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US Policy for Small Businesses: The Week Ahead – 17 Oct 2022

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We’ve had several policies that have hurt small businesses, especially since the advent of Covid. The US administration just implemented a policy to move gig/independent workers to employee status. How does this hurt small businesses? Carol Roth, our special guest for this episode, discussed that in this Week Ahead.

Also, we’ve seen a lot of negative news this week with producer prices, wages, consumer prices rising. One Twitter user asked what would Carol do if she was in charge? What would she do and how does she think it’d help?

Albert helped us look at the Fed and is the dovish Fed dead? We’ve known this for some time, and there were hopes for a pivot, but that seems to be over.

Tracy also talked about diesel inventories, which she talked about for a very long time. She helped us dig into that in this episode.

Key themes
1. US policy punishing small businesses
2. The dovish Fed is dead
3. Diesel inventories
4. The Week Ahead

This is the 38th 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
Carol: https://twitter.com/caroljsroth
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Time Stamp:
0:00 Start
0:48 Key themes for this week ahead
2:43 US policy on gig workers
7:48 Is this to slow down job creation?
10:00 What other things will make things uncompetitive for small businesses?
12:07 What adjustments would Carol Roth do if she’s with the Fed?
16:47 Debt buying and the Fed
19:00 Forecasts for some currencies
20:00 Does the Fed understand that this is a supply-induced inflation?
23:50 They’re not thinking through the political fallout
25:25 Is diesel priced in dollars globally? And what’s the impact?
28:00 How long does the diesel shortage last?
31:34 What’s for the week ahead?

Transcript

Tony Nash: Hi, everybody, and welcome to the week Ahead. I’m Tony Nash. Today we are joined by Carol Roth. Carol is from Chicago. She’s the author of the War on small business. She’s got an amazing Twitter following an amazing Twitter presence. Carol, thanks so much for joining us. Really looking forward to getting your perspectives today. 

We also have Albert and Tracy and I’m looking forward to getting their views on the Fed and on energy today as well. The key themes today we’re looking first at US policies punishing small business. Carol has a really unique perspective, obviously a book on the broader implications of this, but there are some recent policies that she’s been focusing on that will talk about some of those things. 

Next. Albert will help us dig into the Fed. And are we looking at the end of the Dovish Fed? I think we’ve known this for some time, but there’s always kind of been some hope that there’s going to be some sort of pivot and that seems to be over. 

Next we’ll look at diesel inventories. Tracy has been talking about this for a long, long time, but it really seems to be coming to a head. So we’ll dig into that today as well. Please take a look at our product CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.

Before we move on, please like this video, please subscribe to this video. You’ll be able to see all of them and we really want you to be able to see us every week as we bring these in.

So Carol, thank you very much for joining us. I know you’re busy, really demanding schedule. It means a lot to us that you could join us. So thank you very much.

Carol Roth: This is an amazing crew and I can’t believe you left out recovering investment banker out of my introduction because that’s really the most important part,

TN: Right, exactly. And a Raiders fan as we learned last week over Twitter as well. So we’ll forgive you for that. Anyway, thanks very much. I love the work you do on small business. And you’ve been talking about a recent policy and we’ve got a tweet of yours on the screen talking about the Bind regime pushing gig employees to be full time employee status with companies. Can you talk us through what that means for small businesses and why is that a competitive disadvantage?

CR: Yeah, I think the first thing that people really need to understand is how important small business is to the economy. Because I think a lot of people think, oh, it’s small, it’s just a little piece. Before COVID, small business was about half the GDP and about half the jobs. And at this point we have about 32 6 million small businesses in the US.

So if you’re somebody who believes in the concept of decentralization and that being important to economic freedom, this is the decentralized portion of the economy. This is very independent. It’s very spread out geographically via industries backgrounds. Whatnot by the way which is why big business, big governments and big special interests don’t like small businesses because they’re very hard to corral. If you look at the other half of the economy, it’s in the hands of 20 plus thousand big businesses. So it really is that sort of David versus Goliath battle but also this battle between decentralization and centralization. And we have seen all of these efforts over a long period of time to destabilize small businesses and to make competitive advantages to really tip the free market in favor of those big businesses.

And certainly the policies around COVID right, were the biggest example of that ever. It was an epic wealth transfer from Main Street to Wall Street done not based on data and science but based on political cloud and connections. So now that we kind of know what the story is in terms of this unholy triumvirate, if you will, the big business, the big special interest, big government attacking small businesses, you then look as to what else they can do to really make it harder for small businesses to compete.

So there’s this Department of labor ruling that’s come out. It’s followed something called AB Five in California. If anybody has heard or followed what was going on in California and then it has been and passed the House on a federal basis under the Pro Act. But basically the idea is they want to take gig workers and independent contractors which by the way the estimates, they number around 53 million people in the United States. 

So again, this is not a small number of people who are being affected and they want to say you can no longer have the freedom to decide how you work. We don’t want you to be able to enter into a contract in a way that works for you. We don’t want you to have that flexibility. You have to be an employee. Now this may sound like, oh well, that sounds great for people.

Why would they not want to be an employee? Well, there are a lot of reasons why you don’t want to be an employee. The first is you might not have that opportunity. And that’s the biggest issue because it is very difficult. And the government are the ones who have made this very difficult for a company to hire their first employee and also to keep them on an ongoing basis. 

If you hire somebody as an employee versus a contractor, you have to pay in a portion to Social Security. It affects interest. It can affect your 401K or step plans. It just kind of reverberates throughout your business and so it becomes very challenging and difficult. So if you are a small business who maybe gets busy during a certain season or need help just in certain areas, you tend to bring on independent contractors. Or if you’re creative, if you’re running a movie, you’re obviously not bringing everybody unnecessarily as an employee. You might have a caterer who comes in and feeds people, or if you’re a hairdresser, you may want to rent out a chair in a salon. And the salon doesn’t have the wherewithal to make these employees.

So they’re framing this as we’re trying to help the employees. This is going to really stick it to big business. But there are literally hundreds and hundreds of different categories of employees. Anybody who’s a 1099 employee and doesn’t have a business entity that this will threaten not only their economic freedom, the ability to work the way that they want to be flexible, but literally their livelihoods.

So if you believe in choice, it should be your work, your choice. And now the Department of labor wants to give another giveaway to all of those big special interests.

TN: So, Kara, when we’re in an environment right now where the Fed is trying to slow down job

creation, our small company is the largest portion of job creation as well. So is that another tool potentially, maybe unintended or not, I don’t know to slow down job creation? 

CR: Yeah, I mean, certainly if you think of the small companies, they’re the ones that don’t have the financial wherewithal or the fortress balance sheets. They have not been loading up on the cheap debt because they have to personally guarantee it and don’t have the same scale as the big companies. So it’s a challenge for them to survive an environment where the Fed is going, we’re going to destroy demand. It’s basically we’re going to destroy the little guys who can’t endure this pain. So that’s small business. And you’re right. Having the ability to be flexible going, well, maybe I can’t hire an employee, but maybe I can hire somebody as a contractor parttime, and when things get better, I can bring them on as an employee. Or maybe this is just a flexible way that we can work in the future so we can have different people and they can also work with different companies in a way that suits them.

Absolutely. This is going to be on the shoulders of small business. And as they always do, they say, oh, this is an attack on Uber and Lyft. When this happened in California, Uber and Lyft went out and they put it on the ballot. They got an exemption, but they didn’t take everybody else with them. They just got it for a handful of big industries. And all of the other small guys were basically screwed.

So the idea that this is somehow in an attack in the front against the big guys and the small guys are going to come out smelling like a rose is a joke. If you believe that. I’ve got a bridge to sell.

TN: You right. Okay. So we have small businesses that just barely made it through COVID. So that was really a regulatory way to suffocate small business. And my company is one of them that scraped through and now we have these full time employee regulations coming in from the Department of labor. Are there other things on the horizon that you’re seeing that could make it even more uncompetitive for small businesses?

CR: I mean, everything that they’ve done is making it noncompetitive for small business, whether it’s regulation. You think about all of these minimum wage regulations and how these big companies like Amazon and Walmart have shifted their position and decided to lobby for them. Well, why do you think that is? That’s because they know they’re going to pay that level anyway and they don’t want to have the flexibility for the smaller companies to be able to maneuver around.

That certainly a higher interest rate environment messing with the labor force in general, let alone having a rule like this. The supply chains, the decisions that were made, whether it was a direct you have to close your business down or these indirect issues that affected labor supply, whatnot they killed by mandate around seven figures worth of small businesses. And unfortunately, Tony, as you’ve shared personal stories, there are many others that are just scraping by to survive.

And it’s just this like, you know, you get knocked down, you get up again and then they just keep knocking you down and you keep knocking you down. If you wanted people to succeed, if you wanted people to pursue the American dream, if you wanted economic freedom, you would be working to remove

barriers, make it easier for people to work, make it easier for companies to hire in the way that makes sense for both parties, and make it easier to be a small business. And every single thing that comes out

of government at all levels, by the way, it’s not just federal, but state and local is doing the exact opposite.

TN: Yeah, it’s overwhelming. We could talk about just that alone for hours. Let’s move on to former investment banker Warden Grad. You know your way around the economy. There is a tweet put out a few days ago asking you, if you had the big chair, what adjustments would you make to the economy, monetary policy, whatever, to change the environment today to make things better? What are a few things that you would do if you were Chair Powell or Janet Yellen or something like that?

CR: Burn the fed down. I burned down the Federal Reserve. The very first order of business, I put myself out of a job. And I say that kind of jokingly, but I like to clarify. I would take away the Fed’s powers because as I’ve said to many people before, the only thing worse than the Fed making monetary policy decisions and meddling in the markets and doing things like printing money and whatnot would be Congress doing that? So you don’t want to have those if you get rid of the Fed, you don’t want to have somebody else take away the powers. We’re really getting at, you know, getting rid of those powers to interfere. So that would be the first thing I would do.

But obviously that would not solve what is going on. Now. This is not going to be a surprise to any of you, but what we’re dealing with right now is a supply side imbalance. And it has been. They stimulated demand, but they stimulated it into a supply constrained economy. And so we are under supplied, as I know Tracy tweets about all the time in energy, certainly in labor, as we’re talking about food, housing, other commodities. So I personally don’t believe that the Fed has the tools to solve this problem and attack it. And frankly, I think that they’re going to just cause a massive amount of destruction not only here in the US. But reverberating through the global economy, which then swings back and has an impact on the US.

So what needs to be done, again, are policies that remove barriers to supply. What we’ve been talking about, certainly on the energy front, anything that we could do to stimulate supply of energy, which again, do it here, where we do it more cleanly, and not let China and Venezuela and all these countries that don’t do it cleanly be the ones to do that. Because the last time I checked, we all share the same air. It’s not like you believe in a smoking section, right? Like, oh well, they’re just smoking over there, we’re great over here in the same restaurant. Like, that’s so stupid.

So we would obviously do a 180 on energy policy. The same thing with labor. All the things we’re talking about make it easier for companies to hire people to go to work in the way that they want to work and then we close that gap in the labor market, which is insane. 

The same thing in housing. The National Association of Home Builders did a study last year. $94,000 in regulatory costs are added to the cost of every new home from the government. I mean, that’s insane. The average house is almost 4000. So like 25% of the cost is in regulation. And I’m not saying we don’t need anything, but that’s certainly excessive and it’s gone up by something like 30% to 50% over a very short period of time. So it’s those kinds of things that the policies need to be focused on stimulating the supply and shrinking that supply, demand and balance by increasing supply, not by trying to kill the demand. And that’s just where I land on it.

