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BFM Market Watch: King Dollar Deposed For Now

This podcast was first and originally published on https://www.bfm.my/podcast/morning-run/market-watch/bank-of-japan-monetary-policy-revisal-japanese-yen-us-fed-rates-markets-outlook

The CEO of Compete Intelligence, Tony Nash, was interviewed on BFM to discuss the current state of the US markets.

The S&P fell 1.6%, the worst decline in a month, and the tech-heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Nash suggests that this may be due to bad economic data, specifically PPI and retail sales falling, but also notes that consumer is still strong. Nash explains that the US economy is built on services, so people may be trying to confirm their downward bias in things, and when bad news is reported, a sell-off day occurs. Nash also mentions that if PPI falls, that should mean inflation is slowing, which should mean the Fed would ease a little and slow down on rate rises.

He also mentions that markets may be spooked by all the announcements regarding job cuts, such as Microsoft announcing they plan to cut 10,000 jobs and Bank of America telling their executives to pause hiring. Nash suggests that these job cuts are small in terms of the gap that we see in the US workforce, which is still missing millions of jobs in terms of the openings versus the available people.

Nash also mentions the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. He suggests that the BOJ is managing the yield curve to suppress borrowing costs and wants to keep it below 0.5%. Nash also mentions that Japan’s central bank is getting pressure from other central banks to keep their rates low, this means that if Japan lets their rates rise, then that would have a knock-on effect around the world and cause a repricing of government debt all around the world.

Nash concludes by saying that he expects a weaker yen, but doesn’t think we would necessarily hit those lows.

Transcript

BFM

This is a podcast from BFM 89.9, The Business Station. BFM 89.9. It’s 7:06, Thursday, the 19 January, and you’re listening to the Morning Run with Chong Tjen San and I’m Wong Shou Ning. And earlier on, we did ask our listeners how traffic is like and Roberto said traffic today really smooth and super low compared to just yesterday. He loves Chinese New Year in KL. And so do we. I just love Chinese New York because I like the feasting and I like the ang bao collecting.

BFM

I get the hint.

BFM

Yes, we’re all looking at you, Tjen San. But in 30 minutes, we will be speaking to Angela Hahn of Bloomberg Intelligence on the impact of China’s reopening to Markhouse gaming and hospitality sector. But in the meantime, let’s recap how global markets closed yesterday.

BFM

After a good run, all key US. Markets ended down yesterday. The Dow was down 1.8%, S&P 500 down 1.6%. The Nasdaq was down 1.2%. In terms of Asian markets, the Nikkei was up by 2.5%, Hang Seng up by 0.5%. The Shanghai Composite Index, it was unchanged, the Straits Times Index, it was up by 0.3%, and the FBMKLCI it was down by 0.3%.

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BFM

Why are we always again and again there’s a trend here for sure. But to tell us where international markets are heading, we have on the line with us Tony Nash, CEO of Compete Intelligence. Good morning, Tony. Help us understand what’s happening in US markets. Because the S&P fell 1.6% is the worst decline in a month. Tech heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Is this just really due to bad economic data?

Tony

Yeah, we saw PPI and retail sales fall today. The weird part is consumer is still strong. The US economy is really built on services, so I think people are trying to confirm their downward bias in things. And whenever we see bad news, we see a sell off day. So I’m not necessarily sure I would read that much into it, aside from just there was really nothing else going on. So people saw some bad PPI news and they were negative. So if we see downward PPI, that should mean inflation is slowing, which should mean the Fed would ease a little. Not ease, but would slow down on rate rises a bit. So that should have been positive news for markets. So it’s just kind of a weird read of some of that data.

BFM

Do you think markets are also spooked by all these announcements with regards to job cuts? Because Microsoft says they plan to cut 10,000 jobs. Amazon of course, made announcements last week, and even Bank of America is it telling their executives to pause hiring. Not great for the mood on Wall Street?

Tony

Well, maybe, but I think those job cuts are actually kind of small in terms of the gap that we see. So the US is still missing millions of jobs in terms of the openings versus the available people so I think there’s something like 7 million jobs open. We also had a million people post COVID not come back to work. So we have a gap in the workforce, just a status quo workforce of a million people, but we have something like 7 million open positions. So when Microsoft lays off 10,000 people or Goldman lays off 4000 people, sure, it’s tragic. It’s definitely tragic for those individuals. But in terms of the overall health of the economy, it really doesn’t make that much of a difference.

BFM

And Tony, the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. What possible reasons would the central bank have for keeping this status quo?

Tony

Yes, so the BOJ is managing the yield curve to suppress borrowing costs and they want to keep it below kind of 0.5%. There have been some hedge funds and some big investors who’ve been betting that they would tighten it. And the BOJ is just bigger. I mean, when they came back and they said, we’re going to hold the line at 0.5, they spent about $100 billion so far this month to defend that and they have plenty of resources to hold that. So the release issue is this is if Japan lets their interest rates rise, then Japanese, say, banks and pension funds and other investors would consider selling debt from other parts in the world and buying Japanese debt. Okay, so if Japan lets their rates rise, then that would have a knock on effect around the world and that would cause a repricing of government debt all around the world. So it’s not just the BOJ wanting to keep this for Japanese domestic reasons. They’re getting pressure from other central banks to keep their rates low.

BFM

Okay, Tony, but what does this then all mean for the yen? I mean, at its worst point, the yen was trading 150 against the US dollar. Today it’s 128. That’s a very wide range in just a few months. So what are your expectations?

Tony

It is yeah, certainly I would look for a weaker yen. I don’t know that we would necessarily hit those lows. But the BOJ has made their stance clear. The BOJ has a new head coming in in a few months. I would say they’re unlikely to dramatically change policy with a new head because they don’t want to make people nervous. So I think they’re going to aggressively defend the status quo. So I don’t necessarily think you see a yen appreciating dramatically from here. I think the bias is really toward the downside.

BFM

Okay, staying on the topic of currencies then, what’s your view on US dollar? We’re just looking at the Bloomberg Dollar Spot Index this morning. It’s already down 1.5% on a year to date basis. The era of King dollar, is it over?

Tony

Well, I think not necessarily. If you’re looking at the DXY, it’s really heavy on the euro. And so we’ve seen Europe do better than many people thought through the winter because we haven’t had a cold winter there and energy prices haven’t bitten as hard as many people thought they would. So I think Europe is doing better and the Euro is doing better than many people thought. And everything in Currencies is relative. China is opening, although it’s gradually. China is opening. And so that’s good for CNY. Again, in a relative basis, I think there is downward pressure on the dollar, but I don’t necessarily think we’re over on that. I don’t think we’re heading straight down to, say, 95. I think we’re going to see some back and forth over the next couple of months as we figure out what the forward trajectory of the dollar is. And a lot of that really has to do with what direction will the Fed take in terms of their rate hikes and their quantitative tightening. And it has to do with treasury activity from the US. Treasury. How will they spend, what will they do, how will they fund the US government?

BFM

Tony, some analysts are saying that without a recovery in the Chinese economy, a global recession is all but assured. But what are your thoughts on this?

Tony

I don’t necessarily think that’s the case. I think China will do okay this year, and I think regardless, Europe will likely dip into recession this year, although fairly moderate. In the US, you see a very strong employment environment. And so employment is one of the key considerations for recession. So I don’t believe the US. Will dip into recession really on the back of employment news more than anything else. And so once we see some of these layoffs with larger companies and we get through this as, say, equity valuations stabilize, I think we’ll start to see a renormalization in the US economy as the Fed kind of takes the foot off the brake of the US economy. Of course, the Fed will continue to raise rates, but they’ll do it at a much slower pace, and that will make people much more comfortable in doing things like investing capital and so on and so forth, that will help the US to grow.

BFM

All right, thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his outlook for the world economies and also markets in the coming weeks. I think very much the question everyone has on their mind is Fed rates. What is the terminal rate? Will they basically raise rates too much and then cause the US. Tip into a recession? But I see increasingly our guests, our commentators sounding a little bit less pessimistic, hinting that perhaps we’re going to have a soft landing rather than a hard landing.

BFM

Yeah, I think it’s really on the back of the really still strong employment in the US. I mean, he did mention there’s still 7 million jobs available in the US. And there are one million people post COVID that didn’t come back to work. And I think that really is his key point, that the US may not slip into recession, but it looks like EU will and China, it looks like they are really on track to a better recovery this year. I’ve seen some economists say that GDP growth could be like five to 6% as well.

BFM

I see that consensus figure that range is around there for China’s GDP for 2023. Now, turning our attention to corporate that released results they reported, which is Alcoa excuse me, which is aluminium company. They reported fourth quarter results earlier today, which saw losses narrow to $374,000,000. Loss per share as a result was $2.12. The loss included a 270 million charge related to tax expense. Revenue did decline 20% to $2.66 billion.

BFM

And Alcoa attributed the decline in revenue to lower prices for both Alumina and aluminium. Additionally, Alcoa will see some executive leadership changes effective February 1, including CFO William Oplinger reassignment to chief operations officer, in addition to his executive vice president role.

BFM

Okay, the street doesn’t really like this stock when you look at Bloomberg. Five buys, only seven holes, no sells. Consensus target price for the stock, $52.18. During regular market hours, the stock was already down one dollars. And now I think we need to talk about one of the world’s biggest companies, Apple. They are expanding their smart home lineup, taking on Amazon and Google. Are you surprised by this move?

BFM

Jensen not surprised at all. I think Apple is really the leader in terms of innovation, and we’ve seen it over the years, so no surprises there. So I think they’re launching some new devices. There’s a smart display tablet, there’s a HomePod. There’s a TV box and a MacBook and Mac mini using their cutting edge new processor, which is the M Two chip.

BFM

Are you going to buy any of these gadgets? You don’t even use an Apple phone. You haven’t joined a cult. You’re about the only one on the morning run. You and Philip sees that hanging on.

BFM

The iPad at home, but they’re quite old.

BFM

Okay, but will this make a dent to Apple’s earnings? Perhaps. I think they are trying to diversify their product range, because the iPhone, I think, hasn’t done as well as expected. If you look at Apple or Cost, still a darling on Wall Street. 36 buys, eight holes, two sells. Consensus target price for this to $169.24. At regular market hours, it was down seventy three cents to one hundred and thirty five dollars and twenty one cents. I, for one, will be curious as to what these products will be or how they’ll fare. Up next, of course, we’ll cover the top stories in the newspapers and portal. Stay tuned for that. BFM 89.9 you have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.

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News Articles

Zero Hedge: A Country Can’t Save Both Its Currency And Its Bonds

This article was first and originally published on https://brucewilds.blogspot.com/2023/01/a-country-cant-save-both-its-currency.html and can also be found on https://www.zerohedge.com/personal-finance/country-cant-save-both-its-currency-and-its-bonds

I have adopted the position that when a central bank allows its government to overspend and abuse its currency, something has to give. You could say this is one of the unwritten laws of fiat currencies. Time and time again history has proven this to be true and it is the reason many people claim gold is the only true form of money that cannot be corrupted. In a world where everything seems subject to manipulation, this claim about gold is still up for debate. 

The overspending by governments coupled with inflation has really started to affect the perceived value of currencies in relation to other currencies. As these relationships break the losers are the people holding the de-valuated currency. Of course, many factors feed into how we value a currency but the crux of this article is not about whether a currency is over or undervalued but rather what a country must do to defend its value if it comes under attack.

Brent Johnson of Santiago Capital is credited with coining the term the “Dollar Milkshake Theory.” It explains how our debt-based monetary system can cause the US Dollar to rise despite the increasing liquidity injections around the world. Whether this was a “grand master plan” or a situation that just developed over time, it is something that may bode well for the dollar. Johnson recently took part in a discussion that included subjects such as the future price of oil, housing, and the probability of a huge global huge recession. 

About 28 minutes into the discussion which came out in both video and transcript form here:

Johnson conveys what many of us see as a truth that haunts fiat currencies. This is rooted in the fact that when the value of a currency falls, a country and its central bank cannot save both its currency and its bonds. In his “slightly edited” words;

“The problem is you cannot, and this is for every country, the US included, again, there’s a progression in how it’ll go, but you cannot save both the bond market and the currency market because they work at cross purposes. Whatever you do to save the bond market hurts the currency. Whatever you do to save the currency hurts the bond market. And every central bank in history has promised they won’t sacrifice the currency, and every central bank in history has ultimately sacrificed the currency.

And the reason they always choose the currency over the bond or the reason they always choose to sacrifice the currency over the bond market is for two reasons. One, the currency affects the citizens more than the government, and the bond market affects the government more than citizens. So they’re going to bail themselves out before they bail the citizens out. And the second thing is if the bond market blows up and the banking system blows up, there is no longer a distribution system for the government to raise money.

So they can’t let the bond market blow up because then they can’t get money anymore. And then if they can’t get money, they can’t operate. So this is a very long way of saying that I understand why the market moved the way it did. I think maybe in the short term it makes sense, but in the medium to long term, it doesn’t make any sense to me at all. Again, kind of watch what they do, not what they say.”

He later added “The problem, as we’ve kind of figured out and found out that it’s very hard to just get four for four or 5% inflation. It goes from 2% to 12% pretty quickly. They don’t have as much control as they think they do, right? And the problem with four or 5% inflation, you can kind of get away with it because it’s annoying and it is frustrating, but it’s not totally ruining your life. But with 8, 9, 10, 12, 15, 80% inflation, that starts to ruin the pledge life, as you mentioned. And that’s when they start to push back from a political perspective. And that’s what central banks and governments don’t want. They don’t want the populace revolting” 

When you think about the true motivators driving this “system,” it is logical the government and central banks would throw the populace under the bus. This is about their survival. As to the question of equal pain, those in power justify taking raises to offset the impact of inflation under the idea we “need them” to steer things forward for the “greater good.” 

While Johnson’s remarks were aimed at what is most apparent in the actions of Japan, this truth is problematic to all fiat currencies. For more on the Dollar Milkshake Theory see; 

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Podcasts

UK Turns To QE To Calm Markets

This podcast was originally published at https://www.bfm.my/podcast/morning-run/market-watch/uk-qe-outdated-government-bonds-calm-markets-british-pound

The Bank of England surprised markets by announcing that it would buy long dated government bonds in order to stabilise capital markets. Tony Nash, CEO of Complete Intelligence explains why and what does this mean for the Pound.

Transcript

BFM

Good morning. You’re listening to the Morning Run on Thursday the 29 September. I’m Shazana Mokhtar with Wong Shou Ning. Now, in half an hour, we are going to discuss the political future of Crown Prince Mama bin Salman, or MBS of Saudi Arabia, now that he’s been named the Prime Minister of the country. But as always, let’s kick start the morning with a look at how global markets closed.

