In this week’s episode, we look at the CPI numbers from last week, the inflation cycle, and will the Fed stop QE on their Monday meeting? What do you have to expect on the metals market in the longer term? Will the demonstrations around the world push the US to bring out fiscal stimulus again — and can they? What does this mean to the Democrats on November US Election? And lastly, what you should know to thrive and survive this coming week?
This is the sixth episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
For those who prefer to listen to this episode, here’s the podcast version for you.
Follow The Week Ahead experts on Twitter:
Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Nick: https://twitter.com/nglinsman/
Albert: https://twitter.com/amlivemon
Transcript
TN: Hi, everyone, and welcome to The Week Ahead. I’m Tony Nash. And we’re joined by Nick Glinsman, Albert Marko. And today we’re joined by Sam Rines for the first time. Tracy Shuchart could not make it this week. She’ll be back next week.
So before we get started, I’d like to ask you to subscribe to our YouTube channel. It obviously helps us with visibility and it gives you a reminder when a new episode is out. So if you don’t mind, please take care of that.
Now, a lot has happened this week. We saw CPI slightly higher than expected, which is what we talked about on the show last week. Consumer sentiment out on Friday, slightly lower than expected. And there were a few things that we said last week that will remind you of the ten-year cross, too. Nick pretty much nailed that. Crude went sideways. Tracy said that we would see a slight pull back in sideways move in crude. The S&P have a slight down bias, which is what we talked about. And the Dow had a slight upward bias, which is what we talked about. So good week all around. Thank you guys for being so on the spot for that.
Let’s start with CPI. And Sam, since you’re the new guy, it’s surprised high. So what really jumped out for you and what do you expect to see with CPI prints going forward?
SR: Basically, the entire print jumped out to me. I don’t think there was a single thing that was actually positive on the inflation front. There was no positive news that we could extrapolate from there. Whether you’re looking at the actual headline number, the core number, three month annualized accelerating, et cetera, it was a pure CPI hot. It was just hot. Cupcakes and cakes were the worst news in there. Both of those up. I think it was like 2.2%. 2.3% on a month over month basis. The only thing that was a little bit lower, that kind of offset, that was ice cream. So dessert got more expensive for most of us.
I think generally the way to look at CPI right now is we were supposed to have this really interesting hand off from goods to services. And what we really had was no hand off from goods and services begin to start running. You had people begin to go outside of their homes, but they’re also working at home. So you need more stuff. If you have an office and you work from home, you need two computers, you need two microphones, you need two cameras.
That’s really what we’re beginning to see is the confluence of the end of COVID restrictions, but not really the end of COVID all at the same time. That’s a big problem.
TN: So the durable good cycle is we’re late in that cycle, right. So it’s not as if we’re redoing our homes anymore. Most of that stuff is gone. It’s more consumption, right?
SR: Yeah, it is consumption to a certain degree. But also you haven’t really seen a slowdown in people buying homes. When people buy homes, when people build homes, they need to put stuff inside of them. They need couches.
TN: That’s fair.
SR: So I would say we’re probably not at the end-end of the durable good cycle, we might be in the fifth or 6th inning. Okay. But millennials still on homes, right? Millennials figured out that when you can’t go to a really cool restaurant in New York City, it’s not really worth living in 1000 square foot apartment or smaller with a kid. Right. They’ve decided that they really want to go make a household somewhere, buy a house.
So I think we’re more call it mid innings of durable good cycle. And on the services front, we’re just beginning to see the re emergence there. You’re just beginning to see housing costs, housing and rent, et cetera.
TN: Okay, so this inflation cycle is something that Nick and Albert have been talking about for over a year. You started talking about this in August of ’20 or something like that?
AM: Yeah, something like that. I mean, it was evident that the supply chain stresses is going to cause inflation. When the demand starts to tick up and there’s no inventory, of course, it was inevitable at that point.
TN: So when does it end? Obviously, this isn’t kind of the transitory inflation we’ve been told, and that’s been said many times. But do you see this continuing through, let’s say all things equal. There’s no rises from the Fed, nothing else. How long does this go before it works itself out? Nick?
NG: I’m sorry, Albert, do you want to?
