Tony Nash, CEO of Complete Intelligence, spoke to BFM about what is moving international markets.
The recent April headline CPI numbers were better than the projected 5%, coming in at 4.9%. However, core inflation still printed at 5.5%, and so the Fed is unlikely to cut, making it hard for them to stop raising interest rates. The Fed’s rate rise vote was unanimous this month, indicating that the Fed will continue to raise by 25 basis points in June. Tony said the Fed will look at wages and employment figures along with consumer sentiment, producer prices and credit indicators as well.
With regards to the debt ceiling, Tony said it was a US domestic political tool, and in the end, it would last longer than most people wanted it to last, and we would see some melodramatic brinksmanship.
85% of S&P 500 companies have reported actual results for Q1 2023 to date, and of these, 79% have reported actual EPS above estimates. Tony explained that a lot of this is down to margin expansion, and as raw materials prices fell, labor costs rose quickly, allowing companies to raise their prices further.
However, companies are starting to slow down on price rises as consumers are fatigued with the rises. Some tech companies have started laying people off or signaling no pay rises this year, as they realize pushing price rises is something they won’t be able to do much longer in 2023.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station.
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BFM 89.9. Good morning. It’s 7:07 A.M. On Thursday the 10 May. You are listening to the Morning Run. I’m Shazana Mokhtar with Keith Kam and Mark Tan. Now in half an hour, we’re going to zoom in on the outlook for Chinese equity markets, specifically the Shanghai Composite and the Hang Seng Index. But let’s recap how global markets closed overnight.
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In the US market, stocks mostly climb as better inflation data offset worries about the stalled talks between political leaders that have raised fears of a US default. The Dow was down 0.1%, but S&P 500 up 0.5%, and Nasdaq up 1%. In the Asian markets, it’s rate traffic lights Nikkei down 0.4%, Hang Seng down 0.5%, Shanghai Composite down 1.2%, STI down 0.2% and FBM KLCI down 0.5%.
BFM
So for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Always good to have you. Let’s start with CPI numbers. April headline CPI numbers came in at 4.9%, better than the projected 5%. Do you think this will have an impact on the Fed’s policy decision in the near term?
Tony
Yeah, I think it’s unlikely by the next meeting. So what we have to look at is what’s called core inflation. And core inflation still printed at five and a half percent. And so that is hitting people enough that it’s really hard for the Fed to stop. They’re certainly not going to cut, but it’s really hard for them to stop raising when core inflation is still at 5.5%. So we have things like food inflation is still up 7.7% on an annual basis. Electricity is up over 8%. Transportation inflation is up 11%. So as these things are still rising at this rate, it’s really hard unless we see some other compelling data come in, it’s really hard to see the Fed either pause or cut. Now what we also have to recognize is the Fed’s rate rise vote was a unanimous vote in favor of a rate rise this month. Typically, before we see a change in policy, we’ll have votes that are not unanimous. So it seems to me that going into the June meeting, at this point, it’s likely the Fed will continue to raise by 25 basis points in June.
BFM
What are some of the other indicators that the Fed may be looking at in order to help refine this decision, Tony? What are you going to be watching coming out next in the weeks ahead of the June meeting?
Tony
Yeah, they’ll look at consumer sentiment, they’ll look at producer prices, they’ll look at wages, these sorts of things. They’ll look at employment. So the key things they’re looking at are really wages and employment. That’s really it. There are a number of other macro metrics that come out, like retail sales, that the Fed doesn’t really look at that stuff. So you don’t really hear markets here moving on retail sales. It’s more at this point in the cycle. It’s things like wages. They may also be looking at things like credit because we’re staring down, really a credit crunch, which is tight credit because rates have moved and because of the banking risks we’ve seen in the US over the past probably six to eight weeks. And so they may start looking at more credit indicators to see how that’s slowing down.
BFM
Now, US Treasury Secretary Janet Yellen has sounded alarm over possible financial market consequences if the debt ceiling was not raised by early June. What would those consequences be, and how likely would it be for Congress to strike a deal by then?
Tony
Yeah, I want to kind of help you guys and your listeners understand that the debt ceiling is really a US domestic political tool. Okay, so the debt ceiling is an annual ritual that we have here where each party threatens the other to cut programs, so say programs that the other party loves. Right. So at the end of the debt ceiling, all of the politicians just agree to spend anyway. So there will be threats that the US will run out of money, but it won’t. It’s not going to happen. The Treasury always finds money. You will likely see us get to some point where, for example, they’ll close national parks or they’ll say federal employees can’t come to work. Those are really signaling more than substantive because all of those employees get paid. We know that the debt ceiling will be signed three or four or five weeks after that happens, and all those employees get their back pay. It’s not as if anybody’s going hungry. They all have their health care while this is happening. So what will happen, and this is very predictable, and it’s a big eye-roll for most Americans. In the end, this will last a lot longer than any of us want it to last.
Tony
And we’ll see some sort of last minute melodramatic Brinksmanship to kind of save America. When we hear about the debt ceiling, we hear breathy headlines about the debt ceiling. Most Americans just kind of ignore it because this is really a Capitol Hill Washington, DC issue more than it is something that really affects real life here.
BFM
Tony, overall, 85% of S&P 500 companies have reported actual results for Q1 2023 to date. Of these companies, 79% have reported actual EPS above estimates. How would you explain this outperformance? Is it time to chill the bubbly?
Tony
Yeah. A lot of this is down to margin expansion. So in 2021 and 22, we saw goods price inflation, which allowed these companies to raise their prices a bit. As those raw materials prices fell, we saw labor costs rise quickly, and that allowed companies to continue raising prices further. So we’re starting to see companies slow down on their price rises. Consumers here are really fatigued with price rises, so we’re starting to see companies slow down. And some tech companies started this laying people off. Some will signal that there’s, say, no pay rises this year. Microsoft has already signaled that. Some of those are prudent measures that leadership teams are taking in the event of a recession. But some of them are just a realization that pushing price rises is just something that we won’t be able to do much longer in 2023.
BFM
And let’s take a look at oil prices, Tony, they’ve been pulled or they are being pulled in opposing directions. We have deteriorating global demand outlook that has been countered by some bullish supply news from the Biden administration as well as Russia. So where do you think oil prices might be heading in the next one to two months?
Tony
Yeah, you’re right. There are definitely mixed messages in crude markets and it’s easy to take either a bearish or a bullish view, depending on what data you’re looking at. Our view is that crude could rise 5% to 10% in the next month or two, and that’s a typical annual seasonal trend. After, say, June, maybe mid, late summer, we’ll definitely see a sell off in markets. Again, that’s pretty normal for this time of year. So we would expect prices to rally a little bit from here and then we’ll see a calm, say, mid summer.
BFM
Tony, I just want to pick your brains a little bit. Gold prices, they’ve managed to stay above $2,000 for some time after hovering like just below that level for the longest time that I can remember. What do you think the direction is going forward?
Tony
Yeah, so our expectation is that gold prices are going to fall a bit over the next two months back below 1900. So we do not expect gold to stay at these elevated levels. It’s possible, but it’s just not within our forecast. So I would be careful with gold at these levels. And if your listeners believe that it’s a rally, go for it. But that’s just not what our data is telling us.
BFM
1900 is quite substantial. What do you think the reason would be to bring it down to that level?
Tony
Well, if risk is taken out of the economy, so if there’s some systemic, say, relief that the Fed or Treasury gives for banks or something like that, investors typically go into gold and crypto when there’s risk, when they fear risk, or they feel devaluation of the dollar or something like that. Right. And so if there were to be programs to support banks, to backstop banks, these sorts of things, from the position that they’re in right now, I believe it would really turn a lot of that gold trade off. And so it’s quite possible that stuff’s happening because it is a concern with the government here and the government especially as we enter a tight credit cycle, they have to make sure that banks are stable. This is a real concern for them. If there isn’t confidence in the banking system, then you’ll see this domino effect of banks to firms and so on. That’s just one scenario, but it’s possible that some sort of federal backstopping of banks for a temporary period, I’ll say additional backstopping of banks will put the risk on trade back on.
BFM
All right, Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
BFM
I like what Tony said about the debt ceiling issue in the US. Right? That’s all political showmanship, and I guess here in Malaysia we’ll call it Wayang Kulit. Right.
BFM
So once all these shenanigans are over with the politicians who agree at Capitol Hill, and they’ll just continue spending their respective programs.
BFM
It’s nice to know that our politicians all over the world are just in it.
BFM
They’re the same. They have the same in a way. It doesn’t reflect well, though, and I think it does cause volatility, at least in the eyes of observers, regardless of what happens there. We’ll be watching that space, but let’s take our attention over to some of the earnings that have crossed our table. We have Walt Disney Company. They reported revenue and profit that were in line with Wall Street’s projections. The company did also reduce streaming losses by $400 million from the previous quarter. And this is thanks to price increases that helped offset the loss of 4 million subscribers at Disney Plus. So, on the one hand, they narrowed their losses, but they also lost subscribers.
BFM
So on the TV side of the business, disney’s direct to consumer segment, which includes the flagship Disney Plus streaming service, posted a loss of $659,000,000. However, this was significantly lower than the Street’s expectations. Right. The company plans to expand its streaming offerings by the end of the year with a new app that combines Disney Plus and Hulu.
BFM
And on the theme park site and Parks Experiences and Products division remains a bright spot for Disney. This saw a 17% increase in revenue to $7.7 billion during the most recent quarter. But I have to point out as well, disney movies, especially with their new live action version of their animation movies, haven’t been actually doing well. The Little Mermaid is coming out on May 26, and there’ll be something interesting to see if you just glean through social media.
BFM
It’s a bit controversial.
BFM
It is controversial, to say the least.
BFM
I think a lot of the live action films have been the subject of controversy in some form or another. I tend to be of the old school.
BFM
Yeah, me too.
BFM
Feeling. I mean, I like the cartoons. I’ll stick with the cartoons, thanks. But they’re trying to court a whole generation of younger viewers with their live action films. So I guess time will tell whether everything will pay off. Don’t forget that Disney is facing a number of challenges ahead. They’ve got their federal lawsuit against Florida Governor Ron DeSantis, and the writer strike is still ongoing. That is going to have an effect on some of the production that is stalled, such as with Blade and also the Disney Plus Star Wars series. Andor so all these things to watch when it comes to Disney Plus. We are coming up to 720 in the morning. We’re taking a quick break, but we’ll come back with more top stories in the newspapers and portals. Stay tuned. BFM 89.9 you have been listening to.
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A podcast from BF M 89.9, the business station. For more stories of the same kind, download the VFM app.
In this BFM 89.9 podcast, CEO of Complete Intelligence, Tony Nash, discusses the February US equities market and gives his predictions for March. Nash predicts another down month for US markets, albeit not as much as February, with China also being down markedly. He also expects Malaysia to do well and increase by about 1%. Nash also comments on US earnings season, stating that the quality of earnings reported so far is not great and that only $0.88 was matched by cash flows for every dollar of profit, with some companies passing along price hikes successfully but for how long can they keep it up. Nash also discusses interest rates and a more hawkish Fed, which could lead to the dollar rising. He also comments on a newly formed House committee aimed at examining economic competition between the US and China.
Transcript
BFM: BFM 89.9. Good morning. You’re listening to the Morning Run at 7:07 on Thursday the 2nd of March. I’m Shazana Mokhtar with Chong Tjen San and Wong Shou Ning. Now, in half an hour, we’re going to discuss Malaysia’s bilateral ties with the Philippines in light of our Prime Minister currently on a visit there. But as always, we’re going to kick-start this morning with a recap on how global markets closed.
Overnight, US markets were mixed. The Dow was up marginally by 0.2%, the S&P 500 down 0.5%, NASDAQ down 0.7%. Asian markets were also mixed. The Nikkei was up by 0.3%, Hang Seng popped it up and was up by 4.2%, Shanghai Composite up by 1%, Straits Times Index down by 0.2% and the FBMKLCI was down by 0.3%.
It’s everywhere.
That’s right. Well, we’re going to try and kind of peel some trends with Tony Nash, CEO of Complete Intelligence. Tony, good morning. Let’s review what happened back in February. It wasn’t such a great month for US equities. We did see the Dow and SP 500 both lose 4% and 2.6%, respectively. Where do you see the stock market heading in March? Is it going to be more volatility or perhaps brighter skies on the horizon?
Tony: Oh, yeah, it’s going to be pretty choppy. Generally, we expect US markets to have a down month, not down as much as it had been in Feb, but we do expect another down month. Obviously, if the Fed comes in with a very hawkish meeting, then we could see more chop there. We do expect China to be down this month as well. That kind of goes against what we’ve seen in News early this month, but we are seeing China down markedly, say more than 2% this month as well. Good news is we expect Birth of Malaysia to be up about 1%. So while we see chop in others, we may see Malaysia do squeak out a good positive month.
BFM: And Tony, as the US earnings season starts to taper off, what is your assessment of the results that have been released so far? In particular, the most cyclical consumer-facing companies?
Tony: Yes, so the quality of earnings reported so far is not great. So for every dollar of profits, only about $0.88 was matched by cash flows. That’s the largest discrepancy since at least 1990. So that means 12% are from kind of non-cash earnings. So it’s really accounting and other things. So what we’re seeing, especially on the consumer side, is some companies are passing along price hikes, and we see some of them doing that really successfully. I think we’ve talked about that here before, where they’ll hike between eight and say 15% and their sales volume will be down maybe 5%, something like that. That’s really helped the top line and margin expansion. But the real question is for how long can they keep raising those prices and kind of sacrificing transaction volume. So there’s a real question there. But many of those companies have said they’re going to continue to raise prices into later in ’23. The problem is when we run into a company like Coals, which is a retailer here in the US that reported today, and it was all bad, they’re losing customers they’re not able to keep with their costs and other things.
For those companies that cannot pass along price hikes, for whatever reason, it’s really bad news for them. The inflation they’re importing from their vendors is just squeezing their margins, and in some cases, they’re losing money. So, I don’t think the quality of earnings improves from here for at least two quarters. That’s just something to think about as we go into the next Q1 and Q2 earnings.
BFM: Okay, I want to come back to interest rates, Tony, because I’m reading Bloomberg and it seems like the Street is now expecting a terminal rate of 5.6%. Honestly, this changes every day. It was 5.4% not too long ago. But what does this mean for the US dollar? Are we back to the reign of King Dollar again?
Tony: Well, if we see a more hawkish Fed, then I would say yes, that’s probably the case. So, what we would likely see are things like 25 basis points, at least for the next three meetings, if not longer. If we continue to see hot inflation, as we have over the past couple of days, they could do a surprise 50. I don’t think that’s what they’re going to do, but we can’t rule it out. We could also see quantitative tightening, meaning the Fed could unload more mortgage-backed securities or other things, accelerating that from their balance sheet. Because housing is still pretty hot, actually. Prices aren’t moving that much, so we could see the Fed move on MBS or some other things to accelerate that off of their balance sheet. I don’t think that’s highly likely, but it’s a possibility. All of those bode well for the dollar and dollar strength. If that happens, we would definitely see the dollar rise generally.
BFM: Can we take a look at what’s happening over in the US Congress, Tony? There’s a newly formed House committee aimed at examining economic competition between the US and China. I think they held their first hearing earlier this week. What was the outcome? And do you think, as a result, we’re just going to see more trade conflicts between these two superpowers?
Tony: Yeah, so there’s a lot of focus on decoupling from China. There will never be a full decoupling from China. I don’t think we’ll even have a majority decoupling from China. But there are some key industries, like semiconductors and pharmaceuticals, some healthcare aspects that people really do want to decouple from China because we saw through the pandemic that supply chains are very, very dependent on China. Americans want many of those core things closer to home. They’re focused on decoupling. For some reason, people in Congress are just becoming aware that the CCP is in charge of everything in China. So they’ve underestimated the influence of the CCP and they’re waking up to the fact that they’re central in China. We had a couple of former national security advisors suggesting things like accelerating the arming of Taiwan and helping Chinese circumvent the Great Firewall, those sorts of things. And then, of course, human rights. They talked about CCP police outposts that are in US cities where there are actually these CCP outposts that will pursue Chinese nationals within the US, among other things. It’s taking a pretty tough stance on China. I’m not sure to what extreme that will go and what policies will be adopted yet, but I think it’s definitely trying to at least uncover some of the things that Americans haven’t been aware of.
Keep in mind, a little bit of this is theater, right? It’s people in Congress holding hearings to publicize some of their agenda. So, I think it’s a little bit of that so that they can then move into legislation and move the needle just a little bit. I don’t think we’ll see anything extreme, but you will certainly hear some extreme talk over the next couple of months.
BFM: Yeah, but does this change the way fund managers invest? You’ve got this continuing geopolitical tension between the US and China. Is it going to stop, for example, American fund managers from buying Chinese stocks?
Tony: I think it definitely puts China as a higher risk for US portfolio managers. And certainly over the past couple of years, more US portfolio managers have become aware of the risks of investing in China as supply chains close down, among other things. So, I think you will see more of a tighter risk calibration and more weighting of risk for Chinese equities. So, it could potentially not be good for American money investing in Chinese exchanges. Absolutely.
BFM: Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. As he was talking about how March is possibly going to be down, although not as down as February, I couldn’t help but think, ‘Oh, beware the eyes of March.’ But, yes, it’s still choppy out there, especially as the FOMC will be having their meeting this month. I think everyone’s going to wait and see how much they’re going to hike those rates.
Yeah, he gave some predictions on Malaysia as well. He thinks the market will possibly be up by about 1% in March, but the market has been quite disappointing in Malaysia. And he also expects the China market to be down in March by about 2%. And we spoke about the geopolitical risk which may impact US fund managers as well.
The CEO of Complete Intelligence, Tony Nash, spoke about the recent financial events in the market. In regards to Meta, Tony mentioned that the worst for Meta’s share price is over, but job cuts are still to come. Although Meta beat revenue estimates, ad impressions rose by 20%, but the price per impression fell by 22%. Tony also discussed the recent Fed interest rate hike by 25 bips, which was expected and the market welcomed it. Tony says there are likely to be at least two more rate hikes before the current tightening cycle is over. He also mentions that the market is excited but will take a closer look at the statement once they have a better understanding.
Tony also mentioned that there is some irrationality in the market because corporate earnings have been disappointing, but investors are bought off by the stock buybacks. The oil companies, Chevron and Exxon, made windfall profits due to cheap oil and fat refining margins. The refineries were operating at 94% capacity and have crack spreads and refining margins way above normal. The oil and gas companies have not invested in infrastructure since 2014, due to governments and media bullying over ESG and cost. The only option for them is to return the profits to shareholders through stock buybacks.
Transcript
BFM
This is a podcast from BFM 89.9, the business station. BFM 89.9. Good morning. You are listening to the morning run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. It is 7:05 A. M. On Thursday the 2 February. We were off yesterday because of Federal Territories Day, but we are back to bring you through the rest of the week. In half an hour, we’re going to discuss the probability of a Trump 2024 presidential run. But as always, let’s kick start the morning with a recap on how global markets closed overnight.