BFM

Yesterday, US markets had a very good date was at 1.9%. S&P 500 up 2%, while Nasdaq was up a whopping 2.1%. Meanwhile, in Asia, it was all red. Nikkei was down 1.5%, hong Singh was down a whopping 3.4%. Shanghai and Times Index both down 1.6%, while our very own FBM KLCI was down 0.6%.

BFM

So for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us. I want to start off with moves by the bank of England that said it would move to buy long dated government bonds in order to stabilize capital markets. Can you talk us through what the BoE is trying to do and whether this will ultimately be successful?

Tony

Yes. So here’s what happened. You had some pension funds who bought debt, debt instruments called Guilt, and they used those gilts as collateral to borrow more money to buy more debt instruments. And they use that as collateral to borrow more money to buy more instruments. So they were many times leveraged on these government debt instruments. And when the value of those gifts declined, they had to provide collateral against the loans they had taken out to buy that debt. So it’s a very circular kind of series of events that’s happened. So because these pension funds got in trouble, the UK, the bank of England wanted to prevent their insolvency, of course, because many of them are government pension funds. So since the bank of England has nearly endless currency, they can help the government come to a relatively orderly decline. So is it ideal? No, but there was some messaging out from the new Prime Minister in Whitehall that was very disturbing to government bond investors and that triggered the sell off and then that triggered a multibillion pound rescue from the bank of England.

BFM

Okay, I want to stay on the topic of the United Kingdom, but us about the currency. They must be the only G seven countries still doing quantitative easing in some way. Where do you think the pound is heading? Dendu?

Tony

Well, because of the energy environment, they’re going to be spending more money on subsidies to help the British people through the winter and more pound? Denominated spending actually makes the pound stronger, but you have aggressive quantitative easing and you have a relatively stronger US dollar. It’s possible that we see the pound decline, say, 35% more, unless something dramatic happens, like another event like today or another event by the government that really erodes credibility, I don’t see a lot more decline happening, but it’s a weird year. It’s a weird few years that we’re having right now. Right. So I think on some level it’s really hard to tell. And the problem with losing credibility is that you lose credibility. And if they erode even more credibility, it could be worse than anybody thinks. So I think that’s a small chance. I think we’re probably in a range at this point.

BFM

And if we take a look over at the US, we have seen federal officials reiterate the very hawkish stance that they have. But San Francisco Federal Reserve Bank President Mary Daly said that the bank is resolute by bringing down high inflation, but wants to do so as gently as possible so as not to drive the economy into a downturn. Do you think it’s possible at this point to engineer a soft landing, or is a recession inevitable?

Tony

I think it’s possible to engineer a softish landing. I think the problem with the Feds facing as they were very slow to respond to inflation, and so now they’re trying to respond as quickly as they can, and they’re responding in a very kind of brutal kind of way. Mary Daily coming out with these as gently as possible comments are good. And that’s new. Neil Cashari yesterday said he’s another Fed governor. He said there is the risk of overdoing it on the front end, meaning that the Fed could raise rates too quickly. So some of these governors are getting out with messaging, trying to soften the Fed’s hard message over the last couple of months. So the wording from the Feds, ongoing wording generally from especially JPOW, has said that they’re going to be ongoing aggressive hikes, and that’s scaring people. So, like, the Fed needs to be less aggressively hawkish in their language. So that doesn’t mean they turn dovish. That doesn’t necessarily mean they start doing QE. They just need to be less aggressively hawkish. And that’s just toning down the language. I think it’s a little bit too little too late in as much as markets have fallen by, say, 23%, I think, since the highs.

Tony

But I think if they start inserting some less aggressively hawkish language, we can have a smoother glide path to balance, meaning higher interest rates, more moderate equity markets at a slower pace.

BFM

Okay, Tony, can you help us understand what happened today in markets? Because I’m a little bit confused in the sense that US ten year treasury yields fell the most since March 2020. On a day like this, equities shouldn’t go up, but it did. Why?

Tony

Well, I think equity investors are seeing what the bank of England did, and I think on some level they see equity markets versus central banks as a bit of a game of chicken. And the bank of England blinked. And I think equity investors are hoping that the Fed will slow down or blink. This is not a pivot. Meaning when people talk about the Fed and say a pivot, they mean pivoting to quantitative easing and pivoting to dovish language. I don’t see that at all, but I think equity investors are seeing a chance of the Fed becoming less aggressively hawkish, as I was saying. So I think that’s really what happened is just a quick breath think, oh gosh, maybe they’re going to slow down a little bit, which would be positive for equity markets.

BFM

And if you take a look at the Nordstream gas pipeline disruption, that does seem to have changed the energy calculus in Western Europe. How do you think it’s going to affect the dynamics of energy prices over there, especially with winter looming?

Tony

Yeah, I think it will affect, but there isn’t a lot of gas coming by Nordstream. There are other pipelines bringing gas to Europe, so it’s really, at the moment, more perception than reality. So Europe has a fair bit of gas and storage for winter. It’s 87% of their goal, so they’re in pretty good shape. They’re not in great shape, but they’re in pretty good shape. They can make it all the way through winter with what they have in storage, but they aren’t reliant on Nordstrom to fill their reserves further. So I think the kind of the gut punch on this is that it’s a pretty damaging leak and so it would be really hard to get it back online. If Russia say something happened with a resolution of UK, sorry, Ukraine, Russia, and there was optimism that Russia could turn on the taps again, that would be really hard to achieve. So it’ll be an expensive winter for energy in Europe. But Nordstream doesn’t really impact it all that much. It’s more, say, the long term hopes and expectations for Nordstream.

BFM

Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Really assessing what’s happening over in the UK with the actions by the bank of England overnight. That has helped somewhat to calm the plunge in the pound sterling that we’ve seen over the past few days. I think this pound has rallied, but how long this equilibrium will last, I think, is anyone’s guess.

BFM

Well, this morning pound against ringgate is 5.0260 at the lowest in the last two days, if I’m not wrong, 4.8. Right. So it has truly, truly recovered. But volatile markets ahead, I think still question marks about whether this trust economic policy makes any sense. Confusion over the tax cuts, how they’re going to pay for it, reverberating around global markets because we’ve seen actually global bond yields peak. Question about whether there will be more activities by central banks to intervene, to prop up their currencies or to restore come to their own respective markets, because we saw that in Japan. And apparently even South Korea says it plans to conduct an emergency born buyback program.

BFM

Indeed, we do see also that the yuan is coming under pressure, and China central bank has issued a strongly worded statement to warn against speculation after the currency dropped to its lowest versus the dollar since 2008.

BFM

I love the language. The language is released yesterday. Do not bet on one way appreciation or depreciation of the yarn, as losses will definitely be incurred in the long term. Can’t spell it out more clearly than that, right? Indeed.

BFM

716 in the morning. We’re going to head into some messages. And when we come back, what does long or need more? Another quarry or preservation of its forests? Stay tuned. BFM 89.9 you have been listening to.

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Podcasts

UK Prime Minister Truss pledges action on rising energy bills

This podcast is originally published by BBC Business Matters here: https://www.bbc.co.uk/programmes/w172ydq0jbyj4ls

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UK Prime Minister Liz Truss is expected to announce a package of support to deal with rising energy bills in the coming days. It’s understood the government could spend $115 million on plans to subsidise bills. We weigh up the pros and cons of subsidies and windfall taxes with Caroline Meyer, energy analyst and CEO of Meyer Resources.

US e-cigarette maker Juul is to pay a $438.5 million settlement, following a lengthy investigation that found it had marketed its products to underage teenagers. Rachel Butt from Bloomberg in New York explains the background and implications of the story.

Rahul Tandon is joined from Austin, Texas by Tony Nash, CEO and founder of Complete Intelligence, and from Freetown, Sierra Leone by media entrepreneur and TV presenter Stella Bangura.

Transcript

BBC

Hello, there. How are you? This, of course, is Business Matters here on the BBC World Service. I’m Rahul Tandon as always, coming up on the program, we’re talking about changing your leaders. Does it work? That’s happened here in the UK. Liz Truss was sworn in into her new job. We’re going to be looking at the energy challenges that many countries, many of you listeners, are facing at the moment.

BBC

It’s going to be a terrible winter and in many countries, it will be for some of the lower income households. It will literally be a question, do I heat or do I eat?

BBC

There we go. That is a question I think that many people, unfortunately, across the world, will be facing. A lot of tough questions that are going to face businesses here in the UK. Tony Nash joins us as well this evening from Complete Intelligence. Hello, Tony. Always a pleasure to have you on the program. Our new Prime Minister here is going to need a lot of intelligence. Can I ask you, Tony, sometimes when we’re faced with big problems, we think, let’s just change the leader. That doesn’t always work, does it? Just putting a new person in charge. The problems are still there.

TN

The problems are still there. And the problems that we have right now are very hard problems to solve. So Liz Truss is going to really need a lot of help and a lot of deep thought to solving these problems.

BBC

Let’s switch it on its head, though, sometimes, having that new leadership in place, new ideas, new thoughts. She announced her new team a short while ago, Tony, that can make a difference. A fresh look at difficult problems that people are facing, whether it’s countries or businesses as well.

TN

Sure it can. I think some of the problems she’s facing right now, though, are they’re global problems. It’s the energy supply chain, right? It’s the cost of energy, it’s the downstream costs of energy. It’s the cost of things like fertilizer and food into next year. So these are not problems that the head of the UK, the leader of the UK, can solve on their own. This is something that really takes some deep thought to solve, say, the domestic symptoms of those problems, or not the symptoms, but the domestic impacts of those problems, as well as the global sources of those problems. It takes a lot of effort, especially for a new leader, to come in, set up their team and get going.

BBC

Yeah, that’s a good point. Tony, last question to you on this particular issue. Sometimes with leadership, the key is knowing when to take over. This is not the best time for any leader to take over in the country because of those problems you outlined there, which we’re going to be talking about in the program in a lot more detail a bit later.

TN

No, you’re exactly right, but I think there’s a certain kind of leader that’s attracted to taking over in a very difficult time. So I’ve done a turnaround and a couple of startups in my day, and it takes a different kind of person who to want to take a leadership position in that situation. And hopefully she’s a person who is focused. Hopefully she’s a person who can take criticism really well. Hopefully she’s a person who can get people on her team and build trust. And if she can do those things and all of the other things that a leader is supposed to do, she may actually do really well.

BBC

Stella, you were talking about the elections in Sierra Leone, which are coming up by the beginning of next year. I wonder we’re talking about leadership. I suppose the true test of a leader or somebody who wants to be a leader is taking over in difficult circumstances. Not when it’s easy, but when it’s tough. Against your labs. Tony, when you go around Texas, are you seeing a lot of youngsters vaping nowadays?

TN

I have two kids in university and one in junior high. And my kids who are in university were part of that initial group that was marketed to. And so when they were in high school, there was a lot of vaping in high school, and there still is. And even now the kids in junior high are being marketed. And so when I say junior high, that’s kind of 12, 13, 14 years old.

TN

So are they being directly marketed to? Probably not. But the problem here yes, that’s right. And the influencers and the way that they get to these kids, and there are efforts in the schools here to counter that. A lot of the messaging in the schools is countering, and again, I’m talking 12, 13, 14 years old is countering vaping and trying to get the kids to not start vaping. So it is something that’s very common even at a young age, and there are a lot of efforts to really stop it.

BBC

Yeah, go on, Tony.

TN

Yeah, the appeal here for the kids, there are a couple of appeals. First of all, they don’t smell like tobacco, right? So it’s a lot easier to do and conceal. But the other part that’s pretty common is to get vape use that has THC in it. And kids in, say, public schools will smoke in the bathroom between classes or something like that. But it’s the THC juice for their vape.

BBC

Because I’m listed, I know what that is.

TN

It’s basically smoking marijuana, right? It’s the THC is the active ingredient in marijuana. And so it’s a very easy and pretty inconspicuous way to distribute this to schools, to kids in schools. And so it’s not necessarily nicotine, it’s the THC. I’m not saying every kid who vapes has THC in their vape juice, but it’s both. And it’s balancing both out that we see a lot in the junior highs and high schools here.

BBC

I want to bring in Tony here very quickly, because I remember being in India when the government had demonetization completely changed the currency. It’s not that easy, is it? Sometimes?

TN

No, it’s not easy. It’s a shock. And I think that it’s a little bit of a shock by design so that people understand the new value. But when it doesn’t hold, then that’s a real problem. So I’m not laughing at this specific situation now, but with demonetization in India, obviously, that had an organized crime drive, right? Like they wanted to take out the large bills to take the power out of some of the organized crime transactions. Is that fair?

BBC

Yeah, it was. It was also about removing some black money from the economy. Did it work? It’s an interesting discussion that’s still going on in India. Lots more interesting discussions coming up here on Business Matters after the latest news.

BBC

What about where you are in Texas? That’s a part of the world that is known, isn’t it, for its energy resources? It’s fossil fuels, also renewables. Now we’re heading towards Midterms. How big an issue is energy there? Not quite as big maybe as it is in Europe, I suppose.

TN

Well, I live in Houston, Texas, the energy capital of the world. So you should know that everyone in my neighborhood has put in a new swimming pool except me over the past year. So the energy companies are doing well and my neighbors are benefiting. And so I don’t say that to be horrible, but these times part of the problem with times like this is people realize that there is actually under investment in energy.

TN

And so whether it’s electric, power companies or storage or transmission, other things, so what comes out of Texas is natural gas, which goes to Europe to kind of fill the gap that isn’t coming from Russia. Okay. And so because there’s not as much supply, those prices go up, and that benefits the people who take things out. But the under investment happens in two places. It happens kind of on the electricity side, but also on the extraction side. So things here actually in Texas pretty good, and we’re not seeing a lot of the downsides that Europe is seeing.

BBC

Yeah, very much. And I suppose the price of the gas at the moment, a lot of that liquefied gas coming into Europe at the moment means that a lot of those companies in Texas will be doing very well. We were talking about Liz Truss earlier in the program, the new British Prime Minister, because she’s unveiling her energy plan a little bit later this week, on Thursday. But it’s quite clear now that her government’s going to borrow hugely to keep bills low. In the EU, though, Brussels are going to propose levies on energy companies that would channel sky high earnings back to vulnerable households and businesses.

BBC

This is going to cost Europe a huge amount of money because they’re going to have to bail out a lot of people because of the rising cost of energy here and that’s going to have long term economic consequences for the continent.

TN

Sure, yeah and I think that whenever you get a governor estimate, it’s always a little bit low. So whatever the governments are putting out to spend, you can probably count on two times that or more maybe then. Sure, yeah. The government estimates are intentionally low and they always are because they underestimate probably supply constraints in this case.