AM: No. From my perspective, wage inflation is a problem. So until that gets sorted out, inflation is going to be sticky.
NG: Yeah. With Atlanta Fed wage price level, it was 5% I think it was, came out for the first time in 20 years. Actually, I’m going to be slightly contrarian. I think we’re at that peak. Whether we can go up, we can still go up a bit more, but I think there’s a peak. The trouble that people have got to get their minds around is if we’re peaking, it could take several months. Where do we come down to? And my suspicion is we come down to a level that’s still significantly above the 2% Fed targets.
The other thing that I think is really important, you’ve got the conventional wisdom. Feds behind the curve, Feds behind the curve. And now all these forecasts from the street have sort of come like this. Goldman have now joined Bank of America on seven.
The key thing to understand in a zero rates environment, they introduced forward guidance, and that was their technique to try to suppress volatility in the market. Well, now that things have shifted around so rapidly and we’re moving to a rate hiking cycle, they’re actually not going to be suppressing volatility. By definition, they can’t you hear this in Europe as well? Data dependency. We’re dependent on the data. Well, they’re dependent on the data in Europe because their forecast is so terrible. Haven’t been much better in the US either. Right.
So you’re going to have much more volatility. So what we’ve seen in the last couple of weeks, which if you traded, if you ran money through 2008, it’s sort of nothing. But what we’ve seen in the last couple of weeks, get used to it. And I suspect going back to what we mention last week and I even put it on a tweet. Newton’s law of gravity is going to start to impose itself on those stocks without the high dividends, those stocks that don’t have the earnings, those stocks that are over owned.
I know we’ve got witching out next week or OpEx not clear whether the market is long or short delta. Just not clear to me because actually a couple of days ago, Goldman came out with a chart that showed that short interest on the S&P is really low. So if that’s the case, and I maintain that we’ve got a lot of trap longs still there, this volatility is going to get worse.
I mean, you’re getting volatility in the treasury market. And remember, the treasury market, by definition, is zero rates, low rates environment, is long convexity. So the price moves to a couple of basis points are way bigger than they were back in the days when you had a decent coupon, back in those good old days where retirees would earn some money on their bank deposits.
TN: Yeah.
NG: So they’re not suppressing volatility anymore. Volatility cannot be suppressed, even if they sell VIX. We’re talking about broad systemic volatility. Is it a risk? Could be. But that’s gone. Those days have gone. Forward guidance. They’re not even going to forward guide. Powell’s last press conference. I’m going to be humble. I can’t give you whether it’s a 50 or a 25. He never said anything. No. When he was asked aggressive questions. So it’s sort of interesting.
TN: That is very interesting. I think not worried about volatility is a very interesting point, even if they just dial it down a little bit. It’s a very interesting point to me.
So let’s move in that direction, Nick. There was a lot of Fed speculation this week, obviously more intensive than even last week. Inter-meeting hike, 50 basis point hike, 25 basis point hike, all this other stuff. So what are you thinking about that and QT? I also want to get kind of your and Albert’s view and Sam, of course, on this thing going around on Thursday about an emergency meeting on Monday. So let’s talk about all of that stuff with Fed and central banks.
NG: I just don’t think this Fed has it in them to do something shocking. So the first order of business, if they were to do anything intermeeting, is stop QE. That’s absolutely absurd that that’s still going on. Right. So you stop the QE.
Remember, this is a Fed that’s built on… Most of these members are built on the gradualist approach of the Fed. They’ve been suppressing volatility. They don’t want to shock anybody. So I think there is a valid discussion to have between 25 basis points and 50. It’s a discussion they need to have and they need time to think about it.
Interesting Bollard came out as hawkish, given he used to be a Dove and we’d forecasted actually everything he said. We got a little experience of deja vu, but I’m suspicious of this intermeeting situation. The only thing I can think of really would be stopping QE. That’s where their first… If you watch the Main Street media, that was their first part of call with the “experts”, and they’re still doing QE, which is why they’re still doing QE. I think they need a proper… Right now, given it’s a new hike, first hike in the whole process, they need to have a proper meeting.
TN: So you think there’s a greater than zero possibility that they’ll stop QE on Monday? I’m not saying you’re saying it will, but you’re saying it’s greater than zero.
