Tag: us policy

Systemic Risk: Silicon Valley Bank(ruptcy) & America’s Feckless Energy Policy

Post author By admin
Post date March 11, 2023

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In this episode of The Week Ahead, the hosts discuss three key themes: Silicon Valley Bankruptcy, the Federal Reserve’s Quantitative Tightening (QT) and systemic risks, and America’s energy policy.

The discussion begins with a focus on Silicon Valley Bank (SIVB), which had a major issue raising capital and faced a bank run on Thursday. On Friday, the California bank regulator shut the bank down. SIVB had $175 billion in deposits, $151 billion of which were uninsured. One of the discussions surrounding the SIVB collapse is how venture capitalists have been affected.

The hosts then move on to discuss the Federal Reserve’s QT and systemic risks. They note that the US has been experiencing strong data and inflation, and Fed Chairman Powell hinted at a 50 basis point increase this month. The hosts discuss whether the Fed will accelerate QT in this environment, what that could look like, and what risks it would pose to the US financial system.

The third theme discussed is America’s energy policy. Host Tracy Shuchart mentions a speech given by US Energy Secretary Jennifer Granholm, which didn’t seem to give her more confidence in Granholm’s competence as an energy secretary. The discussion touches on the problems with America’s energy policy and how it affects the country’s overall economic outlook.

Finally, the hosts share their expectations for the week ahead.

Overall, this episode offers a comprehensive analysis of current events and trends in finance and policy, with a particular focus on the implications of SIVB’s bankruptcy and the Federal Reserve’s actions. The hosts provide insightful commentary and thought-provoking questions that will be of interest to anyone following these issues.

Key themes:
1. Silicon Valley Bank(ruptcy)
2. Fed’s QT & systemic risks
3. America’s feckless energy policy

This is the 56th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Joseph: https://twitter.com/FedGuy12
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

Tony

Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash. Today we’re joined by Joseph Wang. You may know him as @FedGuy12 on Twitter. He’s a CIO at Monetary Macro and a former senior trader at the New York Fed. Joseph, we’re really happy to have you here. Thanks so much for joining us. We also have Albert Marko and Tracy Shuchart will be joining us during the show. There are some key things we want to talk about. First is a hawkish Fed of course we can’t talk about that without the Silicon Valley Bank things, events that happened today. So we’ll cover that a bit. We’ll get into the systemic risk of quantitative tightening and the likelihood of that happening, as well as America’s rudderless energy policy. And we’ll talk to Tracy about that in detail.

So guys, thanks very much. There’s been a lot going on this week. Albert, I know you’ve been on the road. Joseph, it’s your first time here, so I’m really glad we can have this conversation. Guys, let’s start out with Silicon Valley Bank. I mean, this is something that just kind of happened yesterday. It actually happened with a communications announcement on Wednesday coming in the wake of another bank failure.

And it was really bad timing, it was really bad advice for them to do this. And we’ve just seen a bank explode right, or implode. So can you help us walk through what actually happened from your perspective?

Joseph

Yeah, well, first of all, thanks for having me on the show, guys. I love your show and I do listen to it. So it’s real honor to be here today.

Silicon Valley Bank. So as of recording today, it looks like they’ve been taken into receivership by the FDIC. So basically it’s bankrupt. Now, Silicon Valley Bank over the past couple of years, if you look at their equity prices, they soared really high, especially during the crypto boom. They were known as a bank that would lend a lot to the financial tech sector. And as the financial tech sector imploded, it seemed like that kind of hurt them as well. These past few days you saw it stock price steadily decrease. So if you’re a bank, you have two big concerns. The one is solvency. Are your assets worth more than your liabilities? And the second is liquidity. Do you have enough cash on hand to meet investor withdrawals. When I put money in a bank, so I am an investor in that bank, right. So I eventually lent money to local bank and local bank bought from me and I can go and get that money back anytime I want. And that is part of the problem of a bank. Your liabilities, they are short term, so they can disappear anytime you want. But your assets tend to be longer dated, things like loans, let’s say a five year, ten year loan.

So I can’t really comment on the solvency situation of Silicon Valley Bank. I suspect that they are insolvent simply because I read that they’ve been making a lot of loans to these fintech companies and we all know how that turned out. But you can actually get pretty good insight on their liquidity situation by looking at their regulatory filings. If you want to study a bank and I study bank, so you want to look at something like this.

That’s all this is a call report. A call report is a financial report that banks file. It’s literally 100 page reporting form, and it comes with instruction manual that’s 800 pages in leads. So that’s why I can actually keep a reference here. So if you look at Silicon Valley’s financials, you’ll see that it’s a bank that is vulnerable to liquidity runs. It might not seem so on the surface, but so just for the audience, Silicon Valley Bank has about $210 billion worth of assets. It’s largely funded by deposits. Now let’s look at their asset side first. Now if you’re a bank, you got to keep liquidity on hand because what if everyone starts to ask for their money back? You want to have some liquidity on hand to meet those redemptions. So Silicon Valley Bank has actually a pretty good portfolio of liquid assets. Of the 210 billion in assets, about 120 billion are securities. Securities are good because you can sell them. That’s what a security is. If you have a loan to local company, you can sell them. That’s illiquid. Of the 120 billion, 80 billion are high quality liquid assets. So in the banking world, you want to have high quality liquid assets because you can sell them easily to raise cash.

These are Treasuries and Agency MBS. So so far, $80 billion of high quality liquid assets. Sounds like a great liquid bank. You dig down a little bit more, you find out they’ve already pledged about 50 billion of those away. So they’re already using that to either to secure borrowings. For example, let’s say you are a huge investor. You’re putting money into Silicon Valley Bank, but you don’t really know if you want to take that risk. So you could ask for some collateral. So that could be a possibility as well. So the bottom line is they don’t actually have that much liquid assets, even though they look like they do. Now let’s look at their liabilities. It doesn’t look good either. So normally if you and I okay, I don’t know about you guys, but when I put money in a bank, I have less than 250,000. So it’s within secured by the FDIC. But if you have a lot of money more than 250,000, then it’s not secured by the FDIC. Then you have credit risk. When you look at the depositor profile of Silicon Valley Bank, you can see that they have $150 billion unsecured deposits.

So those are institutional investors who basically lent maybe unsecured, maybe definitely uninsured to Silicon Valley Bank and they could lose everything. If Silicon Valley Bank goes bad, down really badly, they probably will, they’ll get something back. But it’s not good to lose money when we put it in the bank. So they have liabilities that are runnable and they began to run. Now I’ve been hearing anecdotally that everyone was like, get your money out of Silicon Valley Bank. So I’m sure they were. Now you have if you’re a Silicon Valley Bank, that’s a huge, huge problem. You have no liquidity. Everyone is asking for their money back. Your last lifeline is to borrow from, let’s say, the Fed or a Federal Home Loan Bank. It looks like they’re already borrowing from the Federal Home Loan Banks and I don’t know if they can borrow even more. A Federal Home Loan Bank is basically a government sponsored agency whose job is to provide cheap loans to the commercial banks they’re already lending to to the Silicon Valley Bank. In theory they could lend more, but they have a lot of exposure to Silicon Valley Bank. So the Federal Reserve Bank of San Francisco, which is the bank that’s lending to Silicon Valley Bank, 20% of their loan book is to Silicon Valley Bank.

So if you’re a CFO there, do you want to increase your exposure to this bank that’s probably going bankrupt? So yeah, it’s over for them, which is why the FDIC souped in.

Tony

Those are amazing details and it’s exactly what I wanted to hear. Now what I had read earlier was that there are $171 billion of deposits at Silicon Valley Bank and 175 billion but 151 billion of that is uninsured. So basically $24 billion people can pull $24 billion out, but there’s $151 billion that they may or may not get back. Right. So for a lot of these VCs, early stage tech companies and so on, I don’t know if private equity firms or investment funds bank there, but certainly it seems to me to be a systemic risk, especially in the venture capital community. Is that a fair assumption to make?

Joseph

I don’t think it’s systemic to the banking sector and we can talk about that. But these guys who in that community for sure, Tony, I imagine that a lot of people in that community are banking with Silicon Valley Bank. And if Silicon Valley Bank goes under, they’re going to have to have haircuts and maybe it’s a lengthy process. Maybe they get tied up in bankruptcy court or something. So that’s a liquidity problem for them. And so for that community, yeah, I agree, it could be a big problem.

