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Mo’ Money, Mo’ Honey

Tony Nash speaks with the BFM team in Malaysia to explain what’s going on in the US markets and economy after the FOMC announcement. What it means for gold and other assets, if businesses actually spend the excess cash for capital reinvestment, how this adds to wealth inequality in America, and how do tech stocks and traditional stocks compare?

 

BFM Notes

 

In the US, the FOMC left interest rates unchanged, pledging to continue with their quantitative easing till 2022, indicating that America’s markets will continue soaring on the back of this wall of cheap liquidity.

 

Tony Nash, the CEO of Complete Intelligence in Texas, discusses the implications of what commentators are calling the Fed’s ‘yield curve control’ policy.

 

Produced by: Michael Gong

Presented by: Roshan Kanesan, Noelle Lim, Khoo Hsu Chuang

 

Listen to this podcast in BFM: The Business Station.

 

Show Notes

 

BFM: Let’s talk about the markets in the U.S. Markets whipsawed as all attention was on the FOMC meeting. The Dow closed down one percent. The S&P 500 closed down 0.5 percent. But the Nasdaq closed up in the green. 0.7 percent. What about Asia? Asia was rather mixed. The Shanghai Composite ended down 0.4 percent. The Hang Seng was marginally down by 0.03 percent. The Nikkei 225, I think they closed up about 0.2 percent. And FBM was up 0.01 percent. Just barely in the green — 0.01 percent. Now for more on global markets, we speak to Tony Nash, CEO of Complete Intelligence. Tony, are you down the line with us?

 

TN: Yes, sir. Morning.

 

BFM: Good morning to you. Now, the FOMC left interest rates unchanged of the meeting, pledging to continue with quantitative easing till 2022. What does this tell you about the state of the economy there?

 

TN: The Fed is really just trying to create stability. We see them, like you said, the next three years, they’ll keep them the same. We think that they’ll just reinforce some of the policies they’ve already put in place. One of the areas we see them focusing on is on yield curve control, although that’s not explicit. We really see that as an area that they’re moving in to encourage capital investment.

 

We’ve really seen capital investment fall here in the States, especially since the COVID time. Oil and gas companies have trimmed billions of dollars of capital investment, for example. So if they can have low-cost borrowing through a yield curve control, it could help that.

 

BFM: What are the implications of doing this? Yield curve control that, for example, on gold?

 

TN: The environment generally with both QE, which is meant to provide liquidity, and yield curve control, which is meant to provide low interest rates, what that does is it really pushes the Dollar down. Although it’s not perfectly inverse, there is generally inverse relationship between the Dollar and gold. So if it’s intended to push the value of the Dollar down, one would expect gold to rise.

 

BFM: Tony, yield curve control can also be called money printing, which has been happening for the last ten, twelve years from an evidence shil standpoint. Have corporations actually spend some of that excess cash on capital reinvestment or have they done it in terms of paying dividends to themselves and their shareholders or even worse, share buybacks?

 

TN: Mostly share buybacks. But share buybacks and dividends, one can argue are similar. It’s just a different form of paying back shareholders. So share buybacks have really been made to be evil over the last, say, five, 10 years or something. But it’s really similar to a dividend that it brings value to the investors themselves. So is it a good thing? I don’t necessarily think so, but it is just one form of getting money back to investors.

 

It’s not necessarily helping capital investment. It hasn’t necessarily helped capital investment. And so, you know, looking at things like yield curve control, what we’ve seen is a lot of QE, but we haven’t seen as much yield curve control. So yield curve control could be one way to provide more incentive for capex.

 

BFM: Well, that hasn’t happened clearly. And to what extent do you think that that policy has exacerbated the wealth inequality in the country, in the United States, which some say has manifested themselves in some of these demonstrations you see all over the country?

 

TN: That’s a very complicated question. And we can spend a lot of time on it. So I think whether a yield curve control has done that, I can’t necessarily argue for or against it. Has QE done that? Oh, surely. I mean, QE has definitely contributed to inequality. It’s definitely contributed more to capital concentration itself than overall inequality. Capital is concentrated with the investment class rather than, say, the working class. Although that sounds very Marxist and it didn’t really mean it to sound that way, but it’s really helped to concentrate capital.

