Despite weaker economic data, will the Federal Reserve continue their hawkish stance? Do the FOMC minutes offer any hints of their stance? Our CEO and founder, Tony Nash tells us whilst telling us the impact of rising rates on the banking and property sector.
Show Notes
WSN: BFM 89.9. You’re listening to the morning run is seven o’ 7, Thursday, the 7th of July there and keeping you company till 10:00 a.m. Is Shazana Mokda in an undisclosed location far, far away. And I’m Wong shining in the studio now in half an hour, we’re speaking to Manpreet Gill on fixed income and commodity the investment strategy for 2022. But let’s recap how global markets closed yesterday.
SM: So if you take a look over in the US, markets actually closed up despite Fed meeting minutes coming out signaling a more hawkish stance. The Dow was up 0.2%, the SP 500 and the Nasdaq was also up 0.4%. Looking over in Asia though, it’s mostly red. No, it’s all red really. The Naked and Hansi were both down 1.2%, the STI was down marginally by 0.01%, and the Shanghai Composite and FBM KLCI were both down 1.4%.
WSN: So for more on where international markets are hitting, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now so far the economic data coming out of the US shows a slight deceleration of the economy. So do you think that the Fed will then hold back on their hawkish pace of rate hikes despite June’s FYMC minutes indicating that they intend to keep raising rates?
TN: I think they’re definitely going to keep raising rates, I think until we see a marked slowdown in particularly commodity price inflation, but also other things like wage inflation. I think they’re going to keep accelerating. So it’s unlikely they’ll continue with a 75 basis point hike, but they will almost certainly have a 50 basis point hike and continue for the next couple of meetings at least.
WSN: I have another question though, Tony, in that when do you think interest rates will peak or when is the peak of the tightening cycle? Will it be early 2023 or you’re looking maybe later in 2023.
TN: Well, some people are saying that it’s possible they continue to hike until the end of the year, and then in 23 they have some rate cuts similar to what happened in the early 90s. That’s possible. I think it all depends on where the economy is at the time. But I think for now they’re just worried about inflation and the downsides of inflation and they’re looking at asset prices and where asset prices are, and it’s really troubling for them given yeah, the economy has definitely slowed down, but we still have wages rising, we still have very high commodity prices, and we also have an appreciating dollar at the same time. So anything imported should be cheaper on a relative basis, but those prices keep going up as well. So Fed continues to be worried, although they’re getting pressure from the outside because it is an election year and the party in power does not want there to be a recession going into the election. And so they’re getting huge pressure from the treasury and from other people to moderate their stance so that there is not a recession going into the election.
SM: Well, what do you think then, Tony? We know that economists at Goldman Sachs have put the risk of a recessionary slump in the US. In the next year at 30%. So they’re still looking at next year. Some consumers feel it’s already here, I guess. Where are you standing in this debate?
TN: Yeah, I think we have unemployment still falling in the US. So you don’t usually have a recession at a time when unemployment is still falling. We also have high inflation. So on a real GDP basis, you may have a negative real GDP number. Well, you have a positive nominal GDP number. And I know that’s a little bit confusing, but what that basically means is that the rate of inflation pulls the economic growth into a negative number simply because of inflation. So we’re in a place where it’s kind of hard to identify a recession because of the real and nominal difference. But when we still have jobs growing, when we still have investments and other things happening, it’s really hard for us to hand on heart say that we are in or entering a recession.
WSN: Okay, let’s get into the weeds then, with regards to the recent set rate hikes and how that might play out in certain sectors. And I want to look at the US. Banks. So how do you think they perform this quarter? Are you a bull or bear?
TN: Well, it’s a tough time for banks. They had mixed results in Q2, and I think higher interest rates obviously help their net interest margin. But borrowing cools off, and it’s things like mortgages. Other things have cooled off dramatically over the last same month or so. Banks will likely have a very tough Q3, and then when things stabilize, they’ll be better. But I think Q3 is going to be rough for them. I wouldn’t say I’m necessarily bearish on banks, but I would say I’m neutral on banks.
WSN: What about the property sector, Tony? I mean, we’ve heard, of course, a few months ago that whatever you put up in the market, it gets snapped up within the day. But is that trend continuing? Are you a bull or bear for property?
TN: You know what? It depends on where you are in the US. Where I am in Texas, things are really strong. But a lot of other places in the US. Things have slowed down dramatically, and mortgage applications nationally have come to a standstill as interest rates have risen. So I think a couple of weeks ago we may have talked about how a house that was purchased in January, the median price house purchased in January, if it were purchased today, it would cost $800 a month extra. And so the interest rates just had a dramatic impact on house prices. So mortgages have really slowed down.
SM: And can we turn to oil, Tony, because oil prices have dropped below $100 per barrel for West Texas. Does this level accurately reflect supply and demand for crude? And does this then invalidate the bullish forecast of $150 and above that analysts were predicting not too long ago?
TN: Yeah, I think we’re in a really strange place for oil right now. And if you look at the later months of crude oil futures that are being traded, they’re actually trading higher than the current month. So there’s something happening in the current month, like maybe somebody’s books blown up or something. But there’s something happening in the July future that rolls off in a couple of weeks. And I expect that we’ll see higher crude prices going into August and the rest of Q three, early Q four. So it’s going to be pretty choppy for the next few months in energy and commodities generally.
WSN: One last question for me, and it’s more long term economic question, and that’s about Biden’s infrastructure bill that was passed in November last year, but it’s gone really silent. Do you know what’s happening on that front?
TN: Nobody does. There’s been very little news about it. What’s happened partly is inflation has taken a bite out of it and it’s really caused a lot of projects to stall. So the problem with federal appropriations is the longer the money sits, the less money that gets spent, which is good for taxpayers. Right, but I think inflation is really forcing local and state governments to pause on their investment plans because they do have budget, but they don’t have enough budget to get the projects done that they want. So can they appropriate can the US. Congress appropriate more for the next fiscal year? It’s possible. It depends on who’s in power. So if the Republicans come into power in November, then they may not raise the appropriations level and we’ll be stuck with the level that we have, which it’s $500 billion, a massive amount of money. I don’t want anybody to mislead anybody, but the Democrats will likely want to raise that level if they remain in power after the November election. But to date, not a lot has happened. There has not been a lot of movements. We haven’t seen a lot of major announcements of new projects, these sorts of things.
And if it was successful, we would see a lot of major announcements of new projects.
WSN: All right, thank you for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his views on global markets, in particular the US. And whether the Fed will continue to raise rates until 2023. He says maybe, and then maybe they might even cut rates like they did in $2,000.
SM: That’s right. I guess one thing to note is the question is whether we’re going to see a recession sooner rather than later. Yeah, and Tony did point out the fact that labor unemployment is still at really low levels. Unemployment is decreasing so that’s really at odds with a recession and that’s what everyone is looking to see. I think if we start to see unemployment go up, that heralds that a recession is either here or coming.
WSN: I suppose we are living in really weird economic times. None of the normal correlations that we see are making any sense. I think that’s a lot to do with the fact that during COVID-19, governments basically just took the let’s do whatever it takes attitude. There was so much money pumping into the system by every major central bank and the recession was extremely V shaped, sharp recovery. But then that also caused supply chain disruptions and we had the war in Ukraine. It was like the perfect storm of Black Swan events which has resulted in this current situation that we are in now. Very quickly, we’re looking at the Fed minutes that just came out now. Indications are that they are signaling another rate increase of between 50 to 75 basis points lightly in the July meeting. And this is the interesting part, they are willing to accept the price of a slower economy in order to tame inflation.
SM: And this is sort of a change from their soft landing rhetoric, right? So earlier they were trying to say oh, it’s not inevitable that there will be a recession, we can still avoid it, we want to get that sweet spot. But I think now they’re trying to navigate those expectations to go like hey, I think we need to kind of expect pain. There is going to be pain, but it’s better to have this short pay now rather than long term pain later. So I think the Fed is really trying it’s got itself in a pickle essentially in terms of trying to prime expectations of the public.
WSN: I think that’s on the back of the fact that they spend the whole of 2021 telling everyone that inflation is transitory, hey, no problem. And it didn’t turn out to be transitory, so there’s a need to rebuild back that credibility. But up next we’ll be speaking to Carmelo for little on malicious overnight policy rate. Stay tuned for that.
We had a pretty volatile week last week, with crude selling off pretty sharply early in the week. In this episode, we looked at energy backwardation, and Tracy educated us on what’s happening in those markets.
We also had some comments from Putin about a multipolar world. Albert talked through that.
And then on Friday, unfortunately, we saw the assassination of Japan’s former Prime Minister Abe. We talked about the Japan post-Abe and what that means for the region.
Key themes:
Energy backwardation
Putin’s Multi-Polar world
Japan post-Abe
What’s ahead for next week?
This is the 25th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 0:54 Key Themes for the week 1:28 Catalyst of the energy sell-off on Tuesday 5:44 Will we see more action in energy prices? 6:57 Is it cost-ineffective to make hydrogen with natgas prices? 8:11 Diesel 9:20 Vladimir Putin’s multipolar world. 13:44 Japan post-Abe 20:29 What’s for the week ahead?
Listen to the podcast version on Spotify here:
Transcript
TN: Hi. Welcome to the Week Ahead. I’m Tony Nash. Thanks for joining us. I’m with Tracy and Albert today. Sam is away, but we are talking about a pretty volatile week this week. Before we get started, actually, please like and subscribe. Please ask any questions below, make any comments. We want to make sure this is interesting for you, so just let us know any additional info you want or comments. We’re happy to address those.
We had a pretty volatile week this week with crude selling off pretty sharply early in the week. So we’re going to look at energy backwardation, and Tracy is going to educate us all on what’s happening in those markets. We also had some comments out of Putin about a multipolar world. We’re going to have Albert talk through that. And then on Friday, unfortunately, we saw the assassination of Japan’s former Prime Minister Abe. So we’re going to talk about the Japan post Abe and what that means for Japan and the region.
So first let’s get into energy. Tracy, obviously, we had a big sell off in energy early in the week, and then we saw it come back later. What was really the catalyst for that energy sell off on Tuesday?
TS: What happened is that we started on July 5, right? We opened with low liquidity in the market in general. Then we saw a sell off in the general markets and commodities and risky assets that kind of exacerbated that trade. And then on the 6th, we saw a liquidation of a couple of very large positions in that market. And so fundamentally, basically, there is no reason for this sell off other than technicalities.
In fact, if we’re looking at this market, this spreads, the calendar spreads, which means month to month, were exploding higher during this entire move. That implies that the physical market at least, is very tight right now because you’re seeing backwardation increase significantly when we’re seeing a $10 move in ZZ, which is crazy.
TN: Can you tell us what that means? A $10 move in ZZ. What does that mean for the rest of us?
TS: If you’re talking about calendar schedule, we’re talking about monthly. So we can talk about the current front month is August. So we look at August, September, September to October, October to November, et cetera, et cetera. And once these spreads start exploding higher, that means that we’re seeing people want to dump oil in the front month market because that’s more lucrative than keeping it in storage.
So if I’m an investor and I’m looking and I want to invest in a backwardated market, I’m looking at a convex market that goes from right to left, and I’m going to invest in, say, a back month, and I want my investment to move higher…
TN: I’m investing further in the future.
TS: Right. That’s what it backwards. If you’re in a contangable market, we’re looking at the opposite situation, where you’re looking at a convex structure going from right to left, whereas if I invest in December, by the time my investment reaches Frontline X free, I’m losing money. I’m losing value in my investment.
TN: Right.
TS: And so that’s how we kind of have to look at that situation.
TN: Yes. You had a great tweet this week explaining that with visuals.
TS: I did. It’s on Twitter, if anyone wants to see it.
TN: Exactly. We saw this in crude. We also saw it in a natural gas. Right?
TS: Yes. We’re kind of seeing a major pullback in many of the commodities markets. Right. We’re seeing a little bit of a bounce this week because we’re looking at China. China has recently announced we have one last announcement with $200 billion bond sale rate. So we’re looking at a lot of stimulus out of China that’s giving commodities the boost. Right now, we have to see I think the markets are still going to wait on, particularly the industrial and base medical markets are going to wait until we actually see some action in China to really see investment back into these markets after this huge goal.
TN: So nobody believes the China stimulus story right now. It’s kind of a show me the money period. Right. But once they do start to show the money, do you think we’ll see much more action in energy prices?
TS: I think you’ll see more action in metal prices than you will equity prices.
TN: Copper’s way off compared to, say, the last 18 months. But it’s not way off, given historical copper prices. If we go back before, say, Q1 of 2020, it’s kind of where it had been previously in the ballpark, at least. Right. So we haven’t necessarily reverted back to pre-COVID, necessarily. We’re just in the start-stop manufacturing world, and that’s what’s affecting base metals like copper. Is that fair to say?
TS: Oh, absolutely. If you look at, like, a monthly chart rather than looking at a five-minute chart, and the market has kind of just been consolidating, really, for the last two years, until we see a really big break above, say, $5, a really big break below $3, we’re still kind of in that consolidation zone.
TN: 3.50 to 4.50 kind of range. Interesting. Okay. Sorry, Albert.
AM: Yeah. I got a question for Tracy. Nat gas, as we’re talking, since we discussed it a little bit, that’s used to make hydrogen, if I’m not mistaken, and since the nat gas price seems to be elevated, isn’t that going to be a little bit too cost-ineffective to make hydrogen, which causes a diesel problem, if I’m not mistaken? I’m not sure about that. That’s what I’m asking.
TS: No, absolutely. I think that would be a problem. Looking forward. I think there’s a lot of problems if we’re looking at the hydrogen market. There’s still a lot of problems when we’re talking about taking this idea to actual fruition. Right. Because if you look at the hydrogen market, there’s like a rainbow of green hydrogen, blue hydrogen, this hydrogen, this hydrogen. But we really haven’t gotten to the point that can overtake, not gas the allure of the situation is that you can take hydrogen, mix it with nat gas, you can send it down the same pipeline, and that saves a lot of money.
AM: Yeah.
TS: The situation is this is not a great idea in theory, but we’re just not there yet.
TN: Okay, got you. Albert’s, question about diesel. Diesel is not any less tight than it was a week or two ago. Right? In fact, that’s just as tight or tighter than it was, say, a couple of weeks ago or a month ago.
TS: Yeah, I think the diesel market is still very tight.
TN: Right.
AM: Maintenance season starts, isn’t it? From September to November?
TS: Yes, we will start maintenance seasons.
TN: Okay.
TS: I would actually look for some of these refineries to maybe put off maintenance season. So that’s what I would watch to the maintenance season happen. And it’s happened before. If we have it such a tight market, we could see them putting off maintenance seasons. It’s not unheard of.
TN: Okay, so hurricane season and maintenance season are upon us, but we may see at least maintenance season for all of us.
TS: Oh, not I just moved to Florida.
TN: Good luck with that. I’m in Texas. We don’t get as many of you, but it’ll be a fun season for you.
Okay, let’s move on, guys, to some comments out of Putin this week. Vladimir Putin had some comments about us, the multipolar world becoming more and more of reality. We heard this ten years ago. We heard this 20 years ago, and it came up again this week. So, Albert, can you kind of let us know what’s going on there?
