With inflation being the main concern in global markets, are central banks reacting quick enough to hike rates to contain inflation? And how will tech stocks perform amidst the volatility that we have seen year to date so far? Tony Nash, CEO of Complete Intelligence shares his insights with us.
Show Notes
KSC: Good morning. This is BFM 89, five minutes past seven in the morning on 28th April, 2022. I am Khoo Hsu Chuang with Wong Shou Ning and Tan Chen Li. In the meantime, let’s recap how global markets and the It yesterday.
WSN: US Market down 0.2%, SMP 500 up .2% Nasdaq close flat Asian Market Nikay down 1.3%, Hong Kong up .6% Shanghai Composite up 2.5%, SDI closed flat FBM KLCI down .7% pretty interesting trend over there. You can see I think the Shanghai site went up a bit because of the possibility of maybe cases eating in China.
KSC: Yes, foreclosures and more openings. So to join us on the line for some analysis on what’s moving markets, we now turn to Tony Nash, the chief executive of Complete Intelligence. Tony, good morning. Now, let’s start with tech stocks, and they’ve had a bit of a bumpy ride the first quarter and into the second quarter. What’s the situation report in terms of where that risk on asset class is concerned?
TN: Well, check so far in the earnings season hasn’t performed well except in the last few hours when Facebook announced their earnings. So Tech’s really disappointed. Up until about two or 3 hours ago, Facebook announced that ads to their users, their earnings were up and so on and so forth. So after hours, they’ve popped by $30 a share or something like that. And Qualcomm also after hours reported really good earnings. So what we saw early in the earnings season with tech down, hopefully Facebook and Qualcomm have changed things a little bit. But that’s not to say we’re out of this. Just because we’ve had a couple, it doesn’t necessarily mean that we’re out of the woods with tech. So Pinterest reported and they were negative. And so we’re really separating the kind of the viable tech businesses from those that really aren’t viable and who are really struggling. Part of the problem with tech also is that we have a lot of ad space coming online now with Twitter now sorting themselves out and with other tech firms having new ad space like Netflix is adding ad space and ad based subscriptions. So we’re going to see a glut of ad space going forward, which will challenge some of these technology guys in, say, two to four quarters time.
TCL: So, Tony, how do we know what is good and what is not such a good tech stock? What differentiates it? Is it going to be margins? Is it going to be market share? What is it management?
TN: Yeah, I think people are looking at earnings. People are looking for, say, online companies. They’re looking at users. So let’s compare, say, Netflix and Facebook. Netflix had a net loss of users. Facebook had a net out of users. Netflix’s earnings went down. Facebook earnings went up. Netflix versus Facebook, their earnings went up. People are really looking at what is the core business of that tech firm. And are they succeeding at that. So you can’t necessarily make a broad sectoral play. Right now, markets are really in flux as interest rates rise and money supply is kind of reined in. So you really have to understand the companies and you have to understand what the advantages and how they’ll play, at least over the next quarter, if not more kind of medium term.
KSC: Yeah. Tony talked about earnings. Right. What’s earnings season been like so far? It appears to be a mixed bike. Bad at Boeing. Okay. At Visa. Robin Hood is laying off people. What’s your take on earning season so far?
TN: It’s very mixed. And I think you’re seeing the companies that are well run versus the companies that have been just kind of posting. So during the Pandemic, we saw the Fed buying a lot of these Fang names and Tesla and other tech names. So it was pretty easy for tech firms to just kind of move along with that wave and not really get their management in place and not actually manage the business and the operations. These ones like Qualcomm and Facebook that are reporting well, they’re getting their operations in place regardless of what’s happening in the external environment. The guys like Pinterest and some of these other guys, they’re not managing well and it’s showing in their earnings.
WSN: Let’s talk about inflation. As we know, this is the key concern of the global markets. So are central banks around the world a little too late? Too late already in trying to hike rates?
TN: Yes. Central banks are always too late because nobody he wants them to be the buzzkill on a Bull market. And so if they had come in earlier, although it would have been appropriate, they would have been blamed for killing the Bull market. So the pressure on a central banker is such that they really don’t want to be blamed for killing it. Now they have to come in for a lot of different reasons and raise rates. So I would say they’re definitely too late. They’re always too late. Is it too little? That remains to be seen. We expect a 50 basis point hike in May and another 50 basis point hike in June. That would really recalibrate some expectations. And we’ll have to see what happens in markets there. When you look at the ECB, they can’t raise at that rate. They’re stuck in a really bad place with energy and food prices. So they’ll move much more slowly.
TCL: And I guess the same for the bank of Japan that’s supposed to be meeting in the next two days. You don’t expect them to move? I mean, look at the yen. It’s like two decades low. Do you think this will continue?
TN: Yeah. BOJ and ECB have a lot of similar issues, and they’re really kind of pedging into a corner. They can either support their bond markets or they can support their currencies. They’re in that bad of a position. They can’t do both so both of them have to support their bond markets right now. They can’t mind their currencies. Now, when we look at the PBOC really has to just drop helicopter cash across China right now. They have to get incredibly aggressive to support the Chinese economy. If they don’t and if China doesn’t open soon, there are major problems in China. So the PVoC has to be very aggressive going forward.
KSC: Yeah. Just think of the PVC. Tony, do you expect that the Chinese government maintains its very strict zero covered policy, especially since in the context of a rapidly declining local economy.
TN: think China cannot stay closed. Okay. The rest of the world has come to a position where COVID is endemic. That’s the view of the governments. People realize that they have to have an active economy to feed their people. China is making these very active, say, policy changes for a number of reasons. But what’s happening is it’s starting to really bite. They’re starting to impoverish their people because of food prices, because of fuel prices, because there are no exports and so on and so forth. So the Chinese government is in a really sticky position. And if they don’t change policies soon, there will be major difficulties both politically and economically in China.
KSC: Yeah. And lastly, Tony, just want to get your view in terms of rushes and systems are being paid in rubles with its energy supplies. How do you read that move in the context of it being taken off the Swift financial system? It’s freezing of dollar assets in the context of the US dollars utility in the global economy.
TN: Yeah. I think look, Russia, this is a negotiating position for them, and it’s something that they’re insistent on. They know that countries like Germany are way too dependent on Russian oil and gas. So they know that Germany will pay in rubles if they’re pushed to do it. They don’t have a choice. So Russia is right now showing Europe who is boss, and Europe has unfortunately put themselves in this position. Poland hasn’t worked on diversifying their energy of late, and a lot of their energy mix comes from domestically mined coal. But for oil and gas, they’ve been working feverishly on getting alternate supplies, but other parts of Europe have not. And also they’re much more dependent on Russian oil and gas. So Putin is flexing. They have to kind of count out to him and they have to do what he says because he’s their main source.
KSC: Absolutely. Okay. Tony, thank you so much for your time. That was fantastic, as always. That was Tony Nash, complete intelligence chief executive, talking to us about markets. And just in the context of China’s insistence on staying closed, I think if the Chinese government doesn’t about turn even in the slightest, it might just be the biggest fill up for capital markets going forward.
TCL: Well, we’ll find out later at 730. Right. Because you’re going to be talking to Gary, he’s an economist and he’s going to be telling us what’s the situation like on the ground, whether the GDP target of 5.5% is going to be achievable at all, because it looks like the lockdown might even extend all the way to Beijing.
KSC: Yes. And of course, our Foxconn’s factory is bigger supply to Apple also is close in Kunshan, two of them. So global repercussions. Let’s turn to Facebook, now known as Meta, which did report earnings before they reported the shares actually did soon, considerably on the expectation that they would report a bad set of numbers. But actually, Facebook Meta surprised.
TCL: I think there was a lot of negative news even before this. And they were already receiving regulatory headwinds from the EU with regards to whether their dominance questions of their advertising, questions of how much are they involved in our daily lives. But I think the results were better than expected. Yeah.
WSN: So I think adding on to what Shannon was saying, there was also a concern about user base that’s not growing for the first time. The revenue that came out yesterday, it was reported their shares jumped 15% because their revenue jumped 6.6% to $27.9 billion. And this is the first time in Facebook’s ten year history as a public company that they landed in a single digit growth. And if you look at it, is that better?
TCL: Good.
WSN: Well, slower, but still growth.
KSC: Yeah. Because with this kind of platform, it’s all about Dows and Miles. Right. Daily active users and monthly active users now.
TCL: And what they found is that people have been spending a lot of time. So maybe the number of users hasn’t increased as much as they should, but the duration in which you spend on Facebook has increased. So you’re looking at maybe people spending as much as an hour versus other social media platforms where, yes, you might have an increase in users, but the duration is actually shorter. So that’s the justification as to why the share price has bounced today. And this is what Meta is telling the analyst community out there.
KSC: And we saw Snap also report a good set of numbers, surprisingly. Right. So actually doubling daily active users beat expectations, one point 96 billion versus one point 94. And Mouse monthly active use is two point 94 billion. Missed expectations of two point 95. So not a big mess. But actually they did also guide for revenue that was weak because of three things. Right. First of all, the military situation in the Ukraine. The second one, of course, the Apple Privacy changes, which made it more difficult to target ads. And of course, then the supply chain affecting advertisers now very quickly Spotify.
TCL: How many of us have subscriptions? Me, yes, me, I. But the share price fell more than 12% despite reporting first quarter earnings that beat both top and bottom line. Looks like markets still not happy with that number. I think exiting Russian market led to a loss of 1.5 million subscribers. Although monthly active users went up by 19% year on year to 422,000,000 users I think ad supported revenue did also grow 31% but I think basically ending subscriber subscriber base like Netflix seems to have come under pressure in the last few months.
KSC: Yeah sign of the Malays affecting streaming sites. Stay tuned. BFM 89 nine
Russian company Gazprom says it will halt gas supplies to Poland and Bulgaria from Wednesday morning. Poland currently depends on Russian imports for around half of its gas. The country’s deputy foreign minister Marcin Pzydacz tells us his government was already been prepared for this move. Plus, the World Bank’s latest commodities report makes sobering reading, suggesting that high food and fuel prices could blight the global economy for years to come. We hear from its author, World Bank Senior Economist Peter Nagle. With Elon Musk poised to take over at Twitter, the European Union’s Commissioner for the Internal Market Thierry Breton tells us that the firm will be welcome to operate in the EU under new management, providing it adheres to the bloc’s rules. As Delta Air Lines reveals that cabin crew will be paid for boarding as well as flight time in a landmark announcement, the president of the Association of Flight Attendant Sara Nelson says unionization efforts by airline staff forced the company’s hand. And the BBC’s Ivana Davidovic investigates urban mining, the process of reclaiming raw materials from spent products, buildings, and waste. Throughout the program we’re joined live by Zyma Islam, a journalist with The Daily Star newspaper in Bangladesh, and by Tony Nash, chief economist at AI firm Complete Intelligence, based in Houston, Texas.
Show Notes
EB: Joining me today to help discuss all of this to guests from opposite sides of the world, Tony Nash, chief economist at the AI firm Complete Intelligence in Texas. Hi, Tony.
TN: Hi, Good Evening.
EB: Good to have you with us. Tony Nash in Texas, what do you think is interesting, isn’t it, because this could I don’t know, it could go two ways, just politically. It’s an interesting move from Moscow to, if you like, preempt European sanctions against Moscow by cutting off the supply to Europe.
TN: Yeah. I think the further this goes along, the more I like people buying oil and gas from Texas, since that’s where I live. So we’ll take that. But for Poland, less than I think, about 10% of their electricity mixes from gas. So it wasn’t a majority gas driven market anyway. So they were very smart to put resources in place, alternatives in place. And, of course, it hasn’t been cost free. It’s taken a lot of resource to get that in place, but it’s good for them. And being on the border with Russia, they have to be prepared for anything.
EB: Yeah. I mean, gas is obviously very important during the winter months and we’re entering spring. So maybe European countries are feeling the crunch a little bit less strongly. Nonetheless, the question does remain, is Germany especially willing to cut off the oil? The oil is by far the bigger element, isn’t it, in terms of Russian revenue from its energy exports? And that’s the thing that Europe is resisting so far. Do you think we are pushing in that direction?
TN: I think if the fighting continues, they’ll have to. The problem is they don’t really have alternatives right now. And so that’s their dilemma is Europe did not diversify when they should have, and now they’ll pay much, much higher prices. So that will eat into European economic growth and it will really hurt consumers. So I think Europe is in a very difficult position. That’s obvious. But a lot of it is on some level, I wouldn’t say completely their own making, but they had opportunities to diversify, which they didn’t take.
EB: Yeah. I mean, Tony, everyone wants to get their LNG from Qatar and they all from the United States. There are going to be some pretty wealthy Qatari and American exporters of LNG, even if they can meet the demand next year.
TN: All of my neighbors in Houston are benefiting. I’m not in the oil and gas sector, but they are certainly benefiting from this.
EB: Let me bring in Tony there. I mean, we saw a story this week, Indonesia, for instance, banning the export of some palm oil food protectionism could be a thing. We’re not really talking about that yet. But those countries I mean, Bangladesh neighbor, India, will it start cutting off its exports when it starts to see global prices rising and perhaps being more pressure on its domestic supply?
TN: Yeah, it’s possible. And we also have a situation where the US dollar is strengthening and emerging market currencies are weakening. So these ad commodities are becoming more expensive in US dollar terms for sure. But it’s an accelerated inflation rate in emerging market currencies. So one would hope that, say countries like China, who are suffering with this, who devalued their currencies in a big way over the last week, would start to put pressure on Russia to resolve the conflict so that both Russia and Ukraine can start exporting food commodities again.
EB: Tony Nash, what do you think? I’m forgetting the unicorn thing. Could officials come down that hard on Twitter, a new, less regulated Twitter platform under Elon Musk?
TN: Well, let’s assume that he obviously doesn’t understand the technology is regulating 100 million Europeans could turn on their VPNs tomorrow and access Twitter from a pop outside of Europe in 5 seconds. It would be no problem at all. So Twitter could unilaterally shut down in Europe and they’d still have 100 million customers on the European mainland. So he has a fundamental misunderstanding of the technology that he’s supposedly regulating. But what I don’t think he also understands is Twitter has people like Rouhani from Iran and Vladimir Putin and Chinese people who deny that they have a million Muslims in prison and all this other stuff. So why is he not cracking down on Twitter for allowing those guys to have a voice when he’s worried about Elon Musk, who is a loud guy, but he’s a pretty middle of the road guy, seemingly. So I just don’t understand why there’s so much hyperventilating about Elon Musk. I don’t get it.
EB: So you’re along with, I guess certainly a large number of Republicans in Congress right now who are saying bring it on. We’re delighted that this takeover is happening because we imagine we’re going to see a much less regulated platform.
TN: Let’s take another view. Let’s take Jeff Bezos, who owns The Washington Post. Right. It’s a media platform, and it’s had some really questionable practices over the past few years. So why aren’t media regulators in Europe looking at The Washington Post? They’re just not. And so I think if Musk is really going to have Twitter be in the center and not moderate except for things that are illegal, then more power to them. It’s in the spirit of the US law from the 1990s that said that internet content publishers can’t be sued because they’re not Editors. They’re only publishers. So I think it’s more in the spirit of the 1990s Internet regulation than anything that’s out there today.
EB: Tony Delta in Atlanta, that’s not a million miles from where you live, is it? Do you have sympathy for the flight attendants here?
TN: Yeah. It’s insane. I never knew about this. So no wonder the flight attendants are less than cheerful when we arrive on board.
EB: Especially for the check in bid, right?
TN: Exactly. It’s just insane. They’re in uniform, they’re working. Why they’re not paid. I just think that’s insane.
