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BFM 89.9 Market Watch: Nasdaq Up Thanks To AI

This podcast is originally produced and published by BFM 89.9 and can be found at bfm.my/podcast/morning-run/market-watch/us-economic-data-equities-inflation-bond-markets

In this podcast episode, BFM 89.9 Market Watch speaks with Tony Nash, CEO of Complete Intelligence, to discuss the current state of the economy and the stock market. Nash predicts that GDP growth will be around 1% this year, which is a downgrade from previous estimates. He suggests that, due to inflation, firms have been passing on their costs to customers, but with lower volumes expected, there will be a focus on efficiency in the latter half of 2024 and into 2025. Nash also notes that there is a lot of excitement in the tech industry surrounding generative AI, which could bring about efficiencies and revenue opportunities for companies. This has resulted in a rally in tech stocks, despite the lower GDP growth estimates. However, Nash acknowledges that it’s difficult to predict how long this rally will last and whether companies’ valuations will come back down to earth eventually.

Regarding the bond market, Nash suggests that it has historically been more accurate in predicting interest rates compared to central bank prognostications. Currently, bonds are indicating that a recession is coming, but Nash believes there is only a slowdown expected, not a full-blown recession. Furthermore, he suggests that the Fed may be late to respond to this slowdown, as central banks are typically reactive organizations. Nash also discusses the recent performance of safe-haven assets such as the yen, gold, and the US dollar, and suggests that this is due to concerns over the Omicron variant and rising inflation.

Overall, Nash predicts that there will be a focus on efficiency and cautious optimism in the stock market in the coming years. He also suggests that it’s important to remain cautious and vigilant in the current economic climate, as there are a number of uncertainties and potential risks.

Transcript:

BFM

This is a podcast from BFM 89.9. The business station.

BFM

BFM 89.9. 7:06 A.m. On Thursday the 30 March. Good morning. You’re listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning. In half an hour, we’re going to discuss whether the worst is over for the Sri Lankan economy after it secured a 3 billion U. S. Dollar bailout last week from the IMF th. But as always, we’re going to kick start the morning with a look at how global markets closed overnight.

BFM

It was almost perfect. Almost perfect because almost every market was upset one. So let’s name the guilty one. It was the Shanghai Composite Index, which was down 0.2%, but otherwise us all in the green. The Dow was up 1%, S&P 500 up 1.4%, Nasdaq up 1.8%. In fact, if you look at the Nasdaq, this is the shocking thing, right? I thought tech was dead. Growth is over. Well, it ain’t the case because the Nasdaq is up 14% on a year to date basis, this has been the stellar outperformer. Now, if we look at Asian Nikkei was up 1.3%, Hang Seng up 2.1%. Shanghai, like I said, was the one that was down 0.2%. Singapore Straits Times Index, up 0.2%. And our very own FBMKLCI currently up 0.8% to 1420 points.

BFM

All right, so for some thoughts on what’s moving markets we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks, as always, for joining us. Now, given recent performance in US. Equities, investors seem to be looking beyond the challenges in the financial sector and recognizing that US economic growth continues to be resilient. Could investors be headed for a rude shock, though?

Tony

Well, it’s a really interesting question. I think those investors who expect rapid GDP growth, I think will be disappointed. We expect GDP growth to be kind of around 1% this year. That’s downgraded from a couple of months ago. And so it’s not necessarily overall economic growth that will happen. There will be secural growth. And what we’ll see through the rest of, say, this year and into 2025 is a focus on efficiency. What’s been happening is, because of inflation, firms have been passing on their margins or been passing on their costs and more than their costs to their customers. Okay. And so with a lower volume. So we’re going to see a focus on efficiency in the back half of 2024 and into 2025. So you will see equity performance in pockets. But in general, we’ll likely see things sideways unless we see the Fed change footing dramatically, which is still not really expected.

BFM

Okay, so, Tony, is that pocket the Nasdaq? Because help me understand this. Right? Since December, it’s actually up 20%. And I thought growth is great. What’s going on?

Tony

Well, in tech right now, there’s a lot of excitement over generative AI. This is ChatGPT and the other kind of applications of generative artificial intelligence. And so investors are looking at companies everything from semiconductors to say, Meta and saying gosh generative AI, which is kind of the next milestone for AI, could really change these companies and could really bring about efficiencies and could really bring about these revenue opportunities. So there’s a lot happening in tech, of course, but in general, when you look at companies like Microsoft that has made the major investment in OpenAI and you look at Google and their new AI kind of chat item that’s out there and then other companies. It’s similar to I know you guys are too young to know this, but in 2000, whenever a company would release a website, their stock would get a bump. And so what we’re seeing right now is whenever companies release an offering or say they are implementing some sort of generative artificial intelligence or ChatGPT or something like that, they’re getting a bump in their equity price.

BFM

Okay, but how long can this rally kind of last? There seems to be a disconnect because you just told us GDP is 1% and then companies earnings probably aren’t going to be that great for the moment. Yet markets seem to ignore the news. Will they all come back down to earth eventually?

Tony

Well, it depends on how you define down to earth. Right? Is down to earth 2018 valuations and 2018 market levels maybe. Again, it really depends on how the market views, I think generally, how the market views activities by central banks and the Fed. So if the Fed has really isolated the banking crisis, which I believe they have, then the Fed can continue to raise rates and then they can continue to shrink their balance sheet. Now they just grew their balance sheet by a lot by bailing out banks. But they can shrink their balance sheet in certain areas, say mortgages, those sorts of things. So that can help to bring some of these valuations down to earth. But keep in mind, we’re going into a presidential election year in 2024. And so it’s really hard to determine, does the US administration not want a recession or do they want a terrible recession so they can be seen to be passing a fiscal stimulus plan. So I don’t know what their calculus is. They can either keep the economy steaming ahead or they can try to drive the economy into the recession so they can be seen to be passing massive stimulus packages.

BFM

Tony, in one of your panel commentaries, a suggestion was made that bond markets were more accurate in predicting rates compared to central bank prognostications. Why is that so? And what are they currently saying about future Fed hikes?

Tony

Well, the first thing kind of every amateur loves to be a central bank prognosticator, so those are rarely right. But bonds. So if you look at a year ago, bonds were telling the Fed that they needed to raise rates because inflation was coming and they waited until too late. Right now, bonds are saying that a recession is coming and the Fed is continuing to tighten and the Fed is always late. Central banks are typically always late because they are a reactive organization and that’s how they’re designed to be. Are bonds going to be absolutely right about a recession coming later in the year? I’m not really sure. Again, we think there’s a slowdown, but we don’t necessarily think there’s a recession. And when we use the R word, we also have to be careful because it can be defined any way we want. Right. Because we had two consecutive quarters of negative growth last year and nobody says that we had a recession last year. So a recession kind of is whatever we define it as today.

BFM

Okay, well in the last two, three weeks there’s been clear, three clear safe haven assets: yen, gold, and US dollar. Do you think these three asset classes still can be safe haven assets?

