deal. Right. Like they did just today.

TN: Tight diplomatically. While we’re on this this week, the headline said that the UAE and Saudi declined having talks with Joe Biden this week. Is that true? Is the headline the reality of it? And from the time Biden came into office, he was not friendly to Saudi Arabia. So is this payback from that?

TS: No, I don’t think so. Sorry.

AM: Actually, I think it is that it is payback because you have the Saudis and the UAE that have security concerns with the Houthis and the Iranians. And if you’re sitting there approaching the Iranians playing all nice with them, what do you think MBS is going to do?

TS: I agree with Albert on that respect. I just want to interject that the OPEC + Alliance has mainly tried to stay apolitical. Right. So just because the United States says OPEC produce this much more, Saudi Arabia and UAE, which are both the producers that can produce more than the rest, had come out this week and said no, we’re in this alliance and this is how it is, which is totally understandable.

AM: Yeah, but Tracy, but the problem is OPEC saying that is one thing but not taking his call.

TS: No, I agree with you. I agree with you that we have burned bridges. I’m not disagreeing with you here whatsoever. I’m just taking a different kind of look at this.

TN: Sam, what’s your view on that? I’m not hearing you.

SR: Can you hear me now?

TN: Yes, sir.

SR: I would say the naivety of believing that you’re going to have a JCPOA deal or you’re going to be able to have some sort of comeback in terms of Venezuela. So you add the two of those together and who cares relative to what you need to replace Richmond Oil? I mean, it would be great and fine, whatever, but it’s nowhere near enough simply. Right. But it’s also a political naivety to believe that you’re going to have that type of dialogue and you’re going to have it quickly.

TN: Right.

SR: On the front of Saudi and UAE, I would say it is both an OPEC Plus. We’re not going to blow this up before it blows up on its own from the call it the allies of OPEC. Plus.

It’s also the UAE and Saudi is saying, remember, you want to be friends with us, US.

TN: Yeah.

SR: Don’t pretend you don’t want to be.

TN: Right.

SR: So I would say it’s politics in the best possible way on that front. And on Iran, JCPOA, and Venezuela, it was wishful thinking to think that the Russians were going to say no on both fronts.

TN: Well, and the Chinese. Right. I think there are a number of Venezuela has relationships with both Russia and China.

TS: That’s all I was saying is that OPEC is not going to give up that plus alliance. They’re going to try to stay apolitical. Right. Whatsoever. Do I think that the United States is pushing OPEC to Russia and China? Absolutely. Do you see the huge deal that Saudi Arabia made today? Absolutely. Right.

So they’re looking at investing further into China because they are being pushed away from the United States. So agree on that aspect. But I’m just trying to say that they do try to stay apolitical. If you look at the history of OPEC, Iran and Saudi Arabia have been able to subsist cohesively in the OPEC alliance, regardless of the years of them being enemies and having proxy wars against each other. That’s all I’m saying.

TN: Okay. Let’s move on to the next thing. There are a couple of questions about commodities, Tracy, and let’s just cover these really quickly. We have a question about uranium from @JSchwarz91. Will the US ban or will Russia restrict its uranium and could the US actually start producing uranium on its own? Is that a possibility?

TS: The US won’t restrict uranium. It hasn’t restricted uranium because we actually buy a significant amount of uranium from them. It’s easy to say we can skip 600 barrels per day of oil, but not as easy to do with uranium. We’ve stayed away from that.

Will Russia decide to not sell to us? Again, it’s about money, so probably not unless we really push a button in there. Can we produce that amount of uranium in the United States? Absolutely not.

TN: Interesting. Okay. Let’s also move on to rare Earth. So we have a question from @snyderkr0822. He’s asking about the impact of Russia and Ukraine on the availability of rare earths. Is that a factor or is rare Earth more of a China thing?

TS: That’s more of a China thing. We all have to watch to see if China sides with Russia and see how that market ends up. But really, they’re the largest producer in the world, and that’s who we are largely dependent on for rare earths.

TN: Okay, great. Thanks for that.

Now let’s move on to kind of this war driven inflation narrative that we’ve seen over the past a couple of weeks. We had February inflation come out today, and I feel almost as if we’re being tested as a trial balloon for an inflation narrative that inflation is kind of Russia’s fault.

So, Sam, can you talk us through some of the economics of this? Is inflation a new thing like did it just happened two weeks ago?

SR: No. So the inflation narrative going forward, there’s some validity to Russia being the reasoning behind an increase over a base case. Whatever you want to decide that base case is. But in February, January. December and November, those are not in any way related to Russia generally.

What’s interesting to me is how many people are kind of forgetting that, we kind of had a little bit of a log jam breakup in supply chains beginning to occur. It looks like we were going to get a little bit of respite from that narrative. But now if you looked at what’s going on in the neon market, if you look kind of six to twelve to 18 months down the road, it looks a lot less like we’re going to have that log jam broken up and a lot more like we’re going to have somewhat persistent inflation that there is no way for the Fed to solve. There’s no way for the ECB to solve BOJ, et cetera. You’re just going to have to continue to have this hawkish language to try to tamp down those longer term expectations.

TN: Demand destruction.

SR: Demand destruction. But it’s really hard to destroy demand for semiconductors when they’re in everything from my daughter’s doll to my laptop. It is very difficult to destroy that much demand and create an inflationary environment that is less toxic to the Fed or to the ECB without breaking something.

So if the Fed isn’t willing to break something in the next call it six months. They’re not going to break inflation. And if you print out six months from now, you’re breaking something into a midterm election.

TN: Right.

SR: So I’m so much skeptical on the Fed’s ability to do anything at this point.

TN: Right. That’s a great transition to Albert. So how is inflation playing with voters?

AM: Oh, it’s absolutely nuclear football. Allowing inflation to go this high is just going to be devastating to the Democratic Party and Joe Biden. But I want to go back because I have a couple of contentious things to say. Right.

TN: Please do.

SR: Oh, God! Right.

AM: So everyone is pricing in five, six, seven hikes at the moment. Right. But inflation at the moment has probably taken three of them out of the equation because the money’s gone. It’s erasing money left and right at the moment, from the federal point of view, it’s like, why really get rid of it all? That why really attack it when it’s doing our job for us where we only now have to hike three times. Right.

And on top of that, something even more contentious is everyone knows that once the VIX gets to a certain price, somebody sells it off. Right. Somebody industry. Right. But everybody knows that. And when everyone knows that, the house casino usually moves to a different area. What about oil? What if somebody with a big account has bought oil futures and every time it gets to the 120s or 130s, they just crush it for $1015 and the market rallies again.

So this artificial inflation that obviously we have real inflation just because of wage inflation and supply chain. But there’s a little bit of artificial, artificial aspect to it that I think the Fed has been using. Politically, it’s going to be extremely damaging. But for their point of view is if they can get over it and then get the rate hikes out of the way and then maybe probably start QE later in the summer, They could suck their voters at the beginning of the economy back on track again. I don’t think it’s going to work.

TN: Let’s say a month or so ago there was suspicion that we would be doing QT in say June, July. That’s off the table now because of the money that inflation is taken out of the market, right?

AM: Absolutely.

TN: But we’ll do rate hikes and have QE potentially?

AM: That’s right. That’s my point.

TN: You’re in an insane phase of economic history.

AM: It’s just look around, Tony. What’s not insane at the moment?

TN: Undoing this.

TS: That’s 100% fact.

TN: Undoing this is going to be insane. Okay, speaking of undoing crazy stuff, the Chinese techs and real estate stocks really have some problems this week.

So Albert, Sam, can you guys talk a little bit about that? And we have a tweet showing some stocks from Tencent, Alibaba, JD, other ones down 50, 60, 80%. So what’s happening with the tech blood bath in China?

SR: I’ll just do a quick start. Did you see the numbers coming out of JD? They were horrible. I mean, they were absolutely atrocious. So, yeah, you’re going to get a sell off in tech broadly across the board in China. When your numbers are horrible, then you’re going to have additional pressure put on the potential for delisting in the US and the general call it risk off move in markets. So you’ve got the trifecta of horrible for Chinese tech in a nutshell.

But the JD numbers were absolutely atrocious on a revenue growth line. And there’s no way to save Chinese tech if you’re going to have numbers like that. If you continue to have numbers like that, guess what? Look out, because the bottom is not in.

On the Chinese real estate front, I think Albert has a much better view on this than I do. But I would say if you’re going to have a risk off in tech, good luck having a risk on in real estate.

TN: Sorry. Let me stop you before I move on to real estate. So the tech story, what I’m pulling away from there is that it’s potentially disposable income story at the retail level, at the consumer level, and tells me that China is way overdue with its stimulus. Is that fair to say?

SR: That’s harder to say.

TN: Okay.

SR: I would be very careful in saying that the Chinese consumer is not there. China is coming with stimulus. If you’re trying to hit 5.5 by the end of this year and you’re going into a plum, guess what? You got to hit the pedal.

TN: Well, they better hurry up.

SR: They’ve got time, but they’re going to hit the pedal. And the question is how do they hit the pedal? And it’s got to be the consumer because they’re not going to hit it on real estate.

TN: No, they’re not. Going through some of the real estate.

AM: Yeah, well, I have a couple of points to make on. I have a couple of points about the tech. China tech. What was interesting is Sam is right. JD numbers were horrible. Right. This SEC Delisting thing pointed out five companies. Right. Just five. And the big ones. Gamble is a big one. And whatnot. But why only five? It happened to be the only five that actually did their accounting and submitted their accounting numbers. Right. And would that actually let a snowball effect out to say, Holy crap, they will take down every single Chinese number, Chinese company in the market. That’s why a lot of this actually sold off harder than you think it would sell off.

Going to the real estate market. I mean, 75% of China’s fault is real estate. So unless Xi wants pitchforks and torches coming after him, he’s going to have to stimulate the economy, something to support the real estate market.

TN: Yeah. It seems like it’s going to have to come hard and fast. I could be wrong. But, you know, with.

AM: I think by June. I think by June he’s got to do something. He has to.

SR: Hit through the middle.

AM: Absolutely.

TN: Good. And do you guys have any ideas on what exact forms that’s going to take? I mean, of course they’re new triple R, of course, taking a new infrastructure spending. They do the stuff. They announce it every other year. Are there other forms that you have in mind that will take that?

AM: I don’t, to be honest with you, that is $64 million question. To be honest. That’s a big question. That’s very complex.

SR: Yeah. And if I had the answer to that question, I probably wouldn’t be on this call.

TN: Come on, Sam. We know you would.

SR: I would be on a yacht somewhere.

TN: Yeah, that’s right.

TS: It’s interesting about that. If you look at the energy perspective, they just had a meeting and they totally decided that they’re going back to coal other than anything else. So that to me that signifies we have stress in other markets. Right. We cannot spend the money in other places. So we’re going to go back to what we do best, what we know best. And they also offered, if you look at internal documents that are offering huge discounts for going back into the coal industry or whatever. I just like to.

TN: So there’s still 73% coal for their power generation, something like that?

TS: Yes. So for them, they backtracked on COP. They need the money right now, in other words.

TN: Right. So the whole Paris agreement is a convenient agreement, is that what you’re saying?

TS: Correct.

TN: Okay, very good. It’s good to know that we’re all committed to the future. Okay. So guys, speaking of the future, finally, what do you view for the week ahead? Albert, let’s start with you. Maybe with China. Do you think there’s more to come with the blood bath in China?

AM: I think there’s another week or two to come with China blood bath. And I think that’s going to obviously lean on our equities going into Fed week.

TN: Right.

AM: So yeah, I think we’ll be another down week.

TN: Okay. And guys, what about US equities? Are we on a steady decline down to some number 4300 whatever it is, or are we kind of about there? What do you feel is going to happen over the next week?

AM: I think we’ll be sub 4000 by the end of the week at some point.

TN: Okay.

SR: Yeah. I wouldn’t be anything other than market neutral until immediately following the Fed meeting and then you just rip it to the upside.

TN: Okay.

AM: Yeah. The only thing that I have a concern about is we still have this Ukraine war going on which is giving outrageous headlines and then if the Fed hikes 25 basis points and then extremely hawkish tones while Putin is shelling Kiev.

TN: Right.

AM: It’s hard to rip until after that’s all settled.

TN: So sorry, Sam, in your scenario, are you saying the first half up until say Wednesday we have a pretty quiet market, then Thursday and Friday, things are pretty active to the?

SR: Oh no, I am not saying that you have a quiet market until the Fed. I’m saying you don’t want to take a position period until the Fed and then you either want to grip it or rip it one or the other.

AM: I agree with that one wholeheartedly.