Albert Marko: That’s exactly what I was tweeting last few months now. And actually on the show is they are trying to create demand destruction, but the problem is the supply disruption that they’re creating and they put themselves in a doom loop to where when demand comes back, there’s no supply. So you get a cycle of inflationary situations happening, and it’s bad here, it’s worse in Europe and it’s even worse in Asia. So we’re going to be stuck in this until the policies start changing, not just from the Fed, but it’s got to be political also because the governments are doing this COVID zero in Asia and the energy crisis in Europe, and they’re just making it worse. So until those policies change, we’re going to be stuck in this cycle.

TN: Yeah. So I respect both of you, but the Fed doesn’t. So they’re going to do whatever the hell they want. What’s really interesting to me is you guys may have seen today. The treasury was asking investment banks. Hey. Do we need to buy some of the debt off of you so that we can create some liquidity in debt markets. Just basically transfer some cash to you so we can take some of those assets off your balance sheet.

Whether it’s the Fed or the treasury or whatever is done. It just seems like the benefit is for the small circle of people. And when you talk about whether it’s interest rates or QT or whatever, it seems like interest rates are the bluntest instrument that hit the biggest number of people. Right. And it’s hard for me to understand why that’s absolutely necessary.

And Albert, we’re going to segue into your section on the death of the Davis Fed. If we look at interest rates, we’re looking at a terminal rate about around 5% now. Right. And so help me understand what is happening with the Fed, what you’re hearing, what you’re seeing and what you’re expecting for the next couple of months.

AM: Well, I mean, everything at this point well, it should have been for a year now, but everything from this point on is strictly to combat inflation. They are getting screamed at by literally everybody to get the 5.5%. Not just five, they’re going to get the 5.5%. They’re going to do 75 again on this next meeting and then another 75 after that. And their intention is demand destruction. That’s what they’re going to do. And they’re not going to be dovish anymore. But they’re have to walk a tightrope here because Europe, they’ve destroyed so much in the global market, specifically Europe that lost 30 trillion in the bond market, that it could be a systemic problem.

And they can’t have that, so they’ll do 70. Five to 75. Talk guidance extremely hawkish. They’re intent on trying to get inflation down until November and December.

TN: November and December.

AM: They’re going to do 75 both. And they’re just going to have to because their time is out and they have

no more tools left to hit. Inflation at JPY at. Euro will be at 90.

TN: And JPY will be what?

AM: I don’t know the correlation on that one off hand, but the euro is definitely going to go to 90. 90 to 90 on this. But it’s all $30 trillion, Tony. That’s a lot of money. The only people in the money. Yeah, it’s still a lot of money. So when the treasury starts talking about, do we need to buy debt back from banks? Is that the US. Banks or is that European banks? Because I guarantee there’s going to be some European banks in there.

TN: Oh, they have to be. Yeah.

AM: Like I said, they’re causing systemic problems and they can’t have your completely blow up. I mean, they’ll use them for a scapegoat to stop QT announce QT stop. But that’s where we’re at it right now.

TN: Okay, so does the Fed understand that this is largely supply induced inflation?

AM: No, they don’t. They don’t? No, because people do what they know, right? If you go back and you look at what Yelen did, when I say Fed, I just toss in the treasury at the same time because they’re one of the same. They talk. They talk, and they have correlating policies and whatnot. And if you look back in 2013, this is what Yellen did last time. She drove the dollar up, crushed the markets, and drove all the money back into the United States. Yes, the United States market looks all beautiful at 3600 to 3700, and people talking about Fed pivots and 3900 in the es, but it’s not real.

CR: Okay, so first of all, can we just discuss the fact that between the time that Janet Yellen was Fed chair and Treasury Secretary, the woman pulled down over $7 million in economic speeches when she didn’t know how to handle, you know, coming out of quantitative easing. She didn’t see inflation. She said that I think this was actually from you, Tracy, but she said that everything looked great in the treasury markets and then the next day went, oh, yeah, I’m worried about liquidity. I mean, clearly, I’m not sure she knows anything. 

And I want to know how to get in on that gig in terms of making that money for speeches for something that you know nothing about. But I find it hard to believe since everybody and their brother has been talking about all of the issues that are going to happen here. 

And maybe it’s my wart and bias, but I go along with Jeremy Siegel, noted finance professor who’s been out there hammering the Fed, saying, look, first of all, you not only do you not necessarily have the tools we’ve seen some elements of demand destruction in small places, and it takes a while to work through the system.

So if you go too fast, kind of like you didn’t see it on the front side, you’re going to do the same thing and you’re going to overshoot. But the bigger issue alluding to what Albert said is the potential to drag down the global economy. I mean, that the fact that you can end up with currency crises, with a treasury market crises, the whole slew of risk assets could be a massive sale of risk assets so that they

could get their hands on dollars because the Fed wants to keep raising interest rates.

It just seems to me it’s not a question of do they not know this? It’s a question of what’s their intention are. They trying to drag down the global economy so there is a financial reset, so they can introduce some sort of a central bank digital currency and have an excuse for it. It just seems to me to go, oh, they’re ignorant of what’s going on. When every single one of us sees this, you’ve got the IMF talking about it, you’ve got professors talking about it.

The fact that this hasn’t crossed their mind with the people that are involved yelling aside, but the Powells of the world and other folks there, that just seems not very likely to me.

AM: No, it’s not. A lot of it is political right there’s. U.S. Midterms, they don’t want Trump back, so they start throwing in these economic numbers to make Biden Democrats look good. And that screws up Fed

policy going forward. I mean, Yellen takes a dollar up, the Fed gets stuck, and then they have to go back and create a new crisis in Europe or Ukraine or whatever crisis they want to create sometime in the future to blame for everything. Yeah, I think the Fed guys are smart. I think they do know these are not stupid people, although certain people, they. Know they just don’t care.

TN: I think you’re right. I think they don’t care. But what I think they’re not thinking through is the political fallout we saw that Chancellor or the exchequer in the UK kicked out today after about two weeks in office or something. And that’s relatively light compared to what happened in Sri Lanka a few months ago and what’s happening in Africa, what’s happening in, say, Pakistan, Bangladesh, what’s happening in Latin America.

So I think we’ll see political fallout here as a result of the Fed’s inability to understand the implications. Where it will really hurt is if it hits Japan and you get minority party in Japan back in power. They’ll pay attention then. And if you see powers in Europe that aren’t favorable to the US. But that’s already kind of starting to see Czech Republic and Hungary, certainly we’ve. Already started to see this, and it’s just getting started. 

We thought we saw populism in 2016. I don’t think we’ve seen anything yet. I think we’re going to see

this in a big way globally.

AM: Yeah, Tony, you’re right. I mean, the Europeans are absolutely screaming at yelling about this because she straight up lied to them about the bond market. She can’t even talk to the Norwegians

or the Swiss at the moment. This is how bad it’s become.

TN: Yes, I believe it. Okay, so let’s move on to energy. Tracy, you’ve talked a lot about distillates for a reason, warned us for months about diesel shortages and diesel prices, and it seems like it’s really coming back. And as you talk about this, I want to understand, is diesel priced in dollars globally? And so is that going to hit supply chains in other countries as well because of the pricing basis of diesel. Coming out of refineries

Tracy Shuchart: diesel’s price in local currencies and trade in local currencies. Products are crude, obviously, prices in dollars and traded that way globally, except for some instances. But products are generally like Nat gas, it’s traded in different currencies. But really, I mean, we were having a diesel problem. This started back in 2021, so this is nothing new. I was tweeting about it summer of 2021. I was really worried about distalates. I started tweeting about that then because I saw our inventory slow down. It’s even worse now. 

But what’s come to a head all of a sudden, and what’s making this obviously 10 million times worse, is that Europe, for instance, mostly bought diesel from Russia, and they’re trying to lean off of that, right? And so in the meantime, the US. Is trying to supply Europe with diesel. But now over the last week, we’ve had three weeks of ongoing refinery strikes with total. So France has 2500 gas stations that have at least one product that is completely gone, and 2000 of them are shut down entirely. And then we just had a malfunction in the Netherlands and Shells Curtis refinery, which is the largest diesel refinery in all of Europe. 

So right now we have a massive global problem that is just getting worse. And if you see the diesel crackspreads have been they’re ridiculously flowing out. And backwardation is flying right now, which is kind of obscene. In the meantime, we’re still drawing these distills. We had a 9 million build and a 4 million draw in distance, and we’re headed into winter. So we’re going to have major problems here already in the United States, particularly in the Northeast, because they don’t have the refinery capacity there to really supply that area.

TN: Okay, so what does that mean? How long does this last? Does it last into spring? Does it last beyond spring? I’m curious about the magnitude of the impact on price, but I’m also curious about the duration, how long this is going to last.

TS: Well, you know, I mean, this has pretty much been gone ongoing since 2021. We’ve had times where it’s worse and times where it’s not. But it’s been over a year now, over a year and a half now. I don’t see that going away anytime soon because we don’t have the supply. We don’t have enough heavy oil to, you know, to make these products globally, especially when you’re cutting off Russia, because that’s what they produce is heavy oil. You’ve got Venezuela that’s producing 700K bpd. They’re not producing anything. And most of that’s going to China to pay for debts. We don’t have them. We’ve got Canada, but we don’t want to build pipelines right. For that. We can import more for that. So, I mean, we have kind of a global shortage of heavier oils. And sure, we get some from the Middle East.

That’s fine. We get some from Saudi Arabia. They own motiva here in the United States. And certainly they do produce diesel, but it’s still it’s still not enough. And especially when you’re talking about the west, it’s talking about, you know, we’re talking about a complete oil embargo on December 5 of Russian

oil and oil products.

TN: So this isn’t something that’s done by January. This has legs for quite a while.

TS: Yeah, absolutely. We’re already seeing prices rise. We’re at 518 a gallon for diesel here in the United States on a national average, which is higher than gasoline prices, by lots higher than the average. And the gasoline people that I talked to at Opus basically say, man, this is not even a safe level. This is going much, much higher.

CR: I have a question for you, Tracy. So it seems to me everyone seems to be focused on getting through the winter in Europe and the immediate impacts, as if there’s, like, some magic solution waiting on the other side as more of a layperson in this area. It seems to me that this massive under investments, this supplied depression that we’ve been having, there’s nothing coming online to help with that. So doesn’t that suggest that this is something that doesn’t get sorted out even though there may be some volatility, but, like years and years and years that we’re going to be dealing with?

TS: Yes, absolutely. I mean, we’ve got a problem for the next eight to ten years. Really? And if you look at, you know I know if we look at the natural gas situation in Europe, everybody’s thinking, oh, we’re at 95% full before winter, we’re going to be fine. If we just make it through winter, that’ll be fine. That’s great and all, but if you are not replacing that, you’re going to need it in the summer. You need to keep refilling that. So it’s not like, you know, unless they decide to stop using natural gas in March, end of story, we still have a problem. Right. And the next winter is probably going to get even worse.

TN: Great. Just so you know. Awesome. Okay, so let’s move into kind of the week ahead section. Albert, you want to get us started. What are you looking at going into the week ahead? What’s on your mind?

AM: Continuation of the Feds 100 basis point rate hike. I mean, they’re not going to do 100, but they’ll tell the market that they might start thinking about it and the market might start pricing it in. So we’ll definitely have a lot of weakness in the market going ahead in the next week, but it’s midterms, so you never know,

 they could defend the quote unquote Trumpl ine of 35, 40 so they don’t look like complete idiots and give them Fodder for the midterms. Do you still think we’re going to hit maybe 3200 or something eventually? I can guarantee you that by the end of the year for sure. The economic indicators across multiple data sets is just atrocious right now.

