The Week Ahead — 16 May 2022

The number one issue for Americans is inflation. As long as this is a top consideration, the pressure will be on the Fed to bring it down. Sam has been pretty consistent with 3 x 50 rate hikes in May, June, and July. What changed in trading today? Is everyone still bearish? Samuel Rines explains.

Also, what’s next for crypto? Luna fell from $90 last Thursday to $0.00005952 on Friday. Their circulation went from 4 billion yesterday to 6.5 trillion today. Watching the crypto fallout is terrible — lots of people have lost lots of money in this supposedly immutable “currency”. Albert Marko explains what happens next.

Lastly, is China really falling apart? We’ve seen some unsettling posts over the past several weeks out of China. From lockdowns to port closures to gossip that Xi Jinping has been sidelined.

Key themes:

  1. Is everyone a bear now?
  2. What’s next for crypto?
  3. Is China really falling apart?

This is the 18th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon

Listen to this episode on Spotify:

Transcript

TN: Hi and welcome to the Week Ahead. I’m Tony Nash, and as usual, we have our team, Sam Rines and Albert Marko. Tracy, who’s not with us today.

Before we get started, I’d like to ask you to subscribe to our YouTube channel. It helps us a lot get visibility, and it really helps you get reminded when a new episode is out so you don’t miss anything.

Gosh. Big week for everyone. I wish I had fallen asleep a week ago and just woken up now after Friday’s trading. But it’s been a big week all around for everyone.

Guys, we really have a lot to talk about this week. We’re covering the markets. Is everyone a bear now? That’s one of our big topics that we’ll have Sam lean on. Next is what’s next for crypto? A lot of action on crypto, a lot of scary things happening with crypto and then some news out of China or speculation out of China. We’re asking, is China falling apart?

So Sam, let’s start with you first. I guess one of the most relevant items I’ve seen circulating and it was in your newsletter today is the top issues for Americans on the screen right now.

It’s clearly inflation. As long as that’s a top consideration. The pressure on the Fed to bring inflation down is huge. So you’ve been pretty consistent with three times 50 basis point hikes for May, June and July. What’s really changed in trading today? And is everyone still bearish?

SR: Yeah. I mean, everyone still seems to kind of be floating a little bearish, but I kind of like to go back to the number one concern is inflation. We shot ourselves in the foot and then the second one is getting shot in the head, right. It’s violent crime and crime. You add those two together and it’s even larger portion of inflation. So it’s safety and food. Right.

People like to eat and they want to be able to eat and they want to feel safe. I think it’s that simple. Those should be the top two concerns in this type of environment when you have the data pointing towards continuing higher inflation numbers and continuing crime.

On the is everyone a bear front? I think it’s a little complicated, right.

Because if you look at the flows into and out of indices and into and out of fixed income, and when you look at the flows, it’s easy to kind of say everyone’s a bear. Right. Pouring money into Treasuries, taking money out of indices. But at the same time, underneath the surface, you really want to be careful on what you’re a bear on and what you’re not.

There’s a lot of things that can still make money in this environment, oil, food, etc. can still make money. And there’s a lot of things that are probably still going to get torched. Anything that’s a little high beta is probably not the place you want to be for the whole time. Tradable but unlikely to be a long-term type trade.

TN: Like, I noticed some of the techs coming back today, and that’s great. And I hope people don’t lose more there. But is that something that you would consider kind of be careful if you’re going back in type of trade?

SR: Some of it. Not all of it. There’s a lot of tech that actually looks fairly attractive here, whether it’s from a valuation perspective or whether it’s from a very long term perspective.

A lot of stuff re-rated, re-rated fast, and it looks attractive. And there’s a lot of stuff that looks like it’s probably going bankrupt. Right. I wouldn’t be trying to bottom tick Carvana.

AM: Actually to expand on that, Sam, about who’s a bear and bears or Bulls or whatnot. I kind of think that we have to separate the higher great institutions versus the retail dip buyers that are just looking for that get rich, quick return. Many of the institutions, the ones I’ve talked to, are absolutely still bearish. They don’t see real value in this economy until the market until 3700.

Coincidentally, one of the hedge fund guys told me at 3500, you have an actual financial crisis in the United States just because everything’s leveraged up. So I don’t think that the Fed was even going to want to afford or going down past the 38, 3700, in my opinion.

SR: In 100% of that, Albert. Right. You have to separate those two teams of people. Right. The dip buyers are going to try every single time to get rich quick. Real long term allocators are going to take their time here. They’re not going to rush and, those are very large positions they have to take. And they don’t get to move in and call it for two or three weeks. They have to move in for very long periods of time.

