Episode 15: The Perfect Geopolitical Storm

Just as inflation has retreated and it at least appears that a soft landing is not such a far-fetched thought as we once might have believed, BAM, the "perfect storm" is unleashed on the markets in the Middle East, in what could become a worst-case-scenario. 

We start with China, where the PBOC has remains TIGHT even as the economic data erodes as is best evidenced by a multi-month decline in the year-year rate of change in both Export and Imports. The Chinese Central Bank has been reluctant to cut their Policy Rate even in light of six-months of ZERO inflation. It leaves one wondering if China, after a prolonged period of COVID-lockdowns, isn't using a restrictive policy to slow the economy on purpose, squelching growth in the country that has been THE engine of global growth for a decade. Is China purposefully trying to weaken Western economies? 

And in terms of the horrific situation unfolding in the Middle East, is there a chance China is the ultimate puppet master here, like they are behind the scenes in the Russian invasion of the Ukraine? 

Is this a coordinated effort driven by China, "out of" Iran, one that will bring ALL of Israel's enemies together as a means to draw the West into a messy war in the Middle East. And would this provide "cover", especially as the US enters what promises to be a CIRCUS in 2024, politically speaking, for China to make moves in the South China Sea.

What if...inflation rises again, amid continued move higher in Energy prices? 

And most importantly, what should one be doing with their Portfolios at this point, to maintain wealth appreciation while protecting against a Fed that is likely to remain restrictive for MONTHS to come. For sure Greg has already given you some fantastic ideas that have paid off nicely over the last couple of months, so make sure to check out his latest thoughts on this topic.

Indeed, Greg discusses ALL of the above, and then some, in Episode 15 of Money, Markets & New Age Investing. 

