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What happened in China?; Why did silver rally?; Fed & QRA

#China #Geopolitics #Silver

 

 

 

 

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Welcome to the latest episode of “The Week Ahead” with your host, Tony Nash! We’ve assembled a stellar lineup.

 

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Transcript

[00:00:22.090] – Tony Nash

Hi, everyone, and welcome to the week ahead. I’m Tony Nash. Today we’re joined by Albert Marco, Vince Lancey and Blake Morrow. We’ve got a few key themes. The first one, when I went out to ask about this show, the first response I got back from Twitter was, what the hell happened in China this week? So that’s the first thing we’re going to cover. The second is, why was silver rallying? This week we’re going to talk to Vince about silver and gold. And then with Blake, we’ll talk about the Fed and the QRA. CI Markets has been recognized as one of the top stock forecasting tools for 2024 by Techopedia, a leading tech authority. Why? Because it predicts future price movements with a 94.7% accuracy rate. It covers over 1600 assets with weekly re forecasts of stocks, etfs, currencies, commodities and major equity indices. It has an easy to use interface optimized for web and mobile, and pricing plans to fit your needs, including a free option. Stop playing guessing games with your investments. Take control of your portfolio with CI markets. Learn more about CI Markets today@completeintel.com. Slash markets let’s get right into it, Albert.

 

[00:01:33.830] – Tony Nash

We’re playing kind of the where’s Albert this week. So I like your background. That looks really good, and I think you’re a great guy to answer the question, what the hell happened in China this week? So we had a pretty big turnaround in China in the equity markets. We’ve got a chart for Shanghai Composite on the screen. Of course, the Hong Seng did even better than the Shanghai composite. The central government just talked about putting a few hundred billion dollars into the markets. They didn’t actually do it. They greenlit corporate share buybacks to prop up markets. They reduced the Triple R, the reserve requirements so banks can push more cash out into the economy. And of course, we saw that pretty dramatic turnaround in equity markets. So all of this got markets back to where they were about two weeks ago. CNY gained a little bit. It’s off. Blake, maybe you can talk through some of those dynamics. But the question is this, what does this all mean? What did they do? Right, Albert, and what do you think they should have done that they didn’t do?

 

[00:02:38.850] – Albert Marko

What they should have done is a different animal altogether. But what was happening was the narrative was just becoming overwhelming for the chinese economy of systemic collapse of the chinese system from top to bottom. And they had to step in and guarantee, I know that they haven’t done it yet, but close to $300 billion is probably going to be levered up to five to ten times that to prop up the economy. And their entire gambit was to just change the narrative. They didn’t want those headlines that China was collapsing. They’re going to have to step in, for sure. They’re going to step in. There’s no question about that. And it was all to prop up the Hong Kong markets, really. They don’t really care about Shanghai, the mainland or whatnot. But this was specifically to prop up.

 

[00:03:30.310] – Tony Nash

The, you know, we’ve seen all these over the past probably six months. We’ve seen all these year on year comparisons. X is up triple digits in China for trade or double digits or whatever, year on year. And everyone knows the year before things were closed and these year on year things in China haven’t really matter all that much because they were closed for a year and a half or whatever. So I think what I’m seeing in things like global trade, the trade numbers actually don’t look bad, but things in China, we’re seeing deflation, we’re seeing really a lot of bad news. Politically, things are kind of sketchy. They’ve had two of their central committee members just kind of disappear over the last six months. So can money injected. I’m saying that diplomatically, Vince, can money being injected into markets solve that uncertainty? Or is this just kind of a first step? Like, have they just started and there’s a long term plan? Because we’ve been hearing about chinese stimulus for three years now and this is really the first. Aside from some kind of stupid rail investment or whatever, this is really the first tranche of cash that we’ve seen.

 

[00:04:43.210] – Albert Marko

Well, I mean, politically, G is taking advantage of the situation right now, getting rid of his opposition party members that are causing him issues or potentially going to cause him issues. I mean, that’s what anyone really in leadership would do to take advantage in this type of scenario. Yellen has her foot on their throats at the moment and she’s been hitting the sell button on China and keeping the dollar elevated. And rates being up close to 6% is almost the abyss for the chinese market. So they’re definitely playing the defensive. They’re trying to prop up the CNY, they’re trying to prop up the economy. Is it enough? No, absolutely it’s not enough. They’re absolutely going to have to keep going on for the next four to five years. This is not going to be a one year pop and it’s going to fix everything. This is going to be five years down the road of them doing multiple, staggered steps of stimulus to get the economy back in order.

 

[00:05:44.320] – Tony Nash

Yeah. I mean, if we want to make an analogy to the US, imagine if the secretary of state just literally disappeared five months ago. And imagine if the defense secretary just literally disappeared, right? And all of a sudden there’s some new junior person in their place. Right? and so the political uncertainty in China is huge. We saw massive shifts in chinese money into japanese and us etfs over the past two weeks. Right, and so the chinese investment itself is not showing support for the chinese markets. I was in China in June of 2015 when markets fell apart. And at that point, chinese mainlanders were encouraged by the government to put their money back in markets. They did it based on faith in the CCP. I don’t see that happening this time.

 

[00:06:35.390] – Albert Marko

No. And the outflows from China have propped up the bond market and the US equities. I mean, it’s been just absolutely staggering of how much money has left Asia and even Europe and flowed into the United States. And this was all calculated by Janet Yellen. I mean, she knows what she’s doing. She’s been the Fed chair. She’s got her fingers on all the buttons at the treasury. They know that if China starts taking off inflation, it’s going to be another problem right now. And I’m sure our guests will talk about silver and commodities, because that’s a big key part of it. If China is firing on all cylinders, commodities are going to skyrocket again. Lithium. Copper.

 

[00:07:14.330] – Blake Morrow 

Albert, I want to jump in here just because talking about commodities for the markets that I follow, especially like the australian dollar. Copper. Unresponsive to all the actions for us traders in the currency space and the commodity space, we look at it as like a shotgun approach. Yeah, maybe this might have been more of a bigger slug, I guess, that came out of this shotgun shot. But still, you can see the muted response that we’re getting in commodities and currencies. And I think you guys draw a really strong correlation, which should definitely be noted, between the Nike, the market’s definitely shunning China in favor of the Warren Buffett, Berkshire Hathaway trade of Japan, even Germany, and a lot of european equities. And us equities, they’re all beneficiaries. But then again, if we do see China turn the corner a little bit, which I think it’s too early to tell, maybe that takes a little bit of the air out of some of the other markets around the globe.

 

[00:08:26.610] – Tony Nash

Can you talk to us a little bit about CNY dynamics, it really hasn’t moved much.

 

[00:08:31.360] – Blake Morrow 

No, it hasn’t. I don’t focus on the CNY as much as my european counterparts do because my colleagues that traded. Because as a us based trader, it’s prohibited for a lot of brokers to be involved. But it’s a lever that China uses and one of the other things that if they want to really kind of kickstart their economy a little bit, they’ll weaken the CNH a little bit more. But we are up at dire levels because as Albert pointed out, this is more of a confidence, I think, topic. So if you start to see the CNH really come under pressure because the PBOC pulls that lever, next thing you know, yeah, it might help the chinese economy a little bit, but to what extent does it hurt sentiment, equities and sentiment in general? I mean, there has not been a time, I can’t really recall a time that I’ve seen a singular market so just shunned upon right now. Like you are seeing in China, right?

 

[00:09:44.590] – Tony Nash

Yep.

 

[00:09:46.250] – Vince Lanci 

Can I go ahead?

 

[00:09:47.560] – Blake Morrow 

Yeah.

 

[00:09:48.990] – Vince Lanci 

The two statements, blake’s comment about the muted effect on commodities as well as the emerging market. Currencies, commodity currencies, and the comment about them being too safe. I guess what I’m trying to say is in the past when they changed the reserve requirements, I had seen commodity currencies and commodities do better than chinese stocks. It’s one data point, but this time chinese stocks, as low as they are, responded very appropriately. I’m wondering if the whole lack of buying of commodities compared to stocks this time is not a comment on China saying what China’s leadership saying. We need people to buy stocks and stop buying pet rocks like gold. So anyway, I think the lack of confidence in China’s economy has been one of the reasons they’ve been buying gold at the retail level anyway, or at the individual level, and they need to change that or they’re going to have a deflationary crisis. And I just think both those things are.

 

[00:11:04.790] – Tony Nash

Those are all great points. I think the Hong Shang was up between four and 5% this week. It’s still down like 20% over the last six months. Shanghai composite was up two point something this week. So we’ve seen a turnaround, but we haven’t seen a dramatic turnaround. Right. We haven’t seen a 15%. It’s not as if they’ve kind of backed up the truck, put in trillions of dollars. I think they’re being very careful fiscally because they do have to balance a huge amount of government debt that China has and, well, they can, but they’re very careful not to print right away. But my worry is, and if we look at the, you know, they’ve made arrr move, is that beginning, middle, end? Where do you guys think we are on that?

 

[00:11:59.190] – Albert Marko

Well, I mean, going back to what Blake said, we are only in stage one of a long game here of what China has to do to get back on track. It’s going to be years on down the road until anything meaningful really happens with the chinese economy. Of course, we’re going to get stock market pops up and down because that’s just the nature of the stock market globally at the moment. I mean, normally you would see, like Vincent said, commodities would just rip on any kind of chinese news, but that’s just not the case anymore. So, I mean, it’s going to be a nuanced approach from this point on.

 

[00:12:32.210] – Vince Lanci 

Maybe if we stop buying chinese made laundry furniture, I mean patio furniture, they’ll stop buying commodities to make them. Maybe that’s what’s going on, right?

 

[00:12:42.210] – Tony Nash

Could be. I think it’s really interesting this week we’ve seen so many Asia equity analysts say, hey, China is a huge value right now. You need to get in and nobody’s buying it. I don’t know if anybody’s buying it, but I don’t see.

 

[00:12:54.580] – Albert Marko

No, there are, Tony, there are big funds buying it clandestinely at the moment they’re starting to get in because honestly, if you look at a systemic collapse of China, they’re not going to let that happen. The US nor China will allow that to happen. So at some point it’s a decent play, long term to get into China. Long term. Long term. I’m not saying next six months, but next two, three, four years. Absolutely. You would be wise to put a position on.

 

[00:13:23.070] – Tony Nash

Yeah, my biggest worry here has been that $278,000,000,000. The market looks at it and shrugs. And that’s kind of what we’ve seen. Right. And the problem with filling holes in markets is that if you don’t put enough in, they just get bigger and bigger and bigger and hungrier and hungrier. So is there a danger of that, of we open next week and markets just kind of yawn at the $278,000,000,000 and all of a sudden China has to scurry to put out a bigger number sooner?

 

[00:13:52.410] – Albert Marko

Well, I think we have to wait until the actual mechanism of what China is going to use to do that. I know they’re going to be using offshore funds and accounts and lever it up. So we really have to wait until the data comes out because I assure you it’s not going to be just 278,000,000,000. It’ll probably in the trillion, over the trillion range.

 

[00:14:10.930] – Blake Morrow 

I also read, and correct me if I’m wrong, if you heard something different, that there’s a lot of calls being made to institutional, chinese institutional clients that stop shorting the market. Only be on the long side kind of throwing those warnings out, which is I find really interesting. But the sentiment is interesting. I’ve always found it my quarter century of trading the markets, a very interesting dynamic in the markets because sentiment, you could almost use the analogy, it’s like inflation. It’s that genie that you can’t get back in the bottle sentiment. When it’s sour, it’s sour. It takes a lot to turn. And you could look at the polar opposite of the US economy right now and the optimism that people feel and regulators understand what that is. And I think Xi has a very good understanding of that sentiment and why he’s trying to turn it.

 

[00:15:10.050] – Tony Nash

Great, okay.

 

[00:15:11.250] – Tony Nash

Hey, I’d like to make sure you know that you can access our AI driven market forecasting tool called CI markets for free, no strings attached, and it does not require any credit card information. Go to completeintel.com slash markets to subscribe. CI Markets is the perfect addition to your analysis toolbox. This free account includes Nikki stocks, major currency pairs and global economics. Of course, we offer much more in our paid account, but this lets you experience CIA markets before making a financial commitment. CIA Markets uses the power of AI to help you make better trading investment decisions. It’s absolutely free. Again. Go to completeintel.com slash markets to subscribe to. CI Markets free. Let’s move on to precious metals. Vince, you put out a piece earlier this week on silver. Okay. On Tuesday you’re talking about why you bought silver this week. I know it’s retreated as we’ve headed into the end of the week, but I’ve got a gold silver chart on screen. A lot of this has to do with China, which is really interesting to me. Can you talk us through why you got in, what levels you looked for and what are you looking for going forward?

 

[00:16:19.050] – Vince Lanci 

Sure, I’m happy to do that. First of all, it’s a short term trade. It’s not a macro trade. It was more like a win for one day, win for a week and then just keep running with it. If it continues to win. It stopped winning yesterday as far as I was concerned. But we’ll get to that. The thing with silver and gold is they’ve completely diverged in the public eye. Looking at the china demand for gold, looking at the BriCs demand for gold, looking at using gold as an alternative to the treasury or maybe a little bit of a hedge for the treasury as a reserve asset, that increase, well that’s kind of left silver in the dust. That’s the first leg, right? Silver is not precious enough and it takes a lot more space to store it if you are having to deal with something like that. And so that’s one leg that gets kicked out on silver and this is all going to lead to why I bought it actually. And the second leg that gets kicked out on silver is very flow oriented. The last 1015 years of behavior in precious metals have been silver isn’t good for anything.

 

[00:17:32.590] – Vince Lanci 

As a silver bug I have to see what the enemy says. But the reality of it is if you’re pitching an investment or a trade, if you’re saying risk off, you buy gold. If you’re looking at metals, right? If you say risk on, you buy copper because it’s an economic metal, right. And this is manifested out of China as well. For years, every time they throw a little stimulus out there, it’s like buy steel, buy iron by copper, and then eventually you buy silver. So that’s the pecking order in precious metals on the economic side.

 

[00:18:07.690] – Tony Nash

Never heard it put that way. That’s great, thank you for that. I’ve never heard it put that way.

 

[00:18:12.350] – Vince Lanci 

Cool, thank you. So that’s how I used to trade it because I would. Whatever, oh, copper’s up. I’ll buy silver if it’s during Asia. If copper was up during the US, I would sell silver. It’s like a time trade, but bringing it back to why I actually bought silver, the commodity trading advisors, the CTAs, they tend to move in groups like a herd, and they frequently lose money on short term moves. And when they make money, it’s on big term move, long term moves. I would call them momentum. Most of them are momentum traders and they sell weakness and they buy strength. And right about the time people started talking about recession, your commodity trading advisors in the US started putting their clients into shorting oil, shorting silver, shorting copper and shorting aluminum. Those that did trade aluminum, and they do that. It’s kind of interesting because it’s so facile, but it works. Instead of selling their stocks, they hedge the economic exposure by selling commodities. And oil trended lower. They made money, silver trended lower. Despite gold’s strength coming out of China, silver was constantly beat upon and copper trended lower despite calls for a super cycle and what have you, which will come eventually, just not when we’re looking at it.

 

[00:19:41.310] – Vince Lanci 

So when the markets get thin or when there’s not a lot going on, now you have a big cohort of shorts and silver and oil. I’ll put silver, oil and gold in this triangle here, right? So everyone at the CTA level, whether it be small managed money or medium sized managed money, is looking at gold having been shorted twice and gotten killed in a little bit of a shortcoming rally when the Ukraine war started and then getting killed when the Hamas Israel war started. They’re staying away from it, or they’re long. That’s their hedge. Right. Meanwhile, they’re, you know, silver, I think I’ll short that. So they’ll short that as well, economically. And when there’s nothing going on and people start talking about the Fed easing, where the Fed cuts, stocks go up and silver stops going down, oil stops going down, copper stops going down, and then one day you just see all those commodities have like a little bit of a v shaped bottom. Oil, silver. Well, oil wasn’t v shaped. Oil, silver, and the grains. Gold is nowhere, right? And they start to move up. And at that moment, I know from historical perspective and from analysis that I look at that the CTAs, which are the first to move, right, they’re the first to move.

 

[00:21:06.820] – Vince Lanci 

They’re buying silver, they’re buying oil, they’re buying copper, they’re buying grains, and they’re probably selling gold, posing the whole thing out. And for three days, that worked out very nicely. And then the market paused today. So that’s why I bought it. Right? That’s why I bought. I thought, okay, maybe the Fed’s going to ease. I’m long stocks, I’ll buy silver. I kind of the opposite of what they do. And it worked for a couple of days, and then it just kind of flatlined on the flows that I saw. And I said, okay, ctas have covered, but they don’t have any money to put into it. And we talk about markets that climb walls of worry. Gold is up, stocks up over the last three years, and there’s just no, so much money on the sidelines in stocks, and yet stocks are up. And when you look at gold, it’s like, well, the macro investor speculators, they don’t even care about gold anymore, and yet gold is up. There’s such a lack of participation in silver on the american side, except for all the lunatics that think silver is going to go to the moon tomorrow, which they’re friends of mine, so I’m going to defend them, and I’m probably one of them, but I try and keep a lid on it for times like this. Nobody buys silver on the follow through. So I got out of my lungs today and I actually shorted a little bit of gold because I think China is going to get filled on their buying underneath.

 

[00:22:34.410] – Vince Lanci 

So that’s it. I think in the short term it could continue to go higher, but it won’t be because of what I saw. I wouldn’t know what drives it higher in the longer term, I think if stocks drop, silver gets hit more. If stocks drop, gold gets hit. If stocks drop, oil should get hit. But oil is its own animal right now. It seems it’s got its own thing going on. So longer term, I’m very constructive on silver, but that was a trade that just came and went.

 

[00:23:04.650] – Tony Nash

We’re just looking for the catalyst. Right, I’m sorry, catalyst. We’re looking for the long term catalyst. So, Vince, you sent me a Goldman chart. Can you walk us through this? You’ve already covered some of this, but can you walk us through this Goldman chart? And then can you walk us through what some of the catalysts might be? And I’m also curious, what happens if we don’t see a rate cut in March?

 

[00:23:27.970] – Vince Lanci 

Yeah. Okay. The chart that you’re putting up there, I think it’s basically a graphic depiction of what I described, and it confirmed what I had thought. The chart describes several things, but it’s basically a year of performance. And the dark blue part of the body, forget the wicks above and wicks below. I forget what they’re called. But the dark blue body represents how long, if you go up on the chart and how short investors get in these assets. And if you look on the left, you see oil there. And what we’re focused on for this conversation is this green star. The green star shows you that, generally speaking, of all the money that investors, that CTA investors, these are small and medium sized at best. This is a sentiment indicator. Actually, when you think about what Blake was talking about, this is a sentiment indicator. The oil people had been extremely bearish and short out the wazoo. Conversely, if you go to the right side of the chart, you’ll see that they’re also long gold, and that’s because of the war. What have you, SVB, bank or whatever the reason. And then you look at silver and you say, look at silver.

 

[00:24:47.030] – Vince Lanci 

Silver on the far right is they’re extremely short based on how that star is positioned. And silver is behaving in the minds of the normal person. Silver is like copper. It’s behaving like copper.

 

[00:25:01.020] – Tony Nash

When they diverge like that, how long do they usually diverge like that?

 

[00:25:05.490] – Vince Lanci 

Gold and, oh, they can diverge like that for months. And that’ll happen when the market is dominated by fed behavior, right? So if we’re just talking about domestic politics and rates and fed stuff and everything is fine in neo keynesian world, well then you’re going to see buy gold, sell silver, buy gold, sell silver, and they won’t even buy that much gold. They’ll just happily sell silver because every time they’re buying stock, they’re raising capital using something else. But when there’s a global geopolitical problem, doesn’t have to be a war. You had like Brexit was an example of one, Brexit was another one more recently. The guilt when they had the problem there with that mini budget. I forget what the actual. But anyway, what ended up happening there was, what ends up happening is everyone’s long gold and short silver and they’re just happy. And then one day they wake up and silver is $0.50 higher and they say, oh, maybe we should cover that. And so then they cover it. And so basically when the market is focused on american economics, that will stay stretched for a long period of time. But when an event happens, like the Ukraine war, for example, they all bought gold and they all sold silver at that moment.

 

[00:26:28.830] – Vince Lanci 

And then a month later, gold kept going up, so they ended up buying silver. So those are your interesting domestic versus geopolitical, that’s what changes the don’t.

 

[00:26:38.450] – Blake Morrow 

I don’t have a mean, aside from being, I come from the camp, I don’t like shorting precious metals. I like to own precious metals like physical, right? I try not to trade them on the short side. If I’m going to trade them, I like to be on the long side. But why? Just because I have my technical views and I actually think silver is going lower. Just throwing that out there.

 

[00:27:03.900] – Blake Morrow 

I know I might be both, but why did silver outpace gold so excessively during the COVID lockdowns?

 

[00:27:17.390] – Vince Lanci 

Yeah, well, during the COVID lockdowns, that was a special situation. The situation.

 

[00:27:26.380] – Blake Morrow 

You can say that again.

 

[00:27:27.860] – Vince Lanci 

No, but actually it’s directly Covid related. I mean, you’re basically right. This is kind of bizarre. And as a physical person, I think you’d appreciate this. There was an artificial problem, and it manifested more in silver than in gold. Then here’s what happened. It’s actually nice little story. The late George Giro and I were talking about this during COVID A lot of the flows in the US are, if you want to buy metal on the Comex, let’s say you’re going to take delivery on the Comex, right? If you’re going to take delivery on the Comex, what really happens is you buy it on the Comex, the bullion bank does an ARB, an EFPR, right? And they buy it on the Comex, and they end up taking delivery in London. They send it to a refiner to change it to Comex specs, and boom, it comes over here. If you’re the US mint, that’s what you’re doing. You have to buy domestic, so you buy Comex, and the bullion banks are just like they’re doing their arb, their little EFP, and then the London bullion market gives them the metal, they refine it there, and then it comes back here.