Tony

So if I’m a limited partner in a venture fund today, I’m checking with that venture fund to make sure that my cash is okay. Is that the process that people would be doing? For people who don’t know, limited partners are the investors who put money into a venture capital fund. And my assumption is a venture capital fund would likely store that money in Silicon Valley Bank. And if they can’t access all of well, they could take the first $150,000 of that. But if they can’t get beyond that, then it’s not just the VC that’s hurt, it’s that limited partner. Is that correct?

Joseph

Yeah. So that losses, like you mentioned, partnership losses flow through from the entity to the partnership. That’s what being a partner is about. I imagine there are some rules depending on your general partner, limited partner, things like that, but yeah, it’s investors that get hurt.

Tony

And so the allocation just both of you guys probably know more about this than I do, but the allocation of, say, venture capital from, say, a pension fund is a relatively small allocation of all of the allocations of, say, a pension fund. So I would suspect that this probably isn’t a systemic risk back to, say, pension funds and other investment funds like we had maybe in 2007-8. Right. It’s probably less of a systemic risk than that was.

Joseph

Yeah, I totally agree. I don’t view this as a systemic risk.

Albert

I agree with that. Tony. I don’t think anything systemic is going to happen because SVB Bank goes under. I mean, SVB Bank is the FTX of the fintech banking world. I mean, everything on there, everything that they invested in, is based on trust, and not very much for the fundamentals at A. So it’s not a surprise that it went under as the Fed has been raising rates. Everyone knows that if the rates rise, the tech sector is one that gets hit the most. So it’s not really a surprise that this happened now.

Joseph

Yeah, I totally agree. When the Fed is raising rates, it’s trying to slow down the economy through sectors that are interest rate sensitive. I think the great irony here is that we all expected that to be real estate, right? But real estate is fine, but we miss the fact that the other really interest rate sensitive sectors is tech. And we see big layoffs in tech. So it’s actually all the well paid people who complete on Twitter who are having a bad problem, but the more blue collar industries seem to be doing fine.

Albert

Yeah. Housing got a boost because there’s a lot of cash buyers. People were cashing out at the behest of bloodstone, buying everything, but they were cashing out three and four times the value of the homes that they had a mortgage on. So they go and buy other homes, pure cash. There’s no mortgage risk in the system for the rate. Just like you were saying, the housing sector is not really affected by rates at the moment. You can see that because the houses are still going up and still a little bit of a shortage. But the tech sector was always the biggest loser of the hawks.

Joseph

One of the things that I hear is that there’s the fiscal stimulus from all the construction stuff, like is flowing into the state and local governments. And so that kind of construction spending seems to be supportive of employment, at least in the construction sector. So the guys who, if they’re building residential houses, maybe they can go and do something that’s benefiting from fiscal stimulus.

Tony

Sure. Here in Texas and probably in Florida, where Albert lives, there is construction all over the place, and it’s helping the tax base, it’s helping the overall impact of related jobs and other things. So it is still very strong, at least in the south.

Albert

Well, look at the layoffs. It’s all been tech and no construction. Construction has a shortage of workers at the moment, that’s the best indicator that you can have at the moment.

Tony

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Tony

Right. Okay, in talking about that strength, let’s talk about the Fed a little bit. Okay. If we were talking two days ago, there would probably be a bias toward the Fed becoming more hawkish. Right.

All the buzz two days ago was, well, we’re going 50. Fed is going to be more hawkish. It’s going to be tough. But over the last 24 hours, things have really started to lean away from that. So what do you see as drivers of the Fed being hawkish and drivers of the Fed being less? So we can’t say that they’re dovish. Right. But it’s more the degree of the rate rise. So what do you see in the calculus that they’re thinking through?

Joseph

Yeah, so let’s level that a little bit. So at the last FOMC conference, Chair Powell basically said that from now on, we’re going to do 25 basis points. He said that through his statement. So the language was that rather than talk about the pace of the hikes, we’re going to talk about the extent. So that’s kind of a that would seem like a done deal. And from my experience with the Fed, very slow, very conservative organization. 75-50-25-25-25, you know, you don’t go from 25 to 50. Now, that’s what everyone assumed. And also corroborated by, let’s say, President Mester. And then Chair Powell kind of threw that whole thing upside down this past week when he was testifying before the House and Senate. He was basically suggesting that, you know, if the data is still strong, we’re going to do 50 until the market began to price that in. So the question ultimately is, is data strong? And that has to do with what happened today with the non farm payrolls and what happens with the CPI report next week. Now, when you’re looking at market pricing, like you suggested, Tony, they seem to be taking out that 50 basis point hike today, Friday, and that could be in part because of fear contagion in the banking sector, I don’t know.

Now, looking at the non farm payroll itself, it looks like the jobs number over 300,000 was comfortably above Bloomberg expectations of about 200 some thousand dollars. But there was a little bit of a mix in it as well because of the unemployment rate increased. I think the pace of a wage increase is also moderated as well. So it seems to be on the stronger side, but not unambiguously. So my perception from this is if the Chair Powell is basically upending everyone’s expectations and putting 50 on the table, the presumption is 50. And this was not clearly weak. We got to watch CPI next week as well. As long as CPI is not like super, like a big disaster, I think the presumption should be about 50 basis points for the March hike.

Tony

So you think the presumption is 50 now?

Joseph

I think today’s headline employment was pretty strong. It’s not something that is weak enough, I think, to take away the presumption. Again. Everything could change with CPI next week, but we’ll see.

Tony

Thank you very much. That’s okay. We know you’re busy, so thank you so much. So Joseph, with the jobs data, there were 50,000 department store jobs in that jobs data. And to me that seems like a statistical extrapolation from an old model or something. I mean, I don’t know of any department store that’s hiring. So when these things come out, what are we supposed to think about that type of data?

Joseph

Yeah, so a lot of people get into the guts of the report and the Fed actually, internally, they have their own model for stuff like this. I would be hesitant to be looking into too much into these adjustments. As you mentioned, they matter. But then you can look at every single job report and say, oh, it’s actually not as strong as it is, or not as weak as it is. For all these little idiosyncratic reasons. I would just take it as it’s presented and knowing of full well, of course, that it is a statistical abstraction of what reality is.

Tony

So is it fair to say you see it more as a kind of a direction than something that’s more specific?

Joseph

Yes. And also if you just average this one with the past few months, it does seem like the labor market not slowing, has decent momentum and there could be revisions going forward. I mean, January was revised slightly, slightly weaker. So it’s just not obvious evidence that data is weak from my reading.

Albert

Tony, for a long time I’ve been saying the Fed should have been doing 50 basis points months ago, but here we are now talking about 50 after doing 25 a few times. I don’t think that they’re going to do 50. I think more that what they’re going to end up doing is talking about QT and doing QT for longer rather than rates at the moment, just because I think Powell and Yellen and the entire crew over there is a little bit worried about the economy, especially after the bank failed. And looking at the jobs numbers, I just can’t see more than that’s. I just think that things will start breaking. If we go 50, we’ll be down 200 points on the S&P, and things will start breaking. And you start wandering down to 3500 on the S&P, you actually make it a financial crisis.

Tony

Isn’t that kind of what they like? They kind of want some things to start breaking. Right. Not that they don’t bankrupt people, but they do want some things to start breaking.

Albert

They keep talking about a soft landing, and that’s the plan at the moment.

Joseph

I agree with Albert. I think the right policy would just be emphasized QT a bit more. It makes perfect sense. I guess we’ll talk about QT in a bit, but it’s a good policy from my perspective, because when you do QT, you’re putting upward pressure on the rates that actually matter to the economy. You hike the Fed funds up and down. Nobody really cares about the overnight rate. When you’re talking about economically sensitive rates, like mortgage rates or like your auto loan rates, those are like the five year, ten year sector, and that can be influenced by QT. So you want to slow the economy down, you want those rates to go higher. But I think the Fed is pretty stubborn when it comes to QT, in part because they don’t really understand they don’t feel like they understand it well. They feel that they understand the overnight rate a bit better.

Tony

Okay, so let’s talk about that. QT is on our agenda, so let’s move to that. So in terms of rates, Joseph, you’re the 50 camp. Albert, you’re the 25 camp. Let’s move to QT. We have been undertaking QT for, what, ten months now or something, and it’s been gradual. Albert, you smile when I say that. What’s your thought?

Albert

Well, I mean, we’ve been doing QT, but then it’s been offset by Yellen’s TGA activity.

Tony

Yeah. Now what are you hearing about the TGA? Has that slowed down?

Albert

It slowed down now, but once the tax revenue comes in late April, she’ll have that again in May.