Transcript

Analysis of Inflation and Fed Policy

High Inflation and Investment Strategies

Speaker 1 0:01

Hi, greg Weldon here with another episode of Money Markets and New Age Investing Somber times. We're here now facing coming up to this weekend in preparation of what's going on in the Middle East, but really trying to maintain focus on what all of this might mean for the markets. And within that context, we go straight to the data. We have very interesting data in the last 24 hours coming from China. On Friday, the inflation rate at zero five straight months of no inflation in China. Now they have a policy rate that's at 345. That has only been brought down by 20 basis points since last year, which leaves them at a punitively restrictive real policy rate of 3.45. The 3.45 rate relative to the 0% inflation rate that's up from 1% last year and hasn't been negative since 2020. So this is a kind of one of the knocks on China is they haven't been more proactive in stimulating the economy. Okay, you've gone through this. You know COVID lockdowns. Now you're going through this. You know decline that we're seeing that I'm about to give you the details on in terms of trade and in terms of the final demand in China itself, and I have to stop and ask myself is this somehow on purpose? I mean, are they squelching final demand in the place that has been the engine of final demand growth in the global economy for the last decade, you know, is it possible to weaken the West? You know, you kind of know my view on all of this. We're in economic war and the Chinese have pulled some brilliant moves. From their perspective, they played this extremely well and to think that this can't be part of it would really be short-sighted, I think. What's the transmission thereof, of this kind of, you know, okay, slower to ease, not really being stimulative monetary policy? And what's the transmission throughout the world? Well, of course it's in trade. The largest importer of goods, the largest exporter of goods every single month, more than 300 billion each way, is China number one by far, which is why they hold the currency card ultimately. But that's a whole other podcast. We look at their numbers, which just came out on Friday. Hello, we get inflation and trade numbers well over the course of the week. Exports, five months in a row down on a year over year basis, down, 10 out of 12 months. When we break it down by trading partner, oh boy, does it not even get more interesting to the US, you know, exports to the US down, 9% to the EU, down 12% to Australia, down 18% one of their biggest trading partners. There's one place where they're increasing exports by a lot Imports, excuse me, exports to Russia, of 21.0% for them for the you know, year over year for the month of September. Now, other times when we've seen this kind of run of negative year over year numbers in Chinese exports have been only four kind of, on one hand, tech bubble crash, 2008, 2009, global crisis, the pandemic, and one that may not be common knowledge to a lot of people out there, but the 2015, 16 capital outflow crisis in China, which crimped their exports in a similar vein as to what we see now. So when we get to final demand, well, the real crux of final demand, of course, in China is resources and commodities, and they're the largest importer of all these things. Pretty much All right. So that's now down seven consecutive months, down 11 of the last 12 months. How do you spell recession In China? You spell it imports down seven months in a row and 11 of the last 12 months. So I know that China works their purchases of resources, commodities and raw materials. They're very adept at doing this. They're very astute traders. I remember in 1984, when I started on a Florida Comise exchange in the golden silver pits I was on the point which meant I was the conduit to all of the orders going into either pit and I remember the phone. That was the Chinese phone. And, man, when the Chinese phone rang, you jumped. The other clerks jumped to get it because it was among the most important phones out there. You know the Middle East phone, the phone we had that went directly to the kingdoms quote unquote traders, saudi Aramco and you know the kingdom of Saudi Arabia, the house of Saud, I mean that was you know primary phone and, of course, the Chinese phone. They were still up in commerce but it was an important account and they could do big size and they were very good at picking their points. They still are. They do it. I watch it all the time and it is very telling in the sectors, for example in this most recent, in this most recent import decline. Well, do we see what are the resources that are down Copper, soybeans, rubber and steel when you look at the markets, what are the ones that are down Copper, soybeans, rubber and steel? It is not coincidence my most recent experience with how good the Chinese can be as traders and how really astute they are at. This was in, you know, the 2015, 16 period. It was always capital outflow and the whole nine yards was going on China. But besides, that was also gold had gone through. The Washington Accord in 1999, where central banks said we're not gonna sell gold anymore, exploded and it went to the 2011 high and then it came off and it came off into a very key technical level in 2000, late 2015, early 2016. And I remember this specifically watching this day after day after day, when you would get gold below 1050. It was actually 1046, 1048 an ounce precise price. That was the 50% retracing the entire bull move going all the way back to the 70s in gold to the 2011 high. And anytime you went below these levels I not exaggerating. Go back at the charts and look, you can check this out. There's upside tail reversals from below that level repeatedly, day after day, week after week. Anytime you got below there and went out for weeks. Of course, later on you come to find out oh my gosh, china was a major buyer of gold in that