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Growing out of stagflation, Fed operating impact & Brazil Risk: The Week Ahead – 7 Nov 2022

Learn more about CI Futures here: http://completeintel.com/futures

In this episode, we are joined by two special guests – Mary Kissel and Travis Kimmel – as well as our regular co-host Albert Marko. Mary is the EVP and senior policy advisor at Stephens. She was the senior-most aide to Secretary of State Mike Pompeo and was on the editorial board for Wall Street Journal. Travis Kimmel is a technology entrepreneur, market philosopher, and spicy tweeter.

First, we dig into the approach to getting out of the  current stagflationary model. The Bank of England, the ECB, the Fed, and the BOJ are starting a managed decline. And the real question is, is that really necessary? Mary Kissel walks us through how the Fed may actually be making things worse.

We all know the Fed raised by 75bps and is expected to continue with at least 50bps in December. Raising rates has decimated tech names and made operations significantly more challenging. Travis Kimmel discusses the impact of the whiplash in interest rates on operators, on the people who run companies, and how they run those companies in this type of environment.

And then finally, with Albert, we talk about Brazil. We saw a big election result in Brazil this week with Lula declared the winner. Many Brazilians are not happy.

Also, note that Brazil is one of the largest emerging economies and a huge trade partner for China. Lula has already made comments in support of Russia in the war with Ukraine. What does this mean? Is Brazil a risk for US power in the western hemisphere, given China’s inroads in Venezuela, etc?

Key themes
1. Can we grow out of this stagflationary muddle?
2. Impact of Fed rates whiplash on operators
3. How big of a risk is Brazil?

This is the 40th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Mary: https://twitter.com/marykissel
Albert: https://twitter.com/amlivemon
Travis: https://twitter.com/coloradotravis

Transcript

Tony Nash: Hi, and welcome to the week ahead. I’m Tony Nash, and I’m joined this week by Mary Kissel, Travis Kimmel and Albert Marko. You all know Albert well. 

Mary Kissel is the EVP and senior policy advisor at Stevens. She was the senior-most aide to Secretary of State, Mike Pompeo. She was editorial board for Wall Street Journal. Mary is extremely well known. She doesn’t need an introduction.

Travis Kimmel is a technology entrepreneur, market philosopher and a spicy tweeter. So really glad to have you both today. I really appreciate it.

Before we get started, I’m going to take 30 seconds on CI Futures, our core subscription product. CI Futures is a machine learning platform where we forecast market and economic variables.

We forecast currencies, commodities, equity indices. Every week markets closed, we automatically download that data, have trillions of calculations, have new forecasts up for you Monday morning we show you our error. You understand the risk associated with using our data. I don’t know if anybody else in the market who shows you their forecast error. We also forecast about 2000 economic variables for the top 50 economies globally and that is reforecast every month.

Let’s move on. Thanks guys. Thanks very much.

So this week we’re going to move on to some key themes. First, there’s a really interesting concept that Mary brought up. Can we grow out of this Stagflationary muddle? And I really look forward to getting into that a little deeper. 

We’re going to also with Travis talk about the impact of the whiplash in interest rates on operators, on the people who run companies and how they run those companies in this type of environment.

And then finally with Albert we’re going to talk about Brazil. We’ve had a big political change in Brazil and it seems more meaningful than we’re being kind of told. So I want to dig a little bit into that.

Mary, first let’s dig into kind of the approach to getting out of this Stagflationary model. So the UK, the Bank of England, the ECB, the Fed, the BOJ, they all seem to be, as you said, starting a managed decline. And the real question is, is that really necessary? 

And I’ve got on the screen the balance sheets for the ECB, BOJ and BoE and the Fed of course.

And then we also have a graphic for the CPI versus the money supply. Looking at CPI change and what that is related to the money supply.

Do we in fact need to manage this? Decline I think is a real question and I guess who is growing out of this? I think it’s possible that China grows out of it. I think that’s the only card they have right now. But I’m really curious to hear

your thoughts on this.

Mary Kissel: Well, it’s great to be with you Tony, Albert, Travis, thanks for inviting me today.

Of course growing is the best option. It doesn’t necessarily mean that it’s the most politically salable option. But obviously it’s preferable to inflating away your debt and effectively ruining the savings of seniors and putting an enormous burden, particularly on the poorest and in our various economies. Do they developed or developing economies? 

I hate to talk politics because I think it’s always easier for the street to say, “well, you know, we’ve got these neat models and economic forecasts and if you just pulled this lever or that lever, we could achieve X amount of growth.” But the reality is that you have to take politics into account and it’s just very difficult to take the kind of measures that we need to take to grow. And I think you saw that you mentioned the UK and your introduction. You saw that most clearly recently in the UK, where former Prime Minister Liz Truss and her chancellor Kwasi Khortang came out with really what was the only plan outside of Greece?

Greece is the only country that is focusing on growth. They’re looking to hit investment grade next year. But beyond that, the UK was the only country that had really put forth that formula that we know works, which is it’s not just about tax cuts and reducing that burden, it was about stimulating the supply side, opening up Britain’s energy reserves, fracking, going back to the North Sea, encouraging investment.

I mean, if you look at the UK and their economic statistics, it’s pretty shocking. I mean, the two decades prior to the Pandemic, they had growth less than 2% real wages were stagnant for 15 years. Their investment was terrible, even lagging behind their OECD peers. And yet you’ve had twelve years of Conservative governance there and they haven’t really turned the corner. Why? Because politically it’s just simply easier to tax and spend. And once you get on that track, it’s really hard to get off of it. So maybe I’m talking too long, you just one more time.

TN: No, this is a great point. But in talking about managed growth and you brought up politics, I feel like there’s this kind of fate accompli in most Western governments around. Well, we’re really on the downside of our opportunity and we’re a declining country, so we’re just going to manage ourselves that way. And when I think about things like the semiconductor investments and other things coming into the US.

I live in Texas, I don’t know what it’s like in other parts of the country, but it is really booming here. We have a lot of tech companies coming in, we have a lot of investment coming in. It’s a good investment climate. I mean, for anybody in New York or California, it’s terrible here, a lot of rattlesnakes and scorpions. But in terms of the economy, really great. 

And so I want to talk about that a little bit in terms of kind of the fake company around. Well, we’re kind of past our prime. Is that kind of a baby boomer thing? I mean, millennials are as big as baby boomers. So is there this demographic assumption baked into that? 

MK: Well, look, I mean, democracies get the leadership that they elect, period. And so, you know, I may not like what’s happening in Britain. I may think that they’re on the road to looking like France in terms of their, you know, permanently high double digit unemployment and lousy investment and lousy growth, lousy prospects for their young people. If they’re voting for that, that’s what they’re going to get. 

I think that from an investment community. When I’m talking to Stephen’s clients, they’re saying, all right, well, where is there the opportunity for a political process to move us in the other direction? And that’s really just the United States over the next couple of years. I mean, that’s kind of it. Not going to happen in Japan, it’s definitely not happening in Australia, it’s not going to happen in continental Europe.

But the danger here is that the population, particularly the young people, get so mad that they realize that they have no opportunities left, that you see popular protests and you see a push to political extremes. So, look, protests are still going on in France. You’ve got protests starting to erupt in Britain. I wouldn’t be surprised if you saw that in more places across the continent as this energy inflation starts to hurt and as voters realize that this formula of price caps on energy, which isn’t going to solve any of the underlying supply problems of taxing and spending.

So it’s just a huge burden if you want to kind of start a business and get something going. No real move towards less red tape or the ability to kind of start a business and innovate. People are going to get upset at that. Again, I don’t think Populism is dead on the continent, and I think that the US, as these countries kind of go down, I think the US looks more and more attractive.

Albert Marko: No, I mean, Mary is absolutely correct. I’ve always been a proponent of looking at politics in terms of investing, just because things have been shifting so much, being in the United States, emerging markets, which is the rest of the world at the moment, like Mary said. Yeah, I mean, Populism

is absolutely not dead. With layoffs looming in the United States, we’re probably going to see more protests here in the United States gearing up to 2024.

But just like Mary said, I don’t see anywhere else in the world right now that you can actually invest in except for the United States. And I think it’s a little bit by design, by Yellen in them to force money to come out of those countries and into the United States. Although it’s a good thing for the United States in the short term, it’s destructive long term for the global markets.

MK: Sorry, just one more point. In order to get political change and to get back to that growth idea, you have to have real differences between the left and the right in democracies. And I think a lesson that came out of a place like, say, France, where Macron just sat himself in the middle, he destroyed the choice. 

And you know, the Conservatives have done the same thing in the UK. They’ve sat themselves in the middle. They took a lot of the center left platform. So what are you going to do if you’re sitting in Manchester, right? Like, who do you like? Labor light in Rishi Sunak or do you just vote for labor? I mean, it doesn’t really matter, does it? You’re going to get the same outcome, right?

TN: So we’re going to do a little bit of what Tom Keen talked about regular. We’re going to kind of rip up the script here and I’m going to ask about you talk about inflation, talk about the leadership in places like Europe. And is it at all possible I know this is kind of a silly question, but is it all possible that in places like the UK or continental Europe that it’s possible to start fracking? That we start getting some of that upstream activity to ease the burden of energy crisis?

MK: No, you’re going to need a war.

TN: Okay? So the dirty upstream stuff, according to Europe, is other people’s problem. They just want cheap energy.

MK: Look, it took Putin slaughtering thousands of people in Ukraine for them to realize that, hey, maybe Russia isn’t a secure supplier and yet they’re still not welcoming fracking. They’re still not coming to the United States and saying, hey, how do we open up more LNG? What are you guys doing?

Right? I mean, this is unbelievable. What is it going to take?

TN: Something like Larry Tankers sitting off of Europe right now, waiting to unload because there’s not enough capacity?

AM: What it’s going to take is exactly what you said, political people, to the point where it just starts dripping over governments. And right now there’s been a push for Blinken to push leftist governments throughout the world right now that it’s just like the status quo everywhere. They’re not going to open up the franking. We’re not going to touch any kind of environmental issues over in Europe right now.

MK: Look at Rishi Sunak doing a U-turn and going to the COP conference. I mean, this has to be the most ridiculous grouping I’ve ever heard of. I mean, at a time when you’ve got like ten plus inflation and people can barely pay their bills or buy eggs or the rest of it, or fill up their car, they’re going to talk about climate change. Are you kidding me?

TN: China’s tripling down on coal.

MK: Yeah, I’m also clean climate too. I don’t care what kind of energy we use, as long as the market’s figuring it out and we’re letting innovation happen, period.

AM: Well, they’re going to start blaming Brexit. Even the Tories are going to be like, oh, maybe we should stay into the EU.

MK: Could Britain go back to the EU?

AM: Maybe? Yeah, they could.