Tony

It’s really hard for the dollar and gold to be safe haven assets at the same time. For the yen, I think with the change of the governor, the chairman of the BOJ, and Japan of course is already doing this, but I think they have to be very careful. That happens in, I think late next month. And so if they can handle that transition in an easy, seamless way, I think we can probably continue to do that. Gold? I’m not entirely sure. I know there are a lot of people out there pumping gold right now, and there are a lot of people kind of naysaying the dollar right now. Trying to say that Saudi signed some agreement. Saudi Arabia signed some agreement to deal in US dollars, and Russia signed Chinese Yuan and Russia signed an agreement to deal in Chinese Yuan or whatever. But those are very small, nominally very small. So I do think the dollar will remain a safe haven in times of turbulence. Japanese yen probably because currencies are all on a relative basis. They’re all on a relative basis. Gold, I don’t think gold is going to fluctuate a lot, but I think gold investors can be very fickle. So I’d be really careful of that one.

BFM

Tony, thanks as always for the chat. 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. Commenting there a little bit about the difference in market exuberance in tech sector compared with, I suppose the sentiment that perhaps the US could be heading towards a recession or at least markedly slower growth than what was anticipated early on.

BFM

But I think it’s interesting that Tony brought up the reason why, which is, it’s generative AI, well ChatGPT, right. So much excitement about it and I think questions about is it a disruption or is it an opportunity? But I think markets thinking, hey, which companies are going to get involved in this.

BFM

If you see a company that’s involved in AI, if they have their own AI bot or whatever, oh, that must.

BFM

Be a good thing.

BFM

It reminds me so much of the hype over the Metaverse not that long ago when Facebook or Meta decided to take that angle. And right now, there’s no no one’s talking about the Metaverse metabolism.

BFM

What are you talking about, Charles? Everybody’s forgotten about it. Right. So there are always trends that come and go. Let’s see who really can monetize it. That’s the thing at the end of the day.

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Business and Market Discussion

This podcast was originally published in https://www.rthk.hk/radio/radio3/programme/money_talk/episode/808974.

Shanghai on Tuesday reported a surge in local asymptomatic cases as the entire city of 25 million people remains in lockdown. The city reported 268 local symptomatic cases and 13,086 local asymptomatic cases, including 6,788 from Pudong. That’s a 48% increase from the previous day. China’s Vice Premier Sun Chunlan ordered local officials to curtail the outbreak “as soon as possible,” on a visit to the city. Media outlet, Caixin, has reported that close contacts of infected people will be moved to neighbouring provinces. This could potentially involve hundreds of thousands of Shanghai residents.

The US, EU and G7 group of nations are set to impose broad new sanctions on Russia, after President Macron accused Russia of war crimes and President Joe Biden called for a war crimes trial. The US will ban all new investment in Russia. The EU proposal, which will need backing from the 27 member states, will include a ban on Russian coal. Germany said it would temporarily take control of a German unit of Russian state-owned Gazprom, which operates some of Germany’s largest natural gas storage facilities. in a bid to secure gas deliveries. 

The US Treasury said Tuesday that it will not permit any dollar debt payments to be made from Russian government accounts at US financial institutions. The move is designed to heap further pressure on Moscow and force it into a choice between using dollar reserves held in its own country to pay bond investors, spending new revenue, or going into default.

Federal Reserve governor, Lael Brainard, who is awaiting Senate confirmation to become the next vice-chair, said yesterday that the Fed will begin a “rapid” reduction of its US$9tn balance sheet as soon as its next policy meeting in May and is prepared to take “stronger” action when it comes to raising interest rates in order to bring down inflation. She added, the Fed was prepared to take “stronger action” when it came to tightening monetary policy, suggesting support for delivering half-point rate rises at forthcoming meetings.

On today’s Money Talk we’re joined by Iris Pang at ING Wholesale Banking, Jack Siu from Credit Suisse and on the phone from the USA, Tony Nash of Complete Intelligence. 

Show Notes

PL: Good morning. I hope you have a great day off yesterday. This is Peter Lewis back with your business and finance news on Money Talk on Radio Three. The Times 8:03 in Hong Kong on Wednesday, the 6 April. Shanghai on Tuesday reported a surge in local Asymptomatic cases as nearly the entire city of 25 million people remains in lockdown. The city reported 268 local symptomatic cases and 13,086 local Asymptomatic cases, including 6788 from Poo Dong. That’s a 48% increase from the previous day. The US, EU and G seven group of nations are set to impose broad new sanctions on Russia after President Macron accused Russia of war crimes and President Joe Biden called for a war crimes trial. The US will ban all new investment in Russia. The EU proposal, which will need backing from the 27 member States, will include a ban on Russian coal. Germany said it would temporarily take control of the German unit of Russian stateowned Gas Prom, which operates some of Germany’s largest natural gas storage facilities, in a bid to secure gas deliveries. The US Treasury said Tuesday that it will not permit any dollar debt payments to be made from Russian government accounts at US financial institutions.

PL: The move is designed to heap further pressure on Moscow and force it into a choice between using dollar reserves held in its own country to pay bond investors spending new revenue or going into default. Federal Reserve Governor Lyle Brainard, who is awaiting Senate confirmation to become the next vice chair, said yesterday that the Fed will begin a rapid reduction of its $9 trillion balance sheet at its next policy meeting in May, and it’s preparing to take stronger action when it comes to raising interest rates in order to bring down inflation, suggesting support for delivering half point rate rises at forthcoming meetings. On today’s Money Talk, we’re joined by Iris Pang at Ing Wholesale Banking, Jack Siu from Credit Suisse, and on the phone from the USA Tony Nash of Complete Intelligence. On Wall Street. Overnight, US stocks have fallen following Fed Governor Lao Brain odds comments suggesting support for 50 basis point rate increases and a rapid reduction in the Fed’s balance sheet. The SP 500 fell 1.3%, to 4525. The Nasdaq Composites lost 2.3% to 14,204. The Dow slipped 281 points to 34,641. Shares of Twitter rose 2% overnight following a 27% jump on Monday after it was revealed that Elon Musk had bought a nine 2% stake in the company.

PL: Earlier today, Twitter announced that the company will appoint Musk to the company’s board of directors, and shortly afterwards, Elon Musk tweeted that he looked forward to making significant improvements to Twitter in the coming months. In Europe, the stock 600 index rose zero. 2%. London’s Footy 100 climbed three quarters of a percent Hong Kong and mainland China markets were closed yesterday for the Chingling festival. In the commodities markets, oil prices fell slightly, with Bunk crew settling down 1.8% at $106.64 a barrel. Futures linked to Europe’s wholesale coal prices rose more than 10% $290 a ton after European Commission President Ursula von der Leyen said the EU would impose an embargo on Russian coal. Gold is down half a percent at $1,922 an ounce, and following Leo Brain odds remarks, the sell off in US Treasury has accelerated. The yield on the ten year bond surged 16 basis points to an almost three year high of two point 55%, the biggest daily move in two years. And the yields on policy sensitive two year notes also rose, jumping ten basis points to two point 53%. In the currency markets, the US dollar index is up half a percent.

PL: The Euro is trading at 1.9 cents, the Bucks at 123.5. Japanese yen Sterling is worth one point 33 quarter cents, and Hk$10.24 the Chinese yuan is at six point 38 versus the dollar in offshore markets this morning. And Bitcoin is trading 1.3% weaker at $45,500 round. Asian stock markets this morning. It’s all looking to the downside. The SX 200 in Australia is off a third of a percent. Stocks have just opened in Japan, where the Nico 225 is down 1.3%. Similar story in South Korea. Stocks there of zero. 7% at the open futures markets, pointing to a decline of about 70 points for the Hang Segue later on this morning. At the Open, the time is eight or eight and a half. Let’s welcome our guests. We have on the phone Iris Pang, chief greater China economist at Ing Wholesale Banking. Morning to your Iris.