Tony

Okay. So if we have quantitative tightening, which means the Fed is selling things from their balance sheet into the market, probably at a discounted rate, which takes money out of the out of circulation and it tightens the money supply. Right, but if we have the Treasury issuing funds from the general account, it’s offsetting those QT efforts. Right?

Albert

Yeah, that’s exactly what it’s doing. She’s actually, right now, as we speak, being questioned by the TGA from the House Ways and Means Committee. That’s exactly what she’s been doing, and I think it’s more like why she’s doing it politically rather than anything with economic policy in mind.

Tony

Okay, so what are the politicians generally asking her about, Albert?

Albert

Well, they’re asking her about her sterilization of QT by using the TGA and the effects of inflation because of it at the moment. I have a list of the questions that I can definitely give you guys for afterwards if you want to post them up here. But that’s what they’re asking her about. Why is her action why is she talking about rates when she is a CFO of the country? She is the Treasury Secretary. She’s not the Fed chair. She should be talking about rates one day after Powell comes out being hawkish.

Tony

Right. It’s hard to quit the Fed, I guess. Okay, moving on.

Joseph

I have a question, Albert. Do you have any views on who might be the next vice chair? I mean, right now the frontrunner seems to be Janet Everley, this academic in Northwestern, but I watched the hearings and everyone there was like, from the Democratic side was like, “”oh, we got to have an Hispanic vice chair. We got to have an Hispanic vice chair. And Janet Everley, maybe she has distant relatives or maybe she’s going to write a cookbook about tacos or something like that, but she doesn’t appear to be Hispanic to me.

Albert

Yeah, I don’t know. That decision is going to be made by Brainard who they want is the vice chair. That goes with their liberal policies and enacting and using the Fed to push those political agendas. That’s what they’re looking for. I mean, it could be Hispanic or black or white or whatever, but the base case is that they need someone with a liberal slant in their view to help them out.

Joseph

Yeah. Janet Everly definitely has a liberal slant. For you guys who are not aware, she thought it was a good idea to have a higher inflation target. Maybe that will be in the future, not with Jay Powell, but maybe in the future, maybe like 3%, maybe 4%. Who knows?

Albert

I think 3% is definitely coming no matter what. I don’t think it’s realistic for us to get back down to 2%, especially with the Fed members being former liberal than they were a few years ago.

Tony

Okay, let’s talk about the three 4% rate at some point.

Tony

But let’s get back to QT. Joseph, can you talk us through some of the if the Fed were to accelerate QT, which seems to be something that you’d like to see them do, more of what forms would that take?

Joseph

They could just simply raise the cap for Treasury. So right now the Treasuries can match. The QT pays for Treasuries is a maximum $60 billion a month. They could raise that. So what happens mechanically is that you can think of it as the private sector having to hold more Treasuries. You’re increasing the supply of Treasury debt that must be held by the private sector. So basic supply and demand, increasing supply prices for Treasuries decline and so yields go higher. So that’s a way that they could try to tighten policy by making, let’s say, longer dated interest rates higher. And I think it’s helpful, especially in today’s context. So investors look at the world, look at the future based on their experience in the past. And our experience over the past decade was a Fed who would just cut rates at the drop of a hat. And so because the investor community believes that you have a very, very deeply inverted curve and that’s a big problem because as the Fed is hiking rates on the front end, you don’t see that as much in the ten year. And so you can see, for example, mortgage rates continue to go down as they did in January, thus essentially undoing all the hiking the Fed is doing in the frontend.

Joseph

So you really need the market to either believe that the Fed is higher for longer, or you could have the Fed engineer it by just boosting the supply of longer dated Treasuries. And it’s hard to convince the market of something and the market has a reason to believe that JPowell and his committee of largely dovish committee is just going to cut rates. So it’d be easier to just boost the supply of Treasuries through QT.

Albert

Okay, that’s something that nobody talks about, is durational liquidity. Nobody speaks about that right now with the Fed and the Treasury. I haven’t seen one analyst talk about duration liquidity.

Tony

Okay, so can you guys talk about that? How would they change? Well, first of all, if we focus more on QT, would that potentially pose a threat to, say, banking systems or there are other potential systemic threats that QT could pose for the US.

Joseph

Yeah, it could blow up the Treasury market.

Tony

Okay, tell us how that wouldn’t tell us.

Joseph

So I think there’s huge the great systemic risk today is not in the banks or the private sector. It’s in the public sector. It’s in the Treasury market. And we saw kind of a prelude to that with what happened with the gilt market in the Bank of England last year. For those of you who don’t remember, last year we saw gilt yields basically 30 year long good data gilt yields basically explode higher late last year, and in part because, one, the Bank of England announced that they were doing quantitative tightening and also because the government announced that they were going to issue a whole bunch of gilts. Now there are some levered players in that market who basically blew up. Now if you recall throughout late last year, okay, the summer of last year, there’s a lot of articles about Treasury market liquidity. This is something that I’ve been writing about since last January. And Treasury market liquidity is not really strong, in part because the size of the Treasury market is just growing so quickly. It’s not growing in proportion to the underlying market. So I think about this as like a stadium that gets bigger and bigger, but the exits don’t get any bigger.

Joseph

So 20 years ago we had about $7 trillion in Treasuries outstanding. Today we got about 25. And Biden is going to promise that he’s going to issue even more through his spending. And the underlying market liquidity in the market hasn’t scaled in the same way. 20 years ago we were doing $400 billion a day in cash transactions. Today it’s 600. So again, there is some potential for fragility. Now the market got was looking pretty dicey in the summer last summer, but it got bailed out when recession fears predominated and people began to think that Fed is going to cut rates. Recession, you got to buy Treasuries. But in the event that those recession concerns go away or inflation stays persistent, you can have, I think, some real discontinuous event there where yields spike higher like they did in the UK, which of course wouldn’t lead the Fed to respond. Yeah. So that’s what I view as I’m not really worried about banking or anything like that. So one thing that people have to be aware of is that the banking system has really changed a lot over this past decade. So an easy way to look at that is just Fed QE, right?

Joseph

So now banks have $3 trillion of basically liquidity from QE on their balance sheet. They didn’t have that preg. There’s also a lot more regulation. Now banks are really, really boring businesses. Back then it was exciting. Everyone is making huge bonuses and so forth. But now that’s all in the tech sector.

Tony

Okay, so you say that the gilt blow up happened because of long dated yields. Is there anything, if we move into QT, is there anything the Treasuries could do? Could they move that to the shorter end of the curve to avoid that?

Joseph

I think that would be a great idea. So one of the things that they floated is a buyback operation. So what they would do is they would issue bonds and use that proceeds to buy old bonds. Now I think it would be a good idea to issue shorter dated bonds and buy longer dated bonds. They basically change the duration profile. I don’t think that’s what they want to do. So far they’ve been pretty adamant that they want to make it a maturity bond. Now I’ll give you an example. Let’s say you issued a 30 year bond and. After ten years, it rolls down to a 20 year bond. Now it’s an off the run bond. So an off the run is something that was issued, not recent, and that off the run market is very, very illiquid. So what you could do is you could issue a new on the run 20 year on the runs are very liquid because they’re the recent vintage. Take that money and buy back the old 30 year, which became a 20 year. So you don’t really change the duration of the debt outstanding, just the liquidity profile. That’s what they’re floating.

And maybe that’s something they’ll do. I suspect that it’s not going to be enough. If they want to do something like that, they probably will need to rely well, it’s not going to work, so they’re going to have to rely on the Fed. Just like in the UK, they relied on the Bank of England.

Tony

In Japan. What they’ve been doing particularly kind of seven to ten years ago, the Ministry of Finance was issuing shorter duration debt to buy longer duration debt, and the BOJ was buying that shorter duration debt and letting it expire at maturity. Is that something that we could do here? Where the Treasury would issue shorter duration debt, the Fed would buy it, they would pay off the longer duration debt, and then it would just go into nowhere?

Joseph

They could totally change the maturity structure of Treasury debt. It’d be a really good idea if they did that. They don’t actually need the Fed to buy it. There’s a ton of demand for cash at the front end in the US financial system right now. There’s so much demand that people are putting it into the Fed’s reverse repo facility, which is about $2 trillion. So that means that the Treasury could issue $2 trillion worth of Treasury bills, and the market would just lap it up like that. So they don’t need the Fed to buy it.

Tony

Okay, while we’re here, while we’re talking about people buying Treasuries, I saw some notes over the past week or so where people are saying China is selling their Treasuries, everyone needs to worry. Can you talk to us about that? Joseph Albert, can you talk to us about that? To me, that seems laughable, but it is laughable.