BFM
All US markets ended higher as the market shared the Fed’s 25 basis point rate increase. The dollar was up marginally by 0.2%, S&P 500 up by 1%, and the Nasdaq was up by 2%. Asian markets, they were all in the green. The Nikkie was up by 0.1%. Hang Seng was up by 1%, Shanghai Composite up by 0.9%. The Straits Times Index, it was up by 0.4%. But the FBMKLC, it was closed for Federal Territory Day
BFM
As mentioned and for some insights into what’s moving markets this morning, we’re going to be speaking to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks as always for joining us. Now, markets rallied on the back of the Fed, raising interest rates by 25 bips. But before we get into that, I would want to talk about some of the corporate earnings that we saw overnight, namely coming from Meta. The markets were also quite happy with what came up there, up 18% in after hours trading on the back of better than expected sales, do you think this is the worst over for Meta?
Tony
I do think the worst in terms of share price is over. I don’t think their job cuts are over. I think they’re learning how to operate in this environment. So the last two to three years has been pretty easy for a tech company as people were kind of trapped inside and didn’t really have a lot to do. They looked for things online and ad revenue was great for Meta and ad driven companies, but what we saw in there, although they beat revenue estimates, they beat their guide by almost 3%. They announced a $40 billion share buyback, all that’s great news. And the stocks up almost 20% after hours. But keynote in their earnings release, Ad Impressions rose by 20%. Remember, they’re an ad driven business. Ad Impressions rose by 23%, but price per Impression fell by 22%. So they’re not able to push price. They’ve had to drop their price and raise their volume, which is the opposite of what we’re seeing with a lot of retailers and other firms in the US where they can actually push price in light of and accept lower volumes at higher prices.
BFM
And Tony, as expected, the Fed raise rates by 25 bips. Was this in line with what you were expecting, and are we close to the end of the current tightening cycle?
Tony
Yeah, you know, I think pretty much everyone expected 25. There was a slight chance of 50, but everyone pretty much expected 25. The market welcomed it very happily, and they’re still thinking there’s only one rate rise left. But Chair Powell made it very clear that there are a couple of more rate hikes to get to that level we think is “appropriately restrictive.” Those are his words. So we’re looking for at least two more rate hikes before this is over. And the Fed is also going likely to accelerate their quantitative tightening. Okay? So that’s taking assets off of their balance sheet, which is basically hoovering up the money supply in the US. So the market will get tighter. And do we think we’re at the end? We don’t think we’re at the end. The interest rates aren’t the only tool they can use. So the market’s very excited right now, almost a relief. But I think as they look through his statement in detail, I think they’ll take a second look at expectations.
BFM
So let’s build on that. Tony, so you’re basically saying that because when I look at how markets have performed on a year to date basis, S&P up 7.5%, NASDAQ up 12%, this very much on the back of the Fed, going from a hawk to a dove. Do you think that there is some irrationality there?
Tony
I do, actually, because, you know, if you look at corporate earnings announced so far, they’re very disappointing. And so investors are expecting easy conditions to return so that underwhelming earnings are acceptable. So what did Facebook have to do? Their EPS underwhelmed by like 55%. Okay. They had to issue $40 billion in stock buybacks. So investors are basically bought off, and that’s why the stock is rising. But many other people reporting are not seeing the sales that they expected or didn’t see the sales they expected in Q4. And their costs, meaning the cost of employees and raw materials, these sorts of things. Cost of employees are up. Raw materials are down slightly, definitely year on year, but certainly quarter on quarter, they’re down slightly. But earnings are not what people had hoped for. And that’s the real problem we’re seeing in market. So the earnings picture is not reflecting the valuation picture.
BFM
Okay, so that may be the general picture, but if we zoom into oil companies or the two largest US oil companies, Chevron and Exxon, they made more money in 2022 than ever before, posting record earnings in their latest results. How are these windfall profits achieved? And I guess how sustainable is this going into the new year?
Tony
They were largely achieved on the back of cheap oil through the SPR releases and very fat refining margins. So we’ve had refineries in the US operating at about 94% capacity, which is way over what they’re designed for. And we have crack spreads and refining margins way above what is normal. So those refineries are booking profits at a record pace. And so what do they do? If you’re an oil and gas company and the government keeps bullying you over ESG and Cost, and media keeps bullying you over ESG and Cost, oil and gas companies have not invested in infrastructure in upstream or midstream since at least 2014. So if they invest in that, they’re going to be punished. So what do they do? They return it to shareholders. So you have a $75 billion buyback, because that’s really the only option they have. Otherwise, they’re going to get punished by governments, they’re going to get punished by media, and they’re going to get punished by investors. So they have to do this.
BFM
Okay, but let’s talk about OPEC Plus because there was a meeting, and I want to talk about oil prices, because the OPEC Plus Committee has recommended keeping crude production steady as the oil market awaits clarity. What does this then mean for prices? If I look at WTI, currently $77 a barrel, down 4.5%. What’s your view, Tony?
Tony
Well, I think OPEC is taking a lot of the excitement in markets for the past couple of months has been China opening. Ever since December, right? China is going to open and save us all. And that also hit crude markets. People looking at crude prices and going, oh, gosh, China is going to open. We’re going to see jet fuel and gasoline, petrol and other fuels consumption rise dramatically. Well, the opening has been slower than people expected in December, and it’s still not happening at the pace that many Westerners expected. And so I think OPEC is looking at crude consumption and draws from storage and saying, we just need to hold off on raising our level of production. We’re in a good zone with the price right now. We don’t see a dramatic impact. We expect recessions in the west, and we expect China to come back online slowly. So we’re not going to increase production right now. And so I think that’s the prudent thing to do. If I’m an oil producer, that’s what I’m doing, because I want demand to lead production increases. I want to see that people are going to use what I’m going to pull out of the ground, and I want to see pricing pressure before I agree to drill more.
BFM
Yeah, but, Tony, at the same time, what’s interesting to me is the US. Now, during the summer season, President Biden released its reserves, right? Because pump prices were just really very high. Doesn’t this change the equation? If I’m American now, wouldn’t I want to rebuild my reserves at this current level?
Tony
Well, yes and no. The SPR release was really done to get prices down for the US Midterm Elections. That’s really all it was about. Now the SPR is depleted dramatically, so the buying that will have to happen to refill the SPR will put upward pressure on prices. So I think we have to be really careful. If China is, let’s say in March, they start to come aggressively back online and the US starts buying to refill the SPR in Q2, then that’s an accelerator for crude prices in Q2and Q3. Right. So will Biden then beg OPEC again to raise their output? Maybe. China has already forward bought a lot of its crude supply. So if the US is going to choose to refill the SPR at elevated prices, it’s really not the brightest move.
BFM
Tony, thanks very much for speaking to us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets, commenting there on the earnings report of Apple, if not Apple, I’m sorry, Meta. That just came overnight. Apple is to come. So we’re going to be watching out for that before the week ends.
BFM
Let’s turn our attention, though, to what’s happening over in India, where the Adani saga has really taken attention by storm. Gautam, Adani’s flagship firm, called off its 2.5 billion US dollar share sale in a dramatic reversal yesterday as a route sparked by US short seller Hindenburg. Research criticism wiped out more than $80 billion off the value of the Indian tycoon stocks.
BFM
And the plunge accelerated after Bloomberg News reported credit Suisse Group AG has stopped accepting bonds of Adani’s Group of companies as collateral for margin loans. Adani Enterprises was offering shares to investors at $38 to $40 a share, but the stock closed yesterday at $26.13, which is 31% below the bottom price of the pricing range.
BFM
I think let’s take a bit of a step back, right, in terms of how important Adani is to the Indian economy in its way. They are like one of the major producers of energy, and then we’re talking about cement. They are such a huge conglomerate and their fortunes have been really tied to the rise of Nadira Modi. Right. Because the two, the Adani and Modi, are supposedly very close. And so when Adani came back with this 413 page objection, the allegations are all untrue. He also Adani took the step of saying that you’re attacking India as a nation. And then Hindenburg said, look, this has nothing to do with nationalism. Right. You’re just a company where we are not comfortable with your numbers. And then it’s this back and forth. And what was amazing was the share sale was almost going to happen. And the economists reported this is allegedly that the five largest and richest families in India were going to bail this company out by participating in the share sale, but now it’s not happening.
BFM
That’s right. I mean, that came as a big surprise, the fact that they managed to get buyers who were willing to buy these shares at such a high price compared to what the market was having. So, as mentioned, you said, Jensen, they would be buying it at a loss. But yeah, Adani said that the company’s board felt that going ahead with this share issue would not be morally correct because of that big gap in what the prices are being sold for now.
BFM
Yeah, but it was really amazing. You will never get a scenario similar in, let’s say, in America, where the richest families bail out another rich family. Right. So that’s what the economists point out, that doing business in India is very, very different. But the share price, of course, down 45% on a year to date basis.
BFM
I really wonder what they can do to build up to the levels that they were before. I mean, maybe it’s not going to happen again. So something to watch, for sure. This has taken everyone, really by surprise. The twists and turns in the saga at 718 in the morning. We’re going to take a quick break and we’ll come back with more top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9.
BFM
You have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
Roger Hearing is joined by writer and journalist Karen Percy in Melbourne, and the Founder of AI firm Complete Intelligence, Tony Nash, in Houston.
They discuss the tech giants in China that have shared details of their algorithms with Beijing for the first time.
The first day of campaigning is getting under way in Brazil’s presidential elections, due to take place on the Second of October. What is the impact on the economy?
The Prime Minister of Australia, Anthony Albanese, has confirmed his predecessor secretly held five parliamentary roles undertaken in the two years before losing power in May earlier this year. Meanwhile, in the US voters in Wyoming are expected to oust Liz Cheney from her seat in Congress in Republican primary elections taking place on Tuesday.
Transcript
BBC: Also say hello to Tony Nash, founder of AI firm Complete Intelligence, who’s joining us from Houston. So, Tony, very good evening to you.
TN: Hi, Roger. Good evening.
BBC: Good to have you with us. And we’re going to talk let me come to you coming. You’re involved in the AI world, which I guess is in that zone, too. I mean, our algorithms really the great bugbear that we think they are, as Ken was saying, leading us in places we perhaps don’t want to go but are unable to resist, or is it just a very simple way of selling us stuff?
TN: Sometimes they are, sometimes they’re not. These things are trade secrets, whether or not they are, say, patents or excuse me or something like that, these are trade secrets. And companies have spent a lot of time and a lot of money developing them. And so in China, you can expect to have these things demanded to be revealed because there really isn’t personal property in China as much as we think there is, there isn’t in the west and the US. We like to think that we have personal property and company owned property. And so if a government were to command a company to release an algorithm or a trade secret or a business process, then that would effectively be nationalization of property, and it’s just not right.
BBC: Yeah. Some members of Congress certainly want that, as we heard from Facebook and others.
TN: All they do is talk for a living. They’ve never built a business. They don’t know what it’s like to actually value something. And so if something were commanded to be opened, unless it was for a national security reason, which everyone understands, but if things were commanded to be opened, it would be a long fight. But property rights, intellectual property rights are a really big deal, especially over the last 30, 40 years, as we’ve had a software led world. So, again, you can get this in China, where there really are not individual property rights. And for one to expect to have individual property rights in China is silly. But in the west, one would hope that we would have property rights, especially intellectual property rights, and this would not be something that would happen.
BBC: Yeah, but I suppose there’s always compromise in that. That’s a fair point, Tony, in the sense that these are mega companies with enormous power and they are trading in our data. So it isn’t a normal commercial relationship, is it?
TN: No, Roger. What governments have to do and what citizens have to do, if there is objectionable behavior, then they have to legislate and regulate that objectionable behavior. If people are being discriminated against, if people are being threatened, if one political party or another is being favored, those things need to be regulated and legislated. But seizing intellectual property is not the way to do it because the precedent there is devastating. And in the US. Where you have an IP based economy, it would take down valuations of massive companies very quickly.
BBC: But we’ve heard, Tony, that Twitter has effectively open source on this. I mean, maybe they’re not doing brilliantly, but they’re doing okay.
TN: That Twitter API.
TN: Has been available for years, and it kind of tells you what’s going on, but it really doesn’t. And so it’s not a credible example, really, because they kind of let you know a little bit of things. And sure, you can download the data, and that’s a business that Twitter has had for a long, long time, where you can download the data to detect patterns and these sorts of things, but it’s not really letting go of their trade secrets, and that’s where the value is.
KP: That one of the concerns I would have is that politicians, though, rarely want to regulate or legislate. There’s this whole kind of mantra like, oh, no, we’ll let you do your thing, whether it’s the market or whatever. Politicians don’t like to regulate, they don’t like to legislate, and they’re in the rub for me.
BBC: Well, I think there are politicians and politicians, if I can anticipate what I.
TN: Mean, I live in America. Politicians here love to regulate.
BBC: Maybe economics. Tell me there’s a funny aspect of this that Brazil almost seems to be shadowing the US. In a funny sort of way. A similar kind of president, perhaps, in Bolsonaro to what we saw with Trump and some of the same economic issues.
TN: Yeah, I really don’t follow Bolsonaro all that closely, although I know he’s populist and he’s had some new economic measures go out recently that were very populous. So from that respect, you may be right. I think Brazilians have seen Lula before, and they’ve seen Bolsonaro before, so they know what to expect from each president. So at least they’re voting with their eyes open because they know how each performed in previous administrations.
BBC: Yeah, which may of course, be what’s informing the polling, if we believe the polling at the moment. Exactly. And tell you, one of the aspects always seems to me is this is the classic sleeping giant. I mean, it’s an enormous country with enormous resources, and one always bumps into Brazilians. Almost everyone goes, you still about China in a way. It’s a sleeping giant of this. It’s odd that a country like this hasn’t risen to its proper position in the global economy.
TN: Well, but it’s getting there. If you look at, for example, the AG exports that Brazil provides to China, it is a major supplier of the Chinese economy with AG and metals. So Brazil is getting there, and it’s gradually building up. Of course, there’s still a lot of poverty there, and I don’t know of administration in Brazil, and maybe I’m overstepping here, but I don’t know of an administration in Brazil that hasn’t been accused of corruption. Lula was, Temerer was.
BBC: They all are. I think it seems to be a regular thing. True or not, it seems to be there.
TN: Right the time I was absolved. So I just want to make that clear. But they were accused of that coming out of office.
BBC: Of course, one of her key issues is what happened on January 6. She’s on the Congressional committee investigating that at the moment. So meanwhile, Mr. Trump has backed a candidate rivaling her, Harriet Huggerman, who opinion polls suggests will easily win the Republican nomination for the seat. Miss Cheney earlier urged Democrats to register as Republicans in order to boost her slim prospect. I mean, Tony, this is an extraordinary sort of development in a way, because this change is close. It comes really to Republican royalty, isn’t she?
TN: Unfortunately, yes. So we don’t really like royalty in American politics. And so I think part of the problem here is that Lynn Cheney is in the House of Representatives and she represents a state that, whether she likes it or not, is very pro Trump. And so she is not representing her constituents. And at the end of the day, that’s really what this story comes down to, is when a representative is elected by a state, the people expect that representative to actually represent their views in Washington, DC. That’s how the US legislature works. And what’s happened is Liz Cheney has decided that she doesn’t want to represent the people of Wyoming and she wants to have her own views and do things that they don’t want her to do. And that’s really what this comes down to.
BBC: Isn’t there an issue here, though, to do with you delegate and representative? I mean, many people who represent an area in the legislature aren’t necessarily going to transmit the views of the people who elected them because they were elected to have their views heard in the parliament or wherever it is.
TN: In the US Congress. In the House of Representatives. They have two year tenure and they have to be elected every two years. And that’s to ensure that we have a diversity of opinion in Washington, DC. Whether or not one likes Trump or doesn’t like Trump doesn’t matter. I think the issue here is that Liz Cheney is not representing the views of her constituents and they have every prerogative to vote her out. And that’s really what this is about. The people of Wyoming, I haven’t seen the results. I don’t think polls are closed yet.
BBC: But no, I think they’re still open. This Cheney represents the people of Wyoming, not just it is predominantly a Republican, as you say, but not just the Republican Party. She represents the people who voted for it.
TN: But there is one representative from Wyoming. And so, yes, she represents the people of Wyoming. But if she’s a representative of a political party and she’s elected by that political party and the voters in that, so the Republican Party of Wyoming has actually censored her. So they’ve told her that the actions she’s taking are not endorsed by the republican Party of Wyoming. She’s known for over a year. So shortly after the 2020 election, they censored her. And so she’s been way out of bounds for almost two years because it’s the party, she has to go through the party system at the state level to get on the ballot for the primary, so she can win the primary to win the election. And so she really does report to the people and to the party in Wyoming. So it’s kind of the ugly side of democracy, but there is accountability in representation.
BBC: Well, clearly, but I suppose the other thing is that I’ve heard reported is that Liz Cheney, in terms of her views, apart from on the subject of Donald Trump, her views aligned pretty perfectly with most of the Republican voters of Wyoming. Very conservative on most issues. It does seem to be Trump. That’s the issue. Which seems strange to hear that this man still has so much influence over almost everything that happens in US politics.
TN: I don’t know that that’s the case. I think, to be very honest, I think Trump is good for US media and I think US media love covering Trump. Trump has very little to do with a lot that goes on. But if you watch US media, every day has a story about Trump and that story gets the most clicks and the most views. So whether or not Trump has something to do with the story, us media love to make the story about Trump because they know they will get traffic on that story.
BBC: But the reason they get traffic on the story is because people are interested in them. It’s a circle, isn’t it?
TN: Well, I don’t know. I think most people would like to understand what the actual issues are exclusive of Trump, but with the obsession that US media have on Trump, people just can’t get away from it because you have a kind of a splintered media environment in the US. And a lot of that is partisan to the left and to the right. So people can get partisan news really anywhere. But it’s the main US media that really seemed to have this obsession with Trump that they just can’t quit because he gets views and he gets airtime and people watch their shows when he’s on it.
BBC: That would be true in Texas as well as Wyoming, where you are.
TN: Anywhere in the US.
If a story is about Trump, some people intensively hate him, some people intensively love him, and people are in the middle and you just cannot avoid it. You just can’t avoid it.
BBC: Penny I mean, your neck of the woods, I guess that might be where the William Mammoth ends up if colossal get their way. How do you feel about all this, Penny?
TN: Well, it’s a Texas company that did it exactly. Maybe they just wanted more things to hunt, right? We like to hunt in Texas.
BBC: Everything is big. Of course, in Texas. So that makes some sense.