 

[00:28:26.870] – Vince Lanci 

I don’t know, it’s blanks or whatever, even Spider man coins, who the heck knows, right? But that’s what happens during COVID and it happened for both sides, meaning gold as well as silver during COVID And I actually watched this like I actually had it on a map of it. Most of the refiners, most of the, there’s other words, smelters or what have you, they’re in northern Italy, in Switzerland. And so during that timeframe, in the Lombardi region of Italy, Lombardi was hit ridiculously hard during COVID They shut them down. You know what it was? It was regulatory arbitrage. You can see this, right? So you had these specs, I’ll use the gold one because it’s easier to understand. The gold bar in London is 300oz. The gold bar in the US is 100oz. They were not fungible, you couldn’t take. So during that time, you take the 300 ounce bar, you take it over to northern Italy, you have it broken into 3100 ounce bars, and you send it over. They were all shut. So, for a very short time frame, and you’re a trader, so you’re going to appreciate this for a very short time frame.

 

[00:29:39.170] – Vince Lanci 

In the US, we had a venue short squeeze, so everyone wanted Comex gold and Comex silver, preferably silver. Why would they not take London? Because of the regulatory differences. And for a time frame, you could not take delivery of London silver and London gold in the US. And they fixed that by creating a swap contract. But for a time frame, you had deep backwardation in the Comex front, months to one year out, 5% spread. And then you had spot in London trading below because there was no one working. So that’s what happened then.

 

[00:30:17.340] – Blake Morrow 

Interesting. Yeah.

 

[00:30:18.490] – Vince Lanci 

And of course the whole kicker about the economics, the money going into the hot, but that’s what happened. And in fact, if you look back at history, if you look back at history, it was just fascinating because I was like, oh, look at that backwardation on the Comex. Silver and gold must be in the moon in London. Where is it? Plenty of silver here. Why don’t you send it over there? Can’t do that. You guys won’t take it anyway, so that’s what happened then.

 

[00:30:47.150] – Blake Morrow 

Oh, thanks. That’s interesting to know. I know one of my partners at Forex analytics was all over silver, around $15, just buying the living Jesus out of it. And I was like, anyway, okay, great to know.

 

[00:31:00.930] – Vince Lanci 

Thank you. That was the kicker. He was right for a different reason. I’m sure that was the kicker. Look, the silver market is a broken market. I’m going to say this about paper, and I’m not even going to get into the paranoid conspiracy stuff. What I mean is the contract is so big that you can’t buy a fifth of a contract. There’s no one who trades the micro. And so you accumulate, and then you’ve got a problem. It’s made for producers. Speculators are hung out to drive very frequently.

 

[00:31:32.120] – Blake Morrow 

There. Got it.

 

[00:31:36.270] – Tony Nash

That’s great. Okay. A lot of detail there. Watch this.

 

[00:31:41.310] – Vince Lanci 

To digest my first time, I had to. I want to be asked back. And so you can say, vince, you’re really cool. Thanks for coming.

 

[00:31:49.750] – Tony Nash

Of course, of course. Speaking of being asked, doc Blake, I’m always impressed when someone as respectable as you comes back on our program. So thanks for making your performance. I really appreciate that.

 

[00:32:00.070] – Blake Morrow 

Thanks for having me and I appreciate the comments. Thank you.

 

[00:32:02.890] – Tony Nash

You told me that you’re watching Fed and QRA next week, and I think we’re all watching Fed and QRA next week. We saw Christine Lagarde speak this week at the ECB. They’re holding rates. I think there’s an expected cut in April or something.

 

[00:32:20.340] – Blake Morrow 

Right.

 

[00:32:20.660] – Tony Nash

So Europe is a mess. I’m not really sure I really trust what they say, but I think they’re trying to do all they can to manage their market. So Europe is Q two in terms of a cut. Are you looking for similar messaging from the Fed next week?

 

[00:32:39.810] – Blake Morrow 

I’m not actually first of all, I have to take a step back and say, what does the Fed have to gain by doing that?

 

[00:32:50.500] – Tony Nash

The Fed.

 

[00:32:51.290] – Blake Morrow 

And you take, like Chairman Powell, he’s really good at telegraphing and giving the market what it wants. That’s, that’s, that’s a whole nother animal. But I’ve talked a lot with a lot of different macro analysts about financial conditions, and financial conditions have eased quite a bit for a lot of the United States and a lot of businesses, a lot of individuals. And you could actually even see the pending home sales today was just bonkers. Right. So the problem that you’re going to have, if you’re the Fed, is that you have to make sure you cap those expectations a little bit or the function of getting inflation sustainably below their 2% target is going to be a little bit more difficult. So I think if I was the Fed chair, I’d have to push back a little bit on expectations just to keep the market from getting too frothy. A lot of people might say that stocks are frothy right now. I mean, we are at all time highs. And you can’t ignore the fact where we’re at right now. And there is a thing called trickle down effect. Yes, the top 10% or 5% of americans own the majority of the stock market.

 

[00:34:15.250] – Blake Morrow 

But if I feel wealthier, I’m going to spend more at this restaurant and it’s going to trickle down. And there is something to that. And it does ease conditions a bit. So I think the Fed’s got to walk a fine line. I don’t think they’re going to give us a whole lot. I think the bigger deal is going to be the quarterly refinance announcement, quarterly requirement announcement, QRA, the acronyms. And it’s late in the week. For me, the QRA is going to be more of the kicker that happens, actually, the morning of the FOMC and the markets, they got a bit of a gift. I was talking to one of my, they got a bit of a gift this last quarterly announcement in November that on top of the Fed, on top of Waller, who became a little bit more dovish. Now, if you think about where we’re at right now, and I was talking to one of my colleagues, a gentleman by the name of k man, he made a great point that Janet Yellen was know on the wires yesterday, she sounded pretty upbeat. She’s the lever puller, if you, you know, she could very easily tweak the QRA a bit because she’s feeling a little bit better.

 

[00:35:29.660] – Blake Morrow 

About where we’re at. I don’t know if that’s necessarily going to be the case, but that’s going to be something that I think is going to be closely watched from that allocation of notes and going back over to bonds. And I don’t know if there’s going to be a change there, but I think the whole market is very queued up into it. And with the Fed, there’s a lot of risk. If you own stocks at these levels, you have to be nervous about next week. And I think if you own risk in general. One other thing I want to point out is the dollar is holding up exceptionally well in this current environment. So with that being said, I think currency traders, myself included, and I happen to have both short and long dollar exposure at the moment, but more long dollar exposure at the moment. On balance, I think if you’re short dollars, you’re going into next week a little nervous. And I think that the Fed and the QRA is going to have a lot to do with what happens not only in the currency market, but what happens in yields and what happens ultimately in equities as well.

 

[00:36:39.870] – Tony Nash

Yeah, I want to dig into that a little bit. First, let’s step back to the Fed for a it seems to me that you think that the Fed rates are going to be pushed or the rate cuts are going to be pushed back further than people. Vince said. If you don’t have a March rate cut, it could impact markets. Seems like you’re thinking the Fed’s going to cut after the thing, but tell me where I’m wrong on that. And second, you’re not QT. Are they going to ease off QT? Are we going to see it accelerate, stay at the same rate? We’re not going to hear about it anymore. What’s going to happen there?

 

[00:37:15.290] – Blake Morrow 

I don’t see why they would change the rate of QT right now. Why? Because the market’s not broken at the moment, so why change the pace of that? But as far as rates go, as far as expectations go, I think what we’re going to see next week is we’re going to see a little bit of a shift. The market has been pretty, it’s been the talk of the markets for the last couple of months, and about market expectations, know what the Fed thinks? I think they have to bring those expectations down a little bit. But what I have to also add is equity markets and risk in general, you can call it, has been very nonchalant about adjusting their expectations regardless of what the Fed says. Looking at the US economy. And a lot of the talk about soft landing. I mean, how is the Fed supposed to allow expectations to continue to be inflated like this for a great cut in this current environment without making financial conditions even looser and making their job a little bit more difficult?

 

[00:38:32.610] – Tony Nash

PCe came in above expectations, housing came in above expectations, markets are rallying. Why do you need a cut right now? I just don’t understand why we keep hearing about cuts if all of this stuff is happening.

 

[00:38:45.880] – Blake Morrow 

Well, because people think that the trajectory is going in the direction where inflation will eventually be below 2%. I look at, they’ve taken their revolver, I use a gun analogy, they’ve taken their revolver and they expended all their bullets, you know, years ago, bringing rates down to zero. They’ve currently loaded their whole chamber up now, and they could expend a couple of bullets, maybe prematurely, preventatively, if you will, because they’re looking into what’s going to happen, what potentially could happen in 2024. 2025. That would be the argument. I don’t know if I necessarily buy that argument. That’s why I think the Fed’s going to be fairly reserved in doing know, I like to use analogies. Quite a. You’re when know, running a marathon, and I’ve used this over the last six, eight months, you’re running a marathon and you’re trying to get to the very end of the marathon. Your last mile or two is going to be the most difficult, and that’s the fight against inflation. Naturally, it was coming down. Naturally, as we approach that 2% target, it’s going to be a little bit more difficult for the Fed. They’re not going to help themselves any further by not putting a cap on interest rate cut expectations, in my opinion.

 

[00:40:08.350] – Tony Nash

Right. Okay. And speaking of rates, as we look at the QRA, I’ve got marketable treasury debt on the screen. What do you expect? I mean, I expect going into an election year, Yellen is just going to expand. Her comments on Thursday seem to indicate we’re going to have a lot of fiscal this year to aid the administration. How aggressive do you think the forward look is with that QRA?

 

[00:40:40.030] – Blake Morrow 

Well, first of all, I don’t want to just give you answers, just to give you answers. I’m not one that’s going to follow all the debt issuance, but I will tell you that as far as I know, and everybody else will tell you probably in the comments down below, there’s a lot of issuance coming forward. There is now the QRA is going to be what that balance looks like.

 

[00:41:03.480] – Vince Lanci 

I’m sorry, can I ask you a question, just to clarify so we don’t have to go back, when you say coming forward, do you mean it’s coming up or coming up forward on the yield curve? Okay.

 

[00:41:12.820] – Blake Morrow 

No, like all the issuance that’s coming out.

 

[00:41:15.290] – Vince Lanci 

I mean, how much new issuance, right?

 

[00:41:17.210] – Blake Morrow 

Yeah, new issuance is coming out. So as a result, we have to keep in mind that it is coming. And you’re right, it’s going to continue to expand. What the ratio is, is what the market is going to be focused more on. So like I said, I’m not a bond expert, but I do understand the fact that the Fed continues to auction off long term maturities and the takeup has been good. Bond auctions have been pretty strong despite a lot of people thinking they won’t be.

 

[00:41:54.420] – Vince Lanci 

I have a question about the Fed. Can we circle back to that 1 second?

 

[00:41:57.420] – Tony Nash

Sure. Absolutely, Tony.

 

[00:41:58.300] – Vince Lanci 

Or should I just wait a little bit, go for know, like, I feel like the market, this is a question I don’t have an answer to. So it’s not rhetorical in any way. When he seemed to come out as very dovish that first, know, a couple months ago when stock started to take market, the market interpreted that the initial comment was, everyone’s got a narrative in the story was, he doesn’t want to be seen as impeding Biden. It’s an election year. I personally don’t think they’re easing in. So that’s, that’s, I thought QT would maybe taper off, but that’s my bias. No, easing QT might taper off. That’s what I thought. But when he did that, and the markets really rallied and they started coming out, fed speakers started coming out, talking a little bit tougher, slowed it down a little bit, I couldn’t help but wonder. Your comment was essentially, he’s walking a line. The last mile or so are hard, and I guess he’s trying to let the animal spirits out without letting them rush out too hard. But how would this be different if we didn’t have an election year, if it would be different at all?

 

[00:43:24.830] – Vince Lanci 

I feel like. Is he doing anything to make sure he doesn’t appear biased in any way, shape or form?

 

[00:43:34.770] – Blake Morrow 

Well, first of, is JPAL political? I’m going to tell you this much. If I was JPAL, I wouldn’t want to face who I think I’m going to be facing coming up in about nine months. So he’s dealt with President Trump before. He’s probably going to be dealing with him again. And I have to imagine that I would assume and again, assumption that the Biden administration is not as forceful with JPAL as a Trump administration would. He’s, I think he’s actually genuinely trying to do what’s best for the people.

 

[00:44:16.690] – Vince Lanci 

I don’t mean that I wasn’t being conspiratorial at all. I think so as well. I’m just trying to figure out if there were an election, would he not have talked nice before he got tough? I mean, look, I’m kind of threading needles here. I’m just kind of feeling like the market was so adamant for mtes that if he didn’t say something like that, it would have been like he was hurting Biden. And we don’t think he wants to hurt Biden, of course. But I’m just looking at it like it just seemed like such a departure for him after having gotten through SVB, SNB, and all these other problems, for him to just say, you know what, we might ease rates when really inflation isn’t under 2% yet. The six month outlook trajectory is definitely under 2%. But why would he do that? That’s what I understand.

 

[00:45:02.440] – Blake Morrow 

Yeah. And I don’t know when you’re talking about inflation, first of all, why he came out the way as dovish as he was. It was a bit of a head scratcher for us, trading the markets.

 

[00:45:17.090] – Vince Lanci 

A rare tactical error, I thought.

 

[00:45:19.080] – Blake Morrow 

Yeah. And the other thing is, I hear all these debates, especially in the mainstream financial media, if you listen to Bloomberg or CNBC and they talk about people on the street, that they don’t feel like inflation is under control either. That’s because the average person doesn’t understand inflation. People don’t understand. They, they think prices go up, they come back down, but people don’t understand that prices go up and they stay up. Inflation is the rate that prices are going higher versus everybody’s like, oh, my cost of my bread has gone up to whatever it is, $4 a loaf versus $3 a loaf. So it’s eventually going to come back down to three. And that would be inflation is coming down, but that’s actually deflation. And that’s something that’s very rarely seen. So the problem that we are dealing with at this moment with inflation is people have these unrealistic expectations as Americans, just in general, because we’ve never dealt with inflation. For the majority of Americans, you can talk to anybody who’s 65 and older and they understand what real inflation is. But for us that are under the age of 60, which I’m in my 50s, we don’t know what it’s like.

 

[00:46:38.450] – Blake Morrow 

And most Americans don’t know what it’s like.

 

[00:46:42.290] – Tony Nash

I’m going to push back a little bit on that. I mean, we’ve had average 24% inflation since pre Covid. So I’m not saying you’re wrong. I really do think people do understand things hurting their pocketbook. Right.

 

[00:47:01.370] – Blake Morrow 

No, I agree.

 

[00:47:02.220] – Tony Nash

Germany, 1920, of course.

 

[00:47:04.630] – Blake Morrow 

But the disconnect is when prices don’t come down. Right. That’s going to be the disconnect. And I think that’s what’s going to eventually bite the US. Consumer sentiment in general is going to be when prices don’t come down over a long period of time. And then you have the Fed that can’t reach that 2% inflation goal and then rates aren’t coming down and then consumer sentiment starts to turn sour. That’s where it all feeds together. And I think that hits somewhere in this 2024 year.

 

[00:47:38.660] – Tony Nash

Actually, no, I’ve never understood about the inflation discussion is gasoline prices go up and they go down. They go up and they go down. We never really hear about deflation in gasoline prices.

 

[00:47:49.130] – Blake Morrow 

No.

 

[00:47:49.700] – Tony Nash

And so I hear these deflationary arguments, and what that means to me ultimately is that corporate profits collapse. Right. And as corporate profits collapse, wages are pulled back and other things. Right. So there is that follow on effect. But we have something that all of us buy every week, unless you’re on public transport in some big city or whatever, and there’s deflation in gasoline all the time. And it’s never really, I mean, this stupid discussion about gas prices falling is like a tax cut, which is ridiculous. But we never hear people saying, oh, there’s deflation in gasoline.

 

[00:48:28.390] – Blake Morrow 

No, they don’t, because it’s the ultimate variable that’s moving around so quickly for most people, not even Americans. This is like globally, consumers, no matter where their benchmark is for what gas prices are, it’s the one that makes you feel better. Right. If I was just spending $100 to fill my gas tank and now I’m spending 65, that’s a huge savings to me.

 

[00:48:54.990] – Tony Nash

It’s a tax cut.

 

[00:48:56.280] – Blake Morrow 

Yeah, it’s a tax cut. There we go. Right. And that’s why for a lot of people to bet against prices coming down during an election year, it’s a tough bet. It’s a tough trade. Right. Because if you’re a politician and you’re the Biden administration. Yeah. You want prices to come down because you want people to say, hey, prices have come down. I feel better. I’ll vote for you again.

 

[00:49:24.020] – Tony Nash

Your July 4 barbecue is $0.14 cheaper.

 

[00:49:27.290] – Blake Morrow 

Right. Exactly. It’s crazy. But what I think is going to be a big shock for not just Americans, I think the global consumer is that prices for most things, they’ve risen and then they’ll stay higher. And if you look back in history and you go back to way back in the, could buy this for five cents and now it’s eighty cents. Well, there’s a reason for that.

 

[00:49:57.070] – Tony Nash

A lot more money now, right?

 

[00:49:59.230] – Vince Lanci 

You’re old. That’s the reason.

 

[00:50:01.710] – Blake Morrow 

We’re old.

 

[00:50:03.070] – Tony Nash

Okay, guys. So we have a lot to look forward. I think what you’re saying with Fed and treasury, and I don’t want to put words in your mouth, but we’re kind of at a point of uncertainty. Right. There are a lot of expectations in the market, but it doesn’t necessarily look like there’s the catalyst to change things one way or the other. Is that in general a takeaway from.

 

[00:50:24.330] – Blake Morrow 

What you’re just, I’ll just add this, and I’m sure Vince wants to chime in here, this is a very pivotal week for the market. And I think people underestimate the gravity of how big this next week is for the markets in general. Whether you’re talking about risk stocks, china, monetary policy expectations, the dollar, precious metals, as Vince has been alluding to, this is going to be a very pivotal week for the markets. And this is not one to sleep on. This is not one where you’re going to go rearrange your sock drawer. You want to be in front of your computers managing what you trade.

 

[00:51:06.680] – Tony Nash

That’s right. Exactly. Vince, any closing thoughts on the week coming up?

 

[00:51:10.810] – Vince Lanci 

Well, I don’t have anything to add to that. That’s pretty much it. You have a lot of events converging in March, and I think Fed policy will, Fed’s in a reactive situation, I believe right now. So they may want to or not want to ease. They may want to or not want to taper QT, but they need to wait. The data has been kind of choppy. This week was strong, but the data in general has been up and down. So maybe they’re just going to stay the course until they get a distinct trend in the economy weakening with the inflation weaker.

 

[00:51:48.910] – Tony Nash

Yeah, and I think staying the course was going to disappoint a lot of.

 

[00:51:53.330] – Blake Morrow 

To, I forgot to mention this and just bringing it up. One thing that we have to also keep in mind, the FOMC is an open market committee. It’s a committee where he’s looking for a know decision one way or the, you know, going back to Vince, you asked about the Fed and why the Fed chair was so dovish. A lot of that thought back then and I’m just thinking about it now, but I wanted to throw this in there is because he wanted to appease a lot of the doves that were in the FOMC. And I think he’s done that and I think the market has responded to it. Obviously, in retrospect now I think he’s going to have to rein that in a little bit and be a little bit more hard stance and maybe a little bit more hawkish.

 

[00:52:47.410] – Vince Lanci 

I didn’t think of it that way. So it helps to think of Powell as representing the committee. Yes, he may disagree with the committee, but he’s got to represent the committee.

 

[00:52:55.570] – Blake Morrow 

Yes.

 

[00:52:56.360] – Vince Lanci 

Behind closed doors he’s probably saying, told you.

 

[00:52:59.110] – Blake Morrow 

Are you freaking? You know, he’s probably doing a lot of that. And I’m sure. And remember, when we get the FOMC meeting minutes, they do give us what we want to hear or what they think the market wants to hear, not necessarily what you.

 

[00:53:14.220] – Tony Nash

Highly edited. Heavily edited.

 

[00:53:16.250] – Blake Morrow 

Yeah.

 

[00:53:17.020] – Tony Nash

Guys, thank you so much. This has been really informative. I really appreciate your time, all your thoughts, and I just hope you have a great weekend and a great week ahead.

 

[00:53:25.040] – Blake Morrow 

Thank you very much for having us.

 

[00:53:26.130] – Tony Nash

Thank you.

 

[00:53:26.720] – Blake Morrow 

All right.

 

[00:53:27.810] – Vince Lanci 

Thank you. Have a good weekend.

 

[00:53:29.430] – Tony Nash

Thank you.

 

Categories
Visual (Videos)

CNA: US Banking Giants Optimistic Amid Nasdaq Drop, Market Resilience in Question

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

US banking giants express optimism for the year ahead despite warning of potential risks to the economic recovery. Sachs reports a 51% increase in earnings, driven by strong performance in asset and wealth management. However, Morgan Stanley’s net income falls over 30% due to charges, reflecting a mixed performance in the banking sector. The market sell-off is attributed to concerns about the resilience of US markets, potential volatility in the coming months, and uncertainty surrounding the upcoming presidential election and US fiscal spending.

Additionally, Wall Street is affected by the mixed reports from Goldman Sachs and Morgan Stanley weighing on market sentiment.

The show also discusses the upcoming reports from middle regional banks to gauge the performance of commercial lending, consumer activity, and the overall tone for corporate finance and insurance in the next quarter. Overall, market sentiment remains cautious due to uncertainties surrounding economic indicators, the upcoming election, and fiscal spending in the US.