IP: Morning, Peter.

PL: And also with us is Jack Sue, chief investment office of a Greater China at Credit Scores. Morning, Jack.

JS: Good morning, Peter.

PL: And on the phone from the USA, we have Tony Nash, founder and CEO and chief economist at Complete Intelligence. Welcome back, Tony.

TN: Thank you. Good morning, Peter.

PL: Let’s start in Shanghai. A surge in local cases there. The city has reported 268 symptomatic cases over 13,000 local Asymptomatic cases. That’s up almost 50% from the previous day. And the city remains in lockdown for mass testing. It was supposed to have come out of testing yesterday. A media outlet, Kaishin, has reported that close contacts of infected people will now be moved to neighboring provinces. Iris, this sounds it’s getting serious, isn’t it? It’s lasting a lot longer than we thought. This lockdown, the cases seem to be getting worse. What are the consequences of this going to be on China’s economy?

IP: It is actually quite long from my perspective, and because they also come to close contact. So the number of people affected is a large group. So these people cannot work, because if the close contact is moved to another province, they cannot work. And I believe that they will be isolated. So it depends on now how many days they will be isolated. I believe that it will be at least 40 days. So almost the whole month of April is wiped out and Shanghai is a big city. So it’s wiped out around two percentage points of GDP.

PL: Two percentage points for this quarter.

IP: Yeah, for this quarter.

PL: So that means that China is not going to meet its growth target of 5.5% for this year because Shanghai is what, 4% of the country’s GDP.

IP: Yeah. Anyway, my focus originally before this cold outbreak is actually 4.8% lower than the target of 5.5% and now it is 4.3% even lower.

PL: Jack, what are your thoughts on this and also in particular its impact on Chinese markets?

JS: Well, we have a less pessimistic forecast at quite a twist. We think in the second quarter GDP for China, the Shanghai situation will knock off about 1.2% to the quarterly GDP. But in a full annual GDP hit, we calculated about 9.3% hit to the full cars. But the thing is the situation is leading to the authority to come up with more stimulus and setback is regulatory crackdown. And so similar measures are coming to offset the situation right now. So if the tariff situation lasts for the next few weeks, we do see some downside risk. So we are hopeful that in two to three months time we will be returning back to Nova. This is exactly what we expect to happen in Hong Kong, which is about two months ahead of the mainland. In terms of the culprit situation.

PL: We haven’t seen much signs of stimulus so far from the authorities. They seem to be fairly restrained. Do you think it’s coming?

JS: Well, we have seen that workership policy for housing market has continued relaxed. We have seen that the listing rules for us listed companies have relaxed. We have seen that the claim, the message from the central party that they will reduce the crackdown pressure on tech companies. There’s a lot for the investors that digest. We think we are hopeful that it’s impact that lifting the crackdown itself will add a 0.3% GDP. This is an indirect impact. It’s hard to calculate, but we are quite hopeful. We are above consensus and GDP forecast. We’re still sticking to our 5.9% above consensus forecast for this year.

PL: Okay, Tony, let me ask you for sort of an international perspective on this because obviously Shanghai is China’s largest Port. There’s a lot of factories there that are crucial to global supply chains. Is this being noticed and talked about in the US and how do you see it from there?

TN: Oh, sure it is. Yeah. Today a friend told me that the wedding all bonded area at Shanghai Port was closed, I think until April 11 because they found one Kobe case. And I think the view from here is very surprised because I live in Texas. We have been open since June of 2020 effectively. And we’ve had a lot of covered cases and business and life has pretty much gone on. People come to the office when they’ve tested positive for COVID. I know Texas is a little bit extreme, but from this side the concern is the impact on supply chains. So obviously we have inflation with commodities, but the constrained supply of goods of manufactured goods, the secondary impacts of inflation that we would see in manufactured goods simply because of commodities, inflation will be accentuated because of the bottlenecks for manufacturing. So what I have been telling recommending people in the west is that Western governments have to have a discussion with China to accept that Kobe is endemic, that has to be accepted for the health of the global economy.

PL: They don’t seem to want to discuss that, do they? I mean, they are sticking adamantly with this, what they call dynamic zero plan, right.

TN: But it’s Peter, countries cannot live this way and societies cannot stay locked down this way. And the global economy will have that double accelerator of inflation if manufacturing bottlenecks continue. I mean, we already have a double accelerated, but it will accelerate even more. So you talked about the Fed activity. The Fed potentially in intermediate rise and the 50 basis point rise in May and June is becoming more likely. And you can’t necessarily offset supply side shocks with monetary policy. All they can really do is demand destruction. And so with Brennard talking about both interest rate rises and reducing the balance sheet, the Fed is really focused on demand destruction and they’re going to have to accelerate that if China remains closed. So I believe that behind closed doors Western governments are having discussions with China saying, look, you have to accept this as endemic because most of the rest of the world already have.

PL: Iris, do you agree with that? Do you think this zero covert policy that’s being maintained on the mainland is not going to be sustainable? And if it does, it’s not only going to damage China’s economy but it’s going to damage the global economy?

IP: I think it is not a question for us. It’s a question for the Chinese government. Back in the two sessions in early March, there was a signal that the government seems to decide to move away from dynamic clearing because they didn’t mention it in the two sessions and the government work report. But then the outbreak in Hong Kong makes them really worried. And therefore, for example, in Sunshine before Shanghai, the government moved very swiftly to have the mass test and then broken the infection link. But Shanghai is a bigger city than Shenzhen and can’t escape from this. So I think it is the willingness of the central government to move away from the idealistic dynamic clearing. It seems that they are not because of several things that is different between China and the Western side of the world. The first thing and the most important thing is the capacity of hospital. China’s capacity of hospital per capita is actually very low. So in such cases life is more important than economic growth.

PL: Jack, this is all coming at a difficult time because just as we’re seeing the slowdown on the mainland, we’re also getting talk of even more aggressive interest rate rises from the Fed. Markets are pricing in now nine rate rises, nine quarter point rate rises this year, which means there’s going to have to be some half point rate increases. We had loud bridge last night talking about an aggressive reduction in the balance sheet. Is this going to start to affect stocks? It already is clearly on the bond markets. But do you think this is going to start to affect stocks?

JS: Well, number one, on the previous topic, I think China is fully aware of the situation that it cannot live in a serial corpus strategy forever. What we are waiting for is the availability of treatment such as Paxlon which is a proof drug for onshore China. When the supply of drugs become widely available to mainland hospital or healthcare system which would likely at the beginning of the year end or beginning of next year, we will have a gradual shift to lift with Colbert in 2023. This is our forecast number one. Number two, in terms of rate hikes, the third is expected to hide rates by 50 basis point in our view in an early May meeting and followed by another 125 basis point by year end and then another 100 basis points by next year subject to the development of Russia’s Ukraine situation and whether there is a rate hike related hit to the economy that would lead to less consumption in the United States. These are very concerning factors to consider because if I think about my mortgages in Hong Kong which is linked to the Fed rate, if mortgage rate increased by another 150 basis points in Hong Kong, if say you have a mortgage of HK$5 million, $87,000 this year, the money that’s been giving out to the population is only $10,000.

