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US-China tensions: Beijing hits out as Pelosi arrives in Taiwan

This podcast is originally published in BBC Business Matters with the link here: https://www.bbc.co.uk/sounds/play/w172ydph59lnj14

US House of Representatives Speaker Nancy Pelosi has become the most senior US politician to visit Taiwan in 25 years, despite China warning that Washington would “pay the price” if she visited the island. Beijing warned it would respond to any potential visit from Pelosi, who has not been backed by the White House to visit Taiwan.

The first grain ship to depart Ukraine since Russia’s invasion – The Razoni, has arrived at Turkey’s Bosphorus strait. The vessel which is carrying 26,000 tonnes of corn, will be inspected on Wednesday morning before continuing its journey to Lebanon.

Transcript

Roger Herring: Tony. Well, let me come to you because you know this part of the world extremely well. You live there, of course, for a while. You know the ins and outs of it. What do you make of the US position on it? Because Biden has said he doesn’t support what Nancy Pelosi is doing. But is there a bit of, give and take, I mean, underneath, is he perhaps quite glad that it’s been brought to a head like this?

Tony Nash: I think both sides are glad it’s been brought to a head. So bear with me for a few seconds, Roger. The economy in China is pretty bad. The political situation is pretty bad. There are a lot of difficult domestic issues in China. So a galvanizing event before the November senior political meeting is helpful for China domestically. And in the US, with the economy the way it is, with a number of kind of political issues, this is helpful for Pelosi and potentially for retention of the House representative. So this is, yes, on the front there’s a lot of conflict, but in the back, this really helps the politics of the ruling parties in both countries.

RH: Yeah, that’s a really interesting insight actually, the real politique, I suppose, is a terrible cliched word does seem to be there. In fact, maybe, Tony, President Biden, at the moment, he’s already had a hit on Al Qaeda, which I guess he probably likes, might help his ratings. But certainly a major crisis in Asia and a war isn’t going to help, is it?

TN: No, I don’t think it would help anybody just given where the world economy is and given where some of the lingering kind of post-COVID problems are, I don’t think anybody would find it helpful. I don’t think it serves China or the US. 

RH: Because apart from anything else, of course, we’re in the middle of another crisis in another part of the world, and many think they are related, that we are seeing confrontations with the two biggest and most powerful authoritarian regimes on the planet and confronting the west in all kinds of ways. And what, of course, I’m alluding to is what’s going on with Ukraine and the difficulties there with the Russian invasion, the consequences, one of the big consequences for the world from that, of course, has been the lack of grain coming from Ukraine, because it’s effectively borcaded now that…

I’m not much of a sailor, but I have to take my hat off to the crew who steered through that area of the Black Sea. It must have been absolutely hair raising.

TN: Yes, they definitely are in their pay. It sounds like.

RH: Well digested, literally, of course, when it gets to wherever it’s going, we hope, because that’s the whole point of it. But Tony, let me pick up on this, because it’s something that puzzled me. I’m interested your view on it. Why is Russia allowing this to happen? Because I can’t see how it plays into Vladimir Putin’s endgame? 

TN: I think, on some of it, it’s Middle East relations in the US, from Russia. Russia doesn’t want to be seen as starving out people in Lebanon, Egypt, other parts of the Middle East. And I think that is probably a clear consideration for them.

RH: Yeah. And I mean, it also exposes hugely the fragility. During COVID, we learned about the fragility, of course, of supply chains. 

But Tony, this means that food globally, it seems almost on a hand trigger. One thing in a country far away from an awful lot of people changes everything. 

TN: But this is what happens with global supply chains, right? As we concentrate sourcing of food, manufactured goods, commodities, so on and so forth, we concentrate risk in supply chains and they become very fragile, and we realize they’re COVID exactly how fragile global supply chains are.

RH: Yes. A lot of rethinking, I think, going on in a lot of countries and also a lot of companies as to where it all comes from. Tony, how solid is US backing now for Ukraine in the midst of all this? Because there are lots of crises. We’re talking about Taiwan, of course, taking up a lot of bandwidth, if you like, in the State Department. But is it still solid behind Ukraine, do you think and unmoving? 

TN: Roger, it’s $40 billion solid. So there’s quite a lot of financial backing. So I don’t think there’s much doubt that there’s US back in there.

