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[00:00:22.650] – Tony Nash
Hi, and welcome to the week ahead. I’m Tony Nash. Today we’re joined by Michael Belkin, Tracy Schuchart and Ralph Schulheimer. A couple things we’re going to cover today. Our key themes. Michael is going to talk about giddy euphoria in us markets. Those are his words. I love those words. So giddy euphoria in us markets. Tracy, we’re going to talk through the geopolitical influence of us LNG. How much influence does us have can they exert through LNG? That sort of thing. And then with Ralph, we’re going to talk about Germany. First we’re going to talk about evs in Germany, and then we’re going to talk about some industrial policies and other things that Germany’s had that’s really resulted in them kind of hollowing out some parts of their economy. So, Michael, welcome back. Ralph, welcome back, Tracy, thanks again for coming on. Before we get started, I want to let you know about a new free tier we have within CI markets, our global market forecasting platform. We want to share the power of CI markets with everyone. So we’ve made a few things for you. First, economics. We share all of our global economics forecasts for the top 50 economies.
[00:01:30.230] – Tony Nash
We also share our major currency forecasts as well as Nikay 100 stocks. So you can get a look at. What do our stock forecast look like? There is no credit card required. You can just sign up on our website and get started right away. So check it out. CA Markets free. Look at the link below and get started ASAP. Thank you. Michael, you put this note together, I think, last week where you really dig into a lot of the US employment data, and obviously you dig into markets and sectors and individual stocks and all sorts of things. You use the words giddy euphoria in us markets, which I think is great, at least for a section of us markets. And I want to dig into that. But first, I think we really need to look at jobs, which is what you start your piece with, and you look at BLS jobs. And in this cut that we have on screen, you talk about phantom jobs from the BLS, which is interesting. Can you talk us through a little bit of that? We’ve had Mike Green talk about that a little bit, but I’d like to hear it from your perspective as well.
[00:02:41.430] – Michael Belkin
Okay, great. So the jobs report, payroll jobs report last week said plus 353,000. And everywhere you see job market, hot blockbuster jobs report, blah, blah, blah, ever. CNBC, it’s unanimous. Like nobody looked at the numbers. Okay. That’s seasonally adjusted. Not seasonally adjusted was -5.6 million. And that’s not an aberration and it’s not a conspiracy theory. But what happens is the way employment works is a lot of people are hired in the last three months of the year for temporary jobs and retail and things like that, and then they’re laid off at the beginning of the year. That happens every year. So January is always down big in the millions. Right. And it was down more this time than last year.
[00:03:30.130] – Tony Nash
I just want to understand because that’s a big number, 5 million jobs. Okay. And I think a lot of people in markets put a lot of weight on these numbers that come out, these headline preliminary numbers that come out because they move markets for a few hours or whatever. Right?
[00:03:48.200] – Tony Nash
But when you say they seasonally adjusted 5 million jobs kind of into the market, how do you seasonally adjust that? And how does somebody look at that number and go, oh, yeah, that’s normal. Numbers grew. Jobs grew.
[00:04:02.430] – Michael Belkin
All right. So they add basically 6 million. So to get from 5.6 to plus three -5.6 to plus 3.353,000, it’s almost 6 million. They pad it again. It’s not a one off like they do that every year. They want everybody to think it’s a smooth cycle. It doesn’t go up and down. But that’s not the way the real world works. Now, going back, if you look at this historically, it usually takes about three or four months for the level of, in the jobs report, payroll jobs report, to get back to the December level. That’s in a non recession year. In a recession year, that’s like 20 01, 20 07, 20 08 or 2020. They don’t get back. So jobs decline and they head down into the economy, goes into a recession. That’s my forecast. So what I do is I have a time series analysis model which is actually similar to what they seasonally adjust the numbers with. It’s based on box Jenkins and Fourier analysis, which I studied at UC Berkeley and then I was at Solomon Brothers prop trading developed this model. Anyways, so my forecast says jobs are going down. And you just contrast that with what everybody’s, it’s unanimous, jobs are great.
[00:05:18.340] – Michael Belkin
And then even smart people go through, well, all these jobs were created in this kind of sector and this kind of sector, those are all imaginary, like they don’t exist.
[00:05:27.570] – Tony Nash
Well, are they adjusted jobs or are they real jobs? I have a chart from you showing your negative forecast for jobs. We hear about job cuts at meta and it seems to be concentrated in tech. We’ve also heard about a bunch of job cuts at ups and some other places. So these job cuts that we’ve heard about in tech and tech continues to kind of do well in markets. But will we see those go into the broader market, into other sectors?
[00:05:55.570] – Michael Belkin
Yeah. So meta is a case in point. Okay, so they cut 20% of their workforce over the last year or so, and their earnings were up 69% or something, right? So I can just see all these people drooling. Oh, boy, this is how to increase my margins. All these other tech companies, it’s a poster child for what to do. But I mean, think about it. When companies are cutting jobs en masse.Right, which is happening
[00:06:22.810] – Tony Nash
20% is on mass, right? I mean, it’s not like they’re doing a 3% marginal cut or whatever.
[00:06:28.270] – Michael Belkin
But.It’S all these other companies, they’re copycat. So, Snapchat, it’s become the thing to do, right? You lay off people so you can keep your margins up and keep your profits up. That makes the pie smaller. That’s what makes a recession. And it doesn’t happen instantly, but that’s going to be the theme this year, I think. Lots of layoffs in the face of slowing top line revenues. What are you going to do? I think it just drives the economy down again, it’s not instant Quaker oaths or something where it happens overnight, but the force is declining by basically it’s a recessionary, contractionary thing that happens to the economy.
[00:07:15.450] – Tony Nash
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[00:07:55.320] – Michael Belkin
We have to mention just stepping outside of AI about earnings and layoffs and stuff. So outside of tech, all these cyclical stocks are going down. So if you look at the Belkin report, I’ve been short air freight containers, packaging, all these paper products, metals and mining. So the cyclical stocks are weakening. They’re underperforming. There’s only been one thing holding the market up, a handful of big tech stocks, and even those are going like it went so going up anymore.
