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CNA: What does the 75bps mean to the US economy and Fed’s credibility?

Tony Nash joins Channel News Asia and discussed the possible 75 basis point hike by the Fed and what does that mean for the US economy and for the Fed’s credibility?

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

Show Notes

CNA: Welcome back. The world’s largest cryptocurrency Bitcoin continues its downward spiral. For the 8th straight day, it briefly fell below $21,000 and is currently hovering around its December lows. Other digital coins are also sharply lower in that sell-off as investors continue to rotate out of risky assets due to the economic headwinds. Bitcoin started the week with a 15% drop, with Ethereum very even worse. And overall the total crypto market cap shrink to below $1 trillion for the first time since 2021. That’s from a $3 trillion peak in November. Now adding to crypto’s litany of pain, Coinbase has announced it will cut nearly a fifth of its workforce, or about 1000 employees, by the end of the second quarter. CEO Brian Armstrong said the company needs to manage high employee costs in an uncertain market, warning of a looming recession and another crypto winter in the months ahead. He also conceded that the company grew too quickly. Inflation pressures continue to mount in the United States. The annual Producer price index rose ten 8% in May, staying near its record high of 11.5% in March. The data is significant as prices at the wholesale level feed through consumer prices, which are running at their highest level since December 1981.

Now the focus shifts to the Federal Reserve as it kicks off its two-day policy meeting. The Fed is set to hand down its latest decision tomorrow morning. With a 75 basis point move on the table. Investors on Wall Street are now waiting to see what the US central bank will do. Stock seesaw throughout the session. Ahead of that said meeting, it hit a session lows during the final hour of trade, with both the now and the SAP 500 losing ground. The Nasdaq posted a small gain as equities closed. Mixed, we saw the yield on US treasuries continue to surge. The anticipation of an aggressive move from the Fed saw the yields on the US two-year rise and the benchmark ten-year rise higher again. For more on this, we’re joined by Tony Nash, he’s founder and CEO of Complete Intelligence, joining us from Houston, Texas. Thanks for your time today, Tony. Now 75 basis points of the hike are on the table. What does that mean for the US economy, if indeed that is what we get from the Federal Reserve?

TN: Right? It means they’re really trying to pull back inflation. I think they’re trying to kill demand so that the supply side issues in inflation are calmed a bit. Whether they hike 50 or 75 or 100 is less of an issue than the fact that it’s really hard for them to control the supply side inflation that we’re seeing right now with petrol and with oil and with food and other things. So what’s happening right now that’s really problematic is Americans for the past two months, if you look at consumer credit, it’s really risen dramatically over the past two months. And that’s when a lot of the petrol prices have really spiked. So people don’t have the spare capacity in their monthly savings to pay for higher prices for petrol and food and other things. So consumer credit is racking up really quickly.

CNA: Yeah. And does that mean, Tony, that the strength of the consumers in the US will start to inch lower because for a while it was really the consumer spending that was trying to keep the economy going?

TN: Yeah, absolutely. And as that says, consumer credit capacity is limited. You’re right. If interest rates rise, it makes it harder for those people to pay them off. Right. So that credit capacity can’t be paid down. And economic growth, consumer-driven economic growth later in the year is hard to see take off. So this summer, people are paying more in the US for gasoline and flights and really people want to take a vacation no matter what. But I think we’re really going to see some pressure on consumers in, say, September, or October. So if they hike 75 at this meeting, it just means that in two, three, six months, as they accumulate, the future Federate rises in July and September and November, it means that the cost of credit six months out is going to be dramatically higher.

CNA: Before this week, Tony, it was 50 basis points. That was what was expected after the inflation data that we got last week. All of a sudden we’re getting expectations of higher interest rate rises. Does it surprise you that it seems like the US Central Bank keeps getting surprised, but how inflation is ticking higher and it’s not turning the corner as some had expected? And what does this mean for their credibility?

TN: Yeah, it’s a good question. Am I surprised that they’re surprised? I’m shocked that they’re surprised. Right. And I think what it does is it creates, as you say, a credibility issue both for the Fed and for the US administration. So the US administration isn’t putting the right policies in place to help the supply side inflation issues at refineries with crude oil, the food and so on and so forth. But the Fed is late. The Fed should have started hiking months before they did. So many people have said this, but the Fed is late. And now they’re having to catch up super quickly and it’s going to hurt people on hourly wage jobs and in kind of the lower middle class, those are the people who are the most constrained and those are the people who are going to hurt the most.

CNA: Yes, they’re trying to play catch up. But does this force the hand of the US Central Bank to actually push through with a 75 basis point hike when that’s pretty much what most people are expecting?

TN: Yeah, well, a lot of the banks over the past couple of days have started to expect 75. Some are still at 50. I wouldn’t be surprised if they stayed with 50 if we saw that we would see markets rally going into the weekend, which might be a nice sentiment break for people. If they raise 75, then markets are still going to be very difficult and very choppy going into the weekend. So it really all depends on the decision tomorrow. But I think it also makes things more difficult in Asia and other markets. If they continue to hike, then the dollar grinds higher and it makes things like oil and other commodities that much more expensive as those dollar-denominated commodities become more and more expensive, expensive for.

CNA: Everyone around the world and that would just exacerbate the inflation pressures that we are seeing right now. Thanks so much for your insights, Tony. Tony Nash, there founder and CEO of Complete Intelligence.

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Fed Chair Jay Powell Utters Dreaded ‘R’ Word

With Fed Chair Jerome Powell admitting that a recession is inevitable in the US, the narrative now turns to its timing and magnitude. Tony Nash, CEO, Complete Intelligence, helps clear the air.

This podcast first appeared and was originally published at https://www.bfm.my/podcast/morning-run/market-watch/fed-chair-jay-powell-utters-dreaded-r-word on June 23, 2022.

Show Notes

SM: BFM 89.9. Good morning. You are listening to The Morning Run. I’m Shazana Mokhtar with Khoo Hsu Chuang and Wong Shou Ning at on Thursday the 2020 3 June. In half an hour, we’re going to get an update on the situation in Sri Lanka and what the most viable path out of the economic quagmire that they find themselves in at the moment. But first, as always, let’s recap how global markets closed yesterday.

WSN: Guess what? Every market was down. Every single market that we cover, at least, the down nested were down zero 2%. SMP 500, down zero 1%. Nikki, two to five in Japan was down 0.4%. Hong Seng, Hong Kong, down 2.6%. Shanghai was down 1.2%. Straight times Index in Singapore down 0.8%. And our very own FBM KLCI having a bit of a bad day. It was down 1.8%.

SM: So, mark it’s all in the red this morning. For some thoughts on why, we speak to Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. Now, the Fed Chair, Jerome Powell came closest to admitting that a recession is inevitable, as engineering a soft landing would be challenging. These are remarks that he made overnight. Does this mean a less hawkish stance by the central bank going forward, do you think?

TN: Well, I think what they’re trying to do is kind of moderate the perception of their hawkish actions that they’ve taken over the past two months. So you have interest rates, rate rises happening, but you also have quantitative tightening starting as well, which means that the Fed is selling assets on their balance sheet. And what quantitative tightening does is it takes currency out of the market, so the money supply is smaller, which makes that currency more valuable, and it puts pressure on, say, equities and other things because money is not as easy. So, yeah, I think they’re trying to help people not see things as hawkish as they are, but they’re still trying to talk down inflation.

KHC: Yes. Tony, so the narrative existingly for recession is further out in 2023, but there’s one or two banks now in the US saying that 2022, the latter half could be the recession. What’s your opinion?

TN: Yeah, I think look, we already had a negative GDP number in Q1, so it’s quite possible that we see another one in, say, Q3 or something like that. What’s interesting to me is total commercial lending is still rising. So we saw total commercial lending, I’m not talking about consumer credit, I’m talking about bank lending. And so we saw in 2008, we saw in 2020, bank lending either declined or flattened here. It’s still on a steep curve. So that tells me that there’s still activity in the economy that people aren’t completely afraid. Yet you do see commercial and industrial loans still growing in the US as well. So I don’t necessarily think there’s a huge amount of say over the past couple of weeks, I’ve started to see people use the word depression. And we see this every time there’s a recession. People take it to an extreme. I’m not quite sure we’re there yet. A lot of people act like it’s a no brainer. We’re already in a recession, but we saw that in Q1. It doesn’t feel good. We may see it later in the year as well.

WSN: Okay, so, Tony, we know that the technical definition of a recession is two quarters of negative growth. Assuming that happens, so we have a technical recession. Just curious, how painful will this recession be? How long will it take for recovery? Or is it too early to try and make a guess on this?

TN: No, I think typically recessions are probably two quarters. Even if they’re say a shallow recession, what typically happens is the job losses are the most painful. And so we’ve heard so much over the past a year and a half about talent shortages and this sort of thing, and a lot of jobs unfilled. So what’s happening now is the investors and the banking analysts are transitioning their expectation on company performance. So during Covid, they were like, basically saying, look, just hold it together, don’t go belly up as a business, just keep running. And we’ll have a wide birth of kind of loss and other stuff for you. During COVID, we’re normalizing now. So analysts are pushing very hard for management teams to produce normal metrics for performance, and many of them aren’t doing it. And we saw with some of the retail numbers and some other numbers coming in, so what’s going to hurt the most is layoffs. And that’s going to come even with a shallow recession, we’re going to see layoffs. Will that happen now? We’ve seen that in tech. I wouldn’t expect other layouts to start until probably Q3. So that’s what’s going to hurt and finding jobs, it’s going to hurt coming out of this.

KHC: Yeah. Another metric, Tony, I saw that house prices continue to ratchet higher. I think average home prices in the US is nearly half a million US dollars. Do you see any kind of impact in terms of maybe a correction on that price rent?

TN: Yeah. So when we look at, say, the median home price in the US. It’s $428,000. Okay. So just under the 500 you mentioned. Now in January of this year, if you took out a mortgage in the US. Which the term for mortgage in the US. Is typically 30 years. So if you took out a 30 year mortgage, your monthly payment would have been around $1,700. Okay. In June. Now, that same size mortgage would cost you $2,500 a month. Okay. So we have $700 more a month just over the last six months. That hurts. So I think we’re starting to feel the pinch. There’s still demand for housing, but the affordability of housing has really dried up. It’s really hard for people to get the house that they want or need, and people are either choosing to stay in place or they’re just buying something of lower quality or different location or something.

SM: So, Tony, let’s switch over to what’s happening in Europe. The Eurozone’s first quarter GDP growth rose 0.6% on a quarterly basis and 5.4% on a yearly one. What do you make of these numbers? Do they show that Europe might avoid a recession this year?

TN: Yes, I think that’s going to be really hard. Europe is on really weak ground because they’ve had negative interest rates for quite some time now, and the ECB is talking about coming out of a negative interest rate stance. So when you look at that in Q One, you already had household consumption at a negative growth rate, negative 0.7% quarter on quarter, and you had public expenditures. So government spending down zero, quarter on quarter. So households and governments are spending less than they were the previous quarter. So it looks pretty bad. You even have things like fixed capital formation, which is kind of long term hard investments like roads and buildings and stuff. It rose just over zero. So Europe is really on this thin edge of having a growing economy or not. And so I think with rising interest rates in Europe and energy prices and other inflationary pressures, it’s going to be really hard for Europe to stay out of recession this year.

WSN: Tony, I want to ask about currency, because if you look at the Bloomberg spot in dollar, it’s up 7% on a year to date basis. Of course, in every other country is feeling the pinch. What is your view on the dollar? Is it bad or good for the economy?

TN: It depends on where you are. What the treasury and the Fed are trying to do right now is strengthen the dollar so that these commodities that are nominated in dollars or priced in dollars go down for American consumers. Okay, so you source copper globally, you appreciate the dollar. The price of copper goes down just by function of the currency that it’s nominated in. That’s fine for American consumers and American companies. But if you’re in a developing or in middle market or even just not America, look at Japan, right? Their currency has depreciated dramatically. And for, say, Japanese to buy things that are normally priced in US. Dollars, it’s, I think, 26% more expensive than it was, say, six months ago. Okay, so it hurts if you’re outside of the US. So what has to be done? Well, for countries that are importing things that are based in dollars, so energy and food and other things, they’re going to have to raise their interest rates and tighten fiscally and other things. Otherwise those products just get more and more expensive in local currency terms. So it’s going to be hard. It’s going to be a rough time for emerging markets, especially.

KHC: Yeah. Tony switching our attention to Hong Kong, China. There’s a report coming from the city state that John Lee, the new CEO, is working on a strategy to reopen borders with China. Do you think this pretends, maybe a relaxation of the covered rules within China itself?

TN: I hope so, guys. Really, I mean, Asia and the world really needs China to loosen their covert rules. They’re the second largest economy in the world. They’re the major manufacturer for the world. They are the bottleneck for the global economy. So we hear about how Ukraine, the Russia Ukraine war, is impacting inflation. That is nothing compared to what China is doing with bottlenecking manufacturing and trade. So we really need to encourage China to open up. And I did some analysis a few weeks ago. There is, on average, one covet death reported per day in China. Okay? So China is closed for a one over 1.4 billion chance of dying. Okay? So that’s like 70 to the right of the decimal point before the first number appears in a percentage term. So there’s a minuscule chance of dying and they’re closing for that. So it just doesn’t make economic sense, it doesn’t make public health sense for them to close. So we really need to encourage China to open up so that the rest of the world economy heals.

SM: Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks to come, ending there with an appeal to the Chinese government to please open your borders.

WSN: Please. Because I think what’s very disruptive is also this constant opening and then closing and opening and closing, and we can see the impact of that, especially when it comes to supply chain disruptions, like China still the factory to the rest of the world. But very quickly, I think we also have news coming out of us, and this is so much related to inflation because President Joe Biden has basically called on US. Congress to suspend the federal tax for 90 days. Currently, the federal tax stands at $0.18 for a gallon of regular gasoline and $24 per gallon of diesel fuel. So basically trying to calm down. I think also as America goes into summer holidays and driving season starts and I think we’ve seen prices as much as $5, $6 per gallon, which is a shocker to most households. So this is him, I think, making the political overtures that, yes, I’m aware inflation is a problem and let’s try and do something. But I think whether he can get the bipartisan support is always a problem in the US.

KHC: Yeah, we follow the local US papers over the past seven days, actually, he’s been introducing on a day by day basis different, different measures to try and address gas prices, which is of course, a political hot potato in the US.

SM: Very quickly, the UK still sticking on prices? Inflation has hit a 40 year high in the UK of 9.1% on a year on year basis. In May, it’s the highest rate out of the G Seven countries, and it was even higher than the 9% increase recorded in April. So inflation not abating in the UK. 719 in the morning. We’re heading into some messages. And when we come back, how are businesses embracing ESG in their strategies and frameworks? Stay tuned to BFM 89 Nine.

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The Unbeatable Artificial Stock Market

Show Notes

MG: The Lead Lag Report joining us for the hour here is Tony Nash of Complete Intelligence has found a lot of people that I respect following. Tony, I saw a few people saying they were excited to hear what Tony has to say. So hopefully we’ll have a good conversation here.

Tony for those who aren’t familiar with your background talk about who you are how’d you get involved in the data side of markets and forecasting in general. And what you’re doing with Complete Intelligence.

TN: Sure, Michael. First of all, thanks for having me. I have followed you for probably 10 or 15 years.

MG: I am very sorry for that I am very very sorry for that.

TN: But yeah so, I got involved in data way back in the late 90s when I was in Silicon Valley and I built a couple of research firms focused on technology businesses. I then took about probably eight years to become an operator. I did a turnaround in Asia of a telecom firm. I built a firm in Sri Lanka during the Civil War and then I started down the research front again. I was the Global Head of Research for the Economist and I was the Asia Head of Consulting for a company called IHS Markit which is now owned by S&P and then after that I started Complete Intelligence.

So, you know my background is really all about data but it’s also all about understanding the operational context of that data. And I think it’s very hard for people to really understand what data means without understanding how people use it.

MG: Okay. So that’s maybe a good direction to start with that point about context with data because I think part of that context is understanding what domains data is more appropriate for forecasting and others. Right? So, I always made this argument that there are certain domains in particular when it comes to, I would argue investing that have sort of a chaotic system element to them. Right? Where small changes can have ripple effects. So, it’s hard to necessarily to sort of make a direct link between a strong set of variables and the actual outcome because there’s always a degree of randomness. Whereas, something that’s more scientific right that doesn’t have that kind of chaos theory element is it’s clearer.

So, talk about that point about context when it comes to looking at data. And again, the kind of domains where data is more appropriate to really have more conviction in than others.

TN: Yeah. Okay. So, that’s a great place to start. So, the first thing I would say is take every macro variable that you know of and throw it out the window. It’s all garbage data 100 of it. Okay? I would never trade based on macro data.

We’ve tested macro data over the years and it’s just garbage. It doesn’t matter the country. You know we hear people saying that China makes up their data. Well, that may be true you can kind of fill in the blank on almost any country because I don’t know how much you guys understand about macro data. But it is not market clearing data. Okay? Like an equity price or a commodity price.

Macroeconomic data is purely academic made-up data that is a proxy for activity. It’s a second or third derivative of actual activity by the time you see, say, a CPI print which is coming out tomorrow. Right? And it’s late and it’s really all not all that meaningful. So, I wouldn’t really make a trade or put a strategy together based on macro data even historical macro data. Every OECD country revises their data by what four times or something.

So, you see, a print for CPI data tomorrow that’s a preliminary print and that’s revised several times before it’s put on quote-unquote actual. And so, you know, you really can’t make decisions using macroeconomic data beyond a directional decision. Okay? So, if you follow me on Twitter, you see I’m very critical macro data all the time. I’m very sarcastic about it.

I think the more specific you can get… You know if you have to look at say national data or macroeconomic data, I would look at very low-level data the more specific you can get the better. Things like household surveys or you know communist and socialist countries. Chinese data at the very specific level can be very interesting. Okay? Government data the high-level data in every country I consider it garbage data in every country. So, you’re looking at very low-level very specific government or multilateral data, that’s interesting.

The closer you get to market clearing data the better because that’s a real price. Right? A real price history on stuff is better and company data is the best. And of course, company data is revised at times but that really helps you understand what’s happening at the kind of firm level. And what’s happening at the transaction level. So, you know, those are the kind of hierarchies of data that I would look at.

MG: So, okay this is a great. That’s a great point you mentioned that it’s you said very these variables is macro variables they’re proxies for activity. Right? They’re really more proxies for narratives. Right? Because and that’s where I think… You mentioned sarcasm almost 99 of my tweets at this point are sarcasm because when Rome is burning, what else I’m not going to do except joke about it. Right? Because I can’t change anything. Right?

So, and to that point I share a lot of that cynicism around data that people will often reference in the financial media that sounds really interesting, sounds like it’s predictive but when you actually test it to your point, you throw it out because it doesn’t work. Right? There’s no real predictive element to it.

So, we’ll get into some of the predictive stuff that you talk about but I want to hit a little bit on this market clearing phrase you kept on using. Explain what you mean by market clearing.

TN: Data is where there is a buyer and a seller.