TS: These markets will continue to be volatile until we have some resolution with this Ukraine Russia situation just because of all every day we’re seeing new sanctions against Russia and against commodities within Russia, at least for the commodity sector. I think we’ll continue to see volatility, but over the long term I’m still very bullish commodity.

TN: Okay. So Tracy, Sunday night, futures open, crude traded very high. Do you think there’s a possibility of us seeing another dramatic spike like that in the next week or two?

TS: I think that mostly been priced out of the market. I think that was priced in right. We saw a lot of that risk premium come out of the market, which I was very glad to see. I would personally be happy if we saw it traded in the 90s again before going into high demand season because I do think that we will trade higher on fundamentals. But it scares me when we have these big kick ups due to headlines and geopolitical risk.

So for me right now I would like to see this market come down a little bit. I’d like to see it pull back some and hopefully things will resolve quicker than sooner with this situation. But still going forward, I’m still very bullish this market.

TN: Okay. We didn’t talk at all about nickel and metal’s markets, but we saw the LME close today because of a nickel trade supposedly. Will we see those markets reopen and will we see nickel trade? Is it scheduled to trade again on Monday and is there the potential for commodity specific disruption and markets closing over the next week or two because of the volatility.

TS: There’s been a very high contention discussion right now, especially within the commodities industry. I would just say that it was kind of unprecedented what we saw there and the fact that they canceled all the trades. I would say that hedge funds are kind of backing away from that market right now because they’re skeptical of that market right now. But again, it’s not like I don’t want to say this is going to be the norm or anything like that.

TN: Okay.

TS: I think this was a one off crazy thing. It happened in the aluminum market years ago and you can even look it up on Wikipedia, right.

TN: Okay. Last thing week ahead with bonds. Sam, what are you thinking about bonds? We’ve seen the ten year go back up to about two. Are we going to see that continue to take up?

SR: I don’t know. I think the ten year is a little less interesting than the five year and the seven year.

TN: Okay.

SR: The five year and the seven year are really what you want to watch because if the fed goes 25 and goes really hawkish, it’s the five and the seven that you’re going to get the juice from and the ten and the 30 you’re going to get a little less so watch the five and seven. I think the five and seven are really interesting here. If you want to take a bet on a really hawkish Fed.

TN: Fantastic. Okay, guys. Thanks very much. Really appreciated. Have a great week ahead. Thank you very much.

AM: Okay. Bye.

SR: Thank you. Bye.

Categories
Week Ahead

The Week Ahead – 7 Mar 2022

Everyone’s eyes are on the Ukraine-Russia conflict in the past couple of weeks. How do traders make smart decisions in a geopolitically risky environment like this? Tracy Shuchart also explains why the fertilizer market is up 23% last week, what commodities are mostly impacted by the conflict, and how’s China’s energy relationship with Russia? Sam explains the effects on the emerging marketing of the different sanctions on Russia and why China’s exporting deflation is good for the US. Albert elaborates why the conflict is actually a “boom” for China.

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

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

https://open.spotify.com/episode/4SIvGPktSKT7ezaVPEUNPf?si=fcb635574d0047ba

Follow The Week Ahead experts on Twitter:

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

Transcript

TN: Hi and welcome to The Week Ahead. I’m Tony Nash and I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Thanks for joining us. Before we get started, I’d like to ask you to subscribe to our YouTube channel. And like this video helps us out to get visibility, helps you get notifications when we have a new video. So if you wouldn’t mind doing that right now, we would be grateful.

Also, we’re having a flash sale for CI Futures which is Complete Intelligence subscription product. We forecast about 800 markets assets, currencies, commodities, equity indices, and a couple of thousand economic variables with a very low error rate. We’re doing a flash sale right now for about $50 a month and you can see the URL right now, completintel.com/promo It’s a limited time flash sale so please get on that. That’s a 90% off rate on our usual price. So thanks for that.

So this week, guys, we saw commodities mooning. We saw exposure to Russia sovereign. Really a lot of sensitivity to that. Exposure to Russia commercial risk. A lot of sensitivity to that. Obviously the war in Ukraine is on the top of everyone’s mind. But we also had the removal of COVID restrictions in some key US States like New York. We had Joe Biden speak give the State of the Union address without a mask on. All this stuff, easing of national guidelines. So the risk aspect of COVID has gone in the US, but it’s largely gone unnnoticed. So while the war ranges on overseas, at home, we do have some regulation getting out of the way.

A few things we said last week. First, we said that Ukraine would get bloodier and the markets would be choppier. That’s happened. We said that equities would be marginally down. That’s happened and we said commodity prices would be higher and that’s really happened.

So in all of this, guys, the S&P 500 is only down about 15 points over the past week. So when you guys said it would be down marginally with a lot of volatility, you were bang on there. So very good job there.

So our first question today is really a basic one and I’d really like to get all of your different views on this. When we have geopolitical events like we have now, how do you guys make trading decisions? What do you pay attention to? Albert, do you want to get us started?

AM: Yes. Personally I view the market as we’re stuck on repeat right now, especially with the Ukraine and everything fundamentals to me right now. I mean, honestly don’t really mean much. And when we had the jobs number come out and then it was everyone just yawned about it because the nuclear power plants were getting firebound.

So for me I’m looking for the Fed to support the market to a certain degree and looking for geopolitical news events to come out and just scare the bejesus out of people.

TN: Okay. Tracy, what are you looking at? Sorry, Sam. What are you looking at?

SR: Yeah, I’ll jump in there 100% agree with Albert. It’s very difficult to trade when the market is just trading on headlines. It is a straight headline market. And does oil look great here? Yeah, but you get one good headline saying that it looks like tensions with Russia are declining and you’re going to have a $5 gap down in oil and probably get stopped out of your position.

To me, it’s one of those very scary moments for anyone who’s trying to trade in that you never know which way the headline is going to come in next. If you’re playing headlines, you’re going to get in trouble and you’re going to get in trouble pretty fast, unless you’re just getting lucky. So for me, headline driven markets are mostly about selling ball and spikes and getting out of the way on everything else.

TN: Tracy?

TS: Well, being that I mostly look at the commodity markets rather than obviously I look at broader markets. But for what I’m looking at, when I see this sort of volatility in the market, I think that you have to have a fundamental grasp of what is going on and what the trade differences are between countries so that you can kind of position yourself for a market change that is not subject to volatility, meaning that you have to know that the oil market is obviously going to be affected, for example. Right. No matter what dips are going to be bought in this market. So you have to have a conviction that this is going to be affected until something else changes, right?

TN: Yes. Tracy, let me dig in on that a little bit. You said something about Fertilizers. We don’t necessarily didn’t mention a specific company here, but you said something about Fertilizers earlier on Twitter today. Could you use that as an example of the type of analysis that you’re talking about?

TS: Yeah, absolutely. I mean, we saw the Fertilizer market rise 23% today. Russia is the second largest producer of Ammonium, Urea and potash, and the fifth largest producer of processed phosphates. And that country accounts for 23% of the global Ammonium export market. So what we saw in the Fertilizer market was an increase of 23% this week across the globe, not just in the United States, I mean, literally across the globe.

TN: I just wanted to cover this little bit because especially in social media, everyone’s an expert, right. So everyone’s a new political expert. Everyone overnight became a nuclear power expert, all this other stuff. And I just don’t want our viewers to fool themselves into believing that they can play these markets with certainty. But I like what you guys all said about you have to have a conviction. You have to have your stops in place. You have to understand when things are going. And headlines could go either way. So there’s a huge amount of risk out there. Right.

Is there anything else on this? Albert, what are you watching on the ground? How do you get information on the ground if you don’t have people? Are there reliable sources that you look at without having first hand research on the ground?

AM: No. Unfortunately, I don’t. I mean, we’ve come to this point where the nuclear plant attack and all of a sudden people are talking about radiation spikes and so on and so forth. And I actually had to get on Twitter and I’m just like, everybody, relax. Those things can withstand airplanes being hit.

A few bullets isn’t going to do the job. So for me, I personally have context in the region on the ground, both in Ukraine and Georgia. So for me, I get almost on the ground intelligence in real time. So that’s how I’m trading. That’s just the reality of it at the moment. The public is not going to be able to get that information. Right.

TN: Okay. This is great. I really appreciate this, guys. I think this is wisdom that comes from years of trading, but it’s also the reality that comes with dealing with geopolitics on a very intimate level. So thanks for that.

Let’s move on to commodities. We’ve seen commodities, wheat, especially skyrocket this week and last week. So a couple of questions here. Tracy, if you don’t mind starting us off. It seems like every commodity was green this week. I know there are a few that weren’t, but what commodities are impacted most by Russia, Ukraine?

TS: Well, so fertilizer, which I brought up earlier. And then you have aluminum, which was up 14.7% today, or this week. Pardon me. We have copper, 9.34%, neon gas, which is something that most people don’t look at. But Ukraine supplies 90% of the neon gas market for the chip making markets. Then we had Palladium up 37%. Not surprising, Russia supply 43% up that market.

TN: You’ve been talking about Palladium for weeks, though. So anybody listening to you wouldn’t be surprised by this, right?

TS: Right. Not at all. I’ve been talking about this for a very long time. And actually we’re seeing platinum get a little bit of a bid because if you look at the automotive markets, Palladium is a huge thing in a catalytic converter. Right. And so we’re starting to see because prices have been so elevated for the last few years, we’re seeing automakers finally start to retool a bit. And so that’s going to give a little bit of a lift to the platinum markets.

Natural gas obviously is up. Right. We all know about that. Oil obviously up. We have nickel up 9%. The other interesting thing is coal. Russia is a material coal supplier at 15% of the global market. And Europe gets 30% of their imports from the met coal market from Russia and 60% from the thermal coal market. So they’re going to be looking elsewhere for other supplies because they don’t want to have all their eggs in one basket. Where you can have everything in coal and that gas and depend on Russia.

I do want to know on the natural gas market, although there have been rumors Yamal was shut down or whatever. But overall, Jamal is only one pipeline into Europe. Gas supplies have still been consistent and steady this whole time into Europe via different pipelines through Russia.

TN: So weird.

TS: So nobody’s caught off of gas. Right. That’s just weird. They’re on other sides of the war, but one is still supplying the other side energy. I just think that whole thing is very.

AM: Yeah, Tony, you know what concerns me, actually, this is a question for Tracy, too, is like the super spikes in commodities are starting to concern me specifically because of wheat, because obviously that’s food. And once people start getting stressed on food supplies, political problems can happen. I think even today, Hungary decided that they cut off all exports of foods, of wheat and grains because of the concern of spiking prices.

Tracy, where do we see wheat possibly even topping off at this point, especially if Ukraine and Russia go at it for an extended period of time, like, say, three to four weeks?

TS: Yeah. I mean, hopefully they won’t. But as far as that’s concerned, we’re looking at the Black Sea right now because exports are halted, because there’s conflict going on, this is what I think European wheat and US wheat has been limited up literally every day this week. Right.

So that’s going to be a problem that’s going to cause inflation, food inflation elsewhere. And let’s not forget that’s how the Arab Spring started as well. Right. So this is very much a concern globally on a macro sense, on food prices, energy prices, especially when we’re looking at kind of a global downturn in the market. And that’s a whole another discussion we can get in another week, but definitely it’s a concern right now.

TN: Let’s dig a little bit deeper into that. We have a viewer question from @Ramrulez. And Sam, can you take a look at this? The impact of sanctions on Russia, on emerging economies. So where are we seeing impacts of, say, wheat prices? I know Albert brought up Hungary, but what are we seeing in, say, emerging markets and other places that this is already hitting them?

SR: I don’t know that there are places that it’s already hitting, mostly because you’re going to have imported wheat. Wheat right now is being harvested in Ukraine, Hungary, Russia, etc. And that’s going to be more of a late spring summer story when you begin to actually have to import your additional food supplies.

So where would you see it? You’d see it in Egypt. Egypt is a significant importer of both Russian and Ukrainian wheat. You’re going to see it on the cornside, too. It’s worth remembering that Ukraine is a significant exporter of corn. You’re going to see it in Semple our way up, which is going to spill over into other markets because you’re going to have to, if there is no resolution or planting season, you’re going to have to replace some flour, oil with something else. So you’re going to have that issue to deal with as well.

So I don’t know that you’ve seen the spillovers yet. You will see spillovers particularly in North Africa, other significant importers of foodstuffs. The other thing to remember is it could potentially be a marginal benefit to some emerging markets. As you see, net exporters of coal, et cetera, become incremental sources for replacement for both Ukraine and Russia. So I think it’s something to keep an eye on both on the food price front, but also on the front of it’s going to be good for some. It’s going to be very bad for others.