[00:08:24.650] – Tony Nash
Let’s get into that in just a minute. Michael, I want to make sure we talk through soft landing first.
[00:08:30.340] – Tony Nash
Because I think part of really interesting part of your discussion is on soft landing. And so can you talk us through in what context you say soft landings narratives often precede recessions. So I’ve got a chart up that you sent me about mentions of soft landings. So can you talk us through that? And then let’s also move into the Fed funds rate hike and how that plays into the soft landing narrative.
[00:08:58.340] – Michael Belkin
Okay, so if you look at the chart, we’ve got the biggest proliferation of soft landing quotes in media of all time. And the previous ones that were not quite as big as this came right before a recession. So basically, I think the psychology of the market is really messed up. Everyone, the sentiment is unanimous. It’s going to be a soft landing. I think it’s just an insane number, percentage, super high percentage of portfolio managers.
[00:09:28.720] – Tony Nash
I see it every day. I see people who are normally skeptics have changed to say, okay, it’s going to be a soft, I don’t know, the shoe is not going to drop. It’s going to be a soft landing. I’ve just seen over the last six months all of these people who are like, looking for the downside, except you, who are looking for the downside just kind of surrendering to the soft landing narrative.
[00:09:51.940] – Michael Belkin
Absolutely. So I think what we’re talking about is deviant psychology. So what people think. Okay, so you have to say the market’s always right, right? Well, was it right at the top of the tech bubble? Was it right at the bottom when people were bearish in 2002? Was it right when everybody was bowled up in 2007? Was it wrong at the bottom when everybody was bearish? My point is, you get these extremes of sentiment that you need to fade, and what happens is the psychology changes, and that is what drives the change in markets. A change in psychology where people suddenly, all of a sudden there’s some kind of a shock or something, and all of a sudden people say, oh, wait a minute. And so you see this change in sentiment, and that’s what drives investment flows, flows into different sectors and in and out of the market. So that’s why I think we’re set up a major change in psychology. Not overnight, but it’s coming.
[00:10:57.110] – Tony Nash
Right. And so a lot of what’s driving that psychology, it seems to me, is interest rates and so, you know, there has been an expectation, as we saw leading up to the last fed meeting, march rate cut and so on and so forth. And that’s been kind of destroyed for so, you know, we’ve seen it. We have a chart on screen from you showing, know, steepest rate curve or rate rises, all this stuff. So will that eventually erode the psychology we have in the market now?
[00:11:31.070] – Michael Belkin
Absolutely. So just to put things in perspective, take a look at this chart. So 525 basis points from March 2022 to now. I mean, it’s been on hold for a while. That’s the biggest Fed rate hike campaign on record. So when they started this interest rate targeting thing, that was greenspan. Before that, it was reserve targeting with Volcker. So going back to the. What’s that? It’s like 40 something years. And so I was delighted to be invited to this Vale symposium last week. I was there with a lot of heavy hitters, investment strategists, portfolio managers. And one of the things that emerged, David Rosenberg was there, and he pointed out that it takes, the average lag between the beginning of Fed rate hikes and a recession is 24 months. Well, guess how many months it’s been now since the Fed started raising rates. 23. So here we are in February. So March is going to be two year anniversary. That’s the average. So basically, people have just kind of swept that under the rug and said, oh, it doesn’t matter. It’s just the fed
[00:12:38.470] – Tony Nash
[00:12:41.090] – Michael Belkin
But it hits with a lag. And we are setting up for basically the blowback, the delayed response from a serious, serious monetary tightening campaign that is going to slow things down. You see it in the cyclical stocks, not so much tech yet, but that’s what we’re setting up for. The oldest saying, marty Zweig said, don’t fight the Fed. Right. So people think that was back in 2022 when the Fed was raising rates. But the lag effect is about to hit. And if there’s one thing, another along with soft landing, the psychology in the market is unanimous. The Fed’s going to cut interest rates. That’s bullish. For know, everybody says, right. Well, that’s not what in, when it’s a recession, when it’s not a recession, if it is a soft landing, yes, you’re right. Stocks take off. If it’s a recession, the opposite happens. So stocks go down with Fed rate cuts because why earnings decline?
[00:13:46.710] – Tony Nash
Let’s get there eventually.
[00:13:48.390] – Michael Belkin
Yeah, we’re not there yet. I’m actually short bonds now, the model. So I think it’s going to take a few months for this to play out. So basically, I think where I was super bullish on bonds, if you remember back like in October and stuff, when everybody was bearish, my model, I’d been flat on bonds for a month or so. I just entered a short position on bonds. So I think the idea of a fed rate cut campaign was built into forward rates and everybody got too bowled up. So I think we’re going to have. Could bonds go down five or ten points from here? Yeah. So I think for a tactical move, two to three month move, I think bonds could sell off. Even though I’m bearish on the economy, I’m sticking with the model forecast on that.
[00:14:30.790] – Tony Nash
Interesting. So let me bring Tracy in. Tracy, we see a pretty tight fed or relatively tight fed, right. And we’ve talked many times about crude prices and things like geopolitical risk and all that stuff, right. And the impact on, say, evs, and we’ll talk to Ralph about that and green energy and, and it seems like there is kind of no cost to geopolitical risk when we’re in a zerp or nerp environment. But now that we’re in a five and a half percent interest rate environment, it almost feels with all this stuff happening in the Middle east and other stuff, that nobody knows how to factor that into things like commodity prices, crude prices, other things. Am I way off there or have people kind of not realized the cost of risk?