MG: To actual prices of some asset class or something like that.

TN: Yep. That’s right.

MG: Okay. So, that makes sense. Okay. Now again I go back to the certain domains that data is more clear in terms of cause and effect and getting a sense of probabilities the challenge with markets. As we know is that the probabilities change second by second because not only does that mean meaningless data change second by second but the market clearing data changes second by second. Right? Going back to that point.

So, with what you do with Complete Intelligence, talk us through a little bit. What are some of the variables that you tend to find have some predictive power? And how do you think about confidence when it comes to any kind of decision made based on those variables?

TN: Sure. Okay. So, before I do that let me get into why I started Complete Intelligence because if none of you have started a firm before don’t do it. It’s really really hard so…

MG: From the people in the back because I got to tell you I’m an entrepreneur, I’m going through. And all you got is people on Twitter kicking you when you’re down when it’s the small sample anyway.

TN: Absolutely. So, I was where I had worked for two very large research firms The Economist and IHS Markit. And I saw that both of them claimed to have very detailed and intricate models. Okay? Of the global economy industries, whatever. Okay? For all of the interior models. And I have never spoken with a global research firm a data firm that is different from this. And if I’m wrong then somebody please correct me. But at the end of that whole model pipeline is somebody who says “no that’s a little bit too high” or “a little bit too low” and they change the number. Okay? To whatever they wanted it to be in the first place. So, and I tell you 100% of research firms out there with forecasts today have a manual process at the end of their quote-unquote model. A 100% of them. Again, if there’s somebody else that doesn’t do that, I am happy to be corrected. Okay? But I had done that for a decade and I felt like a hypocrite when I would talk to clients.

So, I started Complete Intelligence because I wanted to build a 100% machine driven forecasts across economics, across market, across equities, across commodities, across currencies. Okay? And we’ve done that. So, we have a multi-phase, multi-layer machine learning process that takes in billions of data items. We’re running trillions of calculations every week when we reforecast our data. Right? Now the interval of our forecast is monthly interval forecast. So, if people looking at daily prices that’s not what we’re doing now. Okay? We will be launching daily interval forecasts. I would say probably before the end of the year to be conservative but we’re doing monthly interval forecasts now.

Why is everything I’ve said is meaningless unless we measure our error. Okay? So, for every forecast that we do. And if you log into our website, you can see whether it’s the gold price, the S&P 500, USD, JPY, molybdenum or whatever. We track our error for every month, for everything that we do. Okay? So, if you want to understand your risk associated with using our data it’s there right in front of you with the error calculations. Okay? It’s only fair, If I’m gonna say sell you a forecast, you should be able to understand how wrong we’ve been in the past, before you use that as a decision-making input.

MG: Well, maybe just add some framework on that because I think that’s interesting. So, what you call error I call luck. Right? Because luck is both good or bad. I always make that point that with any equation any set of variables you’re going to have that error is the luck component that you can’t control. And that doesn’t necessarily mean that the equation is wrong. Right? It’s just means that for whatever reason that error in that moment in time was higher or lower than you might otherwise want. Okay?

TN: There is no such thing as zero error. And anybody who tells you that they have zero error is obviously they’re an economist and they don’t understand how markets work. So, there is always error in every calculation.

So, the reason we track error is because that serves as a feedback loop into our machine learning process. Okay? And we have feedback loops every week as we and what we’re doing right now is every Friday end of day. We will download global data process over the weekend have a new forecast on Monday morning. Okay? And so all of that error whether it’s near-term error, short-term error or say medium-term error, we feed that all back in to help correct and understand what’s going on within our process. And we have like I said, we have a multi-phase process in our machine learning platform. So, error is simply understanding the risk associated with using with using our platform.

MG: Right, which is basically how apt is a thing that you’re forecasting to that error which is again luck good or bad. I’m trying to put in sort of a qualitative framework also because I think… Yeah, there’s errors in life obviously, too. Right? And so, when they’re good or bad. But you know those elements.

TN: Right. But here’s what I would and I don’t know, I don’t want to dispute this too much but I think there is. So, you use the word luck and that’s fine but I think luck has a bit to do with the human element of a decision. Okay? We’re using math and code there’s zero human interaction with the data and with the process. And so, I wouldn’t necessarily call it luck. I mean, it literally is error like our algorithms got it wrong. So, if you want to call luck that’s absolutely fine but I would say luck is more of a human say an outcome associated with a human decision. More than something that’s machine driven that’s iterating. Again, we’re doing trillions of calculations every week to get our forecasts out there.

MG: Yeah, no that’s fair and maybe for the audience, Tony. Explain what machine learning is now.

TN: Sure.

MG: I once developed an app called “How Edition”. I was having dinner with the head developer once and he said he just came back from a conference about machine learning and he was just basically well, having drinks with me laughing and joking saying everybody use this term machine learning but it’s really just regression analysis. Right? So, talk about machine learning what is actual machine learning? How important is recent data to changes in the regression? Because I assume that’s part of the sort of dynamic nature of what you do just kind of riff on that for a bit.

TN: Okay. So, when I first started Complete Intelligence, I was really cynical about AI. And I spoke to somebody in Silicon Valley and asked the same question: what is AI? And this person said “Well AI is everything from a basic I say, quadratic equation upward.” I’m not necessarily sure that I agree that something that simple would be considered artificial intelligence. What we’re really doing with machine learning is there are really three basic phases. Okay? You have a preprocess which is looking at your data to understand things like anomalies, missing data, weird behavior, these sorts of things. Okay? So, that’s the first phase that we look at to be honest that’s the hardest one to get right. Okay?

A lot of people want to talk about the forecasting methodologies and the forecasting algorithms. That’s great and that’s the sexy part of ML. But really the conditioning and the pre-process is the is the hardest part and it’s the most necessary part. Okay? When we then go into the forecasting aspect of it, we’re using what’s called an ensemble approach. So, we have a number of algorithms that we use and let’s say they’re 15 algorithms. Okay? That we use we’re looking at a potential combinatorial approach of any individual or combination of those algorithms based on the time horizon that we’re forecasting. Okay?

So, we’re not saying a simple regression is the way to go we’re saying there may be a neural network approach, there may be a neural network approach in combination with some sort of arima approach. We’re saying something like that. Right? And so, we test all of those permutations for every historical period that we’re looking at.

So, I think traditionally when I look back at kind of quote-unquote building models in excel, we would build a formula and that formula was fairly static. Okay? And every time you did say a crude oil forecast you had this static formula that you set your data against and a number came out. We don’t have static formulas at all.

To forecast crude oil every single week we start at obviously understanding what we did in the past but also re-testing and re-weighting every single algorithmic approach that we have and then recombining them based upon the activity that happened on a daily basis in that previous week. And in the history. Okay?

So, that’s phase two the forecasting approach and then phase three is the post process. Right? And so, the post process is understanding the forecast output. Is it a flat line? Right? If it’s a flat line then there’s something wrong. Is it a straight line up? Then that there’s something you know… those are to use some extremes. Right? But you know we have to test the output to understand if it’s reasonable. Right? So, it’s really an automated gut check on the reasonableness of the outcome and then we’ll go back and correct outliers potentially reforecast and then we’ll publish. Okay?

So, there are really three phases to what we do and I would think three phases to most machine learning approaches. And so, when we talk about machine learning that’s really what we’re talking about is that that really generally three-phase process and then the feedback loop that always goes back into that.

MG: Yeah. No that makes sense. Let’s get…

TN: That’s really boring after a while.

MG: No, no, no but I think that’s it’s part of what I want to do with these spaces is try to get people to understand you know beyond sort of just the headline or the thing that is thrown out there. As a term to what does that actually mean in practice you don’t have to know it fully in depth the way the that you do. But I think having that context is important.

TN: I would say on the idea generation side and on the risk management side right now. Okay? Now the other thing that I didn’t cover is obviously we’re doing markets but we also do… we use our platform to automate the budgeting process within enterprises. Okay? So, we work with very large organizations and the budget process within these large organizations can take anywhere from say four to six months. And they take hundreds of people. And so, we take that down to really interacting with one person in that organization and we do it in say less than 24 hours. And we build them a continuous budget every month.

Once accounting close happens we get their new data and then we send them a new say 18-month forward-looking forecast for them. So, their FPA team doesn’t have to dig around and beg people for information and all that stuff. So, some of this is on the firm event could be on the firm evaluation side, as well. Right? How will the firm perform? Nobody’s using us for that but the firms themselves are using that to help them automate their budgeting process. So, some of that could be on this a filtering side and the idea generation side, as well.

So, we do not force our own GL structure onto the clients. We integrate directly with their SAP or Oracle or other ERP database. We take on their GL structure at whatever levels they want. We have found that there is very little deterioration from say, the second or third level GL to say the sixth or seventh level GL, in terms of the accuracy of our forecast. And when we started doing this it really surprised me. We do a say a team level forecast for 10, 12 billion organizations, six layers down within their GL. And we see very little deterioration when we go down six levels than when we do it at say two levels. Which is you know it really to me it speaks to the robustness of our process but would we consider Anaplan a competitor not really, they’re not necessarily doing the kind of a budget automation that we’re doing at least, that I’m aware of. I know that there are guys like Hyperion who do what we’re doing but again their sophistication isn’t necessarily. What we’re doing and they do a great job and Hyperion is a great organization. I think Oracle gave them a new name now but they’re not necessarily using the same machine learning approaches that we’re using. And our clients have told us that they don’t get the same result with using that type of say ERP originated or ERP add-on budgeting process.

Yep. So, I would say we can’t we can do company-specific information for a customer if that’s what they want. Okay? We don’t necessarily have that on our platform today aside from say individual ticker symbols. Okay? But we’re not forecasting say the P&L of Apple or something like that or the balance sheet of Apple. Something we could do in a pretty straightforward manner but we do that on a customer-by-customer basis.

So, what we’re forecasting right now are currency pairs, commodities about 120 commodities and global equity indices. Okay? We are Beta testing individual equity tickers and we probably won’t introduce those fully on the platform until we have our daily interval forecast ready to go to market. But those are still we’re still working some kinks out of those and we’ll have those ready probably within a few months.

MG: Okay. So, let’s talk about commodities here for a bit tonight. Obviously, this is where a lot of people’s attention has gone to. What kind of variables and I know you said you have a whole bunch of variables that are being incorporated here but are there certain variables in particular when it comes to oil and other commodities that have a higher predictive power than others.

TN: There are I think one of the stories that I tell pretty often and this really shocks people is when we look at things like gold. Okay? I’m not trying to deflect from your oral question but just to you know we’ve spoken with the number of sugar traders over the years. Okay? And so, we tell them that say the gold price and the sugar price there may not necessarily be a say short term say correlation there but there is a lot of predictive capability there and we talk them through why. And I think the thing that we get out of the machine learning approach and we cast a wide net. We’re not forcing correlations is that we’ll find some unexpected say drivers. Although drivers implies a causal nature and we’re not trying to imply causality anywhere. Okay?

We’re looking at kind of co-movement in markets over time and understanding how things work in a lead lag basis with some sort of indirect causality as well as say a T0 or current state movement. So, with crude oil you know there are so many supply side factors that are impacting that price right now, that I can’t necessarily point to say another commodity that is having an impact on that. It really is a lot of the supply side and sentimental factors that are impacting those prices right now.

MG: That makes a lot of sense. And I’m curious how did you mention it’s I think the intervals once a month. Right? So, given the speed with which inflation has moved and yields have moved how does a machine learning process adapt to sudden spikes or massive deltas in in variable movement. Right? Because there’s always a degree of randomness going back to error. Right? And you can make an argument that the larger move is the that may actually be more error but I think that’s an interesting discussion.

TN: So, I’ll tell you where we were say two years ago when 2020 hit versus today. Okay? So, in March of 2020, April 2020 everything fell apart. I don’t think there were any models that caught what was going to happen. It was an exogenous event that hit markets and it happened very quickly. So, in June, I was talking with someone who is with one of the largest software companies in the world and they said “Hey has your AI caught up to markets yet because ours is still lost” And you guys would be shocked if I told you who this was because you would expect them to know exactly what’s going to happen before it happened. Okay? I’ll be honest I think it was all of them but the reality is you know Michael you where you were saying that ML is just regression analysis.

I think a lot of the large firms that are doing time series forecasting really are looking at regression and derivatives of regression as kind of their only approaches because it works a lot of the time. Right? So, we had about a two-month delay at that point and part of it was because… So, by June we had caught up to the market. And we had started in February to iterate twice a month, we were doing once a month; I hope you guys can understand with machine learning two factors are we’re always adjusting our algorithms. Okay? We’re always incorporating new algorithms. We’re always you know making sure that we can keep up with markets because you cannot be static in machine learning. Okay? The other thing is we’re always adding capacity why? Because we have to iterate again and again and again to make sure that we understand the changes in markets. Okay?

So, at that time we were only iterating twice a month and so it took us a while to catch up. Guys like this major technology firm and other major technology firms they just couldn’t figure it out. And I suspect that some of them probably manually intervened to ensure that their models caught up with markets. I don’t want to accuse any individual company but that temptation is always there. Especially, for people who don’t report their error. The temptation is always there for people to manually intervene in their forecast process. Okay?

So, now, today if we look for example at how are we catching changes in markets. Okay? So, if I look at the S&P 500 for April for example, our error rate for the S&P 500 for April I think was 0.6 percent. Okay? Now in May it changed it deteriorated a little bit to I think four or six percent, I’m sorry I don’t remember the exact number offhand but it deteriorated. Right? But you know when there are dramatic changes because we’re iterating at least once a week, if not twice a week we’re catching those inflections much much faster. And what we’re having to do, and this is a function of the liquidity adjustments, is where in the past you could have a trend and adjust for that trend and account for that trend. We’re really having to our algorithms are having to select more methodologies with recency bias because we’re seeing kind of micro volatility in markets. And so again…

MG: So, kind of like the difference between a simple moving average versus like an exponential moving average. Right? Where you’re waiting the more recent data sooner.

TN: It could be. Yeah.

MG: Right.

TN: Yeah. That’s a very very simple approach but yeah it would be something like that, that’s right. Yeah. What so when we work with enterprise customers that level of engagement is very tight because when we’re getting kind of the full set of financial data from a client obviously, they’re very vested in that process. So, that’s different from say a small portfolio manager subscribing to RCF futures product where we’re doing forecasts and they have their own risk process in place. And they can do whatever they want with it. Right? But again, with our enterprise clients we are measuring our error so they can see the result of our continuous budgeting process. Okay?

So, if we’re doing let’s say, we launch with a customer in May, they close their mate books in June get them over to us redo our forecast and send it over to them and let them know what our error rate was in May. Okay? So, they can decide how we’re doing by department, by team, by product, by whatever based upon the error rates that we’re giving at every line item. Okay? So, they can select and we’re not doing kind of capital projects budgets we’re doing business as usual budgets so they can decide what they want to take and what they don’t want to take. It’s really up to them but we do talk through that with them and then over time they just start to understand how we work and take it on within their own internal process.

MG: So, back a little bit Tony. So, you mentioned you do this machine learning forecasting work when it comes to broad economics, markets and currency; of those three which has the most variability and randomness in other words which tends to have a higher error? Whenever you do any kind of machine learning to try to forecast what comes next?

TN: I would say it depends on the equity market but probably equity markets when there are exogenous shocks. So, our error for April of 2020 again, we don’t hide this from anybody it was not good but it wasn’t good for anybody. Right? And so, but in general it depends on the equity market but some of the emerging equity markets, EM equity markets are pretty volatile.

We do have some commodities like say rhodium for example. Okay? Pretty illiquid market, pretty small base of people who trade it and highly volatile. So, something like rhodium over the years our air rates there have not necessarily been something that we’re telling people to use that as a basis to trade but obviously, it’s a hard problem. Right? And so, we’re iterating that through our ML process and looking at highly volatile commodities is something that we focus on and work to improve those error rates.

MG: Here, I hope you find this to be an interesting conversation because I think it’s a part of the of the way of looking at markets, which not too many people are themselves maybe using but is worth sort of considering. Because I always make a point that nobody can predict the future but we all have to take actions based on that unknowable future. So, to the extent that there might be some data or some conclusions that at least are looking at variables that historically have some degree of predictive power. It doesn’t guarantee that you’re going to necessarily be better off but at least you have something to hang your hat on. Right? I think that’s kind of an aspect to investing here.

Now, I want to go a little bit Tony to what you mentioned earlier you had lived abroad for a while in Europe. And when I was starting to record these spaces to put up on my YouTube channel the first one, I did that on was with Dan Arvis and the topic of that space was around this sort of new world order that seemed to be shaping up. I want you to just talk from a geopolitical perspective how you’re viewing perhaps changing alliances because of Russia, Ukraine. And maybe even dovetail that a little bit into the machine learning side because geopolitics is a variable. Which is probably quite vault in some periods.

TN: Yeah, absolutely. Okay. So, with the evolving geopolitical order I would say rather than kind of picking countries and saying it’s lining up against x country or lining up with x country or what country. I would say we’ve entered an era of opportunistic geopolitics. Okay? We had the cold war where we had a fairly static order where people were with either red team or blue team. That changed in the 90s of course, where you kind of had the kind of the superpower and that’s been changing over the last say 15 years with say, China allegedly becoming kind of stronger and so on and so forth. So, but we’ve entered a fairly chaotic era with say opportunistic macroeconomic relation or sorry, geopolitical relationships and I think one of the kinds of top relationships that is purely opportunistic today is the China-Russia relationship.

And so, there’s a lot of talk about China and Russia having this amazing new relationship and they’re deep. And they’re gonna go to war together or whatever. We’ve seen over the past say three, four months that’s just not the case. And I’ve been saying this for years just for a kind of people’s background. Actually, advised the Chinese government the NDRC which is the economic planning unit of the central government on a product or on an initiative called the belt and road initiative. Okay? I did that for two years. I was in and out of Beijing. I never took a dime for it. I never took expense reimbursement just to be clear, I’m not a CCP kind of pawn. But my view was, if the Chinese Government is spending a trillion dollars, I want to see if I can impact kind of good spend for that. So, I have seen the inside of the Chinese Government and how it works and I also in the 80s and 90s spoke Russian and studied a lot on the Russian Government and have a good idea about how totalitarian governments work.

So, I think in general if we thought America first was offensive in the last administration then you really don’t want to learn about Chinese politics and you really don’t want to learn about Russian politics because they make America first look like kindergarten. And so, whenever you have ultra-ultra-nationalistic politics, any diplomatic relationship is an opportunistic relationship. And I always ask people who claim to be China experts but say please tell me and name one Chinese ally. Give me one ally of China and you can’t, North Korea, Pakistan. I mean, who is an ally of China there isn’t an ally of China.  There is a transactional opportunistic relationship with China but there is not an ally with China.