Albert

They need dollars to keep even if you look at if you look at over the long run, I think over the last, like, five years, yeah, sure, they had bought a lot of Treasuries and now they’re selling Treasuries. But it’s pretty even at the moment, if you look going back five years, I don’t even take that kind of argument seriously. When people say that China is going to sell Treasuries and dollars going to crash and blah, blah, blah, buy my crypto, buy my gold, it’s what it usually is. So I personally don’t see it as a big deal. I mean, you know, that’s just the way I think about it, so pretty pretty explicit about it.

Tony

Joseph, what do you think?

Joseph

Yeah, it’s hard for China to find a substitute for Treasuries. So Brad sets there at the Council of Foreign Relations, he’s an expert on this and he has done some pretty interesting detective work. And one of the things that seems interesting is that the China foreign reserves actually hasn’t changed all that much over the past several years. So based on their publicly disclosed data, it stayed around, let’s say three, three and a half trillion over the past few years. But if you recall, China has been making a lot of money through exports. During COVID for example, they were exporting like trades to the US trade deficit with China between US exploded higher. Right. So where is all that money going? It’s not going to the sovereign fund. It must be going somewhere else. I think part of it is going to the commercial banks, but I don’t really know how their data works out. I think they definitely have a huge problem in that they have a lot of exposure to the US. That kind of gives the US political power over them, just like the US could seize Russia’s sovereign reserves. It’s a problem for them.

I don’t know how they can solve it. I’m sure they want to solve it, but so far it seems like they’re stuck, at least for the moment, in Treasury.

Albert

It is a big problem for China because when Yelling calls them up and said, you got to help us out in inflation and crush commodities, you’re going to have to do what Yellen and the Fed say just because of how much they’re held off. I absolutely agree with you on that one.

Tony

Let me bring Tracy in here because I don’t like it when she’s quiet. So, Tracy, what do you think about the issue about Chinese selling US treasuries? Do you see that as an issue from your perspective? Does China have other options? What do you think they’re doing with the money they’re making on US. Export, on exports to the US?

Tracy

Well, I think if we look at the big picture, right, we have seen increased central banks buying gold and selling US treasuries, but we have to look at the bigger picture. More people own US debt than any other country in the entire world, so that’s not going away soon. So I hate to cater to these people and say, yeah, central banks are wearing a lot of gold, but that means that they’re shutting us right? Because it’s simply not true. You still look at the highest countries that own US debt still continue to be the same one china, Japan, et cetera. That’s not going away anytime soon. It is notable in the fact that looking at the gold market, which has been particularly lagging, I think it’s very interesting if we’re looking at the commodity side of things because we’ve seen last year particularly we saw outflows of gold flows, people investing in gold, whether it’s physical, ETF, et cetera, literally for eight months straight. I think that kind of makes this market interesting. But again, I don’t want to conflate that with central banks are buying gold, digging US. Treasuries. That means nobody likes us.

Tracy

Debt anymore.

Albert

That’s an important fact that, yeah, whenever they sell gold or Treasuries, they’re just raising my opinion. They’re just arbitraging for dollars later on. It’s nothing systemic that’s a threat to the US dollar by any means.

Tracy

That was my point. Let’s not make this a bigger issue than it needs to be that we have often seen, yeah, central banks can.

Tony

Walk and chew gum and spin plates and all that stuff at the same time. I think they’re capable. They’re very smart people are capable of doing all this stuff. So okay, just before we move on from QT, albert, is there anything else on QT that you wanted to bring up that you’re watching?

Albert

No, Joseph pretty much talked about it extensively, and there’s not really much I can add. I just think that the proper thing for power to do right now is to accelerate QT and keep rates as they are at the moment.

Tony

Okay, so with housing remaining relatively strong, do you think that they’ll sell off more MBS as a part of their QT portfolio, or do you think they’ll just keep it in the same proportion that it’s been now?

Albert

I think they’ll just keep it in the same proportion right now. I mean, housing at the moment is a big political problem because homes are unaffordable at 70% mortgage rate. So they’re going to have to do something they’re keeping an eye on. That I can guarantee.

Joseph

Yeah. I also note that Powell has been asked his point, Blake, and just said no. He can always change his mind. Powell has a reputation for being a pivotal like he just did. But to Albert’s point, mortgage rates are 7%. That’s kind of already a big drag on housing. If it went to 8%, would that really make that much of a difference? It’s already very high, and you’ve already.

Tracy

Seen housing prices come down extensively, right? Redfin just came out and said 45% decrease in luxury homes and 37.5% decrease. So I think what we’re seeing is housing prices decrease in response to the increase in mortgage rates.

Tony

Okay, very good. Okay, let’s move on. Since we’ve been talking about the US. Government for the first two segments, let’s move on to the US. Government for the third segment and talk about America’s rudderless energy policy. So, Tracy, you were tweeting about a speech that Jennifer Granholm, U. S. Energy Secretary, made earlier this week, and I want to kind of parse that through with you because she is the spokesperson for US. Government’s energy policy.

And there just seems to be a lot of mixed messages. And I’ve got a tweet on the screen about the grand home speech where you said she said, we’ll still need fossil fuels in 30 to 40 years, then to send it into how the Inflation Reduction Act makes the US. Irresistible for new energy. So can you talk us through kind of what were you thinking of as you heard her, and what were your big takeaways?

Tracy

Well, the first thing I want to note in that speech is that for the last two years, this administration has been pushing on the energy industry, right. And has been talking about how they have all these profits and they’re not.

Tony

Producing greeny energy companies. Greedy.

Tracy

That’s been the mo, right. For the last two years. And then in this speech, she did like, 180 when asked the question.

Tony

How.

Tracy

Do you think oil companies, oil and gas companies are responding? She said, we’re very happy how oil and gas companies are responding to our request for like, she gave them props, which is literally 180 degree. So to me that I was like, what? Because really our production has not really increased at all. But suddenly she’s at Fair a week giving props to the energy companies because.

Tony

The CEOs were there.

Tracy

Well, right. So it’s a huge mixed message. The other important thing, I think, to take away from that particular speech was that the US. Wants to move on to energy transition. We want to move away from China. We want to be able to mine our own metals and minerals in the US. For this energy transition. But she was quick to add that the permitting process is a nightmare. It takes ten years just to get a permit. And then if you get lawsuits on top of that, to get to an idea from, I want to build this mine in the US. To actual fruition is a ten year permitting process, and then it’s then plus however many lawsuits you have. I thought that was really interesting and that she actually admitted that the permitting process was completely horrible. Since her administration, or the administration that she works for, has said, what we want to do is streamline this permitting process. We’re going to give people all these incentives to build mines, et cetera. Basically, what she did I take away from the speech is basically what she said was completely opposite of what this administration has been telling us, and that is we have all these incentives.

Tracy

We can build all these mines, no problem. And we love the fact that the US. Oil and gas companies have responded to us and are producing more, which is outright not true. Sorry.

Tony

Okay.

Albert

These are political pipe dreams by the Biden administration. As long as the EPA is there and staff with environmental Nazis, there’s no way that manufacturing and mining is going to propel to the next level in the United States.

Tony

Biden budget proposes 17,000 more EPA staff.

Albert

Oh, yeah, that’s a great sign. That’s a great sign.

Tony

But what they’re saying, tracy, tell me if I’m wrong. They’ve already pushed all this money or they’re already planning to push all this money out into the market. Okay. And this week, the EU developed a proposal to kind of complement the US. And compete with the US. So there’s dump trucks of cash now out there to develop alternative energy. But both the US. And Europe have very restrictive policies on getting those mines together. So out of one side of the mouth, they’re saying they want alternative energy for a safe future. But the reality is they’re paying companies to have Congolese children mind cobalt. I mean, that’s the reality of the situation, right.

Tracy

Situation is it’s not in my backyard. Right, right. That’s the reality situation.

Tony

We want cars that plug in, and we don’t want people to know that Congolese children are mining cobalt. But that’s the crude, stark, horrific reality of these policies today.

Albert

Absolutely, yeah. If you want an American built iPhone or American built Tesla, from the battery on all the way up, it’s going to cost you $5,000 for an iPhone and $190,000 for a little smallest Tesla you can possibly buy.

Tracy

Yeah, it doesn’t matter because it’s never going to be enough, but it doesn’t matter. You think Yellen went to Africa, right? Her trick on Africa, all we heard was she went into Africa to join the renewable generator. That is not why she went. She went to go make deals for mining in Africa. It’s really the back of that situation.

