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Crude Oil Supply: The Week Ahead – 29 Aug 2022

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

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

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

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

Key themes

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

2. Jackson Hole Drama

3. China Stimulus (Finally?)

4. What’s ahead for next week?

This is the 31st episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd

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

Sam: https://twitter.com/samuelrines

Josh: https://twitter.com/Josh_Young_1

Listen on Spotify:

Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: That makes sense.

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

but in general the pace is kind of meh.

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

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

SR: None.

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

is going to just relax for a few months.

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

SR: That should sail.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

AM: Yeah, before December. 

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

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

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

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

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

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

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

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

TN: Okay, Sam? 

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

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

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

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

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

Categories
Week Ahead

The Week Ahead – 15 Aug 2022: Europe drought: Cost, energy & industry impact

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

In this episode, we talked about the European drought — and looked at the cost, energy impacts, and industry impacts. We also talked about coal and discussed more broadly energy. But more specifically coal, and what will be some of the issues around it. How will the coal issues impact refineries and other downstream activities? Finally, we looked at inflation. It’s been covered to death last week — CPI PPI — but we also put a few words in on it.

Key themes
1. Europe drought: Cost, energy & industry impact
2. Coal & energy
3. Inflation
4. What’s ahead for next week?

—————————————————————-

This is the 30th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd
Albert: https://twitter.com/amlivemon/
Tracy: https://twitter.com/chigrl

Listen to this episode on Spotify:

Time Stamps

0:00 Start
0:49 Key themes for this Week Ahead
2:16 Europe drought: containers on the Rhine
4:22 How hot is Europe compared to other places?
5:25 How is France doing?
6:02 Europe’s embargo of Russian coal – will it make things worse?
7:48 The beneficiaries of Europe’s Russian coal embargo
9:32 Where’s most of the coal coming from?
10:00 Rhine River and how it affects coal and crude transport
13:00 Is there a silver lining in what’s happening in Europe?
14:16 How will the happenings in Europe impact politics in the region?
15:36 How you should be playing European equities?
16:40 Have we hit the peak inflation?
20:22 Will there be a Feb pivot?
21:17 What’s for the week ahead? Listen to the podcast version on

Transcript

Hi everyone. Thanks for joining us for The Week Ahead. I’m Tony Nash with Complete Intelligence. We’re joined by Albert Marko and Tracy Shuchart as usual. And Sam is out this week and he’s fishing, so I hope he sends us some when he’s back. Some good fish pictures, though. Great pictures from Maine or Vermont or wherever he is. So it’s just beautiful up there.

So this week we’ve got a couple of things on top. First, we’re talking about the European drought. We’re looking at the cost, we’re looking at the energy impacts, industry impacts. Then we’re looking at coal more broadly, energy, but specifically coal, and what will some of the coal issues, how will that impact refinery and other downstream activities?

Finally, we’re looking at inflation. It’s been covered to death this week, CPI PPI, but we’re going to kind of put a few words in on it and then we’ll look at the week ahead.

So before we get started, please like this video, please subscribe to this video. Please give us your comments. We always do come in. We always do respond to comments, even if they’re negative.

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All right, so thanks very much for that. Guys, let’s dive into this for Europe. I want to look at there have been a couple of things out, stories out today about containers on the Rhine not being able to get. There’s a tweet from Bloomberg Energy that we’re showing where container companies can’t get containers up the Rhine and obviously the heat and the drought and there are a number of issues for Europe and Germany specifically.

So Albert, can you kind of go into that? And we’re going to switch to the water levels on the Rhine as well so you can see the red line is well below year to date for water levels on the Rhine.

So Albert, can you kind of help us understand what’s going on there and what the impacts are going to be?

AM: Yeah, I’ll circle back to Germany, but there are other countries that are having similar problems at the moment. You have the Italian. Italy’s pool river completely dried up. Unbelievable. The UK suffering the same effects. Heat waves are hitting France. And this is really bad timing, especially when it comes to inflation, because the commodities and energy prices are skyrocketing.

Now, they have problems for the irrigation of the crops. They have transportation down certain riverways. So the costs are just set to inflate even further from this point on.

Germany, being pretty much the economic engine of Europe right now, is just absolutely taking it on the chin month after month. And this is certainly something that they don’t really need to be happening at the moment.

The Rhine River, like you’re saying, has big effects for multiple industries, specifically energy. They just can’t get things up and down the river at the moment. And the stuff that they can get down the river, the shipping costs have gone. I don’t even know what the rate is the last time I saw this, two or three times the normal rate.

So at this point, it’s like the Europeans, they need a winter where they have a lot of snow or a lot of rain. Otherwise, they’re facing a financial crisis coming.

TN: So let me ask you this. This is going to sound pretty ignorant, but I live in Texas. It’s really hot. Florida, it’s kind of warm, a little bit beautiful. Great place to move if you’re from California. But it’s easy for us to say, “gosh, we deal with heat all the time, it’s not a big deal.” But Europe is a lot hotter than it usually is, right? So how much hotter? Celsius or? 

AM: I wouldn’t say that. Maybe the timing of the heat waves is really bad with the droughts. That’s the problem. Because it’s not exponentially hotter than it was previous summers, but it’s just the timing of it is really bad and there’s been no rainfall. Europe has always had a problem with fresh water supply, and that’s why the United States has been blessed that we have ample fresh water.

Forget about the lake meat stuff that you hear right now. I’m talking about in the farm, the Midwest, where all the farms and all the industry is ample fresh water. And Europe doesn’t have that and they are suffering for it right now.

TN: Now, the key crop… So we’ve talked about energy before and you’ve said France, they’ve kind of got their act together and they don’t have to worry like Germany or in Italy does. How is France doing compared to the other places? I’m sure they’re suffering, but are they a little bit better put together? 

AM: They are a little bit better put together. They have ample food supply that sustains their nation. I think they sold 40% of the wheat crop to China, which I think is probably going to hurt them later on in the year as the job persists. But for France right now, they’re actually sitting far better than Germany is. 

TN: Okay, great. So let’s dig down a little bit more on energy. Tracy, you mentioned before we got on that Europe just embargoed Russian coal, right? With all of the issues and the industry issues in Germany, how much worse does that embargo make things? Before we get into coal prices and all that stuff. How much worse does that make things, the embargo on Russian coal?

TS: Well, it’s just another example of self harm, right. Because we’re already seeing… Russia is already prepared for this. We’ve already seen them sell oil to China, and India makes up for those barrels that are not making it to the west. Right.

And so they’ve already been doing that with coal. Russia has actually become India’s third largest supplier within the last couple of months. And to avoid Western sanctions, they’re also paying in yuan and the Hong Kong dollar. And that’s not to say that the US dollar, they’re trading dollars for those currencies to avoid Western sanctions. So it’s not that they’re not using dollars anymore, but it is that they figured out a clever way to get around sanctions. 

TN: Just circumconvention, right? 

TS: Right. I think that just like oil, where everybody expected three to 4 million barrels to be taken off the market immediately, we never saw this come to fruition because it was such heavily discounted. Those barrels found our way to market anyway, and so is Russian coal, to be honest. So really this hurts Germany more than anything.

That said, the flip side of that is that the beneficiaries of that policy are going to be Australia, United States, Colombia and South Africa.

TN: Okay. So if we look at Australia, just to kind of focus in on there, China barred Australian coal about two years ago, a year and a half ago, something like that? So is there ample supply in Australia to support Europe? And is that new? Have they already been redirecting things to Europe?

TS: I mean, they’ve already been redirecting things everywhere else because demand has suddenly gone up. Right. And not globally. So what we’re seeing, if we look at the benchmark Australian price, which is Newcastle Coal, their prices are about 400 AUD, which is about $284. 

If we look at what current spot prices are going for in the United States, particularly on the East Coast where shipping is a lot less, we can see that those are significantly lower. So that does bode well for coal companies on the East Coast with access to ports, closer access to ports, rather than coming, say, from the Midwest or the West Coast.

TN: So we’ve got the weekly coal price commodity spot prices for us up right now. So the highest there is 186 for Illinois Basin coal. Right. So where is most of that coal coming from? Is it Appalachia? Is it Joe Manchin territory?

TS: You’re going to want to look at Appalachia. Okay. They’re closest to the East Coast, which means your shipping costs significantly go down because you don’t have to ship it across the country first. Clean coal. Yes.

TN: So that does bode well for the United States, just because it’s significantly lower. But I kind of wanted to go back and in the same vein, if we go back to the Rhine River. The fact is that because water levels are so low, they’re about 1.5 meters deep right now. That will sit around 1.2 meters deep. It sits in about 30cm leave room. At the lowest levels right now, where there’s nobody traveling, obviously, they’re about 42cm. Actually, the lowest was in the lowest in the last century was in 2018, where they were about 25cm.

But what’s happening is because, what’s happening with the energy industry in general, because we’re talking there’s a lot of oil products sent down that river as well as coal, is that what these vessels are having to do is they’re having the third with what they’re normally carrying.

TN: So. If you had a vessel that went down and you’re paying X amount of dollars, now you have three vessels going down because you have to split that into a third because those water levels are so low. There’s more demand, there’s higher shipping costs, lower capacity. So those shipping costs are times, what, five or something per unit per ton.

TS: Or are absolutely ridiculous. And then when we talk about like low river levels, they typically impact regional, downstream, refined products. Right. Rather than upstream. So this is going to have a major impact, particularly in Switzerland and Germany again. So this is going to increase the cost of their refined product, particularly diesel, which there’s already a diesel shortage. So I expect that situation to get ten times worse as well as coal and other commodities that are sent out the river.

TN: Okay, so just to shift a little bit downstream. So if you talk about refined products and then we go a step further to say, plastics and that sort of thing. And we look at say, the electronics industry in Germany. We look at automotive industry in Germany. So do we expect a major impact on those industries as well? And at what pace will that happen? Will that be three months? Will that be nine months?

TS: Oh, absolutely. I think that’s going to have a major impact, especially because we’re already looking at those industries, looking to a lot of the manufacturing industry in particular are looking to go from gas to oil switching or gas to diesel switching. 

So if diesel becomes a problem, right. And oil becomes a problem coming down the river, that’s going to make that situation entirely worse. So we’re looking at this situation, I would say three to six months, much sooner than later for certain, especially as we head into the winter.

TN: Oh yeah. So it sounds to me we know that Europe has inflation problems. Right. We know that Europe has energy problems with the river issues and the drought issues. They now have crop problems and they have supply chain problems and they have, say, secondary impacts of, say,  refining secondary, tertiary impacts of refining issues. Right?

So I’m not asking this to be funny, like is there good news out of Europe? Or is there a bright spot in Europe right now? 

AM: No, there really isn’t. There really isn’t. Everything coming out of Europe right now is negative. The ECB came out today and said they’re not going to raise any more rates until next year and they’re looking at a secondary inflation event, causing bigger problems for the European Union and the UK. I don’t want to leave the UK out of it because they got drought issues and transportation inflation issues to deal with all, but there’s no silver lining for the next six to twelve months, in my opinion.

I think the euro is actually going to go down to 95 subparity for quite a while. 

TN: This year? 

AM: At the end of the year and into next year. Okay, so let me ask a couple of questions about markets and politics in Europe. First of all, how will this environment impact European politics in the near term? I expect the German coalition to break apart probably sooner than later. These inflationary effects are going to cause big problems. I mean, just the energy costs alone in Germany, God help them if they see frozen Germans dying, elderly people dying over the winter. It’s just a political nuclear bomb over there.

TN: Okay. Italy, places like that, obviously? 

AM: Italy is a disaster. Italy has always been a disaster. It’s just like their government’s rise and fall with the wind.

TN: UK, same? Do you think we’ll have a very short term government form and then it will fall away next year or something like that?

AM: Yeah, I believe one year. One year will last about a year. The French government is a little more stable, but even then McCrone lost the majority there. But Europe right now is in turmoil. The Dutch. Same problems with the Dutch. All these coalitions that have slim majorities are just going to start breaking apart. Okay, so ECB has kind of lost its backbone. European politics is in disarray. The Euro is likely to devalue or depreciate to 95.

TN: How are you playing, in a broad sense, equities in Europe? Do you think it’s a real danger zone for the next six months? Or again, are there broad equities? 

AM: When, there’s blood in the water you want to start buying. I would look at what’s systemically important to the European Union, like Deutsche Bank, French Bank Societe Generale, BASF.

These systemically important components to the economy have to be shored up so they’ll get bailouts

of support or whatnot and stimulus packages. That’s where. I’d be buying probably in January, February. 

TS: I think we’re already seeing a ton of bailouts, particularly in utilities right now. And so obviously those are going to help those stock prices. And so I expect we just hit the tip of the iceberg with Unifer. Right. And there’s a lot more to come. Those are the sectors that I would be watching.

TN: Wow, that’s pretty bad news. Okay. 

AM: It’s almost to the point where European equities will be cheaper than Chinese equities. That’s what we’re getting to.

TN: Okay, that’s good to know. We’ll keep an eye out for that. Okay, let’s move on to inflation. So everyone’s covered CPI and PPI this week. Please don’t turn off the show right now. We’re going to say something, but I did a survey yesterday. Very scientific, very statistically valid, Twitter survey yesterday looking at in light of CPI and PPI, where do we think Fed rates will go? And it’s pretty much a tie between 75 and 50. So I wonder, guys, we heard for days. There was zero month-on-month inflation, right? CPI inflation. And we saw negative. PPI. These are the things that you look at when there’s hyperinflation. We can’t find good news in the year on year. So let’s look at incremental data. So do you think we’ve hit peak inflation in the US?

AM: No. Secondary effect of inflation coming, mainly because the Fed started to rally this market for political optics. Commodities are rising. I mean, they’ve tried so hard to keep oil and wheat down, and it just simply will not break certain levels. It just won’t go down. Stay in 80s for the oil. It won’t break 750, 770 in wheat. And they just can’t do it. They have to go after these things, but they can’t during the election season.

TN: Okay, so you bring a good point with crude oil. There has been a lot of attention and work to keep crude oil prices and gasoline prices down. Tracy, how long can that happen? Because really, a lot of the zero or negative is in energy, right?

TS: Exactly. And I think what we’re seeing a lot here especially if you look at the front line, is I think we have a lot of things going on right now with the fact that as much Russian crude oil wasn’t taken off the market that people initially thought. There were recession fears. The SPR garage are really starting to weigh on that front month. So there’s a lot of things going on here that are kind of weighing on that front month. Plus open interest is nothing. And we also have China is still on their zero COVID policy and hasn’t opened up yet. So there’s a lot of things weighing on that the market right now. That said is that as soon as the SPR stops, which is end of October, coincidentally near in the Midterms.

Once that stopped and I still think Xi is going to have to open up China somewhat near the People’s Party Congress. And so I think that looking into the end of 2022 and into 2023, we definitely could see those higher oil prices again regardless of what the Fed does.

TN: Okay. Now, compound that real quick, compound those oil prices rising with the cost of rent going up astronomically and I don’t know what magic they’re going to be able to pull to keep CPI under 10%. What month? Like October, November, December?

AM: October, November. December. Okay. Smack in the middle of the Midterms. And they got to be seeing this. They have to be seeing it. If they’re not seeing it right now, it’s purely because the White House is interfering and wants politically driven news for the markets right now. 

TN: Okay, so do you think like a slight pivot to 50 basis points in September is possible or likely and then that eases up,  helps markets out, goose’s markets going into the Midterms and then we start to see this inflation rush come on and say late October, November?

AM: Well, first of all, we have to see what Powell says at Jackson Hole. Whether he’s dovish or hawkish. This rally makes me think that he’s going to have to be hawkish. Right. And then we’re still looking at probably a 50 basis point rate hike in September and after that I don’t want to even project what happens after that because it really depends on what CPI is going to be printing.

TS: Agree with that. 

TN: Okay, perfect guys. So you’re talking about markets rallying. Let’s talk about the week ahead. Equities have done pretty good this week, right? And commodities have done pretty well this week as well. So what are we looking for next week? You say volume is thin. Okay. So do we have another thin

volume week next week? Markets get goose, people feel good and then they come back the following week and we see some drama? What are you expecting?

AM: Yeah, I think that they could take this up closer to 4320 in the S&P. I think that’s the 200-day moving average, if I’m not mistaken. So they could take it up to there. But I’ll tell you what, looking at some of the order books on the S&P on the Futures, there is a boatload of sellers from 4260 to 4300. That boatload of them. 

TS: Yeah. It’s summer, right? Theres… Next week is the same as this week. You’re not going to see much until we hit September and fund managers and everybody’s back from their holidays. So I think we’ll see much of the same. The thing is that retail keeps trying to short this, which is kind of just a fuel to push this market higher because of liquidity issues. I think next week will be kind of the same. I’m not looking for outside of any disastrous thing happening, which hope not. But I think we’re going to stay in this well probably throughout the rest of August.

TN: And one of the things that I want to start thinking about, this isn’t the week ahead, but this is kind of the months ahead. I wonder if what happens if Russia Ukraine gets settled in October, November? That changes calculations pretty dramatically. So I’m starting to work on that hypothesis as well.

AM: Yeah, it depends on what a settlement is and whether Western sanctions still continue to bite the Russians, which are obviously going to retaliate economically. So a lot of the definitions need to be dealt with there.

Categories
News Articles

How AI-based ”nowcasts“ try to parse economic uncertainty

This post was published originally at https://www.emergingtechbrew.com/stories/2022/06/17/how-ai-based-nowcasts-try-to-parse-economic-uncertainty?mid=13749b266cb1046ac6120382996750aa

This month, the S&P 500 officially hit bear-market territory—meaning a fall of 20+ percent from recent highs—and investors everywhere are looking for some way to predict how long the pain could last.

Machine learning startups specializing in “nowcasting” attempt to do just that, by analyzing up-to-the-minute data on everything from shipping costs to the prices of different cuts of beef. In times of economic volatility, investors and executives have often turned to market forecasts, and ML models can offer a way to absorb more information than ever into these analyses.

One example: Complete Intelligence is a ML startup based outside Houston, Texas, that specializes in nowcasting for clients in finance, healthcare, natural resources, and more. We spoke with its founder and CEO, Tony Nash, to get a read on how its ML works and how the startup had to adjust its algorithms due to market uncertainty.

This interview has been edited for length and clarity.

Can you put the idea of nowcasting in your own words—how it’s different from forecasting and the nature of what you do at Complete Intelligence?

