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The Week Ahead – 04 Jul 2022: Metals Meltdown

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We’ve all seen many chops in the markets, especially on the energy side, with the fuel and oil shortages. That was a little bit unexpected to people. Equity markets are struggling and there are a lot of talks this week about recession and trying to move the Fed into being more accommodative, which is 180 degrees from where we were two weeks ago.

Copper is hurting and down 28% since March. What is this telling us about metals, generally, and drivers of metals demand? Is this telling us that China – the largest buyer of industrial metals – won’t really bounce back? Does the market doubt China’s stimulus announcements?

We also discussed Europe, its slowing economy, rising unemployment, and gas shortages.

Lastly, is the Fed anchoring inflation?

Key themes:

  1. Metals Meltdown
  2. How badly is Europe hurting?
  3. Fed inflation anchors
  4. What’s ahead for next week?

This is the 24th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

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
1:45 Key themes for this episode
2:23 Metals meltdown – what are they telling us?
3:48 Will there be a comeback of automotive?
5:09 Does the market believe China’s promise of a stimulus?
7:25 How much is China’s manipulation be beneficial for China?
9:26 What about Japan?
12:00 Europe’s economy and inflation
15:21 Europe’s concentration risk on the sale side
19:42 Europe’s problems stem from this
20:32 Fed and anchoring inflation
25:50 What’s for the Week Ahead?

Listen to the podcast version on Spotify here:

Transcript

TN: Hi everybody, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Sam Rines and Albert Marko. Tracy is out for the long holiday weekend. Before we get started, please don’t forget to like and subscribe the video and please comment on the video. We look at them, we engage. We want to hear your feedback. Also, while you’re here, we have a promo for CI Futures. This is our markets forecasting tool. Our promotion is three months free on a twelve-month subscription. That promotion ends on July 7. So please take a look at it now and get our best promo ever.

So, key theme for this week. We’ve all seen the markets a lot of chop as we talked about. We saw a lot, especially on the energy side, kind of negative with the fuel shortages and oil shortages. I think that was probably a little bit unexpected to people. Equity markets are struggling and there’s a lot of talk this week about recession and trying to move the Fed into being more accommodative, which is 180 degrees from where we were two weeks ago. So a few things we’re talking about.

First is the metals meltdown. Second, Albert Marco, although he’s been in an undisclosed location, he has been in Europe. And we’re going to talk a little bit about how badly Europe is hurting right now. And then we’re going to look at inflation and how the Fed is potentially anchoring inflation.

So first, let’s look at the metals meltdown. If we look at copper. Copper has been a lot of buzz around copper over the last few days and copper is down 28% since March. But I think we could speak to metals more broadly. We’ve got the copper chart on the screen right now. So Albert, if you don’t mind, what are metals telling us generally about markets and the drivers of demand?

AM: Well, I mean, it’s pretty clear that the manufacturing sector across multiple industries is hurting at the moment and has taken a toll in the metals market. There just simply isn’t any demand for consumer products. There’s not going to be any demand for metals probably until the Chinese really start to stimulate.

It’s pretty clear. And then on top of that, they have pressure from the dollar that just keep on charging along trajectory to 110. So those things are really weighing on the metal market. I mean, copper specifically, like you mentioned, aluminum taken some hits just across the board.

TN: Right. So if we look at things like automotive, automotive is held up because of semiconductor supply chain issues which are working out, but automotive manufacturing slowed pretty dramatically. If we see, say, the chip issues get worked out for, say, automotive, do you expect to see more like a comeback of automotive, of car manufacturing, which will pull metal prices along?

AM: No, I don’t. And I don’t think that’s even going to be the case for the next 18 to 24 months. I mean, the auto sector is actually in a really bad shape, And it’s not specifically just because of the chips, like everyone assumes, but you have rubber shortages, you have polyurethane shortages, you have shortages across the board for the entire auto sector, for the manufacturing process. So until all of those supply chain issues get settled, there’s just no hope at the moment, which is interesting because there hasn’t been really any layoffs yet.

I know they’re artificially keeping these people on payroll and doing whatever they want to do with the shifts and manipulating that. But at some point and i’ve been arguing about this specifically the auto sector, there will be layoffs because of all this.

TN: Just for the people who don’t know. Albert is from Detroit, so he pays attention to the auto sector pretty closely, and he knows he has pretty close relationships there. So we’re talking to a man who really does kind of pay attention to what’s going on. Sam, as we see metals prices fall, we’re also seeing china become more aggressive in making statements about economic stimulus and other things. Are the metals prices right now telling us that the market doesn’t believe that china is going to put in the stimulus that they claim to be?

SR: I would say it’s a show me game with China. There’s been way too many people that have been burned way too badly, listening to the rhetoric and trying to get ahead of things on the ground, and then nothing actually happens, or they do something a little different than what they said they were going to do, and you end up with an investment profile that’s completely different.

I think that’s one of the big things to keep in mind is, yes, China is probably going to have to do something into or around the party congress this fall in terms of stimulus. They have to look at going into it. So there’s going to be some stimulus. The question is, what is it and when does it hit and what does it look like? Is it a tax cut? Because in that case, who cares, right?

It’s not going to be that big of a deal for picking up the manufacturing side in a meaningful manner. Is it going to be reopening? Right. Because if they’re sending out checks but not reopening, that’s not going to allow their manufacturing sector to get back to work, which is going to Albert’s point, going to continue to clog the supply chains for autos and auto manufacturing significantly, whether you’re us. Based manufacturer or your South Korean manufacturer, et cetera.

This is a longer term problem where I think you’re not necessarily going to have the pop and metals until people actually see the real data from either Australia or the us. Or even in Mexico. But that’s a significant amount of the auto sector assembly. You’re going to actually have to see the data before people.

TN: Right. And so what I hear about metals in China and I’ve mentioned this before, but what I’m told by people, especially in the copper sector, is that the warehouses in China are actually full, although we’re told that they’re not. They are. And words that warehouses empty out from time to time is simply to manipulate the market up. But there’s ample, say, copper and other industrial metals in warehouses in China, given the demand that the world has.

AM: Let me ask you both little question here. How much is China’s manipulation of their stimulus on and off due to them trying to force the Fed into lowering the rate hikes or putting them into a position where it’s beneficial for China overall?

TN: Sam, what do you think?

SR: I would say they definitely have a calculus instead of the ECB, instead of a certain extent the BOJ when they.. they all have to take that into account and they all have to either front run or attempt to talk their markets one way or the other. That’s why I’m saying it’s definitely part of the calculus. I don’t know how much of the fiscal side is directly related to counteracting with that and how much is directly related to keeping the people happy. I would say those are the two primary catalysts.

TN: Yeah, I think that’s right. I think any Chinese stimulus that’s going to be effective in the short term has to be cash in, say, local government accounts, people’s accounts, company’s accounts. As Sam said, that tax cuts not going to cut it, indirect payments are not going to cut it. Announcing a new rail stimulus, which they do every other year, is not going to cut it. They actually have to just churn cash out in markets. But with the US dollar and rates, I think they’re really careful right now about how quickly they devalue CNY. And I think that is one of the things that they’re being careful of. They don’t want to devalue it too quickly because Chinese exports have surged over the past six weeks. And so if they can continue to make money at the rate they have, they’ll put off the DeVal as long as they have to. But if the dollar continues to appreciate, they may have to accelerate the evaluation and they’re in a tough spot. China is not the all seeing, all knowing planner that many people think, well.

AM: Part two of that would be what about Japan? Because they devalued the Yen and they’re kind of combating whatever China is trying to try and propose and stimulus. So how does that all come into the equation?

SR: And I’ll just pop out that one of the interesting pieces to kind of throw into the puzzle is not copper sending one signal that China is maybe not going to stimulate, et cetera. But you look at Chinese Equities X, the state owned entities, and guess what? You had a plus almost 7% second quarter for those equities. So the market is sniffing something out there. There might be a little bit of a hedge of, well, if you’re not going to build a bunch of stuff, you might hand out checks, like you said. And if you hand out check, it’s going to benefit the Internet and Chinese tech companies more than it’s going to benefit the metals industry.

TN: Right. And if they want to stimulate the top echelon of Chinese society, they could just goose equities and focus on a trickle down theory, which is very anticommunist, but it’s something that they can do pretty quickly. They did it in 2015, they’ve done it at other times, and they can do that. But going back to your Japan question, Albert, it’s an interesting one because China is such a supply chain risk going forward, the uncertainty there, that Japan is selling itself as a secure alternative to China. And that’s why one of the reasons why they’re devaluing so strongly is so that it’s just a no brainer to get stuff done in Japan. Right?

AM: Yeah, of course. That’s a great explanation. It’s very concise and simplistic, and I had known this, but I wanted you guys to explain this to the viewers because it’s a critical thing that most people don’t really take into account. They always see China. China. And they ignore Japan and South Korea.

TN: Yeah, Japan and South Korea have been devaluing. It’s more depreciating than devaluing. I know there’s a nerdy difference between those two, but they’ve been pushing depreciation because they wanted to be seen as a safe alternative to China. But then you also look at Southeast Asia, places like Vietnam, other places, things in Vietnam, all those exports are done in dollars, not in dong, so they can’t really play the currency card to do values.