TN: Okay. Thanks for that. Hey, before we move on from commodities, Tracy, I want to roll back to this viewer question we have from @YoungerBolling. Yes. What are the other sources of crude, grade wise, that can replace Russian crude for US refineries? This is a common question, and I’m sure you can answer it very quickly. So where else can people look to get Russian grade crude?

TS: We get kind of the sludgy stuff from them. Right. So the best, most convenient, easiest place to get it from is Canada. Right. We can get some heavier crude grades from Mexico, but they’re having some political problems there and it’s coming up. So really the easiest place we can look to is to Canada. So opening import lines from Canada is really our best option since they’re on our border.

TN: Didn’t the US cancel a pipeline from Canada about a year ago?

TS: Something decided. Yeah.

TN: Okay. Thanks for that. And then moving to another question, we spoke a bit about China last week, and I’m curious for any further thoughts that the panel has on China in light of last week’s, of this past week events. We do have a viewer question to get us started off. It’s from @HJCdarkhorse1. He says perspectives on Chinese Yuan. But before we get into that, Tracy, let’s talk a little bit about China’s energy relationship with Russia. What do you see happening on that front?

TS: Right. First of all, if we’re looking at the oil industry, China is Russia’s largest importer. Right. I think that anything that comes off the market wise via the west, that China will gladly scoop up at a $28 discount that they’re currently offering. Right. That is interesting in that respect.

There are still 1.5 million barrels kind of off the market. I want to stress nobody has sanctioned oil or energy at all so far. UK, EU, US. That said that people are hesitant and anticipating, and it’s hard to get banknotes right now to get those deals going through. But China is definitely their largest trading partner. China definitely loves cheap oil. So we’re going to continue buying from them no matter what.

TN: Are their pipelines between Russia and China?

TS: There are, but not like not enough. Not enough.

TN: Okay.

AM: Did they just cut a deal for a new pipeline that’s going to pretty much be equal. Sorry. That’s for net gas, that equals North Korean, too.

TN: Did they also come to some agreement recently about buying crude in CNY? Did that happen in the past?

TS: No, that was buying jet fuel.

TN: Okay.

TS: What they said is if we’re in your airport, we’ll buy in your currency. If you’re in our airport, you’ll buy in our currency, which is not that big. Literally.

TN: To some people’s dismay, the US dollar is still the currency for energy.

TS: Since we’re talking about currencies, you and I have talked about CNY for a long time. So can you give us kind of some perspectives on that? I know we had a question about that as well.

TN: Sure. So CNY. Chinese Yuan is a controlled currency. It’s not a freely floating currency. There is an offshore currency called CNH that is, we’ll say marginally floating currency that is linked to the CNY. But the CNY is strictly managed by the PBOC. And when you have a managed currency, it’s devalued. Okay. It’s appreciated and it’s devalued.

And so what’s happened over the last two years is the CNY has appreciated dramatically. And a big part of that is so that they can buy commodities, knowing that commodities would spike starting in the second quarter of 2020, China’s appreciated CNY so they could hoard those commodities, which they’ve done. Okay.

What’s happened? Well, Chinese exporters have suffered a bit because of the appreciated CNY. On a relative basis, they’re paying higher prices, but their experts have been up, too. So they’re not hurt too much. But we have a lot of things happening in China with a big political meeting in November to where they’re starting to spend in a big way, fiscal spending. We’ve also expected since probably August of ’21, we’ve been talking about China starting to devalue the CNY at the end of first quarter or early second quarter of this year.

So what that will do is it will make things a lot easier for exporters. And so exporters will be happy. There’ll be a lot of fiscal stimulus, a lot of monetary stimulus. So that just in time for this political meeting, everyone domestically in China is pretty happy. So we expect a lot of stimulus and a devalued CNY is a big part of that.

SR: And just to kind of jump on that really fast, that’s a positive on the US inflation fighting front. It’s significant positive. We are going to get.

TS: If you’re exporting deflation, that’s fantastic.

SR: Exactly. So when China goes back to to exporting deflation instead of exporting inflation, that’s going to be a completely different ballgame from what we’ve seen for the past year and a half.

TN: That’s a very good thing. Okay, guys, anything else on China, Albert? Do you have any anything on China that you want to add?

AM: Honestly for China? I don’t really see people talking about the fact that this entire Ukraine and Russia war has been a boom for China. They’re getting cheaper commodities. They’re getting a tighter relationship with Russia, although it’s going to be debatable that Russia is going to be a shell of what it was after all this. But still for China, they’re sitting pretty at the moment. I mean, any other place in the world where the Russians had their hands in the domestic economies of countries that China also did is now going to have to take a step back and allow the Chinese to get their banks financing different countries projects. It’s going to be unbelievable for China in the next couple of years.

TN: Yeah. I wonder if the Belt and Road is going to rebuild Ukraine. It’s a cynical question, but I think it’s an opportunity for China to do something like that on infrastructure.

AM: They’re going to have to because Russia is going to have nothing left economically. Right.

SR: And to begin with, there was a $1.58 trillion economy.

TN: Right. But it’s a very detailed answer to that simple question. But yeah, I think it is a medium term opportunity for China as well, not just in getting cheap commodities now or discounted commodities, we’ll say now, but also long term for their financial system, for their infrastructure system and other things. Right.

AM: Got you.

TN: Okay. So what guys are we looking forward to in the week ahead? Tracy, what do you see over the next week?

TS: Again, I’m going to say volatility. I think markets are going to be very volatile, just like we saw this last week. We had eight to ten dollar moves in crude oil like the blink of an eye. I think it’s going to continue to kind of see that in the commodities markets until there’s some sort of resolution to this Ukraine-Russia crisis because there’s too many commodity sectors involved in this.

TN: Right. Sam, same for you, but you talk about the kind of twos and ten years a couple of weeks ago, and I’m curious what your observation is there in addition to other things?

SR: Yeah. The front end of the US curve has been nuts this week, and I think you can kind of attribute that back to two reasons. One, we sucked out all of the Russian reserves from being able to participate in the market, period, full stop. You probably have a significant amount of hoarding on the front end from Russian banks. Call it the zero to three year type timeframe. That’s where they typically play. So I think you continue to see volatility there. That’s going to be absolutely insane.

The Fed. I don’t think the Fed is going to be all that surprising. The Fed was really interesting three weeks ago, and now it’s kind of boring. You’re going to get 25 bps. You’re going to get some gangs on QT. Nobody cares. We’ve kind of moved on from that.

TN: That’s interesting, though, right? Two months ago, 25 basis points was catastrophic. Kind of.

SR: Yes.

TN: And now it’s a faded company and nobody cares.

SR: Nobody cares. You had almost 700 jobs. 700,000 jobs created in February. We didn’t even talk about that. Nobody cares. Cool. 700k consecration up, whatever.

To Tracy’s point, I think it’s kind of a moss, right? More of the same. And just until you get some sort of resolution and some sort of clarity on how long we’re going to have these sanctions, this market is this market. It’s going to continue to be highly volatile and there’s no end of it in sight.

TN: Okay. Very good. And then, Albert, I’m going to ask you specifically about equities. So if we’re getting more of the same but we have upward pressure on commodities, what do you think is going to happen domestically with US equities? Do you think we’re going to see more of the same volatility? Do we have a downside bias? Do we have an upside bias? Where do you see things over the next week?

AM: Well, I mean, it’s hard to say that we have an upside bias at the moment with so much volatility. But from all my indications, I think Putin’s going to up the war rhetoric and surgeons in Ukraine, I think equities are going to have to come down to, I don’t know, 4200 4250. Right. And then we start talking to the start talking about the fed like Sam was talking 25 basis points is now the consensus. But I will have to say Jerome Powell said he was hoping that inflation is not a big problem when those meetings come. So don’t be surprised if it’s a 50 basis point hike.

TN: I think as an outlier, you could be right. I think it’s a possibility. I think it’s greater than 0%.

AM: If we’re talking about commodity supersight commodity surging, with all this volatility in this war, how is inflation going to come down in the next couple of weeks?

TN: Well, just ask a very direct question. A 50 basis point hike is intended to kill demand, right?

AM: Yes.

TN: That’s all it’s intended to do is kill demand.

AM: Of course. But from their perspective, you killed demand, you killed inflation. I don’t know if that’s going to, I doubt it’s going to work, but that’s their narrative.

TN: Right. Okay. Very good, guys. Thank you very much. Good luck in the next week and forgot for anybody viewing. Don’t forget about our CIF futures flash sale at completeintel.com/promo and see you next week. Thank you.

TS: Thank you.

AM: Thanks, Tony.

SR: Thank you.

Categories
Week Ahead

The Week Ahead – 28 Feb 2022

Last week’s big news is Ukraine and Russia. So in this episode, we want to talk you through some context and what this means for markets in the near term. First, the guys talked about the most surprising thing that happened and then we moved on to answer a few viewer questions like what’s the implication of Russia being disconnected from SWIFT? Will anything change between Europe and China? Will the Russia-Ukraine inspire China to actually invade Taiwan? How disrupted the energy markets will be? And finally, what happens to the world economy – Fed, QE, QT, consumers, etc.?

Listen to this episode on Spotify

https://open.spotify.com/episode/6ynTFaOtWF6rl1xNKX1Cnq?si=439f4977cb3743fd

Follow The Week Ahead experts on Twitter:

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

Transcript

TN: Hello. Welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I’d like to ask you to subscribe to our YouTube channel. And like this video. It helps us with visibility and you get reminded when a new episode is out. So thanks for doing that right now.

We had a lot on this week, especially around Ukraine. So today we’re really focused on Ukraine. We want you to understand the context around Ukraine. We want you to understand what it means for markets. And we’re going to take a lot of your questions that we’ve been gathering off of Twitter.

So just a quick recap of what we said last week. Coming out of last week’s episode, we said it’s not a time to make big decisions. We said to keep risk tight and be careful of volatility. And we said that crude markets would move sideways. So we did kind of come into this assuming risk would be there this week. And obviously, we saw that.

So first, guys, can you walk us through some of your observations of the past week? What are you seeing directly in and around Ukraine or Ukraine, and how is that affecting markets? And as each one of you talk, Albert, I want to start with you, but name something that surprised you most in the past week in markets. Okay. Can you give us a quick overview? I know you’ve got deep networks in that region. So can you talk to us a little bit about what you’re hearing and seeing there?

AM: Well, I mean, concerning Ukraine and the markets. What I was most surprised and a little bit taken aback by was the amount of mainstream media just decorations of World War Three and whatnot then how much it affected the markets? So much so that you have to look at the markets and say what is going on?

Because this is just not normal behavior for markets to respond to a situation in the Ukraine that’s really kind of not really attached to the United States market at the moment. I mean, it isn’t commodities and that’s something Tracy will get into. But it was an overabundance of bad news, just an overdrive. And that’s what actually really took me aback.

TN: Good opportunities out there.

AM: There is absolutely good opportunities. But the problem is the volatility goes way up higher. The VIX exploded. You can’t get into options because they’re just far too expensive. You’re going to get burned doing that. And what do you do? Maybe sitting on your hands is the proper thing to do until things stabilize. But yes, there were actually great opportunities.

TN: What are you hearing on the ground, Albert? I know you’re really close to that part of the world. So what are you hearing on the ground?

AM: Well, the situation is really fluid and really tense at the moment. I think the Russians were taken aback. I know that the Russians were taken aback about the actual veracity of defense by the Ukrainians. Their main objective is to take Mariupol and then take Odessa. That is their number one and number two objective. Their next objective is to take not really to take you because I don’t think they can actually do it unless they want to do some kind of redo of the Chech and guerrilla warfare and just start massacring people. They’re not in that business at the moment. The world’s eyes are on it.

So I think political change, maybe snap elections is what they’re probably going for in Kiev just to surround it, stress the city, stress the residents, force a change where Western governments can’t get a bigger say in the matter on a nation that’s right on the doorstep.

TN: Okay, so I’m seeing on say on social media like TikTok videos of burned out Russian tanks and all these things, and I think it seems to me that Russia is losing the PR war right now and that’s really important in the early days and with different demographics even within Russia. Do you think Russia or Putin kind of underappreciated the impact that social media would have, at least on the early days of this?

AM: Of course, Russia has a vast network globally of PR campaigns in the west. So for him, it’s definitely a concern where you have negative images of Russia, Russia’s military trying to enact power projection. It’s a little bit daunting for him at the moment.