So Complete Intelligence is a globally integrated machine learning platform for market finance and planning automation. In short, we’re a machine learning platform for time series data. And nowcasting is using data up to the immediate time period to get a quick snapshot on what the near-term future holds. You can do a nowcast weekly, daily, hourly, or minutely, and the purpose is really just to understand what’s happening in markets or in a company or whatever your outlook is right now

And what sort of data do you use to fuel these predictions?

We use largely publicly available datasets. And we’re using billions of data items in our platform to understand how the world works…Macroeconomic data is probably the least reliable data that we use, so we use it for maybe a directional look, at best, at what’s happening. Currencies data is probably the most accurate data that we use, because currencies trade in such narrow bands. We use commodities data, from widely traded ones like oil and gold, to more obscure ones like molybdenum and some industrial metals. We’re also looking at individual equities and equity industries, and we track things like shipping times for goods—shipping times…are usually pretty good indicators of price rises.

Who are your clients, and how are the nowcasts used in practice?

Our clients range from investors and portfolio managers, to healthcare firms and manufacturing firms, to mining and natural resources firms. So they want to understand what the environment looks like for their, say, investment or even procurement—for example, how the current inflation environment affects the procurement of some part of their supply chain.

In fact, we’re talking to a healthcare company right now, and they want to nowcast over the weekend for some of their key materials. In an investment environment, of course, people would want to understand how, say, expectations and other variables impact the outlook for the near-term future, like, days or a week. People are also using us for continuous budgeting—so revenue, budgeting, expenses, CFOs, and heads of financial planning are using us…to understand the 12- to 18-month outlook of their business, [so they don’t have to have an annual budgeting cycle].

Tell me about how the AI works—which kinds of models you’re using, whether you’re using deep learning, etc.

There are basically three phases to our AI. During the pre-process phase, we collect data and look for anomalies, understand data gaps and how data behaves, classify data, and those sorts of things.

Then we go into a forecasting phase, where we use what’s called an ensemble approach: multiple algorithmic approaches to understand the future scenarios for whatever we’re forecasting. Some of those algorithms are longer-term and fundamentals-based, some of them are shorter-term and technical-based, and some of them are medium-term. And we’re testing every forecast item on every algorithm individually and in a common combinatorial sense. For example, we may forecast an asset like gold using three or four different forecast approaches this month, and then using two forecast approaches next month, depending on how the environment changes

And then we have a post-process that really looks at what we’ve forecasted: Does it look weird? Are there obvious errors in it—for example, negative numbers or that sort of thing? We then circle back if there are issues…We’re retesting and re-weighting the methodologies and algorithms with every forecast that we do.

We’ve had very unique market conditions over the past two years. Since AI is trained on data from the past, how have these conditions affected the technology?

You know, there’s a lag. I would say that in 2020, we lagged the market changes by about six weeks. It took that amount of time for our platform to catch up with the magnitude of change that had happened in the markets. Now, back then, we were not iterating our forecasts more than twice a month. Since then, we’ve started to reiterate our forecasting much more frequently, so that the learning aspect of machine learning can really take place. But we’ve also added daily interval forecasts, so it’s a much higher frequency of forecasting and in smaller intervals, because we can’t rely on, say, monthly intervals as a good input in an environment this volatile.

Categories
Week Ahead

The Week Ahead – 08 Aug 2022: Low energy prices, China tech & stimulus, equity upside?

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

Energy has taken a huge downside hit this week, in the wake of the OPEC+ announcement, US refining capacity utilization declining, etc. What’s happening? Why are we seeing differences between physical and paper crude markets?

Also, there was talk months ago about a new energy supercycle. Is that real? With China-Taiwan-US tensions tighter than they’ve been for years, we’re seeing Chinese tech stocks just muddle through. We haven’t seen a major hit – as if China tech will see major fallout from these tensions – but we also haven’t seen a major bump – as if China is expected to stimulate out of this to win domestic hearts and minds.

Also, could possible government intervention to solve China’s mortgage credit crunch be holding back the broad stimulus we’ve all expected for a couple of quarters?

Key themes:

1. Low energy (prices)

2. China tech & stimulus

3. Equity upside?

4. What’s ahead for next week?

This is the 29th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd

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

Tracy: https://twitter.com/chigrl

Time Stamps

0:00 Start

0:30 Key themes for this Week Ahead episode

1:51 Moves we’re seeing in energy markets – why there’s a fall?

3:39 How much of the energy moves is seasonal?

6:58 EIA computer “glitch” problem

7:24 What happened in the refining capacity now at 91%?

8:30 Capacity utilization fall – is this a statement about the denominator or falling demand?

10:14 Is the commodities supercycle happening?

12:13 China and technology – KWEB is not falling or rising

14:00 Will the Chinese government help real estate developers? Will that take away from possible tech stimulus?

16:58 Viewer question: Is there still upside benefit to SPY?

22:18 How will be the start of the Fed pivot — 25 or 50 bps rise?

24:45 What’s for the week ahead? Listen to the podcast version on

Spotify here:

Transcript

TN: Hi everyone. Welcome to The Week Ahead. I’m Tony Nash, and today we have Tracy Shuchart and Albert Marko joining us.

We’re going to walk through a number of topics today. First is energy prices, low energy prices. We want to understand why that’s happening and what’s around the corner. Next, we’re looking at China tech and potentially the stimulus in China and how that will impact tech.

Finally, we want to look at equities. What remaining upside is there in equities right now, given the environment we’re in? Before we get started, I would like to ask you to like and subscribe to the channel. Also give us your comments. We’re very active and respond to comments, so please let us know what you’re thinking. If there’s something else we should be covering, let us know.

Also, we have a promo for our subscription product, CI futures, right now for $50 a month. With CI futures, you get equity indices, commodities and currencies reforecast every week. And you get all of those, plus about 2000 economic variables for the top 50 countries reforecast every month. So please check it out on the link below. $50 a month for CI Futures.

Okay, so guys, we’ve had a really weird week with the Pelosi visit to Taiwan, geopolitics and the risk associated with geopolitics is kind of back on. We’re not really sure exactly how that’s going to resolve, but I’m really interested in the moves we’re seeing in energy, Tracy, and we’ve seen energy really fall throughout the week and I’m curious why we’re seeing that, particularly with crude, as we’ve seen geopolitics dial up. I know there’s not a perfect correlation there, but we typically see crude prices rise a bit with geopolitics. 

TS: I think, it’s a combination of a lot of things. First of all, we’ve had which is ramped up to 200 million barrels being released to the SPR, which is fine initially, but we’re looking at the cummulative effect of this. In fact, we’re releasing so much so fast that now those barrels are actually finding their way overseas because we have nothing else to do with them. We can’t process that much right now.

And so we’re looking at that which is putting a damper kind of on the front end. We’re also looking at the fact that open interest is almost at the lowest in a decade, which means there’s nobody participating in this market. People are just not participating in this market.

In addition, we have physical traders that are completely nonexistent in this market anymore. They’re all trading via clear port on the OTC market as I’ve talked to actual physical traders, they don’t even want to be involved in this volatility.

And so that’s also taken a lot of open interest out of this contract. So this contract is easily pushed around because there’s just not of liquidity.

TN: How much of that is seasonal? How much of that is because it’s early August, late July, early August?

TS: It is seasonal. I will give you that because this summer is the summer lag. We generally see more participants in getting in September, and we’ll have to see how that kind of plays out.

But in general, the market is, this whole dive started in, was this market was factoring, we’re going to have this huge recession. Right? It’s going to be low berry session. Demand is going to go up.

And then we have this EIA discrepancy. The discrepancy was on gasoline demand. Actual gasoline demand versus what the DOE is reporting. Right? And ever since they had that “glitch,” where we had two weeks of no reporting whatsoever, those numbers suddenly changed.

And now they’re putting gasoline demand at below 2020 numbers at the height of COVID, which is to me,

not to sound conspiratorial, but to me, there’s just no way that we are below 2020 numbers. Right. And if you look at Gas Buddy demand, which is they look at a kind of a different look. What they look at is how

many gallons are being sold per station across the nation. And that’s how they kind of factor in what demand is. DOE is at the midpoint, right? So it’s like the midstream level. But those numbers should

eventually correlate. That discrepancy should eventually get together.

TN: So Gas Buddy is showing demand still growing, and DOE has it kind of caving. Is that correct? You know what I’m saying?

TS: Okay, yes. First of all, I think we need to look at the 914 numbers, the monthly numbers, which are definitely lagging. They’re too much behind, but they have been correct on production. Right? So I think they have weekly production at 12.1 million. Last 914 monthly report was at 11.6 million. So it is lagging information. But we have to start really looking at these weekly numbers and what the DOE is reporting and what they’re not reporting.

TN: If anything, what I’m seeing just observationally traffic seems to continue to grow. Like, I’m seeing more people going back into the office. I’m seeing more people take drives where they wouldn’t have taken long drives before. So what we’re seeing out of DOE doesn’t really match with what I’m seeing observationally. I could have selection bias, but it just doesn’t seem to match what we saw in April, May

of 2020. 

AM: Tracy is absolutely spot on on that. I actually had a few people note that the EIA computer “glitch” problems set all this thing off in the DOE inventory shenanigans. It’s starting to gain more traction with everybody. It just doesn’t add up. When things don’t add up, bad data comes in, and it’s politically advantageous for the moment try to get gasoline down, going into midterms. I mean, Tracy is absolutely 1000% spot on that assessment.

TN: So, Tracy, I want to ask you a couple of questions. We’ve got a chart on refinery capacity utilization, and it shows capacity utilization at about 91%. So last month we were talking about being at 94%. Now it’s at 91%. What’s happened? Has the Denominator going? 

TS: Well, that’s not actually a bad thing. Let me tell you that. Refineries operating at 94% 95% leads to a lot of problems. You’re going to see problems with maintenance, you’re stretching that capacity. Personally, I love anything over 90, 91. I’m much more comfortable with than 94 95%, which we got to, which is very stressing to me because you’re stressing those refineries, right. And that’s going to lead

to problems down the road. So for that to come down, it’s not a big deal to me, to be honest. Anything above 90, great. We’re good.

TN: Okay, so we’ve seen gasoline prices fall as we’ve seen capacity utilization fall. And so is that a statement about the, say, the denominator meaning the available capacity, or is that a statement about falling demand?

TS: I don’t think it’s a statement about necessarily anything. Okay. To be honest. Is the expectations around say that the gasoline price falling, is it expectations maybe around recession, but given the job numbers we got? Expectations about being around recession right when we’re seeing these prices fall. And I think we have a lack of participants in this market, especially lack of participants in the physical markets. The physical guys, like guys that trade for BP and Shell, which is where they’re just not in this market anymore because it’s too volatile, it’s too pulled around, and they can’t deal with that right now. So there’s nothing structurally changed about the physical markets right now.

You have to understand, too, is that the paper markets far outweigh the physical markets, meaning that there’s far more paper barrels traded than there are actual available physical barrels on the market

to be traded.

And when we look at a contract like WTI, which is actually physically deliverable, and we look at the market participants that are involved in deliverability, that is shrinking, shrinking margin, and then you look at something like the Brent contract, is completely just a financial contract.

So there’s a lot of hanky panky goingon in that market.

TN: Okay, now one last question while we’re on crude. Months and months ago, we kept hearing about this emerging commodities super cycle. And as we’ve seen commodities fall over the past few months, there have been some questions about is that really happening? So where are you? Do you think we’re in the early stages of another super cycle or do you think we’re just kind of modelling through?

TS: I actually think we’re still in the early stages of a super cycle. I mean, I think we’re kind of like I think my best comparison sake would be like, let’s look at the 1970s, right? And everybody’s looking at that ’73, ’74 when the oil embargo happened. But I actually think we’re closer to the ’67, ’69 era where we saw inflation kind of hit. Right. They tried to hide us into a recession, and then we had another peak in ’73, ’74 because issues with the market and then we have a third wave. So I actually think we’re only in this first wave of an inflationary cycle as far as commodities are concerned, okay.

Because we’re still in a structural supply deficit across not just the energy sector, but base metals, agriculture, et cetera. but you have to think your input cost for metals and for agriculture, it’s all energy.

So if energy is high to see inflation in energy costs, then you’re going to see inflation across all

of these commodities. We’re at $90. We were at negative $37 two and a half years ago. So to think that we’re crashing? You know.

TN: Okay, let’s switch over to China and technology and kind of talk through a few things with Albert. Obviously. Albert, we spoke earlier about Pelosi’s visit to Taiwan and US. China Taiwan affairs, and I’d recommend anybody view that that we published on Tuesday night US time. But I’m curious, Albert, as we look at and we’ve got KWEB up on the screen, which is an ETF of Chinese technology companies, it’s kind of middling. It’s not really falling. It’s not really rising. It seems like people are a little bit uncertain about what’s happening with Chinese tech. We have the closures of different cities. We have one of the big manufacturing cities that’s going zero COVID now.

And we obviously have the China Taiwan issues. What are your thoughts on China tech right now? And what should we expect over the next, say, two to three months?

AM: Well, over the next two to three months, I think China is going to be forced to stimulate. Once they stimulate names like KWEB, Alibaba actually, I really like Alibaba. There’s some good things happening there. I mean, the delisting stuff is a risk and it’s always been a risk, mainly because Gensler and Yellen have been trying to suppress the Chinese to stop stimulus because it hurts the United States and their plans to fight inflation.

So, yeah, I’m really bullish on KWEB. I really like it at 25 26 level. It’s not that far from where we are right

now. For the Chinese tech, it’s like, I don’t really think domestically, there’s too many problems domestically for KWEB. For me, it’s just all the delisting risk and that shot, the warning shot across the bow from the US. 

TN: Okay, so when you talk about stimulus, I want to understand a little bit of the substitutionality of stimulus. So if we have this big mortgage crisis in China where owners aren’t paying their mortgages,

and that’s even worse on the property developers, and there are trillions of dollars at risk there, do you think the Chinese government will intervene  and help those property developers? And if they do, will that take away from stimulus that could help technology companies?

AM: They will step in, but they’ll step in selectively for the most systemically important property developers. Not just the best connected, but the ones that touch the most debt and whatnot. So they don’t want things getting out of control. So for sure they will step in. I don’t think it will take away from the tech

sector at all. I think that the Chinese have been pretty pragmatic and diversifying how they get money into the system, whether it be other Asian countries, the US, Europe and whatnot. But they’re definitely in line right now to stimulate the economy going into the fall.

TN: Okay, great. If you’re trying right now and you’re talking about stimulus, that is to make up for kind of the COVID Zero close downs, but it’s also, I would assume, kind of winning some of those hearts and minds going into the big political meetings in November. Right, so you’ve whipped up nationalism with the Taiwan thing over the last couple of weeks and now you need bridge to get you to November. So you’re going to put out a bunch of stimulus to keep people fairly nationalistic and obedient. Is that fair to say?

AM: Yeah, that’s definitely fair to say. I think going even a little bit further than that is keeping the circle around Xi happy. That nexus of connected families that make money off the tech sector manufacturers. They need to be able to solidify it economically and stimulus will be targeted like that. And so when you say keep those families happy. You’re talking about skimming, you’re talking about sweet deals on contracts and that sort of thing.

TN: And I just want to make clear that doesn’t only happen in China. That happens in every country, right?

AM: Oh, every country you can imagine that happens. How politically connected with the donors, the political parties and so on and so forth. I just want to make clear to viewers. Like everybody. 

TN: Yeah, I just want to clear to viewers, we’re not just picking on China. This happens everywhere. 

AM: No, this is nothing negative towards China whatsoever. This literally happens in every country in every single country. Yeah.

TN: We had a question come in from a regular viewer talking about one of Sam’s calls. He’s not here, so he can talk behind his back today. The question was, Sam had talked about risks being to the upside a while ago for SPY, for the S&P 500. Now that we have had a mini rally, does he still see higher as the path of least resistance or is the risk reward fairly balanced here? I mean, we’ve seen a really nice uptick in the S&P and equities generally. Do you think there’s still upside benefit, or would you be a little bit hesitant in terms of the broad market?

AM: I’m bullish for a week, basically going a week, maybe two. I think that the CPI number is probably going a little bit lower than people think. And then all the peak inflation people are going to come out the woodwork and then they’re going to talk about Fed pivot, whether it’s real or not. I don’t think the Fed actually pivots. I think they just build a narrative of a pivot, if that makes sense, to rally the market.

But going forward, the economy is not a good footing. The job numbers are just not accurate. It’s a purely political headline for Biden going into the midterms. CPI is going to follow the same suit. They’ll probably have a 50 basis point rate hike in September and say that they’re slowing down. And whether it’s real or not. 

TN: I want to question you just to push back a little bit. When you say the economy is not on a good footing, what do you mean? Help me understand how it’s done on a good footing? 

AM: Well, the whole jobs? Listen, 20% of people don’t have a job. 19% of people have two jobs or more. You’re sitting there making this glorified headlines thatBiden is great for the job market and the economy, but it’s just not accurate. We have people that are struggling paycheck to paycheck more than any time in the last 20 or 30 years. So the underlying economy, forget about the top half that are millionaires that are buying whatever, the bottom half of the country is an absolute recession. So that’s what I’m saying the economy is not good.

TS: I mean, I totally agree with Albert. I mean, I’ll make a case for the bullish side. Let’s put it this way. So not a single trades work this year. Average hedge fund scrambling on how to salvage this year. There’s no other choice, really, but to get long. I mean, we have long going girlfriends been shell shocked. Font, shitty year. Value guys waiting to buy the dip in cyclicals. So I think that until when November comes and we have redemptions and these guys are faced with losing money from clients, I think that right now they have no other choice than to buy the dip, which is really interesting because that coincides with midterms. But not to put on my tinfoil hat there. So that’s my case for we may see a little bit higher than people that anticipate.

Even though I agree we’re still in a bear market. Albert makes a ton of good points, totally agree with

him 100% on that. But for the next few months, we may be looking at different kinds of things, especially because we also have the CTAs that are still super short.

So we have the possibility that we could see a short squeeze now if hedgies start

eating up the market and… This is exactly what the administration wants to see, because they want to see the S&P higher going into Midterm electric if it makes them look great. Of course.

AM: And Tracy is right. And this goes back into the oil numbers from the DOE and the EIA Shenanigans. They lower gas, they try to get inflation lower. They rally the market going into Midterms. It’s just the way it is. Now, going back to the economy, real quick, Tony, I see across the street the US consumer credit was $40 billion. I mean, people are spending and collecting debt like it’s going out of stock.