Tony

Wow, that’s terrible. I mean, it’s just the rainbows and unicorns of the policy as it’s portrayed versus the reality, the ugly reality of this industry is pretty horrific. So, Tracy, as you watched Grand Home, what did you think about the oil and gas sector? Did you think, okay, everything’s fine, I don’t have to worry about all this restrictive stuff for 510 years, they’re just going to keep on with status quo?

Tracy

No, I think once you’re looking at the oil and gas sector and you have to look at what actual oil companies said. So you had Scott Sheffield, a pioneer, say there’s five good years left of the permian. That’s a scary thought. Right. And there’s no incentive to drill more because the government’s telling you that in ten years, we want you totally phase out. And so we are going to have a serious problem. And I have said repeatedly, I think that the 13.1 million barrels per day the US. Produced at the end of 2019 in December is probably the height of that’s. It that’s the height of shell, unless something drastically changes within policy.

Tony

Okay, so it sounds to me, since there’s five good years left to the permian, since the US. Government wants this phased out in ten years, there is no ability for oil and gas and money firms actually to have a capital planning cycle. Right. Anything that has longer than a five year payback just is not worth investing in, is that fair to say?

Tracy

I would say that’s fair to say in the United States. Now, if we look offshore, which is really interesting, and that’s where we’re seeing a lot of investment in, say, Guyana or Namibia or a lot of offshore sector kind of seems to be the focus right now in other countries because they just don’t have the same policy hurdles that the United States does.

Tony

Okay.

Albert

Yeah. All places where the EPA is not at.

Tony

Right. So the entire US energy policy and renewables policy is just a big Nimby policy, like you said, just not in my backyard.

Tracy

It is right now. We’ll see what happens. There’s a project going on in Alaska right now which people should be paying attention to their policymakers want this to go through. I sincerely doubt that it’s going to go through because no majors want to invest up there because they run into a bunch of lawsuits. Right. And so why would you knowingly, even if you bought the land rights or the leases, it’s a horrible place because you know that you’re going to be faced with a million lawsuits and give me a million hurdles and whatever. Even if you look at the recent Gom auction, now, you have environmentalists suing anybody that bought leases. It’s a lose lose situation if you’re really trying to explore more gas in the United States right now.

Tony

Okay, so when you say it’s a horrible place, do you mean specifically that Alaska is a horrible place? Because I think we have, like, three there.

Tracy

Alaska is amazing place. I have friends from Alaska.

Tony

Okay.

Tracy

I’m just saying the problem is that you run into a whole lot of regulatory issues, and then you run into a whole lot of lawsuits that are going to take place. And really, that’s a whole separate issue. Now, I really wrote about this in 2020 was the land that they auctioned off is part of a reserve?

Tony

That’s always a good idea.

Tracy

Probably should have never been. Right? And that’s why it really got no interest. It did get a bid from Chevron again, but I don’t see that project going forward ever.

Tony

Okay. Yeah, it’s crazy. And as I try to figure out the policy and I talk to you and I talk to other people, I just can’t figure out what we’re going to look like in five years. And if I was in charge of capex budgets with upstream, downstream, midstream, I honestly wouldn’t know what to do.

Tracy

Because there’s that’s why we continue to look at these companies, continue to focus on dividends, capital, discipline, and paying down debt. I mean, you have to remember, these studies were not making money for years.

Tony

That’s an important point. So when the President of the United States says that Chevron is a terrible company for giving large dividends and doing large share buybacks, they’re doing that because they cannot spend that money on capex. Because they don’t know what the environment is going to be like in five or ten years, is that correct?

Tracy

Yes, exactly. And that’s the point. And they’re trying to gain shareholders. You have to look, two decades ago the oil and gas sector was 20% of the SF 500 weighting wise. Right. And at the lowest in 2020 we were a little bit below 2%. We’re now at about 4%. But you can see where that market has fared fairly poorly.

Tony

Yeah, but Tracy, it’s all going to be AI software forward, so just complete intelligence.

Tracy

It’s going to be chevron AI.

Albert

Yeah, I’ll fund it by a new Silicon Valley bank.

Tracy

That’s right.

Tony

Okay guys, we have a big week ahead going into leading up to the Fed meeting. So what are you all expecting? Joseph, what do you expect to see next week with the various prints coming up?

Joseph

It’s all about the CPI. I mean, I want to know if it’s actually strong. If it’s strong, then we got 50 basis points blocked in right now. Like you mentioned, Tony, that’s been taken out of the market. It could be a violent repricing. So that’s what we want to focus. So I’m suspecting that a lot of people are pricing in rate cuts in part because of what they perceive to be some risk in the banking sector. I just don’t see that. And so when we see that come out of the market, we could have rates go back to expecting a more higher for longer stance by the Fed.

Tony

Okay, great. What is a high CPI to you?

Joseph

I haven’t checked this expectations yet, but whatever is higher than expectations.

Tony

Okay, so literally higher than expectations, if it’s higher than the consensus, then that’s a high CPI.

Joseph

Yeah. If you think back a couple of months, we’re seeing CPI go down. Right. Deceleration, I want to know if it really just did reaccelerate or if it just kind of gave back. What the increase from last month?

Tony

Okay, great. That’s perfect. Albert, what are you looking for next week?

Albert

Same thing CPI is to make a break for the Fed on 25 verse 50. I’m hoping somehow they’ve managed to manipulate the CPI number to make it somewhat in line with the consensus. Hoping for a nothing burger probably be the best option at the moment. Something meaning consensus. If core CPI is hot, like Joseph said, fifty S, fifty S locked in.

Tony

And if super core CPI is hot, that just reinforces wage expectations and it’s all this super circular situation. Right? Okay, so if we do see a 50, do you see an impact on equities? Like a negative impact on equities? Do you think it’d be sideways?

Albert

Without a doubt. Without a doubt. I think if they go out and do 50, I think we’re down 200 points in the S and P pretty quickly in a week. If they do 25, we might even rally 100 points. You know how it is, we’re in bitcoin world now in the S and P. Right?

Tony

Exactly. Okay, that’s good to know. Tracy. We’ve seen oil kind of move sideways. We see energy kind of move sideways lately. What’s happening and what do you expect to see?

Tracy

You know what? I think we talked about this the other week. I continue to think it’ll move sideways. I think we’re in a range. OPEC is very comfortable with that $80 to $90 range for Brent crude oil. And so I see no reason for much to change in that. I think as we head into high demand season right, june, July, August, we could see an uptick in prices. But for right now, the market is very comfortable.

Tony

Okay. And then this Saudi Iran peace agreement that was announced today, do you think that has an impact on crude supply? Do you think that could push crude prices down?

Tracy

I don’t think that, no. Because OPEC has existed for a very long time. Iran is an original member of OPEC.

Tony

They were the founding member. Right.

Tracy

So that relationship has existed cohesively beyond any of the other geopolitical problems that they have had. And Saudi Arabia has always said that this relationship will exist beyond whatever other problems we are having. So I don’t think within the oil market, it really changes any dynamic because that relationship was already solid.

Tony

That’s good to know. Okay. Thank you so much. Thanks for your time. Thanks for all your knowledge. Have a great weekend. And have a great weekend. Thank you.

Albert

Thanks, Tony.

Joseph

Bye, guys.

Albert

Thank you.

Week Ahead

US Policy for Small Businesses: The Week Ahead – 17 Oct 2022

Post author By admin
Post date October 16, 2022

Learn more about CI Futures here.

We’ve had several policies that have hurt small businesses, especially since the advent of Covid. The US administration just implemented a policy to move gig/independent workers to employee status. How does this hurt small businesses? Carol Roth, our special guest for this episode, discussed that in this Week Ahead.

Also, we’ve seen a lot of negative news this week with producer prices, wages, consumer prices rising. One Twitter user asked what would Carol do if she was in charge? What would she do and how does she think it’d help?

Albert helped us look at the Fed and is the dovish Fed dead? We’ve known this for some time, and there were hopes for a pivot, but that seems to be over.

Tracy also talked about diesel inventories, which she talked about for a very long time. She helped us dig into that in this episode.

Key themes
1. US policy punishing small businesses
2. The dovish Fed is dead
3. Diesel inventories
4. The Week Ahead

This is the 38th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Carol: https://twitter.com/caroljsroth
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Time Stamp:
0:00 Start
0:48 Key themes for this week ahead
2:43 US policy on gig workers
7:48 Is this to slow down job creation?
10:00 What other things will make things uncompetitive for small businesses?
12:07 What adjustments would Carol Roth do if she’s with the Fed?
16:47 Debt buying and the Fed
19:00 Forecasts for some currencies
20:00 Does the Fed understand that this is a supply-induced inflation?
23:50 They’re not thinking through the political fallout
25:25 Is diesel priced in dollars globally? And what’s the impact?
28:00 How long does the diesel shortage last?
31:34 What’s for the week ahead?