EB: The unionization drive does seem to be gathering a bit of pace in America, doesn’t it, right now. And we mentioned we’ve referenced all those other companies. It’s the mood of the moment. Yeah.
TN: Well, labor has the strong hand right now, and wages are rising. And when labor has the strong hand, you see more unionization. So it’s just a natural course.
EB: But it has been decades during which Union participation in the state certainly has gone down, isn’t it? I mean, since I’m in the 70s wasn’t right.
TN: But if we look at the rate of baby Boomer retirement, we have a lot of people going out of the workforce right now. And so we do have tight labor markets because of it. And that’s really part of what’s pushing the strength on the side of labor. And so this stuff is demographic.
EB: And it’s typical when it comes to technology. I mean, I have a personal take on this. I went to Acra in Garner in 2015 to the famous Agbog blushy central dump there, which is an extraordinary place. It’s one of the largest of its kind in the world. Miles of waste, all kinds of things. They’re burning cables just to extract the copper from the tubing and the wiring. But the air, I mean, it took me 24 hours just to feel my lungs clear from that place. It’s an extraordinary thing, isn’t it, Tony Nash, don’t you think it’s strange that the market around the world, the free market, hasn’t found a system whereby the value of old units is recycled efficiently?
TN: Yes. So if I want to recycle electronics here in my local town, I take it to a center and I have to pay them to take it. So they’re taking gold and platinum and other great stuff out of there, but I have to pay them to take my recyclable electronics.
EB: Is that why? I mean, do you understand the economics of that? Because you’d think that supply and demand would suggest that if there were a competitive value in the goods that they’re extracting, there would be competition and therefore there would be people offering lower prices or perhaps even paying you for your old stuff?
TN: Yeah, I understand the competition of it, but I think I just want to get rid of the stuff. And I think that’s what they realize is they can charge people just to get rid of old computers or phones or whatever, and then they get money on both sides.
EB: The big corporations, Tony, have a bigger responsibility here. I mean, they’re the ones producing the stuff. They’re the ones, I guess, I don’t know, paying for the extraction of some of these rare Earth metals and everything else. Some of the toxic stuff coming from places like Russia, Latin America, the DRC, and those are the things that are then being spat out and causing all kinds of pollution.
TN: Sure. I would think, for example, the phone manufacturers and the mobile carriers would have an incentive to collect the old phones from people.
EB: Yeah, but do you think regulators should be doing more here?
TN: I don’t really know. I think regulation tends to kind of contort things like this, And I think for something like this would potentially create an unintended economic opportunity. So we heard about the person in Bangladesh who collects used items in Singapore. I lived there for 15 years. We had somebody called a Karen Gunn person who would collect used electronics and other things and buy our house. So whether it’s that local person or whether it’s an Assembly Or a disassembly location, say, near my house, Those are people who are focused, who are specialized on what they’re doing. I do think, though, that the people who create this actually should have some sort of incentive, not from government, but from their customers to collect this stuff Once they’re finished with it, because it’s costing me money to get rid of it, but I’m paying them for it.
EB: Okay. A couple of minutes left in the show. I’m going to ask you both now for a quick thought about the things that have caught your eye most in the area, the news stories that have caught your attention. Tony, tell us in Texas what’s catching you up there?
TN: It’s really hard to follow that. So in Texas, one of the things that’s happening and this is not new, but it’s becoming more and more common is if you take your car out somewhere, Even in just a normal neighborhood, to, say, a shopping Center, It’s pretty common for someone to come even in the middle of the day and steal the catalytic converter off of your car. You go into a restaurant or a shop and you come out and someone has taken the catalytic converter off your car, which is a key part to muffling sound, and they do it for the precious metals in that piece. So that’s becoming very common here again. It’s happened for years, but it’s becoming much more intense Because of the prices of precious metals.
EB: Yeah, unauthorized recycling. We can full circle Tony Nash and Zimmer Islam in Texas and Bangladesh, respectively. Thanks to you both and thanks to you all for listening. This has been business matters as my name’s Ed Butler. Take care. Bye.
As a start, we looked at the Friday’s trading session and what it means. Is this a bullish market?
We’ve made a few recommendations over the past couple of months. We hope you’ve been paying attention specially on $IPI (Intrepit Potash) and $NTR (Nutrien).
We’ve talked about the tumbling lumber markets in recent weeks. What are Sam and Albert’s current thinking on lumber as we’re looking at $LB lumber futures. Sam talked about housing last month. We looked at $XHB, the home builders ETF. How about the rates and housing? We’ve seen that homebuilders are getting hit with expected rate rises. What is the impact of this on the mortgage market, housing inventory, etc?
Shanghai has been closed for a few weeks now and the largest port in the world won’t open for about another week. How can the second largest economy continue to close when the West has already accepted Covid as endemic? How can manufacturers rely on China as a manufacturing center if they’re unreliable?
For the week ahead, we talked about the earnings season, their portfolios, and Albert talked about Chinese equities for months, etc. Is now the time to look at KWEB, which he discussed for some time?
We’ve got CPI out on Tuesday and is expected at around 7.9% and Retail sales on Friday, which is expected at around 0.3%. Inflation seems unstoppable and consumers seem to be getting tired of spending. Sam explains on this.
Key themes from last week
Friday trading session
Don’t say we didn’t warn you
Rates and housing (Tuna & Caviar)
China’s shutdown
Key themes for the Week Ahead
Earnings season expectations
Near-term equity portfolios
CPI (Tuesday), expected 7.9%
This is the 14th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
TN: Hi, guys, and welcome to The Week Ahead. My name is Tony Nash. I’ve got Albert Marco and Sam Rines with us. Tracy is not able to join us today. Before we get started, if you don’t mind, could you please like and subscribe. That would help us out. And we’ll let you know every time a new episode is up and running.
This past week we saw a lot, but I think the most interesting thing or one of the most recent interesting things is Friday’s trading. We’re going to start talking about the market action on Friday, and then we’re going to get into a couple of things that we told you about trades that if you were paying attention, you would have seen. We’re actually going to go into rates and housing, and Sam’s going to talk a little bit about tuna and Caviar, that discussion from the Fed speech earlier this week. And then we’re going to talk about China’s shutdown, which seems to be getting worse by the hour. So first let’s get into the Friday trading session, guys. What are some of the things you saw on Friday?
AM: Well, from my perspective, the market is acting like crypto. I mean, we’re seeing interday moves on some of these equities, like 5% up and down. It’s a little bit silly. And you wonder if it’s like light volume, if it’s market manipulation by the Fed. It’s just uncanny. I’ve never seen anything like this before. And obviously the market is weak and we’ve talked about black clouds coming over the market and what’s going on. But I don’t see anything any catalyst that would say that this is the bullish market at all. So we’re waiting for multiple numbers of CPI, retail and whatnot. But for me, it’s just like everybody is on pause waiting to see which way this market goes before they take action.
TN: So a couple of weeks ago, we saw a lot of money move into equities. Right? So that money moved in. It’s just parking and waiting. Is that what’s happening?
AM: Yeah, I assume so. The Fed, as it just ups the rates, forces more money to move into the US market, which is actually a brilliant move. You know, this is what we’re seeing. A lot of money here, not knowing what to do at the moment.
SR: To Albert’s point, there’s a lot of money that’s moved in here, but it’s moved into some pretty passive areas that it’s just not moving much in terms of the overall market. You look at fixed income, right? Lots of money moving in there, short into the curb, et cetera, et cetera. I think that’s some of the more interesting stuff as well. But there’s also this weird thing going on where equal weight is outperforming the market cap weight. And has been for some time now, particularly over the last week. If you look yesterday, S&P closed in the red, but if you were equal weighted, close green and it closed green on a non trivial basis, and it was 35 basis points, something like that.
That deviation between market that was led by predominantly tech and only tech, to a market that’s led by other sectors in general is something I think under the surface that paying attention to it can be something that at least can make some money in the near term.
TN: Including Crypto Walmart, which we’ve seen over the past week as well. So we’ll talk about retail later in the show.
Okay. So we had as a group talked about some calls over the past couple of months. Some of those were calls earlier, but let’s get into those just to walk through. Albert, you and Tracy had talked about Intrepid Potash. She talked about Nutrien. We’ve got those on the screen right now. Can you walk us through those and kind of what you’re thinking was on those and what’s happened? What do you expect for those to happen in the near term?
AM: Well, speaking about IPI, Intrepit. It’s like a leveraged ETF in the fertilizer market. That thing swings 5-10, 11% in a week, no problem. That call was basically on the premise that the Ukraine war is going to go on. Russia is cutting off the fertilizer supply. Belarus has a big fertilizer supply. OCP in Morocco has shifted from actual fertilizers to more like phosphate batteries for EVs.
So it only made sense that besides Mosaic, which is the 800 pound gorilla, IPI and Nutrien were just the logical choices for investments.
TN: And is there room to run on fertilizers like there was a target put on Nutrient by one of the banks of like 126 or something? Do you think we could keep running on those trades?
AM: We can, right? Certainly we can. It just really depends on what goes on with the Russians and whatnot. My only risk for running too far is that the Dixie could go to 105, 110 and then we have significant problems across the market, not just fertilizer prices.
TN: Okay. So even if dollar does go to 110, we’re planting now in the US, right. And now and for the next couple of months. And the fertilizer demand is right now and it has been for the past couple of months. But it’s especially right now, is all of that, say planting demand, is that all priced in already, or do you feel like some of that is to come?
AM: I think it’s pretty much priced in. And let’s just be careful because some of the farms that are planting crops are using nitrogen and also fertilizer derived from nat gas. So it really depends on which way the farming community wants to go, what they see the most profitable crops.
TN: Okay, great. That’s good to know. We also talked about lumber, as I remember a conversation probably three or four weeks ago where I think, Sam, you brought up lumber and how lumber was coming off. Can you walk us through that trade, as we have it on the screen?
SR: Yeah, sure. I mean, it’s a Fed trade, right. It’s a Fed tightening quickly, mortgage rates going up and housing demand coming down. The idea that a Fed going this quickly and having the market priced in, there’s a difference. Right. The Fed has only moved 25 basis points.
TN: Right.
SR: The market has done the rest of the tightening for it across the curve. It’s been pretty spectacular. Housing, housing related stocks, those in general, are going to be the first thing that the Fed affects and they’re going to be the first thing that the Fed affects on the margin very quickly. And you’ve seen mortgage rates go to five plus percent.
TN: Sure. Before we get on to housing, I just have a couple of questions about lumber and other commodities. So the downside we’ve seen come in lumber over the past week or so. Do we expect that to come to other commodities as well? I mean, things like weed and corn, there’s still pressure upward pressure on those. But do we expect other commodities to react the way lumber has?
SR: Oh, no, I would not expect the foodstuffs to react in anywhere near the same manner as lumber. Right. Lumber is a fairly… Lumber, you cut it up, you put it in inventory, you sell it, and then you use it for something.
TN: Right.
SR: It doesn’t last forever in good condition either.
TN: Great. Okay, good. Thank you. Now moving on to home builders, which is where you are going. You also talked about XHB, I think two or three weeks ago, and we’re flashing some warning signs about that. We’ve seen obviously rates rise. I was speaking to a mortgage broker earlier this week. He’s doing mortgage at almost 6% right now and expects them to go up kind of close to 8%.
We’re starting to see the resurgence of ARMs. People are already getting back into adjustable rate mortgages because 5.99% is high. Just as a bit of background, less than 10% of US mortgages over the past few years have been adjustable rates. So can you talk us through XHB? And maybe you had mentioned earlier kind of Home Depot and some of the other home makers. Can you talk us through what kind of… Home Depot was a leading indicator on that? Is that fair to say?
SR: It’s fair to say Home Depot and Lowe’s this kind of ties into the lumber conversation. Home Depot and Lowe’s were two of the best at ordering and trying to actually keep inventory on the shelves, even when during the first tremendous spike in lumber. Right. So they kept a lot of lumber on the shelves. They currently have a lot of lumber inventory on the shelves. And it’s part of the reason that you’re seeing what could be described as almost an over inventory of lumber, not just at those two entities, but across the board, because everybody had to buy lumber in order to keep it in stock.
So, yeah, Home Depot and Lowe’s are the tip of the spear in terms of both home building and in terms of home remodeling. Those are both fairly significant drivers of the business there. There’s a little bit of weekend contractor type deals, but very little.
So overall, I would say they are a leading indicator and they have not been acting very well. But when you have mortgage rates to your point at 6%, that creates a problem for the marginal buyer. It’s not a problem for somebody who owns a home. Right. You have your mortgage rate locked in, et cetera, et cetera. It’s not going to destroy you. It might set off being able to put a new deck and redo a pool or something like that. But it’s not going to hurt you in any meaningful way.
TN: Right.
SR: It does hurt the marginal buyer. It hurts the first time buyer, et cetera. So you begin to have slower turns in housing and you begin to have problems with where does that incremental inventory of homes go? And that’s the real problem with higher invetories.
TN: Right. Before we move on to officially talking about rates and housing, I’ll share a story about a friend who is building a house and their lumber broker who should be able to get the best pricing actually has worse pricing right now than Home Depot. Okay. So they can actually go to Home Depot and get better pricing than their lumber broker. And that’s how messed up the lumber market is right now. They’re arbitraging their lumber broker versus retail any given week in their bulk buying to make sure that they can get their house built. So that market both on the lumber side and on the housing side is just a mess.
So let’s officially go to housing and rates. We’ve done a lot of the discussion, but there was a CNBC story about rising mortgage rates are causing more home sellers to lower their asking prices.
And Sam, you talked about that marginal buyer, which is great, and that new buyer. When I talk to people who are doing mortgages, they tell me that even with the rate rises we’ve seen over the past couple of weeks, there is still not a lot of inventory on the market. That’s a big issue. And they’re not seeing a fall in demand for new houses. So is this kind of a last minute rush for people to get a house before rates rise even more? Is that plausible?
SR: There’s some plausibility to that. Yeah, 100%. The other thing is that we’re in Texas. Right. The demand for housing in Texas, the demand for housing in Florida does not tend to be, I would say, as tied to mortgage rates as everywhere else. The rest of the country is much more sensitive to what’s going on. Texas and Florida and a couple of other spots simply have too much inbound demand from higher priced areas. So California, New York, et cetera. There’s still an arbitrage when you sell a place in California or sell a place in New York and move to Texas, Florida, some of the Sunbelt States.
So it’s tough to take Texas as an example, particularly Houston. We’re actually the fourth largest city in the country, and yet we do not get counted in the S&P Schiller because of how different the housing market is here. Dallas gets kind of for whatever reason, but Houston does not.
TN: We’re not jealous at all about that.
SR: No, we’re not.
AM: Go ahead, Sam. Sorry.
SR: But just to wrap that up, I do think that there’s a nuance to Florida and Texas that should almost be ignored. When I look at the data, I’ll be taking out the Southeast region just because it’s one of those that is a little special at the moment.
AM: Yeah, that’s a key point that I always made is like, because of the migration patterns in blue to red States, things are just really wacky. Florida and Texas, Arizona will be red hot. Meanwhile, Seattle, Chicago, parts of New York are just dead spots at the moment. So until that all gets weeded out, people stop moving. Then we’ll actually see the housing market starting to cool off.
TN: Right? Yeah. I was just up in Dallas yesterday, and things are just as hot up there. And the immigration from the coast to Dallas, especially around financial services and tech, it’s just mind blowing. It is not stopping. It has been going on for probably five years, and it’s just not stopping. Those counties just north of Dallas are exploding and they continue to explode.