And so, from a geopolitical perspective if you take that backdrop looking at what’s happening in the world today it makes a whole lot more sense. And a lot of the doomsayers out there saying China is going to fall and it’s going to have this catastrophic impact. And all this other stuff, the opportunism that we see at the nation-state level pervades into the bureaucracy. So, the bureaucracy we hear about Xi Jinping. And Xi Jinping is almost a fictional character. I hate to be that extreme on it but there is the aura of Xi Jinping and there is the reality of Xi Jinping, just a guy, he’s not Mao Zedong. He doesn’t have the power that supposed western Chinese experts claim that he has. He’s just a guy. Okay?

And so, the relationships within the Chinese bureaucracy are purely transactional and they are purely opportunistic. So again, if you take that perspective and you look at what’s happening in geopolitics, hopefully you can see things through a different lens.

MG: Now, I’m glad you’re framing that in those terms because I think it’s very hard for people to really understand some of these dynamics when it’s almost presented like a like the story for a movie. Right? For what could be a conflict to come by the media because and it’s almost overly simplified. Right? When you hear this type of talk. So again, I want to go back into how does that dovetail into actual data. Right? Maybe it doesn’t at all. When you have some of these dynamics and you talk about market clearing data, you’re going to probably see mark movement somewhat respond off of geopolitical changes. Talk about anything that you’ve kind of seen as far as that goes and how should investors consider geopolitical risk or maybe not consider geopolitical risk?

TN: Yeah, I think, well when you see geopolitical adjustments today all that really is… I don’t mean overly simplified but it’s a risk calibration. Right? So, you know Russia invades Ukraine, that’s really a risk calibration. How much risk do we want to accept and then what opportunities are there? Right?

So, when you hear about China, you have to look at what risk is China willing to accept for actions that it takes? Keeping in mind that China has a very complicated domestic political environment with COVID shutdown, lockdowns and all of this stuff. So, having worked with and known some really smart Chinese bureaucrats over the years, these guys are very concerned with the domestic environment. And I don’t although there are idiot you know generals and economists here and there who say really stupid stuff about China should take over TSMC and China should invade Taiwan, these sorts of things. My conversations over the years have been with very pragmatic and professional individuals within the bureaucracy.

So, do I agree with their policies? Not a lot of them but they are well thought out in general. So, I think just because we hear talk from some journalist in Beijing who lives a very sheltered life about some potential thing that may happen. I don’t think we necessarily need to calibrate our risk based on the day-to-day story flow. I think we need to look at like… so there’s a… I’m sure you all know who Leland Miller is in China beige book like?

MG: Yeah, he’s not too long ago.

TN: Yeah. He has a proxy of the Chinese economy and that’s a very interesting way to look at an interesting lens to look through China or through to look at China or whatever. But so, I think that the day-to-day headlines, if you follow those, you’re really just going to get a lot of volatility but if you try to understand what’s actually happening, you’ll get a clearer picture. It’s not necessarily a connection of a collection of names in China and the political musical chairs, it’s really asking questions about how does China serve China first. What will China do to serve China first and are some of these geopolitical radical things that are said do they fit within that context of China serving China first? So, that’s what I try to look at would I be freaked out if China invaded Taiwan? Absolutely. I think everybody would right but is that my main scenario? No, it’s not.

MG: In terms of the data inputs on the machine learning side how granular is the data meaning? Are you looking at where geographically demand might be picking up or is it simply this is what the price is and who cares the source? Because again with hindsight if you knew that the source of China and kind of had a rough sense of the history of Russia-Ukraine maybe that could have been an interesting tell that war was coming.

TN: Yes or No. To be honest it had more to do with the value of the CNY. Okay? And I’ll tell you a little bit about history with the CNY. We were as far as I know, the only ones who called the CNY hitting 6.7 in August of 2019 with a six-month lead time. And so, we have a very good track record with USD-CNY and I would argue that China’s buying early in 2022 had a lot more to do with them from a monetary policy perspective needing to devalue CNY. So, they were hoard buying before they could devalue the CNY and I think that had a lot more to do with their activity than Russia-Ukraine. Okay? And if you notice they’ve made many of their buys by mid-April and once that happened you saw CNY, go to 6.8. Right? It’s recovered a little bit since then but China has needed to devalue the CNY for probably at least nine months. So, it’s long overdue but they’ve been working very hard to keep it strong so that they could get the commodities they needed to last a period of time. Once they had those commodities, they just let the parachute go and they let it do value to 6.8 and actually slightly weaker than 6.8.

MG: The point of the devaluation is interesting. I feel if I had enough space but we were talking about the Yen and what’s happened there. And this observation that usually China will start to devalue when they see the end as itself going through its own devaluation.

How does some of those cross correlations play out with some of the work that on machine learning you’re doing? Because there’s a human element to the decision to devalue a currency. Right? So, the historical data may not be valid I would think because you might have kind of a more humanistic element that causes the data to look very different.

TN: Well, they’re both export lab economies. Right? And we’ve seen a number of other factors dollar strength and we’ve seen changing consumption patterns. And so, yes when Japan devalues you generally see China devalue as well but also, we’ve seen a lot of other activities in on the demand-pull side and on the currency side especially with the US dollar in… I would say over the last two quarters. So, yes, that I would say that the correlation there is probably pretty high but there are literally thousands of factors that contribute to the movement of those of those currencies.

MG: Is there anything recently Tony in the output that machine learning is spitting out that really surprises you? That you know… And again, I understand that there’s a subjective element which is our own views on the world and of course then the pure data. But I got to imagine it’s fascinating sometimes if you’re sitting there and seeing what’s being spit out if it’s surprising. Is there anything that’s been kind of an outlier in in the output versus what you would think would likely happen going forward?

TN: Yeah. You know, what was really surprising to me after we saw just to stick on CNY for a minute because it’s the first thing that comes to mind, when we saw CNY do value to 6.8. I was looking at our forecast for the next six months. And it showed that after we devalued pretty strong it would moderate and reappreciate just a bit. And that was not necessarily what I was hearing say in the chatter. It was kind of “okay, here we go we’re going to go to seven or whatever” but our data was telling us that that wasn’t necessarily going to happen that we were going to hit a certain point in May. And then we were going to moderate through the end of the year. So, you know we do see these bursty trends and then we see you know in some cases those bursty trends continue for say an integer period. But with CNY while I would have on my own expected them. I expected the machines to say they need to keep devaluing because they’ve been shut down and they need to do everything they can to generate CNY fun tickets. The machines were telling me that we would you know we’d see this peak and then we would we would moderate again and it would kind of re-appreciate again.

So, those are the kind of things that we’re seeing that when I talk about this it’s… Oh! the other thing is this: So, in early April we had a we have people come back to us on our forecast regularly who don’t agree with what we’re saying and they complain pretty loudly.

MG: So, what do you say I talk when I hear that because whenever somebody doesn’t agree with the forecast, they are themselves making a fork.

TN: Of course. Yeah. Exactly. Right? Yeah, and so this person was telling us in early April that we’re way wrong that the S&P was going to continue to rally and you know they wanted to cancel their subscription and they hated us and all this other stuff. And we said okay but the month’s not over yet so let’s see what happens this was probably a week and a half in April. And what happened by the end of April things came in line with our forecast and like I said earlier we were like 0.4 and 0.6 percent off for the month. And so that person had they listened to us at the beginning of the month they would have been in a much better position than they obviously ended up being in. Right? And so, these are the kind of things that we see on a… I mean, we’ve got hundreds of stories about this stuff but these are the kind of things that we see on a regular basis. And we mess up guys I’m not saying we’re perfect and but the thing that we when we do mess up, we’re very open about it. Everything that we do is posted on our on our website. Every call we make, every error we have is their wars and all. Okay? And so, we’re not hiding our performance because if you’re using our data to make a trade, we want you to understand the risk associated with using our data. That’s really what it comes down to.

MG: It reminds me of back in 2011 and in some other periods I’ve had similar situations, where I was writing and I was very adamant in saying the conditions favored a summer crash. Right? I was saying that for the summer and the market should be going up and people would say oh where’s your summer crash and I would say this summer hasn’t started. Like it’s amazing how people, I don’t know, what it is, I don’t know if it’s just short-termism or just this kind of culture of constantly reacting as opposed to thinking but it is it is remarkably frustrating.

Going back to your point at the very beginning being entrepreneur don’t do it, that you have to build a business with people and customers who in some cases are just flat out naïve.

TN: That’s all right though. That’s a part of the risk that we accept. Right?

MG: Yeah, the other thing right now that happens with every industry but from the entrepreneur’s standpoint. It’s what you’re doing the likely outcome of your product of your service. You’re trying to communicate that to end clients but then in the single role of the die the guy the end client who comes to you exactly for that simply because they disagree with you know the output, now says I want out.

TN: Oh! Yeah! Well, your where is your summer call from 2011 the analogy today is where is your recession call. Right? So, that’s become the how come you’re not one of us calls right now. So, it’s just one of those proof points and if you don’t agree with that then you’re stupid.

So, I would say you never finish with that there is always a consensus and a something you’re you absolutely, must believe in or you don’t know what you’re talking about.

MG: Yeah, well, thankfully. What you’re talking about so appreciate everybody joining this space Tony the first time you and I were talking. I enjoyed the conversation because I think it said on investing and I encourage you to take a look at Tony’s firm and follow him here on twitter. So, thank everybody. Thank you, Tony and enjoy.

Categories
Week Ahead

The Week Ahead – 13 Jun 2022: CPI & “Peak Inflation”

We had a chop last week. And towards the end of the week, we had the CPI print, which put a damper on markets. In this episode, we’ll talk about CPI and peak inflation, which people have been talking about for months, but we haven’t quite hit it yet.

Of course, we’re going to talk about the hot dollar, and we’re going to talk about fuel inflation and things like refining capacity and even a nat gas plant explosion that happened here in Texas last week.

And then finally, what is going on in the week ahead?

Key themes:

  1. CPI & “Peak Inflation” – Core CPE, hand off from goods to services, Fed policy and markets.
  2. Hot dollar – DXY has only been higher in Feb 1985 and Jan 2002. Fed, Dollar, Yellen, etc.
  3. Fuel Inflation – Refining capacity, natgas explosion.

This is the 22nd 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

Listen to the podcast version on Spotify here:


Transcript

TN: Hi everybody. And welcome to The Week Ahead. My name is Tony Nash. We are with Tracy and Sam today. Albert is in an undisclosed location, so he won’t be joining. But we’ll have a good show anyway. So before we get started, please like and subscribe. And as importantly, please comment. We really appreciate those. We respond to all of them. And it’s great to have the engagement.

This week. We had chop, as Sam talked about. And towards the end of the week, we had the CPI print, which really put a damper on markets. So we’re going to talk about a few things. First, CPI and peak inflation, which people have been talking about for months, but we haven’t quite hit it yet. Of course, we’re going to talk about the hot dollar, and we’re going to talk about fuel inflation and things like refining capacity and even a natgas plant explosion that happened here in Texas last week. And then finally, what is going on in the week ahead?

So first, CPE was all of the focus for the last half of the week. Sam put out an amazing note, a couple of amazing notes this week talking about inflation and what the Fed will do. So we’re looking at a chart right now on core CPI. And Sam, can you walk us through why the core matters and what’s happening there?

SR: Sure. The core matters because it strips out food and energy, and that’s what the Fed likes to look at. Right. That’s what the market looks at for underlying inflation dynamics generally. It’s kind of a quick and easy number. Luckily, it’s accelerated by some marginal amount on a month over month, year over year basis. Cool. Nobody should really care about that, because when you break apart the actual numbers, the entirety of the deceleration and core inflation was in the good side. We know that goods are coming down, particularly on a year over year basis. They want skyrocket and to the right, that’s just not sustainable.

TN: Is that because of the inventories that were accumulated at retailers and other folks.

SR: That’s part of it. Used cars as well. There’s airline fares are in there, too. So that’s going to be somewhat of a problem as we move forward.

The interesting thing to me is when you actually dig into it. Yeah. Core goods accelerated, but core services, which are far stickier and far more difficult for the Fed to kind of get a hold of accelerated.

TN: Right. So let’s put that up now and then. Yeah. So we’ve got your chart up now about the commodities, less food and energy and then services, less energy. So can you help us understand what that means?

SR: Yeah, sure. That’s just call it the core CPI broken into services and goods. Right. So it strips out food and energy from both of them. And then you kind of get a more of a feel of what’s really happening in the underlying economy. And there was always this big debate among economists about when this hand off from goods to services was going to happen and how that was going to affect the economy. And unfortunately for the Fed and for market participants, that hand off is happening.

You can see it in the data and you can see it in the inflation data in particular. It’s happening. The problem is that you don’t have goods coming down fast enough and you have services moving up way too quickly. And those two components are unlikely to give the Fed any sort of comfort in the next six to nine months.

TN: Okay. With services moving up, does that mean that wages, say on the lower end around things like hospitality and restaurants, does it mean that those wages are going up?

SR: Not directly. There’s some implied probability that you’re beginning to see some movement there, but you’ve seen quite a bit of movement at a leisure and hospitality in particular in terms of the wage gains there.

Unfortunately, the wage gains can be pretty large in magnitude, a 5 to 9 percent type acceleration year over year in leisure and hospitality wages. But it doesn’t really move the needle in terms of overall wage gains because those tend to be the lower end of the income scale.

TN: Okay. So I saw some data this week looking at credit capacity, and it looks like US consumers put record amounts on credit cards in April and May. Does that make you nervous? And I’m not talking about the high end of consumers. I’m talking about the middle and lower end of consumers because there’s a lot more of them. Right. Does that make you nervous?

SR: Yes. And it goes to the conversation that Tracy and I are going to have in a little bit here. A lot of it is due to gasoline. Right. You don’t go to a pump and typically pay with cash. I mean, you did that 10, 15, 20 years ago. You typically go to the pump and pay with a credit card.

So when you begin to have prices like this, move this quickly on the pump side of things and grocery side of things, you tend to have a move up in credit card usage that’s translating to debt because you simply don’t have wages keeping up. Yes, wages are ticking higher, but they’re not keeping up. So the lower end of the consumption, called the lower two quartiles, they are struggling with this, and that is going directly on the credit cards.

TN: I’ve talked to a few people this week about how wages in developed economies work. And if we were in an emerging economy, middle income economy, there would be more flexibility on wages because wages rise faster generally in those economies. But in, say, the US, wages really don’t rise fast.

So on some level, it’s a bit hard for people to understand that wages in the US are generally inflexible, especially at the lower and middle ends. And so it is kind of zero sum. Right. So as gas and food prices rise, that takes away consumption from other areas, right?

SR: It does. And the other thing that it leads to is more of a trend towards unionization and other forms of labor activism. And you’re going to continue to see labor activism if wages continue to trail this far behind inflation. That is an underlying trend that I think is going to be somewhat important for understanding how markets react because labor was fairly cheap, give or take for US businesses in particular.

If you begin to have more unionization, if you begin to have more of an activist labor movement, that is going to be a thing to corporate earnings, not just for the next year. That’s going to be a thing for corporate earnings going forward.

TN: Okay. So let’s talk about corporate earnings. As we look at, say, Q2 corporate earnings, it doesn’t look good, right? I mean, generally the expectation is that their margin compression, all this other stuff really starts to sting in Q2 Is that right?

TS: It depends on the industry as well, because what we’re seeing and what I’m hearing as far as obviously oil companies are going to do extremely well so are refiners right now. But we are also seeing the hospitality industry do extremely well as far as travel is concerned, because we’re seeing a lot of pent up demand where people are not spending retail spending, but they’re still spending for trips.

If we look at US air bookings, for example, there are 93% of 2019 levels for Europe. We’re at 95% for South America. We’re at over what we were in 2019 to the Caribbean. And we’re also seeing soaring hotel bookings right now, even with cost pushing higher and ticket prices higher. So I think that Q2 is going to be very good actually, for, say, oil and gas and the hotel industry. But then as we move into Q3, I think we’re going to see a big hangover in that area in the fall.

SR: And to Tracy’s point, hotel bookings are above 2019 levels and the average price of those rooms through the roof. So you multiply those two together to get your average room rate and Occupancy, those are some big numbers that we’re going to see over the summer. To Tracy’s point, there’s going to be a lot of people that blow it out of the water in terms of earnings, and there’s going to be a lot of people that surprise the downside.

If you were a work from home darling, that was expecting work from home and those dynamics to be permanent and you’re in trouble. Right. That’s the target problem. People aren’t buying goods. They’re going places. And the bifurcation there is going to become stark as we move through the second quarter and probably into the third quarter.

TN: Really interesting. Okay. And then I guess the question that is probably overanalyzed, but people are waiting for is what does this mean for the Fed? They’re still on target for 50 in June, 50 in July and 50 in September. Is that your assessment? And maybe 25 in November? I think.

SR: 50 in November, 50 in December.

TN: 50 in November, 50 in December? Wow. So we’re going back to the 90s.

SR: Basically fully priced in the market.

TN: Is there any chance that they will accelerate beyond 50? Like, would they front load any of that just to shock the system?

SR: No, because I don’t think they want to shock the system. The Fed already has a credibility problem. If you move from 50 to 75, you create more of a credibility problem because you forward guided 50-50, and now all of a sudden you’re telling the market you’re doing 75, the market is just going to stop believing and they’re going to push the Fed and they’re just going to push back and it’s going to be a huge problem.

So I don’t think they’re surprised on that front. They may tweak the balance sheet. That’s a little bit of an easier move to make. Right. You can speed up the MBS role. You can pick up a little bit of the front end roll on US Treasuries, you can tighten that way and have it not be as much of a shock to the system.

TN: Okay.

SR: But have it be pretty interesting on the tightening front.

TN: Okay. But let’s dig into that, though. I’m sorry to spend too much time on our first topic, but if they accelerate the MBS stuff, housing is already kind of at a standstill over a two month period. Two to three month period.

A lot of people have had wealth effects because of the rapidly inflated house prices. So if they accelerate MBS, that perception of housing wealth collapses even more. Right. And so does that have relatively like a multiplier effect on the deceleration of consumption?

SR: It does. But that transmission is pretty slow generally, and you had a significant amount of call it front running against the housing market to take out equity. So I would push back a little bit on a collapse in transactions is going to have a big effect. What you really need to see is pricing actually coming down because it’s about pricing.

TN: Pricing coming down.

SR: Yeah. And pricing. The data is so delayed that it’s almost worthless.

TN: Nominal housing prices.

SR: Yes. But you’re still seeing housing prices hold up pretty well for most of the country. So until you really begin to see a crack there, I don’t think the wealth effect really takes hold from houses.

But you’re probably talking about a September, October type time frame for home prices to be weighing on people’s minds.

TN: Okay. It feels like over the past few months things have changed pretty dramatically. Expectations and these sorts of things. I know you’ve been talking about this for months, but I think the world is just catching up to it. And two months ago everyone said, oh, it’s all priced in. And then we get a day like Friday where obviously it’s not priced.

SR: I’ll stop after this but the interesting part about Friday was it wasn’t just call it the November December meetings getting priced higher for Fed rate hikes. It was March and May of next year that also saw pretty significant volumes and saw the pricing of the Fed movement get pushed pretty hard. So you’re seeing movement across a very long time horizon.