Transcript

Tony Nash: Hi, everybody, and welcome to the week Ahead. I’m Tony Nash. Today we are joined by Carol Roth. Carol is from Chicago. She’s the author of the War on small business. She’s got an amazing Twitter following an amazing Twitter presence. Carol, thanks so much for joining us. Really looking forward to getting your perspectives today.

We also have Albert and Tracy and I’m looking forward to getting their views on the Fed and on energy today as well. The key themes today we’re looking first at US policies punishing small business. Carol has a really unique perspective, obviously a book on the broader implications of this, but there are some recent policies that she’s been focusing on that will talk about some of those things.

Next. Albert will help us dig into the Fed. And are we looking at the end of the Dovish Fed? I think we’ve known this for some time, but there’s always kind of been some hope that there’s going to be some sort of pivot and that seems to be over.

Next we’ll look at diesel inventories. Tracy has been talking about this for a long, long time, but it really seems to be coming to a head. So we’ll dig into that today as well. Please take a look at our product CI Futures. It’s a forecast subscription product. It’s $99 a month. We cover a few thousand assets over a twelve month horizon economics, currencies, commodities, equity indices. So please take a look at that. The URL is on the screen. Thanks a lot for that.

Before we move on, please like this video, please subscribe to this video. You’ll be able to see all of them and we really want you to be able to see us every week as we bring these in.

So Carol, thank you very much for joining us. I know you’re busy, really demanding schedule. It means a lot to us that you could join us. So thank you very much.

Carol Roth: This is an amazing crew and I can’t believe you left out recovering investment banker out of my introduction because that’s really the most important part,

TN: Right, exactly. And a Raiders fan as we learned last week over Twitter as well. So we’ll forgive you for that. Anyway, thanks very much. I love the work you do on small business. And you’ve been talking about a recent policy and we’ve got a tweet of yours on the screen talking about the Bind regime pushing gig employees to be full time employee status with companies. Can you talk us through what that means for small businesses and why is that a competitive disadvantage?

CR: Yeah, I think the first thing that people really need to understand is how important small business is to the economy. Because I think a lot of people think, oh, it’s small, it’s just a little piece. Before COVID, small business was about half the GDP and about half the jobs. And at this point we have about 32 6 million small businesses in the US.

So if you’re somebody who believes in the concept of decentralization and that being important to economic freedom, this is the decentralized portion of the economy. This is very independent. It’s very spread out geographically via industries backgrounds. Whatnot by the way which is why big business, big governments and big special interests don’t like small businesses because they’re very hard to corral. If you look at the other half of the economy, it’s in the hands of 20 plus thousand big businesses. So it really is that sort of David versus Goliath battle but also this battle between decentralization and centralization. And we have seen all of these efforts over a long period of time to destabilize small businesses and to make competitive advantages to really tip the free market in favor of those big businesses.

And certainly the policies around COVID right, were the biggest example of that ever. It was an epic wealth transfer from Main Street to Wall Street done not based on data and science but based on political cloud and connections. So now that we kind of know what the story is in terms of this unholy triumvirate, if you will, the big business, the big special interest, big government attacking small businesses, you then look as to what else they can do to really make it harder for small businesses to compete.

So there’s this Department of labor ruling that’s come out. It’s followed something called AB Five in California. If anybody has heard or followed what was going on in California and then it has been and passed the House on a federal basis under the Pro Act. But basically the idea is they want to take gig workers and independent contractors which by the way the estimates, they number around 53 million people in the United States.

So again, this is not a small number of people who are being affected and they want to say you can no longer have the freedom to decide how you work. We don’t want you to be able to enter into a contract in a way that works for you. We don’t want you to have that flexibility. You have to be an employee. Now this may sound like, oh well, that sounds great for people.

Why would they not want to be an employee? Well, there are a lot of reasons why you don’t want to be an employee. The first is you might not have that opportunity. And that’s the biggest issue because it is very difficult. And the government are the ones who have made this very difficult for a company to hire their first employee and also to keep them on an ongoing basis.

If you hire somebody as an employee versus a contractor, you have to pay in a portion to Social Security. It affects interest. It can affect your 401K or step plans. It just kind of reverberates throughout your business and so it becomes very challenging and difficult. So if you are a small business who maybe gets busy during a certain season or need help just in certain areas, you tend to bring on independent contractors. Or if you’re creative, if you’re running a movie, you’re obviously not bringing everybody unnecessarily as an employee. You might have a caterer who comes in and feeds people, or if you’re a hairdresser, you may want to rent out a chair in a salon. And the salon doesn’t have the wherewithal to make these employees.

So they’re framing this as we’re trying to help the employees. This is going to really stick it to big business. But there are literally hundreds and hundreds of different categories of employees. Anybody who’s a 1099 employee and doesn’t have a business entity that this will threaten not only their economic freedom, the ability to work the way that they want to be flexible, but literally their livelihoods.

So if you believe in choice, it should be your work, your choice. And now the Department of labor wants to give another giveaway to all of those big special interests.

TN: So, Kara, when we’re in an environment right now where the Fed is trying to slow down job

creation, our small company is the largest portion of job creation as well. So is that another tool potentially, maybe unintended or not, I don’t know to slow down job creation?

CR: Yeah, I mean, certainly if you think of the small companies, they’re the ones that don’t have the financial wherewithal or the fortress balance sheets. They have not been loading up on the cheap debt because they have to personally guarantee it and don’t have the same scale as the big companies. So it’s a challenge for them to survive an environment where the Fed is going, we’re going to destroy demand. It’s basically we’re going to destroy the little guys who can’t endure this pain. So that’s small business. And you’re right. Having the ability to be flexible going, well, maybe I can’t hire an employee, but maybe I can hire somebody as a contractor parttime, and when things get better, I can bring them on as an employee. Or maybe this is just a flexible way that we can work in the future so we can have different people and they can also work with different companies in a way that suits them.

Absolutely. This is going to be on the shoulders of small business. And as they always do, they say, oh, this is an attack on Uber and Lyft. When this happened in California, Uber and Lyft went out and they put it on the ballot. They got an exemption, but they didn’t take everybody else with them. They just got it for a handful of big industries. And all of the other small guys were basically screwed.

So the idea that this is somehow in an attack in the front against the big guys and the small guys are going to come out smelling like a rose is a joke. If you believe that. I’ve got a bridge to sell.

TN: You right. Okay. So we have small businesses that just barely made it through COVID. So that was really a regulatory way to suffocate small business. And my company is one of them that scraped through and now we have these full time employee regulations coming in from the Department of labor. Are there other things on the horizon that you’re seeing that could make it even more uncompetitive for small businesses?

CR: I mean, everything that they’ve done is making it noncompetitive for small business, whether it’s regulation. You think about all of these minimum wage regulations and how these big companies like Amazon and Walmart have shifted their position and decided to lobby for them. Well, why do you think that is? That’s because they know they’re going to pay that level anyway and they don’t want to have the flexibility for the smaller companies to be able to maneuver around.

That certainly a higher interest rate environment messing with the labor force in general, let alone having a rule like this. The supply chains, the decisions that were made, whether it was a direct you have to close your business down or these indirect issues that affected labor supply, whatnot they killed by mandate around seven figures worth of small businesses. And unfortunately, Tony, as you’ve shared personal stories, there are many others that are just scraping by to survive.

And it’s just this like, you know, you get knocked down, you get up again and then they just keep knocking you down and you keep knocking you down. If you wanted people to succeed, if you wanted people to pursue the American dream, if you wanted economic freedom, you would be working to remove

barriers, make it easier for people to work, make it easier for companies to hire in the way that makes sense for both parties, and make it easier to be a small business. And every single thing that comes out

of government at all levels, by the way, it’s not just federal, but state and local is doing the exact opposite.

TN: Yeah, it’s overwhelming. We could talk about just that alone for hours. Let’s move on to former investment banker Warden Grad. You know your way around the economy. There is a tweet put out a few days ago asking you, if you had the big chair, what adjustments would you make to the economy, monetary policy, whatever, to change the environment today to make things better? What are a few things that you would do if you were Chair Powell or Janet Yellen or something like that?

