Transcripts
Erik: Joining me now is Saxo Bank's commodity chief, Ole Hansen. Ole prepared a slide deck to accompany this interview; you'll 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 that says "looking for the downloads" above Ole's picture. Ole, it's great to have you back. I'm really looking forward to diving into your slide deck. I love the 747 on the splash page there. But let's dive into slide number two.
Ole: Well, let's do that, Erik. Yeah, first of all, thank you very much for inviting me back. It's obviously continued to a very interesting time to be involved in the commodity sector, for good or bad. And movements are seen everywhere. But yeah, let's start with a conclusion first. Basically, our view is that the commodity supercycle is still alive. It's much driven by tight supply than it is by demand. And I think we're seeing that also unfolding across some of these key commodities. Right now, we've had a significant correction, as we can see on this slide. Bloomberg's spot indexes have corrected almost half the gains since the low in 2020. But have started to recover somewhat in during the past three months. And actually, so far this quarter is looking quite promising. But I've highlighted some of the reasons why we believe that the commodity sector will continue to be supported. Simply because in some cases, prices are not high enough in order to attract the production that is required for some of the targets and future goals to aspirations to be met. I mentioned some of them.
I think the first one we're seeing in full flow right now is the fragmentation game that has been ongoing now for a number of years. We're seeing production being reshored and friend-shored. It's having a quite significant positive impact on the US economy. But it's also helping to drive up prices, because it's no longer necessarily where the price of the cheapest that they are being produced. So that's having an impact. The green transformation we all know, and I think the structure of inflation is one that we cannot ignore. We are seeing the, and I got a slide later on just showing how the forward inflation expectations are already starting to pick up again. So we're not going to settle at the central, as the FOMC is, the Fed's long-term inflation time, we may dip, but it is not going to be where we were, we eventually settle. We think that will support commodities. And then we have tight supply. We have seen that in the crude oil market right now due to politically motivated decisions to keep production tight, but we also see it elsewhere across the food commodities and some of the mined metals as well.
Erik: Joining me now is HonTe Advisors founder, Alex Gurevich. Alex, I'm really looking forward to this one. Before we get started, I just want to salute you, sir, because it is so refreshing to me as seeing so many people in this industry, hiding from their mistakes and not admitting when they screw things up your most recent research note, which most people would only send to their research customers, you've actually shared with the whole world. And it starts in the very first paragraph by saying, hey we got some stuff wrong, and we got some stuff right almost. And then we need to talk about what we got wrong. It is just so refreshing to me to see someone with that much honesty and candor directly addressed their clients and everyone else and acknowledge when some of their calls didn't work out, which always happens in this business. That research note is linked in your research, Roundup email, if you don't have a research roundup email, just go to our homepage at macrovoices.com. Click the red button above Alex's picture that says, looking for the downloads. So what did you get right, what did you get wrong, and what happened with the stuff that went wrong?
Alex: Well first of all, thank you for having me. And thank you for your kind words, it's good to be back. The world is indeed somewhat different from how many of us have imagined it even a little while ago. And this note was written in a spirit of like me contemplating what it is that I have learned over the last couple of years. And in this note, specifically, I focused on understanding the persistent nature of inflation. That is, if I asked you Erik, one question, what would you like to know if I asked you? What do you think the inflation is next month? And I can give you only one piece of information about this of all the economic numbers. Do you know what that would be? I don't mind. I don't mean to put you on the spot. But do you have something coming to the top of your mind?
Erik: Joining me now is Forest for the Trees founder, Luke Gromen. Luke, it's great to get you back on the show. It feels like it's been too long, although it really hasn't been. I really want to talk to you about the US dollar. Our friend Brent Johnson says he thinks we could get a retest of that what was it, 115 that we saw on the dollar index. Looks to me like if it got that far, it could go all the way to about 122 or so, which would break a lot of things. Is that a possibility? Are we looking at the potential of the dollar moving even higher than it's been and if so, what would the consequences be?
Luke: Yeah, I think it could move that high. And in terms of what would the consequences be, that would break the US Treasury market, that would break Western sovereign debt markets, that would break US banks, Western banking systems, it would accelerate even further dedollarization of global commodity markets. You know, headline today that China and Brazil just did a deal end-to-end in Yuan, which would only send the dollar higher, force more deleveraging. So, it would break the US dollar system. It's a paradox that most people seem to think that the dollar rising is a sign of the US winning, it's not. It's a sign of the US dollar system unwinding itself.