RH: Yeah, okay. Well, it’s solid and remains. And hopefully the food issue in all this could be moving towards the solution. But we’re going to talk about a wider problem in the moment in the next part of the program. Tony, what about you, just on that principle, the idea. In the States, I imagine federal workers get paid the same whether they’re working in California or Idaho, don’t they?

TN: I don’t know, but I don’t think they should. Obviously, they need to be paid according to the costs around where they live.

RH: That’s interesting. So you back the idea, really? You think it makes sense?

TN: Absolutely. Look, I’m a pretty rational, data driven economic mind. And so if somebody is paid for a salary, if they’re based in DC, but then they move to, say, Texas, where the house cost is a third or somewhere around there what it would be in DC, should they make the same wages they made in DC? I don’t think so. 

RH: But I suppose the argument we had there from Jagged at Chad was actually it attracts when you put money into an area like this, a, you get the best people, I suppose, working in difficult areas, and also they will fuel the local economy anyway when they spend.

TN: Well, it’s very… That kind of clustering theory, used to economic development consulting around

clustering about 20 some years ago, and there are a lot of dependencies there. So you don’t necessarily just attract kind of the best people just because you pay the most or something like that. There’s a lot of social infrastructure and other things that are required to capture kind of the talent that you need. So I do think the reality is private sector companies don’t really work that way. People are paid according to kind of where they live. It’s kind of indexed. And I think if I don’t really follow UK politics

and I don’t really have opinions on UK. 

RH: Lucky you. I think most people feel at this stage. 

TN: But I think it would have been smarter to say, hey, we’re going to appoint a private sector HR advisory firm to index salaries based upon things. Outsourcing, that type of expertise, rather than saying you have regional boards of bureaucrats deciding the stuff is probably sounds a little bit better.

RH: I have to say, Tony, with some experience that they do have such advances and consultants, they’re not popular at all. Of course they’re not. As you can imagine, that doesn’t always get. Our was Michelle Ferry in New York.

Come on, Tony, I’m going to ask you, what would $5,000 a month get you in Houston?

TN: Roger, I’m looking at a listing right now for $4900 a month you get a four bedroom house. 3500 square feet. It looks beautiful.

RH: That’s a rental. We’re in a different world, aren’t we?

TN: Yes, sir.

RH: I got to take a fly here and say that each of us in the past, perhaps when we were younger, has rented. I bet you rented, didn’t you, Jessica? At some point.

Jessica Kind: I currently rent now. My balance sheet light and I can tell you that an average semi detached house in a delicious, delightful quiet estate is 1100 US for 3800 sqft.

RH: That is a lot of space. Yes. That’s nice. That’s good. If I were in Kuala Lumpur somewhere like that, right in the center of the fashionable areas, obviously be a lot more. But because you’ve got a lot of people in the financial I mean, this is maybe the problem in Manhattan. You’ve got people with large amounts of money forcing all this stuff up. I mean, that would be true, Jessica, wouldn’t it? Places Singapore, I guess. 

JK: Actually no big gap between KL and Jahor, really. Singapore is now artificially inflated by a lot of escapees from Hong Kong. Refugees from Hong Kong are pushing up the Singapore property market. Rental and purchase.

RH: Yeah. The point in all this, I suppose, is these are unregulated markets. There was an issue a little while back, I think, in Berlin, where there was a strike because regulated rent strike because regulated rents were coming to an end or being lift or being abandoned, and that makes a big difference to people. Is there a case, do you think, for regulating rent? 

TN: Gosh. It makes things really hard. There are a lot of economic case studies on that, but rent control in New York was notoriously problematic. So as I heard the story and I heard the woman talk about a 48% rent rise. I spent most of my adult life in Singapore and a 48% rent rise you would have to take in stride every so often. That’s just the way it was. There were years you say, take in. Stride, but you had to be earning a hell of a lot to do that, didn’t you? You would figure out how to get it done and there were years, I think, in 2007, eight, where rent would double. There have been times in Singapore, and I’m sure Hong Kong is similar, where rent would just simply double. Yeah, and there have been times when you found it,

you’ve had to make big changes, you’ve had to take deep breaths. Well, that’s what pushed us to buy a house in Singapore and we had to scrape together the money to buy a property so that we could get out of the path of that because it’s too volatile, life is too risky without that.

