All eyes will be on the US CPI data as it gives us an indication of the quantum and pace of rate hikes. But is the Federal Reserve too slow to see if inflation is coming down when there is anecdotal evidence of slowing car and home sales? Tony Nash, CEO of Complete Intelligence tells us.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station BFM 89 Nine. Good morning. You are listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. 07:00 a.m on Thursday the 13 October. Let’s kickstart the morning with a recap on how global markets closed yesterday.
BFM
Looking at US markets, all three key indices close in the red S&P 500, down zero 3%. The Dow and Nasdaq down zero 0.1%. And I think that the S&P has been down for six consecutive days already. Moving to Asian markets, and the Nikkei down marginally 0.02%. Hang Seng down 0.8%. The Shanghai Composite Index back the trend. It’s up 1.5%. Straights Times Index down 0.7%. And our very own FBM KLCI is down 0.5%.
BFM
So for some thoughts on where international markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Now, US CPI data is due out on Friday. What are your expectations for that figure? And how much of this do you think will determine the quantum of the next Fed rate hike?
TN
Everything rests on CPI right now. So I think if it comes in line or higher than expected, it’s just bad news for markets for the next few days. So people are hoping for a lower number because it would provide some relief and some proof that inflation has maybe peaked or is at least slowing down. I think it’s possible that we have it come in slightly under, but given the PPI reading that came today, it’s not a good a sign. So we may see CPI continue to rise in tomorrow’s trading day in the US.
BFM
Okay, Tony, we have a history of the Fed being late to the game, right, when it came to inflation. They kept saying “transitory, transitory,” and we know it wasn’t transitory at all. Do you think that they are also late to the game in recognizing that inflation has been brought under control? Because when I look at some of the data points, one of which is used car sales, that’s dropping. New car sales are also dropping. House sales, home sales are also dropping. Is it possible that inflation is being overstated?
TN
Well, you’re 100% right on the Fed being late to the game, both to recognize inflation and to impact it. The problem that we’re seeing with, say, used cars is, although the unit volume is slowing, the unit price is still rising for, say, used cars, for eating out, for these sorts of things. There’s still been upward pressure on these because of the factor input costs and supply chains and labor and others. So it does feel in the US like things have not that prices have gone back down, but that the rate of rise has slowed. That’s what it feels like at the consumer level, except for petrol, gasoline, which has started to rise again over the past week.
BFM
Let’s take a look over at the UK, where George Bailey, the Bank of England Governor, said that the BoE would end support for UK Gilts by the end of this week. What does this mean for the Pound specifically and other sterling-denominated UK assets like equities?
TN
Oh gosh, we’re likely to see more devaluation of the Pound. There’ll be pressure on the Pound. Well, maybe not devaluation, but depreciation of the Pound. UK pension funds and other guiltholders will likely have to sell assets if the BoE is stopping their intervention in that market. They’re likely to likely to see downward pressure on those prices. So holders of those assets, like big pension funds, will have to use other assets to pay for their collateral for those investments. So it’s going to be ugly all around once the BoE stops because the market for guilt is so weak.
TN
And we’ve seen for the Bank of Japan, we’ve seen for the Fed, for different auctions, different government debt auctions, there have been zero takers for government debt auction. And that tells me they’re not paying enough. The interest rates for that debt has to rise because people feel like inflation and interest rates are going to rise. So these governments need to offer their debt out at a higher rate so that people can make a profit with it, given the inflation environment.
BFM
And Tony moving on to China with a Party Congress meeting happening very soon, and with Xi Jinping set to win an unpresented term, what economic implications would that have for China? And with growth slowing down across the world, how will they aim to achieve the goal of common prosperity?
TN
Yeah, Common Prosperity as a definition can be really taken as raising people up, or it can be taken as pushing kind of those achievers down. Okay. And if you look at China’s history in the late 50’s and the 60’s, as you know, Mao Zedong really pushed those achievers down through the great famine and all this other stuff. So my fear is that as Xi Jinping has consolidated his power, he’s going to start well, he’s already started a couple of years ago, pushing some of those economic overachievers down like Jack Ma and other people.
TN
So I really do worry coming out of this Party Congress that we get a much more restrictive Chinese economy. We’ve already seen foreign investor sentiment sour on China, and we’ve already seen with code lockdowns, with supply chain lockdowns and other things, there has been a functionally more restrictive environment and with sentiment souring as well.
TN
I’m not optimistic, at least in the short term. The Chinese government, whether it’s Xi Jinping or other elements of the Chinese government, they’re going to have to do something to reassure the world that they are a good faith partner in global supply chains and for manufacturing. It’s not going to make them happy to do that. But if they want to continue growing at the rates they have grown, they’re going to have to do that.
TN
So when I say I’m not optimistic about China, I’m not saying China is going to crash. I’m saying I think they’re going to have some pretty mediocre growth rates in the coming years because of the economic environment, regulatory environment and market environment that they’ve cultivated of late.
BFM
OK, Tony, I want to stay in Asia and I want to look specifically at Japan because the Yen weakened to a fresh two-decade low, hitting 146 to the US dollar. What do we make of this? Is this really on the back of Corona vowing to maintain its very accommodative monetary policy?
TN
Well, they have a choice. They can either support the yen or they can buy government bonds. And they’ve continued buying their bonds. So I think they’ve made a choice not to support the currency. And with the strong US dollar position and Janet Yellen made some comments today saying, again, saying that it’s really not the US’s responsibility to maintain the currencies, economies of other parts of the world. It wasn’t those exact words, but it was similar. That will likely push the dollar even stronger and we’re likely to see even more depreciation of the Japanese yen.
TN
So there is a lot of pressure on Japan right now, and the Bank of Japan really has some decisions to make about how they’re going to approach that. Maybe they’re okay with depreciating their currency, but it will fundamentally change things like their imports of energy. They’re very dependent on imported energy. They’re very dependent on imported, say, raw materials like metals for their manufacturing. So this really changes their approach to managing those imports.
BFM
Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
BFM
Yeah, I like his comments on the yen. Right. At what point does it then become really painful for the Japanese economy? Net energy imported, clearly LNG from Malaysia is one of the key imports. What does this then mean for inflation? But it’s one country where inflation has been ultra low, almost as low as ours, I think barely 2-3% for them. But for them it’s a bit of a shocker because they’ve been in a deflationary period for more than ten years.
BFM
Yeah, and his comments on China, I think he said that growth would likely be slow over the next couple of years, and I guess Xi Jinping and China will unlikely dial back on its Zero Covid policy next week. It looks very unlikely at this point.
BFM
I mean, everyone’s hoping to see some kind of announcement to that vein. But again, lots of things to look out for in the weeks ahead.
BFM
We just heard headlines coming out Shanghai, parts of it under even more lockdown.
BFM
Well, very quickly, let’s take a look at some good news. I guess that’s coming out of Australia. We have contest airways. They said their first half year profit will jump to as much as 1.3 billion Australian dollars as travel demand accelerates and the airline stabilizes operations after a prolonged and bruising period of cancelations and delays. This ends a streak of five consecutive half yearly losses totalling 7 billion Australian dollars.
BFM
It said that the frequency of scrap flights, late departures and loss backs are all improving. CEO Alan Joyce said it’s been really challenging time for the national carrier, but the announcement shows that how far the airline has actually improved, and they’ve seen big improvements in their operational performance and acceleration in financial performance as well. And this takes some pressure off Joyce.
BFM
Well, if I look at the street, they like this stock. Twelve buys, three holes. One sell. Contest at close was $5 and 17 Australian cents. Tucker price, 653.
BFM
All right, 718 in the morning. We’re heading into some messages. Stay tuned. BFM 89 Nine you have been listening.
BFM
To a podcast from BFM 89 Nine, the business station. For more stories of the same kind, download the VSM app.
We’ve had several policies that have hurt small businesses, especially since the advent of Covid. The US administration just implemented a policy to move gig/independent workers to employee status. How does this hurt small businesses? Carol Roth, our special guest for this episode, discussed that in this Week Ahead.
Also, we’ve seen a lot of negative news this week with producer prices, wages, consumer prices rising. One Twitter user asked what would Carol do if she was in charge? What would she do and how does she think it’d help?
Albert helped us look at the Fed and is the dovish Fed dead? We’ve known this for some time, and there were hopes for a pivot, but that seems to be over.
Tracy also talked about diesel inventories, which she talked about for a very long time. She helped us dig into that in this episode.
Key themes 1. US policy punishing small businesses 2. The dovish Fed is dead 3. Diesel inventories 4. The Week Ahead
This is the 38th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Time Stamp: 0:00 Start 0:48 Key themes for this week ahead 2:43 US policy on gig workers 7:48 Is this to slow down job creation? 10:00 What other things will make things uncompetitive for small businesses? 12:07 What adjustments would Carol Roth do if she’s with the Fed? 16:47 Debt buying and the Fed 19:00 Forecasts for some currencies 20:00 Does the Fed understand that this is a supply-induced inflation? 23:50 They’re not thinking through the political fallout 25:25 Is diesel priced in dollars globally? And what’s the impact? 28:00 How long does the diesel shortage last? 31:34 What’s for the week ahead?
Transcript
Tony Nash: Hi, everybody, and welcome to the week Ahead. I’m Tony Nash. Today we are joined by Carol Roth. Carol is from Chicago. She’s the author of the War on small business. She’s got an amazing Twitter following an amazing Twitter presence. Carol, thanks so much for joining us. Really looking forward to getting your perspectives today.
We also have Albert and Tracy and I’m looking forward to getting their views on the Fed and on energy today as well. The key themes today we’re looking first at US policies punishing small business. Carol has a really unique perspective, obviously a book on the broader implications of this, but there are some recent policies that she’s been focusing on that will talk about some of those things.
Next. Albert will help us dig into the Fed. And are we looking at the end of the Dovish Fed? I think we’ve known this for some time, but there’s always kind of been some hope that there’s going to be some sort of pivot and that seems to be over.
Next we’ll look at diesel inventories. Tracy has been talking about this for a long, long time, but it really seems to be coming to a head. So we’ll dig into that today as well. Please take a look at our product CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.
Before we move on, please like this video, please subscribe to this video. You’ll be able to see all of them and we really want you to be able to see us every week as we bring these in.
So Carol, thank you very much for joining us. I know you’re busy, really demanding schedule. It means a lot to us that you could join us. So thank you very much.
Carol Roth: This is an amazing crew and I can’t believe you left out recovering investment banker out of my introduction because that’s really the most important part,
TN: Right, exactly. And a Raiders fan as we learned last week over Twitter as well. So we’ll forgive you for that. Anyway, thanks very much. I love the work you do on small business. And you’ve been talking about a recent policy and we’ve got a tweet of yours on the screen talking about the Bind regime pushing gig employees to be full time employee status with companies. Can you talk us through what that means for small businesses and why is that a competitive disadvantage?
CR: Yeah, I think the first thing that people really need to understand is how important small business is to the economy. Because I think a lot of people think, oh, it’s small, it’s just a little piece. Before COVID, small business was about half the GDP and about half the jobs. And at this point we have about 32 6 million small businesses in the US.
So if you’re somebody who believes in the concept of decentralization and that being important to economic freedom, this is the decentralized portion of the economy. This is very independent. It’s very spread out geographically via industries backgrounds. Whatnot by the way which is why big business, big governments and big special interests don’t like small businesses because they’re very hard to corral. If you look at the other half of the economy, it’s in the hands of 20 plus thousand big businesses. So it really is that sort of David versus Goliath battle but also this battle between decentralization and centralization. And we have seen all of these efforts over a long period of time to destabilize small businesses and to make competitive advantages to really tip the free market in favor of those big businesses.
And certainly the policies around COVID right, were the biggest example of that ever. It was an epic wealth transfer from Main Street to Wall Street done not based on data and science but based on political cloud and connections. So now that we kind of know what the story is in terms of this unholy triumvirate, if you will, the big business, the big special interest, big government attacking small businesses, you then look as to what else they can do to really make it harder for small businesses to compete.
So there’s this Department of labor ruling that’s come out. It’s followed something called AB Five in California. If anybody has heard or followed what was going on in California and then it has been and passed the House on a federal basis under the Pro Act. But basically the idea is they want to take gig workers and independent contractors which by the way the estimates, they number around 53 million people in the United States.
So again, this is not a small number of people who are being affected and they want to say you can no longer have the freedom to decide how you work. We don’t want you to be able to enter into a contract in a way that works for you. We don’t want you to have that flexibility. You have to be an employee. Now this may sound like, oh well, that sounds great for people.
Why would they not want to be an employee? Well, there are a lot of reasons why you don’t want to be an employee. The first is you might not have that opportunity. And that’s the biggest issue because it is very difficult. And the government are the ones who have made this very difficult for a company to hire their first employee and also to keep them on an ongoing basis.
If you hire somebody as an employee versus a contractor, you have to pay in a portion to Social Security. It affects interest. It can affect your 401K or step plans. It just kind of reverberates throughout your business and so it becomes very challenging and difficult. So if you are a small business who maybe gets busy during a certain season or need help just in certain areas, you tend to bring on independent contractors. Or if you’re creative, if you’re running a movie, you’re obviously not bringing everybody unnecessarily as an employee. You might have a caterer who comes in and feeds people, or if you’re a hairdresser, you may want to rent out a chair in a salon. And the salon doesn’t have the wherewithal to make these employees.
So they’re framing this as we’re trying to help the employees. This is going to really stick it to big business. But there are literally hundreds and hundreds of different categories of employees. Anybody who’s a 1099 employee and doesn’t have a business entity that this will threaten not only their economic freedom, the ability to work the way that they want to be flexible, but literally their livelihoods.
So if you believe in choice, it should be your work, your choice. And now the Department of labor wants to give another giveaway to all of those big special interests.
TN: So, Kara, when we’re in an environment right now where the Fed is trying to slow down job
creation, our small company is the largest portion of job creation as well. So is that another tool potentially, maybe unintended or not, I don’t know to slow down job creation?
CR: Yeah, I mean, certainly if you think of the small companies, they’re the ones that don’t have the financial wherewithal or the fortress balance sheets. They have not been loading up on the cheap debt because they have to personally guarantee it and don’t have the same scale as the big companies. So it’s a challenge for them to survive an environment where the Fed is going, we’re going to destroy demand. It’s basically we’re going to destroy the little guys who can’t endure this pain. So that’s small business. And you’re right. Having the ability to be flexible going, well, maybe I can’t hire an employee, but maybe I can hire somebody as a contractor parttime, and when things get better, I can bring them on as an employee. Or maybe this is just a flexible way that we can work in the future so we can have different people and they can also work with different companies in a way that suits them.
Absolutely. This is going to be on the shoulders of small business. And as they always do, they say, oh, this is an attack on Uber and Lyft. When this happened in California, Uber and Lyft went out and they put it on the ballot. They got an exemption, but they didn’t take everybody else with them. They just got it for a handful of big industries. And all of the other small guys were basically screwed.
So the idea that this is somehow in an attack in the front against the big guys and the small guys are going to come out smelling like a rose is a joke. If you believe that. I’ve got a bridge to sell.
TN: You right. Okay. So we have small businesses that just barely made it through COVID. So that was really a regulatory way to suffocate small business. And my company is one of them that scraped through and now we have these full time employee regulations coming in from the Department of labor. Are there other things on the horizon that you’re seeing that could make it even more uncompetitive for small businesses?
CR: I mean, everything that they’ve done is making it noncompetitive for small business, whether it’s regulation. You think about all of these minimum wage regulations and how these big companies like Amazon and Walmart have shifted their position and decided to lobby for them. Well, why do you think that is? That’s because they know they’re going to pay that level anyway and they don’t want to have the flexibility for the smaller companies to be able to maneuver around.
That certainly a higher interest rate environment messing with the labor force in general, let alone having a rule like this. The supply chains, the decisions that were made, whether it was a direct you have to close your business down or these indirect issues that affected labor supply, whatnot they killed by mandate around seven figures worth of small businesses. And unfortunately, Tony, as you’ve shared personal stories, there are many others that are just scraping by to survive.
And it’s just this like, you know, you get knocked down, you get up again and then they just keep knocking you down and you keep knocking you down. If you wanted people to succeed, if you wanted people to pursue the American dream, if you wanted economic freedom, you would be working to remove
barriers, make it easier for people to work, make it easier for companies to hire in the way that makes sense for both parties, and make it easier to be a small business. And every single thing that comes out
of government at all levels, by the way, it’s not just federal, but state and local is doing the exact opposite.
TN: Yeah, it’s overwhelming. We could talk about just that alone for hours. Let’s move on to former investment banker Warden Grad. You know your way around the economy. There is a tweet put out a few days ago asking you, if you had the big chair, what adjustments would you make to the economy, monetary policy, whatever, to change the environment today to make things better? What are a few things that you would do if you were Chair Powell or Janet Yellen or something like that?
CR: Burn the fed down. I burned down the Federal Reserve. The very first order of business, I put myself out of a job. And I say that kind of jokingly, but I like to clarify. I would take away the Fed’s powers because as I’ve said to many people before, the only thing worse than the Fed making monetary policy decisions and meddling in the markets and doing things like printing money and whatnot would be Congress doing that? So you don’t want to have those if you get rid of the Fed, you don’t want to have somebody else take away the powers. We’re really getting at, you know, getting rid of those powers to interfere. So that would be the first thing I would do.
But obviously that would not solve what is going on. Now. This is not going to be a surprise to any of you, but what we’re dealing with right now is a supply side imbalance. And it has been. They stimulated demand, but they stimulated it into a supply constrained economy. And so we are under supplied, as I know Tracy tweets about all the time in energy, certainly in labor, as we’re talking about food, housing, other commodities. So I personally don’t believe that the Fed has the tools to solve this problem and attack it. And frankly, I think that they’re going to just cause a massive amount of destruction not only here in the US. But reverberating through the global economy, which then swings back and has an impact on the US.
So what needs to be done, again, are policies that remove barriers to supply. What we’ve been talking about, certainly on the energy front, anything that we could do to stimulate supply of energy, which again, do it here, where we do it more cleanly, and not let China and Venezuela and all these countries that don’t do it cleanly be the ones to do that. Because the last time I checked, we all share the same air. It’s not like you believe in a smoking section, right? Like, oh well, they’re just smoking over there, we’re great over here in the same restaurant. Like, that’s so stupid.
So we would obviously do a 180 on energy policy. The same thing with labor. All the things we’re talking about make it easier for companies to hire people to go to work in the way that they want to work and then we close that gap in the labor market, which is insane.
The same thing in housing. The National Association of Home Builders did a study last year. $94,000 in regulatory costs are added to the cost of every new home from the government. I mean, that’s insane. The average house is almost 4000. So like 25% of the cost is in regulation. And I’m not saying we don’t need anything, but that’s certainly excessive and it’s gone up by something like 30% to 50% over a very short period of time. So it’s those kinds of things that the policies need to be focused on stimulating the supply and shrinking that supply, demand and balance by increasing supply, not by trying to kill the demand. And that’s just where I land on it.
Albert Marko: That’s exactly what I was tweeting last few months now. And actually on the show is they are trying to create demand destruction, but the problem is the supply disruption that they’re creating and they put themselves in a doom loop to where when demand comes back, there’s no supply. So you get a cycle of inflationary situations happening, and it’s bad here, it’s worse in Europe and it’s even worse in Asia. So we’re going to be stuck in this until the policies start changing, not just from the Fed, but it’s got to be political also because the governments are doing this COVID zero in Asia and the energy crisis in Europe, and they’re just making it worse. So until those policies change, we’re going to be stuck in this cycle.
TN: Yeah. So I respect both of you, but the Fed doesn’t. So they’re going to do whatever the hell they want. What’s really interesting to me is you guys may have seen today. The treasury was asking investment banks. Hey. Do we need to buy some of the debt off of you so that we can create some liquidity in debt markets. Just basically transfer some cash to you so we can take some of those assets off your balance sheet.
Whether it’s the Fed or the treasury or whatever is done. It just seems like the benefit is for the small circle of people. And when you talk about whether it’s interest rates or QT or whatever, it seems like interest rates are the bluntest instrument that hit the biggest number of people. Right. And it’s hard for me to understand why that’s absolutely necessary.