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Transcript

CNA

US banking giants are finally calling the bottom, signaling a deal making comeback in the coming months. Executives of two major lenders expressed optimism for the year ahead as they reported fourth quarter earnings. But they also warned of risks that could disrupt the economic recovery. And Goldman Sachs stuck the landing after tumultuous year for the bank. Its earnings jumped 51% in the fourth quarter from a year ago. A strong performance from its asset and wealth management business supported the profit boost, offsetting weaker investment banking, and its shares ended up about seven tenths of a percent. Meantime, Morgan Stanley also topped revenue estimates on an investment banking rebound. But the net income fell more than 30% due to one of charges, pushing its shares lower by more than 4% there. Now it is the first scorecard under new CEO Ted pick, who warned of two major downside risks, including concerns around geopolitics and the health of the US economy. Those bank earnings results posing one of the biggest drags on Wall street, pushing all three major indices lower overnight. Now the S&P 500 had been trading near its all time closing peak, reached in 2022 over the past several sessions, but it is now down about 1% from that record high.

CNA

Meantime, the tech heavy Nasdaq shed about two tenths of a percent. Boeing was the biggest loser in the Dow, shedding about 8%. The plane maker has yet to regain investor confidence after us aviation regulators extended the grounding of its seven three seven max nine jets indefinitely for new safety checks. Spirit Airlines, though, losing more altitude over a blocked acquisition deal. A federal judge ruled against JetBlue’s nearly $4 billion takeover proposal of spirit airlines over antitrust issues. And as equities tumbled, US treasury yields rose with the dollar amid easing rate cut expectations. Yields on benchmark tenure notes are back above 4%. Again on hawkish remarks from Fed governor Christopher Waller. Tony Nash, founder and CEO at Complete Intelligence, joins us for more now. Tony, we’re looking at Wall Street’s sell off accelerating. We’re hearing at the that, you know, markets may have gotten ahead of themselves regarding how deep and how fast those policy rate cuts could be. Your take on that and how we can expect markets to move?

Tony Nash

Sure, the problem with us markets right now is that they’re priced for perfection. So if anything goes wrong, if the Fed signals an overly hawkish message or an overly dovish message, or say, a government macroeconomic data print comes out that isn’t perfect, or if company earnings don’t come out that aren’t perfect, then we can really see some wobbles in us markets. So I’m not really sure about the resilience of markets here. I think what we’ve been telling our customers is you’re going to see some intramonth volatility for the next few months until investors become confident in the direction of the Fed.

CNA

At the same time, this year is a pretty big one. For the US. It is election year. How much of this of lack last step performance is actually due to this? S&P 500 historically performs well in an election year, but it typically sees a slower start first, or is this just part of what is usually happening?

Tony Nash

Yeah, a lot of this really depends on Janet Yellen, the treasury secretary. If she can sell enough bonds to have cash to spend money from the US government, then we can really see markets rally pretty hard. But if Yellen can’t get the authority and can’t sell the bonds necessary to do that, then the US fiscal spending will be problematic. We also have a budget that’s going through in the US and a tentative budget agreement. If the Republicans halt that agreement and make more fiscal spending cut demands, then that could weigh on the US economy as well. Yes, traditionally markets do well in a presidential year, but I think there’s a little bit uncertainty around the election. And people, I think people are a little bit hesitant to spend partly because they’re a little bit loaded up on debt or a lot loaded up on debt. And we’ve seen a really robust 22 and 23. And so really people are wondering how far can we push this in 2024?

CNA

Indeed, dampening sentiment there. Big bank earnings. We’ve got Goldman and Morgan did the latest two report appears to be quite a mixed bag, but mostly not so great this quarter. And that’s weighed on Wall street as well. How do you read the latest earnings report? Are we talking bad debt, the lingering effects of high for longer rates? And what does it tell you about the consumer?

Tony Nash

Yeah, I think that what we’re really waiting for is some of these middle regional banks to see how they report because we’ll know how, say, commercial lending is doing and how commercial real estate lending and how consumers are doing. It’ll be much more evident as we see these regional and mid sized banks report. The larger banks, they’ll be fine. They are fine. They know how to manage and trade off the different lines of business that they have. It really is the mid sized banks that we’re waiting on and that will set the tone for a lot of the corporate finance and banking and insurance for the next quarter.

CNA

All right, Tony, appreciate time this morning. Tony Nash, founder and CEO at Complete Intelligence.

Categories
Podcasts

Global Elections 2024: A Year of Political Significance

This podcast was first and originally published by Peter Lewis’ Money Talk. Find the Substack here:

https://peterlewismoneytalk.substack.com/p/peter-lewis-money-talk-thursday-4-be5

Topics discussed:

  • The upcoming Taiwan election and its potential impact on Taiwan-China relations, with observations on the evolving stance of the Democratic Progressive Party (DPP).
  • The potential weakening of democratic institutions globally, influenced by factors such as economic success, illiberalism, and the impact of the pandemic.
  • The involvement and engagement of young people in politics are considered, with emphasis on their potential interest in national elections and the impact on their lives.
  • The possibility of a Trump presidency, its potential implications, and the dynamics within the Republican party are also discussed, including the potential influence of the primaries.

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✅ 94.7% market forecast accuracy.
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Transcript

Peter Lewis


I’m joined now by Tony Nash, who is founder of Complete Intelligence over in Texas in the USA. Very good morning, Tony. Happy New year to you.

Tony Nash


Hi, Peter. Happy New year.

Peter Lewis


Thank you. Looking forward to 2024. Lots of things to talk about, but I think one of the things that’s going to be interesting is elections this year is going to be dominated by elections in a way in which we haven’t seen before. Eight of the ten most populous countries in the world are going to hold elections. More than 70 countries, about 2 billion people, half the adult population of the globe, is going to have the chance to vote in 2024. It’s a record for one year. This is going to be pretty important, isn’t it? And we got some pretty significant ones, maybe starting with one in just a few days time in Taiwan.

Tony Nash


Right. Yeah, it’s a really interesting year. And the Taiwan election is also very interesting with the DPPKMT and some other things happening there. I think it’ll be interesting to see if there’s a clear winner and who it is. It’s also interesting to see the mainland’s discussion around the Taiwan election, too, which they do this every election. Right. So here in the US, there’s a lot made about the mainland discussion around Taiwan, but this is something that we see every election cycle.

Peter Lewis


It seems to be, though, the rhetoric seems to be ratcheting up this time, doesn’t it? Because this is going to be now, if the DPP wins, the Democratic Progressive Party, it’s going to be their third victory in a row, really broke the stranglehold that the KMT used to have on elections in Taiwan. So it feels like this one in particular is going to be very significant and is going to have some implications for markets as well, as. Well, of course, as relations between Taiwan and China. Mainland China.

Tony Nash


Yeah, it could be significant. I don’t necessarily get the sense that the DPP is as kind of polar opposite of, say, KMT nationalism as they have been in the past. I think the DPP’s moderated just a little bit. Of course, they don’t want unification, but they’ve moderated just a little bit. I think they’ve come a little bit more to the center. And so I think that’s why they’re appealing, and that’s why it’s possible that they have a third term. I think it makes the mainland a little bit uncomfortable. But again, I think this is not something that is completely unique, although it’s ratcheting up. The other thing to remember, and I know your listeners in Asia will know this. But Taiwan has really only had direct elections since the 1990s. And so we hear a lot about kind of the democracy in Taiwan versus the mainland, but there really hasn’t been direct elections for more than 30 years. So it’s really interesting to see how Taiwan has really gravitated to that and how they do elections incredibly well.

Peter Lewis


I mean, these are proper democratic elections, aren’t they? Unlike maybe in some of the countries that are going to hold elections this year where it’s either already a foregone conclusion or do you get the feeling, though, that maybe there is a bit of a recession going on in democracies around the world, that maybe there’s this spreading sort of illiberalism and a weakening of democracy around the world?

Tony Nash


Well, I think a couple of factors have played into that. I think the economic success that we’ve seen in the mainland over the last 30 years has really contributed to, say, I would say maybe an academic and maybe media and other, say, political institutional view that maybe a less liberal approach. And we could even look at Singapore, where people look at a potentially less liberal approach as one that maybe gets more economic success. At least that’s some of the perception. I don’t necessarily think that democracy is weakening, but I do think that those ideas. Does less liberal governance allow more, say, success or economic success or I think a central government strategy? People complain a lot here in the US about the US not having a strategy. I think illiberalism lends itself to having a central strategy. I think one of the other contributing factors is the pandemic, quite frankly. I mean, I think a lot of social liberties were taken away from people for a period of time. And I think it’s driven a lot of maybe thought and or paranoia about growing illiberalism.

Peter Lewis


I mean, I’m thinking maybe one example this year is going to be India, obviously, elections coming up in India as well. That seems to be one country where there does seem to be a weakening of sort of democratic institutions despite the fact that this is still the biggest democracy in the world.

Tony Nash


Yeah, it is a big democracy. The BJP is very, very popular. And it’ll be very interesting to see what happens in India because we do have a very vocal media in India. We have a very vocal population. And so I think as there are or if there are issues around the elections, I think we’ll hear about them. And I don’t think people will be quiet about it.

Peter Lewis


And then, of course, we have some other key elections going on around the world as well. I mean, one of the things that I’m wondering is about young people. I mean, they’re a key voting group in many of these elections, probably in all of these elections that are going on, do you get the feeling that maybe young people are becoming more disengaged? They just don’t feel that democracy is working for them, that elections are making any big difference for them, which is why we’re seeing maybe some of these sort of radical leaders win, populist leaders win in places such as Argentina.

Tony Nash


Well, I don’t know. So here in the US, we have the boomers, Gen X, millennials, and then Gen Z. I have three kids that are Gen Z, and I find them, the discussions that they have about politics are pretty informed. I wouldn’t say very informed, but pretty informed. Their friends who talk about politics, they’re pretty informed. Again, they’re getting a lot from social media, but I think they do have the opportunity to dig into issues. And so I think there’s always an observation from older generations that kind of younger people don’t care as much about politics, but the fact is they’re not paying as much in taxes. They may or may not own property. They may or may not have kids attending a school. So they just may not be as interested in particularly some of those local issues. Right. But I wouldn’t necessarily say that we’re seeing, I would say more extreme candidates because of, say, the Gen Z population. I think it’s a balance of, say, here in the US, it’s a balance of baby boomers. And when we look at the disposable income that people can put toward campaigns here in the US, it’s really overwhelmingly the baby boomers who lend to campaigns that then become extreme.

Tony Nash


So I don’t know what it looks like in other countries, but I know that the level of disposable income and the giving to campaigns here in the US is largely done by baby boomers.

Peter Lewis


And when your kids discuss elections, do they feel that the outcome is likely to make any difference to them personally, to their livelihoods, to their chances of getting a better job or a higher paying job?

Tony Nash


I think potentially, yes, I think they do. One of the things here in the US, obviously, we have local elections and then we have state elections, and then we have national elections. The national elections are what gets most of the attention. But the things that have the most, the races that have the most to do with them getting jobs really are the local and state elections. Is a state more appealing economically? Is there a regulation locally? These sorts of things, but they’re paying more attention to the national elections, of course, because that’s what’s in media. But I think they find the local elections pretty boring, quite frankly. And so they are paying attention to the national elections. And I think they do see that as an opportunity for them. Again, they’re not incredibly well informed, but I think they do see the national elections in terms of social policy and economic policy as something that will impact their lives.

Peter Lewis


And, of course, we’ve got to mention the US election coming up in November. Do we have any sense of what a potential Trump presidency is going to look like?

Tony Nash


That’s a big assumption, Peter. I don’t know. I think there is more of a competition on the republican side than we’re led to believe. I don’t know. It’s probably going to be Trump, but I think it’s possible that there is a different candidate. I don’t know exactly who would be, but I think there’s more of a competition on the republican side than some of the polls today are showing because what we’re seeing are a lot of national polls, and we don’t necessarily vote nationally in the US. We vote at a state level, which awards representatives who vote proportionally to the number of representatives that we have in the. So I think it’ll be more of a contest than we’re led to believe. Now, if Trump is know, I’m not really sure because the last time around, he was not a great administrator. He definitely speaks from the bully pulpit, but he’s not a great administrator. And I think many people who are, say, middle aged or younger in the US look at the current president Biden, and they look at Trump as a potential candidate, and they’re both 80 years old, give or take. And I think the concern from a lot of voters is they want a president who has to live with the consequences of their own policies.

Tony Nash


So I think Americans are looking at these older candidates who are at the extreme end of electable and saying, look, these guys, I’m not really sure that they should govern because they’re really too old to live with the consequences of their policies. So that’s why I think we may see more of a contest on the republican side than we’re being led to believe right now.

Peter Lewis


Mean, on the Republicans. I mean, there are candidates, aren’t there, who are quite considerably younger than Trump who could present an alternative? I’m thinking of people like Nikki Haley, Ron DeSantis. They’re all sort of candidates who would have to live with the consequences of their decisions.

Tony Nash


That’s right. And so until we start seeing some of the primaries come in with Iowa, New Hampshire, and some of these early primaries, I don’t know that we’ll necessarily understand what people on the ground are thinking. And let’s say, for example, Trump doesn’t win Iowa. Well, we’ll hear, well, Iowa is not really important. And then if he doesn’t win New Hampshire, we’ll hear him say that, well, New Hampshire is not really important, these sorts of things. But I do believe that as we start to see some of these early primaries come in, other Americans will get a view of what those early voters are thinking, because these candidates have spent a lot of time on the ground in Iowa, in New Hampshire and other places. And so they’re really reflective or starting to reflect what some of these people on the ground are hearing and seeing.

Peter Lewis


And if Trump were to win, I mean, the way he’s talking at the moment, it sounds like his presidency is going to be quite a vindictive one. It’s going to be about taking revenge on all the people he feels have slighted him over the last sort of four years or so.

Tony Nash


Yeah, I think it’s really interesting to see the mood in 2016 was very different from what it is now. And the mood in 2016 was that people just wanted to see some sort of change. They felt like their voice wasn’t heard. At least this is on the republican side. Right? They really wanted to see change. I think Trump today is an angrier candidate and a more vindictive candidate than he was in 2016. In 2016, he came across as frustrated but constructive. He now comes across as vindictive and angry. And I don’t know how many people that’s going to appeal to. I know there are a lot of frustrated voters, but I’m not really sure that having that angry of a message can really attract the voters that he needs.

Peter Lewis


And he’s also coming across as being fairly illiberal as well. He’s going to tear down some democratic institutions that have been around for a long time and doesn’t seem to respect some of those institutions.

Tony Nash


Well, we’ll see. I mean, does he have the power to do see a lot? We’ve seen a lot of, say, directive government from the executive office. We saw it under Obama, we saw it under Trump. We see it under Biden, where these things are then taken to the federal courts and they’re struck down. So can he actually disassemble some of those institutions? I think it would be really hard.

Peter Lewis


Well, look, Tony, it’s going to be a fascinating year. Look forward to talking to you more about some of these issues as the year develops. As we said, Taiwan’s elections coming up in just a few days time. So thank you very much for your contribution this morning. Have a happy new year. Look forward to speaking to you.

Tony Nash


Thank you, Peter. Happy New Year.

Peter Lewis


That’s Tony Nash, who is the founder of Complete Intelligence.

Categories
Podcasts

BFM 89.9 Market Watch: AI Premium Overdone

This podcast is originally produced and published by BFM 89.9 and can be found at https://www.bfm.my/podcast/morning-run/market-watch/nasdaq-sell-down-tech-ai-premium-us-corporate-results-season.

With CI Markets Free, our goal is to democratize financial insights. We believe that everyone should have access to powerful forecasting tools, enabling them to make informed decisions that align with their financial goals.

In terms of the oil and gas industry, the geopolitical crisis in the Middle East is not expected to have a significant impact on the industry. Despite the volatility in oil prices, there have been consolidation deals within the industry, as companies look to prepare for the future and navigate the shift towards green energy.

In the US markets, there is a sense of nervousness regarding the future of AI and tech valuations. The recent earnings reports have shown that 77% of S&P 500 companies have beaten street expectations, but this could be attributed to a game of meeting or beating numbers rather than a true reflection of corporate America’s performance. Business activity in the US has picked up in October, driven by a rebound in factory demand and an easing in service sector inflation. This trend is expected to continue into 2024. The Yen has weakened against the dollar, but the BOJ is not expected to intervene unless it reaches a level of discomfort.

Meta, formerly known as Facebook, reported better-than-expected third-quarter profits and revenues, driven by a recovery in digital advertising. The company’s operating margin doubled to 40%, its best in two years, largely due to cost-cutting measures. However, its augmented reality division, the metaverse, has incurred significant operating losses. Despite this, Meta’s CEO, Mark Zuckerberg, remains committed to the metaverse. The company expects revenue to be between $36.5 billion and $40 billion for the fourth quarter. Meta is also facing a legal challenge over its addictive qualities and impact on the mental health of younger users.

Transcript:

BFM


BFM 89.9, it’s 7:06 AM on Thursday, the 26th of October. You’re listening to The Morning Run. I’m Shazana Mokhtar with Wong Shou Ning. We’re going to kickstart this rather lovely-looking Thursday morning with a recap on how global markets closed overnight.

BFM


Okay, it’s a nice day, but it wasn’t such a nice night for US markets. They all ended in the red. The Dow is down 0.3 %. And I want to highlight on a year to date basis, it is now in negative territory. It is down on a year to date basis also by 0.3 %. And Nasdaq had its worst day so far this year, down almost 2.5 %. So it’s only up 22 % on a year to date basis. Meanwhile, we look at the S&P 500, it was also down 1.4 %, only up nine % on a year to date basis. So all these earlier gains that we saw throughout the year seem to be slowly disappearing. Meanwhile, if we look at the Asian markets, the Nikkei225, however, was up 0.7 %. Hang Seng was up 0.6 %. Shanghai Composite up 0.4 %. The Singapore Straits Times were however down by 0.2 %, while our very own FBMKLCI was actually up by 0.5 %.

BFM


So for some thoughts on what’s moving international markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. I would like to start with oil and gas. So Shell Oil has given the US some measure of energy independence, but the number of operating oil rigs, a barometer for activity has dropped 16 % to 502, compared with the same time last year. How do you see the geopolitical crisis in the Middle East affecting the fortunes of this industry?

Tony Nash


Yeah, it’s a great question. At this point, I don’t see too much impact at this point. There is a lot of pressure to continue to reduce crude prices. And we’ll see actions in markets, we’ll see intervention by, say, central banks to try to reduce crude prices. But I think we’ll also see, even with the geopolitical risk in the Middle East, we’ll see the supply from Iran continue to hit global markets. We saw with the geopolitical issues in Russia and Ukraine that Russian oil continued to hit markets. I think the go-to place for crude traders is, Oh, gosh, geopolitical risk in the Middle East, that must mean crude prices are going to rise. Not necessarily the case. If they don’t rise, you probably won’t see those rigs come back online.

BFM


Meanwhile, Tony, we have seen a lot of consolidation or quite some pretty big consolidation deals within the oil and gas industry. I think despite the volatility in oil prices. How do you see this trend moving forward?

Tony Nash


Well, yeah, I think these companies are seeing that if the 2030, 2035 goals are kept by a lot of the companies that have… Sorry, national legislatures and regulatory bodies that are trying to push green energy and force, say, electric cars by 2035, which I believe California is doing other things, then really the for these guys are capped, so it’s time to start consolidating. But if that doesn’t happen, which we’re starting to see some pushback on that, then it’s also a great time to consolidate because we’re in a sweet spot where crude prices are, it’s not too high, it’s not too low. And so we’ll likely see more of these deals, not a lot more, but a couple more of these deals on the horizon.

BFM


And let’s talk about U. S. Markets. Well, Nasdaq had a pretty rough day down 2.5 %, pretty much the worst for the year. We did see Meta and IBM come out with their numbers, both actually beating street expectations. What’s driving this nervousness?

Tony Nash


I think a lot of people are feeling that, at least for now, AI has played out. You even had Bill Gates today come out and say that large language models are not what people think they are in terms of the level of innovation, that thing. I think large language models and AI are really cool, and I think there’s a lot more room to run. But I do think valuations are very stretched right now. With interest rates rising, it’s very hard to stretch tech valuations much further. A lot of these companies for the past, say, four quarters, you can count the number of times they say AI in their quarterly earnings calls, and it’s just increased. As they’ve said AI more and more, it’s just helped their share price. But I think that’s a little bit played out. I think until people start to see real gains from AI outside of the chip makers, like CONVIDIA, real gains within corporate sectors, real gains within the user sectors, then I think we may see valuations as stretched as they can be, at least for now.

BFM


Okay, so far, about a quarter of the S&P 500 companies have reported earnings, and apparently, 77 % of them have actually beat street expectations. I’m not sure whether it’s just the street being conservative or really corporate America is doing better than I expected. So is there some contradiction? Because everyone’s been talking about that recession that’s coming, but just never seems to happen yet.

Tony Nash


Yeah. The recession calls are a big game, too. It’s a little bit of conservatism on behalf of analysts and a meeting of the minds between, say, the CFO to the publicly traded companies and analysts, and everyone wants to beat their earnings, right? So it’s a game. Everything, it’s a game. We saw MetaBeat and we saw Microsoft Beat and all this stuff. That’s great, but it’s a game number. Nobody’s going to put a number out there that they knowingly that they’re going to either meet or not meet. They all want to beat everything by a certain amount. It’s a bit of a game. I think we’ve seen in sectors like real estate where things haven’t gone so well. We’ve seen in energy where things haven’t gone so well. Again, those energy valuations are down a bit and that’s created some room for some of those deals that we just talked about. Sectors like materials and health care, they’re down a bit as well compared to a year ago. So even though some of these current firms beat, they are a bit sensitive to market conditions of debt and other things. And so it’s not all good all around.