Okay, so our next topic is China and China’s slowdown. Shanghai has been closed for a couple of weeks with kind of a renewed round of Covid. And obviously the largest Port in the world, which is in Shanghai, is closed. And that kind of exacerbates our supply chain issues, especially around manufactured goods that we’ve been seeing globally. We’ve seen overnight that. Well, not just overnight, but over the last, say, five days. Food has become really scarce in Shanghai. We’ve seen people on social media talking about how it’s difficult to get food. We’ve started to see little mini protests around Shanghai, around food. And things are seem to be becoming pretty dire.
Overnight, we saw that parts of Guangzhou that the government is considering closing, parts of Guangzhou, which Guangzhou is the world’s second largest port. So the two largest ports in the world, there is a potential that those are closed. There is also gossip about parts of Beijing being closed as well. So I’m curious, what do you guys think about that? I can talk about China for days, but I’m curious, kind of, what alarm bells does that raise for you? Not just for China, but globally.
AM: Well, Tony, you recall, you Balding, and I discussing China’s attempt to attack Taiwan and what had happened. And I had pointed out that closing those ports would cause food insecurity and here we are. Although it’s not a Taiwan invasion, it’s a zero Covid policy that shut down the ports and now we have food stress in China causing all sorts of problems.
Most China observers, especially yourself, know that Shanghai has always been the epicenter of uprising for the CCP. It’s a problem for them. They’ve always tried to wash it. Maybe that’s why they’ve come down hard on Zero Covid Policy. That’s something that I’d have to ask you. But from there, this was very predictable. I mean, you shut down ports, China has a food security problem.
TN: On a good day, China has a food security problem. It is an issue that the Chinese authorities worry about day in, day out, not just when there’s a pandemic. Okay. So one of the things that I was talking to some people about yesterday is why is China closing down? Why are they closing down these big cities? There’s a lot of gossip. You can find a lot of theories around social media saying there’s some sinister plan, honestly and for people that don’t know. I’ve done work with Chinese officials over years. And the economic planners I was seconded to economic planner for almost two years. I believe that they’re closing because they’re worried about how the China virus looks, meaning they don’t want Covid to be seen as the China virus. And they worry about the world’s perception if there’s another outbreak that comes from China.
And so I think the leadership believes that they have to be seen to be disproportionately countering COVID so that there isn’t more wording and dialogue about the kind of, “China virus.” And so, again, I don’t think there’s something sinister going on. There’s a lot of gossip about China intentionally trying to stop supply chains to bring the west to its knees and all the stuff. I don’t believe that at all. I think it’s real sensitivity to how they look globally.
Of course, there’s the public health issues domestically. That goes without saying. But I think a big part of it is how do they look globally.
AM: Yeah, but doesn’t shutting down these ports is going to cause even a bigger spike in inflation within China and actually globally?
TN: Oh, absolutely. This is the one thing that I think they didn’t plan on is they’re about to embark on a whole lot of fiscal, a whole lot of monetary stimulants because they have major government meetings in November of this year. So they absolutely cannot go into recession.
But here’s what I have been thinking about. Okay. We’re looking at a Russia-Ukraine war that could potentially bring down Russia and destabilize Russia domestically. We’re now over the past couple of weeks, looking at a China that is starting to self destruct domestically. And I don’t know of anybody who had the domestic issues of both China and Russia as systemic risks in 2022. These things are just coming out of nowhere. And those two risks can be destabilizing for the whole world. And I’ve said for some time, Western governments have to sit the Chinese leadership down and say, look, you guys are systemically important globally. You need to get your act together around COVID, and you have to normalize your economy because it’s hurting everybody.
AM: Great points. Now, going back to Guangdong, there are some really elite families in China out of that area, really wealthy ones, that actually basically gives Xi the support he needs in the CCP. If he loses those families, there’s real trouble for Xi going forward.
TN: I think there’s trouble for him anyway. I think he is not a one man show. Contrary to the popular Western opinion, Xi Jinping is not a one man show. He is not a single Emperor, kind of claiming things from on high. There is a group of people who run China. It’s just too big for a single individual to run.
So I think Xi has been, I wouldn’t necessarily say on thin ice, but I think things have been risky for him for some time. And as you say, it’s pretty delicate for him right now. And if he doesn’t handle this deftly, I think, again, there could be some real destabilizing factors in China. So this is something again, they didn’t plan for. They were talking about major infrastructure stimulus. They were talking about monetary stimulus, getting ready for this big party in November to nominate Xi for more power and all this other stuff. But it’s possible that these events could really hurt him and really hurt his relationships, meaning the key people around him and then the other factions.
Because as much as people say that China is a one party state, sure, it’s a one party state. But there are factions within that one party. And it should be alarming for China and destabilizing China should be alarming for other people around the world.
AM: Yeah. Same thing as Putin. Like their factions behind them that keep them in power. Same thing as Xi. Most autocratic rulers have a circle of trust behind them that keep them in there. If Xi falls and China starts to, I don’t want to say crumble, but at least wobble, if we think we have serious supply chain issues now, wait till that happens.
TN: Oh, yeah. So Russia is important on energy and a couple of other things, but it’s not globally systemically important on a lot. Okay. I would say maybe it’s regionally important, especially to Europe, but China is globally important. And if they can’t figure this out, it will destabilize everybody.
And so I think Western governments need to not lecture to China, but they need to go forward with real concern about China. How can we help you guys out? Right? How can we help you out? Can we get you vaccine? Can we get you support? Is there anything logistically we can do? That is a way that Western governments can come to the legitimate aid of China. They’ll act like they have it all together, but they don’t. It’s obvious. We see it every day on social media. They don’t.
So Western governments really need to offer genuine aid to China in terms of intelligence, in terms of vaccines, in terms of capabilities, and so on and so forth.
Good. Anything else on that?
AM: No, we covered that.
TN: Okay. Looking at the week ahead. Guys, we’ve got earnings season coming up. Can you talk us through your expectations for earnings season?
SR: Sure. I’ll jump in here quickly. I think there’s a few things to watch. One, the consumer sentiment has been dismal. Right. For the last six months. It’s falling off a cliff. Where the US University of Michigan survey, well below where it was at peak of Covid. But we haven’t necessarily seen retail sales. We haven’t seen corporate earnings and corporate announcements follow that sentiment lower whatsoever.
For anybody paying attention this past week, you had Costco with absolute blow out numbers in terms of its same store sales. Take out gasoline, take out anything, and you still have 7% foot traffic. That was stunning. And that’s not a cheap place to shop.
TN: Right.
SR: So that’s indicative of the higher end consumer that’s still holding in there, at least fairly well through March. That’s pretty important. So then there was Carnival with its best week ever in terms of bookings. Those two things are pretty important when it comes to what is the consumer actually doing versus what is the consumer actually saying, which I think is very interesting.
This week we’ll have Delta Airlines. It’ll be interesting to kind of listen to them and see what their bookings have looked like, see what their outlook is for the summer. And then I’ll be paying really close attention to the consumer side of the earnings reports, not necessarily as much the banks. I don’t really care what Jamie Dimon has to say about Fed policy, but I will say…
TN: I think she do.
SR: Nobody does. But I’ll say the quiet thing out loud. But I will be paying very close attention to what the earnings reports are saying about the consumer, because the consumer drives not just the US economy, but the global economy generally, both on the goods side, services side and really trying to parse through what’s happening, not what the US consumer keeps telling us is happening.
TN: Go ahead.
AM: Sam, really quick. How much of these earnings because I’m a little bit suspicious of how much is it inflationary, prices of everything are higher and remnants of stimulus PvP, whatever the people have been getting for the past year. How much is that calculated?
SR: Yes, which is one of the reasons why it’s a great point, one of the reasons why I pointed out Costco. Costco much less on the stimulus side, much less on the saving side, much more on the high-end kind of consistent consumer. And with foot traffic up 7%, inflation was I think it was about 8%, give or take. So they’re passing on the inflation and they’re still getting the foot traffic. So I think that’s an important one.
On the CCL side, it was after the bookings were after the significant stimulus had already run out or run off. You just weren’t getting checks. I think that was also an indication that maybe there’s a shift from the goods to the services side. The one thing that was somewhat disconcerting, if you’re paying attention to the higher end consumer, was Restoration Hardware. They ran down their book to about 200 million in backlog and don’t really appear to be bullish about this year. They guided well below what some were expecting. I think we’re going to hear a lot more about that, partially because they just can’t get enough inventory in time and they’re kind of in trouble on that front.
AM: Yeah.
SR: To your point, it’s a lot of inflation, but some of these guys are seeing some pretty good traffic, too.
AM: Yeah, actually, funny, you mentioned Restoration Hardware because that was one of the things I was looking at specifically for the housing market, like who’s buying a $30,000 at the moment right now. You know what I mean? It’s just silly.
TN: Yeah, that is silly. Okay, great. Thanks for that. And I’m interested to see how the earnings from Q1 also translate to Q2. I’m expecting a real turn in Q2, and I’m wondering how much that is on investors minds as they look at Q1 earnings.
Albert, as we move into the next point around kind of short term or near term equity portfolios. You’ve talked about KWEB for some time, and I’d like you to, if you don’t mind talking about KWEB a little bit, but also if you and Sam can help us understand what is your thinking right now on your term portfolio.
AM: I mean, KWEB is one of my favorite little stocks because it’s a China technology index and it’s been beaten down to a pulp by the Fed. They have absolutely annihilated not just China, but pretty much all foreign equities. And from my perspective, you’re looking at China stimulating in the fall of the shore of Xi. So it’s like it’s a no brainer to me. I think KWEB at 28 is a fantastic deal. Start piling into that.
One of my other ones I was looking at was FXI, which is basically all the China’s big wig companies. So that’s another one I was looking at right now. In terms of the US equities and portfolios, I mean, we’re so overvalued right now. Where do you put your money into? One of my favorite stocks was TWY a tightened tire. It makes 85% of the world’s agriculture tires. Right. I mean, this thing ran up from $1.45 to $14 at the moment. You know what I mean?
How do you put more money into equities at this stage without some sort of correction or something happening with the Fed to show us which way they’re going to go? Are they going to go 50 basis points in the next meeting and then another 50 and another 50, or they’re just going to use a long bond to actually what Sam said earlier and I forgot to bring it out is they’re using the long bonds also to kill the market. So it’s just like,what do you do?
TN: Yeah. The change to valuations we’ll see over the next three months seem to be really astounding.
AM: They’re just silly. Everything is so inflated at the moment. I can’t in good conscience, say get into this stock or get into that stock, because I know how is it going to run right?
TN: Exactly. Sam, anything to add on that?
SR: I love Albert’s point on KWEB. Think about what’s built into the risk there. You have the risk of the SEC delistings. You have the risk that appears to, at least on the margin, be waning. You have the threat of sanctions on China from them helping Russia. You have a lack of stimulus. You have shutdowns. There’s a lot weighing on that index on top of Fed, et cetera. There’s a lot weighing there on that. And you begin to have some of these calls, the geopolitical onion risks begin to be pulled back a little bit. And that to me is a spectacular risk reward in a market that is generally pretty low on the reward.
TN: Okay.
AM: I had one of my biggest clients from the golden guy. I mean, it’s gold and KWEB is what he’s seeing right now. That’s the only thing he wants to even touch, which is fascinating.
TN: Yes, I can see that. Okay. Next, this week ahead, we’ve got CPI out on Tuesday, which is expected to be about 7.9%. Sorry. And then retail sales on Friday, which is 0.3%. So it doesn’t feel like inflation is abating. But, Sam, you talked about, say, Restoration Hardware and other folks earlier. What concerns you guys have about inflation eating into retail sales, do we expect serious difficulty with retail going forward?
SR: Probably not this month. We’ve going to get the release and it’s going to be for March. And I haven’t seen what I would describe as a poor number coming from any of the major retail facing guys for March. I don’t think that number is going to be distressing at all. I think it’s much more of a . May-June story in terms of the economic numbers lag with a hard L. That’s somewhat problematic.
So I would say you’re not going to see the bad official numbers for a month or two. And on the CPI front, I’ll just throw this out there. And Albert can make fun of me for it, but I don’t really care where the inflation readings come in as long as it’s above 5% the Fed still going and it’s still going with its previous plan, and it really doesn’t care, quite frankly.
TN: That’s good to know.
SR: I just think it’s one of those it’s going to be a no. It’s going to be a no reaction type deal. Unless you get a huge break, then you might get a little bit of a come down on twos through sevens or something. But that’s about it.
AM: Yeah. I mean, as much as I want to make fun of Sam on that one. Yeah. Nobody cares about the inflation. Nobody cares about the inflation number right now until the election season starts really ramping up in about June, July. That’s when I agree with Sam with the retail sales are probably crater or starting to lag significantly in May and June. But yeah, prefer inflation. It’s just like everyone is expecting a 7.9 to eight point whatever, you know, so it won’t be a surprise.
TN: Great. Okay, guys, thank you very much for this. This is really helpful and I appreciate it. Have a great week ahead.
Last week’s big news is Ukraine and Russia. So in this episode, we want to talk you through some context and what this means for markets in the near term. First, the guys talked about the most surprising thing that happened and then we moved on to answer a few viewer questions like what’s the implication of Russia being disconnected from SWIFT? Will anything change between Europe and China? Will the Russia-Ukraine inspire China to actually invade Taiwan? How disrupted the energy markets will be? And finally, what happens to the world economy – Fed, QE, QT, consumers, etc.?
TN: Hello. Welcome to The Week Ahead. I’m Tony Nash. And I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I’d like to ask you to subscribe to our YouTube channel. And like this video. It helps us with visibility and you get reminded when a new episode is out. So thanks for doing that right now.
We had a lot on this week, especially around Ukraine. So today we’re really focused on Ukraine. We want you to understand the context around Ukraine. We want you to understand what it means for markets. And we’re going to take a lot of your questions that we’ve been gathering off of Twitter.
So just a quick recap of what we said last week. Coming out of last week’s episode, we said it’s not a time to make big decisions. We said to keep risk tight and be careful of volatility. And we said that crude markets would move sideways. So we did kind of come into this assuming risk would be there this week. And obviously, we saw that.
So first, guys, can you walk us through some of your observations of the past week? What are you seeing directly in and around Ukraine or Ukraine, and how is that affecting markets? And as each one of you talk, Albert, I want to start with you, but name something that surprised you most in the past week in markets. Okay. Can you give us a quick overview? I know you’ve got deep networks in that region. So can you talk to us a little bit about what you’re hearing and seeing there?
AM: Well, I mean, concerning Ukraine and the markets. What I was most surprised and a little bit taken aback by was the amount of mainstream media just decorations of World War Three and whatnot then how much it affected the markets? So much so that you have to look at the markets and say what is going on?
Because this is just not normal behavior for markets to respond to a situation in the Ukraine that’s really kind of not really attached to the United States market at the moment. I mean, it isn’t commodities and that’s something Tracy will get into. But it was an overabundance of bad news, just an overdrive. And that’s what actually really took me aback.
TN: Good opportunities out there.
AM: There is absolutely good opportunities. But the problem is the volatility goes way up higher. The VIX exploded. You can’t get into options because they’re just far too expensive. You’re going to get burned doing that. And what do you do? Maybe sitting on your hands is the proper thing to do until things stabilize. But yes, there were actually great opportunities.
TN: What are you hearing on the ground, Albert? I know you’re really close to that part of the world. So what are you hearing on the ground?
AM: Well, the situation is really fluid and really tense at the moment. I think the Russians were taken aback. I know that the Russians were taken aback about the actual veracity of defense by the Ukrainians. Their main objective is to take Mariupol and then take Odessa. That is their number one and number two objective. Their next objective is to take not really to take you because I don’t think they can actually do it unless they want to do some kind of redo of the Chech and guerrilla warfare and just start massacring people. They’re not in that business at the moment. The world’s eyes are on it.