RH: That’s interesting. Jessica, you say you travel like you rent, you must have had must have been times when you found rent difficult I guess everybody does, and you have to cut back and I suppose think about other ways of doing it.

JK: Once upon a time, when one was young, Roger and Tony. I remember it vaguely. It was a long, long time ago in my case. A little internal benchmark that I never let rent go above 25% of my take home. So for the New Yorkers, with an average salary of $70,000 pre tax, that five grand, I think bites. I think it’s hard. 

RH: Well, we heard in Michel Flores report that 30% was the kind of working rule I mean, Tony, if you were renting, you’re not, but is that a sensible a third of your income effectively? I think people say also the same which you’re paying, if you’re paying a mortgage, should be around that.

TN: Well, it depends on where you are in life, right, Roger? I lived in London when I was in my 20s and my rent was way too high and I could barely afford it, and after a year and a half in London, I left with debt because it was so expensive. So I think it depends on where you are in life and can you really afford it or will you just make ends meet or get roommates or something like that? So we’ve all had to make those trade offs. But I suppose we’re talking about perhaps normal economic times.

RH: But Jessica, I mean, an awful lot of people have gone through COVID when certainly here in Britain, there were lots of rules went in, including people weren’t allowed to be evicted because obviously they couldn’t work, they couldn’t earn, therefore they couldn’t pay rent. Should we perhaps post-COVID take a rather more, I don’t know, involved view of private renting and see if there are ways in which to avoid people who are really vulnerable being put in a really difficult situation like this?

JK: It’s so difficult. I think Tony mentioned earlier in our conversation, didn’t he, that rent controls and those sort of committees and sort of pricing, having foundations for pricing, I think it is all extremely difficult and I have no idea what is the best solution.

But I know that in Singapore now, if you try to rent a flat, you think you’ve sealed a deal with the landlord

in the morning, in the afternoon, you pop back with the deposit you’ve been gazumped. Yeah, well, of course that happens. Property buying as well. I mean, it’s simply another version of that.

RH: But, Tony, what about the principle of social housing? We have quite a lot of it in this country, not perhaps enough, but where there is, it is provided by the local authority in Britain, mostly at a controlled level and affordable level. Is that the real answer to real deprivation, as we’ve heard about in New York?

TN: I don’t have a problem with that. I think there is room for that in society and I think we have to provide for some people, and some people just haven’t had the right opportunities. So I don’t have any issue with that. I think the problems remain when people become, say, you come to an earning level where you can

afford more, but you remain in those places. So I think it can lead to some difficult, say, trade offs. But I do think that… Singapore has that, and again, I was there for a long time. There is housing in Singapore for people who can’t afford more expensive housing. So it’s something I’ve seen work. It doesn’t work well here in the US. It’s a big difficulty and one that we’re not going to come up with an easy answer for a course on a program like this, but it’s always good to talk it through and to get experiences we’ve all had in that market.

RH: So I hope that has been helpful and indeed elucidating, and we hope, entertaining as well. My thanks to Tony Nash, Jessica Kind and to all you for listening.

Categories
Week Ahead

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

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

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

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

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

Key themes:

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

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

Follow The Week Ahead experts on Twitter:

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

Time Stamps

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

Listen to the podcast version on Spotify here:

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

Transcript

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

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

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

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

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

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

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

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

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

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

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

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

AM: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TN: So how far are we going?

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

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

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

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

SR: Not me?

AM: Okay.

TN: Yes.

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

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

SR: Yeah. Dollar denominated non US debt.

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

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

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

SR: Yeah.

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

SR: Correct.

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

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

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

TN: Okay, good. Very good.

SR: Very into the weeds very quickly.

TN: Good.

AM: Yeah.

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

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

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

TN: Okay.

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

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

TN: University Of Michigan.

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

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

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

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

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

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

TN: It’s true.

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

TN: Right.

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

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

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

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

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

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

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

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

SR: Recession fears?

AM: Yeah.

TN: That’s it. Okay.

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

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

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

TN: Very interesting, Sam Rines.

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

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

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

AM: Still it’s going to be higher.

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

AM: Fun times.

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

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

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

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

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

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

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

AM: Of course.