SR: It’s also worth remembering that Japan exports a lot of machinery to China, and so if they don’t, if they strengthen their currency while China is devaluing, that puts them in there.

TN: That’s right. Great questions, Albert. Thank you for that. Okay, let’s move on to Europe. Albert, so you’ve been there. Let’s start by looking at inflation. So we’ve got on the screen right now a comparison of inflation rates in, say, the US. Europe and China. And PPI, especially in Europe, is blistering hot. It’s 40%. And CPI, of course, is accelerated as well. It’s ten plus percent, if you believe that. I think it’s higher than that. But as you’ve been there, can you walk through some of your observations of what’s happening in Europe right now and how it’s affecting companies and the way people spend and so on?

AM: Well, from the bottom up, for the general public, that’s just pure desperation. The media just doesn’t want to cover it because it’s just bad news for every single political party out there. Inflation is running rampant. Food, it’s running rampant. And every single product they have, they’re used to high gas prices to begin with, but like the United States, there’s a certain amount where the strain is just too much for families.

I believe the UK. One out of four people were skipping meals because of food inflation prices. One out of four? That’s stunning. And that will have long term health effects down the road. But we’re talking about the year now. Europe’s manufacturing sector is an absolute shambles. Their export engine into China is just nonexistent. They haven’t built out any overseas networks into Africa or other emerging markets to be able to compete. They have no military to sit there and actually push the trade issues their way. They’re secondary. Not secondary. They’re behind Russia and China in that aspect, not to Mention The United States. So, I mean, I complain about the auto sector in the United States. The manufacturing and the auto sector in Germany is absolutely dead.

TN: Okay, I want to pull that Apart a little bit. Okay, so the manufacturing in Germany is dead or dying, largely because of concentration risk in Russian gas as a feed fuel, right, for electricity.

AM: The energy prices have skyrocketed. Corporations And Private businesses are struggling to keep up with margins to cover their costs. And the governments are just like. They’re just making things worse in Germany, I believe they’re handing out money to every single person, refugee or youth person, that think that will vote for them in the future. That makes inflation worse. I can go down the list of different things that they’re doing an error, but I don’t see how Europe pulls out of this specifically in the fall and going into 2023. I mean, their gas shortages are such a problem here right now that I can’t even fathom what the problems are going to be in Germany and Italy and France going forward.

Actually, in Germany and Austria, they’re running out of wood to heat their homes because people are stockpiling that already, and this is July. So I mean, there’s going to be some serious repercussions of Europe. And this is why I targeted Europe to be a problem, possibly for financial crisis and contagion leading back into the United States. It’s just a big problem across the board.

TN: That PPI chart is just so stunning. Now we talk about concentration risk on the supply side. Let’s look at concentration risk on the sales side. Right. Europe has really over concentrated a lot of its sales requirements in China. China has been the market for a lot of European companies. Right. And outsource manufacturing. So they’re as concentrated in China or more concentrated in China than many US companies are, first of all.

AM: By far.

TN: And they’re more dependent on China as a sales market in many cases, than many US companies are, right?

AM: Yeah. This is the problem that I’ve had with Germany specifically. I want to pick on Germany because they are economic. That’s just the fact of the matter. But the Germans, they go out and they see China as a huge market, and they start pushing out their high tech trains and their windmill technology and so on and so forth. Well, the Chinese, all they did was order that stuff, buy it, piece it apart, copy it, and then they sell that to the Africans for one fourth of the cost of the Germans could possibly sell it to the Africans.

So not only is Germany losing out long term with Chinese trade in the market, because that’s stagnating, but now they have no chance to go into the African market because it’s flooded with Chinese parts.

TN: Sure.

AM: They made such critical errors for the years, and they were just so drunk on cheap money out of China that now for the next decade or two, they’re going to have problems.

TN: Yeah, but my overarching points are that Europe is over concentrated on the energy side with Russia, and they’re over concentrated on the manufacturing and then market side with China. And aside from that, they’re kind of out of bullets. They don’t have a lot. And I think that is a lot of the basis for the reason we’re seeing PPI just explode in Europe.

AM: Yes, of course. The only country that even has the only country… The French are smart. I don’t want to hear anything from the Americans be like, Oh, the French are weak and put up the white flag on the Eiffel Tower, whatever these jokes are. But the French have nuclear power and they have food security for their entire nation.

Two of the biggest problems right now in Europe, France has a grasp on. The rest of Europe is total chaos. But those two issues in France are absolutely secure, and the French are smart and they’re looking for long term gains to push the Germans out of the way and take over the EU, and that will actually end up happening. But in the near term, inflation is almost worse there than it is here. Their housing market is mainly cash based, so it’s not as bad of a bubble, but everything else.

TN: So you don’t see much let up in Europe for the rest of 22. You think it continues to be pretty dire in Europe for the rest of 22?

AM: Oh, absolutely. I think the only reason that it’s even somewhat stable at the moment is the tour season has kicked up, and then that’s created other problems where you’re going to cancel flights and overbooked hotels.

TN: Right. Sam, do you have a similar view on Europe at least for the remainder of the year? It continues to be really difficult for the remainder of the year.

SR: Oh, yeah. And the only other place that I would point out is Italy. I mean, Italy is in a pretty rough spot here too. Even with Mario Draghi at the helm, they’re still in a pretty tight spot, and part of it is natural gas and pretty tight there. But the other part is that when it took Legarde about 35 seconds of saying, we’re going to tighten up a little bit here, from negative rates to maybe zero to almost blow up the bond market in the BBB market, it was insane what was going on, and it was a very small move, and you still had yields blow out across the Italian government deck. It’s one of those situations where things move very quickly, things break very quickly, and it doesn’t have a whole lot of bullets in the site.

TN: It’s not like they can go to their version of the permian and drill again. Just to bring this back to something really basic. A lot of Europe’s problem stems from the fact that it has a very old population. So they don’t have young, productive people to keep up with the commitments to very old people in very simple sense. Does that make sense? Is that right?

AM: Oh, absolutely. Looking at just the Italian demographic, all those young Italian guys have bolted for the UK, London, and New York and Miami. They’re gone.

TN: So until they either have a lot of babies, automate, or have a lot of new immigrants, Europe continues to have the same issue?

AM: 100%.

TN: Okay, good.

SR: Demographics don’t change quickly.

TN: No, they don’t.

SR: It’s about 18 years.

TN: That’s right. Okay, so let’s move on to the Fed and inflation anchoring. Sam, you had a great piece in your newsletter, which I’ve referenced many times, and people always ask me how they get their hands on it. So it’s one of the most exclusive newsletters you can get in America. But you had a great piece on Fed Anchoring. Now, I put a chart up on five year inflation expectations. The only reason I put this up is because they really peaked back in late February. Okay? And after that, the five year inflation has really broken down a lot, almost to normal ranges. Okay. So I know you’re looking shorter term, but can you walk us through a little bit about the Fed Anchoring inflation and what you expect? Kind of the near term impact?

SR: Sure. So kind of the point of what I was trying to get across. There’s really two things that you needed anchored for markets to begin to find some footing in the US. At least. And that was you needed to have inflation expectations begin to become anchored. And I think we’ve seen that. Right. You see that chart and it peaked in March, give or take, and has fallen back towards call it normal ranges, if not slightly below what you would expect in this type of environment. That makes sense, right?

In five years, we’re not going to have this type of solution. I’ll be willing to accept that no problem unless we have another flare up somewhere. But I think that’s a fairly reasonable thing to do. But also you have to have the expectations for the Fed anchored as well, because you had two unanchorings that were really happening side by side that was highly problematic for markets.

One, you had inflation unanchoring very quickly, and that’s problematic for markets generally. But you also have the Fed expectations becoming unanchored, and the market was pushing, pushing, pushing for whatever it could get in terms of hikes. Right. It was 75-75-50-50-50. Adding an item to somewhere around four and a quarter percent at the peak. And as of today, you’re back to having the terminal rates or where the Fed raises interest rates to happen by December of this year, and it’s 3.25% 3.5%, and then it cuts next year, is the expectation.

So you’ve begun to have, call it a pricing that’s similar to 1994 hike and then cut style of Fed. That is pretty interesting. That’s a pretty anchored expectation for the Fed. It’s a reasonable expectation of the towards neutral. You’re probably somewhat towards real rates at that point being somewhat positive just because you have inflation of about 3.2 and you have a Fed funds rate a little bit above that. nThat’s why I think that’s a fairly reasonable place for it on the inflation expectations front, that’s largely specifically going to call it close in inflation expectations under a year.

Those are largely call it oil and gasolated and groceries.

TN: Very much energy.

SR: Yeah, this is US. This is not Europe. But as long as in the US, you don’t continue to have those rise in a dramatic fashion, people tend to stop extrapolating. Those forward in their inflation expectations either stabilized or declined back to what they call it normality. And that normality would be somewhere between two and a half and two so that we could spot.

TN: So if gas prices, gasoline prices in the US stopped at, say, 490 or whatever they’re selling at now as a national average, let’s say we plateaued there for three or four months, people would adjust and it would be livable?

SR: It would be livable, yeah, it would be livable. So long as the not accelerating higher.

