In this podcast episode, BFM 89.9 Market Watch speaks with Tony Nash, CEO of Complete Intelligence, to discuss the current state of the economy and the stock market. Nash predicts that GDP growth will be around 1% this year, which is a downgrade from previous estimates. He suggests that, due to inflation, firms have been passing on their costs to customers, but with lower volumes expected, there will be a focus on efficiency in the latter half of 2024 and into 2025. Nash also notes that there is a lot of excitement in the tech industry surrounding generative AI, which could bring about efficiencies and revenue opportunities for companies. This has resulted in a rally in tech stocks, despite the lower GDP growth estimates. However, Nash acknowledges that it’s difficult to predict how long this rally will last and whether companies’ valuations will come back down to earth eventually.
Regarding the bond market, Nash suggests that it has historically been more accurate in predicting interest rates compared to central bank prognostications. Currently, bonds are indicating that a recession is coming, but Nash believes there is only a slowdown expected, not a full-blown recession. Furthermore, he suggests that the Fed may be late to respond to this slowdown, as central banks are typically reactive organizations. Nash also discusses the recent performance of safe-haven assets such as the yen, gold, and the US dollar, and suggests that this is due to concerns over the Omicron variant and rising inflation.
Overall, Nash predicts that there will be a focus on efficiency and cautious optimism in the stock market in the coming years. He also suggests that it’s important to remain cautious and vigilant in the current economic climate, as there are a number of uncertainties and potential risks.
Transcript:
BFM
This is a podcast from BFM 89.9. The business station.
BFM
BFM 89.9. 7:06 A.m. On Thursday the 30 March. Good morning. You’re listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning. In half an hour, we’re going to discuss whether the worst is over for the Sri Lankan economy after it secured a 3 billion U. S. Dollar bailout last week from the IMF th. But as always, we’re going to kick start the morning with a look at how global markets closed overnight.
BFM
It was almost perfect. Almost perfect because almost every market was upset one. So let’s name the guilty one. It was the Shanghai Composite Index, which was down 0.2%, but otherwise us all in the green. The Dow was up 1%, S&P 500 up 1.4%, Nasdaq up 1.8%. In fact, if you look at the Nasdaq, this is the shocking thing, right? I thought tech was dead. Growth is over. Well, it ain’t the case because the Nasdaq is up 14% on a year to date basis, this has been the stellar outperformer. Now, if we look at Asian Nikkei was up 1.3%, Hang Seng up 2.1%. Shanghai, like I said, was the one that was down 0.2%. Singapore Straits Times Index, up 0.2%. And our very own FBMKLCI currently up 0.8% to 1420 points.
BFM
All right, so for some thoughts on what’s moving markets we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks, as always, for joining us. Now, given recent performance in US. Equities, investors seem to be looking beyond the challenges in the financial sector and recognizing that US economic growth continues to be resilient. Could investors be headed for a rude shock, though?
Tony
Well, it’s a really interesting question. I think those investors who expect rapid GDP growth, I think will be disappointed. We expect GDP growth to be kind of around 1% this year. That’s downgraded from a couple of months ago. And so it’s not necessarily overall economic growth that will happen. There will be secural growth. And what we’ll see through the rest of, say, this year and into 2025 is a focus on efficiency. What’s been happening is, because of inflation, firms have been passing on their margins or been passing on their costs and more than their costs to their customers. Okay. And so with a lower volume. So we’re going to see a focus on efficiency in the back half of 2024 and into 2025. So you will see equity performance in pockets. But in general, we’ll likely see things sideways unless we see the Fed change footing dramatically, which is still not really expected.
BFM
Okay, so, Tony, is that pocket the Nasdaq? Because help me understand this. Right? Since December, it’s actually up 20%. And I thought growth is great. What’s going on?
Tony
Well, in tech right now, there’s a lot of excitement over generative AI. This is ChatGPT and the other kind of applications of generative artificial intelligence. And so investors are looking at companies everything from semiconductors to say, Meta and saying gosh generative AI, which is kind of the next milestone for AI, could really change these companies and could really bring about efficiencies and could really bring about these revenue opportunities. So there’s a lot happening in tech, of course, but in general, when you look at companies like Microsoft that has made the major investment in OpenAI and you look at Google and their new AI kind of chat item that’s out there and then other companies. It’s similar to I know you guys are too young to know this, but in 2000, whenever a company would release a website, their stock would get a bump. And so what we’re seeing right now is whenever companies release an offering or say they are implementing some sort of generative artificial intelligence or ChatGPT or something like that, they’re getting a bump in their equity price.
BFM
Okay, but how long can this rally kind of last? There seems to be a disconnect because you just told us GDP is 1% and then companies earnings probably aren’t going to be that great for the moment. Yet markets seem to ignore the news. Will they all come back down to earth eventually?
Tony
Well, it depends on how you define down to earth. Right? Is down to earth 2018 valuations and 2018 market levels maybe. Again, it really depends on how the market views, I think generally, how the market views activities by central banks and the Fed. So if the Fed has really isolated the banking crisis, which I believe they have, then the Fed can continue to raise rates and then they can continue to shrink their balance sheet. Now they just grew their balance sheet by a lot by bailing out banks. But they can shrink their balance sheet in certain areas, say mortgages, those sorts of things. So that can help to bring some of these valuations down to earth. But keep in mind, we’re going into a presidential election year in 2024. And so it’s really hard to determine, does the US administration not want a recession or do they want a terrible recession so they can be seen to be passing a fiscal stimulus plan. So I don’t know what their calculus is. They can either keep the economy steaming ahead or they can try to drive the economy into the recession so they can be seen to be passing massive stimulus packages.
BFM
Tony, in one of your panel commentaries, a suggestion was made that bond markets were more accurate in predicting rates compared to central bank prognostications. Why is that so? And what are they currently saying about future Fed hikes?
Tony
Well, the first thing kind of every amateur loves to be a central bank prognosticator, so those are rarely right. But bonds. So if you look at a year ago, bonds were telling the Fed that they needed to raise rates because inflation was coming and they waited until too late. Right now, bonds are saying that a recession is coming and the Fed is continuing to tighten and the Fed is always late. Central banks are typically always late because they are a reactive organization and that’s how they’re designed to be. Are bonds going to be absolutely right about a recession coming later in the year? I’m not really sure. Again, we think there’s a slowdown, but we don’t necessarily think there’s a recession. And when we use the R word, we also have to be careful because it can be defined any way we want. Right. Because we had two consecutive quarters of negative growth last year and nobody says that we had a recession last year. So a recession kind of is whatever we define it as today.
BFM
Okay, well in the last two, three weeks there’s been clear, three clear safe haven assets: yen, gold, and US dollar. Do you think these three asset classes still can be safe haven assets?
Tony
It’s really hard for the dollar and gold to be safe haven assets at the same time. For the yen, I think with the change of the governor, the chairman of the BOJ, and Japan of course is already doing this, but I think they have to be very careful. That happens in, I think late next month. And so if they can handle that transition in an easy, seamless way, I think we can probably continue to do that. Gold? I’m not entirely sure. I know there are a lot of people out there pumping gold right now, and there are a lot of people kind of naysaying the dollar right now. Trying to say that Saudi signed some agreement. Saudi Arabia signed some agreement to deal in US dollars, and Russia signed Chinese Yuan and Russia signed an agreement to deal in Chinese Yuan or whatever. But those are very small, nominally very small. So I do think the dollar will remain a safe haven in times of turbulence. Japanese yen probably because currencies are all on a relative basis. They’re all on a relative basis. Gold, I don’t think gold is going to fluctuate a lot, but I think gold investors can be very fickle. So I’d be really careful of that one.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Commenting there a little bit about the difference in market exuberance in tech sector compared with, I suppose the sentiment that perhaps the US could be heading towards a recession or at least markedly slower growth than what was anticipated early on.
BFM
But I think it’s interesting that Tony brought up the reason why, which is, it’s generative AI, well ChatGPT, right. So much excitement about it and I think questions about is it a disruption or is it an opportunity? But I think markets thinking, hey, which companies are going to get involved in this.
BFM
If you see a company that’s involved in AI, if they have their own AI bot or whatever, oh, that must.
BFM
Be a good thing.
BFM
It reminds me so much of the hype over the Metaverse not that long ago when Facebook or Meta decided to take that angle. And right now, there’s no no one’s talking about the Metaverse metabolism.
BFM
What are you talking about, Charles? Everybody’s forgotten about it. Right. So there are always trends that come and go. Let’s see who really can monetize it. That’s the thing at the end of the day.
All eyes will be on the US CPI data as it gives us an indication of the quantum and pace of rate hikes. But is the Federal Reserve too slow to see if inflation is coming down when there is anecdotal evidence of slowing car and home sales? Tony Nash, CEO of Complete Intelligence tells us.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station BFM 89 Nine. Good morning. You are listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. 07:00 a.m on Thursday the 13 October. Let’s kickstart the morning with a recap on how global markets closed yesterday.
BFM
Looking at US markets, all three key indices close in the red S&P 500, down zero 3%. The Dow and Nasdaq down zero 0.1%. And I think that the S&P has been down for six consecutive days already. Moving to Asian markets, and the Nikkei down marginally 0.02%. Hang Seng down 0.8%. The Shanghai Composite Index back the trend. It’s up 1.5%. Straights Times Index down 0.7%. And our very own FBM KLCI is down 0.5%.
BFM
So for some thoughts on where international markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Now, US CPI data is due out on Friday. What are your expectations for that figure? And how much of this do you think will determine the quantum of the next Fed rate hike?
TN
Everything rests on CPI right now. So I think if it comes in line or higher than expected, it’s just bad news for markets for the next few days. So people are hoping for a lower number because it would provide some relief and some proof that inflation has maybe peaked or is at least slowing down. I think it’s possible that we have it come in slightly under, but given the PPI reading that came today, it’s not a good a sign. So we may see CPI continue to rise in tomorrow’s trading day in the US.
BFM
Okay, Tony, we have a history of the Fed being late to the game, right, when it came to inflation. They kept saying “transitory, transitory,” and we know it wasn’t transitory at all. Do you think that they are also late to the game in recognizing that inflation has been brought under control? Because when I look at some of the data points, one of which is used car sales, that’s dropping. New car sales are also dropping. House sales, home sales are also dropping. Is it possible that inflation is being overstated?
TN
Well, you’re 100% right on the Fed being late to the game, both to recognize inflation and to impact it. The problem that we’re seeing with, say, used cars is, although the unit volume is slowing, the unit price is still rising for, say, used cars, for eating out, for these sorts of things. There’s still been upward pressure on these because of the factor input costs and supply chains and labor and others. So it does feel in the US like things have not that prices have gone back down, but that the rate of rise has slowed. That’s what it feels like at the consumer level, except for petrol, gasoline, which has started to rise again over the past week.
BFM
Let’s take a look over at the UK, where George Bailey, the Bank of England Governor, said that the BoE would end support for UK Gilts by the end of this week. What does this mean for the Pound specifically and other sterling-denominated UK assets like equities?
TN
Oh gosh, we’re likely to see more devaluation of the Pound. There’ll be pressure on the Pound. Well, maybe not devaluation, but depreciation of the Pound. UK pension funds and other guiltholders will likely have to sell assets if the BoE is stopping their intervention in that market. They’re likely to likely to see downward pressure on those prices. So holders of those assets, like big pension funds, will have to use other assets to pay for their collateral for those investments. So it’s going to be ugly all around once the BoE stops because the market for guilt is so weak.
TN
And we’ve seen for the Bank of Japan, we’ve seen for the Fed, for different auctions, different government debt auctions, there have been zero takers for government debt auction. And that tells me they’re not paying enough. The interest rates for that debt has to rise because people feel like inflation and interest rates are going to rise. So these governments need to offer their debt out at a higher rate so that people can make a profit with it, given the inflation environment.
BFM
And Tony moving on to China with a Party Congress meeting happening very soon, and with Xi Jinping set to win an unpresented term, what economic implications would that have for China? And with growth slowing down across the world, how will they aim to achieve the goal of common prosperity?
TN
Yeah, Common Prosperity as a definition can be really taken as raising people up, or it can be taken as pushing kind of those achievers down. Okay. And if you look at China’s history in the late 50’s and the 60’s, as you know, Mao Zedong really pushed those achievers down through the great famine and all this other stuff. So my fear is that as Xi Jinping has consolidated his power, he’s going to start well, he’s already started a couple of years ago, pushing some of those economic overachievers down like Jack Ma and other people.