BFM


Can we talk about US business activity, which picked up in October after back to back months of stagnation, helped by a rebound in factory demand and an easing in service sector inflation? So do you see this trend continuing into 2024?

Tony Nash


Yes. What we’ve seen with business activity is we have seen some prices come off a little bit. With service sector activity, really service sector inflation comes down to the wages of service sector workers for the most part. As the rate of inflation for those service sector wages have started to slow, you’ve seen on a relative basis, more activity. A lot of this is really inflation-slowing and the impact of interest rate rises hitting markets. In some ways, like we said, real estate and some other sectors, it’s not a good thing. But in services, as we start to see some pressure on those prices, it can be a better thing for consumption because we do have wages rising in a lot of the economy, but costs have just continued to rise, especially in services. So as people are seeing some of their service costs slow down a little bit and in some cases even decline, people are more willing to spend.

BFM


Okay, I’ve got a quick question on the Yen. It’s slumpab past $150 per dollar, weakest level this year. BOJ, are they going to intervene?

Tony Nash


I think at 150, it’s okay. I think at 155, it becomes a little bit uncomfortable. I think it’s a delicate balance, and they’ll try to keep it at 150 as long as they can. But it really all depends on what happens with the dollar. With geopolitical risk, the dollar becomes more appealing generally, not in all cases, but it becomes more appealing generally as a safe haven. The Yen is a secondary safe haven currency, but it really depends on their monetary policy. If they continue with YCC and some of these other policies, they really need to tighten slightly. Not a lot, but slightly. I’m sure you guys remember 2012. Maybe you were in school. I don’t know, but maybe I’m sure you remember 2012 when Abenomics first came into discussion. The Yen was trading at ’76, I think, right? And then within a month or two, it was in the ’80s or ’90s, and it ripped really quickly.

BFM


Yeah, Tony, I’m the only one in the room that remembers that. You and I.

BFM


I read history books.

Tony Nash


That’s right. The Yen can really fluctuate. It hits these extremes. Once they change policy, it can really boomerang back fairly quickly. If they made some policy tweaks, we could see a Yen at 1:30 or 1:35 or something like that. It sounds like it’s a long way from here, but it’s actually not.

BFM


Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. A lot to watch there, especially as we’re in the thick of earning season. Speaking of that, let’s talk about some of the earnings that have crossed our table this morning. A Meta, third quarter profit and revenue beat analyst expectations thanks to a recovery in digital advertising ahead of the holiday season. We saw this exact same trend with Alphabit yesterday. They also saw digital advertising recover. So Meta is also seeing the same thing. Revenue rose by 23 %. It’s the fastest rate of growth since 2021. They achieved $34.2 billion better than the expected $33.6 billion.

BFM


Okay, so at the same time, their operating margin in the third quarter doubled to 40 %. It’s best in two years. Now, a lot of it is actually driven by their cost cutting measures, right? They’re keeping an eye on this because they’re a bit uncertain in terms of the outlook. So the best thing to do is just really just not spend very much money. Remember their augmented virtual reality thing that they.

BFM


Are so The metaverse. It was all the rage a while back. It’s largely forgotten right now.

BFM


Well, it’s cost them $3.74 billion in operating losses. So you might have forgotten, but they’re paying the price of your forgetfulness. Clearly, it’s not going to turn around so quickly. Since the start of 2022, this division has lost close to $25 billion. But Mark Zuckerberg is plowing ahead. He’s not giving it up. So the outlook, they expect revenue to come in between 36 and a half to 40 billion for the fourth quarter. Analyst will however expect sales for that quarter of 38.5, like the analysts being a bit chicken and really coming in the middle. Now, does the street like this name? The answer is still yes. 60 buys, seven holds, two sells. Consensus target price, 373 US dollars and 87 cents. During regular market hours, the stock was actually down $13. $2.99 to $299.53. The stock’s still up 148 % on a year to date basis.

BFM


Well, Meta has found itself in a bit of a legal pickle over in the US. We’ve got several states that are actually filing a lawsuit against Meta for its addictive qualities impacting the mental health of the younger generation. We are going to get more into that social media impact a little later in the show. 7:19 in the morning, we’re going to head into some messages, but we’ll come back to cover the top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9.

Categories
Podcasts

BBC: Getting aid into Gaza

This podcast is originally published by BBC Business Matters in this link: https://www.bbc.co.uk/programmes/w172yzrsng5klrk.

BBC’s Description:

The World Health Organisation says it needs urgent safe passage to send supplies as people are ‘dying unnecessarily from a lack of water and medical care’.

President Biden and other world leaders have called on Egypt to open the border known as the Rafah crossing as tonnes of aid piles up.

Sam Fenwick discusses this and more business news from around the world with Tony Nash, chief economist at Complete Intelligence, in Texas, and Rachel Cartland, author, writer and expert on Hong Kong.

With CI Markets Free, our goal is to democratize financial insights. We believe that everyone should have access to powerful forecasting tools, enabling them to make informed decisions that align with their financial goals.

Transcript

BBC


Ask our guests today who join us from Hong Kong and Houston, Texas. Good evening to Tony Nash, CEO of Complete Intelligence. It’s an AI forecasting firm, so you should be quite well-placed to talk to us about chips and AI.

Tony Nash


Absolutely, yes. Thank you for having me.

BBC


It’s always good to have you on the show, Tony. Thank you for joining us. I want to just come to Tony Nash on this. As we say, Joe Biden arriving in the region on Wednesday had planned meetings with Jordanian which have now been canceled, also had a meeting with President Abbas of the Palestinian Authority and President CC of Egypt, all of which have been postponed according to the White House. What do you think Mr. Biden will want to achieve from this visit now?

Tony Nash


I think the biggest thing that Biden wants to achieve is the release of American hostages. And if that’s all that can be coordinated, then that’s a major win. It looks very good for the domestic population in the US, and it brings American citizens free and clear from this conflict. I really think that that’s the main priority for Biden’s visit at this moment.

BBC


Okay, thank you, Tony Nash. Let’s bring in Tony Nash. He’s the CEO of Complete Intelligence, and it’s an AI forecasting firm. He’s based in Houston in Texas. As we said, this policy has been in place 12 months. Do you think it has done anything more than just annoy chip makers in the United States?

Tony Nash


NVIDIA says that they comply with the laws that are in place, and they’ve already said that any announcement they made today really won’t have a meaningful hit on their business.

BBC


Although their shares nose-dived, and lots of other chip companies did the same.

Tony Nash


Yeah, they did. There was an estimate that it would hit about $100 billion for their business. It’s really unclear, but they’re a regulated company, they have to comply with what are called ITAR regulations, which is International Technology Regulations that the US government puts out. The real issue here is, will NVIDIA chips be used for Chinese military applications? That’s really what the US government is worried about. And so there are a thousand ways to circumvent the regulation, ship into a third country, all these sorts of things. So it’s not as if the chips won’t get into China. There have been ways to circumvent these regulations for hundreds of years. So they’ll find a way to get them. The real question is, will they get them at the scale that they want them?

BBC


We talked about this time, 12 months ago, we were having the conversations about why this policy had been brought in. And it seemed to be, prior to this, it had been about keeping China and the technology 20 years behind the advancements of the US. And now the policy had changed and they wanted to stop all advancements completely, just cut them off. It doesn’t sound like it’s working from what you’ve said.

Tony Nash


I don’t think anybody expects China’s advancements to stop completely, but I think having the state-of-the-art technology shipped into China to be placed in Chinese military equipment when China has been threatening Taiwan, they’ve been making other threats, the US has been threatening China, these sorts of things, of course, you want to hamper your adversary as much as you can. I think this is just normal technology regulation, export controls. Whoever has the leading edge technology wants to control the leading edge technology. Will China continue to develop its chips? Yeah, absolutely. Are they behind what NVIDIA is producing? Yes, they are. Will it take them a few years to catch up? Yeah, it’ll take them 5-10 years to catch up. But I think over time, China will definitely catch up with where the US is. It’s just going to take some time.

BBC


Now, apparently, NVIDIA was selling an A-800 and an H-800 type of chip, and they were able to do that because it went around the original ban, and then now those have been banned. Will it be that these chip companies will just make a chip that isn’t covered by the ban, and then the government will change the goalpost again?

Tony Nash


Well, that’s the way it works, right? That’s how regulatory arbitrage works. So NVIDIA will look to the letter of the law and conform a chip to match the letter of the law. And then if the trade regulators in the US want them to change, they’ll change. These types of regulations change pretty regularly, and technology companies have to adjust their output according to what the regulators say. This sounds extreme. It’s actually not extreme because there are ITAR regulations, technology export control regulations in most countries. It’s just because it applies to AI-specific chips that it’s really getting this level of attention.

BBC


Let’s talk to Tony Nash first. What do you make of this plan? Do you think it could rival the Panama Canal?

Tony Nash


Yeah, absolutely. I think it’s a great plan. I live in Texas, which is on the US border with Mexico. I think this railway plan is fantastic. There is already a lot of electronics manufacturing moving from Asia to Mexico to service the US. I think three years ago is the first year in 20 years that the US imported more televisions from Mexico than from China. So televisions are pretty straightforward to assemble now. And so more and more sophisticated electronics is moving to Mexico. What your guest said about obviously transiting things across Mexico, but also manufacturing things in Mexico, I think that’s very much on the table, especially as we see more trade regionalization and manufacturing regionalization.

BBC


Is that because of what we’re calling nearshoring, this thing that occurred during the pandemic?

Tony Nash


That’s right. Exactly. Similar. So the risks of having a majority of your manufacturing concentrated, I think Northeast Asia makes 35, 40 % of the world’s manufacturing goods. And so during the pandemic, we saw all the supply chains lengthened because they were bottlenecks. Whereas if we had had those, whether they’re in, say, Eastern Europe or for Europe or Mexico for the US or something like that, I think it reduces a lot of that transit risk for a lot of people. And I think East Asia is probably facing some reinvestment over the next, say, 10 years because that nearshoring or regionalization is a real… It’s definitely on the horizon.

BBC


What was interesting, Tony, is that Benjamin there was talking about investors from the US being interested in building that original rail line a century ago.

Tony Nash


Yes, and obviously, the US was very instrumental in building the Panama Canal as well. The US is very interested in developing Mexico and developing Central America. It doesn’t surprise me that that was the case 120 years ago. It doesn’t surprise me that that’s the case today.

BBC


Tony, there were concerns or have been concerns about what’s known as debt trap diplomacy, that if you borrow money off China, then they will somehow have you over a barrel. Has that come… That still a worry for the US, do you think?

Tony Nash


For the US? Not necessarily, but certainly for African countries. I remember speaking with African representatives probably six or seven years ago, talking to me about how can they restructure their debt for the Belt and Road. The really strange part about the Belt and Road is it’s fully financed in US dollars. We have a time right now where the US dollar is appreciating. Not only is that debt at a relatively high rate, I wouldn’t say it’s sky high, but a relatively high rate, but you have it in a currency that’s appreciating against most emerging market currencies. It’s very difficult for companies to pay back or countries to pay back. I think one of the things about Belt and Road that really isn’t covered that much is the Belt and Road peaked in 2017 and 2018. The funding that you have going into the Belt and Road today is about a fifth of what you had in 2017 and 2018. Construction projects like the transport construction projects that you highlighted, those things all happened in 2013 through 2018, really. The largest portion of investment coming out of Belt and Road right now today in 2023 is for mining. It’s not construction, it’s investment.

Tony Nash


When you look at what’s tabulated as Belt and Road investment, it’s really Chinese money going into mining worldwide.

BBC


Just gives us time at the end of the show to ask our two guests who’ve joined us today, Rachel Cartland and Tony Nash. What are your side hustles? Rachel, you tell me what you’re earning money from.

Rachel Cartland


What’s your side hustle? I’m retired. My husband is constantly reminding me that I’m busy all the time, but with nothing that brings in a dollar, although I have endless voluntary commitments, which are great things to do. I think it’s what they call a portfolio, isn’t it? -bits and pieces of things –

BBC


Absolutely.

Rachel Cartland


-rather than a side hustle.

BBC


-it sounds very satisfying. Tony Nash, do you have time for a side hustle when you’re doing your AI forecasting?

Tony Nash


I make time, Sam. I have to make time. So I run an AI company during the day. On the weekends, I have my own coffee roastery called Nerve Roaster, and I sell coffee as my side hustle because it’s what I love.

BBC


You love drinking coffee?

Tony Nash


Sorry?

BBC


You love drinking coffee?

Tony Nash


I love roasting coffee, so I sell roasted beans.

BBC


Fantastic. I had no idea, Tony. You are a man of many talents. Thank you very much for joining us on Business Matters. And thank you also to Rachel Cartland, author, writer, and expert on Hong Kong. That was Business Matters. Thank you so much for listening. My name was Sam Fenwick. The producer today was Hannah Malane. I’ll be back the same time tomorrow. Don’t join me if you can.

Categories
Audio and Podcasts

Fitch Is Late To Game

This podcast is originally produced by BFM 89.9 and published in https://www.bfm.my/podcast/morning-run/market-watch/fed-markets-economy-interest-rates-dollar-fitch

In this podcast, the hosts discuss the performance of global markets and provide insights from Tony Nash, CEO of Complete Intelligence.

The US and Asian markets experienced declines, with concerns arising over potential downgrades of US banks. Nash believes the stock market has reached its highs for the year and advises caution in investment choices.

The conversation then shifts to the challenges facing the Chinese property sector, highlighting the impact on property developers and risks to China’s economy. The Eurozone’s GDP numbers show stagnation or decline, with Ireland’s outperformance driven by foreign companies. JPMorgan downgrades its forecast for Chinese GDP growth. The discussion also covers Target’s missed sales expectations and Cisco’s weaker outlook for its 2024 fiscal year.

The podcast also mentions the expectation of a slowdown in capital spending by cloud and telecom consumers in 2024, despite the dominance of cloud services offered by companies like Amazon and Microsoft. Stock details are provided, including the consensus target price and the number of buys, holds, and sales.

Chapters

01:21 Fed Meeting Minutes
02:11 Concerns about US Banks
03:15 Performance of Major Indices
04:45 Outlook for Market Direction
05:46 Investing in Stable Assets
06:04 China’s Property Sector Challenges
07:49 Eurozone GDP and Employment Figures
09:45 Consumer Stocks and US Retailers’ Performance
12:38 Cloud and telecom spending expectations

Transcript

Shazana

For some thoughts on what’s moving international markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks, as always, for joining us. Let’s start off with the latest Fed meeting minutes that were just released for July. How much of Fed chairman Powell’s Davish tone was shared by the other Fed policymakers?

Tony

Yes, some, but to be honest, not a lot. The Fed officials really see no recession for the rest of 2023. They’re saying spending is strong, real activity is stronger than anticipated. They really don’t see a recession at all. There’s really no reason for dovishness there. They still see inflation risks and they still see a potential need for higher rates. They’re also saying that quantitative tightening, meaning the shrinking of the money supply, will continue once interest rates stop because they’ve got a bunch of these items on their balance sheet that they’ll continue to let expire. So that will continue to put upward pressure on the dollar as well as higher interest rates.

Mark

Now, there are mountain concerns that Fitch could continue to downgrade US banks, including tier-one names like JPMorgan. So how do we get from a stable situation for US financial institutions a year ago to this current state of affairs?

Tony

Yeah, I think for the tier ones, this is really late. It doesn’t make a whole lot of sense. The tier ones are effectively US government institutions. And when they were buying the regional banks back in March, them taking on some extra risk probably made a lot of sense. But even those regional banks, for the most part, have gotten much stronger. Their balance sheets have gotten stronger. Their net interest margin and other things have gotten stronger over that time. This seems to be 4-5 months late. Unless these guys are expecting a massive real estate wipe out or some massive market event or something like that, this just doesn’t make a whole lot of sense because it should have already been done some time ago if it were going to happen.

Wong

Okay, can we talk about markets? Because if I look at the performance of the major indices, look at NASDAQ. It’s only up 28 % on a year to date basis. S&P.

Tony

Only?

Wong

Only, only. Yes, I love to use the word only. And S&P 500, 14 % up. So there has been some retracement. Do you expect further retracement? Because results season pretty much over about 80 % done. Where are markets going from here?

Tony

Yeah, I think we’ve seen the highs for the year. I don’t think we’re going much higher. It’s either sideways or marginally down from here. I think you’re going to see a lot of people say, Oh, gosh, we’re just getting started. There’s a GDP now in the US right now. The estimate on this quarter’s GDP is over 5 % or something right now, and people are saying, “We haven’t even gotten started on equity markets,” that sort of thing. And there are people who still believe we’re going into a massive recession. And it’s possible that we line up somewhere in the middle, which is what the Fed’s been trying to do. And it’s possible that things are volatile, but not necessarily directionally up or directionally down. I think generally for the rest of the year, that’s probably where we’re going to be. But we’re going to have days that look really good and we’re going to have days that look really bad. And there will be commentators that will extrapolate that out to either fantastic or dire.

Wong

Okay, so while markets trade sideways, where should we park our money?

Tony

Well, I think you have to look at what’s happening with, say, interest rates. I mean, it depends on how aggressive you are, but you really have to look at what’s stable. You have to look at what’s continuing to give value. I’d be careful of things that don’t give strong signals because with interest rates staying higher for longer, valuations are likely going to be compressed a bit. I’m not saying valuations are going to crash, but there’s likely going to be some valuation compression, and margins for companies are likely to continue to be compressed. So it just makes things difficult for companies that are just doing okay. So I would be really careful and I would look for some of those characteristics.

Shazana

Let’s turn our attention over to China because we do know that China is facing mounting headwinds in the property sector. How are you viewing this? Is this a storm in a teacup? Or are there signs that it could spill over to markets outside the mainland, especially in Hong Kong? What does that mean for investability in that region?

Tony

It’s a big problem. Real estate demand in China is very poor. We just had a report, I think it was out this morning in Asia, among 70 cities in China, 49 saw new home prices fall month over month from July. That was a previous month we saw prices fall in 38 cities. Real estate prices are falling. Of course, this is a major source of wealth for people in China. Property developers don’t have money because prices are falling, and so the amount coming in is falling and the value of the houses they have are falling. They can’t service their debt, they can’t service their existing properties, and it’s just a very difficult situation. When you look at the debt from Country Garden and Evergrande, their combined liabilities are approximately the size of the PBOC’s official non-performing loans for all of China. Okay, so those two companies on their own, they’re effectively equivalent to the debt that the PBOC claims for the rest of China. So it’s pretty bad. And today or sorry, yesterday, Asia time, Country Garden is warning of onshore bond default. So it’s not just an offshore phenomenon. Early on in this, this was an offshore phenomenon.

Tony

They had taken USD debt or something like that, and they were going to default on that. And that’s fine. That’s for rent, lenders. But defaulting onshore is something that’s relatively new.

Mark

Well, obviously not very good news for China, but now let’s switch our attention to Europe, where preliminary second quarter GDP from the Eurozone came out last night along with employment figures. What do the numbers tell you about the state of play in Europe and would they dodge a hard lending?

Tony

Yeah, it’s great for Ireland, really not great for the rest of Europe. So Ireland way outperformed pretty much everywhere else underperformed economic growth. So the EU generally, again, outside of Ireland, is either stagnating or declining. And a lot of the Ireland performance is based on foreign companies that have their headquarters in Ireland. So they’re reporting in Ireland, and it counts for economic growth there. So the underlying growth was weaker, of course, well, probably weaker than the GDP growth that was stated. So it was 0.3 % quarter-on-quarter. But again, like I said, given the 3.3 % jump with Irish GDP, it doesn’t really look good for the rest of the EU. Employment was up, which is great. But things, I guess, on the top line look stable. But if you take out Ireland’s performance, things really don’t look good. We now have a few countries in recession. Estonia, Hungary, and the Netherlands are in recession, which obviously is very difficult. We have industrial production. Industrial production was up the most in Ireland, which is great, but it’s also up in Denmark and Lithuania. So this isn’t a broad based economic success story. You have places like Germany and France, huge economies that are really struggling.

Tony

And you have powerhouse economies that punch above their weight, trading economies like the Netherlands, which are in a recession. So it’s a tough place for Europe right now.

Shazana

Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Commenting on a range of economies there. We’ve got the US, China, and ending with the Eurozone in the mix.

Mark

And not very good news for China as well. And JPMorgan, which at one time was very bullish on the Chinese GDP growth, predicting 6.4 % this year, has actually downgraded and lowered its full year forecast down to 4.8 %. I think this is one of the first few banks that come out to say GDP is going to be below 5 %. And for next year, they’re predicting it will only be a 4.2 % growth rate for China.

Shazana

All right. Well, meanwhile, if we take a look at what’s happening over in the US, I think, as Tony mentioned, recession is less and less likely, it seems, over there. But at the same time, we are seeing consumer stocks taking a hit due to softening consumption. We see Target missed its sales expectations even as it beat estimates for earnings in the second quarter. Revenue came in at $24.8 billion. This was a 5% drop from the previous year, while net income was $835 million, up from 183 million in the same period.

Mark

Last year. The retailer also cut both its full year’s sales and profit expectations because it’s struggling to convince customers to spend more than just necessities. This merchandise mix, which includes many fun and impulse-driven items, has become a liability as consumers focus on needs rather than wants.

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Audio and Podcasts

BFM 89.9: Don’t Panic, Debt Default Will Not Happen

This podcast was originally published by BFM 89.9. Find the original link at https://www.bfm.my/podcast/morning-run/market-watch/us-debt-ceiling-2023-global-markets-concerns.

In this podcast episode from BFM 89.9, the hosts discuss the latest updates on global markets and dive into the US debt talks. They are joined by Tony Nash, CEO of Complete Intelligence, who shares his perspective on the debt ceiling and its potential impact on the markets. Tony believes that a US debt default is unlikely and views the current concerns as overblown political maneuvering. He highlights that the debt ceiling issue arises regularly and is often resolved at the last minute, causing frustration among Americans.