[00:15:37.290] – Tracy Shuchart
I think absolutely. That’s what you’re seeing right now across the commodity sector, and especially when we’re talking about metals and things that are really affected by the US dollar. Right. We’ve seen a rally in the US dollar, so that’s kind of very difficult for. That’s a very big headwind. Let’s say four metals per existence, for example. But if we look at crude oil, crude oil is actually more correlated to ten year yields than it is to the US dollar. It’s almost over 81% correlated. And so recently we have seen kind of a jump in the ten year. Right. Meaning yields have come down. So that’s also put pressure technically just on the sector. But as far as geopolitical risk is concerned, I think that I could go into the minutiae of that, where we can talk about there’s not a lot of oil tankers that actually pass through the Red Sea, even though they’re not going there, know there’s a lot of products that ship from Saudi Arabia, Qatar, everything kind of east of the Red Sea that uses the Persian Gulf which is a lot of product when you’re talking know gas and oil.
[00:16:56.990] – Tracy Shuchart
And so that is part of the reason. But I think know still the markets. I think bonds are applying pressure on the energy markets. And I also think that because there’s not a lot of transit through the Red Sea of oil and products and gas, that that’s also having people kind of dismiss what’s going on. That said, I think the risk is much broader now that we have not only the Israel Gaza issue, we also now have Syria’s back in, Jordan’s back know there’s a lot there and I think the market is highly discounting.
[00:17:51.670] – Tony Nash
Okay, so Michael, if we go back to markets in the US, particularly tech continues to be strong despite these rate rises. You’ve been telling us for quite a while that it’s time for a pullback. And in your report you’ve got semiconductors, software, hardware, social media, et cetera, kind of falling in your one to three month horizon. So help us understand when we see the likes of meta rise 20% in a single day last week and we see snap down pretty dramatically after earnings. Granted it’s down to November 23 levels, so it’s not down to historic multi year levels, but it’s still down 35% in a few days. So can you talk to us about where you expect the sector fund flows to move? I mean it’s overwhelmingly in this chart you sent me, overwhelmingly continues moving into tech. So where do you expect that to move?
[00:18:49.770] – Michael Belkin
Okay, first of, there’s within tech. The AI plays have been attracting all the attention, right? And there’s very few of those. So it’s Nvidia. Right. So those kind of stocks keep going up. I follow a broad bunch of stocks within the semiconductor software space and a lot of those are acting like dog meat. Okay, so the shorts are actually working, not massively, but things are underperforming. Things like cloud software. So those are sort of like tiger global favorite longs. Those are some of my top shorts right now, semiconductors. Outside of the AI space, demand for automotive, semiconductors and consumer electronics, all that stuff is disaster. It’s not good. So those are still shorts and those are working. It’s not, you look at the tech market, you think everything’s going up. It’s not. Portfolio managers know this. They’re getting squeezed into this small handful of smaller stocks. And the mag seven is down to like mag three or something, right? Amazon and meta and a couple of others. Okay. But anyways, the biggest outflows over the last year has been energy and the biggest inflows have been tech. So my model is saying time for a change.
[00:20:07.440] – Michael Belkin
Okay, so the flows are going to reverse. So what’s know. So Sir John Templeton said the time to buy is at the point of maximum pessimism. The time to sell is at the point of maximum optimism. And that’s really held up over time. For know you have to get it. Have my biggest buy signal in the model forecast, three month view at least for going forward. Buy energy, physical energy and also the energy stocks. So etfs, xop, oih, things like that, really depressed. They’re in the doghouse, right? And things that are up a know all the tech etfs. My favorite short is like clou. It’s not very liquid, it’s a cloud software thing. So basically you want to be long energy and short tech. Three month view. That’s what I’m telling my clients.
[00:21:00.290] – Tony Nash
That sound about right to you, Tracy?
[00:21:01.850] – Tracy Shuchart
I love it. I think its Fantastic. No, actually, we actually talked about that a little bit. So, with Mullen. I absolutely agree with Michael.
[00:21:17.020] – Tony Nash
Perfect. Ralph, what are you seeing in terms of just the general impact on markets and fund flows? What do things look like in Europe? Are people still super bullish tech? Are they coming off of some of that? Are they looking more at some more conservative sectors? What does that look like from your perspective?
[00:21:36.120] – Ralph Schoellhammer
Well, I think one of the things, and I know that Tracy is going to talk about this in greater detail, and I think it was just mentioned previously as well, what is underwriting would from a european perspective, still impressive resilience of the US economy is natural gas. I sometimes feel that we might not the four of us here in this group, but very often in public reporting, the impact of the shale revolution strikes. And still, as some would underestimate mean. If you look at the numbers, the role of natural gas that it plays in the US economy is astounding. If you take at electricity production and also heating in the chemical industry, in manufacturing, construction, not everything is rosy. Right. I think Albert is not with us. I think he would immediately shoot me down for any kind of optimistic or positive outlook. But I think that really is a huge issue. And this is something that we are currently lacking in Europe. I mean, there was recently a very interesting report in the Wall Street Journal that I find sums it up perfectly, which is the old saying that the United States innovates, the Chinese imitate and the Europeans regulate is probably more true than ever.
[00:22:43.300] – Ralph Schoellhammer
This is going to be a problem because I agree with what was said by Mike before, right. That maybe the AI thing is a bit of a hype. I don’t know enough about it to really make a qualified statement. But I think one thing we’re all going to agree on is whatever algorithms in the future are going to do is in order to have a good algorithm, they’re going to need a lot of electricity. Because in order for the algorithm to, I don’t know, distinguish between a cat and a dog, you have to show.Them a billion pictures of a cat and a billion pictures of a dog. And that means that the computer who does it has to be running. And while it’s running, it needs to be cooled, it needs to be supplied with electricity. So it all goes back. I don’t want to voice my inner Luke Groman, but in many ways, it all goes back to energy. In many ways. And this is still. I know I sound like a broken record, but this is still a huge problem in Europe. There are signs of sanity. I think once Germany was the role model. I think now they’re more the outcasts. So there is a shift in a new direction. I’m worried because the EU is like a weird construct. I mean, we have european parliamentary elections in June. So now, quote, unquote, they pretend to be much saner than they usually are. So we’ll see after the election, if they not all of a sudden say so all these little bit kind of winking and nodding at maybe we are okay with more nuclear energy and maybe we should find ways to allow more energy production in European Union, that once these elections are over, that they go back to saying no, well, the primary goal, of course, is the usual green goals, the green new deals, the climate agenda and all these kind of things. Interesting.