So I think political change, maybe snap elections is what they’re probably going for in Kiev just to surround it, stress the city, stress the residents, force a change where Western governments can’t get a bigger say in the matter on a nation that’s right on the doorstep.
TN: Okay, so I’m seeing on say on social media like TikTok videos of burned out Russian tanks and all these things, and I think it seems to me that Russia is losing the PR war right now and that’s really important in the early days and with different demographics even within Russia. Do you think Russia or Putin kind of underappreciated the impact that social media would have, at least on the early days of this?
AM: Of course, Russia has a vast network globally of PR campaigns in the west. So for him, it’s definitely a concern where you have negative images of Russia, Russia’s military trying to enact power projection. It’s a little bit daunting for him at the moment.
However, from a military strategic point of view, we don’t know exactly what their exact strategy is. Whereas they’re just trying to expand Ukrainian defenses, trying to get the best of their defenses out already. So they have a shortage of supply later on. That’s what most professionals would say is happening.
So we really have to see over the weekend to see what kind of resources have been expended by the Russians trying to take back Mariupol and Odessa.
TN: Do you think the Ukrainians can get stuff resupplied? Do you think they would have any difficulty getting stuff resupplied from the west?
AM: It’s totally up to the west and what they’re going to supply them and how they’re going to supply them. I’m sure that the west have Special Forces sprinkled without inside of Kiev assisting as advisers to the defense forces there. So it just depends on the will of the Europeans at the moment.
TN: Okay, Sam, what have you seen this week in markets that’s kind of gotten your attention or surprise you?
SR: I would say what really caught my attention were two things. One, how quickly Wheat went up and how far it went up and then how quickly Wheat went down and how far it went down.
There were two days where Wheat was just skyrocketing. I think it was 5.5% day followed by negative. I forget where it closed, but a significant negative day in the six to range at a minimum. That really caught my attention.
Ukraine is incredibly important on the wheat front. That’s a pretty important one. And then I would say how quickly and how far gold went. Right. Gold was almost $2,000, and now it’s below where it was prior to the invasion, and it did that all in a day. I mean, that was an incredible move in my book and somewhat shocking. And I think it was kind of interesting when people caught on that if you cut off Russia from being able to really sell, call it dollars, Euros, et cetera, on the market openly, it’s going to potentially have to sell gold if this thing drags out.
So you have an overhang of gold in a war scenario. Not necessarily, I call it a tailwind. I thought that was a really interesting call it knee jerk reaction up in gold, and then kind of a realization of, oh, crap, this might not be the thing to own here.
And then the final thing and I’ll make this one quick is crypto and how war was supposed to be great for crypto. And as the war started, you saw crypto sell off pretty hard. I think it’s interesting on two fronts. One, there’s a significant amount of crypto activity in Ukraine and Russia.
Russia is the second largest country when it comes to providing hash rate to the market for Bitcoin. And if there’s any sort of disruption there, all of a sudden the US could become 50% of the hash rate awfully quickly, which could become an interesting scenario there.
TN: How does the hash rate for people who aren’t crypto experts? How does the hash rate equate to say, the crypto price?
SR: It makes it, call it’s basically an efficiency mechanism where you can either do transactions more quickly, more efficiently, and somewhat of a lower cost. That’s basically what you do.
So if you lower the hash rate, you increase the cost of doing transactions and slow the general system down.
TN: Okay, great.
AM: This is interesting, Tony, because this actually leads into a lot of my arguments against crypto being decentralized, saying, hey, when push comes to shove, governments have control of the networks and the financial system. You can’t get away from that.
TN: Yeah. And if you cut off the electricity supply, it becomes even more difficult.
AM: Nearly impossible. Puerto Rico.
TS: And if you’re Russia that has control of the entire Internet, you can cut off whatever sites that you want. Right?
TN: Right.
SR: Yeah, that’s right. Yeah. It was interesting. There was something floating around yesterday where it appeared that Russia was at least partially geofencing their country from the rest of the world. And if it does that, that could become problematic if it does it in a meaningful way for crypto.
TN: Sure. And taking down the RT site doesn’t help their paranoia there. Right. Tracy, what happened for you over the week? What’s one of your observations that really kind of surprised you?
TS: Well, I mean, to be honest, because I’m focused on the commodity side of everything, pretty much how I saw the markets going or how I pretty much thought how the markets were going to go. Right. I posted a bunch of stuff on Twitter.
TN: You saw all this coming?
TS: No. Well, I didn’t do this. I don’t want to sound like arrogant. I focus on energy, metals, materials, agriculture. And because Ukraine and Russia are such large hubs for all of these commodities, wasn’t really surprising to me that we saw a jump in all of these.
TN: Yeah. Were you surprised the magnitude of the jump?
TS: Yes. And in some respects, I actually expected Palladium to have a bigger jump than it did because Rush is 43% of that global markets and wheat went far beyond bonkers that I thought it was going to go.
Was I surprised about oil? No. On the upside and on the downside today.
TN: Great. Okay, very good. Let’s jump into some of these viewer questions. You guys know that we saw a lot of viewer questions at the start of this.
So the first one I’m going to read out is from Keith Snyder. It’s @snyderkr0822. He says, what would the implications be of disconnecting Russia from SWIFT?
I’ve inspired your knowledge and have to be informed. So there’s been a lot of talk about SWIFT over the past few days. Sam, do you have some insight there on what would happen if Russia was taken out of the SWIFT network?
SR: It would be less bad than it would have been call it three years ago. Russia has somewhat insulated themselves from SWIFT, but not entirely by no means. Right. The SWIFT system can cut you off from dollar denominated, at least dollar denominated transactions.
That’s a pretty important thing, particularly when you’re selling a lot of things that are denominated in dollars. Right. Oil, et cetera. That becomes somewhat problematic. I would say that would be a very significant hit to Russia.
And it would also be a significant hit. And by significant hit, I mean that’s putting you on par with Iran and Cuba. Right. That’s basically putting you at Code E country without saying it. That’s Iran, your Cuba, see you later, bye.
I think that what I would be paying very close attention to is the reaction of European banks. That’s $330 billion worth of Russian liabilities assets on their books. So you’ve got to figure something out there pretty quickly because those books are going to get smacked if you can’t actually get on the SWIFT system.
TN: Okay. And Tracy, if they were taken off a SWIFT on Friday, Germany said that they would be okay with imposing that sanction, how would Germany pay for its electricity?
TS: I mean, Germany said that with a caveat, let’s say, because they did say we’re going to look at this, but we need to look at the implications of this. So obviously the problem there in lies that if you take a Rush off SWIFT, then Europe is screwed energy wise. Right? Unless they choose to scramble and make long term contracts with, say, the United States.
They could go through the United States. They could go through Azerbaijan on the Tap pipeline. They could go through Israel and Egypt if they wanted to, through the Southern gas quarter. I mean, there are options for them.
The problem is that they should have been looking at long term contracts this summer when we already knew that Nordstream Two was going to be delayed.
TN: Four, three, four years ago. I mean, they’ve had this optionality on the table for a long time.
TS: But those options are still on the table for them. But by delaying SWIFT, if you cut Rush off SWIFT, the big problem Europe has to decide is do we cut off SWIFT and hurt ourselves or do we hurt Russia more? And I could argue that both ways. Anybody could argue that both ways. But that’s a big decision that they have to make.
TN: Well, everybody hurts, right? That would not be a sanction that would be pain free for anybody.
TS: Right. Except maybe the US.
AM: Well, Tony, despite the rogue status of Russia, it’s still well attached to the Western financial system. It’s not seen as able or even as aggressive as the Chinese are and detach it from the financial system.
There would be a lot of problems if they were banned from SWIFT. But it’s certainly a valid deterrent if the west wants to actually use it. They keep a lot of their bank and central bank money in the Euro dollar market. So no SWIFT would mean no more Treasuries, but they’d just move into the Euro dollars itself.
Maybe that’s why they were buying gold because of this tension that they saw coming. It’s a risk to their global market.
TN: Sure. Okay, let’s move to China now. We’ve got a few questions on China. We’ve got one from @NathanDallon. He says, does anything in Europe change the situation with China?
There’s another one from Ritesh @chorSipahi, he says question for Samuel Rines and Albert, Ritesh. I’m not taking offense at this. What is the deterrence for China not to invade Taiwan or now to invade Taiwan?
And then we’ve got another one from Rich @rm_ua09. How could China benefit the most out of the Russia Ukraine situation? A, supporting Ukraine in some manner, B, remaining neutral, or C, taking measures to whether Putin.
So there’s a broad spectrum of questions there, guys.
TS: Take the first one, I think, Tony.
TN: Okay, let’s go for it. What happens in Europe?
AM: Well, Europe. I think that the Europeans are going to be actually more dependent on China trade after this because they’re seeing a problem with the Russians politically.
You can’t sit there and tell me that they’re going to be able to support the Russians like they were in trade, whether it’s commodities or whatnot on steel. I mean, name your commodity. Name your.
TN: Chinese already own like 70% of the global steel market. So is it going to make that much of a difference?
AM: It’s, well, I mean, they still diversify. They’re still going to have to play ball in the global trade. So I think at this point, politically, Russia’s poisonous, and then you’re going to have to steer even more towards China.
TN: Right. So, yeah, it seems to me that China could actually use this as an opportunity to distance itself from Russia. Right. If it goes bad, China is very silent right now. And if it goes bad, they could distance themselves from Russia and make some really tight allies in Europe at Russia’s expense. Does that make sense to you guys?
AM: It does to me.
SR: 100%. I think that would be the spare play from China in a lot of ways, because you get two things. You’re going to get tighter ties to Europe, which diversifies you somewhat away from the US even more. It gives you call it a barrier to the United States and whatever the US wants to do, and it also, to a certain extent, raises your profile on the international stage. Right.
TN: That’s key. China really wants to be seen as a credible diplomatic player and I think there’s still a bit of a chip on their shoulder about not being seen as an equal with a lot of the larger Western Nations. So I think your last point is really important.
There seems to be a view that Russia invading Ukraine somehow enables China to invade Taiwan. What are your thoughts on that?
AM: I absolutely disagree with that wholeheartedly. I think the two situations are nothing alike at the moment. I mean, Ukraine is in Russia’s eyes, it’s own territory. Same as is China views Taiwan.
However, Taiwan has a much more active defense military force and more of a backing from not only the US, but Australia, Japan, India. That’s a problem for the Chinese, too. So I think the two. I don’t like to draw a comparison between the two. I don’t think there is anything related to it.
TN: Sam?
SR: I have almost nothing to add beyond that. And I think the one country that’s really interesting in there is India, because India did not step up on the Ukrainian front and India would step up on the Taiwan front.
AM: Yeah. And on top of that, on top of that, let’s just be realistic here. We know that the Chinese probably have military observers inside of Ukraine watching and taking notes.
TN: Sure. How to conduct right now. If you’re a Chinese PLA officer and you’re looking at what’s happening in Russia versus what the United States did in Iraq, what would be your assessment? Russia gives us nothing against the United States.
The United States is a juggernaut. That’s what I think nobody’s even talking about.
TN: Yeah. If Russia didn’t just roll into Ukraine and take it over in 24 hours, what kind of model are they for China?
AM: And that’s on their border, Tony, that’s on their border.
TN: Exactly. No, exactly. So logistically, Russia’s logistic supply chain for their military, it seems like it’s pretty horrific. Their intelligence, like everything. It just seems like a mishmash of let’s just go get them.
AM: They are a professional military force. They have budget problems. That’s what. If they really wanted to go into Ukraine and just smash the place, they could. But the problem is you’d have to kill many civilians in the meantime, which they can’t do that.
So the Chinese are sitting there probably looking at like, what do we do here? Who is this military partner that we’re actually partnering up against the United States? It’s not sufficient.
TN: Yeah. It seems to me that on some level, going back to the social media comment I made, Russia is kind of embarrassing itself. China doesn’t want to be seen allied with someone who’s embarrassing themselves. Right. They’re happy to.
TS: That’s why they’ve been so quiet. They haven’t said nothing.
TN: Yes. And I think China is always looking also looking at how unified is the world’s response against Ukraine. Right. So if they were to go after Taiwan, how unified would the response be?
So going back to what I said earlier, I think China has a real opportunity here to distance itself from Russia, to play nice on Taiwan and really benefit from trade and finance and diplomatic relationships.
AM: 100%.
TN: Tracy, do you have anything else on that on China? Any other thoughts?
TS: No. I think you guys…
TN: Awesome. Okay, very good. Let’s go to the next ones. Okay. Tracy, these are all energy related. So primarily, if we look at this @DaveRubin15, he says, what are the energy implications if Ukraine has no choice but to make this a war of attrition rather than surrender, bleeding Russia out from exposure and can this catalyze an energy super cycle? Okay.
And then we’ve got another one from Giovanni Ponzetto asking, assuming that gas from Russia is kept flowing at the same rate of the past couple of months, will the EU be able to restock gas reserve? So, Tracy, you’re the expert here. Take it away.
TS: All right. So for the first one, there are two extreme scenarios that could happen. Either somebody blows up a pipeline by accident or somebody blows it up on purpose and blames the other side. And if you look at the chart that’s on the screen right now, you can see the choke points where this could easily happen to really hurt gas flows into Europe.
That said, if we look at the role of Ukraine in the gas markets, they’re much smaller today than they were in the 1990s. Right. There was a time when 90% of gas that came from Russia to Europe went through Ukraine. And now it’s about less than a quarter percent.
The other extreme is that Russia just cuts off gas flows entirely. Right. And that hurts EU way more than it hurts Russia because they don’t really actually make that much money selling gas. They make way more money selling oil. They have $640 billion in reserves. They could live without the gas for a few months. And that’s kind of why the US has had problems getting the Europeans on board with sanctions against existing flows from Europe.
In addition, Europe also has other options. They can go again to the United States, Azerbaijan or Israel and Europe.
Now there are about 2.9 million barrels at risk of oil exports that are exported from Russia to the United States and Europe, which is about 30% of their exports. And that would be much more catastrophic than, say, natural gas in the oil markets. But as far as oil flows through Ukraine, it’s very limited. Again, you can see the map.
TN: Okay.
TS: The second question.
AM: Sorry about that. I had a related question for you. How possible is it or how necessary do you think it would be for the Italians to take the initiative and become Europe’s energy hub?
TS: Actually, they really could with Greece. Right. And I’ve been talking about the Southern gas border for a very long time, which branches off, you could go Cypress into Greece and then you could go straight into Italy from the Southern gas corridor.
I think that region is really something you really want to keep an eye on right now. And I’ve kind of been talking about this for a couple of years right now because there’s just so much supply. And although people say that region is geopolitically unstable, so is everywhere. But that’s never really stopped oil and gas flows.
Personally, I think as an investor, I would be looking at that particular area of the world because they really have a lot of gas supply. And now we have pipelines built, and I think it’s more stable than, say, Ukraine, Azerbaijan, that have had a lot.
AM: You know what’s funny, though, Tracy, is every time the Libyans or Egyptians or whoever try to export gas and oil and whatnot, the Russian Wagner conveniently shows up.
TS: Conveniently shows up. Right. Exactly.
AM: Here we are, guys.
TS: Exactly. For the second question, as far as, I think that you were asking about gas flows, if Europe could restock. Absolutely. They can restock because of the things that, because of the alternative sources that I mentioned before, and we’re headed into a season that we don’t need as much. So I think that as we head into summer, it will not be as dire as the dead of winter.
TN: Very good. Okay. Thanks for that.