AM: Tony, I’ve used this multipolar example for the US. Dollar dominance I got for years now. And the fact of the matter is, we are not in a multipolar world. We are not even going into multipolar world.
People are confusing a little bit of weakness in the US. Leadership and errors and decision making, foreign policy for multipolars, it’s just a multipolarity, and it’s just not the case for the world to be in a multipolar scenario, you would need multiple countries with equal militaries and economies. We are nowhere near that.
The Russian economy is 2.5 trillion. The American economy is pushing 30 trillion. This is just a joke by Vladimir Putin. Simply undermine the US dominance both in the world stage and the dollar.
TN: Aside from some dumpster pundits who write for The Atlantic or whatever, who believes that nonsense?
AM: A lot of Europhiles that want to see the United States take a step down, they can do it. A lot of crypto guys, a lot of gold guys. These guys have to make that argument, because without multipolarity, you cannot have a neutral reserve asset to settle trade. And that’s just the fact of the matter.
The problem becomes, if you have a multipolar world, you’re on the verge of another world war, because there always has to be one alpha that takes hold of the system. You just can’t have equal people.
TN: And the cost of the transaction? Cost? The cost of trade, everything goes up. If you have multiple rights go up, everything goes up.
AM: It’s completely unstable.
TS: Inflation from other countries to other countries.
AM: Yeah.
TN: The world is built on China exporting deflation. Has been for 15, 20 years. And it will continue. If they could just keep their ports open, it will continue. And it makes people happy. Right.
AM: No, you’re right. That’s just the way our system works right now, with the dollar underpinning all of it. It’s the lifeblood that makes trade work. And people are not going to like it. But I promise you, no one alive today is going to see anything other.
TN: So let me just take a step back. Who does he think the polls are? Russia, China and the US? Or Germany or something?
AM: He’s trying to make an assumption to say that Russia and China are the new contenders to the United States. The problem with that is they don’t have military power projection globally like the United States does. They can’t even invade Ukraine. China can’t even invade Taiwan. Otherwise they would have taken it if they’ve it could have. This is the world we live.
TN: Yeah. Russia can stir up problems in Libya or the Middle East or whatever.
AM: There’s no question that they can stir up problems and they can fill in gap vacuums that we leave right, unintentionally, unintentionally. But they cannot hold that territory. They cannot force changes in governments like the United States did.
TN: And every time I hear somebody talk about the Belt and Road as a sign of China’s dominance, it reminds me of Napoleon’s march to Russia. Right? I mean, they’re spreading themselves so thin. They can’t keep that up.
AM: They can’t. That’s perfect example to do that, to make that thing actually successful, you need to back that up to secure your trade line, trade with the military. Right. China has like, what, two military bases outside of China? Like one in Djibouti and something else. I mean, they can’t send ships over to their armor.
TN: Myanmar.
AM: Yeah. This is beyond a joke to me. I don’t take anybody seriously that even brings this part up, right. Vladimir Putin included.
TN: That’s good. So anybody watching this, if you have an alternative view, let us know in the comments. Honestly, we’d love to hear it. We just want to hear some credible.
TS: Put your notes in the comments.
TN: Yes, absolutely. Okay. Now, finally today I woke up in the US to the really tragic news of Japan’s foreign Prime Minister Abe, being assassinated.
I saw Abe in his first stint as PM in the mid 2000s. And then when he came back in, in 2013, and with the Abenomics plan, which was really difficult to pull off, ultimately successfully. The guy was smart. He was all about Japan. He’s all about Japan recovering, all about Japan being competitive. I put a picture up of Abe shaking hands with Prime Minister Modi of India. Japan and India were very tight. A lot of Japanese investment going to India, a lot of partnership across those two countries and in Africa, both to defend against China in Asia and other parts of the world. So Prime Minister Abe will be missed.
I think what Abe did partly was bring back Japan’s ability to defend itself by passing a constitutional change that allowed the Japanese military to defend itself where previously it wasn’t even allowed to do that. So there’s a lot of dignity that Japan kind of got back, and we can rub Japan’s nose in World War II for eternity, but it’s not going to be constructive. What happened, happened. They’ve paid their dues, and that’s kind of what Abe said, look, we paid our dues, we’re going to move on now and join the 21st century. And that’s what Japan did.
So I’m just curious to get your thoughts, guys, on Japan post Abe. What do you see as of course they moved on to another prime minister. Japan has already moved on from the Abe government. He wasn’t a sitting prime minister. But what do you see kind of the challenges of Japan’s role in Asia particularly, but also in the world post Abe?
AM: I think the most pressing issue for Japan would be contending with China, both militarily and economically. Abe was, like you said, brilliant statesman and patriot for the Japanese people. So he’s going to be sorely missed. And it’s not just he’s going to be missed, but his cabinet and the people that his network is going to be missed because they’re losing a big part of what he brought to the table in terms of strategy and ideology. It was a big shift.
I think that the Japanese are probably going to struggle for strategy in the next five to ten years. And it’s a sad thing, but I’m sure the Japanese, they’re resilient people and they’ll move on and they’ll recover.
TN: Tracy?
TS: No, I absolutely agree with what Albert said. I think the thing is that people are painting him, the media right now, in particular the Western media, painting them with some villain, which is very interesting to me. And I think that people should really just look at his legacy and respect what he’s done instead of jumping on the bandwagon.
TN: So they’re portraying him as some ultra nationalist, but he’s as ultra nationalist as Modi as in India, or Jokowi is in Indonesia, or Lee is in Singapore, you name it. Tsai Ing-wen in Taiwan. It’s an Asian direction now. Right. And has been for the last ten to 15 years.
AM: Yeah. The media also, Tony, is desperate to not allow any center right or even right nationalist figures be murderers or looked up upon. They just can’t stomach it. They just can’t help themselves to demonize a person that is absolutely unjustifiably demonized by being called an ultra-nationalist and even worse, by the NPR.
NPR had two other headlines that they had to delete because it was just so atrocious. This is a.. And Modi, Abe, I don’t want to put Victor Orban into that, but all these right leaning leaders just get attacked and the media can’t help it.
TN: Right, yeah. I think from an economic plan, if we look at what Abe did with Abenomics, of course, the Japanese Central Bank is kind of “independent,” right. But they really took the JPY from kind of 76 to the dollar to, say, 120 to the dollar, and it really allowed Japanese manufacturing to be competitive again. Right.
And it took somebody with that clarity of economic vision, as well as the clarity of, say, the military vision and political vision, to be able to pull off what they did. And in terms of, say, energy sustainability under Abe, they also created much deeper relationships in the Middle East with places like Qatar, UAE.
TS: And they also looked forward to nuclear, where you looked at the west was looking to shut things down, Abe was looking to invest in nuclear projects. You’re looking for energy security, energy going forward. There are a lot of things that he did to advance that sector in Japan, which is admirable.
TN: Right. Albert if we take a US perspective on this? The US has worked hard to kind of hold a line against China. Do you think with the mediocre leadership we have in the US right now, do you think it’s possible that some of that US say coalition falls apart a little bit? Or do you think we just kind of take a breather and then it resumes based on the institutional stamina of parts of the Japanese government?
AM: That’s a great question, Tony. That’s actually a really good question. And I think where we have to look for we have to separate the Biden foreign policy cabinet with the Pentagon. Because the Pentagon is actually leading this charge for the Pacific with Japan and Australia in charge. I really don’t think that the Japanese are going to take a step back or the US is going to take a step back. I think the system is pretty much, the train has already left the station and it’s rolling.
There might be an argument from the opposition in Japan, but I don’t think. That it’s going to take hold to derail this new initiative by the US and the Pacific.
TN: Great, that’s good to hear. Okay, guys. Hey, on that somber note, we’ll end it, but let’s look at the week ahead. Guys, what are you looking for in the week ahead? We’ve had this real turnaround this week. What do you see going into next week? Do you see things calming a bit?
We saw it coming into Friday. Things really turn up in US markets and in commodity markets. Do we see things stabilizing a bit going into the Fed meeting after we’ve had some Fed comments late this week?
AM: I want to see the comments of where they might signal a 50 basis point rate hike versus a 75. I absolutely believe 75 points is coming just from the jobs data that they posted. It was obviously massaged a little bit.
TN: Just a little bit.
AM: Of course it is. Yeah, but this was a good one. And then the revision too, and it just seems to me that they want another 75 basis point rate hike.
TN: To really kill it?
AM: They got to tackle inflation. I mean, they’re looking at 8.8 on the next CPI, which is just.. And you’re staring on the barrel at 9% and 9.2 and 9.3 in the coming months, which is absolutely a political nuclear bomb that goes off.
TN: Okay, Tracy, what are you looking for in the next week especially in commodities?
TS: Yeah, I mean, I agree we probably will see 75 after non farm payroll this week, which I was looking for a clue kind of are we going to get 50, are we going to get 75? It looks like 75 for sure.
So looking in the coming weeks, I’m really looking to China right now and to see what comes to fruition with these sort of stimulus plans. What does that do to the base in industrial medals markets? And I think those are the two things that you should be focusing on right now, particularly if you’re invested in commodities markets.
TN: Very good. Okay. Yeah. I’m kind of hoping they give in to 50, but I’m not hopeful. I do think they’ll on the kind of conservative hawkish side and go 75. But if they can pick up the bat phone and talk to China, and the China guys will unload a dump truck of cash over the next week or so, then I think they’ll be a little bit lighter and do 50 basis points. But I think a lot of it depends on China ECB. They can’t get their act together, so there’s nothing ECB can do to really help.
And Europe is in so much trouble that it doesn’t really matter what they do. They have huge problems anyway. So. I think you’re right. And tell me what you think about this. But I don’t necessarily think we see massive chop. I think we see just a lot of fairly sideways moved for the next week or so.
AM: I would be wary if we jumped up to 4000 or even, like, 3970. I think a rug pull would be in an order right after that. That’s what they do. They bowl everybody up and then pull the rug out.
TN: Tracy?
TS: Yeah. After this big move down in the oil market, in particular, because we did have sort of a flow event coupled with a couple of large funds kind of workforce to liquidate. So I could see that we still could go a little bit higher next week. Sideways to higher next week.
TN: Very good. Okay, guys, be interesting to see. Thanks for joining us. Thanks very much. Have a great weekend. And have a great week ahead.
TN: Very good. Thank you, guys.
AM: I struggle with the headache through that whole thing.
As markets tumble, users are left unable to withdraw from some exchanges, and a leading hedge fund prepares to enter liquidation. Is crypto in terminal decline? Scott Chipolina, correspondent for the Financial Times, says investors are well used to challenging conditions.
Sri Lanka is among the countries to be worst hit by inflation, and living standards are falling. Joseph Stalin of the Ceylon Teachers’ Union, and Steve Hanke from Johns Hopkins University, tell us why a solution may be some way off.
It’s a host’s worst nightmare: an out-of-control party in your Airbnb. As the platform cracks down on gatherings, we hear the story of a rental gone wrong in the Bahamas.
Also on the programme, a boss at H&M explains why leaving Russia was a tough decision; and it’s happy 15th birthday to Apple’s iPhone.
We’re joined throughout Business Matters by financial consultant Jessica Khine in Malaysia, and economist Tony Nash in Texas.
Show Notes
BBC: Tony Nash, the CEO at the finance forecasting platform, complete intelligence in the US. State of Texas. How’s your day been, Tony?
TN: Great, thanks very much.
BBC: Good to hear. All right, well, thank you for joining us too. Tony Nash in Texas. I wonder what’s your overview of all this? I mean, it’s obviously bad news for crypto investors, but is it also a warning for other people who might have been entertaining the idea of getting into the crypto market?
TN: Yes, it is. The whole kind of crypto fallout that’s happening right now, it’s not the funds that I worry about. It’s the individual investors who have been investing in crypto that really worry me. And that’s the really kind of sad part of this crypto kind of drama is you have crypto assets that have fallen by 70%. People have put their savings and their hard earned money into crypto. And so I do worry about those guys because there are a lot of people, individuals who have lost a lot of money because they believed the narrative about crypto.
BBC: And I think during the pandemic, we saw a lot of people sitting at home starting to think, oh, maybe I’ll give this a go. They’re the most recent entrance into the market. I guess they’re the biggest losers.
TN: They are. So I did have a crypto journey where I invested in something called dogecoin, and I bought it at like four cents, and I ended up selling it at like 68 or $0.70, something like that. So it was just a small amount of money I didn’t want to put very much at risk, but I did, I wanted to understand what that was like, so I put like $50 into it or something like that and then just saw it go up to $70 or something and then sold it. But I think a lot of people thought that it would continue going up not just dogecoin, but a lot of the cryptos. So it’s not like your guest said, I don’t think this is the end of crypto. It is what they call crypto winter, and it’s probably going to last a couple of years. I don’t think we’re going to see crypto bouncing back immediately.
BBC: Presumably that experiment was enough for you. You’re not tempted to get back in, given the latest news?
TN: I don’t like volatility that much. At least with those assets, like your guests said, there’s nothing underlying those assets. There’s not a company, there’s not a physical commodity. There’s nothing underlying them. It’s just trust. And so I can sell sales in my excel workbook and have the same amount of assets underlying as any crypto asset does.
BBC: Listening to that in Texas, do you agree? Did governments like the US. Government make a mistake with all those support programs?
TN: I think they did, but I respect Steve. Thank you a lot. I follow him on twitter. I think they did make a mistake, but I honestly think that governments at the time were just afraid. I don’t think it was necessarily intentional that they overstimulated. I think they were not aware of what was going to happen around the corner, and I think they panicked. They were just afraid. It’s easy to look back from this point in time and say what they did was wrong and other stuff, but I actually think giving them the benefit of the doubt and saying they just panic, they were afraid and they didn’t want people to starve or suffer or lose jobs or whatever, and they stimulated way too much in hindsight.
BBC: Tony is this enforceable from Airbnb, do you think? Can they really stop people having parties? What if they just clean up really well the next day?
TN: Well, I think part of what happened through the pandemic is a lot of Airbnb hosts started charging exorbitant cleaning fees. And no matter how clean or dirty you left the place, the cleaning fee was applied to your Airbnb fee. I stay in Airbnb, or did stay in Airbnbs pretty regularly, but the cleaning fees became so large that I won’t stay in them anymore.
BBC: I didn’t realize the cleaning fee was at the prerogative of the host. I imagine it was like a blanket 10% or something.
TN: No, they’re huge. And so I have no issue with Airbnb enforcing a no party’s rule, but they really have to have a trade off and put a cap on the cleaning fee for Airbnb hosts because they in some cases are as much as the nightly rental.
BBC: Oh, wow.
TN: And these are things that you don’t see when you do a search in Airbnb and you see a nightly price, it does not include the cleaning fee. So if Airbnb is to put on this ban on parties, they really need to put some pressure on their hosts to reduce the cleaning fees.