NG: That would make sense to me, but it would be a bit dramatic given all the huff and puff that’s been in the since last night about this secret meeting, which is also right. I would be surprised if they do an intermeeting.
I’m still trying to figure out whether they’re biased towards 25 and 50. Remember, the market is giving them 50, but when is the last time the Fed taken what the market is giving it?
TN: Albert, what do you think about Monday, the speculation about the meeting on Monday?
AM: Well, yeah, everyone’s talking about this meeting that popped up all of a sudden, and some people are starting to dismiss it’s procedural and whatnot. But realistically, they got together over the weekend to discuss what’s really happening. The last time they did something like that was pre-COVID in 2020.
Right now, the Fed and actually the Biden administration together are looking at problems with the Russian invasion of Ukraine looming, trucker rally, actually in the United States and France and Australia that are looming. I mean, any more supply chain shocks is systemic problems of the economy. And I think they have to address it one way or another.
Whether it’s a 50 basis point hike in Monday or March or something, you’re going to have to do something against inflation.
TN: So you think it’s possible that they can take some action on Monday? You don’t think this is just a procedural meeting?
AM: I don’t think it’s a procedural meeting whatsoever. I think something’s wrong with the system and they’re working to address it.
TN: So if you had to say they’re going to stop QE or they’re going to announce a rise, which is more likely on Monday.
AM: I think they’re going to announce a rise. Well, to think about it, they’ll probably stop QE before they actually do a rate hike. I think the rate hike will definitely come in March.
NG: That’s the sequence.
TN: Okay.
SR: And just to add something there, I think it’s really important to remember that effective Fed funds right now is eight basis points, right? Eight to nine basis points. It bounces around a little bit but we hike in ranges now, right? So we’re going to hike from zero to 25 to 25 to 50 or 50 to 75 and they don’t have to put it at the midpoint right? So going to ranges, so to speak, is not the only way to look hawkish.
If you raise one range of 25 to 50 and set it at 40, 45 towards the top end of the range, you can do one “rate hike”, but be pretty hawkish within that range, you can show your intention pretty quickly there which would match pretty closely to what the market expectations are when you kind of extrapolate down to actual basis points what the market is giving the Fed. So I think it’s really important to pay attention to not just where the range ends up, but where they decide Fed funds goes within that range.
TN: It could be incremental. They could be a Chinese central banks type of like 37 basis points or it’s 38 basis points or something?
SR: Exactly. Exactly. And I think that’s going to be the kind of “the shock” and all that they can use. They can have call it a very hawkish one hike. They don’t need to do two hikes to be overly hawkish.
TN: So what do you think, Sam, on Monday? Do you think it’s a procedural or do you think it’s possible that there could be some sort of policy change?
SR: I think it’s procedural.
TN: Okay. Interesting. It would be interesting to come back in a week and see what’s happened with that. I like the differences there. Sorry. What’s that?
NG: You get the coin out and heads at something.
TN: Right? Exactly.
NG: One thing it can be, it can be a hike without stopping the QE.
SR: Yes.
TN: Right. Okay. That’s a good point. So speaking of inflation, before we get onto the truckers and other stuff, Nick, you guys put out a piece last week about the metals market. And I’m really curious. It looks like there’s a view that there’s longer term rises in metals, industrial metals especially. Can you give us a little bit of color on that and help us what to expect in metal markets?
NG: Sure. It was a longer term view. It’s not really a short term trading view. The view is, I have the thesis that some of the greatest trades attached to some of the biggest traders in time have arisen because of policy mistake. Whether the policy is benefiting or whether the policy was just maligned. And right now we’re in this net zero push, which is the new neurosis and there’s no transition plan.
So the first thing, if we were to look to commodities right now, where is it? The most obvious place that it’s hit? European energy. Right. The German is getting rid of nuclear. It’s just a complete nano mess. But it’s actually in the metals market where over the next couple of years it’s going to be really keenly felt.
There’s been a lack of capex like energy. There’s been a lack of capex in metals. They learned what lessons? We don’t know. Lessons from 2011 when prices were very elevated. And with that lack of capex and they’re paying high dividends, they’re rewarding shareholders, means the supply cannot be flexible enough, elastic enough on the upside to meet all this huge demand.