TN: That’s not a good number. You saw my tweet this last week about the $15 grapes. I mean, that sounds ridiculous, but people are having to. I talked to people about their electricity bills and they’re doubling and tripling over the last few months. And so people are having to do this. Rents are doubling in New York and so on and so forth. So it’s hitting everybody. And people are having to tap into consumer credit just to make ends meet.

AM: Just for the viewers, Tony, the forecast was 27 billion. It came in at 40.

TN: Wow. That’s a slightly overestimate, I would say. Let me ask you a quick question about the Fed pivot. Okay. You say the Fed is going to kind of act like they pivot but not actually pivot. So would that mean and I know everyone’s been on Twitter today or on social media saying, oh, the job’s number puts 75 basis points in focus again, all this stuff. But would the start of a pivot be 50 or 25 basis point rise?

AM: The start of a narrative of a pivot would be 50. But let’s just be honest. Inflation is not going away. They can fake a CPI number, maybe one, maybe two months. But come October, December, January, and inflation is raging, nine point whatever, 9.5%, 10%. They are going to have to keep going 75 basis points. 

TN: So when you talk about a pivot, you’re talking about the beginning of a pivot, maybe a 50 basis point rise in September or something just to kind of ease nerves off a little bit?

AM: Yeah, that’s exactly what it is. It’s just the beginning of a narrative to move the market. It’s all it is. 

TS: Okay, if we went 50 instead of or even 25 instead of 75, which the market is expecting, the barn market would freak out. 

TN: Now what happens to commodities in that case, Tracy, if we’re in September and we go 50? You’re

going higher.

AM: Okay, this is the problem I keep telling screaming people and why I didn’t think that’s why I didn’t think this rally was a good idea is because all of a sudden now you’re going to create this stupid pivot narrative and do 25 or 50 basis points. But then, like Tracy just mentioned, commodities are going to rip. What’s that going to happen then? We’re going to have stage two of inflation coming around in 2023. That’s going to make this like nothing.

TN: Yeah, but as long as it happens after November, I think. Everything’s fine. Right. No, seriously, we have to think we’re in that. We’re in those closures.

TS: You have to think everything is political right now. So every decision is political right now and you have to factor that into kind of your investment thesis right now.

AM: Tracy’s absolutely right. I was just talking to a client. I said I don’t want to hear anything after November of this year. This era is this era right now. After November is a different era. We’ll talk about that accordingly in the next month. But until now it’s just a pure political game.

TN: What are you guys watching in particular for the week ahead?

AM: CPI. I think the CPI comes in a little bit lower than people expect and will rally the market for another 100 points. Like a seven handle or something? I think it’ll be a seven handle.

TS: I mean, everybody is watching CPI, I agree. I’m watching CPI as well. I think what’s really interesting going into this next week is I would start looking at Basin Industrial Metals and miners at this point because I think that they are lagging crude, they have been lagging crude oil. But we’re kind of starting to see a little bit of turnaround. So my focus really is going to be on base and industrial metals.

Categories
Week Ahead

The Week Ahead – 03 Aug 2022: Pelosi, China, & Taiwan

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

There’s all this buzz around Nancy Pelosi’s visit to Taiwan. What is she doing there? Why all the stress? Why is China upset?

Also, Yellen got China to stop the stimulus. If China starts the stimulus, will that be a really good thing for Chinese equities? And what does that do for the CNY?

We also discussed the likelihood now with Pelosi’s visit that China will start stimulating. And what does that mean for oil and gas imports and Europe?

Will China try to hurt US companies that are in China? Do you think they could push against ex-pats in China and make life difficult for them? What are possible aggressive moves that China could take? Like cyberattacks?

There have been some potential whispers of China taking over some of Taiwan’s small islands to make a statement. Is that possible? And will they take it on other countries like India? What is the likelihood of China and the US in direct warfare engagement in the next twelve months?

Listen to Spotify here:

This is the 28th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd

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

Chris: https://twitter.com/BaldingsWorld

Transcript

TN: Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash, and we’ve got a special Week Ahead right now. We’re joined by Albert Marko and Dr. Christopher Balding to talk about the Taiwan-China issues around Nancy Pelosi’s visit. 

Before we get started, I want to let you know about a special we’re having for CI Futures. We’re doing CI Futures for $50 a month. With CI Futures, we forecast about 2000 economic variables every month and about 900 market variables (currencies, commodities, equities) every week. That $50 deal is for the next couple of weeks. And you don’t even have to take a year-long commitment. For the next couple of weeks, you do it a month at a time, and it’s $50 a month. 

So let’s get onto the show, guys. Thanks again for joining. I appreciate it. 

I want to get into there’s all this buzz around Nancy Pelosi’s visit to Taiwan, and I want to take a step back and go, why all the stress? Why is China upset? Because I think there are a lot of loaded assumptions in the discussions that are happening. So can you guys talk us through a little bit, maybe? Chris, if you want to start, why is China so upset about this?

CB: So there’s the full history of the claim of Taiwan as Chinese territory. They refer to it as a Chinese province. That’s the general background. I’m going to assume that most of your listeners or watchers already know that.

However, if we jump ahead to this specific visit, to be honest, I’m a little bit mystified as to why this

specific visit has turned into this small crisis. Trump was sending a cabinet secretary and undersecretaries. There’s been a steady stream of Congresspeople to Taiwan. So why this specific visit? I think there’s very reasonable speculation we can go through those. But why this specific visit has turned into what it has, I think there are probably only a couple of people that could answer that question. 

TN: Okay, Albert?

AM: Well, to expand on that, I can understand why the Chinese have a little bit more drama involved in this visit simply because the economic situation in China at the moment is so dire for Xi that they need a little bit of a distraction just to get the headlines out of the way at the moment.

TN: Yeah, I think that’s a good point. And when I think about this, it’s, yes, you can go back into all the history and the UNC, the 1971 and all of this stuff, but I think my view is democrats need a distraction for the midterms. You have the Afghanistan anniversary coming up, all of these things coming up. A bill was just passed that either does or doesn’t raise taxes on a lot of the population. There’s a lot of discussion around that. 

Are we in a recession? Not a recession. I think this is a convenient foreign policy issue for Democrats to grab onto before the Midterms to raise some external issues that are a little bit more mysterious for people, a little more exciting. Will there be a war? That sort of thing. 

And I think, Albert, you’re exactly right. With the November meeting coming up in Beijing, where Xi is supposed to be this golden boy and a lot more power and all this stuff, the new Mao or whatever, I think China’s economy is in a horrific state. I think the provinces and cities are not falling in line with Beijing, and I think politics in China is terrible. So I think this helps galvanize people in China, it helps galvanize people in the US. And I think it’s more of a convenient event than anything.

AM: It is a convenient event. Other issues are going on within China with the actual US.

Fed and Yellen are Yellen got them to capitulate to stop stimulus to fight inflation. So from the Chinese perspective, they’re a little bit they feel a little bit betrayed here. Seeing Nancy Pelosi

nude sunbathing on Taiwanese beaches, it’s like, what are you doing?

TN: Yellen got them to capitulate, to stop safely. So you’re saying Yellen got China to stop stimulus? 

AM: Yeah. I don’t know if it was direct or indirect, but Xi warned them to don’t stimulate while we’re trying to combat inflation. Look what happened to the Russians. And from the Chinese elite perspective, looking at the oligarchs in Russia, being completely isolated from the rest of the world, that’s just something that a pill that they didn’t want to swallow, and they were glad to hold off stimulus up until this event. Now, I don’t know, after this event, the Chinese might renege on that gentleman’s deal, but we’ll see at this point.

TN: Okay, let me pursue that in a minute because that’s interesting. So if you’re saying that the Chinese were holding back stimulus because of a quiet bargain, and they reverse on that and they start, as I’ve been expecting them to do for the last six months, just dump truckloads of cash on the squares in Chinese cities, if they start doing that, that could potentially actually be a perfect thing for Chinese equities, right? 

AM: Well, of course, but it’s negative for the US inflation and the commodities will start ripping. It’s an asymmetric shot against the US. So it’s something that they have in their toolbox and they haven’t used yet, but they certainly could after this.

TN: Okay, and so what does that do for the CNY, guys? If China starts stimulus, if it’s fiscal that appreciates CNY, at least from a textbook perspective, right? 

AM: Yeah, from the textbook perspective, sure. They control whatever they want to set the CNY at, so, I mean, I can’t see them allowing it to shoot up too far just because they are an export-dependent economy. 

TN: Okay, Chris.

CB: I just wanted to circle back to what we were talking about before jumping back to the CNY issue because this has been a real puzzle about they’ve been pretty restrained, and there are all kinds of questions as to why that is. 

And again, I wish we could provide good, solid answers about that. I think a lot of the issues, like with Taiwan and stuff like that, I think there’s like, Tony, you mentioned the economy. I think that’s distinctly possible. I think it’s also one of those issues. If you go back right after the first of the year, they changed the language about reunification and how they were going to solve that problem for the new era. 

What’s the new era? It’s Xi getting the third term. So is it possible that the economy is, like, pushing this along, egging it forward, so to speak? Yeah, I think that’s possible. I also think there’s much more like Xi has staked his credibility on, I’m making China great again, come hell or high water, if I have to drive it off a cliff to do it. That’s part of what you’re seeing.

AM: Yeah, I agree with Balding on that one. The only caveat that I would throw in there is that would be exactly the case up until the Ukraine situation where Russia got their butts handed to them. 30,000 troops lost, flagship battleship gone, sunk.

From the PLA perspective, it’s like, hey, what happens if we lose? Because it’s not a 0% chance, right? What happens if we get decimated? Our military could be set back 50 years, 100 years. And I think that at this point, it’s too much of a cost for them to take an adventure in Taiwan.

CB: Yeah. I will say you and I disagreed on this previously. Like, what were the risks? Let’s assume Ukraine had never happened. I would say there’s probably a not immaterial chance of something

happening with China and Taiwan in the next, let’s say six to 18 months.

At this point, I definitely would push that back a little bit. If something’s going to happen, I think, within the next few years. But absolutely. I think they’re going back to the drawing board because they see what’s happening to Russia in Ukraine, and they’re like, there’s absolutely no way in hell this can happen to us. 

AM: Yeah, they saw Afghanistan as a point where they could probably take some territory away from the US sphere of influence. But then again, Ukraine happened, and that threw everything through, wrenching all the plans. 

TN: Okay, so let’s talk about that a little bit. The Russia-Ukraine angle is interesting. So when sanctions were put on Russia, Russia can do okay without sanctions, not thrive, but can survive. But China is so intermingled in global trade that if sanctions are put on China, it could be very difficult for them. Right. Or what am I missing? 

AM: It could, but they’re the world’s manufacturing base, so it’s like, you put sanctions on them, they’ll put sanctions, they’ll do something asymmetric, and it’ll hurt the West more than the West can hurt China, to be honest. I mean, The US can handle it. The Europeans can’t. They’re already in dire rates. 

CB: The other thing that I would add to that is people make the sanctions argument. I don’t buy the sanctions argument for two specific reasons. One is basically what they import. The bulk of what they import from the rest of the world is raw materials. And that’s not coming from Western Europe, Japan, or other places like that.

Then the high-tech products that they do import, let’s say very high-grade chips, are going into things like iPhones and then being re-exported right away. Okay, so they’re not on an import basis highly dependent on the rest of the world. 

They’ve made two bets with that in mind. Number one is that they can convince people not to block their exports, meaning Chinese exports to their country. Number one. And then also that other countries are so dependent upon them that they can’t. Okay?

What would happen to Walmart during the Christmas season if they couldn’t buy from China? Okay.

It’s a simple example, but it does throw a monkey wrench in there. 

AM: Caterpillar is another one. The Chinese have done a marvelous job of using US agricultural companies against the US political system. So they’ve got a noose around them. Buick also. GM, Buick, Caterpillar. I can name half a dozen companies. Yeah.

TN: My main focus in terms of sanctions was food. These other things, of course, they’re importing goods, really, largely to be transformed and re-exported. Food is the main issue that I would think would be damaging to China, potentially. 

AM: Yeah, that was always one of my main points of contention about a war starting with Taiwan is those ports being shut down in the eastern part of China, it would be devastating. They would have food and security problems. The Chinese middle class has been growing. They don’t want rice anymore. They want noodles and dumplings. So they have a persistent food issue that just gets worse and worse every year.

TN: Right. Okay, so let’s go into this. I saw Pelosi kind of pull up into that. I think it was the Grand Hyatt she’s staying at in Taipei. And really, what is she doing there? Like official, non Official. What do you think she’s doing there?

AM: That’s a pure distraction from the midterms in the economy in the US at the moment. It’s an easy distraction. They know China is not going to do anything outlandish. They’re a pretty pragmatic country when everything is said and done anyway. So it’s like, what negative is there for them, for Pelosi and the Democrats at the moment?

CB: Here’s the only reason I’m going to disagree with you, and you said something very similar earlier, Tony. Here’s. The only reason I’m going to disagree with you is that this assumes a level of evil genius out of the White House and maniacal thinking that I just don’t think they’re capable of, okay? Okay. Again, I could be wrong.

AM: I just don’t see these guys as the evil genius that says, hey, we need a distraction, what can we do?

I don’t think it’s an evil genius. I think that’s a little bit too strong. The game of scapegoating and distractions in the beltway is as old as time itself. The professionals at it. They can see what they want to do to pull people’s eyes away from one issue onto another and they have the media under their grips so they can do anything. They want to distract people. So the evil genius part comes in what are, steps 2, 3, 4, and 5 after this? Because now the Chinese can retaliate and I don’t think the US is prepared for that.

TN: In what ways? 

AM: Well, I mean if the Chinese decide to start simulating next week and commodities start ripping, inflation in, the US is going to have a ten print, 10% print on CPI come October, November, then what? You’re in the smack middle of the midterms looking at 10% inflation and you’re losing 50, 60 seats in the House and you’re losing the Senate and then you have the Republican take over and start throwing out hearings against Joe Biden every week like they did Trump. It’s chaotic. 

TN: Okay, so that’s an interesting scenario. Okay, I want to ask about that and then I want to ask another question about a potential reason for visiting. But you’ve mentioned that a couple of times. So what’s the likelihood, since they’ve said that they’ll undertake serious pushback, is there a likelihood that they’ll do that? Do you put that at a 50, 60, or 70% likelihood or do you think they’ll continue to hold?

AM: I think after this visit by Nancy Pelosi, it’s a greater than 50% chance that the Chinese start stimulating a little bit earlier than scheduled with commodities ripping.

TN: Okay, so that means more oil and gas imports, more pressure on gas prices, and diesel prices. All this would hurt Europe too? 

AM: Oh, of course. Europe has got massive energy issues going forward and they’re unsolvable within six months. 

TN: Okay, so so far I’m hearing potentially bullish Chinese equities and potentially bullish commodities, particularly energy, commodities, and industrial metals, right?

AM: Oh, absolutely, yeah. Full discretion, I’m going into KWEB. I have Baba at this low with this Pelosi landing. So for me, it’s just like Chinese equities have been battered with no stimulus. We’re down to the point. Yeah.

TN: Okay, so on tech, you mentioned tech. Is it possible that with the chips act just passing in the US, this is the one that supports semiconductor companies for putting operations in the US? Is it possible that there is a message being passed to TSMC or any of the strategic industry guys in Taiwan by Pelosi and her staff? Is that a possibility? And if so, what do you think it would be? 

CB: Absolutely. I would say that that’s one of the things I don’t know if you caught this statement from the chairman of TSMC, but he gave an interview just a day or two ago and he said, “China, if you invade, like all of our plants on the island are dust, they’re worthless. There’s nothing there.” Because I can guarantee you that. I’m sure that the US Air Force would have the coordinates for every TSMC plant that it’s like, hey, we’re going to make sure that China doesn’t get them. I’m sure that TSMC, at this point, their reputation is being a pretty well-run company, very attuned to security issues. And so I’m sure that they have multiple redundancy plans and multiple security plans to address that if China is locked in. So you have to think that TSMC, all the way down to all their key suppliers and things like that, are in some type of meeting here with Nancy.

AM: Yeah. I’m not very keen on this chip sack bill. I think it’s just fireworks and stringers and ticker tape raid. But there are EPA issues to deal with when chip-making also. So no matter what, whatever they want to throw out for legislation, as long as the EPA is hampering manufacturing in the United States, manufacturing is going nowhere, at least for the next five to ten years in the United States. So this chip act, although it gives a little bit of pressure, don’t think it’s going to be that big of a driver in the next five to ten years. 

TN: Okay. I want to talk to you guys a little bit about the pushback that China may give to US companies. So China already blocked a $5 billion battery investment from a Chinese company in the US. That was just announced today, and those batteries were supposed to support Tesla and Ford, I believe. Do you think China may try to hurt US companies that are in China? Could they directly take action against, say, Tesla or GM or Ford or GE or any of the American companies that are sitting in China? Do you think they could push against, say, ex-pats in China, and US ex-pats in China and make life difficult for them? 

Because if we look, for example, at what happened in Russia, we have a lot of Western companies that have abandoned their operations in Russia over the last eight months. Right? Is it possible that American companies get pushback from the Chinese government? 

Because if I think of what the Chinese government did to Japanese companies in 2012 if you remember that. It was very aggressive. They were instigating protests against Japanese companies, Japanese expatriates, and Japanese government officials. Could they instigate that against the US? Companies? And could they push us Companies to just give up their operations in China? 

CB: Well, the only way I would rephrase that is how would that differ from normal standard operating practice? Even within the past couple of years, there’s been a massive flood of not just Americans, but all foreigners out of China. And these are everything from journalists to just basic school teachers, English teachers. Okay? So it doesn’t even matter if you’re a sensitive national or in the sensitive industry or what China deems is sensitive. 

This goes for businesses as well. You heard stories about companies saying, oh, well, I have 10 million, $50 million of profits I can repatriate. I’m going to close down my China plant and go to Vietnam. And basically what they do is they just freeze everything and said, oh, you have an unpaid tax bill, coincidentally, the same amount of money that you were going to repatriate. And so they just have to walk away from everything or sell it for one dollar or something like that. 

So when you talk about that, I think that’s entirely fair. I think that’s going to happen. I think the only people that are going to effectively remain there till the end are the Shells of the world that didn’t get out of Russia until the bombs and the missiles started flying. I think it’s going to be the same with China.