CR: Burn the fed down. I burned down the Federal Reserve. The very first order of business, I put myself out of a job. And I say that kind of jokingly, but I like to clarify. I would take away the Fed’s powers because as I’ve said to many people before, the only thing worse than the Fed making monetary policy decisions and meddling in the markets and doing things like printing money and whatnot would be Congress doing that? So you don’t want to have those if you get rid of the Fed, you don’t want to have somebody else take away the powers. We’re really getting at, you know, getting rid of those powers to interfere. So that would be the first thing I would do.

But obviously that would not solve what is going on. Now. This is not going to be a surprise to any of you, but what we’re dealing with right now is a supply side imbalance. And it has been. They stimulated demand, but they stimulated it into a supply constrained economy. And so we are under supplied, as I know Tracy tweets about all the time in energy, certainly in labor, as we’re talking about food, housing, other commodities. So I personally don’t believe that the Fed has the tools to solve this problem and attack it. And frankly, I think that they’re going to just cause a massive amount of destruction not only here in the US. But reverberating through the global economy, which then swings back and has an impact on the US.

So what needs to be done, again, are policies that remove barriers to supply. What we’ve been talking about, certainly on the energy front, anything that we could do to stimulate supply of energy, which again, do it here, where we do it more cleanly, and not let China and Venezuela and all these countries that don’t do it cleanly be the ones to do that. Because the last time I checked, we all share the same air. It’s not like you believe in a smoking section, right? Like, oh well, they’re just smoking over there, we’re great over here in the same restaurant. Like, that’s so stupid.

So we would obviously do a 180 on energy policy. The same thing with labor. All the things we’re talking about make it easier for companies to hire people to go to work in the way that they want to work and then we close that gap in the labor market, which is insane.

The same thing in housing. The National Association of Home Builders did a study last year. $94,000 in regulatory costs are added to the cost of every new home from the government. I mean, that’s insane. The average house is almost 4000. So like 25% of the cost is in regulation. And I’m not saying we don’t need anything, but that’s certainly excessive and it’s gone up by something like 30% to 50% over a very short period of time. So it’s those kinds of things that the policies need to be focused on stimulating the supply and shrinking that supply, demand and balance by increasing supply, not by trying to kill the demand. And that’s just where I land on it.

Albert Marko: That’s exactly what I was tweeting last few months now. And actually on the show is they are trying to create demand destruction, but the problem is the supply disruption that they’re creating and they put themselves in a doom loop to where when demand comes back, there’s no supply. So you get a cycle of inflationary situations happening, and it’s bad here, it’s worse in Europe and it’s even worse in Asia. So we’re going to be stuck in this until the policies start changing, not just from the Fed, but it’s got to be political also because the governments are doing this COVID zero in Asia and the energy crisis in Europe, and they’re just making it worse. So until those policies change, we’re going to be stuck in this cycle.

TN: Yeah. So I respect both of you, but the Fed doesn’t. So they’re going to do whatever the hell they want. What’s really interesting to me is you guys may have seen today. The treasury was asking investment banks. Hey. Do we need to buy some of the debt off of you so that we can create some liquidity in debt markets. Just basically transfer some cash to you so we can take some of those assets off your balance sheet.

Whether it’s the Fed or the treasury or whatever is done. It just seems like the benefit is for the small circle of people. And when you talk about whether it’s interest rates or QT or whatever, it seems like interest rates are the bluntest instrument that hit the biggest number of people. Right. And it’s hard for me to understand why that’s absolutely necessary.

And Albert, we’re going to segue into your section on the death of the Davis Fed. If we look at interest rates, we’re looking at a terminal rate about around 5% now. Right. And so help me understand what is happening with the Fed, what you’re hearing, what you’re seeing and what you’re expecting for the next couple of months.

AM: Well, I mean, everything at this point well, it should have been for a year now, but everything from this point on is strictly to combat inflation. They are getting screamed at by literally everybody to get the 5.5%. Not just five, they’re going to get the 5.5%. They’re going to do 75 again on this next meeting and then another 75 after that. And their intention is demand destruction. That’s what they’re going to do. And they’re not going to be dovish anymore. But they’re have to walk a tightrope here because Europe, they’ve destroyed so much in the global market, specifically Europe that lost 30 trillion in the bond market, that it could be a systemic problem.

And they can’t have that, so they’ll do 70. Five to 75. Talk guidance extremely hawkish. They’re intent on trying to get inflation down until November and December.

TN: November and December.

AM: They’re going to do 75 both. And they’re just going to have to because their time is out and they have

no more tools left to hit. Inflation at JPY at. Euro will be at 90.

TN: And JPY will be what?

AM: I don’t know the correlation on that one off hand, but the euro is definitely going to go to 90. 90 to 90 on this. But it’s all $30 trillion, Tony. That’s a lot of money. The only people in the money. Yeah, it’s still a lot of money. So when the treasury starts talking about, do we need to buy debt back from banks? Is that the US. Banks or is that European banks? Because I guarantee there’s going to be some European banks in there.

TN: Oh, they have to be. Yeah.

AM: Like I said, they’re causing systemic problems and they can’t have your completely blow up. I mean, they’ll use them for a scapegoat to stop QT announce QT stop. But that’s where we’re at it right now.

TN: Okay, so does the Fed understand that this is largely supply induced inflation?

AM: No, they don’t. They don’t? No, because people do what they know, right? If you go back and you look at what Yelen did, when I say Fed, I just toss in the treasury at the same time because they’re one of the same. They talk. They talk, and they have correlating policies and whatnot. And if you look back in 2013, this is what Yellen did last time. She drove the dollar up, crushed the markets, and drove all the money back into the United States. Yes, the United States market looks all beautiful at 3600 to 3700, and people talking about Fed pivots and 3900 in the es, but it’s not real.

CR: Okay, so first of all, can we just discuss the fact that between the time that Janet Yellen was Fed chair and Treasury Secretary, the woman pulled down over $7 million in economic speeches when she didn’t know how to handle, you know, coming out of quantitative easing. She didn’t see inflation. She said that I think this was actually from you, Tracy, but she said that everything looked great in the treasury markets and then the next day went, oh, yeah, I’m worried about liquidity. I mean, clearly, I’m not sure she knows anything.

And I want to know how to get in on that gig in terms of making that money for speeches for something that you know nothing about. But I find it hard to believe since everybody and their brother has been talking about all of the issues that are going to happen here.

And maybe it’s my wart and bias, but I go along with Jeremy Siegel, noted finance professor who’s been out there hammering the Fed, saying, look, first of all, you not only do you not necessarily have the tools we’ve seen some elements of demand destruction in small places, and it takes a while to work through the system.

So if you go too fast, kind of like you didn’t see it on the front side, you’re going to do the same thing and you’re going to overshoot. But the bigger issue alluding to what Albert said is the potential to drag down the global economy. I mean, that the fact that you can end up with currency crises, with a treasury market crises, the whole slew of risk assets could be a massive sale of risk assets so that they

could get their hands on dollars because the Fed wants to keep raising interest rates.

It just seems to me it’s not a question of do they not know this? It’s a question of what’s their intention are. They trying to drag down the global economy so there is a financial reset, so they can introduce some sort of a central bank digital currency and have an excuse for it. It just seems to me to go, oh, they’re ignorant of what’s going on. When every single one of us sees this, you’ve got the IMF talking about it, you’ve got professors talking about it.

The fact that this hasn’t crossed their mind with the people that are involved yelling aside, but the Powells of the world and other folks there, that just seems not very likely to me.

AM: No, it’s not. A lot of it is political right there’s. U.S. Midterms, they don’t want Trump back, so they start throwing in these economic numbers to make Biden Democrats look good. And that screws up Fed

policy going forward. I mean, Yellen takes a dollar up, the Fed gets stuck, and then they have to go back and create a new crisis in Europe or Ukraine or whatever crisis they want to create sometime in the future to blame for everything. Yeah, I think the Fed guys are smart. I think they do know these are not stupid people, although certain people, they. Know they just don’t care.

TN: I think you’re right. I think they don’t care. But what I think they’re not thinking through is the political fallout we saw that Chancellor or the exchequer in the UK kicked out today after about two weeks in office or something. And that’s relatively light compared to what happened in Sri Lanka a few months ago and what’s happening in Africa, what’s happening in, say, Pakistan, Bangladesh, what’s happening in Latin America.

So I think we’ll see political fallout here as a result of the Fed’s inability to understand the implications. Where it will really hurt is if it hits Japan and you get minority party in Japan back in power. They’ll pay attention then. And if you see powers in Europe that aren’t favorable to the US. But that’s already kind of starting to see Czech Republic and Hungary, certainly we’ve. Already started to see this, and it’s just getting started.