And Albert, we’re going to segue into your section on the death of the Davis Fed. If we look at interest rates, we’re looking at a terminal rate about around 5% now. Right. And so help me understand what is happening with the Fed, what you’re hearing, what you’re seeing and what you’re expecting for the next couple of months.
AM: Well, I mean, everything at this point well, it should have been for a year now, but everything from this point on is strictly to combat inflation. They are getting screamed at by literally everybody to get the 5.5%. Not just five, they’re going to get the 5.5%. They’re going to do 75 again on this next meeting and then another 75 after that. And their intention is demand destruction. That’s what they’re going to do. And they’re not going to be dovish anymore. But they’re have to walk a tightrope here because Europe, they’ve destroyed so much in the global market, specifically Europe that lost 30 trillion in the bond market, that it could be a systemic problem.
And they can’t have that, so they’ll do 70. Five to 75. Talk guidance extremely hawkish. They’re intent on trying to get inflation down until November and December.
TN: November and December.
AM: They’re going to do 75 both. And they’re just going to have to because their time is out and they have
no more tools left to hit. Inflation at JPY at. Euro will be at 90.
TN: And JPY will be what?
AM: I don’t know the correlation on that one off hand, but the euro is definitely going to go to 90. 90 to 90 on this. But it’s all $30 trillion, Tony. That’s a lot of money. The only people in the money. Yeah, it’s still a lot of money. So when the treasury starts talking about, do we need to buy debt back from banks? Is that the US. Banks or is that European banks? Because I guarantee there’s going to be some European banks in there.
TN: Oh, they have to be. Yeah.
AM: Like I said, they’re causing systemic problems and they can’t have your completely blow up. I mean, they’ll use them for a scapegoat to stop QT announce QT stop. But that’s where we’re at it right now.
TN: Okay, so does the Fed understand that this is largely supply induced inflation?
AM: No, they don’t. They don’t? No, because people do what they know, right? If you go back and you look at what Yelen did, when I say Fed, I just toss in the treasury at the same time because they’re one of the same. They talk. They talk, and they have correlating policies and whatnot. And if you look back in 2013, this is what Yellen did last time. She drove the dollar up, crushed the markets, and drove all the money back into the United States. Yes, the United States market looks all beautiful at 3600 to 3700, and people talking about Fed pivots and 3900 in the es, but it’s not real.
CR: Okay, so first of all, can we just discuss the fact that between the time that Janet Yellen was Fed chair and Treasury Secretary, the woman pulled down over $7 million in economic speeches when she didn’t know how to handle, you know, coming out of quantitative easing. She didn’t see inflation. She said that I think this was actually from you, Tracy, but she said that everything looked great in the treasury markets and then the next day went, oh, yeah, I’m worried about liquidity. I mean, clearly, I’m not sure she knows anything.
And I want to know how to get in on that gig in terms of making that money for speeches for something that you know nothing about. But I find it hard to believe since everybody and their brother has been talking about all of the issues that are going to happen here.
And maybe it’s my wart and bias, but I go along with Jeremy Siegel, noted finance professor who’s been out there hammering the Fed, saying, look, first of all, you not only do you not necessarily have the tools we’ve seen some elements of demand destruction in small places, and it takes a while to work through the system.
So if you go too fast, kind of like you didn’t see it on the front side, you’re going to do the same thing and you’re going to overshoot. But the bigger issue alluding to what Albert said is the potential to drag down the global economy. I mean, that the fact that you can end up with currency crises, with a treasury market crises, the whole slew of risk assets could be a massive sale of risk assets so that they
could get their hands on dollars because the Fed wants to keep raising interest rates.
It just seems to me it’s not a question of do they not know this? It’s a question of what’s their intention are. They trying to drag down the global economy so there is a financial reset, so they can introduce some sort of a central bank digital currency and have an excuse for it. It just seems to me to go, oh, they’re ignorant of what’s going on. When every single one of us sees this, you’ve got the IMF talking about it, you’ve got professors talking about it.
The fact that this hasn’t crossed their mind with the people that are involved yelling aside, but the Powells of the world and other folks there, that just seems not very likely to me.
AM: No, it’s not. A lot of it is political right there’s. U.S. Midterms, they don’t want Trump back, so they start throwing in these economic numbers to make Biden Democrats look good. And that screws up Fed
policy going forward. I mean, Yellen takes a dollar up, the Fed gets stuck, and then they have to go back and create a new crisis in Europe or Ukraine or whatever crisis they want to create sometime in the future to blame for everything. Yeah, I think the Fed guys are smart. I think they do know these are not stupid people, although certain people, they. Know they just don’t care.
TN: I think you’re right. I think they don’t care. But what I think they’re not thinking through is the political fallout we saw that Chancellor or the exchequer in the UK kicked out today after about two weeks in office or something. And that’s relatively light compared to what happened in Sri Lanka a few months ago and what’s happening in Africa, what’s happening in, say, Pakistan, Bangladesh, what’s happening in Latin America.
So I think we’ll see political fallout here as a result of the Fed’s inability to understand the implications. Where it will really hurt is if it hits Japan and you get minority party in Japan back in power. They’ll pay attention then. And if you see powers in Europe that aren’t favorable to the US. But that’s already kind of starting to see Czech Republic and Hungary, certainly we’ve. Already started to see this, and it’s just getting started.
We thought we saw populism in 2016. I don’t think we’ve seen anything yet. I think we’re going to see
this in a big way globally.
AM: Yeah, Tony, you’re right. I mean, the Europeans are absolutely screaming at yelling about this because she straight up lied to them about the bond market. She can’t even talk to the Norwegians
or the Swiss at the moment. This is how bad it’s become.
TN: Yes, I believe it. Okay, so let’s move on to energy. Tracy, you’ve talked a lot about distillates for a reason, warned us for months about diesel shortages and diesel prices, and it seems like it’s really coming back. And as you talk about this, I want to understand, is diesel priced in dollars globally? And so is that going to hit supply chains in other countries as well because of the pricing basis of diesel. Coming out of refineries
Tracy Shuchart: diesel’s price in local currencies and trade in local currencies. Products are crude, obviously, prices in dollars and traded that way globally, except for some instances. But products are generally like Nat gas, it’s traded in different currencies. But really, I mean, we were having a diesel problem. This started back in 2021, so this is nothing new. I was tweeting about it summer of 2021. I was really worried about distalates. I started tweeting about that then because I saw our inventory slow down. It’s even worse now.
But what’s come to a head all of a sudden, and what’s making this obviously 10 million times worse, is that Europe, for instance, mostly bought diesel from Russia, and they’re trying to lean off of that, right? And so in the meantime, the US. Is trying to supply Europe with diesel. But now over the last week, we’ve had three weeks of ongoing refinery strikes with total. So France has 2500 gas stations that have at least one product that is completely gone, and 2000 of them are shut down entirely. And then we just had a malfunction in the Netherlands and Shells Curtis refinery, which is the largest diesel refinery in all of Europe.
So right now we have a massive global problem that is just getting worse. And if you see the diesel crackspreads have been they’re ridiculously flowing out. And backwardation is flying right now, which is kind of obscene. In the meantime, we’re still drawing these distills. We had a 9 million build and a 4 million draw in distance, and we’re headed into winter. So we’re going to have major problems here already in the United States, particularly in the Northeast, because they don’t have the refinery capacity there to really supply that area.
TN: Okay, so what does that mean? How long does this last? Does it last into spring? Does it last beyond spring? I’m curious about the magnitude of the impact on price, but I’m also curious about the duration, how long this is going to last.
TS: Well, you know, I mean, this has pretty much been gone ongoing since 2021. We’ve had times where it’s worse and times where it’s not. But it’s been over a year now, over a year and a half now. I don’t see that going away anytime soon because we don’t have the supply. We don’t have enough heavy oil to, you know, to make these products globally, especially when you’re cutting off Russia, because that’s what they produce is heavy oil. You’ve got Venezuela that’s producing 700K bpd. They’re not producing anything. And most of that’s going to China to pay for debts. We don’t have them. We’ve got Canada, but we don’t want to build pipelines right. For that. We can import more for that. So, I mean, we have kind of a global shortage of heavier oils. And sure, we get some from the Middle East.
That’s fine. We get some from Saudi Arabia. They own motiva here in the United States. And certainly they do produce diesel, but it’s still it’s still not enough. And especially when you’re talking about the west, it’s talking about, you know, we’re talking about a complete oil embargo on December 5 of Russian
oil and oil products.
TN: So this isn’t something that’s done by January. This has legs for quite a while.
TS: Yeah, absolutely. We’re already seeing prices rise. We’re at 518 a gallon for diesel here in the United States on a national average, which is higher than gasoline prices, by lots higher than the average. And the gasoline people that I talked to at Opus basically say, man, this is not even a safe level. This is going much, much higher.
CR: I have a question for you, Tracy. So it seems to me everyone seems to be focused on getting through the winter in Europe and the immediate impacts, as if there’s, like, some magic solution waiting on the other side as more of a layperson in this area. It seems to me that this massive under investments, this supplied depression that we’ve been having, there’s nothing coming online to help with that. So doesn’t that suggest that this is something that doesn’t get sorted out even though there may be some volatility, but, like years and years and years that we’re going to be dealing with?
TS: Yes, absolutely. I mean, we’ve got a problem for the next eight to ten years. Really? And if you look at, you know I know if we look at the natural gas situation in Europe, everybody’s thinking, oh, we’re at 95% full before winter, we’re going to be fine. If we just make it through winter, that’ll be fine. That’s great and all, but if you are not replacing that, you’re going to need it in the summer. You need to keep refilling that. So it’s not like, you know, unless they decide to stop using natural gas in March, end of story, we still have a problem. Right. And the next winter is probably going to get even worse.
TN: Great. Just so you know. Awesome. Okay, so let’s move into kind of the week ahead section. Albert, you want to get us started. What are you looking at going into the week ahead? What’s on your mind?
AM: Continuation of the Feds 100 basis point rate hike. I mean, they’re not going to do 100, but they’ll tell the market that they might start thinking about it and the market might start pricing it in. So we’ll definitely have a lot of weakness in the market going ahead in the next week, but it’s midterms, so you never know,
they could defend the quote unquote Trumpl ine of 35, 40 so they don’t look like complete idiots and give them Fodder for the midterms. Do you still think we’re going to hit maybe 3200 or something eventually? I can guarantee you that by the end of the year for sure. The economic indicators across multiple data sets is just atrocious right now.
TN: Okay, great. Carol, I know you’re not really kind of in Marcus, but what are you keeping your eye on for the week ahead?
CR: So I do actually commentate on markets from a sort of a macro perspective, and much like Albert, I’m sort of in the camp that until the Fed tells us what is their intention, is this really just about the midterms? Are they feeling the pressure that it’s risk off from my perspective until we know what’s happening with them. So that’s been sort of my perspective.
TN: Great. Okay. Thanks, Tracy.
TS: On China next week, party congress looking at China, I want to see what they’re going to do policy wise because that’s definitely going to affect the commodities market. We all know that they’re looking for a five 5% GDP by the end of the year, which they’re not going to get. They’ll say they got it, but we all know that they’re not going to get it. So I want to look, an economy is suffering right now and we’re starting to see stirrings of unrest in China. Right.
There was just that article where they had the people on the bridge with the signs that got scrubbed from China Internet. But I think that she is going to have to do something to stimulate that economy. So I’m kind of looking to see what his focus is on that and if they have any plans going forward to simulate the time. Because again, that’s going to affect the commodity markets and to see if he has a plan for the housing market. Oh, he’s got a plan.
TN: Central planners always have plans, don’t they? That’s right. So if you talk to any China economist
for the bank, they’ll tell you that China is going to hit five 5% or maybe they live on the edge and say five three. Right. So as you said, we know they’re going to make it issh somewhere in the ballpark, but we know in reality you can’t have a zero code environment and make a growth rate that high. So my worry, I was just talking about this with somebody earlier in the week, my worry is that China really has made that transition to a slower growth environment for starting with demographic reasons, but also some structural reasons that they put in place.
And I think what she’s going to talk through next week, although not directly, but someone indirectly, is much more control, which will lead people to the conclusion that it’s not a safe place for foreign investment anymore, which will lead them to a slower growth environment economically. Because he’s basically talking about leveling people out. Right. And everyone has the same maybe not opportunity, but the same outcome. And you can’t necessarily do that in China with some of the economic outperformers that you’ve had, like Jack Ma and other people. You have to bring people down instead of push people up. And that’s what I’m expecting.
Again, he’s not going to say he’s going to bring people down, but that’s what I expect is the main message coming out of next week’s meeting.
AM: Yeah, he has already done that, Tony. And there is a little bit of a power struggle with Wang. Yang is actually slated to be power sharing with him. All they’re trying to get him to do that, but all my sources have said that they’re locking down for code with zero until at least March, so we’ll see what kind of fake numbers they come out with.
CR: I will add that this all ties into their social credit system, which is the most advanced one in the world right now. And they really started the social credit on the business front, which is notable for the reasons you were saying. You can’t have that capitalism that’s leaked in a little bit over the past several decades and have these outperformers. So it’s an easy way to sort of bring those folks down a peg and then let that bleed into sort of the individual social credit. And it’s something we should be paying very close attention to as the Fed keeps talking about things like Central Bank, Digital Currencies, and as we see these companies going after people for misinformation, what part of that could leak here as well.
TN: Yep, very worries. So okay, guys, thank you so much for your time. Carol, I’m so grateful that you can join us today. Please come back anytime. Really appreciate this, guys, and have a great week ahead.
In this episode, we’re joined by our special guest, Simon Mikailovich from the Bullion Reserve, along with regular guests Tracy Shuchart and Albert Marko.
First, we looked at systemic risk in the case for hard assets with Simon. When we look at recent events like the BOE intervention in the long-term gilt market, where does he think the next systemic risks could come from? Is it developed more market (European) debt?
Also, Simon discussed how we should be looking at the gold market now. Why is there a divergence between physical gold at the retail level and institutional demand for gold derivatives?
Next, we went into a little bit on OPEC cuts with Tracy. OPEC cut supply by 2m BPD. Everyone has talked about this. We’ve spoken in earlier episodes about a price spike in oil later in Q4, partly owing to SPR releases stopping or slowing. Is this even likelier now? Some US legislators are pushing a bill to break up OPEC. Is that even remotely possible?
And then finally, we took our first look at US midterms. Democrats now control both House and Senate. That’s a huge advantage for Joe Biden. For many reasons – inflation, crime, etc – Democrats are in trouble for November’s midterms, but will they lose control of both the House and the Senate? Albert discussed that in this episode. We’ll cover more of this in the coming weeks, but we want to have a starter conversation here.
Key themes: 1. Systemic risks and the case for hard assets (Gold) 2. OPEC cuts = Q4 Crude price whipsaw? 3. US Midterms 4. The Week Ahead
This is the 37th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Tony Nash: Hi, everyone, and welcome to The Week ahead. I’m Tony Nash. This week we’re joined by our special guest, Simon Mikailovich from the Bullion Reserve. Simon, thanks so much for joining us. We really appreciate it. We’re also joined by Tracy Shuchart and Albert Marko.
We’ve got a lot to dig into this week. The first we’re looking at is systemic risk. And the case for hard assets? We’ll dig into that quite a bit with Simon.
Next, we’ll go into a little bit on OPEC cuts with Tracy. You’ve all heard about it, there’s no secrets there, but what do we expect for crude prices in Q4?
And then finally we’ll take our first look at US midterms. I think we’ve got a lot to talk with Albert about over the next few weeks before US midterms, but we’ll just do a quick dive in this week.
So before we get started, please take a look at our product, CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon, economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.
So, Simon, welcome and thanks for taking the time on a Friday. I know there’s a lot going on in markets, so it’s a huge compliment for you to be here. I want to ask about systemic risks, something you tweet about quite a lot. And we put a tweet, one of your tweets on screen.
You talk about the BoE commits to ensure unicorn in every pot. And this happened a couple of weeks ago, the Bank of England. And I’m really curious, when we look at events like the BoE intervention in the long term guild market, where do you think the next systemic risks could come from? And I guess, more specifically, do you expect those risks to come from developed, more developed markets or emerging markets or does it matter?
Simon Michailovich: First of all, it’s a very difficult subject because obviously you can spend hours and hours talking about it. It’s like the existential problems of our time. And I know we’re also going to talk about gold and systemic risk. What I think I’d like to do is I’d like to have a little parable that kind of explains, I think, or illuminates the situation that we’re in generally. And the dichotomy that may exist, I think exists between markets and life out there.
And terrible comes from very appropriately named for the Times from Russia With Love, which is Ian Fleming’s story, one of the James Bond books. And just to set up this quote that I’m going to read to you, the situation is that James Bond is absconding with a Russian decryption machine on a train and it’s supposed to be met somewhere down the line by the British intelligence agents. And he’s accompanied by a much wiser and older head of station from Istanbul whose name is Kareem Bay.
And Kareem advises him to get off the train immediately because there’s existential danger. They’re being hunted and Bond wants to see this gamble through. And so Kareem tells him a little story which I’d like to read to you which I think kind of explains more or less or answers a question about systemic risk and generally what’s going on between the markets and events that we’re all observing through press but may not necessarily fully understand or yet appreciate their implications.
So what Kareem tells him, he says “you’re a gambler. To me, this is business, to you this is a game.” And then he puts a hand on his shoulder and he says, “this is a billiard table. An easy, flat, green billiard table and you hit your white ball and is traveling easily and quietly towards the end. The pocket is alongside. Fatally, inevitably you’re going to hit the red and the red is going to go into that pocket. It is the law of the billiard table, the law of the billiard room. But outside the orbit of these things a jet pilot has fainted and his plane is dining straight at that billiard room or a guest main is about to explode.
It already has actually, in the real life with Nordstream or lightning is about to strike and the building collapses on top of you and on top of the billiard table. Then what has happened to that white ball that could not miss the red ball and to the red ball that could not miss the pocket. The white ball could not miss according to the laws of the billiard table.
But the laws of the billiard table are not the only laws. And the laws governing the progress of this train and of you to your destination are also not the only laws in this particular game.
And so the point is that for 40 years, the markets, the financial system and the economy has gone along with that, have lived by the laws of financialization, by the laws of the billiard room and of the billiard table and other laws that are outside the real economics more famine, pestilence, inflation have not entered into the equation. And so within the framework of the billiard table there is no, for example US Treasuries do not have credit risk. US dollar does not have counterparty risk. Banking deposits are safe, 100% safe. That’s by the laws of the billiard table. That’s by the laws of the markets.
So essentially this bubble, the everything bubble that the credit bubble that we have been in for x number of years. All the problems inside this bubble were nominal problems related to nominal values in financial markets. And those values can be fixed by creating additional money, by creating additional credit, by creating conditions, by providing liquidity. What cannot be fixed inside this bubble are real problems like energy shortage, like supply chain disruptions, like World War, like the fact that a significant number of other countries are suddenly developing their own ideas as to economic policies and monetary policies and other policies that they want to pursue.
Whereas our system has come to depend on the US dollar as a source of cheap financing without any limits and without any constraints on our ability to create credit, create money, pay the bills, however much, in any quantity at any time. So when you ask me about systemic risks, what I would say is that systemic risks are coming from outside this framework and are not yet fully understood inside the framework.
Which is why, for example, the dollar is on a tier relative to other currencies. And the phrase that’s used to describe it is it’s the least dirty shirt? What is not being said in that statement is how dirty is the least dirty shirt? Has it been already worn for ten days and all the other ones for 20 days, or is it just been worn for ten minutes? That’s my point. So how healthy is the healthiest course in the soap factory? That’s the question, right?
TN: And I guess the question about systemic risk, which is almost unanswerable. But when these things break, do they usually break gradually or do they usually break all at once? Is that an answerable question?
SM: Well, they break gradually and then all at once. Just like the famous also overused quote from Hemingway how do you go broke slowly and then all at once? Obviously you can think of this phenomenon as a confidence collapse. Now, confidence collapse is not a problem in itself. It’s a consequence of other problems where the preponderance of the evidence and preponderance of the mental recognition reaches a certain critical mass, where in the physics it’s called phase transition.