TN
So I really do worry coming out of this Party Congress that we get a much more restrictive Chinese economy. We’ve already seen foreign investor sentiment sour on China, and we’ve already seen with code lockdowns, with supply chain lockdowns and other things, there has been a functionally more restrictive environment and with sentiment souring as well.
TN
I’m not optimistic, at least in the short term. The Chinese government, whether it’s Xi Jinping or other elements of the Chinese government, they’re going to have to do something to reassure the world that they are a good faith partner in global supply chains and for manufacturing. It’s not going to make them happy to do that. But if they want to continue growing at the rates they have grown, they’re going to have to do that.
TN
So when I say I’m not optimistic about China, I’m not saying China is going to crash. I’m saying I think they’re going to have some pretty mediocre growth rates in the coming years because of the economic environment, regulatory environment and market environment that they’ve cultivated of late.
BFM
OK, Tony, I want to stay in Asia and I want to look specifically at Japan because the Yen weakened to a fresh two-decade low, hitting 146 to the US dollar. What do we make of this? Is this really on the back of Corona vowing to maintain its very accommodative monetary policy?
TN
Well, they have a choice. They can either support the yen or they can buy government bonds. And they’ve continued buying their bonds. So I think they’ve made a choice not to support the currency. And with the strong US dollar position and Janet Yellen made some comments today saying, again, saying that it’s really not the US’s responsibility to maintain the currencies, economies of other parts of the world. It wasn’t those exact words, but it was similar. That will likely push the dollar even stronger and we’re likely to see even more depreciation of the Japanese yen.
TN
So there is a lot of pressure on Japan right now, and the Bank of Japan really has some decisions to make about how they’re going to approach that. Maybe they’re okay with depreciating their currency, but it will fundamentally change things like their imports of energy. They’re very dependent on imported energy. They’re very dependent on imported, say, raw materials like metals for their manufacturing. So this really changes their approach to managing those imports.
BFM
Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
BFM
Yeah, I like his comments on the yen. Right. At what point does it then become really painful for the Japanese economy? Net energy imported, clearly LNG from Malaysia is one of the key imports. What does this then mean for inflation? But it’s one country where inflation has been ultra low, almost as low as ours, I think barely 2-3% for them. But for them it’s a bit of a shocker because they’ve been in a deflationary period for more than ten years.
BFM
Yeah, and his comments on China, I think he said that growth would likely be slow over the next couple of years, and I guess Xi Jinping and China will unlikely dial back on its Zero Covid policy next week. It looks very unlikely at this point.
BFM
I mean, everyone’s hoping to see some kind of announcement to that vein. But again, lots of things to look out for in the weeks ahead.
BFM
We just heard headlines coming out Shanghai, parts of it under even more lockdown.
BFM
Well, very quickly, let’s take a look at some good news. I guess that’s coming out of Australia. We have contest airways. They said their first half year profit will jump to as much as 1.3 billion Australian dollars as travel demand accelerates and the airline stabilizes operations after a prolonged and bruising period of cancelations and delays. This ends a streak of five consecutive half yearly losses totalling 7 billion Australian dollars.
BFM
It said that the frequency of scrap flights, late departures and loss backs are all improving. CEO Alan Joyce said it’s been really challenging time for the national carrier, but the announcement shows that how far the airline has actually improved, and they’ve seen big improvements in their operational performance and acceleration in financial performance as well. And this takes some pressure off Joyce.
BFM
Well, if I look at the street, they like this stock. Twelve buys, three holes. One sell. Contest at close was $5 and 17 Australian cents. Tucker price, 653.
BFM
All right, 718 in the morning. We’re heading into some messages. Stay tuned. BFM 89 Nine you have been listening.
BFM
To a podcast from BFM 89 Nine, the business station. For more stories of the same kind, download the VSM app.
Can the Federal Reserve engineer a soft landing for the US economy? Are the odds stacked against them especially if consumer spending stops suddenly. Tony Nash, CEO, Complete Intelligence gives us his views.
Transcript
BFM: The business station BFM 89 Nine is seven. 6th Thursday, the 1 September, and we are in the final quarter of the year. But nonetheless, we don’t need to look so far ahead because in the next half an hour, I’ll be speaking to Hannah Pearson of the travel consultancy Pet Anderson on Asian tourism recovery.
But in the meantime, let’s recap how global markets closed yesterday. So the Dow was down 0.9%, S&P 500 down 0.8%, while the Nasdaq was down 0.6%. Meanwhile, in Asia, Nikkei was down 0.4%, Hang Seng was up very marginally by 0.3%, Shanghai was down 0.8%, Singapore Street Times was up 0.6%, and our very own FBM KLCI was of course close due to the medical holiday.
But for more in terms of where global markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now, the S&P 500, in fact, the US markets continue to slide, but the S&P 500 we know, is down by 4.2% on a monthly basis, even though US jobs and consumer numbers released this week were largely positive. So why is this bearish sentiment in the equity markets persisting?
TN: It’s pretty easy. Equity investors weren’t prepared for Powell to have the conviction to fighting inflation that he showed in last week’s speech. So everyone else, bond vestors, commodity investors and so on, understood Powell’s conviction.
But equity investors had expected the Fed to pivot. And by pivot, maybe coming close to loosening and maybe coming close to ending rate rises. But the Fed was never going to pivot. If anything, the pace of rate rises may slow, but the Fed’s ultimate destination is 4%. And they’ve said that for months.
So there really shouldn’t have been any surprise with that. But equity investors just didn’t want to believe it. And so they’re in price discovery, continuing lower now. So once they hit the valuation that will reflect getting to 4%, I think we’ll be back in decent territory. But until then, we’re in a downward price discovery mode.
BFM: Okay, Tony, the other thing that’s going to happen in next few weeks is of course, the Fed going to reduce their $9 trillion balance sheet. What kind of impact do you think this will have on markets?
TN: Well, it’s tighter. So it’s going to be more difficult. So in September, the Fed will double quantitative tightening. So they’ve been tightening at about 47.5 billion dollars per month. They’re going to more than double that to 95 billion in September. So it will definitely add upward pressure on interest rates.
And when there is upward pressure on interest rates, that means the cost of money is higher and the cost of buying a house is higher, and so on and so forth. And with respect to buying a house, the Fed is about $50 billion behind on shrinking their mortgage-backed securities portfolio. So they do have some catching up to do, but they’ve got time on their side. They can do it at whatever pace they want.
BFM: Okay. In the meantime, right, let’s look at the US consumer. Super important in the US. Economy, but at least 60% of GDP. Do you have a sense of what’s happening there? Are they still very confident? Are they still buying, especially discretionary spending? Has it been robust?
TN: I don’t necessarily think. You have a separation. You have luxury buyers who are very confident. But I think your average buyer, I don’t necessarily think there’s a lot of confidence behind their buying. I think they’re just trying to maintain their pace of spending.
So spending continues to grow, but consumer credit has also expanded. Visa, I think, two days ago said that their payments volume grew by 11%. So that’s not the value. I mean, you could say with inflation, of course, the value is going to go up, but they saw their payments volume go up by 11%. Part of that is due to things like back to school here in the US. The school year starts in late August, early September.
But until consumers stop growing their spending, the Fed will keep raising because the Fed, part of what they’ve been trying to do is what’s called demand destruction. And until consumers and businesses stop raising the pace of their spending, the Fed will continue raising interest rates in tightening conditions.
BFM: But doesn’t this then just mean that the US is officially in a recession? Because you’re basically sending out signals to the market that the economy needs to slow down. And if we continue to do so, we’ve already seen two-quarters of it, right, which means it’s a technical recession. How bad will this recession really be? I mean, it will be official at some point.
TN: Yeah, I really honestly don’t care if we’re in a recession or not. If two quarters is the rule of thumb, then we’re in a recession. And we’ve been in a recession since Q1. So it’s really just a matter of labeling.
I think the difficulty is, as you say, what’s the impact on, say, business growth, job growth, spending growth? And we’re seeing that the job market has remained pretty strong, spending growth has remained pretty strong. And the concern is, will that stop? When will that stop? And I think we have seen things slow down, at least in terms of economic growth, but a lot of that has been around government spending as well.
So things will likely become dramatically slower in 2023 if the Republicans take over the US. House of Representatives, which controls the budget. So if Republicans take over the House, they will put a stop on a lot of the spending bills that the Biden administration continues to want to pass, and they’ll be more budget conscious. So government spending may not necessarily decline, but the pace of the rise will stop. And so government spending has been what’s been keeping, say, GDP and other things moving, but that will likely stop if Republicans take over Congress.
BFM: Okay, but what about the Fed, the actions of the Fed? Because so far it seems like markets are looking to them for engineering a soft landing in the US. Do you think they’ll succeed, though, or are we going to look at the politicians for doing so?
TN: It all depends. Well, not all. A lot of it depends on the Fed’s actions this month, in September. So if the Fed slows the pace of rate rises, let’s say to 50 basis points instead of 75, they’re signaling that they’re willing to slow down a bit with the destination remaining 4%.
So if the Fed were to come and say, a 25 basis point rise, then that would be a real signal that, yes, they’re definitely committed to getting to four, but they’re willing to slow down to get us to four by, say, Q1, maybe late Q1 of ’23. And I think that would be a signal to equity investors that the Fed understands and they’re okay if some of these valuations continue to be stretched.
If we see a 25 basis point rise, which I don’t think anybody is really calling for in September, then that would be a real kind of green light from the Fed. I think we’re likely to see 50. 75 is also likely, but I think 50 is slightly more likely. So we’ll likely see 50 and then a few 25s. And that’ll get us to four in, I think, December or January. And at that point, the Fed is just going to reassess and figure out kind of which strategy to pick after that.
BFM: So is it too optimistic to say that maybe we might have a year-end rally for US. Markets? What do you think?
TN: It’s possible. I wouldn’t necessarily count on it. Again, I think the upside is capped for a period because of the uncertainty of the Fed, at least until we have clarity on the September signaling. So if they do raise 75 in September, then that likely means we have a couple of 25 rises in October, November, something like that. But it doesn’t necessarily mean they’re going to stop. All it means is that they’re going to reassess and the beatings will continue effectively.
BFM: What about oil, though? It’s now $89 a barrel for WTI. Why have prices come under pressure so much?
TN: Well, the Saudis came out with a statement last week around the gap between the paper value of oil and the physical market. And they have been talking about cutting their output because of the difference, the broad difference between the physical market and the paper market. And so I think when we see falls like this, it just convicts the Saudis more. Unless there’s political pressure put on them, it just convicts them more to cut their output.
The Saudis, the Emiratis and others have come together and said we’re likely going to slower output. Part of this is also putting pressure on the Iran deal, assuming that there’s more capacity from Iran. So if exports from Iran are normalized, then that could put downside pressure on the price. So the Saudis are just trying to keep the price up.
Within that context, we also have to look at the Strategic Petroleum Reserve releases in the US. So that will end in October unless they slow down the pace of the SPR release, but that effectively cuts off supply to the market. And so when the SPR release ends and if the Saudis cut their output, we could have a spike in crude prices, say in Q4.
That’s kind of what we’re expecting is for crude prices to rise into the end of the year. The US midterm elections will be passed as Saudis will likely cut their output. Other OPEC countries will likely cut their output. And the US SPR release will be done. Unless the Russia-Ukraine war ends, which would put crude in the open market, we do expect to see crude price rises towards the end of the year.
BFM: All right, thank you for your time. That was Tony Nash, CEO of Complete Intelligence, telling us that we can expect Brent crude prices to actually perhaps go up for the last quarter of the year as there are more output cuts despite some of the demand destruction we are seeing because of the global economic slowdown.
MG: The Lead Lag Report joining us for the hour here is Tony Nash of Complete Intelligence has found a lot of people that I respect following. Tony, I saw a few people saying they were excited to hear what Tony has to say. So hopefully we’ll have a good conversation here.
Tony for those who aren’t familiar with your background talk about who you are how’d you get involved in the data side of markets and forecasting in general. And what you’re doing with Complete Intelligence.
TN: Sure, Michael. First of all, thanks for having me. I have followed you for probably 10 or 15 years.
MG: I am very sorry for that I am very very sorry for that.