You’re talking twelve months out is kind of what people are pushing on now. So that really creates a different dynamic. But it’s a different dynamic to have eight or ten basis points priced in in September or November. It’s a bigger deal to have quite a bit of tightening priced in for December and March. Those are some out months those begin to really move markets on the margin.

TN: All of this in a midterm year. All of this in the midterm election year.

SR: It’s really painful all around, right? It’s painful all around. But I think the Fed kind of plays second fiddle to Tracy’s point on energy and how that flows through the consumer and the consumer psyche because that is critical at this point.

TN: Okay. So speaking of second fiddle let’s move on to the hot dollar and Fed playing second fiddle to Janet Yellen as Tracy has said before. We’re looking. At DXY that is the third highest it’s been ever it was very high in the mid eighty s it was very high in I think February 2002.

We’ve got that chart up now and now it’s hitting rates that it hasn’t hit for years so we have the Fed doing certain things to tame but we also have things like crude and other commodities that are rising in dollars. Terms. And it looks like the dollar is being pushed up to fend off some of that. So, Tracy, can you talk us a little bit through your view of kind of Yellen and her dollar bias and then impacts that you expect to see.

TS: She said since the beginning she wanted a strong dollar. Right. The problem is that right now this is a disastrous recipe for emerging markets right now with high energy prices and high dollar. And it’s no wonder we’re seeing huge outflows in emerging markets right now as far as investments are concerned. And so really that’s who’s going to feel the pain the most that could throw us to a global recession, for sure.

TN: Right.

SR: To that point, Europe is in a lot of trouble, and the Dixie is basically a measurement of euros and yen. That’s right. If you want to talk about a central bank that’s lost credibility, there’s none better than the ECB and Madame Lagarde and that wonderfully stupid speech that she gave this week, it was spectacularly bad.

TN: It’s what happens when you have a lawyer running monetary policy.

SR: They’re raising rates, and we have them, too. Anyway, moving on. So there is an interesting kind of dynamic there where you basically had the ECB for the first time in forever, say we’re going to raise rates like they just told us straight up they were going to do it and they got the wrong reaction across markets.

The currency didn’t go up. The currency didn’t strip. The currency looked pretty ugly that day. And then you’ve got yen sitting at 135 because they’re still doing yield curve control and it doesn’t look like they’re ever going to end it. So you have the Fed going in the exact opposite direction or much quicker than the rest of the world. In the DM world in particular.

That’s a recipe for a stronger dollar. And until you either get the ECB to smarten up or you get YCC brackets moved, yield curve control brackets moved by the bank of Japan, there’s no stopping the Dixie from moving higher. Right. It’s a two currency, two currencies basis.

TN: Remember Abenomics, when they were fighting to get 2% inflation in Japan.

SR: Yes.

TS: They’re still fighting. That’s why you can’t see inflation, it’s incredible.

TN: Yeah. Tracy, if we continue to see the dollar strengthen, do you think that has much impact on, say, crude prices and fuel prices?

TS: I know that everybody likes to think it’s a one to one correlation. Right. We think stronger dollar commodities. But it’s really not a one to one correlation, especially when you’re talking when you have actual supply demand issues. Right. Like we have a supply deficit across. So a stronger dollar is not going to hurt oil prices when you have real supply demand issues. Whereas if you look at something more like gold, the stronger dollar is not necessarily great for gold right now.

TN: Yeah. So I love it when people like talking about correlations of oil and dollar because many of them don’t realize that actually the positive correlation between oil and dollar is more frequent than many people want to admit, and it’s more persistent than many people want to admit.

So the kind of go to there’s a negative .9% correlation between oil and the dollar. It’s just not true. It’s a fiction.

SR: And the dynamic changed when the US became a major producer of oil.

TN: Right.

SR: That completely changed the dynamic. So if you’re not paying attention to the structural breaking system where the US became the world’s largest producer of hydrocarbons, you don’t know what you’re doing.

TN: Right. So who hurts the most? I think we mentioned EMs, but kind of who hurts the most, aside from Sri Lanka, which we already know? Is it like North Africa, those types of places? Is it Southeast Asia? Just off the top of your head, we didn’t rehearse this, so I’m just curious, what do you think hurts the most?

TS: I think you’re going to see a lot of problems in Africa for certain only because a lot of the OPEC producers there are struggling themselves already. Right. All of those people are the ones that are contributing majorly to the quota misses right now. So I think you’re going to see real pain there over Asia, I would say.

TN: Okay, Sam?

SR: Yeah, I would agree with Tracy. North Africa, East Africa, those look very vulnerable, particularly when you combine food costs with gasoline costs and oil. It’s kind of a toxic mix because if you have oil at 125 Brent, there’s an incentive that you want to pump and the people expect you to pump and buy them food. And if you can’t pump and buy food, then you’re basically an illegitimate government in North Africa.

TN: Right. Which is just trembling all around. Okay, let’s move on to energy prices and gasoline and petrol prices. Of course, we just hit this week again, I think three or four times this week we hit record prices for gasoline. And of course, that’s happening all around the world.

I think in the UK it’s £2 a liter or something like that. In the US, it broke $5 a gallon on average. I think 5.01 this morning, Patrick Dejan was saying that. Tracy, can you walk us through? We’ve mentioned this a couple of weeks ago, but in a bit more detail about what’s happening with refining capacity in the US and why this is such a big deal?

TS: Right. The last largest Greenfield project that we had was 1977. We’ve had a lot of brownfield projects, meaning adding to capacity to already existing refining facilities. However, right now we sort of peaked in 2018 and 19 as far as refining capacity is. And now we’re starting to come down again because we’re starting to see more closures, we’re seeing more unplanned outages.

These facilities are very old. So the operable capacity has been on the decline for the last few years. And if you look at Europe and Europe, it’s even worse. Right. So, I mean, Europe already has a problem, too, and that’s why they buy most of their diesel from Russia, which is going to affect them, because the diesel that they buy from them is seaborne. Right. All of it, which it falls under sanctions.

TN: And they can’t get insurance for those vessels.

TS: Yeah. And so they’re going to have a lot of problem. just to put a little tangible example, there’s a news here in Houston this week that I think it’s a Lyondell refinery that’s being closed, and that refinery is over 100 years old. Yes, our refineries are old. They’re aging facilities. They need a lot of maintenance. And we just really haven’t built out enough capacity for the amount that is coming offline over the last few years.

TN: So, Tracy, I know this is a little bit of a request, but we’re sending $40 billion to countries around the world to do different things. Would it not make sense to have some sort of government incentive for midstream companies to actually build refineries?

TS: Well, yeah, absolutely. I mean, infrastructure projects as far as the oil industry is concerned. If you look at the government’s complaining about oil companies are making so much money. However, where were they when they were in the red and racking up the debt? They were nowhere. How many times do we bail out the Airlines and the auto industry? The oil industry never got any help.

TN: Because they’re bad, tracy, oil companies are bad. They’re all my neighbors. But you would think they’re all bad, evil people.

TS: This is causing… Where our refinery operable at capacity? We’re at 94.2% refining right now, which is off the charts. Good. That means good news for your refining stocks if you own any. But we’re pushing it. We’re using it as much as we’re producing. Right.

TN: Let’s say somehow people came to their senses and said, look, we need to incentivize new refineries. How much just off the top of your head? Ten, $20 billion. Is it $100 billion? Just to get things started? How much do you think that would cost? Since we’re throwing money around.

TS: Since we’re throwing money around, I think if you could throw 10 billion, 20 billion at it, you could get some good projects going or tax incentives or something like that for current refineries to be able to build out or upgrade things of that nature. There’s a lot of things the government could do to help boost refining capacity.

TN: Okay. So while we’re throwing money around, would it make sense to reconfigure some of those refineries to refine light sweet Texas crude instead of, say, I don’t know, Venezuelan crude?

SR: Yes, it’s pretty simple. We built the right type of refining for a certain point, but we didn’t build the right type of refining for now. Yes, we would need to upgrade all of them, and it’s going to be a pretty significant issue.

The other really important thing that I think gets overlooked a lot is that even if you begin these projects now. It’s not a solution for several more years. By several more years, three to four at a minimum, kind of where you would expect these to begin to come online.

And the question is, what does the oil market look like at that point? What kind of mix do we have? So you have to make some fairly large assumptions about what your input mix is going to be down the road. So, yeah, I do think that it would be worthwhile to at least upgrade the current refineries, but I think that’s kind of a pipe dream.

TN: Okay. So while we’re throwing $40 billion overseas, we could take half of that and build new refineries and reconfigure refineries with American crude oil. Am I misunderstanding this?

SR: No.

TN: I just want to hammer the point home again. Okay, great. Thank you, guys. We had a really choppy week. We had a lot of kind of bad news come out. What are we looking forward to next week? Is it kind of more the same? Are we still in a really rough place and the Fed meetings this week, some announcements. I don’t think it’s going to surprise anybody, but what else are you looking for this week?

TS: Pretty much the same. I think we’re kind of stuck in this market low for a while now. So I figure you still see chop, you probably see oil sideways to up again. I expect that trend to pretty much continue into the summer until we really start to see some demand destruction, which we’re just not seeing enough yet.

So I think headed into fall, we have a better chance of seeing oil prices come down because again, I think that we’re sort of going to have a travel hangover and everybody’s going to get home and they spend a bunch of money on their credit cards and the economy is not that great. So that’s what I’m looking at. And again, for the week ahead, I think more of the same.

TN: Sam?

SR: Yeah, you have a million meetings next week of central banks. I think that’s really what the markets are going to key off of. And it really depends who says the most dumb stuff. And it’s going to be a competition because you have Powell and then you have the Bank of Japan. So we’ll see if maybe you get a little bit of a bracket move on yield curve control that would make things a little more spicy across markets. And we’ll see what Powell is capable of messing up when it comes to forward guidance during the press conference.

So I would say it’s more the same, but there’s a likelihood that markets are about as hawkish as they can be going into the meeting and that Powell doesn’t want to push markets more. So there may be a little bit of a rally off Powell just not being an uberhawk, and that might be positive, but I would say you’re in for some serious chop, particularly across the rates markets, currency markets.

And when it comes to equity markets, I think it’s going to be exactly what Tracy and I talked about earlier. It’s going to be the story of travel over retail.

TN: Okay? So next week, let’s talk about who said the stupidest central bank statement. Okay?

SR: Perfect.

TN: You got it.

SR: Does that work?

TN: Very good. Okay. Thanks, guys. Thank you very much. Have a great weekend. And have a great weekend.

SR: You, too. Tony.

Categories
Podcasts

Amidst Volatility, Boring is Good

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/us-fed-interest-rates-inflation-earnings-consumer-sentiment on June 9, 2022.

US markets remained volatile and on a downward trend as inflation concerns heightened. With that, the US consumer is beginning to feel the pinch of rising food and energy prices. What then does this mean for earnings in the coming quarters and has this been priced in? Our CEO and founder, Tony Nash answers these questions.

Show Notes

WSN: BFM 89 nine is seven o’ six Thursday the 9 June. And of course you’re listening to the morning run. I Wong Shou Ning together with Philip See. Let’s have a quick recap on how good global markets closed yesterday.

PS: US markets closed in the red. The Dow was down .8% SMP 500 down 1.1%, Nasdaq down zero. 7%. Whereas over in Asia it’s been a mixed bag. The Nikki was up 1%, Hong Sang up 2.2%. China composite up zero 7%. I think on the back of China easing a bit on the tech regulatory concerns. However, in Southeast Asia, Singapore is down 0.2%. FBM KLCI also down.

WSN: .1% so for some analysis on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Please help us understand what is happening in US markets because it is another red day today. Why are markets so choppy this Thursday?

TN: I think people are awaiting the CPI print what’s going to happen with the inflation announcement because that number really helps to indicate if the Fed will accelerate their plans of tightening. So if the CPI runs hot, then we’ll see them accelerate potentially. If it comes in as expected, then they’ll stick with the plan that they’ve got.

PS: So the plan is to 50 basis point hikes. If you see it move higher, are you talking about it hitting 75 or like extending it for a third 4th hike?

TN: If it’s higher, we could potentially see it hit 75 maybe in June or July. But certainly we’re looking at another hike in September that’s probable right now and then maybe a 25 basis point in November. So let’s say we saw come in at nine or something like that for a developed economy like the US. These are people who normally look at inflation, 1%, one and a half percent. So 9% inflation is just something that people have not seen for a long time. And so this is really damaging to people. Wages are not very flexible here. And so I’m sure from the Malaysian perspective, you see that it’s damaging people here in the US and it actually is because wages are not as flexible here as they are in other parts of the world. So if we see CPI come in high, then you would see the set accelerate. If it comes in at eight, let’s say less than 9%, they’ll stick with the plan they have. If it comes in lower, say seven-ish they’ll still stick with the plan they have and continue to fight inflation to get it down around 2%, maybe sometime in Q1 in 2023 or something.

WSN: Okay. So let’s stay on the topic of the US economy now. Bloomberg runs a model, runs different models actually, and they say that there’s a 25% chance of recession in the next twelve months, but a 75% chance by 2023. Do you share the same view but.

TN: A 25% chance of a recession is just a hedge. Right? I mean, that’s just saying maybe it’ll happen.

WSN: It’s a chicken call Tony. It’s like being chicken.

TN: So when you look at what a recession, two months or two quarters. Sorry. Of negative growth. Right. Well, we had a negative quarter of growth in the US, and Q one of 22. Will we have a negative quarter of growth this year? Unlikely. Or this quarter? I mean, it’s unlikely because of the reasons for negative growth in Q one are not the same reasons they would be this year or this quarter. Sorry. So going forward, I don’t necessarily think we’ll have a recession, but I think it will feel like a recession to a lot of people because over the last year, year and a half, we’ve had higher overhiring in a lot of industries like technology, overhiring where companies have been afraid they wouldn’t be able to get the talent they need. So they overhire people. They’ve paid people a lot of money. So sectors like tech will likely continue laying people off. They’ve already started, but they’ll likely reassess their wages as well as they realize that they don’t need as many people as they hired. And of course, there will be other effects if tech start laying people off more broadly. So we’ve already seen housing housing in the US.

There is effectively no new mortgage applications going through on that in the US. So the Fed’s target for housing has kind of been achieved really quickly, actually. But it doesn’t necessarily mean there’s a recession. So things will feel like there’s a recession. But I’m not sure we’ll necessarily technically be in a recession.

PS: So let’s just build on your feelings, Tony, and translate this macro numbers to earnings. What is your expectation in terms of quarter two earnings? Do you expect them to be substantially weaker and how will that translate into equity markets?

TN: Absolutely, yes. Definitely substantially weaker. I mean, look at what happened to say, Walmart and Target a couple of weeks ago when they announced their earnings, they were way down. Why? Because they had way overbought inventory and they had bought the wrong inventory. Okay. So they’re paying for that now and they’re going to have to discount to get rid of that inventory. Right. I think people in a lot of industries because of supply chain issues, they’ve overbought things. And in the meantime, preferences and markets have moved on. So they’ve overbought things and they’re going to have to get rid of a lot of inventory. I think Target and Walmart got out there very early to be able to have their equity price hit hard early. But other companies will come out in second quarter and they’ll admit the same thing. So we’ll see margins really compressed. And because of that, we’ll start to see people announce more layoffs because again, during COVID, investors were very charitable to executive teams, meaning they were telling the executive, look, just stay open, just survive as a company, do whatever you have to. Right now, we’ve got markets that are normalizing.

Investors are being more scrutinizing as they should. They’re saying, look, markets are normalizing. You have to perform like an executive team should perform. You have to perform like a company should perform. So investors and markets are going to be harder on companies in Q two.

WSN: But Tony, does this then mean that when I look at the S&P 500 index, which is probably the broadest barometer of the US economy, it’s down 13 point 65% on the year to date basis. Can we expect further weakness or has this already been priced in?

TN: I don’t think it’s been priced in necessarily. I don’t necessarily think we’re going to see another 13% down, but we always hear that things are priced in. And then when events happen, we find out they’re not priced in. I don’t think it’s priced in. I think there’s more pain to come because people are realizing that they’re basically overpaying for the price of equity. Right. In a company. And so we’re going to see pressure put on valuations, and that’s going to hurt a lot, especially in tech. So we’ve already seen pressure put on valuations in tech. And you saw companies like Facebook who are just throwing off cash still and their valuation is compressed because people have just woken up and said, look, it shouldn’t be valued at that. Right. So we’re going to see that more and more, especially in tech, but also in other sectors.

WSN: So where should we hide, Tony? Will it still be in the commodity space? I mean, oil is up 2 and a half percent this morning.

TN: At where oil is. WCI is trading at 122 right now. Brent is north of that. So it’s possible that we see another 20% rise in crude, but it’s really thin air where it is now. So I think crude price really depends on the supply side. And so can OPEC pump more? Not much. Will things in Russia resolve? Maybe probably in third quarter or something like that. Right. So we really have to look at what are central banks doing? They’re trying to ratchet down demand. Right. And so if they can successfully ratchet down demand, then that will have an impact on true prices.

PS: Tony, I would love to get your view because you’ve seen a different vantage, especially in emerging markets, particularly Southeast Asia. If you saw recently WorldBank has scaled its forecast on global growth and has even highlighted the asphalt is very much vulnerable to stack flat, even recessionary pressures. What’s your view? What’s your advantage in terms of investment in EM markets, especially in Southeast Asia?

TN: Yeah, in Southeast Asia. I mean, look, in Southeast Asia, sadly, Myanmar is going to have the toughest time for the next year or two, right? I mean, we all know the political issues there. I love Myanmar, but it’s going to continue to have the toughest time, I think of the say more developed Southeast Asian countries. I think Thailand is going to continue to have a hard time Partly because of supply chain issues. It’s kind of intermediate point and if supply chains continue to stay strained and tourism continues to be relatively slow in Asia I think Thailand is going to continue to have a tough time. I think places like Malaysia, Philippines, Vietnam, I think they’re in a better position and I don’t know that you’ll necessarily get excessive gains in those markets But I think there’s more stability and more same maturity and leadership in those markets. So if I were to look to Southeast Asia on, say, a country play, that’s where I would look. I would be really careful to look at things like excessive consumption, these sorts of things. I think for the next year or so we’re going to be looking at real stables.

What do people need to live a really boring life because we’ve had this super exciting roller coaster for the past two years and we need to get back to normal and we need to look at what are people going to consume Just to have a normal day in, day out life.

PS: Boring life then.

WSN: Yeah, boring is good.

TN: I love that. Yeah, we all need a little more of that.

WSN: Thank you so much for your time. That was Tony Nash, CEO of Complete Intelligence, saying borrowing is good, we need to get back to normality which means that what investors should be focusing on Perhaps consumer staples Versus consumer discretionary and going back to core fundamentals. Looking at valuations, I think you hit.

PS: The nail on the head core fundamentals because I think investors have given companies the past throughout the pandemic most scrutiny now whether the question will be this will show dispersion and earnings variance between those high earners and low performers Will be a big question Mark as there’s more scrutiny about how you perform in this normal, boring time.

WSN: Stay tuned. That BFM 89.9.

Categories
Week Ahead

The Week Ahead – 06 Jun 2022: Is India a geopolitical trend setter?

