Transcripts
Erik: Joining me now is Rosenberg Research founder David Rosenberg. Rosie, it's great to have you back on the show. It's been way too long. Let's start with the big picture. We're climbing away here with what some people think, is a recovery to maybe new all time highs in the stock market. I'm skeptical myself, how do you see this market? What lies ahead?
David: Well, we have a long way to go to get back to those early 2022 highs. So that is a bit of a stretch. I think that the markets, whether it's the equity market, or whether it's the credit market, has gone into pricing a soft landing. So I think that they more or less bought into the Jim Bullard view from the Fed, that all is good, the business cycle has been repealed, there is no recession. And the green light is there to bid up the forward multiple back almost to 19 earnings. So this is a very expensive stock market right now and it's priced for Goldilocks. So all of a sudden, recession apparently is off the table and investors are embracing the soft landing once again.
Erik: I have a feeling David, that you are not quite as sold on this idea as some others are that it's all uphill from here. What's your outlook and what do you see on the horizon?
Erik: Joining me now is New York Times best selling author and Bear Traps Report founder, Larry McDonald. Larry, it's great to get you back on macro voices, it's been too long. I want to dive right into Fed policy but with a twist. I've been talking to a lot of guests recently about this balancing act the Fed has gotten itself into. Where they're kind of backed into a corner now to where, you know, they need to hike in order to fight inflation, yet they need to cut in order to prevent markets from having a meltdown here. It seems to me there's a whole other dimension to this conundrum that very few people are even talking about, which is we've got a debt ceiling showdown coming up this year. And it's going to be I think, more interesting. I think the fireworks will be more interesting in an environment where Fed policy is already constrained. So how does the debt ceiling factor into monetary policy?
Larry: Well, what's amazing about it is you have a dynamic toward the middle of the year of 2023, where you're going to have about $1.2 trillion of treasury issuance in arrears that are going to have to get cut and because right now, Janet Yellen and her team are really suppressing issuance because of the debt ceiling. And all of that issuance is going to have a colossal catch up from late July, early August, all the way through the end of the year. And then there's the normal financing period. And so this is a dynamic that is so powerful. I think that if the economy turns which we think it's going to, we could see the Federal Reserve in the yield curve control, QE by the fourth quarter, because there's just so many bonds that have to be sold to the public.
Erik: Joining me now is Adam Rozencwajg. Co-founder of Goehring and Rozencwajg, a commodity research firm and fund manager. Adam, it's great to have you back on the show. I want to start out with you know, the last time we talked, you and I were in strong agreement about something that well, either we were wrong or it hasn't happened yet. And that is that we both thought there would eventually be a very significant increase in energy prices due to lack of supply because of insufficient investment. I still hold that view, although it's on hold until the coming recession plays out. It seems like the expectation that increasing Chinese demand was going to be the catalyst that would really take things forward. It was going to change everything... Didn't really happen. Now as we're speaking, we've just had a surprise OPEC announcement which has jerked the oil markets considerably higher. But that was a reaction to a surprise move on OPEC. Before that, we were really plumbing lows that you and I didn't expect to see last time we talked. So what happened? Has the outlook changed? Is the hypothesis different now or is it just a matter of waiting for things for the market to stay irrational for as long as it can before it finally turns on our direction?
Adam: Lots of great questions and thanks so much for having me back. Happy to be here. Really looking forward to our discussion today. So, before we started recording, we confirmed here that we said the last time we spoke was last July, so July of 2022. And as you mentioned, depending on exactly when, in the month we spoke, but natural gas prices here in the US were probably around $7 and oil prices were over $100. And here we are, we outlined, like you said a very bullish view a year ago or just under a year ago. And here we are today before the OPEC announcement, oil was down to 70 and gas, which is even more shocking was all the way down to 2 bucks. You know, which is basically approaching the all time or 20 plus year low, which reached about $1.91 or so back in the summer of 2020. So like you said, the question is what's happened. And for the most part, in fact throughout, I would say that everything we talked about last year is still very much true. And when we look back five, six years from now, we're gonna say what was this decade about, and it'll have been about the decade of shortages. And the reason for that is because we just have not spent enough money in the sector. It's really as simple as that. If you look at capital spending in the energy business, you're still down 60-70%, from where you were in 2014. And you're almost at the all time low, you're up a little bit off the COVID lows, which is sort of understandable. But you're still 30% below pre-COVID levels on oil and gas spending. And so until you fix that problem, you're really not going to change the bigger theme here.
Where we did get things, we were early is that we had expected the fourth quarter of last year to be a really tight pinch point in global gas markets and global oil markets. And that didn't come to pass. And there's some really interesting reasons... Why? The fourth quarter normally is a period of very strong demand for both natural gas and oil. A lot of it has to do with the weather, you know, as things are cold. We use natural gas to generate electricity for air conditioning in the summer, but we use a lot more of it for heating purposes throughout the winter. And so winters are typically most energy intensive season. And this past winter, we just had incredibly mild weather in both the United States and in Europe. And something else happened from a gas perspective in the US. And that is we lost one of our biggest export terminals, the Freeport LNG natural gas export terminal down in the Gulf Coast. That caught fire back in April of last year. It was 2 Bcf/d and that was offline for over 200 days. So it's about 400 Bcf (billion cubic feet) of natural gas demand that we effectively lost last year. And we saw inventories in the US increased by about 400 Bcf/d. Thy are 4 BCF or other total relative to averages. So I think that's entirely explained by the fact that we lost Freeport.
