Transcripts

Erik:    Joining me now is Energy Outlook Advisors managing partner, Dr. Anas Alhajji. Anas, it's great to get you back on the show. And very timely, because what we've had happen in the last several days is the group of eight OPEC+ voted to increase production that immediately resulted in the Western press basically going into overdrive saying, okay, look, this is war. What this means is OPEC+ is declaring a price war on US shale producers. We should basically hunker in for much lower prices. OPEC is going to try to drive the shale guys out of business, that's the only thing this could mean. You published a report on Saturday, just after the vote that was completely non consensus. You're on a completely different page than everybody else. And frankly, based on the tape action on Monday, it looks like you were – Monday and Tuesday – it looks like you may have already been proven right. So why did you have the out of consensus view? Why do you not think this is a price war? And what do you think is going on, going back to your Saturday report.

Anas:   Erik, it is always a pleasure to be on MacroVoices, always. So, thank you very much for this opportunity. I would like to kind of take my time explaining this, because it is very clear that not only the media misunderstood what was going on, even analysts misunderstood what's going on. So, let's start with the fact that, especially for the audience who are not well versed in the oil business, that we have OPEC, which is the Organization of Petroleum Exporting Countries, which has 12 members. And then after 2016, the 10 other members joined them to form OPEC+, which include Russia and Kazakhstan. So, we have 12 members of OPEC, and then we have 10 other members. So, the total of OPEC+ is 22 and what happened here is, after the major increase in prices in 2022, prices start declining, inventory start building up. Demand growth starts weakening. They felt that they need to cut production to prevent a major increase in inventories. OPEC+ met and they did cut production, but few months later, they realized that was not enough. They needed to cut more. Just for context, they did cut twice, big time in 2008 during the recession. So in a sense, there is precedent about big cuts in the past. So when they met, they encountered the problem, many members of the 22 country coalition refused to cut. And the decisions in OPEC+ and previously in OPEC, are made by consensus, which means that any country can say no, and any country can have a veto power, so 8 of them decided to go for voluntary cuts, and they cut by 1.6 million barrels a day. Few months later, they found out that was not enough. Inventories continued to build, so they went for another cut, which was a voluntary cuts of 2.2 million barrels a day on the condition that they will unwind those as soon as possible.

So, the conclusion here is this, we have OPEC, we have OPEC+ and we have the group of 8, which I call the V8, V for voluntary. So, we have those three groups. The V8 includes Saudi Arabia, include Russia, include Kazakhstan, include Kuwait, UAE, Oman and some other smaller members. But the idea here is we have those 3 groups, therefore the press that focused on OPEC+ cuts are wrong because it wasn't OPEC that cut, and it wasn't OPEC or OPEC+ that increased production. It was the group of 8, and we have three cuts. The first one is from OPEC+, and the other two cuts are from the group of 8. Now what happened is, they try to unwind the 2.2 million barrels a day quickly, and they couldn't, because the market was not supportive. So every time they met, they delayed the decision. And as you recall, they delayed four or five times. Finally, they said, that's it. We are going to unwind in October 2024. But by October 2024, they realized we have a presidential election in the United States in November. So they said, okay, let's delay for one more time until we figure out who is going to be the president. So, they delayed the decision until December. In December, they made the decision to unwind the 2.2 million barrels a day starting April 1, 2025, over a period of 18 months. So, it would be gradual increases over those periods. And they emphasized the idea that those countries that over produced in the previous year, they have to compensate for all the increase they made. So, the first fact here is, those who claim to be surprised by the decision to add production, it's nonsense, because they already said this in December, so it should not be a surprise. So, we came into April and they started and winding production, which the amount is about 140,000 barrels a day. If you look at the data right now, since already passed, we found out that the exports of OPEC+ declined. It did not go up. And the exports matter, because that's what the supply to the international market is. Then they shocked the market when they met and they said, okay, we are going to change our policy. We are going to triple the increase in May, so they are going to expedite the unwinding of production. That took everyone by surprise, and the question is, why? What happened? The problem at that time is the media picked up the first part of the story and ignored the second part of the story. The first part of the story, which was increasing or expediting the unwinding of the cuts, the second part of the story was, instead of spreading this return of production over 18 months, they stopped it completely. And they said, now we are instead of meeting twice a year, we are going to meet once every month, and we are going to decide in this meeting what to do the following month. So the media mentioned the first part of the increase in production, but they did not mention the second part, which means that they can literally stop all the increases or even cut. So here comes June, and the decision for June, all expectations in the market was that they are going to repeat what they've done in May, in June. And after they did it, and they agreed on Saturday that they will add 411,000 barrels a day in June, all of a sudden, we've seen many analysts are surprised, and they were predicting a doomsday. Well, if you go to their writings, and if you go back to their tweets and everything else, they were predicting this a month ago. What changed? They were predicting this.