period. Right, they really play and work their imports extremely well. There are tells to be had here. Trust me on this. So what's higher right now in the imports into China? It's all energy, kudoa record highs of 14% year over year, coal of 28% and refined oil products, which is no chump change. It's a decent size number, up 85% versus last year at this time. I mean, the first thing that comes to my mind on about you is this sounds like a country that knows something. I mean, this is last month's imports, all energy related, and all of a sudden, you know, you have this situation where, guess what? Well, xi visits Saudi Arabia, xi has entertained the Iranian president in China. Xi's called for an end to sanctions against Iran, xi Xiite, both being juggled by Saudi Arabia I mean be sure to be by China and played very well on both sides Syria, lebanon, russia, china, iran all together, bringing all of Israel's enemies together too. I mean, let's not forget, it was in much less than a year after the Olympics, after Putin had spent many, many days in Beijing with Xi hammering out a 30 trillion RIM NIMBY oil deal that included funding in yen. It could be in RIM NIMBY, rim NIMBY state bank loans in RIM NIMBY to Russian companies that would build out a new pipeline in Siberia and would build out the infrastructure, including in this deal, kazakhstan that would then ship natural gas, so for oil and natural gas to be shipped out of Russia. The 30 trillion RIM NIMBY deal, including a state bank loans from China in RIM NIMBY. And what happens when the Chinese Communist Party their plenary session? They come out, what is the number one item on their top things for the next five years, which they always do, been doing this for decades. All right, number one food security. And what do you know happens next? Russia invades Ukraine for food and ports to ship it to China. And do we not start to see the connections here? I mean, we have talked about G. The guy's brilliant. I mean, to whatever extent you know, from his perspective, he is brilliant, us educated, all right, mao. Mao is his theme man. I mean, he is a Maoist at heart. His dad, number two man in the Mao regime. You know the whole story right. If you don't, you ought to check it out. It's pretty amazing In the sense that it's manifest destiny. Manifest destiny is the idea here and, to the extent that it used to be, china would back off anytime. Us lob criticism at him, especially for human rights and workers and wages, and all this to be like oh, we'll try better and we promise they don't say that anymore. Notice what she says. She says look, you got kids killing kids in your schools. You do, you will do us. We think our system is better. Don't tell us how to live, and you know. Frankly, for whatever extent, I'm not saying right or wrong in anything, but that's the way they're choosing to go and they're damn good at it. Right To the extent that, is this all now a cover, where you, you know you, just when you have inflation coming down to, the timing is impeccable. Just as inflation starts coming down, maybe you get a soft landing. I don't believe that either, one of those things, but you can't say that it's not possible. I don't know that I'm right here. I'm not always right, but in the context of, if that were to be the case and it would be the appearance of the case to the outside world what a great time to unleash a surprise attack that was highly coordinated and then to bring the other side in being Hezbollah hello, come on, man. I just feel like this has such a bigger picture feel to it. It's not even funny. And to whatever extent, this is kind of covered then, even for something in the South China Sea, you know you have trouble with the Philippines, all right, we know the fishing dynamic. You have the Vietnam and gas rights and oil rights. You have trouble with Tyron right off the bat and you have trouble trouble with Malaysia. You've seen the flyovers. There too is in the airspace. It's a South China Sea manifest destiny and, frankly, between China, russia and OPEC, it's a basically that side of the world manifest destiny. And building a road. Once Afghanistan you know we left Afghanistan US forces left Afghanistan, what's the first thing China did? Started their road. They're a great road. They're going to go through Pakistan, afghanistan, through the Middle East and right on down to Africa. And what is it? It's a transportation route for resources. Come on, man, the grand plan there is huge and it's well thought out and they're executing it beautifully. As we sit here, blind, worried about what's coming next, in a political circus that's going to envelop all of us, and while we're sleeping in this stupidity of both sides of this argument and politics right, I don't support either side, frankly, right now, because both sides are so divided and so into what they want. It's ridiculous as opposed to we, the people, that's a whole nother story, okay, let alone the hatred you have in the world that we should be unifying as Americans. But we're not at a time when hatred is on the rise and this kind of violence is only going to, you know, extrapolate, I think. So there's a lot going on here just even from that perspective, before we even get into the geopolitics of it. But to me the geopolitics of it are a much bigger picture. That has to do with kind of the timing of how do we weaken the West if we're China, russia and OPEC? They've banded together and you know Israel and the US are in the crosshairs. If you don't think that, you don't believe that, then you've kind of not seen the bigger picture and the extent to which, again, china is simply outplaying us in a kind of gross way, you know. The question then becomes can to get back to kind of where we need to be here in the markets for now, while we, you know, let all of this geopolitics play out in whatever way that's going to play out, we already think we know how that's going to affect the markets. We'll come to that