And then in Europe, they went from a very, very tight gas market to a very loose gas market, because winter just never came. And you and your listeners may have heard articles or listen to podcasts alluding to that. But when you look at the numbers, it's really, really shocking. You're talking about the warmest winter in Europe in 40 years. And thank God that happened. It really got them out from a very, very tough spot with Russian gas volumes curtailed after, you know, first of all the Russian invasion of the Ukraine and then the Nord Stream pipeline issues and things of that nature. You lost 15 Bcf a day of your imports. That's huge. And the only way that they could be bailed out being Europe was by really, really mild weather and that's what they got. So that explains the gas market. The question, of course, is now when you look forward in the US here, Freeports back up and running again. So those two Bcf a day are flowing, that demand is back. And in the rest of the world, the question now turns to okay, great, we had this warm winter, we can either hope we keep getting record warm winters, or we're going to have to find some way to replace that 15 Bcf a day of Russian pipe imports. And if you were to put that all in the LNG market, the liquefied natural gas seaborne market where you cool gas and to tankers, and you put it out on the water and in vessels, that would be like a 35-40% increase, 35 of a percent increase in the global LNG market. So that can't be absorbed. So I think you've now gone from what would have been a bullish macro story, you know, long term macro story with a very, very near ter acute pinch point being the fourth quarter last year, that's clearly been pushed out. But you haven't changed any of the main big picture macro drivers in the energy market, which still points to very, very, very, very tight balances going forward.
Erik: Joining me now is Charlie McElligott, Nomura's cross asset macro strategist. Charlie, what a perfect week to get you back on the show because your team is really good at looking at market internals and the flows and so forth. Here's my question. If Bear Stearns just happened and I contend it did, it's called SVB. And you're not sure if Lehman is about to happen next. How do you tell because the Fed and other government officials have a strong incentive to lie in order to shore up confidence? What can we look at in the market to tell whether this banking crisis is a flash in the pan that's already over or if it's something that's just getting started?
Charlie: Appreciate being here. Great to speak with you again. Look, this is one of those rare opportunities where I get to kind of step back from very tactical flows, and look at some actually larger structural, strategic stories. And, you know, that is exactly what's happened over these past few weeks with regards to you know, both the the US regional bank dynamic as well as the, you know, the EU bank story, with SIVB, and Signature, and SI, and Credit Suisse. You know, all of those fails are idiosyncratic symptoms of this larger bank profitability crisis becoming a solvency crisis. And, you know, as it relates to your question, these are long term structural dynamics for banks, whose kind of profitability models were built for an era of 0% interest rates and an era of large scale asset purchases, and an era of slowflation. And we're seeing, you know, the emperor has no clothes pretty clearly here. And, you know, as it relates to, you know, too flat yield curves, as it relates to higher cost of capital, wider credit spreads for banks, and all that means negative carry. So, you know, NIM compression, you know, it's a future state of enhanced regulation and forced capital raises.
And all of that is against this, you know, huge headwind. That's really the catalyst here, which is this continued deposit flight story. Too low deposit rates, versus customers who are then being incentivized to continue shifting money out and into money market funds that sit at the RRP or direct into bills that are offering magnitudes higher premium. So it's that two-tiered US banking system. You know, Janet Yellen got absolutely pinched on her testimony two weeks ago, and that clip that went viral. And basically, it's telling you that there's like a structural long term placeholder trade here. It's like long the major banks versus short regional banks, and the implications of it from the big picture is that, you know, this profitability and solvency crisis becomes a massive financial conditions tightener. And ultimately, you know, in a fractional reserve banking system, where, you know, this is the transmission mechanism for US economic growth. The global economy is going to get toasted, because these banks are going to go into zombie mode, at best and at worst, it means that, you know, credit and lending doesn't flow out into the economy. So it's a really big story. It's a really significant story. And it's where this cycle that's kind of been on this, you know, slow autopilot for the last while, as you know, fed hiked rates and without a lot of market impact. Now, it's really taking a turn.
Erik: Joining me now is Luke Gromen, founder of Forest for the Trees. Luke, what a week! The big news, of course, that came out over the weekend was the failure of Silicon Valley Bank. This is a bank which specialized in setting up fundings for venture capital firms for startups in Silicon Valley. Therefore, a lot of big companies with a lot of cash that was not insured, that bank failed. I think, because of the Fed's hiking cycle. Do you think that that was the cause? And if not, what was the cause? How do you interpret this and what does it mean for the Feds hiking cycle?
Luke: Yeah, thanks for me back on, Erik. I agree, I think it was ultimately the Fed's hiking cycle and really inflation driving the Feds hiking cycle that caused it ultimately, you put that bank and a number of other banks in a position where they have to compete with the Treasury market, the short term Treasury market in particular money markets, money market funds, where the yields error, call it at least before today's trading for three quarter percent for 30 day money, give or take. And so that puts the banks in an uncomfortable position of either having to raise deposit rates, which will put pressure on net interest margins and earnings, which is never popular with bank management's and bank investors or they need to sell these bonds to fund the deposit outflows. But the problem is, is there are these were supposed to be high quality liquid assets. And they've been not so liquid, and they are down on price. And so banks, and I'm not an expert on bank accounting. So take this with a grain of salt. But the gist of it is that the banks don't have to take a mark on big chunks of their securities books, unless a couple of things happen. One of those things being if they sell the bonds, so they would have to mark losses, and that would also hurt earnings, or they have to issue a bunch of equity, or raise otherwise raise capital to replace the deposit funding, the cheap funding as as the deposits go elsewhere, looking for yield. And so it's it sets up a choice of a number of choices for banks that all of which either hurt earnings or margins, are hurting margins, or dilute shareholders. None of which they are really big fans of so I agree with your assessment of it.
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