So, the issue here is this. First of all, the increase was 140,000 in April, 411,000 in May, and on top of that, 411,000 in June. So, we are talking about an increase of 950,000 barrels a day. Now, you might tell me, well, this is a significant amount, and it will lower prices. And our reply said, no, it should not lower prices, because that oil already exists in the market. That oil was the overproduction the 300,000 of Kazakhstan and the 400,000 of Iraq and the others. That oil is already in the market. All they did, basically, is raise the ceiling and legitimize the illegal oil. So, to answer your question, this is the first answer, that most of the oil is already in the market. There is no reason to panic, because it's not the new oil coming to the market. So that's number one. Number two, analysts missed the fact that in the oil producing countries, and if you recall from previous shows, we discussed this several times over the years, in the oil producing countries, in the summer, demand for oil increases substantially. We are not talking about the consuming countries, we are talking about the producing countries. We're talking about the Middle East and North Africa, for example, because the demand for cooling is very high, they demand large amount of electricity. And to provide that, they need to burn a lot of oil and power plants. And based on our estimate in the Arab world alone, that adds about 1.2 million barrels a day in the summer of demand. What that means is, whatever they are going to increase in term of production, some of it is going to be burned inside those countries, and whatever is going to be available to the world is very little.

So, aside from the fact, so number one, that most of that oil is already in the market. The second one is demand increases in the summer because of the heat in the summer. And if the summer is very hot, we might end up really bullish this summer, if the summer is really hot in Middle East and Asia. The third point is very interesting, and that was missed by everyone, the Hajj. The Hajj, the pilgrimage, the pilgrims, millions of Muslims from all around the world come to Saudi Arabia a certain time of the year to perform the Hajj. And when we talk about Hajj, we are talking this year, since Hajj basically is based on the lunar system – so we cannot talk about the solar calendar – but to use the Gregorian calendar, it corresponds to May and June. That's when those millions of people travel Saudi Arabia and they leave, and where the increases and where they expedited the production, May and June. So, what happened in Hajj? You have millions of people coming in, the demand for gasoline goes through the roof. The demand for diesel goes through the roof. The demand for jet fuel goes through the roof, and they have to provide electricity, 24/7, for two months for hundreds of thousands of hotel rooms with cooling because the area is very hot. So, the demand in Saudi Arabia, because of the Hajj, increases substantially. What that means is one, two, three. One, we are talking about the most of that oil is already in the market. And then whatever additions is going to go for the summer cooling in power plants, and the second one is going to go for Hajj so what is left? So that's why, on Saturday after the meeting, basically, we decided to publish this note telling people, look, you got to be very careful. This is really not bearish, the way you guys are looking at it.

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Erik:    Joining me now is Forest for the Trees founder, Luke Gromen. Luke, I've been particularly looking forward to getting you on the show. It seems to me, this might be the year when all of those crazy nutcase things that only Luke Gromen thinks could ever come true came true, at least that's the way it's starting to feel to me. Why don't we start with President Trump and the tariffs, and talk about what's going on, where it's headed. Seems like President Trump's not unwilling to break things. Is he going to break this market more than he has already?

Luke:  Thanks for having me back on. I think the Trump tariffs — or the snowflake that triggered the avalanche on some level — the old metaphor of ‘you never know which snowflake is going to trigger the avalanche,’ I think maybe we're starting to get some idea that that might be the avalanche. I think the tariffs are super interesting on a number of fronts, when paired with, when he came in late January, was inaugurated, immediately, both he and Bessent started talking about the tariffs and talking about fundamentally reversing the trade flows and capital flows that had defined the dollar centric system as we know it for the past 50 years. So, when we wrote a report about it for clients at the end of January, we said, look, with Trump saying we're going to fund more based on tariffs and cut income taxes and Bessent saying we're going to ramp up tariffs, that was very much a fundamental reversal of flows. In other words, it used to be, we send our factories and jobs to China. China sends stuff here. We send China dollars. China recycles those dollars into our capital markets. And that's sort of the virtuous cycle of trade and that's sort of what's defined certainly the last 20 years. And replace China with any number of, you know, Europe and Japan and others, and that's kind of been how the broad stroke flows, capital flows of the dollar centric system have really happened over the last 40 years or so. And late January, Trump says, okay, we're going to do more with tariffs, and we're going to try to cut income taxes. And that is, starts to be a reversal of that, and then Bessent talks about tariffs, and both of those comments in late January, early February, noteworthy, but markets didn't really pay attention. And I think that, the thing to me that really grabbed my attention in a big way, was the America First Investment Policy memo that the Trump administration put out late on Friday night, February 21, we wrote a report about it for clients on February 25 highlighting that, essentially what this report was doing was saying, China, take your money and go home. We don't want you recycling your dollars into US capital markets anymore. And more broadly, the deal appeared to be, the goal appeared to be raising the cost of carry for holding treasury bonds and for reinvesting dollar surpluses back into US capital markets, with the goal of trying to redirect those flows into real assets, Main Street, not Wall Street, as Bessent has said repeatedly.