TN: Yeah. So if we do make woolly mammoths, great. And I think I’m kidding about the hunting, but I think it’s really interesting as different species are, say, overhunted or whatever, I’m curious how they’ll be accepted once they’re reintroduced. So let’s say someone is the first farmer to find this to be a pest and shoots it. So how will that person be treated if this marsupial is reintroduced?
We had a big week, with a lot going on globally. The president’s got COVID. Europe raised rates to zero, and so on and so forth.
First, we talked about Europe. It’s a mess, everyone knows that, but we talked through some opportunities there.
Next, we talked about aluminum. Industrial metals have been really interesting on the downside of late, but Tracy found something around aluminum that is really interesting.
And then we talked about tech, about Snap’s earnings, and what that could mean for other tech earnings coming up.
Key themes:
Europe is a mess. What’s next?
Aluminum supply shock
Tech SNA(P)FU
What’s ahead for next week?
This is the 27th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 0:50 95% on markets forecasts using CI Futures 1:44 Key themes for the week 2:34 What’s happening in Europe and what are some opportunities there? 6:37 Why did the European equity indices in the wake of the ECB meeting? 8:32 What can the ECB do moving forward? 9:40 Metals: what’s going to happen in the aluminum markets? 13:14 Will we switch back to goods in September? 16:50 Snapchat’s earnings and other earnings of tech equities. 21:06 Ad inventory element to tech earnings 23:16 Is there an opportunity for Meta to buy something like Snapchat. 24:21 The week ahead: Fed meeting next week
Listen to the podcast version on Spotify here:
Transcript
TN: Hi, everybody. Welcome to The Week Ahead. My name is Tony Nash. Today we have Albert, Tracy, and we have Sam doing a remote from his car because the Texas power grid can’t handle his house. So thanks, guys, for joining us. Before we get started, if you could please like and subscribe to the channel. When we’re done, and while we’re talking, please make comments, ask us questions. We get back to you during the week, and we really want to hear from you.
Also, I want to let you know about a promotion we’re having for our subscription product, CI Futures, which is a forecast platform for equity indices, currencies, and commodities. We are offering a $50 a month promotion for CI Futures. That is a short term promotion. So please check it out on the link right now and take advantage of that promotion. Okay?
We had a big week, a lot going on globally. The president’s got COVID. Europe raised rates to zero, and so on and so forth. First, we’re going to talk about Europe. It’s a mess, everyone knows that, but we want to try to find some opportunities there. Next, we want to talk about aluminum. Industrial metals have been really interesting, I guess, on the downside of late, but Tracy found something around aluminum that is really interesting. And then we’re going to talk about tech, about Snap’s earnings and what that could mean for other tech earnings coming up.
So first, let’s talk about Europe. Albert, you retweeted this tweet from HedgeEye earlier this week, talking about the 50 basis point rise by the ECB, and we’ve talked about it for months about the problems that Europe has if they raise. The problems they have if they don’t raise. And it was kind of a middle ground that they did. What are your thoughts on what’s happening in Europe, and are there opportunities there?
AM: Are there opportunities? Yeah, of course there are opportunities everywhere, Tony. You just got to be able to sit there and sift through the wreckage of what Europe is at the moment. Their economy is struggling. The 50 basis point rate hike, I kind of like, shrug it off. Surprise they actually did 50, but I kind of shrug it off. Their biggest problem is the dollar being elevated at the moment. It kind of helps them in the manufacturing sector for exports. But realistically, without China importing their products, what are they going to accomplish in the coming, like, two, three months? Probably nothing.
Aside from Europe speaking about the dollar being up, I’m kind of looking at Brazil and India’s next problem places.
TN: Okay.
SR: Yeah. And to that point, Albert, it’s a really interesting one, given it really doesn’t matter if you have great export markets if you can’t actually make anything.
AM: Yeah, I mean, the Europeans right now can’t make anything. They’ve got a labor problem worse than the United States at the moment. They have kind of COVID crazy policies still lingering. As soon as the tourist industry dies down a little bit for tourist season, they’ll probably come back in full force. So, I mean, it’s kind of a gloomy outlook for the Europeans at the moment.
SR: Power prices for the manufacturing engine in Germany.
AM: Yeah.
SR: If you’re not manufacturing anything, good luck selling something.
AM: Yes. I mean, even the stuff that they are manufacturing is going to be an inflated price that the world is not going to be able to even buy at the moment. They got food prices to deal with, not let alone energy prices. But didn’t European?
TS: It was a mixed message. No. Right. Yes. On one hand, they said, we’re raising rates to zero, meaning they’re not going to charge you anymore.
TN: Right.
TS: They don’t have negative rates. But on the other hand, they’re talking about bond buying program that they don’t want. They actually said, this is going to be kind of untransparent bond buying, which is fine.
SR: But that’s important and actually kind of a good thing, if you think about it.
TN: But the BOJ did right. The BOJ did that in 2014, 15, 16, where they bought up all the government debt and it just disappeared. And so is this a way for the ECB to disappear a bunch of government debt within the Eurozone?
SR: That’s what QE is.
AM: Yeah, of course. That’s like a standard thing, especially specifically for the Europeans. They love to hide debt and reissue it elsewhere, longer dated and whatnot. They love to kick the can down the road because they know that the United States is going to bail them out anyways at some point.
TN: Sam?
SR: Yeah, it’s exactly what they’re going to do. In my opinion, it’s kind of brilliant because in a way, you don’t want everyone to know how much Italian debt you’re buying, and they’re going to buy Italian debt, they’re going to buy Greek debt. And then, believe it or not, if we continue to have these kind of problems in Germany, guess what? Germany is probably going to be a huge beneficiary of the debt buying program. So it might be the first time in a long time that we don’t hear Germany complaining about it.
TN: Right. So I just want to be clear, they’re not hiding that they’re actually buying it to retire it. Right.
AM: Tomato, tomato.
SR: They’re not necessarily directly retiring it. They’re just buying it and holding it to maturity.
TN: Exactly right. Which is exactly what the BOJ did in Japan five years ago and they continue to do, actually. Okay, very good. So one last question on that. Why did European equity indices rise in the wake of the ECB meeting? Was it because of this debt issuing?
AM: I think..
TN: was distracted by Tracy. Was it because of the debt program?
AM: Yeah, the non transparent bond buying, and seems like the ECB is going to try to keep the market at least elevated, but, I mean, it was crushed so much that bottom feeders just started to come in in my opinion.
The only companies in the European Union right now that I would even think about are the ones that have ADRs in the US that have more revenue based in the US than anything else.
TS: I think what got them excited is because you saw a spike up in the Euro temporarily, so people started buying into the equity market. However, that’s going to be very short lived, I think still we are going to see inflows to the US market from all of these other markets, but there’s really no other place to go right now.
TN: Right.
SR: There’s also the problem of markets are forward looking and it’s so bad in Europe and it’s all priced in that at some point you get a mechanism where it’s not as bad as it could have been. And that to a large degree, looks to be what’s going on right now.
You’ve got the Euro almost at par. You’ve got an economy that is absolutely in the toilet. Everyone knows that. And it’s all priced into the equities. So if you begin to see a bright light at the end of the tunnel, there’s the potential for a significant rally there that could be kind of face ripping.
TN: Oh, yeah, great. Yes. So the position that the ECB’s in, what can they do going forward? Do they continue raising at small increments or are they kind of one or two and done? What possibilities do they have?
AM: I think they’re only one and two and done. I don’t think they can really keep raising rates like the United States right now. That would decimate them.
TN: Okay.
SR: 100%. One or two and done. And by the way, that kind of lines up with where the US is probably going to be done.
TN: So let me ask you one final question on this. If you’re an American company and you have a vendor in Europe and you’re paying Euros, would you long those contracts, get them locked in and euro prices as long as you can right now, do you think the Euro at Parity is a short-term anomaly?
AM: I think it is, yeah.
SR: Yes. And by the way, you can’t no European companies that dumb. That’s worth doing busines.
TN: I think you overestimate. Okay, that’s good. That’s good. Okay, perfect. Great.
Let’s move on to metals. Tracy, you posted a great graphic on and had a great discussion about aluminum and some aluminum factories that are shutting down largely because of power prices. Can you help us understand that situation and help us understand what’s going to happen in aluminum markets?
TS: Yeah, I mean, if we sort of look at the aluminum markets right now, the big thing is that because of the power crisis in the EU, right, we’ve seen almost 50% of their smelter market come offline because they just can’t afford it anymore. We’ve also actually seen this drift to the United States. We just had Alcoa shut down one of their lines in Indiana. So this is a global phenomenon.
The problem is that we’re short of aluminum by a lot. Because if we look at this energy transition, and I think I stated, particularly if we were looking at because the drivetrains are so heavy, you need a lot more aluminum to produce these vehicles, we’re looking at a deficit.
We’re already in a deficit. We’ve seen a 30% pullback in this market. We’re in a deficit. We’re going to be headed to worst deficit in H2 of ’22 and into 2023. And actually, if we look forward all the way until 2025, what I’m thinking is this pullback in the market has been a little bit overextended, over recession fears. Right. Huge pullback in the metals markets. Huge pullback and slightly pullback in the energy markets. But really, if we’re looking at these based on industrial metals, especially ones that are particular to energy transition, I think this move is a little bit overdone right now. I think there are opportunities to be had because we are looking at structural supply deficits across many of these metals, aluminum in particular.
AM: You know it’s interesting. It’s interesting. That just came to my thought of Tracy talking is utilities have given up every gain that they’ve had for the year, come right back down. Even some of the wheat and commodities just came down. Unbelievable. Dollars surge, futures crushed. It’s stunning. But I believe, just like Tracy says, I believe it’s all oversold at the moment.
TS: It actually is. Even if we take in a scenario where DM markets go into somewhat of a recession, we’re still in a structural supply deficit. So even if we’re in a recession and that takes a particular amount of demand out of the market, we’re still at a deficit.
TN: Okay. So I want to be careful with recession and not to kind of push back on you, Tracy.
TS: I’m just saying because everybody’s throwing that word around right now.
TN: So we can have a slowdown without having a recession, right?
TS: Correct. Absolutely. And I wouldn’t say that we’re necessarily in a recession, but things could get a lot worse in Europe or whatever. But even with taking that demand out of the picture, if we look at it as in we do have a recession in the market. “If”. Right.
TN: Right. So Sam has written quite a bit about the kind of switch to services over the summer from goods and Sam, do you see us switching back to goods, say, in September, October, from service says is that kind of a pretty dramatic switch from one to the other?
SR: No.
TN: Okay, so what happens? We switched. Goes to services over the summer, does that end what happens there? Because I’m curious.
SR: Yeah. No, you continue to have services be the dominant factor, and the services tended precovid to be the dominant factor.
TS: We talked about this a few weeks ago.
SR: Exactly. It’s one of those where goods probably don’t fall off a cliff because at some point you do have to have a comeback outside of the US. In goods. So that’s somewhat of a tail end. You have a reopening in China, you have a reopening in Europe, you have some sort of resolution to the Ukrainian conflict. You begin to have some tailwinds for Goods, but it’s simply not what I would say is kind of back to the coveted, like, goods model that was goods driven, everything was great, blah, blah, blah. No, it really does look like it’s kind of a summer of party, summer of vacation, summer of get out there. We didn’t have vacations in 20 20, 20 21. We’re going to go in 2022, and we’re going to go back. That appears to be the case, and it appears to be playing out. The question is, does that continue as kids go back to school? Probably not. Does it continue as people go back to work in the office? Probably not.
In the fall, you get kind of the current trajectory in Goods, which is back to normal somewhere around a 1% growth rate, and in services back to normal one to 2% growth rate, maybe a little bit more. It’s not a bad thing, but it’s certainly not the boom in goods that we saw over the past year and a half and the boom that we’ve seen services over the last six months.
AM: No, I was thinking about what Sam is saying. There’s a risk here because if the Fed pivots a little bit too early, which everyone thinks they will, and then goods start coming back online and demand still elevated, we could have another inflationary event going into 2023.
It’s like you make policy mistakes and the economy is still red hot at the moment in all sectors. As much as they want to try.
TN: To cover, it’s not red hot because people use the recession word all the time.
AM: Why?
SR: The only pushback I’ll give there is that I would say the interesting thing is that goods come back online in a pretty big way, and if you just have steady state current consumption levels, it’s not a boom. Right. It’s still going to be deflationary or disinflationary on the margin. If you don’t have a surge in the demand for goods, and it’s hard to see where you’re going to have that demand surge for goods in an elevated services environment. Right. So that could actually be the fault signal that makes the Fed back off as we go into the back half of the year.
TN: Interesting. Fantastic. Okay, great. Speaking of signals, let’s look at tech for a minute. Sam, you have the most mysterious newsletter in the US. And newsletter today talk about snaps earnings. And I put a snapshot of your newsletter on the screen looking at average revenue per user for Snap. Can you talk us through some of that? Some of the earnings work for, say, Snap and Twitter? What does that mean for tech generally?
SR: Yeah, it’s interesting. We all kind of know that tech, particularly smaller tech, the startup VC type act companies have been struggling, right? You’ve seen Layoffs, you’ve even seen the big guys. Microsoft, you’ve seen Meta, you’ve seen parts of salesforce have hiring freezes. So we know that there’s been a little bit of underlying problems with the overall tech world in terms of employment.
There are only two ways that you can really solve the problem of slowing revenue growth if you want to drop money to the bottom line, whether it’s or earnings. And that is you can lay people off and you can cut advertising spent. And so Snap and Twitter are kind of, what?
TN: PG and E? Travel and expenditure as well. Travel expenses.
SR: Well, yeah, travel and expenditures. We’ll get there because I hit that later on the night. Perfect. As you know.\
TN: Yeah.
SR: The problem with Snap and Twitter is basically what you saw was great user growth, right? Better user growth than I think anybody really was anticipating. The only issue was that they didn’t monetize it. There was nobody really backing up on the advertising front. Right. We all know that Peloton and all those guys were cutting back on ad spend, carvana basically bankrupt crap company. These guys were cutting back on ad spend, and they were the big marginal drivers of growth for those platforms.
So when you cut back on people in ads, you begin to actually be able to drop something potentially to the bottom line, or at least survive a downturn in VC spent. That played through with Snap and Twitter in a marvelous way. But then to your point on travel and entertainment, you get to the earnings of American Express, which is a great way of getting kind of a peek at upper middle and upper class spending and business spend. And those could not have been better earnings. I mean, if you’re telling me that the consumer is in a recession, it is the bottom half of the spectrum that’s in a recession, if anyone is in a recession. Those were massive earnings numbers, massive spend numbers on a year over year basis. The chart that I sent out was of the spend by bracket of age, and millennials and Gen Z are the biggest spending boost.
AM: Luxury items still are unbelievably hot right now. All the earnings are just beating all estimates.
SR: But it’s the pivot. It’s the pivot, right. Peloton all that crap that we had in Silicon Valley that was overvalued, that everybody bought and everybody thought was cool, everybody bought it. They’re already done with it. You don’t need to buy three peloton bikes, right? It’s the problem with keurig. We all remember the whole Green Mountain coffee thing. It’s the same problem, right? Once you buy it, you don’t have to buy five Turks. You don’t have to buy five Pelotons.
The ability to monetize that over time is something that I think people kind of get a little iffy with. That’s really what I think is smacking right now, and it’s smacking in a pretty real way, and it’s not going anywhere anytime soon.
TN: Okay, so we also have new ad inventory coming online in a big way with Netflix, right. So can you talk about that side of the ad inventory element a little bit?
SR: Sure. You have a ton of ad inventory, right? If you want traditional media, you can go to traditional media. NBC, CBS, whatever. If you want online, you have Facebook, you have Instagram, all part of Meta. You have TikTok. You have snapchat. We can go down the list forever.
Netflix is basically trying to save their business with the greatest dumb quote in their earnings release where they said, our great content is going to have a premium CPM. The way that we measure advertising reps, they’re amazing content. Are you kidding me? No, I mean, they’re going to be competing with Twitter and Snapchat, which is the bottom of the barrel in terms of advertising revenue.
TS: Took that model and extrapolated on it. Right. So now you have maybe they were the first, but now you have everybody else doing it, especially very independent media. Right. That is starting to gain traction.
TN: Exactly. Things like plumbing and that sort of thing. And Hulu’s done that really well as well, inserted advertisements. So the only thing worse than new Netflix content is new Disney Plus content.
SR: Unless you have kids, it’s a lifesaver.
TN: Yeah, it may be a lifesaver, but the old content is good. The new content.
AM: I don’t know, the content on Disney nowadays is kid friendly. Okay.
SR: I didn’t say it was kid friendly. I said it was a lifesaver.
TN: Yeah, but you’re right. I mean, there’s a huge amount of ad inventory and they will be competing with Netflix. They are already competing with Hulu, those sorts of guys. Is there an opportunity for somebody like Meta to buy someone like Snapchat? Would they want to do that?
SR: They tried years ago to buy Snapchat. And why would you like…
TS: Why would you buy it?
SR: Yeah, I mean, that’s the key. And I think that it’s the reason why you can have a 30 plus percent down day and call it a company that has something interesting and something that nobody’s done before. Because I’m sorry, it’s only fans, but without subscription revenue.
TS: They have no real model to make money. That’s the problem. Without subscription, no solid revenue model.
AM: I’d buy an only fans IPO all day long.
TS: I wasn’t talking about only fans, I was talking about Snapchat. No idea about ole fans. Never been on there.
TN: All right, guys, very good. Now let’s just segue to the week ahead. What are you guys looking for in the week ahead? We’ve got the fed meeting next week, right? So that’s going to be all the talk all week long. So what’s going to happen there?
AM: I think they try to get us to the bull bear line of 40 20 or 40 30 in that range and linger us there until the Fed meeting. I think Jerome Powell is pretty much his last chance to be hawkish, because I don’t think there’s not another meeting until September at that point, like, the Fed already are talking about pivoting by then. So this is probably their last chance to be real orkish.
TN: Okay. No, go ahead. Sorry.
TS: I think as far as the energy market that’s concerned, we’ll probably see oil, gas pretty much sideways for the week, just as we have been seeing. And I think I’m very interested in the metals complex the first time in a very long time. So I think we might see a slow kind of interest in that market next week.
TN: Interesting.
SR: I think it’s going to be interesting to see how the market interprets the feds forward view, honestly. We all know they’re going 75. It’s already there. It’s already priced in. I think it’s going to be very interesting to see how the fed begins to look out to September and beyond, and the market is going to begin to really price that in. And so you could see some pretty big whipsaws in the dollar. You can see some pretty big whipsaws on the long end of the curve. And equities in general, I think equities could see the most volatile week, even though it’s the most predictable Fed raise in a couple of meetings, I think you could see some incredible volatility and some really interesting outcomes.
TN: Yes. Very good. I can’t wait to watch. Guys, thanks very much for your time. Have a great weekend. And have a great weekend. Thank you.
TS, AM: Bye. Thanks.