TN: But yeah so, I got involved in data way back in the late 90s when I was in Silicon Valley and I built a couple of research firms focused on technology businesses. I then took about probably eight years to become an operator. I did a turnaround in Asia of a telecom firm. I built a firm in Sri Lanka during the Civil War and then I started down the research front again. I was the Global Head of Research for the Economist and I was the Asia Head of Consulting for a company called IHS Markit which is now owned by S&P and then after that I started Complete Intelligence.
So, you know my background is really all about data but it’s also all about understanding the operational context of that data. And I think it’s very hard for people to really understand what data means without understanding how people use it.
MG: Okay. So that’s maybe a good direction to start with that point about context with data because I think part of that context is understanding what domains data is more appropriate for forecasting and others. Right? So, I always made this argument that there are certain domains in particular when it comes to, I would argue investing that have sort of a chaotic system element to them. Right? Where small changes can have ripple effects. So, it’s hard to necessarily to sort of make a direct link between a strong set of variables and the actual outcome because there’s always a degree of randomness. Whereas, something that’s more scientific right that doesn’t have that kind of chaos theory element is it’s clearer.
So, talk about that point about context when it comes to looking at data. And again, the kind of domains where data is more appropriate to really have more conviction in than others.
TN: Yeah. Okay. So, that’s a great place to start. So, the first thing I would say is take every macro variable that you know of and throw it out the window. It’s all garbage data 100 of it. Okay? I would never trade based on macro data.
We’ve tested macro data over the years and it’s just garbage. It doesn’t matter the country. You know we hear people saying that China makes up their data. Well, that may be true you can kind of fill in the blank on almost any country because I don’t know how much you guys understand about macro data. But it is not market clearing data. Okay? Like an equity price or a commodity price.
Macroeconomic data is purely academic made-up data that is a proxy for activity. It’s a second or third derivative of actual activity by the time you see, say, a CPI print which is coming out tomorrow. Right? And it’s late and it’s really all not all that meaningful. So, I wouldn’t really make a trade or put a strategy together based on macro data even historical macro data. Every OECD country revises their data by what four times or something.
So, you see, a print for CPI data tomorrow that’s a preliminary print and that’s revised several times before it’s put on quote-unquote actual. And so, you know, you really can’t make decisions using macroeconomic data beyond a directional decision. Okay? So, if you follow me on Twitter, you see I’m very critical macro data all the time. I’m very sarcastic about it.
I think the more specific you can get… You know if you have to look at say national data or macroeconomic data, I would look at very low-level data the more specific you can get the better. Things like household surveys or you know communist and socialist countries. Chinese data at the very specific level can be very interesting. Okay? Government data the high-level data in every country I consider it garbage data in every country. So, you’re looking at very low-level very specific government or multilateral data, that’s interesting.
The closer you get to market clearing data the better because that’s a real price. Right? A real price history on stuff is better and company data is the best. And of course, company data is revised at times but that really helps you understand what’s happening at the kind of firm level. And what’s happening at the transaction level. So, you know, those are the kind of hierarchies of data that I would look at.
MG: So, okay this is a great. That’s a great point you mentioned that it’s you said very these variables is macro variables they’re proxies for activity. Right? They’re really more proxies for narratives. Right? Because and that’s where I think… You mentioned sarcasm almost 99 of my tweets at this point are sarcasm because when Rome is burning, what else I’m not going to do except joke about it. Right? Because I can’t change anything. Right?
So, and to that point I share a lot of that cynicism around data that people will often reference in the financial media that sounds really interesting, sounds like it’s predictive but when you actually test it to your point, you throw it out because it doesn’t work. Right? There’s no real predictive element to it.
So, we’ll get into some of the predictive stuff that you talk about but I want to hit a little bit on this market clearing phrase you kept on using. Explain what you mean by market clearing.
TN: Data is where there is a buyer and a seller.
MG: To actual prices of some asset class or something like that.
TN: Yep. That’s right.
MG: Okay. So, that makes sense. Okay. Now again I go back to the certain domains that data is more clear in terms of cause and effect and getting a sense of probabilities the challenge with markets. As we know is that the probabilities change second by second because not only does that mean meaningless data change second by second but the market clearing data changes second by second. Right? Going back to that point.
So, with what you do with Complete Intelligence, talk us through a little bit. What are some of the variables that you tend to find have some predictive power? And how do you think about confidence when it comes to any kind of decision made based on those variables?
TN: Sure. Okay. So, before I do that let me get into why I started Complete Intelligence because if none of you have started a firm before don’t do it. It’s really really hard so…
MG: From the people in the back because I got to tell you I’m an entrepreneur, I’m going through. And all you got is people on Twitter kicking you when you’re down when it’s the small sample anyway.
TN: Absolutely. So, I was where I had worked for two very large research firms The Economist and IHS Markit. And I saw that both of them claimed to have very detailed and intricate models. Okay? Of the global economy industries, whatever. Okay? For all of the interior models. And I have never spoken with a global research firm a data firm that is different from this. And if I’m wrong then somebody please correct me. But at the end of that whole model pipeline is somebody who says “no that’s a little bit too high” or “a little bit too low” and they change the number. Okay? To whatever they wanted it to be in the first place. So, and I tell you 100% of research firms out there with forecasts today have a manual process at the end of their quote-unquote model. A 100% of them. Again, if there’s somebody else that doesn’t do that, I am happy to be corrected. Okay? But I had done that for a decade and I felt like a hypocrite when I would talk to clients.
So, I started Complete Intelligence because I wanted to build a 100% machine driven forecasts across economics, across market, across equities, across commodities, across currencies. Okay? And we’ve done that. So, we have a multi-phase, multi-layer machine learning process that takes in billions of data items. We’re running trillions of calculations every week when we reforecast our data. Right? Now the interval of our forecast is monthly interval forecast. So, if people looking at daily prices that’s not what we’re doing now. Okay? We will be launching daily interval forecasts. I would say probably before the end of the year to be conservative but we’re doing monthly interval forecasts now.
Why is everything I’ve said is meaningless unless we measure our error. Okay? So, for every forecast that we do. And if you log into our website, you can see whether it’s the gold price, the S&P 500, USD, JPY, molybdenum or whatever. We track our error for every month, for everything that we do. Okay? So, if you want to understand your risk associated with using our data it’s there right in front of you with the error calculations. Okay? It’s only fair, If I’m gonna say sell you a forecast, you should be able to understand how wrong we’ve been in the past, before you use that as a decision-making input.
MG: Well, maybe just add some framework on that because I think that’s interesting. So, what you call error I call luck. Right? Because luck is both good or bad. I always make that point that with any equation any set of variables you’re going to have that error is the luck component that you can’t control. And that doesn’t necessarily mean that the equation is wrong. Right? It’s just means that for whatever reason that error in that moment in time was higher or lower than you might otherwise want. Okay?
TN: There is no such thing as zero error. And anybody who tells you that they have zero error is obviously they’re an economist and they don’t understand how markets work. So, there is always error in every calculation.
So, the reason we track error is because that serves as a feedback loop into our machine learning process. Okay? And we have feedback loops every week as we and what we’re doing right now is every Friday end of day. We will download global data process over the weekend have a new forecast on Monday morning. Okay? And so all of that error whether it’s near-term error, short-term error or say medium-term error, we feed that all back in to help correct and understand what’s going on within our process. And we have like I said, we have a multi-phase process in our machine learning platform. So, error is simply understanding the risk associated with using with using our platform.
MG: Right, which is basically how apt is a thing that you’re forecasting to that error which is again luck good or bad. I’m trying to put in sort of a qualitative framework also because I think… Yeah, there’s errors in life obviously, too. Right? And so, when they’re good or bad. But you know those elements.
TN: Right. But here’s what I would and I don’t know, I don’t want to dispute this too much but I think there is. So, you use the word luck and that’s fine but I think luck has a bit to do with the human element of a decision. Okay? We’re using math and code there’s zero human interaction with the data and with the process. And so, I wouldn’t necessarily call it luck. I mean, it literally is error like our algorithms got it wrong. So, if you want to call luck that’s absolutely fine but I would say luck is more of a human say an outcome associated with a human decision. More than something that’s machine driven that’s iterating. Again, we’re doing trillions of calculations every week to get our forecasts out there.
MG: Yeah, no that’s fair and maybe for the audience, Tony. Explain what machine learning is now.
TN: Sure.
MG: I once developed an app called “How Edition”. I was having dinner with the head developer once and he said he just came back from a conference about machine learning and he was just basically well, having drinks with me laughing and joking saying everybody use this term machine learning but it’s really just regression analysis. Right? So, talk about machine learning what is actual machine learning? How important is recent data to changes in the regression? Because I assume that’s part of the sort of dynamic nature of what you do just kind of riff on that for a bit.
TN: Okay. So, when I first started Complete Intelligence, I was really cynical about AI. And I spoke to somebody in Silicon Valley and asked the same question: what is AI? And this person said “Well AI is everything from a basic I say, quadratic equation upward.” I’m not necessarily sure that I agree that something that simple would be considered artificial intelligence. What we’re really doing with machine learning is there are really three basic phases. Okay? You have a preprocess which is looking at your data to understand things like anomalies, missing data, weird behavior, these sorts of things. Okay? So, that’s the first phase that we look at to be honest that’s the hardest one to get right. Okay?
A lot of people want to talk about the forecasting methodologies and the forecasting algorithms. That’s great and that’s the sexy part of ML. But really the conditioning and the pre-process is the is the hardest part and it’s the most necessary part. Okay? When we then go into the forecasting aspect of it, we’re using what’s called an ensemble approach. So, we have a number of algorithms that we use and let’s say they’re 15 algorithms. Okay? That we use we’re looking at a potential combinatorial approach of any individual or combination of those algorithms based on the time horizon that we’re forecasting. Okay?
So, we’re not saying a simple regression is the way to go we’re saying there may be a neural network approach, there may be a neural network approach in combination with some sort of arima approach. We’re saying something like that. Right? And so, we test all of those permutations for every historical period that we’re looking at.
So, I think traditionally when I look back at kind of quote-unquote building models in excel, we would build a formula and that formula was fairly static. Okay? And every time you did say a crude oil forecast you had this static formula that you set your data against and a number came out. We don’t have static formulas at all.
To forecast crude oil every single week we start at obviously understanding what we did in the past but also re-testing and re-weighting every single algorithmic approach that we have and then recombining them based upon the activity that happened on a daily basis in that previous week. And in the history. Okay?
So, that’s phase two the forecasting approach and then phase three is the post process. Right? And so, the post process is understanding the forecast output. Is it a flat line? Right? If it’s a flat line then there’s something wrong. Is it a straight line up? Then that there’s something you know… those are to use some extremes. Right? But you know we have to test the output to understand if it’s reasonable. Right? So, it’s really an automated gut check on the reasonableness of the outcome and then we’ll go back and correct outliers potentially reforecast and then we’ll publish. Okay?
So, there are really three phases to what we do and I would think three phases to most machine learning approaches. And so, when we talk about machine learning that’s really what we’re talking about is that that really generally three-phase process and then the feedback loop that always goes back into that.
MG: Yeah. No that makes sense. Let’s get…
TN: That’s really boring after a while.
MG: No, no, no but I think that’s it’s part of what I want to do with these spaces is try to get people to understand you know beyond sort of just the headline or the thing that is thrown out there. As a term to what does that actually mean in practice you don’t have to know it fully in depth the way the that you do. But I think having that context is important.
TN: I would say on the idea generation side and on the risk management side right now. Okay? Now the other thing that I didn’t cover is obviously we’re doing markets but we also do… we use our platform to automate the budgeting process within enterprises. Okay? So, we work with very large organizations and the budget process within these large organizations can take anywhere from say four to six months. And they take hundreds of people. And so, we take that down to really interacting with one person in that organization and we do it in say less than 24 hours. And we build them a continuous budget every month.
Once accounting close happens we get their new data and then we send them a new say 18-month forward-looking forecast for them. So, their FPA team doesn’t have to dig around and beg people for information and all that stuff. So, some of this is on the firm event could be on the firm evaluation side, as well. Right? How will the firm perform? Nobody’s using us for that but the firms themselves are using that to help them automate their budgeting process. So, some of that could be on this a filtering side and the idea generation side, as well.