TN: As long as what, sorry?

SR: As long as they’re not accelerating higher.

AM: Yeah, Sam is right. The risk is as long as they stabilize, I completely agree with Sam. We have one hurricane in the Gulf of Mexico. We have a problem, like a real problem, looking at like $5.50 to $6 gas, and then inflation becomes absolutely just insane.

Going back to the inflation number that they printed out last time, they’re using this ridiculous 5% for housing and shelter and the CPI equation. It’s a little bit hard for me to swallow, but if they can do some kind of magic and keep inflation somewhat steady over the next few months I agree with Sam.

TN: It’s kind of a short at that point.

SR: The interesting part about that is you create an interesting duality in calling risk markets, where the US risk market looks very attractive. If you’ve peaked on Fed pricing, if you peaked on the PE killing. PEs are down 35% year over year. That’s a bigger drop than we’ve seen for several corrections.

You can have a really interesting US risk market going into the back half of the year across markets. The curve, on the other hand, that could be two spends to get very interested very quickly.

TN: Very good. Okay, good guys. What are we looking for for the week ahead? We’ve got a holiday here on Monday. We’ve started to see, say, gasoline prices perk back up in markets on Friday. Are we going to start to see potentially in the near term gas prices rise post July 4?

AM: I think so. One of the things that’s not being said, I don’t think we touched upon, I think last time we did, but the Saudis come in with lower than expected barrels per day, lower capacity, and this must have been stemmed from McCrone and Biden trying to price cap them. Come on, you do that to us, we’re going to do this to you. It’s a game at this point. And the Russians are certainly pulling strings of the Saudis and the Iranians to make this a little bit more chaotic for the US. So I think gas does go does start to trend a little bit higher over the next two weeks.

You’re certainly going to hear noise from people with July 4 prices for barbecues coming up. So that’s going to be all over the news.

TN: Okay, interesting. Sam, what are you looking for during the week ahead?

SR: To build on what Albert was talking about? I think it’s really interesting that spare capacity from OPEC just doesn’t appear to be there whatsoever. But at the same time, you’re also probably going to have at least somewhat of a call, a permanent impairment of Russian oil fields if you continue to have sanctions, that puts a floor long term in global energy prices, period. And if you don’t have US service firms keeping those fields going, we’ve seen what happens when you send Chinese and Russian oil services firms to Venezuela just before you destroy the oil industry.

So look forward to that. On the other side, I’m really looking forward to the conversations that a bunch of millennials have to have with their parents, the crypto markets this July 4.

TN: You are a millennial.

SR: But I am looking forward to some glorious Twitter cons that Tuesday.

TN: Fantastic. Okay, guys, thanks very much. Have a great holiday weekend and have a great weekend.

AM: Thanks, Tony.

SR: Thanks, Tony.

Categories
Podcasts

Amidst Volatility, Boring is Good

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/us-fed-interest-rates-inflation-earnings-consumer-sentiment on June 9, 2022.

US markets remained volatile and on a downward trend as inflation concerns heightened. With that, the US consumer is beginning to feel the pinch of rising food and energy prices. What then does this mean for earnings in the coming quarters and has this been priced in? Our CEO and founder, Tony Nash answers these questions.

Show Notes

WSN: BFM 89 nine is seven o’ six Thursday the 9 June. And of course you’re listening to the morning run. I Wong Shou Ning together with Philip See. Let’s have a quick recap on how good global markets closed yesterday.

PS: US markets closed in the red. The Dow was down .8% SMP 500 down 1.1%, Nasdaq down zero. 7%. Whereas over in Asia it’s been a mixed bag. The Nikki was up 1%, Hong Sang up 2.2%. China composite up zero 7%. I think on the back of China easing a bit on the tech regulatory concerns. However, in Southeast Asia, Singapore is down 0.2%. FBM KLCI also down.

WSN: .1% so for some analysis on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Please help us understand what is happening in US markets because it is another red day today. Why are markets so choppy this Thursday?

TN: I think people are awaiting the CPI print what’s going to happen with the inflation announcement because that number really helps to indicate if the Fed will accelerate their plans of tightening. So if the CPI runs hot, then we’ll see them accelerate potentially. If it comes in as expected, then they’ll stick with the plan that they’ve got.

PS: So the plan is to 50 basis point hikes. If you see it move higher, are you talking about it hitting 75 or like extending it for a third 4th hike?

TN: If it’s higher, we could potentially see it hit 75 maybe in June or July. But certainly we’re looking at another hike in September that’s probable right now and then maybe a 25 basis point in November. So let’s say we saw come in at nine or something like that for a developed economy like the US. These are people who normally look at inflation, 1%, one and a half percent. So 9% inflation is just something that people have not seen for a long time. And so this is really damaging to people. Wages are not very flexible here. And so I’m sure from the Malaysian perspective, you see that it’s damaging people here in the US and it actually is because wages are not as flexible here as they are in other parts of the world. So if we see CPI come in high, then you would see the set accelerate. If it comes in at eight, let’s say less than 9%, they’ll stick with the plan they have. If it comes in lower, say seven-ish they’ll still stick with the plan they have and continue to fight inflation to get it down around 2%, maybe sometime in Q1 in 2023 or something.

WSN: Okay. So let’s stay on the topic of the US economy now. Bloomberg runs a model, runs different models actually, and they say that there’s a 25% chance of recession in the next twelve months, but a 75% chance by 2023. Do you share the same view but.

TN: A 25% chance of a recession is just a hedge. Right? I mean, that’s just saying maybe it’ll happen.

WSN: It’s a chicken call Tony. It’s like being chicken.

TN: So when you look at what a recession, two months or two quarters. Sorry. Of negative growth. Right. Well, we had a negative quarter of growth in the US, and Q one of 22. Will we have a negative quarter of growth this year? Unlikely. Or this quarter? I mean, it’s unlikely because of the reasons for negative growth in Q one are not the same reasons they would be this year or this quarter. Sorry. So going forward, I don’t necessarily think we’ll have a recession, but I think it will feel like a recession to a lot of people because over the last year, year and a half, we’ve had higher overhiring in a lot of industries like technology, overhiring where companies have been afraid they wouldn’t be able to get the talent they need. So they overhire people. They’ve paid people a lot of money. So sectors like tech will likely continue laying people off. They’ve already started, but they’ll likely reassess their wages as well as they realize that they don’t need as many people as they hired. And of course, there will be other effects if tech start laying people off more broadly. So we’ve already seen housing housing in the US.

There is effectively no new mortgage applications going through on that in the US. So the Fed’s target for housing has kind of been achieved really quickly, actually. But it doesn’t necessarily mean there’s a recession. So things will feel like there’s a recession. But I’m not sure we’ll necessarily technically be in a recession.

PS: So let’s just build on your feelings, Tony, and translate this macro numbers to earnings. What is your expectation in terms of quarter two earnings? Do you expect them to be substantially weaker and how will that translate into equity markets?

TN: Absolutely, yes. Definitely substantially weaker. I mean, look at what happened to say, Walmart and Target a couple of weeks ago when they announced their earnings, they were way down. Why? Because they had way overbought inventory and they had bought the wrong inventory. Okay. So they’re paying for that now and they’re going to have to discount to get rid of that inventory. Right. I think people in a lot of industries because of supply chain issues, they’ve overbought things. And in the meantime, preferences and markets have moved on. So they’ve overbought things and they’re going to have to get rid of a lot of inventory. I think Target and Walmart got out there very early to be able to have their equity price hit hard early. But other companies will come out in second quarter and they’ll admit the same thing. So we’ll see margins really compressed. And because of that, we’ll start to see people announce more layoffs because again, during COVID, investors were very charitable to executive teams, meaning they were telling the executive, look, just stay open, just survive as a company, do whatever you have to. Right now, we’ve got markets that are normalizing.

Investors are being more scrutinizing as they should. They’re saying, look, markets are normalizing. You have to perform like an executive team should perform. You have to perform like a company should perform. So investors and markets are going to be harder on companies in Q two.

WSN: But Tony, does this then mean that when I look at the S&P 500 index, which is probably the broadest barometer of the US economy, it’s down 13 point 65% on the year to date basis. Can we expect further weakness or has this already been priced in?

TN: I don’t think it’s been priced in necessarily. I don’t necessarily think we’re going to see another 13% down, but we always hear that things are priced in. And then when events happen, we find out they’re not priced in. I don’t think it’s priced in. I think there’s more pain to come because people are realizing that they’re basically overpaying for the price of equity. Right. In a company. And so we’re going to see pressure put on valuations, and that’s going to hurt a lot, especially in tech. So we’ve already seen pressure put on valuations in tech. And you saw companies like Facebook who are just throwing off cash still and their valuation is compressed because people have just woken up and said, look, it shouldn’t be valued at that. Right. So we’re going to see that more and more, especially in tech, but also in other sectors.

WSN: So where should we hide, Tony? Will it still be in the commodity space? I mean, oil is up 2 and a half percent this morning.

TN: At where oil is. WCI is trading at 122 right now. Brent is north of that. So it’s possible that we see another 20% rise in crude, but it’s really thin air where it is now. So I think crude price really depends on the supply side. And so can OPEC pump more? Not much. Will things in Russia resolve? Maybe probably in third quarter or something like that. Right. So we really have to look at what are central banks doing? They’re trying to ratchet down demand. Right. And so if they can successfully ratchet down demand, then that will have an impact on true prices.