This past week, we had a flat S&P 500. Nasdaq was up slightly. Bond yields were up slightly. It was a summer stall this week. Not a lot happening from the beginning to the end of the week. In this episode, we’re going to focus on geopolitics.

Key themes:

  1. Is India a geopolitical trendsetter?
  2. China, MBS & Biden – BFFs?
  3. What does Turkey get out of halting NATO expansion?
  4. What’s ahead for next week?

This is the 21st 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
Tracy: https://twitter.com/chigrl

Time Stamps

0:00 Start
1:36 India as a geopolitical trendsetter now?
3:55 US is frustrated with India? What’s going?
7:35 Is India being ridiculously nationalistic?
8:00 China, MBS, and Biden as BFFs?
10:08 How does MBS look at Biden with China opening up?
11:31 Awkward and Desperate: Is the US-Saudi a short-term diplomatic issue?
14:45 Is there any place they can go for energy supply?
16:00 What does Turkey get out of halting the NATA expansion?
20:20 What impacts on some countries by opening the Bosphorus.
21:22 What is DC thinking and do out of the gun discussions?
24:24 What to expect for the week ahead?

Listen to the podcast version on Spotify here:

Transcript

TN: Hi, and welcome to The Week Ahead. I’m Tony Nash. And as always, we’re joined by Sam, Albert, and Tracy. Before we get started, could you please like and subscribe? It’s very important. But here’s what’s more important today. If you could comment on the episode, we would appreciate it. We check that stuff every week. If you disagree with us, if you think we’re full of it, let us know and let us know why. Okay.

So this week, this past week, we had a flat S&P 500. Nasdaq was up slightly. Bond yields were up slightly. Kind of a summer stall this week. Not a lot happening from beginning to end of the week. So we’re going to focus on geopolitics this week.

We’re looking at a few things. Is India a geopolitical trendsetter now? That’ll be a really interesting discussion. Second, we have China, MBS, and Biden as BFFs. So let’s see what’s there. What does Turkey get out of halting NATO expansion? Really, Turkey becoming a real geopolitical linchpin. And then we’ll have a quick chat on what we expect for the week ahead.

So first is India as a geopolitical trendsetter. India recently has halted some commodity exports. They’ve done some deals with Russia for energy, and they’ve been really independent. And India’s typically independent with foreign policy. But I’m curious if we can look at, say, the energy deals first, Tracy, can you help us understand a little bit about that, and what is India doing there?

TS: Well, I mean, absolutely. First of all, India has been complaining about oil price and saying that it’s unsustainable for them for months now, right. As we’ve been over $100. And so when they were typically not really buying anything from Russia.

However, after the Ukraine invasion, then we had that discount. The Euro to Brent discount fell to almost $40 at one point. So India started buying a lot of oil from Russia, obviously, because it’s less expensive. And they said outright energy security is more important to us right now than anything else because they are also having issues with coal. And whatnot really that’s their focus right now.

And so what we think is that likely they’ll probably become a semi permanent customer of them and probably will take in about 500,000 barrels per day going forward. So what is coming off of the European market is actually going to India and China.

TN: A lot of Westerners don’t understand that India and Russia or the former Soviet Union have had a long political ties, longtime political ties, and those long term political ties tend to come up when people need friends. There is a connection between India and Russia that a lot of Westerners don’t understand.

Albert. I guess the US tends to do this very binary. You’re with us or against us. And I would imagine that the White House and State Department, if we actually have a State Department, that they’re a little bit frustrated with India. What’s going through the US’s mind with the India relationship right now?

AM: Well, this is basically goes back to Obama, actually, with his animosity towards Modi. But the Biden, State Department and the DoD just have this naive idea of how things work in the world. India, like you said, the Russian ties with India are long standing because they use them as a counterbalance against the Chinese aggression. Right.

If you look at a map, because I always say this on Twitter, look at a map before you start talking about geopolitics. India’s surrounded by Pakistan, China, all these other proxies to China and Russia. So they can’t afford they can’t afford to sit there and poke the Hornets nest in the region because it’ll just come back at them. I mean, Pakistanika starts things in Kashmir.

The Chinese have been building mountaintop air bases to stress India over the watershed in the Himalayas. There’s so many issues that the Indians have to deal with and balance that with their Western counterparts, animosity with the dealings with Russia. It’s not that complex if you sit there and talk about it for 15 minutes. But for some reason, our State Department just can’t come to grips with that. And it’s actually causing quite the damage of the state relations of United States and India right now.

And you can talk about the Chinese component and how they stress India because they’re a major competitor in the manufacturing sector.

TN: Right.

SR: And not to mention that India has always been a very large importer of energy. And it’s a critical part of their development going forward. And they’re a 1.1 billion population. If you begin to have significant problems with energy prices and food prices, that’s a big problem for a democracy in that part of the world.

And not to mention, I think it’s somewhat hypocritical for the US government to be so mad about them buying 500,000 barrels a day when you still have Europe buying oil and gas every single day and being like, well, maybe we’ll be done by the end of the year.

TN: Right.

SR: The number of hypocrites that just keep coming out. Is India really our friend? It’s like, well, it’s Germany, it’s France, Italy.

TN: Those are valid questions.

SR: I mean, to me, it’s a little bit insincere for us to continuously be pounding on India for trying to survive as a democracy. It doesn’t make a lot of sense.

TN: Well, you conveniently overlook the fact that India regularly imports energy from Iran. Korea places like Korea regularly import energy from Iran. The State Department and White House regularly just overlook things conveniently because they want to. Right. But when it comes to Russia, for some reason, it’s a major issue.

So one quick thing I want to talk about with regard to India, and this has happened with some other Asian countries where India stopped exporting sugar and a few other commodities. We saw Indonesia stopped exporting, say, palm oil and a few other things. So this has been kind of painted as some sort of nationalistic action.

My contention has been, look, a nation state has the kind of obligation to look after their own people first. What do you guys think about that? Is India being ridiculously nationalistic by not exporting sugar and a few other things?

AM: Absolutely not. I mean, this is a case of survival, not just for India, but for multiple countries. Egypt recently, Morocco and all the other North African countries are following suit. I mean, they got to feed their own people. You can’t have your own citizens miss meals because pitchforks and torches start coming out.

TN: Yes, I think that’s a perfect way to say it. Okay, let’s move on to kind of a little bit of a crazily, delicately balanced series of relationships with China, MBS in Saudi Arabia, and Joe Biden. There’s been talk of a trip of a Biden trip to Saudi Arabia, which is a little bit awkward given the fact that MBS wouldn’t take his phone call last month. And then we’ve got China as energy importer. There are a number of levers there.

So, Sam, actually, Tracy, can you take us down that path a little bit on the energy side of what happens there and why that is so important?

TS: Well, I mean, I think it’s a thing. Relations have already been strained. Right. So I think it’s too little, too late. And second of all, to go ahead and think that Saudi Arabia or OPEC, for that matter, can lower oil prices in the US or lower gasoline prices in the US is completely misguided. We should be focusing domestically on what we can be doing here instead of banking other countries.

TN: Let me stop you right there and ask the refinery capacity is like the highest it’s been in 20 years or something, right? 92.4% or something.

TS: Yeah, it was 92.7% this week. The prior week was we were at 93.4%. So we’re pretty much at we’re cranking it out. We definitely need more refining capacity going forward. We haven’t had a major refinery built since 1977. Brownfield projects, but not real Greenfield projects.

TN: Okay. Going back to the Biden-Saudi visit, Sam, what are your thoughts on that? And if you can throw a little bit of China analysis, if China is actually opening up. How does MBS look at Biden with the potential of China opening up more aggressively?

SR: I think he looks at it as a little bit desperate. Right. And probably wants quite a bit out of doing anything. And to begin with, Sunny doesn’t have that much fair capacity. There’s not a whole lot they can do very quickly, maybe release some stocks, et cetera, but there’s not a whole lot they can do to get oil on the market quickly. And there’s a lot less that they can do to magically make diesel.

We don’t have the amount of diesel out there that we need. And we are building a refinery, and a refinery takes three to five years to build. So good luck with that. So I think it’s going to smack is a little bit desperate to MBS, and I think there’s going to be a pretty good bargaining spot for him to be in, given that China has largely shut down for a month and a half to two months, maybe reopening, and that’s going to be another tailwind to oil consumption.

And if you all of a sudden have higher oil consumption coming out of China, that’s going to be a problem for oil prices, even from $1.20, $1.15 where we’re sitting right now. That’s a tailwind that I think MBS kind of has a little bit of a grin on his face saying, hey, nothing I can do here.

TN: Right? And tell me a little bit more about the political dynamics there. Does the US and Saudi Arabia, is this kind of a short-term, say, diplomatic issue, or is it something longer term?

AM: Well, you and Sam said two key words, “awkward” and “desperate.” At the moment, Biden going to Saudi Arabia to meet with the King, which was rejected, so they’re actually pushing them off to MBS is such a black eye to the United States foreign policy. Unbelievable. I mean, at this point, you’re going to have Joe Biden go meet with MBS, who Biden’s cabinet brought up Khashoggi not too long ago, which prompted the phone call to be not even taken by the Saudi, leader of a US President. I can’t even remember when last time US President was ignored by the Saudi Arabians. I mean, it’s a disaster in the making that will probably take a good ten to 15 years to rectify.

The Saudis, what are they really going to do? A couple of hundred thousand barrels extra in a pump just to make Joe Biden happy? It’s not going to do anything. I mean, swallowed up by demand almost instantly. But when it comes to the political stuff, you have a realignment between Saudi Arabia, Russia and China happening right under our noses. And it seems to be just completely missed by the State Department of Biden administration.

SR: And to Albert’s point here, and I think it’s an extremely, extremely important point. Saudi doesn’t need the US anymore. Saudi needed the US for a while. We were their biggest customer. We are not their largest customer by a mile, and we’re unlikely to be their largest customer ever again.

So their pivot towards Asia and away from the US makes strategic sense for them. And that, to me, is an understated long term fundamental issue facing the US-Saudi relationship.

AM: That’s exactly right, Sam. And the only other component that actually contradicts that is because of the security situation between Iran and Saudi Arabia, the Saudis need US armaments, they need the relationship with Israel, and they need to re-mend relationships with Turkey. But if Russia at this point, if they’re not poking the Iranians to mess with the Saudis, there’s really no real desperate need by the Saudis for the US defense umbrella at the moment and they can just be free to sell to the Chinese, the Asians and whoever else. And remember that Biden attempted to go to Venezuela to try to get them to pump more, but then realized that while their refinery is broken down and can’t really produce anything at the moment.

SR: So the Arabians went to fix it.

TN: Yeah.

AM: There’s a lot of hypocrisy and a lot of awkward things that’s coming out of the Biden administration right now for geopolitical issues concerning the Saudis.

TN: It’s amateur hour, guys. Lincoln is a joke, often as a joke. I can’t believe it’s embarrassing where we are right now. Tracy, is there any place else they can go for supply right now?

TS: If you look at OPEC, OPEC can’t even produce what their current quote is, right? Because you have too many, too many laggards. So it doesn’t really matter. I mean, they’re 2 million barrels plus below quota last month. So it doesn’t matter if they keep raising or not. They just don’t have the spare capacity. And a lot of the smaller countries are having problems with production.

There’s nowhere else to go. Right. Especially if you’re trying to push Russia out, which is, depending on the month, the second or third largest producer. Right.

TN: Okay. And I think we can all agree that if we just buy electric cars, that would solve everything.

TS: Oh, absolutely. With the announcement that we’re going to have rolling blackouts in the Midwest this summer, I’m sure that rush right out and get EVs should help us.

TN: Right? Exactly. Okay. Let’s move on to Turkey and get really interested in the power dynamics with Turkey right now and their veto power over NATO expansion and some of their control of energy going through the Bosphorus. Turkey has really emerged as a real regional power.

I remember reading about this with George what’s his name’s book the next 100 years, reading that Turkey would be really powerful. This was a 20 year old book. Right. George Freedman. Right. And so it hasn’t happened exactly as he thought. But at the time I thought, “no, Turkey can’t reemerge.” And it’s happening right now. Right.

Albert, can you talk us through what does Turkey get out of halting NATO expansion?

AM: Well, a few things actually, quite. They really want to stop the Kurdish money system support system coming out of the Scandinavian countries because that’s where a lot of the money and support groups based themselves out of Stockholm and parts of the Baltic area. So they really want to stop that. Right. But that’s not really what they’re after because the Scandinavians put a block on their sales of arms. Right. So the Turks obviously want to sell their drones.

They want to sell some military equipment to the EU and to other players in the region. The Turks, they have a big economic problem. Right. And so they’re using every point of leverage they possibly can use. They’re trying to press the EU to give more loans, trying to stress the refugee situation, trying to stress the energy situation, trying to stress the food situation through the Bosphors. And I’ll let Sam and Tracy touch on that.

But for them right now, if you look at it like I said, with India, look at a map. Turkey right now is arguably the most geostrategic position in the entire world right now with concerns to wheat, gas, oil, refugee status. You can just pick a topic and Turkey is pretty much top five.

TN: Okay. Sam talked us through kind of from a macro perspective. What does that mean? What opportunities does that bring up?

SR: I mean, it brings leverage, right? It brings incredible amount of leverage, particularly as you begin to have Sri Lankan type issues. Go to North Africa. The easiest way for North Africa to solve its problems is for Turkey to solve the problems very quickly by opening the Bosphorus or doing something along those lines. So I think from a macro perspective, it’s really about leverage and what type of leverage they want. Right.

They actually manufacture really good, fairly cheap drones. That’s a pretty easy thing for NATO, the EU, to kind of give them a pound on the back and say, okay, yeah, go. Right. That’s something that they can actually do. And quite frankly, if you’re Sweden and Finland, guess what? You don’t really have a choice.

Turkey is going to be selling drones. Turkey is going to have some leverage on what they get to do, and you’re not going to be able to veto it or you’re going to be sitting there like a sitting duck for the next time that Putin decides he wants a little extra territory.

TN: Right. Okay.

AM: And to expand on that, Tony, the Turks, in sort of cooperation with the Iranians and the Russians, have been moving into Africa using old Ottoman trading post colonies, I mean, through West Africa, North Africa, Horn of Africa, everywhere. And there’s been absolutely no talk about it, no counteraction against it. They’re acting as if they were a major superpower with no one really putting them in their place.

TN: Well, this potentially could turn into I don’t know how much you guys know about Ottoman history 1860s, 18870s, debt load that the Turks had and the refinancing that the British and French came in to do it. And I wonder if that’s where we’ll be in five or ten years. It’s really interesting to see how that Ottoman history played through and see if that happens again with Turkey. I hope it doesn’t, because that ended up leading to World War One. But this could be really interesting.

Tracy, they opened the Bosphorus. What impact does that have on some of these countries, like Egypt and North African countries and say, Lebanon and some of these other countries that are really desperately waiting for some things out of Russia and Ukraine?

TS: Yeah. I mean, obviously that’s going to help. We’re going to get some wheat out. It looks like that is going to happen and that we are starting to see shipments flow that’s obviously going to ease tensions. Hungry people tend to revolt. So something needed to be done, in other words. And so it looks like that’s starting to happen, which is obviously a good thing.

TN: Great. Okay. I want to spring a kind of a surprise topic on you guys just really quickly. It’s a big debate in the US since we’re talking geopolitics. Guns on top of everyone’s mind. Some shootings in the States over the past few weeks.

Albert, I know, you know, DC probably better than all of us. So can you walk us through really quickly? Excuse me, what is DC thinking? What will likely happen in DC out of all of the gun discussions?

AM: Well, because it’s an election year, probably nothing. And I’ll tell you what. In politics, you cannot take a singular issue, isolate it and solve the problem. It doesn’t work like that. So, for instance, and this is something I always stress about. When you look at guns, you have to look at it as what voters intentions are and feelings are with the guns because they’re electing their members. Right.

When you have guns, they’re typically rural Americans that are religious, that have views on abortion and are farmers. Right. What’s under farmlands? Oil. So not only do you have to tackle the religious voter, the anti abortion voter, the rural farm voter, but then also big oil that actually funds all these people. So you can’t take guns alone and say, I’m going to solve it without agitating another 40 million Americans and Senate races are completely dependent on rural voters, not so much urban because that tends to go Democratic anyways. But there is actually swing cities and swing areas on top of the conservative areas that there’s a political calculation and numbers game that has to be played.

So for this year, I don’t see anything happening with guns at all. Maybe something extremely minor, but nothing that would actually be effective.

TN: For people who are non Americans, what do people outside of America not understand about the gun discussion in the US?

AM: It’s a cultural thing. The United States prides itself on being a system of checks and balances. Right. And for guns, Americans tend to think we are not going to let our government intrude and overtake us. That’s our checks and balances to dictatorships. Right. Authoritarian systems.

As other issues come up from the left and come up from the right, just everyone’s going to get more pulverized on this. There’s never going to be 100% solution. The Europeans are definitely not going to understand why Americans love their guns. But it’s just…

TN: Europeans, Australians, Asians, they don’t actually some in Asia get it.

AM: Some in Asia get it. The Swiss hilariously get it. They’re mandatory. They have Pentagon, everyone’s. And it’s unfair for the rest of the world to compare a small country of like, say, 10 million people statistically to the United States that has 350,000,000 plus people out there, the giant system.

TN: Yeah.

AM: We’re doing our best and nothing is a perfect system and we’re getting towards it. But it’ll take decades.

TN: Yes. Okay, good. I just wanted to cover that off since it’s been such a big topic lately. Okay, guys, the week ahead. We had a kind of a lackluster week this week. Tracy, what do you see happening in the week ahead? Crude actually had a fantastic week. What do you see going on next week in, say, energy and commodities?

TS: I’m still bullish energy and commodities. From a technical standpoint, we broke out of a technical pattern. Right. I don’t see anything changing, in other words, in the physical landscape, I mean, markets are tight. We have a structural deficit. The whole complex is in bacridation. So I expect energy prices to stay high. Really? I don’t think Biden’s meeting is going to do anything.

TN: Right. Okay. Very good. Shannon, what are you looking for?

SR: More chop. A lot more chop. I think the jobs report on Friday, there was a quote that it was goldilocks-ish it was not goldilocks-ish if you’re the Fed. The Fed saw a lot of jobs created. It’s a participation tick up and it’s average hourly earnings still sitting at 5.5% for everyone on a year over year basis. Those are three things that they don’t really want to see sitting that high.

TN: Right.

SR: It’s that simple. They would be much happier with 100,000 jobs created or lower. I think they want a couple of negative prints. An average hourly earnings that’s closer to 2% year over year. That means that the wage price spiral isn’t happening. And they really want an awful lot of call it pain in the inflation space. So you’re not really seeing anything to knock the Fed off of its current path. And if anything, you probably gave it a little bit of a tailwind to some more hawkish rhetoric.

Brainard being a Hawk? That should scare everyone. Because when Brainard comes out as a Hawk, that’s a signal.

TN: That’s weird.

SR: That’s a signal that they’re going and they’re going hard.