Sam, let’s look at some economic questions now. We’re looking at from @_0001337 probability of rate hikes and tightening now. We just let inflation run amok. When we see price controls. That’s one question. There’s another one, wondering how North America will go about continuing to grow consumerism, things like cuts on gas taxes, that sort of thing.
And there was another question about gold, which you covered a little bit at first from @Mercerandgrand looking at gold prices. So if you don’t mind, let’s talk a little bit about kind of Fed options now. Are we still expecting given the volatility, are still expecting the Fed to act in March? Are they going to continue to are they going to stop QE? Will they hike? Is QT still on the table for June?
SR: Yes, 25 is going to happen. They will end QE, and QT is still on the table, at least a runoff, not a sale. They’re not going to go over their skis here and start selling mortgage backs or do anything along those lines.
TN: Okay.
SR: But they will continue with their tightening path. I think the broader question here is just how far they actually can go this year. I do think that the limiting factor of highly volatile energy prices at the pump, which is something that monetary policy just can’t solve. Right.
Tightening 5100 basis points isn’t going to push the cost of oil down unless you somehow spark a recession or something. So I think it’s going to be interesting to see how their language evolves around future hikes. I think we kind of know that it’s 25 basis points. 50 is simply not priced in enough for them to do that.
And how we see and how they see monetary policy evolving, call it in the September and onward is going to be really important with the midterms coming up, et cetera. So I think that’s important.
On the consumer front, maybe you see call it a gas tax holiday or something along those lines to lower gas prices at the pump. That could happen. But generally the consumer is not in horrible shape. The consumer is not great, but it’s not in horrible shape. So I don’t really think they have to do much there. And I don’t see any point in buying gold here with the type of move you’ve seen over the past week. I think that if you had narratives that went from invasion of Ukraine to World War Three and you only got it to $2,000 and you couldn’t hold, I think that’s a little bit of a problem for the gold narrative.
TN: Sure. Okay, great. So let’s wrap it up and let’s start looking at the week ahead. What do you guys expect to see the week ahead? Albert, I guess we’ll start with you. Part of it is what do you expect to see on the ground in the week ahead in Ukraine? I expect that to impact markets.
AM: I think that we’re going to get a little bit more bloody, a little bit more daunting headlines. It’s going to affect the markets. I think we probably start shooting a little bit lower depending on how low we go. I think that’s going to make a big impact of what the fed does. I agree with Sam. I think it’s going to be 25 basis points. If the news is okay out of Ukraine, I think they even go 50 basis points.
TN: Wow. Okay. Tracy, what do you expect to see in the week ahead?
TS: I’m looking at the equity markets in particular. So just came out and global flows despite the fact that equities are coming off globally, we’re still seeing people pile into equities, right. We’re still seeing flows into equity markets.
So that to me says that the current situation with Ukraine in Russia is likely to be temporary and that perhaps the big funds and managers are thinking that we’re going to see less of a rate hike in March than most anticipate because they’re still selling bonds and they’re still buying equities.
TN: Okay. Interesting. Sam?
SR: I think you’re looking at a lot of chop here as we transition from as pointed out a moment ago, as you transition from Ukraine grabbing all the headlines to the Fed getting back in the headlines that’s going to be a choppy hand off. When the fed was in the headlines. It wasn’t exactly great for markets and a little bit of a relief rally here off of world war three going into.
TS: Sorry to interrupt. I think that’s a bit of a little bit of end of month rebalancing too, right? What we’re seeing right now.
TN: It could be. Yes, that’s right.
SR: Yeah. Definitely. But I think the hand off from Ukraine headlines back to the Fed headlines creates a lot of chop and probably some downside bias across asset classes or at least we’re assessing.
TN: Sounds like a very interesting week ahead, guys. Thank you. You so much. I really appreciate this. Have a great week ahead. Thank you.
This is the second episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week. Among the topics: industrial metals, energy markets, natural gas, China’s flood of liquidity and property market, CNY, and bond market.
TN: Hi, everyone, and thanks for joining us for The Week Ahead. My name is Tony Nash. We’re with Tracy Shuchart, Nick Glinsman, and Albert Marko. To talk about the markets over this past week and what we’ve expect to see next week. Before we get started, please subscribe to our YouTube channel so you don’t miss any of the upcoming episodes.
So, guys, this week we saw kind of a whipsaw in equity and commodity markets with a slow start, but a lot of action mid week. And commodities seem to kind of extend gains until the end of the week. We saw bonds really wait until Friday to start taking off, but they took off quite a bit today. And part of that may have been on the back of the retail sales print that we saw. That was pretty disappointing. So, Tracy, do you want to kick us off a little bit with talking about commodity markets and energy?
TS: Sure. I mean, obviously, we’ve seen a big push in the oil market. Right, in WTI and Brent this week. We’re definitely a bit overbought. But that said, what I think is happening here is we’re seeing a shift from sort of growth to value. I think the markets are pricing in the fact that OMA crime is over. Right. And the Fed may raise rates. That’s putting pressure on growth and giving kind of a boost to the value market. And we’re kind of seeing a chase here a little bit in the oil markets.
As far as if we look at the natural gas markets, it’s been very volatile this week, not only in the US, but global markets. I think that will continue. And we saw a big push up on Wednesday, and then we saw a big pullback, but that was due to weather. But now we’re looking at this weekend, we’re having another cold front. And part of that reason was also because we discovered that Germany had less natural gas in storage than initially thought. So that market, I definitely think it’s going to continue to be very volatile. So try lightly in that market there’s.
TN: You mentioned the Germany supply side of the market, but what does supplies look like, say in the US and other parts of Europe? Are supplies normal? Are they low? What is that dynamic?
TS: Yeah, we’re pretty much normal in the US, and we’re set to in this year. We’re set to pretty much overtake the market as far as the export market is concerned. That would mean taking over Australia and Qatar because of the amount that we’re building out in the delivery system in Texas. But the supplies here are okay. The problem is within the United States is that the distribution is uneven.
So you’re talking about the Northeast, where you’re seeing local natural gas prices a lot higher there. Then you’re seeing, say, in Henry Hub, which is the natural gas product that trade that you’re trading.
TN: So I saw some just to get a little bit specific on this. I saw some news today about some potential brownouts in, say, New York or something because of this winter storm. How prevalent will that be? Maybe not just say, this weekend going next week, but for the rest of the winter. Are the supply problems that extreme?
TS: Yeah, I think you’re going to have a lot of problems in the Northeast. And I’ve been alluding to this over the last few months saying that they have decided not to go ahead with pipelines. They’ve shut pipelines. They kind of cut off their supply because they don’t really want to pursue that Avenue anymore.
However, it’s turning out to be a particularly cold winter, and that’s a lot of pressure on that market. And that’s why we’re seeing $11 natural gas prices up in that area as opposed to $4 in Henry Hub.
TN: Right. Meantime, Albert’s warm down in Florida, right.
AM: Yeah. Well, I wanted to ask Tracy what happens if we have an extended winter where the winter temperatures go into late March or early April.
TS: Then that’s extremely bullish. That’ll be extremely bullish for domestic supplies because domestic supplies will be in higher demand than they are normally seasonally, especially at a time where we’re a giant exporter right now.
We just came to save the day in Europe with 52 now cargo. So we’re exporting a lot if we have an expanded winter here. Supplies are unevenly distributed. We’re going to see I think we’ll see higher prices in out months that we normally see a pullback in those markets.
TN: Great. Texas, thanks you for those cargo, by the way. We really appreciate it. Okay. What about the broader commodity complex? What are we seeing on, say, industrial metals and precious metals?
TS: So obviously, those have been very bullish are going to continue to be bullish because they’re in deficit. As far as if we’re talking about battery metals and such, I think we’ll continue to see that we’re seeing a little bit in the platinum markets. We’re seeing some demand. I think there’s going to be bigger demand this year.
TN: So we’ll show some platinum on screen here so our viewers can see kind of where the platinum price is and where it’s expected to go.
TS: Yeah. So platinum demands expected to grow because of the automobile markets and because of Palladium is so high they can substitute platinum for that. But that may be capped for the rest of the year, and then we may continue to see higher prices going into 2023.
TN: Okay. So when you say that’s growing because of automotive, is this growth in ice ice vehicles. Okay. And is that happening because and I don’t mean these leading questions, but is that happening because the chip shortage is alleviating and we’re having more manufacturing in ice vehicles?
TS: I mean, that’s part of it. But platinum is used for catalytic inverters Palladium. And because of the fact that there’s platinum happens to be a lot less expensive. Right now. And also there’s more of it right now. So we’re seeing kind of demand pulled to the platinum industry. And I’ve kind of been worrying about this for the last couple of years that this was going to happen.
And now we’re kind of seen that comes to fruition because it takes a couple of years to retool and everything to sort of switch that metal. So I think demand looks good right now for that. We may see it capped a little bit. That may go up again. But if we look at this chart, technically speaking, I would say anywhere between 1005 a 1010. If we kind of Zoom above that, then that market could go a lot higher.
TN: Right. So short term opportunities in platinum, medium term, not so much, but longer term back in.
TS: Yes.
TN: Okay, great. Now when you talk about industrial metals like copper and you say a lot is needed for batteries, these sorts of things, that’s a more medium, longer term term opportunity. Is that right?
TS: Absolutely. When you’re talking about things, I mean, we’re already seeing the nickel market, cobalt market, lithium market, aluminum markets all hitting new highs. Copper’s kind of waffling about. But that’s kind of more a marathon trade rather than a sprint trade, in my opinion. So I think we’re going to see more and more demand for that further out in the market. So it’s kind of a longer term investment.
TN: Okay, great. And then what about industrial metals demand in China? As we switch to talk about a China topic, are we seeing industrial metals demand rise in China, or is it still kind of stumbling along and it’s recovery.
TS: That is still kind of stumbling along. And so what I have said before try to emphasize is that I think a lot of these battery metals in particular demand is going to go going to be outside of China.
China won’t be the main driver of this demand anymore as the west policies want to change to EVs and greener technology. So I think you’re going to start seeing very much increased demand for the west. So China demand might not be as significant anymore in that particular area.
TN: Okay. So that’s interesting. You mentioned China demand, Dink and Albert, I’m interested in your view on that. We had the Fed come out last week and talk about tightening and reinforced some of that this week. What dynamic is necessary in China, if anything, for the Fed to start tightening?
AM: Well, I think first of all, Tony, China is going to have to stimulate. They’re starting to prioritize growth for the first time in a long time. They see the US in a bit in a little bit of trouble here with the Fed making policy errors. I don’t want to say heirs. We’re more about like throwing together against the wall and see what works. Right.
So China is trying to be the seesaw for the world’s finance sector. Money comes into the United States it goes out. Where is it going to go? It’s either Europe or China. Europe right now is a complete mess. So obviously you see that money going into China you will keep on leaning on businesses and look to control more than you should but they’re breaking up a lot of the old power structures and that’s actually bullish long term for China. We can debate many of these episodes that we’re doing now, Tony, about whether it’s a good or bad thing for the China power structure. But that’s for another day.
TN: Right. What kind of stimulus if we look at things like loan demand so we’ll put up that chart on loan demand. Can you talk us through can you talk us through the chart of what it means and what the PPO will likely do as a result of low demand or consumer credit? Sorry.
NG: Yeah, the credit impulse so that’s private sector lending as a percentage of GDP and that chart shows it may have based and that looks like what we’ve been hearing is that the PBOC has been encouraging the private sector to start extending credit into the system, particularly to find off the real estate market which is not a surprise.
My personal view and some of the people that I talked to on China is that’s just filling a hole. This is plugging holes or putting plasters on various holes. So what will be interesting is to see how that progresses further down the line along this year. I don’t think nothing’s going to happen before February 1, lunar new year and then you’re running into that plenum. Do they encourage that you’ve got the Olympics and then you’ve got the plenum? Do they encourage some sort of boost?
I don’t think there’s going to be much fiscal. I think there’s a reason for that. I think there’s a connection with the real estate sector. Real estate sector. As a source of great funding for the local governments.
TN: They spend fiscal on bailing out real estate already. Why would…
NG: You have to provide fiscal to the local governments just for the services?
TN: Right. So the central party meetings are in November, so there’s plenty of time between Lunar New Year and November to really tick off some monetary stimulus and get some feel good factor in, say, Q three or something. Is that what you’re thinking?
NG: There is a desire, as Albert rightly said, they are talking about the economy now, but it just feels like it’s one plug the bad, the big holes that have been appearing and they just keep appearing and now we’ve got Shamal. It just seems like it’s step by step plug every hole and then give a little bit of access to try and get the private credit rolling again.
AM: Tony, everybody is looking for a flood. When is the flood of liquidity going to come into China? Right. But that’s not going to happen until May or June until they see what the US Fed is going to do because nobody right now knows what the Fed is going to do.
Inflation is obviously a problem within China, specifically oil and other commodities, as Tracy was talking about. Their eyes are completely on the Fed. China will have to pop services sector as a real economy. It’s kind of a shambles there due to commodity prices and inflation.
The willingness is there to lend. There’s no question about that. But who wants property right now in China? They can force feed the economy via credit. But that’s inflationary also. So there’s another do move here within China. How do they boost their economy but still keep inflation down? Same thing the United States is going through. Okay.
TN: So let me give you a really simple trick here.
NG: Let’s not forget you’re seeing some majors. Shanghai now has Omikaron. Remember, China, supposedly, according to the World Health Organization, didn’t suffer the first route, but you got Dahlin is closed, Nimboa’s got problems now Shanghai, Shenzhen, and they’re worried it’s going to head up towards Beijing.
All these international flights to Hong Kong completely canceled. So that’s another problem if you extrapolate and equate it to what’s happened in the west whenever these outbreaks have occurred.
TN: Yeah, but I think the solution. Yeah, that’s a problem. I think everybody’s facing that and I think China is just very, very sensitive about that. We can come up with whatever kind of conspiracy theories we want about China, but I just really think that they’re very embarrassed by COVID and they’re trying to cover things up, not cover up, but they’re trying to offset the negative preconceptions globally by taking dramatic action at home. That’s my view.
TS: And they have Chinese New Year and the Olympics coming up, right?
TN: Yeah. And they’re being very careful about that now. My view for quite some time has been that they would keep the CNY strong until after Lunar New Year and after Lunar New Year, they could get some easy economic gains by weakening CNY just a bit. Is that fair?
AM: I think it’s fair. They don’t want the bottom to fall out of the economy. And the extent of their damage the extent of damage to the economy was pretty significant. So they’re going to have to pull off a few tricks. Like you said.
TN: It’s percentage wise, it’s a lot. But in reality, at 65667 CNY historically, it’s nothing compared to where that currency has been historically. And I think it’s pretty easy to devalue to that level. And I think they would get some real economic gain from that.
AM: Yeah. But again, it matters what the Feds are going to do with rate hikes. That’s the wild card.
NG: The devaluation not just look at the dollar, look at the CFA, because I think it pays them to value against the Euro more than the dollar.
TN: Yeah. Okay. We can have a long talk about the CFO’s basket at some point.
NG: My point is you got to look at the Euro CNY as well as the US, because I think that’s where they’ll go.
TN: Yeah. Okay. So does this present an opportunity for Chinese equities in the near term, or is it pushed off until Q two?
AM: I mean, from my perspective, I’ve been on Twitter saying that I’ve gotten into Chinese equities. They are de facto put on the US market, in my opinion. They don’t have the strength of the actual but does. But money has got to flow somewhere, and if it’s not going to the United States. It’s going to go to China.
TN: Okay. All right. Let’s move on to bonds. Okay. Nick, can you cover bonds and tell us are we on track? Are things happening as you expected? Do markets do bonds like what the Fed has been saying? What’s happening there?