 

BFM: Well, let’s take a look at last night. The U.S. markets were mixed overnight. Is this a reality check that the recovery may not be as soon or as sharp as anticipated by investors?

 

TN: The kind of the relief rally we’ve seen over the past few weeks has really been one of really just excitement that COVID is ending and really hopeful that things will open, as well as recognition of the Fed’s activity and the Treasury’s activity of getting trillions of dollars into the economy. As investors realize how slow those openings are going to be and the impact that it will have on Q2 earnings, but potentially Q3 earnings. I think we’ll see some of this enthusiasm fall away. So markets are trying to find that level. What is that level? And because there is so much uncertainty, we don’t really know that level. This is why we’ve expected volatility through Q2 and into Q3 until there’s more clarity about the pace of opening, how that will affect different industries, and the severity of, say, a second wave. And to be honest, whether people really care about the second wave.

 

BFM: Well, NASDAQ has passed ten thousand and valuation is at the highest in the last 15 years. Where do you think tech stocks will go from here?

 

TN: It really all depends on how companies focus on things like productivity. If we continue to see layoffs and unemployment, companies may decide to invest in technology. We may see some real broad-based investment in productivity like we did twenty five to 20 years ago when companies really started to invest in computing and Internet and all these other productivity shows, it’s quite possible that we see that across large companies.

 

It’s really questionable. Have we expanded valuations as far as we can or is there further expansion there?

 

BFM: Just following up on that. We’ve seen the market recover in the U.S., but there’s definitely a divergence between how the tech stocks have performed and how the larger S&P 500 has performed. Do you think there’s a lot more room for tech stock? Do you think these two indexes will actually going to diverge at this point?

 

TN: We may see a little bit of divergence, but I don’t see that much divergence. I think there is a lot of synchronization within those indexes. We may see a bit like we saw today, but I don’t think that will continue in a massive way.

 

BFM: So when you mean synchronicity, you mean that they will track each other in a parallel? But there is a gap between something like the NY Fang index and the S&P in general. Is that due to the S&P just being weighted down by other classes of assets there?

 

TN: Sure, yeah. It’s looking at traditional businesses that have physical assets and a lot of legacy employees and retirement commitments. These sorts of things really weight down old traditional businesses. The Fang’s, for example, they don’t have a huge retirement commitments than, say, a large manufacturer that’s maybe a 100 years old has. As those things play through and this really has to do with the aging of baby boomers, really. Those retirement commitments will age with them and then they’ll phase out eventually.

 

But a lot of this is around again, those companies are not as efficient as they could be. And until they get to a level of efficiency that they need, we’re gonna see a drag on their earnings. So, of course, with guys like the Fang’s, since they have kind of virtual software related businesses, they will have valuations that are much more generous than traditional, say S&P 500 businesses.

 

BFM: All right, Tony. Thank you so much for your time this morning. That was Tony Nash, CEO of Complete Intelligence.

I think just ending that point is how this divergence between traditional industries and tech industries had been even more highlighted by what we’ve seen.

Yeah, I think that’s really quite concerning because the alternative point of view is that of the Fed’s money printing policy, which has really accelerated exponentially the last three months. There really is no indication from Trump, from Jay Powell, that he has an exit strategy in mind or has any exit strategy at all. Because how do you unwind this much? You basically dopamine the markets without having some kind of pain. It’s very clear, I mean, even though he was quite tempered in his response, this inequality has been really exec-abated for the last 10 years.

 

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Podcasts

Message to Fed: More sugar please!

Tony joins BFM for another discussion on the US markets, this time, sending a message to Fed on what needs to be done. What he thinks will Powell do next and why is the Fed buying a lot of ETFs. Plus, a side topic on oil as Saudi called for a larger production cut.

 

Produced by: Michael Gong

 

Presented by: Roshan Kanesan, Noelle Lim, Khoo Hsu Chuang

 

This podcast is originally published by BFM 89.9: The Business Station.

 

 

Podcast Notes

 

BFM: The Fed chair, Jerome Powell, painted a rather negative view of the economy unless fiscal and monetary policymakers rise to the challenge. But what’s left in the toolbox, though?