PS: Tony, I would love to get your view because you’ve seen a different vantage, especially in emerging markets, particularly Southeast Asia. If you saw recently WorldBank has scaled its forecast on global growth and has even highlighted the asphalt is very much vulnerable to stack flat, even recessionary pressures. What’s your view? What’s your advantage in terms of investment in EM markets, especially in Southeast Asia?

TN: Yeah, in Southeast Asia. I mean, look, in Southeast Asia, sadly, Myanmar is going to have the toughest time for the next year or two, right? I mean, we all know the political issues there. I love Myanmar, but it’s going to continue to have the toughest time, I think of the say more developed Southeast Asian countries. I think Thailand is going to continue to have a hard time Partly because of supply chain issues. It’s kind of intermediate point and if supply chains continue to stay strained and tourism continues to be relatively slow in Asia I think Thailand is going to continue to have a tough time. I think places like Malaysia, Philippines, Vietnam, I think they’re in a better position and I don’t know that you’ll necessarily get excessive gains in those markets But I think there’s more stability and more same maturity and leadership in those markets. So if I were to look to Southeast Asia on, say, a country play, that’s where I would look. I would be really careful to look at things like excessive consumption, these sorts of things. I think for the next year or so we’re going to be looking at real stables.

What do people need to live a really boring life because we’ve had this super exciting roller coaster for the past two years and we need to get back to normal and we need to look at what are people going to consume Just to have a normal day in, day out life.

PS: Boring life then.

WSN: Yeah, boring is good.

TN: I love that. Yeah, we all need a little more of that.

WSN: Thank you so much for your time. That was Tony Nash, CEO of Complete Intelligence, saying borrowing is good, we need to get back to normality which means that what investors should be focusing on Perhaps consumer staples Versus consumer discretionary and going back to core fundamentals. Looking at valuations, I think you hit.

PS: The nail on the head core fundamentals because I think investors have given companies the past throughout the pandemic most scrutiny now whether the question will be this will show dispersion and earnings variance between those high earners and low performers Will be a big question Mark as there’s more scrutiny about how you perform in this normal, boring time.

WSN: Stay tuned. That BFM 89.9.

Categories
QuickHit

QuickHit: What China is thinking right now?

What China is thinking right now?

China expert Chris Balding joins us this week for #QuickHit to discuss “What China is thinking right now?” What is the state of the Chinese economy? Are they really doing well in Covid? How about the deleveraging process, is that even real? And what’s happening to CNY? Also talked about are the politics around China especially how it relates to Afghanistan.

 

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This QuickHit episode was recorded on August 24, 2021.

 

The views and opinions expressed in this Sentiment has soured: How will governments and companies respond? (Part 1) QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Hi, everyone. Thanks for joining us for another QuickHit. My name is Tony Nash with Complete Intelligence. Today we’re talking with Christopher Balding about what is China thinking now.

 

Chris, thanks for joining us. Can you let us know a few things about yourself? Give us a little background?

 

CB: Sure. I was a professor at Peking University in China for nine years and then two years in Vietnam at the Fulbright University Vietnam. And today I am a super genius in the United States.

 

TN: Yes, you are. Thanks for taking the time, Chris. You’re one of the very few people I know who’ve actually had on the ground experience in China with a Chinese government organization.

 

So I think it’s really important to go to people like you, who had experience like you to understand what kind of China or the Chinese government is thinking now. Of course, it’s not monolithic. There are a lot of different opinions, but it’s good to have that insider’s view.

 

So I want to start off as we look at where we are in COVID, we’re a year and a half into it, depending on the school of thought, maybe it did or didn’t start in China, but we hear that Chinese economy is doing great and they’ve come out of COVID really well, all these other things. I’m really curious your view on the state of the Chinese economy right now. And what are Chinese economic planners thinking right now as they kind of potentially go into year two of Covid.

 

CB: So I think there is a couple of highlights out of the Chinese economy. First of all is that they’ve resorted to the pretty similar playbook that they go back to every year, which is pump credit, pump construction and infrastructure type spending.

 

In the early part of this year, we saw a significant amounts of credit growth. That’s softened as we’ve moved into summertime. That’s primarily due to because there’s a very clear summer and fall building season that allows builders in China to do things because the weather becomes inclement in significant parts of the year. And then if you add in the Corona backlog, that kind of is essentially almost trying to put two years of expected growth into one year.

 

We actually saw a lot of that. And that front loaded a lot of the credit and demand for things like commodities. This is why you’ve seen such demand for things like coal and steel, which were quite high. We’ve seen that soften as firms built their inventory and really ramped up during the summer building season as the demand for credit has softened and some of the building has actually been undertaken. You’ve seen a softening of that which has caused you’ve already seen talk of maybe there’s going to be unleashing or the economy is a little bit softer than the planners would like. So there’s talk of unleashing some additional credit growth trying to stimulate different parts of the economy. We’ll have to wait and see if that happens.

This chart of ICE Rotterdam Coal is generated from CI Futures, an app forecasting nearly a thousand assets across currencies, commodities, market indices, and economics using artificial intelligence and machine learning technologies. Curious how it can you and your business? Book a time with our expert and get free trial.

 

 

 

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Generally speaking, the rule is, if there’s a debate about whether or not they’re going to unleash credit growth, I would definitely take the over.

 

TN: By about three times. Right. So one of the interesting things you mentioned is that you said that they expended credit in the early part of this year. But what I read from investment banks and what I’ve read from other people who look at China is that China just underwent this big deleveraging process. Is that real? I’m just not sure, because I see on one side that there’s this talk about deleveraging, but my gut tells me it may not necessarily be happening. Is it happening, or is it something that’s just happening on paper or what’s your view?

 

CB: It’s tough to understand the Chinese National Bureau of Statistics and PBOC’s math as to how they arrived at that, because if you’re just running more generalized numbers, it’s very clear that debt at all levels has continued to outpace GDP. So it’s very difficult to understand how they’re estimating a leveraging. And it’s important to note that we did not see, let’s say, the rapid, rapid expansion of economic growth that you saw, for instance, in the United States.

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And what I mean by that is, whereas any United States, maybe growth went from two or three to 5% relative, almost doubling, you know. You probably saw Chinese growth go for maybe like 5% last year to seven or 8% with the Corona boost where you have that base effect. And so you didn’t see it go to, like, 10, 12, 15% that you might have seen if it had really in relative terms, they doubled from the previous year.

 

And so it’s very difficult to understand how they arrive at those deleveraging numbers. And as we all know, China is famous for fudging their numbers. So it’s very difficult to understand how they’re arriving at those numbers.

 

TN: Right. No, I agree. I haven’t believed it when I’ve heard it, but I kind of nod along as if it’s real. But I think, you know, the Chinese economic data a lot more intimately than I do, but I just don’t see where it’s happening, where it’s actually materializing instead of just being debt transfers.

 

Okay. So earlier you said that Chinese economy is slowing. Now, from my perspective, that’s worrisome partly because you’re going into a big export season, and we’ve got some ports that are stopped up. We’ve also got an election next year with Xi Jinping being reelected, whether that’s in square quotes or not, but Xi Jinping being reelected next year.

 

In terms of the resources put towards stimulus this time around, do you expect that to be more intensive than normal?

 

CB: Typically, what you see. And you saw this the first time Xi was elected, you saw this second time Xi was elected. What you typically see is a pretty significant boost to fiscal outlays. And so I think if history is any guide, I think you’re probably going to see going in the fall and the first of year, it’s very, very likely you’re going to see some type of significant boost to fiscal outlays. And this pattern goes back many, many years well before Xi that when there are these elections. And I’m not sure if it’s a scare quotes or air quotes, but both seem to…

 

TN: Yeah.

 

CB: So I think it is very, very likely that you’re likely to see that. And one of the things I think that a lot of people have missed out on is yes, there were absolutely corporate, let’s say, bailouts or corporate funds for Corona. But one of the things is that in the United States, there were the large amounts of transfers directly to households. China has not enjoyed those transfers directly to households.

 

And so actually, consumer spending in China is actually pretty soft. And those are buying inflated data standards. And so I think that is something that is very important to note when we’re talking about the health of the Chinese consumer.

 

TN: Yep. That’s great. Okay. So I also want to talk about the supply chain issues. And I was just reading a story today about how Pudong Airport has been shut down. Cargo on Pudong Airport is going to be much slower for a period of time because of anothe Covid outbreak. This sort of thing. Do you see ongoing port capacity issues related to COVID? Is that something that you’re kind of concerned about?

 

CB: I think that is something that you’re going to be seeing for definitely the foreseeable future. And I should say it’s not just China. You’re seeing a lot of this in other parts of the world that I know, specifically Vietnam, the Middle East. I’ve heard of similar things in Europe where they are just straining at capacity. Sometimes it’s due to COVID shut down. Sometimes it’s due to other issues. But absolutely, these are issues that I think are not going away anytime soon.