[00:24:14.900] – Tony Nash
First thing, I don’t believe the european parliament will be sane ever. Second, interest rates are going to dictate that they can’t really focus on green energy. It’s going to be really hard, and we’ve talked about that with you before and Tracy, and going back to the rate rise that Michael talked makes it puts a real cost to trade offs. Right. And it’s going to be really hard to subsidize that stuff at the cost of money that we have now, I think. And that cost, Michael, as you say, is forcing sector adjustments. And so let’s finally look at your earnings expectations. So your s and P 500 earnings index forecast is pretty negative. So can you talk us through what is your outlook on earnings, on quarterly earnings in the S and P compared to, say, where consensus is?
[00:25:05.890] – Michael Belkin
All right, so I’m a real lone voice in the wilderness here.
[00:25:10.050] – Tony Nash
Not the first time.
[00:25:11.510] – Michael Belkin
Wall street consensus is plus 11%. Last time I looked in 2024 earnings. So right now, we’re about halfway two thirds of the way through Q four, 2023 earnings reporting. So we haven’t even started into 2024 yet. Okay. So we’re tracking for about 52 64, according to standard employers operating earnings so far at two thirds mark, which is down, by the way, 7% from the peak. So s and P 500 quarterly earnings peaked Q four, 2021, two years ago. Does anybody know that?
[00:25:50.140] – Tony Nash
Yeah, I just want to back up 10 seconds, and I want you to say that again. S and P earnings, how do they compare to two years ago?
[00:25:58.080] – Michael Belkin
Down 7% quarterly. So the peak of operating earnings, according to index provider standard employers, was $56.73. Q four, 2021. And that, of course, coincided with the boom of COVID stimulus and all the extra money. So basically, corporations made a lot of money out of inflation. They raised prices, increased demand, and since then, we’ve kind of been dribling down, not collapsing yet. Okay, so basically, Wall street is looking for plus 11% to something like $224. I’m looking for 120. Down 40%.
[00:26:39.600] – Tony Nash
[00:26:40.800] – Michael Belkin
Yeah. Which is not ridiculous. It’s come from model forecast. That’s the typical decline in a recession. So there’s nothing conspiracy theory or licking my finger.
[00:26:53.890] – Tony Nash
I love that you say 40% isn’t ridiculous. I think that’s great, because I think it helps remind us where we are. Right in markets. And we had Alex Gurjevich on last week, and he talked about deflation and how that could impact some markets. So what that tells me is, are you expecting some deflationary impacts to hit companies ability to make profits and that then has an impact on markets?
[00:27:26.110] – Michael Belkin
Yes. But it’s complicated, okay?
[00:27:29.010] – Tony Nash
Oh, I know it’s complicated.
[00:27:30.570] – Michael Belkin
Definitely complicated. So the inflation decline that we’ve seen, by the way, I was super bearish on inflation when it was 9%. Model said it’s going down to 3%, which is basically what it’s done. That decline is over in the model forecast. So I don’t think we’re going to get any near term relief on things like the CPI next few months.
[00:27:49.910] – Tony Nash
You don’t expect a kind of deflation or nothing dramatic?
[00:27:54.080] – Michael Belkin
Well, I think the first thing, like, let’s just take it one step at a time here. Row of dominoes. I think, again, the forward rates overreflected. This idea of Fed easing that needs to get pulled out, I think bonds could sell off and actually short sofa and things like that for a trade two to three months later on in the year. Back to the point of your question. Yes. So demand falls, sales fall. The dynamic of a recession is retail sales fall, sales of the product fall, the company starts canceling orders, then the company that makes the stuff for that company cutting back, laying off people, blah, blah, blah, it goes on and on. And that’s deflationary. I think that won’t begin to surface for another maybe six months later in the year. That will become an issue. Right now, I think it’s more the inflation scare is back for a trade, and that kind of pulls the rug out of this idea that the Fed’s going to ease. By the way, one of the last comment on this, one of the best things to emerge from the Vale symposium that I was at was that Lakshman from the ECri Institute was there and he pointed out, I believe he said, that getting back to the idea of a soft landing, when the times that the Fed delayed cutting rates when the economy was weakening, that is what led to the recession.
[00:29:19.720] – Michael Belkin
So when the Fed is sort of preemptive and cuts rates, then you can have a soft landing. Not necessarily, but historically that’s been the pattern. But when they hold rates up, that almost ensures that we’re going into a recession, which is what’s think, you know, all this ironically, all these phony great economic stories from the administration, how great it is, vote for us. We’re doing such a great job on the economy, it actually ties the Fed’s hands and it prevents the Fed from cutting interest rates. So it’s actually going to have blowback. Instead of making people want to vote for the administration, it’s going to say, oh, wow, the economy is going down and it’s going to be too late to save it. So I think it’s going to be counterproductive. So phony strong economic story is actually counterproductive and it’s going to send the economy into a recession for sure.
[00:30:13.200] – Tony Nash
Wow, that sounds pretty tough. Thank you for that. I mean, it’s awesome. I love getting your view on things, Michael, because you’re right a lot. You have very solid analysis around what you say. You’ve run it through models. It’s tested over decades. And so I love getting your perspective. And it’s different from the, don’t worry, everything’s okay. It’s all going to be soft landing, different this time, all that stuff. Love getting that. So that’s great. Thank you so much for that. I guess one last question, kind of. Your model is generally, I think a one to three month horizon is like your sweet spot. So what is the biggest thing that you expect to happen in the next three months?