TN: Okay, great. Carol, I know you’re not really kind of in Marcus, but what are you keeping your eye on for the week ahead?

CR: So I do actually commentate on markets from a sort of a macro perspective, and much like Albert, I’m sort of in the camp that until the Fed tells us what is their intention, is this really just about the midterms? Are they feeling the pressure that it’s risk off from my perspective until we know what’s happening with them. So that’s been sort of my perspective.

TN: Great. Okay. Thanks, Tracy.

TS: On China next week, party congress looking at China, I want to see what they’re going to do policy wise because that’s definitely going to affect the commodities market. We all know that they’re looking for a five 5% GDP by the end of the year, which they’re not going to get. They’ll say they got it, but we all know that they’re not going to get it. So I want to look, an economy is suffering right now and we’re starting to see stirrings of unrest in China. Right. 

There was just that article where they had the people on the bridge with the signs that got scrubbed from China Internet. But I think that she is going to have to do something to stimulate that economy. So I’m kind of looking to see what his focus is on that and if they have any plans going forward to simulate the time. Because again, that’s going to affect the commodity markets and to see if he has a plan for the housing market. Oh, he’s got a plan.

TN: Central planners always have plans, don’t they?  That’s right. So if you talk to any China economist

for the bank, they’ll tell you that China is going to hit five 5% or maybe they live on the edge and say five three. Right. So as you said, we know they’re going to make it issh somewhere in the ballpark, but we know in reality you can’t have a zero code environment and make a growth rate that high. So my worry, I was just talking about this with somebody earlier in the week, my worry is that China really has made that transition to a slower growth environment for starting with demographic reasons, but also some structural reasons that they put in place.

And I think what she’s going to talk through next week, although not directly, but someone indirectly, is much more control, which will lead people to the conclusion that it’s not a safe place for foreign investment anymore, which will lead them to a slower growth environment economically. Because he’s basically talking about leveling people out. Right. And everyone has the same maybe not opportunity, but the same outcome. And you can’t necessarily do that in China with some of the economic outperformers that you’ve had, like Jack Ma and other people. You have to bring people down instead of push people up. And that’s what I’m expecting. 

Again, he’s not going to say he’s going to bring people down, but that’s what I expect is the main message coming out of next week’s meeting.

AM: Yeah, he has already done that, Tony. And there is a little bit of a power struggle with Wang. Yang is actually slated to be power sharing with him. All they’re trying to get him to do that, but all my sources have said that they’re locking down for code with zero until at least March, so we’ll see what kind of fake numbers they come out with.

CR: I will add that this all ties into their social credit system, which is the most advanced one in the world right now. And they really started the social credit on the business front, which is notable for the reasons you were saying. You can’t have that capitalism that’s leaked in a little bit over the past several decades and have these outperformers. So it’s an easy way to sort of bring those folks down a peg and then let that bleed into sort of the individual social credit. And it’s something we should be paying very close attention to as the Fed keeps talking about things like Central Bank, Digital Currencies, and as we see these companies going after people for misinformation, what part of that could leak here as well.

TN: Yep, very worries. So okay, guys, thank you so much for your time. Carol, I’m so grateful that you can join us today. Please come back anytime. Really appreciate this, guys, and have a great week ahead.

Categories
Week Ahead

Inflation in Asia and the US: The Week Ahead – 3 Oct 2022

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

In this episode, we talked about what’s happening with inflation in markets, and where it’s hitting, particularly in the US in different sectors. Mike walked us through the Asian contagion for inflation. Also, given where USDCNY has been over the past week or so, how vulnerable is China? Are they more concerned about inflation or export competitiveness?

Sam put out a couple of wonderful newsletters about central bank responses to inflation last week. The Fed seems – and is – unrelenting in their response, regardless of what happens with UK gilts. One area Sam raised last week is the car market versus mid-market dining: Cars vs Cracker Barrel. He walked us through the price and volume considerations with these two.

And then we looked at Meta’s move to freeze hiring and their warning about layoffs. Is that a broader signal for tech?

Key themes:
1. Inflation: Asian Contagion
2. US Inflation: Cars vs Cracker Barrel
3. Meta’s move: More to come?
4. The Week Ahead

This is the 36th 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
Mike: https://twitter.com/UrbanKaoboy
Sam: https://twitter.com/SamuelRines

Time Stamp
0:00 Start
0:49 Themes for this Week Ahead
2:47 How vulnerable is China? Are they more concerned about inflation/export?
10:23 China will not be the exporter of deflation anymore
13:28 Will China give in to devaluing CNY?
16:15 Cars VS mid-market dining
22:00 Price increases will continue?
24:26 Is this the beginning of the end of tech wage spike?
29:11 How does this current ad slowdown compare to the past?
30:20 What’s for the week ahead?


Listen to the podcast version on Spotify here:

https://open.spotify.com/episode/5HrIhlEwZMwIBDdFwBo5Ib

#inflation #asiainflation #usinflation #stockmarket #stockmarketnews #economy #economics #inflationrate #costofliving #effectsofinflation #comparingpricesinflation #metalayoffs #meta #layoffs2022 #investing #inflationinasiaandtheus

Transcript

Tony Nash: Hi, everybody. This is Tony Nash and welcome to The Week Ahead. Today we have a couple of very special guests. We’ve got Michael Kao. You would know him from Twitter as UrbanKaoboy. And we’ve got Sam Rines. And obviously you know Sam from previous shows. This week we’re going to talk about a lot about what’s happening with inflation in markets. We’re going to talk a lot about where inflation is hitting, particularly in the US in different sectors. And then we’re going to cover a little bit of tech.

So our key themes this week first is the Asian and contagion for inflation. And Mike’s going to jump into that in quite a bit of detail. We’re then going to look at US inflation. Sam put out a really interesting note covering kind of cars versus Cracker Barrel, although that’s not really the comparison, but it’s something in that range. And then we’re going to look at Meta’s move to freeze hiring and their warning about layoffs. Is that a broader signal for tech? And finally we’ll move into the week ahead.

So before we jump into this, please be aware that we have our product called CI Futures, where we forecast hundreds of commodities, currencies and equity indices as well as economic indicators. I was just going over our error for GDP USD for the month of September, and our area was about 2.23%, I think, for the month. So it’s a very relevant product even in these times. You can find out more on the link below. 

It’s $99 a month and you can see everything in the subscription there. We publish our error rates. We publish our forecast. You can download the data, you can download the charts and do comparisons. So please check that out. 

Michael, thanks for joining us. I really appreciate your time. I’ve heard you on a number of other podcasts and it’s just so great to have you here. I really appreciate it.

Michael Kao: Yeah, thank you. Great to meet both of you. Yeah, I appreciate you having me.

TN: Fantastic. Hey, there’s a tweet that you put out a couple of weeks or about a month ago actually looking at the Asian contagion and pretty much it was reflecting a tweet that you had put out in January, talking about your expectations for the year ahead and the set up for the year ahead.

So given where, say, CNY has been over the past week or so and the set up that you put out earlier in the week, how vulnerable is China? Are they more concerned right now about inflation? Are they more concerned about export competitiveness? What does that look like? And as you start talking, we’ll put up a chart of USDCNY as well.

MK: Sure. Before I answer that question, I just want to take a quick step and just outline for you, like where I kind of arrived at this Asian contagion thesis. Right? So about a year and a half ago, I’ve been invested in the oil patch for quite a while. And I’ve expressed my bet through a long term private equity plate because it’s my belief that years and years of underspend and then exacerbated by this worldwide ESG push right, and diversion of capital away from the sector and then of course, further exacerbated by all of this massive monetary and fiscal stimulus first created oil inflation way back. Right.

So I started noticing this basically around the beginning of ’21 and I wrote a bunch of threads about it. And then during the year I started thinking what are the ramifications of this? Well, the ramifications are that it’s going to make our Fed more hawkish than the rest of the world earlier than the rest of the world. And so what are the ramifications of that? Well, given that currencies are mainly driven by interest rate differentials that would in turn create this what I labeled a USD wrecking ball effect.

And so as that thesis started kind of coming true and gathering steam throughout the year, the tweet that you referenced that I wrote at the beginning of this year was that I said, look, the setup is a scary one for this year because we have the makings of a stagflationary energy crisis not seen since the 70s. It’s going to create tightening ahead of the world, creating this USD wrecking ball. And then we have this everything bubble to boot on top of that. 

And this wrecking ball really reminded me of my sort of baptism by fire into the hedge fund business. In 1997, I joined a hedge fund here in LA called Canyon and we were value credit based investors and a lot of our idiosyncratic bets essentially got swamped by the macro, right? So what started as seemingly innocuous devaluations by a couple of EM countries in Southeast Asia metastasized over the course of a year and a half until full blown credit contagion. Except this time, what I wrote about in this thread is that what’s scary is that number one, the level of inflation that’s driving this US dollar racking ball is much higher than before.

And from my oil centric point of view, I think a lot of it is structural. And then the second thing is that the vulnerability point… I mean the EM countries are also vulnerable. But what’s scary this time around are the developed nation currencies like the Euro, the Japanese yen.

And now I come back to your question, the Chinese Yuan. Your question is a really interesting one that I actually tweeted about this week is China. China is in a box. Just like the Bank of Japan, just like the ECB. They’re all in a box because their respective economies are much weaker than ours.

I think the big question, and I don’t know when the US dollar wrecking ball is going to peak, maybe it already has. But I suspect though, my hunch is that maybe it’s still got some legs to go because until you reach a point where the macro fundamentals of those respective economic zones are strong enough to allow their central banks to essentially outhawk our central bank. Any interventions are going to basically be just a wasted burn of their reserves.

And so you saw that with the BOJ, right? They spent something like 20 billion of reserves defending their currency and that lasted two days. And we’re back to all time lows in the Yen.

So China is really interesting because China is such an export-driven economy. One would think that with their economy on the back foot from the property crisis, from zero COVID policy, one would think that as their neighbors are devaluing and becoming more competitive versus them, that they would be more worried about their current account getting hit, right, their current account surplus getting hit. And so you would think that they would want to let their Renminbi devalue.

What we saw instead, I think, was that yesterday that the PBOC had a pretty strong intervention in CNY. That tells me, I actually put a tweet out to exactly the effect that’s a big tell to me that they’re more concerned about inflation. And China, just like Japan, is uniquely vulnerable in that they are also net importers of something like 80% of their energy. They’re in a tough bind.

And the million dollar question is no one knows when… That day, when the BoE intervened and all risk assets rallied hard. I think that was the market kind of conflating that all these interventions are going to be exactly. It’s going to lead to the Fed also going to QE. And I put out another thought on Twitter saying that, you know what, I don’t know that you can conflate that because the Fed was happy to be the world’s plunge protection team in a world of where there was no structural inflation.

When you’ve got a world of structural inflation, it becomes kind of an every man from self dynamic where I don’t know that how much we can go help stymie the yen or stymie the Renminbi or stymie the Euros collapse by queuing here. Because that’ll just completely inflame inflation. And the big tell on that was on that risk on day. You know, what was really roofing also was oil. And so it comes back down to oil.

If the Fed actually blinks and goes back and pivots, the thing that’s going to moon and lead us right back to square one is oil, which is what started this whole cycle in the first place.

TN: So let me take a step back from what you said, because you just unloaded a lot, which is great, and I think Sam will violently agree with you on a lot of stuff. But what’s really interesting to me. If China is worried about inflation. Although this is somewhat like 2011. When they had the, or 2007 or whatever. When they had the pig flu and all this other stuff.