However, from a military strategic point of view, we don’t know exactly what their exact strategy is. Whereas they’re just trying to expand Ukrainian defenses, trying to get the best of their defenses out already. So they have a shortage of supply later on. That’s what most professionals would say is happening.

So we really have to see over the weekend to see what kind of resources have been expended by the Russians trying to take back Mariupol and Odessa.

TN: Do you think the Ukrainians can get stuff resupplied? Do you think they would have any difficulty getting stuff resupplied from the west?

AM: It’s totally up to the west and what they’re going to supply them and how they’re going to supply them. I’m sure that the west have Special Forces sprinkled without inside of Kiev assisting as advisers to the defense forces there. So it just depends on the will of the Europeans at the moment.

TN: Okay, Sam, what have you seen this week in markets that’s kind of gotten your attention or surprise you?

SR: I would say what really caught my attention were two things. One, how quickly Wheat went up and how far it went up and then how quickly Wheat went down and how far it went down.

There were two days where Wheat was just skyrocketing. I think it was 5.5% day followed by negative. I forget where it closed, but a significant negative day in the six to range at a minimum. That really caught my attention.

Ukraine is incredibly important on the wheat front. That’s a pretty important one. And then I would say how quickly and how far gold went. Right. Gold was almost $2,000, and now it’s below where it was prior to the invasion, and it did that all in a day. I mean, that was an incredible move in my book and somewhat shocking. And I think it was kind of interesting when people caught on that if you cut off Russia from being able to really sell, call it dollars, Euros, et cetera, on the market openly, it’s going to potentially have to sell gold if this thing drags out.

So you have an overhang of gold in a war scenario. Not necessarily, I call it a tailwind. I thought that was a really interesting call it knee jerk reaction up in gold, and then kind of a realization of, oh, crap, this might not be the thing to own here.

And then the final thing and I’ll make this one quick is crypto and how war was supposed to be great for crypto. And as the war started, you saw crypto sell off pretty hard. I think it’s interesting on two fronts. One, there’s a significant amount of crypto activity in Ukraine and Russia.

Russia is the second largest country when it comes to providing hash rate to the market for Bitcoin. And if there’s any sort of disruption there, all of a sudden the US could become 50% of the hash rate awfully quickly, which could become an interesting scenario there.

TN: How does the hash rate for people who aren’t crypto experts? How does the hash rate equate to say, the crypto price?

SR: It makes it, call it’s basically an efficiency mechanism where you can either do transactions more quickly, more efficiently, and somewhat of a lower cost. That’s basically what you do.

So if you lower the hash rate, you increase the cost of doing transactions and slow the general system down.

TN: Okay, great.

AM: This is interesting, Tony, because this actually leads into a lot of my arguments against crypto being decentralized, saying, hey, when push comes to shove, governments have control of the networks and the financial system. You can’t get away from that.

TN: Yeah. And if you cut off the electricity supply, it becomes even more difficult.

AM: Nearly impossible. Puerto Rico.

TS: And if you’re Russia that has control of the entire Internet, you can cut off whatever sites that you want. Right?

TN: Right.

SR: Yeah, that’s right. Yeah. It was interesting. There was something floating around yesterday where it appeared that Russia was at least partially geofencing their country from the rest of the world. And if it does that, that could become problematic if it does it in a meaningful way for crypto.

TN: Sure. And taking down the RT site doesn’t help their paranoia there. Right. Tracy, what happened for you over the week? What’s one of your observations that really kind of surprised you?

TS: Well, I mean, to be honest, because I’m focused on the commodity side of everything, pretty much how I saw the markets going or how I pretty much thought how the markets were going to go. Right. I posted a bunch of stuff on Twitter.

TN: You saw all this coming?

TS: No. Well, I didn’t do this. I don’t want to sound like arrogant. I focus on energy, metals, materials, agriculture. And because Ukraine and Russia are such large hubs for all of these commodities, wasn’t really surprising to me that we saw a jump in all of these.

TN: Yeah. Were you surprised the magnitude of the jump?

TS: Yes. And in some respects, I actually expected Palladium to have a bigger jump than it did because Rush is 43% of that global markets and wheat went far beyond bonkers that I thought it was going to go.

Was I surprised about oil? No. On the upside and on the downside today.

TN: Great. Okay, very good. Let’s jump into some of these viewer questions. You guys know that we saw a lot of viewer questions at the start of this.

So the first one I’m going to read out is from Keith Snyder. It’s @snyderkr0822. He says, what would the implications be of disconnecting Russia from SWIFT?

I’ve inspired your knowledge and have to be informed. So there’s been a lot of talk about SWIFT over the past few days. Sam, do you have some insight there on what would happen if Russia was taken out of the SWIFT network?

SR: It would be less bad than it would have been call it three years ago. Russia has somewhat insulated themselves from SWIFT, but not entirely by no means. Right. The SWIFT system can cut you off from dollar denominated, at least dollar denominated transactions.

That’s a pretty important thing, particularly when you’re selling a lot of things that are denominated in dollars. Right. Oil, et cetera. That becomes somewhat problematic. I would say that would be a very significant hit to Russia.

And it would also be a significant hit. And by significant hit, I mean that’s putting you on par with Iran and Cuba. Right. That’s basically putting you at Code E country without saying it. That’s Iran, your Cuba, see you later, bye.

I think that what I would be paying very close attention to is the reaction of European banks. That’s $330 billion worth of Russian liabilities assets on their books. So you’ve got to figure something out there pretty quickly because those books are going to get smacked if you can’t actually get on the SWIFT system.

TN: Okay. And Tracy, if they were taken off a SWIFT on Friday, Germany said that they would be okay with imposing that sanction, how would Germany pay for its electricity?

TS: I mean, Germany said that with a caveat, let’s say, because they did say we’re going to look at this, but we need to look at the implications of this. So obviously the problem there in lies that if you take a Rush off SWIFT, then Europe is screwed energy wise. Right? Unless they choose to scramble and make long term contracts with, say, the United States.

They could go through the United States. They could go through Azerbaijan on the Tap pipeline. They could go through Israel and Egypt if they wanted to, through the Southern gas quarter. I mean, there are options for them.

The problem is that they should have been looking at long term contracts this summer when we already knew that Nordstream Two was going to be delayed.

TN: Four, three, four years ago. I mean, they’ve had this optionality on the table for a long time.

TS: But those options are still on the table for them. But by delaying SWIFT, if you cut Rush off SWIFT, the big problem Europe has to decide is do we cut off SWIFT and hurt ourselves or do we hurt Russia more? And I could argue that both ways. Anybody could argue that both ways. But that’s a big decision that they have to make.

TN: Well, everybody hurts, right? That would not be a sanction that would be pain free for anybody.

TS: Right. Except maybe the US.

AM: Well, Tony, despite the rogue status of Russia, it’s still well attached to the Western financial system. It’s not seen as able or even as aggressive as the Chinese are and detach it from the financial system.

There would be a lot of problems if they were banned from SWIFT. But it’s certainly a valid deterrent if the west wants to actually use it. They keep a lot of their bank and central bank money in the Euro dollar market. So no SWIFT would mean no more Treasuries, but they’d just move into the Euro dollars itself.

Maybe that’s why they were buying gold because of this tension that they saw coming. It’s a risk to their global market.

TN: Sure. Okay, let’s move to China now. We’ve got a few questions on China. We’ve got one from @NathanDallon. He says, does anything in Europe change the situation with China?

There’s another one from Ritesh @chorSipahi, he says question for Samuel Rines and Albert, Ritesh. I’m not taking offense at this. What is the deterrence for China not to invade Taiwan or now to invade Taiwan?

And then we’ve got another one from Rich @rm_ua09. How could China benefit the most out of the Russia Ukraine situation? A, supporting Ukraine in some manner, B, remaining neutral, or C, taking measures to whether Putin.

So there’s a broad spectrum of questions there, guys.

TS: Take the first one, I think, Tony.

TN: Okay, let’s go for it. What happens in Europe?

AM: Well, Europe. I think that the Europeans are going to be actually more dependent on China trade after this because they’re seeing a problem with the Russians politically.

You can’t sit there and tell me that they’re going to be able to support the Russians like they were in trade, whether it’s commodities or whatnot on steel. I mean, name your commodity. Name your.

TN: Chinese already own like 70% of the global steel market. So is it going to make that much of a difference?

AM: It’s, well, I mean, they still diversify. They’re still going to have to play ball in the global trade. So I think at this point, politically, Russia’s poisonous, and then you’re going to have to steer even more towards China.

TN: Right. So, yeah, it seems to me that China could actually use this as an opportunity to distance itself from Russia. Right. If it goes bad, China is very silent right now. And if it goes bad, they could distance themselves from Russia and make some really tight allies in Europe at Russia’s expense. Does that make sense to you guys?

AM: It does to me.

SR: 100%. I think that would be the spare play from China in a lot of ways, because you get two things. You’re going to get tighter ties to Europe, which diversifies you somewhat away from the US even more. It gives you call it a barrier to the United States and whatever the US wants to do, and it also, to a certain extent, raises your profile on the international stage. Right.

TN: That’s key. China really wants to be seen as a credible diplomatic player and I think there’s still a bit of a chip on their shoulder about not being seen as an equal with a lot of the larger Western Nations. So I think your last point is really important.

There seems to be a view that Russia invading Ukraine somehow enables China to invade Taiwan. What are your thoughts on that?

AM: I absolutely disagree with that wholeheartedly. I think the two situations are nothing alike at the moment. I mean, Ukraine is in Russia’s eyes, it’s own territory. Same as is China views Taiwan.

However, Taiwan has a much more active defense military force and more of a backing from not only the US, but Australia, Japan, India. That’s a problem for the Chinese, too. So I think the two. I don’t like to draw a comparison between the two. I don’t think there is anything related to it.

TN: Sam?

SR: I have almost nothing to add beyond that. And I think the one country that’s really interesting in there is India, because India did not step up on the Ukrainian front and India would step up on the Taiwan front.

AM: Yeah. And on top of that, on top of that, let’s just be realistic here. We know that the Chinese probably have military observers inside of Ukraine watching and taking notes.

TN: Sure. How to conduct right now. If you’re a Chinese PLA officer and you’re looking at what’s happening in Russia versus what the United States did in Iraq, what would be your assessment? Russia gives us nothing against the United States.

The United States is a juggernaut. That’s what I think nobody’s even talking about.

TN: Yeah. If Russia didn’t just roll into Ukraine and take it over in 24 hours, what kind of model are they for China?

AM: And that’s on their border, Tony, that’s on their border.

TN: Exactly. No, exactly. So logistically, Russia’s logistic supply chain for their military, it seems like it’s pretty horrific. Their intelligence, like everything. It just seems like a mishmash of let’s just go get them.

AM: They are a professional military force. They have budget problems. That’s what. If they really wanted to go into Ukraine and just smash the place, they could. But the problem is you’d have to kill many civilians in the meantime, which they can’t do that.

So the Chinese are sitting there probably looking at like, what do we do here? Who is this military partner that we’re actually partnering up against the United States? It’s not sufficient.

TN: Yeah. It seems to me that on some level, going back to the social media comment I made, Russia is kind of embarrassing itself. China doesn’t want to be seen allied with someone who’s embarrassing themselves. Right. They’re happy to.

TS: That’s why they’ve been so quiet. They haven’t said nothing.

TN: Yes. And I think China is always looking also looking at how unified is the world’s response against Ukraine. Right. So if they were to go after Taiwan, how unified would the response be?

So going back to what I said earlier, I think China has a real opportunity here to distance itself from Russia, to play nice on Taiwan and really benefit from trade and finance and diplomatic relationships.

AM: 100%.

TN: Tracy, do you have anything else on that on China? Any other thoughts?

TS: No. I think you guys…

TN: Awesome. Okay, very good. Let’s go to the next ones. Okay. Tracy, these are all energy related. So primarily, if we look at this @DaveRubin15, he says, what are the energy implications if Ukraine has no choice but to make this a war of attrition rather than surrender, bleeding Russia out from exposure and can this catalyze an energy super cycle? Okay.

And then we’ve got another one from Giovanni Ponzetto asking, assuming that gas from Russia is kept flowing at the same rate of the past couple of months, will the EU be able to restock gas reserve? So, Tracy, you’re the expert here. Take it away.

TS: All right. So for the first one, there are two extreme scenarios that could happen. Either somebody blows up a pipeline by accident or somebody blows it up on purpose and blames the other side. And if you look at the chart that’s on the screen right now, you can see the choke points where this could easily happen to really hurt gas flows into Europe.

That said, if we look at the role of Ukraine in the gas markets, they’re much smaller today than they were in the 1990s. Right. There was a time when 90% of gas that came from Russia to Europe went through Ukraine. And now it’s about less than a quarter percent.