TN: Yeah, that’s upside down world weird. And then was it May said out yesterday saying they could do another fifty in September?

SR: Yeah. After the print on Friday, guess what, this is the best part about the Brainard statement is she said in order to have a better balance in the labor market, they need to see job openings decline.

This is critical, though. Job openings are reported a month lagged to everything else. Right. So in September, they’re going to be looking at maybe August.

TN: Let me ask you this. Elon Musk was out this week saying, hey, if you’re not going to come back to the office, we’re going to consider that you resigned. Are we going to see more CEOs do that? And could that potentially have an impact on the jobs numbers?

SR: Not really. One, Musk, then he said we’re over staffed by 10% across salaried workers. So the statement for Musk was probably more to get some natural attrition. So we didn’t have to actually lay off people because it’s a lot cheaper when people quit than it is when people get laid off. And Musk needs a couple of headlines because his Twitter deal was a really dumb idea.

TN: Yeah. And also I kind of preempted Musk by two years. I told my staff in June of 2020, but if you don’t show up, you could resign. So I was early on that boat. So Albert, what do you expect in the week ahead.

AM: Everyone saw Yellen come out and say I missed the inflation and how bad it’s going to be. That’s her getting ahead of the CPI print. It’s going to be a bad one. I think it actually could get close to 9% which would be not good for the markets.

On top of that Opex Fed minute coming up, I think we’re going to be like Sam said, I think there’s going to be some chop. They’re doing their best to keep this thing above 4200. So I think we’re going to be looking at probably push 4250 which is a bull bear line this week until CPI print comes in and then Armageddon.

TN: That’s what you said last week.

AM: That’s a 4200 on that Monday on futures.

TN: Okay.

AM: They tried but they sold it. Everyone’s just selling.

TN: Okay. So we have another chance this week.

AM: Yes.

TN: Great guys. Thank you very much. This has been a great discussion. Thanks so much and I really appreciate this. Have a great week ahead.

AM, SR, TS: Thank you. Bye.

Categories
Podcasts

Major Headwinds Heading To The US Housing Market?

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/us-housing-market-outlook on May 26, 2022.

The VIX or the “fear gauge” has been trading sideways but what does it indicate about equity market expectation? And US home sales in April fell to their lowest in 9 years, brought down by rising mortgage rates but how adversely will this impact the property and construction sector? Tony Nash, CEO of Complete Intelligence tells us more.

Show Notes

SM: Bfm 89 Nine. Good morning. You are listening to the morning run at on Thursday the 26th May. I’m Shazana Mokhtar with Khoo Hsu Chuang and Tan Chen Li. First, let’s recap how global markets closed overnight in the US.

KHC: Doll up zero 6%. Smp 500 up 1%. Nasdaq up 1.5%. Asian markets. Nikay down .3% Hong Kong’s up 3%. Shanghai Composite up 1.2%. Sti down .5% FBN KLCI up zero 3%.

SM: So for some thoughts on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Tony, good morning. Let’s get some reactions on US markets overnight. They interpreted the latest Fed meetings pretty favorably. It seems the US stocks all inched upwards. What did they find reassuring about the Fed’s policy direction?

TN: I think they were just looking for some direction that things weren’t going to be worse than the guidance that they received previously because commodity prices haven’t stopped rising necessarily. And so I think people were afraid that the Fed might accelerate their plan to stop inflation and just a little bit of a nudge that they probably weren’t going to do that and they were going to remain flexible, probably help things out after hours. You had Nvidia report, which was really disappointing. And so the Nasdaq futures are down pretty far right now. So although we had a good trading today, things are looking a little bit pessimistic for tomorrow based on some earnings.

TCL: Yeah. So the Fed translators have a TLDR conclusion on the Fed minutes yesterday. We have it at three more basis, 50 basis points hikes, and then an indefinite pause. Tony, what do you think about that translation?

TN: So I think what they’re saying is where investors are seeing say for the next six months that things will be pretty stable. They can Bake in the 250 basis point rises, and from there it’s pretty easy to calculate how much tolerance you have. The other factor to think through is how much the Fed will tighten for the next six months. And that’s already baked in how much they’re tightening their balance sheet. And I think that’s $23 billion a month, or 32. I can’t remember the number exactly, but it’s a stable number, and that’s really unlikely to accelerate.

TCL: Tony, does it set the stage for a second half risk rally?

TN: Yeah, it possibly could because it’s campaign season and nobody really wants to be tightening going into a campaign. So it’s possible. There’s a lot of talk about recession, and if there is a recession, we’re already in the middle of it. So there’s no sense kind of worrying about it because it’s already here. If that’s the case, we already had a first quarter contraction in US GDP. If we have a second quarter, we’re already halfway through that anyway, almost so or two thirds of the way through that. So it doesn’t really matter that much. And I think people are starting to look at that in a different light.

KHC: The CTO volatility index or the fear gauge has been moving sideways between 25 and 35 over the last month. What would that trading pattern indicate about equity market expectations?

TN: Yes. So the VIX really is it measures volatility of SMP 500 options over the next 30 days. And so it tells me that there is, I would say heightened sensitivity or elevated volatility expected. But I wouldn’t necessarily say it’s extreme. So it doesn’t appear that people are looking for some sort of extreme, say May or April 2020 type of event. So people are worried about further falls in equities for their pullbacks in equities. But I don’t necessarily based on what we’re seeing in the VIX, not necessarily seeing people expect things to fall off a cliff.

SM: And I think looking at how the rise in interest rates, what kind of impact has been having so far, we may be seeing that in US home sales because in April it fell to their lowest in nine years. But what other headwinds do you see facing the US housing market and how do you think it’s going to impact property and the construction sector moving forward?

TN: Yes. People in the US talked about supply like there’s a short supply on the market or not enough supply. In May, we actually went up to nine months of housing supply on the market. What that means is the number of, say, homes that are on the market, given the current pace of buying, would last for nine months. Of course, there is short supply in some markets, but in general, there seems to be across the US at least ample supply. So people are going to pull in their expectations for price given that interest rates have risen. But if they continue to rise, they’ll want to rush their purchases forward, which is possibly what we’ll see, especially over the next 30 days or so, because people always want to save a little bit more on the interest rate. So I don’t see a lot unless we start seeing mass layoff events or something like that. I’m not sure how much of this you see Malaysia, but we did see a lot of all cash buyers for houses in the US. And what’s been happening there is people will take out a loan, a cash loan against their equity portfolio.

TN: We will definitely see that stop because equities are not as relevant as they were 60, 90 days ago. There have been some calls on those loans and so some of those transactions have had to stop. So I think that’s what’s led part of what’s led to a little bit more supply on the market and may slow down some of the purchase transactions.

TCL: Yeah. Tony is still on properties. I think I read somewhere that the median home price in America across the whole country is somewhere around either 349,000, $391,000 per house, which is the highest it’s ever been in a number of years. Do you see that house inflation continuing to creep upwards, or do you think it’s kind of like peaks off and it’s going to taper off?

TN: I think we do have a lot of new houses under construction, so I don’t necessarily think we’ll see that continue to rise at the rate that we’ve seen. If we do, we’ll continue for a period, maybe six to twelve months or something. But I don’t necessarily see house prices continue to rise, especially with interest rates rising. If we had kept interest rates where they were, then sure, we’d continue to see house prices rise at that rate, but because they’re pulling that lever, I think they’re going to let it sit, of course, as Palo said, for a period of time. But if house prices continue to rise in an uncontrolled way, I think they’ll come back in and intervene with interest rates.

KHC: And with India now restricting sugar exports and Malaysia doing the same with chicken, where is the trend towards food protectionism headed, and are we looking at a global food crisis?

TN: Yeah, I think your last question first. Yeah, I think we are definitely looking at a global food crisis. Well, maybe not global a regional food crisis in certain regions. Of course, there have been protests in Iran, supposedly over food prices. We’ve seen issues in Sri Lanka, of course, places like Egypt, different countries. There are problems. But I think some of this is related to Ukraine’s inability to export Ukraine and Russia’s inability to export some of their goods. And yeah, some of it’s protectionist with sugar in India and other things. But I think the countries that are holding back exports are more focused on providing for their citizens, and I think they’re trying to visually make sure that their citizens see that as a priority. So the citizens aren’t protesting and upset. And if we look at what’s happening in Pakistan right now, so citizens aren’t protesting and upset. So the political leadership is actually seen to be doing something to hold some food back for their clients or their citizens as a hedge against inflation. So I think part of it is political. I know it’s a little bit protectionist, but I think it’s more just being very careful about being prudent for their citizens.

SM: Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, weighing in on some of the trends that he sees moving markets, commenting on, I suppose his outlook for the housing sector in the US, which has taken a different trajectory from Malaysia, which are housing hasn’t really gone anywhere for the past two, three years, six years, actually.

TCL: Yeah. In fact, since 2014. But I just checked some of the data from America, the Fred statistics from the St. Louis Fed prices. The median house price in America is $430,000. Of course, median is the middle number between the top and bottom, $430,000 per house in America. That’s average let’s reach out what 1.8 million ring? That’s a lot of money.

SM: That’s inflation for you 717. In the morning we’re heading into some messages. And after that all you should know about green bonds in the region. Stay tuned to BFM 89.9.

Categories
Week Ahead

The Week Ahead – 23 May 2022

Get 3 months FREE of CI Futures. Subscribe here: https://www.completeintel.com/2022Promo

The SPX was down 4%, WTI was up 2.8%, and the 10-year yield was down 2.9%. Intraday vol has been an issue all week. What’s going thru an institutional trader’s mind in this market? Sam Rines explains.

On the commodities market, wheat was down 6% this week. Corn ended this week down about 1%. We’ll help you understand ag and fertilizer markets with Tracy Shuchart.

The dollar (DXY) is down a bit this week, about half a percent. Are global central bankers worried about a rising dollar and is there anything they can do about it? Albert Marko gives his insights on this.

Key themes:

1. How are institutions trading the intraday vol?

2. Ags and fertilizer: Demand Destruction vs Supply Shortages

3. $USD 💪🙂 or ☹️

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This is the 19th 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

Tracy: https://twitter.com/chigrl

Listen on Spotify:

Transcript

TN: Hi everyone, and welcome to The Week Ahead. I’m Tony Nash, joined as always by Sam Rines,

Albert Marko, and Tracy Shuchart. Before we get into it, please, please like and subscribe. Please like and subscribe.

Also, we just started our new CI Futures promo. You get your first three months free. Get global markets, currencies commodities economics with CI Futures. Check it out at completeintel.com/2022Promo 

So guys, this week S&P was down 4%. So I think some people are relieved it wasn’t down more. WTI was up almost 3% and the 10-year yield was down 2.9%. So I think it was a little more tame, at least by the end of the week than some people thought it might be, which probably not helpful to everybody, but I think it helped people a little bit, just kind of get a grip on things.

So our key themes this week, first, how are institutions trading this market and more specifically kind of Intraday Vol?

For AGS and Fertilizer. Is it demand destruction or supply shortages or both? How are those playing out?

And for the US dollar strength? Are global central banks happy about it or sad about it?

So today for our first segment, Sam, if you can help us understand this. Intraday vol has been an issue all week and for the past couple of weeks. What’s going through an institutional traders mind in this market We’ve got a tweet and there was a great thread from Kris Sidial. I definitely recommend reading it. So can you walk us through that a little bit, Sam, what they’re thinking about and what institutional traders are doing?

SR: Sure. I would say what they’re thinking about is not losing money, particularly after you had the target earnings, Walmart earnings. There were some landmines out there in individual retail land. That brought up some call it concerns about the consumer. It brought volatility into places you hadn’t really seen volatility recently. So staples began to really get a little more volatile. In particular, they were more volatile than the S&P500 for the back half of the week. So you began to see call it the volatility spread on underlying issuer basis, but not necessarily really spiking at the headline index level.

TN: So traders are trying to keep it flat, right?

SR: They’re keeping their risk very tight. There’s quite a bit of blood in the streets, so to speak, particularly those trading rates and individual equity names. So yeah, I would say it didn’t look like it was that volatile, but the intraday vol was incredible and it took a lot of the risk out of the system. It’s worth noting that a lot of the risk managers out there aren’t looking at day to day vol. They’re looking at Intraday Vols, PNLs. So you’re likely to get a shoulder tap Intraday if you’re playing these markets with too much leverage.

TN: You tap out at like 2:00 PM or something because of your positions? Is that what happens?

SR: Or you just have to unwind one that you like. Right. If you put on a S&P future trade early in the morning and you get 100 point move Intraday in the S&P, you’re going to get blown out of that position pretty quickly. Right. You have to have really tight stop loss limits. That’s it.

TN: Albert, what are you seeing?

AM: Well, the Fed has done a marvelous job of erasing excess wealth out there, excess money. Not just from retail. Retail is dead in the water right now. But even institutional wise, a lot of funds just been obliterated for the past month and a half now? The problem becomes liquidity. And where is it? I’m looking at the order book on the e-minis, and it’s just there’s nothing there. There’s nothing on the buy side,

nothing on the… Nothing. So these massive 100 point moves, I mean, of course, we’ve never seen anything like this, but if you look at the problem with liquidity there, it makes perfect sense.

TN: So, Albert, from a hedge fund world perspective, do you think we’re going to see some hedge funds cleaned out? Obviously, Melvin, we know that story. But are we going to see some issues there with some funds?

AM: Without question, you’ll see a lot of them unwinding by the end of the year. I know a few personally that have closed up shop or in the process of closing up shop. And I can’t imagine there’s at least 25% more that’s out there that are in some serious trouble. I mean, redemptions will start taking off clients that were sold, big tech names in a zero rate economy, they’re gonna be calling every single day what’s

going on for returns, and there’s none to be found right now.

TN: Yeah.It’s tough to get things out right now. Okay, good. Thanks for that. Let’s move on to our second topic.

Tracy, wheat was down 6% this week. Corn ended down about 1%. We got an interesting viewer question from Thomas Sieckmann, who’s a regular viewer. Can you help us understand AG and fertilizer markets. Thomas is saying, “love to hearyour thoughts on AG commodities. Demand destruction versus supply shortages, fertilizer prices and shortages, drought, lots of cross currents.” Can you help us understand kind of those markets a bit better?

TS: Sure. Well, first, I don’t think you’re going to see demand destruction even at higher prices,

because people need to eat. Right.

TN: Eating is good. Yeah, right. We can agree on that.

TS: The thing is what I think we’re going to see a structural shift in the market, whereas you’re going to see different crops being produced over other crops. In other words, if we look at, say, wheat, for example, what’s happening right now is that wheat crops are being produced more because it’s easier to do, less energy intensive, and that’s going to make a problem on the corn market. Not necessarily in the United States. I would single out the United States as it is kind of a different market altogether?

But if we look at the global markets, where I think this is headed. We’re going to see shortages in areas where you didn’t think so. Right.

We’re all scared about wheat because of obviously Ukraine and Russia and then being major producers, et cetera. But that is going to, in turn, affect the corn market, global production and what those crops are, what crops are being produced globally, if that makes sense. I think that’s what we need to be on a lookout for.

And things like rough rice. Rice. Rice is going to, because nobody wants to put wheat and corn into, say, animal food anymore. Right. Rice is much cheaper. So I would look for rice to go much higher because

they’re going to use that to replace something like animal feed.

TN: Interesting. Okay.

So we’ve seen political instability in Sri Lanka, especially over the past couple of weeks, and part of that is just terrible government. Part of that is weak currency and food affordability. How far do you think this goes? Does it get extended to a lot of other countries, or is there a few other countries that this gets exposed to? Both you and maybe Albert, if you guys can both jump in on this.

TS: Yes, I think it extends. We’re already seeing that name around. Right. We’re already seeing protests in Iran, and I think that this is going to continue, especially in emerging markets. Right. So I think this is nothing new. I think we should expect more of this and be reminded of when we saw the Arab Spring. It all started because of food. Right. So that’s something that we need to pay attention to, in my opinion.

AM: Yeah, I agree with Tracy. Some of the emerging markets are going to be the most hardest hit. It’s funny, because four or five months ago when my client and I were sitting there discussing what countries to look at to invest in, and one of the key components is which ones are stable in their food supply.

I mean, the United States. But France is actually quite stable. I think that they can actually make quite a play for the European Union’s leadership over Germany going forward, specifically because they’ve got enough food to sustain themselves.

As for the other countries…

TN: That’s a good point, Albert. I hadn’t thought about that. But that’s a really good point about France.

AM: Yeah. Well, I mean, they got their own food. They have a big agricultural industry, they’re

top in the world, and they’re self sufficient. And they have water from the Alps, too. So they have everything they need for themselves. So they’re pretty isolated from this.

But you look at Spain, they’re in trouble. North Africa, they’re in significant trouble. Sri Lanka won’t be the first looking for at least a dozen more instances of that happening around the world.

TN: So we have a summer of new government.

TS: I’m looking towards Brazil and Argentina, even though everybody kind of hates those markets right now, is if we look at their agriculture? Their agriculture is robust. And so I think that in the end, that will serve them from an investment standpoint if you’re looking to invest in.

AM: But the only problem with Argentina is so I mean, their government is just absolutely atrocious. And then the Brazilian. High risk. And Brazilians have a big election coming up, and that’s going to be extremely contentious. So I would stay away from those two until after those elections happen and whatnot. 

But yeah, I mean, Brazil, they have fertilizer, they have fruits, they have sugar cane, a lot

of chicken, a lot of soybeans, a lot of meat.

TN: Okay, perfect. Let’s move on to the next topic. Albert, we got a question from Gary

Haubold, who’s a regular viewer. He’s talking about the dollar and how central banks. There’s gossip that central banks are getting nervous about a strong dollar. So dollars up or down, sorry, a little bit this week, but how worried are global central banks about the dollar?

Of course, you have, say, the North African or Brazilian or other kind of fairly shaky monetary markets. But if you look to, say, European or developed Asia or some of those other markets, how worried are those central bankers about a strong dollar?

AM: Well, I just want to isolate this between just the United States and Europe right now, because that’s only really what matters to the market back in the United States. A strong dollar for the Europeans is not good. It’s just absolutely not good. It would be good if the Euro was falling. They had exports to send to China, but they don’t have that anymore. So now they have dollar liabilities that are getting out of control. And I think that the Europeans, I’ve heard whispers inside the Fed and treasury that they’re worried about a European financial crisis. And it makes perfect sense. If they want to get the markets down, blow up Europe, that’s the best way to do it.

TN: But I thought we’ve had a financial crisis in Europe since about 2012.

AM: Yes, but we have it every five or ten years because Europe is a welfare state. It’s a welfare state that lives on Fed swaps. Right. That’s all it is. And I don’t want to insult the Europeans on here, but let’s just get real here. Without Chinese exports, they’ve got nothing.

TN: Sam, what do you think about that?

SR: Yeah. If China doesn’t open up soon, it is going to be extremely problematic for Europe. That would be the saving grace in a lot of ways to Europe for a strong dollar. Other than that, there’s going to have to be some sort of interesting talk down to the dollar, either from treasury or some hawkish comments coming out of the ECB. And you’d begun to hear the ECB be a little bit more hawkish recently. If they really want the dollar to abate, they’re going to have to get more hawkish.