Erik: Joining me now is Simon White. Many of you remember Simon when he was a co-founder of Variant Perception. That's the leading indicator guys that we like to get on the show every three months or so. Simon has moved on now and is Bloomberg Markets live macro strategist. Simon, it's great to get you back on the show. Listeners, Simon has prepared a slide deck, you'll find the download link in your research roundup email. If you don't have a research roundup email, it means you haven't registered yet at macrovoices.com. Just go to macrovoices.com, click the red button above Simon's picture that says looking for the downloads. Simon, I want to start with what's on everybody's mind the long awaited recession, is it really going to be forgotten in favor of a soft landing or is the recession still on the horizon?
Simon: Thanks Erik for having me and that's a great question to begin with. So, I would say I think the consensus has certainly seems to have shifted much more towards soft landing, no landing scenarios. I mean, stepping back, there's an issue here with none of these things are very clearly defined. So I think everybody's in a position where they can be right or at least not proven wrong. Although I think a hard landing is fairly clear, like if we get recession. But even then, a recession is not something that's clearly defined either. I tend to go by the MBR, like they're kind of the arbiter of whether there's a recession or not, and they give some guidelines about what they call a recession or not. But even there, that there's a lot of kind of fuzziness around the definition. So I tend to look at recessions, you know, economies kind of switch into recession, so they are a regime shift. And I think that's what really kind of catches people off guard is recessions, they're pronounced, they're protracted, and pervasive, the three P's. I'd say there's a fourth P as well. And they are precipitate, and they tend to happen very abruptly. So that's what I've tried to show in the chart on slide two, the right hand chart. And they tend to happen when you get interactions between hard and soft data. So soft data is your market data and survey data, things like ISM, and consumer confidence. And hard data, things like, you know, industrial production, retail sales, etc. And when these two tend to operate off each other, and they generate a feedback loop, and past a certain threshold, that they hit a cascading point. And that tends to be when you get recessions. And what's kind of interesting about the chart, is you'll see that there's a number of times when you have a stress in the soft data. But you don't get a stress in the hard data, and you don't get a recession. And they are really the times, you know, the Fed is kind of this, what the Fed is all about, right? The fable Fed put is essentially, if they can stop soft data stress, bleeding into the real economy, and then creating one of these feedback loops, then they've done a reasonably good job, you know, they prevented a recession.
And where we are today, again, if you look at the chart, as you can see that both hard data and soft data are stressed, and they're past a threshold that has normally been associated with recession. So I think we're at a very kind of like, hot point, the soft landing narrative, I think is, as I say, I think is basically misguided. I think that often, just before a recession happens, people tend to be off their guard, and rapidly, you get a decline in the data. And that's exacerbated by the fact that most economic data, some of it considerably so is revised. And here's the kicker, it's often revised at most at turning points like recession, so going into recession, you're kind of most blind and the data is most wrong. So you know, we've got a number of things that are standing out to me right now, that I think are consistent with prior recessions. So the claims data, now you can look at that in two ways. You can look at the national data, which is what most people focus on. But you'll get a lot more information content. If you look at claims data by US state mentioned, you know, recessions, one of the attributes they have as their pervasive. So you tend to see things worsening across sector and geography at the same time. And the claims data by state picks that up. And what we've seen over the last few months is that you're seeing deterioration in claims data across quite a high number of states to a percentage of states that's been consistent with a recession in prior years with a very high kind of hit ratio. And that's the unemployment claims and continuing claims as well.
So I think the recession is much more likely than the consensus believes and I think when it does happen, it will happen much more abruptly, the data will suddenly take a massive turn for the worse. And also subsequently, the data will be revised a lot more. And we won't know, we never do, we never know we're in a recession. Ex-ante is only ex-post. And that's really where it gets interesting because obviously telling someone that a recession has already happened, it’s useless as an investor and what obviously, as an investor, you want some sort of leading idea that you're going into recession. Because equities are kind of like not super quick in terms of like they don't sell off a long, long time before a recession is deemed to have started. But they do sell off a little bit before and they sell off obviously, through the recession, you get a good drawdown then, and that they start rallying before the recession ends. So if you look at where the reactors are behaving right now, in the median sort of around recessions, or the median after bear market, so the bear market that we've not quite left, depending on how you define it, but we've certainly not made a new high back in there, January 2022. You know, right now, markets are behaving in a way that's consistent that this is a bear market that is not going to be followed by a recession. So it's clearly not yet priced and complicating the issue as well. Something maybe we'll get into later on is I don't think this will be a normal recession, certainly not the garden variety recession that most investors will be used to, because I think this recession is going to be accompanied by elevated inflation. And that really kind of complicates matters and changes what people are perhaps expecting going into a recession.