TN: Are you saying that you think some US companies will in the next, let’s say, two to three years, abandon their China operations? Do you think that’s feasible? 

CB: Oh, yeah.

TN: Okay. 

CB: I think it’s already been happening. It’s not announced. You see a couple of announcements here and there. You hear about many more talking to people that are still there. But yeah. 

TN: Albert, what do you think about that? 

AM: Yes, they will. There’ll be certain companies that they go after depending on whatever political calculations they can throw at the US, for sure, without question. They’ve done this. I mean, Christopher said they’ve done this in the past. Nothing new. 

TN: Right. So how would that start? Would they try to push aggressively to localize leadership? I know a lot of that leadership is already localized, but would they almost make it mandatory for leadership of, say, US companies to be Chinese and then kind of cascade that through? Or what would the early phases of that look like?

AM: I think the early phases would be phantom tax violations or some kind of fines or fees that just pop up out of Chinese mountains. Who knows? Do you know what I mean? So I think that’s the first thing you’d want to look at if they start doing it.

CB: Yeah. And again, what you’re talking about, I think, is basically what’s been happening for the past couple of years is whether it’s the phantom tax bill, whether it’s all senior leadership has to be Chinese or party members or all those kinds of things. I mean, when you’re asking about that in the future, it is like, well, how would that differ from the past two to three years?

TN: Right. It feels like we’re on the precipice of that. And some of us have been talking about kind of the end of the Asian century for probably the last five to eight to ten years. And China is what seems slow, but very rapid decline in terms of its ability to grow. Not the fact that it’s not already huge, but its ability to continue to accelerate growth. That’s gone. Those days are gone. Right.

And when growth stalls out, the opportunity becomes a zero-sum game. And it’s about market share. It’s about getting your piece of the pie. Not a growing pie, but a stagnant pie. And that’s when things get very difficult in authoritarian countries. Right?

CB: Well, I think to add upon that, they were following the Asian growth model of build, in simple terms, run large trade surpluses, controlled currency, build apartments. It’s a pretty tried, true path. But one of the things that are very different is if Malaysia runs a large fiscal surplus, nobody cares. If Taiwan runs a significant trade surplus, some people care, but whatever. 

For every percentage point of GDP in trade surpluses that China runs at this point when you’re the second largest economy in the world, that is a massive, massive number, not just against your economy, but against the global economy. And that’s going to create massive, massive dislocations elsewhere. 

And then the other thing is that when your only source of growth is basically building apartments, and now they’ve got like 20% to 25% of these apartments all over the country, empty and household debt that is significantly above the OECD average. It doesn’t make any sense, and this is what they’re running up against. Okay.

AM: To take that a step further, it’s like if you have low growth and your economy starts in the waiver, how do you fund a growing military to combat the United States on a global level? The math doesn’t add up. Very difficult.

TN: Okay, I want to move next on to things like cyberattacks. Chris, I know that you’re very focused on kind of the IT side of what the Chinese government is doing. Can you talk us through some of the potential, maybe aggressive moves that China could take in the wake of this?

CB: Sure. So there are all kinds of things. And one of the things, you saw today where they were looking at, they shut down the Taiwanese Prime Minister’s website. But that’s, to be honest, small potatoes. 

The type of thing that you would look at, and you’ve seen this a little bit in Ukraine is where they went after things like nuclear reactors and other things like that. So if you’re looking at this, one of the types of things that you would be looking at would be, for instance, Taiwan being an island, there’s a handful of spots where cables come ashore. So what would you be looking at? Because if you wanted to make it hard on Taiwan, that might be something that you would go after. 

If you had the capability, and they are very likely due to some capacity, you would be looking at putting bugs in the TSMC type of production capacity. So those would be the types of things to narrow it to Taiwan. But generally speaking, if you aren’t being hacked by China, that basically just renders your place in the universe irrelevant, almost, because they’ve pretty much gone after everybody.

TN: Right. Albert, what do you think? 

AM: Yeah, I mean, the Chinese are prevalent in the cyber terrorism space. They’re out there stealing trade secrets and corporate secrets all over the place, especially in the United States. And I don’t foresee that slowing down at all. If anything ramping up, and they’re good at it, and we have lacked security in the United States, and it needs to be tightened up.

TN: Right. And we intentionally, for the viewers, did not record this on Zoom. That’s an indication of some of the thoughts around there. 

Now, guys, there are some islands between Taiwan and China, and there have been some potential whispers of China taking over, say, some islands, some of Taiwan’s small islands to make a statement. Do you think that’s possible?

AM: It’s possible. I don’t understand why they would try even risking that. What if they lose a few ships?

What if they lose 1000 or 2000 troops? It’s like all of a sudden you look weak and then you’re going to be forced into a position to do something bigger. It would make no sense from my perspective.

CB: The only reason I kind of disagrees is that there’s a handful of some of these very small islands, so I doubt that they have any military hardware there. And some of them are literally, I think, as close as like 10 miles off the Chinese mainland like that. They’re just that close. And so just as a symbolic act, something like that wouldn’t surprise me at all.

AM: It won’t surprise me at all. I’m just saying anything closer to the Taiwanese actual island, I would be wary of seeing the Chinese try to take them. 

TN: I spent a week on one of those islands in 2009 waiting out of typhoon, and it was an experience, but I think it’s feasible. It’s an island off of Taidong, which is no, that’s on the southwest side. They wouldn’t do that. They would do it on the I was on the southeast side. They would do it on the southwest side or the northwest side. But there are lots of islands, very small islands off of Taiwan.

Okay, good. What else I think do we need to be thinking about here? There has been talking of the Biden administration removing trade tariffs and this sort of thing on China. Do you think that could be something that the administration aggressively goes after to kind of compensate China? Or do you think this would maybe solidify those tariffs? 

AM: I don’t think so. Honestly, I would rather see what the rhetoric is around the oil market price cap that they’ve been talking about with G7 and the China terrorists might fall into that realm in negotiations. I would want to see what China’s reaction is to the oil cap at the moment.

CB: I’d be very skeptical at this moment of some type of tariff rollback because for them to… The White House has very badly managed this entire situation where they created a situation where if she went or if she didn’t go, they were losers. They’re not looking bad. And so if they were to roll back tariffs at this point, I think they would get they would get slaughtered, even among the Democrats at this point. So I think that’s very unlikely. 

But look, Jake Sullivan is the guy that a decade ago was proposing, what do you say we walk up to China and give them back Taiwan in exchange for peace in our time? So with these guys, anything is possible.

AM: This is the worst foreign policy cabinet I have ever seen in my life. No one’s even close second at the moment. And that kind of commentary by Jake Sullivan is just unbelievable.

TN: Yeah. Okay, guys, so let me ask you kind of one final question, and you have to answer it with one of these two answers you can’t equivocate in between. Okay. The likelihood of China and the US in some sort of direct warfare engagement in the next, say, twelve months, is it closer to, say, 20% likelihood, or is it closer to 70% likelihood?

AM: 20% in my opinion. 

CB: 20%. 

TN: Oh, good. Okay, so do you think it’s greater than 20% or less than 20%?

AM: I’d say less than 20%. Okay. I would again say less than 20%,

CB: and I would say if you were to draw that out, 24, 36 months, I see it going up, probably steeper as time goes on.

TN: Okay, so that’s fair. So there’s a risk all around, right? We’ve got economic suffering globally. We’ve got inflation globally. We have whatever’s happening post-COVID trying to be figured out globally. We’ve got political uncertainty globally. So we’ve got risk and uncertainty everywhere. Adding a conflict to that mix would not be positive for anybody. 

CB: And the one thing I would say is, even though I say less than 20%, that’s not like a firmly, deeply held conviction. Because if you’re talking about risk, I would have what I would call wide error bands in a lot of these situations. Look, we talk about, like, what is Xi going to do? Xi could say, hey, America is distracted by Ukraine. They got extra troops there. They’re shipping all kinds of weapons. Now’s the time to go to Taiwan. I don’t think people do that. That’s also not crazy to speculate. Yeah,

AM: I would have to agree with that because I never thought that Putin would try to take Kyiv with so few troops, but here we are, him making a vital mistake. And sometimes leaders make bad mistakes because they have a bunch of yes men around them. Yeah. Let me ask you one very quick question.

TN: Do you think there’s a possibility that China kind of takes it out on somebody else? Do they have a dust-up maybe with India to show strength at home while avoiding it with the US? Or something like that? Do they lash out to somebody else so that they can kind of flex muscles at home? 

AM: Yeah, they could, but I mean, honestly, the Indians are not people to be trifled with, to be honest. They are itching to take on China if they show any kind of aggression. So I don’t see who they can pressure to say they’re big, bad China at the moment. I don’t even think they should be doing that. They should be figuring out their economic situation more than anything else. 

TN: Xi Jinping’s role model is Mao. And Mao ultimately was a failure and a pariah in his own country by the time he died. Right. So I don’t think Xi has the sense to understand that Mao was a pariah by the time he died. And so that’s his role model who killed 60 million people through starvation and other things. So this is a problem. We have a guy in the office in China whose role model killed 60 million people directly.

AM: Yes, I understand that, Tony. The problem is the difference is that the CCP has wealthy families now that have almost equal footing as Xi in terms of power, and they can of them if they wanted to. 

TN: Well, and that’s the reality, right? And that’s what nobody talks about. And that may be the backstop for a lot of this stuff.

CB: I’ll tell you this. The rumor mill among Chinese ex-pats, dissidents, et cetera, et cetera, are in hyperdrive this year. Look, it’s hard to know what to believe. It’s very hard to know what to believe. Okay? So I’m not about to push any theories, but there’s a lot of that discussion going around.

TN: Guys, this has been great. Thank you so much for doing this on such short notice. For anyone watching, please put comments below. We’ll take a look at them and we’ll watch them through the next week. If you have any additional thoughts, please let us know, and look forward to seeing how the next thanks a lot.

Categories
Week Ahead

The Week Ahead – 18 Jul 2022: Biden’s Saudi Arabia trip 🛢️

https://www.youtube.com/watch?v=HpcWVeE8mPY

Biden’s Saudi trip ended up being a disappointment and there really is no immediate spare capacity, which is a surprise to no one.

What does the appreciated USD mean? We’ve already seen a fall in Sri Lanka and other places which we’ve talked about for weeks, but where is that going and when will that end?

We also talked about the FOMC expectations. What will the Fed do, especially given CPI PPI data? We have to also keep in mind that we have an election coming up in November, so it’s really hard for the Fed to keep the heat on.

Key themes:

  1. Biden’s Saudi Arabia trip 🛢️
  2. USD🚀 rocket ship and fallout
  3. FOMC expectations (CPI/PPI)
  4. What’s ahead for next week?

This is the 26th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/samuelrines
Albert: https://twitter.com/amlivemon/

Time Stamps

0:00 Start
0:49 Key themes for the episode
1:55 Biden’s trip to Saudi Arabia
3:23 PR game and disastrous foreign policies
5:00 The US President looks like he has no power?
6:17 US can be a marginal price setter for oil, but…
7:34 what happens to crude prices?
10:08 Why is USD pushing higher?
11:22 What’s happening in the Euro Dollar and why?
13:51 FOMC
19:00 What happened to the gasoline prices?
20:07 When will Yellen give up on the 2% inflation?
23:45 What’s for the week ahead?

Listen to the podcast version on Spotify here:

https://open.spotify.com/episode/4cvisj39soBnXdia0S9bXv?si=4c2c9ffb0f6f4717

Transcript

TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. I want to thank Albert and Sam for joining us to take a look at The Week Ahead. Before we get started, please, please like and subscribe on this channel and please comment, ask us questions, let us know additional information you think we should have. We get back to every single one of those and we want to make sure that you guys are happy with what we’re talking about today.

So today there’s a lot that’s happened over the past week and even over the weekend that we want to get into. We’ve got three topics here, but there’s going to be a lot of overlap in these. So I’m just going to introduce these and then we’re going to have a pretty open discussion.

The first is Biden’s Saudi trip, ended up being kind of a disappointment and there really is no immediate spare capacity, which is kind of a surprise to no one, but it happened and we’ll cover it. Next is the US dollar, and what does the appreciated US dollar mean? We’ve already seen a fall in Sri Lanka and other places which we’ve talked about for weeks, but where is that going and when will that end? Next is FOMC expectations. What will the Fed do? Especially given CPI PPI data? And we have to also keep in mind that we have an election coming up in November, so it’s really hard for the Fed to keep the heat on when we have an election coming in November or that would be a normal election year.

So Albert and Sam, thank you so much for taking your Sunday afternoon to talk through to us. Let’s first get into Biden’s trip. Albert, can you give us a little bit of a kind of geopolitical backdrop for us? Help us understand what were the expectations and what actually happened?

AM: Well, I mean, the expectations were that Biden goes into the Saudi Arabians in the Middle East and cuts a deal for them to increase production and capacity and name your whatever little policy that they’re talking about. The reality was Biden wanted to get away from the PPI number and the CPI. They’re just atrocious. So he decided it’s a normal thing that politicians leave and go overseas so they don’t have to deal with it.

So he went over to Saudi Arabia meets MBS, which was already a problem considering the comments that he had for the election. But his goal for upping production by the Middle East and OPEC, it was a fantasy. It was nothing more than a PR gimmick in my opinion, that the Fed has been playing in futures and crushing the price of oil. So it was one of these, look here, this is what I’m doing on the grand stage and oil prices are falling, but in reality they weren’t really connected.

TN: So were there really expectations in the administration that there would be additional immediate capacity? Do they really think that that would be on the table?

AM: I don’t think so to be honest with you, Tony. Like I said, this is a PR game that they’re playing now specifically because, like you mentioned, elections are coming up and their intent is to save the Democratic majority in the Senate. The House is lost, but the Senate is what they’re eyeing up. So in my opinion, this is all PR games.

TN: Okay. But the PR game that is really hard for me to understand is the President, regardless of who it is, okay. The President going to a place that is an ally. Saudi Arabia is pretty much an ally to the US. And coming away with nothing. One would think that the Secretary of State and the Nat Sec guys, other guys would have gone in first to make sure that we could announce something positive and nothing happened.

So it seems to me that there is foreign policy disaster after foreign policy disaster with this administration. I don’t want to be putting my own view on it, but is it that, too?

AM: Of course, we’ve had just multiple disasters and foreign policy. But even from the Saudi Arabian perspective, who’s their biggest client? At the moment, it’s China. Why do they have to listen to Biden, who’s made the Biden administration has made unbelievable mistakes in foreign policy and actually risk their security more than anything else. He’s taking the foot off of the Iranians. The Saudis have to deal with that. The Russians are in their own little world of adventures, but there’s no real stability in the Middle East, and the United States under Biden doesn’t really show that there is anyone stepping up to the plate.

TN: Right. And that’s kind of a leadership issue. Whether or not the US is their main customer, the US has been their main advocate in the Middle East and around the world. Or one of their main advocates. Right.

AM: Yeah.

TN: So that’s the big loss that I see is you have a president going in, not getting an agreement with a huge entourage for agreements that should have been done before they arrived, and it just makes them look like they have no power. Sam, is that how you read it?

SR: Yeah. There’s two things that I think the US. Generally gave to Saudi Arabia, and that was global clout and weapons, right? Yes. And the second part is probably very important to the Saudis going forward because there’s only so many places that manufacture weapons that are decent, and that’s the US, to a certain degree, Russia, China and basically Turkey. So you can kind of buy weapons from those places. Guess what? That was a tool that really wasn’t flexed at all.

And if you’re going to flex policy power, that probably should have been flexed a little bit. And honestly, it doesn’t appear to have been at all. So I would say to Albert’s point exactly, we’re not the largest customer when it comes to oil by a mile. Right, that’s just true. But we are the largest supplier for their national defense.

TN: Here’s the thing that I don’t understand is, with US production, we can be the marginal price setter for global oil prices, but we pull that card off of the table by disabling our domestic manufacturers. Is that a fair thing to say?

SR: Well, I would say that that’s the muscle that we’re kind of flexing right now, right? To a certain extent

TN: Okay, tell me more about that. How are we flexing that?

SR: Well, we’re flexing it. I’m not saying it’s good flex. Right. We’re flexing it by not doing anything. So we are basically the ones holding up global price of oil. OPEC honestly has pumped exactly what they said they would pump with a little variability, and they don’t have much marginal capacity.

The marginal capacity was passed to fracking a long time ago. This is not a shocking revelation. So when you’re the global incremental supply that can flip on in a relatively fast manner and you say, we are not going to do that, period, and we’re not going to in any way supplement the regulatory overhangs and the capital overhangs, and guess what? You’re going to end up with a global shortage of oil and distillates, etc.

TN: Right. So what happens to crude prices with the Saudis saying, okay, maybe capacity in 2027? What do we see in the short term with crude prices? I mean, with a recession looming, supposedly, whether that’s real or not remains to be seen. Right. And we had a good retail sales figure on Friday, pretty strong.

So what do we see happen with crude prices in the short term? Is there upward pressure on crude prices or are we kind of in this range?

AM: I think we’re in this range of 90 to 115. Just simply because of the reality. I want to differentiate pre election versus post election. Right. Pre election, we’re definitely in a range of 90 to 115. The Feds not going to let the price of oil gets to the point where people are paying six, $7 a gallon to the tank. So that’s first and foremost.

After that, hands up. Who knows what’s going to happen then? Because Europe’s going through an energy crisis with gas. The price of oil is probably going to go up just because the green deals that the Biden administration are intent on passing are going to ramp up right at the election and just afterwards. So after the election, I could see 130, 140.

TN: Okay. Sam, any near term change in crude prices because of this? No?

SR: Well, near term, Albert’s point, $90 a barrel seems to be kind of the low here. I don’t think we’re going to go much lower. And that’s a combination of DXY at 108, which DXY at 108 is atypical to oil remaining elevated.

So if you begin to have a dollar breaking into the back half the year, that’s kind of the post election story. I think Albert would back me up on that part. You begin to see that breaking. Guess what? The scaling, that makes 130, 140 is relatively reasonable. But you call it 90 to 115. Absolutely not a problem here. And you probably creep back towards the upper end of that 150 because you’ve seen two things.

You’ve seen gasoline prices come down, which means demand is going to remain resilient, if not pick up on the margins. And guess what? That flows downhill. So I would say oil prices, gasoline prices, they look good right now. I saw a free handle on gasoline close to my house. That’s not going to last. That’s not going to beat the system.