TN: Yes, for sure. And on your China point, I saw a story this week that the Shanghai Port was at about a 90% capacity at some point this week. Whether that’s true or not, I don’t know. But I saw it in a legitimate newspaper so let’s see how long that lasts.

TS: I was going to ask you, Tony. From a China perspective, how do you look at this opening? Do you think Shanghai is really opening like they say it is or is this hearsay or, can you give us a little bit of insight on kind of the China situation right now because that makes a huge difference in demand for energy and materials?

TN: Sure. Absolutely. So I sure want it to open because I want both China and the rest of the world to thrive but because of a lot of domestic considerations, COVID or monkey pox or whatever it is. I don’t know. They’re just lifting it slowly. 

But we talked about this in detail on last week’s show but I really don’t think they’re going to open to any interesting degree until mid summer. Maybe later. I wish they would open tomorrow but they won’t. I think for a lot of reasons they’re kind of getting in their own way and I’ve said this many times China needs to be saved from China. It’s just such terrible management of the country and has been for 50 or more years

and they’re potentially going back into the great famine type of environment which I worry about a lot and that would be detrimental to everybody around the world.

TS: That makes sense.

TN: So on that happy note, thanks so much for taking time for the show, guys. Really appreciate that. Have a great week ahead. Thank you very much.

Categories
Week Ahead

The Week Ahead – 16 May 2022

The number one issue for Americans is inflation. As long as this is a top consideration, the pressure will be on the Fed to bring it down. Sam has been pretty consistent with 3 x 50 rate hikes in May, June, and July. What changed in trading today? Is everyone still bearish? Samuel Rines explains.

Also, what’s next for crypto? Luna fell from $90 last Thursday to $0.00005952 on Friday. Their circulation went from 4 billion yesterday to 6.5 trillion today. Watching the crypto fallout is terrible – lots of people have lost lots of money in this supposedly immutable “currency”. Albert Marko explains what happens next.

Lastly, is China really falling apart? We’ve seen some unsettling posts over the past several weeks out of China. From lockdowns to port closures to gossip that Xi Jinping has been sidelined.

Key themes:

  1. Is everyone a bear now?
  2. What’s next for crypto?
  3. Is China really falling apart?

This is the 18th 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

Listen to this episode on Spotify:

Transcript

TN: Hi and welcome to the Week Ahead. I’m Tony Nash, and as usual, we have our team, Sam Rines and Albert Marko. Tracy, who’s not with us today.

Before we get started, I’d like to ask you to subscribe to our YouTube channel. It helps us a lot get visibility, and it really helps you get reminded when a new episode is out so you don’t miss anything.

Gosh. Big week for everyone. I wish I had fallen asleep a week ago and just woken up now after Friday’s trading. But it’s been a big week all around for everyone.

Guys, we really have a lot to talk about this week. We’re covering the markets. Is everyone a bear now? That’s one of our big topics that we’ll have Sam lean on. Next is what’s next for crypto? A lot of action on crypto, a lot of scary things happening with crypto and then some news out of China or speculation out of China. We’re asking, is China falling apart?

So Sam, let’s start with you first. I guess one of the most relevant items I’ve seen circulating and it was in your newsletter today is the top issues for Americans on the screen right now.

It’s clearly inflation. As long as that’s a top consideration. The pressure on the Fed to bring inflation down is huge. So you’ve been pretty consistent with three times 50 basis point hikes for May, June and July. What’s really changed in trading today? And is everyone still bearish?

SR: Yeah. I mean, everyone still seems to kind of be floating a little bearish, but I kind of like to go back to the number one concern is inflation. We shot ourselves in the foot and then the second one is getting shot in the head, right. It’s violent crime and crime. You add those two together and it’s even larger portion of inflation. So it’s safety and food. Right.

People like to eat and they want to be able to eat and they want to feel safe. I think it’s that simple. Those should be the top two concerns in this type of environment when you have the data pointing towards continuing higher inflation numbers and continuing crime.

On the is everyone a bear front? I think it’s a little complicated, right.

Because if you look at the flows into and out of indices and into and out of fixed income, and when you look at the flows, it’s easy to kind of say everyone’s a bear. Right. Pouring money into Treasuries, taking money out of indices. But at the same time, underneath the surface, you really want to be careful on what you’re a bear on and what you’re not.

There’s a lot of things that can still make money in this environment, oil, food, etc. can still make money. And there’s a lot of things that are probably still going to get torched. Anything that’s a little high beta is probably not the place you want to be for the whole time. Tradable but unlikely to be a long-term type trade.

TN: Like, I noticed some of the techs coming back today, and that’s great. And I hope people don’t lose more there. But is that something that you would consider kind of be careful if you’re going back in type of trade?

SR: Some of it. Not all of it. There’s a lot of tech that actually looks fairly attractive here, whether it’s from a valuation perspective or whether it’s from a very long term perspective.

A lot of stuff re-rated, re-rated fast, and it looks attractive. And there’s a lot of stuff that looks like it’s probably going bankrupt. Right. I wouldn’t be trying to bottom tick Carvana.

AM: Actually to expand on that, Sam, about who’s a bear and bears or Bulls or whatnot. I kind of think that we have to separate the higher great institutions versus the retail dip buyers that are just looking for that get rich, quick return. Many of the institutions, the ones I’ve talked to, are absolutely still bearish. They don’t see real value in this economy until the market until 3700.

Coincidentally, one of the hedge fund guys told me at 3500, you have an actual financial crisis in the United States just because everything’s leveraged up. So I don’t think that the Fed was even going to want to afford or going down past the 38, 3700, in my opinion.

SR: In 100% of that, Albert. Right. You have to separate those two teams of people. Right. The dip buyers are going to try every single time to get rich quick. Real long term allocators are going to take their time here. They’re not going to rush and, those are very large positions they have to take. And they don’t get to move in and call it for two or three weeks. They have to move in for very long periods of time.

So it’s Albert’s point. I don’t think that should be underrated, period.

AM: You can just look at the valuations of some of these companies that are still out in the stratosphere, like one of the ones I’ve recommended, Mosaic, Tight and Tire. They’re just ten fold of what they were in 2020. How do you buy these things? You can’t buy these things.

TN: Right. We’ve seen a lot of chatter about margin calls over the past week and a half. Obviously, that’s been scary for the first wave of kind of people going in. But when that second wave hits, when does that start to hit that second wave? Once we go 3800 or lower? So is that when things get really scary?

AM: Actually, I think part of the margin calls happened this week, today, actually Friday. I think a lot of guys had a liquidate positions and cover shorts and whatnot. And we got a little bit of a squeeze of a rally. I didn’t really feel like a Fed was pumping just thought like people short covers and people trying to get stuff off the board.

TN: Right.

SR: 100%. That’s where I think. I don’t think you want to be in front of a wave of liquidation for let’s call it sun and Ark, right? You do not want to be in front of either one of those two right now, period.

TN: Yeah, it was nice to have a Green Day, but it didn’t necessarily feel like a strong Green Day.

Okay, guys, let’s move on to crypto. Albert, I think you’re the man here. You’ve talked about crypto for a long time. It’s bad. This week is bad. And we’ve got a chart for Luna.

Luna fell from $90 last Thursday to 5, 10 thousand of a cent today, I think. Their circulation went from 4 billion yesterday to 6.5 trillion today. So it doesn’t sound very immutable to me. So the watching crypto fallout, it’s been pretty terrible. Lots of people have lost lots of money and people are questioning and cynical about words like immutable now.

This is something that I think experienced people have expected. But what happens next? Do we have a clearing out of some of these currencies? Do people just hold at 5, 10 thousand of a cents? Do we see some of these actually become currencies or is it all just going to get regulated and kind of thrown out the window?

AM: Well, are they going to be currencies? No, they’ll never be currencies. The dollar is going to be the currency of the world status for trade for the remainder of our lifetimes, whoever is alive today. That’s just the basic fundamental fact that you have to come to grips with.

This is like part one of the closing call for cryptos in my opinion. They got a good dose of the reality that when things need to get liquidated, you’re not liquidating residential towers in Miami on your portfolio. You’re liquidating some Ponzi scheme cryptos that are in your pocket that your clients really made you get into to begin with.

From the retail side, as much as I want to gloat, because I’ve been saying that this was going to happen for years, it’s really not that funny because you had guys out there pushing these crypto things and saying the dollar is dying, gold is dying, digital future, blah, blah, blah. Look at this chart, look at that chart. But the reality is there are nothing but pump and dump schemes. And people lost a lot of money.

I had a friend that goes to school, his daughter goes to school with my daughter. And he told me months ago I put everything to Litecoin for the College fund. I tried to reason with this guy.

TN: Please don’t do that.

AM: Yeah, well, community college for that kid.

TN: Albert, they’re following the lead of some, analysts are credible. They have a credible history and they’ve really started pushing this stuff. Now they’ve dialed it back. But some people who had previously been credible analysts were pushing this stuff.

AM: They’re liars. They’re all liars.

SR: Had been.

AM: They’re trying to get services sold and people to watch their YouTube channels and get subscriptions up. So of course you’re going to go and sit there and try to pump crypto to the retail crowd because they don’t know any better, right?

SR: And anyone who looked if you really dug into the Luna situation, you could understand very quickly how that could unwind in a way that was dramatic. This wasn’t even constructed as well as a pre 2008 money market fund. At least you knew what the money market fund held behind it and how it was going to actually return money to you.

With Tether, it’s supposed to be a crypto ish money market fund. We still don’t know what that actually holds. The whole thing to me is regrettable to Albert’s point, right. The two of us kind of got picked on when we giggled off paying for oil in crypto earlier this year. But the two of us have been kind of like, “no, not so much.” So while it’s tempting to kind of have that little bit of a cocky grin.

It’s a really sad situation and there’s a lot of money that got shredded very quickly there.

TN: Very quickly in less than a week. It’s insane how much money. If anybody who follows me on Twitter knows that I invest in some Doge last year, stuck with it for a few months, got out I did it because it was a joke of a coin. Everyone knew it was a joke of a coin. I wanted to be on part of the joke, and I made some money at it. And that’s it, right? That’s it. You can’t necessarily think of this stuff as a serious investment because it’s so highly unregulated and people engage in this pump and dump stuff.

AM: Yeah. We can have a conversation on this for hours. This is actually at the heart of the problem of the US economy at the moment. All these gig employee, all these gig employees service industry and jobs and whatnot, they left work got into crypto. Got stimulus checks, sat at home, kept getting unemployment, not going to work, and now we’re stuck with the labor shortage in reality. I don’t care what the Fed says and what Yellen says about the market. The labor market is good. The labor market is absolute trash right now. We have no workers anywhere right now. And because. Yeah, this is part of it.

TN: So that’s a good question. With crypto, kind of at least temporarily, maybe permanently dying, does that help the employment picture? Does that help people come back to market even a little bit?

AM: People had tens of thousands of dollars in a Coinbase account that are now $500. They’re going to have to go back to their jobs. And that’s just the reality of it. If you want me to go even a step further, this is probably the intent of the Fed and the treasury is to start eliminating this excess money, forcing people back to work.

SR: Yeah. Oh, 100%. In one of my notes this week that Tony, I think you saw, I sent out the video from SNL of Jimmy Carter saying, hey, get 8% of your money out of your account and light on fire. Guess what? The Fed just did that for millennials.

TN: Yeah.

SR: It’s that simple. The Fed just lit at least 8% of millennial money on fire, generally. Right. And it’s unlikely to come back that quickly. And I think if it wasn’t a direct policy, it was a side effect that the Fed sitting there going, oh, well, that works.

AM: I guarantee I talk to a lot of people. It was a direct policy. I don’t care. I’ll throw the Fed under the bus. They deserve to be thrown under the bus anyways.

TN: Well, yeah, it is where it is. And I would assume more regulations coming at some point because people will scream, especially with Coinbase.

I think it’s Coinbase or one of the exchanges saying that they’re going to undo a lot of the trades over the last two or three days.

AM: Okay.

TN: There are no regulations at all.

SR: Just call them the LME.

TN: Yeah, exactly. So crypto is the LME now, and it’s insane. So a lot of consumer protections are going to be talked about. A lot of regulations going to come in. I think that party is pretty much over.

AM: Yeah. Once the regulations started coming in from Congress and different governments in the world, they’re going to see how false their idea of decentralization really was.

TN: Yeah. Okay, guys, let’s move on to China. We’ve seen a lot over the past few weeks and really gossipy stuff about China. But today I saw a note from Mike Green on Twitter, which is on screen talking about Xi Jinping and Li Kaqiang, and Xi basically being sidelined on May 4.

I also saw another tweet yesterday, a guy going through Shanghai during the lockdown. If you haven’t seen it, the first of the thread is on the screen now. Check it out. It’s really interesting.

China is empty and it’s really sad.

So we’ve seen these really unsettling posts over the past several weeks out of China, from lockdowns to port closures to gossiping Xi as sidelined. So to you guys, what does that all mean? Is it something you’re taking seriously? Do you think it’s something that will have immediate effects? What does that look like to you?

AM: China. China is a big quagmire in itself. It’s such a large country. You’re going to have all sorts of rumors of Xi being sidelined and unrest in different cities like Shanghai and whatnot. But the Chinese are pretty pragmatic. They know that things are not going really well. So they’re going to have to lift off they’re going to have to lift off some of these just draconian policies with locking down people because it’s going to really hurt their economy. And part of it’s probably because they’re fighting inflation, too. They’re trying to cut down demand until supplies catch up. I mean, they got problems over there with inflationary issues.

TN: Also with the deval, with the port closures, with a lot of other stuff that’s happening there, their economy is already host. Right. They’re definitely not hitting 5.5, which is their target this year. And I think they’ll be lucky to have a zero growth year.

But I think Albert, on the political side, a lot of this kind of theater that we’re seeing play out on Weibo and Twitter and other things. Do you think this is plausible?

AM: Of course it’s plausible. I mean, you have the vultures circuit around Xi right now. They want him out. You have one elite group keeping him in power. But most likely have three or four other elite groups within the CCP that want him out. There’s no question about that. He can’t even go out in public.

TN: That’s an important thing that many people don’t think about is there are parties within the party. The CCP is not a unified party. There are factions within the party. Many Westerners don’t understand that. There are definitely factions within the party, and they’ll stab each other in the back in a second.

AM: There’s factions everywhere you go. People try to, China as a one rule or one party, one system, but even the United States, you have the Tea Party, the Freedom Caucus, the Progressive, so on and so forth. I mean, it’s all fragmented no matter what you do.

TN: Yeah, Sam. So China is second largest economy, ports closed, people in their houses, all of that stuff. So how long can they do this before it affects everybody or has it already started doing?

SR: Oh, it’s already affecting everything. The supply chains are already completely ruined because of it. There’s no question about that. I think the real question is what happens when they reopen, right?

We’ve got oil sitting at $109 and half a China is shut down. That is something that doesn’t, I mean, it’s kind of scary, right? You have a bunch of people that aren’t using as much as they should be right now. You begin to spin that back up. That could be a really interesting scenario overall. I don’t know.

AM: You know, Sam, that actually loops back to what you were talking about the Fed trying to fight inflation. No matter what policy they come up with, there’s still supply chain shortages and labor and everything that no matter what they do, they can’t fix.

SR: Their host. It’s an amazing world where you have half the Chinese, let’s just click through. Half the Chinese economy is shut down. You have the US dollar sitting at 105, 106 somewhere in there, and you have oil sitting at 110. Anybody who’s saying oil prices look a little toppy here might want to look at what happens when the dollar falls and China’s going.

AM: That’s what we’re going to have inflation in the five to 7% range for the next 18 months. I can’t say lower than that.

TN: 18 months, you say?

AM: 18 months. How are they going to get it lowered? China opens and then what? You know what I mean? And then you still have shortages everywhere. I mean, go to some of the stores. They have baby formula shortages.

On any given day, you have small materials you need from the home short. Everywhere. That’s going to create artificial inflation. On top of that, you have wage inflation. How do you get that down?

SR: The only way you get it down is having less employees. Look at Silicon Valley. Silicon Valley has started laying people off, and that’s not getting enough. It’s more than just Carvana.

AM: And then that’s the thing. Later in this year, Democrats and Joe Biden can have a real big problem unemployment numbers, starting to creep up. They can’t hide that forever with the BLS manipulation.

SR: Look at the household number. The household number is already not looking great. And that’s the one that they choose not to hide for a reason. Yeah, sure, the establishment is up, but you look at that household number and it’s printing negative already, guys.

TN: Yeah. One more thing I want to cover is this has to do with China shut down and it has to do with the possibility of political instability in China. So there are two separate issues. The newsletter today talked about reshoring.

So these things seem to provide more instability and a lack of reliability of Chinese sourcing. So what are you seeing to support the reshoring argument?

SR: Oh, lots of things. I mean, you have Hyundai. That’s likely to announce a pretty big factory next week in Georgia. You have everyone from Micron to a bunch of other call it higher tech firms beginning to announce that they’re moving back here. They’re building here and they’re going to manufacture here or they’re going to manufacture in Mexico. One of the other.

If you want to have China like characteristics without supply chain issues, you go to Mexico and that re regionalization trend. That’s the theme of mine. Is beginning to pick up steam and it’s going to pick up much more steam, in my opinion.

North America is going to be basically, in my opinion is going back to being the world’s, not manufacturing hub, but the world’s high end manufacturing hub. If you want something that it’ll be like big Germany.

AM: Yeah, I mean that’s just the most logical thing to do is to start putting your supply chains closer to your luxury consumers and you have to do that. But I’ve been high on the Canadian economy and the North American economy.

I think Europe absolutely they’re in deep trouble at the moment. So is Asia. But Europe especially.

TN: On the reshoring note, guys, if Germany can’t get power, will we start to see some German manufacturing firms potentially moving to the US?

SR: You already make AMGs here. Mercedez Ben’s AMGs.

TN: Yeah.

SR: They’re made in Alabama. But they’re made in Alabama.

AM: Yes. But Tony to your question, actually, I do have a colleague that works for Austrian driven outfit and they have been buying factories in the United States specifically for this reason. It’s the only place that people are going to be buying things or has money at the moment. Their entire export industry in China is dead and they’ve sat there and been lackadaisical and never sat there and tried to put their networks back into Africa where the real emerging market should be focused on Africa. It’s going to be bigger than Asia anyway.

SR: Let’s also be honest, they just got done pulling out of Africa in some ways. A couple of decades ago. They missed that boat.

TN: They did. And so did the Americans. So. Hey guys, thank you very much. Really appreciate this. If you’re watching please like and subscribe have a great weekend and have a great week ahead. Thank you.

AM: Thanks, Tony.

SR: Thanks, Tony.

Categories
Week Ahead

The Week Ahead – 09 May 2022

The Fed just announced the 50 basis point hike this week. Albert and Sam explain what this means for markets in the near term. Also, how badly does JPow need media training (he said “a normal economic person probably doesn’t have that much extra to spend”)?