And there was inflation pressures but China has been the source of deflation for the last 25 or 30 years right and so if China is no longer the global exporter of deflation then it is a dramatic change in the structure of the global economy. Dramatic and I think so many people use this that this is not something that we’re not going back to 2019 prices ever. Right? But I don’t really hear people talking about China not being able to be the exporter of deflation anymore and that’s just one that’s come and gone that’s already gone right. 

MK: And it’s not just China. It’s Eastern Europe, too, right, because I wrote a thread that basically borrowed some of the thoughts from Professor Goodheart’s paper about how this was kind of a once in a lifetime demographic dividend that allowed the world and the Fed to basically pay for over every financial crisis of the last four decades with aggressive monetary policy because there were never any inflationary repercussions. But as you so validly pointed out, that was due to like a once in a lifetime sort of demographic dividend that is now in secular reversal.

Sam Rines: To this point… I want to jump in and just reinforce this point here because I think it’s a really good one that China was a massive source of goods deflation globally along with East Germany, Poland. Etc. as they joined in following fall of the Berlin Wall. 

But I think  there’s something really intriguing here is that it doesn’t even matter if they still continue to export some goods deflation over time. Their commodity inflation tailwind is going to be problematic. The only thing that has really saved them with a Renminbi north of seven is that they haven’t had to import anywhere near the amount of commodities that they would typically have to. If you’re locked down, they have the longest commute times on average in the world in China. That is a tremendous tailwind to gasoline. Food. Et cetera. When you begin to reopen and have China’s economy going full bore, that is a tremendous issue for the commodity complex in general in an environment where it’s already broken. It’s going to be a tremendous amount of pressure on that system and I don’t think people are prepared for that either. That China is now the exporter of an incredible amount of commodity inflation over the next half decade or so.

MK: It’s actually really insightful because commodities which they have to import. They’re super afraid of that and that oil is basically the primary factor of production for everything under under the sun. Yes, everything.

TN: Back to CNY do you think they’ll kind of give in to devaluing or do you think they will continue to fight this, which is a battle that everyone loses eventually?

MK: That’s such a hard question to answer because if anybody can fight it, it would be China right?Because they have a non convertible currency, right. So I think, for instance, Japan is much more vulnerable because I don’t see Japan imposing capital controls and I don’t see Japan relaxing on their yield curve control. So the only exit valve there is the Yen devaluation. Right.

But in China’s case, they have capital controls. I spoke on an interview earlier this week with Mike Nicoletos, and we were discussing about whether or not there’s a porosity through the Hong Kong dollar. Right. I think they have to clamp back down, too, right? Because. If they really want to manage the pegs, they need to really like stymie capital controls. Otherwise, I think capital just going to flow out.

TN: So will we see a divergence between CNY and CNH? 

MK: What is the divergence? I mean, it’s tiny. Two or something. 

TN: Okay, great. I’m just wondering if CNH is trading offshore and that’s allowed to freely trade or relatively freely trade? Maybe. Sam, you have a better idea? I’m not entirely clear on what the restrictions are on CNH trading because I don’t think it’s completely for all. Otherwise that divergence would be much bigger, I think.

TN: Well, it’s a spread, right? It’s a proxy of a spread. And so you can see pressure on that, and you can see that pressure pushing the expectation of seeing why potentially devaluing if they don’t handle it. Like PBOC, they’ve got a lot of smart people, but policy wise, they make a lot of mistakes. Don’t think they’ll elegantly.

MK: I was just going to say that I actually think that if they let CNY or CNH freely float, it would have a nine handle on it. At least, I think that’s where it goes.

TN: Yeah, at least. Okay, very good. Thanks for that, Mike. I really appreciate that. Let’s move on to Sam. You put a note out earlier this week talking about inflation and central bank responses to inflation. And the Fed obviously seems unrelenting in their responses. Mike mentioned, as you mentioned in your newsletter and here several times, but one area you raised in your newsletter this week is kind of cars versus mid market dining.

So you talk about cars, Carvana versus Cracker Barrel. Can you kind of walk us through that? And I’ve got a couple of shots from your newsletter. One is on the Carvana release, and the other one is on Cracker Barrel. Actually, we only have the one on Cracker Barrel to show the group. But do you mind walking us through that?

SR: Sure. So the impetus behind the note was really to kind of make the point that Mike made earlier, that the Federal Reserve does not care about what’s going on in the Gills market. It is not going to come save the Bank of England and Downing Street from what they’ve done. That’s not their problem. That’s a domestic issue. And when you decide to have a massive fiscal tailwind and a monetary policy that was being highly restrictive and going to sell bonds, your currency is going to fall. And that’s your own problem. That’s the way that the Fed viewed it. And then a bunch of Fed speakers came out and said basically exactly that, but in a little kinder tone.

But the idea there kind of pulling that together is that the US domestic economy is still doing well. So the CarMax report was really interesting because CarMax has used autos, right? That’s what they sell. And all the headlines about inflation and used autos, their volumes got absolutely trashed in the past quarter. And that makes sense, right? People?

There’s a drawback from interest rates moving higher. It’s one of the most direct things that is affected housing and car financing. But the interesting part about it was while the volumes were down, they still had revenues up on their retail segment because prices were higher 25% year over year, their average selling price. So they did a really good job of kind of managing their revenues.

But that speaks to the inflation problem, right? The Fed doesn’t care about volumes going down. If the prices are still higher. Then you kind of go to Cracker Barrel, right? Middle America in my mind is you can encapsulate middle America in a Cracker Barrel I mean, it’s kind of perfect. And when you look at their release, it’s pretty clear that they called out 65 and over dining down. Guess what? That’s highly sensitive to inflation. They cited lower income individuals dining out less. Again, highly sensitive to inflation. And they still had their comp store sales up 6%, which is pretty good. And then you read a little further in the same sentence and they’re like, and we had pricing higher by 7%, so traffic was down. So they had negative traffic at higher prices. So that is again, they’re giving up volumes to be able to push the price and grow reps.

I think this is kind of a microcosm of the US economy, right? It is a strong economy. If you can continue to push price like that on the consumers. If you can grow revenues while pushing price at those levels, that’s pretty incredible. And then it’s pretty interesting to me because there’s this whole idea that corporate America is going to slow down their price increases. Cracker Barrel basically shot that idea right in the foot by saying, hey, listen, we think wages are going to inflate 5% over the next year. That’s september to September. And then if we’re going to have comparable store sales up, right?

So guess what? They’re going to continue to push price. And that’s where I think we kind of need to take a step back and realize these inflation pressures are broadening out and they are beginning to become embedded. Their food costs, when they forecast that, I believe that number was 8%. These are significant figures, right? These are not things that we would have thought were possible five or six years ago. They’re becoming embedded. I mean, that’s 2023 that these guys are thinking that.

And just one more point going back to the CarMax report, their SG and A, their cost of doing business, we’re up 16% year over year because they hired more people and they paid them more. So you think about you grow revenues at 3%, but your costs are up 16%. I mean, that’s a pretty big problem. Again, it goes back to the two things that the Fed really wants to get under control, including inflation is two things, right? They talk about the vacancies to unemployment ratio. They need less hiring to happen and they need wages to begin wage growth, to begin to subside a little bit because that’s a tailwind consumption.

So I think you’re having a number of pieces working against the Fed that might not be showing up in the data, mostly because I think the data is kind of crap. But the best part is if you’re kind of willing to go to that microlevel  to get the macro and pull the macro out of it, these trends are not going anywhere anytime soon.

TN: So what I get out of that is I hope Cracker Barrel has digital menus. If not, I want to be their menu printer because every time I go into a restaurant, I wonder how often they change their prices, right? And basically, from what you’re saying, it sounds like they’re going to continue to push up, I don’t know, quarterly, semi annually, but they’re going to continue to push these prices up based on what’s happening in the market, and I suspect they’re not going to come back down. Oh, no.

SR: There are other ways to do it, right. You can push price by pushing less food on a plate, too. Right. So you can do some creative things on multiple fronts. Shrinkflation. The shrinkflation. But I do think that you’re not going back to anything like 2019. Right?

MK: I just want to riff off that for just a second because I participated in a real estate panel a couple of weeks ago and listening to these asset managers from around the world present. One big asset manager was basically saying that they’re still seeing essentially. Even though the rent growth is slowing down. It’s still growing for Q3 of this year where you would think that the hiking has already kind of worked its way into the system. That rent growth is still annualizing at a 10% click. So you talk about sticky.

I’ve had this thesis that it started with commodity inflation. Commodities have abated somewhat and certainly will abate more if there is an Asian contagion. Right. But the core stuff, which is what Sam is talking about, and also rents, that’s really sticky. But here’s the problem. When that stuff starts curling over, I really agree with you that if China reopens, you’re going to see a resurgence in commodity stuff again. So I call this sort of like the core energy tag team. And I think we’re going to see this tag team effect possibly for years.

SR: Oh, yeah. To rip off that I called it the COVID earthquake is going to have more aftershocks than anybody really wants to admit. 

TN: Yes, there was so much intervention. You can’t just earn it out in six months, right. Or a year. It takes so long to work that out. So that makes a lot of sense. Guys, staying on this inflation theme and Sam, you mention SG and A and wages. Meta announced yesterday that they are imposing a hiring freeze and they’re warning their employees about restructuring. 

So obviously now that as of yesterday, they’re the second most valuable company in the world with Exxon taking over. But if Meta is instituting a hiring freeze and Sam, you talked about Carvana hiring a bunch of people last quarter and their costs going up, what does that signal for tech?

I think, Sam, you showed me the site layoffs.fyi or something like that to look at layoffs in tech, there are a couple of issues which we covered with Mike Green before and you’ve talked about up befor Sam, where ad space is becoming almost infinite and these guys who are ad based have a lot of headwinds and Meta is no different. And so that’s obviously one of their headwinds.

But the SG&A cost is huge. Right. What do we need to be looking for with Meta and companies like Meta? And is this the beginning of the end of the tech wage spike?

SR: I’ll take part of that. Okay, good. Is it the end of the tech wage hike? I don’t know that is going to be the case simply because we don’t have enough people with those skills, even if we do have a pullback in the number of hires. Right? On the marketing side, yes. But on the tech hiring front of people with programming skills, et cetera, I don’t think that’s going to slow down or those are going to slow down anytime soon, at least until we have enough of them.

But maybe on the marketing side, et cetera, I would say that the Meta announcement is far more indicative of a slowdown generally in Silicon Valley startup ad spending on the marketing. That’s a problem for Meta on the margin. A significant amount of their ad revenue comes from startups.

It’s a much larger problem for a company like Snapchat. Right. There is a hierarchy of where you go to advertise and when you’re going for eyeballs. So if it’s a problem for Meta, it’s probably a much larger problem for a Snap in some of those smaller, less ubiquitous platforms. 

But yeah, it’s always going to be a question of where is Meta putting its incremental dollars, because it is making a pretty big push into the Metaverse. It’s unlikely that people are getting slashed, jobs are getting slashed there. It’s more likely that what you’re going to see is a reduction in places. They’re simply not seeing the returns that they want to see and they’re going to continue to grow the hiring base on something that’s important to them, like building out the Metaverse side of the business.

TN: Sure. Yeah. Mike, what are you seeing with tech?

MK: I don’t follow Idiosyncratic tech as much, so yes and no. I’m actually, ironically, one of my Idiosyncratic positions is actually a dyspacked ad tech company that’s in the ad arbitrage business. That’s a different type of a different type of play, but I haven’t been as focused. So I’m very interested to hear your sort of microcosmic views. Really interesting.