NG: Well, the initial reaction after the testimony from Powell was you had a steadying and a slight rally in bond prices, slightly slower yields. But I thought today was fascinating because today we’ve across the York Cove. We’ve made new highs for the move, so we’re at the highest yield for the last year.
What was interesting is we had that disappointing retail sales. Okay. That would typically suggest if this Fed is sensitive on the economy, perhaps they won’t do much. Well, the bond market didn’t like that. So now you have what is typically good news for the bond market, creating a sell off. And that tells me that the bond market is beginning, especially with the yield curve. Stevening, the bond market is beginning to express more anything that suggests that the Fed doesn’t do what they’re talking about. The market wants to see action. Not words.
TN: We’re getting punished for now.
NG: And what’s interesting is if you think a little bit further forward, if the Fed does hold back and isn’t as aggressive as some of the governors have been suggesting, three to four hikes I didn’t think Ms. Bond Mark is going to like that.
TN: Or Jamie Diamond saying eleven heights.
AM: Jamie diamond is nothing that comes out of his mouth should be taken at face value. Him knocking the 30 year bonds down today, he’s just setting himself up to buy. I mean, the guys he talks his book always has.
TN: Hey, before we move on, before we move on to talking about next week, we did get a question from Twitter from @garyhaubold “Does the FOMC raise rates at the March meeting? And how much does the S&P500 have to decline before they employ the Powell put and walk back their lofty tapering and tightening goals” in 20 seconds or less going, Albert? Oh, 20 seconds or less.
AM: Well, the market needs to get down to at least the 4400, if not the 43 hundreds. That’s got to be done in a violent manner. And it has to put pressure on Congress to do it. And they can’t raise rates unless they get at least $2 trillion in stimulus.
NG: And also don’t forget the Cr expires on February 18. So we could be in the midst of a fiscal cliff.
TN: February 18. Okay. We’ll all be sitting at the edge of our seat waiting for that. Okay. So week ahead, what do you guys think? Albert, what are you seeing next week?
AM: Opec pump for Tuesday and then Biden dump for Wednesday as they set up a build back better push in Congress, along with probably a hybrid stimulus bill to try to get to that $2 trillion Mark. Otherwise, they got no fiscal and this market is going to be in some serious trouble.
TN: Okay. Can they do it? Can they do some sort of BBB hybrid?
AM: Yeah, they can do it. They can get ten Republicans on board as long as there’s a small business, small and medium sized business stimulus program. Okay. They’ll get that.
TN: And if they do market react and you say that’s $2 trillion. You say that’s…
AM: They need a minimum of 2 trillion to be able to even think about raising rates in March.
TN: Okay. And Nick, how does it matter?
AM: This is dependent on how bad inflation actually gets, because if we get an 8% print of inflation next month. Then everything is on the table.
TN: So can you say that you cut out just a little bit if we get what, an 8% print?
AM: If we get an 8% print on CPI the next time around and anything is on the table.
NG: Okay. I think what was happening with the bond market basically is it’s beginning to look a little bit longer term. And I’ve had this conversation, the big traders, the big fund managers are sitting there thinking, okay, look at crude oil now, 85 on Brent. Energy price is crazy in Europe.
That’s going to feed through from the wholesale level all the way through to the consumer via manufacturing goods, via the housing market, via service industries. Starbucks has to charge some more because they’ve got a much bigger overhead.
TN: Netflix just raised their prices by a buck 50 or $2 a month or something.
TS: Filters down to everything. Energy runs the world, right? So that’s going to higher energy prices are going to factor into literally everything you do.
NG: And my personal view, I think that sort of works is in sync with Tracy. I think crude goes a lot higher. I think this year we could see north of 100, perhaps as high as 120. This all feeds through, right? So the point is the bond market there’s a lot of conversations on a longer term plane right now. And the bond market is an expression if it’s higher yields, yield curves deepening.
Anything that says that the fed is hesitant, I think you get sent off. I think that’s why we sold off. We should have been running on week retail sales.
TN: Okay, Nick. Sorry. If we do get a $2 trillion bill, what’s going to happen with bonds?
NG: They’ll be sold.
TN: They’ll be sold. Okay. So they’re going to punish the fed if we get fiscal?
NG: They’ll punish the fiscal fed to start acting and acting in short order. And I remain unconvinced. We’ve only heard words. We got to see the action. They’re still doing. Qe. Right? It’s absurd.
TN: Yes. We’re going to keep the flow going over here, but we’re going to raise interest rates over here. I’m not sure I get it. There’s been that disconnect ever since they announced this in December.
Okay, guys. Thank you very much. We’ve hit our time. Have a great week ahead and we’ll see you next week. Thank you very much.
In the wake of the financial system’s cash glut and collateral shortage from the Fed’s quantitative easing program, the Secured Overnight Financing Rate drops to 0.04% from 0.05% on Monday, the first decline since October.
Even with asset purchase tapering underway, “it’s largely the same set of circumstances as in October,” TD Securities Strategist Gennadiy Goldberg told Bloomberg. “Lots of cash in the system and not a lot of collateral and that’s weighing down repo.”
Meanwhile, U.S. commercial banks park yet another record $1.75T at the Fed’s overnight repo facility, implying the banks are drowning in excess reserves, while searching for yield – which is scarce as most of the Treasury yield curve trades in net negative territory on an inflation-adjusted basis.
There’s an “incredibly large amount of cash sloshing the market,” said Complete Intelligence Founder Tony Nash via Twitter.
In August, the Fed’s overnight repo facility took up more than $1T.
This QuickHit episode is joined by central bank and monetary policy expert Brent Johnson. He talks about inflationists versus deflationists and what makes these camps different in a time of a pandemic. What’s monetary velocity? And why banks are failing at their job, and why they’re not lending anymore money? Also discussed China and when supply chain issues will be resolved.
Brent Johnson is the CEO and founder of Santiago Capital, a wealth management firm. He works with about a dozen different families and individuals customizing wealth management solutions for them. He does that through a combination of separately managed accounts and private funds, also invest in outside deals, private deals, venture capital funds, and others. Brent have a focus on macro and loves the big picture.
📊 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.
This QuickHit episode was recorded on September 28, 2021.
The views and opinions expressed in this Cause and Effect: Are you a deflationist or an inflationist? 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: Part of the reason we’re having this discussion. And is you posted something on Twitter a few weeks ago and I’m going to quote it and we’re going to put it up on screen. You said if you believe an additional QE is on the way, you are secretly a deflationist. If you believe in the taper, you are secretly in the inflation camp. Cause and effect. And I thought it was super interesting. Can you kind of talk through that with us and help us understand what you mean by that?
BJ: Sure. And before I get into that, I’m just going to take a step back because a lot of work I’ve done, a lot of the work I’ve done publicly and put out publicly over the last 10 to 12 years has really been about the design of the monetary system, how it works, how fund flows, you know, this currency versus that currency, what central banks do, etc. Etc.
And this is really a follow on from that and what I was, the point I was trying to get across in this particular tweet is that central banks are a reactive agency. They are not the cause. They are the effect. Now their policies can cause things to happen, but they are reacting to what they see in the market.
And so my point was if you think more QE is coming, then you believe they are going to be reacting to the deflationary forces that still exist in the economy. And so if they were to step back and do nothing, you would have massive deflation.
Now, the flip side of that is if you think that they’re going to taper and you think they’re going to pull away stimulus, then you’re actually an inflationist because you believe inflation is here, it’s going to remain. Prices are going to continue to rise. And the Fed is going to have to step back in reaction to those steadily higher prices.
And so I really get this across because I think there’s a huge battle between the people who believe deflation is next and the people who believe inflation is next. And I think it’s a fantastic debate because I’m not certain which one to come. I kind of get labeled into the deflationary camp, which I don’t mind for a few reasons. But I actually understand all the reasons that the inflationary arguments are being made. And I believe it was a few additional things happen. Then we could get into this sustained inflation. But until those things happen, I’m happy to be labeled into the deflationary camp. So I hope that makes sense.
TN: Yeah. So pull this apart for me. Inflation is ever and always a monetary function. Right. We hear that all the time. Of course, it’s hard to say something “always” is. But people love to quote that. And I think they misapply it in many cases. And I’ve seen that you’ve kind of pushed back on some people in some cases. So can you talk us through that and is this time different? Like, what are the considerations around inflation this time?
BJ: Yeah. So is this a perfect way to set this up because again, I understand the argument that those in the inflationary camp are making. And it would be hard to sit here and say we haven’t seen inflationary effects for the last twelve months. Prices have risen. Regardless of why or whatever prices have gone up. So I’m not going to sit here and deny that we’ve had inflationary pressures.
The question is what comes next. And I think what I would say with regard to the quote that you were just making, I think that was, I can’t remember who said it now, but it’s 50 or 60 years ago. And what I think was assumed in that quote was that monetary velocity is constant. And so you’ve seen these huge rises in the monetary base. But not just the United States, but Canada, Europe, South America, China and Japan.
And so the thought is that with that new money in the system, you’re naturally going to have inflation. But I think Lacy Hunt, who a fellow Texan of yours, does a fantastic job of showing, had the rate of monetary velocity stay the same. That is absolutely the case. But the reality is monetary velocity kind of took a nose dive starting about 20 years ago, and it just continued to lower and lower and lower.
TN: And it’s been negative, right, for the past couple years?
BJ: Yeah. It just continues to fall. And I think the rule is…
TN: Let me just stop you right there. “Negative velocity of money.” What does that mean?
BJ: What it essentially means is that new credit is not being created. And so the system is contracting. And this is really the key to it all. It’s the key to the way the monetary system is designed. It’s the key to the way it functions. And it’s the key to whether we’re going to have inflation or deflation next.
Because I do agree with the money, the inflation is always and everywhere, a monetary phenomenon, assuming that velocity is constant. But velocity isn’t constant. And it’s because of the way the monetary system is designed. And it’s because of the way that the Fed and other central banks have been providing stimulus.
Probably don’t have time to get into all the details of what a bank reserve is and whether it is or whether it isn’t money. But essentially what the central banks have been doing, especially the Fed, is re collateralizing the system. Now re collateralizing the system isn’t exactly the same thing as actually handing somebody else physical money. It sort of is, but it sort of isn’t. And it leads to this big debate on whether they’re actually printing money or not. It’s my argument that the Fed has been re collateralized the system and that has kept prices from continue to fall.
But in order to get this sustained inflation, I keep saying sustained inflation because I don’t want to deny, but we’ve had it. But to have it continue going higher, especially at the rate we’ve seen would require one of two things. Either the Congress has to come out and agree to spend another seven or $8 trillion, which this week is showing, it’s very hard to get them to agree to do that. They can’t even agree on 3.5 trillion and let alone another 6 to 7. Or the banks have to start lending. And the banks simply are not lending.
They lent last year because the loans that the banks made were guaranteed by the government. These were the PPP loans that everybody got.
TN: So. What you’re saying, it sounds to me, and correct me, what you’re essentially saying is that banks are failing as a transmission mechanism. So the government has had to become the transmission mechanism because banks aren’t doing what their job should be. Is that true?
BJ: That’s a very good way of putting it.
TN: Why? Why are banks not the transmission mechanism that they should be?
BJ: Well, they have the potential to be. And that’s what I say. The Fed has provided the banks all the kindling for lack of a better word, all the starter fuel to create this inflationary storm. But the banks haven’t done it. I would argue. Now there’s people to disagree with me. But I would argue that they don’t want to make a loan because believe it or not, banks don’t want to rely on getting bailed out, and they don’t want to make a loan where they are not going to get their money back.
Now, if you’re in an environment where businesses have been shut down either because of the pandemic or because of other laws or because of regulations that can’t afford all the regulations, whatever it is, you know, it’s hard to loan somebody a million dollars if you don’t know that their business is even going to be open the next day. Right.
So banks aren’t in the business of going out and making a loan and having and default on them. They want to get their money back. And I think that they would rather go out and buy a treasury bond that’s yielded one and a half percentage, than make a loan that pays them, three or four of them might go bad. Right.
TN: Okay.
BJ: So to me, that’s indicative of the deflationary forces that the banks who are closer to the money than anybody else, and typically the people that are close to money understand the money or benefit from the money the most, they are telling me from by their actions, maybe not their words, but their actions are telling me they don’t think this is a great investment.
TN: Yeah. I think we could talk about that point for, like, 20 minutes. So let’s switch to something else. So what you didn’t really mention is the supply side of the market in terms of inflation, meaning supply chain issues, these sorts of things. Right.
And so I want to focus a little bit on China. Now, there’s a lot happening in China, and I want to understand how that impacts your worldview.
In China, we’ve got the crypto regulation that’s come in. And the clampdown in crypto. We have a strong CNY, like an unusually strong CNY over the last six or nine months. We have the power supply issues. We have the supply chain issues. That’s a lot happening all at one time, at a time when a lot of people believe there’s kind of China has this clear path to ascendency, but I think they have a lot of headwinds, right. Of those kind of how are you thinking about those factors? The crypto factor, the supply chain factor, the power factor? How are you thinking about that stuff?
BJ: So I think about this a lot first of all. I mean, this is a probably, like it or not, for better force, the China-United States dynamic is probably one of the biggest macro drivers for the next ten or 20 years. It most likely will be. There’s nothing is guaranteed. But that’s probably a pretty safe bet that that’s going to be one of the main drivers. And so I think what you’re touching on as far as the supply chain, in my opinion, that is as big a driver as the “money printing” for the inflationary effects that we’ve seen for the last year.
You know, if you look at the efficiency with which the single global supply chain that Xi call it from 1990 to 2018 or 19, it’s pretty amazing, right. There’s one global supply chain, just in time inventory, you can predict with a very high level of certainty when you would get those things you ordered and at what price. But then with a combination of the US and Chinese antagonism and COVID, the supply chains are broke. And that makes it harder to get those supplies. And the timing of when you get them in the price, which you get to miss completely unknown or its delay, and the prices are higher.
And so I think that has led to a lot of the price pressure on commodities. Now, part of the reason that the decreasing supply push prices up was that demand stayed flat or went up it a little bit. And I think the reason it went up is a lot of people believe that the Fed would print enough money to cause demand to stay, solid and that China was growing and that they would continue. China has been the growth driver for the global economy for years and years. And I think a lot of people thought that China would continue to be that growth driver for these commodities and these other goods that were needed. And so if demand stays flat arise and supply gets cut, then price rises.
Now, I don’t think that China growing and ascending to economic hegemony or however you want to describe it is a given. I think they have more troubles internally than they would like to admit. And I think we’re starting to see that, with the Evergrande, real estate daisy chain of credit extension. You know, if you think that the US has a credit problem, take a look at China, they do as well. And it’s manifested itself nowhere more visibly than in the real estate market there and Evergrande.
Now, the problem is if they cannot send that credit contraction that is currently taking place in the Chinese market from a real estate perspective, then demand is not going to stay cloud. Demand is must start to fall, and demand starts to fall and some of those supply chain logistics start to get ironed out. Now, they’re not going to get fixed overnight. It’s not going to go back to the way it was 18 months ago. But if it even gets a little bit better and demand starts to fall, well, then you could have a move down in commodity prices and then move down in growth expectations.
And that is the way deflationary pressures could take whole. And as those prices start to come down, then you get more credit contraction. It becomes a vicious cycle both to the upside and to the downside. But based on the design of the monetary and I don’t need to keep harping on this. But based on the design of the monetary system, it is literally the stair step up in the elevator shut down. That’s just the way it’s designed. It’s an inherently inflationary system that it has to grow. Or if it doesn’t grow, then it crashes. And crash has always happened faster and steeper than the stairstep higher.