We also discussed what’s happening with TLT? And then, what will the Fed do next? Why is everyone talking about a 75bp move?

Tracy explains what’s happening in natural gas and the crude oil markets. Why does energy seem range-bound?

Key themes:

  1. What the F just happened? (F for Fed)
  2. What the F is next? (F for Fed)
  3. Why does energy seem range-bound?

This is the 17th episode of The Week Ahead in collaboration with Complete Intelligence and Intelligence Quarterly, 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

Listen to the podcast on Spotify:

Transcript

TN: Hi. Welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Tracy Shuchart, Sam Rines and Albert Marco. We’re always joined by those guys. Before we get started, I’d like to ask you to like and subscribe. Really appreciate it if you subscribe to our YouTube channel.

It’s been a very interesting week, guys. We have a few key themes. First of all, what the F just happened F is for Fed. Then we’re looking at what the F is next. So that F also is for Fed. And then we really want to look at some energy stuff. Why does energy seem to be range bound? And I think that’ll be a really interesting discussion.

So Sam and Albert, kind of talk us through what the F just happened? We said this would be the most dovish 50 basis point move in the history of the Fed and it was. And here we are at the end of the week and things don’t look so good. So what happened?

AM: Well, was it a Dovish Fed? Not really. I mean it was pretty hawkish but it was already priced in. Everyone knows it was going to be 50 basis points and everyone knows they were going to talk about all these hawkish words. But then Powell comes out and throws in a little sprinkle of dovishness in there and then the market took off with it. I think it rallied at 3%? Crazy.

However, from what my guys told me, a lot of that was because traders were loading up on spy calls and ES futures and just gamma squeezed it. It was really easy. The market is kind of liquid right now. That actually agitated the Fed because they didn’t want this thing to rally and they came back and just torched everybody the next day. It was like 4% down? Just stunning. Absolutely stunning price action that we’re seeing right now.

It’s just not tradable. I mean you’re in this market and you’re swinging 100 points up and down each way every couple of hours. It’s just not tradable right now.

TS: Albert made a very good point. The thing is these swings that we’re seeing in energy and also in equities, these swings are untradable. Right. So that is very cognizant point that you have brought up.

SR: I mean the interesting thing to me with the whole thing was how quickly you went up, how quickly you went down to follow it up. Not just in ES and S&P, but the dollar got trounced following the Fed and finished flat basically to pre-Fed to finish up the week. You had the two-year absolutely plummet and make a little bit of a comeback. But it generally actually stayed lower following the Fed minutes. But these were huge moves across the board.

It didn’t matter what asset class you were trying to hide in, besides maybe energy. It didn’t matter where you were hiding it. You were just getting whipped. And there was very little tradability across the board in that period.

So it was pretty interesting also to hear several Fed speakers today. I think there were five or six of them come out and were generally hawkish across the board. I mean, you had one non-voter, Barkin, talking about putting 75 back on the table. I mean, it’s ridiculous. Powell just absolutely said no to 75. And then you have beneficials coming back with maybe I haven’t taken 75 off the table. I mean, not that Barkin matters, but he tried to put it back on the table. Their communications are a mess.

TN: The interesting part for me about Wednesday was Yellen came out first saying, “no, it’s all good. Nothing to see here. There’s going to be no recession. Fed is going to be able to manage it.” Everything else. To me, that was the real tell, right, that he was going to be fairly gentle. Of course, it was a 50 basis point hike, but it was a fairly gentle 50 basis point hike. And he was going to stave off the 75 basis point talk.

But then today we see these guys come out being fairly hawkish. So we’ll get into kind of what’s next in a couple of minutes. But I want to ask about a couple of things. Powell, he talks, man. He is not the Greenspan kind of mysterious guy. And his talking seems to get him in trouble.

So one of the things that he said on Wednesday that really caught me, which he said, I’m looking at my notes, he said “a normal economic person probably doesn’t have that much to spend” when he was talking about inflation, that much extra to spend. Sorry, but he actually let the words “normal economic person” pass his lips. And words like that, language like that makes American people feel like it’s the government, this gilded government employee who inflation doesn’t touch versus the American people. What’s wrong with those guys? Why are they using that language?

AM: In my opinion, they want to crush excess money and they’re doing just that. These wild swings in a week that’s meant to just erase money from the system. And Powell is an attorney. He’s not really an economic guy.

TN: An attorney should know words.

AM: Yeah, well, he doesn’t. He’s flustered. He’s flustered. There’s so much stuff going on behind the scenes that he’s flustered. And really, I don’t really even think that Jerome Powell is even in control of things. I think more align on to Auntie Yellen. I think she’s the mastermind behind this dollar rise. I know she is, in fact. I had discussions about it.

She’s the mastermind of pushing this thing past 110. She’s the mastermind of getting capital to force it back into the US equities. She’s the one doing all this.

TN: Right.

AM: Powell might be fighting it, but I’ve talked about this many times. You have this disjointed policy between what the Fed wants to do and Powell and what Yellen is doing. So this is what I see is going on.

TN: Sam?

SR: And to your point. I think their communications generally are a nightmare. They’re not doing a phenomenal job of telling people anything. Right.

It was such a disastrous week. You had quarrels out early in the week talking about how because Biden hadn’t nominated Powell to come back to the Fed. That was one of the reasons why they were behind the curve. Sorry, Randy, but that’s a ridiculous statement. Everybody knew, the betting odds never really broke through 70 that Powell was going to be renominated. Let’s be honest. He was always going to be renominated.

AM: You bring up an interesting point, Sam, and kind of a signal is will Powell actually get confirmed and is Randy and those guys, because Randy deserve this, I believe.

SR: Yes.

AM: So are they trying to defend or trying to upstage Biden and possibly not getting Powell confirmed?

SR: Well, it’s interesting because you would think that Corals would want Powell confirmed because Powell he’s fairly conservative in mindset relative to some of the other people. That could be dominated.

TS: Middle ground, too, I would say.

SR: Yeah, a decent middle ground. And most likely after that, it’s going to be Brainard. Right. I don’t think Corals wants to mastermind getting Brainard in there.

AM: No, I’m saying that Corals are trying to get ahead of the game here, thinking that Powell might be ousted.

SR: Oh, yeah, maybe. I also think that there’s an awful lot of people once they get out of the Fed and they see that they’re part of the decision making that got us to the current inflationary environment and current problems. There’s a little bit of face save when it comes to, hey, look, we wouldn’t actually be here if they had done their job. It wasn’t really us. It was this lack of nomination.

So generally, then you get into the FOMC meeting, the after presser, call it the kerfuffles that he makes constantly during it. Then you get to the Fed speakers after it. The worst part about the FOMC meeting is not the FOMC meeting. It’s just the blackout ends. Let’s be honest. Then we have to listen to them for another three weeks before the blackout comes.

TN: Normal economic people do stuff.

SR: Yeah. Like buy stuff and actually contribute to the economy instead of just blustering about 75 basis points.

TN: Right? Exactly. Okay. Before you get 75 basis points, Sam, can you walk us through what’s happening in the TLT market because it’s falling off a cliff a month ago. Is it like 140. Now, it’s like 118. So what’s happening there? Because I’m hearing a lot of chatter about that.

SR: Yeah. I mean, it’s the tracker for the 20-plus year US Treasury note. When yields rise, the thing is going to get trounced. Right? I mean, that’s pretty easy.

The easiest way to underperform the S&P this year has been to buy TLT. That’s just been that bad. I think it’s down 21% or 22% as of the close today. That’s a pretty devastating bond move right, for portfolios when bonds were supposed to be the safe asset. But generally it’s liquid. Right? You can buy and sell TLT all day long and you can short it. You can do some stuff.

So it’s a fairly easy way for particularly investment advisors and other smaller players that are running separately managed accounts to get in and out of fixed income exposure quickly and be able to move their portfolio duration pretty dramatically, pretty quickly. So it’s a trading tool.

And so when you need liquidity and you’re not going to sell individual bonds, that’s going to be generally fairly liquid and you get some pretty big spreads there. You’re not going to sell those bonds, you’re going to sell TLT instead.

TN: So are TLT markets telling us that they expect tightening to accelerate? Is that what’s being communicated to us?

SR: No, I would actually take the other side of that. And I think it kind of goes to Albert’s point last week is long end yields don’t rise if the markets are expecting a tighter, faster Fed. Right. That would be a recipe for disaster.

Recession being pulled in towards us, not pushed out. So the Fed is expected to do 50 basis point hikes instead of potentially 75. QT was a little bit, QT was basically what was thought even a little slower to phase in. Yields could be telling us a number of things, but one of them is not that the Fed is tightening faster.

TN: Okay.

AM: This is the problem. This is the problem. Right. This is something that nobody’s really talking about is the Fed is trying to create this narrative with long bond and whatnot that? We’re going to tighten. We’re going to tighten, we’re going to tighten. However, the market is still red hot. I mean, even the consumer credit today was outrageous. Did you see that?

SR: That was insane.

AM: I was talking to my client today and we’re looking at shorting retail and whatnot? And I said we cannot show retail. And he was why? I just walked into Gucci and it was a velvet rope with a line of 100 people trying to get in there. And none of them make more than $50,000 a year. Just buying stuff left and right. It’s like, well, the Fed is trying to say we’re tightening, but the market is red hot right now.

TN: Fascinating.

SR: I have no push back to that whatsoever. The consumer numbers today were stupid. 50 plus billion. That was a silly number. That was a silly, silly number.

TN: That’s a great segue to what the F is next. Right. What’s the Fed going to do next? Because if consumer credit is still expanding it’s really fast, how do they slow it down? Is 75 basis points are realistic? I know he said no. But then why do we keep hearing about it? Then why are all these geniuses saying 75?

SR: I haven’t seen a single genius.

TS: That doesn’t mean that it’s necessarily going to come to fruition.

TN: Okay.

SR: Yeah, I mean it’s, James Bullard basically planting that seed. Yeah, one fed and then Barkin picked up on it and said I wouldn’t rule it out. I mean, it’s two people that if you still listen to Bullard and Barkin, I’m sorry, but you’re going to lose money.

TN: Bullard was great like ten years ago, right?

AM: Yeah, but they’re trying to sway less than intelligent traders to believe that it’s coming. Maybe sway some money that way.

TN: The only reason I’m saying it is because I want everyone watching to know that.

AM: They are lying to you. Okay? They are lying.

TN: So the expectation is that what the F is next is kind of staying disciplined. 50 basis points in the next meeting and maybe QT accelerates slightly. Is that kind of what we expect to happen next?

SR: Yeah, I would say 50 bps, but I don’t think you even have to accelerate QT. It’s very difficult to accelerate.

TS: This mark is going to scare them. And what is going to happen is they’re going to be another 50 for sure. But they’re going to be even more dovish than they were last time.

TN: Okay.

AM: I actually want to take a train. I think they’re going to do 50 bips for sure, without question. But I think they’re going to have to accelerate tightening just to scare the market a little bit, for God’s sake, because especially if they want to…

TS: Acceleration timeline, I mean, you could barely take a magnifying glass to it. Right. So you’re talking about almost $9 trillion going down to maybe 8.5. I mean, can you really see that?

AM: No, but they’re also going to be using the dollar. They might even take a dollar to 115 or 120. It breaks everything.

TS: Any QT that they have, it has the exact opposite effect. So they’re not stupid. They know that monetary policy that they’re doing right now may break the market, but they’re going to ensure that…

AM: Yeah, but they want to do QE later in the year.

TS: They want to be able to do it.

TN: I saw an interesting discussion on social media this week about what’s the worst central bank to be a part of right now. And I think it was easily the Hong Kong Monetary authority. Right.

With everything terrible happening in China, but they have to match what the US is doing. It’s just a very difficult place to be in. So I think even as we talk about what is the Fed going to do next, there are some central banks out there that are just in a terrible place. And raising the dollar at 110, 115, 120 would absolutely break some of these central banks and put in a very terrible position.

AM: Yeah, but Tony, the Chinese, they’re very pragmatic with that respect. They’re waiting to see what the Fed does and they’ll react. They are for sure going to stimulate their economy.

TS: They’ve already announced so much stimulus. It’s ridiculous. The market hasn’t particularly reacted at this point as far as the commodities sector is concerned. But literally they have so much if you look at what they have said, they have so much stimulus on the line as far as infrastructure. They do not want, they want, they’re determined to have their 5.5% GDP by the end of year ’22. Right.

TN: Yeah. Well, they’ll hit that no matter.

TS: What they are doing is they’ve already announced so much stimulus. Markets not looking at right now. Right. Or the North American market shows looking at it right now, I promise you.

AM: Yeah, but Tracy, also, you got to remember that the SEC started coming out with delisting threats all over the place. They added 80 more companies to the delisting threat. That’s actually toned down.

TS: I’m not saying I would invest in Chinese companies. What I’m saying is I would invest in commodities.

AM: I know. But when you say that the market hasn’t reacted, that’s a lot to do with it. These delisting things have really scared investors away from them.

TN: What China needs is dump truck and helicopter loads of cash on the boon like tomorrow. And I think to hit 5.5, they’re going to have to do that in every major town. They’re going to have to unleash dump truckloads of cash. The infrastructure they’ve announced is close to what they need to hit that. Sorry? And they have a share… t

TS: hey’re made up number. But in order to. Yes. Hit that, you’re completely correct.

TN: Yeah. They’ve got to do it and they’ll end up canceling unofficially. They’ll give dead jubilees, all that kind of stuff. Like they’ll do all of this unofficially. But it’s to let people reload so they can spend more money. They’ll do all of this stuff starting as soon as they rip the Band Aid off of the lockdown.

TS: That’s why we’re seeing a deval in the currency right now.

TN: Right, right. Which we talked about for months and months. And I’m so glad that it happened. Let’s move to energy, guys. And Tracy, we were talking about this a little bit earlier about energy being kind of range bound.

I’ve got Nat Gas and WTI on screen. We’ve seen Nat Gas really come down hard over the past couple of days. Can you tell us what’s going on there? Because it’s performed really well over the past month, except for that little period. So what’s going on with Nat Gas and what’s going on with WTI? Is it really range-bound?

TS: I mean, it is range bound. What we’re seeing is we’re saying although it’s a larger range, right, like we’re seeing $10-15 ranges in WTI. What we are seeing is that if you look at a daily or weekly chart, you’re seeing that range is coming down. Right.

TN: Okay.

TS: And that’s to be expected. One thing that the market did was that they increased margins. Thank you.

TN: Yeah.

TS: They increased margins. That put a lot of retail traders out of the market. That said, if we look at the recent OI? OI has actually increased daily all this week. So it looks like and we can’t tell at this point whether it’s retail traders or institutional traders. But OI has increased this week in that sector across gasoline.

AM: Yes. Speaking of gasoline, I’m looking at diesel and gasoline crack. I think you’re looking at shortages coming in the summertime. Those things look to get explosive.

TS: You know, texted you two months ago and said, get long diesel.

AM: Yeah.

TS: It lies in the EU. Right. And they are going to see shortages. This is going to affect their overall GDP. We’re going to see less transportation we’re going to see less manufacturing. We’re going to see because they can’t handle these prices. That said, if you’re an investor, you’re going to look at the refiners right now that are refining these because the crack spreads are increasing exponentially.

So if you want to invest in this sector, I think you would be looking at refiners right now that specifically are involved in distillates. Interesting.

TN: Great. Perfect. All right, great. So, guys, what are we looking at for the week ahead? What’s on your mind, Albert? Definitely not shorting retail.

AM: Definitely not shorting retail. I just can’t take that out for at least June. But honestly, the Roe versus weighed the political atmosphere right now and how that’s going to affect the congressional races, not so much the House, because the House is set for the GOP, but possibly the Senate. And why I bring that up is because now those economic bills going through Congress, they start getting affected. And investors started calling me to try to figure out what’s the makeup of Congress.

And I think that’s what I’m going to actually start paying attention to because the beginning of next year we’re going to need stimulus the way that this economy is going. So I’m taking a look at what the makeup of the committees are going to be, what possible stimulus packages will be materializing.

The auto sector, for God’s sake, it’s completely trashed. I think that’s on life support and definitely going to need some help. I’m actually looking for auto sector plays for the long term, 24 months out.

TN: Okay, Sam, what’s on your mind?

SR: I’ll be paying pretty close attention to where the dollar heads, particularly based on our earlier conversation on the Renminbi. And in the end, following the Fed this week and then listening to how other central banks begin to form a narrative around their next moves based on the Fed in particular, Latin America is going to be very interesting given some of the inflation pressures down there and the push and pull of someplace like Brazil, where commodities are both good and bad for an economy, or Argentina, good and bad for an economy, export a lot of food, but import a lot of energy, even though you have the black maritime, psychotic, that’s pretty poorly run.

Anyway, that to me is going to be one of the really interesting stories of the next couple of weeks, given the Fed. The Fed moving quickly, beginning to do some quantitative tightening.

Generally, that would be your number one method of affecting markets is through the dollar. So I just want to see what the dollar does and follow the dollar and not fight that tape.

TN: Yeah, very good. Tracy, what’s on your mind for next week?

TS: I’m going to be concentrating actually on the yuan at this strength. I want to see how much are they going to actually devalue their currency, because I think that’s the sign of how desperate they are to bolster the domestic economy. That’s where my main focus is right.

TN: Supposed Fed your eyes on China.

TS: But you have to realize what happens is that people don’t really talk about why does China devalue the currency? They devalue the currency so that exports become cheaper and more competitive. In turn, that makes imports more expensive. Why does that help the domestic economy? That means that people in China are not buying imports. They’d rather buy from domestic businesses which bolsters their economy.

So right now I think that’s one of the most important things to be looking at right now is to see how much are they going like, how desperate are they?

TN: That’s a great observation and something that I watch every day and I’ll tell you, they’re very desperate. I don’t mean to laugh at it. I feel really empathetic for the people in China but they’re very desperate. So I would watch for some moves that are I would say that tried to appear disciplined because they don’t want to look desperate. But in fact, they’re desperate to get their economy moving because of these lockdowns.

So I think the first sign of that would have to be starting to see a lifting of the lockdown like a legitimate lifting of the lockdowns and not moving into more towns like they did in Beijing over the past couple of weeks. But really legitimately taking these lockdowns off and free movement.

Looking at things like the port zone in Shanghai and how many people are allowed to work in those bonded warehouses, those sorts of things to get that port activity moving. As we look at those indicators, we’ll know how serious the Chinese government is about getting back to work. If they don’t do it, they’re not serious. And if they’re not serious, they’re going to have some real trouble.

I’m not a gloom and doom kind of China is going to have a coup or anything type of guy. But I do think that they’re going to have some real trouble. They want everyone to be happy and harmonious going into the national party meeting in November and there’s going to be some runway needed to get everybody happy. And by everybody being happy, I mean all of those CCP guys in Guangzhou and all the different provinces, they have to be happy coming into that Congress because if they’re not, then Xi Jinping has several problems. Serious problems.

Okay, guys? Hey, thanks very much. I really appreciate this. Have a great week ahead and have a great weekend. Thank you.

AM: Thanks, Tony.

SR: Thank you, Tony.


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