[00:30:57.170] – Michael Belkin
Okay. Energy goes up again. So that’s my favorite trade, long energy. If you want to be long something, don’t be long. Anything other than that. My longs are chicken longs, consumer staples sector, healthcare sector. But energy is really the number one long idea I have right now.
[00:31:13.880] – Tony Nash
Very good. Thank you, Michael. Thank you for that, Tracy. You must love that. So let’s switch over to you. I want to talk about U. S. LNG exports and its role in geopolitics. So you talked about the Biden administration’s LNG export pause earlier this week. And you talked about it last week too, when it was announced and all that stuff. So there was a hearing in the house this week, and you talked about this a little bit in one of your posts. So I guess what I’m really interested here is, is there a geopolitical importance or a geopolitical lever with US LNG exports? The US didn’t export much LNG until 2014, but by 2023, the US accounted for a third of european LNG imports and just over 20% of China’s LNG imports. So not a long time, but the US has become a pretty significant portion of the LNG imports of major economies. So what does that mean to geopolitics in the US’s, say, energy diplomacy?
[00:32:29.250] – Tracy Shuchart
Well, first. So US has become the world’s largest producer of oil and gas and the largest exporter. Right. Qatar will pass us because of their expansion program. But let’s just look at this right now. And so this is us energy leadership. And in fact, when Biden first suggested this, or first said that he was going to pause export licenses, we had twelve trade associations across the US, including the largest one, API, who basically said, this hampers us energy leadership, it endangers american jobs, and it also undermines efforts to reduce greenhouse emissions because obviously natural gas is a much better choice than, say, crude oil or coal, for example, to burn. It’s much cleaner. That said, now, when we look at this pause, it will not affect anything up until 2026. And so this is reversible, say, if there was a new administration to come into play, because everything that’s already been accepted till now, the build out to 2026 will still move forward. However, after 2026 are some of the biggest projects, and that’s where the problem lies. But I just want to say this. It’s not like an immediate threat, but it is on the radar as far as geopolitics is concerned, obviously.
[00:34:15.730] – Tracy Shuchart
First, let’s look at Europe. I mean, we basically said, stop importing russian gas. We will take care of you. And with this new revelation, Europe’s like, wait, what? You just said that you would be our main supporter and we look like we’re abandoning our allies. It doesn’t look good. In fact, Germany last week came out and basically said, how can we rely on the US if they say that we just changed up our whole energy source? We’ve built out infrastructure, we’re building out new infrastructure for our LNG hubs and capacity to import more, particularly with Germany, because they stopped nuclear. And so now there’s a bigger build out for gas capacity. Right. So that’s kind of shaken up the EU a little bit and led them to kind of question, well. How can we rely on you? So this looks terrible with our allies. It also obviously reduces our footprints in the global energy sphere. I mean, you’re not going to see the Middle east, particularly Qatar, the number one gas producer in the Middle east, stopping. They’re building out the world’s largest capacity out to 2028. I think in general, again, I have to quote API or the trade associations as saying this hampers us energy leadership and our place in the energy scope. I mean, natural gas is not going away. We’ve seen a million contracts over the last two years out to 2040, 2050. These are long term gas contracts. It’s not going away. And whether it comes to fruition or not, again, this won’t really affect projects until 2026. Should we have a new administration or should the bipartisan group that is now having hearings against this? And I want to stress it’s bipartisan. It’s not just the Republicans. We have time to overturn this, in other words, but the message it sends to the global community is bad.
[00:36:43.620] – Tony Nash
The message is out there. Ralph, as a European, how does that make you feel? I need your.
[00:36:54.690] – Ralph Schoellhammer
It’s a good question. Well, I mean, it makes a lot of sense. I mean, I’m worried as a european, not just because, as Tracy correctly pointed out, I mean, this is not going to have an impact as soon as some headlines seem to indicate. But I’m also worried because it is a terrible signal also, of course, to domestic us industries, particularly in this sector, because they want to make a profit. I mean, this is something I know we tend to forget. But most companies exist because they want to make a profit. So if you don’t allow them to export, that’s going to be a short lived sugar rush for the US economy because prices, we see it with the Henry hub at the moment, right? Prices are plunging in many ways. So gas is going to be pretty cheap for the US. But at some point, you stop investing. Why would you stop investing in more drilling, in more exploration if you can’t sell it abroad? So I think it’s also, as Tracy pointed out, this is a terrible signal. You cannot be the energy leader if you put like a cork into the bottle, so to speak.
[00:37:46.870] – Ralph Schoellhammer
Now, from a european perspective, I said this on your podcast many times, Tony. I’m still convinced of this. We’ll see what Tucker Carlsen’s interview with Vladimir Putin will reveal in the next couple of hours. But the Europeans will sooner or later return to at least partially. It’s never going to be as much as it was before, but they will return partially to russian gas as well because pipeline gas cannot be intercepted by the hooties. It’s not depending on a us administration that all of a sudden believes that they have to do something against fossil gas. I think that is still an attempt by the environmental lobby that they want to replace the term natural gas with fossil gas or methane, I think is also something that’s getting more popular because supposedly it sounds scarier. So these battles are still going on. So the energy sector that I find always the most important one in many areas. Tracy has recently posted about coal power plants in India. This is a very unique phenomenon. In the west. We have an ideological, it’s getting weaker, but there’s still an ideological crusade against the energy sector. And I can understand that this is unnerving for many who are active in that particular area of the economy.
[00:38:52.660] – Tony Nash
Yeah, that’s great.
[00:38:54.970] – Tracy Shuchart
I just wanted to add one thing really quickly, and why I say this decision will likely be overturned sooner than later is that I really think this is a boy for votes. I mean, the Biden administration literally said they want to win back younger environmentalists, and they literally, literally had 20 something social media influencers on exiting TikTok in a meeting with the energy board in the government. I mean, this is who they’re taking advice from.
[00:39:31.590] – Tony Nash
Honestly, we’re a two party system in the US. Who else are those guys going to go to?