 

TN: There’s quite a lot left, actually. We’ve seen a few trillion dollars spent. What we need to make sure is that that money actually gets out to businesses. So offering lower rates, nobody is really in a mood to borrow unless it’s forgivable. With the mandatory closing of a lot of small and mid-sized businesses, it’s really putting their revenue models in peril. Actually helping those businesses with cash to substitute for revenue, since this was a government shutdown, is really all they can do. But I think the next path is looking to medium-term spending programs like infrastructure. A number of these things that can go from direct cash payments to earned cash so that we can have a more viable economy again.

 

BFM: Could you elaborate more on some of the fiscal measures that you’re talking about?

 

TN: For small and mid-sized businesses, we’ve had things like the PPP, the Paycheck Protection Program. What that does is it gives about two and a half months’ worth of expenses to companies so that they can retain their staff and pay for their rent during the downtime. But what’s happened is not a lot of companies have been approved. Of those who’ve been approved, not all have gotten their money, a number of them are still waiting.

 

For small companies, they run on cash flow. They don’t have three to six months of cash sitting in the bank normally. So while they wait, they’re going bankrupt. They’re having to fire people. At the same time, we’re starting to see more and more large companies announce layoffs over the past two weeks. And so we’ve seen the devastation of a lot of small and mid-sized companies in the US. We’re starting to see that bleed into large corporate layoffs.

 

Those large companies want to see the expenses associated with those layoffs put into Q2. As we go through Q2, we’re expected to see more and more corporate layoffs, so that all those companies can pack them into their earnings reports for Q2.

 

BFM: The correction of the last couple of days, the American share market has been a bit of a test, up 30% since the March lows. A lot of billionaire investors like Stan Druckenmiller and Appaloosa management’s David Tepper say that stocks have been the most overvalued for a number of decades. What does that do for your thinking by way of your portfolio? Are you taking some money off the table? Are you getting more cautious? What are you going to do?

 

TN: The only thing we can really guarantee right now is volatility. And what is happening is they’re trying to find a new pricing level. Until we’ve found that new pricing level, really anything can happen.

 

What we’re entering right now is a phase where people are realizing that states may stay closed longer than many expected. I actually think you’re going to get a lot of push back from citizens in the U.S. Los Angeles just announced they are going to stay closed for three more months. You’re going to see a lot of unrest there. People are really pushing back because their hopes and dreams of decades of these small and mid-sized businesses are just being devastated as local officials make these decisions. I feel in the next few weeks, we’re going to see more and more people pushing back on those orders because they need to get back to work. They’ve got to run their companies. They’ve got to make some money.

 

BFM: That’s right. But this is an ongoing chasm between what’s happening on Wall Street, which is essentially a rally and Main Street, which is dying. People are divided over whether the policy response will be to get into the Fed buying equity market instruments on top of the junk ETFs and all the backstopping of the bond market. What’s your stance and what Jerome Powell is going to do next?

 

TN: They can do that. It’s certainly within their remit to lend money. The ETFs are kind of an indirect way to lend money. It’s radical, but it’s not beyond their capability. Where it looks like the Fed is going is with yield curve control. That means they’re likely to target a rate for the 10-year Treasury, and then they will spend almost unlimited cash to make sure that the rates stay there.

 

If the Treasury yield curve rises too much and people stop taking out long-term loans for infrastructure projects or for other things, if that rises too much, the Fed will push that yield curve down, let’s say, to a half percent rate so that people can borrow over long terms for cheaper. That’s the way for the Fed to encourage investing. That’s not a direct government fiscal policy, but it’s a way to get the private sector to spend cash. This is really for the larger, private sector companies. It’s a signal to me that the federal government itself is preparing itself to spend a lot more money in terms of fiscal policy, and also encourage the private sector to spend a lot more money on these long-term projects.

 

BFM: That is a theoretical concept, which hasn’t proved right in the last 10 years, because what corporations have done is that instead use that easy money to buy back shares and to return dividends to shareholders, not to invest for the long term. So that’s to be the problem.