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

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

AM: Wage inflation alone. Wage inflation alone.

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

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

TN: Great.

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

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

TN: So soft and energy.

AM: Yeah.

TN: Okay. Sam?

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

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

AM: Thanks, guys.

Categories
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
QuickHit

EM Meltdown: China, Turkey & Russia (Part 2)

EM Meltdown: China, Turkey, Russia (Part 2)

In this second part, emerging markets expert Michael Nicoletos discussed Turkey and Russia. What are the major issues that Turkey is facing, specially around its FX reserves? They have an energy problem as well, and will soon need to choose between the US and Russia. And how about Russia’s love-hate relationship with Europe? How does Nicoletos see it will end up?

 

Please watch Part 1 first, if you have not already. Michael talked about China’s household debt and how much is that? Can they ever recover from the Evergrande disaster? And how they got into it in the first place? Is CNY still valuable? How do the Chinese get dollars now with their very limited FX reserve? Should you use the digital Yuan? How much is China spending right now to up its GDP?

 

Michael Nicoletos have spent most of his life around markets, and I used to run a hedge fund for more than 10 years on emerging markets. He shut it down in 2019 to take a sabbatical and Covid 19 hit the world. Now, he is doing a lot of research on emerging markets and trying to see what the next steps will be in terms of the investment world. But in the meantime, he is also advising a few firms on their investment.

 

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This QuickHit episode was recorded on October 20, 2021.

 

The views and opinions expressed in this EM Meltdown: China, Turkey and Russia (Part 1) Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Talking about EMs, and we talked about reserves, and you mentioned Turkey. Let’s talk about Turkey for a minute because you’ve made some really interesting statements about Turkey, and I’d like to really understand your perspective.

 

MN: Turkey faces some other issues. Turkey faces high inflation. More than 20% rates are around 19% of negative yields. The Lira has fallen more than 50% in the past few years. So you might see nominal GDP in Turkish Lira going up. But if you put it in dollar terms, it’s actually flat for the last ten years. It’s not flat, it’s flat-ish. So in Turkish Lira, the last ten years, the Turkish GDP has gone up 350%, which is a wow. But if you put it in dollars, it’s not flat, but it’s not something meaningful.

 

Turkey GDP in Lira and USD

Now, if you look at Turkey and the devaluation, the President of Turkey, Tayyip Erdoğan, has tried to stop the Lira from falling. Right now, it’s I think at its all-time lows around 920 versus a dollar. But if you look at the FX reserve, which is very tricky and this is very interesting for Turkey, you’ll see that, okay, the number is ambiguous because depending on what source you see, you’re going to see another number. But let’s say it’s around $18 billion. Now, this is the gross number. If we deduct gold and all the other stuff and we also deduct the swap lines, and I will explain what the swap line is, this number falls around to $20 billion. And this could be negative according to some sources because the dollars are not there.

 

What has Turkey done? Instead of using its dollars to protect the Lira from falling, I’m not an advocate that you should do that, but that’s what they’ve been doing. They went to the banks and did swap lines with the banks. And the banks are using depositors dollars to buy back the Lira. So depositors right now don’t actually have those dollars in their account.

 

Turkey FX Reserves

 

MN: Because the Turkish banks have made agreements with the central bank with swap lines, which okay, when your central bank gives you a swap line, it’s a guarantee if you’re a bank. And instead of, if you go and you see the headline number of the Turkey central bank, you won’t see it falling. But if you understand that they’ve been using depositors’ dollars to cover for it, you need to subtract that. So the number could be close to 20, maybe there are some allegations that it could even be negative. So if it’s negative, imagine. FX reserves in Turkey are pretty horrible.

 

You have, let’s say, $18 billion of gross FX reserve, and you have $130 billion of short term liabilities, within the next twelve months, Turkey has 130 billion of foreign claims. So again, this metric is not really good. Now, Turkey is estimated to grow around 8 or 9% this year. Again in Turkish Lira.