TN: Okay. I forgot to put you on mute. I apologize, Ready?
Despite weaker economic data, will the Federal Reserve continue their hawkish stance? Do the FOMC minutes offer any hints of their stance? Our CEO and founder, Tony Nash tells us whilst telling us the impact of rising rates on the banking and property sector.
Show Notes
WSN: BFM 89.9. You’re listening to the morning run is seven o’ 7, Thursday, the 7th of July there and keeping you company till 10:00 a.m. Is Shazana Mokda in an undisclosed location far, far away. And I’m Wong shining in the studio now in half an hour, we’re speaking to Manpreet Gill on fixed income and commodity the investment strategy for 2022. But let’s recap how global markets closed yesterday.
SM: So if you take a look over in the US, markets actually closed up despite Fed meeting minutes coming out signaling a more hawkish stance. The Dow was up 0.2%, the SP 500 and the Nasdaq was also up 0.4%. Looking over in Asia though, it’s mostly red. No, it’s all red really. The Naked and Hansi were both down 1.2%, the STI was down marginally by 0.01%, and the Shanghai Composite and FBM KLCI were both down 1.4%.
WSN: So for more on where international markets are hitting, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now so far the economic data coming out of the US shows a slight deceleration of the economy. So do you think that the Fed will then hold back on their hawkish pace of rate hikes despite June’s FYMC minutes indicating that they intend to keep raising rates?
TN: I think they’re definitely going to keep raising rates, I think until we see a marked slowdown in particularly commodity price inflation, but also other things like wage inflation. I think they’re going to keep accelerating. So it’s unlikely they’ll continue with a 75 basis point hike, but they will almost certainly have a 50 basis point hike and continue for the next couple of meetings at least.
WSN: I have another question though, Tony, in that when do you think interest rates will peak or when is the peak of the tightening cycle? Will it be early 2023 or you’re looking maybe later in 2023.
TN: Well, some people are saying that it’s possible they continue to hike until the end of the year, and then in 23 they have some rate cuts similar to what happened in the early 90s. That’s possible. I think it all depends on where the economy is at the time. But I think for now they’re just worried about inflation and the downsides of inflation and they’re looking at asset prices and where asset prices are, and it’s really troubling for them given yeah, the economy has definitely slowed down, but we still have wages rising, we still have very high commodity prices, and we also have an appreciating dollar at the same time. So anything imported should be cheaper on a relative basis, but those prices keep going up as well. So Fed continues to be worried, although they’re getting pressure from the outside because it is an election year and the party in power does not want there to be a recession going into the election. And so they’re getting huge pressure from the treasury and from other people to moderate their stance so that there is not a recession going into the election.
SM: Well, what do you think then, Tony? We know that economists at Goldman Sachs have put the risk of a recessionary slump in the US. In the next year at 30%. So they’re still looking at next year. Some consumers feel it’s already here, I guess. Where are you standing in this debate?
TN: Yeah, I think we have unemployment still falling in the US. So you don’t usually have a recession at a time when unemployment is still falling. We also have high inflation. So on a real GDP basis, you may have a negative real GDP number. Well, you have a positive nominal GDP number. And I know that’s a little bit confusing, but what that basically means is that the rate of inflation pulls the economic growth into a negative number simply because of inflation. So we’re in a place where it’s kind of hard to identify a recession because of the real and nominal difference. But when we still have jobs growing, when we still have investments and other things happening, it’s really hard for us to hand on heart say that we are in or entering a recession.
WSN: Okay, let’s get into the weeds then, with regards to the recent set rate hikes and how that might play out in certain sectors. And I want to look at the US. Banks. So how do you think they perform this quarter? Are you a bull or bear?
TN: Well, it’s a tough time for banks. They had mixed results in Q2, and I think higher interest rates obviously help their net interest margin. But borrowing cools off, and it’s things like mortgages. Other things have cooled off dramatically over the last same month or so. Banks will likely have a very tough Q3, and then when things stabilize, they’ll be better. But I think Q3 is going to be rough for them. I wouldn’t say I’m necessarily bearish on banks, but I would say I’m neutral on banks.
WSN: What about the property sector, Tony? I mean, we’ve heard, of course, a few months ago that whatever you put up in the market, it gets snapped up within the day. But is that trend continuing? Are you a bull or bear for property?
TN: You know what? It depends on where you are in the US. Where I am in Texas, things are really strong. But a lot of other places in the US. Things have slowed down dramatically, and mortgage applications nationally have come to a standstill as interest rates have risen. So I think a couple of weeks ago we may have talked about how a house that was purchased in January, the median price house purchased in January, if it were purchased today, it would cost $800 a month extra. And so the interest rates just had a dramatic impact on house prices. So mortgages have really slowed down.
SM: And can we turn to oil, Tony, because oil prices have dropped below $100 per barrel for West Texas. Does this level accurately reflect supply and demand for crude? And does this then invalidate the bullish forecast of $150 and above that analysts were predicting not too long ago?
TN: Yeah, I think we’re in a really strange place for oil right now. And if you look at the later months of crude oil futures that are being traded, they’re actually trading higher than the current month. So there’s something happening in the current month, like maybe somebody’s books blown up or something. But there’s something happening in the July future that rolls off in a couple of weeks. And I expect that we’ll see higher crude prices going into August and the rest of Q three, early Q four. So it’s going to be pretty choppy for the next few months in energy and commodities generally.
WSN: One last question for me, and it’s more long term economic question, and that’s about Biden’s infrastructure bill that was passed in November last year, but it’s gone really silent. Do you know what’s happening on that front?
TN: Nobody does. There’s been very little news about it. What’s happened partly is inflation has taken a bite out of it and it’s really caused a lot of projects to stall. So the problem with federal appropriations is the longer the money sits, the less money that gets spent, which is good for taxpayers. Right, but I think inflation is really forcing local and state governments to pause on their investment plans because they do have budget, but they don’t have enough budget to get the projects done that they want. So can they appropriate can the US. Congress appropriate more for the next fiscal year? It’s possible. It depends on who’s in power. So if the Republicans come into power in November, then they may not raise the appropriations level and we’ll be stuck with the level that we have, which it’s $500 billion, a massive amount of money. I don’t want anybody to mislead anybody, but the Democrats will likely want to raise that level if they remain in power after the November election. But to date, not a lot has happened. There has not been a lot of movements. We haven’t seen a lot of major announcements of new projects, these sorts of things.
And if it was successful, we would see a lot of major announcements of new projects.
WSN: All right, thank you for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his views on global markets, in particular the US. And whether the Fed will continue to raise rates until 2023. He says maybe, and then maybe they might even cut rates like they did in $2,000.
SM: That’s right. I guess one thing to note is the question is whether we’re going to see a recession sooner rather than later. Yeah, and Tony did point out the fact that labor unemployment is still at really low levels. Unemployment is decreasing so that’s really at odds with a recession and that’s what everyone is looking to see. I think if we start to see unemployment go up, that heralds that a recession is either here or coming.
WSN: I suppose we are living in really weird economic times. None of the normal correlations that we see are making any sense. I think that’s a lot to do with the fact that during COVID-19, governments basically just took the let’s do whatever it takes attitude. There was so much money pumping into the system by every major central bank and the recession was extremely V shaped, sharp recovery. But then that also caused supply chain disruptions and we had the war in Ukraine. It was like the perfect storm of Black Swan events which has resulted in this current situation that we are in now. Very quickly, we’re looking at the Fed minutes that just came out now. Indications are that they are signaling another rate increase of between 50 to 75 basis points lightly in the July meeting. And this is the interesting part, they are willing to accept the price of a slower economy in order to tame inflation.
SM: And this is sort of a change from their soft landing rhetoric, right? So earlier they were trying to say oh, it’s not inevitable that there will be a recession, we can still avoid it, we want to get that sweet spot. But I think now they’re trying to navigate those expectations to go like hey, I think we need to kind of expect pain. There is going to be pain, but it’s better to have this short pay now rather than long term pain later. So I think the Fed is really trying it’s got itself in a pickle essentially in terms of trying to prime expectations of the public.
WSN: I think that’s on the back of the fact that they spend the whole of 2021 telling everyone that inflation is transitory, hey, no problem. And it didn’t turn out to be transitory, so there’s a need to rebuild back that credibility. But up next we’ll be speaking to Carmelo for little on malicious overnight policy rate. Stay tuned for that.
We had a pretty volatile week last week, with crude selling off pretty sharply early in the week. In this episode, we looked at energy backwardation, and Tracy educated us on what’s happening in those markets.
We also had some comments from Putin about a multipolar world. Albert talked through that.
And then on Friday, unfortunately, we saw the assassination of Japan’s former Prime Minister Abe. We talked about the Japan post-Abe and what that means for the region.
Key themes:
Energy backwardation
Putin’s Multi-Polar world
Japan post-Abe
What’s ahead for next week?
This is the 25th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 0:54 Key Themes for the week 1:28 Catalyst of the energy sell-off on Tuesday 5:44 Will we see more action in energy prices? 6:57 Is it cost-ineffective to make hydrogen with natgas prices? 8:11 Diesel 9:20 Vladimir Putin’s multipolar world. 13:44 Japan post-Abe 20:29 What’s for the week ahead?
Listen to the podcast version on Spotify here:
Transcript
TN: Hi. Welcome to the Week Ahead. I’m Tony Nash. Thanks for joining us. I’m with Tracy and Albert today. Sam is away, but we are talking about a pretty volatile week this week. Before we get started, actually, please like and subscribe. Please ask any questions below, make any comments. We want to make sure this is interesting for you, so just let us know any additional info you want or comments. We’re happy to address those.
We had a pretty volatile week this week with crude selling off pretty sharply early in the week. So we’re going to look at energy backwardation, and Tracy is going to educate us all on what’s happening in those markets. We also had some comments out of Putin about a multipolar world. We’re going to have Albert talk through that. And then on Friday, unfortunately, we saw the assassination of Japan’s former Prime Minister Abe. So we’re going to talk about the Japan post Abe and what that means for Japan and the region.
So first let’s get into energy. Tracy, obviously, we had a big sell off in energy early in the week, and then we saw it come back later. What was really the catalyst for that energy sell off on Tuesday?
TS: What happened is that we started on July 5, right? We opened with low liquidity in the market in general. Then we saw a sell off in the general markets and commodities and risky assets that kind of exacerbated that trade. And then on the 6th, we saw a liquidation of a couple of very large positions in that market. And so fundamentally, basically, there is no reason for this sell off other than technicalities.
In fact, if we’re looking at this market, this spreads, the calendar spreads, which means month to month, were exploding higher during this entire move. That implies that the physical market at least, is very tight right now because you’re seeing backwardation increase significantly when we’re seeing a $10 move in ZZ, which is crazy.
TN: Can you tell us what that means? A $10 move in ZZ. What does that mean for the rest of us?
TS: If you’re talking about calendar schedule, we’re talking about monthly. So we can talk about the current front month is August. So we look at August, September, September to October, October to November, et cetera, et cetera. And once these spreads start exploding higher, that means that we’re seeing people want to dump oil in the front month market because that’s more lucrative than keeping it in storage.
So if I’m an investor and I’m looking and I want to invest in a backwardated market, I’m looking at a convex market that goes from right to left, and I’m going to invest in, say, a back month, and I want my investment to move higher…
TN: I’m investing further in the future.
TS: Right. That’s what it backwards. If you’re in a contangable market, we’re looking at the opposite situation, where you’re looking at a convex structure going from right to left, whereas if I invest in December, by the time my investment reaches Frontline X free, I’m losing money. I’m losing value in my investment.
TN: Right.
TS: And so that’s how we kind of have to look at that situation.
TN: Yes. You had a great tweet this week explaining that with visuals.
TS: I did. It’s on Twitter, if anyone wants to see it.
TN: Exactly. We saw this in crude. We also saw it in a natural gas. Right?
TS: Yes. We’re kind of seeing a major pullback in many of the commodities markets. Right. We’re seeing a little bit of a bounce this week because we’re looking at China. China has recently announced we have one last announcement with $200 billion bond sale rate. So we’re looking at a lot of stimulus out of China that’s giving commodities the boost. Right now, we have to see I think the markets are still going to wait on, particularly the industrial and base medical markets are going to wait until we actually see some action in China to really see investment back into these markets after this huge goal.
TN: So nobody believes the China stimulus story right now. It’s kind of a show me the money period. Right. But once they do start to show the money, do you think we’ll see much more action in energy prices?
TS: I think you’ll see more action in metal prices than you will equity prices.
TN: Copper’s way off compared to, say, the last 18 months. But it’s not way off, given historical copper prices. If we go back before, say, Q1 of 2020, it’s kind of where it had been previously in the ballpark, at least. Right. So we haven’t necessarily reverted back to pre-COVID, necessarily. We’re just in the start-stop manufacturing world, and that’s what’s affecting base metals like copper. Is that fair to say?
TS: Oh, absolutely. If you look at, like, a monthly chart rather than looking at a five-minute chart, and the market has kind of just been consolidating, really, for the last two years, until we see a really big break above, say, $5, a really big break below $3, we’re still kind of in that consolidation zone.
TN: 3.50 to 4.50 kind of range. Interesting. Okay. Sorry, Albert.
AM: Yeah. I got a question for Tracy. Nat gas, as we’re talking, since we discussed it a little bit, that’s used to make hydrogen, if I’m not mistaken, and since the nat gas price seems to be elevated, isn’t that going to be a little bit too cost-ineffective to make hydrogen, which causes a diesel problem, if I’m not mistaken? I’m not sure about that. That’s what I’m asking.
TS: No, absolutely. I think that would be a problem. Looking forward. I think there’s a lot of problems if we’re looking at the hydrogen market. There’s still a lot of problems when we’re talking about taking this idea to actual fruition. Right. Because if you look at the hydrogen market, there’s like a rainbow of green hydrogen, blue hydrogen, this hydrogen, this hydrogen. But we really haven’t gotten to the point that can overtake, not gas the allure of the situation is that you can take hydrogen, mix it with nat gas, you can send it down the same pipeline, and that saves a lot of money.
AM: Yeah.
TS: The situation is this is not a great idea in theory, but we’re just not there yet.
TN: Okay, got you. Albert’s, question about diesel. Diesel is not any less tight than it was a week or two ago. Right? In fact, that’s just as tight or tighter than it was, say, a couple of weeks ago or a month ago.
TS: Yeah, I think the diesel market is still very tight.
TN: Right.
AM: Maintenance season starts, isn’t it? From September to November?
TS: Yes, we will start maintenance seasons.
TN: Okay.
TS: I would actually look for some of these refineries to maybe put off maintenance season. So that’s what I would watch to the maintenance season happen. And it’s happened before. If we have it such a tight market, we could see them putting off maintenance seasons. It’s not unheard of.
TN: Okay, so hurricane season and maintenance season are upon us, but we may see at least maintenance season for all of us.
TS: Oh, not I just moved to Florida.
TN: Good luck with that. I’m in Texas. We don’t get as many of you, but it’ll be a fun season for you.
Okay, let’s move on, guys, to some comments out of Putin this week. Vladimir Putin had some comments about us, the multipolar world becoming more and more of reality. We heard this ten years ago. We heard this 20 years ago, and it came up again this week. So, Albert, can you kind of let us know what’s going on there?
AM: Tony, I’ve used this multipolar example for the US. Dollar dominance I got for years now. And the fact of the matter is, we are not in a multipolar world. We are not even going into multipolar world.
People are confusing a little bit of weakness in the US. Leadership and errors and decision making, foreign policy for multipolars, it’s just a multipolarity, and it’s just not the case for the world to be in a multipolar scenario, you would need multiple countries with equal militaries and economies. We are nowhere near that.
The Russian economy is 2.5 trillion. The American economy is pushing 30 trillion. This is just a joke by Vladimir Putin. Simply undermine the US dominance both in the world stage and the dollar.
TN: Aside from some dumpster pundits who write for The Atlantic or whatever, who believes that nonsense?
AM: A lot of Europhiles that want to see the United States take a step down, they can do it. A lot of crypto guys, a lot of gold guys. These guys have to make that argument, because without multipolarity, you cannot have a neutral reserve asset to settle trade. And that’s just the fact of the matter.
The problem becomes, if you have a multipolar world, you’re on the verge of another world war, because there always has to be one alpha that takes hold of the system. You just can’t have equal people.
TN: And the cost of the transaction? Cost? The cost of trade, everything goes up. If you have multiple rights go up, everything goes up.
AM: It’s completely unstable.
TS: Inflation from other countries to other countries.
AM: Yeah.
TN: The world is built on China exporting deflation. Has been for 15, 20 years. And it will continue. If they could just keep their ports open, it will continue. And it makes people happy. Right.
AM: No, you’re right. That’s just the way our system works right now, with the dollar underpinning all of it. It’s the lifeblood that makes trade work. And people are not going to like it. But I promise you, no one alive today is going to see anything other.
TN: So let me just take a step back. Who does he think the polls are? Russia, China and the US? Or Germany or something?
AM: He’s trying to make an assumption to say that Russia and China are the new contenders to the United States. The problem with that is they don’t have military power projection globally like the United States does. They can’t even invade Ukraine. China can’t even invade Taiwan. Otherwise they would have taken it if they’ve it could have. This is the world we live.
TN: Yeah. Russia can stir up problems in Libya or the Middle East or whatever.
AM: There’s no question that they can stir up problems and they can fill in gap vacuums that we leave right, unintentionally, unintentionally. But they cannot hold that territory. They cannot force changes in governments like the United States did.
TN: And every time I hear somebody talk about the Belt and Road as a sign of China’s dominance, it reminds me of Napoleon’s march to Russia. Right? I mean, they’re spreading themselves so thin. They can’t keep that up.
AM: They can’t. That’s perfect example to do that, to make that thing actually successful, you need to back that up to secure your trade line, trade with the military. Right. China has like, what, two military bases outside of China? Like one in Djibouti and something else. I mean, they can’t send ships over to their armor.
TN: Myanmar.
AM: Yeah. This is beyond a joke to me. I don’t take anybody seriously that even brings this part up, right. Vladimir Putin included.
TN: That’s good. So anybody watching this, if you have an alternative view, let us know in the comments. Honestly, we’d love to hear it. We just want to hear some credible.
TS: Put your notes in the comments.
TN: Yes, absolutely. Okay. Now, finally today I woke up in the US to the really tragic news of Japan’s foreign Prime Minister Abe, being assassinated.
I saw Abe in his first stint as PM in the mid 2000s. And then when he came back in, in 2013, and with the Abenomics plan, which was really difficult to pull off, ultimately successfully. The guy was smart. He was all about Japan. He’s all about Japan recovering, all about Japan being competitive. I put a picture up of Abe shaking hands with Prime Minister Modi of India. Japan and India were very tight. A lot of Japanese investment going to India, a lot of partnership across those two countries and in Africa, both to defend against China in Asia and other parts of the world. So Prime Minister Abe will be missed.