TN: Yeah, I think everything Sam says is spot on. I do think that in terms of the core coding skills, there’s a lot of slack there. So for example, as we talk around, because we hire developers. Some of the developers who work for some of the very large tech companies who make mid six figures, something like that, their daily code commit is something like eight lines of code. That’s it. 

Okay, so these guys are not sweatboxing code. It’s a very minimal amount of code they have to put in every day. So I think there are major productivity gains to be made on the developer side within these large tech companies. So maybe it’s not hitting yet, but I think it will hit soon as it always starts with marketing, right? It always starts with traveling expenses and then it goes further. And so I think give it a few months and we can see it go further into development.

MK: I’m curious, Sam, if what you’re seeing in the sort of tech ad slow down, how does this compare to past downturns, past cycles?

SR: It’s hard to say because we haven’t seen many significant down cycles. Because COVID wasn’t a down cycle for ad spending. It was kind of strange. Right. Social media did very well during that time frame, and social media was so young in ’08, ’09 that it’s hard to really get a read there, except you can kind of extrapolate Google. Google did pretty well in ’08 ’09. They took a lot of market share from traditional media, but that was a different age. So I would say it’s pretty hard to look back and say it’s going to be similar this way or not similar.

MK: But wouldn’t you say, though, that the ad slowdown is just across the board? It’s not as if traditional ad spending is going to start eating their lunch across the board.

TN: Real quick before we wrap up, if you can, in ten to 15 seconds, what are you looking for for the week ahead? Mike, what are you looking for next week to watch?

MK: Well, this has been a very confusing week in that I think there have been a lot of quarter inch shenanigans and window dressing. I’m still macro pretty bearish. Okay. I’m concerned that I think after the window dressing is done, I think some of the supports from the market may actually not be there. I watch bonds and commodities a lot.

TN: That makes sense. Yes, Sam?

SR: I’m just watching the Euro and what happens with TTF next week. I think that’s really important after we get through the quarter close.

TN: Absolutely. Guys, thank you so much. I know this is quick. I wish we could talk for two more hours.

I guess we got cut off at the very end there, so I really apologize for that. I just wanted to thank Mike Kao and Sam Rines for coming on The Week Ahead. Thanks, guys, so much for all that you contributed this week. And thanks to everyone for watching. Have a great weekend.

Categories
Week Ahead

European Natgas: The Week Ahead – 5 Sep 2022

Learn more about CI Futures here: http://completeintel.com/2022Promo

This week we’ve seen a lot around dollar hitting almost 110. We’ve seen a lot in the US market downturn. There’s a lot of speculation around the Fed. But we’re really focusing on Europe this week.

Key themes:

1. European Natgas Stock vs Flow

2. Russian Oil Price Cap Fallout

3. Europe’s Food and Fertilizer Fallout

4. What’s ahead for next week?

This is the 32nd 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

Albert: https://twitter.com/amlivemon/

Sam: https://twitter.com/samuelrines

Tracy: https://twitter.com/chigrl

Listen on Spotify

Time Stamps

0:00 Start

1:51 European natgas: stocks VS flows

8:26 What to expect in manufacturing in Europe

9:26 Difficult environment for the German Finance Ministry?

10:27 Fertilizer fallout and impacts on Europe’s food supply

14:19 Is Europe getting relief soon, or will this crisis continue to 2024?

15:33 Russian oil price cap: is it going to come about?

19:12 What’s to stop countries from indirectly buying Russian crude?

22:00 What’s for the week ahead?

Transcript

Tony Nash: Hi, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Sam Rines, Tracy Shuchart and Albert Marko. We’re going through the events this week and looking toward next week.

Before we get started, I’d like to ask you to like and subscribe. Please add your comments. We’re on top of the comments. We come back pretty quickly. We really want your engagement, so add those comments in.

Also we have a promo right now on our subscription product, CI Futures. That promo ends in two weeks. So you get forecast for about 3000 items. About 900 of those are renewed every week. We show you the forecast, the error rates, all sorts of stuff about all of these different assets, global assets. So please check it out. That runs out in mid September.

So this week we’ve seen a lot around dollar hitting almost 110. We’ve seen a lot in US market downturn. There’s, a lot of speculation around the Fed. But we’re really focusing on Europe this week.

The key themes this week are really around European natgas stock versus flows. Russian oil price caps and the fallout that has come with that. Food and fertilizer in Europe. And then we’ll look to the week ahead. So I think we’ll look at some non Europe activities for the week ahead.

First for European natgas, Sam Rines in his newsletter came out with some really interesting points around natural gas stocks and flows. You can see the chart on the screen. Sam, can you talk us through kind of what’s happening in storage for natural in Europe and what we should be looking for as winter approaches?

Sam Rines: Yeah, sure. So you get this really interesting dynamic where everybody talks about the stock but very few people talk about the flow. So talking about the stocks of that gas in Europe is a really interesting one. Yeah, you’ve got stocks building up pretty quickly, particularly in Germany, sitting north of 82% overall for European stocks in general, north of 80%.

So it’s good, right? Stocks seem to be well ahead of where you would anticipate. Germany has a 95 target for November. They might actually reach it even with the shutdown of Ms one, Nordstream One. It’s actually not that big of a deal incrementally to Germany in particular. You go from about call it a 3.2 kilowatt hour type pump into Germany to about a three.

You didn’t really lose that much. I mean, it was pretty much anticipated anyway. So if they keep it off

for longer, whatever. You don’t have significant usage coming through at the moment for natural gas.

It’s a time where you can actually afford to not have those significant closing. They’ll probably still have some stock bill that will just be slower.

So overall, I think it’s a lot of headlines that a lot of it’s already priced in. If you were looking at the expectations of complete and utter frozen winter, you’re pretty much not looking at that assuming that Norway and Belgium continue to put their flows through to Germany at the current rate.

So overall, you’re actually sitting on a decent call it stock level. Right? That’s fine. And as long as you continue to have the flows from call it Northern Europe, you should be okay for the winter. You’re not going to be great. It’s going to be expensive, and it’s going to suck. But relative to the expectation of Europe’s going to freeze this winter,

I think that might actually be a little bit of an overblown one, and you might begin to have a significant blowback on that. And you’ve seen significant declines in things like electricity pricing ahead, which is a ridiculous contract anyway. And Dutch TTF, the net gas contract you’ve seen collapse this week, even with the shutdown of Nordstream.

So I think a little bit of the froth, a little bit of that angst is beginning to come out of the market, and you might actually have a positive surprise relative to expectations in Europe.

TN: So Dutch TTF peaked on Tuesday or something, right? It was early in the week, right?

SR: Correct.

TN: And Tracy, what are you seeing with that? Do you expect us to hit back up to those peaks, and do you think that was kind of a one time hit? And what Sam saying about storage is really kind of starting to take hold.

Tracy Shuchart: I think it really depends over the long run and how slow go. I totally agree with Sam here. Right now, for winter, Europe is pretty much okay, not great, as he said, but I think given if we don’t see increased flows, that storage would drain significantly by February. So we really have to keep an eye on flows from other countries, particularly in the United States, in the Middle East, and to see how those flows go. So I think it’s too early to be completely doom and gloom, but that is something we need to be cognizant of, because that storage can only last until February.

TN: Right. And for those people who aren’t in Northern Europe, northern European winter really stays cold, really until like, April, right. It’s not something that February comes and goes and it’s spring and everything’s great. You still have cold temperatures in Northern Europe until probably April or so. Is that about right?

TS: Yeah, absolutely. Anecdotally, if you’re been on Twitter, you see a lot of people starting to buy wood. The big thing on the European sites is to post how much wood you collected before this winter. So people are sourcing. People are expecting energy prices to be high and doing whatever they can personally, to kind of lower the prices. Because you have to understand, when you’re talking about European power prices, it’s not just your solid power price. They have that almost all of their taxes on top is on top of what they actually would be paying, which is outrageous carbon, et cetera.

TN: And so I just want to go back to one point in Sam’s chart as well. I think sam, you said the storage is about 82% full or something and they’re targeting 95%, but we’re ahead in 2022 from where we were in 2021, is that right?

SR: Yeah, that is correct.

TN: Okay, so the doom and gloom that we’re hearing again, we have inflation, we definitely have shortages, but in terms of storage, we’re ahead of where we were. And we don’t expect like a mass extinction event in northern Europe because of heating or whatever, right?

SR: Correct. I think that is a good base case. That’s good for everything. No mass extinction is low bar, but yes, that’s right. 

TN: Exactly. Okay, very good. Do you have anything to add on this?

Albert Marko: I’m on middle of the road here. I do agree with Sam that they’ll be okay so long as they’re okay with no manufacturing, no growth in their economy, and so on and so forth. I mean, if they tried to kick things up and the demand starts to rise, I don’t think it will be okay. I don’t think that the Russians are going to play ball, especially when they start talking about these price caps on Russian oil and gas. It’s one of those things where economically, I can understand where Sam is coming from.

Politically, I’m inclined to say that Europeans are going to screw up and just agitate the Russians. And then you start getting into this back and forth. That economic trade and price.

TN: Let’s set the price cap aside for a minute. But when you say no manufacturing, so we’ve seen some manufacturing dial back and some facilities slow down and shutter. Is that expected to continue or do we expect that to ramp back up?

AM: I expect it to completely be just stalled for the entire winter. I just think the energy prices are so astronomically high that it’s just not economical for companies to manufacture anything.

TN: Okay, so if you’re sourcing things in Germany, then you should expect supply chain issues for the next five or so months. Is that fair to say?

AM: At least six months. And this is why I keep saying that this inflation doom loop keeps recurring because as the demand rises, there’s not enough supply and then you get back into an inflationary event. What’s the inflation rate in the UK right now? Like 20% reported. 20%? And in Germany, I think it’s like 19% and rising. It doesn’t stop.

TN: And PPI is in the 30s or something. Just to play this out, I wouldn’t have a whole lot of time to cover this, but if private sector is shutting down, even parts of it, then government spending has to kick up. And if government spending is kicking up and we have an ECB that’s tightening, that’s a difficult environment for the German Finance Ministry, right? Or is it no big deal then?

SR: No, I would completely disagree. I mean, Germany is one of the few countries in the world that has they could basically print their GDP and they’d still be perfectly fine on an ability to pay basis. They spent, like, three years getting paid to have debt.

TN: So very good, because, look, nobody wants Germany to suffer, right? And if government spending

has to kick up, then great. If they’re not going to suffer as a government to be able to do that, then that’s even more fantastic, because with ECB tightening, it could create some difficult trade offs for some countries in the region, of course.

So let’s take this and park it and let’s move on to fertilizer, because, of course, that’s related to natural gas.

And we have some there’s a recent Bloomberg story about Europe’s deepening fertilizer crunch. 70% of fertilizer production is halted. And then we have a chart showing the price of nitrogen fertilizer in Germany. Obviously, it looks pretty extreme. Can we cover that, Albert, and look at the impacts of fertilizer and how that’s going to hit food going into spring or summer of next year?

AM: Oh, yeah, the fertilizer, specifically what you’re talking about, nitrogen based ones, are relying on natural gas. Natural gas prices just keep on spiking over there. And again, we can continue this whole discussion about inflationary, commodity prices, but food is a big problem. They shut down their potash.

On top of that, the farmers, they’re notorious penny pinchers, whether it’s the United States, whether it’s Europe, so on and so forth. But they’re going to have to make up the nutrients for the soil in the spring of 2023 and most likely into 2024, they can’t deprive the land of nutrients.

So, of course, they’re going to have to have another round of demand for fertilizer. I don’t know about the night gas based ones, but potash certainly will have a surge.