So, we do not force our own GL structure onto the clients. We integrate directly with their SAP or Oracle or other ERP database. We take on their GL structure at whatever levels they want. We have found that there is very little deterioration from say, the second or third level GL to say the sixth or seventh level GL, in terms of the accuracy of our forecast. And when we started doing this it really surprised me. We do a say a team level forecast for 10, 12 billion organizations, six layers down within their GL. And we see very little deterioration when we go down six levels than when we do it at say two levels. Which is you know it really to me it speaks to the robustness of our process but would we consider Anaplan a competitor not really, they’re not necessarily doing the kind of a budget automation that we’re doing at least, that I’m aware of. I know that there are guys like Hyperion who do what we’re doing but again their sophistication isn’t necessarily. What we’re doing and they do a great job and Hyperion is a great organization. I think Oracle gave them a new name now but they’re not necessarily using the same machine learning approaches that we’re using. And our clients have told us that they don’t get the same result with using that type of say ERP originated or ERP add-on budgeting process.
Yep. So, I would say we can’t we can do company-specific information for a customer if that’s what they want. Okay? We don’t necessarily have that on our platform today aside from say individual ticker symbols. Okay? But we’re not forecasting say the P&L of Apple or something like that or the balance sheet of Apple. Something we could do in a pretty straightforward manner but we do that on a customer-by-customer basis.
So, what we’re forecasting right now are currency pairs, commodities about 120 commodities and global equity indices. Okay? We are Beta testing individual equity tickers and we probably won’t introduce those fully on the platform until we have our daily interval forecast ready to go to market. But those are still we’re still working some kinks out of those and we’ll have those ready probably within a few months.
MG: Okay. So, let’s talk about commodities here for a bit tonight. Obviously, this is where a lot of people’s attention has gone to. What kind of variables and I know you said you have a whole bunch of variables that are being incorporated here but are there certain variables in particular when it comes to oil and other commodities that have a higher predictive power than others.
TN: There are I think one of the stories that I tell pretty often and this really shocks people is when we look at things like gold. Okay? I’m not trying to deflect from your oral question but just to you know we’ve spoken with the number of sugar traders over the years. Okay? And so, we tell them that say the gold price and the sugar price there may not necessarily be a say short term say correlation there but there is a lot of predictive capability there and we talk them through why. And I think the thing that we get out of the machine learning approach and we cast a wide net. We’re not forcing correlations is that we’ll find some unexpected say drivers. Although drivers implies a causal nature and we’re not trying to imply causality anywhere. Okay?
We’re looking at kind of co-movement in markets over time and understanding how things work in a lead lag basis with some sort of indirect causality as well as say a T0 or current state movement. So, with crude oil you know there are so many supply side factors that are impacting that price right now, that I can’t necessarily point to say another commodity that is having an impact on that. It really is a lot of the supply side and sentimental factors that are impacting those prices right now.
MG: That makes a lot of sense. And I’m curious how did you mention it’s I think the intervals once a month. Right? So, given the speed with which inflation has moved and yields have moved how does a machine learning process adapt to sudden spikes or massive deltas in in variable movement. Right? Because there’s always a degree of randomness going back to error. Right? And you can make an argument that the larger move is the that may actually be more error but I think that’s an interesting discussion.
TN: So, I’ll tell you where we were say two years ago when 2020 hit versus today. Okay? So, in March of 2020, April 2020 everything fell apart. I don’t think there were any models that caught what was going to happen. It was an exogenous event that hit markets and it happened very quickly. So, in June, I was talking with someone who is with one of the largest software companies in the world and they said “Hey has your AI caught up to markets yet because ours is still lost” And you guys would be shocked if I told you who this was because you would expect them to know exactly what’s going to happen before it happened. Okay? I’ll be honest I think it was all of them but the reality is you know Michael you where you were saying that ML is just regression analysis.
I think a lot of the large firms that are doing time series forecasting really are looking at regression and derivatives of regression as kind of their only approaches because it works a lot of the time. Right? So, we had about a two-month delay at that point and part of it was because… So, by June we had caught up to the market. And we had started in February to iterate twice a month, we were doing once a month; I hope you guys can understand with machine learning two factors are we’re always adjusting our algorithms. Okay? We’re always incorporating new algorithms. We’re always you know making sure that we can keep up with markets because you cannot be static in machine learning. Okay? The other thing is we’re always adding capacity why? Because we have to iterate again and again and again to make sure that we understand the changes in markets. Okay?
So, at that time we were only iterating twice a month and so it took us a while to catch up. Guys like this major technology firm and other major technology firms they just couldn’t figure it out. And I suspect that some of them probably manually intervened to ensure that their models caught up with markets. I don’t want to accuse any individual company but that temptation is always there. Especially, for people who don’t report their error. The temptation is always there for people to manually intervene in their forecast process. Okay?
So, now, today if we look for example at how are we catching changes in markets. Okay? So, if I look at the S&P 500 for April for example, our error rate for the S&P 500 for April I think was 0.6 percent. Okay? Now in May it changed it deteriorated a little bit to I think four or six percent, I’m sorry I don’t remember the exact number offhand but it deteriorated. Right? But you know when there are dramatic changes because we’re iterating at least once a week, if not twice a week we’re catching those inflections much much faster. And what we’re having to do, and this is a function of the liquidity adjustments, is where in the past you could have a trend and adjust for that trend and account for that trend. We’re really having to our algorithms are having to select more methodologies with recency bias because we’re seeing kind of micro volatility in markets. And so again…
MG: So, kind of like the difference between a simple moving average versus like an exponential moving average. Right? Where you’re waiting the more recent data sooner.
TN: It could be. Yeah.
MG: Right.
TN: Yeah. That’s a very very simple approach but yeah it would be something like that, that’s right. Yeah. What so when we work with enterprise customers that level of engagement is very tight because when we’re getting kind of the full set of financial data from a client obviously, they’re very vested in that process. So, that’s different from say a small portfolio manager subscribing to RCF futures product where we’re doing forecasts and they have their own risk process in place. And they can do whatever they want with it. Right? But again, with our enterprise clients we are measuring our error so they can see the result of our continuous budgeting process. Okay?
So, if we’re doing let’s say, we launch with a customer in May, they close their mate books in June get them over to us redo our forecast and send it over to them and let them know what our error rate was in May. Okay? So, they can decide how we’re doing by department, by team, by product, by whatever based upon the error rates that we’re giving at every line item. Okay? So, they can select and we’re not doing kind of capital projects budgets we’re doing business as usual budgets so they can decide what they want to take and what they don’t want to take. It’s really up to them but we do talk through that with them and then over time they just start to understand how we work and take it on within their own internal process.
MG: So, back a little bit Tony. So, you mentioned you do this machine learning forecasting work when it comes to broad economics, markets and currency; of those three which has the most variability and randomness in other words which tends to have a higher error? Whenever you do any kind of machine learning to try to forecast what comes next?
TN: I would say it depends on the equity market but probably equity markets when there are exogenous shocks. So, our error for April of 2020 again, we don’t hide this from anybody it was not good but it wasn’t good for anybody. Right? And so, but in general it depends on the equity market but some of the emerging equity markets, EM equity markets are pretty volatile.
We do have some commodities like say rhodium for example. Okay? Pretty illiquid market, pretty small base of people who trade it and highly volatile. So, something like rhodium over the years our air rates there have not necessarily been something that we’re telling people to use that as a basis to trade but obviously, it’s a hard problem. Right? And so, we’re iterating that through our ML process and looking at highly volatile commodities is something that we focus on and work to improve those error rates.
MG: Here, I hope you find this to be an interesting conversation because I think it’s a part of the of the way of looking at markets, which not too many people are themselves maybe using but is worth sort of considering. Because I always make a point that nobody can predict the future but we all have to take actions based on that unknowable future. So, to the extent that there might be some data or some conclusions that at least are looking at variables that historically have some degree of predictive power. It doesn’t guarantee that you’re going to necessarily be better off but at least you have something to hang your hat on. Right? I think that’s kind of an aspect to investing here.
Now, I want to go a little bit Tony to what you mentioned earlier you had lived abroad for a while in Europe. And when I was starting to record these spaces to put up on my YouTube channel the first one, I did that on was with Dan Arvis and the topic of that space was around this sort of new world order that seemed to be shaping up. I want you to just talk from a geopolitical perspective how you’re viewing perhaps changing alliances because of Russia, Ukraine. And maybe even dovetail that a little bit into the machine learning side because geopolitics is a variable. Which is probably quite vault in some periods.
TN: Yeah, absolutely. Okay. So, with the evolving geopolitical order I would say rather than kind of picking countries and saying it’s lining up against x country or lining up with x country or what country. I would say we’ve entered an era of opportunistic geopolitics. Okay? We had the cold war where we had a fairly static order where people were with either red team or blue team. That changed in the 90s of course, where you kind of had the kind of the superpower and that’s been changing over the last say 15 years with say, China allegedly becoming kind of stronger and so on and so forth. So, but we’ve entered a fairly chaotic era with say opportunistic macroeconomic relation or sorry, geopolitical relationships and I think one of the kinds of top relationships that is purely opportunistic today is the China-Russia relationship.
And so, there’s a lot of talk about China and Russia having this amazing new relationship and they’re deep. And they’re gonna go to war together or whatever. We’ve seen over the past say three, four months that’s just not the case. And I’ve been saying this for years just for a kind of people’s background. Actually, advised the Chinese government the NDRC which is the economic planning unit of the central government on a product or on an initiative called the belt and road initiative. Okay? I did that for two years. I was in and out of Beijing. I never took a dime for it. I never took expense reimbursement just to be clear, I’m not a CCP kind of pawn. But my view was, if the Chinese Government is spending a trillion dollars, I want to see if I can impact kind of good spend for that. So, I have seen the inside of the Chinese Government and how it works and I also in the 80s and 90s spoke Russian and studied a lot on the Russian Government and have a good idea about how totalitarian governments work.
So, I think in general if we thought America first was offensive in the last administration then you really don’t want to learn about Chinese politics and you really don’t want to learn about Russian politics because they make America first look like kindergarten. And so, whenever you have ultra-ultra-nationalistic politics, any diplomatic relationship is an opportunistic relationship. And I always ask people who claim to be China experts but say please tell me and name one Chinese ally. Give me one ally of China and you can’t, North Korea, Pakistan. I mean, who is an ally of China there isn’t an ally of China. There is a transactional opportunistic relationship with China but there is not an ally with China.
And so, from a geopolitical perspective if you take that backdrop looking at what’s happening in the world today it makes a whole lot more sense. And a lot of the doomsayers out there saying China is going to fall and it’s going to have this catastrophic impact. And all this other stuff, the opportunism that we see at the nation-state level pervades into the bureaucracy. So, the bureaucracy we hear about Xi Jinping. And Xi Jinping is almost a fictional character. I hate to be that extreme on it but there is the aura of Xi Jinping and there is the reality of Xi Jinping, just a guy, he’s not Mao Zedong. He doesn’t have the power that supposed western Chinese experts claim that he has. He’s just a guy. Okay?
And so, the relationships within the Chinese bureaucracy are purely transactional and they are purely opportunistic. So again, if you take that perspective and you look at what’s happening in geopolitics, hopefully you can see things through a different lens.
MG: Now, I’m glad you’re framing that in those terms because I think it’s very hard for people to really understand some of these dynamics when it’s almost presented like a like the story for a movie. Right? For what could be a conflict to come by the media because and it’s almost overly simplified. Right? When you hear this type of talk. So again, I want to go back into how does that dovetail into actual data. Right? Maybe it doesn’t at all. When you have some of these dynamics and you talk about market clearing data, you’re going to probably see mark movement somewhat respond off of geopolitical changes. Talk about anything that you’ve kind of seen as far as that goes and how should investors consider geopolitical risk or maybe not consider geopolitical risk?
TN: Yeah, I think, well when you see geopolitical adjustments today all that really is… I don’t mean overly simplified but it’s a risk calibration. Right? So, you know Russia invades Ukraine, that’s really a risk calibration. How much risk do we want to accept and then what opportunities are there? Right?
So, when you hear about China, you have to look at what risk is China willing to accept for actions that it takes? Keeping in mind that China has a very complicated domestic political environment with COVID shutdown, lockdowns and all of this stuff. So, having worked with and known some really smart Chinese bureaucrats over the years, these guys are very concerned with the domestic environment. And I don’t although there are idiot you know generals and economists here and there who say really stupid stuff about China should take over TSMC and China should invade Taiwan, these sorts of things. My conversations over the years have been with very pragmatic and professional individuals within the bureaucracy.
So, do I agree with their policies? Not a lot of them but they are well thought out in general. So, I think just because we hear talk from some journalist in Beijing who lives a very sheltered life about some potential thing that may happen. I don’t think we necessarily need to calibrate our risk based on the day-to-day story flow. I think we need to look at like… so there’s a… I’m sure you all know who Leland Miller is in China beige book like?