Like for example, boiling water, which looks the same whether it’s half boiling or almost boiling. And then suddenly you see the bubbles, you see the churn, and it almost happens in moments, but it didn’t happen in the moment. It’s been heating up for a while. So that’s how I would describe it. And
TN: this is all great, I guess, if we have a doomsday clock, are we like really close to midnight or are we kind of approaching midnight? And it’s something that will come at some point I know that’s kind of an ambiguous question, but does it feel to you like we’re really close to midnight or can we put it off for a little bit?
SM: Well, I would answer it this way. I think the proverbial train has left the station. The crisis is now underway. Okay? The crisis, geopolitical crisis, military crisis, supply chain crisis, economic crisis, and financial crisis. All of the… And political crisis. You’re going to talk about elections. So all of these events, and by crisis I mean a moment of high danger, again develops similarly to boiling water. Crisis itself, once it starts, it means the heat is now in real time, is going up. The boiling point has not yet been reached. How long does it take to reach it? It depends on the intensity of the flame. Right. So that we cannot gauge. But what we can gauge is that the process has started and it can accelerate or decelerate as it goes, but I don’t think it can stop suddenly.
TN: Right. And a US president using the word Armageddon in a fundraising speech half a dozen times this week doesn’t really help lower the boiling point.
SM: It does not help lower the boiling point. It does not help. And frankly, I think that people are not paying much attention to what happened with this Nordstream explosion. But this is the first act of sabotage on an international against an international supply chain infrastructure, which I think is going to have dramatic consequences ultimately, because it changes the rules of the game. Sure something unthinkable becomes feasible.
Albert Marko: Just real quick. I agree with Simon on the systemic risks. And the fact is the Fed policies have completely ignored geopolitical issues, political issues, supply chain problems. I mean, they keep going on this tear about raising rates is going to bring down inflation, but then they put themselves in doom loop because the demand is going to come back faster than the supply damage that they’re creating.
So, yeah, Simon is correct that the systemic risks are there and getting worse and that’ll see any chance that they can be alleviated in the next six months. I’m skeptical that ongoing rate rises or rapid rate rises is going to have an impact on inflation given… Wait till they end QT in the next couple of months and continue on with rate hikes thinking that’s going to fix things. It’s not. It’s not. It’s whistling past the graveyard. It’s way overused. But that’s what we’re doing.
TN: So before we move on to other things, I want to ask you about gold. Okay, Tracy, kindly put out some questions for you last night. And we got some responses from some Twitter users and this Twitter user @Spudlink1, asked, “if gold doesn’t rally in this environment, how could conditions possibly get more perfect than the last three years? Is gold dead?”
So, very poignant question, but what are your thoughts on that?
SM: So my thoughts on that are very simple. Gold itself. Gold is not a company. It doesn’t release results. It’s not like things are going better or worse. Gold is the same gold. So the price of gold and the prospects of gold are not determined by gold itself or anything that it does, but it is determined by supplying demand, which is human driven. So it’s human perception and human behavior.
So why is gold not behaving like certain people like this gentleman expect it should? That’s because what this gentleman thinks and what few of us think is not accepted as received wisdom by the vast majority of investors. That’s not consensus.
So the fact that these are perfect conditions for gold is absolutely not consensus because by the rules of the billiard table inside the billiard room, gold is not seen at the moment as a safe haven. The dollar is because the dollar is fiat gold. Now, fiat of gold is no gold. But inside this framework that we’ve been in for 40 years, it has been and so demand for gold, you don’t need to take my word for it. I mean, you can just look at the ETF flows like GLD publishes ETF laws and you can see that money is not flowing into gold.
So demand from investors for gold is anemic in an environment where some of us think it should be robust. But that’s because we see certain things and we believe that there’s tremendous systemic risk and market large does not believe it.
Again, you don’t need to take this as the only example. You can look at the Treasuries, they’re trading, I mean for something percent with the percent inflation. Well, why is that? Well, because the breakeven rate, which is market expectation of future inflation, the curve, the forward curve shows that rates are actually positive and getting more positive because inflation is supposed to drop to 2-3% imminently. Well, is it going to? Well, that’s conventional wisdom is that it will. So that’s one thing.
The other thing I would say is when people say that gold is dead, I mean, it’s an American century theory because gold is essentially a reserve currency. It has outperformed all other currencies, reserve currencies but gold. So let’s say in dollar terms gold is down like 6% year to date, but in yen terms it’s up 18%. In pound terms it’s up 13%. In Europe, in Swiss Franc, all of the DXY components, currencies, DXY, Canadian dollar in all of those currencies, gold is up.
So gold is outperforming financial assets, stocks, equity is down 23%, Nasdaq is down whatever it is, 33% or 34% here today. Gold is down 6%. So it’s outperforming financial assets and an underperforming US dollar because US dollar is gold by the rules of the billiard table and the guest line has already blew up, but maybe the plane has not yet hit the room.
And so as long as that’s continuing, everybody’s playing by those rules where there’s no credit risk in the dollar. So if there’s no credit risk in the dollar or in Treasuries, in US sovereign obligations, then by the dent of that reasoning, getting any kind of coupon beast getting no coupon, if you factor out credit risk and market is not factoring in credit risk, I think the credit risk is tremendous. And obviously people who are asking and wondering how come gold is not surging, they think there’s credit risk. But that’s a minority opinion. That’s a simple answer to that question.
TN: And that is fantastic. Thank you so much for that. This is an amazing perspective because I think there is a lot of cynicism around gold in the markets today around kind of popular chatter. And it’s so great to get this perspective.
AM: Tony, I mean, I’ve been a big critic of gold for a long time. However, in this scenario, I even have to admit that if you want to arbitrage for dollars, especially in other currencies and FX’s, gold is the only real way to do it. And the longer that the Fed makes errors in policy, there’s no question that people are going to start resorting to gold just as a hedge.
SM: My only warning to people is gold is a commodity that’s sort of it’s an industrial commodity in physical form. So, of course, all the paper gold exposure has counterparty risk. Physical gold does not have counterparty risk, but physical gold is a manufactured product. And manufactured product borrows coins.
By the way, the premiums on coins are surging, and it’s doubled this summer since the beginning of the summer. So manufactured products, they’re supply chains, they’re manufacturing facilities that produce them. They can work 24 hours a day, but three ships, but they can’t work faster than that.
So just like with toilet paper, it all works until suddenly there’s a surge in demand. Then there’s no toilet paper in your supermarket. It’s the same thing with gold. It’s available until everybody wants it, at which time, by definition, it’s not available because the inventory and supply chain is geared towards test demand, not towards surging demand. So as soon as demand surges, it disappears.
So you buy insurance when you can, not when you think you really need it, because you’re not the smartest guy or person you know, other people achieve the same reach the same conclusion at the same time. And so everybody wants insurance at the same time.
TN: You’re the only guy I’ve ever heard who compared gold to toilet paper in a positive way. Yeah. Okay, let’s move on to crude from one physical quantity to another. Tracy, we talked about OPEC in recent weeks. We talked about crude prices in recent weeks.
And with the OPEC announcement, the supply cut announcement this week, I want to revisit our discussion from a couple of weeks ago about crude prices in Q4. We talked about the possibility of a whipsaw effect for crude prices in Q4. What’s your thoughts on that? Do we see that happening?
Tracy Shuchart: Well, I think what we’re… First, I kind of wanted to touch on this 2 million barrels because it’s not actually a 2 million barrel cut, right? Because the group hasn’t been producing a quota all year, basically. So we’re running at a 3.58 million barrel shortfall, really, which happened in September. And so if we take a look at the cut distribution, yes, the five countries that are producing at or near quote, which are Iraq, Kuwait, Saudi Arabia, UAE and Russia, yes, they are shouldering most of that burden. But when you net everything out, it’s really closer to like 1.25 million barrels. So I just kind of wanted to clear that up because it’s really not 2 million.
Going into Q 4, what we have to pay attention to is, one, the ending of the SPR, which if they keep releasing it, eventually it will drain. But so far it should end in November, which is going to immediately take four to 7 million barrels off the market because that’s kind of what they’ve been releasing per week on average. Then we also have to look at China and their COVID lockdowns trying to come to an end because they’re looking for 5.5% GDP by end of year, which is not going to happen.
TN: Well, it’ll happen.
TS: Well, on paper it’ll happen. Statistically it’ll happen. But we are starting to see a little bit of firmness in mobility data in traffic and airlines. What I’m also looking at is they are talking about lifting export quotas. If they do that, that means they are going to have to purchase more crude barrels because it would be a significant increase. Those are kind of the things that I’m.. Going into Q4, in other words, I think the pressure is definitely to the upside rather than the downside, just looking at what is coming online potentially that could propel this market higher as far as… I mean, we’re already in a structural supply deficit, so it’s not going to take a lot for this kind of freak out.
TN: Post US midterms, post CCP meeting, post SPR, post other stuff. Right.
TS: And then December 5, we have to see if EU actually follow through with their oil and product embargo for Russia. So also another thing that would take more barrels off the market.
TN: Right. So I’ve also heard, I think you may have said it where this OPEC meeting, and what we’ve seen over the past few months is really OPEC changing their orientation to Asia and really forgetting about the west. Is that real? Are you seeing that, in fact, or is that just kind of a myth?
TS: Well, no, I mean, if you look throughout the last few years, I mean, China and Russia basically compete, sorry, Russia and Saudi Arabia basically compete for China’s fitness. So off and on, one of those countries has been their biggest suppliers. So this is not new where the focus is towards Asia, especially because over the last few years, the west is pursuing green policies and trying to stay away from that. And so where they can sell barrels like you see Saudi Arabia or you see OPEC in general raising their OSP to Asia consistently, right. Because they can capture above markets for their barrels. That’s not really a new phenomenon.
TN: Well, China’s perpetuating green policies, too, right. Kind of wink wink, supposedly as they build out coal plants and other things. But I think what I find interesting is Europe and the US are kind of begging for more energy and OPEC is saying, no, we’re going to cut back. I think the headline is more important than the fact the 2 million is more important than the 1.25, because that’s what really moved markets in the immediate term. But China had really bought all their crude already by, say, April or something, right? And so they had fixed all that stuff, the prices for the year in kind of second quarter. So this doesn’t at least for now, it doesn’t really affect them. It won’t affect them until early next year or something like that. Is that fair to say?
TS: Well, unless in Q4 they raise these export quotas, then it’s going to matter because that’s still on the table for discussion next year. This is kind of a last-minute thing. And so that’s definitely something that I’m watching if they actually follow through with that. Right?
TN: And also with purchases in a dollar equivalent, whether it’s not US dollar, whether or not it’s US dollar, these are extraordinarily expensive barrels compared to what they could have gotten in Q2. So something has to change for them to want to buy the volumes that they bought. And then if they’re buying at the same time the US is trying to refill the SPR, that creates even more pressure on the market. Is that fair to say?
TS: Yeah, absolutely. In fact, our SPR barrels are going to China, right? Right.
TN: So, Tracy, what are we missing? I mean, we’ve heard all this chat about OPEC over the last couple of days. What’s the nugget that you feel like people are missing?
TS: I think as prices have come down, I think everybody has been forgetting we are still in a structural supply deficit. Even though prices were coming down, they were down to extraneous reasons like recession fears and not as many Russian barrels off the market as initially anticipated. But really, the market structure hasn’t changed, nor has the supply problem. Right. Let me add another question there. I want to ask about refining capacity. What are we at now with refining capacity? We need more refining capacity. 90 something. We’re currently we’ve been between 90 and 95% of our refining capacity, which is crazy because I’m actually surprised that we haven’t seen more heart breakdowns. They’re not built to Google at 95%.
TN: So we have a hurricane goes through Louisiana, cuts out some refineries for a week. What does that do?
TS: Well, that would be a little bit of a relief for crude prices, right? Because you shake it with the barrels. But that’s going to take your product prices through the roof, and your current tax rates are going to go through the roof.
TN: And what’s the lag on that? What’s the tail on that?
TS: That really depends on how long the refinery is offline for. Right. Whether it’s a week or two, that’s fine. But if we start going into, like Katrina, where you’re going in months, then that’s going to be longer. Problem.
TN: Okay, very good. Thank you for that. And as we talk about gasoline, it becomes very political at some point. And Albert, as we go into we’re deep into the midterm season right now, and I’ve got a couple of graphics from Real Clear Politics looking at the House and the Senate races in the US.
And it looks like it’s very competitive in the Senate. The House, it seems like Republicans are doing very well to reclaim the House, but it seems like the Senate is really competitive at the moment. Can you walk us through that?
AM: Yeah, well, simply, the Republicans will easily take the majority. Redistricting alone will give them 20 seats, which is the majority, and then you start looking at any Democrat that one with 2% or less across the country is probably going to lose. So I think that will probably end up getting 250 seats in the House of the GOP. So I think that would end up being like 185 for the Democrats, which is important because you need a buffer to avoid any messy infighting the Senate becomes difficult because the Republicans have kind of weak candidates in Oz, in Pennsylvania, and Walker in Georgia.
If those two candidates were stronger, it would have been a slam dunk, but it’s not at the moment. Nevada looks like it’s trending towards the GOP, which is a big, big problem for the Democrats at the moment. If they lose Nevada, they’ll probably end up losing Arizona. And if they lose Arizona, it’s going to be a one or two seat GOP majority.
TN: Okay, and so what does that do? Okay. We covered Pennsylvania, right? You said it’s potential
Republican but not strong. Georgia potential, but not strong. Arizona is leaning that way. Nevada is leaning that way. Wisconsin is Wisconsin.
AM: Wisconsin and North Carolina are solid Republican.
TN: Okay, so then what does that mean for the second half of the Biden administration?
AM: Not good things. Hearings all over the place, from Hunter Biden’s antics to Biden’s pipeline policies, environmental policies that’s affecting the economy at the moment. Border crime, elections, election integrity, I mean, you name it, it’s going to be all over the news. So it’s just not good for the Biden administration. I expect them to keep on going with executive orders because there won’t be anything that he can pass.
TN: Okay, very interesting. Now for the people not in the US. Most Americans view legislative gridlock as a good thing, right? I mean, it’s a good thing for business when we have legislative gridlock. So this is not necessarily a bad thing for US government. There will be a lot of talk about can’t pass a budget, can’t get extensions on certain things, and that’s just drama that comes every year. But legislative gridlock is not necessarily a bad thing for American business. Is that fair to say?
AM: It’s not. You’re absolutely correct about that. However, actually, with Biden insisting on producing executive orders for his own policies and the treasury, with the Allen just acting insane, in my opinion, god knows what they’re going to sit there and pass. If you can’t pass something legislatively, they’ll do it via budgets. That’s fine. But it sets a terrible pressing going. Forward because we’re well past that, Tony. We’re well past that president. We’re well past that.
TN: Okay, great. I want to cover this over the next couple of weeks as we lead up to the election. So I just want to give people a taste of what we can talk about. So if we don’t mind if you guys don’t mind, let’s just go around and I’d love to know what you guys are looking for in the week ahead. Tracy, do you want to get us started? Then Simon will go to you. And now what are you guys looking for for the week ahead?
TS: Obviously, I’m watching the energy markets right as we get closer and to see what sort of policies the US is going to or the current administration is going to try to pull out of a hat to derail oil prices in front of Midterms. They’ve been talking about fuel bans, fuel export bans. They’re talking about actually trying to pass the no peck bill again. They’re also talking about actually seizing assets of Saudi Arabia, which they do own, motivo, which is the largest refinery in the US. Which is paramount to all out oil war. So closely watching the administration and how they’re going to move forward with energy policy.
TN: is this Venezuela thing real? Will they dial back the restrictions on Venezuela to get Venezuelan crude?
TS: Venezuela produces 7000 barrels per day and literally most of that goes to China to pay debts. There’s nothing more you can squeeze out of Venezuela.
TN: Okay, that’s good to know. So that’s fake news. All right. Okay. Simon, what do you see
going into the week?
SM: Well, a week is not my reference, in my opinion, but I think that the most important thing people should be watching are international geopolitical developments because I believe we are in a world war. It sounds very dramatic. War usually is assumed to be bomb flying, but there are other forms of enforcing essentially will on other people and economic, financial, political, ideological, cyberspace,
space, outer space these days.
So I think the most critical thing to watch are developments like with Tracy’s talking about confiscation of Saudi refinery. I mean, that’s an act of war. That’s an act of economic war. So this is where I think a lot is going to come from. And the other thing I would watch very carefully for the types of developments like what we saw with Gilts in UK just overnight, things happen. Like for example, the repo lines right now are in excess of 2 trillion. I mean, in 2019, the first blow up, they went in with 30 billion. So this is a crisis that’s continuing and it’s being bailed out by the Fed.
So I would watch all these excess, telltales of all these excesses and watch for ripples on the surface to make sure to identify if something is really breaking. Like you said, when is it going to come? Well, is the water starting to boil? That’s what I want…
TN: Real quickly, do you get the sense that at least in the US, they’re trying to hold this back until midterms and then we’ll start to see a bunch of bad news come?
SM: Well, for example, they’re releasing strategic petroleum reserve, which is clearly controlling an attempt to control energy prices at the pump, gas prices at the pump. So, yes, I think after the elections we’re going to see some damage break.
TN: Yeah, interesting. Albert, week ahead, what do you got. Your eyes on?
AM: CPI. And I think it’s going to end up coming in hot and all of a sudden you’ll see the dollar surge once again, maybe threatening 120. Then you talk about what Simon is saying about things breaking and building up of a narrative of ending QT, although we haven’t really started it, but it is what it is.
TN: Well, exciting times guys. Thank you so much. Thanks for your time. Thank you very much for all your insights. And have a great weekend. Thank you very much.
In this episode, we talked about what’s happening with inflation in markets, and where it’s hitting, particularly in the US in different sectors. Mike walked us through the Asian contagion for inflation. Also, given where USDCNY has been over the past week or so, how vulnerable is China? Are they more concerned about inflation or export competitiveness?
Sam put out a couple of wonderful newsletters about central bank responses to inflation last week. The Fed seems – and is – unrelenting in their response, regardless of what happens with UK gilts. One area Sam raised last week is the car market versus mid-market dining: Cars vs Cracker Barrel. He walked us through the price and volume considerations with these two.
And then we looked at Meta’s move to freeze hiring and their warning about layoffs. Is that a broader signal for tech?
Key themes: 1. Inflation: Asian Contagion 2. US Inflation: Cars vs Cracker Barrel 3. Meta’s move: More to come? 4. The Week Ahead
This is the 36th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Time Stamp 0:00 Start 0:49 Themes for this Week Ahead 2:47 How vulnerable is China? Are they more concerned about inflation/export? 10:23 China will not be the exporter of deflation anymore 13:28 Will China give in to devaluing CNY? 16:15 Cars VS mid-market dining 22:00 Price increases will continue? 24:26 Is this the beginning of the end of tech wage spike? 29:11 How does this current ad slowdown compare to the past? 30:20 What’s for the week ahead?
Tony Nash: Hi, everybody. This is Tony Nash and welcome to The Week Ahead. Today we have a couple of very special guests. We’ve got Michael Kao. You would know him from Twitter as UrbanKaoboy. And we’ve got Sam Rines. And obviously you know Sam from previous shows. This week we’re going to talk about a lot about what’s happening with inflation in markets. We’re going to talk a lot about where inflation is hitting, particularly in the US in different sectors. And then we’re going to cover a little bit of tech.
So our key themes this week first is the Asian and contagion for inflation. And Mike’s going to jump into that in quite a bit of detail. We’re then going to look at US inflation. Sam put out a really interesting note covering kind of cars versus Cracker Barrel, although that’s not really the comparison, but it’s something in that range. And then we’re going to look at Meta’s move to freeze hiring and their warning about layoffs. Is that a broader signal for tech? And finally we’ll move into the week ahead.
So before we jump into this, please be aware that we have our product called CI Futures, where we forecast hundreds of commodities, currencies and equity indices as well as economic indicators. I was just going over our error for GDP USD for the month of September, and our area was about 2.23%, I think, for the month. So it’s a very relevant product even in these times. You can find out more on the link below.