I think what Abe did partly was bring back Japan’s ability to defend itself by passing a constitutional change that allowed the Japanese military to defend itself where previously it wasn’t even allowed to do that. So there’s a lot of dignity that Japan kind of got back, and we can rub Japan’s nose in World War II for eternity, but it’s not going to be constructive. What happened, happened. They’ve paid their dues, and that’s kind of what Abe said, look, we paid our dues, we’re going to move on now and join the 21st century. And that’s what Japan did.
So I’m just curious to get your thoughts, guys, on Japan post Abe. What do you see as of course they moved on to another prime minister. Japan has already moved on from the Abe government. He wasn’t a sitting prime minister. But what do you see kind of the challenges of Japan’s role in Asia particularly, but also in the world post Abe?
AM: I think the most pressing issue for Japan would be contending with China, both militarily and economically. Abe was, like you said, brilliant statesman and patriot for the Japanese people. So he’s going to be sorely missed. And it’s not just he’s going to be missed, but his cabinet and the people that his network is going to be missed because they’re losing a big part of what he brought to the table in terms of strategy and ideology. It was a big shift.
I think that the Japanese are probably going to struggle for strategy in the next five to ten years. And it’s a sad thing, but I’m sure the Japanese, they’re resilient people and they’ll move on and they’ll recover.
TN: Tracy?
TS: No, I absolutely agree with what Albert said. I think the thing is that people are painting him, the media right now, in particular the Western media, painting them with some villain, which is very interesting to me. And I think that people should really just look at his legacy and respect what he’s done instead of jumping on the bandwagon.
TN: So they’re portraying him as some ultra nationalist, but he’s as ultra nationalist as Modi as in India, or Jokowi is in Indonesia, or Lee is in Singapore, you name it. Tsai Ing-wen in Taiwan. It’s an Asian direction now. Right. And has been for the last ten to 15 years.
AM: Yeah. The media also, Tony, is desperate to not allow any center right or even right nationalist figures be murderers or looked up upon. They just can’t stomach it. They just can’t help themselves to demonize a person that is absolutely unjustifiably demonized by being called an ultra-nationalist and even worse, by the NPR.
NPR had two other headlines that they had to delete because it was just so atrocious. This is a.. And Modi, Abe, I don’t want to put Victor Orban into that, but all these right leaning leaders just get attacked and the media can’t help it.
TN: Right, yeah. I think from an economic plan, if we look at what Abe did with Abenomics, of course, the Japanese Central Bank is kind of “independent,” right. But they really took the JPY from kind of 76 to the dollar to, say, 120 to the dollar, and it really allowed Japanese manufacturing to be competitive again. Right.
And it took somebody with that clarity of economic vision, as well as the clarity of, say, the military vision and political vision, to be able to pull off what they did. And in terms of, say, energy sustainability under Abe, they also created much deeper relationships in the Middle East with places like Qatar, UAE.
TS: And they also looked forward to nuclear, where you looked at the west was looking to shut things down, Abe was looking to invest in nuclear projects. You’re looking for energy security, energy going forward. There are a lot of things that he did to advance that sector in Japan, which is admirable.
TN: Right. Albert if we take a US perspective on this? The US has worked hard to kind of hold a line against China. Do you think with the mediocre leadership we have in the US right now, do you think it’s possible that some of that US say coalition falls apart a little bit? Or do you think we just kind of take a breather and then it resumes based on the institutional stamina of parts of the Japanese government?
AM: That’s a great question, Tony. That’s actually a really good question. And I think where we have to look for we have to separate the Biden foreign policy cabinet with the Pentagon. Because the Pentagon is actually leading this charge for the Pacific with Japan and Australia in charge. I really don’t think that the Japanese are going to take a step back or the US is going to take a step back. I think the system is pretty much, the train has already left the station and it’s rolling.
There might be an argument from the opposition in Japan, but I don’t think. That it’s going to take hold to derail this new initiative by the US and the Pacific.
TN: Great, that’s good to hear. Okay, guys. Hey, on that somber note, we’ll end it, but let’s look at the week ahead. Guys, what are you looking for in the week ahead? We’ve had this real turnaround this week. What do you see going into next week? Do you see things calming a bit?
We saw it coming into Friday. Things really turn up in US markets and in commodity markets. Do we see things stabilizing a bit going into the Fed meeting after we’ve had some Fed comments late this week?
AM: I want to see the comments of where they might signal a 50 basis point rate hike versus a 75. I absolutely believe 75 points is coming just from the jobs data that they posted. It was obviously massaged a little bit.
TN: Just a little bit.
AM: Of course it is. Yeah, but this was a good one. And then the revision too, and it just seems to me that they want another 75 basis point rate hike.
TN: To really kill it?
AM: They got to tackle inflation. I mean, they’re looking at 8.8 on the next CPI, which is just.. And you’re staring on the barrel at 9% and 9.2 and 9.3 in the coming months, which is absolutely a political nuclear bomb that goes off.
TN: Okay, Tracy, what are you looking for in the next week especially in commodities?
TS: Yeah, I mean, I agree we probably will see 75 after non farm payroll this week, which I was looking for a clue kind of are we going to get 50, are we going to get 75? It looks like 75 for sure.
So looking in the coming weeks, I’m really looking to China right now and to see what comes to fruition with these sort of stimulus plans. What does that do to the base in industrial medals markets? And I think those are the two things that you should be focusing on right now, particularly if you’re invested in commodities markets.
TN: Very good. Okay. Yeah. I’m kind of hoping they give in to 50, but I’m not hopeful. I do think they’ll on the kind of conservative hawkish side and go 75. But if they can pick up the bat phone and talk to China, and the China guys will unload a dump truck of cash over the next week or so, then I think they’ll be a little bit lighter and do 50 basis points. But I think a lot of it depends on China ECB. They can’t get their act together, so there’s nothing ECB can do to really help.
And Europe is in so much trouble that it doesn’t really matter what they do. They have huge problems anyway. So. I think you’re right. And tell me what you think about this. But I don’t necessarily think we see massive chop. I think we see just a lot of fairly sideways moved for the next week or so.
AM: I would be wary if we jumped up to 4000 or even, like, 3970. I think a rug pull would be in an order right after that. That’s what they do. They bowl everybody up and then pull the rug out.
TN: Tracy?
TS: Yeah. After this big move down in the oil market, in particular, because we did have sort of a flow event coupled with a couple of large funds kind of workforce to liquidate. So I could see that we still could go a little bit higher next week. Sideways to higher next week.
TN: Very good. Okay, guys, be interesting to see. Thanks for joining us. Thanks very much. Have a great weekend. And have a great week ahead.
TN: Very good. Thank you, guys.
AM: I struggle with the headache through that whole thing.
We’ve all seen many chops in the markets, especially on the energy side, with the fuel and oil shortages. That was a little bit unexpected to people. Equity markets are struggling and there are a lot of talks this week about recession and trying to move the Fed into being more accommodative, which is 180 degrees from where we were two weeks ago.
Copper is hurting and down 28% since March. What is this telling us about metals, generally, and drivers of metals demand? Is this telling us that China – the largest buyer of industrial metals – won’t really bounce back? Does the market doubt China’s stimulus announcements?
We also discussed Europe, its slowing economy, rising unemployment, and gas shortages.
Lastly, is the Fed anchoring inflation?
Key themes:
Metals Meltdown
How badly is Europe hurting?
Fed inflation anchors
What’s ahead for next week?
This is the 24th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 1:45 Key themes for this episode 2:23 Metals meltdown – what are they telling us? 3:48 Will there be a comeback of automotive? 5:09 Does the market believe China’s promise of a stimulus? 7:25 How much is China’s manipulation be beneficial for China? 9:26 What about Japan? 12:00 Europe’s economy and inflation 15:21 Europe’s concentration risk on the sale side 19:42 Europe’s problems stem from this 20:32 Fed and anchoring inflation 25:50 What’s for the Week Ahead?
Listen to the podcast version on Spotify here:
Transcript
TN: Hi everybody, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Sam Rines and Albert Marko. Tracy is out for the long holiday weekend. Before we get started, please don’t forget to like and subscribe the video and please comment on the video. We look at them, we engage. We want to hear your feedback. Also, while you’re here, we have a promo for CI Futures. This is our markets forecasting tool. Our promotion is three months free on a twelve-month subscription. That promotion ends on July 7. So please take a look at it now and get our best promo ever.
So, key theme for this week. We’ve all seen the markets a lot of chop as we talked about. We saw a lot, especially on the energy side, kind of negative with the fuel shortages and oil shortages. I think that was probably a little bit unexpected to people. Equity markets are struggling and there’s a lot of talk this week about recession and trying to move the Fed into being more accommodative, which is 180 degrees from where we were two weeks ago. So a few things we’re talking about.
First is the metals meltdown. Second, Albert Marco, although he’s been in an undisclosed location, he has been in Europe. And we’re going to talk a little bit about how badly Europe is hurting right now. And then we’re going to look at inflation and how the Fed is potentially anchoring inflation.
So first, let’s look at the metals meltdown. If we look at copper. Copper has been a lot of buzz around copper over the last few days and copper is down 28% since March. But I think we could speak to metals more broadly. We’ve got the copper chart on the screen right now. So Albert, if you don’t mind, what are metals telling us generally about markets and the drivers of demand?
AM: Well, I mean, it’s pretty clear that the manufacturing sector across multiple industries is hurting at the moment and has taken a toll in the metals market. There just simply isn’t any demand for consumer products. There’s not going to be any demand for metals probably until the Chinese really start to stimulate.
It’s pretty clear. And then on top of that, they have pressure from the dollar that just keep on charging along trajectory to 110. So those things are really weighing on the metal market. I mean, copper specifically, like you mentioned, aluminum taken some hits just across the board.
TN: Right. So if we look at things like automotive, automotive is held up because of semiconductor supply chain issues which are working out, but automotive manufacturing slowed pretty dramatically. If we see, say, the chip issues get worked out for, say, automotive, do you expect to see more like a comeback of automotive, of car manufacturing, which will pull metal prices along?
AM: No, I don’t. And I don’t think that’s even going to be the case for the next 18 to 24 months. I mean, the auto sector is actually in a really bad shape, And it’s not specifically just because of the chips, like everyone assumes, but you have rubber shortages, you have polyurethane shortages, you have shortages across the board for the entire auto sector, for the manufacturing process. So until all of those supply chain issues get settled, there’s just no hope at the moment, which is interesting because there hasn’t been really any layoffs yet.
I know they’re artificially keeping these people on payroll and doing whatever they want to do with the shifts and manipulating that. But at some point and i’ve been arguing about this specifically the auto sector, there will be layoffs because of all this.
TN: Just for the people who don’t know. Albert is from Detroit, so he pays attention to the auto sector pretty closely, and he knows he has pretty close relationships there. So we’re talking to a man who really does kind of pay attention to what’s going on. Sam, as we see metals prices fall, we’re also seeing china become more aggressive in making statements about economic stimulus and other things. Are the metals prices right now telling us that the market doesn’t believe that china is going to put in the stimulus that they claim to be?
SR: I would say it’s a show me game with China. There’s been way too many people that have been burned way too badly, listening to the rhetoric and trying to get ahead of things on the ground, and then nothing actually happens, or they do something a little different than what they said they were going to do, and you end up with an investment profile that’s completely different.
I think that’s one of the big things to keep in mind is, yes, China is probably going to have to do something into or around the party congress this fall in terms of stimulus. They have to look at going into it. So there’s going to be some stimulus. The question is, what is it and when does it hit and what does it look like? Is it a tax cut? Because in that case, who cares, right?
It’s not going to be that big of a deal for picking up the manufacturing side in a meaningful manner. Is it going to be reopening? Right. Because if they’re sending out checks but not reopening, that’s not going to allow their manufacturing sector to get back to work, which is going to Albert’s point, going to continue to clog the supply chains for autos and auto manufacturing significantly, whether you’re us. Based manufacturer or your South Korean manufacturer, et cetera.
This is a longer term problem where I think you’re not necessarily going to have the pop and metals until people actually see the real data from either Australia or the us. Or even in Mexico. But that’s a significant amount of the auto sector assembly. You’re going to actually have to see the data before people.
TN: Right. And so what I hear about metals in China and I’ve mentioned this before, but what I’m told by people, especially in the copper sector, is that the warehouses in China are actually full, although we’re told that they’re not. They are. And words that warehouses empty out from time to time is simply to manipulate the market up. But there’s ample, say, copper and other industrial metals in warehouses in China, given the demand that the world has.
AM: Let me ask you both little question here. How much is China’s manipulation of their stimulus on and off due to them trying to force the Fed into lowering the rate hikes or putting them into a position where it’s beneficial for China overall?
TN: Sam, what do you think?
SR: I would say they definitely have a calculus instead of the ECB, instead of a certain extent the BOJ when they.. they all have to take that into account and they all have to either front run or attempt to talk their markets one way or the other. That’s why I’m saying it’s definitely part of the calculus. I don’t know how much of the fiscal side is directly related to counteracting with that and how much is directly related to keeping the people happy. I would say those are the two primary catalysts.
TN: Yeah, I think that’s right. I think any Chinese stimulus that’s going to be effective in the short term has to be cash in, say, local government accounts, people’s accounts, company’s accounts. As Sam said, that tax cuts not going to cut it, indirect payments are not going to cut it. Announcing a new rail stimulus, which they do every other year, is not going to cut it. They actually have to just churn cash out in markets. But with the US dollar and rates, I think they’re really careful right now about how quickly they devalue CNY. And I think that is one of the things that they’re being careful of. They don’t want to devalue it too quickly because Chinese exports have surged over the past six weeks. And so if they can continue to make money at the rate they have, they’ll put off the DeVal as long as they have to. But if the dollar continues to appreciate, they may have to accelerate the evaluation and they’re in a tough spot. China is not the all seeing, all knowing planner that many people think, well.
AM: Part two of that would be what about Japan? Because they devalued the Yen and they’re kind of combating whatever China is trying to try and propose and stimulus. So how does that all come into the equation?
SR: And I’ll just pop out that one of the interesting pieces to kind of throw into the puzzle is not copper sending one signal that China is maybe not going to stimulate, et cetera. But you look at Chinese Equities X, the state owned entities, and guess what? You had a plus almost 7% second quarter for those equities. So the market is sniffing something out there. There might be a little bit of a hedge of, well, if you’re not going to build a bunch of stuff, you might hand out checks, like you said. And if you hand out check, it’s going to benefit the Internet and Chinese tech companies more than it’s going to benefit the metals industry.
TN: Right. And if they want to stimulate the top echelon of Chinese society, they could just goose equities and focus on a trickle down theory, which is very anticommunist, but it’s something that they can do pretty quickly. They did it in 2015, they’ve done it at other times, and they can do that. But going back to your Japan question, Albert, it’s an interesting one because China is such a supply chain risk going forward, the uncertainty there, that Japan is selling itself as a secure alternative to China. And that’s why one of the reasons why they’re devaluing so strongly is so that it’s just a no brainer to get stuff done in Japan. Right?
AM: Yeah, of course. That’s a great explanation. It’s very concise and simplistic, and I had known this, but I wanted you guys to explain this to the viewers because it’s a critical thing that most people don’t really take into account. They always see China. China. And they ignore Japan and South Korea.
TN: Yeah, Japan and South Korea have been devaluing. It’s more depreciating than devaluing. I know there’s a nerdy difference between those two, but they’ve been pushing depreciation because they wanted to be seen as a safe alternative to China. But then you also look at Southeast Asia, places like Vietnam, other places, things in Vietnam, all those exports are done in dollars, not in dong, so they can’t really play the currency card to do values.
SR: It’s also worth remembering that Japan exports a lot of machinery to China, and so if they don’t, if they strengthen their currency while China is devaluing, that puts them in there.
TN: That’s right. Great questions, Albert. Thank you for that. Okay, let’s move on to Europe. Albert, so you’ve been there. Let’s start by looking at inflation. So we’ve got on the screen right now a comparison of inflation rates in, say, the US. Europe and China. And PPI, especially in Europe, is blistering hot. It’s 40%. And CPI, of course, is accelerated as well. It’s ten plus percent, if you believe that. I think it’s higher than that. But as you’ve been there, can you walk through some of your observations of what’s happening in Europe right now and how it’s affecting companies and the way people spend and so on?
AM: Well, from the bottom up, for the general public, that’s just pure desperation. The media just doesn’t want to cover it because it’s just bad news for every single political party out there. Inflation is running rampant. Food, it’s running rampant. And every single product they have, they’re used to high gas prices to begin with, but like the United States, there’s a certain amount where the strain is just too much for families.
I believe the UK. One out of four people were skipping meals because of food inflation prices. One out of four? That’s stunning. And that will have long term health effects down the road. But we’re talking about the year now. Europe’s manufacturing sector is an absolute shambles. Their export engine into China is just nonexistent. They haven’t built out any overseas networks into Africa or other emerging markets to be able to compete. They have no military to sit there and actually push the trade issues their way. They’re secondary. Not secondary. They’re behind Russia and China in that aspect, not to Mention The United States. So, I mean, I complain about the auto sector in the United States. The manufacturing and the auto sector in Germany is absolutely dead.
TN: Okay, I want to pull that Apart a little bit. Okay, so the manufacturing in Germany is dead or dying, largely because of concentration risk in Russian gas as a feed fuel, right, for electricity.
AM: The energy prices have skyrocketed. Corporations And Private businesses are struggling to keep up with margins to cover their costs. And the governments are just like. They’re just making things worse in Germany, I believe they’re handing out money to every single person, refugee or youth person, that think that will vote for them in the future. That makes inflation worse. I can go down the list of different things that they’re doing an error, but I don’t see how Europe pulls out of this specifically in the fall and going into 2023. I mean, their gas shortages are such a problem here right now that I can’t even fathom what the problems are going to be in Germany and Italy and France going forward.
Actually, in Germany and Austria, they’re running out of wood to heat their homes because people are stockpiling that already, and this is July. So I mean, there’s going to be some serious repercussions of Europe. And this is why I targeted Europe to be a problem, possibly for financial crisis and contagion leading back into the United States. It’s just a big problem across the board.
TN: That PPI chart is just so stunning. Now we talk about concentration risk on the supply side. Let’s look at concentration risk on the sales side. Right. Europe has really over concentrated a lot of its sales requirements in China. China has been the market for a lot of European companies. Right. And outsource manufacturing. So they’re as concentrated in China or more concentrated in China than many US companies are, first of all.
AM: By far.
TN: And they’re more dependent on China as a sales market in many cases, than many US companies are, right?
AM: Yeah. This is the problem that I’ve had with Germany specifically. I want to pick on Germany because they are economic. That’s just the fact of the matter. But the Germans, they go out and they see China as a huge market, and they start pushing out their high tech trains and their windmill technology and so on and so forth. Well, the Chinese, all they did was order that stuff, buy it, piece it apart, copy it, and then they sell that to the Africans for one fourth of the cost of the Germans could possibly sell it to the Africans.