The conversation then shifts to the state of the US economy, particularly the labor market. Tony notes that there is fatigue in jobs growth, with ongoing layoffs in various industries, including tech companies. The hosts also discuss the recent rise in the US April services PMI, indicating a shift from goods to services and suggesting continued growth in the services sector.

Nvidia’s quarterly results become the focus of the discussion, as the company outperformed expectations and experienced significant stock price growth. Tony explains that Nvidia is a key player in the AI infrastructure space and has benefited from the increasing adoption of AI and machine learning technologies. However, he cautions that the high valuation and potential impact of a recession on corporate infrastructure spending could affect Nvidia’s future performance.

The podcast concludes with a recap of Nvidia’s financial performance and analyst expectations, noting the positive sales figures and high target price. The hosts question whether a company involved in AI deserves the current forward PE ratio of 66 times.

Overall, this podcast provides insights into the US debt ceiling issue, the state of the labor market, and the performance of Nvidia in the context of the broader market trends.

Transcript

BFM

This is a podcast from BFM 89.9. The Business Station. BFM 89.9. It’s 7:06 A.M. On Thursday the 25 May. You’re listening to the Morning Run. I’m Shazana Mokhtar, with Wong Shou Ning and Mark Tan. In half an hour, we’re going to be discussing the outlook for Netflix and the US streaming services. But as always, we’re going to kick start the morning with a recap on how global markets closed overnight.

BFM

The markets are all red, probably thanks to the jitters surrounding the US debt talks. In the US markets, the Dow Jones was down 0.8%, S&P500 down 0.7%, and Nasdaq down 0.6%. Over here in the Asian markets, Nikkei down 0.9%, Hang Seng down 1.6%, Shanghai Composite down 1.3%, STI down 0.1%, and our own FBM KLCI down 0.1%.

BFM

All right, so for more insights on what’s moving markets we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. So let’s start with what seems to be keeping markets on tenterhooks. In recent commentary, though, you’ve opined that a US debt default really isn’t on the table. So why do you say that? And why are current concerns of a debt default overblown, in your view?

Tony

Yeah, so the debt ceiling literally happens every other year in the US. And it’s happened for the past 15 years. So I’ve said this many times. This is shameless partisan positioning intended to show politicians coming to the rescue of a crisis that they created themselves. So they’ll get media attention. Then at the last minute, probably after the deadline, they’ll miraculously find a solution when everything seems the most chaotic. So this is something that most Americans are really frustrated by. It’s like we know they’re not going to default. If they do, it’s ridiculous, and it’s just shameless partisanship. So are people here worried? To be honest, not really. I think a bunch of portfolio managers are being very careful in markets, but on a personal level, I seriously doubt that many people are all that worried.

BFM

So, putting aside the political shenanigans, of much greater importance to global markets is the state of the US economy, particularly the labor market. Is there a sense of fatigue in jobs growth or more room for expansion?

Tony

There’s definitely fatigue. If we look at the data since the end of COVID there’s a metric that the Fed…

Tony

Okay, we’re going to try and get Tony back to talk more about what’s happening with the US labor market. But as he said earlier about the debt ceiling, he’s taken a little bit of a, I guess, sanguine tone on it. He’s less worried that debt default will actually have long term implications. He thinks things will be resolved, just that it’ll take a lot of drama to get there.

BFM

Yeah, but the consequences are already being felt. I mean, I’m seeing this headline on Bloomberg, United States may be cut by Fitch on debt limit fight because US ratings have been placed on Watch Negative from Outlook Stable by Fitch. So the rating watch reflects the increased political partisanship that is hindering reaching a solution to race or suspend a debt limit despite the fast approaching, as we call it, X State. This is the first rating agency that has already given them some warning snakes, right? And once this happens, what this means is that the cost of borrowing is going to rise quite significantly on top of the fact that the interest rate in the US is already 5.2%. I mean, the Feds have raised it what, ten times since last year?

BFM

There’s a lot of moving parts to this picture, and I think there’s also discussion on what is it that other stakeholders in the US government can do if Congress can’t get its act together, what can the Treasury do? Can the Fed do anything? In any case, I think the Treasury will probably try to prioritize the debts that it owes, which means that some people will may not receive their bills. I think looking at Social Security and Medicaid and Medicare, hospitals, roads, who’s going to maintain all that?

BFM

Well, I do think that we have Tony back on the line. Tony, can you hear us?

Tony

Hi, guys. There you go. Sorry about that.

BFM

No worries.

Tony

On the debt ceiling. What’s interesting what’s happened is this week people in Congress asked Janet Yellen how she did her calculation on finding that X date. So it’s a kind of mysterious calculation and nobody knows. So people are trying to dig into that to understand when actually is the date, because nobody’s showing any math, nobody’s showing any data around it. And again, it seems like this is being hyped as a political ploy. So what you rightly point out about if it does come, the US government will have to prioritize payments. Right? And that’s fine. But again, voters and legislators don’t actually know how she’s coming up with that X date and a lot of people just don’t trust her.

BFM

Well, coming back to the point we were discussing earlier on the labor market, Tony, what’s your sense of how jobs is doing there?

Tony

Yes, jobs are in a rough spot. So there’s a metric called continuous unemployment claims and they’re at their highest level since the end of 2021. So I know that isn’t a long period, but stimulus is worn off, consumer credit levels are rising really fast, and tech companies are still laying off staff. So Verizon, a big telecom carrier here, just announced today that they’re going to be doing layoffs. So we’ve seen the Amazon and Facebook. Facebook yesterday announced another layoff. And so what’s happening now? That those initial layoff announcements were made to give a boost to stock prices. But now that that boost is largely expanded, people are simply not hiring. So they’re choosing not to hire for open jobs as a way to contain their workforce through just retirements and quits and that sort of thing.

BFM

Now, Tony, the US April services PMI rose from 55.1 from 53.6, surpassing the market expectation of 52.6. Isn’t this further evidence that at least in this sector, growth hasn’t been tempered by inflation or the rate hikes?

Tony

Yeah, well, certainly I think what it’s showing is an ongoing shift from goods to services. So during COVID everyone loaded up on goods. For the past twelve to 18 months, we’ve seen a trade off of goods purchases to services purchases. That services PLI will likely continue for the next two to three months, partly because the summer here in the US is holiday season, it’s vacation season, and so services will continue to thrive through that period. So we would expect a services PMI decline, maybe not necessarily contraction, but at least decline in Q3, probably mid Q3.

BFM

Okay, Tony, can we talk about one results, one set of results that came out last night, and that’s Nvidia. Right. They really beat street expectations up 20 over percent stock price. This is one tech stock that has done exceptionally well, I think a lot to do with AI. Are you bull on this name?

Tony

Well, Nvidia has done very well, and definitely top line growth surpassed expectations. So Nvidia is to the AI boom, which Cisco was to the Internet boom 20 plus years ago. Right. So they’re selling the infrastructure for AI and machine learning and a lot of these new capabilities, and people need them. And that same infrastructure is used for crypto mining and other things. So they planned extremely well, and they’re kind of reaping the profits of that right now. So as long as we continue to see companies adopting and expanding AI and machine learning capabilities, the value in Nvidia should be there. I don’t necessarily want to make a prediction on the stock price where it is right now. It’s a pretty high price in terms of valuation and other things. But I think in terms of corporate performance, it’s certainly strong and will remain strong.

BFM

So do you think any stock that has an edge or have first mover advantage when it comes to AI deserves a premium? Just pretty much like Tesla when it comes to electric vehicles?

Tony

Well, I think when you’re looking at a stock value, you have to look at the forward expectations. And so do you believe, or does an investor believe that that company that provides either AI software or AI hardware or something like that, do they believe there’s growth in that area? And if they believe there’s growth, so what’s the multiple on that growth and how quickly will it come? That’s how people come up with those price expectations.

BFM

Yeah, because when I look at Nvidia, the Bloomberg showing a PE of 66 times forward PE. So it looks like markets are really expecting a lot of growth.

Tony

Oh, yeah, they do. And I think part of the problem is people really load up on hardware first. And so that growth may very well continue at that same pace. But it really all depends on what happens to corporate infrastructure spending. And if that corporate infrastructure, meaning IT infrastructure spending continues, then it’s really good news for Nvidia. If we do hit a recession, then corporate infrastructure spending could be hit and that could hit Nvidia in a negative way.

BFM

Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, talking to us about some of the trends that he sees moving markets in the days and weeks ahead. Capping the conversation there with just some thoughts on how Nvidia has performed. And we do have their results coming out overnight, right? They did really well, performing well beyond Wall Street expectations. Their sales in the three months ending July will be about $11 billion, which is 53% higher than what analysts were foreseeing.

BFM

Revenue for the first quarter was $7.2 billion versus 6.5 expected, while earnings per share was $1.9 adjusted versus the $0.92 expected.

BFM

Okay. Sorry.

BFM

Net income was $2.5 billion versus $1.62 billion from the same period last year.

BFM

Okay. I’m so excited to tell you how many analysts cover this. Well, a lot. 44 buys, 13 holds. No sells at all. At all. Okay. So consensus target price, $307, which is already very, very close to the regular market hours share price, which was down one dollars. And but I know aftermarket hours, the stock boomed, shattered by ceiling by going up by 20%. So I won’t be surprised if a lot of the analysts actually rush out to upgrade. But the ceiling to me is the fact that PE forward PES are 66 times. Do you think a company involved in AI deserves 66 times? Which was my question for Tony.

BFM

That’s right. And I think AI is going to be driving a lot of investor interest in these kinds of stocks. But let’s turn to another stock in the tech sector that hasn’t been doing so well or hasn’t done so well recently. Then that’s snowflake. Their sales outlook for the current quarter fell short of analyst expectations, and this did lead to a share downturn. Snowflake software helps businesses organize data in the cloud, and their quarterly revenue is expected to be growing at 34%, but well below Wall Street expectations.

BFM

Snowflake also cut its outlook for the fiscal year, saying product revenue will be about $2.6 billion versus 2.7 it predicted early in March. Analysts had feared that a slowdown demand for cloud services would dance. Snowflake’s pay as you go model.

BFM

Okay.

BFM

But still quite popular with analysts. 29 buys, 13 holds, two sells, albeit not as popular as Nvidia. Consensus target price for the stock, $188. Last time, priced during regular market hours, it was up all right at 718 in the morning.

BFM

We’re going to take a quick break, but we’ll come back to cover more top stories in the newspapers and portals this morning. Stay tuned BFM 89.9.

BFM

You you have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.

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Audio and Podcasts

Don’t Worry, It’s Only ‘Wayang Kulit’ At Capitol Hill

This podcast is originally published by BFM 89.9 The Morning Run. Find it here: https://www.bfm.my/podcast/morning-run/market-watch/global-us-markets-debt-ceiling-april-2023

Tony Nash, CEO of Complete Intelligence, spoke to BFM about what is moving international markets.

The recent April headline CPI numbers were better than the projected 5%, coming in at 4.9%. However, core inflation still printed at 5.5%, and so the Fed is unlikely to cut, making it hard for them to stop raising interest rates. The Fed’s rate rise vote was unanimous this month, indicating that the Fed will continue to raise by 25 basis points in June. Tony said the Fed will look at wages and employment figures along with consumer sentiment, producer prices and credit indicators as well.

With regards to the debt ceiling, Tony said it was a US domestic political tool, and in the end, it would last longer than most people wanted it to last, and we would see some melodramatic brinksmanship.

85% of S&P 500 companies have reported actual results for Q1 2023 to date, and of these, 79% have reported actual EPS above estimates. Tony explained that a lot of this is down to margin expansion, and as raw materials prices fell, labor costs rose quickly, allowing companies to raise their prices further.

However, companies are starting to slow down on price rises as consumers are fatigued with the rises. Some tech companies have started laying people off or signaling no pay rises this year, as they realize pushing price rises is something they won’t be able to do much longer in 2023.

Transcript

BFM

This is a podcast from BFM 89.9, The Business Station.

BFM

BFM 89.9. Good morning. It’s 7:07 A.M. On Thursday the 10 May. You are listening to the Morning Run. I’m Shazana Mokhtar with Keith Kam and Mark Tan. Now in half an hour, we’re going to zoom in on the outlook for Chinese equity markets, specifically the Shanghai Composite and the Hang Seng Index. But let’s recap how global markets closed overnight.

BFM

In the US market, stocks mostly climb as better inflation data offset worries about the stalled talks between political leaders that have raised fears of a US default. The Dow was down 0.1%, but S&P 500 up 0.5%, and Nasdaq up 1%. In the Asian markets, it’s rate traffic lights Nikkei down 0.4%, Hang Seng down 0.5%, Shanghai Composite down 1.2%, STI down 0.2% and FBM KLCI down 0.5%.

BFM

So for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Always good to have you. Let’s start with CPI numbers. April headline CPI numbers came in at 4.9%, better than the projected 5%. Do you think this will have an impact on the Fed’s policy decision in the near term?

Tony

Yeah, I think it’s unlikely by the next meeting. So what we have to look at is what’s called core inflation. And core inflation still printed at five and a half percent. And so that is hitting people enough that it’s really hard for the Fed to stop. They’re certainly not going to cut, but it’s really hard for them to stop raising when core inflation is still at 5.5%. So we have things like food inflation is still up 7.7% on an annual basis. Electricity is up over 8%. Transportation inflation is up 11%. So as these things are still rising at this rate, it’s really hard unless we see some other compelling data come in, it’s really hard to see the Fed either pause or cut. Now what we also have to recognize is the Fed’s rate rise vote was a unanimous vote in favor of a rate rise this month. Typically, before we see a change in policy, we’ll have votes that are not unanimous. So it seems to me that going into the June meeting, at this point, it’s likely the Fed will continue to raise by 25 basis points in June.

BFM

What are some of the other indicators that the Fed may be looking at in order to help refine this decision, Tony? What are you going to be watching coming out next in the weeks ahead of the June meeting?

Tony

Yeah, they’ll look at consumer sentiment, they’ll look at producer prices, they’ll look at wages, these sorts of things. They’ll look at employment. So the key things they’re looking at are really wages and employment. That’s really it. There are a number of other macro metrics that come out, like retail sales, that the Fed doesn’t really look at that stuff. So you don’t really hear markets here moving on retail sales. It’s more at this point in the cycle. It’s things like wages. They may also be looking at things like credit because we’re staring down, really a credit crunch, which is tight credit because rates have moved and because of the banking risks we’ve seen in the US over the past probably six to eight weeks. And so they may start looking at more credit indicators to see how that’s slowing down.

BFM

Now, US Treasury Secretary Janet Yellen has sounded alarm over possible financial market consequences if the debt ceiling was not raised by early June. What would those consequences be, and how likely would it be for Congress to strike a deal by then?

Tony

Yeah, I want to kind of help you guys and your listeners understand that the debt ceiling is really a US domestic political tool. Okay, so the debt ceiling is an annual ritual that we have here where each party threatens the other to cut programs, so say programs that the other party loves. Right. So at the end of the debt ceiling, all of the politicians just agree to spend anyway. So there will be threats that the US will run out of money, but it won’t. It’s not going to happen. The Treasury always finds money. You will likely see us get to some point where, for example, they’ll close national parks or they’ll say federal employees can’t come to work. Those are really signaling more than substantive because all of those employees get paid. We know that the debt ceiling will be signed three or four or five weeks after that happens, and all those employees get their back pay. It’s not as if anybody’s going hungry. They all have their health care while this is happening. So what will happen, and this is very predictable, and it’s a big eye-roll for most Americans. In the end, this will last a lot longer than any of us want it to last.

Tony

And we’ll see some sort of last minute melodramatic Brinksmanship to kind of save America. When we hear about the debt ceiling, we hear breathy headlines about the debt ceiling. Most Americans just kind of ignore it because this is really a Capitol Hill Washington, DC issue more than it is something that really affects real life here.

BFM

Tony, overall, 85% of S&P 500 companies have reported actual results for Q1 2023 to date. Of these companies, 79% have reported actual EPS above estimates. How would you explain this outperformance? Is it time to chill the bubbly?

Tony

Yeah. A lot of this is down to margin expansion. So in 2021 and 22, we saw goods price inflation, which allowed these companies to raise their prices a bit. As those raw materials prices fell, we saw labor costs rise quickly, and that allowed companies to continue raising prices further. So we’re starting to see companies slow down on their price rises. Consumers here are really fatigued with price rises, so we’re starting to see companies slow down. And some tech companies started this laying people off. Some will signal that there’s, say, no pay rises this year. Microsoft has already signaled that. Some of those are prudent measures that leadership teams are taking in the event of a recession. But some of them are just a realization that pushing price rises is just something that we won’t be able to do much longer in 2023.

BFM

And let’s take a look at oil prices, Tony, they’ve been pulled or they are being pulled in opposing directions. We have deteriorating global demand outlook that has been countered by some bullish supply news from the Biden administration as well as Russia. So where do you think oil prices might be heading in the next one to two months?

Tony

Yeah, you’re right. There are definitely mixed messages in crude markets and it’s easy to take either a bearish or a bullish view, depending on what data you’re looking at. Our view is that crude could rise 5% to 10% in the next month or two, and that’s a typical annual seasonal trend. After, say, June, maybe mid, late summer, we’ll definitely see a sell off in markets. Again, that’s pretty normal for this time of year. So we would expect prices to rally a little bit from here and then we’ll see a calm, say, mid summer.

BFM

Tony, I just want to pick your brains a little bit. Gold prices, they’ve managed to stay above $2,000 for some time after hovering like just below that level for the longest time that I can remember. What do you think the direction is going forward?

Tony

Yeah, so our expectation is that gold prices are going to fall a bit over the next two months back below 1900. So we do not expect gold to stay at these elevated levels. It’s possible, but it’s just not within our forecast. So I would be careful with gold at these levels. And if your listeners believe that it’s a rally, go for it. But that’s just not what our data is telling us.

BFM

1900 is quite substantial. What do you think the reason would be to bring it down to that level?

Tony

Well, if risk is taken out of the economy, so if there’s some systemic, say, relief that the Fed or Treasury gives for banks or something like that, investors typically go into gold and crypto when there’s risk, when they fear risk, or they feel devaluation of the dollar or something like that. Right. And so if there were to be programs to support banks, to backstop banks, these sorts of things, from the position that they’re in right now, I believe it would really turn a lot of that gold trade off. And so it’s quite possible that stuff’s happening because it is a concern with the government here and the government especially as we enter a tight credit cycle, they have to make sure that banks are stable. This is a real concern for them. If there isn’t confidence in the banking system, then you’ll see this domino effect of banks to firms and so on. That’s just one scenario, but it’s possible that some sort of federal backstopping of banks for a temporary period, I’ll say additional backstopping of banks will put the risk on trade back on.

BFM

All right, Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.

BFM

I like what Tony said about the debt ceiling issue in the US. Right? That’s all political showmanship, and I guess here in Malaysia we’ll call it Wayang Kulit. Right.

BFM

So once all these shenanigans are over with the politicians who agree at Capitol Hill, and they’ll just continue spending their respective programs.

BFM

It’s nice to know that our politicians all over the world are just in it.

BFM

They’re the same. They have the same in a way. It doesn’t reflect well, though, and I think it does cause volatility, at least in the eyes of observers, regardless of what happens there. We’ll be watching that space, but let’s take our attention over to some of the earnings that have crossed our table. We have Walt Disney Company. They reported revenue and profit that were in line with Wall Street’s projections. The company did also reduce streaming losses by $400 million from the previous quarter. And this is thanks to price increases that helped offset the loss of 4 million subscribers at Disney Plus. So, on the one hand, they narrowed their losses, but they also lost subscribers.

BFM

So on the TV side of the business, disney’s direct to consumer segment, which includes the flagship Disney Plus streaming service, posted a loss of $659,000,000. However, this was significantly lower than the Street’s expectations. Right. The company plans to expand its streaming offerings by the end of the year with a new app that combines Disney Plus and Hulu.

BFM

And on the theme park site and Parks Experiences and Products division remains a bright spot for Disney. This saw a 17% increase in revenue to $7.7 billion during the most recent quarter. But I have to point out as well, disney movies, especially with their new live action version of their animation movies, haven’t been actually doing well. The Little Mermaid is coming out on May 26, and there’ll be something interesting to see if you just glean through social media.

BFM

It’s a bit controversial.

BFM

It is controversial, to say the least.

BFM

I think a lot of the live action films have been the subject of controversy in some form or another. I tend to be of the old school.

BFM

Yeah, me too.

BFM

Feeling. I mean, I like the cartoons. I’ll stick with the cartoons, thanks. But they’re trying to court a whole generation of younger viewers with their live action films. So I guess time will tell whether everything will pay off. Don’t forget that Disney is facing a number of challenges ahead. They’ve got their federal lawsuit against Florida Governor Ron DeSantis, and the writer strike is still ongoing. That is going to have an effect on some of the production that is stalled, such as with Blade and also the Disney Plus Star Wars series. Andor so all these things to watch when it comes to Disney Plus. We are coming up to 720 in the morning. We’re taking a quick break, but we’ll come back with more top stories in the newspapers and portals. Stay tuned. BFM 89.9 you have been listening to.

BFM

A podcast from BF M 89.9, the business station. For more stories of the same kind, download the VFM app.

Categories
Week Ahead

Doom Cycle: Market Sentiment, Fed-Induced Credit Crunch & European Policy Risk

Explore your CI Futures options: https://completeintel.com/futures

In the latest edition of “Week Ahead”, Tony Nash is joined by Daniel Lacalle, Chief Economist at Tressis, Albert Marko, and Ralph Schoellhammer from Webster University in Vienna to discuss the key themes in the market. The trio begins with a discussion on market optimism, macro earnings, and money growth, and how the market participants are overly optimistic despite interest rate rises, bank failures, and persistent inflation. Lacalle highlights the factors that are driving this optimism and provides insights into how investors can navigate the current market conditions.