It’s $99 a month and you can see everything in the subscription there. We publish our error rates. We publish our forecast. You can download the data, you can download the charts and do comparisons. So please check that out.
Michael, thanks for joining us. I really appreciate your time. I’ve heard you on a number of other podcasts and it’s just so great to have you here. I really appreciate it.
Michael Kao: Yeah, thank you. Great to meet both of you. Yeah, I appreciate you having me.
TN: Fantastic. Hey, there’s a tweet that you put out a couple of weeks or about a month ago actually looking at the Asian contagion and pretty much it was reflecting a tweet that you had put out in January, talking about your expectations for the year ahead and the set up for the year ahead.
So given where, say, CNY has been over the past week or so and the set up that you put out earlier in the week, how vulnerable is China? Are they more concerned right now about inflation? Are they more concerned about export competitiveness? What does that look like? And as you start talking, we’ll put up a chart of USDCNY as well.
MK: Sure. Before I answer that question, I just want to take a quick step and just outline for you, like where I kind of arrived at this Asian contagion thesis. Right? So about a year and a half ago, I’ve been invested in the oil patch for quite a while. And I’ve expressed my bet through a long term private equity plate because it’s my belief that years and years of underspend and then exacerbated by this worldwide ESG push right, and diversion of capital away from the sector and then of course, further exacerbated by all of this massive monetary and fiscal stimulus first created oil inflation way back. Right.
So I started noticing this basically around the beginning of ’21 and I wrote a bunch of threads about it. And then during the year I started thinking what are the ramifications of this? Well, the ramifications are that it’s going to make our Fed more hawkish than the rest of the world earlier than the rest of the world. And so what are the ramifications of that? Well, given that currencies are mainly driven by interest rate differentials that would in turn create this what I labeled a USD wrecking ball effect.
And so as that thesis started kind of coming true and gathering steam throughout the year, the tweet that you referenced that I wrote at the beginning of this year was that I said, look, the setup is a scary one for this year because we have the makings of a stagflationary energy crisis not seen since the 70s. It’s going to create tightening ahead of the world, creating this USD wrecking ball. And then we have this everything bubble to boot on top of that.
And this wrecking ball really reminded me of my sort of baptism by fire into the hedge fund business. In 1997, I joined a hedge fund here in LA called Canyon and we were value credit based investors and a lot of our idiosyncratic bets essentially got swamped by the macro, right? So what started as seemingly innocuous devaluations by a couple of EM countries in Southeast Asia metastasized over the course of a year and a half until full blown credit contagion. Except this time, what I wrote about in this thread is that what’s scary is that number one, the level of inflation that’s driving this US dollar racking ball is much higher than before.
And from my oil centric point of view, I think a lot of it is structural. And then the second thing is that the vulnerability point… I mean the EM countries are also vulnerable. But what’s scary this time around are the developed nation currencies like the Euro, the Japanese yen.
And now I come back to your question, the Chinese Yuan. Your question is a really interesting one that I actually tweeted about this week is China. China is in a box. Just like the Bank of Japan, just like the ECB. They’re all in a box because their respective economies are much weaker than ours.
I think the big question, and I don’t know when the US dollar wrecking ball is going to peak, maybe it already has. But I suspect though, my hunch is that maybe it’s still got some legs to go because until you reach a point where the macro fundamentals of those respective economic zones are strong enough to allow their central banks to essentially outhawk our central bank. Any interventions are going to basically be just a wasted burn of their reserves.
And so you saw that with the BOJ, right? They spent something like 20 billion of reserves defending their currency and that lasted two days. And we’re back to all time lows in the Yen.
So China is really interesting because China is such an export-driven economy. One would think that with their economy on the back foot from the property crisis, from zero COVID policy, one would think that as their neighbors are devaluing and becoming more competitive versus them, that they would be more worried about their current account getting hit, right, their current account surplus getting hit. And so you would think that they would want to let their Renminbi devalue.
What we saw instead, I think, was that yesterday that the PBOC had a pretty strong intervention in CNY. That tells me, I actually put a tweet out to exactly the effect that’s a big tell to me that they’re more concerned about inflation. And China, just like Japan, is uniquely vulnerable in that they are also net importers of something like 80% of their energy. They’re in a tough bind.
And the million dollar question is no one knows when… That day, when the BoE intervened and all risk assets rallied hard. I think that was the market kind of conflating that all these interventions are going to be exactly. It’s going to lead to the Fed also going to QE. And I put out another thought on Twitter saying that, you know what, I don’t know that you can conflate that because the Fed was happy to be the world’s plunge protection team in a world of where there was no structural inflation.
When you’ve got a world of structural inflation, it becomes kind of an every man from self dynamic where I don’t know that how much we can go help stymie the yen or stymie the Renminbi or stymie the Euros collapse by queuing here. Because that’ll just completely inflame inflation. And the big tell on that was on that risk on day. You know, what was really roofing also was oil. And so it comes back down to oil.
If the Fed actually blinks and goes back and pivots, the thing that’s going to moon and lead us right back to square one is oil, which is what started this whole cycle in the first place.
TN: So let me take a step back from what you said, because you just unloaded a lot, which is great, and I think Sam will violently agree with you on a lot of stuff. But what’s really interesting to me. If China is worried about inflation. Although this is somewhat like 2011. When they had the, or 2007 or whatever. When they had the pig flu and all this other stuff.
And there was inflation pressures but China has been the source of deflation for the last 25 or 30 years right and so if China is no longer the global exporter of deflation then it is a dramatic change in the structure of the global economy. Dramatic and I think so many people use this that this is not something that we’re not going back to 2019 prices ever. Right? But I don’t really hear people talking about China not being able to be the exporter of deflation anymore and that’s just one that’s come and gone that’s already gone right.
MK: And it’s not just China. It’s Eastern Europe, too, right, because I wrote a thread that basically borrowed some of the thoughts from Professor Goodheart’s paper about how this was kind of a once in a lifetime demographic dividend that allowed the world and the Fed to basically pay for over every financial crisis of the last four decades with aggressive monetary policy because there were never any inflationary repercussions. But as you so validly pointed out, that was due to like a once in a lifetime sort of demographic dividend that is now in secular reversal.
Sam Rines: To this point… I want to jump in and just reinforce this point here because I think it’s a really good one that China was a massive source of goods deflation globally along with East Germany, Poland. Etc. as they joined in following fall of the Berlin Wall.
But I think there’s something really intriguing here is that it doesn’t even matter if they still continue to export some goods deflation over time. Their commodity inflation tailwind is going to be problematic. The only thing that has really saved them with a Renminbi north of seven is that they haven’t had to import anywhere near the amount of commodities that they would typically have to. If you’re locked down, they have the longest commute times on average in the world in China. That is a tremendous tailwind to gasoline. Food. Et cetera. When you begin to reopen and have China’s economy going full bore, that is a tremendous issue for the commodity complex in general in an environment where it’s already broken. It’s going to be a tremendous amount of pressure on that system and I don’t think people are prepared for that either. That China is now the exporter of an incredible amount of commodity inflation over the next half decade or so.
MK: It’s actually really insightful because commodities which they have to import. They’re super afraid of that and that oil is basically the primary factor of production for everything under under the sun. Yes, everything.
TN: Back to CNY do you think they’ll kind of give in to devaluing or do you think they will continue to fight this, which is a battle that everyone loses eventually?
MK: That’s such a hard question to answer because if anybody can fight it, it would be China right?Because they have a non convertible currency, right. So I think, for instance, Japan is much more vulnerable because I don’t see Japan imposing capital controls and I don’t see Japan relaxing on their yield curve control. So the only exit valve there is the Yen devaluation. Right.
But in China’s case, they have capital controls. I spoke on an interview earlier this week with Mike Nicoletos, and we were discussing about whether or not there’s a porosity through the Hong Kong dollar. Right. I think they have to clamp back down, too, right? Because. If they really want to manage the pegs, they need to really like stymie capital controls. Otherwise, I think capital just going to flow out.
TN: So will we see a divergence between CNY and CNH?
MK: What is the divergence? I mean, it’s tiny. Two or something.
TN: Okay, great. I’m just wondering if CNH is trading offshore and that’s allowed to freely trade or relatively freely trade? Maybe. Sam, you have a better idea? I’m not entirely clear on what the restrictions are on CNH trading because I don’t think it’s completely for all. Otherwise that divergence would be much bigger, I think.
TN: Well, it’s a spread, right? It’s a proxy of a spread. And so you can see pressure on that, and you can see that pressure pushing the expectation of seeing why potentially devaluing if they don’t handle it. Like PBOC, they’ve got a lot of smart people, but policy wise, they make a lot of mistakes. Don’t think they’ll elegantly.
MK: I was just going to say that I actually think that if they let CNY or CNH freely float, it would have a nine handle on it. At least, I think that’s where it goes.
TN: Yeah, at least. Okay, very good. Thanks for that, Mike. I really appreciate that. Let’s move on to Sam. You put a note out earlier this week talking about inflation and central bank responses to inflation. And the Fed obviously seems unrelenting in their responses. Mike mentioned, as you mentioned in your newsletter and here several times, but one area you raised in your newsletter this week is kind of cars versus mid market dining.
So you talk about cars, Carvana versus Cracker Barrel. Can you kind of walk us through that? And I’ve got a couple of shots from your newsletter. One is on the Carvana release, and the other one is on Cracker Barrel. Actually, we only have the one on Cracker Barrel to show the group. But do you mind walking us through that?
SR: Sure. So the impetus behind the note was really to kind of make the point that Mike made earlier, that the Federal Reserve does not care about what’s going on in the Gills market. It is not going to come save the Bank of England and Downing Street from what they’ve done. That’s not their problem. That’s a domestic issue. And when you decide to have a massive fiscal tailwind and a monetary policy that was being highly restrictive and going to sell bonds, your currency is going to fall. And that’s your own problem. That’s the way that the Fed viewed it. And then a bunch of Fed speakers came out and said basically exactly that, but in a little kinder tone.
But the idea there kind of pulling that together is that the US domestic economy is still doing well. So the CarMax report was really interesting because CarMax has used autos, right? That’s what they sell. And all the headlines about inflation and used autos, their volumes got absolutely trashed in the past quarter. And that makes sense, right? People?
There’s a drawback from interest rates moving higher. It’s one of the most direct things that is affected housing and car financing. But the interesting part about it was while the volumes were down, they still had revenues up on their retail segment because prices were higher 25% year over year, their average selling price. So they did a really good job of kind of managing their revenues.
But that speaks to the inflation problem, right? The Fed doesn’t care about volumes going down. If the prices are still higher. Then you kind of go to Cracker Barrel, right? Middle America in my mind is you can encapsulate middle America in a Cracker Barrel I mean, it’s kind of perfect. And when you look at their release, it’s pretty clear that they called out 65 and over dining down. Guess what? That’s highly sensitive to inflation. They cited lower income individuals dining out less. Again, highly sensitive to inflation. And they still had their comp store sales up 6%, which is pretty good. And then you read a little further in the same sentence and they’re like, and we had pricing higher by 7%, so traffic was down. So they had negative traffic at higher prices. So that is again, they’re giving up volumes to be able to push the price and grow reps.
I think this is kind of a microcosm of the US economy, right? It is a strong economy. If you can continue to push price like that on the consumers. If you can grow revenues while pushing price at those levels, that’s pretty incredible. And then it’s pretty interesting to me because there’s this whole idea that corporate America is going to slow down their price increases. Cracker Barrel basically shot that idea right in the foot by saying, hey, listen, we think wages are going to inflate 5% over the next year. That’s september to September. And then if we’re going to have comparable store sales up, right?
So guess what? They’re going to continue to push price. And that’s where I think we kind of need to take a step back and realize these inflation pressures are broadening out and they are beginning to become embedded. Their food costs, when they forecast that, I believe that number was 8%. These are significant figures, right? These are not things that we would have thought were possible five or six years ago. They’re becoming embedded. I mean, that’s 2023 that these guys are thinking that.
And just one more point going back to the CarMax report, their SG and A, their cost of doing business, we’re up 16% year over year because they hired more people and they paid them more. So you think about you grow revenues at 3%, but your costs are up 16%. I mean, that’s a pretty big problem. Again, it goes back to the two things that the Fed really wants to get under control, including inflation is two things, right? They talk about the vacancies to unemployment ratio. They need less hiring to happen and they need wages to begin wage growth, to begin to subside a little bit because that’s a tailwind consumption.
So I think you’re having a number of pieces working against the Fed that might not be showing up in the data, mostly because I think the data is kind of crap. But the best part is if you’re kind of willing to go to that microlevel to get the macro and pull the macro out of it, these trends are not going anywhere anytime soon.
TN: So what I get out of that is I hope Cracker Barrel has digital menus. If not, I want to be their menu printer because every time I go into a restaurant, I wonder how often they change their prices, right? And basically, from what you’re saying, it sounds like they’re going to continue to push up, I don’t know, quarterly, semi annually, but they’re going to continue to push these prices up based on what’s happening in the market, and I suspect they’re not going to come back down. Oh, no.
SR: There are other ways to do it, right. You can push price by pushing less food on a plate, too. Right. So you can do some creative things on multiple fronts. Shrinkflation. The shrinkflation. But I do think that you’re not going back to anything like 2019. Right?
MK: I just want to riff off that for just a second because I participated in a real estate panel a couple of weeks ago and listening to these asset managers from around the world present. One big asset manager was basically saying that they’re still seeing essentially. Even though the rent growth is slowing down. It’s still growing for Q3 of this year where you would think that the hiking has already kind of worked its way into the system. That rent growth is still annualizing at a 10% click. So you talk about sticky.
I’ve had this thesis that it started with commodity inflation. Commodities have abated somewhat and certainly will abate more if there is an Asian contagion. Right. But the core stuff, which is what Sam is talking about, and also rents, that’s really sticky. But here’s the problem. When that stuff starts curling over, I really agree with you that if China reopens, you’re going to see a resurgence in commodity stuff again. So I call this sort of like the core energy tag team. And I think we’re going to see this tag team effect possibly for years.
SR: Oh, yeah. To rip off that I called it the COVID earthquake is going to have more aftershocks than anybody really wants to admit.
TN: Yes, there was so much intervention. You can’t just earn it out in six months, right. Or a year. It takes so long to work that out. So that makes a lot of sense. Guys, staying on this inflation theme and Sam, you mention SG and A and wages. Meta announced yesterday that they are imposing a hiring freeze and they’re warning their employees about restructuring.
So obviously now that as of yesterday, they’re the second most valuable company in the world with Exxon taking over. But if Meta is instituting a hiring freeze and Sam, you talked about Carvana hiring a bunch of people last quarter and their costs going up, what does that signal for tech?
I think, Sam, you showed me the site layoffs.fyi or something like that to look at layoffs in tech, there are a couple of issues which we covered with Mike Green before and you’ve talked about up befor Sam, where ad space is becoming almost infinite and these guys who are ad based have a lot of headwinds and Meta is no different. And so that’s obviously one of their headwinds.
But the SG&A cost is huge. Right. What do we need to be looking for with Meta and companies like Meta? And is this the beginning of the end of the tech wage spike?
SR: I’ll take part of that. Okay, good. Is it the end of the tech wage hike? I don’t know that is going to be the case simply because we don’t have enough people with those skills, even if we do have a pullback in the number of hires. Right? On the marketing side, yes. But on the tech hiring front of people with programming skills, et cetera, I don’t think that’s going to slow down or those are going to slow down anytime soon, at least until we have enough of them.
But maybe on the marketing side, et cetera, I would say that the Meta announcement is far more indicative of a slowdown generally in Silicon Valley startup ad spending on the marketing. That’s a problem for Meta on the margin. A significant amount of their ad revenue comes from startups.
It’s a much larger problem for a company like Snapchat. Right. There is a hierarchy of where you go to advertise and when you’re going for eyeballs. So if it’s a problem for Meta, it’s probably a much larger problem for a Snap in some of those smaller, less ubiquitous platforms.
But yeah, it’s always going to be a question of where is Meta putting its incremental dollars, because it is making a pretty big push into the Metaverse. It’s unlikely that people are getting slashed, jobs are getting slashed there. It’s more likely that what you’re going to see is a reduction in places. They’re simply not seeing the returns that they want to see and they’re going to continue to grow the hiring base on something that’s important to them, like building out the Metaverse side of the business.
TN: Sure. Yeah. Mike, what are you seeing with tech?
MK: I don’t follow Idiosyncratic tech as much, so yes and no. I’m actually, ironically, one of my Idiosyncratic positions is actually a dyspacked ad tech company that’s in the ad arbitrage business. That’s a different type of a different type of play, but I haven’t been as focused. So I’m very interested to hear your sort of microcosmic views. Really interesting.
TN: Yeah, I think everything Sam says is spot on. I do think that in terms of the core coding skills, there’s a lot of slack there. So for example, as we talk around, because we hire developers. Some of the developers who work for some of the very large tech companies who make mid six figures, something like that, their daily code commit is something like eight lines of code. That’s it.
Okay, so these guys are not sweatboxing code. It’s a very minimal amount of code they have to put in every day. So I think there are major productivity gains to be made on the developer side within these large tech companies. So maybe it’s not hitting yet, but I think it will hit soon as it always starts with marketing, right? It always starts with traveling expenses and then it goes further. And so I think give it a few months and we can see it go further into development.
MK: I’m curious, Sam, if what you’re seeing in the sort of tech ad slow down, how does this compare to past downturns, past cycles?
SR: It’s hard to say because we haven’t seen many significant down cycles. Because COVID wasn’t a down cycle for ad spending. It was kind of strange. Right. Social media did very well during that time frame, and social media was so young in ’08, ’09 that it’s hard to really get a read there, except you can kind of extrapolate Google. Google did pretty well in ’08 ’09. They took a lot of market share from traditional media, but that was a different age. So I would say it’s pretty hard to look back and say it’s going to be similar this way or not similar.
MK: But wouldn’t you say, though, that the ad slowdown is just across the board? It’s not as if traditional ad spending is going to start eating their lunch across the board.
TN: Real quick before we wrap up, if you can, in ten to 15 seconds, what are you looking for for the week ahead? Mike, what are you looking for next week to watch?
MK: Well, this has been a very confusing week in that I think there have been a lot of quarter inch shenanigans and window dressing. I’m still macro pretty bearish. Okay. I’m concerned that I think after the window dressing is done, I think some of the supports from the market may actually not be there. I watch bonds and commodities a lot.
TN: That makes sense. Yes, Sam?
SR: I’m just watching the Euro and what happens with TTF next week. I think that’s really important after we get through the quarter close.
TN: Absolutely. Guys, thank you so much. I know this is quick. I wish we could talk for two more hours.
I guess we got cut off at the very end there, so I really apologize for that. I just wanted to thank Mike Kao and Sam Rines for coming on The Week Ahead. Thanks, guys, so much for all that you contributed this week. And thanks to everyone for watching. Have a great weekend.
The Bank of England surprised markets by announcing that it would buy long dated government bonds in order to stabilise capital markets. Tony Nash, CEO of Complete Intelligence explains why and what does this mean for the Pound.
Transcript
BFM
Good morning. You’re listening to the Morning Run on Thursday the 29 September. I’m Shazana Mokhtar with Wong Shou Ning. Now, in half an hour, we are going to discuss the political future of Crown Prince Mama bin Salman, or MBS of Saudi Arabia, now that he’s been named the Prime Minister of the country. But as always, let’s kick start the morning with a look at how global markets closed.
BFM
Yesterday, US markets had a very good date was at 1.9%. S&P 500 up 2%, while Nasdaq was up a whopping 2.1%. Meanwhile, in Asia, it was all red. Nikkei was down 1.5%, hong Singh was down a whopping 3.4%. Shanghai and Times Index both down 1.6%, while our very own FBM KLCI was down 0.6%.
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 for joining us. I want to start off with moves by the bank of England that said it would move to buy long dated government bonds in order to stabilize capital markets. Can you talk us through what the BoE is trying to do and whether this will ultimately be successful?