TN

If you look at things like gas storage. So I’m not of the belief that we’re going to have like a horrific event in Europe this year or this winter because if you look at gas storage, for example, Germany has a natural gas storage, it’s something like 84% of reserves and their target is 95% and they’ll fill that 95% by probably November. So there will be supplies of gas in Europe. It will be expensive.

TN

So as your guest said, people will have to choose between food and heating. I don’t necessarily think that’s the case. If you look at the German government, they have the capacity to issue a massive amount of debt to pay their people to survive through the winter. So not every government in Europe has that luxury, but Germany certainly does and a lot of northern European governments too.

BBC

Well, we did see, didn’t we, earlier this week, the Chancellor of Germany outlining plans to help people will have Liz Truss do that as well. Texas, California, two rivals. I think a lot of our listeners across the world will be surprised to hear about blackouts in a state like California, one of the wealthiest in the US.

TN

Well, yes, in California needs a lot of investment in its power grid. That’s really something that’s long overdue and they haven’t necessarily put the investment in. It’s got a creaking power grid and so this is why power is so inefficiently distributed in California. And until they do that they’re going to continue to have these brownouts and blackouts and power distribution problems.

BBC

And do you think that’s one of the reasons why we’ve seen a movement of quite a lot of businesses, haven’t we? It’s not just about taxation from California to your part of the world.

TN

Yes, absolutely. It’s about regulation, it’s about the continuity of power and it’s about education. And the students that come out of Texas institutions are very good, very hard working students. So there are a lot of factors related to it. And land, there’s a lot of land in Texas that can be built on for things like Tesla and other places.

BBC

Stella well, that’s very similar to the situation in Bangalore, a city that you know well. As you Tony know very well, yes.

TN

Gosh, I spent a lot of time in Bangalore about 20 years ago, before the new airport, before the second ring road, all of that stuff. So it was the same town, but it was a little bit different, not quite the scale that it has today, but the disasters there, it’s heartbreaking.

TN

I moved to Texas in 2017 when we had a Hurricane Harvey, and one of the things your guest was talking about is how people would help each other out in Bangalore with the floods. And that’s exactly what we saw here where we went and helped ten or 20 people take all of their belongings out of their house and started new life. It’s heartbreaking.

BBC

It is indeed. And it has been a sad end to the program, talking about the city I know very well in Bangalore. Hopefully, I’ll get on its feet. Thanks to Tony. Thanks to Stella. We’ll be back same time, same place tomorrow.

Categories
Podcasts

USD-Euro Parity Offers Opportunities

This podcast first appeared and was originally published at https://www.bfm.my/podcast/morning-run/market-watch/usd-euro-parity-currencies-euro-monetary-policies on July 21, 2022.

Currencies have been in a flux with the US dollar gaining strength on the back of the rising Fed fund rate. Our CEO and founder, Tony Nash tells us if there are actually investment opportunities from this.

Show Notes

SM: BFM 89 nine. You are listening to the morning run at on Thursday the 21 July I’m Shazana Mokhtar with Wong Shou Ning. In half an hour, we’ll discuss the emerging market economies that are at risk of going the way of Sri Lanka. But as we always do, let’s recap how global markets closed overnight.

WSN: While I haven’t seen this in a very long time because every market that we’re going to report pond is actually in the green. So the Dow was up 0.2%, the S&P 500 up 0.6%, Nasdaq up 1.6%. Meanwhile in Asia, Nikkei was actually up 2.7%, hong Kong up 1.1%, shanghai up 0.8%, Singapore street times up 1.7% and our very own FBM KLCI was up 0.6%.

SM: These days are far and fewer between indeed when the board is completely green. But for analysis on what’s moving markets, we speak to Tony Nash, CEO of complete intelligence. Tony, good morning. Thanks as always for joining us. So another choppy session on wall street, but the SP 500 posted its first back to back gains in two weeks. Do you think markets have bottomed and is there a sense of relief that results season so far has been pretty decent?

TN: I think the result season has been okay. It’s still a slowdown from the previous quarter. I think it’s really people taking a sigh of relief about the Fed. They’re was fear last week that the fed was going to raise 100 basis points for a few days and that really led to dramatic falls. And what we’ve seen is a sigh of relief that that’s unlikely to happen. We’re likely to see 75, which although that’s elevated, it’s less than a 400 basis points. So I think it’s more that than earnings right now because there’s not a specific sector that’s necessarily doing dramatically better or dramatically worse. Of course tech, we have some tech gains, but we also had other areas where things gained, so it’s more broad than anything else.

WSN: Tony, what did you think of Netflix? Sorry, Tesla’s results that came out just a few moments ago. Did it surprise you in terms of how well they’ve done considering the shutdown that they experienced in China?

TN: Yes, it did. And they banked a billion dollars on bitcoin. So I think that I’m hoping that Tesla starts to get more focus on their performance and their actual market rather than speculating on cryptocurrency. I think every business, at least in America is having to come back down to earth and focus on their own operations now and Tesla is one that really needs to do so. The results were good and that’s great, but I think more focus is needed, especially with the opportunity they have right now in the US.

WSN: And another thing I want to ask you about is some of these leading tech companies. So we see in Google, we’ve seen Apple actually coming out to say that they’re stopping. They’re hiring. At this current juncture, does this make you nervous about the state of the US. Economy or is it actually pretty good because the job market was too high and inflation was a major concern?

TN: Does it make me nervous? Yes or no? I’ll tell you what’s been happening here in the US. If you’re under 30 and you work for a tech company, you know that if you work for a company for twelve months and you jump to another job, you’re going to get a 20% to 30% pay rise. So for the last few years, if you’re under 30 or say under mid thirty s, you would work for a tech company for a year, then switch jobs and get a significant pay rise. So because of that, these tech companies have over solicited jobs. We’ve heard about these millions of unfilled jobs in the US. Those aren’t real jobs, okay? Those are jobs that tech companies have been waiting for people to move on from because they know their employees are going to move on after twelve to 15 months. And so they’re prepacking the employment queue so that they don’t have disruption in their business. That’s what that’s all about. So Microsoft, Google, Netflix, all these guys saying, we’re taking all these jobs out of the market. It’s really just them seeing that the market is slowing down and their staff aren’t going to jump jobs as much as they have been.

WSN: And one other thing I want to ask you about is the aviation sector. So last night, United also reported numbers that were below street expectations a lot due to capacity constraints across the industry. Do you think it’s time to buy this if we really believe in the reopening theme, because these are just temporary blips.

TN: Oh, the time to buy airlines was like three, four months ago. I would be really careful right now if I were to go on airlines. I’d want to know the summer travel season, it’s halfway behind us. So I think if you were buying airlines, you should have done it excuse me? You should have done it a few months ago and then seen the rise as we went into the summer season and sold just before earnings. But as we’re seeing some of their earnings come in somewhat disappointing, I think that’s the real kind of warning for, say, Q Three. So these disruptions, they’re not necessarily getting any better. Disrupted flights are not necessarily getting any better. So corporate earning or stock market prices are about expectations. They’re not about actual performance. So we saw the expectations in Q Two disappoint. So that’s going to really erode expectations for Q Three. So I would be really wary of looking at airlines right now.

SM: Okay. And if we take a look at Europe, the European Central Bank meets today to decide on whether or not to raise rates. What do you think they’re going to do?

TN: Look, Europe is pretty rudderless the ECB is pretty rudderless. They’ve got negative real interest rates and they don’t have a way out. So they’re kind of either already entered or about to enter a recession. So if they raise rates or tightened too much, they’ll steepen the negative slope of the recession. They’ll make it worse. If they don’t raise rates, then the recession will be a bit easier. But they’ll weaken the euro. And as they’re importing all of this power gas and oil and same natural resources, it’s just making those things more expensive in euro terms. So if they tighten, it’s likely about the purchasing power of the Euro more than anything else. The other part that they’re likely to do is look at things like demand destruction, which is what the Fed has been focusing on for about four, five months. They’ve been raising rates so fast that people feel less purchasing power and they stop buying as much. And so if the ECB raises, say, 75 basis points, which I doubt they will, what they’re really signaling to people is they want them to stop buying so much. But we really think the ECB is going to kind of have a moderate tone to the meeting and really not surprised the upside.

WSN: Okay, I want to stay in Europe and I want to talk about the week euro. I mean, at one point you said parity with the US. Dollar. But do you think that actually a weak Euro does provide some stock picking opportunities?

TN: Yeah, it can. I mean, if you look at those European companies that export a lot, let’s say to the US. That would give those companies opportunity to expand their margin in local currency terms while keeping their US. Prices either constant or raising them right. So I would look really hard at European countries who are exporting to places, dollar nominated locations to where they can absorb some of the same gains. For example, not a European company but Pepsi, okay, they make snacks and drinks and this sort of thing. Last quarter they raised their prices by 12% and they had a 1% volume expansion. So American consumers are accepting price rises, double digit price rises and they’re continuing to buy. Okay, so European companies could look that European companies that export a lot to the US. Could really look at this market and put that into their strategy for US. Exports. The problem in Europe right now, a big part of the problem is the expansion of energy prices. German producer prices rose by 30% last month and so they have a real problem with productivity or with profitability. Their costs are rising so fast they have to find a way to raise prices.

And they can only do that into a strong dollar market. It’s very difficult for them to do that elsewhere.

SM: Okay. And speaking of energy, currently, how much correlation is there between oil and natural gas prices and which one do you see undergoing more price volatility in the coming months.

TN: It’s almost zero, actually, over the last month. The correlation is zero point 607, to be precise. Okay.

WSN: It’s a real number.

TN: No, I actually did the calculation. I did the math. So that’s what I do all day long. So normally that’s kind of a zero seven to eight, which is a significant correlation. Right. What we’ve seen is that we’ve seen crude prices, downward pressure on crude prices over the past month. There’s been a lot of pressure, especially in the US. With the Biden administration really kind of bullying crude prices down now that gas prices have been pushed up because of the issues of gas exports out of Russia. Okay. And so you’ve had a disintegration or disconnection sorry. Of those correlations. Where do we expect more volatility? Well, we expect crude oil to be kind of range traded, say, between 95 and $115 for the next few months, that gas can continue to rise, especially if Russia does not turn the gas back on the pipelines. Which decision is, I think tomorrow or the next few days? If they decide not to turn those prices back on, the price of gas continues to rise pretty dramatically.

SM: All right, Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Ending the conversation there with just a look at how natural gas and oil prices are expected to trend in the coming months. Crude oil to trend within the range of natural gas. Now, that’s where we could really see some price volatility if geopolitical situation in Russia and Europe doesn’t, I guess, stabilize.

WSN: Yeah. All this is going to feed into inflation. Right? And we are already seeing that in UK numbers. So it came out yesterday, hit a new four year high as food and energy prices continue to so. The consumer price index there rose 9.4% annually. It’s a lot, and it’s mainly due to fuel and food prices, which were the most significant contributors to the rising inflation rate that we’ve seen. So as a result, the bank of England might actually consider a 50 basis point high at its August policy meeting.

SM: Something to keep an eye on, and I’m sure something that the incoming prime minister, whether it’s Rishi Suna or Liz Truss, will need to start strategizing from now 718 in the morning. We’re heading into some messages and when we come back, does the antisexual harassment bill that was passed in parliament yesterday pass muster? Stay tuned. BFM 89 nine.

Categories
Week Ahead

The Week Ahead – 18 Jul 2022: Biden’s Saudi Arabia trip 🛢️

https://www.youtube.com/watch?v=HpcWVeE8mPY

Biden’s Saudi trip ended up being a disappointment and there really is no immediate spare capacity, which is a surprise to no one.

What does the appreciated USD mean? We’ve already seen a fall in Sri Lanka and other places which we’ve talked about for weeks, but where is that going and when will that end?

We also talked about the FOMC expectations. What will the Fed do, especially given CPI PPI data? We have to also keep in mind that we have an election coming up in November, so it’s really hard for the Fed to keep the heat on.

Key themes:

  1. Biden’s Saudi Arabia trip 🛢️
  2. USD🚀 rocket ship and fallout
  3. FOMC expectations (CPI/PPI)
  4. What’s ahead for next week?

This is the 26th 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 experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/samuelrines
Albert: https://twitter.com/amlivemon/

Time Stamps

0:00 Start
0:49 Key themes for the episode
1:55 Biden’s trip to Saudi Arabia
3:23 PR game and disastrous foreign policies
5:00 The US President looks like he has no power?
6:17 US can be a marginal price setter for oil, but…
7:34 what happens to crude prices?
10:08 Why is USD pushing higher?
11:22 What’s happening in the Euro Dollar and why?
13:51 FOMC
19:00 What happened to the gasoline prices?
20:07 When will Yellen give up on the 2% inflation?
23:45 What’s for the week ahead?

Listen to the podcast version on Spotify here:

https://open.spotify.com/episode/4cvisj39soBnXdia0S9bXv?si=4c2c9ffb0f6f4717

Transcript

TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. I want to thank Albert and Sam for joining us to take a look at The Week Ahead. Before we get started, please, please like and subscribe on this channel and please comment, ask us questions, let us know additional information you think we should have. We get back to every single one of those and we want to make sure that you guys are happy with what we’re talking about today.

So today there’s a lot that’s happened over the past week and even over the weekend that we want to get into. We’ve got three topics here, but there’s going to be a lot of overlap in these. So I’m just going to introduce these and then we’re going to have a pretty open discussion.

The first is Biden’s Saudi trip, ended up being kind of a disappointment and there really is no immediate spare capacity, which is kind of a surprise to no one, but it happened and we’ll cover it. Next is the US dollar, and what does the appreciated US dollar mean? We’ve already seen a fall in Sri Lanka and other places which we’ve talked about for weeks, but where is that going and when will that end? Next is FOMC expectations. What will the Fed do? Especially given CPI PPI data? And we have to also keep in mind that we have an election coming up in November, so it’s really hard for the Fed to keep the heat on when we have an election coming in November or that would be a normal election year.

So Albert and Sam, thank you so much for taking your Sunday afternoon to talk through to us. Let’s first get into Biden’s trip. Albert, can you give us a little bit of a kind of geopolitical backdrop for us? Help us understand what were the expectations and what actually happened?

AM: Well, I mean, the expectations were that Biden goes into the Saudi Arabians in the Middle East and cuts a deal for them to increase production and capacity and name your whatever little policy that they’re talking about. The reality was Biden wanted to get away from the PPI number and the CPI. They’re just atrocious. So he decided it’s a normal thing that politicians leave and go overseas so they don’t have to deal with it.

So he went over to Saudi Arabia meets MBS, which was already a problem considering the comments that he had for the election. But his goal for upping production by the Middle East and OPEC, it was a fantasy. It was nothing more than a PR gimmick in my opinion, that the Fed has been playing in futures and crushing the price of oil. So it was one of these, look here, this is what I’m doing on the grand stage and oil prices are falling, but in reality they weren’t really connected.