 

And it is, I mean one of the debates in the United States right now is transitory or structural inflation. And I think, not to be capping out on the issue, but I do think it is kind of a mix of both. And I think the supply chain issues don’t be surprised if we’re looking at very likely two years before all these issues are really worked through, because when people went to, let’s say, just in time or contract manufacturing, what that did is that gave you less wiggle room. So you did not just have a massive warehouse of supply that you inventory, and then you could draw down as necessary where it would give you three months to make a mistake. Now people were essentially saying, I got one week of inventory, and if that one week gets shot, I’m in deep trouble.

 

So the chips are, there’s chips, there’s car, there’s Corona shutdowns, there’s capacity issues at some ports. And so it’s going to take a couple of years, probably to work through all these issues to return to what we think of as some degree of normalcy.

 

TN: Right. What’s interesting to me about that is the previous administration of the US tried to bring manufacturing businesses back to the US.

 

Now, with COVID because of the global supply chain issues and the intermittent supply issues, there’s more of a move to bring things back, at least to North America. I know lots going into Mexico right now. Some’s going into the US to minimize the disruption of things, especially in electronic supply chain.

 

So it seems like regardless of the kind of official policy, whether it’s trade policy or just say public health policy, it looks like more of this regionalization is happening. Does that make sense to you?

 

CB: Yeah, absolutely. I mean, look, nobody is going to announce that they’re leaving China for many reasons. But nobody’s going to announce that they’re leaving China. But you do absolutely see a spread of manufacturing capabilities.

 

Whether that is because they want to have multiple manufacturing bases, they want to be more diversified, whether it’s because of IT issues, whether it’s because of Corona risks, tariffs, all of these issues, there is absolutely increasing diversification of manufacturing capabilities, whether it’s Mexico, India, Malaysia, all of these different places. You’ve even seen Africa doing relatively well in certain areas. So it has absolutely happened.

 

TN: Okay. One last question on the economy then we’ll move to kind of politics and China’s place in the world. What’s the thought behind the elevated CNY? We’re trading much higher than we have for a long time, and it stayed there, right? It’s pegged right around 6.4 something, and it’s been there since Q1, I think. Why the persistent strength in CNY?

 

CB: Well, I mean, I think first of all, they have been running during Corona pretty significant surpluses. The United States has exports to China and other parts of the world have declined, not insignificantly or remained flat as we’re importing a lot more. That’s number one.

 

I think also the dollar has gone into a specific range. And the way that I think of the CNY is it’s basically just a reverse USB tracker, which I think explains most of what we’re seeing. I think what they’re trying to do and the reason that China has been buying some dollars, not in major amounts, but I think they kind of have, like, ICBC and CCB, those types of banks acting as dollar cushions for lack of a better term, is that they don’t want it to appreciate too much for a number of reasons, because they know they’ve become more expensive and that would just make it that much more expensive. So in a way, I think they’re trying to manage that, manage that flow. But I think it’s still generally within a range where it’s like you can say they’re within spitting distance of what their index say they should be. Okay, that’s fair.

This chart of USD/CNY is generated from CI Futures, an app forecasting nearly a thousand assets across currencies, commodities, market indices, and economics using artificial intelligence and machine learning technologies. Curious how it can you and your business? Book a time with our expert and get free trial.

 

 

 

TN: Okay. Now let’s move on to politics. Let’s move on to kind of China’s big, long term, multi hundred year plan to rule the world, which I think is not real.

 

So let’s talk about Afghanistan. This just happened over the last couple of weeks, and there’s a few that China is going to be the master winner of the US withdrawal from Afghanistan. I think there are multiple perspectives on that, but the consensus view seems to be that the US really did had to job on the withdrawal. And the ultimate winner of this is China. Can you kind of walk me through some of your views on that? What are some of the possibilities there with China and Afghanistan?

 

CB: Sure. So I think it is very fair to say that the United States has pretty badly bungled the withdrawal. You know, why, you know, we should have waited until we’d already evacuated all the army to say we’re going to start evacuating US citizens and Afghani translators and people like that.

 

One of the things I do think is absolutely happening. And this is not just China. And you’ve heard this from country after country. Taiwan, Germany, UK on down is they are saying we need to go back to the drawing board and re evaluate everything we think we know.

 

Okay. And somebody that I was talking to, I think, expressed it very well is the United States still has credibility because we can move large amounts of assets, whether it’s military, governmental, other private sector, we can bring significant assets and influence to the table. What, this has really changed in a lot of people’s minds is confidence.

 

TN: Yes. That’s fair.

 

CB: That has changed a lot of people’s mind. So you have a lot of people going back to the drawing board. One of the things I’m going to be a little bit hesitant to do is start pronouncing winners, losers, and this is what XYZ country is going to do in ABC country is going to do. And the reason I say that is it’s very, very plausible to construct a scenario where the Taliban and the CCP become BFFs. Okay?

 

TN: Sure.

 

CB: I mean, if China is shipping large amounts of fentanyl out of northeast China, it’s not a crazy scenario to say they partner with the Taliban to start shipping large amounts of opium into the United States at the same time.

 

TN: Sure.

 

CB: Not a crazy scenario. It’s also not a crazy scenario for the Taliban to start bombing China within a year or two. Okay. You could very easily construct those types of scenarios that lead to that. Okay. So it’s very, very difficult to construct those types of scenarios with any what I would consider a degree of certainty. Okay?

 

TN: Sure. So what about the, the China-Pakistan relationship? $46 billion of investment, supposedly, supposedly a tight relationship there. That’s arguable. Do you think that pays dividends in Afghanistan, or is that kind of something that’s a little bit, I wouldn’t say irrelevant, but a little bit less directly connected.

 

CB: So I think Pakistan is actually very pretty directly involved in all of this. But again, it’s very difficult to say with a high degree of certainty what’s happening there because Pakistan has very direct connections into both the Taliban, Al Qaeda. Some would even say that they were a Pakistani security service creation. At the same time, it’s well known that there are blood feuds between groups within each of those organizations.

 

So it’s very difficult to get to say exactly who the winner, loser there. With regards to China and Pakistan, one of the things that you’ve seen very clearly is that pretty much the Pakistani government and the Pakistani elites are effectively compromised by China. They will say nothing about wingers and other issues.

 

At the same time, everything, I think indicative on the ground and of the mass population is that there is maybe not extreme, but I would say broad discontent with the Pakistani relationship with China for many reasons.

 

TN: From who and Pakistan? Is it from the armed forces? Is it from other parts of the government, from regular folks who isn’t happy with that relationship?

 

CB: I think a lot of folks broadly. The business community. I think there’s a growing sense that they are effectively a Chinese colony. One Pakistani I know who described it as such. So I think there is very broad discontent. And as we all know, Pakistan has quite the lengthy history of governmental instability.

 

So similar to what you’ve seen in other countries in the region, it’s very easy to paint a picture, a scenario where the current government remains compromised and under the thumb of the CCP for years to come. I think it’s also plausible that a new government or some type of political instability happens in Pakistan. And all of a sudden, there’s an about face on how to manage relationships with China.

 

Generally speaking, though, I think there is going to be very tight coordination between Beijing, Islamabad and Kabul because those… Pakistan, I mean, almost anything that happens in Afghanistan is going to be maybe not controlled by Pakistan. I think that overstate it. But there’s going to be large amounts of information flows and influence back and forth happens over what happens in Afghanistan.

 

TN: Yeah. Okay. That’s all really interesting. I think we could spend a long time talking about China, Pakistan, Afghanistan, India, Russia, kind of where all those countries come together, Central Asia. But I want to end on this.

 

We’ve seen, a lot really changed with US standing in the world over the past couple of weeks over Afghanistan. We’ve seen a lot change in the US China relationship over the past year with the new administration. And so let’s talk for a minute about the overall US China relationship. What’s your thought there? Are they getting along? Is there a constructive dialogue? How do issues like Taiwan fit within that discussion? Can you just help me think about some of your thoughts there?

 

CB: So I was talking to someone, and I think they put succinctly the way that I would characterize the Biden administration’s record on China. You can’t criticize them for what they’ve done on China because they really haven’t done anything at all. Okay. Other than adding a couple of names to the Sanctiosn books, there really has not anything taken place.

 

They promised that they were going to get out their China strategy plan in June. Then there were rumblings that might happen in July, where now at almost rapidly approaching September 1. And now there’s not even talk of when it might be released. So really, nothing has been happened except for the Alaska meeting, which apparently went over like a lead balloon.

 

Everything right now just seems to be a stalemate. And the Biden administration is worrying, and that China is still moving forward, and the Biden administration is basically doing nothing.

 

The most telling point to me about the by administration approach, and I think this is something I think you should fault in. In fairness, Trump for is look, we can talk about values and do the right thing and all this kind of good stuff. But the United States, at some point has to actually put resources into this effort.

 

And the Trump administration, other than political capital with allies or other countries, never put any real hard resources or assets into these issues. And the point I would make is the Biden administration has made a point of spending literally trillions of dollars. And to the best of my knowledge, there has been almost zero spending passed that has really anything to do with China. Okay.

 

We cannot continue to talk to countries like Vietnam, Malaysia, South Korea, Japan. You cannot talk about the threat China poses and never spend any money on the issue.

 

TN: Sure.