 

MN: If we take the Lira is down 25% this year. So this is an issue. Another issue is in Turkey, 60% of its current account is energy. They don’t have domestic energy, so they need to import energy and we know what’s been going on with the energy crisis and natural gas and oil going higher. So all these are main problems for Turkey right now, which I think will be forced to find a drastic way to… They don’t want to go to the IMF or the World Bank, but I think at some point they’ll have to go. And again here geopolitics come to play why they say geopolitics is because Turkey is in NATO. It’s the second biggest force in NATO. The US wants to keep it in NATO because wherever US doesn’t send military, Turkey does. Not many NATO allies send military forces wherever they go.

 

So Turkey is trying to play both sides right now. Trying to be the good guy with Russia, good guy with NATO. Trying to get the most out of both sides. But I think time is ticking and they will be forced to take some form of decision on what they want to do in the future because they’re running out of time in terms of their FX reserves.

 

TN: Yeah, it sounds like it’s pretty short time. Wow. Okay. So looking at the energy issues, not just what Turkey faces, but that Europe faces, I want to spend a little bit of time talking about the Russia-Europe relationship and what you’re seeing there. Will Russia provide sufficient gas to Europe this winter? And, from a financial perspective, how much will Russia benefit from that? Just generally.

 

MN: Yeah. Okay. But the thing is here the following: Europe trying to transition to a more green related economy. The planning was pretty horrible. I would say they wanted to do it fast and they wanted to say “blackmail” corporations to go to more green energy. What did they do then? They created the CO2 emissions credits. So if you were polluting above a level, you were forced to buy CO2 credits in order to cover for that. And that was like an indirect tax, making it less efficient for corporations to use that form of energy so they would be forced to go to other forms of energy.

 

Now, from going to coal to, let’s say, totally green. It takes some time to create the wind turbines and the sun. And actually Germany shut down all its nuclear reactors because of Fukushima.

 

TN: They have a lot of low-end Taiwanese fabs transition to photovoltaics with all of the incentives they were providing. I mean, for a long time, low-end fabs across Asia were just doing a very quick transition to a PV, and it was just a kind of back up the truck moment where they were just taking all the dollars they earned or Euros or whatever currency they could because Germany and all these other places were incentivizing them to do it. And they were low-end PVs. They weren’t high-end. They were just bog standard photovoltaics.

 

MN: No, no. Okay, but besides that, what did the European Commission do? There are auctions every now and then of CO2 credits. But the auctions are arbitrary. So the Commission, whenever it wanted the prices to go up, they did not do the auctions. So then the supply of credits was less and less. CO2 credit emissions went through the roof. So suddenly, if you use natural gas as an energy, it went even higher. And this created the viscious loop, creating the natural gas prices to go even higher.

 

In the meantime, Europe was negotiating with Russia about Nordstream, too. So Russia, which is a pretty good strategic and geopolitical player, realized that Europe was going back as being back in the corner and said, unless you sign whatever I want, let me put it in layman’s terms. I’m not going to pump anymore natural gas. Europe says, no, we have to sit down. We have to discuss. Okay, I’m not pumping. So one brings to another. And every time that Europe trying to play hardball, Russia says, okay, there’s no such a problem. I’m not going to be pumping and prices go higher and higher.

 

So I guess that at some point Europe will need to sign anything Russia wants at this moment. And will try to negotiate some form of an agreement which will be obviously not, it won’t be good. But it will be much better than the current prices that we’re seeing now. And because of the energy prices going higher, Russia is benefiting on a macro level, benefiting on a geopolitical level, and it’s gaining a lot of strength in the region.

 

TN: Hugely. Yeah. Hugely.

 

MN: So the two are interconnected. It’s not one or the other. So the energy crisis has helped Russia, and Russia has exploited Europe’s inability to act smoothly and fast.

 

TN: It’s very interesting. Okay. Just to close this out because I know we’ve been going on for a while. I’m just curious about Russia’s position with Europe, say, over the medium term. Do you see Russia and Europe growing closer? Do you see that relationship becoming tighter, or do you see that eventually becoming an antagonistic relationship? Are there substitutional energy sources that Europe can utilize and that eventually becomes an antagonistic relationship again? Just in general terms. I don’t necessarily political specifics. But how do you think that plays out?

 

MN: Well, I’ll use Henry Kissinger’s famous quote that was back, like 40 years ago. He said, “When I called Europe, who do I call?” So right now, you have, in Germany you just had elections. They haven’t formed the government. It might take months before they form a government.