Travis Kimmel: I think the thing that’s really challenging here is we just need coherent and stable frameworks for a lot of the stuff, whether it’s energy policy, monetary policy, like if you think about what the purpose of markets are, to take a really simple example, take a CSA. What is that? It’s a futures market. It’s done in a really small scale. You got a farmer who’s basically short forward produce, right, and you’re buying futures and then you’re taking delivery of whatever lettuce and cabbage and. 

If you think about that as it’s a very simple example of what a market is designed to do, it’s designed to allow operators to derisk their business. A large futures market is no different. I mean, I work in tech. We’re sort of like extreme beta, right? And what we just went through here is we went through this period where everyone was looking at a massive boom as a result of policy. And so we all started hiring and there was the time we’re all trying to hire the same time. Staff up handles the influx of business and then in the middle of that staffing motion, your reverse course. So now you have these companies that are… You heard Stripe come out, they’re cutting 14% and just owning it. Like we missed-staff for the environment. 

There was almost no way to navigate that properly for operators. And so what you have is you have this destructive policy impulse that is sort of like ruining the whole reason we have markets in the first place.

The reason we have markets is to allow for derisking. And speculators come in there and they provide liquidity and it’s awesome. Markets are awesome. But we’re removing the value that markets once had for operators. And if you’re out here in the economy running a business, it’s extremely hard to navigate that.

TN: Yeah, Travis, that’s a great segue. And let me put up your tweet that you put up earlier this week. Talking about Powell saying some of you losing your job is like little rays of sunlight to me and I think that’s great.

And talking about how do operators work in areas in times of rates whiplash like this, I think bringing it back to risk is, is it? Right. And I run a tech firm. You run a tech firm and it’s not about high rates or low rates. It’s about the magnitude of change for planning. Right. So we can plan for a high rates environment if we know that’s going to happen.

We can plan for a low rates environment if we know that’s going to happen. But that stability is what economies like the US are built on. Right? Yes.

You mentioned one word, “coherence.” And I’m afraid that that’s a little bit too much to ask from policymakers right now, especially when we have the push pull going on with the Fed and the Treasury right now, right?

TK: Yeah. I think we’ve been overdriving this thing for years now. Basically, you saw this in, think about the events that we tried to respond to policy with. You have basically volmageddon. They were like, oh, and they used policy to address that. So your policy takes two freaking years to come through. I mean, how can you respond to a pandemic via policy? I know people get really upset about the SPVs where they short up private credit, but I would say that was probably the smartest thing they did.

So this pandemic and it was like, oh, it’s a few hundred million, right? And so they shore up private credit. Like we’ll backstop that. Arguably, that is the original intent of central banking, is that motion. Of course, you’re supposed to do a higher interest rate and all that badge itself, but whatever.

So that tiny motion was sort of interesting and maybe well played, but flooring rates, making money free and then just jamming liquidity into the economy at the same time, and we’re basically, they generated this boom that we’re now on the back of.

Now we’re reversing that super hard. I just don’t think you can respond to this kind of stuff with monetary or fiscal policy. I don’t think you can respond to emergent events. It’s not an emergency thing. What these are designed to do is to tune structural weirdness like you could tune a demographic change because demographics aren’t going to change that much in a short period of time. And so you can apply a policy to that and wait for the policy to translate through. I think what I would have liked to see when they realized their error here is just set rates at whatever, 3%, leave the balance sheet slowly until you’re back to where you want to be. And don’t do much. All these extreme action where the Fed comes in, they’re like, we get an event we don’t like, whether it’s the coronavirus or inflation or whatever. And they’re like, we’re on it. We’re going to respond swift and hard. That’s the mistake. You can’t do that. So we’re now going to get this…

What I expect to see here is eventually they will solve inflation. But that solution is by the time it translates through, it’s going to have its own momentum and it’s going to be very destructive.

TN: Oh, yeah. I think the real irony is you have publicly traded companies that are expected to give market kind of insight twelve months out to the penny on the share level, right. But then you have Powell standing in front of the world saying, we’re not really sure what we’re going to do next month. It may be whatever, and it’s data dependent. It’s like, really? Like, how many people do you have, analysts do you have? And you don’t know what you’re going to do in 30 days? That’s crazy. Right?

MK: I think Travis is raising such a good point. And the underlying theme here is that is to do something right and to juice the markets on the monetary and the fiscal side. That’s why I put in a plug. If you haven’t read it. James Grant’s book on the 1921 crash, like The Forgotten Depression, such a great book because essentially it’s like do nothing in the market. It will take pain, but then we’ll come back up.

TK: I love you mention that example. It looks like we are generating that exact same, it looks like we’re

generating a depression. Not like the depression that everyone remembers, but that little, very short, swift, extremely difficult period of time. It’s like a couple years in 1920. We’re teeing up the same thing here. It’s really weird.

MK: People make it worse. I don’t know, Travis.

TK: Look, I’m not going to fail that.

MK: I think you could be in the 30s because they’re not going to do nothing, right? They’re going to cap energy prices. They’re going to do more programs to help people.

TK: You have to let the market achieve homeostasis. And the bond market is like, it’s the spine of the economy, and we just keep whipping it back and forth. So everything else is going to be high data.

AM: Yeah, but why are they whipping it?  It’s because the political influences within the central banking system, whether they’re Treasury and the Fed. Right now, nobody is talking about the real civil war happening between conservative Powell and some of his members at the Fed, and Lail Brainard and Yellen, who are liberal that are trying to help Democrats by pumping these markets. They crush the bond market only to pump it up two points, like within minutes to pump the Nasdaq, and then the market starts running with it, and then they parade out all these liberal members of the Fed to counteract Powell’s speech yesterday.

So it’s like we can hope for stability, but until they depoliticize the Fed to the point where it’s actually acting properly, I think it’s just a pipe dream.

TN: Do you think Powell is overplaying because of the kind of politics inside the Fed?

AM: Oh, absolutely, because if you look at the Fed minutes in the FOMC releases, those are going to continue to be muted because it’s a cooperative process. Right. They have all the members talked about vote on issues and whatnot, and then Powell has to come out there and counteract that and say, listen, things aren’t working out like the minutes are reflecting, so I’m telling you we’re going to go 75 basis points next meeting. And then again today, they bring out another Fed member to say, oh, no, it might be 50, it might be 50, and then the market shoots up 100 points. This is absurd. Right? That’s an untradable market. It’s untradable market. Right? Yeah.

TN: Since we’re talking about policy fumbles, and Mary recommended a book. I don’t know if you’ve read, Ammonie Schlay’s The Forgotten Man, fantastic book about the 1930s, talking about policy error after policy error after policy error. FDR is proclaimed as this hero who got us out of the Great Depression, and he absolutely screwed up time and time and time again, and took what could have been a two-year recession and turn it into a twelve-year recession. Right? Yeah.

And so are we entering that again? That’s the real question. And it’s really easy for people to say, oh, we’re in the 30s again. I mean, I hear that so many times, it’s just tiring. Right. But we have to look at why the 30s happened. We have to look at why 1921 was so quick and then understanding what the implications for policy and the economy are.

Travis, what you brought up in terms of quick, sharp actions for specific events is exactly what we need. I think rate rises are stupid. Playing these stupid rate rise games, it freaks everyone out. It creates volatility, uncertainty, and nobody can plan. And then you get between now I think we talked about this two weeks ago, Albert, between now and the end of the year, we’re going to see so many layoffs in tech companies and they’re all going to get them just in time for Christmas, because that’s what happens all the time. Right?

TK: The thing that Albert highlights here is really interesting. It’s like, from a decision making perspective, we have the speed wobbles. You’re riding a bike and you get that thing, it’s like, you know you’re going down, you can’t pull out. We just have that right now. We’re whipping this thing back and forth. We’re being hyper reactive. And until we get to a place where we can just sort of chill for a while. Does anybody think that’s on the horizon? It doesn’t look like it. No.

AM: Not as long as politics and inflation are taking hold and there’s elections to be won. That just can’t happen.

MK: I think investors, they go back to basics. They say, OK, where do we have a stable rule of law Where do we have any kind of predictability in the political process? Or even, you know, as I said, the US like the opportunity to have a more attractive business environment. 

And where do we have resources? You know, human resource, mineral resources, you know, and so that’s essentially the Gulf in the United States.

TN: Don’t talk to Texas too much, Mary, please. Okay, perfect. Guys, thanks for that.

Let’s move on to Brazil. Brazil’s obviously a really big story this week, and Albert, we saw Lula declared the winner. This was very much a 50-50 election. Of course there were irregularities. There were irregularities in every election. We’ve seen five days of protest now. I’ve got a tweet up from Steve Hanke talking about tens of thousands of Brazilians out who are Bolsonaro supporters.

But what’s really interesting to me about this is not really who wins, but Brazil is a huge supplier of things like energy, frozen chicken, soybeans, these sorts of things to China. And so this type of disruption can hurt that type of trade. We’ve also had Lula already make supportive comments of Russia shortly after the results were announced. So, Albert, what does this mean? What do we need to be looking out for?

AM: Commodities, really. Soybeans, soybeans, corn, ethanol and everything tied into that. Now you’re looking at Brazil, which you’d mentioned is a big supplier to China for soybeans. And then he goes on and declares that Putin is right in Ukraine. It just smells so bad right now for the United States and the longterm interest in the region.

Like I mentioned before, these push for leftist governments, it’s just not wise. I mean, it’s shortsighted.

Long term, these leftist governments are really susceptible to Beijing and Russia at the moment. So, you know, you’re out there and Lula comes out and immediately declares, like, the World Economic Forum is correct, and we’re going to take on deforestation, which is obviously going to obviously going to depress the soybean crowd because it takes years.

How the soybean crops work is like, you clear land, and you got to let them sit there for two years, and then you start rotating in and out. So there will be a steady supply of soybeans that the Chinese eat up pretty much, I think, like 60% or 70% of their crop every year. So what are we looking at? Higher food prices across the board, everywhere in the United States is specifically a problem.

TN: So I’m interested in that regional political angle you mentioned. So if we look at Brazil, we look at Venezuela, we look at Colombia, the government’s coming into kind of our region, and the influence that China has on, say, Venezuela with the debt that’s owed to China Development Bank and then with Brazil on the trade side and so on, is that a regional political risk for the US?

AM: It’s an incredible risk. I mean, you’re looking at the Argentinians about to sell a naval base to the Chinese. So now they have Atlantic access. Bolivia was a problem with the lithium mines to the Chinese. Peru was starting to set up naval bases for the Chinese. I mean, it’s like, how do we overlook this? This is right in our backyard, and we’re sitting there overlooking leftist governments taking control and then flipping against us the very next minute. I don’t understand what Blinken and Jake Sullivan are looking at here. What plan do they have for US interests long term when these governments routinely act against us? Venezuela decided to go start talks with Colombia again. US friendly nation in any sense of the word. So it just boggles my mind at the moment.

TN: So, Mary, you’ve sat in the seat. What would you be thinking at this point?