TN: Right. Okay. So, Sam, you mentioned the dollar at 108. We hit 109 last week. Why is the dollar pushing higher, guys?

AM: I can tell you why. I’ve been adamant about this. Yellen tell the European counterparts that she was going to drive the dollar up to 110 and above. She’s done this in 2013 before. There’s nothing new under the sun. It’s part of her playbook. She knows what she’s doing. She can even go up another 10%. Now, what that does to emerging markets? Oh, God help them at the moment. But still, the dollar is the most effective tool in their eyes for inflation busting, at least short term.

TN: So how far are we going?

AM: I think we go up to 112 to 115.

TN: Okay, over what time horizon? The next month? The next three months?

AM: Yeah, I think it’s in the next month. I think they want to get this over and done with so they can pivot starting September. Stop the rate hikes. And on top of that, this is something for Sam that could talk about the Fed is I think that Powell probably loses the majority of votes in the Fed for Fed members come October.

TN: Okay, hold on, hold on, hold on. I want to talk about that. But let’s finish up with the dollar first. Okay? This is good. Okay, so with the dollar, help me understand what’s happening in the Euro dollar markets right now. Okay. We’ve seen the Euro dollar fall as the dollar rises. What’s actually happening there, and why.

SR: Not me?

AM: Okay.

TN: Yes.

AM: I’ve been adamant about this. Also, as global trade slows down, the need and use of Euro dollars becomes less so. And a lot of people sit there mistake that as the dollar is dying and gold is coming back and whatever name your crypto, that’s supposed to be the next reserve currency. But that’s just the reality of the moment, is they are purposely trying to kill demand. When you kill demand, the Euro dollar starts to fall because there’s less need of it. That’s just the most simple basic explanation that I can give you at the moment.

TN: Okay, so, Sam, that is non US demand in US dollars, right?

SR: Yeah. Dollar denominated non US debt.

TN: Okay. And so the largest portion of the euro dollar market. Is that still in Europe?

SR: No, it still flows through Europe. Right, okay. But it’s a much larger market than simply Europe.

TN: Okay. It tells me outside of the US, there’s a slow down generally. Is that fair to say?

SR: Yeah.

TN: And we’ve talked about this before. Europe has big problems. We saw China’s numbers last week, which are obviously overreported anyway, so Japan is having problems. So all the major markets are having issues. So the Euro dollar is just a proxy for what’s actually happening, those markets through trade and through the demand for actually US dollar currency spent outside of the US.

SR: Correct.

AM: Yes. Very simplistic terms, yes, that’s exactly right.

TN: Good. Anything else for the viewers here? Like, anything else that you guys want to add on Euro dollars just so they can pay attention to things?

AM: Not really. It’s a very good just simplistic, basic understanding of Euro dollars. I mean, we can get into the whole mechanics of your dollars, but it’s so big it’ll take up an entire episode.

TN: Okay, good. Very good.

SR: Very into the weeds very quickly.

TN: Good.

AM: Yeah.

TN: So if anybody’s watching has questions about Euro dollars, let us know. We’ll get Sam and Albert in on this and help them answer the questions. All right?

Okay. Finally, FOMC, okay. We saw CPI hit to the high side. We saw PPI hit to the high side last week. A lot of talk about 100 basis point hike. Sam had a newsletter out that said could be 100, could be 75. And Albert obviously thinks that there’s going to be a pivot in September. So Sam, do you want to kick this one off?

SR: Yeah, sure. I do want to point out that I said there’s a difference between should and will in the newspaper, and the notion was, should the Fed go 100 now? Will they? Probably, unless the University of Michigan survey comes in light. And it came in light. So you’re 75 basis points now. It’s that simple.

TN: Okay.

SR: Very straightforward. The Fed probably wanted to have flexibility for 100, but when they tied themselves to something so stupid as the University of Michigan survey and it falls I mean…

AM: You know what, Sam, the funny thing is that you say that is, that is exactly what they look at, for making their policy decisions. The only thing they look at.

TN: University Of Michigan.

SR: I know they look at it. The problem was they said it out loud. Like, you don’t say that out loud. That’s the mysterious parts of it. It’s a survey of a very small subsection that is basically never been tied to reality at all across any time frame whatsoever. And like yeah..

TN: It’s like making policy based on Atlanta GDP now. Right. It’s like a lot of these things are proxies of small survey sizes of whatever.

SR: Error terms that interact with each other, yes.

TN: Right. I think a lot of people who watch markets see these indexes, like the University of Michigan index come out and they think that it means something, but it kind of does, but it kind of doesn’t. And so I always recommend people, you have to understand these indexes. You have to understand what these releases mean. You have to understand the methodology. If you’re going to make investment decisions based upon these things, you have to understand what they are.

And as you dig down beneath these things like University of Michigan was put out what 30 years ago initially. The methodology hasn’t changed much since then. So if you imagine the technology and the capabilities 30 years ago and they carried that forward, it’s pretty light. It’s pretty light. A lot of these things are pretty light.

AM: Yeah, but they want it like that though Tony. They don’t want to update their stuff because they don’t want transparency. Seriously.

TN: It’s true.

AM: If you want to massage the numbers, you go with what you know, what you know is flawed and that’s what you go with.

TN: Right.

AM: I had a quick question for Sam. Like I said, I think that they’re going to pivot in September after 75 basis point rate hike now and whatever CPI coming in in August. But I don’t think this is the right decision for them to pivot this early because they’re expecting demand to come down and I see no demand coming down anywhere at the moment. So what happens if they sit there and try to pivot for September, October, November, election time and then January, December comes along and demand is sky high again? What does that do to inflation for 2023?

SR: I think it’s complicated, right? Because it’s kind of the goods versus services problem going into the back of the year. Right. We’ll have plenty of goods, print, crap on store shelves and Target for toys and whatnot because that part of the supply chain is solved.

What’s going to be persistent on the CPI price is going to be shelter, which we all know is six months lagged and is going to be a problem for the rest of the year. And there’s nothing they can do about that because their methodology is, again, stupid. So there’s nothing they can do on the prints from here out.

They’re going to have prints that are sitting at 30 basis points plus just because of shelter and it’s weight in core, that’s going to be a big problem for them on the CPI front. So if they pivot, they’re basically going to have to say that, you know, look at headline, it absolutely plummeted. Gasoline.

TN: Will we get a core rating, x Energy, Food and shelter? Will we start quoting that?

SR: Yeah. That’s what I started looking at for the exact reason of trying to find a pivot. Because eventually that will be the metric that they are forced to go to if they want to pivot. It’ll be SuperCore and guess what you call it supercore.

SuperCore doesn’t look that great right now, but it could look pretty interesting if you begin to have gasoline coming down 40% month over month with what the next one is going to say or 25% month over month. So you’re going to continue to have some volatility on the headline CPI front, which is basically what the Fed is going to have to look at in order to pivot.

TN: Okay, so can I ask what happened with gasoline prices? We still have 94% or whatever utilization. Crude prices haven’t come down that much. So why have we seen a 30% fall in gasoline prices over the past three to four weeks?

SR: Recession fears?

AM: Yeah.

TN: That’s it. Okay.

AM: Yeah, pretty much exactly. It’s just the narrative of recessions coming and trying to kill demand based on that. It’s just like I said, PR games, nothing more.

SR: The one thing that I want to point out that I think is really important to kind of consider for Albert’s point of a pivot is equities tend to move in a six month precursor. And what you’ve seen since July 1 is an absolute rip in home builders and a relative squashing of utilities.

And if people were betting on a longer recession in a longer Fed cycle, XLU would be the buy and homebuilders would be the short. And that has simply not been the case so far.

TN: Very interesting, Sam Rines.

AM: When do you think that Yellen this is for both of you, when do you think that Yellen gives up on the 2% inflation number and says 4% is the goldilocks level?

TN: Sam Rines you first. It’s a great question.

SR: I don’t think they go 4%, but I think they say, and they’ve begun to do this, if you go back over the last six months of speeches that 2 to 2.5 is fine.

AM: Still it’s going to be higher.

SR: They’re creeping it up. Right. I don’t think it’ll be 4%. I think between two and 3% is a reasonable target, blah, blah, blah, given and they’ll go into things like because of the way that we measure CPI, 2 to 3%, blah, blah, blah. There’ll be some.

AM: Fun times.

TN: I think if they did that, Albert, I think it would be after the election.

AM: Oh, of course. They’re not doing anything that’s going to trip up Operation Save the Democratic Senate, you know what I mean? They’re just not going to do that. Right?

TN: Yeah. I think people are already really upset about inflation. Companies are starting to report or expected report numbers down, their earnings down, and so it’s hurting everybody.

AM: Yeah, but everything they’re doing is just going to make inflation worse in 2023. But it’s going to come back with a vengeance because unemployment is still unemployment is going to start ticking up, because…

TN: It’s not an election year. Nobody cares because it’s not an election year.

AM: Stimulus checks will flow again. It’ll be fun.

SR: The one thing, again this goes to Albert’s point on, will a potential September pivot be a mistake? Pepsi’s report this week showed a 1% organic volume growth and 12% pricing. They put 12% pricing and consumers and had volumes creep up 1%. Guess what? If companies can get away with that, they are going to all day long, and they will in fact, make a fortune on the back side of this.

AM: Of course.

SR: Paying attention to that demand destruction has not crept through yet. If you can push that kind of price and not have volumes fall, guess what?

TN: Well, the biggest thing, of course, and this is a no brainer, but prices are not going back to where they were. They are not going back to where they were. This is not a temporary inflation thing. And it may have started that way, but the way we responded to it was completely wrong. And it just baked in these supply side things that flowed all the way through to the retail side.

AM: Wage inflation alone. Wage inflation alone.

TN: Yeah. But I think we’re going to see more on the, say, low, medium side of wages. I think in order to keep up with a 12% price hike in Pepsi, you’re going to have to see more action on the wage side.

SR: Granted, that was mostly free online. That was mostly salty snacks. And it might have had something to do honestly, it might have had something to do with more frequent gasoline stops. You buy more chips. But I wouldn’t read too much into that. Right. I do think that their ability to push price is pretty good.

TN: Great.

SR: Yes. To your point, it’s a step function in pricing and therefore it’s a step function in inflation. Great. Okay, guys, 60 seconds. What do you see for the week ahead? Albert, go.

AM: Commodities. Rebounding commodities. I’m long wheat. I think there’s problematic globally for wheat. I want to see wheat prices start to track back up, to be honest with you. Same thing with oil.

TN: So soft and energy.

AM: Yeah.

TN: Okay. Sam?

SR: Yeah. Watching the inflation trade, honestly, and I think it’s very similar to Albert’s point on oil. And wheat, I’ll be watching the relative sector distribution pretty closely here, looking for those like XLU versus the housing guys versus some of the other trades to see what people actually putting money to work are really thinking, not just by them.

TN: Very good, guys, thank you so much. Thank you so much for taking your Monday afternoon. Thanks, everybody, for watching our late week ahead. And guys, thanks. Have a great week ahead.

AM: Thanks, guys.

Categories
Podcasts

No Let Up in Fed Rate Hikes

This podcast first appeared and was originally published at https://www.bfm.my/podcast/morning-run/market-watch/us-federal-reserve-interest-rates-hike on July 7, 2022.

Despite weaker economic data, will the Federal Reserve continue their hawkish stance? Do the FOMC minutes offer any hints of their stance? Our CEO and founder, Tony Nash tells us whilst telling us the impact of rising rates on the banking and property sector.

Show Notes

WSN: BFM 89.9. You’re listening to the morning run is seven o’ 7, Thursday, the 7th of July there and keeping you company till 10:00 a.m. Is Shazana Mokda in an undisclosed location far, far away. And I’m Wong shining in the studio now in half an hour, we’re speaking to Manpreet Gill on fixed income and commodity the investment strategy for 2022. But let’s recap how global markets closed yesterday.

SM: So if you take a look over in the US, markets actually closed up despite Fed meeting minutes coming out signaling a more hawkish stance. The Dow was up 0.2%, the SP 500 and the Nasdaq was also up 0.4%. Looking over in Asia though, it’s mostly red. No, it’s all red really. The Naked and Hansi were both down 1.2%, the STI was down marginally by 0.01%, and the Shanghai Composite and FBM KLCI were both down 1.4%.

WSN: So for more on where international markets are hitting, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now so far the economic data coming out of the US shows a slight deceleration of the economy. So do you think that the Fed will then hold back on their hawkish pace of rate hikes despite June’s FYMC minutes indicating that they intend to keep raising rates?

TN: I think they’re definitely going to keep raising rates, I think until we see a marked slowdown in particularly commodity price inflation, but also other things like wage inflation. I think they’re going to keep accelerating. So it’s unlikely they’ll continue with a 75 basis point hike, but they will almost certainly have a 50 basis point hike and continue for the next couple of meetings at least.

WSN: I have another question though, Tony, in that when do you think interest rates will peak or when is the peak of the tightening cycle? Will it be early 2023 or you’re looking maybe later in 2023.

TN: Well, some people are saying that it’s possible they continue to hike until the end of the year, and then in 23 they have some rate cuts similar to what happened in the early 90s. That’s possible. I think it all depends on where the economy is at the time. But I think for now they’re just worried about inflation and the downsides of inflation and they’re looking at asset prices and where asset prices are, and it’s really troubling for them given yeah, the economy has definitely slowed down, but we still have wages rising, we still have very high commodity prices, and we also have an appreciating dollar at the same time. So anything imported should be cheaper on a relative basis, but those prices keep going up as well. So Fed continues to be worried, although they’re getting pressure from the outside because it is an election year and the party in power does not want there to be a recession going into the election. And so they’re getting huge pressure from the treasury and from other people to moderate their stance so that there is not a recession going into the election.

SM: Well, what do you think then, Tony? We know that economists at Goldman Sachs have put the risk of a recessionary slump in the US. In the next year at 30%. So they’re still looking at next year. Some consumers feel it’s already here, I guess. Where are you standing in this debate?

TN: Yeah, I think we have unemployment still falling in the US. So you don’t usually have a recession at a time when unemployment is still falling. We also have high inflation. So on a real GDP basis, you may have a negative real GDP number. Well, you have a positive nominal GDP number. And I know that’s a little bit confusing, but what that basically means is that the rate of inflation pulls the economic growth into a negative number simply because of inflation. So we’re in a place where it’s kind of hard to identify a recession because of the real and nominal difference. But when we still have jobs growing, when we still have investments and other things happening, it’s really hard for us to hand on heart say that we are in or entering a recession.

WSN: Okay, let’s get into the weeds then, with regards to the recent set rate hikes and how that might play out in certain sectors. And I want to look at the US. Banks. So how do you think they perform this quarter? Are you a bull or bear?

TN: Well, it’s a tough time for banks. They had mixed results in Q2, and I think higher interest rates obviously help their net interest margin. But borrowing cools off, and it’s things like mortgages. Other things have cooled off dramatically over the last same month or so. Banks will likely have a very tough Q3, and then when things stabilize, they’ll be better. But I think Q3 is going to be rough for them. I wouldn’t say I’m necessarily bearish on banks, but I would say I’m neutral on banks.

WSN: What about the property sector, Tony? I mean, we’ve heard, of course, a few months ago that whatever you put up in the market, it gets snapped up within the day. But is that trend continuing? Are you a bull or bear for property?

TN: You know what? It depends on where you are in the US. Where I am in Texas, things are really strong. But a lot of other places in the US. Things have slowed down dramatically, and mortgage applications nationally have come to a standstill as interest rates have risen. So I think a couple of weeks ago we may have talked about how a house that was purchased in January, the median price house purchased in January, if it were purchased today, it would cost $800 a month extra. And so the interest rates just had a dramatic impact on house prices. So mortgages have really slowed down.

SM: And can we turn to oil, Tony, because oil prices have dropped below $100 per barrel for West Texas. Does this level accurately reflect supply and demand for crude? And does this then invalidate the bullish forecast of $150 and above that analysts were predicting not too long ago?

TN: Yeah, I think we’re in a really strange place for oil right now. And if you look at the later months of crude oil futures that are being traded, they’re actually trading higher than the current month. So there’s something happening in the current month, like maybe somebody’s books blown up or something. But there’s something happening in the July future that rolls off in a couple of weeks. And I expect that we’ll see higher crude prices going into August and the rest of Q three, early Q four. So it’s going to be pretty choppy for the next few months in energy and commodities generally.

WSN: One last question for me, and it’s more long term economic question, and that’s about Biden’s infrastructure bill that was passed in November last year, but it’s gone really silent. Do you know what’s happening on that front?

TN: Nobody does. There’s been very little news about it. What’s happened partly is inflation has taken a bite out of it and it’s really caused a lot of projects to stall. So the problem with federal appropriations is the longer the money sits, the less money that gets spent, which is good for taxpayers. Right, but I think inflation is really forcing local and state governments to pause on their investment plans because they do have budget, but they don’t have enough budget to get the projects done that they want. So can they appropriate can the US. Congress appropriate more for the next fiscal year? It’s possible. It depends on who’s in power. So if the Republicans come into power in November, then they may not raise the appropriations level and we’ll be stuck with the level that we have, which it’s $500 billion, a massive amount of money. I don’t want anybody to mislead anybody, but the Democrats will likely want to raise that level if they remain in power after the November election. But to date, not a lot has happened. There has not been a lot of movements. We haven’t seen a lot of major announcements of new projects, these sorts of things.


And if it was successful, we would see a lot of major announcements of new projects.

WSN: All right, thank you for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his views on global markets, in particular the US. And whether the Fed will continue to raise rates until 2023. He says maybe, and then maybe they might even cut rates like they did in $2,000.

SM: That’s right. I guess one thing to note is the question is whether we’re going to see a recession sooner rather than later. Yeah, and Tony did point out the fact that labor unemployment is still at really low levels. Unemployment is decreasing so that’s really at odds with a recession and that’s what everyone is looking to see. I think if we start to see unemployment go up, that heralds that a recession is either here or coming.

WSN: I suppose we are living in really weird economic times. None of the normal correlations that we see are making any sense. I think that’s a lot to do with the fact that during COVID-19, governments basically just took the let’s do whatever it takes attitude. There was so much money pumping into the system by every major central bank and the recession was extremely V shaped, sharp recovery. But then that also caused supply chain disruptions and we had the war in Ukraine. It was like the perfect storm of Black Swan events which has resulted in this current situation that we are in now. Very quickly, we’re looking at the Fed minutes that just came out now. Indications are that they are signaling another rate increase of between 50 to 75 basis points lightly in the July meeting. And this is the interesting part, they are willing to accept the price of a slower economy in order to tame inflation.