TN: So were there really expectations in the administration that there would be additional immediate capacity? Do they really think that that would be on the table?

AM: I don’t think so to be honest with you, Tony. Like I said, this is a PR game that they’re playing now specifically because, like you mentioned, elections are coming up and their intent is to save the Democratic majority in the Senate. The House is lost, but the Senate is what they’re eyeing up. So in my opinion, this is all PR games.

TN: Okay. But the PR game that is really hard for me to understand is the President, regardless of who it is, okay. The President going to a place that is an ally. Saudi Arabia is pretty much an ally to the US. And coming away with nothing. One would think that the Secretary of State and the Nat Sec guys, other guys would have gone in first to make sure that we could announce something positive and nothing happened.

So it seems to me that there is foreign policy disaster after foreign policy disaster with this administration. I don’t want to be putting my own view on it, but is it that, too?

AM: Of course, we’ve had just multiple disasters and foreign policy. But even from the Saudi Arabian perspective, who’s their biggest client? At the moment, it’s China. Why do they have to listen to Biden, who’s made the Biden administration has made unbelievable mistakes in foreign policy and actually risk their security more than anything else. He’s taking the foot off of the Iranians. The Saudis have to deal with that. The Russians are in their own little world of adventures, but there’s no real stability in the Middle East, and the United States under Biden doesn’t really show that there is anyone stepping up to the plate.

TN: Right. And that’s kind of a leadership issue. Whether or not the US is their main customer, the US has been their main advocate in the Middle East and around the world. Or one of their main advocates. Right.

AM: Yeah.

TN: So that’s the big loss that I see is you have a president going in, not getting an agreement with a huge entourage for agreements that should have been done before they arrived, and it just makes them look like they have no power. Sam, is that how you read it?

SR: Yeah. There’s two things that I think the US. Generally gave to Saudi Arabia, and that was global clout and weapons, right? Yes. And the second part is probably very important to the Saudis going forward because there’s only so many places that manufacture weapons that are decent, and that’s the US, to a certain degree, Russia, China and basically Turkey. So you can kind of buy weapons from those places. Guess what? That was a tool that really wasn’t flexed at all.

And if you’re going to flex policy power, that probably should have been flexed a little bit. And honestly, it doesn’t appear to have been at all. So I would say to Albert’s point exactly, we’re not the largest customer when it comes to oil by a mile. Right, that’s just true. But we are the largest supplier for their national defense.

TN: Here’s the thing that I don’t understand is, with US production, we can be the marginal price setter for global oil prices, but we pull that card off of the table by disabling our domestic manufacturers. Is that a fair thing to say?

SR: Well, I would say that that’s the muscle that we’re kind of flexing right now, right? To a certain extent

TN: Okay, tell me more about that. How are we flexing that?

SR: Well, we’re flexing it. I’m not saying it’s good flex. Right. We’re flexing it by not doing anything. So we are basically the ones holding up global price of oil. OPEC honestly has pumped exactly what they said they would pump with a little variability, and they don’t have much marginal capacity.

The marginal capacity was passed to fracking a long time ago. This is not a shocking revelation. So when you’re the global incremental supply that can flip on in a relatively fast manner and you say, we are not going to do that, period, and we’re not going to in any way supplement the regulatory overhangs and the capital overhangs, and guess what? You’re going to end up with a global shortage of oil and distillates, etc.

TN: Right. So what happens to crude prices with the Saudis saying, okay, maybe capacity in 2027? What do we see in the short term with crude prices? I mean, with a recession looming, supposedly, whether that’s real or not remains to be seen. Right. And we had a good retail sales figure on Friday, pretty strong.

So what do we see happen with crude prices in the short term? Is there upward pressure on crude prices or are we kind of in this range?

AM: I think we’re in this range of 90 to 115. Just simply because of the reality. I want to differentiate pre election versus post election. Right. Pre election, we’re definitely in a range of 90 to 115. The Feds not going to let the price of oil gets to the point where people are paying six, $7 a gallon to the tank. So that’s first and foremost.

After that, hands up. Who knows what’s going to happen then? Because Europe’s going through an energy crisis with gas. The price of oil is probably going to go up just because the green deals that the Biden administration are intent on passing are going to ramp up right at the election and just afterwards. So after the election, I could see 130, 140.

TN: Okay. Sam, any near term change in crude prices because of this? No?

SR: Well, near term, Albert’s point, $90 a barrel seems to be kind of the low here. I don’t think we’re going to go much lower. And that’s a combination of DXY at 108, which DXY at 108 is atypical to oil remaining elevated.

So if you begin to have a dollar breaking into the back half the year, that’s kind of the post election story. I think Albert would back me up on that part. You begin to see that breaking. Guess what? The scaling, that makes 130, 140 is relatively reasonable. But you call it 90 to 115. Absolutely not a problem here. And you probably creep back towards the upper end of that 150 because you’ve seen two things.

You’ve seen gasoline prices come down, which means demand is going to remain resilient, if not pick up on the margins. And guess what? That flows downhill. So I would say oil prices, gasoline prices, they look good right now. I saw a free handle on gasoline close to my house. That’s not going to last. That’s not going to beat the system.

TN: Right. Okay. So, Sam, you mentioned the dollar at 108. We hit 109 last week. Why is the dollar pushing higher, guys?

AM: I can tell you why. I’ve been adamant about this. Yellen tell the European counterparts that she was going to drive the dollar up to 110 and above. She’s done this in 2013 before. There’s nothing new under the sun. It’s part of her playbook. She knows what she’s doing. She can even go up another 10%. Now, what that does to emerging markets? Oh, God help them at the moment. But still, the dollar is the most effective tool in their eyes for inflation busting, at least short term.

TN: So how far are we going?

AM: I think we go up to 112 to 115.

TN: Okay, over what time horizon? The next month? The next three months?

AM: Yeah, I think it’s in the next month. I think they want to get this over and done with so they can pivot starting September. Stop the rate hikes. And on top of that, this is something for Sam that could talk about the Fed is I think that Powell probably loses the majority of votes in the Fed for Fed members come October.

TN: Okay, hold on, hold on, hold on. I want to talk about that. But let’s finish up with the dollar first. Okay? This is good. Okay, so with the dollar, help me understand what’s happening in the Euro dollar markets right now. Okay. We’ve seen the Euro dollar fall as the dollar rises. What’s actually happening there, and why.

SR: Not me?

AM: Okay.

TN: Yes.

AM: I’ve been adamant about this. Also, as global trade slows down, the need and use of Euro dollars becomes less so. And a lot of people sit there mistake that as the dollar is dying and gold is coming back and whatever name your crypto, that’s supposed to be the next reserve currency. But that’s just the reality of the moment, is they are purposely trying to kill demand. When you kill demand, the Euro dollar starts to fall because there’s less need of it. That’s just the most simple basic explanation that I can give you at the moment.

TN: Okay, so, Sam, that is non US demand in US dollars, right?

SR: Yeah. Dollar denominated non US debt.

TN: Okay. And so the largest portion of the euro dollar market. Is that still in Europe?

SR: No, it still flows through Europe. Right, okay. But it’s a much larger market than simply Europe.

TN: Okay. It tells me outside of the US, there’s a slow down generally. Is that fair to say?

SR: Yeah.

TN: And we’ve talked about this before. Europe has big problems. We saw China’s numbers last week, which are obviously overreported anyway, so Japan is having problems. So all the major markets are having issues. So the Euro dollar is just a proxy for what’s actually happening, those markets through trade and through the demand for actually US dollar currency spent outside of the US.

SR: Correct.

AM: Yes. Very simplistic terms, yes, that’s exactly right.

TN: Good. Anything else for the viewers here? Like, anything else that you guys want to add on Euro dollars just so they can pay attention to things?

AM: Not really. It’s a very good just simplistic, basic understanding of Euro dollars. I mean, we can get into the whole mechanics of your dollars, but it’s so big it’ll take up an entire episode.

TN: Okay, good. Very good.

SR: Very into the weeds very quickly.

TN: Good.

AM: Yeah.

TN: So if anybody’s watching has questions about Euro dollars, let us know. We’ll get Sam and Albert in on this and help them answer the questions. All right?

Okay. Finally, FOMC, okay. We saw CPI hit to the high side. We saw PPI hit to the high side last week. A lot of talk about 100 basis point hike. Sam had a newsletter out that said could be 100, could be 75. And Albert obviously thinks that there’s going to be a pivot in September. So Sam, do you want to kick this one off?

SR: Yeah, sure. I do want to point out that I said there’s a difference between should and will in the newspaper, and the notion was, should the Fed go 100 now? Will they? Probably, unless the University of Michigan survey comes in light. And it came in light. So you’re 75 basis points now. It’s that simple.

TN: Okay.

SR: Very straightforward. The Fed probably wanted to have flexibility for 100, but when they tied themselves to something so stupid as the University of Michigan survey and it falls I mean…

AM: You know what, Sam, the funny thing is that you say that is, that is exactly what they look at, for making their policy decisions. The only thing they look at.

TN: University Of Michigan.

SR: I know they look at it. The problem was they said it out loud. Like, you don’t say that out loud. That’s the mysterious parts of it. It’s a survey of a very small subsection that is basically never been tied to reality at all across any time frame whatsoever. And like yeah..

TN: It’s like making policy based on Atlanta GDP now. Right. It’s like a lot of these things are proxies of small survey sizes of whatever.

SR: Error terms that interact with each other, yes.

TN: Right. I think a lot of people who watch markets see these indexes, like the University of Michigan index come out and they think that it means something, but it kind of does, but it kind of doesn’t. And so I always recommend people, you have to understand these indexes. You have to understand what these releases mean. You have to understand the methodology. If you’re going to make investment decisions based upon these things, you have to understand what they are.

And as you dig down beneath these things like University of Michigan was put out what 30 years ago initially. The methodology hasn’t changed much since then. So if you imagine the technology and the capabilities 30 years ago and they carried that forward, it’s pretty light. It’s pretty light. A lot of these things are pretty light.

AM: Yeah, but they want it like that though Tony. They don’t want to update their stuff because they don’t want transparency. Seriously.

TN: It’s true.

AM: If you want to massage the numbers, you go with what you know, what you know is flawed and that’s what you go with.

TN: Right.

AM: I had a quick question for Sam. Like I said, I think that they’re going to pivot in September after 75 basis point rate hike now and whatever CPI coming in in August. But I don’t think this is the right decision for them to pivot this early because they’re expecting demand to come down and I see no demand coming down anywhere at the moment. So what happens if they sit there and try to pivot for September, October, November, election time and then January, December comes along and demand is sky high again? What does that do to inflation for 2023?

SR: I think it’s complicated, right? Because it’s kind of the goods versus services problem going into the back of the year. Right. We’ll have plenty of goods, print, crap on store shelves and Target for toys and whatnot because that part of the supply chain is solved.

What’s going to be persistent on the CPI price is going to be shelter, which we all know is six months lagged and is going to be a problem for the rest of the year. And there’s nothing they can do about that because their methodology is, again, stupid. So there’s nothing they can do on the prints from here out.

They’re going to have prints that are sitting at 30 basis points plus just because of shelter and it’s weight in core, that’s going to be a big problem for them on the CPI front. So if they pivot, they’re basically going to have to say that, you know, look at headline, it absolutely plummeted. Gasoline.

TN: Will we get a core rating, x Energy, Food and shelter? Will we start quoting that?

SR: Yeah. That’s what I started looking at for the exact reason of trying to find a pivot. Because eventually that will be the metric that they are forced to go to if they want to pivot. It’ll be SuperCore and guess what you call it supercore.

SuperCore doesn’t look that great right now, but it could look pretty interesting if you begin to have gasoline coming down 40% month over month with what the next one is going to say or 25% month over month. So you’re going to continue to have some volatility on the headline CPI front, which is basically what the Fed is going to have to look at in order to pivot.

TN: Okay, so can I ask what happened with gasoline prices? We still have 94% or whatever utilization. Crude prices haven’t come down that much. So why have we seen a 30% fall in gasoline prices over the past three to four weeks?

SR: Recession fears?

AM: Yeah.

TN: That’s it. Okay.

AM: Yeah, pretty much exactly. It’s just the narrative of recessions coming and trying to kill demand based on that. It’s just like I said, PR games, nothing more.

SR: The one thing that I want to point out that I think is really important to kind of consider for Albert’s point of a pivot is equities tend to move in a six month precursor. And what you’ve seen since July 1 is an absolute rip in home builders and a relative squashing of utilities.

And if people were betting on a longer recession in a longer Fed cycle, XLU would be the buy and homebuilders would be the short. And that has simply not been the case so far.

TN: Very interesting, Sam Rines.

AM: When do you think that Yellen this is for both of you, when do you think that Yellen gives up on the 2% inflation number and says 4% is the goldilocks level?

TN: Sam Rines you first. It’s a great question.

SR: I don’t think they go 4%, but I think they say, and they’ve begun to do this, if you go back over the last six months of speeches that 2 to 2.5 is fine.

AM: Still it’s going to be higher.

SR: They’re creeping it up. Right. I don’t think it’ll be 4%. I think between two and 3% is a reasonable target, blah, blah, blah, given and they’ll go into things like because of the way that we measure CPI, 2 to 3%, blah, blah, blah. There’ll be some.

AM: Fun times.

TN: I think if they did that, Albert, I think it would be after the election.

AM: Oh, of course. They’re not doing anything that’s going to trip up Operation Save the Democratic Senate, you know what I mean? They’re just not going to do that. Right?

TN: Yeah. I think people are already really upset about inflation. Companies are starting to report or expected report numbers down, their earnings down, and so it’s hurting everybody.

AM: Yeah, but everything they’re doing is just going to make inflation worse in 2023. But it’s going to come back with a vengeance because unemployment is still unemployment is going to start ticking up, because…

TN: It’s not an election year. Nobody cares because it’s not an election year.

AM: Stimulus checks will flow again. It’ll be fun.

SR: The one thing, again this goes to Albert’s point on, will a potential September pivot be a mistake? Pepsi’s report this week showed a 1% organic volume growth and 12% pricing. They put 12% pricing and consumers and had volumes creep up 1%. Guess what? If companies can get away with that, they are going to all day long, and they will in fact, make a fortune on the back side of this.

AM: Of course.

SR: Paying attention to that demand destruction has not crept through yet. If you can push that kind of price and not have volumes fall, guess what?

TN: Well, the biggest thing, of course, and this is a no brainer, but prices are not going back to where they were. They are not going back to where they were. This is not a temporary inflation thing. And it may have started that way, but the way we responded to it was completely wrong. And it just baked in these supply side things that flowed all the way through to the retail side.