MK: Well, the key to all of this is Cuba because none of these regimes, many of them, would not be in power were it not for the Cuban security services, which is not really talked about, but, you know, Maduro good examples, publicly available information. His private security officers are all Cubans. So I think Biden had a fantastic opportunity early in his term. All these Cuban people came out under the streets. We should have turned on the Internet and allowed them to determine their own fate.

But instead, where did that go? Nobody seems to care. I think Latin America today for the administration, is more about domestic political ends, and it is about thinking strategically about wait a second. Okay, we’ve got some pretty decently large markets, as Travis  pointed out, right?

In Brazil, in Argentina, and Mexico is going way far away from us. That’s another huge story nobody’s talking about. Canada. Right? There’s a lot of opportunity within the hemisphere to create market openings and growth for all of us, but they’re not thinking about it. They really don’t care. It’s about talking about democracy in Brazil so they can talk about the state of democracy in the United States.

AM: Yeah, it’s just because Colombia was such a great US ally and the government was solidly behind the United States and a focal point for Latin American aspirations, and then you go and push for a leftist government that’s favorable to Maduro. I don’t understand what goes through their heads at the moment.

TN: Great. Okay, thanks for that, guys. Just one last question for all of you. Kind of don’t have to necessarily come in individually, but we’ve had all these economic announcements this week. We’ve got the elections, the midterms, US midterms next week. What are you guys looking for in the week ahead Generally? I guess, Albert, you have some specific ideas, but for Travis and Mary, what do you guys expect in the week ahead?

AM: For the midterms, it’s pretty much set in stone as the Republicans are going to take control of the elite the House most likely to Senate by two seats. So you know how the market reacts. Whether we start dumping is really going to probably depend on CPI.  So that’s actually what I’m going to really watch, the CPI so we can solidify the 75 basis point rate hike in December.

TN: Okay, great. Travis, any thoughts.

TK: In the political sphere, I’m just kind of looking for individuals that make sense. I’m not really, I don’t really have team allegiances. I just want somebody who’s talking sense.

I think the CPI will be interesting. In terms of intraweek stuff, I try not to think of markets that way. I try to think of a little more defensively and where I want to end up. So if I had a position on, I want to be able to ignore it for a month or two while I just focus on doing my job. I’m a pretty defensive player here. Especially with all the whip.

MK: I think even if Albert is right, and I think he is, that Republicans take control of one or more houses, the regulatory state is going to grind on. So I’m really not looking so much at the federal level. I’m looking at governor’s races where like a Republican Lee Zeldin as Governor of New York could open up fracking in New York.

TN: Is that a real possibility, do you think?

MK: I think it could be, absolutely. Remember Cuomo shut it down himself, so why couldn’t Zeldin open it up?

TN: No, but do you think Zeldin being elected is a real possibility, do you think?

MK: Oh yeah. Really? Remember Giuliani, the pollsters went out and they were like, hey, you’re going to vote for Rudy? And everyone on the Upper West Side said, no, I’d never vote for that guy. Right. And then they looked at the crime in the mess, and then they went into the polling moves and they went yeah, exactly. Right.

TN: So it could be New York, could be Michigan, some of these other places that have had some polarizing governors kind of move more to the right or to the middle.

TK: Do you think that policy at a state level is sufficient to justify capex for energy companies?

MK: No. I mean, really, only the Feds can make a meaningful difference at the margin. I talk a lot to clients about the regulatory state, because we don’t talk about it a lot. But that really is what depresses investment.

Categories
Podcasts

Could Stagflation Be a Worry?

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

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

Show Notes

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

SM: That’s right.

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

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

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

SM: I think.

TCL: Yeah.

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

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

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

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

Categories
QuickHit

Quick Hit Cage Match: Van Metre vs Boockvar on Inflation (Part 2)

This is Part 2 of the inflation discussion with Steven van Metre and Peter Boockvar with your host Tracy Shuchart. In this second part, they talked about the possibility of the Fed tapering this year or early in 2022. How about the possible rate hike and what will possibly happen in other parts of the world like Bank of Japan and Bank of England if ever this happens? What is Powell doing exactly and why? Is there a possibility of a new Fed chair next year? And what do they think about stagflation?

 

For Part 1 of this QuickHit Cage Match episode, please go here. 

 

Steven van Metre is a money manager who have invented a strategy called Portfolio Shield. He also has a YouTube show that discusses economic data and the news three days a week.

 

Peter Boockvar is the Chief Investment Officer and portfolio manager at Bleakley Advisory Group. He has a daily macromarket economic newsletter called The Boock Report.

 

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This QuickHit episode was recorded on October 14, 2021.

 

The views and opinions expressed in this Quick Hit Cage Match: Van Metre vs Boockvar on Inflation Part 2 episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TS: Do you see the Fed tapering? And if they do, how much is this going to affect inflation? And also, I know the market is saying the Fed is going to raise rates in ’22, 2023. But is this a reality at all?

 

But before we jump into that, I just wanted to remind you to please subscribe to our YouTube channel.

 

PB: I think the Fed will at least start the taper and see how it goes. The thing that is different with this taper is that it’s coinciding with central banks around the world that are also beginning to remove accommodation. However slow, however glacial that process is, they’re all outside of the BOJ. They’re all doing it at once.

 

So if the Fed starts to taper in December, which they basically told you that they will, well, the Bank of England could be raising rates in December. We recently got a rate hike from Norway a month or two ago from South Korea. We’ve had Canada and Australia trimmed QE. Even the ECB has trimmed QE. So there’s a global shift to tightening. And I do believe tapering is tightening to define that. Just as we saw last year, the past 18 months obviously massive global easing.

 

Now I can’t even discuss the rate hike situation because I’m not even sure that they’re going to be able to get through the tapering. If you look back to 2010, every single notable market correction in equities and also fixed income markets outside of Covid and the one evaluation in August 2015 coincided with the end of QE, where it was a hard stop QE1 and QE2. And then obviously you had the taper 2013 and then obviously around rate hikes. Every single one coincided with a tightening of policy. And even again, it was gradual. It still affected markets. And we’re going to have it again to think that we’re going to somehow get through tapering without any accidents, I think, is delusional. And you believe that there’s a free lunch and it’s a matter of what kind of accident occurs by this.

 

Now QE itself essentially, at the end of the day, it’s an asset swap. And yeah, does some of that money sort of filter into markets? Yeah, maybe, I guess. But a lot of it’s psychological, but it also does help to, at least on the short end, suppress interest rates to where they would be otherwise. That said, when QE has been on, you’ve been paid to steepen the curve when QE is off, it pays to flatten it. And I think we’ve seen some recent flattening in the yield curve. And I think that that has been the right trade to do when QE is about to turn off.

 

But to Steve’s point about the bottom 50%. Well, if you get a short equity market correction, well, the top 50% is going to feel that as well. And yeah, can that filter into how they spend for sure? But that doesn’t necessarily resolve the supply issues.

 

That’s how this inflation story is going to recalibrate. The supply side is going to take a couple of years, and it’s going to be less demand. That is going to recalibrate this inflation story. And I think that is. No central bank wants to preside over a declining economy. But unfortunately, you’re going to have to have a trade off. You want lower inflation and a slower economy or an economy, as is but fast inflation, that’s going to hurt the people that can least afford it.

 

SVM: Yeah, this balance sheet taper thing is really interesting because I will be on record. I’ll hold on record still, and I don’t think the Fed’s going to do it. Although, as Peter mentioned, you just said that you think that the Fed is going to start and then quit. I’ve had to come to your side of the fence on that deal, mainly because when Powell spoke at Jackson Hole, it seemed like he was saying, we can’t make this mistake. We got to keep easing because we could let off the gas too soon.

 

And then for whatever reason, there’s this massive pivot between that and the last meeting. And he’s going to have a disadvantage going into the November F-O-M-C. And not have the non farm payroll report because he concludes me on Wednesday. Nonfarm payroll is out on Friday. Maybe he’s got some early access, who knows? But it seems like all of a sudden he’s in a panic to start tapering.

 

Now, could this be because we know the treasury is going to reduce their issuance of notes and bonds as we borrow less money, and he doesn’t want to be over purchasing? Sure. Could it be, as Peter mentioned, that the other central banks are tapering and starting to raise hike rates. And that’s interesting, because the way I look at it is that would be a catalyst if the Fed doesn’t start tapering, that the dollar goes higher.

 

Well, there’s part of the inflation story that almost nobody is looking at. What if the dollar gets up into 96, 97, maybe even close to 100? I mean, we’re talking about destroying the inflation story just from the dollar alone. And is this one of those things where we had coordinated easing? So now we need to have coordinated tapering to keep the dollar from going up too much? I’m not sure what his motivation is, but I will say this. There’s no way that they get to the end of that taper. There’s a 0% chance they’re going to raise rates. And even if they did, it doesn’t matter. They’ve effectively given the banks a pass by saying, look, there’s no reserve requirement because, well, you’ve got all these QE reserves you don’t need anymore.

 

The whole idea that we’re going to get this balance sheet unwound. I think the bond market is telling us the Fed’s making a mistake. I think, Peter, you and I agree that we don’t know how many months they’re going to go? The only question is, at what point is there a payroll report or some data that comes out that the Fed goes, “Oh, my God, we made a big mistake.”

 

PB: I’ll tell you why he’s doing this. Well, first of all, the whole purpose of monetary policy, as we know, is to push the demand side. And if you look at what are the two most interest rate sensitive parts of the economy — it’s housing and autos. So is Powell with a straight face going to say, I need to pedal to the metal, continue to stimulate the demand for housing and autos, when you can’t find an auto and the price of the home is worth 20% more than last year? They need to take their foot off that demand pedal. And he does not want to be Arthur Burns. He does not want to be Arthur Burns. And right now he is headed towards being Arthur Burns.

 

And the Fed is going to reach a pivot point, where if inflation still remains sticky and persistent, but growth is really decelerating to a greater extent than it already is. And we know that the Atlanta Fed third quarter GDP number has one handle on it. He’s going to have to reach a point, do I try to come inflation, but then risk further weakness in the economy and a fall in asset prices, which JPowell obviously inflated. Where is he going to just not really respond quick enough. And being in Washington, we can be sure he probably leans towards trying to save the economy, but then that creates its own problems.

 

The one thing in the dollar, the dollar is going to get tied into this, too, because if he remains too easy for too long, well, that may sacrifice the dollar. If he is more aggressive at dealing with inflation, well, then you can see a faster move in the dollar. So he’s just been an absolutely no win situation here. But there is going to be a pivot point where he’s going to reach that we’ll have to see, does he go down the Paul Volcker route, or is he going to go continue down the Arthur Burns route?

 

SVM: See, Peter, you just said it best. He didn’t know what his situation. And all we’re debating is, at what point does he back off and quit because he realizes it’s not working? I mean, we can look at the velocity of money and see the monetary policy is not functioning properly.