SM: And this is sort of a change from their soft landing rhetoric, right? So earlier they were trying to say oh, it’s not inevitable that there will be a recession, we can still avoid it, we want to get that sweet spot. But I think now they’re trying to navigate those expectations to go like hey, I think we need to kind of expect pain. There is going to be pain, but it’s better to have this short pay now rather than long term pain later. So I think the Fed is really trying it’s got itself in a pickle essentially in terms of trying to prime expectations of the public.

WSN: I think that’s on the back of the fact that they spend the whole of 2021 telling everyone that inflation is transitory, hey, no problem. And it didn’t turn out to be transitory, so there’s a need to rebuild back that credibility. But up next we’ll be speaking to Carmelo for little on malicious overnight policy rate. Stay tuned for that.

Categories
Week Ahead

The Week Ahead – 11 Jul 2022: Energy Backwardation

We had a pretty volatile week last week, with crude selling off pretty sharply early in the week. In this episode, we looked at energy backwardation, and Tracy educated us on what’s happening in those markets.

We also had some comments from Putin about a multipolar world. Albert talked through that.

And then on Friday, unfortunately, we saw the assassination of Japan’s former Prime Minister Abe. We talked about the Japan post-Abe and what that means for the region.

Key themes:

  1. Energy backwardation
  2. Putin’s Multi-Polar world
  3. Japan post-Abe
  4. What’s ahead for next week?

This is the 25th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon/

Time Stamps

0:00 Start
0:54 Key Themes for the week
1:28 Catalyst of the energy sell-off on Tuesday
5:44 Will we see more action in energy prices?
6:57 Is it cost-ineffective to make hydrogen with natgas prices?
8:11 Diesel
9:20 Vladimir Putin’s multipolar world.
13:44 Japan post-Abe
20:29 What’s for the week ahead?

Listen to the podcast version on Spotify here:

Transcript

TN: Hi. Welcome to the Week Ahead. I’m Tony Nash. Thanks for joining us. I’m with Tracy and Albert today. Sam is away, but we are talking about a pretty volatile week this week. Before we get started, actually, please like and subscribe. Please ask any questions below, make any comments. We want to make sure this is interesting for you, so just let us know any additional info you want or comments. We’re happy to address those.

We had a pretty volatile week this week with crude selling off pretty sharply early in the week. So we’re going to look at energy backwardation, and Tracy is going to educate us all on what’s happening in those markets. We also had some comments out of Putin about a multipolar world. We’re going to have Albert talk through that. And then on Friday, unfortunately, we saw the assassination of Japan’s former Prime Minister Abe. So we’re going to talk about the Japan post Abe and what that means for Japan and the region.

So first let’s get into energy. Tracy, obviously, we had a big sell off in energy early in the week, and then we saw it come back later. What was really the catalyst for that energy sell off on Tuesday?

TS: What happened is that we started on July 5, right? We opened with low liquidity in the market in general. Then we saw a sell off in the general markets and commodities and risky assets that kind of exacerbated that trade. And then on the 6th, we saw a liquidation of a couple of very large positions in that market. And so fundamentally, basically, there is no reason for this sell off other than technicalities.

In fact, if we’re looking at this market, this spreads, the calendar spreads, which means month to month, were exploding higher during this entire move. That implies that the physical market at least, is very tight right now because you’re seeing backwardation increase significantly when we’re seeing a $10 move in ZZ, which is crazy.

TN: Can you tell us what that means? A $10 move in ZZ. What does that mean for the rest of us?

TS: If you’re talking about calendar schedule, we’re talking about monthly. So we can talk about the current front month is August. So we look at August, September, September to October, October to November, et cetera, et cetera. And once these spreads start exploding higher, that means that we’re seeing people want to dump oil in the front month market because that’s more lucrative than keeping it in storage.

So if I’m an investor and I’m looking and I want to invest in a backwardated market, I’m looking at a convex market that goes from right to left, and I’m going to invest in, say, a back month, and I want my investment to move higher…

TN: I’m investing further in the future.

TS: Right. That’s what it backwards. If you’re in a contangable market, we’re looking at the opposite situation, where you’re looking at a convex structure going from right to left, whereas if I invest in December, by the time my investment reaches Frontline X free, I’m losing money. I’m losing value in my investment.

TN: Right.

TS: And so that’s how we kind of have to look at that situation.

TN: Yes. You had a great tweet this week explaining that with visuals.

TS: I did. It’s on Twitter, if anyone wants to see it.

TN: Exactly. We saw this in crude. We also saw it in a natural gas. Right?

TS: Yes. We’re kind of seeing a major pullback in many of the commodities markets. Right. We’re seeing a little bit of a bounce this week because we’re looking at China. China has recently announced we have one last announcement with $200 billion bond sale rate. So we’re looking at a lot of stimulus out of China that’s giving commodities the boost. Right now, we have to see I think the markets are still going to wait on, particularly the industrial and base medical markets are going to wait until we actually see some action in China to really see investment back into these markets after this huge goal.

TN: So nobody believes the China stimulus story right now. It’s kind of a show me the money period. Right. But once they do start to show the money, do you think we’ll see much more action in energy prices?

TS: I think you’ll see more action in metal prices than you will equity prices.

TN: Copper’s way off compared to, say, the last 18 months. But it’s not way off, given historical copper prices. If we go back before, say, Q1 of 2020, it’s kind of where it had been previously in the ballpark, at least. Right. So we haven’t necessarily reverted back to pre-COVID, necessarily. We’re just in the start-stop manufacturing world, and that’s what’s affecting base metals like copper. Is that fair to say?

TS: Oh, absolutely. If you look at, like, a monthly chart rather than looking at a five-minute chart, and the market has kind of just been consolidating, really, for the last two years, until we see a really big break above, say, $5, a really big break below $3, we’re still kind of in that consolidation zone.

TN: 3.50 to 4.50 kind of range. Interesting. Okay. Sorry, Albert.

AM: Yeah. I got a question for Tracy. Nat gas, as we’re talking, since we discussed it a little bit, that’s used to make hydrogen, if I’m not mistaken, and since the nat gas price seems to be elevated, isn’t that going to be a little bit too cost-ineffective to make hydrogen, which causes a diesel problem, if I’m not mistaken? I’m not sure about that. That’s what I’m asking.

TS: No, absolutely. I think that would be a problem. Looking forward. I think there’s a lot of problems if we’re looking at the hydrogen market. There’s still a lot of problems when we’re talking about taking this idea to actual fruition. Right. Because if you look at the hydrogen market, there’s like a rainbow of green hydrogen, blue hydrogen, this hydrogen, this hydrogen. But we really haven’t gotten to the point that can overtake, not gas the allure of the situation is that you can take hydrogen, mix it with nat gas, you can send it down the same pipeline, and that saves a lot of money.

AM: Yeah.

TS: The situation is this is not a great idea in theory, but we’re just not there yet.

TN: Okay, got you. Albert’s, question about diesel. Diesel is not any less tight than it was a week or two ago. Right? In fact, that’s just as tight or tighter than it was, say, a couple of weeks ago or a month ago.

TS: Yeah, I think the diesel market is still very tight.

TN: Right.

AM: Maintenance season starts, isn’t it? From September to November?

TS: Yes, we will start maintenance seasons.

TN: Okay.

TS: I would actually look for some of these refineries to maybe put off maintenance season. So that’s what I would watch to the maintenance season happen. And it’s happened before. If we have it such a tight market, we could see them putting off maintenance seasons. It’s not unheard of.

TN: Okay, so hurricane season and maintenance season are upon us, but we may see at least maintenance season for all of us.

TS: Oh, not I just moved to Florida.

TN: Good luck with that. I’m in Texas. We don’t get as many of you, but it’ll be a fun season for you.

Okay, let’s move on, guys, to some comments out of Putin this week. Vladimir Putin had some comments about us, the multipolar world becoming more and more of reality. We heard this ten years ago. We heard this 20 years ago, and it came up again this week. So, Albert, can you kind of let us know what’s going on there?

AM: Tony, I’ve used this multipolar example for the US. Dollar dominance I got for years now. And the fact of the matter is, we are not in a multipolar world. We are not even going into multipolar world.

People are confusing a little bit of weakness in the US. Leadership and errors and decision making, foreign policy for multipolars, it’s just a multipolarity, and it’s just not the case for the world to be in a multipolar scenario, you would need multiple countries with equal militaries and economies. We are nowhere near that.

The Russian economy is 2.5 trillion. The American economy is pushing 30 trillion. This is just a joke by Vladimir Putin. Simply undermine the US dominance both in the world stage and the dollar.

TN: Aside from some dumpster pundits who write for The Atlantic or whatever, who believes that nonsense?

AM: A lot of Europhiles that want to see the United States take a step down, they can do it. A lot of crypto guys, a lot of gold guys. These guys have to make that argument, because without multipolarity, you cannot have a neutral reserve asset to settle trade. And that’s just the fact of the matter.

The problem becomes, if you have a multipolar world, you’re on the verge of another world war, because there always has to be one alpha that takes hold of the system. You just can’t have equal people.

TN: And the cost of the transaction? Cost? The cost of trade, everything goes up. If you have multiple rights go up, everything goes up.

AM: It’s completely unstable.

TS: Inflation from other countries to other countries.

AM: Yeah.

TN: The world is built on China exporting deflation. Has been for 15, 20 years. And it will continue. If they could just keep their ports open, it will continue. And it makes people happy. Right.

AM: No, you’re right. That’s just the way our system works right now, with the dollar underpinning all of it. It’s the lifeblood that makes trade work. And people are not going to like it. But I promise you, no one alive today is going to see anything other.

TN: So let me just take a step back. Who does he think the polls are? Russia, China and the US? Or Germany or something?

AM: He’s trying to make an assumption to say that Russia and China are the new contenders to the United States. The problem with that is they don’t have military power projection globally like the United States does. They can’t even invade Ukraine. China can’t even invade Taiwan. Otherwise they would have taken it if they’ve it could have. This is the world we live.

TN: Yeah. Russia can stir up problems in Libya or the Middle East or whatever.

AM: There’s no question that they can stir up problems and they can fill in gap vacuums that we leave right, unintentionally, unintentionally. But they cannot hold that territory. They cannot force changes in governments like the United States did.

TN: And every time I hear somebody talk about the Belt and Road as a sign of China’s dominance, it reminds me of Napoleon’s march to Russia. Right? I mean, they’re spreading themselves so thin. They can’t keep that up.

AM: They can’t. That’s perfect example to do that, to make that thing actually successful, you need to back that up to secure your trade line, trade with the military. Right. China has like, what, two military bases outside of China? Like one in Djibouti and something else. I mean, they can’t send ships over to their armor.

TN: Myanmar.

AM: Yeah. This is beyond a joke to me. I don’t take anybody seriously that even brings this part up, right. Vladimir Putin included.

TN: That’s good. So anybody watching this, if you have an alternative view, let us know in the comments. Honestly, we’d love to hear it. We just want to hear some credible.

TS: Put your notes in the comments.

TN: Yes, absolutely. Okay. Now, finally today I woke up in the US to the really tragic news of Japan’s foreign Prime Minister Abe, being assassinated.

I saw Abe in his first stint as PM in the mid 2000s. And then when he came back in, in 2013, and with the Abenomics plan, which was really difficult to pull off, ultimately successfully. The guy was smart. He was all about Japan. He’s all about Japan recovering, all about Japan being competitive. I put a picture up of Abe shaking hands with Prime Minister Modi of India. Japan and India were very tight. A lot of Japanese investment going to India, a lot of partnership across those two countries and in Africa, both to defend against China in Asia and other parts of the world. So Prime Minister Abe will be missed.

I think what Abe did partly was bring back Japan’s ability to defend itself by passing a constitutional change that allowed the Japanese military to defend itself where previously it wasn’t even allowed to do that. So there’s a lot of dignity that Japan kind of got back, and we can rub Japan’s nose in World War II for eternity, but it’s not going to be constructive. What happened, happened. They’ve paid their dues, and that’s kind of what Abe said, look, we paid our dues, we’re going to move on now and join the 21st century. And that’s what Japan did.

So I’m just curious to get your thoughts, guys, on Japan post Abe. What do you see as of course they moved on to another prime minister. Japan has already moved on from the Abe government. He wasn’t a sitting prime minister. But what do you see kind of the challenges of Japan’s role in Asia particularly, but also in the world post Abe?

AM: I think the most pressing issue for Japan would be contending with China, both militarily and economically. Abe was, like you said, brilliant statesman and patriot for the Japanese people. So he’s going to be sorely missed. And it’s not just he’s going to be missed, but his cabinet and the people that his network is going to be missed because they’re losing a big part of what he brought to the table in terms of strategy and ideology. It was a big shift.

I think that the Japanese are probably going to struggle for strategy in the next five to ten years. And it’s a sad thing, but I’m sure the Japanese, they’re resilient people and they’ll move on and they’ll recover.

TN: Tracy?

TS: No, I absolutely agree with what Albert said. I think the thing is that people are painting him, the media right now, in particular the Western media, painting them with some villain, which is very interesting to me. And I think that people should really just look at his legacy and respect what he’s done instead of jumping on the bandwagon.

TN: So they’re portraying him as some ultra nationalist, but he’s as ultra nationalist as Modi as in India, or Jokowi is in Indonesia, or Lee is in Singapore, you name it. Tsai Ing-wen in Taiwan. It’s an Asian direction now. Right. And has been for the last ten to 15 years.

AM: Yeah. The media also, Tony, is desperate to not allow any center right or even right nationalist figures be murderers or looked up upon. They just can’t stomach it. They just can’t help themselves to demonize a person that is absolutely unjustifiably demonized by being called an ultra-nationalist and even worse, by the NPR.

NPR had two other headlines that they had to delete because it was just so atrocious. This is a.. And Modi, Abe, I don’t want to put Victor Orban into that, but all these right leaning leaders just get attacked and the media can’t help it.

TN: Right, yeah. I think from an economic plan, if we look at what Abe did with Abenomics, of course, the Japanese Central Bank is kind of “independent,” right. But they really took the JPY from kind of 76 to the dollar to, say, 120 to the dollar, and it really allowed Japanese manufacturing to be competitive again. Right.

And it took somebody with that clarity of economic vision, as well as the clarity of, say, the military vision and political vision, to be able to pull off what they did. And in terms of, say, energy sustainability under Abe, they also created much deeper relationships in the Middle East with places like Qatar, UAE.

TS: And they also looked forward to nuclear, where you looked at the west was looking to shut things down, Abe was looking to invest in nuclear projects. You’re looking for energy security, energy going forward. There are a lot of things that he did to advance that sector in Japan, which is admirable.

TN: Right. Albert if we take a US perspective on this? The US has worked hard to kind of hold a line against China. Do you think with the mediocre leadership we have in the US right now, do you think it’s possible that some of that US say coalition falls apart a little bit? Or do you think we just kind of take a breather and then it resumes based on the institutional stamina of parts of the Japanese government?

AM: That’s a great question, Tony. That’s actually a really good question. And I think where we have to look for we have to separate the Biden foreign policy cabinet with the Pentagon. Because the Pentagon is actually leading this charge for the Pacific with Japan and Australia in charge. I really don’t think that the Japanese are going to take a step back or the US is going to take a step back. I think the system is pretty much, the train has already left the station and it’s rolling.

There might be an argument from the opposition in Japan, but I don’t think. That it’s going to take hold to derail this new initiative by the US and the Pacific.

TN: Great, that’s good to hear. Okay, guys. Hey, on that somber note, we’ll end it, but let’s look at the week ahead. Guys, what are you looking for in the week ahead? We’ve had this real turnaround this week. What do you see going into next week? Do you see things calming a bit?

We saw it coming into Friday. Things really turn up in US markets and in commodity markets. Do we see things stabilizing a bit going into the Fed meeting after we’ve had some Fed comments late this week?

AM: I want to see the comments of where they might signal a 50 basis point rate hike versus a 75. I absolutely believe 75 points is coming just from the jobs data that they posted. It was obviously massaged a little bit.

TN: Just a little bit.

AM: Of course it is. Yeah, but this was a good one. And then the revision too, and it just seems to me that they want another 75 basis point rate hike.

TN: To really kill it?

AM: They got to tackle inflation. I mean, they’re looking at 8.8 on the next CPI, which is just.. And you’re staring on the barrel at 9% and 9.2 and 9.3 in the coming months, which is absolutely a political nuclear bomb that goes off.

TN: Okay, Tracy, what are you looking for in the next week especially in commodities?

TS: Yeah, I mean, I agree we probably will see 75 after non farm payroll this week, which I was looking for a clue kind of are we going to get 50, are we going to get 75? It looks like 75 for sure.

So looking in the coming weeks, I’m really looking to China right now and to see what comes to fruition with these sort of stimulus plans. What does that do to the base in industrial medals markets? And I think those are the two things that you should be focusing on right now, particularly if you’re invested in commodities markets.

TN: Very good. Okay. Yeah. I’m kind of hoping they give in to 50, but I’m not hopeful. I do think they’ll on the kind of conservative hawkish side and go 75. But if they can pick up the bat phone and talk to China, and the China guys will unload a dump truck of cash over the next week or so, then I think they’ll be a little bit lighter and do 50 basis points. But I think a lot of it depends on China ECB. They can’t get their act together, so there’s nothing ECB can do to really help.

And Europe is in so much trouble that it doesn’t really matter what they do. They have huge problems anyway. So. I think you’re right. And tell me what you think about this. But I don’t necessarily think we see massive chop. I think we see just a lot of fairly sideways moved for the next week or so.

AM: I would be wary if we jumped up to 4000 or even, like, 3970. I think a rug pull would be in an order right after that. That’s what they do. They bowl everybody up and then pull the rug out.

TN: Tracy?

TS: Yeah. After this big move down in the oil market, in particular, because we did have sort of a flow event coupled with a couple of large funds kind of workforce to liquidate. So I could see that we still could go a little bit higher next week. Sideways to higher next week.

TN: Very good. Okay, guys, be interesting to see. Thanks for joining us. Thanks very much. Have a great weekend. And have a great week ahead.

TN: Very good. Thank you, guys.

AM: I struggle with the headache through that whole thing.