So we put the blocks together. China. China, give or take, is still there as a big user and consumer of the metal. Now you add on the rest of the world, plus China, additional China on net zero products. EV cars, right. All the wind farms, solar panels. All this stuff needs metal. Some of it needs fossil fuels as well.
And I got triggered a couple of weeks ago. There was a report in France that said in the next two years, the available supply of copper, not new finds, or not new mines. The available supply right now would have been used up. Yes or no. But the point is that’s the direction. Nickel, even more so. And then you think about nickel and the geopolitics of Russia having a huge nickel company. What we’re about to go through, potentially with sanctions?
All this geopolitics grinds against the need for these metals in terms of net zero. So basically you’ve got those two forces against each other which squeezes everything up in terms of price. And from the point of view, we have no transition plan. So if there was none of that, we needed a transition plan anyway.
So our view, you can go through the metals. Aluminium has been making new multi year highs this week.
TN: Right.
NG: Aluminum being the cheaper copper.
TN: Okay. Yeah. And I think as a medium, longer term plan, as a strategic placement, I think that’s very interesting.
Let’s move on to other components of uncertainties with what seems to me is a resurgence of populism with these trucker strikes and other kind of demonstrations.
Obviously, the Canadian trucker strike has stolen the headlines this week, but there are things happening across Europe, and they have been for a year. Australia has been happening for six months, something like that. Demonstrations. You see sporadic demonstrations in the US with talk about truckers striking at the Super Bowl or something like that. So what do you guys think about that? Is that a real risk, and is that a risk that will flow into markets?
AM: I think it absolutely is a risk. If you’re talking about adding more stress to the supply chain, of course it’s going to be a systemic risk. I won’t even put it past some foreign actors propelling it through social media campaigns to stress the United States, France and Australia.
TN: Okay.
AM: I certainly would if I was Russia or China. I would definitely do that.
TN: Okay. So what does that do if there is this kind of wave of populism that is pushing back against kind of COVID restrictions? Do you think that puts more stress on, say, the US government to get fiscal spending out there to kind of placate people?
AM: There’s no way we’re getting fiscal. The reasons that the Fed has been doing all the shenanigans behind the scenes is because there’s no fiscal that’s happening.
TN: Okay.
AM: Rumors are that they’re even buying oil futures.
TN: Okay. So it makes things complicated, right? I mean, if you can’t send fiscal out to the people, then it makes kind of populism even more complicated.
AM: Of course.
TN: And more acute. Right. So what does that say for November in the US? Does that mean that it’s going to be tougher than we had thought on Democrats?
AM: Oh, absolutely. I mean, they sent out a memo to all the Democratic governors with all the warning flags. If you don’t lift off these COVID restrictions, we’re going to get massacred in November. So all of a sudden you saw this week like a dozen Democratic governors lift all the mask mandates.
TN: Okay. But do you agree if they had room for fiscal, it would solve some of these populist issues?
AM: That’s a tough question, Tony. I mean, possibly, but then the talk of new stimulus checks comes out and then the inflation probably gets worse. What are we doing?
TN: It’s a complex problem, which is why I’m asking the question.
NG: Didn’t Germans should make it pretty clear though, this week? They said I’ve been… Last year with the last fiscal. I said inflation. Inflation, inflation.
TN: Yes.
NG: Clear as you can be. But he’s a swing vote in the Senate. He just said we’re not getting inflation.
TN: Inflation tramps fiscal is what you’re all saying, is inflation tramps fiscal regardless of what happens with populist.
AM: Sorry, Sam. Let’s make a quick real quickly. Inflation is a nuclear football for politicians.
TN: Well, especially at 7.6%. Right. So fuel inflation of 40% year on year. I mean, this is crazy.
Okay, let’s move into what we expect for next week. What are you guys looking for next week?
SR: The flattening on the 210s curve will continue until the Fed breaks something and has to go the other way.
TN: Okay.
SR: I think that to me is the easy trade out there right now. It’s 210 flatten and done.
NG: Put a health warning on that.
SR: Yeah.