 

I mean, there was a lot of people that predicted at the end of the last quarter that as economy reopen, velocity would pop. But it didn’t because of the fact that monetary policy is not transmitting into the economy. And so now the real issue is if he starts tapering and it does do what it’s supposed to do, does he inadvertently tighten financial conditions? I mean, this is such a mess of what he’s got to deal with. And I don’t know if you’ll agree with me honest, but I don’t think they have a clue what they’re doing.

 

I think they’re just betting that this is all going to work out, that Powell, as himself, is going to get renominated. And somehow, in the end, either he’s going to look like a superhero and say, look, see, I did it and go out as one of the most celebrated Fed chairs ever. Or he’s going to find someone else to blame this on when it doesn’t work.

 

PB: The Fed has been winging it for decades, and this all goes back to Greenspan. In 1994, he raised rates aggressively. We know he blew up Mexico, he blew up Orange County, California, and he took that at heart. He learned a lesson. And so you go into the late 90s when everything is on fire. Stock market bubble. We know he was very slow to raise interest rates because he didn’t want to repeat 1994.

 

And then, of course, you have the blow up. And he’s obviously quick to raise interest rates. But remember the mid 2000s, every single. When he started raising interest rates, he did it every single meeting, and in every single statement, it said, we are doing this at a measure pace, because he didn’t want to repeat 1994.

 

And then what we have, obviously, the housing bubble and so on and so on. And then now you take Powell. We know Janet Yellen was afraid to raise interest rates. Took them seven years to get off zero. And then after finally raising, took them another twelve months to finally raise rates again. And then Powell started to pick up the pace. And then he blew himself up in the fourth quarter of 2018. And then that helps to explain why they’re going so slow now.

 

Then you throw in, of course, the whole social justice. The Feds become the Ministry of Social Justice now and how they view monetary policy. But yeah, to your point, they are winging it. And they’ve been winging it for decades.

 

SVM: And you bring up an interesting point about 2018. I’m really glad you did, because a lot of people forgot that we started easy to the point that it didn’t really make a lot of sense from the outside look in it. And so now this whole notion, and I don’t know what your reaction was, but I remember hearing the press conference when he’s like, okay, when Powell said, “We’re going to gradually unwind the balance sheet by mid 2022.” I’m like, since when is “gradual” six months. There’s no way this is going to work for you, buddy, but good luck if you’re going to pull it off.

 

PB: Yeah. And the Fed got lucky for a period of time. They got lucky in 2017 because the markets rallied and ignored Fed rate hikes and the beginning of the shrinking of their balance sheet. They were double tightening and they got bailed out because everyone focused on the corporate income tax cut. That obviously happened at the end of 2017. But that entire year, the Vix got down to eight. Every dip was bought because everyone was pricing in that tax cut. But once that tax cut was in place, the Fed then raised interest rates again in January 2018. And then we immediately shift back to the Fed is double tightening here between the balance sheet and rates. And that obviously coincided with the fourth quarter of 2018.

 

So we know in the Fed tapering, the Fed tightens until they hit a wall. The Fed tightens until something breaks, and you can be sure something will break in 2022. It’s just a matter of how deep they get. And also one last point here is that having low inflation gives central banks that Wayne’s World Concert pass that all access to do anything they want for how long as they want, when there’s no inflation. But once you get inflation into the numbers, into the economy, their flexibility is greatly diminished. And that will be an interesting sort of tug of war as they get further into the tapering and something eventually breaks.

 

TS: One last question, a couple of last question. How do you feel about Stagflation? I kind of amend the Stagflation camp. Do you think that’s a cop out or how do you feel about that?

 

SVM: I think it’s temporary. I mean, we’re supposed to be rising unemployment. I mean, I guess with people coming off the ranks, I don’t know. Maybe it’ll go back up. I don’t think that’s likely to happen. And then you tend to get that with higher prices. But when we start looking at the bond market. The bond market is starting to tell us that, hey, this Stagflation is going to be transitory. And then the risk that I see is that we get into outright deflation from here.

 

PB: To me, I just look at stagflation as just slower growth and higher inflation. And in an economist textbook, they think that slow growth means lower prices. Faster growth means higher prices. I’m just looking at the Bank of Japan. The Bank of Japan said we need to get inflation at 2%, and somehow that will then generate faster growth. To me, they’ve got that backwards. You need stable prices in order to develop and sustain healthier growth.

 

So right now. But the Stagflation it’s sort of intertwined in the sense that it’s the inflation and what is driving it. So it’s the inflation itself that is beginning to impact consumer spending. And it’s the factors that are creating the inflation, like the supply bottlenecks that in itself, are also creating slower growth.

 

TS: Excellent. One last question, just for a thought experiment. I mean, say Powell does leave the Fed next year and we have find a Dove, right. So what does the Fed look like at that point if we have a dove as a Fed chair?

 

PB: Well, 2022 becomes completely politicized. The Fed’s already politicized, but it becomes Uber politicized in 2022 because of the elections in November. And if a Lael Brainard becomes the next Fed chair in February, 2022, you can be sure that Steve and I are right, that there’s no chance in hell they’re going to finish this taper because the second something breaks, you know, they’re going to back off and they’re going to do their best to, or at least the Democrats headed by the Lael Branard will do their best to maintain control of Congress.

 

SVM: Yeah. I’ll put that as a low probability chance that Powell is out. If he does, I’m 100% agree.

 

PB: I agree. I think he stays as well.

 

SVM: Yeah, 100% agree. I think it’s a big risk for the Biden administration to pull him. He hasn’t really done anything wrong. But if he does, again, I think Peter is spot on. I mean, now it becomes even more political than the Fed is supposed to be. And he’s right, as soon as something goes wrong, I mean, we’re going to 120 billion a month. Yeah, right. It’ll be multiples of that in a second.

 

TS: All right. Well, I want to thank you both again for everything you shared with us today. Can you each tell us where we can find you on social media or otherwise?

 

PB: Well, I just want to say thank you to Tracy and Steve. Thank you for having me in this debate and discuss this with you. It was definitely a fun time. If you want to read my daily readings, you can subscribe to boockreport.com. boockreport.com And our wealth management business is at bleakley.com.

 

TS: Excellent.

 

SVM: I want to thank you as well. Peter, you and I know this has been a long time coming for us to be on the same screen together. I had a blast. Totally looking forward to the next time. If you want to find more about me, you could go to my website. stevenvanmetre.com On Twitter @MetreSteven. On YouTube at @stevenvanmetrefinancial.

 

TS: Great. And for everyone watching, please don’t forget to subscribe to our YouTube channel and we look forward to seeing you on the next QuickHit.

Categories
QuickHit

Quick Hit: Are you a deflationist or an inflationist?

Brent Johnson of Santiago Capital tweets, “If you believe additional QE is on the way, you are secretly a deflationist. And if you believe in the taper, you are secretly in the inflation camp.” What does he mean by that? Also discussed in this QuickHit episode:

  • What are the considerations around inflation this time?
  • “Negative velocity of money.” What does that mean?
  • Why are banks not the transmission mechanism that they should be?
  • How China plays a part in the world economy?
  • How long will the supply chain issues will be resolved?

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QuickHit

Cause and Effect: Are you a deflationist or an inflationist?

This QuickHit episode is joined by central bank and monetary policy expert Brent Johnson. He talks about inflationists versus deflationists and what makes these camps different in a time of a pandemic. What’s monetary velocity? And why banks are failing at their job, and why they’re not lending anymore money? Also discussed China and when supply chain issues will be resolved.

 

Brent Johnson is the CEO and founder of Santiago Capital, a wealth management firm. He works with about a dozen different families and individuals customizing wealth management solutions for them. He does that through a combination of separately managed accounts and private funds, also invest in outside deals, private deals, venture capital funds, and others. Brent have a focus on macro and loves the big picture.

 

Subscribe to our Youtube Channel.

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

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

 

This QuickHit episode was recorded on September 28, 2021.

 

The views and opinions expressed in this Cause and Effect: Are you a deflationist or an inflationist? QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Part of the reason we’re having this discussion. And is you posted something on Twitter a few weeks ago and I’m going to quote it and we’re going to put it up on screen. You said if you believe an additional QE is on the way, you are secretly a deflationist. If you believe in the taper, you are secretly in the inflation camp. Cause and effect. And I thought it was super interesting. Can you kind of talk through that with us and help us understand what you mean by that?

 

Inflation, deflation tweet

 

BJ: Sure. And before I get into that, I’m just going to take a step back because a lot of work I’ve done, a lot of the work I’ve done publicly and put out publicly over the last 10 to 12 years has really been about the design of the monetary system, how it works, how fund flows, you know, this currency versus that currency, what central banks do, etc. Etc.

 

And this is really a follow on from that and what I was, the point I was trying to get across in this particular tweet is that central banks are a reactive agency. They are not the cause. They are the effect. Now their policies can cause things to happen, but they are reacting to what they see in the market.

 

And so my point was if you think more QE is coming, then you believe they are going to be reacting to the deflationary forces that still exist in the economy. And so if they were to step back and do nothing, you would have massive deflation.

 

Now, the flip side of that is if you think that they’re going to taper and you think they’re going to pull away stimulus, then you’re actually an inflationist because you believe inflation is here, it’s going to remain. Prices are going to continue to rise. And the Fed is going to have to step back in reaction to those steadily higher prices.

 

And so I really get this across because I think there’s a huge battle between the people who believe deflation is next and the people who believe inflation is next. And I think it’s a fantastic debate because I’m not certain which one to come. I kind of get labeled into the deflationary camp, which I don’t mind for a few reasons. But I actually understand all the reasons that the inflationary arguments are being made. And I believe it was a few additional things happen. Then we could get into this sustained inflation. But until those things happen, I’m happy to be labeled into the deflationary camp. So I hope that makes sense.

 

TN: Yeah. So pull this apart for me. Inflation is ever and always a monetary function. Right. We hear that all the time. Of course, it’s hard to say something “always” is. But people love to quote that. And I think they misapply it in many cases. And I’ve seen that you’ve kind of pushed back on some people in some cases. So can you talk us through that and is this time different? Like, what are the considerations around inflation this time?

 

BJ: Yeah. So is this a perfect way to set this up because again, I understand the argument that those in the inflationary camp are making. And it would be hard to sit here and say we haven’t seen inflationary effects for the last twelve months. Prices have risen. Regardless of why or whatever prices have gone up. So I’m not going to sit here and deny that we’ve had inflationary pressures.

 

The question is what comes next. And I think what I would say with regard to the quote that you were just making, I think that was, I can’t remember who said it now, but it’s 50 or 60 years ago. And what I think was assumed in that quote was that monetary velocity is constant. And so you’ve seen these huge rises in the monetary base. But not just the United States, but Canada, Europe, South America, China and Japan.