 

In France, there are elections in April. It seems that the right could be a threat to Macron. And we don’t know what the “right’ means in France. It could be Le Pen or it could be someone else, but it could be anything right now. So right now, I don’t see a leader. If Macron wins, he could be the next leader of Europe. But right now, there’s a leadership problem within Europe.

 

So as long as there’s a leadership problem within Europe, in my view, there’s a vacuum. And I think Russia will exploit it to gate as much influence as it can. And I cannot foresee the future. But in the next six to eight months, I think Russia will try and get as much influence as it can and try to exploit that vacuum.

 

TN: I think you’re right. They’re very smart. They’re very smart political players.

Categories
QuickHit

EM Meltdown: China, Turkey & Russia (Part 1)

EM Meltdown: China, Turkey & Russia (Part 1)

The emerging markets expert Michael Nicoletos shares his insights into the Chinese economy and why it’s in a very big trouble?

 

This is the first part of the discussion. Subscribe to our channel to get notified when Part 2 is out.

 

In this first part, Michael talked about China’s household debt and how much is that? Can they ever recover from the Evergrande disaster? And how they got into it in the first place? Is CNY still valuable? How do the Chinese get dollars now with their very limited FX reserve? Should you use the digital Yuan? How much is China spending right now to up its GDP?

 

Michael Nicoletos have spent most of his life around markets, and I used to run a hedge fund for more than 10 years on emerging markets. He shut it down in 2019 to take a sabbatical and Covid 19 hit the world. Now, he is doing a lot of research on emerging markets and trying to see what the next steps will be in terms of the investment world. But in the meantime, he is also advising a few firms on their investment.

 

Tony Nash met Michael at a Real Vision event in 2019, when he was giving a presentation on China, and he had a chart in there that was actually Michael’s chart. They had a conversation after that and have stayed in touch occasionally since then.

 

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on October 20, 2021.

 

The views and opinions expressed in this EM Meltdown: China, Turkey and Russia (Part 1) Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: So on China. Michael, I wanted to ask you, you sent out a tweet. I think it was last week talking about China’s household debt and it’s on the screen now. So it’s talking about how China’s household debt is at $10 trillion and looking at the ratio of China’s household debt to say, Hong Kong and the US. So can you talk to us a little bit about China’s household debt loads and what that really means for the Chinese economy?

 

Banking bubble in China and Hong Kong

 

MN: Well, as we all know, it’s been in the news lately. The Evergrande imminent. I don’t know if it’s going to be a default because there are some discussions right now to find a solution. But either way, it’s very hard for it to be repaid at its face value.

 

Now, the problem here is twofold. One problem is that China is highly levered as a whole, approximately more than 270% of GDP. The other thing is that real estate is approximately 62 trillion, I’d say the property market, which includes also home prices and everything. It’s about 62 trillion, of which around 10 trillion around sold properties. So it’s a very big backlog. The real estate crisis has started with Evergrande, and we’ve seen actually bond yield spiking in China real estate bond prices. And the big issue here is that banks are the ones who lend obviously to the real estates. So right now, banking assets in China are around 400% of GDP. And in Hong Kong, which is a proxy to China is around 900% of GDP. Just to put it in perspective.

 

In 2007, the relevant numbers for the US was 230%. And Ireland where the crisis started was like 700%. So we’re past both those levels. So we see that there’s a very big debt problem within China. Now, because China has capital controls in place, money cannot leave the country. So the bubble grows, grows, grows. But the money stays in the system.

 

So people now are starting to be afraid. And it’s the first month after six years that retail prices started falling in China. So this is creating a vicious loop. That fear that the contractor will not deliver your house. It means that you’re not going to purchase a new house. So you’re afraid. People in China have stopped buying, which creates a negative, vicious look.

 

So China has tried to avert this at least three or four times in the past ten years. Every time China is trying to stem back from giving you debt, we see such a small crisis, and then China is forced to reverse immediately because it cannot afford. It’s too big of an economy. Real estate is approximately 29% of China’s GDP. So you understand that something like that is very hard to control.

 

Now, China has been a rock in a hard place because I’ve been trying to shift from an investment, let’s say, investment intensive economy to a more consumption driven economy.

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TN: This has been a 20-year transition, right? It’s not something they started two years ago. They’ve been trying to do this for, like, 20 years, right?