I mean the consumption impact is definitely a concern in terms of how it’s going to hit economy. But in terms of investment, right. We have to focus on areas that is not really driven by consumers. Like in China we have infrastructure led policy where we do see earnings rising in later sectors. In the new energy sector we do see earnings rising because of the global transaction in the green energy. And in terms of global investment we do see in the short term US Equities can go higher. I think beyond that we have to be very selective in this sector strategy because the banks are going to be beneficiaries of rising interest rates and high inflation. The energy companies, we think oil price will remain above 100 this year and therefore they will still be profitable and we have to be invested in SME sectors where because they are able to reprice because inflation pressure is coming. At the same time as business we open in the west, they are able to charge slightly higher price on the back of high inflation, and they can do that. And those companies will be more profitable than the last couple of years.

So we have to be selective when investing in this new environment we’re in.

PL: Okay, Tony, let me ask you about Laurel Bernard’s comments overnight. She’s talking about an aggressive reduction in the balance sheet. She seems to be suggesting that she supports now 50 basis point rate hikes. We’ve obviously seen a big reaction over the last couple of weeks in the bond markets to this idea that the Fed is going to get more aggressive, not really so much in stocks. Maybe today more concern. But do you think at some point investors are going to have to take more notice of just how aggressive the Fed is talking at the moment?

TN: Oh, absolutely. And I think Brennan’s speech today was an important milestone because Lornad is seen as an Uber Dove in the Fed. She is seen as not wanting to get bullish at all. So when she comes out with a speech like she did today, talking about rate rises in QT, at the rate that she was discussing today, people have to sit up and notice because she is probably at the extreme end of dovish of the Fed group. So I think people are finally starting to realize that this is serious in January. If somebody would have said that we’d see 50 basis point rises in May and June, you would have been lapsed out of a room and QT on top of that. But things have changed really quickly on the inflation front, and the treasury is pushing very hard to have some action taken on inflation because it’s an election year in the US and they don’t want to see double digit inflation going into elections in November.

PL: Okay. Iris, we seem to be facing a trifecta of shocks at the moment. Don’t we have the Fed talking a lot more aggressively? We have the Ukraine war, which is creating a global supply problem, and the slowdown in China as well. This is all coming together at a bad time.

IP: Yeah, you’re right. But for China itself, the economy, I think the most important thing for this time is whether to control covet successfully within a short time frame. So I expect it only affects April. Hopefully it doesn’t expect it doesn’t expect May because the long holiday in May. And I am also looking for stimulus, but not those mentioned by Jack. I’m looking for stimulus in infrastructure projects, so that could be really fast kick off of the growth.

PL: Again, Jack, switching topics, I want to ask you about US listed Chinese stocks. Chinese authorities look like they’re preparing to give US regulators full access to the audit reports in the hope that that will keep them mainly listed in the US. The Csrcs confirmed that it’s going to change confidentiality laws that prevents its overseas listed companies from providing sensitive financial information to foreign regulators. How big a game changer is this and is this supportive for Chinese markets?

JS: I think this is very supportive and quite positive to the Chinese equity market in general, because removing the listing risk for more than two thirds of the company listed in the United States suggests that the selling pressure in these equities will substantially reduce because the listing risk no longer exists for most of them. Secondly, the market would begin to price out the listing or regulation risk premium from both the US and the China side. In other words, the discount we’ve been seeing in these stocks in the last one year or so will continue to reduce. And now we are left with whether earnings can continue to rebound in the current environment because despite this risk premium being removed, what we’re seeing is the valuation of these companies have been increasing, but the earnings of these companies have not been increasing and not being revised higher. So what we are looking for now is there’s probably more room, more upside for valuation of these companies to rise further. But investors have to be aware if in the next couple of quarters earnings do not start stabilizing or rebounding, then there may be an opportunity to take some profits after the rebound.

JS: For now, we think there’s more upside. We think the Hang Seng Tech index, which is the main Beneficiary listing in Hong Kong, are likely a better investment than the Hangstang index itself.

PL: Tony, I’m wondering out here, as you’ve heard there from Jack, people are taking quite a positive view of this that’s going to be quite supportive of stocks. But I’m wondering if investors here maybe getting ahead of themselves because we still don’t know yet what the view of US regulators is on this. I know it’s hard to look into their minds, but do you think there’s enough here to satisfy them?

TN: Yeah, I think you’re right to be cautious, Peter. I think it is getting a little bit ahead of itself now, but also the large US portfolio managers that I’ve talked to have said that they’ve been told that they must be very cautious with investments in China. So if that is happening among the large portfolio managers in the US, then this change could be helpful. But I don’t necessarily see it clearing the way for a massive kind of acceleration evaluations of Chinese companies. I think the best thing that can happen for Chinese companies, for example, in tech is a big stimulus that’s going to funnel money into tech that would help evaluation. So investors say in the west could see that those profits, as Jack talked about, are actually coming in to match some of the revenue rises. But while the regulatory aspects will help.

PL: I don’t necessarily see that they will provide a major thrust of investment from American portfolio managers and also the companies themselves under these rules have to decide what is sensitive information and what can’t be handed over to US regulators. So there’s still pressure on them.

TN: That’s right. And it’s political, right? What? Sensitive information is very political.

PL: Yes. How do you see this?

IP: I have no comments on this.

PL: Okay. Let me ask you. Tell me why you’re here. As a final thought, let me ask you about Twitter. We’ve seen this 30% share price jump in two days now after Elon Musk said he owns 2% of the company, has just been appointed to the board. Interestingly. When he ticked his box on the regulatory filing, he indicated he was a passive investor in Twitter. Do you believe that? What’s in his mind? Why does he want to do this?

IP: Yes, please, go ahead.

TN: I’m sorry, Iris.

IP: All right. Thank you. I think it is very difficult to find evidence of anything that has happened. Right. Unless we have the CCTV to check again. So it is very interesting that a CEO is saying something like that and it also means that if it is true, then it is more careless. If it is wrong, then what’s behind it? He could be maybe have some other intention that we don’t know. So I would rather stay away from it.

PL: Totally fine. And work for you on this. What do you think is his mind here? Is he really a passive investor?

TN: Well, I think he’ll be very active in terms of his board position. And I think there are a group of technology entrepreneurs, Mark Andreessen, Elon Musk, other people who are becoming more aggressive in trying to pull tech away from a political alignment. Tech in the US is seen as being very leftward aligned. And I think some of these guys who have a more middle ground view are trying to pull tech back to the middle. Twitter has been very left aligned, blocking Donald Trump and a lot of people on the right. And I think these guys understand that if they want to have viable products for half of America, they have to move back toward the middle. And I think this is the first action of what could be many over the next couple of years to try to pull these companies back toward the political metal.

PL: Okay. Well, thank you very much for your comments. You heard that Tony Nash, founder and CEO and chief economist at Complete Intelligence, Iris Pang, chief Greater China economist at RNG Wholesale Banking and Jackson, chief investment officer for Greater China at Credit Suisse. You’re listening to Money Talk on RTHK Radio Three. A final look at the markets for this morning. In Australia, the SX 200 down a third of the K two five in Japan is off about one and a quarter percent. The Cosby is also down in South Korea around about two thirds of a percent. And it looks like the Hang Seng is going to lose about 70 points at the Open coming up after the news on Radio Three Covet updates with Jim Gordon. Anna Fenton, the weather forecast for today five hot and dry during the day, maximum temperature of about 28 degrees, and the outlook is for it to be mainly fine and dry in the next few days. Hot during the day. Temperature right now is 21 degrees and it’s 80% relative humidity coming up to 832. Here’s Andrew Shawski with the half hour news.