 

And so the thought is that with that new money in the system, you’re naturally going to have inflation. But I think Lacy Hunt, who a fellow Texan of yours, does a fantastic job of showing, had the rate of monetary velocity stay the same. That is absolutely the case. But the reality is monetary velocity kind of took a nose dive starting about 20 years ago, and it just continued to lower and lower and lower.

 

TN: And it’s been negative, right, for the past couple years?

 

BJ: Yeah. It just continues to fall. And I think the rule is…

 

TN: Let me just stop you right there. “Negative velocity of money.” What does that mean?

 

BJ: What it essentially means is that new credit is not being created. And so the system is contracting. And this is really the key to it all. It’s the key to the way the monetary system is designed. It’s the key to the way it functions. And it’s the key to whether we’re going to have inflation or deflation next.

 

Because I do agree with the money, the inflation is always and everywhere, a monetary phenomenon, assuming that velocity is constant. But velocity isn’t constant. And it’s because of the way the monetary system is designed. And it’s because of the way that the Fed and other central banks have been providing stimulus.

 

Probably don’t have time to get into all the details of what a bank reserve is and whether it is or whether it isn’t money. But essentially what the central banks have been doing, especially the Fed, is re collateralizing the system. Now re collateralizing the system isn’t exactly the same thing as actually handing somebody else physical money. It sort of is, but it sort of isn’t. And it leads to this big debate on whether they’re actually printing money or not. It’s my argument that the Fed has been re collateralized the system and that has kept prices from continue to fall.

 

But in order to get this sustained inflation, I keep saying sustained inflation because I don’t want to deny, but we’ve had it. But to have it continue going higher, especially at the rate we’ve seen would require one of two things. Either the Congress has to come out and agree to spend another seven or $8 trillion, which this week is showing, it’s very hard to get them to agree to do that. They can’t even agree on 3.5 trillion and let alone another 6 to 7. Or the banks have to start lending. And the banks simply are not lending.

 

They lent last year because the loans that the banks made were guaranteed by the government. These were the PPP loans that everybody got.

 

TN: So. What you’re saying, it sounds to me, and correct me, what you’re essentially saying is that banks are failing as a transmission mechanism. So the government has had to become the transmission mechanism because banks aren’t doing what their job should be. Is that true?

 

BJ: That’s a very good way of putting it.

 

TN: Why? Why are banks not the transmission mechanism that they should be?

 

BJ: Well, they have the potential to be. And that’s what I say. The Fed has provided the banks all the kindling for lack of a better word, all the starter fuel to create this inflationary storm. But the banks haven’t done it. I would argue. Now there’s people to disagree with me. But I would argue that they don’t want to make a loan because believe it or not, banks don’t want to rely on getting bailed out, and they don’t want to make a loan where they are not going to get their money back.

 

Now, if you’re in an environment where businesses have been shut down either because of the pandemic or because of other laws or because of regulations that can’t afford all the regulations, whatever it is, you know, it’s hard to loan somebody a million dollars if you don’t know that their business is even going to be open the next day. Right.

 

So banks aren’t in the business of going out and making a loan and having and default on them. They want to get their money back. And I think that they would rather go out and buy a treasury bond that’s yielded one and a half percentage, than make a loan that pays them, three or four of them might go bad. Right.

 

TN: Okay.

 

BJ: So to me, that’s indicative of the deflationary forces that the banks who are closer to the money than anybody else, and typically the people that are close to money understand the money or benefit from the money the most, they are telling me from by their actions, maybe not their words, but their actions are telling me they don’t think this is a great investment.

 

TN: Yeah. I think we could talk about that point for, like, 20 minutes. So let’s switch to something else. So what you didn’t really mention is the supply side of the market in terms of inflation, meaning supply chain issues, these sorts of things. Right.

 

And so I want to focus a little bit on China. Now, there’s a lot happening in China, and I want to understand how that impacts your worldview.

 

In China, we’ve got the crypto regulation that’s come in. And the clampdown in crypto. We have a strong CNY, like an unusually strong CNY over the last six or nine months. We have the power supply issues. We have the supply chain issues. That’s a lot happening all at one time, at a time when a lot of people believe there’s kind of China has this clear path to ascendency, but I think they have a lot of headwinds, right. Of those kind of how are you thinking about those factors? The crypto factor, the supply chain factor, the power factor? How are you thinking about that stuff?

 

BJ: So I think about this a lot first of all. I mean, this is a probably, like it or not, for better force, the China-United States dynamic is probably one of the biggest macro drivers for the next ten or 20 years. It most likely will be. There’s nothing is guaranteed. But that’s probably a pretty safe bet that that’s going to be one of the main drivers. And so I think what you’re touching on as far as the supply chain, in my opinion, that is as big a driver as the “money printing” for the inflationary effects that we’ve seen for the last year.

 

You know, if you look at the efficiency with which the single global supply chain that Xi call it from 1990 to 2018 or 19, it’s pretty amazing, right. There’s one global supply chain, just in time inventory, you can predict with a very high level of certainty when you would get those things you ordered and at what price. But then with a combination of the US and Chinese antagonism and COVID, the supply chains are broke. And that makes it harder to get those supplies. And the timing of when you get them in the price, which you get to miss completely unknown or its delay, and the prices are higher.

 

And so I think that has led to a lot of the price pressure on commodities. Now, part of the reason that the decreasing supply push prices up was that demand stayed flat or went up it a little bit. And I think the reason it went up is a lot of people believe that the Fed would print enough money to cause demand to stay, solid and that China was growing and that they would continue. China has been the growth driver for the global economy for years and years. And I think a lot of people thought that China would continue to be that growth driver for these commodities and these other goods that were needed. And so if demand stays flat arise and supply gets cut, then price rises.

 

Now, I don’t think that China growing and ascending to economic hegemony or however you want to describe it is a given. I think they have more troubles internally than they would like to admit. And I think we’re starting to see that, with the Evergrande, real estate daisy chain of credit extension. You know, if you think that the US has a credit problem, take a look at China, they do as well. And it’s manifested itself nowhere more visibly than in the real estate market there and Evergrande.

 

Now, the problem is if they cannot send that credit contraction that is currently taking place in the Chinese market from a real estate perspective, then demand is not going to stay cloud. Demand is must start to fall, and demand starts to fall and some of those supply chain logistics start to get ironed out. Now, they’re not going to get fixed overnight. It’s not going to go back to the way it was 18 months ago. But if it even gets a little bit better and demand starts to fall, well, then you could have a move down in commodity prices and then move down in growth expectations.

 

And that is the way deflationary pressures could take whole. And as those prices start to come down, then you get more credit contraction. It becomes a vicious cycle both to the upside and to the downside. But based on the design of the monetary and I don’t need to keep harping on this. But based on the design of the monetary system, it is literally the stair step up in the elevator shut down. That’s just the way it’s designed. It’s an inherently inflationary system that it has to grow. Or if it doesn’t grow, then it crashes. And crash has always happened faster and steeper than the stairstep higher.

 

TN: They take longer, but steeper on the way up. Right.

 

BJ: That’s right. That’s right.

 

TN: Okay. So in terms of the supply chain issues, okay. I’m just curious, is this something that you think is going to resolve itself in three or six months? Do you think it’s something that’s with us for three years or what was I feeling out of this?

 

BJ: Some of it is gonna resolve itself in three or six months? And I think that will be a combination of just working out the kinks and demand falling. Right. I think that will help. But I don’t think it’s all going to get fixed in three to six months, and I think it might take three to six years to get the other part of it. And this is where I have to actually say that in the past, I’ve been somewhat critical of the people who called for stagflation because I kind of felt the top out, right? You couldn’t decide. So you just go down the middle.

 

But I actually think that that’s a very likely scenario. I think some things are going to inflate and some things are going to deflate and we’re going to have this kind of the stagflationary environment. I think the central banks are going to do everything they can to kind of offset those deflationary pressures. And in some cases, it will work. In some cases, they won’t. But the global debt, the amount of global debt and the global dollar… Is so big that deflationary scare, in my opinion, is always going to be there. And in my opinion, you can’t ignore it.

 

A lot of people just think, oh, don’t worry about it. Central banks, have you back. There’s a Fed put, don’t need to worry about it. I understand that argument, but I don’t think it’s correct. I think you do have to worry about it.

 

TN: Yes, I think that’s right. Brent, I would love to talk to you for another couple of hours. I think we could do it. And I’d love to revisit this in a few months. Thank you so much for your time for everyone watching. If you wouldn’t mind following us on YouTube and subscribing, we’d really appreciate that. That helps us get up to where we can promote more and other things. And, Brent, I really appreciate your time and really appreciate this conversation. Thank you very much.

Categories
Visual (Videos)

Deflation (and falling demand) is Still The Main Problem Globally Now?

This video is originally uploaded on Youtube at https://youtu.be/0D0IxTnufoo.

 

Jason Burack of Wall St for Main St interviewed returning guest, founder and CEO of Complete Intelligence, Tony Nash.

 

Tony’s company helps many companies solve their global supply chain problems and he has also lived and worked in Asia for 15 years in the past and advised the Chinese government on their economy and trade in the past. Tony’s company also uses AI predictive analytics software to predict stock market and commodity price movements.

 

During this 40+ minute interview, Jason asks Tony about China’s economy, the global chain, the threat of much worse stagflation and volatility in markets like stocks. Tony thinks that the main problem is still deflation and a lack of demand now regardless of the amount of currency, stimulus and bailouts governments do.

 

Show Notes

 

JB: Hi everyone. This is Jason Burack of Wall St for Main St. Welcome back to another Wall Street from Main Street podcast interview today’s special guest is a returning guest he is founder and CEO of Complete Intelligence, Tony Nash thank you for joining me.


TN:
 Thanks Jason.

 

JB: now Tony, I know you’ve lived in Asia for 15 years you’ve done a lot of work with the Chinese government consulting them on their economy. You’ve worked with a lot of companies all over Asia — Singapore, China, Hong Kong — helping them with their supply chains. So let’s talk about the Chinese economy and if you think it’s recovered post coronavirus.

 

You put out a survey about a month or so ago talking about unemployment rates in China with factory order…

 

TN: 50 million because at the time I think China had said that there were five million unemployed as a result of coronavirus and I put out survey saying “is it 0-5 million, 5-25 or something and then over 50.” And the vast majority of people responded over 50 million people. Not vast majority, but majority of people responded over 50 million.

 

I’ve since seen data that estimates unemployment in China alone as a result of coronavirus at 120 million or more. I think it’s safe to say nobody actually knows the real number. But it’s probably big. And it’s probably tens of millions rather than single millions. I think it’s a safe bet to say it’s probably north of 50 million. A number of economists watching China are still assuming that the government number holds.

 

 

JB: I’ve been reading articles quoting some factory owners and some factory owners in China. I don’t know if this is all the factory owners. But at least a few of them that have been quoting articles have been saying that their orders are down 70 percent. So exports are down a lot so there are not purchase orders for a lot of different companies right now is that what you’re also hearing?