 

MN: They’ve been trying to do this, say ten years. But let’s see, consumption as a percentage of GDP is around 38%. When in the US, it’s around 70%. It’s very hard to get that number higher. And given that all the wealth or most of the wealth by Chinese people, is linked directly or indirectly to real estate, you understand that this is a chicken and egg problem. If you try to stop one problem, you’ll create the other problem.

 

TN: Sure.

 

MN: So there are these problems right now in China. I think China will be forced to reverse course again. I don’t think you can afford to create a real estate crisis. I don’t think there would be a world contagion, by the way. But I think it could create a spillover effect with other real estate entities. Evergrande, the size was around 300 billion. It’s actually the biggest one. So we’ve seen the biggest one. And the thing is this could spill over to the whole industry.

 

Now, what’s the problem here, besides that? The problem is that China has been trying to convince banks and actually all the regions to stop giving loans, which are unproductive. Now, because GDP in China is an input number and not an output number like it’s in the Western countries, whatever the number the government sets, that’s what everyone tries to achieve and they can achieve it by giving more money.

 

TN: I just want to stop you there because I don’t think that point is well understood. When you say GDP is an input number in China and it’s an output number everywhere else. I’ve been trying to make this point for years to people, and you say… Help me understand, when you say it’s an input number. What do you mean in simple terms?

 

MN: In simple terms is the government wants 7% growth, so everyone will do the best they can to achieve that 7% growth, no matter what. So it means if I’m a bank or if I’m a region in China and I need to do more, I need to produce more growth. I’ll give out loans, which could be unproductive.

 

What do I mean? If I build a bridge, this is the most common example. If I build a bridge, when I build a bridge, this is counted in the GDP growth. Now, if I destroy the bridge, that is not deducted by the GDP. Right? If I rebuild the bridge, it’s added again. So in theory, you could make one bridge, build it, destroy it, build it, destroy it. And you would only have growth. So when China wants an input number, it will create bridges. The bridges could be, as we say, the usual “bridges to nowhere.” The famous quote. Or it could be bridges, which are useful. So all these unproductive debt went mostly to properties. And that’s why we see all these vacancies and all these ghost towns around China which actually were built and this was added in the GDP growth numbers. But then no one went to live there and the towns are there, and now they have to bring them down.

 

TN: Right. Now, you’re famous for kind of calculating for every say CNY spent by the Chinese government, it results in X amount of GDP, right? There used to be a multiplier effect to CNY spent and GDP. But you started seeing as that was diluted. So when you last calculated that, what was that number? For every say Chinese Yuan spent how much GDP was created?

China credit to GDP ratio

 

MN: So your viewers can understand because it’s a bit technical. So let’s assume you’re an economy and you create debt. You want that debt to create more GDP than the debt you’re giving. So if you’re giving one unit of debt, you want that one unit of debt to create one point, something of GDP.

 

So in theory, you would want it to be two, three, four. Okay, that’s not very easy. But if it’s a plus, it means that your debt was accredited. So it helped the economy. The problem here is, since 2008, China from using approximately let’s say, two units of debt to create one unit of GDP. So we’re already negative, because when you have two units of debt to create one unit of GDP, it means that that one unit will end up as a bad debt at some point. It’s not imminent, but at some point it will add up. So we went from 1 to 2.2 units of debt to create one unit of GDP. And right now we’re approximately between eight and nine units of debt to create that same one unit of GDP. So China needs more and more debt to sustain the same rate of growth.

 

TN: Right. So instead of a multiplier effect, which is what kind of economic impacts people usually talk about, there’s almost a divisor effect in China.

 

MN: You could say that. But because it’s a closed economy, that money can’t leave the system. So in theory, if you had a free account or if you had an open capital account, the Chinese will say, oh, my God, my currency is overvalued. Or let me take some money out of China and make a dollar. Now, this is not possible because Chinese have, I think, a quota of $50,000 a year they can take out? Something like that. Now, obviously, there are ways to take money out, but it’s not the easiest thing, and it’s not for everyone.

 

TN: I guess. It’s jewelry and watches the latest.