So it’s Albert’s point. I don’t think that should be underrated, period.

AM: You can just look at the valuations of some of these companies that are still out in the stratosphere, like one of the ones I’ve recommended, Mosaic, Tight and Tire. They’re just ten fold of what they were in 2020. How do you buy these things? You can’t buy these things.

TN: Right. We’ve seen a lot of chatter about margin calls over the past week and a half. Obviously, that’s been scary for the first wave of kind of people going in. But when that second wave hits, when does that start to hit that second wave? Once we go 3800 or lower? So is that when things get really scary?

AM: Actually, I think part of the margin calls happened this week, today, actually Friday. I think a lot of guys had a liquidate positions and cover shorts and whatnot. And we got a little bit of a squeeze of a rally. I didn’t really feel like a Fed was pumping just thought like people short covers and people trying to get stuff off the board.

TN: Right.

SR: 100%. That’s where I think. I don’t think you want to be in front of a wave of liquidation for let’s call it sun and Ark, right? You do not want to be in front of either one of those two right now, period.

TN: Yeah, it was nice to have a Green Day, but it didn’t necessarily feel like a strong Green Day.

Okay, guys, let’s move on to crypto. Albert, I think you’re the man here. You’ve talked about crypto for a long time. It’s bad. This week is bad. And we’ve got a chart for Luna.

Luna fell from $90 last Thursday to 5, 10 thousand of a cent today, I think. Their circulation went from 4 billion yesterday to 6.5 trillion today. So it doesn’t sound very immutable to me. So the watching crypto fallout, it’s been pretty terrible. Lots of people have lost lots of money and people are questioning and cynical about words like immutable now.

This is something that I think experienced people have expected. But what happens next? Do we have a clearing out of some of these currencies? Do people just hold at 5, 10 thousand of a cents? Do we see some of these actually become currencies or is it all just going to get regulated and kind of thrown out the window?

AM: Well, are they going to be currencies? No, they’ll never be currencies. The dollar is going to be the currency of the world status for trade for the remainder of our lifetimes, whoever is alive today. That’s just the basic fundamental fact that you have to come to grips with.

This is like part one of the closing call for cryptos in my opinion. They got a good dose of the reality that when things need to get liquidated, you’re not liquidating residential towers in Miami on your portfolio. You’re liquidating some Ponzi scheme cryptos that are in your pocket that your clients really made you get into to begin with.

From the retail side, as much as I want to gloat, because I’ve been saying that this was going to happen for years, it’s really not that funny because you had guys out there pushing these crypto things and saying the dollar is dying, gold is dying, digital future, blah, blah, blah. Look at this chart, look at that chart. But the reality is there are nothing but pump and dump schemes. And people lost a lot of money.

I had a friend that goes to school, his daughter goes to school with my daughter. And he told me months ago I put everything to Litecoin for the College fund. I tried to reason with this guy.

TN: Please don’t do that.

AM: Yeah, well, community college for that kid.

TN: Albert, they’re following the lead of some, analysts are credible. They have a credible history and they’ve really started pushing this stuff. Now they’ve dialed it back. But some people who had previously been credible analysts were pushing this stuff.

AM: They’re liars. They’re all liars.

SR: Had been.

AM: They’re trying to get services sold and people to watch their YouTube channels and get subscriptions up. So of course you’re going to go and sit there and try to pump crypto to the retail crowd because they don’t know any better, right?

SR: And anyone who looked if you really dug into the Luna situation, you could understand very quickly how that could unwind in a way that was dramatic. This wasn’t even constructed as well as a pre 2008 money market fund. At least you knew what the money market fund held behind it and how it was going to actually return money to you.

With Tether, it’s supposed to be a crypto ish money market fund. We still don’t know what that actually holds. The whole thing to me is regrettable to Albert’s point, right. The two of us kind of got picked on when we giggled off paying for oil in crypto earlier this year. But the two of us have been kind of like, “no, not so much.” So while it’s tempting to kind of have that little bit of a cocky grin.

It’s a really sad situation and there’s a lot of money that got shredded very quickly there.

TN: Very quickly in less than a week. It’s insane how much money. If anybody who follows me on Twitter knows that I invest in some Doge last year, stuck with it for a few months, got out I did it because it was a joke of a coin. Everyone knew it was a joke of a coin. I wanted to be on part of the joke, and I made some money at it. And that’s it, right? That’s it. You can’t necessarily think of this stuff as a serious investment because it’s so highly unregulated and people engage in this pump and dump stuff.