MG: Yeah, he’s not too long ago.
TN: Yeah. He has a proxy of the Chinese economy and that’s a very interesting way to look at an interesting lens to look through China or through to look at China or whatever. But so, I think that the day-to-day headlines, if you follow those, you’re really just going to get a lot of volatility but if you try to understand what’s actually happening, you’ll get a clearer picture. It’s not necessarily a connection of a collection of names in China and the political musical chairs, it’s really asking questions about how does China serve China first. What will China do to serve China first and are some of these geopolitical radical things that are said do they fit within that context of China serving China first? So, that’s what I try to look at would I be freaked out if China invaded Taiwan? Absolutely. I think everybody would right but is that my main scenario? No, it’s not.
MG: In terms of the data inputs on the machine learning side how granular is the data meaning? Are you looking at where geographically demand might be picking up or is it simply this is what the price is and who cares the source? Because again with hindsight if you knew that the source of China and kind of had a rough sense of the history of Russia-Ukraine maybe that could have been an interesting tell that war was coming.
TN: Yes or No. To be honest it had more to do with the value of the CNY. Okay? And I’ll tell you a little bit about history with the CNY. We were as far as I know, the only ones who called the CNY hitting 6.7 in August of 2019 with a six-month lead time. And so, we have a very good track record with USD-CNY and I would argue that China’s buying early in 2022 had a lot more to do with them from a monetary policy perspective needing to devalue CNY. So, they were hoard buying before they could devalue the CNY and I think that had a lot more to do with their activity than Russia-Ukraine. Okay? And if you notice they’ve made many of their buys by mid-April and once that happened you saw CNY, go to 6.8. Right? It’s recovered a little bit since then but China has needed to devalue the CNY for probably at least nine months. So, it’s long overdue but they’ve been working very hard to keep it strong so that they could get the commodities they needed to last a period of time. Once they had those commodities, they just let the parachute go and they let it do value to 6.8 and actually slightly weaker than 6.8.
MG: The point of the devaluation is interesting. I feel if I had enough space but we were talking about the Yen and what’s happened there. And this observation that usually China will start to devalue when they see the end as itself going through its own devaluation.
How does some of those cross correlations play out with some of the work that on machine learning you’re doing? Because there’s a human element to the decision to devalue a currency. Right? So, the historical data may not be valid I would think because you might have kind of a more humanistic element that causes the data to look very different.
TN: Well, they’re both export lab economies. Right? And we’ve seen a number of other factors dollar strength and we’ve seen changing consumption patterns. And so, yes when Japan devalues you generally see China devalue as well but also, we’ve seen a lot of other activities in on the demand-pull side and on the currency side especially with the US dollar in… I would say over the last two quarters. So, yes, that I would say that the correlation there is probably pretty high but there are literally thousands of factors that contribute to the movement of those of those currencies.
MG: Is there anything recently Tony in the output that machine learning is spitting out that really surprises you? That you know… And again, I understand that there’s a subjective element which is our own views on the world and of course then the pure data. But I got to imagine it’s fascinating sometimes if you’re sitting there and seeing what’s being spit out if it’s surprising. Is there anything that’s been kind of an outlier in in the output versus what you would think would likely happen going forward?
TN: Yeah. You know, what was really surprising to me after we saw just to stick on CNY for a minute because it’s the first thing that comes to mind, when we saw CNY do value to 6.8. I was looking at our forecast for the next six months. And it showed that after we devalued pretty strong it would moderate and reappreciate just a bit. And that was not necessarily what I was hearing say in the chatter. It was kind of “okay, here we go we’re going to go to seven or whatever” but our data was telling us that that wasn’t necessarily going to happen that we were going to hit a certain point in May. And then we were going to moderate through the end of the year. So, you know we do see these bursty trends and then we see you know in some cases those bursty trends continue for say an integer period. But with CNY while I would have on my own expected them. I expected the machines to say they need to keep devaluing because they’ve been shut down and they need to do everything they can to generate CNY fun tickets. The machines were telling me that we would you know we’d see this peak and then we would we would moderate again and it would kind of re-appreciate again.
So, those are the kind of things that we’re seeing that when I talk about this it’s… Oh! the other thing is this: So, in early April we had a we have people come back to us on our forecast regularly who don’t agree with what we’re saying and they complain pretty loudly.
MG: So, what do you say I talk when I hear that because whenever somebody doesn’t agree with the forecast, they are themselves making a fork.
TN: Of course. Yeah. Exactly. Right? Yeah, and so this person was telling us in early April that we’re way wrong that the S&P was going to continue to rally and you know they wanted to cancel their subscription and they hated us and all this other stuff. And we said okay but the month’s not over yet so let’s see what happens this was probably a week and a half in April. And what happened by the end of April things came in line with our forecast and like I said earlier we were like 0.4 and 0.6 percent off for the month. And so that person had they listened to us at the beginning of the month they would have been in a much better position than they obviously ended up being in. Right? And so, these are the kind of things that we see on a… I mean, we’ve got hundreds of stories about this stuff but these are the kind of things that we see on a regular basis. And we mess up guys I’m not saying we’re perfect and but the thing that we when we do mess up, we’re very open about it. Everything that we do is posted on our on our website. Every call we make, every error we have is their wars and all. Okay? And so, we’re not hiding our performance because if you’re using our data to make a trade, we want you to understand the risk associated with using our data. That’s really what it comes down to.
MG: It reminds me of back in 2011 and in some other periods I’ve had similar situations, where I was writing and I was very adamant in saying the conditions favored a summer crash. Right? I was saying that for the summer and the market should be going up and people would say oh where’s your summer crash and I would say this summer hasn’t started. Like it’s amazing how people, I don’t know, what it is, I don’t know if it’s just short-termism or just this kind of culture of constantly reacting as opposed to thinking but it is it is remarkably frustrating.
Going back to your point at the very beginning being entrepreneur don’t do it, that you have to build a business with people and customers who in some cases are just flat out naïve.
TN: That’s all right though. That’s a part of the risk that we accept. Right?
MG: Yeah, the other thing right now that happens with every industry but from the entrepreneur’s standpoint. It’s what you’re doing the likely outcome of your product of your service. You’re trying to communicate that to end clients but then in the single role of the die the guy the end client who comes to you exactly for that simply because they disagree with you know the output, now says I want out.
TN: Oh! Yeah! Well, your where is your summer call from 2011 the analogy today is where is your recession call. Right? So, that’s become the how come you’re not one of us calls right now. So, it’s just one of those proof points and if you don’t agree with that then you’re stupid.
So, I would say you never finish with that there is always a consensus and a something you’re you absolutely, must believe in or you don’t know what you’re talking about.
MG: Yeah, well, thankfully. What you’re talking about so appreciate everybody joining this space Tony the first time you and I were talking. I enjoyed the conversation because I think it said on investing and I encourage you to take a look at Tony’s firm and follow him here on twitter. So, thank everybody. Thank you, Tony and enjoy.
US markets remained volatile and on a downward trend as inflation concerns heightened. With that, the US consumer is beginning to feel the pinch of rising food and energy prices. What then does this mean for earnings in the coming quarters and has this been priced in? Our CEO and founder, Tony Nash answers these questions.
Show Notes
WSN: BFM 89 nine is seven o’ six Thursday the 9 June. And of course you’re listening to the morning run. I Wong Shou Ning together with Philip See. Let’s have a quick recap on how good global markets closed yesterday.
PS: US markets closed in the red. The Dow was down .8% SMP 500 down 1.1%, Nasdaq down zero. 7%. Whereas over in Asia it’s been a mixed bag. The Nikki was up 1%, Hong Sang up 2.2%. China composite up zero 7%. I think on the back of China easing a bit on the tech regulatory concerns. However, in Southeast Asia, Singapore is down 0.2%. FBM KLCI also down.
WSN: .1% so for some analysis on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Please help us understand what is happening in US markets because it is another red day today. Why are markets so choppy this Thursday?
TN: I think people are awaiting the CPI print what’s going to happen with the inflation announcement because that number really helps to indicate if the Fed will accelerate their plans of tightening. So if the CPI runs hot, then we’ll see them accelerate potentially. If it comes in as expected, then they’ll stick with the plan that they’ve got.
PS: So the plan is to 50 basis point hikes. If you see it move higher, are you talking about it hitting 75 or like extending it for a third 4th hike?
TN: If it’s higher, we could potentially see it hit 75 maybe in June or July. But certainly we’re looking at another hike in September that’s probable right now and then maybe a 25 basis point in November. So let’s say we saw come in at nine or something like that for a developed economy like the US. These are people who normally look at inflation, 1%, one and a half percent. So 9% inflation is just something that people have not seen for a long time. And so this is really damaging to people. Wages are not very flexible here. And so I’m sure from the Malaysian perspective, you see that it’s damaging people here in the US and it actually is because wages are not as flexible here as they are in other parts of the world. So if we see CPI come in high, then you would see the set accelerate. If it comes in at eight, let’s say less than 9%, they’ll stick with the plan they have. If it comes in lower, say seven-ish they’ll still stick with the plan they have and continue to fight inflation to get it down around 2%, maybe sometime in Q1 in 2023 or something.
WSN: Okay. So let’s stay on the topic of the US economy now. Bloomberg runs a model, runs different models actually, and they say that there’s a 25% chance of recession in the next twelve months, but a 75% chance by 2023. Do you share the same view but.
TN: A 25% chance of a recession is just a hedge. Right? I mean, that’s just saying maybe it’ll happen.
WSN: It’s a chicken call Tony. It’s like being chicken.
TN: So when you look at what a recession, two months or two quarters. Sorry. Of negative growth. Right. Well, we had a negative quarter of growth in the US, and Q one of 22. Will we have a negative quarter of growth this year? Unlikely. Or this quarter? I mean, it’s unlikely because of the reasons for negative growth in Q one are not the same reasons they would be this year or this quarter. Sorry. So going forward, I don’t necessarily think we’ll have a recession, but I think it will feel like a recession to a lot of people because over the last year, year and a half, we’ve had higher overhiring in a lot of industries like technology, overhiring where companies have been afraid they wouldn’t be able to get the talent they need. So they overhire people. They’ve paid people a lot of money. So sectors like tech will likely continue laying people off. They’ve already started, but they’ll likely reassess their wages as well as they realize that they don’t need as many people as they hired. And of course, there will be other effects if tech start laying people off more broadly. So we’ve already seen housing housing in the US.
There is effectively no new mortgage applications going through on that in the US. So the Fed’s target for housing has kind of been achieved really quickly, actually. But it doesn’t necessarily mean there’s a recession. So things will feel like there’s a recession. But I’m not sure we’ll necessarily technically be in a recession.
PS: So let’s just build on your feelings, Tony, and translate this macro numbers to earnings. What is your expectation in terms of quarter two earnings? Do you expect them to be substantially weaker and how will that translate into equity markets?
TN: Absolutely, yes. Definitely substantially weaker. I mean, look at what happened to say, Walmart and Target a couple of weeks ago when they announced their earnings, they were way down. Why? Because they had way overbought inventory and they had bought the wrong inventory. Okay. So they’re paying for that now and they’re going to have to discount to get rid of that inventory. Right. I think people in a lot of industries because of supply chain issues, they’ve overbought things. And in the meantime, preferences and markets have moved on. So they’ve overbought things and they’re going to have to get rid of a lot of inventory. I think Target and Walmart got out there very early to be able to have their equity price hit hard early. But other companies will come out in second quarter and they’ll admit the same thing. So we’ll see margins really compressed. And because of that, we’ll start to see people announce more layoffs because again, during COVID, investors were very charitable to executive teams, meaning they were telling the executive, look, just stay open, just survive as a company, do whatever you have to. Right now, we’ve got markets that are normalizing.
Investors are being more scrutinizing as they should. They’re saying, look, markets are normalizing. You have to perform like an executive team should perform. You have to perform like a company should perform. So investors and markets are going to be harder on companies in Q two.
WSN: But Tony, does this then mean that when I look at the S&P 500 index, which is probably the broadest barometer of the US economy, it’s down 13 point 65% on the year to date basis. Can we expect further weakness or has this already been priced in?