AM: Wage inflation alone. Wage inflation alone.

TN: Yeah. But I think we’re going to see more on the, say, low, medium side of wages. I think in order to keep up with a 12% price hike in Pepsi, you’re going to have to see more action on the wage side.

SR: Granted, that was mostly free online. That was mostly salty snacks. And it might have had something to do honestly, it might have had something to do with more frequent gasoline stops. You buy more chips. But I wouldn’t read too much into that. Right. I do think that their ability to push price is pretty good.

TN: Great.

SR: Yes. To your point, it’s a step function in pricing and therefore it’s a step function in inflation. Great. Okay, guys, 60 seconds. What do you see for the week ahead? Albert, go.

AM: Commodities. Rebounding commodities. I’m long wheat. I think there’s problematic globally for wheat. I want to see wheat prices start to track back up, to be honest with you. Same thing with oil.

TN: So soft and energy.

AM: Yeah.

TN: Okay. Sam?

SR: Yeah. Watching the inflation trade, honestly, and I think it’s very similar to Albert’s point on oil. And wheat, I’ll be watching the relative sector distribution pretty closely here, looking for those like XLU versus the housing guys versus some of the other trades to see what people actually putting money to work are really thinking, not just by them.

TN: Very good, guys, thank you so much. Thank you so much for taking your Monday afternoon. Thanks, everybody, for watching our late week ahead. And guys, thanks. Have a great week ahead.

AM: Thanks, guys.

Categories
Week Ahead

The Week Ahead – 27 Jun 2022: The “R” Word

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Powell was out saying “I don’t think a recession is inevitable” but also admitted that rate hikes may be one of many factors that push the economy into recession. All of this while bank credit continues to grow, which we saw flatten in 2020 and decline in 2008. What’s happening? Is a recession inevitable at this point?

We talked about the dollar two weeks ago and the strength is still there. Are we pushing higher so commodities feel a bit cheaper to Americans? Is this temporary – mainly so Americans talk about cheaper gasoline over the July 4th holiday weekend? How far and how long do you expect the dollar to go? Why?

Can crude continue to rally into a recession?

Key themes:

  1. The “R” Word
  2. Geopolitical fallout
  3. Crude 💪 or 👎/ Dollar 🚀
  4. What’s ahead for next week?

This is the 23rd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon/

Time Stamps

0:00 Start
1:03 Key themes for the week
1:48 Powell’s recession call
3:48 The catalysts that could whip growth
6:58 Geopolitics in EMs and related to the US
8:35 Is the ECB a risk as well?
11:00 Crude and the Dollar
16:00 Where do you expect the dollar to go?
19:00 The week ahead

Listen on Spotify:

Transcript

TN: Hi, everybody, and welcome to The Week Ahead. I’m Tony Nash. We’re joined as always, by Tracy, Sam, and Albert. Thanks, guys, for joining us. Before we get started, please, like, please subscribe, please comment. We read all of them and try to respond to all of them. So please go ahead and do that while you’re here. Also, we are running a summer promo for CI Futures. This is our market forecast subscription product. You get three free months, so please go to completeintel.com/2022Promo and learn all about it.

So this week there’s a lot going on, a lot politically in markets, other stuff. We’re talking about three main themes this week. First is the R word. Second is geopolitical fallout of the R word. And third is crude and dollar activity. So I ran a poll earlier this week asking what is the most widely held consensus view that people are seeing right now? And that’s on screen, of course. So first is recession. People are seeing recession as a consensus view all over the place. Next is equities lower, followed by crude higher, followed by a stronger dollar. So we’re going to talk about all these things today.

Sam, let’s talk about that recession call. That recession consensus call. Powell is out this week saying, I don’t think a recession is inevitable after being really hawkish last week and driving people kind of to the edge of this. So what’s actually happening right now? We’re seeing credit continue to grow. And I know I showed you earlier this week. Bank credit continues to grow. Is that meaningful? And what are you looking at to know if we’re going into recession or not?

SR: Yeah, I mean, bank credit, is meh. But at the same time, are we going into a recession? Meh. I don’t really think so. It’s a booming summer. You have hotels full, you have bars and restaurants full. You have airlines unable to keep up with demand. I mean, that sounds like a small subset of the economy, but at the same time, that is a massive portion of the summer economy. It’s massive. So do I think we’re imminently in a recession? No. I actually think that’s one of the big narratives that kind of misses the bigger point, right? Do we make goods? No, we don’t make anything. What we do is we have services. That’s it. So we’re a service based economy. If services are booming, you’re not going into a recession. You’re unlikely to see some sort of huge move in unemployment because a recession technically is down on growth, down on employment.

If you don’t have the down on employment, you don’t have a recession. So maybe you have a slowing of growth. That’s somewhat probable. But a recession, no, not in the cards, at least until the back half this year. In the back half of this year, you have a number of catalysts which could really whip things the other way in terms of both growth.

TN: Okay, so what are some of those catalysts. And when you say back, you’re talking about October? November?

SR: Yes, October. November.

TN: My thinking is if we’re going to see it, we’re going to start seeing it maybe late September, October or something like that. But what are some of those catalysts you’re talking about? A couple of them?

SR: The catalysts then are actually to the gross side, which I think is where I’ll take the opposite side of a lot of people. Those catalysts are called a devolving of the Ukraine conflict. Number one, while that doesn’t take off sanctions in the near term, it does take off the incremental oops.

Then you have the beginning of the reopening of China, which is a big boost to growth in Europe, and secondarily, LatAm and the United States. So you put those pieces together and all of a sudden you’re looking at a back half of the year that has more upside catalysts, potentially. And it’s not like you can reset down China and it’s going to be a negative callus. It’s already in the numbers. It’s not like you can have another war in Ukraine that’s already in the numbers. If you begin to have those two come together, guess what? That’s positive. So I would say the rest of this year is shaping up to be oddly positive.

TN: Yes, but no, I’m kidding. Everyone’s so negative right now. Everyone wants to just find the downside. Russia is going to invade finland or something like that, right?

SR: Yeah. Here’s the play. I would say 3600 is a lot less likely than 43.

TN: I like that.

SR: On the S&P.

TS: I think what we’re going to see is kind of like a balance, right? Where we see services really big this summer, especially in the travel industry, hospitality industry, which we will see taper off this fall, which is not unusual. That always tapers off this fall. But we also see airline prices increasing, so people have booked their summer vacations in Q1. Those people are going to fall off. So I think we’ll see a push. We’ll see a pullback in that industry, but we could see growth in industries that Sam is mentioning.

TN: Great.

SR: Just to throw in there, we have to remember that at some point we have to refill supply chains on the drivable stuff, and those supply chains are at bone zero right now. It will require a whole bunch of employment, a whole bunch of production, and will actually have a fairly significant thrust to GDP. Our production has been zero.

TN: That’s great. My poll is wrong, which is awesome. I love that.

SR: I would bet against every single thing that your poll said.

TN: Perfect. I love that. Okay, so if you’re in the US, that holds. But let’s switch, Albert, to kind of say geopolitical risk and some other things. Obviously, Sri Lanka two months ago started falling apart and not started, but really fell apart. We’ve seen Ecuador and other places really start falling apart.

Albert, what are you seeing, geopolitically, and what are you seeing in EMs related to what’s happening in the US?

AM: I don’t really like focusing on EMs at this moment just because they’re not big enough to really cause a problem in the markets. In my opinion. I’m looking squarely at the European Union right now.

It’s suspicious that we come out with US bank tests and then we come out with EU bank tests and then literally a day later, the Germans come out and say, we could have a Lehman moment across the economy just because of these gas shortages that are happening.

TN: By the way, your tweet about the German Lehman moment up.

AM: Yeah. And this goes back to just the topic we were just talking about, recession. You really need some kind of catalyst or something to break. And the only thing that I could even contemplate of breaking and causing a “recession” would be the European Union going through another financial crisis. You have a contagion that probably leaks over to the United States financial markets and the Putin price hikes become a thing again, justifies any kind of QE that the Federal want to do, probably in Q four this year. Geopolitically, the EU is my target right now to look at.

TN: Okay. It’s energy supply chains. Is the ECB a risk as well? Is there a risk that they tighten too fast or too much or anything?

AM: How are they going to have to I mean, the inflation over there is climbing just as fast as the United States and it’s causing problems across the board.

SR: I would double down on that and say that Qatar, right after we had the train go down in Corpus Christi, came out and said, yeah, we’ll send gas to the European Union. Just sign a 20 year deal.

TN: Right. And they did. Right?

SR: European Union is not going to do that. I mean, nobody in Europe is going to do that. It was kind of like, we got your back, but give us a long term agreement and we’ll do it.

The irony of it is that you have a crisis going on in Europe. There was a dragon moment of do whatever right, anything.

TN: Sorry, Tracy. What’s that?

TS: Self imposed crisis? Their energy crisis is literally self imposed.

TN: Yeah. Okay.

AM: There’s no question that is self imposed. The European Union’s leadership has been atrocious. I mean, they’ve had the worst energy policy you could possibly think of that hampers their economic engine for the last two, three decades. I mean, you can just throw a dart at the board and pick whatever policy they’ve come up with. It has been an absolute disaster.

TN: Why is that? Why are they making such stupid well.

AM: They’ve made such a big swing to the left, the leftist voters, and they’re just climate Nazis. They won’t even discuss nuclear.

SR: We’re literally talking.

AM: They won’t even discuss nuclear power, which is absurd. They’re like, what if something goes bad like Fukushima? Oh, yeah. What if a dam breaks? Or what if a coal plant blows up? Or, God forbid, what if 10,000 Germans freeze to death because you don’t have gas stored because you didn’t have any proper management? I mean, they’re really bad at managing what’s going on without the United States holding their hand and directing what to do.

TN: Well said. Fantastic. Okay, so since we focus a little bit on energy there, Tracy, let’s swing to talk about crude and the dollar. So, our friend Josh Young posted something about kind of energy could potentially outperform this sort of stuff and really kind of looking back to the 1970s.

So it really looked like we were heading there until this week, and then we saw things really come down this week, in terms of, say, WTI, natural gas, other things. What’s going on there?

TS: I think it depends on what you’re looking at. If you were looking at frontline crude oil price, that’s one thing where a lot of speculators are involved in. If you’re looking at the spreads, it’s you’re looking at the crack spreads that are still exploding. If you’re looking at calendar spreads that are up again this week, that pretty much tells you that we put a floor under front month crude price, regardless of who is involved in what specs are involved in the industry right now. Because the spreads are really what I consider will tell you really where things are going. Right.

So we kind of have a floor night. Yes, oil had a bad week. We saw a lot of selling on downtime in markets and things of that nature. I don’t think that doesn’t change the overall fundamentals of the market. Right? I mean, we’re still fundamentally structurally undersupplied.

TN: So I’m going to ask a really dumb question here. I’m sorry if I may hear it.

SR: But we know.

TN: So are we seeing a short term sell off? Is it politically driven so that when Americans get together on July 4, they can say, gosh, gas is really down this week, and then you have a three day weekend where people are talking about that and then it rocket ships up after the fourth?

TS: Well, I think it’s a combination of most things. I think this week recession scares, we’re really the big driver for that market because everybody’s thinking we’re going to have a recession.

SR: That and the potential of having an export ban.

TS: Right.

TN: Recession, export ban, and July 4th.

TS: An export ban. That said, and I kind of tweeted this out, having an export ban, especially a fuel export ban, would make things obviously worse.

First of all, it’ll raise prices for the EU prices abroad, which after all of this with Ukraine, do we really want to hurt the EU that much? Because we supply them with one to 1.3, 1.5 million barrels per day of diesel, which they are having a huge problem. So really, are we going to abandon the you at this point? Also…

TN: My Texas friends would love to have more diesel to power their ram trucks.

TS: But the thing is that what happens is the fuel flows get so disrupted is that we’re going to have to see refineries cut run significantly in the US. Which is going to ultimately raise prices. We may see deepen prices initially, but you’re going to see higher prices ultimately.

SR: I’ll push back on that because you have a lot of storage, but you didn’t have a lot of storage before. So you don’t have to cut back on runs. You can put into storage at a pretty profitable rate because of forward selling basically all of your inventory right now. I would push back on you have to cut runs at this point.

TS: And I’m going to push back on that. We have to look at the east coast. Right. And so that’s looking at gasoline runs to make a barrel. Diesel requires a lot more oil than it does say to make gasoline. And so if we see a diesel problem, we’re going to have to cut back on this runs. I think it depends on what coast you’re looking at and what area you’re looking at.

TN: All we care about is Texas and Florida. Right.

SR: You have a lot of places to store gasoline. I mean, it’s not like we have an oversupply gasoline at the moment.

TN: It’s true. Our bob’s down this week too, right. So it’s tight.

AM: It’s interesting, Tony, it’s funny. One thing that you said July 4 and one thing that Tracy said, thinly traded is that hilariously every time we need a rally in the market during the thinly traded holiday hours, crude goes down, dollar goes down and the market goes up almost by magic on the thinly traded holiday hours. Something you should watch.

SR: University of Michigan. Come on.

TN: It’s a big driver. University of Michigan. Okay, so let’s move on. You mentioned the dollar, Albert, and so if we look at the dollar, obviously it’s near highs for the decade and that’s great if you’re in the US buying dollar denominated commodities. But elsewhere in the world it’s really hard. Right. So where do you expect the dollar to go? I can’t remember what you’ve said your expected target is. Possibly? 110. Possibly 120. So if it hits 120, Japanese Yen is at what, like 160? 170? something like that?

AM: 163,164? My calculation… This is something Yellen has done in 2012. It’s nothing new. She’s driven the dollar up. She’s out into Europe talking that she’s going to take the dollar up to 110. So this is nothing new. Everyone knows what’s going to happen. Everyone’s watching it. So we’re at 104 something today, just sitting there and hasn’t really done anything. Last day or so. Another 5% up is not a big deal for the dollar.

TN: So you see Yellen driving a stronger dollar. Sam, what do you see?

SR: I would say that I hate taking the other side. I’m going to take the other side.

TN: Great.

SR: I’m going to say that Yellen’s ability to control the dollar is de minimis at this point, mostly because the Fed is tapped out. But you already had a 4% terminal rate for Fed funds priced in two weeks ago. Today you’re sitting at basically 3.65%. So you’ve got the peak, in my opinion, priced in for the FOMC hiking cycle and now you’re on the other side of that. So I would say JPY, you’re probably looking at above 10.

TN: Oh, wow, okay, great.

SR: And you’re probably looking at a Euro at 108. 109. And it doesn’t really matter if they go into a recession because they’re… Right. The US is going to back off in incremental steps the long end of the hiking cycle and…

TN: Perfect.