NG: If the Fed wimp out, I even think 25 basis points and non hawkish statement. If they whimp out, that long end is going to get hit because the idea of a flattening curve.
Remember, the sequencing is wrong here. That curve flattens after they’ve well into hiking cycles because of the potential for a recession. 13 out of the last 14 hiking cycles have led to a recession. That’s why I curved bear flat. Okay. It’s already doing it.
But the point is it’s because they think it will be enough. If the Fed given the narrative now, don’t go ahead with this. And I’m still anxious about the Fed, even though Powell warned back when the QE three was being launched, you’re going to create a whole lot of problems. Ironically, he got all the problems.
I’m just still nervous about this Fed because.
TN: I think everybody is Nick. I think that’s why we’re seeing the volatility because no one’s getting a clear signal. And we saw some Fed governors out on Friday saying that 50 basis points is too much and putting 25 basis points into question.
So I’m not sure if there’s a consensus.
NG: Actually, there’s a great trade to be had. Great trade in some of the markets. You buy a struggle, you buy volatility effectively. Make it, usually pay up for premium, but you make it completely not dependent on direction.
TN: Is what you’re saying for the next several weeks.
NG: Because they’re not going to suppress volatility anymore. It’s reversed. So everything they do now is by definition going to be creating more volatility. We’ve been zero rates, forward guidance. Let’s just cruise.
And the balance sheet is pushing stocks up. The other thing you need to watch, by the way, is the level of reserves.
TN: Right.
NG: Because I actually think if back in 19 there was that Reserve issue with the repo. I think that slightly could be problematic if something like that happens again.
TN: Okay, great. Good to know. So let’s go one by one. And what do you guys see say in equity markets next week? Is your bias for equity markets? Do you have a downside bias in equity markets? Sorry, Albert, go ahead.
AM: So I was just going to say next week, I think it’s going to be all about the Federal Reserve’s narrative building. It’s going to be a choppy session in equities all week. They’re preparing you, they’re sending out boulerd with ridiculous 100 point basis comments, and they’re just preparing you for a 50 basepoint rate hike.
TN: Right.
AM: So that’s what I think is going to happen. So we’ll just be choppy on next week.
TN: Okay. Sam?
SR: I like SPX more than I like the Dow, and I like the queues less than I like the Dow.
TN: Amid the volatility, you believe in tech?
SR: No. Okay. I don’t like any of them. Okay. And I prefer the S&P to the Dow. And I prefer the Dow to the queues.
TN: Okay.
SR: Yes, exactly. And I don’t like any of them. But if you had a gun to my head and made me buy something, it would be SPX and shorting queues against it.
TN: So there’s a slight downside bias in markets next week, equity markets? Okay, Nick, same?
NG: Yes. I think, as I said, I like what I wrote. News is law of gravity. As these rates come up, it starts to put gravity on the equity market and gravity will bring it down.
TN: Okay.
NG: One provisor, though. If we get some, along the path that we’re going, we get some serious shake outs. I do think what could be interesting is some of these commodity related starts, because actually commodities do quite well during a hiking cycle. Okay. That again, fits with our thesis anyway.
AM: Of course, gold has been on a tear for the last four trading days.
NG: Confusing everybody, right?
AM: Yeah, of course.
TN: Sam, do you agree with that commodity during the hiking cycle?
SR: I think oil is great during a hiking cycle. If you look back over hiking cycles, oil tends to do pretty well. I actually like the long oil short gold trade.
TN: Okay. So you bring us into a good point. Oil was my last stopping point. So, Albert, Nick, do you guys sit in the same place with oil? You think in the short term, say next week oil is looking good, or you think it continues to trade sideways?
AM: I think it goes up. I know. Rumors are Fed buying oil futures. I think it’s going to go up to 110. Not next week, but over the next week.
TN: Even with the inflationary pressure? Even with, which is unbelievable for me to say that. Even with the dollar rising. It’s unbelievable for me to say this.
NG: Albert just made a great point. These commodities are all at new levels and really the dollar hasn’t collapsed yet.
TN: Okay?
NG: Can you imagine what would happen if the dollar sells off some of these commodities?
TN: Yeah, we’re going to have to wrap it up there. So thanks very much, guys. This has been great and have a great week ahead.