So not only is Germany losing out long term with Chinese trade in the market, because that’s stagnating, but now they have no chance to go into the African market because it’s flooded with Chinese parts.
TN: Sure.
AM: They made such critical errors for the years, and they were just so drunk on cheap money out of China that now for the next decade or two, they’re going to have problems.
TN: Yeah, but my overarching points are that Europe is over concentrated on the energy side with Russia, and they’re over concentrated on the manufacturing and then market side with China. And aside from that, they’re kind of out of bullets. They don’t have a lot. And I think that is a lot of the basis for the reason we’re seeing PPI just explode in Europe.
AM: Yes, of course. The only country that even has the only country… The French are smart. I don’t want to hear anything from the Americans be like, Oh, the French are weak and put up the white flag on the Eiffel Tower, whatever these jokes are. But the French have nuclear power and they have food security for their entire nation.
Two of the biggest problems right now in Europe, France has a grasp on. The rest of Europe is total chaos. But those two issues in France are absolutely secure, and the French are smart and they’re looking for long term gains to push the Germans out of the way and take over the EU, and that will actually end up happening. But in the near term, inflation is almost worse there than it is here. Their housing market is mainly cash based, so it’s not as bad of a bubble, but everything else.
TN: So you don’t see much let up in Europe for the rest of 22. You think it continues to be pretty dire in Europe for the rest of 22?
AM: Oh, absolutely. I think the only reason that it’s even somewhat stable at the moment is the tour season has kicked up, and then that’s created other problems where you’re going to cancel flights and overbooked hotels.
TN: Right. Sam, do you have a similar view on Europe at least for the remainder of the year? It continues to be really difficult for the remainder of the year.
SR: Oh, yeah. And the only other place that I would point out is Italy. I mean, Italy is in a pretty rough spot here too. Even with Mario Draghi at the helm, they’re still in a pretty tight spot, and part of it is natural gas and pretty tight there. But the other part is that when it took Legarde about 35 seconds of saying, we’re going to tighten up a little bit here, from negative rates to maybe zero to almost blow up the bond market in the BBB market, it was insane what was going on, and it was a very small move, and you still had yields blow out across the Italian government deck. It’s one of those situations where things move very quickly, things break very quickly, and it doesn’t have a whole lot of bullets in the site.
TN: It’s not like they can go to their version of the permian and drill again. Just to bring this back to something really basic. A lot of Europe’s problem stems from the fact that it has a very old population. So they don’t have young, productive people to keep up with the commitments to very old people in very simple sense. Does that make sense? Is that right?
AM: Oh, absolutely. Looking at just the Italian demographic, all those young Italian guys have bolted for the UK, London, and New York and Miami. They’re gone.
TN: So until they either have a lot of babies, automate, or have a lot of new immigrants, Europe continues to have the same issue?
AM: 100%.
TN: Okay, good.
SR: Demographics don’t change quickly.
TN: No, they don’t.
SR: It’s about 18 years.
TN: That’s right. Okay, so let’s move on to the Fed and inflation anchoring. Sam, you had a great piece in your newsletter, which I’ve referenced many times, and people always ask me how they get their hands on it. So it’s one of the most exclusive newsletters you can get in America. But you had a great piece on Fed Anchoring. Now, I put a chart up on five year inflation expectations. The only reason I put this up is because they really peaked back in late February. Okay? And after that, the five year inflation has really broken down a lot, almost to normal ranges. Okay. So I know you’re looking shorter term, but can you walk us through a little bit about the Fed Anchoring inflation and what you expect? Kind of the near term impact?
SR: Sure. So kind of the point of what I was trying to get across. There’s really two things that you needed anchored for markets to begin to find some footing in the US. At least. And that was you needed to have inflation expectations begin to become anchored. And I think we’ve seen that. Right. You see that chart and it peaked in March, give or take, and has fallen back towards call it normal ranges, if not slightly below what you would expect in this type of environment. That makes sense, right?
In five years, we’re not going to have this type of solution. I’ll be willing to accept that no problem unless we have another flare up somewhere. But I think that’s a fairly reasonable thing to do. But also you have to have the expectations for the Fed anchored as well, because you had two unanchorings that were really happening side by side that was highly problematic for markets.
One, you had inflation unanchoring very quickly, and that’s problematic for markets generally. But you also have the Fed expectations becoming unanchored, and the market was pushing, pushing, pushing for whatever it could get in terms of hikes. Right. It was 75-75-50-50-50. Adding an item to somewhere around four and a quarter percent at the peak. And as of today, you’re back to having the terminal rates or where the Fed raises interest rates to happen by December of this year, and it’s 3.25% 3.5%, and then it cuts next year, is the expectation.
So you’ve begun to have, call it a pricing that’s similar to 1994 hike and then cut style of Fed. That is pretty interesting. That’s a pretty anchored expectation for the Fed. It’s a reasonable expectation of the towards neutral. You’re probably somewhat towards real rates at that point being somewhat positive just because you have inflation of about 3.2 and you have a Fed funds rate a little bit above that. nThat’s why I think that’s a fairly reasonable place for it on the inflation expectations front, that’s largely specifically going to call it close in inflation expectations under a year.
Those are largely call it oil and gasolated and groceries.
TN: Very much energy.
SR: Yeah, this is US. This is not Europe. But as long as in the US, you don’t continue to have those rise in a dramatic fashion, people tend to stop extrapolating. Those forward in their inflation expectations either stabilized or declined back to what they call it normality. And that normality would be somewhere between two and a half and two so that we could spot.
TN: So if gas prices, gasoline prices in the US stopped at, say, 490 or whatever they’re selling at now as a national average, let’s say we plateaued there for three or four months, people would adjust and it would be livable?
SR: It would be livable, yeah, it would be livable. So long as the not accelerating higher.
TN: As long as what, sorry?
SR: As long as they’re not accelerating higher.
AM: Yeah, Sam is right. The risk is as long as they stabilize, I completely agree with Sam. We have one hurricane in the Gulf of Mexico. We have a problem, like a real problem, looking at like $5.50 to $6 gas, and then inflation becomes absolutely just insane.
Going back to the inflation number that they printed out last time, they’re using this ridiculous 5% for housing and shelter and the CPI equation. It’s a little bit hard for me to swallow, but if they can do some kind of magic and keep inflation somewhat steady over the next few months I agree with Sam.
TN: It’s kind of a short at that point.
SR: The interesting part about that is you create an interesting duality in calling risk markets, where the US risk market looks very attractive. If you’ve peaked on Fed pricing, if you peaked on the PE killing. PEs are down 35% year over year. That’s a bigger drop than we’ve seen for several corrections.
You can have a really interesting US risk market going into the back half of the year across markets. The curve, on the other hand, that could be two spends to get very interested very quickly.
TN: Very good. Okay, good guys. What are we looking for for the week ahead? We’ve got a holiday here on Monday. We’ve started to see, say, gasoline prices perk back up in markets on Friday. Are we going to start to see potentially in the near term gas prices rise post July 4?
AM: I think so. One of the things that’s not being said, I don’t think we touched upon, I think last time we did, but the Saudis come in with lower than expected barrels per day, lower capacity, and this must have been stemmed from McCrone and Biden trying to price cap them. Come on, you do that to us, we’re going to do this to you. It’s a game at this point. And the Russians are certainly pulling strings of the Saudis and the Iranians to make this a little bit more chaotic for the US. So I think gas does go does start to trend a little bit higher over the next two weeks.
You’re certainly going to hear noise from people with July 4 prices for barbecues coming up. So that’s going to be all over the news.
TN: Okay, interesting. Sam, what are you looking for during the week ahead?
SR: To build on what Albert was talking about? I think it’s really interesting that spare capacity from OPEC just doesn’t appear to be there whatsoever. But at the same time, you’re also probably going to have at least somewhat of a call, a permanent impairment of Russian oil fields if you continue to have sanctions, that puts a floor long term in global energy prices, period. And if you don’t have US service firms keeping those fields going, we’ve seen what happens when you send Chinese and Russian oil services firms to Venezuela just before you destroy the oil industry.
So look forward to that. On the other side, I’m really looking forward to the conversations that a bunch of millennials have to have with their parents, the crypto markets this July 4.
TN: You are a millennial.
SR: But I am looking forward to some glorious Twitter cons that Tuesday.
TN: Fantastic. Okay, guys, thanks very much. Have a great holiday weekend and have a great weekend.
Powell was out saying “I don’t think a recession is inevitable” but also admitted that rate hikes may be one of many factors that push the economy into recession. All of this while bank credit continues to grow, which we saw flatten in 2020 and decline in 2008. What’s happening? Is a recession inevitable at this point?
We talked about the dollar two weeks ago and the strength is still there. Are we pushing higher so commodities feel a bit cheaper to Americans? Is this temporary – mainly so Americans talk about cheaper gasoline over the July 4th holiday weekend? How far and how long do you expect the dollar to go? Why?
Can crude continue to rally into a recession?
Key themes:
The “R” Word
Geopolitical fallout
Crude 💪 or 👎/ Dollar 🚀
What’s ahead for next week?
This is the 23rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
0:00 Start 1:03 Key themes for the week 1:48 Powell’s recession call 3:48 The catalysts that could whip growth 6:58 Geopolitics in EMs and related to the US 8:35 Is the ECB a risk as well? 11:00 Crude and the Dollar 16:00 Where do you expect the dollar to go? 19:00 The week ahead
Listen on Spotify:
Transcript
TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. We’re joined as always, by Tracy, Sam, and Albert. Thanks, guys, for joining us. Before we get started, please, like, please subscribe, please comment. We read all of them and try to respond to all of them. So please go ahead and do that while you’re here. Also, we are running a summer promo for CI Futures. This is our market forecast subscription product. You get three free months, so please go to completeintel.com/2022Promo and learn all about it.
So this week there’s a lot going on, a lot politically in markets, other stuff. We’re talking about three main themes this week. First is the R word. Second is geopolitical fallout of the R word. And third is crude and dollar activity. So I ran a poll earlier this week asking what is the most widely held consensus view that people are seeing right now? And that’s on screen, of course. So first is recession. People are seeing recession as a consensus view all over the place. Next is equities lower, followed by crude higher, followed by a stronger dollar. So we’re going to talk about all these things today.
Sam, let’s talk about that recession call. That recession consensus call. Powell is out this week saying, I don’t think a recession is inevitable after being really hawkish last week and driving people kind of to the edge of this. So what’s actually happening right now? We’re seeing credit continue to grow. And I know I showed you earlier this week. Bank credit continues to grow. Is that meaningful? And what are you looking at to know if we’re going into recession or not?
SR: Yeah, I mean, bank credit, is meh. But at the same time, are we going into a recession? Meh. I don’t really think so. It’s a booming summer. You have hotels full, you have bars and restaurants full. You have airlines unable to keep up with demand. I mean, that sounds like a small subset of the economy, but at the same time, that is a massive portion of the summer economy. It’s massive. So do I think we’re imminently in a recession? No. I actually think that’s one of the big narratives that kind of misses the bigger point, right? Do we make goods? No, we don’t make anything. What we do is we have services. That’s it. So we’re a service based economy. If services are booming, you’re not going into a recession. You’re unlikely to see some sort of huge move in unemployment because a recession technically is down on growth, down on employment.
If you don’t have the down on employment, you don’t have a recession. So maybe you have a slowing of growth. That’s somewhat probable. But a recession, no, not in the cards, at least until the back half this year. In the back half of this year, you have a number of catalysts which could really whip things the other way in terms of both growth.
TN: Okay, so what are some of those catalysts. And when you say back, you’re talking about October? November?
SR: Yes, October. November.
TN: My thinking is if we’re going to see it, we’re going to start seeing it maybe late September, October or something like that. But what are some of those catalysts you’re talking about? A couple of them?
SR: The catalysts then are actually to the gross side, which I think is where I’ll take the opposite side of a lot of people. Those catalysts are called a devolving of the Ukraine conflict. Number one, while that doesn’t take off sanctions in the near term, it does take off the incremental oops.
Then you have the beginning of the reopening of China, which is a big boost to growth in Europe, and secondarily, LatAm and the United States. So you put those pieces together and all of a sudden you’re looking at a back half of the year that has more upside catalysts, potentially. And it’s not like you can reset down China and it’s going to be a negative callus. It’s already in the numbers. It’s not like you can have another war in Ukraine that’s already in the numbers. If you begin to have those two come together, guess what? That’s positive. So I would say the rest of this year is shaping up to be oddly positive.
TN: Yes, but no, I’m kidding. Everyone’s so negative right now. Everyone wants to just find the downside. Russia is going to invade finland or something like that, right?
SR: Yeah. Here’s the play. I would say 3600 is a lot less likely than 43.
TN: I like that.
SR: On the S&P.
TS: I think what we’re going to see is kind of like a balance, right? Where we see services really big this summer, especially in the travel industry, hospitality industry, which we will see taper off this fall, which is not unusual. That always tapers off this fall. But we also see airline prices increasing, so people have booked their summer vacations in Q1. Those people are going to fall off. So I think we’ll see a push. We’ll see a pullback in that industry, but we could see growth in industries that Sam is mentioning.
TN: Great.
SR: Just to throw in there, we have to remember that at some point we have to refill supply chains on the drivable stuff, and those supply chains are at bone zero right now. It will require a whole bunch of employment, a whole bunch of production, and will actually have a fairly significant thrust to GDP. Our production has been zero.
TN: That’s great. My poll is wrong, which is awesome. I love that.
SR: I would bet against every single thing that your poll said.
TN: Perfect. I love that. Okay, so if you’re in the US, that holds. But let’s switch, Albert, to kind of say geopolitical risk and some other things. Obviously, Sri Lanka two months ago started falling apart and not started, but really fell apart. We’ve seen Ecuador and other places really start falling apart.
Albert, what are you seeing, geopolitically, and what are you seeing in EMs related to what’s happening in the US?
AM: I don’t really like focusing on EMs at this moment just because they’re not big enough to really cause a problem in the markets. In my opinion. I’m looking squarely at the European Union right now.
It’s suspicious that we come out with US bank tests and then we come out with EU bank tests and then literally a day later, the Germans come out and say, we could have a Lehman moment across the economy just because of these gas shortages that are happening.
TN: By the way, your tweet about the German Lehman moment up.
AM: Yeah. And this goes back to just the topic we were just talking about, recession. You really need some kind of catalyst or something to break. And the only thing that I could even contemplate of breaking and causing a “recession” would be the European Union going through another financial crisis. You have a contagion that probably leaks over to the United States financial markets and the Putin price hikes become a thing again, justifies any kind of QE that the Federal want to do, probably in Q four this year. Geopolitically, the EU is my target right now to look at.
TN: Okay. It’s energy supply chains. Is the ECB a risk as well? Is there a risk that they tighten too fast or too much or anything?
AM: How are they going to have to I mean, the inflation over there is climbing just as fast as the United States and it’s causing problems across the board.
SR: I would double down on that and say that Qatar, right after we had the train go down in Corpus Christi, came out and said, yeah, we’ll send gas to the European Union. Just sign a 20 year deal.
TN: Right. And they did. Right?
SR: European Union is not going to do that. I mean, nobody in Europe is going to do that. It was kind of like, we got your back, but give us a long term agreement and we’ll do it.
The irony of it is that you have a crisis going on in Europe. There was a dragon moment of do whatever right, anything.
TN: Sorry, Tracy. What’s that?
TS: Self imposed crisis? Their energy crisis is literally self imposed.
TN: Yeah. Okay.
AM: There’s no question that is self imposed. The European Union’s leadership has been atrocious. I mean, they’ve had the worst energy policy you could possibly think of that hampers their economic engine for the last two, three decades. I mean, you can just throw a dart at the board and pick whatever policy they’ve come up with. It has been an absolute disaster.
TN: Why is that? Why are they making such stupid well.
AM: They’ve made such a big swing to the left, the leftist voters, and they’re just climate Nazis. They won’t even discuss nuclear.
SR: We’re literally talking.
AM: They won’t even discuss nuclear power, which is absurd. They’re like, what if something goes bad like Fukushima? Oh, yeah. What if a dam breaks? Or what if a coal plant blows up? Or, God forbid, what if 10,000 Germans freeze to death because you don’t have gas stored because you didn’t have any proper management? I mean, they’re really bad at managing what’s going on without the United States holding their hand and directing what to do.
TN: Well said. Fantastic. Okay, so since we focus a little bit on energy there, Tracy, let’s swing to talk about crude and the dollar. So, our friend Josh Young posted something about kind of energy could potentially outperform this sort of stuff and really kind of looking back to the 1970s.
So it really looked like we were heading there until this week, and then we saw things really come down this week, in terms of, say, WTI, natural gas, other things. What’s going on there?
TS: I think it depends on what you’re looking at. If you were looking at frontline crude oil price, that’s one thing where a lot of speculators are involved in. If you’re looking at the spreads, it’s you’re looking at the crack spreads that are still exploding. If you’re looking at calendar spreads that are up again this week, that pretty much tells you that we put a floor under front month crude price, regardless of who is involved in what specs are involved in the industry right now. Because the spreads are really what I consider will tell you really where things are going. Right.
So we kind of have a floor night. Yes, oil had a bad week. We saw a lot of selling on downtime in markets and things of that nature. I don’t think that doesn’t change the overall fundamentals of the market. Right? I mean, we’re still fundamentally structurally undersupplied.
TN: So I’m going to ask a really dumb question here. I’m sorry if I may hear it.
SR: But we know.
TN: So are we seeing a short term sell off? Is it politically driven so that when Americans get together on July 4, they can say, gosh, gas is really down this week, and then you have a three day weekend where people are talking about that and then it rocket ships up after the fourth?
TS: Well, I think it’s a combination of most things. I think this week recession scares, we’re really the big driver for that market because everybody’s thinking we’re going to have a recession.
SR: That and the potential of having an export ban.
TS: Right.
TN: Recession, export ban, and July 4th.
TS: An export ban. That said, and I kind of tweeted this out, having an export ban, especially a fuel export ban, would make things obviously worse.
First of all, it’ll raise prices for the EU prices abroad, which after all of this with Ukraine, do we really want to hurt the EU that much? Because we supply them with one to 1.3, 1.5 million barrels per day of diesel, which they are having a huge problem. So really, are we going to abandon the you at this point? Also…
TN: My Texas friends would love to have more diesel to power their ram trucks.
TS: But the thing is that what happens is the fuel flows get so disrupted is that we’re going to have to see refineries cut run significantly in the US. Which is going to ultimately raise prices. We may see deepen prices initially, but you’re going to see higher prices ultimately.
SR: I’ll push back on that because you have a lot of storage, but you didn’t have a lot of storage before. So you don’t have to cut back on runs. You can put into storage at a pretty profitable rate because of forward selling basically all of your inventory right now. I would push back on you have to cut runs at this point.