SR: The dollar prices is long end of the hiking cycle and Yellen can do a lot of things. What she can’t do is increase the internal rate.

TN: That’s great.

AM: The thing is, the treasury sets USD policy, so she can certainly drive it up. I don’t know how much ammo she has left because it’s gone up. But we’ll see.

TN: Okay, perfect. That’s great. So we’ve covered almost everything in that survey and almost everything was wrong.

SR: I told you everything was I would take the other side of every single one of those.

TN: Perfect. Okay, let’s talk about the week ahead. We have month end and quarter end coming next week, right? So what does that mean for the week ahead? Everyone else.

TS: Can I go?

TN: Yes, you go Tracy.

TS: I don’t know. What I’m looking at for the week ahead is the last week of the month. Of the month and the quarter. Right. So we have roughly about $100 billion of US equities that need to be purchased over the next five trading sessions. We have a rebalance in the RTY. So we should see a lot of inflows, roughly 5.98 point billion of inflows into the US equity markets just because of the rebalance factor.

We should probably see outflows in the bond market and then that’s walking into a backdrop of negative dealer gamma. So we have the potential of a shot higher in the market.

TN: Sam? Sam?

SR: Yeah. I would say everything Tracy said in terms of the risk seems to be to the upside. I would also say it looks pretty scary when you walk into the end of the month in terms of the way the dollar chart looks right now.

You walk into the end of the month with a dollar chart looking like it’s ready, looking ready to gap down, and you have oil where it’s at. You could have a very interesting quarter end in terms of risk assets. You have a weaker dollar. You have a big buy on SPY, RTX, et cetera, or SPX, not SPY. You begin to put those pieces together and you begin to have a pretty risk on into the quarter that could be very interesting very quickly.

You get any positive headlines out of China in terms of lockdowns, you get any positive headlines out of Ukraine in terms of ceasefires, whatever BS they want to leak. Then all of a sudden you’re more upside. So I would say skewed to the upside through the beginning of July.

TN: Sam, you’re optimistic today. That’s amazing.

SR: I know. And contrarian.

TN: Optimistic and contrarian. I love it. Okay.

AM: Yeah, I mean, I agree mostly with Sam. I think just because the market is so thinly traded, the dollar should be chopping around probably on the downside a little bit, just for the week up until July 4 weekend, so long as the Europeans don’t come out and start saying any more Lehman things, Lehman crash things and all of a sudden dollar shoots up just because of fear factor out of the European side. But I don’t think that’s going to materialize over the next week, probably next couple of weeks.

After that, I think 30 days, we’re starting to look at possibly something that happened in the European Union. But for the week ahead.

TN: Fantastic. So the past three days carries into the next week. Fantastic.

AM: Yeah.

TN: Okay, guys, thank you very much. Thanks for your time. Thanks for all the stuff you passed along, and have a great week ahead. Thank you.

AM: All right, thanks.

TS, SR: Thank you.

Categories
Week Ahead

The Week Ahead – 13 Jun 2022: CPI & “Peak Inflation”

We had a chop last week. And towards the end of the week, we had the CPI print, which put a damper on markets. In this episode, we’ll talk about CPI and peak inflation, which people have been talking about for months, but we haven’t quite hit it yet.

Of course, we’re going to talk about the hot dollar, and we’re going to talk about fuel inflation and things like refining capacity and even a nat gas plant explosion that happened here in Texas last week.

And then finally, what is going on in the week ahead?

Key themes:

  1. CPI & “Peak Inflation” – Core CPE, hand off from goods to services, Fed policy and markets.
  2. Hot dollar – DXY has only been higher in Feb 1985 and Jan 2002. Fed, Dollar, Yellen, etc.
  3. Fuel Inflation – Refining capacity, natgas explosion.

This is the 22nd 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 experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl

Listen to the podcast version on Spotify here:


Transcript

TN: Hi everybody. And welcome to The Week Ahead. My name is Tony Nash. We are with Tracy and Sam today. Albert is in an undisclosed location, so he won’t be joining. But we’ll have a good show anyway. So before we get started, please like and subscribe. And as importantly, please comment. We really appreciate those. We respond to all of them. And it’s great to have the engagement.

This week. We had chop, as Sam talked about. And towards the end of the week, we had the CPI print, which really put a damper on markets. So we’re going to talk about a few things. First, CPI and peak inflation, which people have been talking about for months, but we haven’t quite hit it yet. Of course, we’re going to talk about the hot dollar, and we’re going to talk about fuel inflation and things like refining capacity and even a natgas plant explosion that happened here in Texas last week. And then finally, what is going on in the week ahead?

So first, CPE was all of the focus for the last half of the week. Sam put out an amazing note, a couple of amazing notes this week talking about inflation and what the Fed will do. So we’re looking at a chart right now on core CPI. And Sam, can you walk us through why the core matters and what’s happening there?

SR: Sure. The core matters because it strips out food and energy, and that’s what the Fed likes to look at. Right. That’s what the market looks at for underlying inflation dynamics generally. It’s kind of a quick and easy number. Luckily, it’s accelerated by some marginal amount on a month over month, year over year basis. Cool. Nobody should really care about that, because when you break apart the actual numbers, the entirety of the deceleration and core inflation was in the good side. We know that goods are coming down, particularly on a year over year basis. They want skyrocket and to the right, that’s just not sustainable.

TN: Is that because of the inventories that were accumulated at retailers and other folks.

SR: That’s part of it. Used cars as well. There’s airline fares are in there, too. So that’s going to be somewhat of a problem as we move forward.

The interesting thing to me is when you actually dig into it. Yeah. Core goods accelerated, but core services, which are far stickier and far more difficult for the Fed to kind of get a hold of accelerated.

TN: Right. So let’s put that up now and then. Yeah. So we’ve got your chart up now about the commodities, less food and energy and then services, less energy. So can you help us understand what that means?

SR: Yeah, sure. That’s just call it the core CPI broken into services and goods. Right. So it strips out food and energy from both of them. And then you kind of get a more of a feel of what’s really happening in the underlying economy. And there was always this big debate among economists about when this hand off from goods to services was going to happen and how that was going to affect the economy. And unfortunately for the Fed and for market participants, that hand off is happening.

You can see it in the data and you can see it in the inflation data in particular. It’s happening. The problem is that you don’t have goods coming down fast enough and you have services moving up way too quickly. And those two components are unlikely to give the Fed any sort of comfort in the next six to nine months.

TN: Okay. With services moving up, does that mean that wages, say on the lower end around things like hospitality and restaurants, does it mean that those wages are going up?

SR: Not directly. There’s some implied probability that you’re beginning to see some movement there, but you’ve seen quite a bit of movement at a leisure and hospitality in particular in terms of the wage gains there.

Unfortunately, the wage gains can be pretty large in magnitude, a 5 to 9 percent type acceleration year over year in leisure and hospitality wages. But it doesn’t really move the needle in terms of overall wage gains because those tend to be the lower end of the income scale.

TN: Okay. So I saw some data this week looking at credit capacity, and it looks like US consumers put record amounts on credit cards in April and May. Does that make you nervous? And I’m not talking about the high end of consumers. I’m talking about the middle and lower end of consumers because there’s a lot more of them. Right. Does that make you nervous?

SR: Yes. And it goes to the conversation that Tracy and I are going to have in a little bit here. A lot of it is due to gasoline. Right. You don’t go to a pump and typically pay with cash. I mean, you did that 10, 15, 20 years ago. You typically go to the pump and pay with a credit card.

So when you begin to have prices like this, move this quickly on the pump side of things and grocery side of things, you tend to have a move up in credit card usage that’s translating to debt because you simply don’t have wages keeping up. Yes, wages are ticking higher, but they’re not keeping up. So the lower end of the consumption, called the lower two quartiles, they are struggling with this, and that is going directly on the credit cards.

TN: I’ve talked to a few people this week about how wages in developed economies work. And if we were in an emerging economy, middle income economy, there would be more flexibility on wages because wages rise faster generally in those economies. But in, say, the US, wages really don’t rise fast.

So on some level, it’s a bit hard for people to understand that wages in the US are generally inflexible, especially at the lower and middle ends. And so it is kind of zero sum. Right. So as gas and food prices rise, that takes away consumption from other areas, right?

SR: It does. And the other thing that it leads to is more of a trend towards unionization and other forms of labor activism. And you’re going to continue to see labor activism if wages continue to trail this far behind inflation. That is an underlying trend that I think is going to be somewhat important for understanding how markets react because labor was fairly cheap, give or take for US businesses in particular.

If you begin to have more unionization, if you begin to have more of an activist labor movement, that is going to be a thing to corporate earnings, not just for the next year. That’s going to be a thing for corporate earnings going forward.

TN: Okay. So let’s talk about corporate earnings. As we look at, say, Q2 corporate earnings, it doesn’t look good, right? I mean, generally the expectation is that their margin compression, all this other stuff really starts to sting in Q2 Is that right?

TS: It depends on the industry as well, because what we’re seeing and what I’m hearing as far as obviously oil companies are going to do extremely well so are refiners right now. But we are also seeing the hospitality industry do extremely well as far as travel is concerned, because we’re seeing a lot of pent up demand where people are not spending retail spending, but they’re still spending for trips.

If we look at US air bookings, for example, there are 93% of 2019 levels for Europe. We’re at 95% for South America. We’re at over what we were in 2019 to the Caribbean. And we’re also seeing soaring hotel bookings right now, even with cost pushing higher and ticket prices higher. So I think that Q2 is going to be very good actually, for, say, oil and gas and the hotel industry. But then as we move into Q3, I think we’re going to see a big hangover in that area in the fall.

SR: And to Tracy’s point, hotel bookings are above 2019 levels and the average price of those rooms through the roof. So you multiply those two together to get your average room rate and Occupancy, those are some big numbers that we’re going to see over the summer. To Tracy’s point, there’s going to be a lot of people that blow it out of the water in terms of earnings, and there’s going to be a lot of people that surprise the downside.

If you were a work from home darling, that was expecting work from home and those dynamics to be permanent and you’re in trouble. Right. That’s the target problem. People aren’t buying goods. They’re going places. And the bifurcation there is going to become stark as we move through the second quarter and probably into the third quarter.

TN: Really interesting. Okay. And then I guess the question that is probably overanalyzed, but people are waiting for is what does this mean for the Fed? They’re still on target for 50 in June, 50 in July and 50 in September. Is that your assessment? And maybe 25 in November? I think.

SR: 50 in November, 50 in December.

TN: 50 in November, 50 in December? Wow. So we’re going back to the 90s.

SR: Basically fully priced in the market.

TN: Is there any chance that they will accelerate beyond 50? Like, would they front load any of that just to shock the system?

SR: No, because I don’t think they want to shock the system. The Fed already has a credibility problem. If you move from 50 to 75, you create more of a credibility problem because you forward guided 50-50, and now all of a sudden you’re telling the market you’re doing 75, the market is just going to stop believing and they’re going to push the Fed and they’re just going to push back and it’s going to be a huge problem.

So I don’t think they’re surprised on that front. They may tweak the balance sheet. That’s a little bit of an easier move to make. Right. You can speed up the MBS role. You can pick up a little bit of the front end roll on US Treasuries, you can tighten that way and have it not be as much of a shock to the system.

TN: Okay.

SR: But have it be pretty interesting on the tightening front.

TN: Okay. But let’s dig into that, though. I’m sorry to spend too much time on our first topic, but if they accelerate the MBS stuff, housing is already kind of at a standstill over a two month period. Two to three month period.

A lot of people have had wealth effects because of the rapidly inflated house prices. So if they accelerate MBS, that perception of housing wealth collapses even more. Right. And so does that have relatively like a multiplier effect on the deceleration of consumption?

SR: It does. But that transmission is pretty slow generally, and you had a significant amount of call it front running against the housing market to take out equity. So I would push back a little bit on a collapse in transactions is going to have a big effect. What you really need to see is pricing actually coming down because it’s about pricing.

TN: Pricing coming down.

SR: Yeah. And pricing. The data is so delayed that it’s almost worthless.

TN: Nominal housing prices.

SR: Yes. But you’re still seeing housing prices hold up pretty well for most of the country. So until you really begin to see a crack there, I don’t think the wealth effect really takes hold from houses.

But you’re probably talking about a September, October type time frame for home prices to be weighing on people’s minds.

TN: Okay. It feels like over the past few months things have changed pretty dramatically. Expectations and these sorts of things. I know you’ve been talking about this for months, but I think the world is just catching up to it. And two months ago everyone said, oh, it’s all priced in. And then we get a day like Friday where obviously it’s not priced.

SR: I’ll stop after this but the interesting part about Friday was it wasn’t just call it the November December meetings getting priced higher for Fed rate hikes. It was March and May of next year that also saw pretty significant volumes and saw the pricing of the Fed movement get pushed pretty hard. So you’re seeing movement across a very long time horizon.

You’re talking twelve months out is kind of what people are pushing on now. So that really creates a different dynamic. But it’s a different dynamic to have eight or ten basis points priced in in September or November. It’s a bigger deal to have quite a bit of tightening priced in for December and March. Those are some out months those begin to really move markets on the margin.

TN: All of this in a midterm year. All of this in the midterm election year.

SR: It’s really painful all around, right? It’s painful all around. But I think the Fed kind of plays second fiddle to Tracy’s point on energy and how that flows through the consumer and the consumer psyche because that is critical at this point.

TN: Okay. So speaking of second fiddle let’s move on to the hot dollar and Fed playing second fiddle to Janet Yellen as Tracy has said before. We’re looking. At DXY that is the third highest it’s been ever it was very high in the mid eighty s it was very high in I think February 2002.

We’ve got that chart up now and now it’s hitting rates that it hasn’t hit for years so we have the Fed doing certain things to tame but we also have things like crude and other commodities that are rising in dollars. Terms. And it looks like the dollar is being pushed up to fend off some of that. So, Tracy, can you talk us a little bit through your view of kind of Yellen and her dollar bias and then impacts that you expect to see.

TS: She said since the beginning she wanted a strong dollar. Right. The problem is that right now this is a disastrous recipe for emerging markets right now with high energy prices and high dollar. And it’s no wonder we’re seeing huge outflows in emerging markets right now as far as investments are concerned. And so really that’s who’s going to feel the pain the most that could throw us to a global recession, for sure.

TN: Right.

SR: To that point, Europe is in a lot of trouble, and the Dixie is basically a measurement of euros and yen. That’s right. If you want to talk about a central bank that’s lost credibility, there’s none better than the ECB and Madame Lagarde and that wonderfully stupid speech that she gave this week, it was spectacularly bad.

TN: It’s what happens when you have a lawyer running monetary policy.