BBC: It is a kind of fine line, though, isn’t it? I mean, I’ve had friends rent Airbnb and there’s been a few of us and there’s been drinking, but I guess what they’re talking about is when you invite strangers, or not necessarily strangers, but people who are not staying the night or booked in to stay, that’s when it becomes a party. Is that how they’re going to define it, do you think? Tony
TN: Yeah, I don’t know. If I’m staying in an Airbnb and I want to have some people over for dinner, is that a party if I want to cook for some friends and have them over? I don’t know. I think it could be, obviously loud music, drunk people, that sort of thing. Of course that’s a party, right? So they have to define it. I’m not a lawyer. I’m sure they can find a way to define it legally so that fees can be kept or whatever.
BBC: Tony you’re in Texas, not far from California. Have you heard of this issue before of land being seized from African American owners? I must admit it’s the first time I’ve heard of it.
TN: I’ve probably seen it in movies. I’ve seen it elsewhere. I think I’ve run across it, but I don’t remember it. But when I read this story today, it was great. It was great to hear and really interesting to dig into the story. And it was terrible that people had to suffer with that for 80 years.
BBC: It does say a lot, though, doesn’t it? If neither you nor I, you’re there in the States, have heard of this issue, I mean, from what Alison was saying, this wasn’t the only case. Has it been underreported, do you think?
TN: I don’t know. I don’t know how much property African Americans were allowed to hold before a certain point in time. I’m just not really sure. My family that settled in New Amsterdam when the Dutch still ruled America, had some property that was seized by the British in 1671. So it happened.
BBC: How did you find that out?
TN: We know our family history pretty well, but this was land in lower Manhattan, right around where Wall Street is, and so it was seized. These things happen. I’m not in any way trying to take away from the racial injustice that was done in California, not at all. But these things happen occasionally, and I’m just glad that these guys could get their land back and benefit from it eventually.
BBC: Tony, you’ve been looking at hmmm. We’ve been hearing there about its planned expansion into Latin America, but at the moment you’ve been looking at where their product is sourced. And we were just speaking about Myanmar. It’s Myanmar, sure.
TN: Yeah. Asian sources quite a lot in Myanmar. And part of the problem they’re facing is a lot of the manufacturers in Myanmar are being driven to insolvency because of energy prices. And so H and M doesn’t only have a problem generating revenue to replace Russia, but they do have a supply chain sustainability problem with matching the costs they can get in Myanmar, but also replacing that manufacturing pretty quickly as those manufacturers are driven to insolvency.
BBC: Tony, listening to that, how much has the iPhone changed your life, do you think?
TN: I have never owned an iPhone.
BBC: Smartphone. Do you own a smartphone?
TN: I do. Yeah. Of course I do.
BBC: So do you think iPhone opened the door to that?
TN: Of course it did. But I just never got into the Apple ecosystem. And I just haven’t owned an iPhone anti Apple. I just haven’t been I’m just waiting for it to get a little better. But of course, it’s influenced phones and it’s influenced the way we engage with technology. And it was a great product at the time. It was revolutionary. I remember I was using a Nokia phone at the time. Keep in mind, this is 2007, and you could play your music on that phone and have conversations, and I thought that was pretty cool. But that was before the iPhone came out. The navigation the interface. Everything just really changed the way people interact with phones. It’s great.
BBC: I think that’s all we have time for on this edition of business matters. Thank you so much to Tony in Texas and Jessica in Malaysia. And thanks to Joanna Stern from the Wall Street journal, who brought us up to date on iPhone’s 15th birthday as well. This has been business matters with me, Vivian Nunes. Thanks for listening. Bye.
Powell was out saying “I don’t think a recession is inevitable” but also admitted that rate hikes may be one of many factors that push the economy into recession. All of this while bank credit continues to grow, which we saw flatten in 2020 and decline in 2008. What’s happening? Is a recession inevitable at this point?
We talked about the dollar two weeks ago and the strength is still there. Are we pushing higher so commodities feel a bit cheaper to Americans? Is this temporary – mainly so Americans talk about cheaper gasoline over the July 4th holiday weekend? How far and how long do you expect the dollar to go? Why?
Can crude continue to rally into a recession?
Key themes:
The “R” Word
Geopolitical fallout
Crude 💪 or 👎/ Dollar 🚀
What’s ahead for next week?
This is the 23rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 1:03 Key themes for the week 1:48 Powell’s recession call 3:48 The catalysts that could whip growth 6:58 Geopolitics in EMs and related to the US 8:35 Is the ECB a risk as well? 11:00 Crude and the Dollar 16:00 Where do you expect the dollar to go? 19:00 The week ahead
Listen on Spotify:
Transcript
TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. We’re joined as always, by Tracy, Sam, and Albert. Thanks, guys, for joining us. Before we get started, please, like, please subscribe, please comment. We read all of them and try to respond to all of them. So please go ahead and do that while you’re here. Also, we are running a summer promo for CI Futures. This is our market forecast subscription product. You get three free months, so please go to completeintel.com/2022Promo and learn all about it.
So this week there’s a lot going on, a lot politically in markets, other stuff. We’re talking about three main themes this week. First is the R word. Second is geopolitical fallout of the R word. And third is crude and dollar activity. So I ran a poll earlier this week asking what is the most widely held consensus view that people are seeing right now? And that’s on screen, of course. So first is recession. People are seeing recession as a consensus view all over the place. Next is equities lower, followed by crude higher, followed by a stronger dollar. So we’re going to talk about all these things today.
Sam, let’s talk about that recession call. That recession consensus call. Powell is out this week saying, I don’t think a recession is inevitable after being really hawkish last week and driving people kind of to the edge of this. So what’s actually happening right now? We’re seeing credit continue to grow. And I know I showed you earlier this week. Bank credit continues to grow. Is that meaningful? And what are you looking at to know if we’re going into recession or not?
SR: Yeah, I mean, bank credit, is meh. But at the same time, are we going into a recession? Meh. I don’t really think so. It’s a booming summer. You have hotels full, you have bars and restaurants full. You have airlines unable to keep up with demand. I mean, that sounds like a small subset of the economy, but at the same time, that is a massive portion of the summer economy. It’s massive. So do I think we’re imminently in a recession? No. I actually think that’s one of the big narratives that kind of misses the bigger point, right? Do we make goods? No, we don’t make anything. What we do is we have services. That’s it. So we’re a service based economy. If services are booming, you’re not going into a recession. You’re unlikely to see some sort of huge move in unemployment because a recession technically is down on growth, down on employment.
If you don’t have the down on employment, you don’t have a recession. So maybe you have a slowing of growth. That’s somewhat probable. But a recession, no, not in the cards, at least until the back half this year. In the back half of this year, you have a number of catalysts which could really whip things the other way in terms of both growth.
TN: Okay, so what are some of those catalysts. And when you say back, you’re talking about October? November?
SR: Yes, October. November.
TN: My thinking is if we’re going to see it, we’re going to start seeing it maybe late September, October or something like that. But what are some of those catalysts you’re talking about? A couple of them?
SR: The catalysts then are actually to the gross side, which I think is where I’ll take the opposite side of a lot of people. Those catalysts are called a devolving of the Ukraine conflict. Number one, while that doesn’t take off sanctions in the near term, it does take off the incremental oops.
Then you have the beginning of the reopening of China, which is a big boost to growth in Europe, and secondarily, LatAm and the United States. So you put those pieces together and all of a sudden you’re looking at a back half of the year that has more upside catalysts, potentially. And it’s not like you can reset down China and it’s going to be a negative callus. It’s already in the numbers. It’s not like you can have another war in Ukraine that’s already in the numbers. If you begin to have those two come together, guess what? That’s positive. So I would say the rest of this year is shaping up to be oddly positive.
TN: Yes, but no, I’m kidding. Everyone’s so negative right now. Everyone wants to just find the downside. Russia is going to invade finland or something like that, right?
SR: Yeah. Here’s the play. I would say 3600 is a lot less likely than 43.
TN: I like that.
SR: On the S&P.
TS: I think what we’re going to see is kind of like a balance, right? Where we see services really big this summer, especially in the travel industry, hospitality industry, which we will see taper off this fall, which is not unusual. That always tapers off this fall. But we also see airline prices increasing, so people have booked their summer vacations in Q1. Those people are going to fall off. So I think we’ll see a push. We’ll see a pullback in that industry, but we could see growth in industries that Sam is mentioning.
TN: Great.
SR: Just to throw in there, we have to remember that at some point we have to refill supply chains on the drivable stuff, and those supply chains are at bone zero right now. It will require a whole bunch of employment, a whole bunch of production, and will actually have a fairly significant thrust to GDP. Our production has been zero.
TN: That’s great. My poll is wrong, which is awesome. I love that.
SR: I would bet against every single thing that your poll said.
TN: Perfect. I love that. Okay, so if you’re in the US, that holds. But let’s switch, Albert, to kind of say geopolitical risk and some other things. Obviously, Sri Lanka two months ago started falling apart and not started, but really fell apart. We’ve seen Ecuador and other places really start falling apart.
Albert, what are you seeing, geopolitically, and what are you seeing in EMs related to what’s happening in the US?
AM: I don’t really like focusing on EMs at this moment just because they’re not big enough to really cause a problem in the markets. In my opinion. I’m looking squarely at the European Union right now.
It’s suspicious that we come out with US bank tests and then we come out with EU bank tests and then literally a day later, the Germans come out and say, we could have a Lehman moment across the economy just because of these gas shortages that are happening.
TN: By the way, your tweet about the German Lehman moment up.
AM: Yeah. And this goes back to just the topic we were just talking about, recession. You really need some kind of catalyst or something to break. And the only thing that I could even contemplate of breaking and causing a “recession” would be the European Union going through another financial crisis. You have a contagion that probably leaks over to the United States financial markets and the Putin price hikes become a thing again, justifies any kind of QE that the Federal want to do, probably in Q four this year. Geopolitically, the EU is my target right now to look at.
TN: Okay. It’s energy supply chains. Is the ECB a risk as well? Is there a risk that they tighten too fast or too much or anything?
AM: How are they going to have to I mean, the inflation over there is climbing just as fast as the United States and it’s causing problems across the board.
SR: I would double down on that and say that Qatar, right after we had the train go down in Corpus Christi, came out and said, yeah, we’ll send gas to the European Union. Just sign a 20 year deal.
TN: Right. And they did. Right?
SR: European Union is not going to do that. I mean, nobody in Europe is going to do that. It was kind of like, we got your back, but give us a long term agreement and we’ll do it.
The irony of it is that you have a crisis going on in Europe. There was a dragon moment of do whatever right, anything.
TN: Sorry, Tracy. What’s that?
TS: Self imposed crisis? Their energy crisis is literally self imposed.
TN: Yeah. Okay.
AM: There’s no question that is self imposed. The European Union’s leadership has been atrocious. I mean, they’ve had the worst energy policy you could possibly think of that hampers their economic engine for the last two, three decades. I mean, you can just throw a dart at the board and pick whatever policy they’ve come up with. It has been an absolute disaster.
TN: Why is that? Why are they making such stupid well.
AM: They’ve made such a big swing to the left, the leftist voters, and they’re just climate Nazis. They won’t even discuss nuclear.
SR: We’re literally talking.
AM: They won’t even discuss nuclear power, which is absurd. They’re like, what if something goes bad like Fukushima? Oh, yeah. What if a dam breaks? Or what if a coal plant blows up? Or, God forbid, what if 10,000 Germans freeze to death because you don’t have gas stored because you didn’t have any proper management? I mean, they’re really bad at managing what’s going on without the United States holding their hand and directing what to do.
TN: Well said. Fantastic. Okay, so since we focus a little bit on energy there, Tracy, let’s swing to talk about crude and the dollar. So, our friend Josh Young posted something about kind of energy could potentially outperform this sort of stuff and really kind of looking back to the 1970s.
So it really looked like we were heading there until this week, and then we saw things really come down this week, in terms of, say, WTI, natural gas, other things. What’s going on there?
TS: I think it depends on what you’re looking at. If you were looking at frontline crude oil price, that’s one thing where a lot of speculators are involved in. If you’re looking at the spreads, it’s you’re looking at the crack spreads that are still exploding. If you’re looking at calendar spreads that are up again this week, that pretty much tells you that we put a floor under front month crude price, regardless of who is involved in what specs are involved in the industry right now. Because the spreads are really what I consider will tell you really where things are going. Right.
So we kind of have a floor night. Yes, oil had a bad week. We saw a lot of selling on downtime in markets and things of that nature. I don’t think that doesn’t change the overall fundamentals of the market. Right? I mean, we’re still fundamentally structurally undersupplied.
TN: So I’m going to ask a really dumb question here. I’m sorry if I may hear it.
SR: But we know.
TN: So are we seeing a short term sell off? Is it politically driven so that when Americans get together on July 4, they can say, gosh, gas is really down this week, and then you have a three day weekend where people are talking about that and then it rocket ships up after the fourth?
TS: Well, I think it’s a combination of most things. I think this week recession scares, we’re really the big driver for that market because everybody’s thinking we’re going to have a recession.
SR: That and the potential of having an export ban.
TS: Right.
TN: Recession, export ban, and July 4th.
TS: An export ban. That said, and I kind of tweeted this out, having an export ban, especially a fuel export ban, would make things obviously worse.
First of all, it’ll raise prices for the EU prices abroad, which after all of this with Ukraine, do we really want to hurt the EU that much? Because we supply them with one to 1.3, 1.5 million barrels per day of diesel, which they are having a huge problem. So really, are we going to abandon the you at this point? Also…
TN: My Texas friends would love to have more diesel to power their ram trucks.
TS: But the thing is that what happens is the fuel flows get so disrupted is that we’re going to have to see refineries cut run significantly in the US. Which is going to ultimately raise prices. We may see deepen prices initially, but you’re going to see higher prices ultimately.
SR: I’ll push back on that because you have a lot of storage, but you didn’t have a lot of storage before. So you don’t have to cut back on runs. You can put into storage at a pretty profitable rate because of forward selling basically all of your inventory right now. I would push back on you have to cut runs at this point.
TS: And I’m going to push back on that. We have to look at the east coast. Right. And so that’s looking at gasoline runs to make a barrel. Diesel requires a lot more oil than it does say to make gasoline. And so if we see a diesel problem, we’re going to have to cut back on this runs. I think it depends on what coast you’re looking at and what area you’re looking at.
TN: All we care about is Texas and Florida. Right.
SR: You have a lot of places to store gasoline. I mean, it’s not like we have an oversupply gasoline at the moment.
TN: It’s true. Our bob’s down this week too, right. So it’s tight.
AM: It’s interesting, Tony, it’s funny. One thing that you said July 4 and one thing that Tracy said, thinly traded is that hilariously every time we need a rally in the market during the thinly traded holiday hours, crude goes down, dollar goes down and the market goes up almost by magic on the thinly traded holiday hours. Something you should watch.
SR: University of Michigan. Come on.
TN: It’s a big driver. University of Michigan. Okay, so let’s move on. You mentioned the dollar, Albert, and so if we look at the dollar, obviously it’s near highs for the decade and that’s great if you’re in the US buying dollar denominated commodities. But elsewhere in the world it’s really hard. Right. So where do you expect the dollar to go? I can’t remember what you’ve said your expected target is. Possibly? 110. Possibly 120. So if it hits 120, Japanese Yen is at what, like 160? 170? something like that?