Tony
Yes. So here’s what happened. You had some pension funds who bought debt, debt instruments called Guilt, and they used those gilts as collateral to borrow more money to buy more debt instruments. And they use that as collateral to borrow more money to buy more instruments. So they were many times leveraged on these government debt instruments. And when the value of those gifts declined, they had to provide collateral against the loans they had taken out to buy that debt. So it’s a very circular kind of series of events that’s happened. So because these pension funds got in trouble, the UK, the bank of England wanted to prevent their insolvency, of course, because many of them are government pension funds. So since the bank of England has nearly endless currency, they can help the government come to a relatively orderly decline. So is it ideal? No, but there was some messaging out from the new Prime Minister in Whitehall that was very disturbing to government bond investors and that triggered the sell off and then that triggered a multibillion pound rescue from the bank of England.
BFM
Okay, I want to stay on the topic of the United Kingdom, but us about the currency. They must be the only G seven countries still doing quantitative easing in some way. Where do you think the pound is heading? Dendu?
Tony
Well, because of the energy environment, they’re going to be spending more money on subsidies to help the British people through the winter and more pound? Denominated spending actually makes the pound stronger, but you have aggressive quantitative easing and you have a relatively stronger US dollar. It’s possible that we see the pound decline, say, 35% more, unless something dramatic happens, like another event like today or another event by the government that really erodes credibility, I don’t see a lot more decline happening, but it’s a weird year. It’s a weird few years that we’re having right now. Right. So I think on some level it’s really hard to tell. And the problem with losing credibility is that you lose credibility. And if they erode even more credibility, it could be worse than anybody thinks. So I think that’s a small chance. I think we’re probably in a range at this point.
BFM
And if we take a look over at the US, we have seen federal officials reiterate the very hawkish stance that they have. But San Francisco Federal Reserve Bank President Mary Daly said that the bank is resolute by bringing down high inflation, but wants to do so as gently as possible so as not to drive the economy into a downturn. Do you think it’s possible at this point to engineer a soft landing, or is a recession inevitable?
Tony
I think it’s possible to engineer a softish landing. I think the problem with the Feds facing as they were very slow to respond to inflation, and so now they’re trying to respond as quickly as they can, and they’re responding in a very kind of brutal kind of way. Mary Daily coming out with these as gently as possible comments are good. And that’s new. Neil Cashari yesterday said he’s another Fed governor. He said there is the risk of overdoing it on the front end, meaning that the Fed could raise rates too quickly. So some of these governors are getting out with messaging, trying to soften the Fed’s hard message over the last couple of months. So the wording from the Feds, ongoing wording generally from especially JPOW, has said that they’re going to be ongoing aggressive hikes, and that’s scaring people. So, like, the Fed needs to be less aggressively hawkish in their language. So that doesn’t mean they turn dovish. That doesn’t necessarily mean they start doing QE. They just need to be less aggressively hawkish. And that’s just toning down the language. I think it’s a little bit too little too late in as much as markets have fallen by, say, 23%, I think, since the highs.
Tony
But I think if they start inserting some less aggressively hawkish language, we can have a smoother glide path to balance, meaning higher interest rates, more moderate equity markets at a slower pace.
BFM
Okay, Tony, can you help us understand what happened today in markets? Because I’m a little bit confused in the sense that US ten year treasury yields fell the most since March 2020. On a day like this, equities shouldn’t go up, but it did. Why?
Tony
Well, I think equity investors are seeing what the bank of England did, and I think on some level they see equity markets versus central banks as a bit of a game of chicken. And the bank of England blinked. And I think equity investors are hoping that the Fed will slow down or blink. This is not a pivot. Meaning when people talk about the Fed and say a pivot, they mean pivoting to quantitative easing and pivoting to dovish language. I don’t see that at all, but I think equity investors are seeing a chance of the Fed becoming less aggressively hawkish, as I was saying. So I think that’s really what happened is just a quick breath think, oh gosh, maybe they’re going to slow down a little bit, which would be positive for equity markets.
BFM
And if you take a look at the Nordstream gas pipeline disruption, that does seem to have changed the energy calculus in Western Europe. How do you think it’s going to affect the dynamics of energy prices over there, especially with winter looming?
Tony
Yeah, I think it will affect, but there isn’t a lot of gas coming by Nordstream. There are other pipelines bringing gas to Europe, so it’s really, at the moment, more perception than reality. So Europe has a fair bit of gas and storage for winter. It’s 87% of their goal, so they’re in pretty good shape. They’re not in great shape, but they’re in pretty good shape. They can make it all the way through winter with what they have in storage, but they aren’t reliant on Nordstrom to fill their reserves further. So I think the kind of the gut punch on this is that it’s a pretty damaging leak and so it would be really hard to get it back online. If Russia say something happened with a resolution of UK, sorry, Ukraine, Russia, and there was optimism that Russia could turn on the taps again, that would be really hard to achieve. So it’ll be an expensive winter for energy in Europe. But Nordstream doesn’t really impact it all that much. It’s more, say, the long term hopes and expectations for Nordstream.
BFM
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. Really assessing what’s happening over in the UK with the actions by the bank of England overnight. That has helped somewhat to calm the plunge in the pound sterling that we’ve seen over the past few days. I think this pound has rallied, but how long this equilibrium will last, I think, is anyone’s guess.
BFM
Well, this morning pound against ringgate is 5.0260 at the lowest in the last two days, if I’m not wrong, 4.8. Right. So it has truly, truly recovered. But volatile markets ahead, I think still question marks about whether this trust economic policy makes any sense. Confusion over the tax cuts, how they’re going to pay for it, reverberating around global markets because we’ve seen actually global bond yields peak. Question about whether there will be more activities by central banks to intervene, to prop up their currencies or to restore come to their own respective markets, because we saw that in Japan. And apparently even South Korea says it plans to conduct an emergency born buyback program.
BFM
Indeed, we do see also that the yuan is coming under pressure, and China central bank has issued a strongly worded statement to warn against speculation after the currency dropped to its lowest versus the dollar since 2008.
BFM
I love the language. The language is released yesterday. Do not bet on one way appreciation or depreciation of the yarn, as losses will definitely be incurred in the long term. Can’t spell it out more clearly than that, right? Indeed.
BFM
716 in the morning. We’re going to head into some messages. And when we come back, what does long or need more? Another quarry or preservation of its forests? Stay tuned. BFM 89.9 you have been listening to.
The ride-hailing company said it was responding to a ‘cybersecurity incident’ and that several internal systems had been affected. Margi Murphy is a cybersecurity reporter at Bloomberg News and updates us on the story.
Why do we have such an attachment to some of our favorite brands? We know brand loyalty is a marketing executive’s dream – but how have some of our kitchen cupboards seemingly become even more than that – more like old friends? The BBC’s Dave Reid investigates.
The UK competition authority intervened after Facebook’s parent company Meta applied to buy out the gif platform Giphy. Technology reporter Ryan Broderick gives us the background.
Will Bain is joined throughout the program by Tony Nash, founder of the AI firm Complete Intelligence, in Houston, Texas, and by Shuli Ren, Bloomberg Opinion reporter in Hong Kong.
Transcript
BBC
Hello and welcome to Business Matters on the BBC. World Service will be with you today. Thanks so much for ending your week with us. Most linking off today, though, for our two guests, tony Nash, founder of the AI firm Am Complete Intelligence, joining us from Houston, Texas. Tony, welcome back.
TN
Hi, Will.
BBC
Ending the week with us, and you can tell BBC Sport have been in the studio here before because I just saw flash through on one of the panels here, the Houston Astros, your beloved Houston Astros getting underway in momentarily the baseball and joining us.
TN
That’s right. They’re doing well.
BBC
Thank you, they are. And putting in your Yankees under a lot of pressure, too, which I know will give you even more pleasure, tony, absolutely, yes. Tony Nash in Houston, because this is right in your wheelhouse, Tony. I want to pick up that point that Margie made right at the end there. First of all, these companies, A, specialized in technology, b are some of the richest companies on the planet. How on earth does this keep happening?
TN
There are always new ways to hack you’re as strong as your weakest employees. Temptation, I guess. And it sounds like they got in through a phishing attack. And it’s hard to make things 100% secure. If people want access to the outside Internet, if they want access to emails, these sorts of things, you have to have some ways for people to get in, unfortunately. And it’s just not surprising everyone gets hacked whether they admit it or not. And so this was just a very visible hack on Uber.
BBC
Yeah, Uber have been doing something interesting, certainly, tony, in my reading around this, I didn’t know quite as much about this. Perhaps you could explain more to people, but they were using ostensibly kind of a team of their own hackers to kind of test for vulnerable points in their system over and over again. And actually, bizarrely, that might have proved to be one of the vulnerabilities here. Just explain first that how it works and then how that might have happened.
TN
Yeah, I mean, it’s good practice to have people trying to hack your system. It’s probably good to have contractors doing it and also alternate them from time to time because you have to have different thinking about your security because there will always be people thinking differently about your security. And so it’s a challenge, and you have to be very careful. So it’s really easy to second guess Uber and say they did the wrong thing, but I’m sure they are industry best practice and more. It’s just a matter of, on some level, bad luck.
BBC
No, really interesting point, actually. In our earlier sister show, World Business Report, we were talking to Chris Low, one of our financial analysts, who were saying actually the share price was reacting on perhaps exactly that, actually, maybe you were better prepared for this than others. So an interesting kind of wrinkle to that element of it. She’s the blessing and the curse of new technology that we always want something new and shiny to sell to investors and to customers when actually investing, ensuring what we’ve got might actually be better long term for the business. Yes, Tony, I could hear you agreeing with that too.
TN
Yeah, it’s not an easy balance. Right. And Uber is in kind of a weird place, coming out of Covet and trying to get their business at the same place as it was and more. It’s difficult for everyone. And again, everything you do to remain secure can potentially hamper your ability to get revenue. Those are not different sides of the same coin. But I think you have to be careful about your security kind of overwhelming your business needs. So it’s a real hard one.
BBC
So you don’t become too cautious, I guess, going the other way.
TN
That’s right. Exactly. So it’s a real hard one to look at Uber and go, oops, they did something wrong. There’s always something done wrong on the security side within businesses. Right. And so they’re no different. And like I said earlier, they’re probably better than most people.
BBC
I’m a sucker for a good deal. Shirley, don’t get me wrong. Tony, you wanted to come in.
TN
Well, they don’t have people as full time employees, and this isn’t really to defend Uber, but they do give people a lot of flexibility. Again, it’s really hard to look at that and say, oh, they’re such a terrible company. I don’t believe that. I mean, they’re a very popular company.
BBC
Absolutely. That was just only in the past life. Stock markets was very much your bag as well.
TN
Oh, yeah. And also servicing global curry companies. When I was at The Economist, we did work for those guys in 2007. I remember one of them calling me with a situation just like this, and they said, It’s not public. We saw this. What’s your view on this? So I called the chief economist at the time, and I said, hey, this is happening. Should we worry about this? He said, no, it’s probably just a blip. So these are very serious things. We all know what happened in 2007 and 2008. So these are very serious things, especially when a company like FedEx says it. And so we have to pay attention. And if they say it’s already happened or this is old information, then, great, we’re already well into it. That’s the relief that I come out of this with is if they say that it’s happened some time ago, even if it’s a few months, great, that stuff happened. We’ve seen China closing down, and we’ve seen the number of the impact on the supply chains. And the US already had two quarters of negative GDP growth, and we see what’s happening with energy prices, other things in Europe.
TN
So it’s no mystery that we’re in a recession, right? It’s no mystery at all. I’m glad that we’re seeing things like this. FedEx report come to confirm it.
BBC
Tony taking us neatly to exactly one of those issues, the sort of extra pillar putting the pressure on here, energy. Big development on that in Europe today because there have been dramatic developments in Europe’s largest economy. Germany has taken over local branches of Russia’s biggest oil company, where you raised it. It’s all of this that’s in the mix, isn’t it? This sort of mess around where energy is coming from, how people can get it, how much is going to cost.
TN
Yes, it’s a very big problem, to say the least. And energy is going to cost a lot this winter in Europe. There is no debate about that. And we see coal plants reactivated, we see more oil, we see desperation for natural gas. I’m in Texas. That makes us happy. But it’s going to be very difficult in Europe. The saving grace of this is the following. Countries like Germany have plenty of room within their national account to subsidize a lot of energy so they can subsidize something like one time their entire GDP. So there is room to spend at least with the German government and a few others. So northern Germany generally can help their people or northern Europe sorry, generally can help their people with some sort of subsidy to get through the supply type of issue.
BBC
And Tony, obviously in a sentence or two, interesting pressure on the US. To pump more reopen pipeline. Difficult politics, isn’t it?
TN
Yes. Please call DC and tell them to reopen pipeline.
BBC
So speaks of Texas Republican. That Tony Nash with us from Houston, Texas, the energy capital of the US. Of course, sheli ran also with us from Hong Kong. Pay more from both of them in the second half of business matters right after we get you up to speed with the latest worldviews two rapidly middle ageing men discussing gifts there you can see the problem in a nutshell. Ryan Broderick of the content minds podcast helping us out with that. Tony, that’s the issue, isn’t it? Something starts off being cool, and then we’re talking about it in our defense on business matters late at night on a business show on the world service and radio four. That’s when it stops becoming cool. Perhaps.
TN
Perhaps. I sent a gift yesterday and today on twitter. Here’s the thing. I know I’m not cool, so I’m not trying to be cool. I’m just trying to contextualize something that I said. So whether it’s cringey or not, I don’t think it matters. I think people do it. Some of them are a little bit annoying, but a good Austin powers gift every so often is kind of fun.
BBC
Well, this is where I wrestled with it in that interview, tony, because he’s actually from an American advert. I think he’s from a geico insurance advert. But I like the pig who sticks his head out the window and he’s got kind of sort of a toy fan that whizzes in kind of excitement, and I like to use that one pretty regularly. And then listening to Ryan’s interview back, I thought, probably going to have to retire that Shelley bluntest submissions I’ve ever seen in what is normally a fairly dull area, competitions and markets, authorities submissions. Would you maybe advise if you could perhaps be a little less honest in the future?
TN
It’s worth it. Not cool enough. Defense, right? Yeah, I don’t know. I think it sounds like they like Meta headquarters and they like the free meals and the massages and all that stuff, and they don’t want to have to go out in the cold again. I don’t know why else you would do that.
BBC
And in a wider sense, we see it in some of the sectors, don’t we? We were talking about it in the office, actually, about things like craft beer. You get to a certain stage, actually, and that none of your fans or the people who love your product necessarily want you to sell out to a big company, a giant company, but actually, they’re the ones who can facilitate growing more, getting more eyeballs, getting more users on your products.
TN
I’d love to sell it. To.
BBC
Come find complete intelligence, call Tony. We’ll link you all up. Well, we’re going to stick talking brands. Complete intelligence, obviously an excellent one. Surely if you’ve got a plug, you’ve got about 20 minutes left in the program as well that we can get to. Tell us about what the magic of Tabasco is. Louisiana’s pride and joy.
TN
Well, obviously you don’t know about the enemy between Texas and Louisiana.
BBC
Of course.
TN
It’S great, and Louisiana is fantastic. We love that stuff here and it’s really a Louisiana thing, but Texans really love kind of spicy Louisiana food and of course, Texas barbecue.
BBC
In terms of brand loyalty, what is it, Tony? What makes a customer exactly like Shirley says? Because most people are driven by price. So why is it just ease and comfort? Or is there something more hooky about it, something cleverer in the marketing?
TN
Yeah, I think it’s comfort and as much as it’s a feeling, right. I mean, there’s a particular type of condiment that I like that I’m not going to mention on here, but I like that my family knows that I don’t take anything else. I’ve been in since I was a kid, right. And we don’t get any other brands because they just taste different, and my palate is just articulated for that taste. But we grow up with these things and they give us a level of comfort. And I think about my kids grew up in Singapore. We spent 15 years there. So there’s a particular brand, for example, of soy milk that they like from Singapore that reminds them of Singapore. They don’t want Japanese soy milk or whatever. They want this particular brand of Singapore soy milk.
BBC
Play that piece a little bit, because obviously it’s a huge constitutional and historic moment here in Britain. But it’s interesting the kind of global grab that the story and the event has had for days now. Do you think perhaps some of those silver screen portrayals are part of that story, part of that reason why sure, yeah.
TN
I lived in London when Diana died, and I remember being in London when the Queen Mother died, and not so much Queen Mother, but these previous events really did get certainly Western attention, if not world attention. And I think there’s a fascination with the Royal family, but I think there’s also kind of a confusion of, like, what do they actually do? I don’t mean that in a disrespectful way. I think that’s a lot of the.
BBC
Rest of the world no, we’ve seen some pretty quirky constitutional stuff this week, haven’t we? Things that we’ve never seen in this country on the tele before, some of the sort of announcements and Privy Council meetings and things that television is giving us a view into.
TN
Right. And I think that is something that is interesting. It’s puzzling and people romanticize a lot of that.
BBC
Of course, Tony in the US is going to be a huge global television event come Monday with US networks, I imagine, are all piling on the plane as we speak.
TN
Yeah, I’m sure they are. I don’t really know, but I’m sure they are very well.
BBC
But there’s going to be an appetite for it is, and it’s going to do big numbers there. And TV news has become a lot about big events like that.
TN
It is. And all sorts of non expert experts will come up to talk about the Royal family to fill that time. I think what I would love to see is people just take it in, whether it’s on video or whether they’re there. This type of event obviously rarely happens, right? So don’t give me commentary talking over the live events, just kind of show us what’s actually happening and occasionally explain what’s happening, but really just let people take it in more than have this kind of rambling commentary about it.
BBC
Well, of course, if people do want to take it in, the BBC website, BBC TV and right here on the World Service is going to have plenty of coverage of that on Monday. Tony Nash, Shuli Ram, been a real pleasure to have you with us on business matters. As always, both of you, have a great weekend. And to all of you listening, the same, thanks so much for being with us. Bye.
With stronger inflation data suggesting that the Federal Reserve will continue with their hawkish stance, what then does this mean for markets? And will inflation be exacerbated by the potential rail strike. Tony Nash, CEO of Complete Intelligence tells us whilst diving into the impact of a strong greenback.
Produced by: Michael Gong
Presented by: Wong Shou Ning, Shazana Mokhtar
Transcript
BFM
Good morning. You are listening to the Morning Run. 7:06 am. On Thursday, the 15 September. I’m Shazana Mokhtar with Wong Shou Ning. In half an hour we’re going to be speaking to criminal lawyer Srikant Pillay on the criminal defamation charges filed against the edge. But as we always do, let’s kick start the morning with the recap on how global markets closed yesterday.
BFM
It’s the tale of two halves because the US markets all closed up in the green. The Dow was up 0.1%, S&P500 up 0.3%, and Nasdaq was up 0.7%. Albeit actually it was a very choppy trading session with US stocks actually sometimes swinging violently between gains and losses throughout the day. Meanwhile, in Asia, it all closed in the red. Nikkei was down 2%, Hang Seng down two 5%, Shanghai was down 0.8%. Straight Times Index in Singapore down 1%, while our very own FBMKLCI was down 1.3%.
BFM
So first, some thoughts on where international markets are headed. We have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Now, we saw equities plunged this week in response to worries over US CPI numbers. But if we take a closer look at the numbers itself, headline inflation only rose about a .1% month over month, which doesn’t seem like a lot. Do you think markets are over reacting and making much ado about nothing?
TN
Well, kind of. But what’s really happened is it’s about expectations for the terminal rate, which is basically the terminal rate is when does the Fed have to stop hiking at what rate? Right? So the terminal rate expectations change from 4% to about 4.3%. And with that expectation, that means that the Fed would have to hike more and maybe hike faster. So investors were reacting to that because consensus had become 75 basis point hike in September, then two more 50s before the end of the year, and then maybe a 25 and boom, we’re at the terminal rate. But with a rise in the terminal rate, we could have a 75 in Sep, 75 in October, and then who knows after that if inflation doesn’t slow down. Now, what I see and what you mentioned is a zero 1% rise month on month in August. That tells me that the rate of rise of inflation is slowing. So on a year on year basis it still looks bad, but the rate of rise of inflation is slowing. That’s good news. Okay, let’s see what happens. And we could have some positive unexpected things like, let’s say for example, the Russia Ukraine war ends or something like that, right?