TN: I don’t think it’s been priced in necessarily. I don’t necessarily think we’re going to see another 13% down, but we always hear that things are priced in. And then when events happen, we find out they’re not priced in. I don’t think it’s priced in. I think there’s more pain to come because people are realizing that they’re basically overpaying for the price of equity. Right. In a company. And so we’re going to see pressure put on valuations, and that’s going to hurt a lot, especially in tech. So we’ve already seen pressure put on valuations in tech. And you saw companies like Facebook who are just throwing off cash still and their valuation is compressed because people have just woken up and said, look, it shouldn’t be valued at that. Right. So we’re going to see that more and more, especially in tech, but also in other sectors.
WSN: So where should we hide, Tony? Will it still be in the commodity space? I mean, oil is up 2 and a half percent this morning.
TN: At where oil is. WCI is trading at 122 right now. Brent is north of that. So it’s possible that we see another 20% rise in crude, but it’s really thin air where it is now. So I think crude price really depends on the supply side. And so can OPEC pump more? Not much. Will things in Russia resolve? Maybe probably in third quarter or something like that. Right. So we really have to look at what are central banks doing? They’re trying to ratchet down demand. Right. And so if they can successfully ratchet down demand, then that will have an impact on true prices.
PS: Tony, I would love to get your view because you’ve seen a different vantage, especially in emerging markets, particularly Southeast Asia. If you saw recently WorldBank has scaled its forecast on global growth and has even highlighted the asphalt is very much vulnerable to stack flat, even recessionary pressures. What’s your view? What’s your advantage in terms of investment in EM markets, especially in Southeast Asia?
TN: Yeah, in Southeast Asia. I mean, look, in Southeast Asia, sadly, Myanmar is going to have the toughest time for the next year or two, right? I mean, we all know the political issues there. I love Myanmar, but it’s going to continue to have the toughest time, I think of the say more developed Southeast Asian countries. I think Thailand is going to continue to have a hard time Partly because of supply chain issues. It’s kind of intermediate point and if supply chains continue to stay strained and tourism continues to be relatively slow in Asia I think Thailand is going to continue to have a tough time. I think places like Malaysia, Philippines, Vietnam, I think they’re in a better position and I don’t know that you’ll necessarily get excessive gains in those markets But I think there’s more stability and more same maturity and leadership in those markets. So if I were to look to Southeast Asia on, say, a country play, that’s where I would look. I would be really careful to look at things like excessive consumption, these sorts of things. I think for the next year or so we’re going to be looking at real stables.
What do people need to live a really boring life because we’ve had this super exciting roller coaster for the past two years and we need to get back to normal and we need to look at what are people going to consume Just to have a normal day in, day out life.
PS: Boring life then.
WSN: Yeah, boring is good.
TN: I love that. Yeah, we all need a little more of that.
WSN: Thank you so much for your time. That was Tony Nash, CEO of Complete Intelligence, saying borrowing is good, we need to get back to normality which means that what investors should be focusing on Perhaps consumer staples Versus consumer discretionary and going back to core fundamentals. Looking at valuations, I think you hit.
PS: The nail on the head core fundamentals because I think investors have given companies the past throughout the pandemic most scrutiny now whether the question will be this will show dispersion and earnings variance between those high earners and low performers Will be a big question Mark as there’s more scrutiny about how you perform in this normal, boring time.
Tech stocks on Nasdaq and NYSE are being pummelled as momentum behind the Fed’s unwinding policy continues. Tony Nash, CEO, Complete Intelligence, discusses.
KHC: BFM 89.9 20th of January 2022, 7:06 in the morning with me Khoo Hsu Chuang with Philip See. Now let’s look at how global markets closed yesterday.
PS: Oh, it was terrible. I think that was a lot of downward pressure in the US. Down S&P500 were down 1%, Nasdaq was down one 2%. Asian markets were relatively mixed. The Nikkei was down two 8%. Hung Seng up marginally zero 6%, Shanghai Composite down zero 3%, STI up zero 1%, and back home, FBM KLCI down zero 8%.
KHC: And to discuss what’s happening in global markets, we now welcome Tony Nash, the chief executive of Complete Intelligence. Tony, Nasdaq down 8.3% year to date. It’s been a bit of a bloodbath. How concerned should equity investors be at this point in time, especially those that are heavily into tech companies?
TN: Yeah, if they’re heavily invested in tech companies, they should be very concerned when interest rates rise. It’s a signal that there should be rotation out of technology. And that’s clearly what’s going on. So if we look at Apple, for example, Apple was down over 2% today. They’ve had a really hard time recovering the kind of $180 share peak they hit in early December. So people have known for a month and a half now. Well, definitely over a month that there’s been a rotation out of tech. So we expect headwind for several months until we get a clear indication of the path that the Fed’s going to undertake and how steeply they’re going to raise rates and start to tighten their balance sheet.
PS: Do you think the markets are priced in all the hikes planned?
TN: I think markets are trying to figure out what rates they’re going to do. I mean, there’s gossip right now that they’re going to raise 50 basis points in March, which would be probably an overshoot. But that’s part of the reason you’re seeing such volatility in equities right now is people aren’t really sure. And it’s a debate. It’s an ongoing debate. So where do you put your money? Well, you look at commodities, you look at commodity companies, energy companies, more traditional say manufacturing, not durable goods. People really stocked up on durable goods over the last two years, but other types of manufacturing companies could be interesting.
KHC: And Tony, we’ll talk about oil in just a second. But where do you think the funds are flowing? I know it’s a liquid activity, but where are the funds flowing away from tech into?
TN: Well, if you look at Walmart, there’s some very reliable, say, retail names that they’re going into. If you look at some of the resource plays, like Goldfields was up almost 13% today, volley was up 4.5%. So some of these commodity plays are really intercepting those games.
KHC: That’s right. And of course, talking about commodities, oil is on a tail 13% higher for Brent at $88. West Texas is up 15% to $87. What are the key drivers behind this upper trajectory beyond obviously this market driven flows, Tony?
TN: Yeah. I mean, part of it is the rotation in the market. There are some supply constraints that have been talked about and kind of been undertaken over the past week with some activities in Iraq between Iraq and Turkey, Libya. And there are some political risks, of course, Kazakhstan, Ukraine and other places. But our view is that oil is really kind of topped out for this run. There’s potentially a little more upside, but we don’t necessarily expect oil to take a run at, say $100 right now. We expect a little bit of a pullback certainly later in the year. We expect much higher crude prices.
PS: Do you think this will have any short term impact on the travel industry then and Airlines particularly?
TN: Yes, of course, it depends on what happens with jet fuel and the magnitude of the rise with jet fuel. But Gosh Airlines are contending with enough problems already as it is. So I think for them it’s just kind of another headwind to kind of throw in their pocket.
KHC: And Tony moving into China, and of course, they are pursuing a zero covet policy. They’ve locked down key shipping ports like Nimbo. Obviously, global supply chain problems have been exacerbated by that. So what measures can countries outside China do, for example, nausea, to alleviate these issues in the short, long term?
PS: I think that’s a technology issue.
TN: Sorry, guys. No, that’s my technology issue.
I apologize.
We’ve had these Covid issues for about two years now, and I think the real problem there is policy uncertainty, and some of these policies are becoming quite dangerous. They were very understandable early in the pandemic. But as we’ve started to recognize the issues, these things really need to be tightened down. So, for example, I think the best thing or we think the best thing countries outside of China could do is accept COVID as endemic and convince China that it’s now endemic. Why is that important? Well, we’ve really been in a bunker mentality, and we can’t really stay in that for another two, five or ten years. So if we look over the past day or so, the UK and Denmark have both announced normalization over the next week, and that’s ending things like work from home, ending vaccine requirements and passports, that sort of thing. The impact will be social, it will be economic, and of course, there will be political benefits. So the only reason these politicians are moving in that direction is because they’re getting such political pressure to unwind the requirements that they’re finally doing it because China is the center of global supply chains.
There has to be political pressure for China to normalize because supply chain constraints are affecting every country. And so this is something that really needs to happen. Now if China will not normalize, if they continue to close factories and ports, then companies just need to move their supply chains closer to their consumption countries. And I say just it’s a very complicated activity, but they’ve certainly had two years to start preparing to move those things. So they should accelerate those plans.
PS: And, you know, Tony keeping on the theme of unwinding and going back to normal, I guess many would say increasing interest rates would be kind of normalizing. But I wonder what their applications will be for countries like Brazil, Egypt, Argentina, South Africa and Turkey Who are potentially vulnerable to rising US rates. What’s your assessment on that?
TN: Yeah, it’s going to be hard for them. These are countries with weak and volatile currencies. Turkish Leira, Brazil riyal in Asia, I work particularly about the Tai Baht and the Rupia and Indonesia, I think they’re both vulnerable to rate hikes. I think part of what we’re witnessing is a transition from government led, say, planning. And for the last two years we’ve all looked to government for leadership on this stuff. And I think we’re starting to see a transition toward private sector leadership, at least in developed countries, at least in the west, those private sector companies will feel that currency volatility in their operations in countries like Indonesia, Thailand, Turkey and so on and so forth. So it’s not going to be painless for those governments, for the people in those countries or for the companies that operate there.
KHC: Tony, delightful to have you on again. Thank you so much for your time. That was Tony Nash, chief executive of Complete Intelligence. I don’t know if you’re an investor this year. I mean, what do you do? We’re just literally 20 days into the new year and it’s been tumultuous, right?
PS: It’s choppy waters. I mean, look at year to date, right? All down. I think S&P, Dow Jones, Nasdaq, Nasdaq down 8% year to date.
KHC: Yes, but then my dad a humongous last eleven years, right? So they’ve seen the market capital explode. A bit of correction isn’t bad for the soul sometimes, but you just wonder Where’s the end inside, right?
PS: Correct. I mean, the debate is I think earnings expect to be robust, but the issue is your evaluations.
BFM 89.9 asks Tony Nash from Complete Intelligence on how China’s PBOC adoption of looser monetary policy will affect the yuan and the broader Chinese economy.
SM: BFM 89 nine. Good morning. You’re listening to the morning run. I’m Shazana Mokhtar are together with Philip See. It is Christmas Eve, Friday, the 24 December 9:06 in the morning. But in the meantime, let’s take a look at the activity on Bursa Malaysia.
PS: It’s flat like Coke without any bubbles.
SM: Oh, no, that’s the worst kind of flat.
PS: Yes, the foot sabotage. Malaysia is flat slightly down .09% at 1515.
SM: So still above 1500.
PS: Still above 1500.
But it’s been yoyoing a bit green and red so far. But the rest of the markets across Asia are in green territory. The Straits time is up at 3100. Cosby also up 58% at 3015. Nikkei also up zero 6%, 28814. Now, just to bring your attention, looking at the crypto Bitcoin 5998.65 above the 50,000 mark. Theorem also uptrend 4114115.184. Now, if we shift over to the currencies, ring it to US dollar 4.11988. You’re seeing some strengthening there. But across the other two currencies pound and sing dollar, we’re seeing some weakness there.
Ring it to pound 5.62967. Ring it to Sing dollar 3.0922. Now, looking over to the value board. Really. Smattering of small caps actually driving it, but cost number one Ata IMS at .72 cent unchanged, followed by SM Track up 13% at .13, followed by Kajura Tran asphas flat at .26%.
SM: Okay, so that is the snapshot of Bursa Malaysia at 9:09 this morning. We’re taking a look now at how global markets closed yesterday.
So if we look at the US markets, they closed in the green. The Dow was up 0.6%. The S&P P 500 was up zero 6% as well. The Nasdaq was up zero 9%. So a lot of optimism going into the Christmas weekend. Joining us on the line for analysis on what’s moving markets. We have Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us today. Now 2022 is just a week away. And given the triple headwinds of Fed tapering, Omicron and a China slowdown, will there be a difference in how developed and emerging markets in Asia are going to be impacted?
TN: I think with the tightening in the Fed and with what emerging markets are going to have to do, meaning in the near term, like China is going to have to loosen. So I think you’ll have a strengthening dollar and more of a rush for capital into the US, so that should at the margin, kind of help US markets stay strong across debt and equity. Other things. I think in emerging markets it could eventually China loosening. The PVC loosening could help demand in emerging markets, but it’s going to be hard to get around the hard slowdown that started in China around Omicron.
PS: I see.
And so when you contrast that to the Fed tightening, right. You said China PBOC is adopting a looser monetary policy. How will this affect the UN in relation to those Asian currencies in which there’s a lot of trade between these two countries?