AS: Thank you, Peter. Professor John Burns from the University of Hong Kong says the chief executive’s decision to not seek a second term was well expected.

JB: Kerry Lam has had a very hard time, a very difficult five years. She started off with great promise, but by 2019 we had the chaos in Hong Kong, which the government is partially responsible for and has yet to accepted responsibility for that. I think the central government was not happy with that. And then we have the management of COVID.

AS: A spokesman for the restaurant trade says he’s concerned that it won’t benefit from the latest round of consumption vouchers, which will be released tomorrow as social distancing curbs on eateries are still in place. Last year, eateries took a third of the share of vouchers, said the President of the Hong Kong Federation of Restaurants and Related Trades, Simon Wong. But this year, with restaurants only allowed to see two people per table and with dine in not allowed after 06:00 p.m., Mr. Wong expected that figure to fall.

TN: And this time I assume that because of this social distance we can only get about 15% of the share and we still have to wait until the second round of lifting of the social distancing measures.

AS: The Ukrainian President, Vlogalensky, has told the UN Security Council Moscow must be held accountable for the atrocities committed by the Russian Army during its occupation. Mr. Zelensky showed a short graphic video which included pictures of victims and mass graves and called for Russia to be excluded from the Security Council. The BBC’s not atopic, reports.

BBC: President Zelensky’s address to the Council was devastating. He said the most terrible crime since the Second World War had been committed in Ukraine. Civilians in Bucha were killed in their homes, crushed by tanks, women raped and killed in front of their children. He accused Russia of deliberately killing as many civilians as possible to leave the country destroyed. And in Runes, which Moscow denies, he urged reforms for a more effective UN for the next generation.

AS: More than 10 million people have now fled their homes in Ukraine because of the Russian military campaign, and further accounts of devastation and allegations of possible war crimes are emerging from areas of Ukraine from which Russian troops have withdrawn. Police in the town of Bora dyanca, to the northwest of capital KIV, said there could be hundreds of people trapped in the rubble beneath bombed out blocks of flats. Local people claim that Russia troops fired at those who attempted to dig out the victims the news from RTHK.

Categories
Podcasts

Will The Rally Sustain?

Tony Nash from Complete Intelligence explains whether the US market’s biggest 4-day rally since November can sustain?

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/will-the-rally-sustain on February 3, 2022.

Show Notes

SM: BFM 89.9. Good morning. You are listening to the Morning Run. I’m Shazana Mokhtar together with Wong Shou Ning and Philip See. It 7:05am on Thursday 3rd of February. But first, let’s recap how global markets closed yesterday.

WSN: Well, the US had a pretty good day. That was up 0.7%, SP 500 up 0.9% while Nasdaq was up 0.4%. And for Asia, the only market that was really open with the Niki, and it was up 1.7%. Hong Sung, Shanghai, Singapore and our very own FPM KLCI.

SM: We were all closed for celebrating the Year of the Tiger. Speaking of meta, I think the results came out and they were not within forecast essentially.

WSN: Well, actually after hours, right. The trade actually the share actually tumbled more than 20% in extended trading earlier. And I think it’s on the back of like what you say, Charles. It’s disappointing earning results. And added to that, they are giving weak guidance and said that user growth has stagnated. Now that’s kind of scary for a company the size of matter.

PS: Yeah.

Just to break down the numbers, earnings per share was at $367 versus the expected 384. Revenue was at $33.67 billion. The expected was 33.4, which wasn’t so bad. But Facebook also missed estimates with user numbers with his daily active users at one point 93 billion versus the expected one point 95 billion.

WSN: Now, I think why the markets are nervous is because when you think about it. Right, this company is at a critical juncture at this point. It’s fighting a regulatory battle on multiple France. And it’s also, remember, guys, it’s trying to shift into the Metaverse. And this shift is costing them an extremely a lot of money. So whether they can translate these KPCS that they’ve already kind of agreed to in terms of $2 and cents, that’s the question mark when your core business is not growing.

PS: I guess a big question of how do you monetize from meta and that pathway has not been articulated very carefully, isn’t it? But that’s a long term expectation. As you said, Shannon, there’s so much regulatory pressure on them. And I wonder with the whole discussion about your revenue source, whether you can rely on advertising revenue now going forward. That’s a big challenge for Facebook going forward and better.

SM: I mean, that’s going to be one of the major headwinds to them. I mean, Apple’s iOS changes affected ad targeting and measurements. That’s already a headwind. There’s also the fact that a lot of people are sort of flocking to other options when it comes to social media TikTok, YouTube. I think the advertising rates for Metsa’s own Reals on Instagram, that’s a lot lower than what’s available on other unfeeding stories.

WSN: No rewind, a few earning season rewind. Let’s go back a few quarters. And I think what has happened is that 18 year olds to 29 year olds were flocking to Facebook. Right. So the question is better, is it going to attract them? And what progress are they going to make? So that’s another thing that the markets are looking at.

SM: Joining us on the line now for analysis on what’s moving global markets, we have Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks so much for speaking with us today. Can we get a quick reaction from you then on the disappointing results from Meta and Spotify? Does this mean something for tech bargain hunters?

TN: Well, I’d be really careful here because tech is really a deflation play. It’s not an inflation play. And so as we’re in the midst of the inflation cycle, there’s more movement to other sectors. So I don’t necessarily maybe it’s a short term opportunity, but again, if I was investing, I’d be really careful here with the Spotify and other misses.

PS: And can we get your perspective on the energy and financial sector? They helped the US Equities stage a mini rally over the last few days. Why are these economic sectors being buoyant while others like tech creating?

TN: Yeah, well, energy, commodities, finance, those are deflation plays or those are inflation plays. I’m sorry. And so that’s why more money is moving into commodities and energy and so on and so forth. So the market seems to be indicating that it doesn’t believe at least the equity market seems to be indicating that it doesn’t believe the Fed will fight inflation effectively. So they seem to be indicating that we’ll keep ripping on inflation.

WSN: So, Tony, how should we allocate our cash? Let’s say we have cash. Where would you be putting your money?

TN: Oh, gosh. Well, you really have to that’s an individual question. I just want to be really careful. So there’s a lot of money moving into commodities because there’s a belief that inflation is here to stay for a while. So if I were looking around, that’s really where I would look, of course, you have to have a risk allocation and you have to have some money and things like tech. But I would focus on companies that actually make physical stuff rather than, say, the work from home plays that we had over the last two years.

SM: And, Tony, let’s take a look at the US yield curve. It’s flattening even before the Fed has fired the first shot on rate hikes. What could possibly be causing this to happen? And do you see a short or long cycle of rate increases?

TN: Yes, I think to answer your last question first, I think what would be best is a short and abrupt cycle because it would really put a stop on the threat of inflation and so on and so forth. So like a 50 basis point hike in March would probably be the best solution we could find. But when we look at the yield curve flattening first, it is a traditional signal of a looming recession. So if you look at today’s employment data in the US, there was a loss of 300,000 jobs. So we’re in this weird place where we have booming inflation and a loss of 300,000 jobs. So it’s like the late 1970 stagflation. I’m not going to say we’re necessarily there, but if you just look at today, it seems like right. So what the yield curve flattening means is bond traders are pretty nervous and stagnation is ugly. So they seem to be saying that they don’t believe that the Fed will take the necessary action on inflation in the short term. So JPOW is not Volker is really what they’re saying. Paul Volcker from the 1980s. So bond traders can really make things difficult on both the Fed and equity markets.