TN
But what I’m expecting are things like a continued deceleration of inflation. It doesn’t mean we’re going back to pre 2020 pricing levels, it just means that the rate of inflation is slowing and spenders get used to paying higher prices over time.
BFM
So, Tony, what then is your feel in terms of what the Fed will do at their meeting next week? Are you expecting a 75 basis point hike? I even hear some houses saying a 100 basis point hike.
TN
Yeah. So I think there’s a 20% to 30% likelihood of 100 basis point hike. And everyone loves to kind of freak out about the Fed. So it’s possible that we have 100 basis point hike. I think what they’ll end up doing is hiking 75 and they’ll try to sound really bearish about things or sorry, not bearish, really hawkish about things. That’s what I meant to say. So they’ll hike 75. They’ll basically say, if you don’t slow down, we’re going to hike more, and then there’ll be another 75 where we hit expected or where the market generally hit expected at 50 for the next meeting.
BFM
Two year US treasury yields continue to spike, worsening the inversion that already existed prior to this. In what time frame can we expect to see some equilibrium return to fixed income markets?
TN
Yeah, I think that’s largely happening because of uncertainty about inflation expectations. I think there had been a hope that inflation would moderate more on a year on year basis in August, which it didn’t. And so that added some uncertainty into the mix. And so you’re seeing those short yield spike based on that uncertainty. And so when we see more certainty, a lot of this stuff really started to rise in October, November of ’21. Okay. And so as we get into those months, what we expect to see are some base effects. So we already started to see things rise in October, November of ’21. As we get to October, November of ’22, we will have already started getting at a higher pricing level in Q4 of ’21 anyway. So we expect to see the observed inflation slow as we get to those months and we’ll see a little bit more predictability, a little bit less uncertainty about inflation.
BFM
Tony, I want to pick your brain on this talk of a potential rail strike in the US. How detrimental will it be to the economy? Or is it just a blip?
TN
No, everyone goes back to the supply chain bottlenecks that we saw, and of course the union is playing on those fears and the consumers are worried about more supply chain bottleneck. Is it a problem? Yes, it’s a big problem. So I don’t think anything you’re seeing in media at this point is kind of too shrill. It could be really bad. And so this stuff will come down there’s brinksmanship it’ll come down to the last minute and will likely, I’m sure it will be solved somehow. Right. And again, that’s a secondary impact of inflation. Right. So we’ve seen things rise. Dock workers are saying we’re not being paid enough. And then it’s that wage price spiral that you hear about. So wages rise. I know in Asia people are a lot more aware of this than people in the US are. Where we typically have say, one or 2% inflation, you don’t really see a wage price spiral here. I think you see it in spurts in Asia a lot more frequently than we see it here in the US. So yes, it’s a real problem. Yes, they’ll get their raise or a significant portion of it.
TN
It could be ugly until it’s settled, but I don’t expect it to be a protracted issue. Sorry. The other thing I’m not to think about is we’re starting to enter kind of the pre holiday import period. So the guys who are negotiating against the dock workers know that if this goes out a month or two months it’s going to hurt all that stuff on the shelf at Walmart, all that stuff on the shelf and all the stores, Amazon, all those guys.
BFM
Yeah. So some people might not get their Christmas presents on time. Right. But do you think the other headwind is the US dollar strength, which it has come down slightly last night, but even if we look at the Bloomberg Dollar spot Index on a year to date basis, it’s 11% and Oracle used that as an excuse to explain why earnings were a bit soft. How much more of these announcements are we going to see from US corporate?
TN
US dollar is going to be the Pinata. It’s going to get the bashing this quarter and earnings reports, everybody is going to blame weak earnings on the US. Dollar. Everybody. So it’s 11% year to date. So people are going to say if they missed by 11%, they’re going to go it’s the dollar is fault, regardless of what operational issues they have, regardless of what inventory issues they have, they’re going to blame it on the dollar. Wall street analysts know better, but they’re going to accept that as an excuse and that’s just the game that everyone’s going to play this quarter.
BFM
Tony, thanks very much for speaking with us this morning. 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. I really like the comment he made about the US. Dollar becoming the Pinata in next season’s quarterly report.
BFM
I’m going to bang it, try to hit it to get all the sweets out.
BFM
Right. We could probably do a game like a bingo game how many corporates mentioned US dollar as the reason for faltering earnings perhaps something to look for.
BFM
I mean even in Malaysia we’ve got corporates doing that all the time.
BFM
Right.
BFM
And it’s a non cash item but clearly an excuse. So we’ll be watching this space, lots of headwinds. I think the other news coming out of Asia, which is interesting, is actually and this is of course according to people familiar with the matter as opposed to unfamiliar with the matter, SoftBank Group founder Masayososhi’s Son has revived discussions of setting up a third vision fund. And what’s ironic about it is because just a few weeks ago, he apologized for the disappointing performance of his first two funds.
BFM
You know how they say there’s that saying goes, insanity is doing the same thing over and over again, but expecting different results. I wonder if that’s what this third vision fund is in a way. If the first two haven’t really performed, is setting up a third fund really the answer?
BFM
But it’s amazing. People do give him cash, right? It’s not like he doesn’t get new injections of cash all the time.
BFM
It reminds me very much of Adam Newman, actually the founder of WeWork. And even though he had such an infamous fall from grace, he is back in the corporate scene now with a new venture and people still continue to give him money. So go figure. Some people are just really good at getting cash.
BFM
Selling themselves in the brand.
BFM
7:16 in the morning, we’re heading into some messages and when we come back, we are going to be taking a look at the proposal to expand the parliamentary seat allocation for Sabah and Sarawa. Stay tuned for that conversation. BFM 89 nine you have been listening to a podcast from BFM 89 nine, the business station. For more stories of the same kind, download the VFM up.
It has been a terrible week in markets. It is not looking good for anybody, at least on the long side. A lot of that seemed to change when the CPI number came out. It’s like people woke up and terminal rate is going to be higher and just everything flushes out.
We talked through why the dollar is where it is and how long we expect it to stay there. Brent Johnson recently said that the USD & equities will both rise. And so we dived a little bit deep into that. We also looked at crude.
Crude’s obviously been falling. Tracy discussed how long is that going to last.
We also did a little bit of Fed talk because the Fed meets this week. And we want to really understand when does the Fed stop? After last week’s US CPI print, the terminal rate rose from 4% pretty dramatically. Does QT accelerate?
Key themes: 1. $USD 🚀 2. How low will crude oil go? 3. When does the Fed stop? 4. The Week Ahead
This is the 34th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Time Stamps 0:00 Start 1:20 Key themes for this episode 2:24 What got us to stronger USD and will it continue to rise? 8:29 Dedollarization 10:23 Intervention in the dollar if it gets too strong? 12:22 Both the USD and US equities will be rising? 14:18 Crude: how low can it go? 18:03 Look at the curves for crude 19:17 Slingshot in December? 20:18 How India and China buys Russian oil and resell 21:33 Restock the SPR at $80?? 22:57 When does the Fed stop raising rates? 29:33 What if Russia, Ukraine, and China don’t lock down anymore? 32:08 What’s for the week ahead?
Listen to the podcast version on Spotify here:
Transcript
Tony Nash: Hi everybody, and welcome to The Week Ahead. My name is Tony Nash. We’re joined today by Tracy Shuchart and Brent Johnson. So thanks guys for joining us, really appreciate the time to talk about what’s going on in markets this week and next week.
Before we get started, I want to remind you of our $50 promo for CI Futures. CI Futures is a subscription platform to get forecast for thousands of items: currencies commodities, equity indices and economics. The currencies commodities equities are refreshed every week. So every Monday you come in for a new forecast, economics forecast every month. That $50 a month promo ends on September 21. So please take a look now go in and check it out and if you have any questions, let us know, we’re happy to answer them. So thanks for taking the time to do that.
So, Brent and Tracy, it has been a terrible week in markets. It is not looking good for really anybody, at least on the long side. And so a lot of that seemed to change when the CPI number came out. It’s like people woke up and we’re like, oh no, the term rate is going to be higher and just everything flushes out, right. And earnings and a bunch of other stuff. So we can go into a lot of specifics. But one of the items that I’ve been really curious about for weeks, if not years, ever since I met Brent in 2018, 19, is the dollar. So we’re going to go a little bit deep into the dollar today.
We’re also going to look at crude. Crude’s obviously been falling. So we’re going to ask Tracy kind of how long is that going to last? And then we’re going to do a little bit of Fed talk because the Fed meets in the week ahead. And I want to really understand kind of when does the Fed stop.
So those are our key themes today.
So, Brent, welcome. Thanks again for joining us. I’d really like to talk through the dollar and we are where we are, which is amazing. And you have seen this years ago. On the screen, I’ve got a chart of our CI Futures forecast which shows a dollar continuing to rise over the next year. We’ve got some bumps in there, but for the most part we see a persistently strong dollar.
CI Futures provides highly accurate commodity, equity, currency and economics forecasts using advanced AI. Learn more about CI Futures here.
So I’m curious what got us here and what will continue to push the dollar higher?
Brent Johnson: Sure. Well, first of all, thanks for having me. I always enjoy talking to you, Tony. The reason I like talking to you is you’ll talk a lot about Asia, but you’ve actually lived there and you actually know what you’re talking about rather than people who’ve just read it in a book. And same with Tracy. So I’m happy to do this and happy to do it anytime you invite me.
But anyway, what’s really going on with the dollar is a function of the fact that it’s not only the Fed and it’s not only the US that has, for lack of a better word, idiotic leaders. The rest of the world does, too.
And I think over the last several years. At least in the retail investment world. There’s been this theme that the Fed is out of control. The government’s out of control. They’re going to spend all this money. The dollar is going to pay the price. And it’s going to get inflated away and go to zero. And the rest of the world is going to do great and we’re going to do poor.
And I understand that view if you just analyze the United States. But the problem is you can’t just analyze the United States because it’s a big world and everything is interconnected. And all of the problems that people have forecast to fall upon the US.
Dollar are currently happening to a greater extent in Europe and Asia. And the budget deficits, the printing of the money, the central bank support, the holding down of rates, all of that applies even more so to Japan and Europe than it does the United States. And that’s really what you’re seeing.
Over the last, let’s just call a year, you’ve seen the yen fall 20% versus the dollar. That is an incredible move for any currency, but it is an absolutely astonishing move for a major currency, specifically the third biggest currency in the world, or some would even argue the second biggest currency in the world. And then you’ve seen the euro over the last year is down 10% or 15%.
So these are very big moves. Again, the reason is because the Fed is raising rates. So on a relative basis, we have higher rates than those two big competitors. And on a relative basis, those two big competitors are doing more monetary stimulus or QE or extraordinary measures, however you want to define that central bank activity.
And you always because the globe runs on the dollar, there is a persistent and consistent bid for the dollar globally. And so it’s really a supply versus the demand issue. Now, everybody always focuses on the supply. Central banks are increasing the currency in circulation. They’re going to print all this money and so therefore the dollar falls or the currency falls. Well, that’s just focusing on the supply side.
But again, you have to remember that all central banks are increasing supply, but the demand is what makes the difference and that there is global demand for the dollar. Now, whether you think there should be, whether you think it’s the right thing, it doesn’t really matter. It just is. That’s the way the system works.
But there is not that same global demand for yen. There’s not that same global demand for yuan, there’s not the same global demand for euros or Reals or Florence or Liras or anything.
And so what you’re really seeing play out is Trifan’s dilemma. And so I’ve spoken about this before. But Trifon’s dilemma is an economic theory that states that if you have a single country’s currency that also serves as the global reserve currency, at some point the needs of the domestic economy for that global reserve currency will come into conflict with the needs of the global economy. And that’s what we have.
We have an inflationary pressure problem in the United States. The Fed is very embarrassed about it. They got it wrong and now they need to do something about it. And they’re bound and determined to try to bring it under control. And so they’re raising rates to counteract that. Well, when you raise rates, you’re tightening the monetary supply. And that’s happening. That’s fine for the US. But there’s many countries around the world that cannot handle that right now.
But that’s what’s happening. And so the needs of the domestic economy are in conflict with the needs of the global economy. And it’s going to be the global economy that suffers more than the domestic economy as a result. It doesn’t mean that the domestic economy won’t be hurt. It just means on a relative basis, you want to be closer to the money than far away from the money. And because we have the global reserve currency, we’re closer to the money.
TN: So it’s interesting when you talk about the dollar versus other currencies, and we often hear people say, oh, CNY is rising as a share of spend, which that’s debatable. But from my perspective, it’s not the dollar that’s kind of in the gladiator ring of currencies. It’s the yen, it’s the euro, it’s the British pound, it’s the aussie dollar, it’s these secondary currencies. They’re going to lose share before the dollar does. Is that wrong?
BJ: No, I think that’s absolutely right. And again, that’s a very good way to put it. I know gladiator walks into the ring and thinks, I’m not going to at least get a few scratches. It’s going to hurt. That’s just the nature of being a gladiator. But what matters is who’s standing at the end of the day, right? And so I think it’s these other currencies are getting hurt by the battle more so than the dollar. It doesn’t mean that we’re not getting hurt. It doesn’t mean it doesn’t sting. It doesn’t mean there isn’t going to be any pain involved. But at the end of the day, if you’re at war, you want to be the last man standing because of the way the system is designed, I believe that that will be the US dollar.
The other thing that I would just quickly point out is a lot of people say, why can’t you see it? It’s very obvious. The rest of the world wants to de-dollarize. They’re putting all of these trade deals in place, the dollars falling as a percent of reserves, etc. And the point I would make is, yes, I do see it. I agree with you the world would like to dedollarize, but it’s much harder to dedollarize than just saying, just because you put an announcement out there doesn’t mean you’re actually going to be able to do it.
I’d like to make the analogy that I’ve said I want to lose weight and get in great shape for 20 years. It doesn’t mean it’s going to happen. It hasn’t happened yet.
But that’s the headline versus reality, right? I just think that’s where we’re at. And the dollar, for better or worse, it’s a rigged game in favor of the dollar. And the US set it up that way is the global hegemon. They set it up that way. Now, it doesn’t mean they’re not trying. It doesn’t mean that the world doesn’t want to get away from it. It’s just very hard to do it.
The last thing I’ll say and I’ll shut up, but the other thing I would say is the process of de-dollarization, even if it is successful, will not be a calm transition. And the process of dedollarization is not necessarily, and in my opinion, not probable to be negative for the price of the dollar. I think the volatility and the lack of liquidity in dollars that would go along with de-dollarization would actually squeeze the price of the dollar higher.
And so it doesn’t matter to me whether de-dollarization happens or not. I think the dollar is going higher for all of these reasons.
TN: I think what’s funny there is people always put de-dollarization in this almost moralistic language. It’s a good or a bad thing. And it’s just not. It just is.
Tracy Shuchart: I just had a question for Brent. I mean, do you see at any point that there’s some kind of intervention on the dollar? The dollar gets too strong because it’s going to crush emerging markets? Do you think there’s any point in which Yellen kind of backs up?
BJ: I do think they will. And that’s why I think the dollar is going to go back to all-time highs before this is all said and done. I don’t think it’s going to be a straight line. It can’t be a straight line without absolute devastation. Doesn’t mean it can’t happen. But I think this is going to play out over several years rather than several weeks. It could play out over several weeks, but I think it will take longer. And the reason I think it will take longer is I think that they will interact or they will get involved, as you’re suggesting, Tracy.
I actually think right now the Fed and the Treasury want the dollar strong. I think they’re using it as a weapon or as a tool. It’s something that can be used very effectively. Again, whether you think it should be used or not, I don’t care. I just think it will be, and I think it is being and so I think that will continue.
But I think the Fed and the treasury, they want the dollar higher, but they want it done in a measured fashion that they can control. If it starts to get out of control, I think that they will rein it in. I think they want some of the other parts of the world to be an economic pain, but I don’t think they want the whole system to collapse. And so my guess is that we’ll get the dollar higher, maybe it goes to 115, 120, and then they’ll do something, it’ll pull back for six months, three months, whatever, and then it’ll get higher again and they’ll come out and do something.
So I think this will be a process, a little bit of a roller coaster, up and down, but I think that the general trend is higher and I think there’s more pain to come for the global economy as a result.
TN: Brent, real quick, before we get onto oil. You sent out a tweet earlier this week that said you think that we’re going to come to a point where both the dollar and equities and US equities are rising. Can you walk us through that just real quickly? I know there’s a very detailed thesis behind that, but can you walk us through that very quickly so we understand kind of what you’re talking about there?
BJ: Yeah, so the first thing I’ll say for anybody who’s just kind of passing through this conversation is that I don’t think this is happening right now. It could happen right now. In the short term, I expect US equities to go lower. I think that’s just kind of where markets are headed.
But as the pain develops throughout the global economy, I think we are going to experience a global sovereign debt crisis. And when the world, the US included, starts selling sovereign debt rather than buying sovereign debt, I think that money will have to go.
Now, some of the money will just be, it’ll just go poof. It’ll be gone. And so that money won’t have anywhere to go but the people who start selling the bonds looking for another place to go, I think the next best place to go will eventually be US equities. And I think US equities will be seen as the new… I don’t want to say new Treasuries.
That’s a little bit hard to say. But on a relative basis, the place where big global capital can go, that is the most advantageous to them. And so I think we will get into a point in the sovereign debt crisis where US equities will get safe haven flows and I think the whole world will potentially be printing more money, right.
So be sending more liquidity out there. And so I think that liquidity that is generated with little liquidity there is, I think we’ll find its way into the US and the US Dow, big blue chip stocks and I think they’ll go higher. I might be wrong on that, but that’s my working thesis as of right now.
TN: Let’s move on to crude oil. Obviously we’ve seen crude take some hits over the past few weeks and we’ve got a WTI chart on the screen right now.
So how low will crude go? Are we almost there? Are we headed to 65 where it was for a while? And what then pushes it higher?
TS: I don’t really want to forecast exactly where crude is going to go. I definitely think that we could see some more downside, but we have to look at what is weighing on price and sentiment right now. One, there’s more Russian barrels on the market than everybody anticipated.
Two, you’ve got never ending zero Covid China lockdown that haven’t seemed to let up yet. We also have EU recession, right? And then we had 160 million barrels of SPR thrown on the market. And so that’s really weighing kind of on the front end of the curve. Those are the things kind of weighing on sentiment right now. That’s why we’re seeing a lot of weakness.
That said, if we look at the fundamentals of the market, the market is still very tight. We’re still drawing globally. We definitely have a diesel problem that is global. And I think where we start to see kind of a change in this, I think when it comes to the end of October, when the SPR is done this with kind of been looking over the last couple of weeks, had we not had such large SPRs, we would have actually been drawing a regular stock.
So it’s not as if that oil is going piling up anywhere. So I think as soon as the SPR stops, I think after Midterms, because I think this administration is trying to do whatever they can to suppress the price of oil, thus, gasoline. And I also think that we have to see kind of what happens in China after the People’s Party Congress in the middle of October and trying to see what their policy is going to be moving forward.
Are they going to open up? I mean, they’re looking at they want 5.5% YoY GDP by the end of the year,
which…
TN: They’ll hit it. On the nose, we can guarantee that.
TS: But I think they’re going to have to start stimulating the economy a little bit more. And we kind of saw announcement Evergrande is going to start financing more inspection projects and whatnot going into starting at the end of September. So I think we’ll probably see the last quarter if we get a little stimulus and if they back on their policy because, that’s the big thing for oil right now, is that if that demand comes back because they’re down about 2.7% on the year and as far as consumption is concerned.
So I think if that demand comes rushing back, know that’s going to be a huge upside surprise for the market. I think over the long run, oil is going higher, but out looking out into 2023, I just think that’s just the trajectory of it. I’m not calling for $200 oil, anything crazy like that. I just think that we will see higher oil, and I think we’re poised to see higher for longer than the functionality of the market and the fact that we have no capex for the last seven years.
TN: So last month you said to look three to four months out, look at the curves three to four months out to understand kind of what the real oil price was or is going to be. And so that would be two to three months now. So that’s November. December.
TS: Look at those spreads are widening out or not, right. You want to see if we’re moving into more backwardation and even more backward dated market, right? So you kind of want to look at that.