The other extreme is that Russia just cuts off gas flows entirely. Right. And that hurts EU way more than it hurts Russia because they don’t really actually make that much money selling gas. They make way more money selling oil. They have $640 billion in reserves. They could live without the gas for a few months. And that’s kind of why the US has had problems getting the Europeans on board with sanctions against existing flows from Europe.

In addition, Europe also has other options. They can go again to the United States, Azerbaijan or Israel and Europe.

Now there are about 2.9 million barrels at risk of oil exports that are exported from Russia to the United States and Europe, which is about 30% of their exports. And that would be much more catastrophic than, say, natural gas in the oil markets. But as far as oil flows through Ukraine, it’s very limited. Again, you can see the map.

TN: Okay.

TS: The second question.

AM: Sorry about that. I had a related question for you. How possible is it or how necessary do you think it would be for the Italians to take the initiative and become Europe’s energy hub?

TS: Actually, they really could with Greece. Right. And I’ve been talking about the Southern gas border for a very long time, which branches off, you could go Cypress into Greece and then you could go straight into Italy from the Southern gas corridor.

I think that region is really something you really want to keep an eye on right now. And I’ve kind of been talking about this for a couple of years right now because there’s just so much supply. And although people say that region is geopolitically unstable, so is everywhere. But that’s never really stopped oil and gas flows.

Personally, I think as an investor, I would be looking at that particular area of the world because they really have a lot of gas supply. And now we have pipelines built, and I think it’s more stable than, say, Ukraine, Azerbaijan, that have had a lot.

AM: You know what’s funny, though, Tracy, is every time the Libyans or Egyptians or whoever try to export gas and oil and whatnot, the Russian Wagner conveniently shows up.

TS: Conveniently shows up. Right. Exactly.

AM: Here we are, guys.

TS: Exactly. For the second question, as far as, I think that you were asking about gas flows, if Europe could restock. Absolutely. They can restock because of the things that, because of the alternative sources that I mentioned before, and we’re headed into a season that we don’t need as much. So I think that as we head into summer, it will not be as dire as the dead of winter.

TN: Very good. Okay. Thanks for that.

Sam, let’s look at some economic questions now. We’re looking at from @_0001337 probability of rate hikes and tightening now. We just let inflation run amok. When we see price controls. That’s one question. There’s another one, wondering how North America will go about continuing to grow consumerism, things like cuts on gas taxes, that sort of thing.

And there was another question about gold, which you covered a little bit at first from @Mercerandgrand looking at gold prices. So if you don’t mind, let’s talk a little bit about kind of Fed options now. Are we still expecting given the volatility, are still expecting the Fed to act in March? Are they going to continue to are they going to stop QE? Will they hike? Is QT still on the table for June?

SR: Yes, 25 is going to happen. They will end QE, and QT is still on the table, at least a runoff, not a sale. They’re not going to go over their skis here and start selling mortgage backs or do anything along those lines.

TN: Okay.

SR: But they will continue with their tightening path. I think the broader question here is just how far they actually can go this year. I do think that the limiting factor of highly volatile energy prices at the pump, which is something that monetary policy just can’t solve. Right.

Tightening 5100 basis points isn’t going to push the cost of oil down unless you somehow spark a recession or something. So I think it’s going to be interesting to see how their language evolves around future hikes. I think we kind of know that it’s 25 basis points. 50 is simply not priced in enough for them to do that.

And how we see and how they see monetary policy evolving, call it in the September and onward is going to be really important with the midterms coming up, et cetera. So I think that’s important.

On the consumer front, maybe you see call it a gas tax holiday or something along those lines to lower gas prices at the pump. That could happen. But generally the consumer is not in horrible shape. The consumer is not great, but it’s not in horrible shape. So I don’t really think they have to do much there. And I don’t see any point in buying gold here with the type of move you’ve seen over the past week. I think that if you had narratives that went from invasion of Ukraine to World War Three and you only got it to $2,000 and you couldn’t hold, I think that’s a little bit of a problem for the gold narrative.

TN: Sure. Okay, great. So let’s wrap it up and let’s start looking at the week ahead. What do you guys expect to see the week ahead? Albert, I guess we’ll start with you. Part of it is what do you expect to see on the ground in the week ahead in Ukraine? I expect that to impact markets.

AM: I think that we’re going to get a little bit more bloody, a little bit more daunting headlines. It’s going to affect the markets. I think we probably start shooting a little bit lower depending on how low we go. I think that’s going to make a big impact of what the fed does. I agree with Sam. I think it’s going to be 25 basis points. If the news is okay out of Ukraine, I think they even go 50 basis points.

TN: Wow. Okay. Tracy, what do you expect to see in the week ahead?

TS: I’m looking at the equity markets in particular. So just came out and global flows despite the fact that equities are coming off globally, we’re still seeing people pile into equities, right. We’re still seeing flows into equity markets.

So that to me says that the current situation with Ukraine in Russia is likely to be temporary and that perhaps the big funds and managers are thinking that we’re going to see less of a rate hike in March than most anticipate because they’re still selling bonds and they’re still buying equities.

TN: Okay. Interesting. Sam?

SR: I think you’re looking at a lot of chop here as we transition from as pointed out a moment ago, as you transition from Ukraine grabbing all the headlines to the Fed getting back in the headlines that’s going to be a choppy hand off. When the fed was in the headlines. It wasn’t exactly great for markets and a little bit of a relief rally here off of world war three going into.

TS: Sorry to interrupt. I think that’s a bit of a little bit of end of month rebalancing too, right? What we’re seeing right now.

TN: It could be. Yes, that’s right.

SR: Yeah. Definitely. But I think the hand off from Ukraine headlines back to the Fed headlines creates a lot of chop and probably some downside bias across asset classes or at least we’re assessing.

TN: Sounds like a very interesting week ahead, guys. Thank you. You so much. I really appreciate this. Have a great week ahead. Thank you.

SR, AM, TS: Thank you.

Categories
News Articles Visual (Videos)

CNA: Expect rates to be near 1% by the end of 2022

The full episode was posted at https://www.channelnewsasia.com. It may be removed after a few weeks. This video segment is owned by CNA. 

Show Notes

CNA: Welcome back. Strong consumer spending and business activity growth drove a 40% profit search for Southeast Asia’s third largest lender, UOB. In 2021. The bank reported a net profit of four. 7 billion single dollars for 2021. That’s slightly above endless estimates. Uob says economic recoveries in Singapore and regional neighbors helped bring in more income for the bank, filling its profit rise. Net interest income rose 6% from one year ago as loans expand 10%. Net interest margin remained stable at 156 percent, while the Dow snapped a three day losing streak on Wall Street. As an easing of geopolitical tensions overshadowed hot U. S. Inflation data. All three majors got back to winning ways after Russia confirmed a partial withdrawal of troops from the Ukraine border. The news helped Starks a with the Dow closing up by one 2%. A big Bough in Texas saw the SP 500 climbing one 6% and the Nasdaq jumped two 5%, while the Deescalating tensions also helped push oil lower. In addition to geopolitical news, investors got another look at the inflation picture. On Tuesday, the producer price index jumped 9.7%. On year in January, it was up 1% for the month. The index tracks the prices businesses receive for their goods and services.

And this latest number adds two calls for the Fed to act at its next meeting. To help us understand more about the future market trend, we’re joined by Tony Nash, founder and CEO with complete intelligence, speaking to us from Houston, Texas. Very good afternoon to you, Tony. So traditionally, investors like Fabri because it’s a good month for risk taking. But looking at this February, we are coping with situations like tensions between Ukraine and Russia, as well as Fed rate hikes possible. So maybe investors this time around should remain cautious. What’s your take on this?

TN: I think you’re right. I think we’re in an environment right now where we are seeing a lot of volatility. We saw equity markets fall earlier this week. We’re seeing them rise today. And we expect quite a lot of volatility as the Fed and as central banks get their strategies and their new policies together and as some of these geopolitical tensions come and go.

CNA: And we’re also looking at the PPI number released overnight, which puts Fed policy in the spotlight again. But historically, the Fed hasn’t been able to push down inflation without a recession. And this time around, we are talking about economic recovery that’s comparatively fragile. So how worried are you about that the Feds unleash aggressive rate hikes could again bring in another recession?

TN: The Fed always has policy missteps. They’re a blunt tool. And so the Fed is in inflation fighting mode right now. They’re getting a lot of political pressure to be in inflation fighting mode. The data is telling them they need to be inflation fighting mode and selling to well, in March, they’re stopping buying assets for their balance sheet, but they’re also expected to raise interest rates. And then later in Q two start to tighten their balance sheet, which means they’re selling off the assets that they’ve bought over the last two years and they’ll be taking currency out of circulation. So we’ll have slightly tighter currency conditions and we’ll have slightly higher interest rates.

CNA: So are you worried about the possible economic recession in the US?

TN: Yes, I think everyone sees it as a possibility. I think part of the problem is we don’t have the fiscal spending out of the US government that we had in 2021 and 2020. And so the big missing piece in the US economy right now is that fiscal spending that we’ve had for the past two years. So the Biden administration hasn’t really been able to get it together to have that fiscal piece because what we’re looking for is a bridge, really from the government spending led economy that we had in 2021 to more of a private sector led economy in 22. There was a hope that there would be some government spending to bridge that, and we’re just not seeing it. So the lack of government spending, I think more so even than.

TN: Say, interest rate hikes will have a negative impact on the economy.

CNA: And we’ve seen that market have basically priced in the fed rate hikes. But how do you expect that possible rate hike to affect the value of the currency? The dollar over there?

TN: Sure. We have a real risk of the dollar appreciating sharply. Depending on how aggressive the fed becomes, I think there will be moderate upward pressure on the dollar as the fed reigns in inflation. So again, they’ll shrink the amount of currency available. They’ll raise interest rates. Both of these actions typically put upward pressure on dollar values and, of course, that would hurt some of the countries in Southeast Asia when people sell or have due debt in US dollars. But it could help them if they’re selling assets in US dollars like, Malaysia, say, exporting oil and gas.

CNA: Tony, nice talking to you as always, Tony Nash, founder and CEO, with infinite intelligence.

Categories
Podcasts

Rate Hikes in the US and Rate Cuts in China

What should we expect from the FOMC meeting minutes in the US and also the latest CPI and PPI figures from China? Will oil prices continue to rally or slump with the latest development near Ukraine? And will it be another IPO year in India this year? Tony Nash, CEO of Complete Intelligence tells us more.

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/rate-hikes-in-the-us-and-rate-cuts-in-china on February 17, 2022

Show Notes

SM: BFM 89 Nine. Good morning. It’s Seven five in the morning on Thursday, the 17 February. You’re listening to the morning run with Shazana Mokhtar, Philip See and Tan Chen Li but first, let’s recap how global markets closed yesterday in US.

TCL: Dow was down zero 2%. S&P 500 was up zero 2%. Nasdaq down. .1% Asian markets Niki up 2.2%. Hong Kong’s up 1.5%. Shanghai Composite up 6%. Sti up 5%. FBI KLCI up zero 2%.

SM: All right, so all green and Asia, but some red coming in from the US markets. For more on where markets are headed, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. Can we start with just the FOMC minutes that came out overnight? What did you make of them? And do you think this raises the possibility of a 50 bits rate hike in March?

TN: Yeah, I don’t think it raises the likelihood of a 50 basis point hike in March. I think it will likely be a measured approach. We have a pretty complicated central bank system in the US right now. We’re still easing until March, meaning the Fed is still buying securities and stuff until March. That doesn’t stop until March. So we need to start quantitative tightening, which means we sell off some of those assets because there’s too much currency in circulation and then raising interest rates will unlikely to be 50 basis points. The thing to remember is the US hikes in bands. So zero to 25 basis points, 25 to 50 basis points. So even if they come out saying it’s a 25 to 50 basis point hike, it doesn’t mean it goes straight to 50 basis points. They could hike at 32 basis points. And so it’s likely some sort of calibration like that that will happen.

PS: So then if you look at it, maybe not on this specific occurrence, but cumulatively, in 2022, what was originally expected to be 75 basis points for a whole of 22 people are expecting it to go as much as 150 basis points. Now, do you agree with that assessment?

TN: Yeah, I’m not sure that 150 is correct. I think it’ll be north of 75 and we expect it to be around 100. So around a 1% hike by the end of the year. Keep in mind that the Fed does need to tighten. That’s a reality because of inflation. But we also need to remember that it’s an election year in the US, and the party in power never wants the Fed to be too aggressive in an election year. So the Fed will make motions, but they’ll probably also let it run a little bit hot because they don’t want to upset the politicians in power regardless of party.