That’s why I’ve always on Twitter have been big on Mosaic being the 800 pound gorilla outside of Morocco’s. OCP, but OPC, I think it is. But that’s not a tradable stock mosaic fertilizer. I’m very bullish on that. That’s going to relate to bigger increases in food prices, specifically in the UK.

TN: What crops in Europe would be most impacted by this?

AM: Wheat. Most likely wheat.

TN: Yeah. Okay. And where does Germany traditionally, where does it source most of its fertilizer? Is it from Russia?

AM: I believe they get most of their stuff from Belarus originally. And I know that they have potash fertilizer plants inside of Germany itself, but I’m not sure how. I don’t know the exact numbers on the importance of what they do for a fertilizer, but it’s certainly a problem specifically for Germany. Of course it’s a problem for France. It’s even bigger problem because they’re a big food producer.

TN: Okay, Tracy, you’ve said a lot about fertilizer in the past. What are your thoughts on this? Does it just get even more intense or do we see some relief on the horizon?

TS: Well, I think it does get a little bit more intensive when we just saw And, Norway’s largest fertilizer company, all kind of curve back production in various countries wherever their plants are concerned. So it’s definitely a concern. 100% agree with Albert. Going into next year is going to be a very big problem. I mean, everybody’s harvesting right now. Everything’s fine. We’ve seen big pullback in those prices. But going forward, in particular next year, we’re going to have a problem.

AM: And a lot of that, Tracy, has to do with the national governments are going to look out for their national interests, their own farmers, so that although the imports will drop, so the exports will drop and they’ll just keep it closed within their own nation, so they can feed their own people.

TN: Fertilizer nationalism.

AM: Well, it’s just the same thing with oil. I mean, the countries are not export more than they can handle.

Yeah.

TN: Okay, so sounds pretty dire, but do we see any relief next year? Or, like you said, is it going to go into 24, or does it all depend on Russia?

AM: I think it depends on Russia whether the Europeans and the United States come to their senses and stop trying to put their foot on the throat of the Russians. You’re hampering your own economic growth, and they’re sitting there talking about, oh, we’re going to get away from fossil fuels and do this whole new climate thing. That’s just not realistic. And I don’t think they just haven’t come to grips with that yet.

TN: I think it’s a time frame thing. Right? I mean, it’s going to take some time, and I think there’s a hybrid mix in the interim that I think we’re trying to rush.

AM: Well, that’s the point. They’re trying to rush things. When you rush things, your own people are going to suffer economically and so on and so forth. It’s just not politically. They just can’t swallow it. Some of the voters don’t swallow that. Sort of stuff. 

TN: And things break. Like Californians can’t charge their electric cars. Right. These are weird times.

Okay, great. Thanks, guys.

And then on the oil price cap, we had about this week, former Russian President Good about this week, saying that Russia just won’t deal with people who subscribe to the price cap.

And then we had Xavier Blossom, Bloomberg tweet about it, saying that he and his friends are going to agree to a price cap on beer at their local pub and that the guys at the pub don’t agree with it, which is a nice analogy, I guess.

Tracy, what are you seeing on the price cap? Is it actually going to come about?

TS: First, they just announced that they’ve been talking about this for months. Let me give a little bit of background. And they just now say there’s going to be three different kind of price caps, one for crude and two for refined products.

However, if you look at the actual G7 statement that was out today, they were pretty vague on it. Basically, they said, we invite all countries to provide input on the price cap design and to implement this important measure. So in other words, they’ve decided they’re going to do this, but not exactly holiday.

TN: It’s going to be 2030 before they come to an agreement on.

TS: it’s because. They’Re asking all their stakeholders to join in this. And so what I see as the problems with this right now is that there are four specific problems. One, it’s not really enforceable outside of G Seven countries if people don’t sign up for this. Two, Russia already said, again repeating you, that they won’t sell to countries that enact price caps. Three, part of this is the maritime insurance on vessels carrying Russian oil India is already providing safety and notification through IRGC class.

So by Dubai, subsidiary of the Russian shipping group. So I hope I pronounced that right. But anyway, they’ve already kind of gotten their way around this. And four, they’re also thinking about creating their own benchmark.

So right now, Russian crude oil is expressed as a discount to Brent because rent is the benchmark price. They already have an oil trading platform in place via RTS and MYsix. So they could build out this platform, which they’ve been talking about, and go through near Mir, which is basically their version of Swift, and completely by past that and just let market forces work.

I think this price cap is still way off from seeing the light of day. But this actually could turn out much more bullish because this price cap overlooks how Russia could influence global markets.

If they wanted to, they could opt to cut off the EU and NATO, not just G7. G Seven members shut production and raise global crude oil prices through the roof because they would take barrels off the market there by hurting the G7 nation.

I’m not saying that would happen. I’m just saying that’s within the realm of two box. And it’s not surprising after we just saw today, as soon as an oil price cap was announced as a plan, suddenly we just saw gas problem with Nordstream one, therefore I’m off of national gas.

TN: So what’s to stop, let’s say, a European country that signs onto a price cap from buying, let’s say, Russian crude that is sent to Chinese, say ownership and then resold to say, I don’t know, Germany. I mean, that type of circumvention is already happening, right?

TS: No, you can definitely do that. What we’re really seeing now is that kind of circumvention is happening in the product market. So it’s very easy for, say, India to buy Russian crude oil, refine it until it’s anywhere else because it’s very hard to track where those barrels really came from. It’s easier to track a resale. Right, if that makes sense.

TN: Sure it does. But they put in a barrel of, say, Emirati crude with a million barrels of Russian crude and then they label it Emirati crude. Right? Something like that.

TS: Yeah. If they both have the same API level, depends. You could mix them. If they both were the same exact API level, then you could mix them. It’s kind of different than, say, the natural gas market. Yeah.

AM: The Iranians do this with the Iraqi oil and bozzar. Often they mix it and label it As Iraqi 

TS: because they share oil fields. I mean, Albert and I have been talking about this for years now.

AM: Years.

TN: Let’s be honest, the rules apply to the people who abide by the rules. Right. And so even if these price caps are put in place, there will be circumvention in a big way, of course, at least a refined product, if not crude product. And so a lot of it’s for sure. Is that fair to say?

AM: Of course, yeah. A lot of it is for show. This is a political thing right now for scapegoating Russia

for inflation problems. Now they’re just snowballing things and saying Russia’s gas is the problem

 for inflation, Russia’s oil is the inflation problem, and other caps. But like I said earlier, and even just Tracy reaffirmed it’s like the moment you mentioned price caps against Russia, Moscow finds an issue, whether it’s gas, prom leak or Belarus problems, or Algeria has problems with Wagner. They create these issues all the time.

TN: Of course, anytime there are sanctions on a country, right. These things happen. Okay, very good. Thank you, guys. We spent a lot of time talking about Europe. So let’s move on to the week ahead and

what we expect to happen the week ahead.

We saw some really interesting action in markets, and last week we talked about how Palo speech, we really should have been a surprise to no one, but markets seem to kind of take it on the chin this week, acting shocked that he repeated himself again. So what do we expect going into next week? Do we expect things to kind of moderate a little bit or do we at least in equity markets, do we still expect some downward movement and also, say energy markets? We saw crude down, I think at 86 or something.

Tracy, do you expect, say, energy markets to continue to fall next week?

TS: What I would really look at, and what I’m looking at more, instead of looking at just reprice, which seems highly manipulated right now, especially going into midterms, not suggesting anything, but I think what I would start looking at is in like second and third month spreads or fourth month spreads. Right. So you really want to be looking, I think, just a couple of months down that curve a little bit. And if you start seeing because those curves are still kind of telling us that the market is very tight and curves, you can’t really manipulate as much as you can somewhat of the front line. So I think that’s where you should be looking at.  I think we’ll really get a better grasp on these markets and to see what front market is next week is OPEC meeting, right. So they were talking about cuts, right, over the last couple of weeks. That’s right. That’s all. I will be on that. That’s on the fifth.

TN: And SPR keeps going until October. So we’re only looking at November,December before we’ll see some upward pressure on prices. At least a stand up pressure.

TS: Yeah, exactly. And depending on what OPEC says, we could see an initial pull back. The general consensus is they’re not going to do anything in September. However, OPEC has been known

to give us some surprises. So just keep that in mind.

TN: That’s good all right. Very good. Sam, what are you looking for for next week?

SR: Next week I’m looking at the ECB. I want to hear how hawkish they are and how quick they’re going to go and what type of language they’re using. They’re still in the QE boat, right? They’re still buying Italy, they’re still buying Spain, they’re still buying a bunch of the southern debt periphery type debt.

So I want to hear what they’re saying, how they’re saying it, and just how call it, quote, unquote, inflation-oriented. They are. They probably should be particularly versus the bank of England, who is very hawkish and likely to continue to, one, explore actually outright sales from their asset purchases to shrink their balance sheet and how quickly the relative moves are there.

I think that can create some fireworks, particularly called the Euro pound type crossed I think that could be really interesting and cross asset class could be.

TN: Do you think you should be able to surprise hawkish?

SR: Yes.

TN: You do? Okay, interesting. That would be very interesting to see. Wow. Okay. And so you think the Euro recovers a little bit on that?

SR: I think it knee jerks, yes. But the question is how long does that last? Right. That, I think, is a much more important question than the initial knee jerk. And I think over time, it would be a fade the news move.

TN: Okay, very interesting. Okay, very good. Thanks for that, Albert, close this out. What do you see for next week?

AM: The big boys come back to play from vacation. That’s right, they do. I think they’re going to start holding the market a little bit more accountable for all this bad data. And I think earnings were just atrocious when you look at what inflation was. I’m actually going to be watching though

China as we get closer to the CCP, the Party meeting, I think it’s October 16, I think XI might start announcing many stimulus packages in certain sectors. So I want to see if those materialize and what that does with commodities that are attached to them.

TN: Okay. I just want to say, with regard to the Party meeting in November, if anybody talks about reading tea leaves or any of that garbage, you’re banned immediately. Okay.

So we’re not going to imply, like, cultural mysteriousness on Chinese political processes. It’s just they’re a bureaucracy like everyone else. They make decisions like everyone else. They’re no more or less mysterious than anyone else. So I would say that for the people watching, because the people watching are going to see a lot of kind of China experts or whatever China watchers talked about how mysterious the CCP is and a lot of question marks. A lot of them are Fed talking points from the CCP spin machine. So they’re not mysterious, they’re a bureaucracy. They’re boring, just like every other country.

AM: Yeah. And the Party is I believe that Congress is October 16, not November. Yeah. So it’s closer than people realize. It’s only 30 days away, but China is going to have to probably stimulate some sectors associated with whoever is in line with the party leadership to keep them happy. So that’s what I’ll be watching next week.

TN: Yes. Very good, guys. Thank you so much. Looking forward to have a great holiday weekend, and I look forward to seeing you next week. Thank you very much.

Categories
Week Ahead

Crude Oil Supply: The Week Ahead – 29 Aug 2022

Learn more about CI Futures here: http://completeintel.com/2022Promo

Crude and energy are on everybody’s minds, and we spent a lot of the Week Ahead parsing the details. Saudi Arabia came out with some comments about restricting their crude supplies to global markets, and we also have a detailed discussion on the SPR release in the US – when will it end, how will that impact crude prices, etc. 

We also discussed Jackson Hole drama and the conclusions of Powell’s latest speech. Powell really didn’t say anything new, so why are equity markets reacting so dramatically?

And will we finally get some stimulus from China’s government? We’ve seen movement in tech stocks and some talks of the stimulus release, but we expect more after the US election. 