 

TN: Well, either way, shareholders win, right? Either way, cash is spent or they get it in their return. U.S. equity markets are broadly held among most working Americans. So on some level, if that is done through share buybacks, it will help a broad base of shareholders through those equity prices. Share buybacks sound morally questionable, but either way that money is spent, it helps the broad economy.

 

BFM: So the U.S. Fed is now buying junk bonds, why ETF for the first time. Why these instruments? What’s the significance of it?

 

TN: They can’t invest directly in equities. Some of this stuff is a signal that they want to do more in debt markets. They’re too big to help out small companies. They’ve put together this main street lending program as a way to lend to, quote, unquote, small companies. But those small companies are actually pretty big. Most of the corporate entities in the U.S. are actually pretty small. The Fed is trying to alleviate the market of certain risk assets. I believe and hope that banks will lend to small and medium-sized companies. They’re trying to take the risk out of the market and off the balance sheets of banks so that those banks will invest more directly in actual operating companies that need the money and not necessarily the risky, junk bond companies.

 

BFM: A little bit on oil. Saudi Arabia has called for larger production cuts. Will the whole OPEC plus community back them? Should we expect some pushback? And what does this look like for oil prices?

 

TN: I don’t think you’re going to get a lot of pushback. We have about three months of crude supply overhang right now. Given that economies are locked down, there’s really no way to burn that off. So the only way to get prices back up to a sustainable level is really to cut off supply. Until the largest producers really slow down their production, and we can burn off some of that supply overhang, we’re not going to see prices rise much.

 

Demand’s not necessarily coming about quickly. It’s going to be gradual. As demand gradually accelerates and supply declines gradually, hopefully, we’ll meet in the middle somewhere and get a price that’s a little bit more livable for oil producers globally.

 

 

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News Articles

Oil prices could plunge below $20 a barrel this quarter as demand craters: CNBC survey

The oil prices article below is originally published by CNBC, where our CEO and founder Tony Nash was quoted. 

 

The oil price bust may not be over.

 

A historic demand shock sparked by the coronavirus pandemic is set to worsen in the current quarter, undermining any coordinated effort by heavyweight producers Saudi Arabia, Russia and the United States to cut supply aggressively and rebalance the market, according to a CNBC survey of 30 strategists, analysts and traders.

 

Episodic spikes of $20 a barrel or more in benchmark crude oil futures of the type seen last week cannot be ruled out as rivals Saudi Arabia and Russia attempt to reverse a damaging battle for market share and engineer a global supply deal which could cut up to 15 million barrels a day, the equivalent of about 10% of global supply.

 

But such price rallies are unlikely to last, according to the findings of the CNBC survey conducted over the past two weeks.

 

Brent crude futures, the barometer for 70% of globally trade oil, are likely to average $20 a barrel in the current quarter, according to the median forecast of 30 strategists, analysts and traders who responded to a CNBC survey, or 12 out of 30 respondents.

 

However, nearly a third, or nine of those surveyed, said prices may drop below $20 a barrel this quarter.

 

Amongst the more pessimistic projections, ANZ’s Daniel Hynes saw the risk of prices in the ‘mid-teens’ while JBC Energy’s Johannes Benigni warned that both Brent and US crude futures could ‘temporarily’ fall to around $10 a barrel.

 

 

New normal

 

The Organization of Petroleum Exporting Countries (OPEC), the supplier of a third of the world’s oil, and its rivals outside the group are “of pretty limited relevance in this context, as they are neither likely to be willing nor able to stem the current demand shock,” Benigni said.

 

Bearish forecasters said two forces would keep oil prices depressed in the second quarter — skepticism that Saudi Arabia and Russia would relent in their price war and commit to the deepest cuts in the producer group’s history (with or without participation from U.S. shale producers) and a glut in the current quarter caused by a monumental collapse in global demand as the full economic severity of the global coronavirus pandemic unfolds.

 

“A demand drop of 10% is the New Normal with oil,” said John Driscoll, director of JTD Energy Services in Singapore and a former oil trader whose career spans nearly 40 years.

 

Global commodities trader Trafigura’s chief economist Saad Rahim offered a starker prediction. Oil demand could fall by more than 30 million barrels a day in April, or around a third of the world’s daily oil consumption, Reuters reported on March 31, citing his forecasts.