TCL: Ahead of the Russian following through and announced troop withdrawal near Ukraine.

West Texas crude has up to around $90 a barrel. Even so, the oil market remains tight. How do you think this will play out in the weeks to come?

TN: Yes, we expect crew to really trade sideways for the next several weeks, and we’ve been saying this for about the last two weeks, and so it’s kind of proving to be that. And so it will be volatile, but it will trade sideways. The thing to remember is that crude typically rallies during tightening cycles. So we’ll likely see crude rise a bit from here. There are certain people who say it’ll be 120 or $150. I don’t necessarily subscribe to that. There has to be a certain things aligned for that to happen. But there is underlying medium and long term strength for crude oil because of the underinvestment that we’ve had over the last decade and well under investment in exploration and in production capacity. So we need an investment cycle to have the capacity to reduce long term prices.

PS: Yeah. That’s why I’m wondering whether she’ll come into the picture. Right.

As you say, there is this medium long term upside potential still happening. There’s still that pent up demand won’t shall come into the picture then?

TN: It should yeah. I live in Texas, so I love Shell, but, yeah, it should come into the picture and it should help to reduce some of those prices over time. Absolutely.

SM: Tony, if I could get your thoughts on where you think supply will increase. I think Iran is coming up in the headlines again. There seems to be discussions on the nuclear deal. How do you see that playing out?

TN: I think Iran is already preparing to start exporting. So I think Iran is already exporting something like a million barrels per day, whether it’s official or unofficial. And they put $115,000,000,000 into their next fiscal year budget from oil revenues. And they’re already marketing, especially around Asia. They’ve been in South Korea recently and other places. So Iran will export oil. I think whether or not the nuclear agreement is agreed.

I think there is a skepticism that the US will enforce any embargoes.

TCL: Moving to China after last month’s ten basis points cut. The PBOC has refrained from cutting interest rate this week on the back of the slowing inflation in China. Should PPOC have adopted a more aggressive approach, you think?

TN: No. I think they need to signal I think it’s a fine path. You and I, we’ve discussed this several times since probably Q three of 2021, that I’ve expected the PVoC to start loosening in late Q one of 22. So I think the PVoC is actually listening to BFM, which is pretty awesome. A big part of this is really to weaken CNY, so it’s to stimulate the Chinese economy domestically, but it’s also to weaken the currency because they’ve had a really elevated, really strong currency over the past year and a half. And that’s partly been to fight inflation and commodity prices. Now that a number of those commodity prices, not oil, of course, but some of those commodity prices have come down off of those very high levels. It’s time to weaken their currency, which will help their exports.

PS: Which comes back to the question about China being the world’s factory, I think breathing as far as relief when we saw factory gain, inflation ease a bit to about 9.1% in January. What’s your take likely scenario of PPI moderating?

TN: That’s a good sign. So PPI peaked at 13% and so that is a good sign that the PPOC can start to moderate in ease. So I think aggressive moderation could potentially contribute to PPI. But if they’re moving in that direction gradually, as PPI eases, they’ll start becoming more aggressive about their intervention. So China is also entering potentially a slow period for the economy. So PPI will likely flow as a result of that. But as China had an appreciated CNY, they also accumulated a lot of things like industrial metals like copper and so on and so forth. So it’s not as if they need to continue to buy this stuff in huge quantities. They have a lot of storage of those commodities right now.

SM: Tony, let’s have a conversation with a quick look at what’s taking place in India in markets. India’s new stock listings are losing their edge. I think they’ve been calamitous IPO of PTM, Ecommerce, Domato and Nica. I mean, what do you make of this? Are the IPOs in India all hype and hoopla, but no substance?

TN: Yeah, I think these particularly have been a lot of hype. I think they’ve kind of peaked too early. Firms like tomato. I think every middle class urban Indian has used tomato. So it’s not as if they don’t have market penetration, but they’re really burning cash. And I think investors at this point in the cycle are already rotating out of technology. So they’re wary of firms that either don’t make money or burn cash or are very expensive in a share price perspective. So it’s the rotation out of tech. These companies need to show profitability and they need to have a more appropriate valuation. So I don’t think there’s necessarily Indian IPOs are out of favor. I think it’s really value with these companies.

SM: Tony, thanks very much for speaking to us today. That was Tony Nash, CEO of Complete Intelligence, giving us his thoughts on some of the trends affecting US markets. Also some developments in China and India as well.

PS: Yeah, I think India has a long term potential, but I think this is a bit of aberration, I believe. I think the IPOs that have come out have really been not stellar for sure. I think it’s causing a lot of people to rethink one of them being all your rooms, which is planning to IPO by saying that put on hold. So, yeah, let’s hope to see some long term gains in the future for Indian market.

TCL: I am quite curious to see and watch the US market, especially on the oil and also the inflation because has the inflation really peaked already or are we going to see higher numbers coming up in the next month inflation report? That’s something that’s unknown for now.

Categories
Week Ahead

The Week Ahead – 14 Feb 2022

In this week’s episode, we look at the CPI numbers from last week, the inflation cycle, and will the Fed stop QE on their Monday meeting? What do you have to expect on the metals market in the longer term? Will the demonstrations around the world push the US to bring out fiscal stimulus again — and can they? What does this mean to the Democrats on November US Election? And lastly, what you should know to thrive and survive this coming week?

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

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

https://open.spotify.com/episode/3g8GVyOSmh2NYrcfHevj51?si=b923efb0567a4979

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Nick: https://twitter.com/nglinsman/
Albert: https://twitter.com/amlivemon

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And we’re joined by Nick Glinsman, Albert Marko. And today we’re joined by Sam Rines for the first time. Tracy Shuchart could not make it this week. She’ll be back next week.

So before we get started, I’d like to ask you to subscribe to our YouTube channel. It obviously helps us with visibility and it gives you a reminder when a new episode is out. So if you don’t mind, please take care of that.

Now, a lot has happened this week. We saw CPI slightly higher than expected, which is what we talked about on the show last week. Consumer sentiment out on Friday, slightly lower than expected. And there were a few things that we said last week that will remind you of the ten-year cross, too. Nick pretty much nailed that. Crude went sideways. Tracy said that we would see a slight pull back in sideways move in crude. The S&P have a slight down bias, which is what we talked about. And the Dow had a slight upward bias, which is what we talked about. So good week all around. Thank you guys for being so on the spot for that.

Let’s start with CPI. And Sam, since you’re the new guy, it’s surprised high. So what really jumped out for you and what do you expect to see with CPI prints going forward?

SR: Basically, the entire print jumped out to me. I don’t think there was a single thing that was actually positive on the inflation front. There was no positive news that we could extrapolate from there. Whether you’re looking at the actual headline number, the core number, three month annualized accelerating, et cetera, it was a pure CPI hot. It was just hot. Cupcakes and cakes were the worst news in there. Both of those up. I think it was like 2.2%. 2.3% on a month over month basis. The only thing that was a little bit lower, that kind of offset, that was ice cream. So dessert got more expensive for most of us.

I think generally the way to look at CPI right now is we were supposed to have this really interesting hand off from goods to services. And what we really had was no hand off from goods and services begin to start running. You had people begin to go outside of their homes, but they’re also working at home. So you need more stuff. If you have an office and you work from home, you need two computers, you need two microphones, you need two cameras.

That’s really what we’re beginning to see is the confluence of the end of COVID restrictions, but not really the end of COVID all at the same time. That’s a big problem.

TN: So the durable good cycle is we’re late in that cycle, right. So it’s not as if we’re redoing our homes anymore. Most of that stuff is gone. It’s more consumption, right?

SR: Yeah, it is consumption to a certain degree. But also you haven’t really seen a slowdown in people buying homes. When people buy homes, when people build homes, they need to put stuff inside of them. They need couches.

TN: That’s fair.

SR: So I would say we’re probably not at the end-end of the durable good cycle, we might be in the fifth or 6th inning. Okay. But millennials still on homes, right? Millennials figured out that when you can’t go to a really cool restaurant in New York City, it’s not really worth living in 1000 square foot apartment or smaller with a kid. Right. They’ve decided that they really want to go make a household somewhere, buy a house.

So I think we’re more call it mid innings of durable good cycle. And on the services front, we’re just beginning to see the re emergence there. You’re just beginning to see housing costs, housing and rent, et cetera.

TN: Okay, so this inflation cycle is something that Nick and Albert have been talking about for over a year. You started talking about this in August of ’20 or something like that?

AM: Yeah, something like that. I mean, it was evident that the supply chain stresses is going to cause inflation. When the demand starts to tick up and there’s no inventory, of course, it was inevitable at that point.

TN: So when does it end? Obviously, this isn’t kind of the transitory inflation we’ve been told, and that’s been said many times. But do you see this continuing through, let’s say all things equal. There’s no rises from the Fed, nothing else. How long does this go before it works itself out? Nick?

NG: I’m sorry, Albert, do you want to?

AM: No. From my perspective, wage inflation is a problem. So until that gets sorted out, inflation is going to be sticky.

NG: Yeah. With Atlanta Fed wage price level, it was 5% I think it was, came out for the first time in 20 years. Actually, I’m going to be slightly contrarian. I think we’re at that peak. Whether we can go up, we can still go up a bit more, but I think there’s a peak. The trouble that people have got to get their minds around is if we’re peaking, it could take several months. Where do we come down to? And my suspicion is we come down to a level that’s still significantly above the 2% Fed targets.

The other thing that I think is really important, you’ve got the conventional wisdom. Feds behind the curve, Feds behind the curve. And now all these forecasts from the street have sort of come like this. Goldman have now joined Bank of America on seven.

The key thing to understand in a zero rates environment, they introduced forward guidance, and that was their technique to try to suppress volatility in the market. Well, now that things have shifted around so rapidly and we’re moving to a rate hiking cycle, they’re actually not going to be suppressing volatility. By definition, they can’t you hear this in Europe as well? Data dependency. We’re dependent on the data. Well, they’re dependent on the data in Europe because their forecast is so terrible. Haven’t been much better in the US either. Right.

So you’re going to have much more volatility. So what we’ve seen in the last couple of weeks, which if you traded, if you ran money through 2008, it’s sort of nothing. But what we’ve seen in the last couple of weeks, get used to it. And I suspect going back to what we mention last week and I even put it on a tweet. Newton’s law of gravity is going to start to impose itself on those stocks without the high dividends, those stocks that don’t have the earnings, those stocks that are over owned.

I know we’ve got witching out next week or OpEx not clear whether the market is long or short delta. Just not clear to me because actually a couple of days ago, Goldman came out with a chart that showed that short interest on the S&P is really low. So if that’s the case, and I maintain that we’ve got a lot of trap longs still there, this volatility is going to get worse.

I mean, you’re getting volatility in the treasury market. And remember, the treasury market, by definition, is zero rates, low rates environment, is long convexity. So the price moves to a couple of basis points are way bigger than they were back in the days when you had a decent coupon, back in those good old days where retirees would earn some money on their bank deposits.

TN: Yeah.

NG: So they’re not suppressing volatility anymore. Volatility cannot be suppressed, even if they sell VIX. We’re talking about broad systemic volatility. Is it a risk? Could be. But that’s gone. Those days have gone. Forward guidance. They’re not even going to forward guide. Powell’s last press conference. I’m going to be humble. I can’t give you whether it’s a 50 or a 25. He never said anything. No. When he was asked aggressive questions. So it’s sort of interesting.

TN: That is very interesting. I think not worried about volatility is a very interesting point, even if they just dial it down a little bit. It’s a very interesting point to me.

So let’s move in that direction, Nick. There was a lot of Fed speculation this week, obviously more intensive than even last week. Inter-meeting hike, 50 basis point hike, 25 basis point hike, all this other stuff. So what are you thinking about that and QT? I also want to get kind of your and Albert’s view and Sam, of course, on this thing going around on Thursday about an emergency meeting on Monday. So let’s talk about all of that stuff with Fed and central banks.

NG: I just don’t think this Fed has it in them to do something shocking. So the first order of business, if they were to do anything intermeeting, is stop QE. That’s absolutely absurd that that’s still going on. Right. So you stop the QE.

Remember, this is a Fed that’s built on… Most of these members are built on the gradualist approach of the Fed. They’ve been suppressing volatility. They don’t want to shock anybody. So I think there is a valid discussion to have between 25 basis points and 50. It’s a discussion they need to have and they need time to think about it.