Key themes

1. Crude oil supply: Saudi/UAE cuts vs SPR

2. Jackson Hole Drama

3. China Stimulus (Finally?)

4. What’s ahead for next week?

This is the 31st 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

Albert: https://twitter.com/amlivemon/

Sam: https://twitter.com/samuelrines

Josh: https://twitter.com/Josh_Young_1

Listen on Spotify:

Transcript

Tony Nash: Hi, and welcome to The Week Ahead. I’m Tony Nash. This week, we’re joined by Josh Young for the first time. So I want to thank Josh a lot for taking the time to join us. We’ve got Albert Marko and Samuel Rines. We’re lucky to have these three really valuable guests.

Before we get started, I’d like to ask you to like and subscribe to this YouTube channel. You’ll get reminded every week. Give us comments on the show. We always look at the comments. We always respond to the comments. So thanks for taking the time to do that.

We also have a promo for our product, CI Futures. That product is $50 a month right now. You can go month to month with it, try it out. We cover about 900 assets with weekly forecasts, and we do about 2000 economic variables with monthly forecasts. So check it out. We’re transparent. We disclose our error rates for every month. So it’s good information.

We have a couple of key items this week. First is the crude oil supply. We had Saudi Arabia come out with some comments about restricting their supply. We also have some information on the SPR release in the US. So we’re going to ask Josh to leave the discussion on that. 

Obviously, Jackson Hole drama. We’re probably the only people not leading the Jackson Hole today. But there are some meaningful things happening. There are some things happening that are not meaningful, and Sam will talk us through that. 

And then when we finally get some China stimulus, I think that’s a real question and Albert will lead us on that.

So Josh, thanks again for joining us. You put out a tweet earlier today about the UAE supporting the Saudi comments on supply restrictions.

Can you talk us through that and help us understand why did that happen and why is that important?

Josh Young: So the UAE is supporting what the Saudis and other OPEC members are doing in terms

of threatening to cut production based on the combination of lower price, as well as their observation that there may be some paper market price manipulation and disconnect from what they’re seeing as the largest sort of combined suppliers in the oil market. And it’s particularly important that the UAE did this because what we saw at Bison was that most of the OPEC members were actually producing their maximum production capacity. And when you produce that maximum, the fields aren’t designed for that. It’s sort of like driving with your foot all the way down on the gas 100% of the time. You’ll break your car and you’ll crash.

And so a lot of these fields and their processing facilities, they’re just not designed to run at this. It’s a theoretical capacity that’s supposed to run for a week, a month, three months, not how they’ve been running it. And so there’s a lot of pressure on a lot of fields in many of the OPEC countries to actually reduce production slightly, so it’s not a surprise.

And we forecast that there would be some discussion of this given the high run rate versus their spare capacity. UAE in particular does have some remaining spare capacity, so what we’re seeing is cohesion within OPEC along with supply exhaustion of the other OPEC members. So it’s actually a pretty big thing, and I don’t think people are really picking up on it too much. Although maybe it’s why oils flat up a little.

TN: With the market down a lot today. Is this something that will start small incrementally and then it will accelerate? Meaning will they cut off a little bit of supply and then over time, maybe they take some fields down for maintenance or something like that, and then you start to see bigger chunks? Is that a possible scenario?

JY: Yeah. Honestly, I don’t know exactly what the path will be. I just know that they see it. We were joking before the show that, hey, maybe they’re following my Twitter feed and a few other people’s been observing these problems with the oil market and sort of weird trading patterns versus very strong physical demand and sort of very strong indicators.

And you see Saudi has a very high price relative to their benchmarks. Right. Their poster price, especially Asia, has been very high and usually that’s associated with price strength, and instead we’ve seen price weakness. So I think they’re very frustrated by that, but they may wait for some other things. So oil prices to fall a little more or some other sort of signal, maybe some small amount of demand destruction to the extent that happens. I think it’s a little hard, just given the Saudi relationship  with the US and their sort of hope to maintain a lot of their alliance and their alignment with the west. 

So I think they need sort of an additional catalyst. That being said, once they do it, they might… I don’t know if they start small and then go big, or they might just go big. They might just say, hey, we’re cutting by a million barrels a day. We increased by four over the last year and a half, and we’re fully supportive of the market. We might go a lot bigger if necessary, and there’s a disconnect and we’re going to support it.

TN: Okay, so how much of this is related to the SPR release? Is the SPR release having such an impact on prices that the Saudis are kind of fed up with it, or are there other factors?

JY: I actually don’t think it’s related to the SPR release almost at all. It does look like it’s a little related to some of the job owning around a potential agreement with Iran. And there’s a lot of disagreement in terms of how much oil production could come on if Iran came to an agreement with the west and sort of restarted. JCPOA. I’m in the camp that there’s not a lot left to produce and to export. You can see the amount is getting exported to India and various other countries. It’s up a lot from the last time this was floated, six or seven months ago. So whatever that capacity was for Iran to export, it’s less.

But I think it’s partly tied to that because Iran is a regional foe of Saudi Arabia and UAE and several other OPEC countries. So I think it’s a little bit of that. And I think it’s a lot related to the paper market trading patterns and just this really big weird disconnect where you see consumption fine and you see price down and it’s probably messing up your CI Futures forecasting a little because you’re probably tracking the consumption and the consumption is fine and the price is down. And it’s like. Okay. The inventories are down. This is weird. Again, excluding SPR, when the SPR stops releasing, obviously you’d expect price to recover substantially absent a million barrels a day of demand structure.

TN: Is that what you expect when the SPR release is done, that’s late October or something, right, do you expect prices to rise notably? 

JY: Yeah. And I think like, the EIA forecast for shale production growth and sort of overall US oil production is just totally off base. They haven’t reset it, even though I think they had like a million barrels a day or something forecast for growth. And I think we’re at sort of 300,000 barrels a day so far this year and pretty flat. And the rig count is not up that much, and the frac stack count is definitely not up enough. So I think there’s sort of this disconnect. 

There also in terms of this mark to model from a production perspective versus what’s actually happening in the field.  And then you look at it’s not hard to see who the big producers are on the public side and then which ones had forecast growth and how much they’re actually achieving. 

It’s really hard to reconcile their forecast for production growth versus what’s actually happening. And we’re really well situated for this because we spend most of our time we talk a lot about macro, we spend most of our time just like looking at individual companies and evaluating them and evaluating their securities. And so I think it’s part of why we’ve had such a powerful voice from a macro perspective, because we’re spending most of our time talking to these companies, looking at the rigs, looking at other services, figuring out the bottlenecks, and looking at some of the local stuff.

And when you do that and you step back and say, these numbers don’t make sense, and the companies are not tracking anywhere close to that. So back to SPR, that matters a lot because we’re not achieving the production that is being forecast. And it seems like a lot of market participants, or at least prognosticators, are just accepting as a given. That means that at whatever point… I’m not saying that the SPR release stops in October. They may continue it, but at whatever point, there is a finite amount of oil there. And we’re hitting tank bottom on some of those caverns that are releasing oil. At some point we just run out or we stop releasing and whatever that point is, absent significant demand destruction in a very deep recession, I think we see a lot higher oil prices.

TN: So in terms of the SPR release, you said, you talk about being empty, this sort of thing. How much do you think are you still thinking kind of October? Are you thinking they’re going to continue, but it would kind of have to trickle out, not at the same rate they had been releasing to date. Right? Because they are short on supply in the SPR.

JY: Yeah, I don’t think it has to trickle out. I think they could produce pretty hard for another month or so, and then it starts becoming more of an issue. But as you get down to it, looks like the numbers around 20% or so for any of the individual storage facilities, and for some of them, it might be a little higher, some of it might be a little lower. You start having issues with contamination as well as just physical deliverability, actually extracting it out. 

And I think people take the numbers a little too seriously. And it’s very weird because no one trusts the government about certain things and then other things they just blindly say, oh yeah, it’s right. It’s from, okay, try to reconcile that.

And I think when you talk to engineers and some of the people that have worked on these facilities, their observation is that it’s reasonable to expect less deliverability. But there are enough of the facilities that aren’t drawn down enough that they should be able to supply. I don’t think we’re really hitting deliverability issues yet, but I think we’re likely to start to hit them, let’s say over the next month or so.

TN: Okay. So kind of when we take what you’re talking about and we look at, say, the potential impact of crude prices and refined product prices on inflation and energy prices generally on inflation, seems to me that you’re implying that towards the end of the year we could see those prices rise fairly quickly. Is that fair to say?

JY: It is. But at the same time, gasoline prices are still down a lot. These will start to tick back up the gasoline, which is a big consumer factor, as well as it gets felt through a number of different aspects of the economy. So at least for now, that’s not so much of a risk. But yeah, definitely. Sort of later on in the year, one could expect that. 

And one other way to look at that is there’s been a divergence, and I’ve ignored these historically, to my detriment. There’s been a divergence in between the oil price and oil and gas equity prices and oil and gas equities have done a lot better over the last, let’s say, month and a half than oil prices have. And it looks like the equity market is telling us that the companies… 

I mean, one, the companies are just very cheap, so I would think naturally they should rise. But the degree of divergence is so much that it seems like the equity market is making a forward looking bet on higher than strip prices in the future. And the forward market and the oil paper market is making the bet that it will be lower.

So there does seem to be a noteworthy divergence that could mean much higher inflation, like you’re saying, but it might also be that shelter matters a lot more and some other stuff matters a lot more, and it might really take diesel rising a lot and gasoline rising a lot to actually shift back into high inflation.

TN: Okay, is that divergence between only upstream companies or is it upstream midstream? Is it the whole stack? What is that divergence? What does that include?

JY: So I’m most focused on upstream. I don’t actually remember whether it also included the pipelines and services. But on the upstream, definitely both the large cap, the XLE ETF that includes Exxon and Chevron and stuff, as well as XOP, which includes sort of independence.

TN: Fantastic. Okay, Josh, that is excellent. Thank you so much for that. On that inflation topic,

let’s move to Jackson Hole. Of course, there’s a lot of breathy analysis of Jackson Hole over the last couple of days, and there will be over the weekend. But Sam Rines, who has the most valuable newsletter that I know of that’s available in America today, covered this week, and there’s a chart that he has in there looking at the meeting probabilities and also looking at the headlines that may or may not come out of Jackson Hole.

Sam, can you talk us through that? And what do you expect some of the conclusions to be?

Sam Rines: Yeah, so I thought it was really interesting. The Fed said nothing all that interesting today. I mean, it might have been a shock to people who weren’t paying attention, but the Fed just reiterated about, I don’t know, 99% of what it’s already said and set it in different words. And Powell said it basically eight and a half minutes. Right. That was the big change. All he did was take a bunch of time out of the speech, condense it and say, we’re not pivoting. They were never pivoting. The pivot was out of the picture at the last meeting. He made that pretty clear during that press conference. 

So it’s really interesting to me that there was an actual equity reaction to it. It’s also really interesting

that there was relatively little reaction out of Currencies, relatively little reaction out of global interest rates and only a reaction on the equity front. It was like it was a shock to the equity guys, and everybody else was like, yeah, we need that. So I think that was really the big takeaway was it was a shock to the equity

markets, but everyone who had to be paying attention for the last six months was like, yeah, no big deal.

So Jackson Hole I think one of the things that I had said about it in the newsletter was, you’re not going

to learn anything new. And the only thing that we learned was that Paul was going to say absolutely nothing new and absolutely nothing interesting, and equity markets would still react to it in a pretty meaningful way. The idea that we were going to go to 4% and then stay at 4% was already priced in to Fed fund futures through the end of ’23.