TN: Okay, so I paid $2.88 a gallon for gas at my local last night. We’re the energy capital in the world. Yeah, I’m going to show it off. Anyway, that is kind of coming down. And energy has been the biggest upward factor in some of the inflation issues. That’s good news, at least until the election. Hey, I’ll take it while I can get it, right? And if it heads back up after the election, I think we’re all prepared for that on some level.
So I guess SPR, as he said, election happens, there’s no political reason necessarily to suppress these prices and so on and so forth. So do you expect to see almost a slingshot in, say, December, where things trend higher pretty quickly?
TS: I don’t think we’ll have… I don’t want to call it a slingshot because anything can happen in the oil market. I mean, we’ve seen $7 to $10 in a day before, so that’s not unheard of. But I do think we go higher, especially if you’re looking into the market, is going to get even tighter in December because of tax reasons. December 31 is the tax assessment date for the barrels that you have on hand. So they tend to pull back on production so they can move out inventory as much as they can, so they’re not taxed at the end of the year.
Usually we see a little decline in production anyway in December and the second half of December, we do see prices start to rebound off the seasonal for regular seasonal trend low. Okay, so that would be normal.
TN: Brent, I think you had a question for Tracy on crude markets as well.
BJ: Yeah, I actually had two quick questions. One, I wanted to get your thoughts on the fact that India and China are buying oil at a discount from Russia. And then there’s lots of stories about them selling that oil
on to Europe or other places. And so they’re making that spread. I just wanted to get your thoughts on that and logistically how that actually takes place.
TS: So if you’re looking at India, definitely they are buying discounted crude. What they do is they don’t
resell that to Europe. What they do is they blend it and they sell fuel. So that’s refined. So it’s really hard to trace what’s in… They don’t trace those barrels that way.
So that’s how that oil is kind of emerging back in Europe. It’s really by way of refined products. Now when we talk about China with the gas, really what they’re doing is they’re buying gas right now, literally half off from Russia, and they’re turning around and selling their own gas to Europe for the higher marked up. The gas they already have. So they’re selling the gas they already have? So that’s kind of how that’s working.
BJ: And then the other question I have for you quickly is I was surprised this week when the rumor was floated by whoever floated that they would restock the SPR at $80. It seems like they’re doing everything they can to get the price lower. And then to have that rumor come out and put kind of a floor under it was kind of surprising to me. So maybe nothing more than just the speculation, but did you have any thoughts on that?
TS: Yeah, I mean, basically they put a floor on it. Everybody’s calling it, the Biden put now. But the thing is that it’s all nice and well if they want to do that, they still got enough 60 million barrels that they need to release. And then by the time those contracts go through and you want to refill the SPR, I mean, that’s months away. We’re looking at months and months down the road. And who knows what oil price would be? To me, it was just another try to jaw bone market down lower.
BJ: It kind of reminded me of the ECB where they’re raising rates on one hand, but they’re buying bonds with the other. Biden wants his cap. He’s like got a collar on it. He’s trying to put a cap on it and a foot on it.
TN: Strategy. Let’s move on to a little bit more of kind of the Fed kind of Fed talk. There’s a Fed meeting next week, and when CPI came out this week, the terminal rate really rose very quickly. And that’s when we started to see equities fall pretty dramatically. And we’ve got on the screen right now expectations for the rates coming out of each meeting. So 75 in September, 75 in November, and another 50 in December. That has accelerated the expectations for the Fed by about 25-50 basis points?
When does the Fed stop, basically from where you are now, do you think this continues to accelerate in 2023 or given, let’s say, CPI? Of course on a year-on-year basis it looks terrible. But once we get to November, when CPI really started to accelerate, November 21, do we start to see some of those base effects in a year-on-year basis and the Fed starts to pull back a little bit and go, okay, wait a minute, maybe we’re okay with the plan we have when we stop at say 450 or whatever as a terminal rate.
The other complicating factor will add in there is University of Michigan came out, University of Michigan survey came out on Friday and it’s a bit lower than what was expected. And the Fed has really been looking to University of Michigan, which is kind of a semi-serious survey, but they’ve really used that to justify some of their decisions.
So we obviously have a mixed environment. But I’m wondering, with all of this stuff coming out this week, do we expect the Fed to keep marching pretty aggressively into 2023?
BJ: I’ll take that first. So I actually do expect them to keep marching higher into 2023. And I say that for a couple of reasons, and I’m going to qualify this and say that they will pivot when they have to pivot, but I don’t think they’re going to pivot until they have to pivot. And so I think a lot of people that are predicting the pivot are misunderstanding the Fed’s intentions and perhaps for a good reason. They’ve done a fantastic job of ruining their credibility. So it’s understandable not to believe them.
But in this case, I think you kind of have to believe them. And I’ll tell you why I think you have to believe them. Number one, I think they don’t mind the dollar being stronger. Again, I think that’s kind of policy that I spoke of earlier in conjunction with the treasury.
Number two, I think they want asset prices lower. So the fact that the stock market goes down I don’t think would bother them. I think if the Dow was at 28,000 and the S&P was at 3600, I think they’d say that’s totally fine. I don’t think they have a problem with that as long as it’s not collapsing. Right? Now, if it collapses, then they have to come in. And they will come in, but I don’t think they mind if the stock market is 10% or 20% lower than here.
The third thing I’d say is the Fed central banks in general, they’re always lagging. They’re a reactionary agency. They’re not a predictive agency. We all know that. They can’t predict anything anyway. I’m not sure I want them predicting things, but to me they’re always behind the curve because they always wait until they see it and then they react, right? They come in and they try to save the day. So when things get really bad, then they’ll eventually come in and provide support.
And when things are always too late to tighten as they are now, and then they try to make up for it. So I think they’re going to despite, like you said, the Michigan number starting to come down, Atlanta Feds already slash their GDP. So even though they’re getting these signals that things are slowing down, they’re not reacting to it yet. They will react to it late.
And then the fourth thing I’d say is that I think Powell is mad and he’s pouting, right? Not just Powell, but mainly Powell, but he got all this advice from all his staff and however many staff, PhD staffers they have at the Fed, and they all said inflation is transitory and it’s going to be fine. And then it wasn’t. Right? Now he’s mad.
TN: He’s a lawyer, not an economist.
BJ: And I’m going to do something about it. And if you don’t think that I can bring inflation down, well, then you just watch me, right? And I’ll take my ball and go home. And his ball is interest rate. So he’s taking them higher, and he’s taking them home, he’s taking them higher. And so it come hell or high water, and after the, I don’t know, the chink in their armor or the threat to their credibility that they’ve had over the last year or two, I think the last thing in the world that Powell wants to deal with is the fact that he slowed down or, God forbid, cut rates and then inflation kept going higher.
That would look even worse than waiting for it to crumble, right? So I think for all of those reasons, you kind of have to take them at their word. Again, I’m not saying not unless the markets force them to do it
and the markets might force them to do it. I’m not saying that that’s out of the possibility. The only thing I don’t like saying about this is this is the hole they’re going to hike until it breaks theory, right?
And I agree with that. The thing I don’t like about it is everybody else seems to agree with it now, too. That seems to be the common refrain, is that they’re going to hike until something breaks, and everybody says, yeah, that’s kind of what’s going to happen. Usually when everybody thinks something, it doesn’t happen that way. But as long as equity prices are higher and as long as inflationary prints keep coming in high, I think they continue hiking.
And think about it, inflation could fall by 30%, and it’s still at five or six, which is still two or three times higher than their goal. So is there a path to a pivot? Yes, I think there’s a path to a pivot, but every week, when people come out every week and, oh, they’re going to pivot, they’re going to pivot. I don’t think they’re pivoting next week, and I don’t think they’re pivoting in October unless they have to.
TN: Okay, Tracy, what do you think of that?
TS: Yeah, I absolutely agree. All the data coming in, there’s no way they’re not doing 75 next week. In my opinion. I could be wrong. Somebody will come back. I think that’s pretty much a lock.
TN: Yeah, I think short of, let’s say sometime in Q4, Russia, Ukraine ends, and China says we’re not going to lock down anymore, that would fundamentally change the Feds calculations, right?
BJ: Well, if they weren’t locked down anymore and it pushed demand higher and it pushed prices higher as a result of demand increasing, then to me, that would keep them on their path to hiking. The flip side. And the flip side is that if something breaks in China, and China has to devalue or revalue the yuan in order to deal with the real estate collapse or the internal problems, whatever it is, that could send a deflationary wave to the rest of the world.
So I’m not going to sit here and deny the inflationary pressures that we’re seeing, but I think to a certain extent, people have again dumped themselves into the inflation camp or the deflation camp, and I think we’re going to have periods of both.
I think if you fundamentally understand the design of the monetary system, the threat of a deflationary
wave is always there. But if you don’t admit that the inflationary pressures are here, I think you’ve also got your head in the sand. I’ve said this several times, but I will admit to a big mistake, and that is, for several years, I hated the term stagflation. I thought it was a cop out. I thought it was for people who just couldn’t decide if they were in the inflation or deflation camp. But I think that’s what we have, and I think we have it in spades. I think some assets and some prices are going to continue to rise and be higher, and I think others are going to collapse, and that’s what makes it so hard to deal with.
So to anybody I ever took a shot at for them using stagflation as a cop out, I apologize. I’m with you now. I got that part wrong.
TN: Brent, one of the things I admire about you is you’re not afraid to say you were wrong, right?
BJ: No. I mean, do you mind if I just make a comment on this really quick? I think too often in our business, people will make a call and then they’re just so afraid to change it. Or you’ll make a call, and then somebody else will call you out on it if you got it wrong. At the end of the day, our job is sort of to predict the future. And so anybody who thinks that they can accurately predict the future 100% of the time has the biggest ego in the history of the world.
The reason I don’t mind making predictions is number one. I don’t mind being wrong because I don’t think I’m the smartest guy in history. And if I get something wrong, then I’ll have to deal with it. But this idea that we’re always going to be right and we know everything, it’s ridiculous. So anyway, we’re all speculating at the end of the day.
TN: That’s right. Okay, real quickly, guys, what are you looking for in the week ahead? More the same. More the same disappointment, difficulties, headwind, all that stuff. Until the Fed meeting? Is that what we’re looking for until the press conference?
TS: Yeah, I think we’re the markets will be in limbo, definitely until the Fed. I mean, everybody expects 75. We get 75. Maybe we see a bounce in equity, actually, because it’s already done with, right. There’s no question anymore. So maybe we get a bounce after that.
TN: Slightly less hawkish language than is expected, right?
BJ: I think that’s right. Now we’ve got the potential of maybe 100 basis points, right. So if they come in a couple of weeks ago, although now there’s a path to pivot, they’re probably only going to do 50 basis points in September.
Well, then we got the CPI print and it’s 75. That’s 75 is going to happen. Then a couple of people go hundreds now on the table, right? So now if they only come out and do 75, maybe the market kind of breathes a little bit. At least it wasn’t 100. So my guess is that we would have some volatility leading up to the meeting. Maybe they do 75. Perhaps things get a little bit of a bounce as a breather.
But I don’t think markets are going to change a whole lot between now and the election. I think they’re going to be volatile. I think the Feds are going to keep hiking. And I think Market Powell said it himself. We had the boom and now we have to deal with the pain. This is the unfortunate side effect of what we have to do. So he’s telling you he’s going to cause pain. He just doesn’t want to collapse. So if it starts to collapse, it’s the sad truth.
TN: Guys, thank you so much for your time. Thank you so much. Have a great weekend and have a great week ahead.
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UK Prime Minister Liz Truss is expected to announce a package of support to deal with rising energy bills in the coming days. It’s understood the government could spend $115 million on plans to subsidise bills. We weigh up the pros and cons of subsidies and windfall taxes with Caroline Meyer, energy analyst and CEO of Meyer Resources.
US e-cigarette maker Juul is to pay a $438.5 million settlement, following a lengthy investigation that found it had marketed its products to underage teenagers. Rachel Butt from Bloomberg in New York explains the background and implications of the story.
Rahul Tandon is joined from Austin, Texas by Tony Nash, CEO and founder of Complete Intelligence, and from Freetown, Sierra Leone by media entrepreneur and TV presenter Stella Bangura.
Transcript
BBC
Hello, there. How are you? This, of course, is Business Matters here on the BBC World Service. I’m Rahul Tandon as always, coming up on the program, we’re talking about changing your leaders. Does it work? That’s happened here in the UK. Liz Truss was sworn in into her new job. We’re going to be looking at the energy challenges that many countries, many of you listeners, are facing at the moment.
BBC
It’s going to be a terrible winter and in many countries, it will be for some of the lower income households. It will literally be a question, do I heat or do I eat?
BBC
There we go. That is a question I think that many people, unfortunately, across the world, will be facing. A lot of tough questions that are going to face businesses here in the UK. Tony Nash joins us as well this evening from Complete Intelligence. Hello, Tony. Always a pleasure to have you on the program. Our new Prime Minister here is going to need a lot of intelligence. Can I ask you, Tony, sometimes when we’re faced with big problems, we think, let’s just change the leader. That doesn’t always work, does it? Just putting a new person in charge. The problems are still there.
TN
The problems are still there. And the problems that we have right now are very hard problems to solve. So Liz Truss is going to really need a lot of help and a lot of deep thought to solving these problems.
BBC
Let’s switch it on its head, though, sometimes, having that new leadership in place, new ideas, new thoughts. She announced her new team a short while ago, Tony, that can make a difference. A fresh look at difficult problems that people are facing, whether it’s countries or businesses as well.
TN
Sure it can. I think some of the problems she’s facing right now, though, are they’re global problems. It’s the energy supply chain, right? It’s the cost of energy, it’s the downstream costs of energy. It’s the cost of things like fertilizer and food into next year. So these are not problems that the head of the UK, the leader of the UK, can solve on their own. This is something that really takes some deep thought to solve, say, the domestic symptoms of those problems, or not the symptoms, but the domestic impacts of those problems, as well as the global sources of those problems. It takes a lot of effort, especially for a new leader, to come in, set up their team and get going.
BBC
Yeah, that’s a good point. Tony, last question to you on this particular issue. Sometimes with leadership, the key is knowing when to take over. This is not the best time for any leader to take over in the country because of those problems you outlined there, which we’re going to be talking about in the program in a lot more detail a bit later.
TN
No, you’re exactly right, but I think there’s a certain kind of leader that’s attracted to taking over in a very difficult time. So I’ve done a turnaround and a couple of startups in my day, and it takes a different kind of person who to want to take a leadership position in that situation. And hopefully she’s a person who is focused. Hopefully she’s a person who can take criticism really well. Hopefully she’s a person who can get people on her team and build trust. And if she can do those things and all of the other things that a leader is supposed to do, she may actually do really well.
BBC
Stella, you were talking about the elections in Sierra Leone, which are coming up by the beginning of next year. I wonder we’re talking about leadership. I suppose the true test of a leader or somebody who wants to be a leader is taking over in difficult circumstances. Not when it’s easy, but when it’s tough. Against your labs. Tony, when you go around Texas, are you seeing a lot of youngsters vaping nowadays?
TN
I have two kids in university and one in junior high. And my kids who are in university were part of that initial group that was marketed to. And so when they were in high school, there was a lot of vaping in high school, and there still is. And even now the kids in junior high are being marketed. And so when I say junior high, that’s kind of 12, 13, 14 years old.
TN
So are they being directly marketed to? Probably not. But the problem here yes, that’s right. And the influencers and the way that they get to these kids, and there are efforts in the schools here to counter that. A lot of the messaging in the schools is countering, and again, I’m talking 12, 13, 14 years old is countering vaping and trying to get the kids to not start vaping. So it is something that’s very common even at a young age, and there are a lot of efforts to really stop it.
BBC
Yeah, go on, Tony.
TN
Yeah, the appeal here for the kids, there are a couple of appeals. First of all, they don’t smell like tobacco, right? So it’s a lot easier to do and conceal. But the other part that’s pretty common is to get vape use that has THC in it. And kids in, say, public schools will smoke in the bathroom between classes or something like that. But it’s the THC juice for their vape.
BBC
Because I’m listed, I know what that is.
TN
It’s basically smoking marijuana, right? It’s the THC is the active ingredient in marijuana. And so it’s a very easy and pretty inconspicuous way to distribute this to schools, to kids in schools. And so it’s not necessarily nicotine, it’s the THC. I’m not saying every kid who vapes has THC in their vape juice, but it’s both. And it’s balancing both out that we see a lot in the junior highs and high schools here.
BBC
I want to bring in Tony here very quickly, because I remember being in India when the government had demonetization completely changed the currency. It’s not that easy, is it? Sometimes?
TN
No, it’s not easy. It’s a shock. And I think that it’s a little bit of a shock by design so that people understand the new value. But when it doesn’t hold, then that’s a real problem. So I’m not laughing at this specific situation now, but with demonetization in India, obviously, that had an organized crime drive, right? Like they wanted to take out the large bills to take the power out of some of the organized crime transactions. Is that fair?
BBC
Yeah, it was. It was also about removing some black money from the economy. Did it work? It’s an interesting discussion that’s still going on in India. Lots more interesting discussions coming up here on Business Matters after the latest news.
BBC
What about where you are in Texas? That’s a part of the world that is known, isn’t it, for its energy resources? It’s fossil fuels, also renewables. Now we’re heading towards Midterms. How big an issue is energy there? Not quite as big maybe as it is in Europe, I suppose.
TN
Well, I live in Houston, Texas, the energy capital of the world. So you should know that everyone in my neighborhood has put in a new swimming pool except me over the past year. So the energy companies are doing well and my neighbors are benefiting. And so I don’t say that to be horrible, but these times part of the problem with times like this is people realize that there is actually under investment in energy.
TN
And so whether it’s electric, power companies or storage or transmission, other things, so what comes out of Texas is natural gas, which goes to Europe to kind of fill the gap that isn’t coming from Russia. Okay. And so because there’s not as much supply, those prices go up, and that benefits the people who take things out. But the under investment happens in two places. It happens kind of on the electricity side, but also on the extraction side. So things here actually in Texas pretty good, and we’re not seeing a lot of the downsides that Europe is seeing.
BBC
Yeah, very much. And I suppose the price of the gas at the moment, a lot of that liquefied gas coming into Europe at the moment means that a lot of those companies in Texas will be doing very well. We were talking about Liz Truss earlier in the program, the new British Prime Minister, because she’s unveiling her energy plan a little bit later this week, on Thursday. But it’s quite clear now that her government’s going to borrow hugely to keep bills low. In the EU, though, Brussels are going to propose levies on energy companies that would channel sky high earnings back to vulnerable households and businesses.
BBC
This is going to cost Europe a huge amount of money because they’re going to have to bail out a lot of people because of the rising cost of energy here and that’s going to have long term economic consequences for the continent.
TN
Sure, yeah and I think that whenever you get a governor estimate, it’s always a little bit low. So whatever the governments are putting out to spend, you can probably count on two times that or more maybe then. Sure, yeah. The government estimates are intentionally low and they always are because they underestimate probably supply constraints in this case.
TN
If you look at things like gas storage. So I’m not of the belief that we’re going to have like a horrific event in Europe this year or this winter because if you look at gas storage, for example, Germany has a natural gas storage, it’s something like 84% of reserves and their target is 95% and they’ll fill that 95% by probably November. So there will be supplies of gas in Europe. It will be expensive.
TN
So as your guest said, people will have to choose between food and heating. I don’t necessarily think that’s the case. If you look at the German government, they have the capacity to issue a massive amount of debt to pay their people to survive through the winter. So not every government in Europe has that luxury, but Germany certainly does and a lot of northern European governments too.
BBC
Well, we did see, didn’t we, earlier this week, the Chancellor of Germany outlining plans to help people will have Liz Truss do that as well. Texas, California, two rivals. I think a lot of our listeners across the world will be surprised to hear about blackouts in a state like California, one of the wealthiest in the US.
TN
Well, yes, in California needs a lot of investment in its power grid. That’s really something that’s long overdue and they haven’t necessarily put the investment in. It’s got a creaking power grid and so this is why power is so inefficiently distributed in California. And until they do that they’re going to continue to have these brownouts and blackouts and power distribution problems.