 

TN: Sure there was just a piece out today saying that a survey in China has exports for May down 7 to 8 percent year-on-year. Imports are down almost 10 percent year-on-year. That survey data Is possibly under under waiting what the fall is. I don’t doubt that exports are down double digits and there has been some lag. As you remember from the kind of early mid Corona period, there were these supply chain issues of just getting stuff out. So initially, there was this wave of pent up export requirements just to get stuff out of China. But now things are starting to settle in because you have those demand in May, especially with the US and Europe closed, you have real demand depression. I think the main numbers may be overstated a bit and I think the exports may be down even more. Of course, it’s highly unlikely we’ll see that in the official data but it’s terrible.

 

I think things may be recovering a bit. I don’t think that China is in for a V-shaped recovery like we’ve seen, but I do think that they’ll come back maybe not to as much as they had thought they would but I don’t think it’s going to be a long-term depression.

 

My concern with China is in industrial production declines and the employment declines that come as a result of that and then the wage pressure that comes as a result of that.

 

JB: what is the percentage of GDP for exports right now because there’s a lot of people that are I would call them China trolls that tell me that it’s a lot lower amount but the numbers I’ve seen for exports as a percentage of GDP are still very high for the Chinese economy.

 

TN: It’s not as high as I once as I once knew. It’s definitely, I believe as a percent of GDP it’s it’s smaller than it was like five years ago. You do have that growing services economy component you do have growing domestic demand so but I don’t think it’s it’s definitely not as high as it was. Sorry I don’t have the number to hand but it’s really not what it once was>

 

JB: It seems that China has like astagflation problem right now in food prices and rent they’ve had to import an enormous amount of pork last year. All of 2018, they were having the African swine flu problem so the report shortages in China food prices were rising long before the coronavirus, and there’s a lot of videos online of shop owners protesting either rent not being reduced or rent prices going up by their building owner. So would you say that that’s why the Chinese government and the People’s Bank of China has been very hesitant about how much stimulus and QE to inject into their economy right now because they are worried that if they put too much in it will accelerate like a stagflation problem in their rural economy?

 

TN: I think that’s a concern. I think there’s also just concerns about the fiscal resources if the Chinese government has. Of course, they can print as many fun tickets as they want as long as it’s in CNY. But I think that is a concern.

I’m quite frankly more concerned about about deflationary pressures in China and just just on the face of it naked deflationary pressures through obviously the rest of Q2 and into Q3 and then how they potentially get out of it. I think China really hasn’t had an issue or had a problem with contriving inflation when needed. But if we do have the industrial production issues and the wage issues that I’ve been concerned about, I do think that deflation is more the overall and more serious concern there.

 

JB: That’s interesting because you’ve been predicting that the Chinese yuan against their exchange rate against the dollar it gets devalue down 7.2, right?

 

TN: That’s right.

 

JB: How would that jive then with deflation if they’re trying to devalue their currency?

 

TN: I think you’ve got both of those trends moving in the same direction. Unfortunately with energy prices down into the 30s, of course you have into the 40s. Yesterday or today, you have Brent move into the 40s. Sorry WTI. With the resources depressed, again, this is on a year-on-year basis.

 

But I think there’s serious downward pressure and will be continuing a series downward pressure on resources and commodities so the secondary impacts will also show a bit of producer price deflation. And then you have just the function of overproduction in China and having to sell those inventories. You don’t necessarily have the take off from the US. Partly I mean, this is a two or so year-old trade war, but because of our discussion, but because of the trade war, and then you have the issues in Europe with demand as a result of COVID, so I think you’re looking at more supply in China of manufactured goods.

 

They’re looking at commodity prices that I don’t believe we’ll come back dramatically. It’s it’s an ongoing issue. At the same time, you have the what I believe ongoing concerns for industrial production as a result of this and then there are the jobs and wages issues. If you have wages declining, then people just can’t pay for those goods so that’s disinflationary. Again I’m worrying about this where I think a lot of other people aren’t worrying about this. But it is something that I’m actually quite concerned about in China.

 

JB: It looks like the government can create even more distortions with what they try to do with intervention and central planning with the currency. We’re recording this interview right now in June 5th, the currency is that the Chinese Yuan is at 7.081 to the Dollar.

 

I’ve been reading articles that a lot of Chinese manufacturers are producing but there’s not really demand. So they’re stockpiling a lot of stuff. I’ve been reading a lot of articles lately too about a lot of oil companies in China importing more oil. I think they built another or the atleast announced another Strategic Petroleum Reserve. How many is that what five or six now? They are buying more oil. I don’t know if they’re using the oil because my friend tracks Chinese auto traffic data and he says it’s nowhere near the pre-coronavirus 2019 levels and there’s almost no traffic whatsoever on the weekends in the major cities. Only at rush hour is there actually like anywhere close to normal traffic levels and the other data throughout the day and night and on the weekends is nowhere is way way off.

 

TN: It’s not surprising at all. What it reminds me of is the kind of quotas for stockpiling for Soviet production and the kind of deflationary impact that had in many ways on certain goods in the former Soviet Union. In China, over production and stockpiling, I mean we’ve known about this and things like steel for years. But as it comes to finished goods, that’s hugely problematic given the volume that I suspect overproduction is happening and given the disappearance of demand in overseas markets and obviously domestic markets. Areas like automotive auto parts electronic goods these sorts of things that just people are not going to be renewing. Of course that’s not an absolute statement. It’s an incremental statement, but these things really hurt the manufacturing complex in China. We’ve all taken a pause generally from consumption in Q2 globally. In China it’s been a bit more stark.

 

JB: I think the factory orders are not coming in like you said in the stockpiling is just increasing the amount of credit that I think the Chinese government is injecting I’ve seen from China beige but they put an article out on their Twitter it was like 400 billion in a month pace. But I think a lot of that’s just going to keeping the factories running right now so they don’t go bankrupt.

 

TN: Yeah and that’s not surprising. I mean they don’t want people to be unemployed because they don’t want to see civil unrest. We’ll see more and more social controls in China so that there isn’t civil unrest because people are just bored out of their minds.

 

JB: Speaking of social unrest you know all the rules changes and stuff going on with Hong Kong. We’ll talk about U.S. and China trade relations in a couple minutes, but do you think that China one of the main reasons they’re going into Hong Kong is economically? Do you think that the Chinese government is eyeing that $400 billion that the Hong Kong Monetary Authority has to protect their dollar pay?

 

TN: Of course they are. I think the US was really smart to take away Hong Kong status very, very quickly because the incentive was that Hong Kong would continue to be this buffer zone and that China would continue to be able to benefit from that buffer zone and it’s fine if it’s a buffer zone and it really is a free market because in its heyday, and this is not that long ago like months ago, Hong Kong was the freest market in the world. But as you have the mainland authorities take over things like the judiciary, then Hong Kong no longer become the freest market in the world. So I think that was the reason or there are a lot of reasons but that was one of the reasons for them to grow assertive. China is looking for reasons to distract from the economy, which i think is extremely dangerous, but I think Hong Kong is one way for them to distract from their domestic economic issues.

 

JB: I completely agree. I think there was multiple reasons for what they did with Hong Kong and then what Trump does they gonna blame it on Trump.

 

TN: Right of course and that’s fine and that’s easy. Anything to distract, whether it’s incursions in India or whether its South China Sea or its Hong Kong or whatever it is. The Chinese ambassador to the UK making stupid statements about the Tiananmen, well kind of circumventing that. They’re doing anything they can to distract from their own domestic economy.

 

JB: I think yesterday was the anniversary of Tiananmen.

TN: that’s right

 

JB: For our listeners are not familiar, I think one of the tricks that what not the a lot of Chinese companies were getting around to not pay the tariffs last year was they were exporting their goods from mainland China to Hong Kong and then they were taking advantage of that. So they were re-exporting out of Hong Kong to avoid the tariffs that the US had put on. I think that was quite common practice, right?

 

TN: Sure yeah. Any sort of third country trans-shipment, but Hong Kong was as viable as any other, and because it had this relationship with the US, it was a very easy solution. But I think that’s becoming more and more difficult. Regardless of the goods, I think it’s becoming more and more difficult. Even things like exporting components or knocked down goods for assembly and their locations even that stuff is becoming more and more difficult.

 

JB: So now I want to transition to the US and China trade relations. We still occasionally get a tweet out from Trump or one of his representatives in the Trump administration or White House about how the US-China trade deal is progressing. But really, there’s been very little positive actions on China’s end about the trade deal. I think they made one purchase of soybeans. The trade announcement was in October 2019. So we have October, November, December, January, February, March, April and May. Finally, the Chinese government buys some soybeans in May. It was a fairly decently large order. But look at all the months that they didn’t really buy anything, it didn’t comply with phase one. So do you think the phase one trade agreement is dead?

 

TN: I don’t think it’s necessarily dead, but I think China is very good at negotiating agreements and very bad at going through on them. This is why the Americans were very focused on the enforcement mechanism within the phase one agreement. So I think the real question is, will the US follow through with enforcement? If the US doesn’t follow through with enforcement, then it’s just a piece of paper. It doesn’t really matter that much. But if the enforcement mechanisms come through, then I think it’s possible. Again, I’m skeptical. I was pleasantly shocked and surprised when the agreement was made in Q4. At the time, I was like most people skeptical about the ability to have that enforced because what are you gonna do? You can’t force people to buy stuff from you. That’s the real problem. Now with Hong Kong coming into the picture and with the US has action on Hong Kong coming into the picture, I think it’s going to be harder and harder for those for those the agreement terms to be exercised.

 

JB: My contracts in China, when the phase 1 deal was announced, they were really happy for the Chinese government. They were celebrating because no more tariff hikes. That was the main goal for the Chinese government for phase 1 announcement the trade deal was to make sure there was no more tariff hikes.

 

TN: Right. Evidently some of the state-owned buyers have started to look at soybeans and other products more recently. I’m just not sure that that’s real. I mean, this is some stuff that we’ve been hearing some transactions in the market. But stopping the tariff hikes is the first thing but actually getting them to buy is the more interesting part on the US side of course.

 

JB: But did Beijing just almost now for the last month or so there’s been press release announcements back and forth, back and forth between the US and China like Trump is now blocking the retirement savings I think of a lot of military and government employees from being invested in China, China then threatened to remove Chinese companies listing from US exchanges. Those are just a couple examples but back and forth back and forth back and forth. This is going. It doesn’t seem like this is Trump’s crazy way of negotiating from the art of the deal but this just doesn’t seem like it’s productive towards a trade agreement.

 

TN: I think it’s more of a recognition that these things haven’t been happening anyway. We may very well see more purchasing later in the year but I think this stuff is that there has to be well, there is tension between the US and China. China has become more aggressive in South China Sea in Hong Kong and other places, India. I think part of this is maybe not necessarily a direct hit on what may seem to be a problem it may be related to actions that China has been taking toward relationships that the US is becoming closer to. I don’t necessarily see trade as a single issue. I see trade as a multi-layered issue.