SR: They’re raising rates, and we have them, too. Anyway, moving on. So there is an interesting kind of dynamic there where you basically had the ECB for the first time in forever, say we’re going to raise rates like they just told us straight up they were going to do it and they got the wrong reaction across markets.

The currency didn’t go up. The currency didn’t strip. The currency looked pretty ugly that day. And then you’ve got yen sitting at 135 because they’re still doing yield curve control and it doesn’t look like they’re ever going to end it. So you have the Fed going in the exact opposite direction or much quicker than the rest of the world. In the DM world in particular.

That’s a recipe for a stronger dollar. And until you either get the ECB to smarten up or you get YCC brackets moved, yield curve control brackets moved by the bank of Japan, there’s no stopping the Dixie from moving higher. Right. It’s a two currency, two currencies basis.

TN: Remember Abenomics, when they were fighting to get 2% inflation in Japan.

SR: Yes.

TS: They’re still fighting. That’s why you can’t see inflation, it’s incredible.

TN: Yeah. Tracy, if we continue to see the dollar strengthen, do you think that has much impact on, say, crude prices and fuel prices?

TS: I know that everybody likes to think it’s a one to one correlation. Right. We think stronger dollar commodities. But it’s really not a one to one correlation, especially when you’re talking when you have actual supply demand issues. Right. Like we have a supply deficit across. So a stronger dollar is not going to hurt oil prices when you have real supply demand issues. Whereas if you look at something more like gold, the stronger dollar is not necessarily great for gold right now.

TN: Yeah. So I love it when people like talking about correlations of oil and dollar because many of them don’t realize that actually the positive correlation between oil and dollar is more frequent than many people want to admit, and it’s more persistent than many people want to admit.

So the kind of go to there’s a negative .9% correlation between oil and the dollar. It’s just not true. It’s a fiction.

SR: And the dynamic changed when the US became a major producer of oil.

TN: Right.

SR: That completely changed the dynamic. So if you’re not paying attention to the structural breaking system where the US became the world’s largest producer of hydrocarbons, you don’t know what you’re doing.

TN: Right. So who hurts the most? I think we mentioned EMs, but kind of who hurts the most, aside from Sri Lanka, which we already know? Is it like North Africa, those types of places? Is it Southeast Asia? Just off the top of your head, we didn’t rehearse this, so I’m just curious, what do you think hurts the most?

TS: I think you’re going to see a lot of problems in Africa for certain only because a lot of the OPEC producers there are struggling themselves already. Right. All of those people are the ones that are contributing majorly to the quota misses right now. So I think you’re going to see real pain there over Asia, I would say.

TN: Okay, Sam?

SR: Yeah, I would agree with Tracy. North Africa, East Africa, those look very vulnerable, particularly when you combine food costs with gasoline costs and oil. It’s kind of a toxic mix because if you have oil at 125 Brent, there’s an incentive that you want to pump and the people expect you to pump and buy them food. And if you can’t pump and buy food, then you’re basically an illegitimate government in North Africa.

TN: Right. Which is just trembling all around. Okay, let’s move on to energy prices and gasoline and petrol prices. Of course, we just hit this week again, I think three or four times this week we hit record prices for gasoline. And of course, that’s happening all around the world.

I think in the UK it’s £2 a liter or something like that. In the US, it broke $5 a gallon on average. I think 5.01 this morning, Patrick Dejan was saying that. Tracy, can you walk us through? We’ve mentioned this a couple of weeks ago, but in a bit more detail about what’s happening with refining capacity in the US and why this is such a big deal?

TS: Right. The last largest Greenfield project that we had was 1977. We’ve had a lot of brownfield projects, meaning adding to capacity to already existing refining facilities. However, right now we sort of peaked in 2018 and 19 as far as refining capacity is. And now we’re starting to come down again because we’re starting to see more closures, we’re seeing more unplanned outages.

These facilities are very old. So the operable capacity has been on the decline for the last few years. And if you look at Europe and Europe, it’s even worse. Right. So, I mean, Europe already has a problem, too, and that’s why they buy most of their diesel from Russia, which is going to affect them, because the diesel that they buy from them is seaborne. Right. All of it, which it falls under sanctions.

TN: And they can’t get insurance for those vessels.

TS: Yeah. And so they’re going to have a lot of problem. just to put a little tangible example, there’s a news here in Houston this week that I think it’s a Lyondell refinery that’s being closed, and that refinery is over 100 years old. Yes, our refineries are old. They’re aging facilities. They need a lot of maintenance. And we just really haven’t built out enough capacity for the amount that is coming offline over the last few years.

TN: So, Tracy, I know this is a little bit of a request, but we’re sending $40 billion to countries around the world to do different things. Would it not make sense to have some sort of government incentive for midstream companies to actually build refineries?

TS: Well, yeah, absolutely. I mean, infrastructure projects as far as the oil industry is concerned. If you look at the government’s complaining about oil companies are making so much money. However, where were they when they were in the red and racking up the debt? They were nowhere. How many times do we bail out the Airlines and the auto industry? The oil industry never got any help.

TN: Because they’re bad, tracy, oil companies are bad. They’re all my neighbors. But you would think they’re all bad, evil people.

TS: This is causing… Where our refinery operable at capacity? We’re at 94.2% refining right now, which is off the charts. Good. That means good news for your refining stocks if you own any. But we’re pushing it. We’re using it as much as we’re producing. Right.

TN: Let’s say somehow people came to their senses and said, look, we need to incentivize new refineries. How much just off the top of your head? Ten, $20 billion. Is it $100 billion? Just to get things started? How much do you think that would cost? Since we’re throwing money around.

TS: Since we’re throwing money around, I think if you could throw 10 billion, 20 billion at it, you could get some good projects going or tax incentives or something like that for current refineries to be able to build out or upgrade things of that nature. There’s a lot of things the government could do to help boost refining capacity.

TN: Okay. So while we’re throwing money around, would it make sense to reconfigure some of those refineries to refine light sweet Texas crude instead of, say, I don’t know, Venezuelan crude?

SR: Yes, it’s pretty simple. We built the right type of refining for a certain point, but we didn’t build the right type of refining for now. Yes, we would need to upgrade all of them, and it’s going to be a pretty significant issue.

The other really important thing that I think gets overlooked a lot is that even if you begin these projects now. It’s not a solution for several more years. By several more years, three to four at a minimum, kind of where you would expect these to begin to come online.

And the question is, what does the oil market look like at that point? What kind of mix do we have? So you have to make some fairly large assumptions about what your input mix is going to be down the road. So, yeah, I do think that it would be worthwhile to at least upgrade the current refineries, but I think that’s kind of a pipe dream.

TN: Okay. So while we’re throwing $40 billion overseas, we could take half of that and build new refineries and reconfigure refineries with American crude oil. Am I misunderstanding this?

SR: No.

TN: I just want to hammer the point home again. Okay, great. Thank you, guys. We had a really choppy week. We had a lot of kind of bad news come out. What are we looking forward to next week? Is it kind of more the same? Are we still in a really rough place and the Fed meetings this week, some announcements. I don’t think it’s going to surprise anybody, but what else are you looking for this week?

TS: Pretty much the same. I think we’re kind of stuck in this market low for a while now. So I figure you still see chop, you probably see oil sideways to up again. I expect that trend to pretty much continue into the summer until we really start to see some demand destruction, which we’re just not seeing enough yet.

So I think headed into fall, we have a better chance of seeing oil prices come down because again, I think that we’re sort of going to have a travel hangover and everybody’s going to get home and they spend a bunch of money on their credit cards and the economy is not that great. So that’s what I’m looking at. And again, for the week ahead, I think more of the same.

TN: Sam?

SR: Yeah, you have a million meetings next week of central banks. I think that’s really what the markets are going to key off of. And it really depends who says the most dumb stuff. And it’s going to be a competition because you have Powell and then you have the Bank of Japan. So we’ll see if maybe you get a little bit of a bracket move on yield curve control that would make things a little more spicy across markets. And we’ll see what Powell is capable of messing up when it comes to forward guidance during the press conference.

So I would say it’s more the same, but there’s a likelihood that markets are about as hawkish as they can be going into the meeting and that Powell doesn’t want to push markets more. So there may be a little bit of a rally off Powell just not being an uberhawk, and that might be positive, but I would say you’re in for some serious chop, particularly across the rates markets, currency markets.

And when it comes to equity markets, I think it’s going to be exactly what Tracy and I talked about earlier. It’s going to be the story of travel over retail.

TN: Okay? So next week, let’s talk about who said the stupidest central bank statement. Okay?

SR: Perfect.

TN: You got it.

SR: Does that work?

TN: Very good. Okay. Thanks, guys. Thank you very much. Have a great weekend. And have a great weekend.

SR: You, too. Tony.

Categories
Week Ahead

The Week Ahead – 28 Mar 2022

‼️SPECIAL OFFER FOR THE WEEK AHEAD VIEWERS: $50/MO ON CI FUTURES SUBSCRIPTION. ‼️

We’ve seen so much about oil for rubles, gas for bitcoin, etc this week. Does it represent a fundamental shift for energy markets? And is the dollar dead? The yen fell pretty hard versus the dollar this week. Why is that happening, especially if the dollar is dead?  Bonds spike pretty hard this week, especially the 5-year. What’s going on there and what does it mean?

Key themes from last week:

  1. Oil for rubles (death of the Dollar?)
  2. Rapidly depreciating JPY
  3. Hawkish Fed and the soaring 5-year


Key themes for The Week Ahead:

  1. New stimulus coming to help pay for energy. Inflationary?
  2. How hawkish can the Fed go?
  3. What’s ahead for equity markets?


This is the 12th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week. 

Listen on Spotify:

https://open.spotify.com/episode/0twcBeGGELUrzdyMS0o37U?si=4dab69b94c3e4ec9


Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon


Time Stamps

0:00 Start
0:34 CI Futures
1:22 Key themes this week
1:48 Oil for rubles (death of the Dollar?)
3:15 Acceptance of cryptocurrency?
5:34 Petrodollar Petroyuan?
7:32 Rapidly depreciating JPY
10:12 Hawkish Fed and the soaring 5-year
11:58 Housing is done?
13:10 Stimulus for energy
15:53 How hawkish can the Fed go?
17:34 What’s ahead for equity markets?

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m here with Albert Marko, Sam Rines, and Tracy Shuchart. Before we get started, please, if you can like and subscribe to our YouTube channel, we would really appreciate it.

Also, before we get started, I want to talk a little bit about Complete Intelligence. Complete Intelligence, automates budgeting processes and improves forecasting results for companies globally. CI Futures is our market data and forecast platform. CI Futures forecasts approximately 900 assets across commodities, currencies and equity indices, and a couple of thousand economic variables for the top 50 economies. CI Futures tracks forecast error for accountable performance. Users can see exactly how CI Futures have performed historically with one and three month forward intervals. We’re now offering a special promotion of CI Futures for $50 a month. You can find out more at completeintel.com/promo.

Okay, this week we had a couple of key themes. The first is oil for rubles and somewhat cynically, the death of the dollar. Next is the rapidly depreciating Japanese yen, which is somewhat related to the first. But it’s a big, big story, at least in Asia. We also have the hawkish Fed and the soaring five-year bond. So let’s just jump right into it. Tracy, we’ve seen so much about oil for rubles and Bitcoin and other things over the past week. Can you walk us through it? And is this a fundamental shift in energy markets? Is it desperation on Russia’s behalf? Is the dollar dead? Can you just walk us through those?

TS: All right, so no, the dollar is not dead. First, what people have to realize is that there’s a difference. Oil is still priced in USD. It doesn’t matter the currency that you choose to trade in because you see, in markets, local markets trade gasoline in all currencies. Different partners have traded oil in different currencies. But what it comes down to is it doesn’t matter because oil is still priced in dollars. And even if you trade it in, say, the ruble or the yuan, those are all pegged to the dollar. Right. And so you have to take dollar pricing, transfer it to that currency. And so it really doesn’t matter.

And the currency is used to price oil needs three main factors, liquidity, relative stability, and global acceptability. And right now, USD is the only one that possesses all three characteristics.

TN: Okay, so two different questions here. One is on the acceptance of cryptocurrency. Okay. I think they specifically said Bitcoin. Is that real? Is that happening? And second, if that is happening and maybe, Albert, you can comment on this a little bit, too. Is that simply a way to get the PLA in China to spend their cryptocurrency to fuel their army for cheap? Is that possibly what’s happening there?

TS: It could be. Russia came out and said, we’ll accept Bitcoin from friendly countries. Mostly, they were referring to Hungary and to China. Right. And I don’t think that is a replacement for USD no matter what because not every country except for perhaps China really accepts or El Salvador really accepts Bitcoin or would actually trade in Bitcoin. Right.

TN: In Venezuela, by the way. I think. Right. So on a sovereign basis. Okay. So Sam and Albert, do you guys have anything on there in terms of Bitcoin traded for energy? Do you have any observations there?

AM: No, this is a little bit of… This is even a serious conversation they’re having? With El Salvador going to be like the global hub for Russian oil now because they can use Bitcoin?

TN: That would be really interesting.

AM: But this is just silly talk. Every time there’s some kind of problem geopolitically and they start talking about gold for oil or wine or whatever you want to throw out, they start talking about the US dollar dying and whatnot.

I mean, like Tracy, I don’t want to reiterate what Tracy said, but her three points were correct. On top of that, we’re the only global superpower.

TN: Okay.

AM: That’s it.

SR: Yeah. My two cent is whatever on Bitcoin for a while.

TN: Right.

SR: Cool.

TN: I think that all makes sense now since we’re here because we’re already here because we all hear about the death of the petrodollar and the rise of the petroyuan and all this stuff. So can we go there a little bit? Does this mean that the petrodollar is dead? I know that what you said earlier is all oil is priced in dollars. So that would seem to be at odds with the death of the petrodollar.

AM: Well, Tony, in my perspective, the petrodollar is a relic of the 1970s. Right. Okay. Today it’s the Euro dollar. It’s not the petrodollar that makes the American economy run like God on Earth at the moment. It’s the Euro dollar. Forget about Petro dollar. Right. Because it’s not simply just oil that’s priced in it in dollars. It’s every single piece of commodity globally that’s priced in dollars.

TN: And Albert, just for viewers who may not understand what a Euro dollar is, can you quickly help them understand what a Euro dollar is?

AM: They’re just dollars deposited in overseas banks outside the United States system. That’s all it is.

TN: Okay with that. Very good.

SR: And the global economy runs on them. Full stop.

AM: It’s the blood of the global economy.

TN: So the death of the petrodollar, rise of the petroyuan and all that stuff, we can kind of brush that aside. Is that fair?