 

And even if Saudi Arabia, its OPEC allies and major producers outside the group such as Russia and the U.S. did agree on aggressive supply restraint, it’s unlikely to materially drain global inventories that are closing in on what the oil industry calls ‘tank tops’, or storage capacity limits.

 

 

Too little, too late

 

“The long and short of it is that the current rally will likely be short lived,” Citigroup’s oil strategists led by Ed Morse said in an April 2 report.

 

“The big three oil producers may have found a way to work together to balance markets, but it looks like it is too little too late. That means prices would have to fall to the single digits to facilitate inventory fill and shut in production.”

 

Fatih Birol, executive director of the International Energy Agency said oil inventories would still rise by 15 million barrels a day in the second quarter even with output cuts of 10 million barrels a day, Reuters reported on April 3.

 

Citi expects Brent to average $17 a barrel in the current quarter and warned Moscow, Riyadh and Washington “cannot in the end stop prices from possibly falling below $10 before the end of April.”

 

Plus, travel restrictions, border closures, lockdowns and economic disruption caused by ‘social distancing’ and other measures taken by governments globally to slow the spread of the virus will exact a heavy toll on oil demand and could even linger when the virus clears, clouding the prospects of a recovery.

 

“As for the second quarter or even the third, I don’t see a V-shaped recovery for prices,” said Anthony Grisanti, founder and president of GRZ Energy, who has over 30 years of experience in the futures industry.

 

“The longer people are shut in the more likely behaviour will change…I have a hard time seeing oil above $30-35 a barrel over the next 6 months.”

 

 

Negative pricing

 

Standard Chartered oil analysts Paul Horsnell and Emily Ashford said they expect “an element of persistent demand loss that will continue after the virus has passed, driven by permanent changes in air travel behavior and the demand implications of businesses unable to recover from the initial shock.”

 

With demand at near-paralysis, oil and fuel tanks from Singapore to the Caribbean are close to brimming – stark evidence of the global glut.

 

Global oil storage is “rapidly filling – exceeding 70% and approaching operating max,” said Steve Puckett, executive chairman of TRI-ZEN International, an energy consultancy.

 

Citi’s oil analysis team and JBC Energy’s Johannes Benigni even warned of the risk of oil prices turning negative if benchmarks drop below zero, effectively meaning producers pay buyers to take the oil off their hands because they’ve run out of storage space.

 

“Theoretically, the unprecedented stock-build might mean negative oil prices in places, should the world or some regions run out of storage and if higher-cost production is stickier than thought,” Citi analysts said.

 

Despite the bearish consensus, nine survey respondents held a more constructive view. Within that group, six forecasters expected Brent crude prices to stabilize around the mid-to-late twenties in the second quarter while one called for $30 a barrel.

 

Tony Nash, founder and chief economist at analytics firm Complete Intelligence, and independent energy economist Anas Alhajji topped the range at $42- and $44 a barrel, respectively.

 

U.S. shale producers, who need $50 to $55 a barrel crude oil to just break-even, are struggling to maintain operations in a depressed price environment. That’s led to cutbacks in production and capital spending, job losses and bankruptcies across the U.S. shale industry and globally.

 

The oil market is underestimating such a shake out and its future impact on rebalancing the global oversupply, Alhajji said.

 

“Shut-ins are already taking place. Companies made major spending cuts and many will cut again.”

 

Markets are also downplaying the extent of the post-virus rebound on oil demand, Alhajji and Nash claimed, though determining the endpoint to the pandemic is near-impossible.

 

“We expect initial excitement over demand in May as the West comes back online, then it falls slightly as expectations are moderated going into June,” Complete Intelligence’s Nash said.

 

This article originally appeared in CNBC at https://www.cnbc.com/2020/04/06/oil-prices-could-plunge-below-20-a-barrel-in-q2-as-demand-craters-cnbc-survey.html

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News Articles

United States ups the ante in China rivalry with Asia Reassurance Initiative Act

05 January 2019
The China-US rivalry in Asia – especially in the South China Sea – will intensify with the passage of American legislation underlining Washington’s commitment to the region, analysts said.
Read the rest of the story in South China Morning Post