TN: They take longer, but steeper on the way up. Right.
BJ: That’s right. That’s right.
TN: Okay. So in terms of the supply chain issues, okay. I’m just curious, is this something that you think is going to resolve itself in three or six months? Do you think it’s something that’s with us for three years or what was I feeling out of this?
BJ: Some of it is gonna resolve itself in three or six months? And I think that will be a combination of just working out the kinks and demand falling. Right. I think that will help. But I don’t think it’s all going to get fixed in three to six months, and I think it might take three to six years to get the other part of it. And this is where I have to actually say that in the past, I’ve been somewhat critical of the people who called for stagflation because I kind of felt the top out, right? You couldn’t decide. So you just go down the middle.
But I actually think that that’s a very likely scenario. I think some things are going to inflate and some things are going to deflate and we’re going to have this kind of the stagflationary environment. I think the central banks are going to do everything they can to kind of offset those deflationary pressures. And in some cases, it will work. In some cases, they won’t. But the global debt, the amount of global debt and the global dollar… Is so big that deflationary scare, in my opinion, is always going to be there. And in my opinion, you can’t ignore it.
A lot of people just think, oh, don’t worry about it. Central banks, have you back. There’s a Fed put, don’t need to worry about it. I understand that argument, but I don’t think it’s correct. I think you do have to worry about it.
TN: Yes, I think that’s right. Brent, I would love to talk to you for another couple of hours. I think we could do it. And I’d love to revisit this in a few months. Thank you so much for your time for everyone watching. If you wouldn’t mind following us on YouTube and subscribing, we’d really appreciate that. That helps us get up to where we can promote more and other things. And, Brent, I really appreciate your time and really appreciate this conversation. Thank you very much.
Geopolitics experts Albert Marko and Nick Glinsman are back on QuickHit for a discussion on the Federal Reserve, the ECB, and central banks. What are they thinking right now?
Albert Marko advises financial firms and some high net worth individuals on how politics works in D.C.. He worked with congressional members and their staff for the past 15 to 20 years. In his words, Albert basically is a tour guide for them to figure out how to invest their money.
Nick Glinsman is the co-founder and CIO of EVO Capital LLC. He does a lot of writing and some portfolio management. He was a macro portfolio manager in one of the big micro funds in London for quite a few years. Prior to that, Nick was with Salomon Brothers. Now, he concentrates on providing key intel, both economics and politics on a global level to finance managers and politicos.
📊 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.
This QuickHit episode was recorded on July 29, 2021.
The views and opinions expressed in this The Fed & ECB Playbooks: What are they thinking right now? (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: Today we’re talking about central banks and given where we are in “the cycle”, whatever that means at this point, post or late Covid, we’ve had waves of support coming from finance ministries and treasuries and central banks around the world. Central banks seem to be in a very weird position right now. So I’d really love to understand your point of view particularly what the Fed and the ECB thinking about right now and what are some of the biggest dilemmas they have? Nick, if you want to go first and frame that out a little bit and then Albert, will obviously go to you.
NG: Well, given how long I’ve been doing this, I’m more of a traditional, black coated central bank watcher. And I would say a couple of key comments to make right now is I think they’ve lost their independence to a large extent. Harder for the ECB to lose its independence. But with the commission, you have that loss.
I also think that we are, defective monetary financing. And again, I’ll go back to the ECB, who literally for the last month, for everything that was issued in Europe and this reluctance by the Fed to, even they admit talking about talking about tapering, but this reluctance to even consider a pullback on the mortgage-backed securities. The jest, pretty much the same, and it’s very clear with a lot of the actions that I’m in, my interpretation is, one, they’re working in cahoots with the political arm.
So treasury in the US, commission in Europe. Bank of England is a slight exception about to happen, but we can cover that later. So that’s clearly going on. And I think now Albert might do a lot of work together and I think this Albert came out with a comment a while back saying Yellen wants six trillion dollars fiscal. And the excuse that was given, aside from the political bias, was the Treasury market needs it.
And interesting enough, we saw the change to the Repos yesterday. This was after criticism by a committee that was published in the F.T. yesterday. And even Bill Dudley’s commented on Today suggesting that a lot more work needs to be done to ensure that the normal functioning of the plumbing behind the form of safe assets.
So it’s clear to me that things are being worked on in a politically coordinated way that impacts monetary policy. Now, I think they’ve got themselves into an economic or policy black hole. I think the mind set, and it’s been like this since probably ’08, which is they’re not prepared to accept the economic cycle anymore.
So back to one of my previous appearances on on your pod, the Fed not doing anything? Yeah, it seems to me that that’s an acceptable process, regardless of inflation is way above their forecast. And forecasting that’s a whole ‘nother bad area for the… Fed’s forecasts are terribly wrong. The ECB’s forecasts have been wrong for, you know, since time immemorial.
The ECB is more dangerous because they have a bias that keeps them on their policy’s wreck.
TN: So first on forecasts, if any central bankers are watching, I can help you with that. Second, when you say they don’t believe in the business cycle anymore, do you mean the central banks or do you mean the political folks?
NG: The central banks and government. I mean, funnily enough, I’m reading a biography on Jim Baker right now. And when you look at Reagan, when he came in and Volcker, economic data was pretty bad back at the beginning of the 80s. That. No way, no politician is prepared to accept that anymore. To be honest, I think the central bankers are prepared to accept that anymore. Any of the people leading the central banks being political appointees, of course.
TN: So this is kind of beyond a Keynesian point of view, because even Keynesians believed in a business cycle, right?
NG: It’s a traditional Keynesian point of view. The modern day, neo Keynesian, yes, you’re right. Way beyond what they’re thinking.
TN: There’s a lot of detail in that, and I think we could spend an hour talking about every third thing you said there. So I really do appreciate that. Albert. Can you tell us both Fed and ECB, what are they thinking about right now? What are the trade offs? What are the fears they have?
AM: We’ll start with the ECB. The ECB is not even a junior player right now in the central bank world. I know people want to look at the EU and say, oh, it’s a massive trading bloc, so and so. But the fact is, that it’s completely insolvent. Besides the Germans and maybe the French in some sectors, there’s nothing else in Europe that’s even worth looking at at the moment.
As for the ECB’s standpoint, you know, they’re still powerless. I mean, the Federal Reserve makes all the policy. They first will talk to the Anglosphere banks that are on the dollar standard basically. I mean, the Pound and the Australian dollar and whatnot. They’re just Euro Dollar tentacles. But, for the ECB, they’re frustrated right now because they see that the Euro keeps going up and their export driving market is just taking a battering at the moment. But they can’t do anything because the Fed goes and buys Euros on the open market to drop the price of the Dollar to promote the equities in the United States. And that’s just happening right now.
When it comes to the Fed, we have to look at what is the Fed, right? Normally what everyone is taught in school is that they are an independent entity that looks over the market and so on and so forth. Right. But these guys are political appointees. These guys have money and donors. They play with both political parties. Right now, the Democrats have complete control of the Federal Reserve. And everyone wants to look at Jerome Powell as the Fed chair, but I’ve said this multiple times on Twitter, the real Fed chair is Larry Fink. He’s got Powell’s portfolio under management of BlackRock. He’s the one making all the moves on the market, with the market makers and coordinating things behind the scenes. He’s the guy to look at, not Jerome Powell.
I mean, have anyone even watched Jerome Powell’s speech yesterday? It was appalling. He was overly dovish. That’s the script that he was written. He’s not the smart guy in this playing field, in this battleground.
TN: He needs a media training, actually. I think.
AM: He’s being set up to be scapegoated for a crash. He’s just no one to show. He’s a Trump appointee. So next time there’s a crash, whether it’s one week from now or one month from now, it’s going to be pointed on him that, you know, he’s the Fed chair. Look at the Fed chair. Don’t look at everything else that the political guys have made and policies in the past four or five years that have absolutely just decimated the real economy.
TN: This time reminds me, and I’m not a huge historian of the Fed, but it really reminds me of the of the Nixon era Fed where Nixon and his Fed chair had differences and they were known, and then the Fed chair ended up capitulating to do whatever Nixon wanted to get back in his good graces. Does that sound about right?
AM: No, that’s a perfect example. I mean, this idea that’s floated around by economists that economics and politics are separate entities is absolute fantasy. And it just it doesn’t exist in the real world.
NG: Just to pop in on this one because actually there is a new book out which I started three days at Camp David. Because it’s coming up to 50 years since that decision of the gold standard. Now, it’s just interesting you brought it up, because if you think of one of the rationales for coming off the gold standard, there’s several, but one that struck me as I was reading actually the review, the back cover show Percy.
This enables the government to stop printing in terms of fiscal, fiscal, fiscal. That’s what it did in effect. First of all, that’s one of the biggest arguments against people who argue for a return to the gold standard because that would decimate things or cryptos being in a limited supply of crypto as the new reserve currency because the gain that would be pulling against the elastic and you wouldn’t get, the economy would just boom. Right.
So that’s where I think it’s just huge, you know. I’ve always said that actually what we have is what we’re going to ultimately see is exactly the same cost that came with Lyndon Johnson paying for the Vietnam War, Covid. And then the Great Society, which is Joe Biden’s what I call social infrastructure and green ghost plan. So. Going back to that, Nixon was paying part of the price for all of that. With Volcke right. So I actually sit there thinking, well. There are similarities right now, and we’re seeing effectively a central bank and the Treasury, wherever you want to look, untethered from what used to be, well before I started in this business, to be part of the discipline. But even when they came off the gold standard, there was discipline. As you referred earlier, to, traditional Keynesians believed in the economic cycle of boom, bust. You know, boom, you tap the brakes a little bit, take the punch all the way. That’s gone.
That is to me what’s gone on recently, I don’t know whether you would say since the 08 or more recently is the equivalent of that ’73 meeting where they came off the gold standard. People just said no more cycles. Tapping the brakes and now the central banks are in a hole and politicized, they’re not independent because there are no.
AM: Yeah, yeah, that that’s real quick, Tony. That’s exactly right. I mean, even like, you know, I was on Twitter saying we’re going to go to 4400. We’re going to go to 4400 and people are like “No way. We’re in a bear market. This thing’s going back down 37, whatever charts and whatever Bollinger bands they want to look at. But the fact is because of the politics has a necessity to pump the market and then crash it to pass more stimulus packages. The only way was to go up to 4400 plus, right.
TN: Right. OK, now, with all of that in mind, Nick, you did a piece recently about the Fed and housing and some of the trade offs that they’re looking out looking at with regard to the housing market. Now, housing is an issue in Australia. It’s an issue in the UK. It’s an issue in the US and other places. Can you walk us through a little bit of your kind of reasoning and what you were thinking about with regard to the Fed and housing?
WASHINGTON — The former U.S. Secretary of the Navy and former Senator Jim Webb recently issued an article in which he put forward an interesting proposal in which he called on the Biden administration to launch the “American version of the Belt and Road Initiative” to counter China’s influence in the world. Weber believes that the United States can do better than China. This proposal has sparked a lot of debate. Some scholars believe that the United States encourages free competition and that the “Belt and Road” initiative is not the way the United States does things.
Weber published an article in the Wall Street Journal on February 17 advising the Biden administration to consider launching the “US version of the Belt and Road.” “China invests in large-scale infrastructure projects all over the world to increase its influence, and the United States can do the same,” he said.
Weber pointed out that as an important part of China’s global strategy for hegemony, the Chinese government has established economic and diplomatic ties with developing countries in Asia, Africa and Latin America through the “One Belt, One Road” project, and conducted military infiltration on the grounds of protecting the interests of these projects. However, public discussions in the United States have not paid enough attention to this.
Weber believes that the Chinese government’s escalating military, diplomatic provocations and human rights persecution in recent years have made many developing countries hesitate to participate in the Belt and Road Initiative. He called on the Biden administration to seize this opportunity and begin to attach importance to the “often neglected countries” in U.S. foreign policy, and to give these regions the opportunity to choose the U.S. in order to counter China’s influence and prevent the world system from being coerced by authoritarianism. This is conducive to the “diplomatic and economic health” of the United States.
“This is not a doomed career, but an unrecognized opportunity,” Weber said.
Weber proposed that the Biden administration implement a comprehensive and coordinated policy in Asia, Africa and Latin America, integrating thoughtful diplomacy, security commitments, and project investment and participation by the American business community to fill the vacuum.
Weber also believes that the United States can do better than China. “The U.S.’s major investment in this—without colonial motives and based on a more credible and more time-tested business model—will forcefully start developing economies, and at the same time boost the U.S. economy, and inspire further progress in a global free society. Pre-development,” Weber said.
The United States encourages free competition, “One Belt One Road” is not our way of doing things
As soon as the article came out, supporters called Weber a “visionary pragmatist”, and the United States urgently needed to implement it, and it was not too late. Jose Manuel, a student of international relations at King Juan Carlos University in Spain, said on Twitter: “If the United States wants to prevent China from winning the title of world superpower, it will be able to retaliate and support the Asian and African countries. Investment projects in Latin America.”
However, American liberal economists urged that the United States should not follow China in its competition with China.
Tony Nash, founder of the data analysis company Complete Intelligence, told VOA: “The Belt and Road Initiative or the Made in China 2025, this is not an American way of doing things.”
Nash believes that the best way for the United States to deal with competition among major powers is to encourage free competition. The United States’ world influence should come from an international system that advocates transparency and free competition.
On February 23, John Tamny, editor of RealClearMarkets, a US economic news website, pointed out that “the influence of the United States is freedom.” He believes that projects such as the “Belt and Road” highly dependent on government regulation will only waste huge amounts of resources. , And damage the United States’ world image of advocating free competition.
In an interview with VOA, Michael Kugelman, director of Asian projects at the Wilson Center in Washington think tank, said that the United States’ number one strategic competitor, China, is exerting its influence on a global scale through the Belt and Road Initiative. It is true that the United States has increased its investment in overseas infrastructure projects. There is strategic value, but now is not the time. Currently, the focus of the Biden administration is to revitalize the US economy.
However, Joyce Mao, a professor of history at Middlebury College in Vermont and an expert on U.S.-Asia relations, supports the United States’ overseas infrastructure investment. She told the Voice of America that the US foreign policy that integrates mature diplomacy and strategic intervention is inseparable from the domestic development of the United States. But she also pointed out that it is a challenge to obtain sufficient American public support and bipartisan consensus on this point.
Whether the proposal can be supported by the American public
Henry Blodget, the founder of the news website Business Insider, said on Twitter: “Good idea, but the United States has not yet reached an agreement on investment in domestic infrastructure.” Independent media “Chinese “Non-projects” also said on Twitter: “U.S. taxpayers’ own roads, bridges, and airports are in a state of disrepair. It is hard to imagine that they will support huge investments in infrastructure construction in developing countries to compete with China.”
Nash of Complete Intelligence believes that the American public cannot accept spending trillions of dollars on overseas projects right now. Under the impact of the epidemic, there are too many places to spend money in the United States. If the US government spends money and energy on this knot to form a global infrastructure investment plan, it will certainly make many taxpayers angry.
Kugelman of the Wilson Center said that the top priority of the Biden administration is obviously to restart the motor of the US domestic economy. Investment in overseas infrastructure is a strategic issue worth considering in the future, but at least it will have to wait a few more months. “If you do this at the same time, Two things become a situation where you have to keep the cake and eat the cake,” Kugelman said.
“People who are struggling in the’rust zone’ due to industrial decline will not have a good response if they hear that their government will launch such a huge plan to develop infrastructure projects thousands of miles away,” Kugelman said.