TS: Yeah. I mean, even if you look at say, you know, China started their own Yuan contract rights, oil contract and Yuan futures contract. But that still pegged to the price of the Dubai contracts. Right. That are priced in dollars.

TN: Let’s be clear, the CNY and crude are both relative to dollars. Right?

TS: Right.

TN: You have two things that are relative to dollars trying to circumvent dollars to buy that thing. The whole thing is silly.

TS: Exactly.

AM: Yeah, of course. Because Tony, the thing is, if China decides to sell all their dollars and all their trade or whatever, everything they’ve got, they risk hyperinflation. What happens to the Renminbi and then what happens in the world? Contracts trying to get priced right.

TN: Exactly. It’s a good point. Okay. This is a great discussion.

Now, Albert, while we’re on currencies, The Japanese yuan fell pretty hard versus the dollar this week. Do you mind talking through that a little bit and helping us understand what’s going on there?

AM: Yeah, I got a real simple explanation. The Federal Reserve most likely green light in Japan To devalue their yen to be able to show up the manufacturing sector in case China decides to get into a bigger global geopolitical spat with the United States. Simple as that.

TN: Great. Okay. So that’s good. This is really good. And I want people to understand that currencies are very relevant to geopolitics or the other way around. Right. Whenever you see currency movements, there’s typically a geopolitical connection there.

AM: Of course. And on top of that, if it was any other time and they started to devalue the currency like this, the Federal Reserve where the President would start calling the currency manipulators. And there’d be page headlines on the financial times.

TN: Right.

AM: And because that didn’t happen, It’s an automatic signal to me that this is what’s happening at the moment. Right.

What’s also interesting to me, Albert, is we’ve seen last week we saw Japan approach the Saudis and the Emiratis about oil contracts. We saw Japan call. There’s a meeting in Japan next week, I think, with China. So Japan is becoming this kind of foreign policy arm, whether we want to admit it or not, they’re kind of becoming foreign policy arm for the US. Because the US is not well respected right now. Is that fair to say?

AM: It’s more than fair to say, I believe Biden’s conference with South Asian leaders was just canceled on top of everything else.

TS: Sorry. And we saw this week Japan and India just signed, like, a $42 billion trade deal. So it kind of seems like they’re smoothing over the rough edges because the United States kind of came after India a little bit earlier about two weeks ago.

TN: Yeah, that’s a good call, Tracy. I think Japan and India have had a long, positive relationship. It’s especially intensified over the past, say, seven or eight years as China has tried to invest in India and the Japanese have kind of countered them and giving the Indians very favorable terms for investment and for loans. And so this is kind of a second part of that investment that was, I think, announced in, say, 2014 or 2015, something like that. And again, as we talked about it’s, Japan intervening to help the US out and obviously help Japan out at the same time. Thanks for that.

Now, Sam. We saw bonds spike pretty hard this week, especially the five year. I’ve got a Trading View source up there on the five year up on the screen right now. So can you walk us through what’s happening with US bonds right now, especially the five year?

SR: Sure. I mean, it’s pretty straightforward. The Fed is getting very hawkish and the market is adopting it rather quickly. And I don’t know how forcefully to say this. The current assumption coming from city is four straight 50 basis point hikes and then ending the year with just a couple of 25. That is a pretty incredibly fast off zero move time, some quantitative tightening, and you’re somewhere around three and a half percent to 4% worth of tightening in a year. That’s a pretty fast move.

So the two year to five years reflecting that the Fed is moving very quickly, you’re likely having the long end of the curve is lagging a little bit. You saw flattening, not steepening this week. The long end of the curve is telling you that the terminal rate may, in fact, actually be at least somewhat sticky around two and a half and might actually be moving a little bit higher. And that terminal rate is really important because that is how high the Fed can go and then stay there. It is also how fast the Fed can get there and how much above it the Fed is willing to go. So I think there’s a lot of things that happened on the curve this week.

TN: Okay. Albert, what’s in on those? Yes, go ahead, Albert.

AM: Oh, I’ve heard whispers that the long bond is going to 2.8% and maybe even 3%. That’s what the whispers have been telling me about that, which is going to absolutely devastate housing.

TN: But that was my actual idea.

SR: Oh, yeah. Housing is done. I mean, you saw pending home sales were supposed to be up a point and down 4%. That’s the first signal. The next signal will be when lumber goes back to $300.

TN: Okay. It seems to me you’re saying by say Q3 of this year we’re going to see real downside in the housing market. Is that fair to say?

SR: Oh, in Q2, you’re going to see real downside in the housing market. Yeah.

TN: Wow.

SR: Pending sales are, I think, one of the most important indicators of how the housing market is going. Right. It’s a semi forward looking indicator. If you begin to see a whole bunch of these homes in the ground stay as homes that are not being built. Right. So if you begin to see just a bunch of pads out there, it’s going to become a significant problem considering a lot of people have already bought the materials to build it off. And you’re going to begin to have some really interesting spirals that go back into some of the commodity markets that have been on fire on the housing front.

TN: Wow. Okay. That’s a big call. I love this discussion. Okay, good. Okay. So let’s move on to the week ahead. Tracy, we’ve had some stimulus announced to help pay for energy. Can you help us understand? Do you expect we’ve seen California and some other things come out? Are more States going to do this or more countries going to do this, and what does that do to the inflation picture?

TS: Well, absolutely. We saw California, Delaware, Germany, Italy talking about it. Japan already. They’re coming out of the woodwork right now. There’s actually too many to list. It’s just that we’re just now this week just starting to see the US kind of joining this on a state to state basis. The problem is that this is not going to help inflation whatsoever. You’re literally creating more demand and we still do not have the supply online. So all of these policies are going to have the opposite of the intended effect that they are doing. Right. It’s just more stimulus in the market.

TN: Do we think there’s going to be some federal energy stimulus coming?

TS: They’ve talked about different options. I mean, really, the only thing that they could do right now is get rid of the federal excise tax, but that’s only really a few cents. And they kind of don’t want to do that because that goes towards repairing roads, et cetera. That doesn’t fit into their plan that they just passed back in the fall. Right. We had infrastructure plan, so they need to pay for that. That’s already passed. So they probably won’t do that.

The other options that they have that they’re weighing are more SPR release, which is ridiculous at this point because they could release it all and it would still not have a long lasting effect on the market. And that’s our national security. It’s a national security issue. And we’re experiencing all these geopolitical events right now. We have bombs in Saudi Arabia. We’ve got Russia, Ukraine. So I think that’s like a poor move altogether.

TN: So if more States are going to come in, is it suspects like Massachusetts, New York, Illinois, those types of places?

TS: Yes.

TN: Okay. So all inflationary, it’s going in the wrong direction.

TS: It’s going to create demand, which is going to drive oil prices higher because we still don’t have the supply on the market.

TN: Okay. Wow. Thanks for that. Sam. As we look forward, you mentioned a little bit about how hawkish the Fed would be. But what are you looking at say in the bond market for the next week or so? Do we expect more activity there, or do you think we’re kind of stabilizing for now?

SR: We’re going into month end. So I would doubt that we’re going to stabilize in any meaningful way as portfolios either head towards rebalancing or begin to rebalance into quarter end. So I don’t think you’re going to see stabilization. And I think some of the signals might be a little suspect. But I do think back to the housing front. I’m going to be watching how housing stocks react, how the dialogue there really reacts, probably watching lumber very closely, a fairly good indicator of how tight things are or aren’t on the housing front.

And then paying a little bit of attention to what the market is telling us about that terminal rate. If the terminal rate keeps moving higher, to Albert’s point, that’s going to be a big problem for housing, but it’s going to be a big problem for a number of things as we begin to kind of spiral through, what the consequences of that are. It will be for the first time in a very long time.

TN: Okay. So it’s interesting. We have, say, energy commodities rising. We have, say, housing related commodities potentially falling, and we have food commodities rising. Right. It seems like something’s off. Some of it’s shortages based, and some of it is really demand push based. So energy stuff seems to be stimulus based or potentially so some interesting divergence in some of those sectors.

Okay. And then, Albert, what’s ahead for equity markets? We’ve seen equity markets continue to push higher. How much further can they go?

AM: Last week they eliminated, I think, up to about $9 trillion inputs, short squeeze, VIX crush. I mean, they went all out these last two weeks. It’s absolutely stunning. From my calculations, I think they expanded the balance sheet another $150 billion. Forget about this tapering talk. There’s no tapering. They just keep on going. How high can they go? That’s anybody’s guess right now. I think we’re like 6% off all time highs. On no news.

TN: So potentially another 6% higher?

AM: Honestly, I know that there’s hedge funds waiting, salivating at 4650. Just salivating to short it there. So I don’t think they can even get close to that, to be honest with you. So I don’t know, maybe 4590 early in the week before they start coming down.

TN: Okay. Interesting. So you think early next week we’ll see a change in direction?

AM: Yeah, we’re going to have to this has been an epic run, like I said, 90% short squeeze, 10% fixed crush. You don’t see this very often. Okay, Sam, what do you think, Sam? Similar?

SR: On equities, I like going into the rip higher. I’m kind of with Albert, but a little less bearish. I think you chop sideways from here looking for a catalyst in either direction. Bonds ripping higher today, yields ripping higher today. Bond prices plummeting. That I thought was going to be a catalyst for equities to move lower. It wasn’t. That kind of gives me a little bit of pause on being too bearish here, but it’s hard for me to get bullish.

TN: Okay.

TS: What’s interesting? I’ll just throw in like, Bama, weekly flows. We actually saw an outflow from equities for the first time in weeks. It wasn’t a lot 1.9 billion. But that says to me people are getting a little nervous up here. Profit taking, as they say on CNBC.

TN: All right, guys. Hey, thank you very much. Really appreciate the insight. Have a great week ahead.

AM, TS: Thanks.

SR: You too, Tony.

TN: Fabulous. Look. I’m married. I’m a man. I don’t notice anything. I noticed the other guys laughed at that. Uncomfortably. That’s great. Okay. I’m just going to start that over, guys. And we’re going to end it.

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Visual (Videos)

USD unlikely to continue strengthening, CNY to stay strong

 

This is the most recent guesting of our CEO and founder Tony Nash in CNA’s Asia First, where he shares his expertise on inflation and the US economy. Will consumers continue to spend to help the economy? What’s his view on Biden’s call to boost oil supply to ease prices? Where does he think the US dollar is headed and how will that impact Asian currencies?

 

The full episode was posted at https://www.channelnewsasia.com. It may be removed after a few weeks. This video segment is owned by CNA. 

 

 

 

Show Notes

 

CNA: What’s still ahead here in Asia First. We’ll check if US companies continue to charm investors with some big earnings in focus. Plus, to give us a stake on markets inflation and the US economy, we’ll be joined by Tony Nash from Complete Intelligence.

 

US stocks closed in the red overnight as lingering inflation concerns continue to dog investors. The Dow ended lower by six tenths of one percent, dragged down by a four point seven percent. Drop in visa the S&O 500 slipped 0.2 percent. And the NASDAQ fell by 0.3 percent.

 

Now after the bell, we also had some US tech earnings. NVIDIA shares rose after it beats on the top and bottom lines. The ship maker saw its revenue jump 50 percent on year on strong gaming and data center sales. Cisco shares tumbled and extended trade after missing on revenue expectations before the quarter. The computer networking company also issued a weaker than expected guidance.

 

For more on the broader markets and economy. We’re joined by Tony Nash is founder and CEO of Complete Intelligence speaking to us from Houston, Texas. So Tony as we heard their inflation fears seem to be back despite better expected earnings but CEO’s are starting to warn of more pain when it comes to supply chains. And that could put a damper on in that could lift inflation. Do you think the US consumers will continue to spend despite all this and will that help the recovery of the US in the next year?

 

TN: Yeah, I think the real issue here is that inflation is rising faster than wages. And what we’re seeing with oil prices. These oil prices are not terrible given kind of historical prices but it’s oil prices within the context of everything else. Obviously, the supply constraints really are pushing up prices of food and other activities as well as say goods that are imported for say the holiday purchases that Americans will make.

 

So Americans have absorbed a lot of those price rises to date. They’ll continue to absorb some but I think they’re almost at their limit in terms of what they can tolerate without getting upset.

 

CNA: Yeah, Do you think there’s a disconnect here when it comes to energy because Biden administration is hoping to boost supply to ease that oil price pressure but OPEC and its allies expect surplus into the next year. So, do you think they’re looking at it differently? And who has it right here and where oil prices headed?

 

TN: Yeah, I think part of the issue in the US with crude oil is the Biden administration restrictions on pipelines and on the supply side in the US. So, Joe Biden is asking other countries Russia, Saudi Arabia, other OPEC members to supply more oil yet he’s restricting the supply domestic supply in the US. So, I think what’s happening with those other suppliers they have customers who are buying their crude oil. They don’t necessarily want to have to produce more because they want slightly higher prices. They don’t want things too high but they want slightly higher prices and so they’re pushing back on on Joe Biden and saying look you really need to look at your own domestic supply. You really need to look at at those issues yourself before we start to open up our own market.

 

So you know, the current administration is trying to have it both ways. They’re trying to restrict supply within the US. They’re trying to bring in more supply from overseas. Americans see this and they understand kind of the incongruent nature of that argument from the administration.

 

CNA: I want to get your thoughts on the US dollar, Tony. Because that hit a 16-month high amid his expectations of more aggressive policy from the Federal Reserve. Where do you think the US dollar is headed and how will that impact us here in Asia, especially Asian currencies?

 

TN: Sure, it’s a great question. We saw a lot of action with the US dollar yesterday. The dollar index as you said reached highs for in the last say 18 months, two years. And that is on Fed action but one thing to consider is we’re looking at potentially changing the Fed chairman later this year.

 

So, if the current Fed chairman is exited. There is an expectation of a more dovish Fed chair coming in that’s one possibility. I think people are really trying to… While there is upward pressure on the dollar. People are trying not to get too far too much behind it because there could be a more double dovish Fed chair coming in. So, we think the dollar is overshot just a little bit in the short term.

 

We don’t expect it to continue rallying at its current pace. We expect say the Euro has fallen quite a bit and depreciated quite a bit in the last say three weeks. It’s going to appreciate just a bit a couple cents over the next month or so. Asian currencies, we think the CNY will stay strong. We think CNY will remain strong through say March, April as they start a devaluation cycle to help exporters. We think the Singapore dollar is going to stay in the same range that it’s in about now. We don’t see much policy change in Singapore and we think with a stable dollar at these levels. We think the same dollar will stay at about the same exchange rate of Scott now.

 

CNA: All right. We’ll keep our eyes on those currency exchanges and who becomes the next Federal Reserve Chairman. Tony Nash thanks for joining us. Tony Nash there founder and CEO of Complete Intelligence joining us from Houston, Texas.