Interesting Bollard came out as hawkish, given he used to be a Dove and we’d forecasted actually everything he said. We got a little experience of deja vu, but I’m suspicious of this intermeeting situation. The only thing I can think of really would be stopping QE. That’s where their first… If you watch the Main Street media, that was their first part of call with the “experts”, and they’re still doing QE, which is why they’re still doing QE. I think they need a proper… Right now, given it’s a new hike, first hike in the whole process, they need to have a proper meeting.

TN: So you think there’s a greater than zero possibility that they’ll stop QE on Monday? I’m not saying you’re saying it will, but you’re saying it’s greater than zero.

NG: That would make sense to me, but it would be a bit dramatic given all the huff and puff that’s been in the since last night about this secret meeting, which is also right. I would be surprised if they do an intermeeting.

I’m still trying to figure out whether they’re biased towards 25 and 50. Remember, the market is giving them 50, but when is the last time the Fed taken what the market is giving it?

TN: Albert, what do you think about Monday, the speculation about the meeting on Monday?

AM: Well, yeah, everyone’s talking about this meeting that popped up all of a sudden, and some people are starting to dismiss it’s procedural and whatnot. But realistically, they got together over the weekend to discuss what’s really happening. The last time they did something like that was pre-COVID in 2020.

Right now, the Fed and actually the Biden administration together are looking at problems with the Russian invasion of Ukraine looming, trucker rally, actually in the United States and France and Australia that are looming. I mean, any more supply chain shocks is systemic problems of the economy. And I think they have to address it one way or another.

Whether it’s a 50 basis point hike in Monday or March or something, you’re going to have to do something against inflation.

TN: So you think it’s possible that they can take some action on Monday? You don’t think this is just a procedural meeting?

AM: I don’t think it’s a procedural meeting whatsoever. I think something’s wrong with the system and they’re working to address it.

TN: So if you had to say they’re going to stop QE or they’re going to announce a rise, which is more likely on Monday.

AM: I think they’re going to announce a rise. Well, to think about it, they’ll probably stop QE before they actually do a rate hike. I think the rate hike will definitely come in March.

NG: That’s the sequence.

TN: Okay.

SR: And just to add something there, I think it’s really important to remember that effective Fed funds right now is eight basis points, right? Eight to nine basis points. It bounces around a little bit but we hike in ranges now, right? So we’re going to hike from zero to 25 to 25 to 50 or 50 to 75 and they don’t have to put it at the midpoint right? So going to ranges, so to speak, is not the only way to look hawkish.

If you raise one range of 25 to 50 and set it at 40, 45 towards the top end of the range, you can do one “rate hike”, but be pretty hawkish within that range, you can show your intention pretty quickly there which would match pretty closely to what the market expectations are when you kind of extrapolate down to actual basis points what the market is giving the Fed. So I think it’s really important to pay attention to not just where the range ends up, but where they decide Fed funds goes within that range.

TN: It could be incremental. They could be a Chinese central banks type of like 37 basis points or it’s 38 basis points or something?

SR: Exactly. Exactly. And I think that’s going to be the kind of “the shock” and all that they can use. They can have call it a very hawkish one hike. They don’t need to do two hikes to be overly hawkish.

TN: So what do you think, Sam, on Monday? Do you think it’s a procedural or do you think it’s possible that there could be some sort of policy change?

SR: I think it’s procedural.

TN: Okay. Interesting. It would be interesting to come back in a week and see what’s happened with that. I like the differences there. Sorry. What’s that?

NG: You get the coin out and heads at something.

TN: Right? Exactly.

NG: One thing it can be, it can be a hike without stopping the QE.

SR: Yes.

TN: Right. Okay. That’s a good point. So speaking of inflation, before we get onto the truckers and other stuff, Nick, you guys put out a piece last week about the metals market. And I’m really curious. It looks like there’s a view that there’s longer term rises in metals, industrial metals especially. Can you give us a little bit of color on that and help us what to expect in metal markets?

NG: Sure. It was a longer term view. It’s not really a short term trading view. The view is, I have the thesis that some of the greatest trades attached to some of the biggest traders in time have arisen because of policy mistake. Whether the policy is benefiting or whether the policy was just maligned. And right now we’re in this net zero push, which is the new neurosis and there’s no transition plan.

So the first thing, if we were to look to commodities right now, where is it? The most obvious place that it’s hit? European energy. Right. The German is getting rid of nuclear. It’s just a complete nano mess. But it’s actually in the metals market where over the next couple of years it’s going to be really keenly felt.

There’s been a lack of capex like energy. There’s been a lack of capex in metals. They learned what lessons? We don’t know. Lessons from 2011 when prices were very elevated. And with that lack of capex and they’re paying high dividends, they’re rewarding shareholders, means the supply cannot be flexible enough, elastic enough on the upside to meet all this huge demand.

So we put the blocks together. China. China, give or take, is still there as a big user and consumer of the metal. Now you add on the rest of the world, plus China, additional China on net zero products. EV cars, right. All the wind farms, solar panels. All this stuff needs metal. Some of it needs fossil fuels as well.

And I got triggered a couple of weeks ago. There was a report in France that said in the next two years, the available supply of copper, not new finds, or not new mines. The available supply right now would have been used up. Yes or no. But the point is that’s the direction. Nickel, even more so. And then you think about nickel and the geopolitics of Russia having a huge nickel company. What we’re about to go through, potentially with sanctions?

All this geopolitics grinds against the need for these metals in terms of net zero. So basically you’ve got those two forces against each other which squeezes everything up in terms of price. And from the point of view, we have no transition plan. So if there was none of that, we needed a transition plan anyway.

So our view, you can go through the metals. Aluminium has been making new multi year highs this week.

TN: Right.

NG: Aluminum being the cheaper copper.

TN: Okay. Yeah. And I think as a medium, longer term plan, as a strategic placement, I think that’s very interesting.

Let’s move on to other components of uncertainties with what seems to me is a resurgence of populism with these trucker strikes and other kind of demonstrations.

Obviously, the Canadian trucker strike has stolen the headlines this week, but there are things happening across Europe, and they have been for a year. Australia has been happening for six months, something like that. Demonstrations. You see sporadic demonstrations in the US with talk about truckers striking at the Super Bowl or something like that. So what do you guys think about that? Is that a real risk, and is that a risk that will flow into markets?

AM: I think it absolutely is a risk. If you’re talking about adding more stress to the supply chain, of course it’s going to be a systemic risk. I won’t even put it past some foreign actors propelling it through social media campaigns to stress the United States, France and Australia.

TN: Okay.

AM: I certainly would if I was Russia or China. I would definitely do that.

TN: Okay. So what does that do if there is this kind of wave of populism that is pushing back against kind of COVID restrictions? Do you think that puts more stress on, say, the US government to get fiscal spending out there to kind of placate people?

AM: There’s no way we’re getting fiscal. The reasons that the Fed has been doing all the shenanigans behind the scenes is because there’s no fiscal that’s happening.

TN: Okay.

AM: Rumors are that they’re even buying oil futures.

TN: Okay. So it makes things complicated, right? I mean, if you can’t send fiscal out to the people, then it makes kind of populism even more complicated.

AM: Of course.

TN: And more acute. Right. So what does that say for November in the US? Does that mean that it’s going to be tougher than we had thought on Democrats?

AM: Oh, absolutely. I mean, they sent out a memo to all the Democratic governors with all the warning flags. If you don’t lift off these COVID restrictions, we’re going to get massacred in November. So all of a sudden you saw this week like a dozen Democratic governors lift all the mask mandates.

TN: Okay. But do you agree if they had room for fiscal, it would solve some of these populist issues?

AM: That’s a tough question, Tony. I mean, possibly, but then the talk of new stimulus checks comes out and then the inflation probably gets worse. What are we doing?

TN: It’s a complex problem, which is why I’m asking the question.

NG: Didn’t Germans should make it pretty clear though, this week? They said I’ve been… Last year with the last fiscal. I said inflation. Inflation, inflation.

TN: Yes.

NG: Clear as you can be. But he’s a swing vote in the Senate. He just said we’re not getting inflation.

TN: Inflation tramps fiscal is what you’re all saying, is inflation tramps fiscal regardless of what happens with populist.

AM: Sorry, Sam. Let’s make a quick real quickly. Inflation is a nuclear football for politicians.

TN: Well, especially at 7.6%. Right. So fuel inflation of 40% year on year. I mean, this is crazy.

Okay, let’s move into what we expect for next week. What are you guys looking for next week?

SR: The flattening on the 210s curve will continue until the Fed breaks something and has to go the other way.

TN: Okay.

SR: I think that to me is the easy trade out there right now. It’s 210 flatten and done.

NG: Put a health warning on that.

SR: Yeah.

NG: If the Fed wimp out, I even think 25 basis points and non hawkish statement. If they whimp out, that long end is going to get hit because the idea of a flattening curve.

Remember, the sequencing is wrong here. That curve flattens after they’ve well into hiking cycles because of the potential for a recession. 13 out of the last 14 hiking cycles have led to a recession. That’s why I curved bear flat. Okay. It’s already doing it.

But the point is it’s because they think it will be enough. If the Fed given the narrative now, don’t go ahead with this. And I’m still anxious about the Fed, even though Powell warned back when the QE three was being launched, you’re going to create a whole lot of problems. Ironically, he got all the problems.

I’m just still nervous about this Fed because.

TN: I think everybody is Nick. I think that’s why we’re seeing the volatility because no one’s getting a clear signal. And we saw some Fed governors out on Friday saying that 50 basis points is too much and putting 25 basis points into question.

So I’m not sure if there’s a consensus.

NG: Actually, there’s a great trade to be had. Great trade in some of the markets. You buy a struggle, you buy volatility effectively. Make it, usually pay up for premium, but you make it completely not dependent on direction.

TN: Is what you’re saying for the next several weeks.

NG: Because they’re not going to suppress volatility anymore. It’s reversed. So everything they do now is by definition going to be creating more volatility. We’ve been zero rates, forward guidance. Let’s just cruise.

And the balance sheet is pushing stocks up. The other thing you need to watch, by the way, is the level of reserves.

TN: Right.

NG: Because I actually think if back in 19 there was that Reserve issue with the repo. I think that slightly could be problematic if something like that happens again.

TN: Okay, great. Good to know. So let’s go one by one. And what do you guys see say in equity markets next week? Is your bias for equity markets? Do you have a downside bias in equity markets? Sorry, Albert, go ahead.

AM: So I was just going to say next week, I think it’s going to be all about the Federal Reserve’s narrative building. It’s going to be a choppy session in equities all week. They’re preparing you, they’re sending out boulerd with ridiculous 100 point basis comments, and they’re just preparing you for a 50 basepoint rate hike.

TN: Right.

AM: So that’s what I think is going to happen. So we’ll just be choppy on next week.

TN: Okay. Sam?

SR: I like SPX more than I like the Dow, and I like the queues less than I like the Dow.

TN: Amid the volatility, you believe in tech?

SR: No. Okay. I don’t like any of them. Okay. And I prefer the S&P to the Dow. And I prefer the Dow to the queues.

TN: Okay.

SR: Yes, exactly. And I don’t like any of them. But if you had a gun to my head and made me buy something, it would be SPX and shorting queues against it.

TN: So there’s a slight downside bias in markets next week, equity markets? Okay, Nick, same?

NG: Yes. I think, as I said, I like what I wrote. News is law of gravity. As these rates come up, it starts to put gravity on the equity market and gravity will bring it down.

TN: Okay.

NG: One provisor, though. If we get some, along the path that we’re going, we get some serious shake outs. I do think what could be interesting is some of these commodity related starts, because actually commodities do quite well during a hiking cycle. Okay. That again, fits with our thesis anyway.

AM: Of course, gold has been on a tear for the last four trading days.

NG: Confusing everybody, right?

AM: Yeah, of course.

TN: Sam, do you agree with that commodity during the hiking cycle?

SR: I think oil is great during a hiking cycle. If you look back over hiking cycles, oil tends to do pretty well. I actually like the long oil short gold trade.

TN: Okay. So you bring us into a good point. Oil was my last stopping point. So, Albert, Nick, do you guys sit in the same place with oil? You think in the short term, say next week oil is looking good, or you think it continues to trade sideways?

AM: I think it goes up. I know. Rumors are Fed buying oil futures. I think it’s going to go up to 110. Not next week, but over the next week.

TN: Even with the inflationary pressure? Even with, which is unbelievable for me to say that. Even with the dollar rising. It’s unbelievable for me to say this.

NG: Albert just made a great point. These commodities are all at new levels and really the dollar hasn’t collapsed yet.

TN: Okay?

NG: Can you imagine what would happen if the dollar sells off some of these commodities?