AM: Yeah. We can have a conversation on this for hours. This is actually at the heart of the problem of the US economy at the moment. All these gig employee, all these gig employees service industry and jobs and whatnot, they left work got into crypto. Got stimulus checks, sat at home, kept getting unemployment, not going to work, and now we’re stuck with the labor shortage in reality. I don’t care what the Fed says and what Yellen says about the market. The labor market is good. The labor market is absolute trash right now. We have no workers anywhere right now. And because. Yeah, this is part of it.

TN: So that’s a good question. With crypto, kind of at least temporarily, maybe permanently dying, does that help the employment picture? Does that help people come back to market even a little bit?

AM: People had tens of thousands of dollars in a Coinbase account that are now $500. They’re going to have to go back to their jobs. And that’s just the reality of it. If you want me to go even a step further, this is probably the intent of the Fed and the treasury is to start eliminating this excess money, forcing people back to work.

SR: Yeah. Oh, 100%. In one of my notes this week that Tony, I think you saw, I sent out the video from SNL of Jimmy Carter saying, hey, get 8% of your money out of your account and light on fire. Guess what? The Fed just did that for millennials.

TN: Yeah.

SR: It’s that simple. The Fed just lit at least 8% of millennial money on fire, generally. Right. And it’s unlikely to come back that quickly. And I think if it wasn’t a direct policy, it was a side effect that the Fed sitting there going, oh, well, that works.

AM: I guarantee I talk to a lot of people. It was a direct policy. I don’t care. I’ll throw the Fed under the bus. They deserve to be thrown under the bus anyways.

TN: Well, yeah, it is where it is. And I would assume more regulations coming at some point because people will scream, especially with Coinbase.

I think it’s Coinbase or one of the exchanges saying that they’re going to undo a lot of the trades over the last two or three days.

AM: Okay.

TN: There are no regulations at all.

SR: Just call them the LME.

TN: Yeah, exactly. So crypto is the LME now, and it’s insane. So a lot of consumer protections are going to be talked about. A lot of regulations going to come in. I think that party is pretty much over.

AM: Yeah. Once the regulations started coming in from Congress and different governments in the world, they’re going to see how false their idea of decentralization really was.

TN: Yeah. Okay, guys, let’s move on to China. We’ve seen a lot over the past few weeks and really gossipy stuff about China. But today I saw a note from Mike Green on Twitter, which is on screen talking about Xi Jinping and Li Kaqiang, and Xi basically being sidelined on May 4.

I also saw another tweet yesterday, a guy going through Shanghai during the lockdown. If you haven’t seen it, the first of the thread is on the screen now. Check it out. It’s really interesting.

China is empty and it’s really sad.

So we’ve seen these really unsettling posts over the past several weeks out of China, from lockdowns to port closures to gossiping Xi as sidelined. So to you guys, what does that all mean? Is it something you’re taking seriously? Do you think it’s something that will have immediate effects? What does that look like to you?

AM: China. China is a big quagmire in itself. It’s such a large country. You’re going to have all sorts of rumors of Xi being sidelined and unrest in different cities like Shanghai and whatnot. But the Chinese are pretty pragmatic. They know that things are not going really well. So they’re going to have to lift off they’re going to have to lift off some of these just draconian policies with locking down people because it’s going to really hurt their economy. And part of it’s probably because they’re fighting inflation, too. They’re trying to cut down demand until supplies catch up. I mean, they got problems over there with inflationary issues.

TN: Also with the deval, with the port closures, with a lot of other stuff that’s happening there, their economy is already host. Right. They’re definitely not hitting 5.5, which is their target this year. And I think they’ll be lucky to have a zero growth year.

But I think Albert, on the political side, a lot of this kind of theater that we’re seeing play out on Weibo and Twitter and other things. Do you think this is plausible?

AM: Of course it’s plausible. I mean, you have the vultures circuit around Xi right now. They want him out. You have one elite group keeping him in power. But most likely have three or four other elite groups within the CCP that want him out. There’s no question about that. He can’t even go out in public.

TN: That’s an important thing that many people don’t think about is there are parties within the party. The CCP is not a unified party. There are factions within the party. Many Westerners don’t understand that. There are definitely factions within the party, and they’ll stab each other in the back in a second.

AM: There’s factions everywhere you go. People try to, China as a one rule or one party, one system, but even the United States, you have the Tea Party, the Freedom Caucus, the Progressive, so on and so forth. I mean, it’s all fragmented no matter what you do.