 

CB: Okay. And look, this doesn’t have to mean we go out and increase military spending by 20%. This could simply mean we’re going to go into Vietnam and say, we want to have a development program and, you know, help solve issues. This can mean capitalizing the Development Finance Corporation to help countries like India and Malaysia and say, look, there is a real opportunity that does not involve the Belt and Road, where there’s going to be green standards or these non-corrupt standards and things like this to make sure that this money is really helping your country. You know, and it was probably something that was negotiated could be all the way back to the Obama administration.

 

There was some type of military center opened in, I believe, Jakarta with the Indonesian government that was supposed to have other governments. It’s a small center. Even those types of things. There’s simply not the resources being dedicated. And I think that’s indicative of where this ranks within the Biden administration priorities.

 

TN: I’ll be honest, Chris, it sounds like a mess. It sounds pretty bleak to me.

 

So great. I really appreciate this. I think if anybody knows has an idea of what China is thinking, I think you’re the guy. And I really, really appreciate your time.

 

Everyone watching. Please please subscribe to our YouTube channel. The more we have, the more we can bring to you as a part of our videos. And, Chris, thank you so much. And thanks to everyone. We’ll see you on the next interview. Thanks.

Categories
Visual (Videos)

Supply Chain Innovation, Transformation, and Sustainability

How can leaders and finance teams enable business growth, innovation, and resilience through supply chain management (SCM) and digital transformation? And, how does sustainability affect supply chains? To answer these questions, we spoke with Jon Chorley, Chief Sustainability Officer and Group Vice President of Oracle, and Tony Nash, CEO & Founder of Complete Intelligence.

 

This video interview first appeared and originally published at https://www.cxotalk.com/video/supply-chain-innovation-transformation-sustainability on April 17, 2021.

 

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The conversation includes these topics:

 

Jon Chorley is group vice president of product strategy for Oracle’s supply chain management (SCM) applications and leads the team responsible for driving the business requirements and product roadmaps for these applications. Chorley is also the chief sustainability officer for Oracle.

 

Tony Nash is the CEO and Founder of Complete Intelligence. Previously, Tony built and led the global research business for The Economist and the Asia consulting business for IHS (now IHS Markit).

 

 

Show Notes

 

Michael Krigsman: We’re discussing supply chain innovation and transformation and sustainability with Jon Chorley of Oracle and Tony Nash of Complete Intelligence. Jon, tell us about your role at Oracle.

 

Jon Chorley: I run the supply chain management strategy group at Oracle, responsible for our overall investment priorities and directions for our supply chain solutions. I also have the chief sustainability officer role at Oracle where I help coordinate all of our sustainability policies and practices for the Oracle Corporation and help drive some of those ideas and thoughts into the products and services we deliver to the market.

 

Michael Krigsman: Tony Nash, tell us about the focus of your work.

 

Tony Nash: Complete Intelligence, we’re a globally integrated and fully automated artificial intelligence platform for cost and revenue proactive planning. We do forecasting for enterprises and markets in areas like continuous cost budgeting, continuous revenue budgeting, automation of certain, say, forecasting tasks. We also offer agile budgeting and forecasting.

 

We measure our error rates, so that’s important that someone is planning, especially around supply chain. We’re trying to help people reduce the risks around their future costs.

 

Supply chains are very complex: time, cost, quality, all sorts of considerations. Our focus is on the cost element of it, and there are many other things and why we’re working with Oracle. They have so many other things to bring to the table that try to complement them on that side.

 

Michael Krigsman: You met Jon through the Oracle startup program. Just briefly tell us about that.

 

Tony Nash: Oracle for Startups program is a fantastic way for early-stage companies to integrate with the Oracle ecosystem. There is the Oracle technology product side of it, but there is also meeting people like Jon, meeting people like his colleagues, and the Oracle marketing team, Salesforce, and product teams. Amazing opportunities to understand how an organization like Oracle works and how a company like Complete Intelligence can come alongside them and enhance Oracle’s end customer experience for the better.

 

 

How did supply chains function during the disruptions of 2020?

 

Michael Krigsman: Jon, during the last year, supply chain became a household topic for pretty much everyone.

 

Jon Chorley: Yes.

 

Michael Krigsman: What did the last year tell us about the nature and the reality of supply chains?

 

Jon Chorley: Well, that they’re central to everything that makes the modern world. When you see an empty shelf and realize it’s an issue with the supply chain. Or you see a run on a product as some shortage or some challenge in some way. People now understand that the complicated infrastructure that brings those products to them is the supply chain.

 

As we’ve gotten into the more recent months where we’re looking at the vaccine distribution, people understand that yes, it’s a technical problem to produce the vaccine, but it’s also a supply chain problem to get it in people’s arms.

 

All of those things, I think, have helped take the supply chain from the back office, from the folks like Tony and I who work in it day-to-day, into the board room, which I think is very important. But also into the dining room. People now understand the importance and centrality to efficient supply chains.

 

Michael Krigsman: Jon, give us some insight into the kinds of weaknesses that this last year exposed in how we handle supply chains.

 

Jon Chorley: I think that there are a couple of areas there that I’d point out. One is we had a very uncharacteristic demand shock. There was a real change in short-term demand.

 

Some of that was upside. A lot of charcoal sold to power the grill. A lot of toilet paper.

 

Some of it was downside. Restaurants challenged, hospitality, and so on.

 

Those demand shocks forced people to look at different ways to look at their traditional forecasts. That is supportable by the kind of technology Tony and I can help deliver, but it does require people to look carefully at how they’re forecasting their demands. That’s one angle.

 

Another angle, I would say, is the overall concern about resiliency. A lot of folks looked at ways of single sourcing, for example. Maybe relying on goods out of Western China, for example.

 

All of those things had a lot of challenges, and that forced people to look at, was the single-sourcing strategy driven by cost only the right answer? Did they need to look at A) maybe simplifying their product lines a little bit, so they had more flexibility, and B) looking at alternate sources of supply? I think resiliency came a lot more to the fore.

 

Tony Nash: We’ve had even companies like semiconductor companies (who have been based in Asia) start to build facilities in the U.S. so that they can regionalize some of those supply chains and de-risk the downturn impacts of future shocks like this. Electronics manufacturers, other people who are assembling goods, or even some primary goods, are regionalizing their supply chains so that they don’t see huge impacts or any future issues like COVID or other shocks.

 

There’s at least a little bit of a buffer by region, which saves. It’s greener in terms of saving on the sea freight fuel and that sort of thing, but it also helps cushion any shocks on the supply side so consumers can get what they need when they need it.

 

 

Challenges associated with overseas manufacturing operations

 

Michael Krigsman: Jon, I’ve heard you talk in the past about the inherent challenge of manufacturing goods overseas (in China, for example) and the timeliness of getting them here in the U.S.

 

Jon Chorley: It has a lot of advantages in terms of costs, scale, and so on. But it does bake into your supply chain a certain fixed amount of time. That is fine if you have predictable demand. But if you have variable demand, it becomes a lot trickier to manage.

 

The same is true really of the innovation cycles. The speed with which you may want to innovate can be constrained by working those things from points of consumption (let’s say Europe, North America) and points of production (let’s say the East, China, Vietnam, and so on). Those are factors folks are considering.

 

I think, in some areas, certainly advances in things like automation and technologies like 3D printing, rapid prototyping, those things are changing the equation a little bit in terms of what constitutes the most cost-effective or the most efficient, or the most responsive approach to manufacturing. I think you’re going to see those factors gradually have more and more of a play as people develop new ways to balance those equations.

 

Tony Nash: Michael, that’s interesting because, as we look at how the history of supply chains have evolved from keeping POs on 3×5 notecards 30 years ago to the digitization of that, it started with EDI (electronic data interchange) from, say, the ocean lines and the airfreight firms so that you knew where your package was, all the way down to today where you have everything kept, let’s say, in a bill of material within an ERP system or a supply chain system.

 

What people have been doing for the past few years is really bill of material versioning, where you’re running scenarios on the same product configuration, of bill of materials for multiple locations, to understand where they should make a certain good. Those considerations are allowing people flexibility. They can make the time and cost tradeoffs to look at when they can have goods in a market, whether it’s seasonality or whether it’s some disruption or whether it’s some demand pop for some reason people may not know. Allowing people to run multiple bills of material or versions of bills of material allows them the flexibility to identify what they should produce where and what it should be made of.

 

Michael Krigsman: It sounds like this is a data and analytics problem.

 

Tony Nash: It is, and the way things have been done typically is, as a manufacturer, you sign a longer-term agreement for your raw materials with a vendor. They provide that for you to a certain point. You make it in factory A somewhere and then ship it out. Of course, there is not necessarily a single factory for any large company, but it’s a well-worn path.

 

We’ve had an atomization of that with mini manufacturing, or regional manufacturing, flexible manufacturing, so people can have localized versions or, like I said, seasonality. These sorts of things. Manufacturing and finance teams can only make those types of decisions with data and with automation. It’s a simpler way on how to make better business decisions.

 

 

Digital tansformation and sustainability in supply chain

 

Michael Krigsman: You need clarity around the goals and the strategy. You need the right kinds of data. Then you need the cultural willingness to innovate and do things differently. Is that an accurate way of summarizing?