Moving on, the discussion shifts to the Fed’s stance on interest rates. Albert Marko shares his view that the Fed would likely stay strong given the inflation environment and predicts two more rate hikes. He explains why he expects two more hikes and what it means for the “higher for longer” duration. The conversation provides a comprehensive analysis of the current state of the market and offers practical insights into how investors can stay ahead of the curve.

Finally, Ralph Schoellhammer takes the floor to discuss the nuclear power industry’s future, specifically the differences in approach between Germany and Japan, and other countries. The discussion offers a unique perspective on the challenges facing the industry and the potential solutions that could be implemented.

Key themes:

1. Market optimism: macro, earnings, & money growth
2. 2 more Fed hikes?
3. Nuclear: Germany vs Japan (& others)

This is the 62nd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd
Daniel: https://twitter.com/dlacalle_IA
Albert: https://twitter.com/amlivemon
Ralph: https://twitter.com/Raphfel

Transcript

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Tony

Hi everybody, and welcome to The Week Ahead. I’m Tony Nash. We’ve got some great guests this week. We’ve got Daniel Lacalle. He’s the chief economist at Tressis. We’ve got Albert Marko, and we’ve got Ralph Schoellhammer from Webster University in Vienna. There’s been a lot happening this week, guys, and I think what we want to start with is Daniel had talked about market optimism and how it may be a little bit off and inappropriate for where kind of some fundamentals and other things are right now. So we’re going to jump into that at the start. Albert’s talked about two more Fed hikes. So I want to see kind of where that is and what he’s thinking and what the conditions are for that. And then for Ralph, we’re going to look at European energy. There have been some movements around nuclear energy in Germany this week and so we want to talk about that and a little bit of kind of the European environment for energy defense, those sorts of things. So guys, thank you so much for joining us.

Tony

Daniel, you had this great video out early this week talking about market optimism.

And I’d really like to kind of get some of your thoughts on that. Where is that optimism now? Is it overly optimistic? Why is it overly optimistic? And where do you think things go from here?

Daniel

Thank you so much for inviting me to start. I think the first thing that we need to understand is that we have gone from a moment in which if you look at the greed and fear index that CNN publishes, we went from extreme fear to extreme greed in less than a month. This was basically triggered by the Federal Reserve’s decision to make whole all of the depositors at Silicon Valley Bank and to implement this incredibly outrageous policy of purchasing at full price the sovereign bonds and the asset base of lenders in exchange for immediate liquidity. So that immediately reversed the reduction in the balance sheet. Federal Reserve Federal Reserve’s balance sheet has basically consumed 70% of the tightening that had happened in prior months. And with that, the market went back to extreme optimism. But interestingly, it has happened in a period in which the earnings season has started and the earnings downgrade cycle has actually accelerated. So we are not seeing it’s not like we are seeing a great earning season. It’s probably one of the worst earning season in terms of sales surprise, earnings surprise is relatively acceptable. However, it comes fundamentally from buybacks, as all of the people that are watching us or hearing us know.

Daniel

So what we are back is in multiple expansion mode and viciously in multiple expansion mode because it started with technology and it started with more cyclical stocks to the point that despite the fact that, after and we will talk about energy afterwards. But despite the production cut from OPEC and the limits to exports from Russia, oil prices are still down WTI 5% on the year. And the energy sector has seen the largest multiple expansion of them all because the earning season in energy is coming with an expected year-on-year first quarter results that will be down between 20% to 30%. Yet the market still seems to be very optimistic about that. So my concern, we’re going to be talking about maybe couple of rate hikes that very few people expect in the near future. And what most people are estimating is that the reason to buy the market in this environment is because there’s not going to be any further rate hikes. Actually, the market is discounted rate cuts in the second half of the year and because the effect of the Federal Reserve balance sheet coming back to the levels where it was prior to the tightening might reduce that liquidity crunch.

Daniel

So I’m concerned about that because the combination of multiple expansion greed and a lack of understanding of the reality of where rates are going to be may create a very significant level of volatility, probably in May, if, as we will probably discuss later, those rate hikes, which I would agree actually happen against consensus estimates.

Tony

Danielle I feel like with earnings season, when we saw banking earnings, certainly for the globally systemic banks, but with some of the regionals as well, there was a huge sigh of relief that oh gosh, it wasn’t as bad as it could have been. And I kind of feel like we’re in that zone in markets where people are like, well, everything’s fine, it’s not as bad as it could have been. Is that kind of where your head’s at, what you’re thinking? And are people positioned for things being great when we just kind of like escaped something? Are people thinking things are really good when we just kind of barely escape something?

Daniel

We need to start by this completely erroneous concept of everybody’s bearish completely. One thing is where people investors are saying in surveys, which is rubbish, okay? And the other thing is where they’re positioned and everybody is positioned for things going great, not going well, going great. And yes, you’re absolutely right, earnings were not as bad as feared. The economy might not get into a recession, but consumer confidence ism PMIs all show a very weak level of growth. So yes, I’m happy to understand why investors would be positioned for a not so bad environment. My concern is that investors are positioned for a hugely positive environment. It’s very cyclical, very involved in the stocks that plummeted in 2022 and therefore getting in those that actually require multiple expansion. So my worry is that the narrative becomes, well, things are not as bad as the doomsayers were predicting. Let’s go crazy. And that’s not obviously.

Albert

One little comment on the earnings season. And the whole not so bad sentiment of the market is how much of that is reliant on inflation? Because a lot of these companies passed on the inflation numbers to the consumers 20, 30, sometimes 40%. But now, as consumers demand destruction has taken hold, those companies can’t pass those numbers along. So how much of those earnings were affected by just inflation tailwinds versus the reality of it?

Daniel

It’s very evident what you just said, and it’s a key element because many people blame corporate profits on inflation, which is stupid, because corporate profits don’t cause inflation. They are a symptom of inflation. But when demand destruction is happening, as you’re saying, then those corporate profits and margins go back very, very quickly and people are not taking into account demand destruction. I would agree with that.

Tony

So when you talk about demand destruction, one of the things I think about is auto loans. Auto loans in the US have really started to look terrible with defaults and other things coming along. I don’t have the numbers in my mind, but I’ve seen this over the past couple of months, whereas we saw in 2021 used cars and auto loans just booming. So to me that’s one indication, especially in the US where people are in their cars all the time, when we start to see destruction in auto loans, that tells me there’s something really concerning about consumers. But what Albert just said about companies passing on inflation to consumers and Sam Rines, who’s here regularly talks about price over volume, where we’ve seen volume destruction at the expense of price rises. Are consumers starting to be tapped out? I see evidence every day of people saying, oh, consumers are tapped out, look at auto loans, look at other things. I see evidence on the other side where people say consumers aren’t tapped out, they have plenty of capacity left. So what are you guys seeing in terms of where the consumer sits in the US and in Europe?

Ralph

I would just add one thing kind of alluding a little bit to what Albert and Daniel said. When we look at the potential rate hikes, and this has been truth in the past as well, but it’s a little bit different. I would argue now is the central banks are not just hiking against inflation or market inflation, they’re also hiking against government inflation because governments try to offset inflation with more government programs, which then of course leads down the road to more inflation. So central banks, and this is probably worse in Europe because they’re the central bank is kind of an external actor for many national governments. So this is a little bit of an additional twist. I mean, this has always been a little bit the case, but I think in Europe this time, austria has been, in a recent statistic, the country with most handouts over the last three years. And this was really it was, quote unquote, “helicopter money”. It was government giving checks. I had it myself. I opened up my bank statement and there it was, the energy bonus, €500. And then there was the heating bonus, €1000. So me adapting my spending behavior according to inflation was psychologically very difficult because I got these extra 500 here, these extra thousand there. So that makes it also, I think, harder to get inflation down because the central banks have to react both to inflation from the market and inflation from central government.

Albert

Yeah, but let’s differentiate central banks versus economic policies versus the political realities where these politicians need to be reelected so they’re more than willing, for short term gain to sacrifice long term outcomes.

Daniel

You bet they will. Absolutely. Yeah. I think that the reason why the consumer is behaving relatively in a more positive way than what many would have expected comes down to the fact that we still have negative real rates and that credit is abundant. And if you look at Europe, consumption in real terms is down in absolute terms. If you look at GDP of the eurozone, you look at the part that’s the consumer the only reason why consumption was slightly higher than zero was because the GDP deflator is lower. The inflation print, which is the typical way in which governments boost GDP. The GDP inflator is lower than the real inflation rate. So the nominal number adjusted is actually coming higher in real terms. But I think it’s basically because of credit. For example, with employees and with people that work with us, we find that a lot of people are finishing the month taking short term credits, and that’s a sign. And the reason why they’re doing it is because they believe that inflation is going to come down dramatically very quickly. And that’s not what is happening. What we’re seeing is a deceleration in the pace of growth, which is very different.

Tony

So, Daniel, in this environment…

Albert

Real quick, Tony, real quick. I’m glad that you said that, Dan, because Daniel because that’s one of the Fed’s tools now is calling up the banks and telling them to restrict credit and tighten that way because there’s no real liquidity left in the market outside of corporate and the financial sector. So their plan on tightening involves bank lending and stopping it, of course.

Tony

So the capping off the transmission mechanism or one of the transmission mechanisms, which right now just makes things harder.

Tony

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Tony

So Daniel, where do you, since there is this optimism in the market that remains and seems to me that it’s people trying to eke out that last kind of, that last trade right before things maybe head down. How would you recommend people take a look at this in terms of positioning or strategy or something like that?

Daniel

Well, the first thing that I would do is to tell everyone that is being told that “now is the moment to buy long duration in bonds” is not to fall into that trap. The second thing that I would do is to avoid the view that commodities are going to go through the roof because monetary contraction, fundamentals matter, but the biggest fundamental is the quantity and the cost of money. And, and if monetary contraction is going to continue, commodities may not fall, but certainly not go through the roof, which is what many people expect. And I see a lot of people betting on one thing and the opposite. And we discussed this this morning with my team, how on the one hand, people are betting on energy commodity prices going through the roof, buying emerging markets, buying commodity linked assets, and at the same time betting on inflation coming down very quickly. What the hell are you talking about? So I would make people sit down with their portfolios and say, okay, maybe I’m wrong, but at least don’t bet on one thing and the opposite. Don’t bet on inflation coming down at the same time commodities going up.

Daniel

Don’t bet on central banks normalizing, and at the same time buy long duration assets. I think that all those things are the ones that worry me. So I would avoid long duration bonds, I would avoid ultracyclicals, and I would stick to stocks, to be fairly honest, I would stick to gold. And I always like to have US dollar exposure, because when the market corrects, having US dollar exposure gives you the cushion to look for opportunities. And we need to be, I have to start with this. We need to be 100% invested all the time. We don’t come in and out of the market.

Tony

Very good.

Albert

I think that’s important. That’s the key point. I mean, I talk to a couple of Eastern European governments all the time, and they talk about the de dollarization nonsense. And I always tell them you have to have dollars in your reserves just to combat hyperinflation. That’s just the reality of the story. No matter what some cockamania financial analysts want to talk about there’s no such thing as the dollar station if you want to combat hyperinflation.

Tony

Great points.

Daniel

I agree with that.

Tony

Great points. Okay, let’s move on to Albert.

Tony

Albert, you had earlier this week sent some tweets out about Fed hikes.

And I think the conventional view right now is that we’ll see one more hike, one more 25 basis point hike in early May. You’re contending that we’ll likely see two more. Can you kind of talk us through some of your thoughts there on why that’s happening and what some of the impacts will be?

Albert

It’s really basic. It’s the inflation issue. It’s not going away at the moment, and Europe being in a zombie status, China opening up in a staggered sense and slower than expected. Inflation still hasn’t come down. Forget about the top line numbers that you see in the media and the politicized number that goes out everywhere. But if you look at SuperCore and core inflation, it’s trending up again. It’s not coming down. Since a lot of the central bank’s tools have been already expended, the only thing they have left, really, is rate hikes. And for that reason alone, I think that we’re looking at at least well, one for sure in May, but we’re probably looking at at least another one after that, at the very least.

Tony

Okay, and then Daniel talked about how stimulating the banks has really kind of offset a lot of the QT that had been done over the last year or so. Do you see any movement on the Fed to tighten their balance sheet, or are they kind of just in this holding position until there’s 100% confidence that the banking system is stabilized?

Albert

The whole banking crisis was completely, in my opinion, falsified. I mean, they needed something to stop QT, and they got it. They unwound nine months of QT in a week. It was absolutely stunning to see that. And this is why you actually see a lot of the people in the market talk about, no, this is the new QE. This is New QE. No, it’s not QE. It’s just the stopgap measure and trying to place status quo until they hope that inflation stabilizes in the next three to six months. However, I don’t see that happening. I think that we’re looking at probably at a secondary inflation event, not as high as it was last year, but marginally higher from this point on.

Tony

Okay, so when we see rates rising, say, another 50 basis points, and we see banks not lending, and we see some of these credit issues coming up, how does that impact things like housing? We continue to see house prices stay pretty stable, actually.

Albert

The problem that we have is, although the banks are tightening from the West Coast of the United States and New York Fed, but the middle part of America and southern part of America, the banks were still lending. I mean, you can still go out in the housing market and still see an appreciation in prices in housing at the moment, right? You don’t see that in New York, you don’t see that in California, but everywhere else in the United States, it’s happening. So the problem I see is that it’s a patchwork. They’re trying to do a comprehensive policy for tightening specifically the housing and consumer markets, but it just doesn’t work because it’s so fragmented at the moment. You can’t tell banks not to make money after six months. It’s just not going to happen. I mean, they’re going to find ways to give loans out to people because they’re banks. They rely on margins.

Tony

Right. And you also mentioned SuperCore and kind of the inflationary aspects of that. What are you seeing on wages and what will slow down wage growth, especially in the middle of the US.

Albert

Nothing. I mean, the tourist season is upon us now in the United States and also coming up in Europe, and I don’t see wage inflation slowing down one bit. And this is actually something that Janet Yellen and Brainerd wanted. They wanted wage inflation because it’s politically advantageous to them.

Tony

Okay, so the Fed is looking at SuperCore. Wages aren’t slowing down. Wages are a big contributor to that through services prices. So it feels like we’re in this continuous loop that just doesn’t stop. What is that? Is there kind of just no end to this or at least for the next, I don’t know, six months or something?

Albert

This is what we’ve talked about numerous times on this podcast, is this doom loop of, like, Fed policies and then political policies intermixing and muddying up the waters, and you just get an inflationary loop over and over again. I mean, nothing’s been actually fixed. I mean, the supply side okay, a little bit. It’s come back online to a marginal degree, but like I said, European in a zombie status. They’re not even really opening. I mean, manufacturer is not opening in Europe again. China is staggered in their opening. So we’re just going to get this doom loop until political policies start coming back into more realistic terms.

Tony

Okay, so, Daniel, you had mentioned something about May around some events potentially happening in May. So with more Fed rate hikes, do you expect markets to take a bit of a turn in May?

Daniel

I think so. I think that if all these things that we’ve just mentioned are absolutely critical because it’s the opposite of what the average of the market thinks. The average of the market thinks that inflation is coming down dramatically and that, yes, core inflation is rising, but core inflation lags by they invent these things that core inflation lags by months with headline inflation. It’s something that has been completely she just gets so angry as an economy. No, the reason why core inflation is rising is because all those secondary effects of the previous inflationary wave are building in the economy, and ultimately the money supply growth is coming down, but money supply growth continues to be above real GDP. In May, you will probably have a few things now. To start with, the base effect that has given these headline positive numbers on inflation fades Away, because basically everybody oh, inflation is coming down. Yes, of course, over a 9% number. The second one is that right now there is this very optimistic view about the global growth. I find it amazing to see that the Chinese slowdown, that the Chinese recovery being virtually in existence is not something that has created more headlines.

Daniel

In fact, it’s rather the opposite. And the stagnation that Albert was just mentioning is something that is not embedded in people’s estimates. People are estimating 3% growth for the global economy with the Eurozone escaping recession with a one and a half percent growth, the United States not entering into a recession, despite all of the indicators that we have mentioned before. So all those things tend to happen between May and June because also, if you remember Tony, is that a lot of people that sell the bullish argument for the economy always talk, every year, the tale of, oh, but from June onwards, it gets better. Okay, so people do the back half of the year.

Tony

The back half of the year in every economy is the back half of the year.

Daniel

It’s a tale of two of two years. I’ve been an investment banker as well, but with the point that I’m trying to say is that for those first five months, there’s a lot of confidence in that story. But then reality bites and we see consumption stagnant, growth stagnant, persistent inflation. And central banks have only one tool, which is rate hikes. They’re not tightening the balance sheet because they can’t. So this is like the Pringles advert once you pop, you can’t stop.

Tony

Yeah, it’s interesting you mentioned 3% growth. My view of these IMF releases the world economic outlooks. They’re PR. They’re not necessarily solid economics. And our view has been, is China going to grow at 5.3 or whatever? The IMF is saying no. Is the US. Going to grow at 1.8 or whatever? No. Our view is the US. Is going to grow maybe at one kind of right around there. Q2, Q3 are going to look really difficult. And so we do get these kind of pump pieces out of the IMF saying, and they always say global growth is going to be better unless the prevailing sentiment is totally negative. Then they’ll be really bearish just to align with that. But these are really PR pieces, more than solid kind of economic outlooks. Is that kind of your view?

Daniel

It’s absolutely spot on. The IMF has hundreds of top-notch economists looking at all sorts of models and analysis of the economy. But ultimately, and I’ve worked with a few of them, ultimately, when they have to put together the estimates for the world. Each country goes to each of the analysts and says, “wow, come on, you’re not going to put 1%, it’s going to be 2%.” And what are they going to say? “Okay, fair enough.” Have you ever seen a government say, we’re not going to grow this year? Never. So the IMF has, interestingly, a tremendous level of predictive capacity of recessions, but never predicts it publicly. Predicts them publicly because as you said, it’s hugely diplomatic. So that’s why it’s always a downgrade of growth story. And now what they do is that we have to do with the CFO and C meeting is that we have to read between the lines. And what they do now is that they maintain the polish argument, but they give sort of subliminal messages about weaker things here and there. And it’s usually buried between page 20 and page 30 of their release. And between page 20 and page 30 of their release, what you have is that credit impulse is plummeting in developed economies.

Tony

That’s right. So far, very happy show, very optimistic show, guys. I just want to thank you for that. It’s been awesome so far. So, Ralph, let’s move on to Germany and energy in Europe. So the Germans announced this week that they’re halting or that they stopped their nuclear plants.

Tell me about that. Why is that happening?

Ralph

Well, they did, right? So this was on April 15, they shut off their last three nuclear power plants. So Germany is, at the moment of us speaking here, is a nuclear power-free country. I mean, inside the country, Europe has an integrated electricity grid. So they still on occasion get plenty of nuclear energy from the Czech Republic and from France. But Germany has left the world of nuclear power. And that’s of course the problem. It’s an integrated grid. So some people pointed out, why is everybody making such a drama out of this? Germany was a net electricity export the last year. That is all true. But this is the problem. So it’s not just a problem for Germany. It’s a problem for the entire energy situation in Europe. And just to put a few numbers on this, at the moment the average megawatt hour in Europe is still about twice as much as the average megawatt hour in China. So that is a problem for manufacturing. And if you take the United States, you have this absurd situation that in the shale patch, right? The oil production has natural gas as kind of a side product.

Ralph

So they literally have to burn natural gas because they don’t know what to do with it. So natural gas prices are down. So to quote Emmanuel Macron, he wants to make Europe the third superpower. But if we look at energy prices in these hypothetical three superpowers, Europe is at the dead end. Energy here is still much too expensive. And if we look at the manufacturing sector versus the service sector, the service sector in Europe is not doing so bad at the moment. It’s even expanding, but manufacturing is suffering. And some and I think those people are not entirely wrong, would say that manufacturing is in a recession and it makes a lot of sense. And we kind of enter now what Albert mentioned, we enter this doom cycle because now you have in Germany and other European countries this idea, “oh, this is not a problem.” We’re going to make a special industry energy price where the government guarantees a specific price per megawatt hour, but the government guarantees a specific price for the access to energy. But that energy still must come from somewhere. Currently you have the German energy minister and the chancellor traveling all the coastal cities in Germany because there’s a lot of local resistance against new LNG ports.

Ralph

But those LNG ports are the promise how they’re going to solve the problem of having abandoned nuclear. So a lot of the things that are supposed to replace nuclear are things that are currently in planning that haven’t materialized yet. So I would argue that for the foreseeable future, whether we will call it an energy crisis kind of overdramatic, but there’s definitely going to be a lot of pressure on prices in the energy market because energy production, whether it’s electricity or other areas, is not keeping up. Will there be a shortage? I don’t think there will be a shortage. Europe is still rich enough to buy it, but it’s going to be more expensive. And that price is going to end up one way or another on the bills, on the monthly bills of the consumers.

Tony

So I had dinner last night here in rural Texas with two Germans and a Belgian, and I was asking them about this.

Ralph

That’s the beginning of a great joke.

Tony

It is. It really is. But when I asked them about started asking about energy and nuclear in Germany, they said, we’re going to stop here and we’re only going to give yes no answers because they were so annoyed by the policy and so annoyed by kind of just how crazy some of these decisions are. So it sounds to me like it’s kind of just a nod in my backyard, a NIMBY type of deal where Germans don’t want nuclear energy in their country, but they’re happy to take energy derived from nuclear, not their countries.