Erik: Joining me now is Gavekal co-founder Louis-Vincent Gave. Louis, it's great to get you back on the show. You, having been a Frenchman who's lived in Hong Kong for much of your life, are very well known in finance as a China expert. So, I want to start there. And I think my real question is, okay, what actually is going on in China? Is this about, we're waiting for the Chinese economy to recover, like everybody was talking about? Because that's going to bring back final demand into the global economy? Is that what we're waiting for? Or is it more that we're waiting to find out if we're starting a major global war with China that's going to completely change the nature of trade? I'm not sure which it is anymore.
Louis: Well, first of all, thanks for having me again, Erik. It's a pleasure to be here. Pleasure to catch up with you guys as always. So thanks again for having me. Look, I think the narrative around China this summer has been fascinating. You know, you've had I think back-to-back covers of The Economist, you've had that meltdown cover on Business Week. Let's just say that the media narrative around China has been extremely dire. And to me, the first observation I have is that when it comes to China, I think people in the Western world always fall into one of two categories. It's either China's going to take over the world, or China's about to implode in a blaze of glory. And we seem to be swinging always from one extreme to the next. And today, obviously, we're in the "Oh, China's imploding" category. And I think this is for two reasons. First, of course, China's reopening has been disappointing. And here, I'll put my hands up, I messed up on this. I think I messed up a little by laziness. When China reopened, I thought, "Oh, I've seen this movie before, you know, I saw it in Europe, and I saw it in the US, and I saw it in Canada. And when economies reopen, you got all this pent-up demand, and you get all this growth, and this is going to be awesome." And I think the reason this script didn't play out in China is the very difference in the labor markets. I think what happened in the Western world was people were told, "You go home, you stay at home, and we'll pay you to stay at home." And then when we told people in the Western world, "Okay, you guys get back to work," you had a small minority of people that said, "Well, actually, I like working from home, or maybe I don't feel like going back to work." And this was especially true at the lower jobs, your McDonald's workers or your hotel cleaners or whatever else. And so all of a sudden, we found we had a shortage of labor at the low end. And that pushed wages up, that further fueled the consumption boom in the Western world.
In China, meanwhile, the situation was completely different. In China, people were told, "Okay, go home." And going home in China meant actually going back to the countryside. So you had literally tens of millions of people that left the cities, went back to the countryside. So when the government said, "Okay, you guys can come back to work," now you had tens of millions of people that swarmed back into the cities and actually depressed wages. And that's where we've been the past six months, you know, a fairly weak wage growth in China. And with that, obviously, bad consumption data, etc. Now, combine that with the fact that you've had five years of real estate crackdown, that real estate prices have rolled over by 10-20%. And pretty much any city that you care to think of, big property developers are going bust and/or have gone bust. And that at the same time, you're having all sorts of problems in the shadow banking system. And now I think you're seeing the other extreme, where people in the Western world are saying, "Aha, I've seen this movie before. This is 2008 all over again, falling real estate, property developers in trouble, financial intermediaries in trouble." But the reality, of course, is that China's financial system is completely different than that of the Western world. And the whole "Oh, China's going through its Lehman moment" is completely misplaced. And you see this, frankly, in the data. Chinese bank shares aren't collapsing, they're not going up, but they're not collapsing. You know, iron ore prices are up 50% since China reopening in late October, LVMH sales are still cranking away. So China today is… There is trouble on the real estate front there. There is trouble on the local authority front.
But if you take a step back away from the hyperbole, what do you see? Well, you see an economy that has gone from a trade surplus of 30 billion a month to 80 billion a month. You know, if you took all of China's annual trade surplus, it would be basically the 20th biggest economy in the world. China's trade surplus is almost a trillion dollars a year now. It's roughly the size of the GDP of Switzerland or Argentina or any G20 country. And behind that is a simple reality. Behind the surge in China's trade surplus is the fact that China's massively moved up the value chain in a number of industries. Where this is the most visible is autos. You know, five years ago, China didn't export any cars. In five years, China's become all of a sudden the world's biggest car exporter. And you can replicate that to earthmoving equipment, to solar panels, to trains, to nuclear power plants, you name the industry, and China in the past five years has done accomplished really pretty impressive things and become a genuine global player in pretty much any industry you care to name. So, to think that with all these strides, with an economy that's, you know, having a trade surplus of 80 billion a month, you're about to see an economic Armageddon and implosion, to me, is a massive stretch.
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