 

Jon Chorley: I agree. I think you need to have some idea of where you’re going. Although, that probably is going to change. But you need to have that idea. You need to have the information, as Tony has discussed, that helps you navigate that path.

 

Then you need to be able to course-correct because we live in the real world, and nothing quite goes the way you expect it to. You need to be able to constantly course-correct.

 

Like I say, if you have a great set of headlights, you can see what’s coming. You’re coming to a cliff. If you have no brakes and no steering wheel, it’s a huge problem you’d rather not know.

 

The ability to course correct is like having brakes and a steering wheel. You need to be able to make those adjustments as things change around you. That means flexible systems, flexible processes, a willingness to look at new ways of doing things, cultural changes. All of those things become important.

 

Michael Krigsman: Tony, I have to imagine you spend a lot of time thinking about the sources of data as well as the machine learning models and other types of models that you create.

 

Tony Nash: I get excited about things like data governance, but most people don’t. I get excited about it because I understand that it helps to have much better forecasting applications and tools to make those decisions.

 

Yes, we’re thinking about the granularity, the frequency, the level of detail people have. Are they using the data that they have to make decisions today because it’s not just, let’s say, a cultural change of let’s rely on automation of things like forward-looking views or forecasting or proactive planning? It could also be a cultural change: are we looking at our data to make our decisions? How much of our data are we looking at? Are we looking at maybe the error rates of the way we plan? Are we looking back on that from time to time?

 

Although that may seem mundane and small, it’s actually very big for things like digital transformation because you have to take inventory of what you’re doing today so you can plan where you’re going tomorrow. As Jon said, it’s never going to go exactly to plan – never. I wish it would, but it never does. You have to understand yourself well today so that you can identify what’s possible.

 

Michael Krigsman: Jon, we’ve been talking about the complexities of supply chain. Let’s shift gears slightly and talk about the complexities of sustainability. How does sustainability intersect supply chain?

 

Jon Chorley: Most people would agree that supply chains are about making and moving physical goods around the world. That is a huge part of what’s impacting the environment. It’s a huge impact on sustainability.

 

The way we design those supply chains, historically, has been what I would call a linear supply chain. Which is we make a product, we sell a product, we forget the product. We then make another product, sell that product, and forget that product. It’s a fire and forget mentality, if you like – to some degree.

 

If we want to be sustainable, we need to think about the full lifecycle of those products and how they get recycled back into the forward supply chain. As we progress into the future and start thinking about these things more — and we’re required to by the markets, by regulations (potentially), and by what constitutes good business — we will increasingly move towards adjusting our supply chains to be more circular. That is, looking at the full lifecycle of the product.

 

That begins with how you design it. That’s going to be a fundamental change in the way we think about all supply chains.

 

Advice on supply chain transformation for business leaders

 

Michael Krigsman: As we finish up, Tony, can you offer advice to business leaders and finance teams who are listening to this who say, “Yes, we want to change, transform our supply chain, but where do we even begin? It’s such a daunting challenge.”

 

Tony Nash: I would say, really start with the easy stuff. Get some successes. Do a pilot. Then you can accelerate it very quickly.

 

Data scales very quickly. Technology scales very quickly. But your team may be uncomfortable with digital transformation, especially around supply chains. Help them see some quick wins and then push forward as quickly as possible after that.

 

Michael Krigsman: Jon, you discussed earlier the cultural dimensions of supply chain transformation. It’s really important, so just share some further thoughts on that and advice that you have for folks who are listening.

 

Jon Chorley: I think any change is at least as much cultural as it is technological, and the people who implement those changes are key to its success. I think part of what’s needed is a willingness to understand that the way you did things in the past may not be the way you need to do things in the future.

 

Quite often companies, for example, feel that they have a certain special way of doing a process that’s absolutely required, and they hold onto that even though there is really no business differentiation for them to do it that way. They’ll invest a lot of time and energy to duplicate that on a new platform.

 

We always encourage people to step back a little bit and leave behind some of those preconceptions. Not everything is your secret sauce. Your secret sauce is a little bit on the top. It’s not stuff on the bottom.

 

Leave behind those preconceptions. I think that’s probably the single biggest cultural shift.

 

Then the other point we mentioned earlier is board support. I think that’s top-down. Having that support from the upper levels of the business is critical to any large-scale transformation.

 

I think the great thing, if there is a great thing from 2020, is that boards are aware now of the criticality of supply chains in their business and are probably more open to those kinds of conversations. Those difficult conversations from supply chain professionals with their board. Now is the time. The folks that make the investments now are the folks who are going to benefit from the uptick that we all hope is coming.

 

Michael Krigsman: Jon Chorley and Tony Nash, thank you both for sharing your expertise with us today.

 

Jon Chorley: All right.

 

Tony Nash: Thanks, Michael.

 

Jon Chorley: Thank you so much. Great talking with you all.

 

Tony Nash: Thank you.

Categories
Podcasts

Work-from-home stocks a defensive play in 2021?

In this BFM episode, Tony Nash explains the defensive play of the WFH company Keane and how it compares to other tech stocks like Tesla? Also, will the good days for the financial and energy stocks continue? And how about the outlook for Sterling as the Brexit deal is being ironed out? Will the Pound appreciate or decline? And why there seems to be a never-ending trade war against China — now recently with Vietnam and Malaysia imposing tariffs on the Chinese steel?

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/work-from-home-stocks-a-defensive-play-in-2021 on December 24, 2020.

 

❗️ Check out more of our insights in featured in the CI Newsletter and QuickHit interviews with experts.

❗️ Discover how Complete Intelligence can help your company be more profitable with AI and ML technologies. Book a demo here.

 

BFM Description

 

As we head into 2021, will we see more work-from-home stocks being used as a defensive play? The Morning Run speaks to Tony Nash for his perspective on this, as well as his views on financials and energy stocks, the Sterling, and tit-for-tat trade wars.

Produced by: Mike Gong

 

Presented by: Roshan Kanesan, Wong Shou Ning

 

 

Show Notes

 

WSN: With volumes on U.S. equities drying up ahead of the holiday season, are you expecting investors to hit the sell button or to keep this whole positions over the period? Because the market’s somewhat a little bit more happy today, a little bit more green?

 

TN: I’m not sure, but I’m sure there is not a conviction either way right now. Investors aren’t really sure that they’re ready to pull the plug on things. People are waiting to see what’s going to happen with the stimulus funds. They’re waiting to see how smoothly the transition goes with the US government. They’re waiting to see how companies Q4 earnings come in. So in the next few weeks, aside from some commodities play, I’m not entirely convinced that we’ll see dramatic movements in one way or another.

 

WSN: And I’m just curious following up on that. So for the moment, it still seems that even though the Nasdaq corrected a little bit today, the work-from-home, Keane is here to stay as a defensive play?

 

TN: Sure, that is an effective play, but the benefits or the upside to that play is really questionable. The Nasdaq has over 40% this year. When you look at the valuation multiples on some of these tech companies like Tesla, you’re looking at over a thousand percentage. For some of the tech companies, you’re looking at fifty to 200 to revenue.

 

Some of these tech companies are being played out. That’s not to say they’re going to see necessarily downside. But the upside? I don’t believe it’s necessarily as high as it has been in 2020. We have these moments in markets where you see serious upside in different sectors and then it comes down for a bit. We’ve seen that in 2020. Are we going to see that in 2021? We’re not convinced. That maybe  possible. But we’ve seen some pretty hard closed down for people who’ve had their quickly transition to work from home. A lot of that valuation are largely played out.

 

WSN: If we look at the performance of the S&P 500, it was really the day for financials and also the energy stocks. Do you think these themes will continue into 2021?

 

TN: Certainly, that kind of stock are partly a result of the expectation of stimulus — whether that’s $600 to $2000 per person. There should be more transactional activity in terms of services with energy. There’s an expectation that people will start flying a bit more.

 

What’s positive is the expectation on a  margin within oil and gas firms as they refine their products. I think that’s a bit higher as the margins of the percentage go up as the normal values go up. We’ve been saying for several months that the oil prices will rise in the end of December and early Jan, and that’s playing out. We’ve expecting that for about six months. But we do expect crude prices to fall going into February. So while those margin plays are there now, we don’t expect that to be there at the end of Q1.

 

WSN: Moving to the UK, the Sterling appreciated this morning on the back of the news that Brexit deal might be ironed out. But where do you see the currency heading?

 

TN: We’ve expected the Sterling to weaken a bit by the immediacy of the news. But over time, we expect the Pound to re-appreciate because we really value the U.K. There’s a lot of wishful thinking within the EU that Britain would suffer as they exit the EU. We’ve done a lot of analysis on this over the last three years and there’s really just a lot of upsides for the U.K. to separate. That’s not a political view. That’s purely an economic view. We have expected the Pound to take a bit of a pounding in the short term. But we do expect it to re-appreciate as that separation gets in pace.

 

WSN: Malaysia and Vietnam, they recently placed higher tariffs on Chinese steel. And although unrelated, this comes after China imposed some additional duties on various Australian imports. Do you see this tit for tat tariffs going to continue to be the norm in 2021 and no end to it?