 

JB: Interesting. How important do you think what’s happening with Huawei and how the Huawei CFO, her extradition process in Canada is continuing, how important do you think that is?

 

TN: It’s very, because Huawei is kind of a crown jewel in China and I think as the UK starts looking to other technology as Huawei technology becomes an issue for Germany and they start looking at other sources, I think that removes China’s centrality to the deployment of these types of networks. Of course, that’s obvious. But the services, the information and other things that you can sell off of owning that network equipment is huge. So it’s not just a one-time sale. It is a long relationship. Now that doesn’t just have impacts on Huawei. It has impacts on places like China export-import bank or CDB. It’s not just the equipment, it’s the financing of the equipment. These centrally planned economies or heavily centrally influenced economies, it’s a game of musical chairs. Once you stop the music, it has knock-on effects for many, many other players. I think the Huawei issue with Canada and the US  is that on its own is an embarrassing issue. But stopping the purchase of Huawei equipment in Europe and the US and other places has long-term commercial effects with Huawei, but also the whole value chain including places like Export Import Bank and other places that are supporting those purchases or supporting the financing of those activities, whether it’s Exim Bank or another bank doesn’t matter, but it’s the overseas financial services impacts in China is also stopped or slowing dramatically.

 

JB: Do you think then if the Huawei CFO, if the charges aren’t dropped, if this doesn’t stop with what’s going on with Huawei, that that’s a deal-breaker for the US and China trade relations? Are they going to be able to figure out a workaround?

 

TN: There are a number of layers here. First of all, it shows that the law is not the law in China, that you can be of a certain class and rank and the law doesn’t really apply to you, if in fact she broke the law, right? If she broke the law and China is still upset then, it’s a very clear indicator to Chinese citizens that the law doesn’t apply to people of Ming stature. That’s a problem for China. While they fight for her return, I think a very bad development for them would be that she has found guilty yet China still wants her let free and they let her go. That’s a real perception problem in China for Chinese citizens. But do I think it will impact the US-China trade war? I think every issue is connected when you’re talking to China. So now from the US side, the way Trump thinks is he bundles issues, and so the way American administration’s typically think is they think in an unbundled way. So the State Department typically cannot walk and chew gum at the same time. We’ve seen that for decades State Department will be happy about finishing one agreement when another agreement that should be linked isn’t and they can never get it done or something like that. What Trump and what his administration actually does very well from my perspective is they bundle things extremely well and so I don’t think the Trump administration itself sees that trade agreement as discrete and different from the main issue or from Taiwan or South China Sea or Hong Kong or any of these issues. I thing the administration sees everything is bundled which is not dissimilar from the way the Chinese diplomats and central government see things. They see everything is bundled.

 

JB: I see Huawei is one of the most important things for China because they have such long-term plans for it like you said like it’s their main cornerstone company, it’s their main technology company and then once Huawei has control over the 5g networks and all the other infrastructure there for communications, then the other Chinese companies the financing companies and all the others start to follow suit after that.

 

TN: Yeah. I think that’s fair.

 

JB: Let’s talk then about the global supply chain. It seems in January and February, the global supply chain started to break. Do you think that it’s being fixed now?

 

TN: Do I think it’s fixed? I don’t. Our US supply chains fixed. I don’t think they’re fixed. Is the Chinese supply chain infrastructure moving again? Yes. I think what’s happening is a number of important US importers and US manufacturers and even global manufacturers are trying to find places to reduce their risk and exposure to China. And not because they want to abandon China. I don’t believe that’s the case at all. I think we see people who are say super nationalist or whatever who want to act like these guys are interested in leaving China completely. I don’t believe that’s the case at all. I think global manufacturers are looking for incremental manufacturing capacity to reduce their risk if there is a second wave of Corona, if there is political unrest in China, if there is some sort of retribution or something. I think they want incremental manufacturing for that. And for that, they’ll look to places like Mexico, parts of the US parts, or Europe or somewhere else, other place in Latin America. I don’t necessarily see a wholesale substitutional effect for supply chains out of China at least for the first two to three years. I think over time, there may be more substitutionality. But right now, I think it’s more of an incremental discussion.

 

JB: Do you think India is gonna benefit from this because we’ve seen headlines where India is talking about subsidizing, trying to get more Apple supply chain out of China? I think they’ve gotten one company to move from China to India but they’re going after a lot more than that. They see this as an opportunity and the sentiment online, Tony, I don’t know if I’ve ever seen this before where lots of people here in the West in the US and Europe are talking about boycotting Chinese products. Now that’s easier said than done because a lot of stuff that’s partially made in China is finished assembling here in the US and then it’s stamped made in the US but it’s all the components that go into it are not fully made in the US.

 

TN: Do I might think India will benefit from this? I love India. I really wish India would benefit from this. But I think there’s so much corruption in India. I think it’s very, very difficult. I think it’d be a very difficult thing for any manufacturer to make a significant commitment to India. While I would love for India to benefit from this, and while I would love for manufacturers to move to India, I think the reality is from a bureaucratic, from a corruption, from a just sheer logistically difficult position, again, you know I spent a lot of time in India in the same way I spent a lot of time in China. I just don’t see that happening. I wish it would, but I just don’t see it happening.

 

JB: That’s sad.

 

TN: Yup.

 

JB: it’s sad, they have an opportunity to do it too.

 

TN: They do, but I think the institutional issues are so great that it’s gonna take them years and years to root that out. Look, having services functions moved to India? No problem at all. This is why the BPO sector started booming in India 20 years ago. But actually having physical Manufacturing, and physical logistics, I think it’s probably still a very difficult proposition.

 

JB: In some of your answers, you said that the large corporations don’t want to leave China said they don’t really care if some of their intellectual property or research and development or forced technology transfer or a forced Chinese silent partner they were okay with that?

 

TN: No, I’m not saying they don’t want to leave China. But they already have a large amount of investment there and so moving wholesale from China over the next two to three years presents a big risk for them. So I think, what they’ll do is initially move incremental production away from China. Let’s say it’s a new model or a new product line or a regionalised product line. Let’s say they do something just for North America or something, I think they’ll move that stuff first because those are new supply chains that they would be building out. New manufacturers or expanded with existing manufacturers and then they look at either new physical transport or expanded physical transport. All these things are things that they have to be careful of not just the risk in China, but the risk within the new supply chains that they’re developing in other places.

 

So I don’t think any major US manufacturer will rush out of China unless they’re absolutely forced to. I think they’ll develop parallel supply chains and incremental supply chains first. Test them out for a couple years and then gradually, some of that may be rapid some of that may be slow, but gradually move stuff out.

Before the financial crisis in 2008-09, many manufacturers, particularly Japanese manufacturers, but many manufacturers were looking at something that they called their “China plus one” or “China plus 2“ or “China plus 3 strategy”, where they were looking at manufacturing goods in China but having other locations as backups. Now when the financial crisis came about, all these manufacturing firms wanted to just get rid of risk and they saw these other supply chains as risk so they doubled down on China and they continue to build out in China for all the new equipment and hiring and everything else in China as well. So they saw it as de-risking or at least not growing risk, but actually by concentrating their activities it actually became riskier. Now with a place like Japan, we saw with the 2012 riots and protests and other things that the Chinese did against Japan, this was over the Senkaku Islands, we saw a lot of Japanese manufacturers move their manufacturing out of China. Initially it was slow, and then it became much faster. I think people looking to exit China will look at that as a template. It wasn’t that long ago. It was 2012, 13, 14 when this stuff started and then it moved. So I think they look at that as a template rather than China try to invent something wholesale.

 

JB: I think it could take years for more factories to leave China. Could take a significant amounts of the supply chain to move. There’s billions of dollars of investment. Some of these factories now are not cheap to build. It’s a lot of technology involved, a lot of investment. And given the global economy right now, and how the consumer has not come back, some of these investments may be delayed.

 

TN: Yeah, I don’t think I’ll take as long as a decade. But I do think it’ll take years. But having said that, I don’t think many of these manufacturers will completely want to remove their operations from China either. It’s a big market and the Chinese spend money just like anyone else. So they’ll have their China operations for China and maybe they’ll build for other parts of Asia or they’ll build especially parts or something like that. But I don’t think many of them will have global manufacturing based in China. I think we’re going to see re-regionalization of supply chains and we may have talked about this before, but the move away from say the NAFTA and Euro area around 2000, it was a zero sum where most of the stuff went to China over the next 10 years, 15 years, particularly in the first five years. But then it kind of bled over the next five to eight years and then it became completely concentrated in China and then with the centrality of China, kind of the regionalization complete now we’re starting to see the re-regionalization even if it is a higher manufacturing price because the risk associated with closing again with an event like COVID is so high that people just need to have supply chains closure at home.

 

JB: Yeah. You told me to call it localization and not de-globalization like Peters Ayhan has been calling it regionalization.

 

TN: Regionalization, yeah. I think the globalization is a bit of a, it’s charged first of all but I also think it’s not really accurate. I think we’re still globalized. We still have globalization. But I think we’re Re-regionalizing. Things were pretty regionalized in the 90s and then they de-regionalized, they globalized with China as the epicenter but I think we’re going through a phase of re-regionalization and I think we’ll dip into globalization as needed, we’ll dip into regionalization as needed because people can run pretty sophisticated supply chains now and so whereas 20 years ago it was harder to do that.

 

JB: Yeah, I totally agree. I’ve been reading articles and also my last interview with you where you talked about it, our listeners can go back I think in December 2019, where you’re talking about your company Complete Intelligence and the supply chain management software, the improvements it’s had just in the last couple decades. So in the past, when there wasn’t good supply chain management software, it might take a purchasing manager or manager, even a senior manager at the company, might take them days or weeks with phone calls and tracing to trace orders and exact amounts of the supply chain. Now they can do it on their on their iPad.

 

TN: Sure, yeah. Just the track and trace stuff, the location of stuff, that’s old technology and it’s very easy. I think what’s harder for people is to understand the true cost and cost scenarios for manufacturing a good. What is the cost at the element level or the component level of that phone that you’re building or that electronic equipment or that food item or whatever. What we’re able to do and I think things are moving is much more precision around taking those costs, breaking them out, understanding where they’re going over the next one to say 24 months so that you can really plan where the best location is, what the right price is, all this stuff. The geopolitics and the trade policy around trade, I don’t think that stuff will ever leave us. The precision with which you can plan around cost and price and other things, I think those things are allowing manufacturers to adjust really, really quickly and really have a bottom line impact within say 90 days something like that.

 

JB: I think a lot of these governments are talking about trade so much because they all are seeing that they want to bring back manufacturing for jobs.