So this whole idea that Powell somehow shocked the market. It’s one of the more entertaining things

today, in my opinion, is just that equity markets were so taken aback by it while you had three or four basis point moves in interest rates across the US curve. And just a big shrug. 

To me, the big news today was probably out of Europe where people were potentially discussing 75 basis

point hike from the ECB. The Czech Republic doing an emergency meeting on energy.

There were some more interesting things that happened in the market today, but I think I overlooked in favor of an eight and a half minute speech by somebody just re iterating what he had already said 900 times.

TN: So let’s talk about Europe a little bit, because that’s interesting. I mean, Europe is in a world of hurt, right? We’ve talked about that several times. So what do you think the path for the ECB is from here? Do you think they’re going to hike 75?

SR: No, I think they hike 50. I think 75 is probably a little too aggressive for them. I mean, we were talking about ten basis points three months ago as being something that we thought would be interesting. And now the idea of floating 75, I think that was mostly to defend the currency, right. They knew that there was a known that you were going into Jackson Hole and if you front ran that with the leak that you might go 75, you’re going to defend your currency somewhat against a potentially hawkish Powell. It’s pretty straightforward in terms of defending a Euro at one. So I think that was basically the case. Call 50, maybe 75, I don’t really care. They’re going to hike, and they’re going to hike in a pretty meaningful way, particularly for a place that is already screwed. Right into the recession, right? Yeah.

I think it’s a pretty interesting opportunity to go long the long-end booned and short the Euro. Yeah, we’ve talked about that a few times here and that’s great.

TN: Okay, guys, what else do you have on the, Albert, Josh? Are you guys hearing anything else on US economy or Jackson Hole? 

Albert Marko: Sam mentioned about the equity reaction. How much of that is really because

of the low liquidity right now? There’s no traders really out there, no volume out there really, at the moment. 

SR: But liquidity works both ways, right? If you have low liquidity, you can rip it. It can get ripped either way. And I think what you saw immediately following his speech was you saw a leg down, then you saw 1% leg down, 1% leg back up, and then a two to 3% leg down, depending on what industry you want to look at. Right. So liquidity works.

AM: But you’re right, nothing was new. That rally that they launched for the weeks prior to that, you expected them to go hawkish after that, what are they going to do? Go dovish and go to 4400, 4500 and look ridiculous? Nothing new came out of this. He’s right about that. 

SR: I think there was an opportunity for them to potentially begin to say, hey, we’re going 50s and then 25s, and then we’re going to pause at 4% and we’re going to see how much we’ve ruined everything. There was the potential for that.

But then when you get STIs, you get financial conditions ripping higher, you have meme stocks

coming back into the news. Yeah. The Fed is not going to consider that type policy. If anything, they’re going to look at that and say, hey, it looks like short term neutral is a little bit higher than we thought it was. We need to move a little further and then begin to pause.

So if anything, the equity rally going into Jackson Hole was more problematic for equity markets than people thought. 

TN: So do you think some of those 25 expected 25s could be 50s in say, Q4?

SR: I don’t care if they’re going to get to four and then they’re going to stop and they’re going to get to four before they’re going to get to four around December and then they’re going to see what kind of carnage they’ve done. If they haven’t done enough carnage, they go higher. Pause there.

TN: That makes sense.

SR: The pace is probably I would say the pace kind of matters for shock and all purposes,

but in general the pace is kind of meh.

The end is really important and the length of staying at the peak is what is truly the most important thing here. If they’re there for a year and a half and they don’t care about a recession, that’s one thing. If they’re there for six months and cut by 75 because we’re in a recession, then go back, that’s a different thing. But I really don’t care how quickly they get there.

TN: Okay. And the run up to the midterms has no bearing on what the Fed is going to do, is that? 

SR: None.

TN: None. Okay. I just hear that from time to time. Well, the midterms are coming, so the Fed

is going to just relax for a few months.

AM: You hear that mainly from me. From my perspective, it’s always been like when I say Fed, I want to say Treasury and Fed together because of Yellen.  But sometimes they have those concerns. Like they don’t want the current administration looking bad. I had a midterm. Yeah.

SR: That should sail.

AM: Well, that should sail because just because of the ridiculous antics that they pulled recently with inflation, it’s being ridiculous. So you’re right, that ship has sailed.

TN: Well, I mean, are they ridiculous or not? I mean, inflation has definitely risen and they’ve definitely taken action to offset inflation.

AM: Yeah, they’ve done that in a vacuum because China is not online yet and Europe is a complete disaster at the moment. Right. And we haven’t had a real event to drive oil up into like the 130s, 140s again. God forbid we have a hurricane in like a week that goes into the Gulf of Mexico while Grandhome is sending out letters to all the refiners saying you can’t export anything anymore. There’s plenty of room. 

TN: She’s encouraging them. She’s not requiring them. Right?

AM: Yeah. Okay, well, we’ll see about that.

JY: She’s making them an offer that they can’t refuse. So my general take was just like, I’m not a Fed watcher. My general take was kind of stagflation coming out of this. Right? It’s like policy that can’t get too extreme to really like they’re going to try to torch the economy, but they’re also not going to go to a 15 interest rate or anything like that. They’re going to go to a four or whatever, and maybe they’ll go slower or faster.

I think there’s some political motivation there. So maybe they go slower and then they turn on higher after the election. Maybe not. Unclear. Kind of doesn’t matter from my perspective.

What does matter is, like Albert was saying, I think there’s a decent shot that we end up with higher oil prices. We end up with other factors. So, like, there are various drivers that are pushing, especially in the rental market, shelter higher, not lower. And so with persistent inflation in the biggest household bucket, and then with a likely move higher this winter in oil and diesel and probably also gasoline, it’s going to look pretty ugly. And if you have them stopping kind of at four, maybe going to let’s say five or something, but inflation is at ten or nine or whatever, right? Some directionally, really high number. At some point, you just start ticking in where you have negative real and positive nominal, and that’s just hard to break unless they go a lot higher. But if the economy is sucking, that makes it really hard. So that was my sort of general take from what they were saying.

AM: I wanted to come back and ask you about the SPR just real quick about the oil in it. Some of it has got to have degradation, and there’s a lot less barrels there that they can actually release. They might have to stop in end of September. You might start seeing oil rise even before October.

JY: Yes. My base case is not that. My base case is there’s a little bit of contamination, but they’ve managed to reduce that either by not pulling from the caverns that have had contamination historically or by treating the oil or something. My base case is that the oil there is extractable, except they can’t get the last barrel because there’s a certain percentage that needs to be there for the caverns to continue to be

functional, and they’re not going to destroy the storage caverns just to get the last oil. That’s my base case.

But I think there’s a reasonable expectation that there’s less oil there, given the history of contamination and the issues. And they did have a big draw this past week, but prior to that, they had multiple smaller draws. There’s also the crude quality thing, which I’m not really in the crude quality matters camp. I think there’s sort of this bizarre notion that crude, which is mostly fungible, really matters. It did to some extent before you could export oil and before various changes in US refineries.

At this point, it matters a little in terms of getting a couple of dollars, more or less per barrel, depending on transport cost. But I don’t think that’s really affecting the global balance. And I think it’s sort of like

a magic trick, right? It’s like focus on this and not like the thing that actually matters.

And so I’m glad you didn’t bring it up. I guess I brought it up and I just don’t think it matters, though.

TN: Great. Thanks for that, guys. Okay, let’s move on to China. Albert, over the past a week or so, we’ve seen a number of stories saying that China fiscal stimulus may finally be coming.

And we’ve seen some movements, say, in China, tech stocks, these sorts of things. So can you talk us through what you’re seeing with China in the stimulus camping? And why now? They’ve waited so long. Why would it be coming now?

AM: Well, it’s coming out because the policy and the dollar is so high, the Chinese economy is struggling at the moment and they come out with these mini stimulus announcements and there were shots across the bow. I mean, the worst thing right now that the Fed can happen is China stimulating commodities ripping at the moment, that would be absolutely atrocious. Inflation will start going higher and we seen like Josh said a 10% CPI prints coming out and they’re going to be forced to do 75 basis points again. It would throw a wrench in a lot of things and it’s not good if they stimulate it right now. 

But after the election, after the US election, they can do what they want to do because they have their own interests at heart at the moment. They cannot let the Chinese economy fall to a point where they can’t recover in the near future.

TN: So what do you see coming out in the near term? This $229 billion bond sale? That was a start, right? So do you see more than that or dramatically more than that coming out? And how quickly do you expect? 

AM: Yeah, I expect by January that will have a significant stimulus package coming out. This little SEC audit deal was basically a gift to delay it as much as long as they can.

TN: Okay, very good. And then so you don’t expect a significant amount of Chinese stimulus before, say, December or something like that?

AM: Yeah, before December. 

TN: Okay. Sam, what do you think about that? Do you think China stimulus hurts the US? 

SR: I really don’t think that the Fed would care or go 75. I mean, it’s commodities, right? And the Fed tries to ignore commodities as much as possible. So yeah, you’re going to get a rip in oil because there’s not enough oil to go around, there’s not enough oil for China and it’s going to coincide with the end of the SPR release. So you’re kind of screwed there. 

Copper, all that stuff goes higher. I don’t think the Fed cares. The Fed is going to try to cut that out. Then they’ll pivot core and you’re going to have a really weak Renminbi and you’re going to have probably at least a little bit of a pass through to US consumers on the goods front as you get goods to flow back. 

So you could actually see kind of an interesting offset where core goods kind of begins to decline on a Chinese reopen. Commodities rip and you get the, hey look, it looks like core is moving back towards two. We’re not going to have to raise rates as much because we don’t really care about headline, we can’t control oil, we can’t pump more oil. 

So I think it’s a weird kind of catch 22 where the Fed is going to have to pivot from talking about headline to talking about core. But I think they’re happy to do it as long as that core is really moving lower because I think they know they’re screwed on energy. They’re in so much trouble in energy, commodities, et cetera, that there’s nothing they can do.

TN: I think you’re right and we’ve needed a weaker CNY for about six, seven months now. So I think it’s about time and we’ve started to see it move, but I think we’ll start to see it move more dramatically soon.

Okay, guys, let’s start looking at the week ahead. Just a quick kind of round the horn of what do you think, Albert, what are you looking for for the coming week?

AM: I’m looking for a little bit of a rally back off these loads here, try to bring it back to 4200. I just personally think that the economy is in trouble, they’re delaying a recession as long as they possibly can, but it’s coming. So I think a little bit of a pump next week and then probably heading back down into September.

TN: Okay, Sam? 

SR: Oh, I agree with Albert there. I think the knee jerk reaction today to the Fed is going to be unloud as people begin to look at what really went on in rates. What’s going on in FX. The concentration should be on what’s going on in Europe. And the flow versus the stock problem that nobody seems to be able to figure out. Which is you can stock as much gas as you want in a bunch of caverns in Europe. If you don’t have flow over the winter, your stocks really don’t matter. I think there’s going to be a little bit of a realization that stock versus flow matter more than stocks and at some point you’ve got to figure that one out. So that’s what I’m watching.

TN: Interesting. Okay, Josh, what are you looking for in the week ahead?

JY: Just more information on oil demand. So we’re starting to see reports of surprise, higher oil demand than people would have thought, which coincide with actual reports of oil demand when you look at the raw data. So that should be interesting to see sort of how that gets processed and then sort of how oil price may or may not get suppressed. Again, just as we get more good data points, price should go higher, but it doesn’t seem to want you for now.

TN: Very good. From the energy capital of the Universe in Houston, Texas, Josh Young, Sam Rines.

Guys. Thanks very much. Albert, thanks. Have a great day, have a great weekend and a great week ahead.