TS: And I’m going to push back on that. We have to look at the east coast. Right. And so that’s looking at gasoline runs to make a barrel. Diesel requires a lot more oil than it does say to make gasoline. And so if we see a diesel problem, we’re going to have to cut back on this runs. I think it depends on what coast you’re looking at and what area you’re looking at.
TN: All we care about is Texas and Florida. Right.
SR: You have a lot of places to store gasoline. I mean, it’s not like we have an oversupply gasoline at the moment.
TN: It’s true. Our bob’s down this week too, right. So it’s tight.
AM: It’s interesting, Tony, it’s funny. One thing that you said July 4 and one thing that Tracy said, thinly traded is that hilariously every time we need a rally in the market during the thinly traded holiday hours, crude goes down, dollar goes down and the market goes up almost by magic on the thinly traded holiday hours. Something you should watch.
SR: University of Michigan. Come on.
TN: It’s a big driver. University of Michigan. Okay, so let’s move on. You mentioned the dollar, Albert, and so if we look at the dollar, obviously it’s near highs for the decade and that’s great if you’re in the US buying dollar denominated commodities. But elsewhere in the world it’s really hard. Right. So where do you expect the dollar to go? I can’t remember what you’ve said your expected target is. Possibly? 110. Possibly 120. So if it hits 120, Japanese Yen is at what, like 160? 170? something like that?
AM: 163,164? My calculation… This is something Yellen has done in 2012. It’s nothing new. She’s driven the dollar up. She’s out into Europe talking that she’s going to take the dollar up to 110. So this is nothing new. Everyone knows what’s going to happen. Everyone’s watching it. So we’re at 104 something today, just sitting there and hasn’t really done anything. Last day or so. Another 5% up is not a big deal for the dollar.
TN: So you see Yellen driving a stronger dollar. Sam, what do you see?
SR: I would say that I hate taking the other side. I’m going to take the other side.
TN: Great.
SR: I’m going to say that Yellen’s ability to control the dollar is de minimis at this point, mostly because the Fed is tapped out. But you already had a 4% terminal rate for Fed funds priced in two weeks ago. Today you’re sitting at basically 3.65%. So you’ve got the peak, in my opinion, priced in for the FOMC hiking cycle and now you’re on the other side of that. So I would say JPY, you’re probably looking at above 10.
TN: Oh, wow, okay, great.
SR: And you’re probably looking at a Euro at 108. 109. And it doesn’t really matter if they go into a recession because they’re… Right. The US is going to back off in incremental steps the long end of the hiking cycle and…
TN: Perfect.
SR: The dollar prices is long end of the hiking cycle and Yellen can do a lot of things. What she can’t do is increase the internal rate.
TN: That’s great.
AM: The thing is, the treasury sets USD policy, so she can certainly drive it up. I don’t know how much ammo she has left because it’s gone up. But we’ll see.
TN: Okay, perfect. That’s great. So we’ve covered almost everything in that survey and almost everything was wrong.
SR: I told you everything was I would take the other side of every single one of those.
TN: Perfect. Okay, let’s talk about the week ahead. We have month end and quarter end coming next week, right? So what does that mean for the week ahead? Everyone else.
TS: Can I go?
TN: Yes, you go Tracy.
TS: I don’t know. What I’m looking at for the week ahead is the last week of the month. Of the month and the quarter. Right. So we have roughly about $100 billion of US equities that need to be purchased over the next five trading sessions. We have a rebalance in the RTY. So we should see a lot of inflows, roughly 5.98 point billion of inflows into the US equity markets just because of the rebalance factor.
We should probably see outflows in the bond market and then that’s walking into a backdrop of negative dealer gamma. So we have the potential of a shot higher in the market.
TN: Sam? Sam?
SR: Yeah. I would say everything Tracy said in terms of the risk seems to be to the upside. I would also say it looks pretty scary when you walk into the end of the month in terms of the way the dollar chart looks right now.
You walk into the end of the month with a dollar chart looking like it’s ready, looking ready to gap down, and you have oil where it’s at. You could have a very interesting quarter end in terms of risk assets. You have a weaker dollar. You have a big buy on SPY, RTX, et cetera, or SPX, not SPY. You begin to put those pieces together and you begin to have a pretty risk on into the quarter that could be very interesting very quickly.
You get any positive headlines out of China in terms of lockdowns, you get any positive headlines out of Ukraine in terms of ceasefires, whatever BS they want to leak. Then all of a sudden you’re more upside. So I would say skewed to the upside through the beginning of July.
TN: Sam, you’re optimistic today. That’s amazing.
SR: I know. And contrarian.
TN: Optimistic and contrarian. I love it. Okay.
AM: Yeah, I mean, I agree mostly with Sam. I think just because the market is so thinly traded, the dollar should be chopping around probably on the downside a little bit, just for the week up until July 4 weekend, so long as the Europeans don’t come out and start saying any more Lehman things, Lehman crash things and all of a sudden dollar shoots up just because of fear factor out of the European side. But I don’t think that’s going to materialize over the next week, probably next couple of weeks.
After that, I think 30 days, we’re starting to look at possibly something that happened in the European Union. But for the week ahead.
TN: Fantastic. So the past three days carries into the next week. Fantastic.
AM: Yeah.
TN: Okay, guys, thank you very much. Thanks for your time. Thanks for all the stuff you passed along, and have a great week ahead. Thank you.
MG: The Lead Lag Report joining us for the hour here is Tony Nash of Complete Intelligence has found a lot of people that I respect following. Tony, I saw a few people saying they were excited to hear what Tony has to say. So hopefully we’ll have a good conversation here.
Tony for those who aren’t familiar with your background talk about who you are how’d you get involved in the data side of markets and forecasting in general. And what you’re doing with Complete Intelligence.
TN: Sure, Michael. First of all, thanks for having me. I have followed you for probably 10 or 15 years.
MG: I am very sorry for that I am very very sorry for that.
TN: But yeah so, I got involved in data way back in the late 90s when I was in Silicon Valley and I built a couple of research firms focused on technology businesses. I then took about probably eight years to become an operator. I did a turnaround in Asia of a telecom firm. I built a firm in Sri Lanka during the Civil War and then I started down the research front again. I was the Global Head of Research for the Economist and I was the Asia Head of Consulting for a company called IHS Markit which is now owned by S&P and then after that I started Complete Intelligence.
So, you know my background is really all about data but it’s also all about understanding the operational context of that data. And I think it’s very hard for people to really understand what data means without understanding how people use it.
MG: Okay. So that’s maybe a good direction to start with that point about context with data because I think part of that context is understanding what domains data is more appropriate for forecasting and others. Right? So, I always made this argument that there are certain domains in particular when it comes to, I would argue investing that have sort of a chaotic system element to them. Right? Where small changes can have ripple effects. So, it’s hard to necessarily to sort of make a direct link between a strong set of variables and the actual outcome because there’s always a degree of randomness. Whereas, something that’s more scientific right that doesn’t have that kind of chaos theory element is it’s clearer.
So, talk about that point about context when it comes to looking at data. And again, the kind of domains where data is more appropriate to really have more conviction in than others.
TN: Yeah. Okay. So, that’s a great place to start. So, the first thing I would say is take every macro variable that you know of and throw it out the window. It’s all garbage data 100 of it. Okay? I would never trade based on macro data.
We’ve tested macro data over the years and it’s just garbage. It doesn’t matter the country. You know we hear people saying that China makes up their data. Well, that may be true you can kind of fill in the blank on almost any country because I don’t know how much you guys understand about macro data. But it is not market clearing data. Okay? Like an equity price or a commodity price.
Macroeconomic data is purely academic made-up data that is a proxy for activity. It’s a second or third derivative of actual activity by the time you see, say, a CPI print which is coming out tomorrow. Right? And it’s late and it’s really all not all that meaningful. So, I wouldn’t really make a trade or put a strategy together based on macro data even historical macro data. Every OECD country revises their data by what four times or something.
So, you see, a print for CPI data tomorrow that’s a preliminary print and that’s revised several times before it’s put on quote-unquote actual. And so, you know, you really can’t make decisions using macroeconomic data beyond a directional decision. Okay? So, if you follow me on Twitter, you see I’m very critical macro data all the time. I’m very sarcastic about it.
I think the more specific you can get… You know if you have to look at say national data or macroeconomic data, I would look at very low-level data the more specific you can get the better. Things like household surveys or you know communist and socialist countries. Chinese data at the very specific level can be very interesting. Okay? Government data the high-level data in every country I consider it garbage data in every country. So, you’re looking at very low-level very specific government or multilateral data, that’s interesting.
The closer you get to market clearing data the better because that’s a real price. Right? A real price history on stuff is better and company data is the best. And of course, company data is revised at times but that really helps you understand what’s happening at the kind of firm level. And what’s happening at the transaction level. So, you know, those are the kind of hierarchies of data that I would look at.
MG: So, okay this is a great. That’s a great point you mentioned that it’s you said very these variables is macro variables they’re proxies for activity. Right? They’re really more proxies for narratives. Right? Because and that’s where I think… You mentioned sarcasm almost 99 of my tweets at this point are sarcasm because when Rome is burning, what else I’m not going to do except joke about it. Right? Because I can’t change anything. Right?
So, and to that point I share a lot of that cynicism around data that people will often reference in the financial media that sounds really interesting, sounds like it’s predictive but when you actually test it to your point, you throw it out because it doesn’t work. Right? There’s no real predictive element to it.
So, we’ll get into some of the predictive stuff that you talk about but I want to hit a little bit on this market clearing phrase you kept on using. Explain what you mean by market clearing.
TN: Data is where there is a buyer and a seller.
MG: To actual prices of some asset class or something like that.
TN: Yep. That’s right.
MG: Okay. So, that makes sense. Okay. Now again I go back to the certain domains that data is more clear in terms of cause and effect and getting a sense of probabilities the challenge with markets. As we know is that the probabilities change second by second because not only does that mean meaningless data change second by second but the market clearing data changes second by second. Right? Going back to that point.
So, with what you do with Complete Intelligence, talk us through a little bit. What are some of the variables that you tend to find have some predictive power? And how do you think about confidence when it comes to any kind of decision made based on those variables?
TN: Sure. Okay. So, before I do that let me get into why I started Complete Intelligence because if none of you have started a firm before don’t do it. It’s really really hard so…
MG: From the people in the back because I got to tell you I’m an entrepreneur, I’m going through. And all you got is people on Twitter kicking you when you’re down when it’s the small sample anyway.
TN: Absolutely. So, I was where I had worked for two very large research firms The Economist and IHS Markit. And I saw that both of them claimed to have very detailed and intricate models. Okay? Of the global economy industries, whatever. Okay? For all of the interior models. And I have never spoken with a global research firm a data firm that is different from this. And if I’m wrong then somebody please correct me. But at the end of that whole model pipeline is somebody who says “no that’s a little bit too high” or “a little bit too low” and they change the number. Okay? To whatever they wanted it to be in the first place. So, and I tell you 100% of research firms out there with forecasts today have a manual process at the end of their quote-unquote model. A 100% of them. Again, if there’s somebody else that doesn’t do that, I am happy to be corrected. Okay? But I had done that for a decade and I felt like a hypocrite when I would talk to clients.
So, I started Complete Intelligence because I wanted to build a 100% machine driven forecasts across economics, across market, across equities, across commodities, across currencies. Okay? And we’ve done that. So, we have a multi-phase, multi-layer machine learning process that takes in billions of data items. We’re running trillions of calculations every week when we reforecast our data. Right? Now the interval of our forecast is monthly interval forecast. So, if people looking at daily prices that’s not what we’re doing now. Okay? We will be launching daily interval forecasts. I would say probably before the end of the year to be conservative but we’re doing monthly interval forecasts now.
Why is everything I’ve said is meaningless unless we measure our error. Okay? So, for every forecast that we do. And if you log into our website, you can see whether it’s the gold price, the S&P 500, USD, JPY, molybdenum or whatever. We track our error for every month, for everything that we do. Okay? So, if you want to understand your risk associated with using our data it’s there right in front of you with the error calculations. Okay? It’s only fair, If I’m gonna say sell you a forecast, you should be able to understand how wrong we’ve been in the past, before you use that as a decision-making input.
MG: Well, maybe just add some framework on that because I think that’s interesting. So, what you call error I call luck. Right? Because luck is both good or bad. I always make that point that with any equation any set of variables you’re going to have that error is the luck component that you can’t control. And that doesn’t necessarily mean that the equation is wrong. Right? It’s just means that for whatever reason that error in that moment in time was higher or lower than you might otherwise want. Okay?
TN: There is no such thing as zero error. And anybody who tells you that they have zero error is obviously they’re an economist and they don’t understand how markets work. So, there is always error in every calculation.
So, the reason we track error is because that serves as a feedback loop into our machine learning process. Okay? And we have feedback loops every week as we and what we’re doing right now is every Friday end of day. We will download global data process over the weekend have a new forecast on Monday morning. Okay? And so all of that error whether it’s near-term error, short-term error or say medium-term error, we feed that all back in to help correct and understand what’s going on within our process. And we have like I said, we have a multi-phase process in our machine learning platform. So, error is simply understanding the risk associated with using with using our platform.
MG: Right, which is basically how apt is a thing that you’re forecasting to that error which is again luck good or bad. I’m trying to put in sort of a qualitative framework also because I think… Yeah, there’s errors in life obviously, too. Right? And so, when they’re good or bad. But you know those elements.
TN: Right. But here’s what I would and I don’t know, I don’t want to dispute this too much but I think there is. So, you use the word luck and that’s fine but I think luck has a bit to do with the human element of a decision. Okay? We’re using math and code there’s zero human interaction with the data and with the process. And so, I wouldn’t necessarily call it luck. I mean, it literally is error like our algorithms got it wrong. So, if you want to call luck that’s absolutely fine but I would say luck is more of a human say an outcome associated with a human decision. More than something that’s machine driven that’s iterating. Again, we’re doing trillions of calculations every week to get our forecasts out there.
MG: Yeah, no that’s fair and maybe for the audience, Tony. Explain what machine learning is now.
TN: Sure.
MG: I once developed an app called “How Edition”. I was having dinner with the head developer once and he said he just came back from a conference about machine learning and he was just basically well, having drinks with me laughing and joking saying everybody use this term machine learning but it’s really just regression analysis. Right? So, talk about machine learning what is actual machine learning? How important is recent data to changes in the regression? Because I assume that’s part of the sort of dynamic nature of what you do just kind of riff on that for a bit.
TN: Okay. So, when I first started Complete Intelligence, I was really cynical about AI. And I spoke to somebody in Silicon Valley and asked the same question: what is AI? And this person said “Well AI is everything from a basic I say, quadratic equation upward.” I’m not necessarily sure that I agree that something that simple would be considered artificial intelligence. What we’re really doing with machine learning is there are really three basic phases. Okay? You have a preprocess which is looking at your data to understand things like anomalies, missing data, weird behavior, these sorts of things. Okay? So, that’s the first phase that we look at to be honest that’s the hardest one to get right. Okay?
A lot of people want to talk about the forecasting methodologies and the forecasting algorithms. That’s great and that’s the sexy part of ML. But really the conditioning and the pre-process is the is the hardest part and it’s the most necessary part. Okay? When we then go into the forecasting aspect of it, we’re using what’s called an ensemble approach. So, we have a number of algorithms that we use and let’s say they’re 15 algorithms. Okay? That we use we’re looking at a potential combinatorial approach of any individual or combination of those algorithms based on the time horizon that we’re forecasting. Okay?
So, we’re not saying a simple regression is the way to go we’re saying there may be a neural network approach, there may be a neural network approach in combination with some sort of arima approach. We’re saying something like that. Right? And so, we test all of those permutations for every historical period that we’re looking at.
So, I think traditionally when I look back at kind of quote-unquote building models in excel, we would build a formula and that formula was fairly static. Okay? And every time you did say a crude oil forecast you had this static formula that you set your data against and a number came out. We don’t have static formulas at all.
To forecast crude oil every single week we start at obviously understanding what we did in the past but also re-testing and re-weighting every single algorithmic approach that we have and then recombining them based upon the activity that happened on a daily basis in that previous week. And in the history. Okay?
So, that’s phase two the forecasting approach and then phase three is the post process. Right? And so, the post process is understanding the forecast output. Is it a flat line? Right? If it’s a flat line then there’s something wrong. Is it a straight line up? Then that there’s something you know… those are to use some extremes. Right? But you know we have to test the output to understand if it’s reasonable. Right? So, it’s really an automated gut check on the reasonableness of the outcome and then we’ll go back and correct outliers potentially reforecast and then we’ll publish. Okay?
So, there are really three phases to what we do and I would think three phases to most machine learning approaches. And so, when we talk about machine learning that’s really what we’re talking about is that that really generally three-phase process and then the feedback loop that always goes back into that.
MG: Yeah. No that makes sense. Let’s get…
TN: That’s really boring after a while.
MG: No, no, no but I think that’s it’s part of what I want to do with these spaces is try to get people to understand you know beyond sort of just the headline or the thing that is thrown out there. As a term to what does that actually mean in practice you don’t have to know it fully in depth the way the that you do. But I think having that context is important.
TN: I would say on the idea generation side and on the risk management side right now. Okay? Now the other thing that I didn’t cover is obviously we’re doing markets but we also do… we use our platform to automate the budgeting process within enterprises. Okay? So, we work with very large organizations and the budget process within these large organizations can take anywhere from say four to six months. And they take hundreds of people. And so, we take that down to really interacting with one person in that organization and we do it in say less than 24 hours. And we build them a continuous budget every month.
Once accounting close happens we get their new data and then we send them a new say 18-month forward-looking forecast for them. So, their FPA team doesn’t have to dig around and beg people for information and all that stuff. So, some of this is on the firm event could be on the firm evaluation side, as well. Right? How will the firm perform? Nobody’s using us for that but the firms themselves are using that to help them automate their budgeting process. So, some of that could be on this a filtering side and the idea generation side, as well.
So, we do not force our own GL structure onto the clients. We integrate directly with their SAP or Oracle or other ERP database. We take on their GL structure at whatever levels they want. We have found that there is very little deterioration from say, the second or third level GL to say the sixth or seventh level GL, in terms of the accuracy of our forecast. And when we started doing this it really surprised me. We do a say a team level forecast for 10, 12 billion organizations, six layers down within their GL. And we see very little deterioration when we go down six levels than when we do it at say two levels. Which is you know it really to me it speaks to the robustness of our process but would we consider Anaplan a competitor not really, they’re not necessarily doing the kind of a budget automation that we’re doing at least, that I’m aware of. I know that there are guys like Hyperion who do what we’re doing but again their sophistication isn’t necessarily. What we’re doing and they do a great job and Hyperion is a great organization. I think Oracle gave them a new name now but they’re not necessarily using the same machine learning approaches that we’re using. And our clients have told us that they don’t get the same result with using that type of say ERP originated or ERP add-on budgeting process.