Ralph

Not not at all. That’s what the really frustrating thing about the story is. The majority of the German population is by now this was not the case five, six years ago, but by now, after the energy crisis of last year, a majority, according to the most recent polls and I think Tracy talked about this in one of the most recent episodes of The Week Ahead as well. A majority is now pronuclear. There’s even now an idea that the German states, Bavaria particularly, they want to keep them running. They want to basically buy them from the federal government and keep them running on their own. And even for that there would be a majority. There is a broader issue. Albert tends to allude to this, and Daniel also kind of talked a little bit about it when he talked about kind of politicians or certain forecasters, not necessarily saying the truth. In the last decades, the economic expansion and the globalization under US and Germany was so comfortable and ran so well that we could afford to have very unrealistic politicians and elect them into office. And with the Greens in Germany, that is the case. But now we have kind of a reassertion of reality.

Ralph

And I think many governments, I would argue also in the United States, struggle with that. And I don’t mean this to be facetious or provocative, but we also have a problem in recruitment, let’s say in civil service. And these.

Tony

Oh my gosh.

Ralph

Bureaucracies in some areas they are good, right? Finland, I think, is very well managed. Denmark does a pretty good job. So there are some that are well managed. But areas in the United States, the major powers at the moment, like France and Germany and Europe, they have a problem. Their bureaucracy is not what it was in the course my favorite time span in the 19th century. And they still live off the capital. They still have their reputation, right? When you say Germany, you think about clean streets and a well run bureaucracy and all these kind of things. But we saw during the COVID Pandemic something that Tony and I we talked about before the show, that it was not that well run like the Germans, for example, the way they communicated throughout the country, the numbers of infections, they did it via fax machines because the entire health system was not fully digitalized.

Ralph

So that is a problem that’s a little bit under the surface. But given a world, let’s say that is where politics becomes more important because countries are becoming more risk averse and kind of very often want to hedge their bets. I think some countries are not at the moment in a position to do that because we have neither the politicians nor the civil service to do this. I mean, just a quick example, no offense towards the United States.

Tony

Be offensive for the US. It’s okay.

Ralph

If you look at Congress, I mean, you literally have people that are either demented or at the brink of dementia or who had recently had a stroke. Nothing against these people personally, but that’s a luxury you can afford when everything is going well. I think that once somebody said we’re rich enough to be stupid, I think we’re no longer that rich to be that stupid. And I think that’s going to be a bigger problem. I know it’s a little bit metaphorical, but I think that’s going to be a bigger problem going forward.

Tony

No, it’s true. I tell people all the time, our people in congress and in the federal government. They’re all like, 124 years old, and they just can’t relate to people who actually work. But we elect these people. I don’t understand why. European Bureaucratic in Aptitude. I’d like to introduce you to Washington DC. Because Europe is perfect compared to what we have in DC.

Ralph

And it’s there’s one thing I think Albert is going to love this. I don’t know if it’s true, but supposedly in this leak document from last week, it turned out that two thirds of employees at the Pentagon are under 30 years old. And one would argue that at least in some ways, if you look at foreign policy and diplomacy as it is conducted, again, also by Europeans at the moment. Right.

Ralph

I think there is a lack of skill. There is a lack of fine tuning. Again, I don’t think that these are bad people. I don’t think they do it because they’re ill intentioned. I think they simply do not have the required skill set.

Tony

But let me push back on that a little bit. If they’re young, at least they have a stake in their future. When we look at US politicians who average 124 years old, they don’t have a stake in their future. Okay? They’ve been in these roles for decades. And honestly, will they be around in five or ten years to deal with the ramifications of their policy? I just don’t believe they are, and I don’t believe they care.

Albert

Yeah, Tony, but the problem is they don’t have the experience and they’re ideologically biased. This is the problem when you start working in diplomacy, is you have to be very fluid and very gray area, and a lot of people aren’t. Whenever you take a position based on your political ideology, it hurts things. I mean, look what Blinken did in Brazil and Colombia. Shifted them over to the left, and then now they’re sitting there talking, damning, the United States at the UN for perpetuating wars and stuff. Like I said, when you lack experience and overly politically biased, it’s a problem in diplomacy, it’s on both sides of the aisle.

Tony

Yeah, absolutely.

Daniel

It’s the worst combination. You have 120 year old people in the leadership positions that don’t want change, and you have all the ground staff and the people that are doing the work that are less than 30 years old and that have been told that two plus two equals 22, and that the money making machine will solve everything. So I’m like, oh, my God. The condemnation. However, I will say one thing in the defense of the United States, the massive bureaucratic machine doesn’t weigh more than 50% of the economy in the European Union.

Ralph

It does. Oh, yeah.

Daniel

And what you were mentioning before is scary because think about this. You have a massive energy crisis. You have the evidence that you have to rely more on, that Germany had to go and suddenly depend more on late night on coal and massively import energy from the United States. We have been saved in the eurozone of a massive recession by an extremely mild winter. Despite having all the luck and understanding that you have made a massive mistake, you double down on the mistake. This is the same, by the way, it’s happening in Spain, it’s happening in Italy, where they’re trying to completely overrule the shareholders decision on the major utility company. And you’ve mentioned a critical thing is that you cannot expect the European Union to provide growth and manufacturing improvement with those levels of energy costs. Today’s, PMI manufacturing PMI is at 43 month low after the next generation EU, massive monetary and fiscal expansion and all the subsidies you could imagine to industries, as you very well mentioned.

Tony

So it feels like we’re facing a bit of a hangover. So this is kind of a very doomy episode, guys.

Albert

It’s the free money policies that’s been around for decades. And everyone thinks, especially the younger, under 30 people, they listen to Bernie Sanders and say, oh, everything should be paid for by the government and this and that. But they don’t want to talk about the ramifications 15 – 20 years down the line. They see money now and that’s it.

Tony

Right? Yeah. Okay. So, Ralph, you and Albert talked about US DOD, and we had a viewer question come up on Twitter when I talked about this episode, asking about Europe paying for NATO and Europe paying for their own defense. And the question said the Trump administration tried to get Europe to pay more of their NATO costs, and the Biden administration is trying to get Europe to pay more of their NATO costs. Is that something that will ever happen? Will Europe ever pay their own way fully of their NATO costs?

Albert

Well, go ahead.

Ralph

With few exceptions, right. Poland does Greece, of course, for different reasons. Greece does because they feel threatened by yet another NATO member in the form of Turkey, which has a certain irony to it. And I think there’s two Baltic states to do as well. But, yeah, I agree. I agree with Albert. You see, it even there was all this excitement about Sweden’s joining NATO, but one of the first things the Swedes said was, well, but we’re not going to meet the 2% of GDP target before 2028, which means when the new government is probably going to be in power. So they’re already pushing this forward to the next government. And Albert also tweeted about this. Even in Germany, they asked the parliamentarian in charge of the armed forces, and she said they haven’t seen her words, like I’m quoting here, “we haven’t seen a single cent of the promised additional 100 billion for the titan vendor.” The time change. So this has been in Germany, at least a lot of this has been talk, but not much have happened. And even if you look at European military spending, for some of them, not all of them.

Ralph

But again, if you take Germany and some others, if you subtract pensions and wages and all these kind of things, the kind of money that really goes into military readiness is very small. I always argue this always gets me a lot of hate, but I argue I think the United States should make I don’t know what the English word for this is but a kind of cold turkey for the Europeans and say, we have provided defense for you long enough. You have the economic power. You can provide it for yourselves. As Albert well knows, and I’m sure Daniel as well, from the occasional Twitter fight, there are so many Europeans who claim we are on the US occupation and Macron means we are the vassals of the United States. All right? I mean, if we are that good as Europeans, if we can do it on our own, I think the Americans should call our bluffs. And then there will be a rearrangement, right? Poland will become more important. Germany will become less important unless they step up their game. But I think this idea that if you tell Europeans the Americans will always continue to pay, you create zero incentives for the Europeans to pay more.

Tony

Right?

Daniel

But even if you do say the Americans are not going to pay any, the problem in Europe is that that ship has sailed, is that people are still going to think that we are going to get the level of security that we have out of thin air, that you don’t need to spend in military. That problem is not easy to solve. The only way that I see it is that if the United States looks at it as a vendor financing scheme, as in the sense that it continues to provide the support for the military in NATO, et cetera, and quid pro quo, that means opening agriculture, automotive, et cetera, et cetera, of all of those hyper protected industries in the European Union. The problem, from my perspective of the United States policy, is that it continues to pay for NATO and all the military spending and continues to allow, one by one, each of the US presidents, the European Union, to enter into bigger and bigger and bigger protectionist measures under the disguise of environmental requirements.

Albert

I’ll make this quick, Tony. Europe has a decision. Either they fund their military or fund their social programs. They can’t do both. And if you want to win an elections in Europe, you cannot cut social programs. As simple as that.

Daniel

Okay?

Tony

I hear that. With such a large gray cohort in Europe, can they continue to pay for those social programs? Do they have wage earners who can pay for that? Is there too much of a demographic issue? So is it not one or the other, but is it neither of them? Right?

Albert

Well, the problem is then you start talking about best swap lines and the political aspects of those things keeping Europe afloat. That’s where that comes into.

Ralph

I think that we again have the problem, and I do it too, but I try always to kind of get myself to stop doing it. We talk about Europe in very general terms, but to give you one example, in Sweden, for example, the retirement age is directly tied by law to average life expectancy. So in Sweden, automatically the retirement age goes up if life expectancy goes up. Now, as you see in France right now, it’s absolutely impossible. This is a little bit due to the unpopularity in many areas of Macron, but it’s basically not possible to increase the retirement age from 62 to 64, which is absolutely necessary just to make it somewhat viable. I mean, I would argue that’s a problem all Western nations in a sense have. I mean, at some point because in the United States the whole debt ceiling debate is breaking out again. But at some point Medicaid and Social Security will need one way or another to be reformed because that also cannot go on forever. But Daniel said, I think another very important point, and that always bothers me in these debates both about so called multipolarity and dedolarization, there is this idea that all of this could hypothetically happen and yet nothing would change.

Ralph

It’s mostly Europeans who talk about this. You have Europeans who say other new multipolar world and the dollar will be replaced, but none of this would be great for Europe. In a sense, I’d rather be the European Athens to America’s Rome than to be some province squeezed between the Middle East, the US. And China. That both economically and militarily is not as strong as we might like to be. But as Albert pointed out, we’re also not willing to put the money would have to go in order to be that powerful.

Tony

If you had to put a probability on the latter scenario, do you think that’s probable? Do you think that’s 40% probable that Europe becomes squeezed between China, US and Middle East, given where things are going?

Ralph

Well, I think what we got to increasingly see is the EU will always remain as, “always” I take that back. Will remain as an institution for long because as you all know, institutions and bureaucracies have a tendency to perpetuate themselves. But what we, for example, saw last week when Romania, Bulgaria, Slovakia, Hungary and Poland announced that they going to basically ban all imports of Ukrainian agricultural goods into their countries. This was in direct violation of an authority that was given legally to the European Union. And the EU has a quasi free trade agreement, particularly in the area of agricultural goods, with Ukraine. So what they did was they basically ignored one of the key competences of the European Union and the European Commission. And I think we’re going to see this more often in the future. So the EU will remain in one way or another, but I think there will be certain areas where countries occasionally go it alone. And what we also then, and this is going to depend on the United States, but there are already talks, whether they’re going to be fruitful or not, to something else, whether the United States should refocus, let’s say, more on Poland as their main partner in Europe, whether they should focus more on Central and Eastern European countries.

Ralph

So I think there is something is going on. I cannot yet say what exactly, how it’s going to end, but something is going on in Europe. And this started in 2004 with the expansion towards the east because that was a new kind of countries in many ways good, but definitely different from the Western European Union as it existed. And I think this is increasingly more difficult to keep together.

Tony

So maybe Blinken will adopt a very Rumsfeldian view of old and new Europe.

Albert

Maybe don’t hold your breath on that.

Tony

Guys. Gosh, this has been such an optimistic discussion. Thank you so much for your time. I really appreciate it. Seriously, this has been really informative. I can’t wait to see what happens over the next week with regard to some of these things, Daniel, especially with your market kind of optimism. So, guys, thank you very much for your time. Have a great weekend and have a great week ahead. Thank you.

Daniel

Thanks a lot.

Ralph

Thank you.

Categories
Week Ahead

Will AI Take Your Job? Exploring the Realities of Automation

Explore your CI Futures options: https://completeintel.com/promo

In the latest Week Ahead episode, three experts – Todd Gentzel, Chris Balding, and Sam Rines – discuss the impact of AI on the job market and the enterprise.

The conversation delves into the macro environment and the rise of AI, with Sam Rines framing the discussion by noting the fast adoption of AI tools like ChatGPT and Midjourney, which are taking out low and mid-level writing, creative, and analyst tasks. This is a threat at a scale not seen before as this generation of AI is targeting professional, corporate, and office jobs.

Todd Gentzel, who has consulted and led strategy for some of the world’s largest companies, discusses the current state of AI in the enterprise. He notes that many AI projects are just pet projects to tick a box and the “AI” portion of these projects is extremely limited. However, he believes that AI has the potential to change the enterprise significantly and identifies the factors holding the enterprise back from adopting useful AI.

Chris Balding, the founder of an AI-NLP firm, discusses whether AI will steal jobs. He notes that starting his firm has changed his view of the application of AI and its potential to take on whole job functions. The conversation covers the impact of AI on labor and capital, the potential for AI to be deployed to take on individual functions, and whether AI can only be used to augment job functions or take on whole job functions.

The discussion raises important questions about the impact of AI on the job market and the enterprise, and how it will change the way we work. While the experts have different perspectives on the potential of AI, they all agree that it will have a significant impact on the economy, the job market, and society as a whole.

Key themes:
1. Is the macro environment to blame for the rise of AI?
2. How will AI change the enterprise?
3. Will AI steal your job?

This is the 60th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter
Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Todd: https://twitter.com/ToddGentzel
Chris: https://twitter.com/BaldingsWorld

Transcript

Tony

Hi everyone, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Todd Gentzel. Todd is an industry and technology strategist spanning healthcare, mining, oil and gas, transportation, and consumer goods. Todd, it’s your first time on the show. Thanks so much for joining us.

Tony

We’ve also got Chris Balding. Chris Balding you guys all know well from Twitter. He’s the founder of a stealth mode AI firm, and he’s also the founder of New Kite Data and a recovering academic.

Tony

We’ve also got Sam Rines of Corbu, who’s on here regularly. So guys, I really appreciate your joining us for the program today. This means a lot.

Tony

I’ve wanted to look at the hype around AI for quite some time. For non-experts, it’s really hard to tell what’s hype and what’s real. We see stuff about ChatGPT or whatever every day, and we can’t tell what’s real output, what’s simulated output, or whatever. So we try to assemble you guys, some experts, to tell us what’s happening. And there’s some real critical answers that we want to address. Why is AI on the rise right now? There are some reasons why AI is coming to the forefront right now. So what are those?

Tony

Will it take your job? A lot of people are, and some people are joking about that. Some people are taking it seriously, some not. But really, will it?

Tony

How will AI change corporate life? What impact will AI have on markets and regulations and so on? These are all things that we don’t know all the answers to right now, but we’re kind of figuring this out as we go along.

Tony

So, just over a year ago, I published a fairly rudimentary illustration showing the pace of impact that I thought at the time AI would take in the workplace and on jobs. So if you notice at the bottom, most of the kinds of infield jobs are retained. A lot of stuff has to physically happen. And my view, at least over the next, say, a few years, is 5% to 10% of jobs need to be automated. And I think that’ll largely grow toward the end of this decade.

Tony

So we have some key themes. First, is the macro environment to blame for the rise of AI? I think that’s a real concern, and we’ll talk about that with Sam. Second is how will AI change the enterprise. We’ll talk about that with Todd. He’s a real expert there, and I can’t wait to have that discussion. And finally, will AI steal your job? That’s kind of a silly question, but I think it’s one that everybody really wants the answer to, and we’ll talk about that with Chris.

Tony

So first, Sam, I want to frame up the discussion with a little bit of an understanding of the macro environment. We’ve had AI enthusiasm before. You have these really robust AI eras, and then you have kind of AI winters. We had a really robust era in 2018 when S&P bought a company called Kensho, which very few people talk about now.

This was just five, or six years ago. They bought Kensho for $550 million and really, nothing happened with it. They were folded into S&P. At the time I talked with people who had visibility to Kensho. They didn’t know what to do with it. It really wasn’t obvious value. But S&P kind of got the opportunity to tick the box on AI. So, in part, S&P wasn’t adopted by S&P’s customers. At least this is my running thesis. It wasn’t adopted by S&P’s customers because wages had been pretty stagnant for 30 years.

Tony

So even in 2018, you could kind of throw people at analysis problems and the type of things that Kensho was built to solve. But now we’re seeing ChatGPT, MidJourney, and those types of large language models and image models being adopted pretty quickly.

Tony

ChatGPT, as you guys know, had millions of users in the first hours, in the first couple of days. So we can say that processing power and coding and that sort of thing are responsible for advancement in AI, which is true. But adoption seems to be different than the actual capability. So when we see ChatGPT and MidJourney adopted so quickly, they’re really taking out low and mid-level writing, creative and analyst tasks. That’s what they’re taking out right now, are those tasks. These are things that earlier had 10-15 years ago, had been sent to, say, India and other offshoring places, but now it’s being experimented with doing this stuff virtually in developed countries. So I realize I’m talking a lot today. I don’t normally do this at the top of the show, but I think we need to introduce some of these ideas for people to watch.

Tony

I’m sorry I’m talking so much today, but one key point here is that AI has always been discussed more than robotics. So where it would take over the job of physical laborers, like people in warehouses, blue-collar workers, as Americans would call them. But this generation of AI is different. This generation is targeting professional jobs, corporate jobs, and office jobs, which are new. It’s kind of unprecedented, where this level of fear for white collar jobs is discussed to be replaced by technology. So, Sam, after that long intro, can you talk us through some of your thoughts on this? This is my hypothesis. Is there anything there? Can you talk us through some of the kind of capital versus labor and wage issues that we’re seeing right now? And is that having an impact on the adoption of AI?

Sam

Yeah. So don’t throw too much at me at once. Okay, so let’s take a big view of the history and kind of parse this out, because I do think it’s worth kind of going back to previous periods to look at what exactly spawns the adoption of various technologies. Because AI is a technology and it’s incredibly useful for those people that want to become, or can become much more productive over time. So I think that’s kind of the level set there. But if you look back at 70s and the level of inflation there, it spawned a significant amount of capital investment in things like computers, right. It was expensive to hire an individual, inflation was running out of control, and you wanted to maintain your margins if you were a corporation. So what did you do? You made people more productive by employing technology, specifically the computer at the time. Right. It sounds kind of ridiculous to say that the computer was a productivity enhancer because we all know that now productivity is not necessarily enhanced by a computer in front of you. But then it was incredibly enhanced for productivity. So when you have significant inflation pressures against a business, it spawns the want and the need to go ahead and invest in incremental technologies.

Sam

So kind of fast forward to COVID, and if you were a leisure and hospitality company or a company that faced individuals, you had an incredible incentive to invest in an underlying technology to allow your business to either exist in a couple of years or to survive and maybe even thrive. If you were very good at it. You had to go out and you had to make sure that your website could offer delivery or pickup options for food. You had to really invest in technologies that previously didn’t necessarily have to do. Were they emerging? Were they interesting? Yes. But all of a sudden they became existential to your business and the ability to survive going forward. So you saw an incredible amount of investment in platforms that allowed for delivery and pickup of food, et cetera. Kind of coming out of COVID. Now what you have is an incredible shortage of workers and a significant amount of wage pressures, and you have inflation pressures. So if you’re a business looking to maintain margins, grow going forward, AI is an incredibly interesting potential tool for you to be able to make some of your best workers and best thought leaders and intellectual leaders much more productive and allow you to grow going forward without having to worry about whether or not you’re going to be able to find that incremental employee.

Sam

And I think that really is an understated catalyst for why ChatGPT-4 is so incredible, right? I love it. It makes me a lot more productive at my job. I’m still playing with it and I don’t actually publish anything.

Tony

Can I just give you a tangible example of what you’re talking about? I know that you understand this Sam, but for our viewers. So my staff last week put together a persona in a large language model and called it Nash, and it looked at all of our previous shows of The Week Ahead and then it came up with a persona for Nash. So last week’s newsletter, Complete Intelligence Newsletter, and going forward, they’re largely written by this persona in Chat GPT. So we don’t have to spend the time anymore to actually write our newsletter. Of course we clean it up a little bit, but it has my voice, it has my word choice, sentence structure and so on. And so largely our newsletter is automated and of course there are little tweaks here and there, but for the most part those are the types of things where maybe I had to hire a newsletter person before, even if they were offshore. But now it’s done in three minutes.

Tony

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Sam

No, again, that’s productivity enhancing for your team, right? And it allows you to say, okay, now that we really kind of come up with a way to automate this newsletter, what else can we do? So it allows you to be not only productivity enhancing, but potentially revenue enhancing, potentially bottom line enhancing, producing new products, new services, et cetera, et cetera. So in my mind, that is the one of the tailwinds to AI adoption at this point is that you really have not only called a curiosity with it, but also a need to replace the incremental employee because you can’t find them. If the incremental employee doesn’t exist, you’re not destroying jobs, you’re creating/enhancing ones that exist. The idea I’m kind of running ahead of us. I know, sorry. But to me that’s really the catalyst behind the current adoption, right? And if you look at one of the most labor intensive businesses out there and we kind of touched on this while we were chatting before reporting if you look at agriculture, I mean, John Deere has been working on AI tools for farmers for a decade and has bought up a significant amount of IP around that to not only allow farmers to become much more productive, but potentially make it so the farmer doesn’t have to be in the tractor during planting, during when they’re spraying the plants early on and during harvesting, the farmer can go do other stuff.