So the Fed has a real balancing act to do. They don’t want equity markets to crater, but they don’t want bond traders to kind of extract their vengeance on the Fed and equity market. So if we don’t see rates rise, if we don’t see the balance sheet reduced, then bond traders are not going to be happy and it could get ugly in safety, too.

PS: I wonder what all this means for the US dollar. Where does the US dollar hit going forward and how do you see Euro and Yen perform against the greenback?

TN: Yes, again, that depends on which direction the Fed takes. If the Fed’s approach is weak and if fiscal support from Congress is weak or it doesn’t come, as many in equity markets seem to be implying, then the dollar will likely level out or even depreciate a bit. That would mean a stronger Euro and yen versus the dollar in a relative sense. And currencies are all relative. If the Fed resumes the hawkish talk that they started last week in Jpow’s comments and then on Sunday and Monday through some of the regional presence, then the dollar will strengthen and the Euro and the yen will weaken. Obviously on a relative basis. There’s not a lot of strength in Europe. And especially when you look at some of the geopolitical issues around, say, Ukraine and Russia, there’s a lot of risk in Europe. So people are really nervous about Europe and then Japan. Yeah, it’s stronger than Europe, but that’s really not saying a lot. So the yen will strengthen on a relative basis, but it’s not necessarily an endorsement of the strength of the economy.

SM: Tony, thanks so much for speaking with us this morning. That was Tony Nash, CEO of Complete Intelligence, talking to us about some of the trends that will be moving markets in the weeks and months ahead.

WSN: Yeah, it looks like markets are headed towards a very volatile period for the moment. So the Nest did really well. But what we do know is the results of Spotify and also Meta were disappointing. And after hours trading, these stocks took a huge hitting. Even PayPal, which results came out the night before, also is down 20 over percent. It looks like markets are seeing this glass as half empty rather than half full so the minute you disappoint right you really get whacked down because everyone basically was already making money the year before so their patience in terms of like writing out this maybe dip in earnings is just not there.

PS: It’s a consequence of so many issues, isn’t it? Because we saw this dip even before the real earnings came out, isn’t it? Because that was when JPY in the earlier minutes said that they were going to raise interest rates and also accelerate tapering and then I think these really disappointing earnings I think just compounded the matters worse but you do see some pickup going forward so whether they’re selective opportunities you don’t play the sector, you don’t play the themes but you really go stock by stock now, isn’t it?

WSN: Yeah, you have to take a very bottom up approach. The easy money is clearly made but you can see a shift of money and this is what Tony is saying is there’s a shift towards commodity prices right? So brand crew this morning is close to $90 barrel. It’s close to seven year high. This is despite the fact that OPEC has said that they are going to raise output but there’s a lot of judges because of the geopolitical tensions that we’re seeing coming out of Ukraine but maybe it’s also due to the fact that oil is truly an inflation play and inflation is here. It’s not transitory at all.

PS: Yeah, and I just think I do see some improvement also in Bitcoin right? If you can see across ECM and Bitcoin up actually marginally just one and a half percent you see some good news there but I wonder if this is a sign of whether that the pressure is really on the equities market going forward but the rest are still holding resilient.

Categories
QuickHit

What signals are markets missing right now?

In this QuickHit episode, our guest Julian Brigden answers “What signals are markets missing right now?” How important is the equity market right now in the current economic cycle? Most importantly, how long before we can see directional change in the market, and what you should do before then?

 

Julian Brigden is based in Colorado and started in the markets in the very late 80s, trading precious metals. He moved into trading FX, then switched into sales for various investment banks. He also worked for a policy consultancy group called Medley Global Advisors in the very late 90s to early 2000s and fell in love with the research space. Just over ten years ago, he set up MI2. MI2 was grown organically. Julian can be seen together with Raul from Real Vision where he does Macro Insider.

 

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This QuickHit episode was recorded on November 3, 2021.

 

The views and opinions expressed in this What signals are markets missing right now? Quickhit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Julian, I’ve watched a lot of your videos, and I love a lot of the thoughts you’ve talked about recently about velocity, about the yield curve, about central banks. It’s all great stuff. I guess one of the things that I’m really wondering right now, especially, is what is the market missing? What are market participants missing? Because this is something that I don’t hear a lot of talk about. We hear a lot of the Fed should do this or this asset is going that way or whatever. But what is the market missing right now?

 

JB: Right. So we’ve been on this inflation gig since, actually, March of 2020. Sorry. Apologies. So at the depths kind of the pandemic. It’s a very long thesis. I’ve probably been in the inflation court really since the end of 2016. But in this sort of current phase, and we’ve been in and out of them, you have to. That’s what markets are about. We have been on this inflation kick since March of 2020. And initially it was just a trade breakevens, which are a metric of inflation in the bond market had got crushed because they were held by the risk parity boys as their inflation hedge in their portfolios. And they delevered like everyone else did in the spring of 2020. And those things dropped to like, five-year inflation was priced at 50 basis points.

 

Well, Tony basically trades the cycle, right. So as the economy recovers, which you had to assume it would, they were going to come back. But as we’ve sort of taken a step back and from a bigger picture perspective, we’d always said that even as soon as Trump came in, when you start playing with just monetary, that’s one thing. But when you add that fiscal side into the equation, into the mix, it becomes totally and utterly different.

 

And we’ve actually always used the period from the mid 1960s to the late 1960s. That’s where I kind of think we are. So we’ve had these sort of pro-cyclical, unnecessary, excessively large fiscal stimulus. And they came to create this accelerative oscillation. Okay. So I’ve got a couple of very smart ones, way smarter than me.

 

Classic example of the A students working for the C student. And we were looking at inflation back in 2016, and I was just looking at the chart in the 60s, and my quant came up to me and went, Boss, that’s an accelerative oscillation. And I said, Steven, what the hell is that? And he goes, well, he was, by the way, he was a mining expert, specialized in explosives. And he said, kind of what you do when you model an explosive wave is it goes out in a wave until it hits something. And if it hits it at the wrong time, far from the wave decelerating because you expected to hit something and stop, it can actually accelerate the oscillation of the wave. And so essentially, from an inflation perspective is that the way that you think about this is you get something like the Trump stimulus, which was back in late 2016, totally unnecessary fiscal stimulus at the wrong point of the cycle, where we didn’t need it.

 

So far from sort of rolling over like a sine wave, which the economic cycles behave that way, too. And inflation cycles generally behave that way because of self limiting on the tops and the bottom, cycle actually picks up amplitude. And what you tend to do is you create policy error after policy error after policy error because you’re behind the curve all of a sudden, you know what it’s like in trading, right?

 

If you’re on your game and you’re short something or long something and it moves in your direction, you might take some profit. Look for the retracement, double up, whack it hard. You get caught the wrong way into the move and your head just becomes discombodulated. And that’s what happens from a policy perspective. So. When I look at this current situation, the first thing I would say is I think people are, they’ve finally woken up to this concept that maybe inflation is not transitory. I think they’re right. We’ve been on this gig for a long time, but the immediate risks, I think, are twofold.