BBC
And do you think that’s one of the reasons why we’ve seen a movement of quite a lot of businesses, haven’t we? It’s not just about taxation from California to your part of the world.
TN
Yes, absolutely. It’s about regulation, it’s about the continuity of power and it’s about education. And the students that come out of Texas institutions are very good, very hard working students. So there are a lot of factors related to it. And land, there’s a lot of land in Texas that can be built on for things like Tesla and other places.
BBC
Stella well, that’s very similar to the situation in Bangalore, a city that you know well. As you Tony know very well, yes.
TN
Gosh, I spent a lot of time in Bangalore about 20 years ago, before the new airport, before the second ring road, all of that stuff. So it was the same town, but it was a little bit different, not quite the scale that it has today, but the disasters there, it’s heartbreaking.
TN
I moved to Texas in 2017 when we had a Hurricane Harvey, and one of the things your guest was talking about is how people would help each other out in Bangalore with the floods. And that’s exactly what we saw here where we went and helped ten or 20 people take all of their belongings out of their house and started new life. It’s heartbreaking.
BBC
It is indeed. And it has been a sad end to the program, talking about the city I know very well in Bangalore. Hopefully, I’ll get on its feet. Thanks to Tony. Thanks to Stella. We’ll be back same time, same place tomorrow.
This week we’ve seen a lot around dollar hitting almost 110. We’ve seen a lot in the US market downturn. There’s a lot of speculation around the Fed. But we’re really focusing on Europe this week.
Key themes:
1. European Natgas Stock vs Flow
2. Russian Oil Price Cap Fallout
3. Europe’s Food and Fertilizer Fallout
4. What’s ahead for next week?
This is the 32nd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Tony Nash: Hi, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Sam Rines, Tracy Shuchart and Albert Marko. We’re going through the events this week and looking toward next week.
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So this week we’ve seen a lot around dollar hitting almost 110. We’ve seen a lot in US market downturn. There’s, a lot of speculation around the Fed. But we’re really focusing on Europe this week.
The key themes this week are really around European natgas stock versus flows. Russian oil price caps and the fallout that has come with that. Food and fertilizer in Europe. And then we’ll look to the week ahead. So I think we’ll look at some non Europe activities for the week ahead.
First for European natgas, Sam Rines in his newsletter came out with some really interesting points around natural gas stocks and flows. You can see the chart on the screen. Sam, can you talk us through kind of what’s happening in storage for natural in Europe and what we should be looking for as winter approaches?
Sam Rines: Yeah, sure. So you get this really interesting dynamic where everybody talks about the stock but very few people talk about the flow. So talking about the stocks of that gas in Europe is a really interesting one. Yeah, you’ve got stocks building up pretty quickly, particularly in Germany, sitting north of 82% overall for European stocks in general, north of 80%.
So it’s good, right? Stocks seem to be well ahead of where you would anticipate. Germany has a 95 target for November. They might actually reach it even with the shutdown of Ms one, Nordstream One. It’s actually not that big of a deal incrementally to Germany in particular. You go from about call it a 3.2 kilowatt hour type pump into Germany to about a three.
You didn’t really lose that much. I mean, it was pretty much anticipated anyway. So if they keep it off
for longer, whatever. You don’t have significant usage coming through at the moment for natural gas.
It’s a time where you can actually afford to not have those significant closing. They’ll probably still have some stock bill that will just be slower.
So overall, I think it’s a lot of headlines that a lot of it’s already priced in. If you were looking at the expectations of complete and utter frozen winter, you’re pretty much not looking at that assuming that Norway and Belgium continue to put their flows through to Germany at the current rate.
So overall, you’re actually sitting on a decent call it stock level. Right? That’s fine. And as long as you continue to have the flows from call it Northern Europe, you should be okay for the winter. You’re not going to be great. It’s going to be expensive, and it’s going to suck. But relative to the expectation of Europe’s going to freeze this winter,
I think that might actually be a little bit of an overblown one, and you might begin to have a significant blowback on that. And you’ve seen significant declines in things like electricity pricing ahead, which is a ridiculous contract anyway. And Dutch TTF, the net gas contract you’ve seen collapse this week, even with the shutdown of Nordstream.
So I think a little bit of the froth, a little bit of that angst is beginning to come out of the market, and you might actually have a positive surprise relative to expectations in Europe.
TN: So Dutch TTF peaked on Tuesday or something, right? It was early in the week, right?
SR: Correct.
TN: And Tracy, what are you seeing with that? Do you expect us to hit back up to those peaks, and do you think that was kind of a one time hit? And what Sam saying about storage is really kind of starting to take hold.
Tracy Shuchart: I think it really depends over the long run and how slow go. I totally agree with Sam here. Right now, for winter, Europe is pretty much okay, not great, as he said, but I think given if we don’t see increased flows, that storage would drain significantly by February. So we really have to keep an eye on flows from other countries, particularly in the United States, in the Middle East, and to see how those flows go. So I think it’s too early to be completely doom and gloom, but that is something we need to be cognizant of, because that storage can only last until February.
TN: Right. And for those people who aren’t in Northern Europe, northern European winter really stays cold, really until like, April, right. It’s not something that February comes and goes and it’s spring and everything’s great. You still have cold temperatures in Northern Europe until probably April or so. Is that about right?
TS: Yeah, absolutely. Anecdotally, if you’re been on Twitter, you see a lot of people starting to buy wood. The big thing on the European sites is to post how much wood you collected before this winter. So people are sourcing. People are expecting energy prices to be high and doing whatever they can personally, to kind of lower the prices. Because you have to understand, when you’re talking about European power prices, it’s not just your solid power price. They have that almost all of their taxes on top is on top of what they actually would be paying, which is outrageous carbon, et cetera.
TN: And so I just want to go back to one point in Sam’s chart as well. I think sam, you said the storage is about 82% full or something and they’re targeting 95%, but we’re ahead in 2022 from where we were in 2021, is that right?
SR: Yeah, that is correct.
TN: Okay, so the doom and gloom that we’re hearing again, we have inflation, we definitely have shortages, but in terms of storage, we’re ahead of where we were. And we don’t expect like a mass extinction event in northern Europe because of heating or whatever, right?
SR: Correct. I think that is a good base case. That’s good for everything. No mass extinction is low bar, but yes, that’s right.
TN: Exactly. Okay, very good. Do you have anything to add on this?
Albert Marko: I’m on middle of the road here. I do agree with Sam that they’ll be okay so long as they’re okay with no manufacturing, no growth in their economy, and so on and so forth. I mean, if they tried to kick things up and the demand starts to rise, I don’t think it will be okay. I don’t think that the Russians are going to play ball, especially when they start talking about these price caps on Russian oil and gas. It’s one of those things where economically, I can understand where Sam is coming from.
Politically, I’m inclined to say that Europeans are going to screw up and just agitate the Russians. And then you start getting into this back and forth. That economic trade and price.
TN: Let’s set the price cap aside for a minute. But when you say no manufacturing, so we’ve seen some manufacturing dial back and some facilities slow down and shutter. Is that expected to continue or do we expect that to ramp back up?
AM: I expect it to completely be just stalled for the entire winter. I just think the energy prices are so astronomically high that it’s just not economical for companies to manufacture anything.
TN: Okay, so if you’re sourcing things in Germany, then you should expect supply chain issues for the next five or so months. Is that fair to say?
AM: At least six months. And this is why I keep saying that this inflation doom loop keeps recurring because as the demand rises, there’s not enough supply and then you get back into an inflationary event. What’s the inflation rate in the UK right now? Like 20% reported. 20%? And in Germany, I think it’s like 19% and rising. It doesn’t stop.
TN: And PPI is in the 30s or something. Just to play this out, I wouldn’t have a whole lot of time to cover this, but if private sector is shutting down, even parts of it, then government spending has to kick up. And if government spending is kicking up and we have an ECB that’s tightening, that’s a difficult environment for the German Finance Ministry, right? Or is it no big deal then?
SR: No, I would completely disagree. I mean, Germany is one of the few countries in the world that has they could basically print their GDP and they’d still be perfectly fine on an ability to pay basis. They spent, like, three years getting paid to have debt.
TN: So very good, because, look, nobody wants Germany to suffer, right? And if government spending
has to kick up, then great. If they’re not going to suffer as a government to be able to do that, then that’s even more fantastic, because with ECB tightening, it could create some difficult trade offs for some countries in the region, of course.
So let’s take this and park it and let’s move on to fertilizer, because, of course, that’s related to natural gas.
And we have some there’s a recent Bloomberg story about Europe’s deepening fertilizer crunch. 70% of fertilizer production is halted. And then we have a chart showing the price of nitrogen fertilizer in Germany. Obviously, it looks pretty extreme. Can we cover that, Albert, and look at the impacts of fertilizer and how that’s going to hit food going into spring or summer of next year?
AM: Oh, yeah, the fertilizer, specifically what you’re talking about, nitrogen based ones, are relying on natural gas. Natural gas prices just keep on spiking over there. And again, we can continue this whole discussion about inflationary, commodity prices, but food is a big problem. They shut down their potash.
On top of that, the farmers, they’re notorious penny pinchers, whether it’s the United States, whether it’s Europe, so on and so forth. But they’re going to have to make up the nutrients for the soil in the spring of 2023 and most likely into 2024, they can’t deprive the land of nutrients.
So, of course, they’re going to have to have another round of demand for fertilizer. I don’t know about the night gas based ones, but potash certainly will have a surge.
That’s why I’ve always on Twitter have been big on Mosaic being the 800 pound gorilla outside of Morocco’s. OCP, but OPC, I think it is. But that’s not a tradable stock mosaic fertilizer. I’m very bullish on that. That’s going to relate to bigger increases in food prices, specifically in the UK.
TN: What crops in Europe would be most impacted by this?
AM: Wheat. Most likely wheat.
TN: Yeah. Okay. And where does Germany traditionally, where does it source most of its fertilizer? Is it from Russia?
AM: I believe they get most of their stuff from Belarus originally. And I know that they have potash fertilizer plants inside of Germany itself, but I’m not sure how. I don’t know the exact numbers on the importance of what they do for a fertilizer, but it’s certainly a problem specifically for Germany. Of course it’s a problem for France. It’s even bigger problem because they’re a big food producer.
TN: Okay, Tracy, you’ve said a lot about fertilizer in the past. What are your thoughts on this? Does it just get even more intense or do we see some relief on the horizon?
TS: Well, I think it does get a little bit more intensive when we just saw And, Norway’s largest fertilizer company, all kind of curve back production in various countries wherever their plants are concerned. So it’s definitely a concern. 100% agree with Albert. Going into next year is going to be a very big problem. I mean, everybody’s harvesting right now. Everything’s fine. We’ve seen big pullback in those prices. But going forward, in particular next year, we’re going to have a problem.
AM: And a lot of that, Tracy, has to do with the national governments are going to look out for their national interests, their own farmers, so that although the imports will drop, so the exports will drop and they’ll just keep it closed within their own nation, so they can feed their own people.
TN: Fertilizer nationalism.
AM: Well, it’s just the same thing with oil. I mean, the countries are not export more than they can handle.
Yeah.
TN: Okay, so sounds pretty dire, but do we see any relief next year? Or, like you said, is it going to go into 24, or does it all depend on Russia?
AM: I think it depends on Russia whether the Europeans and the United States come to their senses and stop trying to put their foot on the throat of the Russians. You’re hampering your own economic growth, and they’re sitting there talking about, oh, we’re going to get away from fossil fuels and do this whole new climate thing. That’s just not realistic. And I don’t think they just haven’t come to grips with that yet.
TN: I think it’s a time frame thing. Right? I mean, it’s going to take some time, and I think there’s a hybrid mix in the interim that I think we’re trying to rush.
AM: Well, that’s the point. They’re trying to rush things. When you rush things, your own people are going to suffer economically and so on and so forth. It’s just not politically. They just can’t swallow it. Some of the voters don’t swallow that. Sort of stuff.
TN: And things break. Like Californians can’t charge their electric cars. Right. These are weird times.
Okay, great. Thanks, guys.
And then on the oil price cap, we had about this week, former Russian President Good about this week, saying that Russia just won’t deal with people who subscribe to the price cap.
And then we had Xavier Blossom, Bloomberg tweet about it, saying that he and his friends are going to agree to a price cap on beer at their local pub and that the guys at the pub don’t agree with it, which is a nice analogy, I guess.
Tracy, what are you seeing on the price cap? Is it actually going to come about?
TS: First, they just announced that they’ve been talking about this for months. Let me give a little bit of background. And they just now say there’s going to be three different kind of price caps, one for crude and two for refined products.
However, if you look at the actual G7 statement that was out today, they were pretty vague on it. Basically, they said, we invite all countries to provide input on the price cap design and to implement this important measure. So in other words, they’ve decided they’re going to do this, but not exactly holiday.
TN: It’s going to be 2030 before they come to an agreement on.
TS: it’s because. They’Re asking all their stakeholders to join in this. And so what I see as the problems with this right now is that there are four specific problems. One, it’s not really enforceable outside of G Seven countries if people don’t sign up for this. Two, Russia already said, again repeating you, that they won’t sell to countries that enact price caps. Three, part of this is the maritime insurance on vessels carrying Russian oil India is already providing safety and notification through IRGC class.
So by Dubai, subsidiary of the Russian shipping group. So I hope I pronounced that right. But anyway, they’ve already kind of gotten their way around this. And four, they’re also thinking about creating their own benchmark.
So right now, Russian crude oil is expressed as a discount to Brent because rent is the benchmark price. They already have an oil trading platform in place via RTS and MYsix. So they could build out this platform, which they’ve been talking about, and go through near Mir, which is basically their version of Swift, and completely by past that and just let market forces work.
I think this price cap is still way off from seeing the light of day. But this actually could turn out much more bullish because this price cap overlooks how Russia could influence global markets.
If they wanted to, they could opt to cut off the EU and NATO, not just G7. G Seven members shut production and raise global crude oil prices through the roof because they would take barrels off the market there by hurting the G7 nation.
I’m not saying that would happen. I’m just saying that’s within the realm of two box. And it’s not surprising after we just saw today, as soon as an oil price cap was announced as a plan, suddenly we just saw gas problem with Nordstream one, therefore I’m off of national gas.
TN: So what’s to stop, let’s say, a European country that signs onto a price cap from buying, let’s say, Russian crude that is sent to Chinese, say ownership and then resold to say, I don’t know, Germany. I mean, that type of circumvention is already happening, right?
TS: No, you can definitely do that. What we’re really seeing now is that kind of circumvention is happening in the product market. So it’s very easy for, say, India to buy Russian crude oil, refine it until it’s anywhere else because it’s very hard to track where those barrels really came from. It’s easier to track a resale. Right, if that makes sense.
TN: Sure it does. But they put in a barrel of, say, Emirati crude with a million barrels of Russian crude and then they label it Emirati crude. Right? Something like that.
TS: Yeah. If they both have the same API level, depends. You could mix them. If they both were the same exact API level, then you could mix them. It’s kind of different than, say, the natural gas market. Yeah.
AM: The Iranians do this with the Iraqi oil and bozzar. Often they mix it and label it As Iraqi
TS: because they share oil fields. I mean, Albert and I have been talking about this for years now.
AM: Years.
TN: Let’s be honest, the rules apply to the people who abide by the rules. Right. And so even if these price caps are put in place, there will be circumvention in a big way, of course, at least a refined product, if not crude product. And so a lot of it’s for sure. Is that fair to say?
AM: Of course, yeah. A lot of it is for show. This is a political thing right now for scapegoating Russia
for inflation problems. Now they’re just snowballing things and saying Russia’s gas is the problem
for inflation, Russia’s oil is the inflation problem, and other caps. But like I said earlier, and even just Tracy reaffirmed it’s like the moment you mentioned price caps against Russia, Moscow finds an issue, whether it’s gas, prom leak or Belarus problems, or Algeria has problems with Wagner. They create these issues all the time.
TN: Of course, anytime there are sanctions on a country, right. These things happen. Okay, very good. Thank you, guys. We spent a lot of time talking about Europe. So let’s move on to the week ahead and
what we expect to happen the week ahead.
We saw some really interesting action in markets, and last week we talked about how Palo speech, we really should have been a surprise to no one, but markets seem to kind of take it on the chin this week, acting shocked that he repeated himself again. So what do we expect going into next week? Do we expect things to kind of moderate a little bit or do we at least in equity markets, do we still expect some downward movement and also, say energy markets? We saw crude down, I think at 86 or something.
Tracy, do you expect, say, energy markets to continue to fall next week?
TS: What I would really look at, and what I’m looking at more, instead of looking at just reprice, which seems highly manipulated right now, especially going into midterms, not suggesting anything, but I think what I would start looking at is in like second and third month spreads or fourth month spreads. Right. So you really want to be looking, I think, just a couple of months down that curve a little bit. And if you start seeing because those curves are still kind of telling us that the market is very tight and curves, you can’t really manipulate as much as you can somewhat of the front line. So I think that’s where you should be looking at. I think we’ll really get a better grasp on these markets and to see what front market is next week is OPEC meeting, right. So they were talking about cuts, right, over the last couple of weeks. That’s right. That’s all. I will be on that. That’s on the fifth.
TN: And SPR keeps going until October. So we’re only looking at November,December before we’ll see some upward pressure on prices. At least a stand up pressure.
TS: Yeah, exactly. And depending on what OPEC says, we could see an initial pull back. The general consensus is they’re not going to do anything in September. However, OPEC has been known
to give us some surprises. So just keep that in mind.
TN: That’s good all right. Very good. Sam, what are you looking for for next week?
SR: Next week I’m looking at the ECB. I want to hear how hawkish they are and how quick they’re going to go and what type of language they’re using. They’re still in the QE boat, right? They’re still buying Italy, they’re still buying Spain, they’re still buying a bunch of the southern debt periphery type debt.
So I want to hear what they’re saying, how they’re saying it, and just how call it, quote, unquote, inflation-oriented. They are. They probably should be particularly versus the bank of England, who is very hawkish and likely to continue to, one, explore actually outright sales from their asset purchases to shrink their balance sheet and how quickly the relative moves are there.
I think that can create some fireworks, particularly called the Euro pound type crossed I think that could be really interesting and cross asset class could be.
TN: Do you think you should be able to surprise hawkish?
SR: Yes.
TN: You do? Okay, interesting. That would be very interesting to see. Wow. Okay. And so you think the Euro recovers a little bit on that?
SR: I think it knee jerks, yes. But the question is how long does that last? Right. That, I think, is a much more important question than the initial knee jerk. And I think over time, it would be a fade the news move.
TN: Okay, very interesting. Okay, very good. Thanks for that, Albert, close this out. What do you see for next week?
AM: The big boys come back to play from vacation. That’s right, they do. I think they’re going to start holding the market a little bit more accountable for all this bad data. And I think earnings were just atrocious when you look at what inflation was. I’m actually going to be watching though
China as we get closer to the CCP, the Party meeting, I think it’s October 16, I think XI might start announcing many stimulus packages in certain sectors. So I want to see if those materialize and what that does with commodities that are attached to them.
TN: Okay. I just want to say, with regard to the Party meeting in November, if anybody talks about reading tea leaves or any of that garbage, you’re banned immediately. Okay.
So we’re not going to imply, like, cultural mysteriousness on Chinese political processes. It’s just they’re a bureaucracy like everyone else. They make decisions like everyone else. They’re no more or less mysterious than anyone else. So I would say that for the people watching, because the people watching are going to see a lot of kind of China experts or whatever China watchers talked about how mysterious the CCP is and a lot of question marks. A lot of them are Fed talking points from the CCP spin machine. So they’re not mysterious, they’re a bureaucracy. They’re boring, just like every other country.
AM: Yeah. And the Party is I believe that Congress is October 16, not November. Yeah. So it’s closer than people realize. It’s only 30 days away, but China is going to have to probably stimulate some sectors associated with whoever is in line with the party leadership to keep them happy. So that’s what I’ll be watching next week.
TN: Yes. Very good, guys. Thank you so much. Looking forward to have a great holiday weekend, and I look forward to seeing you next week. Thank you very much.