 

TN: We’ve been saying for a couple of years that we expect trade to turn from these fairly invisible activities like subsidy to non tariff barriers, which is really regulatory into direct tariffs. It’s like going back to 1980s pre-WTO where there’s more of a fiscal benefit for the country than the protectionist benefit in a non-tariff barrier regulation.

 

Many countries are a bit tapped out on subsidies, so they’re not necessarily going to be able to pay their industry as much to protect them. So they’re going to have tariffs to generate revenue. Specifically, the Chinese steel, there’s a global glut of Chinese steel, of the Hang Seng, for years. It wasn’t surprising that these tariffs have been levied because they have a little bit of it’s own steel industry. They’re protecting themselves from the glut of Chinese steel.

 

WSN: All right. Thank you for your time. And that was Tony Nash, CEO of Complete Intelligence, giving us his views on global markets.

Categories
QuickHit Visual (Videos)

QuickHit: China is not going to stop being China

Panama Canal Authority’s Silvia Fernandez de Marucci joins us for this week’s QuickHit, where explains why China is not going to stop being China. She also shares first-hand observation on the global trade trends — is it declining and by how much, what’s happening in cruises and cargo vessels, where do gas and oil shipments are redirecting, why June was worse than May, and what about July? She also shares the “star” in this pandemic and whether there’s a noticeable regionalization changes from Asia to Europe, and when can we see it happening? Also, what does Panama Canal do to be up-to-date with technology and to adapt the new normal?

 

Silvia is the Canal’s manager of market analysis and customer relations. She has 20 years of experience studying all the markets for them and is responsible for their pricing strategy, their forecasting of traffic and customer relations.

 

Panama Canal opened in 1914 with annual traffic of 14,702 vessels in 2008. By 2012, more than 815,000 vessels had passed through the canal. It takes 11.38 hours to pass through it. The American Society of Civil Engineers has ranked the Panama Canal one of the seven wonders of the modern world.

 

***This video was recorded on July 30, 2020 CDT.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

 

TN: Recently, the CPB of the Netherlands came out and said that world trade was down by double digits for the first five months of the year. Obviously that’s related to COVID. Can you tell us a little bit about what you’ve seen at the Canal and really what you guys have been doing? Everyone’s been in reactionary mode. So what have you seen happening in the market?

 

SM: There are some trends that had been present before COVID like the movement of production from China to Eastern Asia and we think this is going to be accelerated by this pandemia. But I don’t think that China is going to stop being China. It will keep the relevance and the importance in global trade as they have today.

 

We think that probably, yes, we will see more regionalization. We saw the signing of the renewal of the NAFTA trade between Canada, the US, and Mexico. So we think that there may be something happening in that area. However, we don’t see that trade is going to stop. I mean trade is going to continue growing after this pandemic.

 

This is something that I would say very different from anything that we have experienced before because once it is solved, I don’t know if the vaccine appears and people start going back to the new normal, there will be changes probably to the way we do things and the consumer is going to be very careful and probably will change his habits in order to prevent contagion. But I think trade is going to continue.

 

We see some of these trends becoming more and more important or at a faster pace. It is not an economic crisis per se. Once the people are going back to work, the industry will restart their operations, people are going to be rehired. The economy should start recovering faster. We are not sure because there is no certainty with this situation.

 

We first heard about it early in the year with the cases in China. But then, it looked so far away. It was happening to China. It was happening to Italy. We didn’t think about it as something that was so important or so relevant. The first casualty was the passenger vessels. The whole season for cruise ships at the Canal was cut short in March and Panama went to a total lockdown on March 25.

 

It really started for us when we received the news of a cruise ship arriving in Panama with influenza-like disease on board that wanted to cross, which was the Zaandam, and the first one that we had with the COVID patients on board.

 

TN: And how much of your traffic is cruise ships?

 

SM: It’s very small, to be honest. It’s less than two percent of our traffic. But still, we see it as an important segment, not only because of the traffic through the Canal, but also because of what it does to the local economy. We have a lot of visitors, a lot of tourism, and that is a good injection of cash coming to Panama. It was the probably the end of the season but it was shorter than what we would have wanted.

 

TN: When we saw the first wave of COVID go through Asia, did you see a a sharp decline in vessel traffic in say Feb, March? Or was it pretty even? Did we not see that much? Because I’ve spoken to people in air freight and they said it was dramatic, the fall off they saw. I would imagine in sea freight, it’s not as dramatic but did you see a fall off?

 

SM: It started in January, which is the very low season for containers, which is the most important market segments in terms of contribution to tolls. When we saw that there was this COVID happening in Chinese New Year, everything was closed. We were in a slow season. So we didn’t see much of an impact.

 

And for the Canal, there is a lagging effect because we are 23 days away in voyage terms. So whatever happens in China, we feel it probably one month later. We expected January and February to be slow because of the normal seasonality of the trade. But then after March, I would say that April was probably the worst month for us. We were hit April then May was worse than April and then June that was even worse than than May.

 

TN: June was worse than May? Okay.

 

SM: June was worse than May. We‘ve seen four percent, ten percent, fourteen or sixteen percent decline each month. It was like, “Oh wow! This is really thick. This is really getting worse.” We had reviewed our forecast in April. And I think so far, it is behaving as we expected back then. But there’s nothing written about COVID. We are learning as we go.

 

I would say that container vessels were also affected these three months of the year. We have LNG vessels that were supposed to deliver natural gas to Japan, Korea, and China. And LNG had been behaving very badly all year. That is kind of a peak season for LNG and LNG has been having a hard time because the market were supplied and the prices were very low, so many shipments that were supposed to end up in Asia, ended up in Europe or other destinations that were more profitable for the owners. But when the price of oil collapsed and went negative, the prices of LNG were affected in the Middle East and became more competitive than the US prices.

 

We saw a harsher decline in LNG shipments. We see, for example, 30 percent less than we expected to see and by COVID in April, it was probably 50 percent below what we were expecting. It was major and Iguess it’s a matter of demand because since the whole Asia was locked down, there was no demand.

 

TN: When industry stops, you don’t need energy. It’s terrible.

SM: Exactly. It’s really terrible. It was terrible. But we had some stars in our trade that supported the situation like LPG, the cooking gas and obviously people were cooking more at home so the demand was high and we saw an increase in trade for LPG. It’s a good market for us, for the neopanamax locks, so in a way we are grateful that our trade has not suffered as much as we have seen in other areas.

 

TN: You said you declined into June. How have things been in in July, so far?

 

SM: July seems promising. We came from a from a very bad June that was closed probably 16 percent below what we expected to have. But July is about maybe seven percent below our expectation. But we are very concerned about a potential W-shape recovery because of the new cases that we have seen in the US.

 

TN: When we saw factories close across Asia in the first quarter and in some cases stay until the second quarter, did you see some of the folks who were shipping through the Canal start to pivot their production to North America?

 

SM: It’s probably too early to say. We will see the effects of COVID probably in terms of near shoring maybe in two years. I don’t think that the companies or the factories are so quick as to move the production especially during this period in which everybody is still trying to cope with the situation.

 

TN: And manage their risks, right?

 

SM: Yes. So I don’t see that happening anytime soon. But it’s probably something that the factories and the companies are going to start speeding up and diversifying their production.

 

TN: And as you said earlier, China’s still going to be there. China’s not going to disappear as an origin, right? What I’ve been saying to people is it’s incremental manufacturing that may move. It’s not the mainstay of Chinese manufacturing that’s going to move or regionalize. They’re still going to do much of the commoditized manufacturing there because the infrastructure is there.The sunk cost is there, and they need to earn out the value of those factories. I like your timeline of two years before you really start to see an impact because we may see some incremental movement and maybe some very high value, high tech stuff or something like that move first but the volume of things probably won’t happen for at least two years. Is that fair to say?

 

SM: I would say so and I would add that we have seen these shifts to Vietnam and Malaysia and other countries in Asia, but we still see containerized cargo shipping from China. The volumes are still not high enough to be shipping directly from those countries. The container may come from Vietnam and or from Malaysia and they come to Shanghai or to another port in China. They consolidate the vessel there and the vessel departs from those ports. So in terms of Canal, for us that is good news. And I would say that probably Korea is trying to attract that tradition as well. So the long voyage will start in China or in Korea or in Japan instead of these other countries that are further away from our area of relevance.

 

TN: That makes a lot of sense. Just one last question. How do you see transit changing over the next five to ten years? What are you seeing from the Canal perspective in the way your operations will change?

 

SM: We are still adjusting to what is happening. We have always been very regulated in the best way. What I mean is that we have always had our protocols and codes for attending every situation. We have our protocol for infectious diseases that was the basis to start working with COVID. We think that at the canal probably, what we will see in the future is more technology to improve the operation. I’m not sure exactly how, but definitely there are machine learning and artificial intelligence that may help us be more accurate in our forecasts and probably organize our traffic in a way that is faster or we make better use of the assets. The canal is 106 years old. We have been adjusting every time to the new ways of the world, and we’ll continue to do so as a trade enabler.

 

TN: That’s right. Silvia, thank you so much for your time. This has been very insightful. I really do hope that we can connect again in some time and and just see how trade recovers and what we look like maybe going into 2021 or something like that. Okay. Thank you so much.

 

SM: Thanks to you.