 

The first one is they are not. And it’s not necessarily here in the US. I think it’s going to be a problem here in the US, but I think it could be a bigger problem, actually, in Europe and for the bond market that matters because all those bond markets are all fungible. Right. So if bonds blow out or your eyeboard, the front end contracts in Europe blow out, it’s all going to affect our markets over here. And. They’ve totally underestimated the price pressures in the pipeline.

 

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TN: In Australia, right?

 

JB: Yeah, we have. But not. I think we’ve got another maybe three months of numbers of I think could make people’s eyes bleed. You’ve got this price pressure in the system. Three possible outcomes. Price pressures dissipate. PPI pressures just dissipate. Okay?

 

Well, we just got the market survey this last week. Pressures are up. We just got the ISM services. Price pressures are back up to the previous highs. We just got the Swedish service thread bank PMI services yesterday. Price pressures at new highs. Okay.

 

TN: China’s PPI are like 14% or something year on year, right?

 

JB: Exactly. And their PMI price pressure number, which was dropping, just re accelerated. So option number one, that somehow price pressures just miraculously evaporate, doesn’t seem like an option. Option number two, the companies eat the price increases. They take them in margins. Well, if that’s the case. And this is one of the things the equity market hasn’t woken up to, then your assumptions on margin growth are. The good stuff that you can get here in Colorado, right.

 

Now thus far in the United States, it’s absolutely not the case, right? Companies are pushing through those price increases. Okay. Which brings you to option number three. Price inflation, given where these PPIs are, right? So US, even the final demand, the new sort of slightly adjusted, surprising how when they do adjust these things, Tony, they generally drop from the old metric?

 

Now it’s like, two and a half to 3% under the old PPI series. But anyway, it doesn’t matter. Eight and a half percent here in the US. I think we printed another 45 high in Sweden. And I’m picking Sweden because it’s a nice open economy. And you see the data come through very quickly. I think there’s one of those 17%. Spain, 23. Eurozone, 13 and a half. Okay. So higher than the US.

 

If companies can pass those price increases on, what makes people think for a nano second that CPI is going to stay here in Sweden at two and a half in the Eurozone at four. Why couldn’t Eurozone HICP, which is their CPI, which is max only ever had a 5% spread to PPI, right? At the moment, we have a nine plus spread. Why couldn’t HICP print somewhere, my guess is between eight and a half and eleven?

 

TN: So those are Chinese figures?

 

JB: Yeah. Exactly. What the hell does this? Do you think Lagarde is going to be able to say, like King Canute, “stop?”

 

TN: So in one of your interviews that I watched, you said central bank assets and inflation are effectively the same thing. And I think that’s really interesting. Can you explain that a little bit?

 

JB: So the balance sheet? Yeah. Essentially. Look, you print money, which is what it is. QE is printing money. Monetary 101. This is how the Roman Empire ended up falling apart. And you can inflate asset prices because I know this is not how central banks initially told you it worked actually. Having said that, I do love it. And we’ll come to this, I think the second point, the markets are missing in a second, and another central banker.

 

The only central banker who’s been truly honest was Richard Fisher, the old Dallas Fed central bank chairman. And I love the Texans from the Dallas Fed because they’re just straight shooters. They’re just bloody honest, right? I mean, he came out on CNBC, and I remember watching this interview because it was done on CNBC Europe, I think. And the guy always had one of the British guys on CNBC in the US. The guy nearly fell off his damn chair when Richard Fisher said, “of course, it was about the equity market. It was always about the equity market.” Right.

 

We just front load this stuff and they could boost asset prices. And you can look at the PA of the S&P. You can look at the S&P itself. You can look at the NYSE, you can look at the value line geometric index, which is a super broad metric of US Equities, and you can put them all against the Feds balance sheet. And it’s the same thing.

 

TN: Let me ask you this. And I hear you and I am aligned with what you’re saying. The question is, why does it have to do with the equity markets? And my understanding is that it has to do with equity markets because that’s where American 401Ks are. And there’s such a large baby Boomer cohort with their money in 401Ks that they can’t be losing their wealth. Is that the reason why it’s always about equity markets?

 

JB: Well, I mean, I say it’s housing as well, right. But they tend to try and deemphasize that one because politically, that can be a bit of a pain in the ass. Right. But look, this is true monetary debasement 101, right? I mean, we wrapped it up in this veneer that is G7 central banking or the sophisticated theories. But we’ve done this throughout history, right? We just debased the currency.

 

People forget in the Weimar Republic, the Reichsmark was imploding in value. Sorry, the pre-Reichsmark was imploding in value, and the stock market was going up thousands of percent today to keep phase with this because it’s a claim on a tangible asset, right? A cash flow or a piece of land or a factory or whatever, right? So this is not new. I think this is. No, I think it’s not so much about the 401Ks. The thing that I think is truly problematic in the US is what I refer to as the financialisation of the real economy.

 

Tony, that CEOs are not paid to produce a thing. There are actually numerous companies in the S&P that I’ll argue don’t produce anything, right? They are simply an utterly shepherds of an equity price. That’s how they’re compensated. We talk about perverse incentives. Okay. That’s how they’re compensated. They basically compensate to bubblish their stock as much as they possibly can.

 

And as a result, the minute that stock prices got going up, let alone fall. They look immediately to the bottom line as to how to address costs and keep those profits falling. So if you look at the correlations between, and it’s just frightening, the correlations between total US employment and the NYSE, broad metric of US Equities, Capex and NYC. They’re the same bloody chart.

 

TN: Sure.

 

JB: So literally, you can’t really allow stocks even to go sideways for an extended period of time. You’ve got to keep this game go.

 

TN: Sure, it’s not the flow, right? We’re in a flow game. We’re not in a stock game.

 

JB: Bond markets much more flow in terms of the shape of the curve is much more a flow thing. Equities are really about, they care when the flows turned off, but they’re really about the quantity.

 

TN: Overall stock. Okay. So what else are markets missing?

 

JB: The second thing is I just want to raise this. There’s a really important Bloomberg story out today by Bill Dudley, the ex New York Fed President, ex Goldman guy. And once again, I love the honesty of these retired US Fed guys. And he’s been talking at some length about policy error. But today is fundamentally the issue.

 

So let’s use that old storyline. If a tree falls in the woods and no one hears it, did it fall? Okay. So in the last few weeks, we’ve had a lot of pressure at the front end of these bond markets. We built in rate hikes. And that’s a market assumption on what the Fed or ECB or the Bank of England or the RBA or whatever is going to do with their policy, right?

 

But at the end of the day, Tony, do we care what banks here in the US earn in the overnight from Fed funds? No. There’s literally no relevance unless you’ve got some sort of liable based funding mortgage. But really, essentially, even then, has no relevance to the real world. Right? Policymakers raise policy rates to affect broad financial conditions. And broad financial conditions are essentially five metrics depending on the waiting in every single index. And they are short term rates, let’s say two years. Long term rates, let’s say ten years. Credit, tightness. Level, equity market. And the Dollar.

 

And what you can see in the US and most other places is despite the fact that we’ve seen these big moves at the front end of these bond markets, financial conditions haven’t budged. Ten-year yields, if anything, have fallen. It’s a bare flattener. It’s kind of what you would expect at this point in the cycle. But nonetheless, there is no tightening coming from the ten year sector. Because there is no tightening coming from the ten-year sector.