[00:39:34.710] – Tracy Shuchart
They’re not going to go to, all I’m saying. And so I think it’s a ploy to get votes. I think that ultimately this will be overturned after the election. If the Democrats win, I think this will be given to pressure from, again, bipartisan pressure groups within the legislative branch. And this will be overturned. And I think it’s just a ploy for votes. However, that’s a big risk. You’re taking a ploy for votes versus your message to the global community. Not sure that was the best decision to make.
[00:40:11.490] – Tony Nash
We sure have done over the last two administrations a lot to erode institutional credibility in the US. Right. And from a geopolitical perspective, in terms of wanting to count on the US, we really destroyed a lot of over the last, say, 1520 years as a geopolitical partner. Right. As the US. So this does nothing to help the US geopolitically. Tracy, I want to ask you about China, because if we’re providing a fifth of nacas to China or lng to China, from my perspective, it seems like, I don’t think us necessarily holds China hostage with that. And I don’t think that would be any intention. But it does make sourcing energy from the US a factor within the China geopolitical. And so, you know, I think about Japan in World War II. I’m not making any serious analogy about Japan and China, but part of the reason Japan was so upset with the US is because the US cut off oil. And so I don’t think that the US would do that again and say, we’re not going to sell you lng, but it does become a factor in that. And I think from China’s perspective, there is always a healthy level of paranoia around that type of stuff.
[00:41:24.320] – Tony Nash
Right. So does the US have the opportunity to grow that much? Or do you think China will say, we love your lng, we’ll take 21% of our lng from you, but we’re not going to do a lot more because there’s too much risk in that.
[00:41:38.640] – Tracy Shuchart
I think they would absolutely say that. And I think they’re absolutely looking to Russia right now. Right. They’re going to expand the Siberia pipeline. You have siberian two pipeline. And that’s a double edged sword because does Russia become too dependent on China as a buyer? That’s a whole nother issue. We can get into another, you know. Absolutely. I think it’ll force China to look elsewhere. And they will. I mean, you can go to Qatar. Qatar is offering huge discounts right now. Right. We just saw them make a huge deal with India today, I think I posted. And so I think China would most likely say, yeah, we’re good with what we got, we’re cool, we can look elsewhere.
[00:42:29.480] – Tony Nash
Right. Okay. So there’s a little bit of a geopolitical lever there, but not a lot because the Chinese are going to stay on their guard. Okay, that’s interesting. I appreciate that. I think we have to look at markets and geopolitics together at times. Right. And so this is really helpful for me to think about this stuff. So, Ralph, let’s move on to Europe, which, I’m sorry, but it’s really easy to bash Europe, right? And so, no offense, it’s not you. I’ll bash on our american political leaders any day of the week, so it’s not your fault. But you talked earlier this week about Germany’s electric vehicle dreams fading away. Can you really help us dig into that a little bit? What were those dreams and what’s making them fade away?
[00:43:23.910] – Ralph Schoellhammer
I would just say one thing, Tony. Your president recently said that he talked to Francois Mitteron, who died in 96. So you’re bashing.
[00:43:34.930] – Tracy Shuchart
That’s not the only one, right? That’s the only instance lately.
[00:43:41.250] – Ralph Schoellhammer
Well, I think what we can observe, the Germans, in all fairness, I always get this criticism that people say, well, Germany is not Europe and Europe is not german. And that’s, of course, true. It is also true that german companies, for various reasons, particularly their car manufacturers, have somewhat slept through the EV revolution. I think that is also fair to say that they kind of could not really translate the advantage they had with the combustion engine into the electric vehicles. But there’s, of course, something else going on, and I think that connects nicely with the geopolitical issue, which is that I think many companies kind of had a business model with evs. And that’s true not just in Germany. That’s also true in Austria. That’s also true in Switzerland. That’s also true in France, where the idea was that they say, okay, the government is pouring so much money into subsidies of all various kinds that they officially talked about their EV strategies because they wanted to milk that cow as long as possible. And I think that is now slowly coming to an end. Germany has a huge budget hold due to a recent ruling by their supreme court.
[00:44:46.710] – Ralph Schoellhammer
We see the same in France. We see discussions in Austria, because now governments, a couple of years back, until recently, they subsidized evs. But now they start to realize, if everybody’s moving to an ev, we’re going to lose all these gasoline taxes. I mean, this was also part of the step in Germany because there is a sense that agriculture will not quickly move to battery driven tractors. So they tried to make new diesel taxes for the agricultural sector. But as all of you know, the farmers have not been taking it very well, to put it mildly. And in many ways, just kind of to add on a little bit to this street construction. Highway construction, of course, was for a very long time directly financed out of these diesel gasoline fuel taxes. But now we have this new situation where evs are significantly heavier. So the bearing tear on streets is actually going to be more than it was with the internal combustion engine cars. So you would potentially need more of these taxes to maintain and sustain and keep these roads in shape. Same with parking spaces in Austria and Germany, for example, in the inner city, you can park for free with evs.
[00:45:51.110] – Ralph Schoellhammer
Now, as more and more people have evs, this is a revenue source for cities. But even more than that, parking structures are not built for these significantly heavier cars. And that goes twice in Europe. In the United States, people are also driving heavy suvs and pickup trucks and heavy cars that are heavy, even though they’re not evs. But, you know, Americans always mock Europeans for this. But we had the kind of niche boutique small cars, and if they all get replaced with significantly heavier evs, this is going to have, down the road, unintended consequences. So I think this is where the shift is happening. And the other thing is, people bought it, particularly people with higher incomes, because subsidies were really great. You had subsidies on fueling them, you had subsidies on parking. You had certain insurance advantages. So there was a whole package of subs. It wasn’t just that they give you something that as well, that you got a direct financial incentive so that they give you €10,000. If you sold your gasoline, gasoline car and got an EV, there were all other kinds of incentives as well. And they are now slowly to break away.