 

MN: Right. Okay. It was also Bitcoin. They try to be creative. Well, there’s a good ratio here, which is pretty interesting, and people forget. Now, if you devise the M2, the FX reserves to M2, why do I do that? Because let’s assume money is the money supply within the system. The ratio goes to 9%. Now, the Tiger countries in the Asia crisis in ’97 had the same ratio of approximately 25% to 30%. When it dropped below the 25%, you had the big devaluation.

 

Now, China doesn’t have a big external debt. So since it doesn’t have a big external debt, there is no trigger from that side of the equation for China to be forced to liquidate that fixed reserves to cover for it. But even though they have approximately $3.2 trillion of FX reserves and maybe another trillion from the banks and everything. I’d say 4 trillion. The M2 is approximately around $36 trillion right now. So these numbers… Imagine a hot balloon that you put air. At some point it’s going to blow. We don’t know what that level is. Okay. It could be like ten years before that happened. Or we could see, in my view, the Japan-like model where for ten years, you have an anemic growth. But you don’t see anything really, not a substantial bust. Because one thing.

 

TN: You also just destroyed the idea of China becoming a global currency, of the CNY becoming a global currency. Right. Because if they do have to trade on an open basis, then it’s way overvalued. Right. It’s like monopoly money.

 

MN: Well, China tried or is trying, at least. And it appears through Alipay and WeChat to create a digital Yuan. Why does he want to create a digital Yuan. It’s pretty simple. If the world is using a digital Yuan outside China, it means that the CNY or Yuan or Renminbi or whatever you want to call it, will be used abroad. So this means that it’s usage outside China will increase.

 

We’ve seen, however, that during the last two years, and I’m sure you have the guests, which are better to talk about this, know this subject a bit better than me. The dollar usage has gone up. The dollar is around 87% of global transactions. It actually went up. So there’s a discussion where everyone says the dollar is dying. The dollar is dying, the dollar is dying. Okay. And I understand where it’s coming from because of the policies. But monetary policies are relative. They’re not absolute. Maybe US is doing something bad, but the rest of the world is not doing something better.

 

So right now, the US dollar dominance increases. Now. I’m pretty sure I understand that this cannot stay at current levels. But going from 87% to being to 5%, it’s not something that’s going to happen in the next 2 years.

 

TN: I think the dollar had been down to like 82% six to seven years ago. And seeing it go up to 87%, that’s not a small amount. But the Fed does not want to be the World Central Bank. The US Treasury does not want to be the world’s treasury. So there’s this belief that the US wants to be the dominant global currency. I don’t necessarily believe that’s true. I think there are advantages to having a large portion of global currency usage, but I think 87% is just way too much. It’s way too much concentration of risk, actually, for the Fed and for US monetary officials. Go ahead. Sorry.

 

MN: No, you’re absolutely right. I think you’re right. However, the US, I think would like to remain the number one. Now, I don’t know what the percentage, the optimal percentage would be. But I’m pretty sure they prefer being the dominant than not being the dominant.

 

TN: Oh, yeah, absolutely. They want to say number one, but 87% is just too much.

 

MN: Since we’re talking about the dollar. The important thing about the dollar is that if the dollar strengthens, okay. And I don’t have a strong view here, I think it’s going to strengthen, but I understand if it doesn’t. If the dollar strengthened, this puts the pressure on emerging markets as a whole, because usually emerging markets tend to borrow in foreign currency because the foreign currency interest rate is much lower than the local currency.

 

For example, in Turkey, it’s 20%. The dollar is 0%. So if there’s a Turkish corporate wants to launch a bond, it will borrow on dollars at five 6% instead of borrowing at 20%. So they try to do that.

 

Now, as the dollar strengthens, especially for emerging markets, this puts pressure to repay the debt and it becomes harder and harder. So if the dollar were to strengthen, that would create a very, very big problem. I think the Goldman Sachs issued a report where it showed that the growth divergence between emerging markets and developed markets is at its lowest point. If you look at the cycles and it leaves that it could expand and right now, I think it discounts like a 4% growth for EM as a total.

 

So if the dollar strengthens, I don’t think we’ll see these numbers. I think you’ll see pressure on EM. Huge.

 

TN: Talking about EMs, and we talked about reserves and you mention Turkey. Let’s talk about Turkey Turkey for a minute because you’ve made some really interesting statements about Turkey. And I’d like to really understand your perspective.