The next clue to our eyes about what the Trump administration is trying to accomplish came when White House Council of Economic Advisors Chairman Stephen Miran gave a speech at the Hudson Institute where he reiterated, essentially the goal of the America First Investment Policy memo, which is, look, if you do trade with us, you're going to end up with dollars, and you're welcome to reinvest those dollars into our physical infrastructure, property, plant, equipment. You are welcome to cut us a check for tariffs. Cut a check to Treasury, buy some weapons from us. The other thing that Miran didn't say, and I don't know if he was thinking it, I certainly understand why he wouldn't have said anything about it. But the final clue, I think, in everything that has really grabbed our attention most about this whole tariff episode over the last month has been that Trump put tariffs on, on basically everybody and everything draconian, higher than expected, certainly higher than we thought. I mean, he tariffed an island full of penguins, if I remember reading properly. But the one thing he didn't put tariffs on, that everybody was sure he was going to put tariffs on was gold. No tariffs on gold. Tariffs on everything and everyone else, but no tariffs on gold. Which was very curious, because when put together with higher cost of carry on treasuries and US financial assets, and what Miran said, it starts to look when you paint with broad strokes like, hey, the old deal is off. We no longer want you recycling your dollar surpluses into our financial asset markets. You're welcome to invest them in US factories. You're welcome to buy US weapons. You're welcome to cut the US Treasury a check. You're welcome to pay the tariffs, or there's no tariffs on gold either, and so you can buy gold to your heart's delight. That works for us too, because that's going to bid up gold relentlessly. And as gold rises, it's going to effectively drive more of a settlement and a neutral reserve asset dynamic that we've been discussing for years and years and years together, Erik. And as gold gets higher, the dollar will weaken over time against creditor currencies that are “manipulating their currencies,” like the Chinese Yuan, like the Japanese Yen, and lo and behold, over the last month, look what's happened. Dollar is down against the Yuan a little bit. It's down against the Yen, fairly notably. And it's down big against gold. So I think we are in, I can see in broad strokes what the Trump administration is trying to do here, which is, what we termed it, closing the financial asset window, in a nod to Nixon closing the gold window in ’71. Well, we wrote for clients about a month ago, we said Trump just closed the financial asset dollar window, which is to say, take your dollar surpluses. We don't want them in the NASDAQ. We don't want you bidding Mag7 from 50 times sales to 75 times sales anymore. Build factories here, buy our weapons, pay our tariffs, or buy gold. And so that's the kind of price action we've seen in markets over the last month, last week and a half, except that there's been a lot of confusion on Wall Street. We've never seen this before, most of us in our careers, even those of us that have been doing it for a long time, which is dollar down, stocks down, bonds down. That's capital outflow, price action. And that is precisely what you'd expect to see, especially when married with gold up big that, based on what I just laid out. So that's what I think the Trump administration is trying to do in all of this, basically Main Street, not Wall Street, making America more competitive again, reshoring and weakening the dollar. But they are admittedly blunt instruments with high degrees of difficulty and very high degrees of executional risk, and what it appears they are trying to accomplish, in my opinion.

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Erik:    Joining me now is Michael Howell, CEO of CrossBorder Capital. Michael provided two downloads for our listeners this week. The first one before the slide deck is a very interesting write up about how CrossBorder Capital thinks about markets. And I'm going to highly encourage everyone, if you've got time to pause here and read it first, it will give you some really good context on how Michael’s firm thinks about markets, which I find fascinating, because any experienced businessman knows that it doesn't work the way textbooks say, where supposedly, you get credit based on an analysis of your ability to repay. It really is based on the system's need to lend more than on the borrowers need, our ability to repay and need to borrow. Michael's approach really analyzes markets from the context of understanding how the system really works, not what the textbook says. I really think that that article is worth a read, but for the part of our audience who won't actually do that because they're busy driving or whatever, Michael, give us the quick rundown, 30 second overview of what the global liquidity cycle white paper says before we move on to the second download, which is your slide deck. And listeners, you'll find those in the usual places in your Research Roundup email. If you don't have one, just go to our home page at macrovoices.com, click the red button above Michael's picture that says, looking for the downloads. Michael, global liquidity cycle, Cliff’s Notes, let's hit it.