TN: Yeah, we’re going to have to wrap it up there. So thanks very much, guys. This has been great and have a great week ahead.

Categories
Week Ahead

The Week Ahead – 07 Feb 2022

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

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

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

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

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Tracy: https://twitter.com/chigrl
Nick: https://twitter.com/nglinsman/
Albert: https://twitter.com/amlivemon

Show Notes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: So does that mean July or November?

NG: Probably means July. Okay.

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

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

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

TN: I ask it every week.

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

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

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

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

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

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

TN: Okay.

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

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

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

TN: That’s right.

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

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

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

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

TN: Right.

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

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

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

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

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

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

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

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

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

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

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

TN: Sure.

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

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

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

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

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

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

AM: $4.25 in Tampa.

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

TS: $3.99 in the Northeast.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: Okay.

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

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

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

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

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

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

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

TS, AM, NG: Yes.

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

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

TN: Okay.

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

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

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

TN: Okay. Right.

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

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

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

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

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

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

AM: Disagree.

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

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

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

TS, AM: Agreed.

NG: That’s a dollar call.

TN: Okay. Explain that.

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

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

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

TN: Very good. Okay.

TS: Keep your eyes on B come.

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

TS: Thank you.

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

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

NG: The professional version of Luke.

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

TN: Good. Alright.

Categories
QuickHit

The year ahead: What have we learned from 2021? (Part 1)


Patrick Perret-Green of PPG Macro joins us for a QuickHit episode to reflect what 2022 brings. Patrick got not only the Covid call, but a lot of inflation calls right through the pandemic. As we wrap up 2021, what does he think about right now and how does that set the stage for his view on 2022?

PPG started in 1997 in research where he learned how bank balance sheets work. He also run the strategy for Citi for rates and effects in Asia and at one point worked out in Sydney. And in the past five years now, he’s been focused on the global macro environment.

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

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

This QuickHit episode was recorded on December 16, 2021.

The views and opinions expressed in this The year ahead: What have we learned from 2021? (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: So, Patrick, you’ve got not only the Covid call, you’ve gotten a lot of inflation calls right through the pandemic. And as we wrap up 2021, I guess what I’d really like is, what are you thinking about right now and then how does that set the stage for your view on 2022?

PPG: Well, there’s a whole lot of multiple issues. So I was rewatching Powell’s Q&A this morning. And clearly there is the energy side of things. There is the good side of things, the demand for goods, and they are responsible for big chunks. And I was quite surprised by the ECB’s massive upward revision for inflation for 2022 in the press conference earlier on today. But base effects are very powerful. So we always knew we were going to get peak base effects. We’re going to come in around October, November time. Oil average WTI average below about 39 to $40 last October, November. And by January are up to, or early February, we were early 60s. That base effect will tumble out quite dramatically.

I also think that the durable goods effect is also going to tumble out dramatically. We’ve had record purchases, but I remember talking joking with people last year. It was about the middle of last year, and I was saying I was just as an experiment going on ebay and seeing what I could pick a Peloton up for. So everyone got their Peloton or they bought a flat screen TV. They did the house, they did the kitchen because everyone was at home.

And I think when you look at durable goods purchases in the US and this is chart I’ve posted many times on Twitter. They are off the charts and they’re off the charts relative to disposable income as well, which is now falling. Okay, due to inflation as well. But in the US, we’ve also got this remarkable thing that it’s very different to other countries.

So you look at the UK. We had the employees taken out the other day. We’ve now got more people on payrolls than we had prepandemic. Non-farm payrolls are still down 3.9%. And in Europe employment has been much better. So the great retirement, the great resignation seems to be a US phenomenon.

But I think next year the risks are that everyone that goods purchases collapse and pricing power similarly collapses with that. And even things like autos as well will pass. So we know for well that the auto manufacturers have got lots full of 95% completed cars, and the chip shortage is actually a thing. It’s not that the world has run out of chips. There’s some papers recently looking at chip supply.

So the supply chain disruptions are being true. Yes, there’s still log jams with ports in the US, but in Asia, around Singapore, they’ve largely cleared into chain. Yeah, we’ve still got subjects very pandemic risks of problems with changing over ship crews and things like that. But overall, I think that side of things will ease down.

Okay. The pandemic is of pain, but we all know that. And there’s a lot of we’ve got Omicron now, but there is some cause for hope. It’s incredibly infectious. But all the people I know have got it. I don’t know anybody who’s had it really bad. Whereas I know people who even had Delta and they were really late. I don’t know anybody hospitalized, really. But could this be, like a bit of a bushfire?

It goes through very quickly. But actually, then we have the benefit because it’s so infectious. So many people get it. That herd in unity becomes higher. And actually, by February we’re back and everyone not giving a damn.

TN: Which is what I love. I love it. I love it. Let it be. So I hope it happens.

PPG: But let us go. But let’s not forget the underlying reality. People seem to stare in sort of my a rose tinted glasses and look back and think like, oh, wasn’t it wonderful prepondemic? No, it wasn’t. The world central banks weren’t cutting rates in 2019 because we were in good shape and there wasn’t a load of excess capacity. My concern is now that actually we talk about capacity being built. So records for containerships is less.

However, the volume of global trade actually is not particularly higher. It’s more because of disruptions. An empty container has been trapped in places. So people are building more containers and they’re building more factory space. But once the supply chain disruptions come down, then you’re going to be left with even more excess capacity.

TN: Right. Well, it’s the other side of letting all those old containerships and book carriers retire in kind of 2011 to 15. Right?

PPG: I’m still left with an image of a world that, compared to 2019, has more debt, it’s older and the capacity hasn’t gone away. And then we’ve also got the geopolitics and the politics and all that sort of stuff as well.

Watching Powell last night, I was struck by how amazingly sort of confidently was about the outlook for the US economy. Two, how he seemed to have lost all recollection of the effect of the last tightening cycle on what was a much healthier economy. So here we’re talking about, we got a 150 basis points of tightening by the end of 2023.

Okay, tapers. We all knew that’s going to end quickly. It’s going to be done by middle of March, in 10 weeks time.

TN: Just words, Patrick. It’s just words.

PPG: And then they do Redux. And he admitted at the end towards the end that they had their first discussion about the balance sheet. So I think they’ll start balance sheet reduction much sooner. But the problem is if we go back to last time when debt was so much lower, the Fed overtightened.

My reckoning, was they should have only really gone to one of the records. They completely underestimated the impact of balance sheet reduction on liquidity. I did quite a lot of work on the plumbing, and the irony is that the Fed is in charge of a mandatory systems. They’re not a very good plumber. They seem to actually understand how their own system works properly. So you end up being like the repo crisis. No, it’s not QE. We’re just buying bills and then we’re buying coupons. But it’s not QE it’s just liquidity management.

All these various issues and the other aspects I think about inflation is, there’s a lot of similarities with what happened with China in 2008, 2009. China had this. It was only a $7 trillion economy. A trillion dollars of stimulus. M1 was up 40%, M2 was up 30%. And rather than normal lags of six to eight, nine months, M2 growth peaked at the end of 2009 or late 2009. But inflation didn’t peak until the end of 2010, early 2011. So such was the volume of stimulus that came through. It just reverberated along. You dropped a Boulder in a pond?

TN: Sure.

PPG: So the ripples effect just last for much longer. And I think that’s one of the things we’re seeing, but obviously, what we also are seeing is global money growth as a whole has slowed very dramatically. And even when I look at things like excess reserves or where we are now or currency and circulation within the US, the sort of three to six month annualized rates are backed down to rates that they were at pre crisis.

So the year on year base effects are all fading out. And ultimately, unfortunately, most central bankers aren’t monetarists. They seem to have banned monetary economics. Greens bank scrapped M3 in the US. He’s a great scenery as far as I’m concerned.

TN: So when do you see this stuff really taking hold? Is it kind of mid 22 or?

PPG: The second quarter it really picks it. And we got the other side of it. So we got a US that’s doing okay or brilliantly, as far as pounds and the Feds… Europe, that actually is doing all right as well I mean, everyone’s got perpetual downer in Europe. But I think Europe could be the surprise next year.

And we got China, which is everyone still gets on this sugar high. They’re doing stimulus. And I keep on trying to explain to people, it’s not stimulus. This is dialysis.

TN: That’s a great statement.

PPG: I had a long term view on China, and it really goes back to sort of 2014. Once Xi really took control, got rid of all the rivals, started centralizing the power.

And there’s a long term rationale behind that. So, yes, in terms of the Chinese are great at some long term thinking. In other ways, I describe them to people as like, yeah, China is like a linebacker. He’s like 250 pounds. He’s six foot six tall, but unfortunately, he’s got the brain of an 18-year-old.

TN: I think the latter is more accurate, actually. With that in mind, as we move from inflation to say another obvious kind of what’s ahead for 22? What do you see for China in 22? Do you see ongoing stimulus? Do you see a roaring Chinese economy? What does China look like for you in 2022?

PPG: Well, the interesting one is that we look at everything that’s come out of the recent Central Economic Forum, all the going. The whole emphasis is on stability. None of this grandiose stuff about we’re going to be strong. It’s about stability.

Think tank South China Morning Post, which is owned by Alibaba, which is effectively controlled by the state nowadays. So there’s the G 40 Economic Council, whatever they are think tank. But it’s next PVoC governor or deputy governor on it as well. A big article. Nothing is said without less it’s approved.

So they were talking about monetary and fiscal stimulus next year and by that moderately lower interest rates. Central government stimulus because it can’t come from local governments because they’re bankrupt and they’re not getting the land sales revenue and they won’t because the collapse of the real estate.

TN: That’s an important point, though, if you don’t mind holding on the SCMP article for a second. I see people on social media say all the time, well, local governments will always come in with stimulus. But from where? I don’t understand this fallacy, that local governments can always come in with stimulus.

PPG: Well, no, they can’t, because I think even Goldman come out and say that local governments have got hidden debt of about 40 trillion CNY. And all their various financing vehicles. They’re screwed.

They don’t have the money. But over time over the past few years, we’ve probably seen this greater and greater central control. Come on them anyway. They’re more and more dependent on central government forward expenditure. And the rationale comes to this because I think the regime has always recognized that the debt or we’ll keep playing the game of Jenga is unsustainable.

TN: Right.

PPG: And therefore you have to get to a point where we’re going to take some pain. So if you look back at what Xi’s been talking about over the past few years, it’s all about struggle, the Long March. I mean, this is like really going in. That is the story of China. He conveniently forgets to mention, the Long March was actually really a long retreat and basically hardly anybody who started it survived. But that’s completely ignored.

But there is this centralization of power because they know that things have to be dealt with and there will be there’s a potential for trouble. So you become a super authoritarian super, you know, look at all the moves about data.

It’s all about the Chinese government having much more control, much more visibility, a greater ability to snuff out any sort of signs of opposition at the very earliest time.

TN: But my worry there is that China, actually, I think, is becoming fairly brittle. Meaning the Chinese government is becoming fairly brittle.

Under previous regimes, you had a fair bit of flexibility where you had the different levels, not with a lot of autonomy, but with a fair bit of autonomy. Now you have a huge amount of centralization and that creates a fairly brittle government, both economically and politically.

I’m not saying it’s necessarily going to break, but I do worry about what they’re creating.

PPG: Well, I agree with you. I’ve made sneak it past my then investment bank employees. When I came out 2014, I wrote about the stylinization of Chairman Xi.

So you have the centralization of power in one man. But then you also get that fear of slightly Tsar Russia. Nobody wants to be the bearer of bad news. So you had African swine fever. Everyone covered it up. Which was one of my concerns about Covid, because, like you saw in Wuhan, local police shut up the doctors on the 1 January.

And similarly, so you have this culture of paralysis, even pre crisis, Xi comes out and says, oh, we need to reduce coal fire stations. So good party figures, party Chiefs, local party Chiefs. We shut it, shut it down. And then they realize, actually, we haven’t got anything to heat the homes or schools.

Oh, by the way, then we have to divide the energy from the gas from the aluminium shelters to actually do that. You got this sort of, whereas, if you look back to China and Zheng and other leaders, China sort of thrived on its basically Brown envelope culture. We just get it done. Ignore central government. Okay, but at the same time, we are putting loads of cadmium into the ground and killing ourselves. But so be it.

TN: When you look at what’s happening in China domestically, with the economy and with the political structure. I’m also curious about their outward political projection. And I do worry about Northeast Asia, not just China, but Japan, Korea, Taiwan.

And I’m curious, since you have such a historical background, I’m curious what you think about China in terms of political projection, say for 2022. Are you worried that they are going to become aggressive in ’22?