Sam

So I think as we begin to really understand that there aren’t enough farm workers out there. That there aren’t enough people to hire into various businesses, I mean, just look at the participation rate. The participation rate is not exactly coming back the way anybody thought it would after COVID, and it’s unlikely that it’s going to recover anytime soon with the number of retirees. Retirees have a significant demand for services. If you’re going to provide those services, you’re going to need to not only adopt new technologies and new tools, you’re going to have to come up with new ways of doing things generally. So I think AI always was going to be something interesting, but it’s something interesting at the right time with the right catalyst moving forward. And this is not something that’s going to be… There’s a little bit of fattiness to it in different ways, but I don’t think it’s going to be one of those passing fads that everybody’s like, “remember when AI was a thing?” I think it’s much more of something that we’re going to interact with on a daily basis across a whole lot of services and a whole lot of businesses that we did not anticipate prior.

Tony

So two things there. Technology generally is deflationary, right? I mean, aside from like $1,400 iPhone or whatever, generally, technology is deflationary for kind of status quo activities. Is that fair to say?

Sam

Sure.

Tony

That’s good. And then you said something like, we’re going to X with AI. But people are already experimenting with that stuff. So we do have people who are already doing that. And it’s really a question of it going at things going broad market. Like, I don’t want to be the AI hypester here. I’m really just kind of asking these types of questions just to understand your view on this stuff.

Sam

Sure. I think it’s pretty straightforward. Right. You have to have some way of replacing a nonexistent labor market, and AI does that in a fairly efficient manner.

Tony

So it’s demographics, wages, participants, demographics, wages.

Sam

Demographics change slowly than all at once. It’s not as though you can simply incentivize the demographics to change. Right?

Tony

Exactly.

Sam

That ship sailed a long time ago. Generally, to your point, demographics are a powerful force where when you have a significant amount of people that are older and out of the labor force demanding a significant amount of services, you have to figure out a way to deliver those services into them. With fewer people in the labor force, which is a massive long term catalyst to tools like AI, like ChatGPT, that type of thing, and it’s not going to stop there.

Tony

Yes. Okay. Good points. Okay, so let’s move from the kind of context and thanks for that, Sam.

Tony

Let’s move into how will AI change the enterprise? Todd, you’ve consulted and led strategy for really some of the world’s largest companies. In enterprise circles, we hear about AI projects from big consulting firms or a firm like Palantir, which really is a consulting firm. These are largely pet projects to tick a box. But at least in my mind, the kind of AI portion of these projects is extremely limited at this point. So given the economic context that Sam discussed and the corporate dynamics that you’re aware of, is AI in the enterprise a real thing right now?

Todd

Yeah, I think that you probably have to break it into a couple of groups. I think the earlier statement about agriculture and John Deere is true in oil and gas is true in healthcare. I mean, there are lots of companies that have been at this for a while, and they’ve got relatively mature environments, and in those environments, they’re really playing a different game. It’s not a check the box. It really is kind of fundamental to business models. I think there’s sort of a sort of much larger group of organizations that are just beginning to be aware of the opportunity in the kind of intermediate and long term. I’m super positive. I think this is unquestionably, the direction this has been headed for a long time. I think in the short term, we’re going to see what we always see during these periods of technical transition. It’s going to be messy. I think it’s important to always remember that there are real power dynamics around any adoption of new technologies. And in a lot of cases, the people who are in leadership and the people who are making these decisions are the authors of the current state.

Todd

And so they struggle to sort of conceptualize what the world would look like under a completely different set of norms. And I think unlike some of the previous generations of technical advancement, I would argue we’re coming out of the age of digital enablement. We’ve talked about transformation. I think there’s been very little transformation. I think it’s mostly just enabling some core things we were already doing and gaining some minor improvements in productivity. AI is one of a dozen exponential technologies that plays a very, very different role in accelerating innovation and accelerating business model development and changing operating models. That’s where things get really dicey. And I think there are going to be winners and there’s losers. And I know, Tony, you and I have talked over the years about when you do scenario planning, you sort of right off the bat, assume that there’s really no good or bad future. It’s good for some and it’s bad for others, and I think that’s going to be true here. I think what we’re going to see is there are organizations who have spent the last decade really creating the kind of agility, the kind of resilience that’s necessary to make a transition like this and really capitalize on it.

Todd

And there’s going to be some organizations that really struggle. And that’s why I actually think that this may not be the age of the incumbents. I think that the people who are really intending to disrupt have a window of opportunity here while people are kind of working through the internal dynamics of what it means to adopt these new technologies and brand new ways of working. People who are unencumbered by those cultures and those kind of leadership norms are going to be able to move much more quickly and likely be able to sell into that world. And I think that’s going to give rise to a whole new group of consultants. I think there’s always the system integrator model and we’re going to sell the big thing and we’re going to work it out over five years and rest of that. I think that the people who will play most prominently in this next phase really are hyper specialists and they’re going to come in and they’re going to solve significant real problems.

Tony

When you say that, I think you said the current operational architecture is a reflection of the current leadership or something like that. And it sounds like they won’t change willingly. Just to be a little bit brutal here, is there going to have to be a wave of retirements or something like that for AI to really hit larger firms or what would push larger firms to attract or to adopt really interesting levels of, say, technology and productivity?

Todd

I think that we’re at a kind of a unique place where a lot of the things that made us successful in the past are the things that actually inhibit our progress. And you know, if you’ve got folks who are relatively intransigent, I mean, really the only option is to move on. We used to have a firm I worked for. This sounds really crass. We had a phrase you either change the people or you change the people. And I think we’re at that kind of a moment where if you find yourself in an environment where the leadership and the operating norms really are not particularly conducive to making these key pivots, everything Sam said is right on the money. I mean, these are economic realities. You’re going to have to make these changes to remain competitive and you’re going to have to find a way to a new way of operating that will allow you to do that again and again and again. Because this isn’t an embrace AI. It’s embrace tool after tool after tool that’s solving these problems. It’s a very different discipline, but it’s also spinning up a bunch of interesting challenges. I was just talking to somebody this week that was working on some things around material science and leveraging AI in that space.

Todd

And we are so rapidly spinning up new materials that it’s difficult to find people who are capable by way of their training, of conceptualizing the utilization of those materials. And so these opportunities in some cases take a little while not just to ingest but to train up people to leverage these to their full extent. Which is why I think the short term is going to be really a story of fits and starts. There’s going to be some big wins and there’s going to be some significant resistance. One of the places where I’m kind of most interested right now is what was mentioned earlier about sort of the top of the food chain right. You’re talking about very elite, top level professional jobs. We’re already seeing some really incredible things in the healthcare space around second reads of scans.

Tony

What does that mean, second read? Can you walk us through that process? Yeah.

Todd

So the radiologist takes a look at your X ray or MRI and says, this is what I see. And then it automatically goes out to an AI engine that goes in and makes sure that everything was caught. And what we’re finding is that we’re routinely catching things with the AI. Well, that’s beginning to tell a story, not just about supporting the work of a radiologist, but potentially, over time, the machine actually becoming a superior mechanism to leverage as a first read and a second read, and you can actually create alternate models. And these are things that are not science fiction. These things are already happening. These are institutionalized systems are doing it really to mitigate risk. I now can say I’ve looked at it multiple ways, and we feel fairly confident at what we’re seeing. That’s happening in industries right now, where we’re actually seeing real life, serious use cases that are mitigating risk, lowering costs, improving outcomes that needs to be scaled. And that’s really what I’m getting at. I think that you see these really interesting spot treatments, right, where we’re looking at something saying, I can solve that. The question is, how do enough of those actually begin to be leveraged?

Todd

It becomes a way of working rather than just a tool in the box that we go to in very specific and very narrow circumstances.

Tony

So what about those people who say, “oh, I’ll never let AI be my doctor, I’ll never have a robot for a doctor, or I’ll never let AI be my CPA” or something like that? Will they have a choice?

Todd

Yeah, I don’t know that they will. I will tell you that there’s some pretty sophisticated tools that are already on the market that are very close to being able to achieve the same level of efficacy and diagnosis as the very best physicians that we have. When you think about that as a language model, I mean, if you think about, like, a Physician Desk Reference and you’re asking questions and you’re getting the medical history and you’re making decisions and there’s things that the machine is capable of doing that’s, just far more capable in the human mind in evaluating the different levels of risk and the likelihood that this is what I’m seeing versus this other thing. Because we’ve seen such a remarkable advancement just on that front in the last four or five years, and you’ve seen its adoption. You look at the NHS or you look at Medicare and you say, there’s absolutely no way, at least at that first level of diagnosis, that we’re not moving very aggressively in that direction for a lot of reasons. Number one, it’s much cheaper, but number two, it’s super available. It’s easy access. We’re actually catching these things long before they become genuinely problematic and cost the public a whole lot more by way of health care dollars.

Todd

So I get it. I understand it. I think there’s sort of an impulse initially to say “I’m very uncomfortable with that.” But increasingly there is a whole lot of diagnostic stuff that’s happening behind the scenes that people aren’t seeing that’s already in place. That’s pretty significant part of their care.

Tony

Right. Okay, so this is where I’m going to give a little shameless plug for complete intelligence, just to give people a little tangible idea of what can be done.

Tony

So we do budget forecasting for companies, and we have one company, a client, $12 billion in revenue. They have 400 people who take three months to do their annual budget process. We did that in 48 hours, taking one of their people less than a week of their time to transfer knowledge to us. We had better results in 48 hours than what 400 people did over three months. And this is a very tangible way of identifying the opportunity that’s available with AI tools and other technology tools. It’s not just replacement. It’s not RPA, robotic process automation. It’s not that it’s better. Right? And that’s where people should be a little bit aware, where we’re talking about doctors, we’re talking about people with MBAs, we’re talking about highly educated professionals where we can have a machine do that work better and faster. And that brings us to Chris Balding to give us great news, Chris. Thanks, Todd. I really appreciate that. And you guys jump in on this anytime.

Tony

Chris, the real question here is, will AI take my job? Right? My job? I’m hoping it does. But for most people, will AI take their job? I think you’re about to launch an AI NLP, a natural language processing firm. First question, I guess, is how has starting that firm changed your mind about the application of AI today versus even just a few years ago?

Chris

I think there’s this discussion about will it take people’s jobs? And if you look back on really any technological breakthrough from the cotton gin to fracking, what you really had is the per unit price would drop of a T shirt or how much it costs to get that oil and gas out of the ground. But what happened was it consumed people that had the technical training, higher levels of technical training. If you think about AI, people will say, well, hey, we don’t need as many coders. Well, you know, what’s going to happen is that opens up a whole new field of cybersecurity risks. And all those coder jobs are going to migrate into cybersecurity because all you’re doing is opening up cybersecurity risks, as a simple example. If you talk to any IT guy inside big companies or whatever, there’s typically a list of about 40 projects management wants them to work on, and there’s 20 that are constantly at the top of that field and they never get to those more advanced, maybe investment, longer term types of product. Well, if you’re able to blow through those 20 faster, as a simple example, you can move on to those more creative, risky type of projects.

Chris

So when I hear people talk about, well, it’s going to take my job, I think it’s absolutely going to change how people work. I think it’s going to change the types of jobs that we do. For instance, one type of coding might move more into cybersecurity. Is it going to eliminate these jobs so that the total level of employment disappears? Absolutely not. It’s just going to change how we work and the specific jobs we do.

Tony

So is it at least at this phase, is it more augmentation than it is automation?

Chris

So it really kind of depends on what you’re specifically saying. One of the things, and I think OpenAI has, has even said things to this effect, you know, we talked about macro and other stuff, but really, what has, what is undergirding this is that really, for the past, let’s say five to ten years, you’ve basically seen this exponential increase in AI type stuff. And that is really driven by, just to be blunt, the hardware of what you can do with GPUs. And part of the reason that we talk about this is, going forward, the amount of GPU capacity that you’re going to need is I mean, you’re going to start sucking down. I mean, the the amount of energy that they were sucking down from GPUs to do bitcoin will pale in comparison if it really takes off the way people say it will. I’ve used it for a lot of coding and similar types of things. And what you really see is, especially on more complex types of projects, you kind of use it to kind of seed what you’re doing, maybe take specific steps. It absolutely, I don’t think, is near the point where it can basically manage entire significant projects.

Chris

And so it’s absolutely a time saving tool. We talk about this with coders. It’s absolutely a time saving tool. Is it taking over their job? No, absolutely not. It’s going to help them do things faster, move on to more complex types of processes that they’re trying to automate.

Tony

Okay, but if it helps people do things faster, then that means they’re spending less time doing the job they have now. So somebody’s losing, right? Somebody’s losing a job, right?

Tony

Because if it’s helping people do stuff faster, then companies have to spend less time on headcount. Right? I’m trying to get out of the, hey, this is replacing jobs. But we kind of end up there with this type of technology.

Chris

Yeah. So think about it two ways. Let’s assume you have an IT department. All of a sudden, that IT department is doing less work, making sure that there’s not a paper jam at the printer and that the computer can talk to the printer. Okay. There’s less time spent doing that. But I guarantee you there’s hackers in Russia that are now using ChatGPT to say, “how do we break into this?” Part of the issue is that guy who started out in It is probably going to move over to cybersecurity. Okay? Or they might say, “hey, we can let go of a couple of people, but now we want these other guys to focus on these bigger investment type projects that maybe we had kept on the back burner because they just didn’t fit within our budgetary priorities.”

Tony

Okay, so those are relatively fungible skills. But if you’re like the Radiologist that Todd’s talking about, can those skills be repurposed to something else?

Todd

Well, honestly, I think it’s case by case, but I mean, Radiology is a great example and just health care generally. I think we’ve all probably heard that we have a nursing shortage and that you can’t find an endocrinologist and we’re constantly dealing with this really serious labor issue. A lot of that is because across the board in healthcare you have people really failing to operate at the top of their license because they’re spending an incredible amount of time doing the paperwork, meeting the CMS requirements. And so you have doctors who are doing 30% doctoring because the rest of their time is basically meeting all of the obligations to all the different stakeholders. Right.

Todd

I think what we’re likely to see is these people who are sitting in that sort of, again, that sort of top tier of kind of professional expertise, really spend more of their time doing value creating work. I think if you think about what’s really going on, we have effectively an opportunity cost that’s baked into everything that we’re just not doing because we’re doing all of these things that really don’t require somebody operating at that level.

Tony

Right.

Todd

What we’re trying to do. I think and I think this is really the way we should be framing the future of AI is that if you really get focused on value creation and you start talking about that opportunity cost gap, I need every one of these employees operating at the very top of their capabilities, regardless of whether they’re a physician or a coder. And I need most of their time being pushed against real value creating activities rather than all the stuff that really should be relatively easy to put off to this other way of operating. And I think you can be threatened by it or you can recognize that the greatest inhibitor to innovation over the course of the last decade has not been our ability to produce technology. It’s our ability to free up capable people to really focus on the innovative things that need to get done in order to make things go to the next level. This is that linchpin moment. And every leader ought to be asking the question like, “how do I maximize the value of every single human asset that I have and really get them operating at top their license.”

Todd

And if that’s not the focus, then this probably is going to be a challenging period and it will become about cost and it’ll become about reducing by way of eliminating positions. That’s not, I think, the way to go. I think that’s actually probably the wrong way to think about it. I don’t doubt that there will be people who will be in that trap because they just are going to have a hard time to make the move, but the smart companies are going to be able to understand that very quickly and move aggressively to make that happen.

Sam

Yeah. And I think that’s a critical point that should not be overlooked is you can be scared of it or you can embrace it and use it as a tool to enhance your one, your life, because none of us like doing the lower end of the spectrum stuff that we always have to do. If you use it to eliminate that and get to do the stuff that is much more highly value add, that is incredibly accretive not just to the business but also to your lifestyle in general. Right. I think embracing it and actually having a positive attitude about it and saying, how can I use this to make myself more productive and generally more happy? Because hopefully we’re doing things that we love to do. How do I use this to do that? I think it’s all about the mentality of approaching it rather than saying, “oh my word, is this going to take my job?” I think it’s a fundamental thing that if you think it’s going to take your job, it probably is simply because you’re not going to embrace it and learn and try to adapt to the new technology, you’re going to fear it and shut it.

Sam

And I think that’s going to be the fundamental difference between those that succeed with the new technologies that are coming and those that fail and fail in a meaningful way.

Tony

Yeah, but I think fear is a natural response to something like this. Right. I mean, we’re all kind of not all of us, but a lot of us are afraid of new stuff. We’ve had our same job for 10-20 years. We have a routine, we go in, we do our work, we leave it five and call it a day. That’s most people, the vast majority of people, and I don’t necessarily think maybe I’m a skeptic here and maybe I’m a bad person for thinking this, but as Todd you talk about people want to look at the greatest value add they can have within their job and that will help them from being kind of automated. I don’t know that most people think that way. Maybe they do. But I think most people are just kind of going in for hours to do a routine job and those are the things that are the most dangerous, I think the positions that are the most dangerous.

Tony

Before we kind of wrap this up, I don’t want people to think that I just kind of loaded this with people who I knew would have the same view as me.

Tony

So, guys, let’s take the other side of the table for a little bit. And I’m not accusing you of having the same view as me, but let’s take the other side of the table a little bit. Let’s assume that large language models and Chat GPT and all these things are overhyped right now, okay? What could stop the implementation of these technologies so that they aren’t adopted across companies and across the economy? What could stop this stuff? Chris, you’re muted.

Chris

I think one of the things is Todd has alluded to this is you’re going to need so basically the basic technology that ChatGPT used is really probably just ten years old. They just added a lot more data and a lot more GPUs. I mean, the fundamental technology is not new in the least. What you’re really going to need, what is going to stop this is now you have to get domain experts coupled with those tech geeks to say, what can we do together? So whether it’s an endocrinologist, whether it’s a financial analyst, whatever it is, and one of the things is outside of the mainstream that you’ve seen a lot, is how can you develop these language models that are providing very precise answers for very specific fields? I’m a tax accountant. I am an endocrinologist, I am whatever. So if you don’t bring those domain experts together with those tech geeks and you’re just stuck with ChatGPT, which is basically trained on the Internet, you’re going to get a lot of bad answers rather than being able to augment what those humans can do.

Todd

Well, I would go further on that and say that those domain experts are critical, especially at this moment in time, right? Like, you start thinking about healthcare, aviation, mining, oil and gas, places where there’s really some very significant risk, and you say, look, those domain experts working side by side, they see that risk coming, they bake that into the conversation. They talk about what to actually put in that learning model to actually create an environment where you accomplish those kind of incremental improvements, but without exposing the organizations to exponential risk. I would tell you right now, the issue is it’s early. And so there’s not a lot of domain expertise that’s actually fluent enough in this to have a dialogue that’s meaningful to kind of push this forward. And the risk that’s inherent to that is the sort of ugly pre adolescence, as we sort of learn our way into using the technologies appropriately, getting out over our skis and getting some things really profoundly wrong, that really creates sort of a downdraft, right? Like, oh, this failed, or this didn’t work or it opened up this massive amount of risk, that’s a human error question. That’s really just a function of moving more.

Chris

Just to kind of add to that, Todd. Give me 1 second, Sam. I’m sorry about that is one of the issues that especially in an issue like the medical field, and I’ve heard this talked about in multiple other fields, is humans are there for a reason and especially if there’s a license, if there’s legal liability, et cetera, et cetera. No human, no matter how good the technology is, even if the technology is demonstrably far superior to human, no human is going to turn that legal liability over to a computer without saying, I’m going to sign off on this, I’m going to check it. And as you said, Todd, that machine learning was basically double checking what the radiologist was doing, just verifying.

Sam

Yeah, to Todd’s point and to Chris’s point, and I think this is really important, if we don’t get the domain experts in there to actually help and make better decisions, better outcomes, better reporting by the by ChatGPT 4, 5, 6, 7, 8, we are going AI in general is going to end up being regulated in a meaningful way. It only takes a couple of really big incidences, car crashes, et cetera, before you end up with the FAA, before you end up with the Transportation agency, et cetera, et cetera, Department of Energy. However you want to look at it, the amount of regulation that will come down on top of this in a landslide like way if you don’t get it right from the beginning and have some sort of self regulating mechanism, whatever it might be, is another, I think, understated suffocating factor, right? There’s nothing that suffocates innovation like regulation. And if you don’t get it right and you don’t get it right pretty quickly the amount of regulation that’s going to come down on this, particularly when it’s consumer facing, when it’s labor facing, those are some very powerful lobbies that are going to absolutely hammer this if it’s deemed to be unsafe or dangerous. I mean, it’s that simple.

Tony

Interesting. So basically what I get from you guys is we’re likely to have at least a few years where it’s more augmentation, where those experts are feeding back into the models to help them understand what they do before these things can really go off on their own. Is that fair to say? So we can’t just open the box today, replace a bunch of jobs and everyone’s on government payments or whatever for the rest of their lives. It’s going to take a few years for this stuff to really get some practical momentum in the workplace.

Todd

I think that’s right. But I think to that previous comment, the industry has to be very careful to sort of self moderate here. I mean, there are going to be folks who really very diligently go about the process of ensuring that we do it right. And then there will be people who inevitably will play it fast and loose. It’s the folks on that side of the fence that actually create the downward pressure from the legislative and regulatory environment. And so it’s just kind of an interesting moment in time because it’s sort of the learning period that really puts it on a solid footing. But it’s also a period where there’s a great deal of volatility and potential for there to be some kind of significant things that happen that actually harm the long term ability to get it implemented in a way that makes sense for the public.

Tony

Very interesting. Yeah, I think that regulation point is so super important. Okay, guys, anything else to add before we wrap this up? This has been hugely informative for me. Anything else that’s on your mind about this?

Sam

I’ll just say don’t fear it. Use it. If you’re not using it, if you’re not trying to learn about it, then make it make you better or get out of the way.

Tony

Exactly. Watch a few videos, learn how to do some mundane tasks. Use it to your advantage and do things like we do with our newsletter. Just get some really routine tasks automated and then just start learning from there. So guys, thanks so much. This has been really, really valuable. Thank you very much. Have a great weekend.

Todd

Thanks, Tony.

Sam

Thank you, Tony.