TN: Yeah, Sam. So China is second largest economy, ports closed, people in their houses, all of that stuff. So how long can they do this before it affects everybody or has it already started doing?

SR: Oh, it’s already affecting everything. The supply chains are already completely ruined because of it. There’s no question about that. I think the real question is what happens when they reopen, right?

We’ve got oil sitting at $109 and half a China is shut down. That is something that doesn’t, I mean, it’s kind of scary, right? You have a bunch of people that aren’t using as much as they should be right now. You begin to spin that back up. That could be a really interesting scenario overall. I don’t know.

AM: You know, Sam, that actually loops back to what you were talking about the Fed trying to fight inflation. No matter what policy they come up with, there’s still supply chain shortages and labor and everything that no matter what they do, they can’t fix.

SR: Their host. It’s an amazing world where you have half the Chinese, let’s just click through. Half the Chinese economy is shut down. You have the US dollar sitting at 105, 106 somewhere in there, and you have oil sitting at 110. Anybody who’s saying oil prices look a little toppy here might want to look at what happens when the dollar falls and China’s going.

AM: That’s what we’re going to have inflation in the five to 7% range for the next 18 months. I can’t say lower than that.

TN: 18 months, you say?

AM: 18 months. How are they going to get it lowered? China opens and then what? You know what I mean? And then you still have shortages everywhere. I mean, go to some of the stores. They have baby formula shortages.

On any given day, you have small materials you need from the home short. Everywhere. That’s going to create artificial inflation. On top of that, you have wage inflation. How do you get that down?

SR: The only way you get it down is having less employees. Look at Silicon Valley. Silicon Valley has started laying people off, and that’s not getting enough. It’s more than just Carvana.

AM: And then that’s the thing. Later in this year, Democrats and Joe Biden can have a real big problem unemployment numbers, starting to creep up. They can’t hide that forever with the BLS manipulation.

SR: Look at the household number. The household number is already not looking great. And that’s the one that they choose not to hide for a reason. Yeah, sure, the establishment is up, but you look at that household number and it’s printing negative already, guys.

TN: Yeah. One more thing I want to cover is this has to do with China shut down and it has to do with the possibility of political instability in China. So there are two separate issues. The newsletter today talked about reshoring.

So these things seem to provide more instability and a lack of reliability of Chinese sourcing. So what are you seeing to support the reshoring argument?

SR: Oh, lots of things. I mean, you have Hyundai. That’s likely to announce a pretty big factory next week in Georgia. You have everyone from Micron to a bunch of other call it higher tech firms beginning to announce that they’re moving back here. They’re building here and they’re going to manufacture here or they’re going to manufacture in Mexico. One of the other.

If you want to have China like characteristics without supply chain issues, you go to Mexico and that re regionalization trend. That’s the theme of mine. Is beginning to pick up steam and it’s going to pick up much more steam, in my opinion.

North America is going to be basically, in my opinion is going back to being the world’s, not manufacturing hub, but the world’s high end manufacturing hub. If you want something that it’ll be like big Germany.

AM: Yeah, I mean that’s just the most logical thing to do is to start putting your supply chains closer to your luxury consumers and you have to do that. But I’ve been high on the Canadian economy and the North American economy.

I think Europe absolutely they’re in deep trouble at the moment. So is Asia. But Europe especially.

TN: On the reshoring note, guys, if Germany can’t get power, will we start to see some German manufacturing firms potentially moving to the US?

SR: You already make AMGs here. Mercedez Ben’s AMGs.

TN: Yeah.

SR: They’re made in Alabama. But they’re made in Alabama.

AM: Yes. But Tony to your question, actually, I do have a colleague that works for Austrian driven outfit and they have been buying factories in the United States specifically for this reason. It’s the only place that people are going to be buying things or has money at the moment. Their entire export industry in China is dead and they’ve sat there and been lackadaisical and never sat there and tried to put their networks back into Africa where the real emerging market should be focused on Africa. It’s going to be bigger than Asia anyway.

SR: Let’s also be honest, they just got done pulling out of Africa in some ways. A couple of decades ago. They missed that boat.

TN: They did. And so did the Americans. So. Hey guys, thank you very much. Really appreciate this. If you’re watching please like and subscribe have a great weekend and have a great week ahead. Thank you.

AM: Thanks, Tony.

SR: Thanks, Tony.

This Week Ahead is originally published at https://www.completeintel.com/weekahead/the-week-ahead-16-may-2022.

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