AM: 163,164? My calculation… This is something Yellen has done in 2012. It’s nothing new. She’s driven the dollar up. She’s out into Europe talking that she’s going to take the dollar up to 110. So this is nothing new. Everyone knows what’s going to happen. Everyone’s watching it. So we’re at 104 something today, just sitting there and hasn’t really done anything. Last day or so. Another 5% up is not a big deal for the dollar.
TN: So you see Yellen driving a stronger dollar. Sam, what do you see?
SR: I would say that I hate taking the other side. I’m going to take the other side.
TN: Great.
SR: I’m going to say that Yellen’s ability to control the dollar is de minimis at this point, mostly because the Fed is tapped out. But you already had a 4% terminal rate for Fed funds priced in two weeks ago. Today you’re sitting at basically 3.65%. So you’ve got the peak, in my opinion, priced in for the FOMC hiking cycle and now you’re on the other side of that. So I would say JPY, you’re probably looking at above 10.
TN: Oh, wow, okay, great.
SR: And you’re probably looking at a Euro at 108. 109. And it doesn’t really matter if they go into a recession because they’re… Right. The US is going to back off in incremental steps the long end of the hiking cycle and…
TN: Perfect.
SR: The dollar prices is long end of the hiking cycle and Yellen can do a lot of things. What she can’t do is increase the internal rate.
TN: That’s great.
AM: The thing is, the treasury sets USD policy, so she can certainly drive it up. I don’t know how much ammo she has left because it’s gone up. But we’ll see.
TN: Okay, perfect. That’s great. So we’ve covered almost everything in that survey and almost everything was wrong.
SR: I told you everything was I would take the other side of every single one of those.
TN: Perfect. Okay, let’s talk about the week ahead. We have month end and quarter end coming next week, right? So what does that mean for the week ahead? Everyone else.
TS: Can I go?
TN: Yes, you go Tracy.
TS: I don’t know. What I’m looking at for the week ahead is the last week of the month. Of the month and the quarter. Right. So we have roughly about $100 billion of US equities that need to be purchased over the next five trading sessions. We have a rebalance in the RTY. So we should see a lot of inflows, roughly 5.98 point billion of inflows into the US equity markets just because of the rebalance factor.
We should probably see outflows in the bond market and then that’s walking into a backdrop of negative dealer gamma. So we have the potential of a shot higher in the market.
TN: Sam? Sam?
SR: Yeah. I would say everything Tracy said in terms of the risk seems to be to the upside. I would also say it looks pretty scary when you walk into the end of the month in terms of the way the dollar chart looks right now.
You walk into the end of the month with a dollar chart looking like it’s ready, looking ready to gap down, and you have oil where it’s at. You could have a very interesting quarter end in terms of risk assets. You have a weaker dollar. You have a big buy on SPY, RTX, et cetera, or SPX, not SPY. You begin to put those pieces together and you begin to have a pretty risk on into the quarter that could be very interesting very quickly.
You get any positive headlines out of China in terms of lockdowns, you get any positive headlines out of Ukraine in terms of ceasefires, whatever BS they want to leak. Then all of a sudden you’re more upside. So I would say skewed to the upside through the beginning of July.
TN: Sam, you’re optimistic today. That’s amazing.
SR: I know. And contrarian.
TN: Optimistic and contrarian. I love it. Okay.
AM: Yeah, I mean, I agree mostly with Sam. I think just because the market is so thinly traded, the dollar should be chopping around probably on the downside a little bit, just for the week up until July 4 weekend, so long as the Europeans don’t come out and start saying any more Lehman things, Lehman crash things and all of a sudden dollar shoots up just because of fear factor out of the European side. But I don’t think that’s going to materialize over the next week, probably next couple of weeks.
After that, I think 30 days, we’re starting to look at possibly something that happened in the European Union. But for the week ahead.
TN: Fantastic. So the past three days carries into the next week. Fantastic.
AM: Yeah.
TN: Okay, guys, thank you very much. Thanks for your time. Thanks for all the stuff you passed along, and have a great week ahead. Thank you.
Russian company Gazprom says it will halt gas supplies to Poland and Bulgaria from Wednesday morning. Poland currently depends on Russian imports for around half of its gas. The country’s deputy foreign minister Marcin Pzydacz tells us his government was already been prepared for this move. Plus, the World Bank’s latest commodities report makes sobering reading, suggesting that high food and fuel prices could blight the global economy for years to come. We hear from its author, World Bank Senior Economist Peter Nagle. With Elon Musk poised to take over at Twitter, the European Union’s Commissioner for the Internal Market Thierry Breton tells us that the firm will be welcome to operate in the EU under new management, providing it adheres to the bloc’s rules. As Delta Air Lines reveals that cabin crew will be paid for boarding as well as flight time in a landmark announcement, the president of the Association of Flight Attendant Sara Nelson says unionization efforts by airline staff forced the company’s hand. And the BBC’s Ivana Davidovic investigates urban mining, the process of reclaiming raw materials from spent products, buildings, and waste. Throughout the program we’re joined live by Zyma Islam, a journalist with The Daily Star newspaper in Bangladesh, and by Tony Nash, chief economist at AI firm Complete Intelligence, based in Houston, Texas.
Show Notes
EB: Joining me today to help discuss all of this to guests from opposite sides of the world, Tony Nash, chief economist at the AI firm Complete Intelligence in Texas. Hi, Tony.
TN: Hi, Good Evening.
EB: Good to have you with us. Tony Nash in Texas, what do you think is interesting, isn’t it, because this could I don’t know, it could go two ways, just politically. It’s an interesting move from Moscow to, if you like, preempt European sanctions against Moscow by cutting off the supply to Europe.
TN: Yeah. I think the further this goes along, the more I like people buying oil and gas from Texas, since that’s where I live. So we’ll take that. But for Poland, less than I think, about 10% of their electricity mixes from gas. So it wasn’t a majority gas driven market anyway. So they were very smart to put resources in place, alternatives in place. And, of course, it hasn’t been cost free. It’s taken a lot of resource to get that in place, but it’s good for them. And being on the border with Russia, they have to be prepared for anything.
EB: Yeah. I mean, gas is obviously very important during the winter months and we’re entering spring. So maybe European countries are feeling the crunch a little bit less strongly. Nonetheless, the question does remain, is Germany especially willing to cut off the oil? The oil is by far the bigger element, isn’t it, in terms of Russian revenue from its energy exports? And that’s the thing that Europe is resisting so far. Do you think we are pushing in that direction?
TN: I think if the fighting continues, they’ll have to. The problem is they don’t really have alternatives right now. And so that’s their dilemma is Europe did not diversify when they should have, and now they’ll pay much, much higher prices. So that will eat into European economic growth and it will really hurt consumers. So I think Europe is in a very difficult position. That’s obvious. But a lot of it is on some level, I wouldn’t say completely their own making, but they had opportunities to diversify, which they didn’t take.
EB: Yeah. I mean, Tony, everyone wants to get their LNG from Qatar and they all from the United States. There are going to be some pretty wealthy Qatari and American exporters of LNG, even if they can meet the demand next year.
TN: All of my neighbors in Houston are benefiting. I’m not in the oil and gas sector, but they are certainly benefiting from this.
EB: Let me bring in Tony there. I mean, we saw a story this week, Indonesia, for instance, banning the export of some palm oil food protectionism could be a thing. We’re not really talking about that yet. But those countries I mean, Bangladesh neighbor, India, will it start cutting off its exports when it starts to see global prices rising and perhaps being more pressure on its domestic supply?
TN: Yeah, it’s possible. And we also have a situation where the US dollar is strengthening and emerging market currencies are weakening. So these ad commodities are becoming more expensive in US dollar terms for sure. But it’s an accelerated inflation rate in emerging market currencies. So one would hope that, say countries like China, who are suffering with this, who devalued their currencies in a big way over the last week, would start to put pressure on Russia to resolve the conflict so that both Russia and Ukraine can start exporting food commodities again.
EB: Tony Nash, what do you think? I’m forgetting the unicorn thing. Could officials come down that hard on Twitter, a new, less regulated Twitter platform under Elon Musk?
TN: Well, let’s assume that he obviously doesn’t understand the technology is regulating 100 million Europeans could turn on their VPNs tomorrow and access Twitter from a pop outside of Europe in 5 seconds. It would be no problem at all. So Twitter could unilaterally shut down in Europe and they’d still have 100 million customers on the European mainland. So he has a fundamental misunderstanding of the technology that he’s supposedly regulating. But what I don’t think he also understands is Twitter has people like Rouhani from Iran and Vladimir Putin and Chinese people who deny that they have a million Muslims in prison and all this other stuff. So why is he not cracking down on Twitter for allowing those guys to have a voice when he’s worried about Elon Musk, who is a loud guy, but he’s a pretty middle of the road guy, seemingly. So I just don’t understand why there’s so much hyperventilating about Elon Musk. I don’t get it.
EB: So you’re along with, I guess certainly a large number of Republicans in Congress right now who are saying bring it on. We’re delighted that this takeover is happening because we imagine we’re going to see a much less regulated platform.
TN: Let’s take another view. Let’s take Jeff Bezos, who owns The Washington Post. Right. It’s a media platform, and it’s had some really questionable practices over the past few years. So why aren’t media regulators in Europe looking at The Washington Post? They’re just not. And so I think if Musk is really going to have Twitter be in the center and not moderate except for things that are illegal, then more power to them. It’s in the spirit of the US law from the 1990s that said that internet content publishers can’t be sued because they’re not Editors. They’re only publishers. So I think it’s more in the spirit of the 1990s Internet regulation than anything that’s out there today.
EB: Tony Delta in Atlanta, that’s not a million miles from where you live, is it? Do you have sympathy for the flight attendants here?
TN: Yeah. It’s insane. I never knew about this. So no wonder the flight attendants are less than cheerful when we arrive on board.
EB: Especially for the check in bid, right?
TN: Exactly. It’s just insane. They’re in uniform, they’re working. Why they’re not paid. I just think that’s insane.
EB: The unionization drive does seem to be gathering a bit of pace in America, doesn’t it, right now. And we mentioned we’ve referenced all those other companies. It’s the mood of the moment. Yeah.
TN: Well, labor has the strong hand right now, and wages are rising. And when labor has the strong hand, you see more unionization. So it’s just a natural course.
EB: But it has been decades during which Union participation in the state certainly has gone down, isn’t it? I mean, since I’m in the 70s wasn’t right.
TN: But if we look at the rate of baby Boomer retirement, we have a lot of people going out of the workforce right now. And so we do have tight labor markets because of it. And that’s really part of what’s pushing the strength on the side of labor. And so this stuff is demographic.
EB: And it’s typical when it comes to technology. I mean, I have a personal take on this. I went to Acra in Garner in 2015 to the famous Agbog blushy central dump there, which is an extraordinary place. It’s one of the largest of its kind in the world. Miles of waste, all kinds of things. They’re burning cables just to extract the copper from the tubing and the wiring. But the air, I mean, it took me 24 hours just to feel my lungs clear from that place. It’s an extraordinary thing, isn’t it, Tony Nash, don’t you think it’s strange that the market around the world, the free market, hasn’t found a system whereby the value of old units is recycled efficiently?
TN: Yes. So if I want to recycle electronics here in my local town, I take it to a center and I have to pay them to take it. So they’re taking gold and platinum and other great stuff out of there, but I have to pay them to take my recyclable electronics.
EB: Is that why? I mean, do you understand the economics of that? Because you’d think that supply and demand would suggest that if there were a competitive value in the goods that they’re extracting, there would be competition and therefore there would be people offering lower prices or perhaps even paying you for your old stuff?
TN: Yeah, I understand the competition of it, but I think I just want to get rid of the stuff. And I think that’s what they realize is they can charge people just to get rid of old computers or phones or whatever, and then they get money on both sides.
EB: The big corporations, Tony, have a bigger responsibility here. I mean, they’re the ones producing the stuff. They’re the ones, I guess, I don’t know, paying for the extraction of some of these rare Earth metals and everything else. Some of the toxic stuff coming from places like Russia, Latin America, the DRC, and those are the things that are then being spat out and causing all kinds of pollution.
TN: Sure. I would think, for example, the phone manufacturers and the mobile carriers would have an incentive to collect the old phones from people.
EB: Yeah, but do you think regulators should be doing more here?
TN: I don’t really know. I think regulation tends to kind of contort things like this, And I think for something like this would potentially create an unintended economic opportunity. So we heard about the person in Bangladesh who collects used items in Singapore. I lived there for 15 years. We had somebody called a Karen Gunn person who would collect used electronics and other things and buy our house. So whether it’s that local person or whether it’s an Assembly Or a disassembly location, say, near my house, Those are people who are focused, who are specialized on what they’re doing. I do think, though, that the people who create this actually should have some sort of incentive, not from government, but from their customers to collect this stuff Once they’re finished with it, because it’s costing me money to get rid of it, but I’m paying them for it.
EB: Okay. A couple of minutes left in the show. I’m going to ask you both now for a quick thought about the things that have caught your eye most in the area, the news stories that have caught your attention. Tony, tell us in Texas what’s catching you up there?
TN: It’s really hard to follow that. So in Texas, one of the things that’s happening and this is not new, but it’s becoming more and more common is if you take your car out somewhere, Even in just a normal neighborhood, to, say, a shopping Center, It’s pretty common for someone to come even in the middle of the day and steal the catalytic converter off of your car. You go into a restaurant or a shop and you come out and someone has taken the catalytic converter off your car, which is a key part to muffling sound, and they do it for the precious metals in that piece. So that’s becoming very common here again. It’s happened for years, but it’s becoming much more intense Because of the prices of precious metals.
EB: Yeah, unauthorized recycling. We can full circle Tony Nash and Zimmer Islam in Texas and Bangladesh, respectively. Thanks to you both and thanks to you all for listening. This has been business matters as my name’s Ed Butler. Take care. Bye.
As a start, we looked at the Friday’s trading session and what it means. Is this a bullish market?
We’ve made a few recommendations over the past couple of months. We hope you’ve been paying attention specially on $IPI (Intrepit Potash) and $NTR (Nutrien).
We’ve talked about the tumbling lumber markets in recent weeks. What are Sam and Albert’s current thinking on lumber as we’re looking at $LB lumber futures. Sam talked about housing last month. We looked at $XHB, the home builders ETF. How about the rates and housing? We’ve seen that homebuilders are getting hit with expected rate rises. What is the impact of this on the mortgage market, housing inventory, etc?
Shanghai has been closed for a few weeks now and the largest port in the world won’t open for about another week. How can the second largest economy continue to close when the West has already accepted Covid as endemic? How can manufacturers rely on China as a manufacturing center if they’re unreliable?
For the week ahead, we talked about the earnings season, their portfolios, and Albert talked about Chinese equities for months, etc. Is now the time to look at KWEB, which he discussed for some time?
We’ve got CPI out on Tuesday and is expected at around 7.9% and Retail sales on Friday, which is expected at around 0.3%. Inflation seems unstoppable and consumers seem to be getting tired of spending. Sam explains on this.