We thought we saw populism in 2016. I don’t think we’ve seen anything yet. I think we’re going to see

this in a big way globally.

AM: Yeah, Tony, you’re right. I mean, the Europeans are absolutely screaming at yelling about this because she straight up lied to them about the bond market. She can’t even talk to the Norwegians

or the Swiss at the moment. This is how bad it’s become.

TN: Yes, I believe it. Okay, so let’s move on to energy. Tracy, you’ve talked a lot about distillates for a reason, warned us for months about diesel shortages and diesel prices, and it seems like it’s really coming back. And as you talk about this, I want to understand, is diesel priced in dollars globally? And so is that going to hit supply chains in other countries as well because of the pricing basis of diesel. Coming out of refineries

Tracy Shuchart: diesel’s price in local currencies and trade in local currencies. Products are crude, obviously, prices in dollars and traded that way globally, except for some instances. But products are generally like Nat gas, it’s traded in different currencies. But really, I mean, we were having a diesel problem. This started back in 2021, so this is nothing new. I was tweeting about it summer of 2021. I was really worried about distalates. I started tweeting about that then because I saw our inventory slow down. It’s even worse now.

But what’s come to a head all of a sudden, and what’s making this obviously 10 million times worse, is that Europe, for instance, mostly bought diesel from Russia, and they’re trying to lean off of that, right? And so in the meantime, the US. Is trying to supply Europe with diesel. But now over the last week, we’ve had three weeks of ongoing refinery strikes with total. So France has 2500 gas stations that have at least one product that is completely gone, and 2000 of them are shut down entirely. And then we just had a malfunction in the Netherlands and Shells Curtis refinery, which is the largest diesel refinery in all of Europe.

So right now we have a massive global problem that is just getting worse. And if you see the diesel crackspreads have been they’re ridiculously flowing out. And backwardation is flying right now, which is kind of obscene. In the meantime, we’re still drawing these distills. We had a 9 million build and a 4 million draw in distance, and we’re headed into winter. So we’re going to have major problems here already in the United States, particularly in the Northeast, because they don’t have the refinery capacity there to really supply that area.

TN: Okay, so what does that mean? How long does this last? Does it last into spring? Does it last beyond spring? I’m curious about the magnitude of the impact on price, but I’m also curious about the duration, how long this is going to last.

TS: Well, you know, I mean, this has pretty much been gone ongoing since 2021. We’ve had times where it’s worse and times where it’s not. But it’s been over a year now, over a year and a half now. I don’t see that going away anytime soon because we don’t have the supply. We don’t have enough heavy oil to, you know, to make these products globally, especially when you’re cutting off Russia, because that’s what they produce is heavy oil. You’ve got Venezuela that’s producing 700K bpd. They’re not producing anything. And most of that’s going to China to pay for debts. We don’t have them. We’ve got Canada, but we don’t want to build pipelines right. For that. We can import more for that. So, I mean, we have kind of a global shortage of heavier oils. And sure, we get some from the Middle East.

That’s fine. We get some from Saudi Arabia. They own motiva here in the United States. And certainly they do produce diesel, but it’s still it’s still not enough. And especially when you’re talking about the west, it’s talking about, you know, we’re talking about a complete oil embargo on December 5 of Russian

oil and oil products.

TN: So this isn’t something that’s done by January. This has legs for quite a while.

TS: Yeah, absolutely. We’re already seeing prices rise. We’re at 518 a gallon for diesel here in the United States on a national average, which is higher than gasoline prices, by lots higher than the average. And the gasoline people that I talked to at Opus basically say, man, this is not even a safe level. This is going much, much higher.

CR: I have a question for you, Tracy. So it seems to me everyone seems to be focused on getting through the winter in Europe and the immediate impacts, as if there’s, like, some magic solution waiting on the other side as more of a layperson in this area. It seems to me that this massive under investments, this supplied depression that we’ve been having, there’s nothing coming online to help with that. So doesn’t that suggest that this is something that doesn’t get sorted out even though there may be some volatility, but, like years and years and years that we’re going to be dealing with?

TS: Yes, absolutely. I mean, we’ve got a problem for the next eight to ten years. Really? And if you look at, you know I know if we look at the natural gas situation in Europe, everybody’s thinking, oh, we’re at 95% full before winter, we’re going to be fine. If we just make it through winter, that’ll be fine. That’s great and all, but if you are not replacing that, you’re going to need it in the summer. You need to keep refilling that. So it’s not like, you know, unless they decide to stop using natural gas in March, end of story, we still have a problem. Right. And the next winter is probably going to get even worse.

TN: Great. Just so you know. Awesome. Okay, so let’s move into kind of the week ahead section. Albert, you want to get us started. What are you looking at going into the week ahead? What’s on your mind?

AM: Continuation of the Feds 100 basis point rate hike. I mean, they’re not going to do 100, but they’ll tell the market that they might start thinking about it and the market might start pricing it in. So we’ll definitely have a lot of weakness in the market going ahead in the next week, but it’s midterms, so you never know,

they could defend the quote unquote Trumpl ine of 35, 40 so they don’t look like complete idiots and give them Fodder for the midterms. Do you still think we’re going to hit maybe 3200 or something eventually? I can guarantee you that by the end of the year for sure. The economic indicators across multiple data sets is just atrocious right now.

TN: Okay, great. Carol, I know you’re not really kind of in Marcus, but what are you keeping your eye on for the week ahead?

CR: So I do actually commentate on markets from a sort of a macro perspective, and much like Albert, I’m sort of in the camp that until the Fed tells us what is their intention, is this really just about the midterms? Are they feeling the pressure that it’s risk off from my perspective until we know what’s happening with them. So that’s been sort of my perspective.

TN: Great. Okay. Thanks, Tracy.

TS: On China next week, party congress looking at China, I want to see what they’re going to do policy wise because that’s definitely going to affect the commodities market. We all know that they’re looking for a five 5% GDP by the end of the year, which they’re not going to get. They’ll say they got it, but we all know that they’re not going to get it. So I want to look, an economy is suffering right now and we’re starting to see stirrings of unrest in China. Right.

There was just that article where they had the people on the bridge with the signs that got scrubbed from China Internet. But I think that she is going to have to do something to stimulate that economy. So I’m kind of looking to see what his focus is on that and if they have any plans going forward to simulate the time. Because again, that’s going to affect the commodity markets and to see if he has a plan for the housing market. Oh, he’s got a plan.

TN: Central planners always have plans, don’t they? That’s right. So if you talk to any China economist

for the bank, they’ll tell you that China is going to hit five 5% or maybe they live on the edge and say five three. Right. So as you said, we know they’re going to make it issh somewhere in the ballpark, but we know in reality you can’t have a zero code environment and make a growth rate that high. So my worry, I was just talking about this with somebody earlier in the week, my worry is that China really has made that transition to a slower growth environment for starting with demographic reasons, but also some structural reasons that they put in place.

And I think what she’s going to talk through next week, although not directly, but someone indirectly, is much more control, which will lead people to the conclusion that it’s not a safe place for foreign investment anymore, which will lead them to a slower growth environment economically. Because he’s basically talking about leveling people out. Right. And everyone has the same maybe not opportunity, but the same outcome. And you can’t necessarily do that in China with some of the economic outperformers that you’ve had, like Jack Ma and other people. You have to bring people down instead of push people up. And that’s what I’m expecting.

Again, he’s not going to say he’s going to bring people down, but that’s what I expect is the main message coming out of next week’s meeting.

AM: Yeah, he has already done that, Tony. And there is a little bit of a power struggle with Wang. Yang is actually slated to be power sharing with him. All they’re trying to get him to do that, but all my sources have said that they’re locking down for code with zero until at least March, so we’ll see what kind of fake numbers they come out with.

CR: I will add that this all ties into their social credit system, which is the most advanced one in the world right now. And they really started the social credit on the business front, which is notable for the reasons you were saying. You can’t have that capitalism that’s leaked in a little bit over the past several decades and have these outperformers. So it’s an easy way to sort of bring those folks down a peg and then let that bleed into sort of the individual social credit. And it’s something we should be paying very close attention to as the Fed keeps talking about things like Central Bank, Digital Currencies, and as we see these companies going after people for misinformation, what part of that could leak here as well.

TN: Yep, very worries. So okay, guys, thank you so much for your time. Carol, I’m so grateful that you can join us today. Please come back anytime. Really appreciate this, guys, and have a great week ahead.

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