[00:46:52.760] – Ralph Schoellhammer
And of course, now people are reconsidering whether or not they shall buy such a car. Now, one option would have been to say, well, then we’re going to buy all these new chinese cars because they overproduced. But the EU is already working on special tariffs on chinese electric vehicles. So that option, it will still be there, but it will get more difficult. So as things look at the moment, I think the mean this is always, and I know we talked about this on the show many times, sometimes it’s maddening if you listen to analysts. So I’m always glad that Tracy and Micah here to bring a sense of realism into this. People look at a development that’s like this, and then they take a ruler, put it on there and say, okay, if this was the development over the last two years, it’s going to be like this over the next 20 years. And then they draw this line and say, by 2040, everybody’s going to drive.
[00:47:37.170] – Tony Nash
An EV extrapolate today and forever.
[00:47:40.270] – Ralph Schoellhammer
Exactly. And this is not how it works. And I think this is not increasingly what we see. Plus, of course, another element that we have touched upon on quite significantly is dcvs need electricity, and Germany has currently less electricity production. I think it’s the lowest level since 2002. Listen, if you turn off all your nuclear power plants and promise, and then the promise doesn’t live up to the expectations that renewables will replace it, you have a problem in this area. So we see this already, that electricity prices are going up. And another element that is barely talked about is insurance for evs is getting crazy, right. Once the government support falls away, this is also an additional cost factor. So they are simply getting more and more expensive. And unfortunately, without being too facetious here, the evs are kind of falling down to the same category as wind and solar, right? There were these huge promises made, what they can deliver, and now it turns out that they can’t. Now, don’t get me wrong, in city areas, I’m a huge fan of evs. I can imagine that if you’re an apartment owner in a high traffic area of a town and all of a sudden everybody drives evs, that’s going to drive up the value of a property because there is no fumes, there is no noise.
[00:48:53.310] – Ralph Schoellhammer
So this is going to be great. But overall, a country that’s either spread out or like in Austria or Germany, where rural populations still commute significant distances to go to work, this is going to be a problem. And as I said before, this was one of the promises, like so many in that area that have been made in the past that are not being kept. And I think you also see a kind of, that’s more in Poland, but also in Germany as the last point, an emotional mean. People identify with cars, people identify with the car industry in Germany. And the ice bashing over the last couple of years, I think, now has a reaction that says, I’m going to buy a diesel car or a gasoline car simply because that’s german, right? In a sense. So I think at the moment it looks like that’s where the journey is going. Of course, always under the assumption that there is no major massive technological breakthrough that can be easily introduced to the market. I mean, this is what I always say in the energy area, if the Wanda battery that we hear about every two months is actually become a reality at any point in time, well, then all bets are off.
[00:50:00.510] – Ralph Schoellhammer
Then things will be different. But for now, we have been hearing the, that battery promise from time to time, I google it. I think it goes now back 20 years. The solid state battery and the salt battery, all these kind of things. And it’s like fusion. They exist theoretically, but so far, I think they’re not ripe for the market. Okay.
[00:50:19.900] – Tony Nash
So there’s real trade offs to be made and subsidies. People are tired of subsidies, it sounds like. And I guess generally in Germany, the business environment there has not. It’s deteriorated. Right. So you tweeted earlier this week that the AfD party said that the german government hates Germany. I think that’s the word they use. Or hate their own country or something like that. Can you talk us through that? First of all, who are the AfD for those of us who aren’t in Europe? And second of, like, what does this mean? Is that a mainstream german thought? Do most Germans believe that the government is not friendly to Germans?
[00:51:05.490] – Ralph Schoellhammer
I mean, the AfD that you just mentioned, right, the so called alternative for Germany. The alternative for Germany was a party that emerged during the euro crisis in 2008, 2009. And the name derives from a sentence that Angela Merkel said when she said, there is no alternative. Right. Whether it was from migration to the euro, there is no alternative. And then the party kind of came up originally as a kind of economic, libertarian, yet eurocritical party that has now morphed into what in the media would be called a far right party. I think if you take a closer look at their positions or their average positions, in many ways, I would argue they resemble common sense, which I believe is one of the reasons why they are very popular or growingly popular with the electorate. And the other thing, this was their leader, one of their two leaders, Alice Weidel, said that in the german Bundesstag, the german parliament, the current german government hates its own people. And I have to admit, if you look at the numbers, I mean, it is really, really very difficult to disagree with her. What the german government has done.
[00:52:04.410] – Ralph Schoellhammer
This is why I think it’s an interesting topic over the last couple of years, the so called ample coalition of the Social Democrats, the liberals and the Greens. It is the destruction of Germany as an industrial superpower. There’s really no other way to put this. I said, I don’t want to be hyperbolic here or be all, but I don’t know any other way to describe it. We talk about a country, and this is an issue we talked about a lot in the past that had paid off, built out world class nuclear power plants, and they turned them off for purely ideological reasons. There was no other reason. The reason is when people say, well, you exaggerate about Germany, I don’t know what to tell you. And you see the same now recently they approved, now, I think ten gigawatts of gas powered electricity power plants, again with this weird thing, in ten years they have to be run on hydrogen. It’s never going to happen. They’re either going to run on american lng or on russian pipeline gas. They’re never going to run on hydrogen. But again, they need to be built first. And the Germans are not as good in building stuff as they have been in the past.
[00:53:05.280] – Ralph Schoellhammer
And they have an electricity deficit for the first time since 2002. They are now a net electricity importer and no longer a net electricity exporter. And just to put it on a broader sphere of Europe, Europe doesn’t have that many net electricity exporters. It’s the Czech Republic, it’s Germany, and there’s another one and France, if the nuclear power plants are not in a state of renovation, in a comatose state. But the situation is very dire. I’m not saying the end is nigh because one of the beauties of democracy is that people can vote those in, power out and vote somebody else in. And I think this is increasingly what more and more people plan to do in Europe now. Will these parties then have silver bullets? I don’t think so. But we just recently one of the major and very old german washing machine refrigerator producers, Mile, has now moved production to Poland because that’s the other story nobody talks about. We have a manufacturing miracle in Europe as well, and that is Poland. So if a country pursues the right policies, economic growth is still possible, even know sometimes insane Europe. But what of course is worries.