Key themes from last week
Friday trading session
Don’t say we didn’t warn you
Rates and housing (Tuna & Caviar)
China’s shutdown
Key themes for the Week Ahead
Earnings season expectations
Near-term equity portfolios
CPI (Tuesday), expected 7.9%
This is the 14th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
TN: Hi, guys, and welcome to The Week Ahead. My name is Tony Nash. I’ve got Albert Marco and Sam Rines with us. Tracy is not able to join us today. Before we get started, if you don’t mind, could you please like and subscribe. That would help us out. And we’ll let you know every time a new episode is up and running.
This past week we saw a lot, but I think the most interesting thing or one of the most recent interesting things is Friday’s trading. We’re going to start talking about the market action on Friday, and then we’re going to get into a couple of things that we told you about trades that if you were paying attention, you would have seen. We’re actually going to go into rates and housing, and Sam’s going to talk a little bit about tuna and Caviar, that discussion from the Fed speech earlier this week. And then we’re going to talk about China’s shutdown, which seems to be getting worse by the hour. So first let’s get into the Friday trading session, guys. What are some of the things you saw on Friday?
AM: Well, from my perspective, the market is acting like crypto. I mean, we’re seeing interday moves on some of these equities, like 5% up and down. It’s a little bit silly. And you wonder if it’s like light volume, if it’s market manipulation by the Fed. It’s just uncanny. I’ve never seen anything like this before. And obviously the market is weak and we’ve talked about black clouds coming over the market and what’s going on. But I don’t see anything any catalyst that would say that this is the bullish market at all. So we’re waiting for multiple numbers of CPI, retail and whatnot. But for me, it’s just like everybody is on pause waiting to see which way this market goes before they take action.
TN: So a couple of weeks ago, we saw a lot of money move into equities. Right? So that money moved in. It’s just parking and waiting. Is that what’s happening?
AM: Yeah, I assume so. The Fed, as it just ups the rates, forces more money to move into the US market, which is actually a brilliant move. You know, this is what we’re seeing. A lot of money here, not knowing what to do at the moment.
SR: To Albert’s point, there’s a lot of money that’s moved in here, but it’s moved into some pretty passive areas that it’s just not moving much in terms of the overall market. You look at fixed income, right? Lots of money moving in there, short into the curb, et cetera, et cetera. I think that’s some of the more interesting stuff as well. But there’s also this weird thing going on where equal weight is outperforming the market cap weight. And has been for some time now, particularly over the last week. If you look yesterday, S&P closed in the red, but if you were equal weighted, close green and it closed green on a non trivial basis, and it was 35 basis points, something like that.
That deviation between market that was led by predominantly tech and only tech, to a market that’s led by other sectors in general is something I think under the surface that paying attention to it can be something that at least can make some money in the near term.
TN: Including Crypto Walmart, which we’ve seen over the past week as well. So we’ll talk about retail later in the show.
Okay. So we had as a group talked about some calls over the past couple of months. Some of those were calls earlier, but let’s get into those just to walk through. Albert, you and Tracy had talked about Intrepid Potash. She talked about Nutrien. We’ve got those on the screen right now. Can you walk us through those and kind of what you’re thinking was on those and what’s happened? What do you expect for those to happen in the near term?
AM: Well, speaking about IPI, Intrepit. It’s like a leveraged ETF in the fertilizer market. That thing swings 5-10, 11% in a week, no problem. That call was basically on the premise that the Ukraine war is going to go on. Russia is cutting off the fertilizer supply. Belarus has a big fertilizer supply. OCP in Morocco has shifted from actual fertilizers to more like phosphate batteries for EVs.
So it only made sense that besides Mosaic, which is the 800 pound gorilla, IPI and Nutrien were just the logical choices for investments.
TN: And is there room to run on fertilizers like there was a target put on Nutrient by one of the banks of like 126 or something? Do you think we could keep running on those trades?
AM: We can, right? Certainly we can. It just really depends on what goes on with the Russians and whatnot. My only risk for running too far is that the Dixie could go to 105, 110 and then we have significant problems across the market, not just fertilizer prices.
TN: Okay. So even if dollar does go to 110, we’re planting now in the US, right. And now and for the next couple of months. And the fertilizer demand is right now and it has been for the past couple of months. But it’s especially right now, is all of that, say planting demand, is that all priced in already, or do you feel like some of that is to come?
AM: I think it’s pretty much priced in. And let’s just be careful because some of the farms that are planting crops are using nitrogen and also fertilizer derived from nat gas. So it really depends on which way the farming community wants to go, what they see the most profitable crops.
TN: Okay, great. That’s good to know. We also talked about lumber, as I remember a conversation probably three or four weeks ago where I think, Sam, you brought up lumber and how lumber was coming off. Can you walk us through that trade, as we have it on the screen?
SR: Yeah, sure. I mean, it’s a Fed trade, right. It’s a Fed tightening quickly, mortgage rates going up and housing demand coming down. The idea that a Fed going this quickly and having the market priced in, there’s a difference. Right. The Fed has only moved 25 basis points.
TN: Right.
SR: The market has done the rest of the tightening for it across the curve. It’s been pretty spectacular. Housing, housing related stocks, those in general, are going to be the first thing that the Fed affects and they’re going to be the first thing that the Fed affects on the margin very quickly. And you’ve seen mortgage rates go to five plus percent.
TN: Sure. Before we get on to housing, I just have a couple of questions about lumber and other commodities. So the downside we’ve seen come in lumber over the past week or so. Do we expect that to come to other commodities as well? I mean, things like weed and corn, there’s still pressure upward pressure on those. But do we expect other commodities to react the way lumber has?
SR: Oh, no, I would not expect the foodstuffs to react in anywhere near the same manner as lumber. Right. Lumber is a fairly… Lumber, you cut it up, you put it in inventory, you sell it, and then you use it for something.
TN: Right.
SR: It doesn’t last forever in good condition either.
TN: Great. Okay, good. Thank you. Now moving on to home builders, which is where you are going. You also talked about XHB, I think two or three weeks ago, and we’re flashing some warning signs about that. We’ve seen obviously rates rise. I was speaking to a mortgage broker earlier this week. He’s doing mortgage at almost 6% right now and expects them to go up kind of close to 8%.
We’re starting to see the resurgence of ARMs. People are already getting back into adjustable rate mortgages because 5.99% is high. Just as a bit of background, less than 10% of US mortgages over the past few years have been adjustable rates. So can you talk us through XHB? And maybe you had mentioned earlier kind of Home Depot and some of the other home makers. Can you talk us through what kind of… Home Depot was a leading indicator on that? Is that fair to say?
SR: It’s fair to say Home Depot and Lowe’s this kind of ties into the lumber conversation. Home Depot and Lowe’s were two of the best at ordering and trying to actually keep inventory on the shelves, even when during the first tremendous spike in lumber. Right. So they kept a lot of lumber on the shelves. They currently have a lot of lumber inventory on the shelves. And it’s part of the reason that you’re seeing what could be described as almost an over inventory of lumber, not just at those two entities, but across the board, because everybody had to buy lumber in order to keep it in stock.
So, yeah, Home Depot and Lowe’s are the tip of the spear in terms of both home building and in terms of home remodeling. Those are both fairly significant drivers of the business there. There’s a little bit of weekend contractor type deals, but very little.
So overall, I would say they are a leading indicator and they have not been acting very well. But when you have mortgage rates to your point at 6%, that creates a problem for the marginal buyer. It’s not a problem for somebody who owns a home. Right. You have your mortgage rate locked in, et cetera, et cetera. It’s not going to destroy you. It might set off being able to put a new deck and redo a pool or something like that. But it’s not going to hurt you in any meaningful way.
TN: Right.
SR: It does hurt the marginal buyer. It hurts the first time buyer, et cetera. So you begin to have slower turns in housing and you begin to have problems with where does that incremental inventory of homes go? And that’s the real problem with higher invetories.
TN: Right. Before we move on to officially talking about rates and housing, I’ll share a story about a friend who is building a house and their lumber broker who should be able to get the best pricing actually has worse pricing right now than Home Depot. Okay. So they can actually go to Home Depot and get better pricing than their lumber broker. And that’s how messed up the lumber market is right now. They’re arbitraging their lumber broker versus retail any given week in their bulk buying to make sure that they can get their house built. So that market both on the lumber side and on the housing side is just a mess.
So let’s officially go to housing and rates. We’ve done a lot of the discussion, but there was a CNBC story about rising mortgage rates are causing more home sellers to lower their asking prices.
And Sam, you talked about that marginal buyer, which is great, and that new buyer. When I talk to people who are doing mortgages, they tell me that even with the rate rises we’ve seen over the past couple of weeks, there is still not a lot of inventory on the market. That’s a big issue. And they’re not seeing a fall in demand for new houses. So is this kind of a last minute rush for people to get a house before rates rise even more? Is that plausible?
SR: There’s some plausibility to that. Yeah, 100%. The other thing is that we’re in Texas. Right. The demand for housing in Texas, the demand for housing in Florida does not tend to be, I would say, as tied to mortgage rates as everywhere else. The rest of the country is much more sensitive to what’s going on. Texas and Florida and a couple of other spots simply have too much inbound demand from higher priced areas. So California, New York, et cetera. There’s still an arbitrage when you sell a place in California or sell a place in New York and move to Texas, Florida, some of the Sunbelt States.
So it’s tough to take Texas as an example, particularly Houston. We’re actually the fourth largest city in the country, and yet we do not get counted in the S&P Schiller because of how different the housing market is here. Dallas gets kind of for whatever reason, but Houston does not.
TN: We’re not jealous at all about that.
SR: No, we’re not.
AM: Go ahead, Sam. Sorry.
SR: But just to wrap that up, I do think that there’s a nuance to Florida and Texas that should almost be ignored. When I look at the data, I’ll be taking out the Southeast region just because it’s one of those that is a little special at the moment.
AM: Yeah, that’s a key point that I always made is like, because of the migration patterns in blue to red States, things are just really wacky. Florida and Texas, Arizona will be red hot. Meanwhile, Seattle, Chicago, parts of New York are just dead spots at the moment. So until that all gets weeded out, people stop moving. Then we’ll actually see the housing market starting to cool off.
TN: Right? Yeah. I was just up in Dallas yesterday, and things are just as hot up there. And the immigration from the coast to Dallas, especially around financial services and tech, it’s just mind blowing. It is not stopping. It has been going on for probably five years, and it’s just not stopping. Those counties just north of Dallas are exploding and they continue to explode.
Okay, so our next topic is China and China’s slowdown. Shanghai has been closed for a couple of weeks with kind of a renewed round of Covid. And obviously the largest Port in the world, which is in Shanghai, is closed. And that kind of exacerbates our supply chain issues, especially around manufactured goods that we’ve been seeing globally. We’ve seen overnight that. Well, not just overnight, but over the last, say, five days. Food has become really scarce in Shanghai. We’ve seen people on social media talking about how it’s difficult to get food. We’ve started to see little mini protests around Shanghai, around food. And things are seem to be becoming pretty dire.
Overnight, we saw that parts of Guangzhou that the government is considering closing, parts of Guangzhou, which Guangzhou is the world’s second largest port. So the two largest ports in the world, there is a potential that those are closed. There is also gossip about parts of Beijing being closed as well. So I’m curious, what do you guys think about that? I can talk about China for days, but I’m curious, kind of, what alarm bells does that raise for you? Not just for China, but globally.
AM: Well, Tony, you recall, you Balding, and I discussing China’s attempt to attack Taiwan and what had happened. And I had pointed out that closing those ports would cause food insecurity and here we are. Although it’s not a Taiwan invasion, it’s a zero Covid policy that shut down the ports and now we have food stress in China causing all sorts of problems.
Most China observers, especially yourself, know that Shanghai has always been the epicenter of uprising for the CCP. It’s a problem for them. They’ve always tried to wash it. Maybe that’s why they’ve come down hard on Zero Covid Policy. That’s something that I’d have to ask you. But from there, this was very predictable. I mean, you shut down ports, China has a food security problem.
TN: On a good day, China has a food security problem. It is an issue that the Chinese authorities worry about day in, day out, not just when there’s a pandemic. Okay. So one of the things that I was talking to some people about yesterday is why is China closing down? Why are they closing down these big cities? There’s a lot of gossip. You can find a lot of theories around social media saying there’s some sinister plan, honestly and for people that don’t know. I’ve done work with Chinese officials over years. And the economic planners I was seconded to economic planner for almost two years. I believe that they’re closing because they’re worried about how the China virus looks, meaning they don’t want Covid to be seen as the China virus. And they worry about the world’s perception if there’s another outbreak that comes from China.
And so I think the leadership believes that they have to be seen to be disproportionately countering COVID so that there isn’t more wording and dialogue about the kind of, “China virus.” And so, again, I don’t think there’s something sinister going on. There’s a lot of gossip about China intentionally trying to stop supply chains to bring the west to its knees and all the stuff. I don’t believe that at all. I think it’s real sensitivity to how they look globally.
Of course, there’s the public health issues domestically. That goes without saying. But I think a big part of it is how do they look globally.
AM: Yeah, but doesn’t shutting down these ports is going to cause even a bigger spike in inflation within China and actually globally?
TN: Oh, absolutely. This is the one thing that I think they didn’t plan on is they’re about to embark on a whole lot of fiscal, a whole lot of monetary stimulants because they have major government meetings in November of this year. So they absolutely cannot go into recession.
But here’s what I have been thinking about. Okay. We’re looking at a Russia-Ukraine war that could potentially bring down Russia and destabilize Russia domestically. We’re now over the past couple of weeks, looking at a China that is starting to self destruct domestically. And I don’t know of anybody who had the domestic issues of both China and Russia as systemic risks in 2022. These things are just coming out of nowhere. And those two risks can be destabilizing for the whole world. And I’ve said for some time, Western governments have to sit the Chinese leadership down and say, look, you guys are systemically important globally. You need to get your act together around COVID, and you have to normalize your economy because it’s hurting everybody.
AM: Great points. Now, going back to Guangdong, there are some really elite families in China out of that area, really wealthy ones, that actually basically gives Xi the support he needs in the CCP. If he loses those families, there’s real trouble for Xi going forward.
TN: I think there’s trouble for him anyway. I think he is not a one man show. Contrary to the popular Western opinion, Xi Jinping is not a one man show. He is not a single Emperor, kind of claiming things from on high. There is a group of people who run China. It’s just too big for a single individual to run.
So I think Xi has been, I wouldn’t necessarily say on thin ice, but I think things have been risky for him for some time. And as you say, it’s pretty delicate for him right now. And if he doesn’t handle this deftly, I think, again, there could be some real destabilizing factors in China. So this is something again, they didn’t plan for. They were talking about major infrastructure stimulus. They were talking about monetary stimulus, getting ready for this big party in November to nominate Xi for more power and all this other stuff. But it’s possible that these events could really hurt him and really hurt his relationships, meaning the key people around him and then the other factions.
Because as much as people say that China is a one party state, sure, it’s a one party state. But there are factions within that one party. And it should be alarming for China and destabilizing China should be alarming for other people around the world.