Categories
Week Ahead

The Week Ahead – 04 Jul 2022: Metals Meltdown

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We’ve all seen many chops in the markets, especially on the energy side, with the fuel and oil shortages. That was a little bit unexpected to people. Equity markets are struggling and there are a lot of talks this week about recession and trying to move the Fed into being more accommodative, which is 180 degrees from where we were two weeks ago.

Copper is hurting and down 28% since March. What is this telling us about metals, generally, and drivers of metals demand? Is this telling us that China – the largest buyer of industrial metals – won’t really bounce back? Does the market doubt China’s stimulus announcements?

We also discussed Europe, its slowing economy, rising unemployment, and gas shortages.

Lastly, is the Fed anchoring inflation?

Key themes:

  1. Metals Meltdown
  2. How badly is Europe hurting?
  3. Fed inflation anchors
  4. What’s ahead for next week?

This is the 24th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon/

Time Stamps

0:00 Start
1:45 Key themes for this episode
2:23 Metals meltdown – what are they telling us?
3:48 Will there be a comeback of automotive?
5:09 Does the market believe China’s promise of a stimulus?
7:25 How much is China’s manipulation be beneficial for China?
9:26 What about Japan?
12:00 Europe’s economy and inflation
15:21 Europe’s concentration risk on the sale side
19:42 Europe’s problems stem from this
20:32 Fed and anchoring inflation
25:50 What’s for the Week Ahead?

Listen to the podcast version on Spotify here:

Transcript

TN: Hi everybody, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Sam Rines and Albert Marko. Tracy is out for the long holiday weekend. Before we get started, please don’t forget to like and subscribe the video and please comment on the video. We look at them, we engage. We want to hear your feedback. Also, while you’re here, we have a promo for CI Futures. This is our markets forecasting tool. Our promotion is three months free on a twelve-month subscription. That promotion ends on July 7. So please take a look at it now and get our best promo ever.

So, key theme for this week. We’ve all seen the markets a lot of chop as we talked about. We saw a lot, especially on the energy side, kind of negative with the fuel shortages and oil shortages. I think that was probably a little bit unexpected to people. Equity markets are struggling and there’s a lot of talk this week about recession and trying to move the Fed into being more accommodative, which is 180 degrees from where we were two weeks ago. So a few things we’re talking about.

First is the metals meltdown. Second, Albert Marco, although he’s been in an undisclosed location, he has been in Europe. And we’re going to talk a little bit about how badly Europe is hurting right now. And then we’re going to look at inflation and how the Fed is potentially anchoring inflation.

So first, let’s look at the metals meltdown. If we look at copper. Copper has been a lot of buzz around copper over the last few days and copper is down 28% since March. But I think we could speak to metals more broadly. We’ve got the copper chart on the screen right now. So Albert, if you don’t mind, what are metals telling us generally about markets and the drivers of demand?

AM: Well, I mean, it’s pretty clear that the manufacturing sector across multiple industries is hurting at the moment and has taken a toll in the metals market. There just simply isn’t any demand for consumer products. There’s not going to be any demand for metals probably until the Chinese really start to stimulate.

It’s pretty clear. And then on top of that, they have pressure from the dollar that just keep on charging along trajectory to 110. So those things are really weighing on the metal market. I mean, copper specifically, like you mentioned, aluminum taken some hits just across the board.

TN: Right. So if we look at things like automotive, automotive is held up because of semiconductor supply chain issues which are working out, but automotive manufacturing slowed pretty dramatically. If we see, say, the chip issues get worked out for, say, automotive, do you expect to see more like a comeback of automotive, of car manufacturing, which will pull metal prices along?

AM: No, I don’t. And I don’t think that’s even going to be the case for the next 18 to 24 months. I mean, the auto sector is actually in a really bad shape, And it’s not specifically just because of the chips, like everyone assumes, but you have rubber shortages, you have polyurethane shortages, you have shortages across the board for the entire auto sector, for the manufacturing process. So until all of those supply chain issues get settled, there’s just no hope at the moment, which is interesting because there hasn’t been really any layoffs yet.

I know they’re artificially keeping these people on payroll and doing whatever they want to do with the shifts and manipulating that. But at some point and i’ve been arguing about this specifically the auto sector, there will be layoffs because of all this.

TN: Just for the people who don’t know. Albert is from Detroit, so he pays attention to the auto sector pretty closely, and he knows he has pretty close relationships there. So we’re talking to a man who really does kind of pay attention to what’s going on. Sam, as we see metals prices fall, we’re also seeing china become more aggressive in making statements about economic stimulus and other things. Are the metals prices right now telling us that the market doesn’t believe that china is going to put in the stimulus that they claim to be?

SR: I would say it’s a show me game with China. There’s been way too many people that have been burned way too badly, listening to the rhetoric and trying to get ahead of things on the ground, and then nothing actually happens, or they do something a little different than what they said they were going to do, and you end up with an investment profile that’s completely different.

I think that’s one of the big things to keep in mind is, yes, China is probably going to have to do something into or around the party congress this fall in terms of stimulus. They have to look at going into it. So there’s going to be some stimulus. The question is, what is it and when does it hit and what does it look like? Is it a tax cut? Because in that case, who cares, right?

It’s not going to be that big of a deal for picking up the manufacturing side in a meaningful manner. Is it going to be reopening? Right. Because if they’re sending out checks but not reopening, that’s not going to allow their manufacturing sector to get back to work, which is going to Albert’s point, going to continue to clog the supply chains for autos and auto manufacturing significantly, whether you’re us. Based manufacturer or your South Korean manufacturer, et cetera.

This is a longer term problem where I think you’re not necessarily going to have the pop and metals until people actually see the real data from either Australia or the us. Or even in Mexico. But that’s a significant amount of the auto sector assembly. You’re going to actually have to see the data before people.

TN: Right. And so what I hear about metals in China and I’ve mentioned this before, but what I’m told by people, especially in the copper sector, is that the warehouses in China are actually full, although we’re told that they’re not. They are. And words that warehouses empty out from time to time is simply to manipulate the market up. But there’s ample, say, copper and other industrial metals in warehouses in China, given the demand that the world has.

AM: Let me ask you both little question here. How much is China’s manipulation of their stimulus on and off due to them trying to force the Fed into lowering the rate hikes or putting them into a position where it’s beneficial for China overall?

TN: Sam, what do you think?

SR: I would say they definitely have a calculus instead of the ECB, instead of a certain extent the BOJ when they.. they all have to take that into account and they all have to either front run or attempt to talk their markets one way or the other. That’s why I’m saying it’s definitely part of the calculus. I don’t know how much of the fiscal side is directly related to counteracting with that and how much is directly related to keeping the people happy. I would say those are the two primary catalysts.

TN: Yeah, I think that’s right. I think any Chinese stimulus that’s going to be effective in the short term has to be cash in, say, local government accounts, people’s accounts, company’s accounts. As Sam said, that tax cuts not going to cut it, indirect payments are not going to cut it. Announcing a new rail stimulus, which they do every other year, is not going to cut it. They actually have to just churn cash out in markets. But with the US dollar and rates, I think they’re really careful right now about how quickly they devalue CNY. And I think that is one of the things that they’re being careful of. They don’t want to devalue it too quickly because Chinese exports have surged over the past six weeks. And so if they can continue to make money at the rate they have, they’ll put off the DeVal as long as they have to. But if the dollar continues to appreciate, they may have to accelerate the evaluation and they’re in a tough spot. China is not the all seeing, all knowing planner that many people think, well.

AM: Part two of that would be what about Japan? Because they devalued the Yen and they’re kind of combating whatever China is trying to try and propose and stimulus. So how does that all come into the equation?

SR: And I’ll just pop out that one of the interesting pieces to kind of throw into the puzzle is not copper sending one signal that China is maybe not going to stimulate, et cetera. But you look at Chinese Equities X, the state owned entities, and guess what? You had a plus almost 7% second quarter for those equities. So the market is sniffing something out there. There might be a little bit of a hedge of, well, if you’re not going to build a bunch of stuff, you might hand out checks, like you said. And if you hand out check, it’s going to benefit the Internet and Chinese tech companies more than it’s going to benefit the metals industry.

TN: Right. And if they want to stimulate the top echelon of Chinese society, they could just goose equities and focus on a trickle down theory, which is very anticommunist, but it’s something that they can do pretty quickly. They did it in 2015, they’ve done it at other times, and they can do that. But going back to your Japan question, Albert, it’s an interesting one because China is such a supply chain risk going forward, the uncertainty there, that Japan is selling itself as a secure alternative to China. And that’s why one of the reasons why they’re devaluing so strongly is so that it’s just a no brainer to get stuff done in Japan. Right?

AM: Yeah, of course. That’s a great explanation. It’s very concise and simplistic, and I had known this, but I wanted you guys to explain this to the viewers because it’s a critical thing that most people don’t really take into account. They always see China. China. And they ignore Japan and South Korea.

TN: Yeah, Japan and South Korea have been devaluing. It’s more depreciating than devaluing. I know there’s a nerdy difference between those two, but they’ve been pushing depreciation because they wanted to be seen as a safe alternative to China. But then you also look at Southeast Asia, places like Vietnam, other places, things in Vietnam, all those exports are done in dollars, not in dong, so they can’t really play the currency card to do values.

SR: It’s also worth remembering that Japan exports a lot of machinery to China, and so if they don’t, if they strengthen their currency while China is devaluing, that puts them in there.

TN: That’s right. Great questions, Albert. Thank you for that. Okay, let’s move on to Europe. Albert, so you’ve been there. Let’s start by looking at inflation. So we’ve got on the screen right now a comparison of inflation rates in, say, the US. Europe and China. And PPI, especially in Europe, is blistering hot. It’s 40%. And CPI, of course, is accelerated as well. It’s ten plus percent, if you believe that. I think it’s higher than that. But as you’ve been there, can you walk through some of your observations of what’s happening in Europe right now and how it’s affecting companies and the way people spend and so on?

AM: Well, from the bottom up, for the general public, that’s just pure desperation. The media just doesn’t want to cover it because it’s just bad news for every single political party out there. Inflation is running rampant. Food, it’s running rampant. And every single product they have, they’re used to high gas prices to begin with, but like the United States, there’s a certain amount where the strain is just too much for families.

I believe the UK. One out of four people were skipping meals because of food inflation prices. One out of four? That’s stunning. And that will have long term health effects down the road. But we’re talking about the year now. Europe’s manufacturing sector is an absolute shambles. Their export engine into China is just nonexistent. They haven’t built out any overseas networks into Africa or other emerging markets to be able to compete. They have no military to sit there and actually push the trade issues their way. They’re secondary. Not secondary. They’re behind Russia and China in that aspect, not to Mention The United States. So, I mean, I complain about the auto sector in the United States. The manufacturing and the auto sector in Germany is absolutely dead.

TN: Okay, I want to pull that Apart a little bit. Okay, so the manufacturing in Germany is dead or dying, largely because of concentration risk in Russian gas as a feed fuel, right, for electricity.

AM: The energy prices have skyrocketed. Corporations And Private businesses are struggling to keep up with margins to cover their costs. And the governments are just like. They’re just making things worse in Germany, I believe they’re handing out money to every single person, refugee or youth person, that think that will vote for them in the future. That makes inflation worse. I can go down the list of different things that they’re doing an error, but I don’t see how Europe pulls out of this specifically in the fall and going into 2023. I mean, their gas shortages are such a problem here right now that I can’t even fathom what the problems are going to be in Germany and Italy and France going forward.

Actually, in Germany and Austria, they’re running out of wood to heat their homes because people are stockpiling that already, and this is July. So I mean, there’s going to be some serious repercussions of Europe. And this is why I targeted Europe to be a problem, possibly for financial crisis and contagion leading back into the United States. It’s just a big problem across the board.

TN: That PPI chart is just so stunning. Now we talk about concentration risk on the supply side. Let’s look at concentration risk on the sales side. Right. Europe has really over concentrated a lot of its sales requirements in China. China has been the market for a lot of European companies. Right. And outsource manufacturing. So they’re as concentrated in China or more concentrated in China than many US companies are, first of all.

AM: By far.

TN: And they’re more dependent on China as a sales market in many cases, than many US companies are, right?

AM: Yeah. This is the problem that I’ve had with Germany specifically. I want to pick on Germany because they are economic. That’s just the fact of the matter. But the Germans, they go out and they see China as a huge market, and they start pushing out their high tech trains and their windmill technology and so on and so forth. Well, the Chinese, all they did was order that stuff, buy it, piece it apart, copy it, and then they sell that to the Africans for one fourth of the cost of the Germans could possibly sell it to the Africans.

So not only is Germany losing out long term with Chinese trade in the market, because that’s stagnating, but now they have no chance to go into the African market because it’s flooded with Chinese parts.

TN: Sure.

AM: They made such critical errors for the years, and they were just so drunk on cheap money out of China that now for the next decade or two, they’re going to have problems.

TN: Yeah, but my overarching points are that Europe is over concentrated on the energy side with Russia, and they’re over concentrated on the manufacturing and then market side with China. And aside from that, they’re kind of out of bullets. They don’t have a lot. And I think that is a lot of the basis for the reason we’re seeing PPI just explode in Europe.

AM: Yes, of course. The only country that even has the only country… The French are smart. I don’t want to hear anything from the Americans be like, Oh, the French are weak and put up the white flag on the Eiffel Tower, whatever these jokes are. But the French have nuclear power and they have food security for their entire nation.

Two of the biggest problems right now in Europe, France has a grasp on. The rest of Europe is total chaos. But those two issues in France are absolutely secure, and the French are smart and they’re looking for long term gains to push the Germans out of the way and take over the EU, and that will actually end up happening. But in the near term, inflation is almost worse there than it is here. Their housing market is mainly cash based, so it’s not as bad of a bubble, but everything else.

TN: So you don’t see much let up in Europe for the rest of 22. You think it continues to be pretty dire in Europe for the rest of 22?

AM: Oh, absolutely. I think the only reason that it’s even somewhat stable at the moment is the tour season has kicked up, and then that’s created other problems where you’re going to cancel flights and overbooked hotels.

TN: Right. Sam, do you have a similar view on Europe at least for the remainder of the year? It continues to be really difficult for the remainder of the year.

SR: Oh, yeah. And the only other place that I would point out is Italy. I mean, Italy is in a pretty rough spot here too. Even with Mario Draghi at the helm, they’re still in a pretty tight spot, and part of it is natural gas and pretty tight there. But the other part is that when it took Legarde about 35 seconds of saying, we’re going to tighten up a little bit here, from negative rates to maybe zero to almost blow up the bond market in the BBB market, it was insane what was going on, and it was a very small move, and you still had yields blow out across the Italian government deck. It’s one of those situations where things move very quickly, things break very quickly, and it doesn’t have a whole lot of bullets in the site.

TN: It’s not like they can go to their version of the permian and drill again. Just to bring this back to something really basic. A lot of Europe’s problem stems from the fact that it has a very old population. So they don’t have young, productive people to keep up with the commitments to very old people in very simple sense. Does that make sense? Is that right?

AM: Oh, absolutely. Looking at just the Italian demographic, all those young Italian guys have bolted for the UK, London, and New York and Miami. They’re gone.

TN: So until they either have a lot of babies, automate, or have a lot of new immigrants, Europe continues to have the same issue?

AM: 100%.

TN: Okay, good.

SR: Demographics don’t change quickly.

TN: No, they don’t.

SR: It’s about 18 years.

TN: That’s right. Okay, so let’s move on to the Fed and inflation anchoring. Sam, you had a great piece in your newsletter, which I’ve referenced many times, and people always ask me how they get their hands on it. So it’s one of the most exclusive newsletters you can get in America. But you had a great piece on Fed Anchoring. Now, I put a chart up on five year inflation expectations. The only reason I put this up is because they really peaked back in late February. Okay? And after that, the five year inflation has really broken down a lot, almost to normal ranges. Okay. So I know you’re looking shorter term, but can you walk us through a little bit about the Fed Anchoring inflation and what you expect? Kind of the near term impact?

SR: Sure. So kind of the point of what I was trying to get across. There’s really two things that you needed anchored for markets to begin to find some footing in the US. At least. And that was you needed to have inflation expectations begin to become anchored. And I think we’ve seen that. Right. You see that chart and it peaked in March, give or take, and has fallen back towards call it normal ranges, if not slightly below what you would expect in this type of environment. That makes sense, right?

In five years, we’re not going to have this type of solution. I’ll be willing to accept that no problem unless we have another flare up somewhere. But I think that’s a fairly reasonable thing to do. But also you have to have the expectations for the Fed anchored as well, because you had two unanchorings that were really happening side by side that was highly problematic for markets.

One, you had inflation unanchoring very quickly, and that’s problematic for markets generally. But you also have the Fed expectations becoming unanchored, and the market was pushing, pushing, pushing for whatever it could get in terms of hikes. Right. It was 75-75-50-50-50. Adding an item to somewhere around four and a quarter percent at the peak. And as of today, you’re back to having the terminal rates or where the Fed raises interest rates to happen by December of this year, and it’s 3.25% 3.5%, and then it cuts next year, is the expectation.

So you’ve begun to have, call it a pricing that’s similar to 1994 hike and then cut style of Fed. That is pretty interesting. That’s a pretty anchored expectation for the Fed. It’s a reasonable expectation of the towards neutral. You’re probably somewhat towards real rates at that point being somewhat positive just because you have inflation of about 3.2 and you have a Fed funds rate a little bit above that. nThat’s why I think that’s a fairly reasonable place for it on the inflation expectations front, that’s largely specifically going to call it close in inflation expectations under a year.

Those are largely call it oil and gasolated and groceries.

TN: Very much energy.

SR: Yeah, this is US. This is not Europe. But as long as in the US, you don’t continue to have those rise in a dramatic fashion, people tend to stop extrapolating. Those forward in their inflation expectations either stabilized or declined back to what they call it normality. And that normality would be somewhere between two and a half and two so that we could spot.

TN: So if gas prices, gasoline prices in the US stopped at, say, 490 or whatever they’re selling at now as a national average, let’s say we plateaued there for three or four months, people would adjust and it would be livable?

SR: It would be livable, yeah, it would be livable. So long as the not accelerating higher.

TN: As long as what, sorry?

SR: As long as they’re not accelerating higher.

AM: Yeah, Sam is right. The risk is as long as they stabilize, I completely agree with Sam. We have one hurricane in the Gulf of Mexico. We have a problem, like a real problem, looking at like $5.50 to $6 gas, and then inflation becomes absolutely just insane.