TN: Yeah. CNY has been strong for a protracted period, and it’s made sense on one level, so China can import the energy and food, particularly and some raw materials that it needs in a time of uncertainty. So the PVC has kept it strong through this period. What we’ve expected for some time. And what we’ve shown is that after Lunar New Year, we expect the PPOC to begin to weaken the CNA. We don’t think it’s going to be dramatic, but we think it’s going to be obviously evident. Change of policy, Chinese exporters, although they’ve been producing at not capacity, but then producing pretty.
Okay. China is going to have to devalue the CNY to help those exporters regain their revenues that they’ve lost over the last two years. So we’re in a strange period globally of moving from kind of state support back to market support, whether it’s the US, Europe, Asia, we’ve really had state supportive industries, state supportive individuals as we move beyond covet. Hopefully we’re moving more into a market orientation globally, and there will be some volatility with that.
PS: Yeah, but I was wondering for China, especially, I’m interested to know what the state of the Chinese consumer will be in 2022 because the government is worried for slow down. Right. And wouldn’t they want to expedite and give a bit more ammunition to the Chinese consumer?
TN: They would. But the problem is with Chinese real estate values declining, a lot of consumer debt is secured against real estate. And so the ability of Chinese consumers to expand the debt load that they’re carrying. Is it’s pretty delicate? It’s a fine balance that they’re going to have to run. So either the economic authorities in China push real estate markets up to allow Chinese consumers to keep debt with their real estate portfolios, or they make other consumer debt type of rules that allow Chinese consumers to hold more debt.
Real estate is the part that’s really tricky in this whole equation in China, because if real estate values are falling, the perceived wealth of those consumers is falling pretty rapidly as well, and the desire to consume excessively, it’s just tempt out.
SM: And I suppose still sticking to our view of China looking at metal commodities, what metals have been affected by the slowdown of demand in China? And do you foresee a recovery for them in early 2022?
TN: Yeah. We’ve seen industrial metals like copper and steel, and those sorts of things really slow down dramatically compared to where they were earlier in 2021. We’re seeing reports of, say, copper shortages at the warehouse level at the official warehouses in China, but that’s not real. What we’re seeing and I speak to copper producers in Australia and other places. What they’re telling us is that those copper inventories are being shifted to unofficial warehouses to create a perception of shortage. So we may see a run. We may see an uptick in, say, industrial metals prices in early 22, but we don’t expect it to last long because the supply of constraint is not real.
So until demand picks up for manufacturing and goods consumption. And the other thing to remember is we’ve had a massive durable goods wave through covet. Everyone’s talked up on durable goods. Okay, so there is almost no pent up demand for durable goods. And this is the stuff that industrial metals go into on the demand side, there are some real problems on the supply side. There seems to be plenty of supply in many cases. So we don’t necessarily see the pressure upward, at least in Q1 of 2022 on industrial metals.
PS: And that’s why I’m quite interested where you say that this demand is, I think slowly going to dissipate because yesterday key US inflation gauge sharpest rise in nearly 40 years, right? Personal consumption expenditure surged 5.7% in November. How long do you think this elevator level will last?
TN: Well, US consumers are pretty tapped out. So I think inflation happens for a couple of different reasons. Some people say it’s only monetary. Not necessarily true. We’ve seen real supply constraints that contribute to inflation. We’ve seen demand pulls because of overstimulating economies, and those two things together have accelerated inflation. And so we have to remember at the same time in 2020, we saw prices. If things go down pretty dramatically around mid year, say a third of the way through the year to mid year to just after mid year.
Some of these inflationary effects have been a little bit base effects because prices fell so hard in 2020. But we have seen consumption ticking up because of government stimulus. And we have to remember if the Fed is tightening things like mortgage backed securities, their purchases of mortgage backed securities will slow. Okay, so if people can’t refinance their house or buy new houses again, those wealth effects dissipate if you have a home. If your home price is rising, whether it’s the US or China or elsewhere, the wealth perception is there and people have a propensity to spend.
But if the Fed is pulling back on mortgage backed securities, then you won’t necessarily have that wealth effect that will dissipate. So government spending will decline marginally because build back better didn’t pass. We won’t have that sugar rush of government spending flowing into the economy early in 2002, although we may see something later. I believe governments love to spend money. So I believe the US government will come with some massive package later in the year to bring government spending back up.
SM: Tony, thanks very much for speaking to us. And an early Merry Christmas to you. That was Tony Nash, CEO of Complete Intelligence, giving us a quick take on what he sees moving markets in the final year. In the final weeks of 2021. Looking ahead to 2022.
Our CEO, Tony Nash, talks about inflation’s and Omicron’s role in US shares sinking, as fears spread over their non-transitory nature. And how will Asia react to the ‘non-transitory’ nature of inflation and the new Covid variant? Is Gold a good asset to use to hedge against inflation?
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Show Notes
PS: Markets in the US were down across the board. The Dow is down 1.3%. S&P 500 down 1.2% Nasdaq down 1.8%. Now over across in Asia, everyone was up. Nikkei was up .4% Hang Seng up .8% Shanghai Composite also up .4% and STI Singapore up 1.9%. And as I was saying early on, FBM KLCI was down 1.1%.
TN: Yeah. Thanks for having me, guys. I think the biggest consideration really is Powell’s comments on inflation, saying it’s kind of no longer transitory. So people should expect inflation to stay. What that means generally is we’ve hit a new pricing level is his expectation. So meaning prices are not in his mind, in many cases, going to go back to the levels that we saw before this inflationary stairstep. And what we’ve seen, particularly in the US, is consumers have accepted this and consumers accepted it, thinking that it was a temporary rise in prices.
But what he delivered today is some bad news that it’s likely a permanent prize in the level of prices. And the kind of short term cost rises that people thought they were going to endure are more permanent.
KSC: Yeah. So, Tony, try and give us a bit of a perspective here, because obviously the last twelve years and the last accelerated two years of monetary easing have induced this inflation. How does it all end? And does it stop the weak economic growth we’ve been seeing in the US the last few months.
TN: Yeah. So US economic growth, we don’t see a rapid acceleration of US economic growth. And so we have the US, China, Japan, and the EU, all at very subdued growth rates. And that’s bad. Those are the four largest economies with elevated price rises. Earnings are growing in some areas. I’m sorry, wages are growing in some areas, but they’re not necessarily growing across the economy. And part of that, particularly in the US, is a shortage of staff. So people have opted out of the workforce. We’ve lost, like 6 million workers in the US since Covid.
And so there are fewer workers. And so we have wages rising in certain areas. But it’s not necessarily across the board. So people are really going to have to start taking a look at their disposable income to understand what of these ongoing price rises that they can continue to accept. And I think we’re at a point where, since it’s no longer viewed as temporary, people and companies are going to have to start making trade offs. This is really the bad news is when people have to, when it’s no longer temporary, companies and people have to start making trade offs of what to do with their resources.
And that’s where the real problem is. So it’s not ongoing expansionary spending. And even I think it was Biden who said today we don’t expect a stimulus package for the current variant. Again, people are having to look at trade offs, and this is the real problem. When companies have to look at trade offs, they’re looking at their operating costs, they’re looking at their capital expenditure, they’re looking at their investments, they’re looking at other things. So down to Earth type of environment where we’re starting to enter Realville, we’re starting to exit the kind of fantasy environment we’ve been in the monetary induced sugar coma that we’ve been in for the past year and a half.
PS: So that’s a very interesting point, because I’ve always felt like in 2021, we saw this huge divergence in recovery right between the developed world led by the US and emerging markets, which are still really struggling to contain the virus and such. So when we talk about Asia, how do you think markets will react to this tightening of monetary policy by the Fed?
TN: Yeah. We think that Southeast Asia generally will stay pretty muted. We don’t expect early breakout at least over the next quarter or two. We don’t expect really breakout moves in Southeast Asia. We expect China to have a fair bit of volatility, but we do expect China to be generally positive over the next quarter to quarter horizon. We do expect Japan to continue to rise pretty well in India as well. Japan largely on the back of monetary policy automation, other things. So Asia is not one market, of course.
So we do expect different parts of Asia to react differently. Korea will be a mix between China and Japan like it always is. So we’ll see some volatility there reflecting China, but we’ll see some, I guess, acceleration and equities like we would see in Japan to make some both.
KSC: Well, Tony, in truth, inflation has been with us for some weeks now. But what hasn’t been with us for some weeks has been on the Omicron that’s the other big roadblock posing an obstacle to markets. How does Asia behave? How does Asia react, especially since we’re going to be opening in a few hours time?
TN: Yeah, I think Asia generally. You guys know I lived in Asia for most of my life, and Asia generally takes these things in stride with more vaccines available with the typical kind of weathering, the storm kind of approach that people have, particularly in Southeast Asia. I think people will generally take it in stride. This is really the first pandemic. Let’s say in the west that people have had for probably 50 years where they’ve really been kind of freaked out and worried in Asia, we’ve seen these types of pandemics for 2030 years.
It’s a bit different. People are more conservative, people are more used to these types of volatile, say, public health and market and other type of environments in Asia. So of course, we’ll see things shake up, but we won’t necessarily see the dire kind of messages that we’ve seen, say in the west. I don’t think we will. We’ve seen dire messages come out of, say, Germany and Italy and Austria, particularly over the past week with full lockdowns with 100% vaccine mandates, with really dire messaging. I don’t necessarily think we’re going to see super negative messaging in Asia like we’ve seen there.
PS: We won’t freak out as much as what you’re saying then essentially.
TN: No. Come on, man. It’s Asia, right? People are used to volatility in Asia and the developed markets. Developed markets are highly calibrated. Right? 0.2% change. Either way is people see as dramatic in Asia a small they’re not as calibrated. So people are accustomed to more ups and downs, and people just generally take it in stride.
PS: And I said that generally it’s quite calming. Is gold with inflation basically consigned away from this trend trade term? What’s your view in terms of gold? That’s a hit against inflation then? Because if I look at the data, the method is down 6% year to date.
TN: Right. And a lot of the inflationary rise has already happened. A lot of the stuff happens in stairstep fashion, and a lot of the mitigation efforts are already under way. So while we’ll continue to see inflation and we’ll continue to stay at an inflated level, I don’t necessarily. Or we’re not seeing dramatic price rises going forward. Okay. You’ll see it in pockets where there are, say, supply issues or something like that. But gold is more effective when everything is well, gold is a barometer for finding value.
I’ll say that much. It’s a tangible metal and people see it as worth something. And so what used to happen is gold and say the dollar as the dollar do value the gold would appreciate. But now we have crypto and people treat crypto kind of in the same way they used to treat gold. The gold market is really trying to find itself. So I think we’re going to have to see some fallout in crypto if it is to happen. We’ll have to see some fallout in crypto before we start to see gold being the safe haven again or being the preeminent safe haven.
So until Bitcoin and the other crypto assets really deteriorate in value and people go flocking back to gold, which I think will happen eventually. I don’t think it’ll happen overnight, but until we see a lack of faith in crypto, I don’t think we’ll necessarily see dramatic price pressure on gold.
KSC: Tony, you talked about Asia, right? And now China is moving to banners via structure, which is the loophole that allows its companies to list in New York and other foreign exchanges. What does this mean in terms of China’s overall strategy to go its own way to quote Fleetwood Mac?
TN: Sure. Yeah. So I think, of course, it hurts Western banks, and it hurts the Western banks that are in Asia because they don’t necessarily have those fees to take things public in the west. But I think the bigger problem is this those companies going public don’t have US dollar denominated resources to access, and so they have to get CNY or Hong Kong dollar or Japanese yen or other Sing dollar other denominated assets. Okay. But the US dollar is 87% of global transactions. So it helps those companies to have US dollar reserves, especially as they’re newly public.
Because why do you go public? Because you want to buy another company, you want to use that cash for a big investment or something, you want to expand in a big way. So if you don’t have the US dollar assets that come from going public, say, in New York or somewhere in the US or whatever, it’s really hard to have a big source of cash to do a massive international expansion or undertake a big international project or do a big international buy that’s I guess the biggest downside I would see from the decline of that type of structure in China.
KSC: All right, Tony, thank you so much for your time, Tony Nash there chief executive of Complete Intelligence. And just to hang on this last point, Phil, if you don’t list in the US, you don’t get US dollars necessarily. But that doesn’t matter if you are China, and you believe that the real market is domestically or within ASEAN, where you’ve got to combine, I don’t know, 2.1 trillion people or 2.1 billion people. That’s quite a fair few heads. Yes.