AM: Yeah. Same thing as Putin. Like their factions behind them that keep them in power. Same thing as Xi. Most autocratic rulers have a circle of trust behind them that keep them in there. If Xi falls and China starts to, I don’t want to say crumble, but at least wobble, if we think we have serious supply chain issues now, wait till that happens.
TN: Oh, yeah. So Russia is important on energy and a couple of other things, but it’s not globally systemically important on a lot. Okay. I would say maybe it’s regionally important, especially to Europe, but China is globally important. And if they can’t figure this out, it will destabilize everybody.
And so I think Western governments need to not lecture to China, but they need to go forward with real concern about China. How can we help you guys out? Right? How can we help you out? Can we get you vaccine? Can we get you support? Is there anything logistically we can do? That is a way that Western governments can come to the legitimate aid of China. They’ll act like they have it all together, but they don’t. It’s obvious. We see it every day on social media. They don’t.
So Western governments really need to offer genuine aid to China in terms of intelligence, in terms of vaccines, in terms of capabilities, and so on and so forth.
Good. Anything else on that?
AM: No, we covered that.
TN: Okay. Looking at the week ahead. Guys, we’ve got earnings season coming up. Can you talk us through your expectations for earnings season?
SR: Sure. I’ll jump in here quickly. I think there’s a few things to watch. One, the consumer sentiment has been dismal. Right. For the last six months. It’s falling off a cliff. Where the US University of Michigan survey, well below where it was at peak of Covid. But we haven’t necessarily seen retail sales. We haven’t seen corporate earnings and corporate announcements follow that sentiment lower whatsoever.
For anybody paying attention this past week, you had Costco with absolute blow out numbers in terms of its same store sales. Take out gasoline, take out anything, and you still have 7% foot traffic. That was stunning. And that’s not a cheap place to shop.
TN: Right.
SR: So that’s indicative of the higher end consumer that’s still holding in there, at least fairly well through March. That’s pretty important. So then there was Carnival with its best week ever in terms of bookings. Those two things are pretty important when it comes to what is the consumer actually doing versus what is the consumer actually saying, which I think is very interesting.
This week we’ll have Delta Airlines. It’ll be interesting to kind of listen to them and see what their bookings have looked like, see what their outlook is for the summer. And then I’ll be paying really close attention to the consumer side of the earnings reports, not necessarily as much the banks. I don’t really care what Jamie Dimon has to say about Fed policy, but I will say…
TN: I think she do.
SR: Nobody does. But I’ll say the quiet thing out loud. But I will be paying very close attention to what the earnings reports are saying about the consumer, because the consumer drives not just the US economy, but the global economy generally, both on the goods side, services side and really trying to parse through what’s happening, not what the US consumer keeps telling us is happening.
TN: Go ahead.
AM: Sam, really quick. How much of these earnings because I’m a little bit suspicious of how much is it inflationary, prices of everything are higher and remnants of stimulus PvP, whatever the people have been getting for the past year. How much is that calculated?
SR: Yes, which is one of the reasons why it’s a great point, one of the reasons why I pointed out Costco. Costco much less on the stimulus side, much less on the saving side, much more on the high-end kind of consistent consumer. And with foot traffic up 7%, inflation was I think it was about 8%, give or take. So they’re passing on the inflation and they’re still getting the foot traffic. So I think that’s an important one.
On the CCL side, it was after the bookings were after the significant stimulus had already run out or run off. You just weren’t getting checks. I think that was also an indication that maybe there’s a shift from the goods to the services side. The one thing that was somewhat disconcerting, if you’re paying attention to the higher end consumer, was Restoration Hardware. They ran down their book to about 200 million in backlog and don’t really appear to be bullish about this year. They guided well below what some were expecting. I think we’re going to hear a lot more about that, partially because they just can’t get enough inventory in time and they’re kind of in trouble on that front.
AM: Yeah.
SR: To your point, it’s a lot of inflation, but some of these guys are seeing some pretty good traffic, too.
AM: Yeah, actually, funny, you mentioned Restoration Hardware because that was one of the things I was looking at specifically for the housing market, like who’s buying a $30,000 at the moment right now. You know what I mean? It’s just silly.
TN: Yeah, that is silly. Okay, great. Thanks for that. And I’m interested to see how the earnings from Q1 also translate to Q2. I’m expecting a real turn in Q2, and I’m wondering how much that is on investors minds as they look at Q1 earnings.
Albert, as we move into the next point around kind of short term or near term equity portfolios. You’ve talked about KWEB for some time, and I’d like you to, if you don’t mind talking about KWEB a little bit, but also if you and Sam can help us understand what is your thinking right now on your term portfolio.
AM: I mean, KWEB is one of my favorite little stocks because it’s a China technology index and it’s been beaten down to a pulp by the Fed. They have absolutely annihilated not just China, but pretty much all foreign equities. And from my perspective, you’re looking at China stimulating in the fall of the shore of Xi. So it’s like it’s a no brainer to me. I think KWEB at 28 is a fantastic deal. Start piling into that.
One of my other ones I was looking at was FXI, which is basically all the China’s big wig companies. So that’s another one I was looking at right now. In terms of the US equities and portfolios, I mean, we’re so overvalued right now. Where do you put your money into? One of my favorite stocks was TWY a tightened tire. It makes 85% of the world’s agriculture tires. Right. I mean, this thing ran up from $1.45 to $14 at the moment. You know what I mean?
How do you put more money into equities at this stage without some sort of correction or something happening with the Fed to show us which way they’re going to go? Are they going to go 50 basis points in the next meeting and then another 50 and another 50, or they’re just going to use a long bond to actually what Sam said earlier and I forgot to bring it out is they’re using the long bonds also to kill the market. So it’s just like,what do you do?
TN: Yeah. The change to valuations we’ll see over the next three months seem to be really astounding.
AM: They’re just silly. Everything is so inflated at the moment. I can’t in good conscience, say get into this stock or get into that stock, because I know how is it going to run right?
TN: Exactly. Sam, anything to add on that?
SR: I love Albert’s point on KWEB. Think about what’s built into the risk there. You have the risk of the SEC delistings. You have the risk that appears to, at least on the margin, be waning. You have the threat of sanctions on China from them helping Russia. You have a lack of stimulus. You have shutdowns. There’s a lot weighing on that index on top of Fed, et cetera. There’s a lot weighing there on that. And you begin to have some of these calls, the geopolitical onion risks begin to be pulled back a little bit. And that to me is a spectacular risk reward in a market that is generally pretty low on the reward.
TN: Okay.
AM: I had one of my biggest clients from the golden guy. I mean, it’s gold and KWEB is what he’s seeing right now. That’s the only thing he wants to even touch, which is fascinating.
TN: Yes, I can see that. Okay. Next, this week ahead, we’ve got CPI out on Tuesday, which is expected to be about 7.9%. Sorry. And then retail sales on Friday, which is 0.3%. So it doesn’t feel like inflation is abating. But, Sam, you talked about, say, Restoration Hardware and other folks earlier. What concerns you guys have about inflation eating into retail sales, do we expect serious difficulty with retail going forward?
SR: Probably not this month. We’ve going to get the release and it’s going to be for March. And I haven’t seen what I would describe as a poor number coming from any of the major retail facing guys for March. I don’t think that number is going to be distressing at all. I think it’s much more of a . May-June story in terms of the economic numbers lag with a hard L. That’s somewhat problematic.
So I would say you’re not going to see the bad official numbers for a month or two. And on the CPI front, I’ll just throw this out there. And Albert can make fun of me for it, but I don’t really care where the inflation readings come in as long as it’s above 5% the Fed still going and it’s still going with its previous plan, and it really doesn’t care, quite frankly.
TN: That’s good to know.
SR: I just think it’s one of those it’s going to be a no. It’s going to be a no reaction type deal. Unless you get a huge break, then you might get a little bit of a come down on twos through sevens or something. But that’s about it.
AM: Yeah. I mean, as much as I want to make fun of Sam on that one. Yeah. Nobody cares about the inflation. Nobody cares about the inflation number right now until the election season starts really ramping up in about June, July. That’s when I agree with Sam with the retail sales are probably crater or starting to lag significantly in May and June. But yeah, prefer inflation. It’s just like everyone is expecting a 7.9 to eight point whatever, you know, so it won’t be a surprise.
TN: Great. Okay, guys, thank you very much for this. This is really helpful and I appreciate it. Have a great week ahead.
Tony Nash joins the BBC Business Matters podcast for a discussion around what’s happening in the world right now: Malaysia’s working class, Tesla’s new branch in Germany, Biden’s recent visit to Europe, lifting of tariffs imposed by the Trump administration, energy crises in Europe, and so much more.
ST: Tony Nash, economist in Texas, CEO of Complete Intelligence and host of The Week Ahead, a weekly YouTube show on markets and geopolitics. Hello. Good evening, Tony.
TN: Hi. Good evening. Good morning.
ST: Tony, let me bring you in here on this one as well. I mean, you may be living in Austin, Texas, at the moment, but is there anything you want to pick up on because you grew up in this area?
TN: Sure. Yeah. I think what Jessica says about the migrant labor is a key issue because it prices a lot of Malaysians out of working class jobs. So if those minimum wages apply also to migrant workers, then it presents a fairer playing field for Malaysians. Without that, it’s a labor arbitrage and it’s a domestic labor arbitrage. So I think the Minister has a tough job ahead of him in that respect. I do think, though, as you mentioned in your interview, it’s a good time for energy. And I think if Malaysia can swing the current energy prices into investment and technology, I think they could look at some seriously interesting opportunities.
ST: Yeah, indeed. As he said, he was being helped by the price of oil at the moment. All right, Tony and Jessica, for the moment. Thank you both very much. Tony, let me come to you on this one. You’re based there in Austin, in Texas. So is Tesla. Now, when are they opening their big factory there?
TN: First, I want to say I love the statement that Germany is not known for risk affinity. I thought that was a highlight, but the Tesla factory in Austin started production in December of 21, and they have a grand opening on April 6 of this year. So they’ll start rolling cars off the factory line. It should be in April.
ST: Okay.
TN: So it’s a hugely optimistic statement by Tesla to do all of these openings. It’s fantastic.
ST: Yeah. We have to wait and see where the plans are for the next one then. Tony Nash in Austin, Texas, what do you make of this? How is this going to go down with American producers?
TN: I think when these restrictions were put in by the Trump administration, the sense that I always got was that the UK got caught up within some of its Brexit and immediately post Brexit issues. My understanding of that time, that era was that the tariffs were really focused on countering subsidies and nontariff barriers. And the UK steel industry is not as reliant on subsidies and nontariff barriers as the European steel industry is. Of course, there are some, but my understanding was that that wasn’t as big of an issue for UK steel. So I was always confused why the UK got caught up in this. So since it’s out, I don’t think specifically UK steel is the issue. I think Chinese steel is the bigger issue by American producers, and the dumping of Chinese steel on global markets is really the main focus.
ST: Just as a quick aside, the other items that got caught up in this. I don’t know whether they’re sort of like a little footnote and almost like an aside to this, the jeans, the whiskey and the Harley Davidsons.
TN: Look, the UK is suffering on that side of the deal, right? I mean, if you can’t get American. I’m sorry. I’m just kidding. So anyway, once it’s done, all that stuff will go through, which is great. So a little bit of bourbon next time I visit London would be great.
ST: Oh, no, we need to take you to enjoy some Scottish whisky, I’m sure. But that is the other question that’s always in the background now of this one now coming through to the forefront is now this is out the way. Could there be talks again, restarted again on that sort of full scale free trade deal with the US? Do you see that as happening anytime soon?
TN: I think Americans would welcome it. Absolutely. I think there is a warm spot in many Americans heart for the UK, and I think Americans would absolutely welcome it. There would be almost zero opposition to it.
ST: All right, Tony, for the moment. Thank you. Tony. Let me bring you in. Now, President Biden is traveling to Europe in the next few hours. He’s starting with a NATO meeting, also meeting with EU, European Union and G7 leaders. They’re now to Poland for discussions about the humanitarian response. What do you expect from this felt that this is more of a signal that he’s actually there. He’s made the trip or something more significant?
TN: Well, I think he has an opportunity to do something very significant when he speaks to the European Council. The EU right now is developing a defense plan and putting together plans for hundreds of billions of euros worth of spending on defense. And if Biden were to endorse that at the European Council, it would send the message that the US is very supportive. Unfortunately, within US government, within State and Department of Defense, there are career bureaucrats who are opposed to Europe defending itself. So if Biden were to make a very clear statement at the European Council that he supports Europe putting this debt package together to put its own very strong defense together, it could be a significant trip.
ST: How is this playing back at home for him? I was looking at his approval ratings earlier. He’s a new low of 40% as according to a poll conducted or in the last couple of days. Is that as a result of what he is saying or what he is doing at the moment or anything else?
TN: The biggest thing that’s dragging him down right now is inflation. And the White House has really tried to say that inflation started when Russia invaded Ukraine, and Americans know that it started much earlier. And so Americans have been very skeptical since the White House has tried to say that inflation lays at the feet of Russia. They’re very skeptical. His polling has really declined over the past, say, two months, partly because Americans feel like they’re being misled on that, and it hits people’s petrol tanks and it hits their pocketbooks and everything else. That’s the biggest issue that can make him unpopular.
ST: But I mean, just staying, though, with his stance on Russia and Ukraine, how is that particularly playing out at home? Would people like him to get more involved or less involved? And is it purely just domestic matters that they have on their minds at the moment?
TN: I think people see the news and hear the news on it and kind of the headline, Putin is a bad guy. It’s hard to disagree with that. But I think many Americans that I speak it to and many who I see say in social media and other forums, they just don’t want to get directly involved. Americans are happy for Europe and happy to support Europe to solve this problem. But Americans generally, from what I can tell, just don’t want to get involved. So we’re happy to send aid, we’re happy to send materials and so on and so forth. But most of the Americans, at least that I talk to, maybe I’m only talking to a minority of people, but they really don’t want to see American personnel on the ground there.
ST: Yeah. There are suggestions that he will announce measures to end European reliance on Russian energy, or at least some sort of plan or ideas or opinions on that. What could he possibly suggest? What could he put on the table, throw on the table for that?
TN: Texas where I’m living, we have a lot of gas in Texas, a lot. We flare a lot of it, which means we burn it at the well, that will require many more vessels to transport liquefied natural gas, sure. But we’re very happy in Texas to support the energy to Europe. So I would think that part of a plan has to include US energy going to Europe. It may not be all of it, but it surely should be part of it.
ST: Not just the tankers, but obviously the ports that are able to take that on board and then the infrastructure that would be needed there. Tony, it’s cost of living that’s dominating the headlines for you, isn’t it?
TN: It is, yeah. I’m really curious to see what Jessica is going to say after that. So we live in Texas for the energy capital of at least the Western Hemisphere, if not the world. So seeing, say, WTI and Brent at the prices they are is really helpful to my neighbors. It’s really helpful to the state government here and the taxes that we raise. Unfortunately, there has also been a massive influx of people into Texas over the past year or two years. So I have a friend who’s selling a house right now in Houston, and the price has risen by 30% in the past six months or something like that. So real estate inflation here. It’s not just petrol or gasoline, it’s not just energy, it’s real estate. It’s everything. As I said, we’re seeing an influx of people from outside California, New York, other places coming into Texas and they’re used to paying a lot more for things. So people moving here will find a house online without seeing it and buy it. And the prices are relatively cheap to what they’re paying in wherever they’re from. So Texans are facing what people in Idaho and Oregon and some of these other States where Californians have moved in the past.