Yep. So, I would say we can’t we can do company-specific information for a customer if that’s what they want. Okay? We don’t necessarily have that on our platform today aside from say individual ticker symbols. Okay? But we’re not forecasting say the P&L of Apple or something like that or the balance sheet of Apple. Something we could do in a pretty straightforward manner but we do that on a customer-by-customer basis.
So, what we’re forecasting right now are currency pairs, commodities about 120 commodities and global equity indices. Okay? We are Beta testing individual equity tickers and we probably won’t introduce those fully on the platform until we have our daily interval forecast ready to go to market. But those are still we’re still working some kinks out of those and we’ll have those ready probably within a few months.
MG: Okay. So, let’s talk about commodities here for a bit tonight. Obviously, this is where a lot of people’s attention has gone to. What kind of variables and I know you said you have a whole bunch of variables that are being incorporated here but are there certain variables in particular when it comes to oil and other commodities that have a higher predictive power than others.
TN: There are I think one of the stories that I tell pretty often and this really shocks people is when we look at things like gold. Okay? I’m not trying to deflect from your oral question but just to you know we’ve spoken with the number of sugar traders over the years. Okay? And so, we tell them that say the gold price and the sugar price there may not necessarily be a say short term say correlation there but there is a lot of predictive capability there and we talk them through why. And I think the thing that we get out of the machine learning approach and we cast a wide net. We’re not forcing correlations is that we’ll find some unexpected say drivers. Although drivers implies a causal nature and we’re not trying to imply causality anywhere. Okay?
We’re looking at kind of co-movement in markets over time and understanding how things work in a lead lag basis with some sort of indirect causality as well as say a T0 or current state movement. So, with crude oil you know there are so many supply side factors that are impacting that price right now, that I can’t necessarily point to say another commodity that is having an impact on that. It really is a lot of the supply side and sentimental factors that are impacting those prices right now.
MG: That makes a lot of sense. And I’m curious how did you mention it’s I think the intervals once a month. Right? So, given the speed with which inflation has moved and yields have moved how does a machine learning process adapt to sudden spikes or massive deltas in in variable movement. Right? Because there’s always a degree of randomness going back to error. Right? And you can make an argument that the larger move is the that may actually be more error but I think that’s an interesting discussion.
TN: So, I’ll tell you where we were say two years ago when 2020 hit versus today. Okay? So, in March of 2020, April 2020 everything fell apart. I don’t think there were any models that caught what was going to happen. It was an exogenous event that hit markets and it happened very quickly. So, in June, I was talking with someone who is with one of the largest software companies in the world and they said “Hey has your AI caught up to markets yet because ours is still lost” And you guys would be shocked if I told you who this was because you would expect them to know exactly what’s going to happen before it happened. Okay? I’ll be honest I think it was all of them but the reality is you know Michael you where you were saying that ML is just regression analysis.
I think a lot of the large firms that are doing time series forecasting really are looking at regression and derivatives of regression as kind of their only approaches because it works a lot of the time. Right? So, we had about a two-month delay at that point and part of it was because… So, by June we had caught up to the market. And we had started in February to iterate twice a month, we were doing once a month; I hope you guys can understand with machine learning two factors are we’re always adjusting our algorithms. Okay? We’re always incorporating new algorithms. We’re always you know making sure that we can keep up with markets because you cannot be static in machine learning. Okay? The other thing is we’re always adding capacity why? Because we have to iterate again and again and again to make sure that we understand the changes in markets. Okay?
So, at that time we were only iterating twice a month and so it took us a while to catch up. Guys like this major technology firm and other major technology firms they just couldn’t figure it out. And I suspect that some of them probably manually intervened to ensure that their models caught up with markets. I don’t want to accuse any individual company but that temptation is always there. Especially, for people who don’t report their error. The temptation is always there for people to manually intervene in their forecast process. Okay?
So, now, today if we look for example at how are we catching changes in markets. Okay? So, if I look at the S&P 500 for April for example, our error rate for the S&P 500 for April I think was 0.6 percent. Okay? Now in May it changed it deteriorated a little bit to I think four or six percent, I’m sorry I don’t remember the exact number offhand but it deteriorated. Right? But you know when there are dramatic changes because we’re iterating at least once a week, if not twice a week we’re catching those inflections much much faster. And what we’re having to do, and this is a function of the liquidity adjustments, is where in the past you could have a trend and adjust for that trend and account for that trend. We’re really having to our algorithms are having to select more methodologies with recency bias because we’re seeing kind of micro volatility in markets. And so again…
MG: So, kind of like the difference between a simple moving average versus like an exponential moving average. Right? Where you’re waiting the more recent data sooner.
TN: It could be. Yeah.
MG: Right.
TN: Yeah. That’s a very very simple approach but yeah it would be something like that, that’s right. Yeah. What so when we work with enterprise customers that level of engagement is very tight because when we’re getting kind of the full set of financial data from a client obviously, they’re very vested in that process. So, that’s different from say a small portfolio manager subscribing to RCF futures product where we’re doing forecasts and they have their own risk process in place. And they can do whatever they want with it. Right? But again, with our enterprise clients we are measuring our error so they can see the result of our continuous budgeting process. Okay?
So, if we’re doing let’s say, we launch with a customer in May, they close their mate books in June get them over to us redo our forecast and send it over to them and let them know what our error rate was in May. Okay? So, they can decide how we’re doing by department, by team, by product, by whatever based upon the error rates that we’re giving at every line item. Okay? So, they can select and we’re not doing kind of capital projects budgets we’re doing business as usual budgets so they can decide what they want to take and what they don’t want to take. It’s really up to them but we do talk through that with them and then over time they just start to understand how we work and take it on within their own internal process.
MG: So, back a little bit Tony. So, you mentioned you do this machine learning forecasting work when it comes to broad economics, markets and currency; of those three which has the most variability and randomness in other words which tends to have a higher error? Whenever you do any kind of machine learning to try to forecast what comes next?
TN: I would say it depends on the equity market but probably equity markets when there are exogenous shocks. So, our error for April of 2020 again, we don’t hide this from anybody it was not good but it wasn’t good for anybody. Right? And so, but in general it depends on the equity market but some of the emerging equity markets, EM equity markets are pretty volatile.
We do have some commodities like say rhodium for example. Okay? Pretty illiquid market, pretty small base of people who trade it and highly volatile. So, something like rhodium over the years our air rates there have not necessarily been something that we’re telling people to use that as a basis to trade but obviously, it’s a hard problem. Right? And so, we’re iterating that through our ML process and looking at highly volatile commodities is something that we focus on and work to improve those error rates.
MG: Here, I hope you find this to be an interesting conversation because I think it’s a part of the of the way of looking at markets, which not too many people are themselves maybe using but is worth sort of considering. Because I always make a point that nobody can predict the future but we all have to take actions based on that unknowable future. So, to the extent that there might be some data or some conclusions that at least are looking at variables that historically have some degree of predictive power. It doesn’t guarantee that you’re going to necessarily be better off but at least you have something to hang your hat on. Right? I think that’s kind of an aspect to investing here.
Now, I want to go a little bit Tony to what you mentioned earlier you had lived abroad for a while in Europe. And when I was starting to record these spaces to put up on my YouTube channel the first one, I did that on was with Dan Arvis and the topic of that space was around this sort of new world order that seemed to be shaping up. I want you to just talk from a geopolitical perspective how you’re viewing perhaps changing alliances because of Russia, Ukraine. And maybe even dovetail that a little bit into the machine learning side because geopolitics is a variable. Which is probably quite vault in some periods.
TN: Yeah, absolutely. Okay. So, with the evolving geopolitical order I would say rather than kind of picking countries and saying it’s lining up against x country or lining up with x country or what country. I would say we’ve entered an era of opportunistic geopolitics. Okay? We had the cold war where we had a fairly static order where people were with either red team or blue team. That changed in the 90s of course, where you kind of had the kind of the superpower and that’s been changing over the last say 15 years with say, China allegedly becoming kind of stronger and so on and so forth. So, but we’ve entered a fairly chaotic era with say opportunistic macroeconomic relation or sorry, geopolitical relationships and I think one of the kinds of top relationships that is purely opportunistic today is the China-Russia relationship.
And so, there’s a lot of talk about China and Russia having this amazing new relationship and they’re deep. And they’re gonna go to war together or whatever. We’ve seen over the past say three, four months that’s just not the case. And I’ve been saying this for years just for a kind of people’s background. Actually, advised the Chinese government the NDRC which is the economic planning unit of the central government on a product or on an initiative called the belt and road initiative. Okay? I did that for two years. I was in and out of Beijing. I never took a dime for it. I never took expense reimbursement just to be clear, I’m not a CCP kind of pawn. But my view was, if the Chinese Government is spending a trillion dollars, I want to see if I can impact kind of good spend for that. So, I have seen the inside of the Chinese Government and how it works and I also in the 80s and 90s spoke Russian and studied a lot on the Russian Government and have a good idea about how totalitarian governments work.
So, I think in general if we thought America first was offensive in the last administration then you really don’t want to learn about Chinese politics and you really don’t want to learn about Russian politics because they make America first look like kindergarten. And so, whenever you have ultra-ultra-nationalistic politics, any diplomatic relationship is an opportunistic relationship. And I always ask people who claim to be China experts but say please tell me and name one Chinese ally. Give me one ally of China and you can’t, North Korea, Pakistan. I mean, who is an ally of China there isn’t an ally of China. There is a transactional opportunistic relationship with China but there is not an ally with China.
And so, from a geopolitical perspective if you take that backdrop looking at what’s happening in the world today it makes a whole lot more sense. And a lot of the doomsayers out there saying China is going to fall and it’s going to have this catastrophic impact. And all this other stuff, the opportunism that we see at the nation-state level pervades into the bureaucracy. So, the bureaucracy we hear about Xi Jinping. And Xi Jinping is almost a fictional character. I hate to be that extreme on it but there is the aura of Xi Jinping and there is the reality of Xi Jinping, just a guy, he’s not Mao Zedong. He doesn’t have the power that supposed western Chinese experts claim that he has. He’s just a guy. Okay?
And so, the relationships within the Chinese bureaucracy are purely transactional and they are purely opportunistic. So again, if you take that perspective and you look at what’s happening in geopolitics, hopefully you can see things through a different lens.
MG: Now, I’m glad you’re framing that in those terms because I think it’s very hard for people to really understand some of these dynamics when it’s almost presented like a like the story for a movie. Right? For what could be a conflict to come by the media because and it’s almost overly simplified. Right? When you hear this type of talk. So again, I want to go back into how does that dovetail into actual data. Right? Maybe it doesn’t at all. When you have some of these dynamics and you talk about market clearing data, you’re going to probably see mark movement somewhat respond off of geopolitical changes. Talk about anything that you’ve kind of seen as far as that goes and how should investors consider geopolitical risk or maybe not consider geopolitical risk?
TN: Yeah, I think, well when you see geopolitical adjustments today all that really is… I don’t mean overly simplified but it’s a risk calibration. Right? So, you know Russia invades Ukraine, that’s really a risk calibration. How much risk do we want to accept and then what opportunities are there? Right?
So, when you hear about China, you have to look at what risk is China willing to accept for actions that it takes? Keeping in mind that China has a very complicated domestic political environment with COVID shutdown, lockdowns and all of this stuff. So, having worked with and known some really smart Chinese bureaucrats over the years, these guys are very concerned with the domestic environment. And I don’t although there are idiot you know generals and economists here and there who say really stupid stuff about China should take over TSMC and China should invade Taiwan, these sorts of things. My conversations over the years have been with very pragmatic and professional individuals within the bureaucracy.
So, do I agree with their policies? Not a lot of them but they are well thought out in general. So, I think just because we hear talk from some journalist in Beijing who lives a very sheltered life about some potential thing that may happen. I don’t think we necessarily need to calibrate our risk based on the day-to-day story flow. I think we need to look at like… so there’s a… I’m sure you all know who Leland Miller is in China beige book like?
MG: Yeah, he’s not too long ago.
TN: Yeah. He has a proxy of the Chinese economy and that’s a very interesting way to look at an interesting lens to look through China or through to look at China or whatever. But so, I think that the day-to-day headlines, if you follow those, you’re really just going to get a lot of volatility but if you try to understand what’s actually happening, you’ll get a clearer picture. It’s not necessarily a connection of a collection of names in China and the political musical chairs, it’s really asking questions about how does China serve China first. What will China do to serve China first and are some of these geopolitical radical things that are said do they fit within that context of China serving China first? So, that’s what I try to look at would I be freaked out if China invaded Taiwan? Absolutely. I think everybody would right but is that my main scenario? No, it’s not.
MG: In terms of the data inputs on the machine learning side how granular is the data meaning? Are you looking at where geographically demand might be picking up or is it simply this is what the price is and who cares the source? Because again with hindsight if you knew that the source of China and kind of had a rough sense of the history of Russia-Ukraine maybe that could have been an interesting tell that war was coming.
TN: Yes or No. To be honest it had more to do with the value of the CNY. Okay? And I’ll tell you a little bit about history with the CNY. We were as far as I know, the only ones who called the CNY hitting 6.7 in August of 2019 with a six-month lead time. And so, we have a very good track record with USD-CNY and I would argue that China’s buying early in 2022 had a lot more to do with them from a monetary policy perspective needing to devalue CNY. So, they were hoard buying before they could devalue the CNY and I think that had a lot more to do with their activity than Russia-Ukraine. Okay? And if you notice they’ve made many of their buys by mid-April and once that happened you saw CNY, go to 6.8. Right? It’s recovered a little bit since then but China has needed to devalue the CNY for probably at least nine months. So, it’s long overdue but they’ve been working very hard to keep it strong so that they could get the commodities they needed to last a period of time. Once they had those commodities, they just let the parachute go and they let it do value to 6.8 and actually slightly weaker than 6.8.
MG: The point of the devaluation is interesting. I feel if I had enough space but we were talking about the Yen and what’s happened there. And this observation that usually China will start to devalue when they see the end as itself going through its own devaluation.
How does some of those cross correlations play out with some of the work that on machine learning you’re doing? Because there’s a human element to the decision to devalue a currency. Right? So, the historical data may not be valid I would think because you might have kind of a more humanistic element that causes the data to look very different.
TN: Well, they’re both export lab economies. Right? And we’ve seen a number of other factors dollar strength and we’ve seen changing consumption patterns. And so, yes when Japan devalues you generally see China devalue as well but also, we’ve seen a lot of other activities in on the demand-pull side and on the currency side especially with the US dollar in… I would say over the last two quarters. So, yes, that I would say that the correlation there is probably pretty high but there are literally thousands of factors that contribute to the movement of those of those currencies.
MG: Is there anything recently Tony in the output that machine learning is spitting out that really surprises you? That you know… And again, I understand that there’s a subjective element which is our own views on the world and of course then the pure data. But I got to imagine it’s fascinating sometimes if you’re sitting there and seeing what’s being spit out if it’s surprising. Is there anything that’s been kind of an outlier in in the output versus what you would think would likely happen going forward?
TN: Yeah. You know, what was really surprising to me after we saw just to stick on CNY for a minute because it’s the first thing that comes to mind, when we saw CNY do value to 6.8. I was looking at our forecast for the next six months. And it showed that after we devalued pretty strong it would moderate and reappreciate just a bit. And that was not necessarily what I was hearing say in the chatter. It was kind of “okay, here we go we’re going to go to seven or whatever” but our data was telling us that that wasn’t necessarily going to happen that we were going to hit a certain point in May. And then we were going to moderate through the end of the year. So, you know we do see these bursty trends and then we see you know in some cases those bursty trends continue for say an integer period. But with CNY while I would have on my own expected them. I expected the machines to say they need to keep devaluing because they’ve been shut down and they need to do everything they can to generate CNY fun tickets. The machines were telling me that we would you know we’d see this peak and then we would we would moderate again and it would kind of re-appreciate again.
So, those are the kind of things that we’re seeing that when I talk about this it’s… Oh! the other thing is this: So, in early April we had a we have people come back to us on our forecast regularly who don’t agree with what we’re saying and they complain pretty loudly.
MG: So, what do you say I talk when I hear that because whenever somebody doesn’t agree with the forecast, they are themselves making a fork.
TN: Of course. Yeah. Exactly. Right? Yeah, and so this person was telling us in early April that we’re way wrong that the S&P was going to continue to rally and you know they wanted to cancel their subscription and they hated us and all this other stuff. And we said okay but the month’s not over yet so let’s see what happens this was probably a week and a half in April. And what happened by the end of April things came in line with our forecast and like I said earlier we were like 0.4 and 0.6 percent off for the month. And so that person had they listened to us at the beginning of the month they would have been in a much better position than they obviously ended up being in. Right? And so, these are the kind of things that we see on a… I mean, we’ve got hundreds of stories about this stuff but these are the kind of things that we see on a regular basis. And we mess up guys I’m not saying we’re perfect and but the thing that we when we do mess up, we’re very open about it. Everything that we do is posted on our on our website. Every call we make, every error we have is their wars and all. Okay? And so, we’re not hiding our performance because if you’re using our data to make a trade, we want you to understand the risk associated with using our data. That’s really what it comes down to.
MG: It reminds me of back in 2011 and in some other periods I’ve had similar situations, where I was writing and I was very adamant in saying the conditions favored a summer crash. Right? I was saying that for the summer and the market should be going up and people would say oh where’s your summer crash and I would say this summer hasn’t started. Like it’s amazing how people, I don’t know, what it is, I don’t know if it’s just short-termism or just this kind of culture of constantly reacting as opposed to thinking but it is it is remarkably frustrating.
Going back to your point at the very beginning being entrepreneur don’t do it, that you have to build a business with people and customers who in some cases are just flat out naïve.
TN: That’s all right though. That’s a part of the risk that we accept. Right?
MG: Yeah, the other thing right now that happens with every industry but from the entrepreneur’s standpoint. It’s what you’re doing the likely outcome of your product of your service. You’re trying to communicate that to end clients but then in the single role of the die the guy the end client who comes to you exactly for that simply because they disagree with you know the output, now says I want out.
TN: Oh! Yeah! Well, your where is your summer call from 2011 the analogy today is where is your recession call. Right? So, that’s become the how come you’re not one of us calls right now. So, it’s just one of those proof points and if you don’t agree with that then you’re stupid.
So, I would say you never finish with that there is always a consensus and a something you’re you absolutely, must believe in or you don’t know what you’re talking about.
MG: Yeah, well, thankfully. What you’re talking about so appreciate everybody joining this space Tony the first time you and I were talking. I enjoyed the conversation because I think it said on investing and I encourage you to take a look at Tony’s firm and follow him here on twitter. So, thank everybody. Thank you, Tony and enjoy.