Professor Mao of Mingde College said that Weber’s proposal while the U.S. economy is still trapped by the epidemic is worthy of scrutiny. She pointed out that there are many debates about where the health and well-being of the American economy come from. This has always been a classic political issue that has divided opinions between conservatives and liberals in the United States. At this special moment of the epidemic, this disagreement focuses on what kind of economic plan is the one that will enable the United States to recover from the epidemic.
Weber said in the article that US investment in infrastructure projects in developing countries not only helps to counter China, but also benefits the US economy. But Professor Mao pointed out that Weber’s proposal seems to “assume that most Americans can understand and agree that the future of the US economy depends on the existence of internationalism and interventionism”, but the reality is not the case. She said that although there is a lot of political support in the United States, especially within the Republican conservatives, in the fight against China, investing in large-scale overseas infrastructure projects may not be consistent with their political priorities.
“What benefits will the U.S. version of the Belt and Road Initiative bring to ordinary U.S. citizens? How will employment opportunities be realized? To what extent can it help develop overseas markets and other resources for U.S. goods?” Professor Mao believes that this proposal is necessary Get enough support. These are the basic questions that need to be answered to the American public and policymakers.
Kugelman: There are ready-made investment frameworks available
Kugelman pointed out that although a large-scale plan such as the “US version of the Belt and Road” should first give way to the restoration of the domestic economy, Biden’s policy can make good use of the relevant institutions and tools that have been established during the Trump administration to implement Related investment commitments.
In 2018, Trump signed the “Good Use of Investment Guidance and Development Act” (referred to as the BUILD Act), which merged the Overseas Private Investment Corporation (OPIC) and the Development Credit Administration (DCA) under the United States Agency for International Development (USAID) to form a new establishment The United States International Development Finance Corporation (IDFC) was established to enhance the United States’ international development financing capabilities, and expanded financing and financing tools to coordinate and promote the participation of the U.S. private sector in the economic construction of developing countries.
Under the “Free and Open Indo-Pacific Policy”, the Trump administration signed a memorandum of cooperation on a trilateral infrastructure investment partnership with Japan and Australia in 2018 to jointly encourage and support domestic private companies to build high-tech projects in the Indo-Pacific region that meet international standards. Quality infrastructure construction project.
In 2019, the United States, Japan and Australia jointly launched the Blue Dot Network (Blue Dot Network) to counter China’s “One Belt One Road” initiative in Asia. The plan unites the government, enterprises and civil society to evaluate and certify infrastructure projects under “common standards” to promote high-quality projects for sustainable development.
David Dollar and Jonathan Stromseth, fellows of the Brookings Institution’s China Program, also called on the Biden administration to implement a series of infrastructure investment commitments in Southeast Asia during the Trump administration. They pointed out that nearly 42,000 U.S. companies export products to 10 member states of the Association of Southeast Asian Nations (ASEAN), supporting approximately 600,000 jobs in the U.S. However, the U.S.’s economic position in the region is facing the erosion of China, and Southeast Asia has become Beijing. A hotbed of strategic competition with Washington.
Nash: Government-supported projects shouldn’t be a way of American competition
Nash, who had provided consulting and assistance to China’s National Development and Reform Commission on the “Belt and Road” project, told VOA that China’s “Belt and Road” operation principle is to transfer funds from banks that carry out overseas business in China to China, which invests in infrastructure projects around the world. Among state-owned and semi-state-owned entities, it is a way of financing overseas and domestic debt. Although the United States also has international financing institutions such as the International Development Finance Corporation (IDFC), its scale of operation is unlikely to support large overseas investment projects such as China’s “One Belt, One Road” initiative. In addition, China can provide loans with negative interest rates for certain projects, but US financial institutions that have always focused on risk management standards are unlikely to do so.
Nash also said that the best way for the United States to compete among major powers is to compete freely. Whether it is China’s “One Belt, One Road” or “Made in China 2025” industrial policy, it should not be the way the United States follows. These projects are highly dependent on the role of the government, and the government has invested heavily to support the technology industry or support domestic companies to invest in overseas projects. Doing so may nourish a group of companies and industries whose actual competitiveness is not up to the standard.
“The best way is to let American construction companies and infrastructure companies go out to compete for projects. If they can’t compete, then they should fail because they are not competitive enough,” Nash said.
At a seminar last month, Clyde Prestowitz, a well-known American expert on globalization and Asian issues and director of the Institute for Economic Strategy, said that the Biden administration should have a far-reaching industrial policy. “China has their Made in China 2025, and we should have our Made in America 2025,” he said.
Nash believes that the way for the United States and China to maintain influence and leadership on a global scale is to uphold the values of transparency and free competition. He believes that the United States previously required NATO allies to be open and transparent in defense spending as a manifestation of leadership.
He believes that the United States should also continue to pursue transparency against government subsidies and non-tariff barriers, so as to ensure that the World Trade Organization can effectively perform inspections in this area, so that the world can see how the industries of various countries are protected. of. At the same time, the United States should also call on the international community to pursue transparency in foreign aid. Where does the money go?
“The United States has come forward to demand transparency in multilateral organizations, transparency in foreign aid, and a free competition environment for international bidding for infrastructure projects. This is the best way for the United States to demonstrate and maintain leadership,” Nash said.
How to do the “US version of the Belt and Road Initiative”?
Kugelman believes that the United States is still gaining the upper hand in the competition between the United States and China, whether it is military strength or a leading advantage in high-tech fields. Like Weber, he also believes that although the United States has faced some setbacks in soft power in recent years, it is still ahead of China.
Kugelman therefore emphasized that the United States should have its own pace and expectations in terms of overseas infrastructure investment, and there is no need to equalize with China in the order of magnitude. After all, China has already led too many steps in this area. “With some progress in the field of infrastructure investment, instead of investing heavily in this to catch up with China in vain, why not focus more on maintaining the United States’ competitive advantage and comparative advantage in its traditionally leading field?” Kugelman said.
Kugelman partially agrees with Weber’s view that the United States can do better in infrastructure investment. He said that the quality of many of China’s Belt and Road projects has been criticized, such as financial opacity, the breeding of corruption, damage to the local environment, and the substandard rights of workers. The United States can provide a higher standard and high-quality options for these issues. China has built surveillance systems through infrastructure projects in some areas to export authoritarianism. The United States obviously can also provide less intrusive options in this regard.
Like Weber, Kugelman also believes that China’s “wolf war diplomacy” in recent years has opened up opportunities for the United States. Kugelman cited, for example, that China’s aggressive strategy of flexing muscles in the South China Sea has sounded the alarm for many countries in the region, and began to question whether the consistent attitude of “asking the United States for security and asking China for money” should continue. He believes that the United States should focus on investing in countries like the Philippines that hesitate to China and are a key regional ally of the United States.
Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation, part two, where we start looking into things like raw materials cost versus processing and manufacturing bottlenecks. Also discussed are the wage inflation and labor availability and how long these impacts will last. And finally, we start talking about central banks. What will the Fed do? Will it do anything? When will it do it?
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This QuickHit episode was recorded on April 28, 2021.
The views and opinions expressed in this nflation: Buckle up, it may get worse QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests 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: What the people in the middle. So the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things, or are they passing that directly along?
NG: Sorry, Sam. I’m jumping in here. The beauty of that question right now is there was a major headline, the Financial Times talking about margin compression of how US corporates are going to be increasing prices. It was today. You have the likes of Chipotle. We’ll go on to that. That’s a labor cost issue. But the other company, you know, J&J, various bare necessities manufacturers for nappies for kitchenware also they’re saying they’re going to have to put price pressure through to the consumer and as we were discussing just before we started, there’s the elasticity of price increases is very high.
The elasticity of price decreases is extremely low. And I would contend that this becomes a rolling, snowball effect as these prices get passed through to the consumer. There are other costs that will be passed through to which we can talk about later on labor side. But this clearly, one of the signals that our well worth watching, on the margins in the corporate reporting, and all of them are suggestive of higher prices to the consumer.
Then you look at the ISM prices paid. I have a chart, a model that looks at that versus the CPI. And if that sticks to what it’s done over the last couple of decades, it’s indicative of CPI, actually, the big figure having a getting up to somewhere around four, maybe even higher.
TN: Which was kind of a China 2011 scenario of four to six percent CPI.
NG: Correct. But also also the the process of decoupling, as long as it may be, that process has created a demand because of the supply shock.
There’s a supply shock in the system. The demand is adjusting there, too, so that work as additional demand to fill in the gaps, so if the decoupling replacement process is long standing, the demand is still there, it’s a matter and then catching up. There’s a price disparity caused by that.
TN: Yeah, we definitely have a mismatch, at least in the short term. And will those supply chains catch up? That’s a real question. Sam, what’s your view on that in terms of manufacturers being able to absorb these cost and margin pressures?
SR: So I’ll jump to the housing market as my example, which I think is one of the more interesting ones filtering, filtering through down into lumber.
A very close friend of mine in Houston is delaying the start of one hundred and ninety homes that were supposed to be going into, well… He has the pads laid. He won’t build those homes until lumber prices go down. It’s the largest backlog he’s ever had. And that got us talking and kind of working through the market. And when you look at the market for pine studs in the US, it’s an intriguing look into kind of where the cost pressures are coming through, where mills are making mills that make the two by fours are making an absolute fortune off of the disruption.
But if you own a pine stand of several thousand acres, the tree that you are cutting off of it is the exact same price that it was a year ago. You have seen none of the prices at all.
TN: So there’s not a supply, a raw materials supply issue. It’s a processed materials issue.
SR: Yes. Exactly. So it’s the supply chain breaking down. You didn’t have enough. You didn’t have the mills up and running for a couple of months. You had about 40 percent of the capacity offline. And that created a shock to the system that eventually will be sorted out at some point.
We didn’t destroy any capacity for two by fours. We’re building even at the current rate, we’re building one point seven million homes. That’s nowhere near what we were doing in 2005. And yet lumber is four times where it was. So, yeah.
NG: May I ask a question because you’re obviously in touch with that level on a micro basis? So one of the things that I’ve been told by several different sources is they don’t disagree with your number coming down eventually. The problem the homebuilders now have is labor shortage.
SR: That might be a problem in the northeast. That might be a problem in a kind of coastal problem in the US, where I have fewer contacts in construction. But in the south, there’s no labor shortage. Wages are still very strong. You have some projects that were delayed for large oil which created a supply of able bodied plumbers, electricians, where there’s a shortage elsewhere. So I would say that’s probably very true for parts of the country.
There’s anecdotally, Beth. Beth Iron Works? One of the major boat docks in the north, northeast is driving around an RV trying to recruit people to come, trying to recruit welders. That was a problem before Covid that was and will remain a problem. The trades will be a big issue. Common labor, particularly in the South, does not appear to be an issue. That is an issue in the north.
NG: I’ve heard it’s an issue in Florida, actually, which is back to you point about coasts. Sorry, I interrupt.
TN: We’re in Texas. It’s the Promised Land. I mean, I think you…
NG: Would agree with you on that one.
TN: OK, so we’ve gone long. I know these are very detailed issues, but I’m going to ask another question. I did ask for some questions over Twitter.
So one of them came in from Brent. This was around supply chain disruptions, which we’ve already talked about. There’s another from Jerrett Heath. He says, “Will it be velocity or magnitude that causes the Fed to react to inflationary pressures?”
So what do you guys think? Are we going to see kind of the magnitude inflation push the Fed to react or what’s going to push the Fed to react to start to taper a little bit, if they do at all?
NG: I would say both at the same time. My great fear is that there is, and this was actually covered by the Wall Street Journal, but I’ve written and spoken about this as well. I sit there looking at the Fed becoming reactive rather than proactive, and the punch bowl analogy is gone, and that worries me enormously because they have great confidence in something that they’re forecasting as transitory and we know what their forecast record is, and if you really want a bad forecast record, just go to Frankfurt and see what the ECB is all about.
Now, it’s interesting to me that the conventional wisdom, the consensus forecast is for tapering to the end of this year as opposed to next year. It seems like the more people talk about the inflation pressure, the greater it is. But I wonder whether we will get tapering. That’s what worries me about the Fed.
I’ve been really working hard on looking at what Claudia Sahm has written and said over the last couple of weeks. She wrote an op ed in The New York Times and Bloomberg. She’s said… She’s an ex-economist for the FOMC and the Board of Governors, actually. And you get the feeling that the priorities are unemployment with equity, racial equity as opposed to equality. Furthermore, you get the feeling that financial stability… Both of those more important than inflation.
Now, if that’s the case and we start to see any signs of a taper tantrum, I worry that this Fed is going to do a proactive. Either stop the idea of tapering or do a twist or something that eases this market. I think they’ve got themselves, we have a very political Fed that, if it’s reactive by nature, it could be procyclical by action. And that’s where I find I really worry about it.
Then, we’ve got Powells term expiry February. Well, Lail Brainard is one of Janet Yellen’s favorite people. And if she gets in, we’re going full MMT. So those are my concerns about the tapering, its focus on financial stability and the risk that reactive policy will be procyclical.
TN: Interesting. OK, that’s great. Thank you. Sam. Help me understand, what’s your point of view on this? What gets the Fed to react and how do they react?
SR: Yeah, so I would go with neither of those will get the Fed to react. It’s not a question of should they or, you know, what they think they should do. But it’s a question of will they. And they won’t react to inflation. They do not care about the magnitude. They do not care about the velocity. And they won’t care for at least another nine months because we know the combination that they’re going to look through, the combination of basic facts and supply chain disruptions, at least through the end of the third quarter. They do not care. And then they will start the clock on their four quarters of inflation above or at two percent, and they want full employment before they raise. That’s four percent at least on measured unemployment.
So I would say, it, whatever you want to look at for inflation numbers, they don’t care. And maybe they should, but they don’t.
TN: So they don’t care yet. Or they don’t care period?
SR: They don’t care, period, until it’s been until it’s been a year of around 2 percent in this summer and fall don’t matter to them.
NG: Let me add one or it’s too late.
SR: Yes.
NG: I’m with you. You and I seem to agree. I mean, that is exactly the impression I got from Claudia Sahm’s words. I mean it was just straight up. And that’s where I worry, you know, I have a huge respect for Lail Brainard. She is a very, very accomplished economist. But she’ll go full MMT is what Janet Yellen wants. It’s what the Democrats want and I really worry about that.
Plus, you combine this with here we go back to Larry Summers. You combine this with this fiscal effort and one thing that, so in American terminology, progressive policies typically have historically been inflationary. In English terminology, is what I am, these socialist policies have a history of inflation. More government intervention, more pushing against the string of inefficient allocation of resources. Labor restrictions, minimum wage, universal basic income. It all leads to in one direction.
So I agree with you, Sam. I think the Fed doesn’t care and I think, hence, the reactive. When they react, it’s going to be, in my view, potentially too late. It’s already started.
TN: So I just sent out on Twitter a chart that Sam published about three weeks ago from another source on the negative impact of fiscal stimulus, and as we end up ’21, like in Q3, Q4 of ’21, that fiscal stimulus starts to have a negative impact. And certainly in ’22, the US fiscal stimulus has a negative impact.
So, you know, there are a number of things to worry about, not just with inflation, but with the efficacy of some of this fiscal stimulus that’s going into the market.
So with that, I want to thank both of you guys. Honestly, we could talk about this for hours. I would love to have this discussion with you guys again, you know, even in a couple of weeks to talk about other issues. So let’s see where this goes. But thank you so much. Thank you very much for your time on this. I really appreciate it.
We’ll get this out as quickly as possible. Thanks to everyone who’s watching this. Thanks for everyone who submitted questions. For those who did submit questions, for the questions we used, we’ll give you guys a month of CI Futures and look forward to the next time. Thanks for joining us.