We’re starting to face some of those issues and the cost of living is becoming a real issue here.
ST: Totally cutting out people who now can no longer afford to buy them where they’ve been born and grown up. Tony Nash. Joining us from Austin, Texas and you, wherever you are in the world, listening to us today on Business Matters. Thank you very much for your company. This is Business Matters here on the BBC. See World Service. Until next time, thanks for listening. Bye.
What should we expect from the FOMC meeting minutes in the US and also the latest CPI and PPI figures from China? Will oil prices continue to rally or slump with the latest development near Ukraine? And will it be another IPO year in India this year? Tony Nash, CEO of Complete Intelligence tells us more.
SM: BFM 89 Nine. Good morning. It’s Seven five in the morning on Thursday, the 17 February. You’re listening to the morning run with Shazana Mokhtar, Philip See and Tan Chen Li but first, let’s recap how global markets closed yesterday in US.
TCL: Dow was down zero 2%. S&P 500 was up zero 2%. Nasdaq down. .1% Asian markets Niki up 2.2%. Hong Kong’s up 1.5%. Shanghai Composite up 6%. Sti up 5%. FBI KLCI up zero 2%.
SM: All right, so all green and Asia, but some red coming in from the US markets. For more on where markets are headed, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. Can we start with just the FOMC minutes that came out overnight? What did you make of them? And do you think this raises the possibility of a 50 bits rate hike in March?
TN: Yeah, I don’t think it raises the likelihood of a 50 basis point hike in March. I think it will likely be a measured approach. We have a pretty complicated central bank system in the US right now. We’re still easing until March, meaning the Fed is still buying securities and stuff until March. That doesn’t stop until March. So we need to start quantitative tightening, which means we sell off some of those assets because there’s too much currency in circulation and then raising interest rates will unlikely to be 50 basis points. The thing to remember is the US hikes in bands. So zero to 25 basis points, 25 to 50 basis points. So even if they come out saying it’s a 25 to 50 basis point hike, it doesn’t mean it goes straight to 50 basis points. They could hike at 32 basis points. And so it’s likely some sort of calibration like that that will happen.
PS: So then if you look at it, maybe not on this specific occurrence, but cumulatively, in 2022, what was originally expected to be 75 basis points for a whole of 22 people are expecting it to go as much as 150 basis points. Now, do you agree with that assessment?
TN: Yeah, I’m not sure that 150 is correct. I think it’ll be north of 75 and we expect it to be around 100. So around a 1% hike by the end of the year. Keep in mind that the Fed does need to tighten. That’s a reality because of inflation. But we also need to remember that it’s an election year in the US, and the party in power never wants the Fed to be too aggressive in an election year. So the Fed will make motions, but they’ll probably also let it run a little bit hot because they don’t want to upset the politicians in power regardless of party.
TCL: Ahead of the Russian following through and announced troop withdrawal near Ukraine.
West Texas crude has up to around $90 a barrel. Even so, the oil market remains tight. How do you think this will play out in the weeks to come?
TN: Yes, we expect crew to really trade sideways for the next several weeks, and we’ve been saying this for about the last two weeks, and so it’s kind of proving to be that. And so it will be volatile, but it will trade sideways. The thing to remember is that crude typically rallies during tightening cycles. So we’ll likely see crude rise a bit from here. There are certain people who say it’ll be 120 or $150. I don’t necessarily subscribe to that. There has to be a certain things aligned for that to happen. But there is underlying medium and long term strength for crude oil because of the underinvestment that we’ve had over the last decade and well under investment in exploration and in production capacity. So we need an investment cycle to have the capacity to reduce long term prices.
PS: Yeah. That’s why I’m wondering whether she’ll come into the picture. Right.
As you say, there is this medium long term upside potential still happening. There’s still that pent up demand won’t shall come into the picture then?
TN: It should yeah. I live in Texas, so I love Shell, but, yeah, it should come into the picture and it should help to reduce some of those prices over time. Absolutely.
SM: Tony, if I could get your thoughts on where you think supply will increase. I think Iran is coming up in the headlines again. There seems to be discussions on the nuclear deal. How do you see that playing out?
TN: I think Iran is already preparing to start exporting. So I think Iran is already exporting something like a million barrels per day, whether it’s official or unofficial. And they put $115,000,000,000 into their next fiscal year budget from oil revenues. And they’re already marketing, especially around Asia. They’ve been in South Korea recently and other places. So Iran will export oil. I think whether or not the nuclear agreement is agreed.
I think there is a skepticism that the US will enforce any embargoes.
TCL: Moving to China after last month’s ten basis points cut. The PBOC has refrained from cutting interest rate this week on the back of the slowing inflation in China. Should PPOC have adopted a more aggressive approach, you think?
TN: No. I think they need to signal I think it’s a fine path. You and I, we’ve discussed this several times since probably Q three of 2021, that I’ve expected the PVoC to start loosening in late Q one of 22. So I think the PVoC is actually listening to BFM, which is pretty awesome. A big part of this is really to weaken CNY, so it’s to stimulate the Chinese economy domestically, but it’s also to weaken the currency because they’ve had a really elevated, really strong currency over the past year and a half. And that’s partly been to fight inflation and commodity prices. Now that a number of those commodity prices, not oil, of course, but some of those commodity prices have come down off of those very high levels. It’s time to weaken their currency, which will help their exports.
PS: Which comes back to the question about China being the world’s factory, I think breathing as far as relief when we saw factory gain, inflation ease a bit to about 9.1% in January. What’s your take likely scenario of PPI moderating?
TN: That’s a good sign. So PPI peaked at 13% and so that is a good sign that the PPOC can start to moderate in ease. So I think aggressive moderation could potentially contribute to PPI. But if they’re moving in that direction gradually, as PPI eases, they’ll start becoming more aggressive about their intervention. So China is also entering potentially a slow period for the economy. So PPI will likely flow as a result of that. But as China had an appreciated CNY, they also accumulated a lot of things like industrial metals like copper and so on and so forth. So it’s not as if they need to continue to buy this stuff in huge quantities. They have a lot of storage of those commodities right now.
SM: Tony, let’s have a conversation with a quick look at what’s taking place in India in markets. India’s new stock listings are losing their edge. I think they’ve been calamitous IPO of PTM, Ecommerce, Domato and Nica. I mean, what do you make of this? Are the IPOs in India all hype and hoopla, but no substance?
TN: Yeah, I think these particularly have been a lot of hype. I think they’ve kind of peaked too early. Firms like tomato. I think every middle class urban Indian has used tomato. So it’s not as if they don’t have market penetration, but they’re really burning cash. And I think investors at this point in the cycle are already rotating out of technology. So they’re wary of firms that either don’t make money or burn cash or are very expensive in a share price perspective. So it’s the rotation out of tech. These companies need to show profitability and they need to have a more appropriate valuation. So I don’t think there’s necessarily Indian IPOs are out of favor. I think it’s really value with these companies.
SM: Tony, thanks very much for speaking to us today. That was Tony Nash, CEO of Complete Intelligence, giving us his thoughts on some of the trends affecting US markets. Also some developments in China and India as well.
PS: Yeah, I think India has a long term potential, but I think this is a bit of aberration, I believe. I think the IPOs that have come out have really been not stellar for sure. I think it’s causing a lot of people to rethink one of them being all your rooms, which is planning to IPO by saying that put on hold. So, yeah, let’s hope to see some long term gains in the future for Indian market.
TCL: I am quite curious to see and watch the US market, especially on the oil and also the inflation because has the inflation really peaked already or are we going to see higher numbers coming up in the next month inflation report? That’s something that’s unknown for now.
This is the second episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week. Among the topics: industrial metals, energy markets, natural gas, China’s flood of liquidity and property market, CNY, and bond market.
TN: Hi, everyone, and thanks for joining us for The Week Ahead. My name is Tony Nash. We’re with Tracy Shuchart, Nick Glinsman, and Albert Marko. To talk about the markets over this past week and what we’ve expect to see next week. Before we get started, please subscribe to our YouTube channel so you don’t miss any of the upcoming episodes.
So, guys, this week we saw kind of a whipsaw in equity and commodity markets with a slow start, but a lot of action mid week. And commodities seem to kind of extend gains until the end of the week. We saw bonds really wait until Friday to start taking off, but they took off quite a bit today. And part of that may have been on the back of the retail sales print that we saw. That was pretty disappointing. So, Tracy, do you want to kick us off a little bit with talking about commodity markets and energy?
TS: Sure. I mean, obviously, we’ve seen a big push in the oil market. Right, in WTI and Brent this week. We’re definitely a bit overbought. But that said, what I think is happening here is we’re seeing a shift from sort of growth to value. I think the markets are pricing in the fact that OMA crime is over. Right. And the Fed may raise rates. That’s putting pressure on growth and giving kind of a boost to the value market. And we’re kind of seeing a chase here a little bit in the oil markets.
As far as if we look at the natural gas markets, it’s been very volatile this week, not only in the US, but global markets. I think that will continue. And we saw a big push up on Wednesday, and then we saw a big pullback, but that was due to weather. But now we’re looking at this weekend, we’re having another cold front. And part of that reason was also because we discovered that Germany had less natural gas in storage than initially thought. So that market, I definitely think it’s going to continue to be very volatile. So try lightly in that market there’s.
TN: You mentioned the Germany supply side of the market, but what does supplies look like, say in the US and other parts of Europe? Are supplies normal? Are they low? What is that dynamic?
TS: Yeah, we’re pretty much normal in the US, and we’re set to in this year. We’re set to pretty much overtake the market as far as the export market is concerned. That would mean taking over Australia and Qatar because of the amount that we’re building out in the delivery system in Texas. But the supplies here are okay. The problem is within the United States is that the distribution is uneven.
So you’re talking about the Northeast, where you’re seeing local natural gas prices a lot higher there. Then you’re seeing, say, in Henry Hub, which is the natural gas product that trade that you’re trading.
TN: So I saw some just to get a little bit specific on this. I saw some news today about some potential brownouts in, say, New York or something because of this winter storm. How prevalent will that be? Maybe not just say, this weekend going next week, but for the rest of the winter. Are the supply problems that extreme?
TS: Yeah, I think you’re going to have a lot of problems in the Northeast. And I’ve been alluding to this over the last few months saying that they have decided not to go ahead with pipelines. They’ve shut pipelines. They kind of cut off their supply because they don’t really want to pursue that Avenue anymore.
However, it’s turning out to be a particularly cold winter, and that’s a lot of pressure on that market. And that’s why we’re seeing $11 natural gas prices up in that area as opposed to $4 in Henry Hub.
TN: Right. Meantime, Albert’s warm down in Florida, right.
AM: Yeah. Well, I wanted to ask Tracy what happens if we have an extended winter where the winter temperatures go into late March or early April.
TS: Then that’s extremely bullish. That’ll be extremely bullish for domestic supplies because domestic supplies will be in higher demand than they are normally seasonally, especially at a time where we’re a giant exporter right now.
We just came to save the day in Europe with 52 now cargo. So we’re exporting a lot if we have an expanded winter here. Supplies are unevenly distributed. We’re going to see I think we’ll see higher prices in out months that we normally see a pullback in those markets.
TN: Great. Texas, thanks you for those cargo, by the way. We really appreciate it. Okay. What about the broader commodity complex? What are we seeing on, say, industrial metals and precious metals?
TS: So obviously, those have been very bullish are going to continue to be bullish because they’re in deficit. As far as if we’re talking about battery metals and such, I think we’ll continue to see that we’re seeing a little bit in the platinum markets. We’re seeing some demand. I think there’s going to be bigger demand this year.
TN: So we’ll show some platinum on screen here so our viewers can see kind of where the platinum price is and where it’s expected to go.
TS: Yeah. So platinum demands expected to grow because of the automobile markets and because of Palladium is so high they can substitute platinum for that. But that may be capped for the rest of the year, and then we may continue to see higher prices going into 2023.
TN: Okay. So when you say that’s growing because of automotive, is this growth in ice ice vehicles. Okay. And is that happening because and I don’t mean these leading questions, but is that happening because the chip shortage is alleviating and we’re having more manufacturing in ice vehicles?
TS: I mean, that’s part of it. But platinum is used for catalytic inverters Palladium. And because of the fact that there’s platinum happens to be a lot less expensive. Right now. And also there’s more of it right now. So we’re seeing kind of demand pulled to the platinum industry. And I’ve kind of been worrying about this for the last couple of years that this was going to happen.
And now we’re kind of seen that comes to fruition because it takes a couple of years to retool and everything to sort of switch that metal. So I think demand looks good right now for that. We may see it capped a little bit. That may go up again. But if we look at this chart, technically speaking, I would say anywhere between 1005 a 1010. If we kind of Zoom above that, then that market could go a lot higher.
TN: Right. So short term opportunities in platinum, medium term, not so much, but longer term back in.
TS: Yes.
TN: Okay, great. Now when you talk about industrial metals like copper and you say a lot is needed for batteries, these sorts of things, that’s a more medium, longer term term opportunity. Is that right?
TS: Absolutely. When you’re talking about things, I mean, we’re already seeing the nickel market, cobalt market, lithium market, aluminum markets all hitting new highs. Copper’s kind of waffling about. But that’s kind of more a marathon trade rather than a sprint trade, in my opinion. So I think we’re going to see more and more demand for that further out in the market. So it’s kind of a longer term investment.
TN: Okay, great. And then what about industrial metals demand in China? As we switch to talk about a China topic, are we seeing industrial metals demand rise in China, or is it still kind of stumbling along and it’s recovery.
TS: That is still kind of stumbling along. And so what I have said before try to emphasize is that I think a lot of these battery metals in particular demand is going to go going to be outside of China.
China won’t be the main driver of this demand anymore as the west policies want to change to EVs and greener technology. So I think you’re going to start seeing very much increased demand for the west. So China demand might not be as significant anymore in that particular area.
TN: Okay. So that’s interesting. You mentioned China demand, Dink and Albert, I’m interested in your view on that. We had the Fed come out last week and talk about tightening and reinforced some of that this week. What dynamic is necessary in China, if anything, for the Fed to start tightening?
AM: Well, I think first of all, Tony, China is going to have to stimulate. They’re starting to prioritize growth for the first time in a long time. They see the US in a bit in a little bit of trouble here with the Fed making policy errors. I don’t want to say heirs. We’re more about like throwing together against the wall and see what works. Right.
So China is trying to be the seesaw for the world’s finance sector. Money comes into the United States it goes out. Where is it going to go? It’s either Europe or China. Europe right now is a complete mess. So obviously you see that money going into China you will keep on leaning on businesses and look to control more than you should but they’re breaking up a lot of the old power structures and that’s actually bullish long term for China. We can debate many of these episodes that we’re doing now, Tony, about whether it’s a good or bad thing for the China power structure. But that’s for another day.