Michael:   Yeah. Okay, Erik, well, let's try. I mean, basically our approach is, as you pointed out, very different. I mean, what we're looking at is global liquidity at the heart of the system. And effectively, we take a flow of funds approach and trying to understand how liquidity flows and capital flow shifts are really changing the whole dynamics of the system. And we're not focusing on individual securities, which is really the textbook approach. We're looking at, I suppose, behavioral aspects. In a way, we're looking at the constraints that are imposed on investors. In other words, investors operate with constraints about their liabilities. Those are often duration constraints. In other words, they've got to time future retirements, or insurance companies have got to time payouts at certain future frequencies. So, these things are really critical in terms of asset allocation. And then we also look at the constraints that are operating on credit providers. And credit providers clearly are operating in an environment which is highly cyclical, where central banks are operating and changing their own liquidity dynamics. And what we've had, particularly since the evolution, or the evolution since the global financial crisis, is that the whole financial system now is really based around collateral where the repo markets are really central. So, understanding these various dynamics is important, and that's what we put most of our emphasis really on. It's not a textbook model of where interest rates are important, and interest rate setting drives a sort of capital spending cycle. What we're saying is, it's balance sheet that's important. Flows of liquidity matter, and the whole system is now a debt refinancing system, where something like three out of every four transactions in financial markets involve a debt refinancing trade.

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Erik:    Joining me now is Tressis chief economist and fund manager, Daniel Lacalle. Daniel, it's great to get you back on the show. I was particularly keen to get you on the show this year because one of my rules is that when you have a changing geopolitical landscape where the balance of relations between really strong allies like Western Europe and the United States, is starting to come under question now, I think it's really important for investors to reach out to their friends on the other side of that divide and get their perspective. So, let's start with the European asset managers perspective. Somehow, I'm guessing the media in your country is not telling, is not lauding JD Vance for coming and enlightening Europeans on the benefits of free speech. I'm guessing that the European perspective on the Trump tariffs might be a little bit different than the White House's perspective. Tell us what the international audience, Americans and everyone else, should understand, maybe about how European finance is changing its perspective on its relationship with the United States.

Daniel:   I think you guessed correctly, Erik, thank you so much for inviting me. The media and the political narrative over here is very, very, I would say, one, biased and second, very one sided. You also have to remember, as you know very, very well, but for the people who are listening, that in Europe, we don't have any kind of political party that is in the mainstream parties. There is no one that is similar to the Republican Party. So, the exaggerations when there is a Republican president are enormous. So the position of most fund managers in Europe relative to the situation in the United States right now is a little bit more informed, I would say, than what the media is telling us. In general, there is a perception that there are some merits to the arguments of the United States relative to tariffs and relative to the trade barriers imposed by the partners of the United States. But certainly, there is, at the same time, a perception that the way in which those demands have been presented, and the not particularly diplomatic, one would say, and the extent of the damage created in the financial world are creating also quite a significant, let's say, concern that the approach to negotiations can be significantly more damaging than initially expected. I think that the average fund manager is more concerned about the next tweet or the next change in headlines than looking at the big picture and focusing on what this really is about and what can be improved, both for the European Union businesses and North American and US businesses.

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Erik:    Joining me now is Simon White, macro strategist for Bloomberg, and for those of you lucky enough to have a Bloomberg terminal, also the author of the MacroScope column. Simon prepared a slide deck to accompany today's interview. Registered users will find the download link in your Research Roundup email. If you don't have a Research Roundup email, just go to our homepage macrovoices.com, look for the red button above Simon's picture that says, looking for the downloads. As we get into the discussion of treasuries in just a few minutes, just follow along with us in the slide deck.

Simon, feels to me like one of those weeks when decades happen. We're recording this interview early on Tuesday morning, so you and I have only experienced one day of this week. On that day, we had, at one point, a 5.5% move up on the S&P500 futures in the course of six minutes, followed by a retrace of those 300 points up, we came back down 200 points in six minutes. Took another 15 minutes to get the remaining 100 points for a complete retrace. That was after somebody third hand, hearsay, said they thought they heard somebody else say something about what might be on President Trump's mind, and then the White House said it was fake news, and that all retraced. Needless to say, it's a headline driven market. Then we had Keir Starmer basically announce the end of globalism, kind of a profound thing to say, and that was just Monday. I can only imagine what happens between now and Thursday, when our listeners actually hear this interview. What's going on? What should we make of this? Obviously, President Trump's tariffs are kind of the key driver in it. But how should we think about these markets with just so many crazy things happening all at once?