 

TN: That’s right. Whether it’s Europe or the US or South East Asia. You look at a place like Malaysia. A lot of Malaysian manufacturing was transitioned to China between say 2000 and 2012, 2015. And now global manufacturing companies or for the past couple years they’ve been looking at places like Malaysia and Thailand again because it’s simply not China and so it’s not just localizing manufacturing in North America it’s looking at other regions and arbitrage in the regulations and the tariffs instead of arbitrage say the electricity price, which is one of the reasons people after Mexico, or regulatory in taxes, which is part of the reason people of the US. So, this isn’t just say a Western or European US issue. It’s regionalization in the truest sense.

 

JB: So these governments and central banks, it’s not just the US and the Federal Reserve. The European Central Bank, the Bank of Japan, the People’s Bank of China is doing some but nowhere near the amounts because I think they are really worried about the stagflation component, but they are flooding in general the global economy and asset markets with currency. Some people are getting what twelve hundred dollar checks. There’s SBA loans. Is this going to put a lot higher costs in the global supply chain? Are you seeing higher cost yet?

 

TN: I don’t necessarily foresee that, but I do think we’ll see incremental costs. So what you’re talking about is so much money is out there that chasing those goods will become more expensive. I think you’ll see that maybe in futures markets or in financial trading markets. But I think in terms of demand-led consumption, actually people buying tangible things, I think we’re in an environment where prices are hard for us to rise. Granted you see oil trading like I said earlier WTI broke I think $40 today, which is great. It’s healthy. But when that actually transitions into physical demand and how that transitions into other areas, I’m not really sure. Meaning, that $40 or how much price pressure is that going to have on downstream goods? Because $40 is much less than it has traded even though we had negative 37 and 20 and 28 and 32 for a long time, those prices are still pretty far depressed from where they have been historically. So I don’t see that. Typically when we have this type of stimulus that cash makes its way into things like real estate and equities and that sort of stuff. Will there be inflation there? Probably. But will we see it in supply chains? Probably not as much as one would think initially.

 

JB: So you don’t see a stagflation scenario where people in the US are going to be given more $1,200 or more checks per month and then because the global supply chain is not functioning at pre coronavirus levels, that there’s going to be less goods and services to purchase, so there’s going to be more currency creating less goods and services which would be stagflation airing that in my opinion?

 

TN: Certainly that’s possible. Not necessarily my central view. I think once you see these, the benefits and this $600 a week extra for unemployment, I think once you see that end at the end of June, I think we’ll see people really try to get back to work as quickly as possible. I think we will see some wage deflation among kind of white-collar workers especially in places and things like oil and gas. I’m based in Houston, Texas so I think you’ll see that stuff as those jobs become more competitive. But I don’t necessarily see a fully stagflation airy environment in the US.

 

JB: I think one of the main points though is the distortions that all these government interventions and the central bank intervention is creating because look at the stock market now that the stock market the Dow is over 27-thousand and I we haven’t seen any examples really of a recovery in the US economy yet.

 

TN: Again, markets are trying to find their levels and what I’ve been explaining to our clients is we will likely see quite a lot of volatility between now and say August, where we’ll see markets rise and we’ll see markets fall.

 

In hindsight, if we look let’s say on a monthly average basis, they may look like pretty boring markets. But in reality, we’ll see things rise and fall quite a bit until those markets, whether it’s say a copper price or whether it’s sp500 ETF. They’ll bounce around quite a lot. So again nobody really knows this is this is the problem it’s price discovery. When we talked with say procurement people, our supply chain people, even revenue planning people within companies, they’re all kind of making their best guesses. But they don’t really know and I think whether it’s somebody allocating a portfolio or whether somebody buying for a product, the planning, the precision of planning, the tools that people you are using really are not that precise and they really don’t incorporate a number of scenarios. We do have a lot of planning teams and let’s say portfolio strategy teams who are really kind of guessing and that’s why we see and we believe we will see the volatility in markets because it’s easy to look at the Dow or the S&P and say, “wow that’s too high” and then next week it swings 5% lower and then the week after it swings up 3% and so we see these things go up and down until we find that price where market participants agree that it should be in general region. I think we’re gonna be having that debate in markets for the next two to three months.

 

JB: I expect a lot more volatility even though the VIX is down below 25 that was below its support levels at 28. It was in a new trading range a higher trading range now it’s below that. But the Fed has talked about Powell and the Fed have talked about wanting to reduce volatility. Temporarily, they have reduced stock market volatility. But I’m looking for data out of the real world economy especially in the US economy where there’s improvement and I haven’t really seen improvement yet, now they are gonna we’re hopefully gonna restart the economy, but who knows if we’re gonna get a second wave of the coronavirus soon.

 

TN: Well if you look at driving right now, it’s at like 80 percent of pre corona. And this is part of what’s giving strength to crude oil markets. People are getting back on the roads. Not really getting back into planes that much yet. But they are getting back on the roads and I’m optimistic about that. When we start to see some of these basic signs of life at say 80% level, I think that’s positive. I do understand why markets were up today given the unemployment data and things like the road data that sort of stuff. Are they at the right level? I don’t know that anybody really knows but I think there is growing optimism that things may be coming back. The rate at which they’ll come back? Again, I think markets are going to debate that for at least a couple more months and then we’ll see real tangible, sustainable activities say late July August and people get an idea of where things will land for the rest of the year.

 

JB: Do you think the US economy is gonna have to make some really radical changes as in a lot of the bricks and mortar retailers, a lot of a lot of these casuals sit down in restaurants, they’re going to go away and the transition to e-commerce and online sales is gonna, it was already happening before the coronavirus, but now it’s gonna be a rapid acceleration than in the coming years?

TN: I think in general, I would say no. But I do think that a lot of your marginal businesses in strip malls or your marginal franchises or whatever that we’re just barely making it, I think it’s like this is a good time to cut those losses. I think things like real estate obviously you’ll see some changes there. But you know I think most people just want to go back to normal whatever that is. If we look at say pre 9/11,  everyone said the world was going to change. It ended up being kind of a TSA check and so I think yes it’s easy. It’s been pretty easy over the past couple months to kind of extrapolate today into the future and today is forever. Normal is not normal anymore. But I think most people just want to get back to normal. Of course there’s going to be changes, but we’ve seen from some from some of the say protest activity over the past week, people will get out and they’ll go in public for whatever their right reasons are. Do I think the dining experience is going to change dramatically? I don’t. Do I think the shopping experience is going to change dramatically? I think it’ll change a little bit, but I don’t think it’s going to be some new normal of every single thing being done online and everything being delivered to house. Of course, people want that especially that’ll take off or continue likely in urban areas in a big way. But I think at the end of the day most people just want to get out of the house right now. They’ve been there for so long that they’re just trying to trying to get out and do something else aside from eat another meal in their house.

 

JB: The food delivery companies, they’re way overcharging on fees. I’m paying for a couple of my deliveries I think I ordered like a pizza and a couple other things and it was fifty bucks. It’s way more than than the normal cost.

 

TN: It’s very inflexible demand, very inelastic so if they can charge it, they will and I don’t blame them. I wish I was in that position.

 

JB: They still can’t make money if you look at their earnings report. Jim Chanos like put out a he posted an interesting article on his Twitter about like there’s an the Pizza arbitrage. Did you see that article?

 

TN: no

 

JB: Yeah. So him and his buddy who’s a restauranteur, they figured out that GrubHub was under-pricing pizzas so they bought ten pizzas at the GrubHub subsidized price and then they were able to basically make $100 per order risk-free, 80 to 100 dollars cash for is free. There’s an article that I could send you. It’s pretty funny.

 

TN: They could sell it to other people.

 

JB: They could resell it, but it was basically, they were there was an arbitrage trade because of like doordash and GrubHub were intentionally under-pricing the menu items and so people would order from them and their call centers so they could sell to Wall Street that there was growth that there was revenue growth for deliveries so the stock would still go up.

TN: Wow fantastic, what a game, huh?

 

JB: well I’m not the CEO of a publicly traded company like that but yeah it’s a bad and said there’s a lot of added incentives right now in society.

 

TN: Yeah.

 

JB: Well, Tony, I really enjoyed our discussion today. We live in very interesting time. One last question here about the dollar. So you think the dollar shortage is real and that the dollar is gonna start rolling soon?

 

TN: “Soon” is relative. So do I think the dollar shortage is real? Yes. Do I think the dollar is going to rally soon? I think it’s inevitable, but I think it really all depends on several things. But I do believe that emerging markets will continue to try to devalue their currencies because their exports especially China, I think that the dollar is in demand because there is so much debt globally, and they have to have dollars to pay down their their US dollar denominated debt. I do believe that Brent Johnson, his view his milkshake theory, I think is very solid and I think there’s a level of patience behind that theory and I don’t see the fundamentals changing that much. I think it’s a pretty elegant in the way he’s put that together.

 

JB: It’s a sound theory, but I think the US government the US Treasury President Trump who’s tweeted a lot about the dollar in the last two years, there’s a lot of ways that Congress and Trump and the Treasury can spend, can hand out checks, can do a plaza court agreement, if things get bad enough, they can do what FDR did in 1934. And if the dollar does get to those levels that Brent Johnson is predicting at 120 and the dollar index I mean that would collapse everything.

 

TN: Maybe. I don’t know that it would collapse everything. But I think it would certainly put strains on emerging markets. I don’t know that it would collapse everything, but I think it would certainly harm and I think emerging markets would have to live within limits that they haven’t had to for probably 30 years. So, and this is the basis of the end of the Asian century is they borrowed against the next 30 years to pay for the last 15, right. It’s just not sustainable since they don’t have a global currency and I think if you get a dollar north of say 105 close to 110, I think Asia just starts having serious serious problems.

 

JB: Yeah, I agree. And emerging markets have an interesting business model since China joined the WTO. So they set up to export to China either luxury goods or commodities and then they started borrowing in dollars especially around what after 2009, when the dollar index in what 2011 to some of the all-time lows there with Ben Bernanke just doing the QE programs. They basically started shorting the dollar at the worst possible time when the dollar was already relatively low and they were doing a lot of exports to China but then borrowing in dollar so it was a dangerous game that the emerging markets had set up.

 

TN: Very dangerous. I think being in those markets, betting against the dollar is a really hard proposition especially right now because the relative strength of the US, the US is in pretty good position compared to a number of these markets. It’s in a good position compared to say Europe. I’m not just talking like this month, I mean we’re all hurting this month. I think over the medium and long term from demographics to resources to other things, the US is in a is in a pretty good position it’s not in an excellent position I don’t think anybody globally is but I think it’s in a pretty good position.

 

JB: I want to thank you so much for your time today, Tony. If my listeners want to follow you more on Twitter or take a look at your company Complete Intelligence and the work you do, how did they do so?

 

TN: Sure, our company website is at completeintel.com on Twitter the company URL is or the company tag is @complete_intel. My personal twitter is @TonyNashNerd.

 

JB: Putting out a lot of good surveys and a lot of good stories, too, about the global trade in China as well.

 

TN: Thanks Jason. Thanks so much for your time.