TN: Right. What kind of stimulus if we look at things like loan demand so we’ll put up that chart on loan demand. Can you talk us through can you talk us through the chart of what it means and what the PPO will likely do as a result of low demand or consumer credit? Sorry.
NG: Yeah, the credit impulse so that’s private sector lending as a percentage of GDP and that chart shows it may have based and that looks like what we’ve been hearing is that the PBOC has been encouraging the private sector to start extending credit into the system, particularly to find off the real estate market which is not a surprise.
My personal view and some of the people that I talked to on China is that’s just filling a hole. This is plugging holes or putting plasters on various holes. So what will be interesting is to see how that progresses further down the line along this year. I don’t think nothing’s going to happen before February 1, lunar new year and then you’re running into that plenum. Do they encourage that you’ve got the Olympics and then you’ve got the plenum? Do they encourage some sort of boost?
I don’t think there’s going to be much fiscal. I think there’s a reason for that. I think there’s a connection with the real estate sector. Real estate sector. As a source of great funding for the local governments.
TN: They spend fiscal on bailing out real estate already. Why would…
NG: You have to provide fiscal to the local governments just for the services?
TN: Right. So the central party meetings are in November, so there’s plenty of time between Lunar New Year and November to really tick off some monetary stimulus and get some feel good factor in, say, Q three or something. Is that what you’re thinking?
NG: There is a desire, as Albert rightly said, they are talking about the economy now, but it just feels like it’s one plug the bad, the big holes that have been appearing and they just keep appearing and now we’ve got Shamal. It just seems like it’s step by step plug every hole and then give a little bit of access to try and get the private credit rolling again.
AM: Tony, everybody is looking for a flood. When is the flood of liquidity going to come into China? Right. But that’s not going to happen until May or June until they see what the US Fed is going to do because nobody right now knows what the Fed is going to do.
Inflation is obviously a problem within China, specifically oil and other commodities, as Tracy was talking about. Their eyes are completely on the Fed. China will have to pop services sector as a real economy. It’s kind of a shambles there due to commodity prices and inflation.
The willingness is there to lend. There’s no question about that. But who wants property right now in China? They can force feed the economy via credit. But that’s inflationary also. So there’s another do move here within China. How do they boost their economy but still keep inflation down? Same thing the United States is going through. Okay.
TN: So let me give you a really simple trick here.
NG: Let’s not forget you’re seeing some majors. Shanghai now has Omikaron. Remember, China, supposedly, according to the World Health Organization, didn’t suffer the first route, but you got Dahlin is closed, Nimboa’s got problems now Shanghai, Shenzhen, and they’re worried it’s going to head up towards Beijing.
All these international flights to Hong Kong completely canceled. So that’s another problem if you extrapolate and equate it to what’s happened in the west whenever these outbreaks have occurred.
TN: Yeah, but I think the solution. Yeah, that’s a problem. I think everybody’s facing that and I think China is just very, very sensitive about that. We can come up with whatever kind of conspiracy theories we want about China, but I just really think that they’re very embarrassed by COVID and they’re trying to cover things up, not cover up, but they’re trying to offset the negative preconceptions globally by taking dramatic action at home. That’s my view.
TS: And they have Chinese New Year and the Olympics coming up, right?
TN: Yeah. And they’re being very careful about that now. My view for quite some time has been that they would keep the CNY strong until after Lunar New Year and after Lunar New Year, they could get some easy economic gains by weakening CNY just a bit. Is that fair?
AM: I think it’s fair. They don’t want the bottom to fall out of the economy. And the extent of their damage the extent of damage to the economy was pretty significant. So they’re going to have to pull off a few tricks. Like you said.
TN: It’s percentage wise, it’s a lot. But in reality, at 65667 CNY historically, it’s nothing compared to where that currency has been historically. And I think it’s pretty easy to devalue to that level. And I think they would get some real economic gain from that.
AM: Yeah. But again, it matters what the Feds are going to do with rate hikes. That’s the wild card.
NG: The devaluation not just look at the dollar, look at the CFA, because I think it pays them to value against the Euro more than the dollar.
TN: Yeah. Okay. We can have a long talk about the CFO’s basket at some point.
NG: My point is you got to look at the Euro CNY as well as the US, because I think that’s where they’ll go.
TN: Yeah. Okay. So does this present an opportunity for Chinese equities in the near term, or is it pushed off until Q two?
AM: I mean, from my perspective, I’ve been on Twitter saying that I’ve gotten into Chinese equities. They are de facto put on the US market, in my opinion. They don’t have the strength of the actual but does. But money has got to flow somewhere, and if it’s not going to the United States. It’s going to go to China.
TN: Okay. All right. Let’s move on to bonds. Okay. Nick, can you cover bonds and tell us are we on track? Are things happening as you expected? Do markets do bonds like what the Fed has been saying? What’s happening there?
NG: Well, the initial reaction after the testimony from Powell was you had a steadying and a slight rally in bond prices, slightly slower yields. But I thought today was fascinating because today we’ve across the York Cove. We’ve made new highs for the move, so we’re at the highest yield for the last year.
What was interesting is we had that disappointing retail sales. Okay. That would typically suggest if this Fed is sensitive on the economy, perhaps they won’t do much. Well, the bond market didn’t like that. So now you have what is typically good news for the bond market, creating a sell off. And that tells me that the bond market is beginning, especially with the yield curve. Stevening, the bond market is beginning to express more anything that suggests that the Fed doesn’t do what they’re talking about. The market wants to see action. Not words.
TN: We’re getting punished for now.
NG: And what’s interesting is if you think a little bit further forward, if the Fed does hold back and isn’t as aggressive as some of the governors have been suggesting, three to four hikes I didn’t think Ms. Bond Mark is going to like that.
TN: Or Jamie Diamond saying eleven heights.
AM: Jamie diamond is nothing that comes out of his mouth should be taken at face value. Him knocking the 30 year bonds down today, he’s just setting himself up to buy. I mean, the guys he talks his book always has.
TN: Hey, before we move on, before we move on to talking about next week, we did get a question from Twitter from @garyhaubold “Does the FOMC raise rates at the March meeting? And how much does the S&P500 have to decline before they employ the Powell put and walk back their lofty tapering and tightening goals” in 20 seconds or less going, Albert? Oh, 20 seconds or less.
AM: Well, the market needs to get down to at least the 4400, if not the 43 hundreds. That’s got to be done in a violent manner. And it has to put pressure on Congress to do it. And they can’t raise rates unless they get at least $2 trillion in stimulus.
NG: And also don’t forget the Cr expires on February 18. So we could be in the midst of a fiscal cliff.
TN: February 18. Okay. We’ll all be sitting at the edge of our seat waiting for that. Okay. So week ahead, what do you guys think? Albert, what are you seeing next week?
AM: Opec pump for Tuesday and then Biden dump for Wednesday as they set up a build back better push in Congress, along with probably a hybrid stimulus bill to try to get to that $2 trillion Mark. Otherwise, they got no fiscal and this market is going to be in some serious trouble.
TN: Okay. Can they do it? Can they do some sort of BBB hybrid?
AM: Yeah, they can do it. They can get ten Republicans on board as long as there’s a small business, small and medium sized business stimulus program. Okay. They’ll get that.
TN: And if they do market react and you say that’s $2 trillion. You say that’s…
AM: They need a minimum of 2 trillion to be able to even think about raising rates in March.
TN: Okay. And Nick, how does it matter?
AM: This is dependent on how bad inflation actually gets, because if we get an 8% print of inflation next month. Then everything is on the table.
TN: So can you say that you cut out just a little bit if we get what, an 8% print?
AM: If we get an 8% print on CPI the next time around and anything is on the table.
NG: Okay. I think what was happening with the bond market basically is it’s beginning to look a little bit longer term. And I’ve had this conversation, the big traders, the big fund managers are sitting there thinking, okay, look at crude oil now, 85 on Brent. Energy price is crazy in Europe.
That’s going to feed through from the wholesale level all the way through to the consumer via manufacturing goods, via the housing market, via service industries. Starbucks has to charge some more because they’ve got a much bigger overhead.
TN: Netflix just raised their prices by a buck 50 or $2 a month or something.
TS: Filters down to everything. Energy runs the world, right? So that’s going to higher energy prices are going to factor into literally everything you do.
NG: And my personal view, I think that sort of works is in sync with Tracy. I think crude goes a lot higher. I think this year we could see north of 100, perhaps as high as 120. This all feeds through, right? So the point is the bond market there’s a lot of conversations on a longer term plane right now. And the bond market is an expression if it’s higher yields, yield curves deepening.
Anything that says that the fed is hesitant, I think you get sent off. I think that’s why we sold off. We should have been running on week retail sales.
TN: Okay, Nick. Sorry. If we do get a $2 trillion bill, what’s going to happen with bonds?
NG: They’ll be sold.
TN: They’ll be sold. Okay. So they’re going to punish the fed if we get fiscal?
NG: They’ll punish the fiscal fed to start acting and acting in short order. And I remain unconvinced. We’ve only heard words. We got to see the action. They’re still doing. Qe. Right? It’s absurd.
TN: Yes. We’re going to keep the flow going over here, but we’re going to raise interest rates over here. I’m not sure I get it. There’s been that disconnect ever since they announced this in December.
Okay, guys. Thank you very much. We’ve hit our time. Have a great week ahead and we’ll see you next week. Thank you very much.
Our CEO and founder, Tony Nash, joins the BBC Business Matters podcast to discuss mainly the anniversary of the US Capital riot — and why most Americans don’t really care anymore. Also discussed are the patent-free Covid vax and the CES 2022 and the coolest thing in the event.
FN: Let’s go to Tony and the view from Texas. And I’m just wondering, Tony, we talked about, you know, viewing this from outside the nation’s capital. What have people been talking about today?
TN: Fergus, I gotta be really honest. No, nobody cares. I talked to students. I talked to business people. I talked to people across the country, and this is a DC event, and it’s drama that DC has conjured up and nobody in the rest of the country really cares. It’s just not a big deal for people.
FN: Okay, I’ll tell you why. I find that interesting. One thing. People travel to DC, right? For this event, whether they attended the rally or whether they actually went to the capital and took part. They weren’t DC residents, all of them. And the second thing is it’s a political thing right now, surely, across the country, there are politicians running on this event as a mandate. No?
TN: I don’t think so. No, I don’t think there are politicians running on this. You may have some politicians who are trying to run on this, but honestly, I just spoke to a couple of College students an hour ago and asked them what they thought about it. They didn’t care. I spoke to business people today and they just didn’t care. And they shrug it off as just something that’s in DC, and they shrug it off as the administration trying to distract attention. That is in the middle of the country.
That is the view from Chicago down to Texas and across the middle of the country. Nobody cares. And even in the capital building. So if these guys really wanted to overthrow the government and harm Congress people, they would have gone to the administrative buildings. I mean, these aren’t stupid people, but nobody else cares.
KA: I’m sorry, that’s not accurate. They were in the capital building.
TN: It is. Absolutely. We were in the administrative building.
TN: There were Congress people who weren’t even close to the administrative building.
FN: So, demonstrators sitting in the Speaker’s chair. Right.
TN: The demonstrators were there. The Congress people weren’t there at the end of the day. Fergus, look at the end of the day here’s what we’re talking about. We’re talking about trespass and we’re talking about property crime. Okay. That’s why people don’t care.
FN: There were five fatalities.
TN: Yeah. The Capitol police shot a woman. Right.
FN: Tony, I want to pick up on your point about people in Chicago down to Houston, not caring. This is what you’re reflecting to us about. Hang on. Let me please ask. Does that mean that nobody from Houston up to Chicago, et cetera, in the middle of America believes the message that was behind this campaign because it strikes me that 48% of the Republican Party believe the message behind what happened a year ago.
TN: What message is that, Fergus?
FN: That the election was stolen. This is the message that President Trump continues. A former President Trump continues to put out and the message that those demonstrators sought to enact as they see it. When you say people don’t care, you’re suggesting that it’s done and dusted. And I’m suggesting to you that’s far from the case.
TN: I think it is done and dusted. And I think if you look at people like Ashley Babbitt, who was shot in the back as she was entering like she was unarmed and shot at the back, these were not people who were fighting for something. Right.
FN: All right. Tony, come in. You want to jump in there?
TN: Yeah. I think Rachel is absolutely right. With the Pelosi’s support of the storming of the entry into Ledgeco in 2019, I think the Apathy in the US is really just more exhaustion than anything. I think Americans are just tired of the partisan nonsense. They’re just exhausted by it. And I think people don’t care because they don’t see this coming to an end. And DC is a world unto itself. And most of America just doesn’t care anymore. Honestly.
FN: But at that point and Rachel’s point, I was just reflecting on some of Carrie Lam’s comments exactly a year ago. And this phrase double standards, she said foreign audience should set us. Do Americans recognize that as double standards?
TN: Oh, absolutely. Yes, absolutely. They do. Well, most do not all, of course. But I think most do. If you were to rewind to 2019 and show those tapes to many Americans, they would completely get it. We’re not the Cretans that everyone tries to make us out to be. We understand that.
FN: Tony Nash is with us from Houston, may well be familiar with many of the names we’ve been discussing in the last five, six minutes. Tony, let’s focus on the philanthropy first. Presumably, that’s something you recognize that when you don’t get federal funding, you don’t get the big sort of specific targeted funding that a lot of big Pharma got back at the beginning of the pandemic. You reach into donor sections.
TN: Sure. Yeah, absolutely. And I think the Baylor College of Medicine did fantastic work here with the resources they had, and everyone here is proud of them. Texas is a huge force in medical like in public health, in oncology in many areas of healthcare. And this is just a very public view, public way of doing it. I love what they’re doing. It’s hard not to love what they’re doing.
FN: In terms of the generic issue. We’ve heard a lot about big Pharma is, I guess, easy to demonize, because a lot of the companies are making some very big returns on vaccines, and these people seem to be ready to maybe not give up the whole game, but essentially go for the generic version so that it can be spread more quickly and more cheaply.
TN: Well, all of the private sector vaccine developers, I think they got $20 billion from the US government in 2020, so those medicines have been paid for. They should give them out for free. All their IP should be open source. There should be nothing secret. The American people paid for the ones that were developed in the US. And I think as a foreign policy, we should open source that and let every country develop it at whatever cost they can.
FN: It would be a fantastic kind of diplomatic soft power, too. Wouldn’t it be?
TN: Absolutely would.
FN: And, Tony, I’m not sure how much you heard. There a quick thought from you as we end the program on the survival of Tech despite the pandemic?
TN: I think tech has thrived in the pandemic. And I’m glad to see shows like CES happening where people can go in person or be remote. I think it’s great to be in person. So I’m really happy to see it. And the coolest thing I saw at CES was a car that could change color because of nanotechnology in the paint. That was the coolest thing I saw there.
FN: Yeah, I saw that one online as well. That’s the purple thing I was referring to. Kind of Sci-Fi is real, I guess. All right, Tony, thank you very much. Indeed. Glad we got you back. Briefly. Sorry we lost the line halfway through there.