Going back to the inflation number that they printed out last time, they’re using this ridiculous 5% for housing and shelter and the CPI equation. It’s a little bit hard for me to swallow, but if they can do some kind of magic and keep inflation somewhat steady over the next few months I agree with Sam.

TN: It’s kind of a short at that point.

SR: The interesting part about that is you create an interesting duality in calling risk markets, where the US risk market looks very attractive. If you’ve peaked on Fed pricing, if you peaked on the PE killing. PEs are down 35% year over year. That’s a bigger drop than we’ve seen for several corrections.

You can have a really interesting US risk market going into the back half of the year across markets. The curve, on the other hand, that could be two spends to get very interested very quickly.

TN: Very good. Okay, good guys. What are we looking for for the week ahead? We’ve got a holiday here on Monday. We’ve started to see, say, gasoline prices perk back up in markets on Friday. Are we going to start to see potentially in the near term gas prices rise post July 4?

AM: I think so. One of the things that’s not being said, I don’t think we touched upon, I think last time we did, but the Saudis come in with lower than expected barrels per day, lower capacity, and this must have been stemmed from McCrone and Biden trying to price cap them. Come on, you do that to us, we’re going to do this to you. It’s a game at this point. And the Russians are certainly pulling strings of the Saudis and the Iranians to make this a little bit more chaotic for the US. So I think gas does go does start to trend a little bit higher over the next two weeks.

You’re certainly going to hear noise from people with July 4 prices for barbecues coming up. So that’s going to be all over the news.

TN: Okay, interesting. Sam, what are you looking for during the week ahead?

SR: To build on what Albert was talking about? I think it’s really interesting that spare capacity from OPEC just doesn’t appear to be there whatsoever. But at the same time, you’re also probably going to have at least somewhat of a call, a permanent impairment of Russian oil fields if you continue to have sanctions, that puts a floor long term in global energy prices, period. And if you don’t have US service firms keeping those fields going, we’ve seen what happens when you send Chinese and Russian oil services firms to Venezuela just before you destroy the oil industry.

So look forward to that. On the other side, I’m really looking forward to the conversations that a bunch of millennials have to have with their parents, the crypto markets this July 4.

TN: You are a millennial.

SR: But I am looking forward to some glorious Twitter cons that Tuesday.

TN: Fantastic. Okay, guys, thanks very much. Have a great holiday weekend and have a great weekend.

AM: Thanks, Tony.

SR: Thanks, Tony.

Categories
Week Ahead

The Week Ahead – 27 Jun 2022: The “R” Word

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Powell was out saying “I don’t think a recession is inevitable” but also admitted that rate hikes may be one of many factors that push the economy into recession. All of this while bank credit continues to grow, which we saw flatten in 2020 and decline in 2008. What’s happening? Is a recession inevitable at this point?

We talked about the dollar two weeks ago and the strength is still there. Are we pushing higher so commodities feel a bit cheaper to Americans? Is this temporary – mainly so Americans talk about cheaper gasoline over the July 4th holiday weekend? How far and how long do you expect the dollar to go? Why?

Can crude continue to rally into a recession?

Key themes:

  1. The “R” Word
  2. Geopolitical fallout
  3. Crude 💪 or 👎/ Dollar 🚀
  4. What’s ahead for next week?

This is the 23rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon/

Time Stamps

0:00 Start
1:03 Key themes for the week
1:48 Powell’s recession call
3:48 The catalysts that could whip growth
6:58 Geopolitics in EMs and related to the US
8:35 Is the ECB a risk as well?
11:00 Crude and the Dollar
16:00 Where do you expect the dollar to go?
19:00 The week ahead

Listen on Spotify:

Transcript

TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. We’re joined as always, by Tracy, Sam, and Albert. Thanks, guys, for joining us. Before we get started, please, like, please subscribe, please comment. We read all of them and try to respond to all of them. So please go ahead and do that while you’re here. Also, we are running a summer promo for CI Futures. This is our market forecast subscription product. You get three free months, so please go to completeintel.com/2022Promo and learn all about it.

So this week there’s a lot going on, a lot politically in markets, other stuff. We’re talking about three main themes this week. First is the R word. Second is geopolitical fallout of the R word. And third is crude and dollar activity. So I ran a poll earlier this week asking what is the most widely held consensus view that people are seeing right now? And that’s on screen, of course. So first is recession. People are seeing recession as a consensus view all over the place. Next is equities lower, followed by crude higher, followed by a stronger dollar. So we’re going to talk about all these things today.

Sam, let’s talk about that recession call. That recession consensus call. Powell is out this week saying, I don’t think a recession is inevitable after being really hawkish last week and driving people kind of to the edge of this. So what’s actually happening right now? We’re seeing credit continue to grow. And I know I showed you earlier this week. Bank credit continues to grow. Is that meaningful? And what are you looking at to know if we’re going into recession or not?

SR: Yeah, I mean, bank credit, is meh. But at the same time, are we going into a recession? Meh. I don’t really think so. It’s a booming summer. You have hotels full, you have bars and restaurants full. You have airlines unable to keep up with demand. I mean, that sounds like a small subset of the economy, but at the same time, that is a massive portion of the summer economy. It’s massive. So do I think we’re imminently in a recession? No. I actually think that’s one of the big narratives that kind of misses the bigger point, right? Do we make goods? No, we don’t make anything. What we do is we have services. That’s it. So we’re a service based economy. If services are booming, you’re not going into a recession. You’re unlikely to see some sort of huge move in unemployment because a recession technically is down on growth, down on employment.

If you don’t have the down on employment, you don’t have a recession. So maybe you have a slowing of growth. That’s somewhat probable. But a recession, no, not in the cards, at least until the back half this year. In the back half of this year, you have a number of catalysts which could really whip things the other way in terms of both growth.

TN: Okay, so what are some of those catalysts. And when you say back, you’re talking about October? November?

SR: Yes, October. November.

TN: My thinking is if we’re going to see it, we’re going to start seeing it maybe late September, October or something like that. But what are some of those catalysts you’re talking about? A couple of them?

SR: The catalysts then are actually to the gross side, which I think is where I’ll take the opposite side of a lot of people. Those catalysts are called a devolving of the Ukraine conflict. Number one, while that doesn’t take off sanctions in the near term, it does take off the incremental oops.

Then you have the beginning of the reopening of China, which is a big boost to growth in Europe, and secondarily, LatAm and the United States. So you put those pieces together and all of a sudden you’re looking at a back half of the year that has more upside catalysts, potentially. And it’s not like you can reset down China and it’s going to be a negative callus. It’s already in the numbers. It’s not like you can have another war in Ukraine that’s already in the numbers. If you begin to have those two come together, guess what? That’s positive. So I would say the rest of this year is shaping up to be oddly positive.

TN: Yes, but no, I’m kidding. Everyone’s so negative right now. Everyone wants to just find the downside. Russia is going to invade finland or something like that, right?

SR: Yeah. Here’s the play. I would say 3600 is a lot less likely than 43.

TN: I like that.

SR: On the S&P.

TS: I think what we’re going to see is kind of like a balance, right? Where we see services really big this summer, especially in the travel industry, hospitality industry, which we will see taper off this fall, which is not unusual. That always tapers off this fall. But we also see airline prices increasing, so people have booked their summer vacations in Q1. Those people are going to fall off. So I think we’ll see a push. We’ll see a pullback in that industry, but we could see growth in industries that Sam is mentioning.

TN: Great.

SR: Just to throw in there, we have to remember that at some point we have to refill supply chains on the drivable stuff, and those supply chains are at bone zero right now. It will require a whole bunch of employment, a whole bunch of production, and will actually have a fairly significant thrust to GDP. Our production has been zero.

TN: That’s great. My poll is wrong, which is awesome. I love that.

SR: I would bet against every single thing that your poll said.

TN: Perfect. I love that. Okay, so if you’re in the US, that holds. But let’s switch, Albert, to kind of say geopolitical risk and some other things. Obviously, Sri Lanka two months ago started falling apart and not started, but really fell apart. We’ve seen Ecuador and other places really start falling apart.

Albert, what are you seeing, geopolitically, and what are you seeing in EMs related to what’s happening in the US?

AM: I don’t really like focusing on EMs at this moment just because they’re not big enough to really cause a problem in the markets. In my opinion. I’m looking squarely at the European Union right now.

It’s suspicious that we come out with US bank tests and then we come out with EU bank tests and then literally a day later, the Germans come out and say, we could have a Lehman moment across the economy just because of these gas shortages that are happening.

TN: By the way, your tweet about the German Lehman moment up.

AM: Yeah. And this goes back to just the topic we were just talking about, recession. You really need some kind of catalyst or something to break. And the only thing that I could even contemplate of breaking and causing a “recession” would be the European Union going through another financial crisis. You have a contagion that probably leaks over to the United States financial markets and the Putin price hikes become a thing again, justifies any kind of QE that the Federal want to do, probably in Q four this year. Geopolitically, the EU is my target right now to look at.

TN: Okay. It’s energy supply chains. Is the ECB a risk as well? Is there a risk that they tighten too fast or too much or anything?

AM: How are they going to have to I mean, the inflation over there is climbing just as fast as the United States and it’s causing problems across the board.

SR: I would double down on that and say that Qatar, right after we had the train go down in Corpus Christi, came out and said, yeah, we’ll send gas to the European Union. Just sign a 20 year deal.

TN: Right. And they did. Right?

SR: European Union is not going to do that. I mean, nobody in Europe is going to do that. It was kind of like, we got your back, but give us a long term agreement and we’ll do it.

The irony of it is that you have a crisis going on in Europe. There was a dragon moment of do whatever right, anything.

TN: Sorry, Tracy. What’s that?

TS: Self imposed crisis? Their energy crisis is literally self imposed.

TN: Yeah. Okay.

AM: There’s no question that is self imposed. The European Union’s leadership has been atrocious. I mean, they’ve had the worst energy policy you could possibly think of that hampers their economic engine for the last two, three decades. I mean, you can just throw a dart at the board and pick whatever policy they’ve come up with. It has been an absolute disaster.

TN: Why is that? Why are they making such stupid well.

AM: They’ve made such a big swing to the left, the leftist voters, and they’re just climate Nazis. They won’t even discuss nuclear.

SR: We’re literally talking.

AM: They won’t even discuss nuclear power, which is absurd. They’re like, what if something goes bad like Fukushima? Oh, yeah. What if a dam breaks? Or what if a coal plant blows up? Or, God forbid, what if 10,000 Germans freeze to death because you don’t have gas stored because you didn’t have any proper management? I mean, they’re really bad at managing what’s going on without the United States holding their hand and directing what to do.

TN: Well said. Fantastic. Okay, so since we focus a little bit on energy there, Tracy, let’s swing to talk about crude and the dollar. So, our friend Josh Young posted something about kind of energy could potentially outperform this sort of stuff and really kind of looking back to the 1970s.

So it really looked like we were heading there until this week, and then we saw things really come down this week, in terms of, say, WTI, natural gas, other things. What’s going on there?

TS: I think it depends on what you’re looking at. If you were looking at frontline crude oil price, that’s one thing where a lot of speculators are involved in. If you’re looking at the spreads, it’s you’re looking at the crack spreads that are still exploding. If you’re looking at calendar spreads that are up again this week, that pretty much tells you that we put a floor under front month crude price, regardless of who is involved in what specs are involved in the industry right now. Because the spreads are really what I consider will tell you really where things are going. Right.

So we kind of have a floor night. Yes, oil had a bad week. We saw a lot of selling on downtime in markets and things of that nature. I don’t think that doesn’t change the overall fundamentals of the market. Right? I mean, we’re still fundamentally structurally undersupplied.

TN: So I’m going to ask a really dumb question here. I’m sorry if I may hear it.

SR: But we know.

TN: So are we seeing a short term sell off? Is it politically driven so that when Americans get together on July 4, they can say, gosh, gas is really down this week, and then you have a three day weekend where people are talking about that and then it rocket ships up after the fourth?

TS: Well, I think it’s a combination of most things. I think this week recession scares, we’re really the big driver for that market because everybody’s thinking we’re going to have a recession.

SR: That and the potential of having an export ban.

TS: Right.

TN: Recession, export ban, and July 4th.

TS: An export ban. That said, and I kind of tweeted this out, having an export ban, especially a fuel export ban, would make things obviously worse.

First of all, it’ll raise prices for the EU prices abroad, which after all of this with Ukraine, do we really want to hurt the EU that much? Because we supply them with one to 1.3, 1.5 million barrels per day of diesel, which they are having a huge problem. So really, are we going to abandon the you at this point? Also…

TN: My Texas friends would love to have more diesel to power their ram trucks.

TS: But the thing is that what happens is the fuel flows get so disrupted is that we’re going to have to see refineries cut run significantly in the US. Which is going to ultimately raise prices. We may see deepen prices initially, but you’re going to see higher prices ultimately.

SR: I’ll push back on that because you have a lot of storage, but you didn’t have a lot of storage before. So you don’t have to cut back on runs. You can put into storage at a pretty profitable rate because of forward selling basically all of your inventory right now. I would push back on you have to cut runs at this point.

TS: And I’m going to push back on that. We have to look at the east coast. Right. And so that’s looking at gasoline runs to make a barrel. Diesel requires a lot more oil than it does say to make gasoline. And so if we see a diesel problem, we’re going to have to cut back on this runs. I think it depends on what coast you’re looking at and what area you’re looking at.

TN: All we care about is Texas and Florida. Right.

SR: You have a lot of places to store gasoline. I mean, it’s not like we have an oversupply gasoline at the moment.

TN: It’s true. Our bob’s down this week too, right. So it’s tight.

AM: It’s interesting, Tony, it’s funny. One thing that you said July 4 and one thing that Tracy said, thinly traded is that hilariously every time we need a rally in the market during the thinly traded holiday hours, crude goes down, dollar goes down and the market goes up almost by magic on the thinly traded holiday hours. Something you should watch.

SR: University of Michigan. Come on.

TN: It’s a big driver. University of Michigan. Okay, so let’s move on. You mentioned the dollar, Albert, and so if we look at the dollar, obviously it’s near highs for the decade and that’s great if you’re in the US buying dollar denominated commodities. But elsewhere in the world it’s really hard. Right. So where do you expect the dollar to go? I can’t remember what you’ve said your expected target is. Possibly? 110. Possibly 120. So if it hits 120, Japanese Yen is at what, like 160? 170? something like that?

AM: 163,164? My calculation… This is something Yellen has done in 2012. It’s nothing new. She’s driven the dollar up. She’s out into Europe talking that she’s going to take the dollar up to 110. So this is nothing new. Everyone knows what’s going to happen. Everyone’s watching it. So we’re at 104 something today, just sitting there and hasn’t really done anything. Last day or so. Another 5% up is not a big deal for the dollar.

TN: So you see Yellen driving a stronger dollar. Sam, what do you see?

SR: I would say that I hate taking the other side. I’m going to take the other side.

TN: Great.

SR: I’m going to say that Yellen’s ability to control the dollar is de minimis at this point, mostly because the Fed is tapped out. But you already had a 4% terminal rate for Fed funds priced in two weeks ago. Today you’re sitting at basically 3.65%. So you’ve got the peak, in my opinion, priced in for the FOMC hiking cycle and now you’re on the other side of that. So I would say JPY, you’re probably looking at above 10.

TN: Oh, wow, okay, great.

SR: And you’re probably looking at a Euro at 108. 109. And it doesn’t really matter if they go into a recession because they’re… Right. The US is going to back off in incremental steps the long end of the hiking cycle and…

TN: Perfect.

SR: The dollar prices is long end of the hiking cycle and Yellen can do a lot of things. What she can’t do is increase the internal rate.

TN: That’s great.

AM: The thing is, the treasury sets USD policy, so she can certainly drive it up. I don’t know how much ammo she has left because it’s gone up. But we’ll see.

TN: Okay, perfect. That’s great. So we’ve covered almost everything in that survey and almost everything was wrong.

SR: I told you everything was I would take the other side of every single one of those.

TN: Perfect. Okay, let’s talk about the week ahead. We have month end and quarter end coming next week, right? So what does that mean for the week ahead? Everyone else.

TS: Can I go?

TN: Yes, you go Tracy.

TS: I don’t know. What I’m looking at for the week ahead is the last week of the month. Of the month and the quarter. Right. So we have roughly about $100 billion of US equities that need to be purchased over the next five trading sessions. We have a rebalance in the RTY. So we should see a lot of inflows, roughly 5.98 point billion of inflows into the US equity markets just because of the rebalance factor.

We should probably see outflows in the bond market and then that’s walking into a backdrop of negative dealer gamma. So we have the potential of a shot higher in the market.

TN: Sam? Sam?

SR: Yeah. I would say everything Tracy said in terms of the risk seems to be to the upside. I would also say it looks pretty scary when you walk into the end of the month in terms of the way the dollar chart looks right now.

You walk into the end of the month with a dollar chart looking like it’s ready, looking ready to gap down, and you have oil where it’s at. You could have a very interesting quarter end in terms of risk assets. You have a weaker dollar. You have a big buy on SPY, RTX, et cetera, or SPX, not SPY. You begin to put those pieces together and you begin to have a pretty risk on into the quarter that could be very interesting very quickly.

You get any positive headlines out of China in terms of lockdowns, you get any positive headlines out of Ukraine in terms of ceasefires, whatever BS they want to leak. Then all of a sudden you’re more upside. So I would say skewed to the upside through the beginning of July.

TN: Sam, you’re optimistic today. That’s amazing.

SR: I know. And contrarian.

TN: Optimistic and contrarian. I love it. Okay.

AM: Yeah, I mean, I agree mostly with Sam. I think just because the market is so thinly traded, the dollar should be chopping around probably on the downside a little bit, just for the week up until July 4 weekend, so long as the Europeans don’t come out and start saying any more Lehman things, Lehman crash things and all of a sudden dollar shoots up just because of fear factor out of the European side. But I don’t think that’s going to materialize over the next week, probably next couple of weeks.

After that, I think 30 days, we’re starting to look at possibly something that happened in the European Union. But for the week ahead.

TN: Fantastic. So the past three days carries into the next week. Fantastic.

AM: Yeah.

TN: Okay, guys, thank you very much. Thanks for your time. Thanks for all the stuff you passed along, and have a great week ahead. Thank you.

AM: All right, thanks.

TS, SR: Thank you.