 

There is no tight, not much tightening going on in the mortgage market, okay? Because there is no tightening coming from the ten-year sector, the equity market where the Algos literally just trade ten-year treasuries is their metric and wouldn’t know what a Euro dollar was, in order to fund the interest rate contract if it bit them in the proverbial ass, okay? Have completely ignored what’s going on. The dollar is caught in the wash between these various central banks who are all behind the curve and has gone nowhere. And credit hasn’t moved, because he’s looking at the equity market.

 

So there has been no tightening of financial conditions. What Bill Dudley said is that’s all that bloody matters. And so until there is a tightening of financial conditions in an economy which at least the President, probably, I suspect well into the middle of next year could change quite dramatically in the middle of next year. But for the moment, and that’s a eight, seven, eight month trading horizon, until there is a tightening of financial conditions, which means stocks down, credit wider, dollar up, ten-year yields higher. Those two year yields have to go further and further and further and further.

 

And this concept that the market is currently pricing, that we’re going to try and raise a little bit. And the whole edifice is going to blow up because they have what they refer to as the terminal rate, kind of the highest projection of where rates are essentially going to go in the tightening cycle is that one six is wrong.

 

We may have to go way through that. And Bill Dudley actually talks about 2004, 2006, where the Fed started off way behind the curve and the economy just kept running. Demand was there and they had to go 225 basis points and they had to do all sorts of other stuff before the damn things slowed down.

 

TN: True. When we consider that. So you’re saying, really seven, eight months before we see a major directional change in markets. I don’t want to put words in your mouth.

 

JB: Well, look, I think there’s sufficient, I do not see this as a slowing economy. I see this as an economy where demand is utterly excessive because central banks and policy makers misread. I think it was a fair mistake to make. I’m not critical of that, misread Covid.

 

TN: Sure. Policy errors are all over the place.

 

JB: All over the shop. Right. So we have far too easy, excessive policy. Right. Look, today the Fed is going to taper, but let’s be honest, tapering isn’t tightening. Tapering is less easing. We are driving into the brick wall that is the output gap, right. The economy at full capacity, not at 120 billion a month. But let’s say from next month, 105. Right. If you drove into a brick wall in your car at 105 versus 120, I think it would make very little difference to the outcome.

 

TN: That’s a good point. But we all remember the taper tantrum. So will we see a bit of a breather in markets before things amp up again? Or do you think people are just going to take and stride this time?

 

JB: I don’t think we get a taper tantrum this time. I think the Fed has been pretty clear. You’re sort of getting a little bit of a taper tantrum at the front end of these bull markets. But because most of the world doesn’t look at wonks like me, care what EDZ3 is, right? Or LZ3 in the UK, right? Or Aussie two year swaps. But most people don’t, aren’t aware of them, and they should be. But I mean, that’s what policymakers have to watch.

 

And as I said, I think the bigger thing is how far the rates have to go in an economy where demand is literally off the charts, where we’re seeing wage growth in the private sector from the ECI at 4.6%, where John Deere factory workers just rejected a 10% wage increase this year with following subsequent increases that probably work out around six odd percent over the next five years where they just said, forget it. Not enough, right? Not enough.

 

TN: Look at retail sales. The stepwise rise in retail sales over the past six months is incredible how quickly.

 

JB: I’m looking at stuff and if you look at the senior loan, which is the banking where they ask the bank loan offices what they intend to lend and who they’re lending to, and are they tightening conditions or whatever. Lending, they’re falling over backwards to try to lend money. Now we know that people have got some cash on sidelines because of the stimulus.

 

We know that companies have still got PPP loans that they’re still working through. So demand is a little lower, but supply is literally off the chart. So lending bank willingness to lend to consumers, decade highs, right. Bank willingness to lend to companies all time survey highs, 30-year highs. Right. So even if we were to get and I don’t think this is the case, even if wages would not keep space with inflation next year in the US, people have got plenty of places to go and borrow money to keep consuming.

 

So I just think this is an economy which is in the middle of its cycle. I mean, most cycles are three years long, three plus years long, with 15 months 16 months into this thing. I mean, this is mid cycle stuff. It’s the easiest of easy money, right?

 

TN: Okay. And so just kind of to end the three-point sermon, what else are markets missing? This is really interesting for me because I’m hearing a lot of different kinds of thesis out there every day, but very few about kind of what the market’s missing.

 

JB: Look. And I think it comes back to the final point, which we alluded to earlier. The equity market is making an assumption, of course, the equity market, I’m a bond guy and an FX guy. I hate the equity market. My glass is absolutely, defensively, half empty. Right. And ideally someone’s paid in it. But that’s the best day for it. That’s like the best market for me. Right. But the XG market is doing its classic thing where they’re just assuming the best of both worlds. So they’re assuming that margins are going to grow, so there is no cost pressure that could infringe on those. And we’re starting to see that.

 

I think Q4 numbers that we get in Q1 will start to get a little bit more interesting. Right. But we sure what wild wings or whatever the thing is called the Buffalo Wing place just got stumped because their wage costs were up and their input costs were up and they couldn’t pass it on. Right. But the equity market, as is classic, has taken the highest margins in 20 years, which is what we have now. And they’ve assumed that next year it grows even more. And in ’23, it grows yet again. Okay.

 

So as I said, if you’ve got this cost push and firms can’t pass it on, that doesn’t happen. Margins get crushed. Don’t think that’s a risk here in the US at the moment. Do think that’s a risk in Europe because these PPI increases are just so large. Right. And if you’re a Spanish company and your PPI went up 23.6%, you cannot pass on 23.6% increases to the consumer. In the US, if your prices went up eight and a half, you can wiggle a little bit through productivity, maybe a couple. You can probably get away with 5% price increases. Okay. So margin assumptions may be utterly wrong, but if they aren’t, what does that mean, Tony? It means that price inflation is rising, and in which case inflation is not transitory. And that’s the second big assumption. So they’ve assumed margins rise. Oh, and conveniently, inflation is transitory. And that in a cost push environment, you can’t square that circle. Right. One has to be wrong.

 

My gut is at the moment, it’s the latter in the US, not the former, more worried about the former in Europe in Q4. But that’s another thing, which I think the market has miraculously misread. But as I said, as those pricing pressures come through, I think policymakers and markets will have to adjust significantly. And I think it set us up for a policy error sometime next year. Probably huge. Probably.

 

TN: We’ll trip over ourselves with policy errors until we see this. And then when we do see some sort of reckoning, we’ll have even more policy errors.

 

JB: Correct. As Raul and I say constantly on Macro Insiders you just do buy the dip. You just got to figure out when the dip comes because you don’t want to be in when the dip comes and when you hold your nose and grab your bits and decide that you’re going to jump into the deep end and buy it by the seller.

 

TN: Great. Julian, thank you so much for your time. This has been fantastic for everyone watching. Please subscribe to our YouTube channel. It really helps us a lot to get those subscribers. And Julian, I hope we can revisit with you again sometime soon. Thanks very much.

 

JB: Thanks. Bye bye.

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6% The Best China Can Do

As markets overnight were bolstered by concerns over a virus spreading from China, we speak to Tony Nash, CEO of Complete Intelligence, for his insight into the downgrade of China’s GDP forecast, the upside to US equities, and a fall in oil prices as a result of China’s coronavirus.

 

Presented by: Roshan Kanesan, Wong Shou Ning, Lyn Mak

 

Listen to the podcast from BFM: The Business Station.