[00:54:17.190] – Ralph Schoellhammer
Germany is still the major economy. The old saying is if Germany catches a cold, if Germany sneezes, the continent catches a cold. That is not entirely wrong. And as I said before, I have historically never seen a government pursuing policies at all costs and obviously against the will of the voters. It’s fascinating to observe, it’s very german, but it’s also very worrisome because of course, if the so called moderates are perceived as working against the interests of the people, then the people will vote for those who are not described as being moderate. But if they feel that they are more in line with their interests, they’re going to give them their vote.
[00:54:55.460] – Tony Nash
So is for people doing business in Germany or with Germany. Is there political risk in Germany now or is it just kind of like an inconvenient or uncomfortable discussion to have.
[00:55:10.470] – Ralph Schoellhammer
Well, I would argue, contrary to what you read also in german newspapers, I think the only political risk is if the current government would, at the election sign 2025, if the current government would get an additional period or maybe two additional periods. I think from a purely economic perspective, a rightward shift, maybe even including an AfD conservative coalition government, would be the best that could happen. If you look at the economic program of the AfD, that is a common sense, useful economic program. Again, yes, they have. Particularly in the German east. Let’s say they speak in a way that I would not speak. They use a language that I would not use. But I think the same was true in 2016 with Donald Trump and his presidential election. So this idea that if you have a right winger or a right wing party come to power, fascism is the next thing around the corner. This is not how this works. The german institutions are very stable. The german military, the german police is not going to participate in a right wing coup. Again, the same as in the United States. Donald Trump can say what he wants.
[00:56:11.400] – Ralph Schoellhammer
He doesn’t have the military, doesn’t have the national guard. He cannot erect a fascist dictatorship in the US. I know it’s a good headline. It’s great clickbait, but it’s not going to happen. But just as is Trump in the US, if you then pursue sensible economic policies, at least in some areas, you can create a boom, or a boom like economy. So, as somebody says, what’s the biggest risk for the german economy? I would still argue it’s the green party and the Social Democrats, because when it comes to the economy, they are insane. I mean, there is no other term to describe it.
[00:56:43.410] – Tony Nash
Well, it sounds to me like good old fashioned parliamentary consensus. Right? You’re going to be pulling this way, people pulling that way, and they’ll meet somewhere in the middle. And that’s just the way Europe works generally. I think so. Good. Okay. Well, guys, this has been fantastic. I think, Ralph, I don’t really think that much about Germany, but I need to think more about it. And I think what you talked about with the Mila factory moving to Poland, I had heard about industrialization, deindustrialization, mostly moving toward China. But to hear that things are moving to Poland now as well, I know that’s not new, particularly, but there just seems to be this real exodus from Germany, which is kind of sad to hear.
[00:57:28.740] – Ralph Schoellhammer
But this last point, the United States, the comparisons between the US and Europe, sometimes we are more similar than we think we have both in Europe and the US. I think we have a problem of political leadership, but there is still a huge amount of structural advantages. Now, the US have massive structural advantages simply because of the energy. But in Europe you still have a skilled labor force. The problem we have all from Portugal, partially, again, maybe not to Poland, but at least in France. In Austria and Germany, we have created a welfare system that incentivizes or disincentivizes labor in many ways, right? If part time work pays per hour, if you calculate it more than full time work, then people say, why should I work a full time job? If you have people who are 65 and say, I don’t want to retire, I want to continue to work, but the government kind of then sticks their hands so deeply into your pocket that you say, okay, fine, if my option is to make more money, not working or retiring, then earning money and continue to work, I’m not going to continue to work.
[00:58:31.620] – Ralph Schoellhammer
But these would be highly trade, highly skilled, highly experienced workers that actually the companies would like to hold. But under the current tax structure, it’s not so easy for them to do that. As I say, I don’t know how this in the US, but if you make 2000 after tax as an employer in Austria, Germany, you cost your employer over 5000, right? So this is with all the Social Security payments and so on and so on and so on. It’s similar in other countries as well. But this is the problem. We have created a structure that disincentivizes skilled labor just as a kind of. As a boomois, a sherry on top. And how is the discussion to say, well, maybe we should introduce the four day work week because then we will be competitive. So there is a lot of insanity going on. I blame law schools, because I think the only people who sit in parliaments these days went to law school and none of them ever went actually to found a business or to work in trade or to work a construction site, because they have this weird idea. I mean, it’s amusing, right?
[00:59:31.130] – Ralph Schoellhammer
They say, well, if you only have four work days, you’ll be so motivated that you easily make up for the one day you lost. Really?
[00:59:37.820] – Tony Nash
Doesn’t work that way? Sorry?
[00:59:39.960] – Ralph Schoellhammer
Have you ever worked on a construction site? You show me that you work more. That might be true. Yeah, that might be true. What is the famous us sitcom two and a half man, where Charlie Sheen was like doing these jingles for advertising. That might be true, right? That you can make more jingles in four days than in five days, but for construction, for police, for healthcare, please show me how a nurse that is working for four days can have the same effect than a nurse working five days.
[01:00:10.400] – Tony Nash
This doesn’t work that way.
[01:00:11.720] – Ralph Schoellhammer
It’s political insanity. But I think the people below the iceberg and below the waterline are still fairly sane, and I hope that they don’t lose the courage of their own convictions during the next elections.
[01:00:24.060] – Tony Nash
I love how you say they’re fairly sane. I think we can say that here in the US, most people are fairly sane. So with that, Michael, thank you so much for joining us. Tracy, Ralph, really appreciate your time. Thank you so much. Have a great weekend and have a great week ahead.
[01:00:38.640] – Tony Nash
[01:00:39.640] – Ralph Schoellhammer