Simon:  Well, thanks for having me on again, Erik. I think we actually spoke, not the last time, but the time before the last time, just when the pandemic started. So very similar circumstances, and I think the Lenin quote about decades in weeks was being used then, and it's certainly appropriate, the amount of uncertainty has ratcheted up by a huge amount, and it's hard to tell really exactly what the main aim is. I mean, my initial thinking was, when the tariffs were announced, the aim was to reduce trade deficit, for the US to reduce the trade deficit. But I'm wondering really, if they want to close them all together, which is obviously a very different set circumstances. If that's correct, then Keir Starmer’s notion about the end of globalization is right too. But again, we really don't know. I think there are definitely some more ideological people within the Trump administration, obviously, Navarro for one of them, and they maybe do look to close the trade deficits altogether. Whereas, Trump obviously is renowned for being open to deals, and perhaps if the right thing comes his way, he won't be quite as ideological.

But nonetheless, these are big changes, and I think one kind of analogy that's fairly relevant right now is Brexit. I mean, it was almost 10 years ago that UK voted to leave the European Union, and the principal motivations behind Brexit were a renegotiation of the relationships with your trading partners and taking back control of your borders. And that's really not dissimilar to what's happening in the US right now. The fundamental difference is it didn't work out well for the UK, certainly in the first couple of years, because capital started to leave. But the fundamental difference with the US would normally be that the US is insulated from such effects, because the US has the reserve currency and there's always a demand for its assets. But I think, like many things that we are used to taking as rules of thumb, I really don't think we can take that as for granted anymore. So, I don't think we can take that for granted anymore, that there's going to be the same requirement for, or desire for US dollars and dollar assets as there once was. Now, there's a few things here that make it even more interesting. As in the last few years, the US has been running enormous current account deficits. So normally, the sort of the rule of thumb, if you like, that the dollar rallies in sort of risk off events is based on the fact that dollar is normally essentially a funding currency. People tend to borrow the dollar, so there's a structural short in the dollar. And when you have a kind of financial shock that we're seeing similar to right now, that short is covered. But when you had so much capital coming into the US, and the numbers are huge that can easily overwhelm any short covering, structural short covering that you might normally see, and I think that's kind of what we've been seeing. So, the DXY has reversed most of its post-election (before the election and after) rally, can reverse most of that. And I think there's a sign that the dollar is no longer what it once was. And as I say, the current account deficits are huge. Now, most of that money coming into the US has not been for bonds. In recent years, it's really been equities. So, most of those deficits have been funded by equities. So, we've had something like $9 trillion of inflows into US equities since the pandemic, you know, doubling its size. And there's now over $18 trillion that foreigners hold, something like 16% of the total of US equities outstanding. So that's a lot of potential capital that can come out.

Now, equities are kind of in the heat of the storm right now. But it was kind of clear, I think, certainly to me, that why should treasuries be exempt from this? Now, the demand for treasuries had slowed. Certainly, reserve accumulation really began to sort of gradually ease after the financial crisis. But that really accelerated in the wake of the Russia-Ukraine war, after Russia's assets, reserve assets were seized, and then that confidence in the dollar was kind of further undermined with the recent rumblings we've had about a Mar-a-Lago accord. Essentially, you cannot take it for granted that the dollar is a politically kind of meddle-free instrument anymore. So that's really kind of scared the horses, not just amongst emerging markets and people that might be considered flows of the US, but also amongst friends too. So, there's a real fundamental kind of rethink here about what the dollar is about, whether people need to hold as much as they once did, and obviously that applies to treasuries, and that's compounded when it comes to the US by the massive fiscal deficits that the US has been running. So already, I would say that treasuries were facing a demand problem. You know, US has been running 7% fiscal deficits, treasuries aren't particularly attractive with a 7% fiscal deficit. Then, if we get a recession, I can get into that in a bit more detail later on, if we get a recession, I mean, the fiscal stabilizer alone would take that fiscal deficit into double digits. Now, inflation is already elevated, and when inflation is elevated, the yellow rule of thumb that people are probably quite used to is that Treasuries are a recession hedge. I mean, when inflation is elevated, that's just not the case, and you tend to get bonds and stocks moving positively correlated.

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