PS: Correct. I think it’s a question of whether you see a convergence between where you list versus where you operate.
KSC: Absolutely.
PS: And I think in the past we thought, okay, you could tap financial markets globally to serve your local markets. But I think China is kind of proving the point. No. I think it’ll be closer together.
KSC: Yeah. And what he was talking about in response to your question on gold, Phil, how gold hasn’t responded to all this uncertainty, which has been traditionally the case. And Bitcoin is somewhere hovering around in the mid 50s, which is a bit weird because you would expect some kind of flight to what was seen as safe havens, right.
PS: Ironic is considered Bitcoin a flight to safe havens.
KSC: Well, because it’s finite in nature. So it’s a bit like gold, right. It seems interesting, because in the last few weeks, we’ve seen a move among corporates like Mark Zuckerberg of Facebook and now Jack Dorsey, formerly of Twitter, who has left his job at Twitter. Still, at the same time was CEO of Square fintech platform financial platform. He’s moving to turn Square into a company called Block, and it’s a bit like it would make Mr. Miyagi proud because martial arts moves from square to block, but he’s going all in.
PS: But this is a very interesting thing because he’s going all in on crypto. And I think you’re referring to Blockchain blockchain reference to Blockchain, which is the distributed platform for data used by Crypto.
But it’s interesting, right? This whole name shift.
I think Jack Dorsey, I think, is trying to evolve away from just being a pure payments provider to offering solutions that are anchored on blockchain as a solution.
Tony Nash gave the BFM 89.9: The Morning Run his thoughts on how the sooner-than-expected Fed rate hikes could affect global markets. Will inflation derail hastening of the tapering talk? How does crude oil look like in the next few months? As the Christmas season is coming, how much of a concern supply chains will be for the consumers and the economy? When the Fed begins normalizing rates, which currencies will be vulnerable if or when this happens?
❗️ Discover how Complete Intelligence can help your company be more profitable with AI and ML technologies. Book a demo here.
Show Notes
SM: BFM 89.9 good morning. You are listening to the Morning Run. I’m Shazana Mokhtar together with Khoo Hsu Chuang and Philip See. It’s 9:07 in the morning. Thursday, the 25 November. If we look at how the US markets closed yesterday, the Dow was down marginally by 0.3%. The S&P 500 was up 0.2%. Nasdaq was also up 0.4%. So for some thoughts on where international markets are headed, we have with us on the line Tony Nash, CEO of Complete Intelligence. Good morning, Tony. So the Fed minutes revealed that the pace of tapering may be hastened, while macro data points from personal spending to job data suggest that the US economy is in quite the sweet spot, but will inflation derail this?
TN: Yeah. There was a statement from one of the Fed governors today talking about that inflation is not transitory in their mind or could potentially not be transitory in their mind. That’s a real danger to people who are thinking that we’re really in a sweet spot right now because it could mean Fed intervention, meaning tightening sooner than many people had counted on. So I think people had counted on some sort of intervention, maybe in Q2, but it may be happening sooner. That would have a real impact on the dollar. The dollar would strengthen, and that would have a real impact on emerging markets all around Asia, all around Africa. People would feel it in a big way where there is US dollar debt.
KHC: We are seeing that strengthening US dollar in our currency now. But I just want to get your perspective on crude oil because various countries from the US to China are now tapping into their strategic crude reserves to alleviate the present energy crisis. But if you look at crude now, it’s not really being responsive, right to these actions?
TN: Right? That’s right. So what the US agreed to release is about two and a half days of consumption. Not much. The releases agreed in the UK and India, for example, were really token releases. They weren’t really major portions of their consumption. So these countries are kind of giving a nod to the Biden administration, but they’re not really alleviating the supply concerns that are spiking prices. So it really has been a dud for the White House. It’s been kind of an embarrassment because crude prices haven’t fallen, really. They fell initially, but they really came back after the release announcement was absorbed.
PS: Yeah. Tony, that trickling in oil supply releases from the US government hasn’t done much to alleviate the supply concerns. Gas prices in America have been on a massive uptrend as well, just in terms of inflation and not being as transitory as people expected, as we enter Christmas season, how much of a concern is it for consumers as well as the economy?
TN: It’s a real concern. I have to tell you, I’ve driven halfway across the US for our Thanksgiving holiday, which is tomorrow morning. It’s Thursday here, and we’ve seen a lot of trucks with cargoes on US roads, and I make this drive pretty regularly. So it seems like a lot more on roads than I normally see. So that’s good in terms of the domestic supply chain.
I think it’s the international supply chain that is really concerning, and we still have those backups in the Port of Long Beach. That is the real main constraint for supply chains in the US. So I don’t think we’re going to see major disruptions outside of other ports. But through Long Beach, we definitely see issues.
The semiconductor supply chain is the main impact for, say, electronics and automobiles in the US. We did see semi manufacturers start to produce more auto related semiconductors, say mid-Q3 and into Q4. We should start to see those automotive supply chains, the semiconductor dependent issues and automotive supply chains alleviate, probably in Q1. So that will help.
But for the Christmas season, I’m not sure that there’s a whole lot that’s going to help with electronics and say automobiles.
PS: Yeah, Tony with JPowell still back and still in the fair chair in terms of his reappointment. And he does hike rates earlier than expected to address inflationary concerns. How much of a dangerous is to slowing down the economy in America and as the rest of the world.
TN: Sure, it is a risk in America. I think it’s really hard to hire people in the US right now. There’s a lot of job switching happening and people haven’t come back into the workforce. We lost about 5 million people in the workforce in the US through the Covid period. So that’s a real issue. Anything that raises the cost of doing business is problematic for the US and will inhibit growth. The main problem in the US is that the environment right now, it continues to crush small companies. It’s very difficult for small companies. And while it may seem that small companies don’t matter that much, they are the main employer in the US and the main growth engine in the US. And the Biden administration hasn’t helped this with a lot of their policies. Their policies have been very favorable toward big companies. If the Fed pushes inflation, it will make borrowing a little bit harder. I’m sorry if the Fed pushes the interest rate, it’ll make borrowing a little bit harder. But the collapsing, say, the tapering of the Fed balance sheet will have a bigger impact on liquidity in the US.
SM: And if I could just touch on large US dollar debt and what happens to emerging markets when the Fed begins normalizing rates, which currencies do you see as going to be particularly vulnerable if or when this happens?
TN: Well, I think one that I’m really keeping an eye on is the Chinese Yuan because it’s a highly appreciated currency right now. And the Chinese government has kept the CNY strong so they can continue to import commodities and energy for the winter. And they’ll likely keep it strong through Chinese New Year. We expect CNY to really start to weaken, say, after Chinese New Year to help Chinese exporters. So winter we mostly pass. They want to help kind of push a Chinese export, so they’ll start to really devalue, seeing why probably end of Q1 early Q2.
We do see pressure, the Euro, as you’ve seen over the last three weeks, there’s been real pressure on the Euro as well. Other Asian currencies. We do think that there will be pressure on other Asian currencies. Sing Dollar will likely continue to stay pretty consistent. But we’ll see some pressure on other Asian currencies simply because of the US dollar pressure. The US dollar is something like 88% of transnational transactions. So the US dollar as a share of transnational transactions actually come up over the past two to three years. So there’s much more pressure with an appreciated dollar and it’s coming.
KHC: Just like the one. Tony, India Indian equities record high. Have you reached to speak considering PTM’s IPO failure?
TN: Yeah. I think there’s been a lot of excitement there, and I think it’s at least for now. I think it has I don’t think you can ever really claim that an equity market has hit its peak, but I think for now, a lot of the excitement is dissipated. It may come back in a month, it may come back in six months. But I think that momentum is really important. And as you see, failed IPOs, I think it’s really hard for equity investors to kind of get their mojo back.
SM: Tony, thank you so much as always for speaking to us and happy Thanksgiving to you and your family. That was Tony Nash, CEO of Complete Intelligence, giving us his thoughts on how the sooner-than-expected Fed rate hikes could affect global markets.
This is the most recent guesting of our CEO and founder Tony Nash in CNA’s Asia First, where he shares his expertise on inflation and the US economy. Will consumers continue to spend to help the economy? What’s his view on Biden’s call to boost oil supply to ease prices? Where does he think the US dollar is headed and how will that impact Asian currencies?
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: What’s still ahead here in Asia First. We’ll check if US companies continue to charm investors with some big earnings in focus. Plus, to give us a stake on markets inflation and the US economy, we’ll be joined by Tony Nash from Complete Intelligence.
US stocks closed in the red overnight as lingering inflation concerns continue to dog investors. The Dow ended lower by six tenths of one percent, dragged down by a four point seven percent. Drop in visa the S&O 500 slipped 0.2 percent. And the NASDAQ fell by 0.3 percent.
Now after the bell, we also had some US tech earnings. NVIDIA shares rose after it beats on the top and bottom lines. The ship maker saw its revenue jump 50 percent on year on strong gaming and data center sales. Cisco shares tumbled and extended trade after missing on revenue expectations before the quarter. The computer networking company also issued a weaker than expected guidance.
For more on the broader markets and economy. We’re joined by Tony Nash is founder and CEO of Complete Intelligence speaking to us from Houston, Texas. So Tony as we heard their inflation fears seem to be back despite better expected earnings but CEO’s are starting to warn of more pain when it comes to supply chains. And that could put a damper on in that could lift inflation. Do you think the US consumers will continue to spend despite all this and will that help the recovery of the US in the next year?
TN: Yeah, I think the real issue here is that inflation is rising faster than wages. And what we’re seeing with oil prices. These oil prices are not terrible given kind of historical prices but it’s oil prices within the context of everything else. Obviously, the supply constraints really are pushing up prices of food and other activities as well as say goods that are imported for say the holiday purchases that Americans will make.
So Americans have absorbed a lot of those price rises to date. They’ll continue to absorb some but I think they’re almost at their limit in terms of what they can tolerate without getting upset.
CNA: Yeah, Do you think there’s a disconnect here when it comes to energy because Biden administration is hoping to boost supply to ease that oil price pressure but OPEC and its allies expect surplus into the next year. So, do you think they’re looking at it differently? And who has it right here and where oil prices headed?
TN: Yeah, I think part of the issue in the US with crude oil is the Biden administration restrictions on pipelines and on the supply side in the US. So, Joe Biden is asking other countries Russia, Saudi Arabia, other OPEC members to supply more oil yet he’s restricting the supply domestic supply in the US. So, I think what’s happening with those other suppliers they have customers who are buying their crude oil. They don’t necessarily want to have to produce more because they want slightly higher prices. They don’t want things too high but they want slightly higher prices and so they’re pushing back on on Joe Biden and saying look you really need to look at your own domestic supply. You really need to look at at those issues yourself before we start to open up our own market.
So you know, the current administration is trying to have it both ways. They’re trying to restrict supply within the US. They’re trying to bring in more supply from overseas. Americans see this and they understand kind of the incongruent nature of that argument from the administration.
CNA: I want to get your thoughts on the US dollar, Tony. Because that hit a 16-month high amid his expectations of more aggressive policy from the Federal Reserve. Where do you think the US dollar is headed and how will that impact us here in Asia, especially Asian currencies?
TN: Sure, it’s a great question. We saw a lot of action with the US dollar yesterday. The dollar index as you said reached highs for in the last say 18 months, two years. And that is on Fed action but one thing to consider is we’re looking at potentially changing the Fed chairman later this year.
So, if the current Fed chairman is exited. There is an expectation of a more dovish Fed chair coming in that’s one possibility. I think people are really trying to… While there is upward pressure on the dollar. People are trying not to get too far too much behind it because there could be a more double dovish Fed chair coming in. So, we think the dollar is overshot just a little bit in the short term.
We don’t expect it to continue rallying at its current pace. We expect say the Euro has fallen quite a bit and depreciated quite a bit in the last say three weeks. It’s going to appreciate just a bit a couple cents over the next month or so. Asian currencies, we think the CNY will stay strong. We think CNY will remain strong through say March, April as they start a devaluation cycle to help exporters. We think the Singapore dollar is going to stay in the same range that it’s in about now. We don’t see much policy change in Singapore and we think with a stable dollar at these levels. We think the same dollar will stay at about the same exchange rate of Scott now.
CNA: All right. We’ll keep our eyes on those currency exchanges and who becomes the next Federal Reserve Chairman. Tony Nash thanks for joining us. Tony Nash there founder and CEO of Complete Intelligence joining us from Houston, Texas.