at the end of the show here. But is inflation over? I mean is, can the Fed declare victory? Well, cpi is back to three seven from three. I don't think three seven is anywhere near two and certainly doesn't as the as Paul says he wants to ensure inflation is defeated. At three point seven. Inflation is nowhere near defeated. Number one Now I would say it's not as problematic for the Fed because they still have a restrictive policy rate at five point five relative to three point seven, or relative to PCE, or relative to even the smooth Atlanta numbers that are Cleveland. You know chain numbers, whatever number you want to look at it for inflation, I like CPI. It's just straight up because you know all the components. You can see it, I can feel it, I know what it is, I know the insides, I know what's going on in there. It's a hundred and eighty base point real Fed funds rate. That's tight, it's restrictive. The Fed is where they want to be, right here. They don't need to move. All right, I call it Godot. That Godot would show up to famous play. Waiting for Godot. He never shows up. He's not going to be in inflation in the US. For the last 10 years until finally Godot decided to show up and we wrote about it in 2021, early 2021, and boom, there it was. Godot showed up and you couldn't get him to leave. Then I said transitory was the worst word possible to be using. Of course it was. And we said you see a peak that would kind of have an eighties feel to it and would disinflate, just as it has. Based on the energy based effect. Because the only thing that's negative right now is energy. The only thing that is negative is energy, and some food items, like lean hogs, had gone down. So there was a period of time where meat was negative year over year, but really the only thing is energy, and now energy is going to go up year over year. I'm going to talk about that in a second. So now we have the potential for the reverse based effect. I also said told my clients in my July 21st Weldon live goes to institutional and wealthy and individual investors. At 74 59 Crude oil last change I said we're going to 107 to 114, some point in the fourth quarter. You have a 2.5 million barrel per day deficit. You've already drained the strategic petroleum reserve by 40%. Joe Biden has just let it all go and you have a situation now we're going to draw down inventories to significantly low levels and bam, you have a war breaks out in the Middle East. So what if inflation doesn't stay at three, seven or below four? What if inflation jumps to five and a half? Let's just say what if inflation jumps to five and a half? Then what? It vaporizes your restricted policy in one fell swoop. The Fed doesn't have to do anything to have their entire restricted policy thrown out the window. They would be neutral, because five, five inflation against a five, five policy rate is guess what? Probably not even neutral. It might even be a little stimulative. R-star and 311 pages of white papers published in 2018 tell us R-Star puts the neutral rate at 50 basis points above the rate of inflation. Doesn't say about inflation rate. They talk about that all day long, but that's a whole nother point. To keep policy restrictive as it is now, they have to go to 7%, which is where this whole thing around 7% came from. Didn't come out in thin air, didn't just pick 7% as a nice number that we can scare the public with. That's a real number, because inflation could go to five and a half on the base effect of energy, and if energy goes higher from here, you're almost starting to get to five Now. Within that context, one of the things I had said way back in our podcast here was that the Fed and Powell's comments were very specific to this Did not like the fact that the forward Fed funds market back in April and May of this year was pricing in 200 basis points of rate cuts for next year and that to be, you know, the first half of next year. And I said the Fed will be on hold or will continue to push and will certainly continue to push, most importantly, with the hawkish rhetoric, the things that they say, and we see that all the time. Now we really do. Until that was eradicated, you eliminated that easing priced into the forward Fed funds market. And guess what they did? And it really came about in September, especially when Powell really talked tough. I mean, that was the last gasp and you pushed all of that easing. It's gone. You have some now at the end of next year, 50 basis points of easing priced in the youngest year. But this kind of gets you to the idea that, hey, wait a minute. Okay, no one now expects the Fed to move at all, which means we have 15 months of restrictive policy coming, All right. So, yeah, the economy hasn't completely folded yet. Do we think we can stand 15 months of this. All right, number one, number two I could argue, and I will, that policy has not even been restrictive that long, because as rates came up, inflation was coming down. But it was still a negative policy rate for a long time, until like May. All right, you could say it's five months, I'll be conservative and say it's seven months. It doesn't matter five or seven months is it? For how long the Fed's policy rate has been in a restrictive position? And if we're talking lags of 12 to 18 months, we are still a long way away from feeling the worst of this. Now there are factors that offset that comment. There really are. Banking system had its poorest part. Will it have a more poor situation or worse situation show up? Well, we know the liquid rates are rising. We know the consumer stuff, yes, maybe All right. So this is kind of what's interesting to. And if energy is going to spike here, it's a dagger in the economy and it's a dagger in the stock market too, because if the Fed has to, you know, continue to push a restrictive narrative or actually move rates even more, the stock market will crack wide open. So where is inflation right now? Because we just got the numbers two days ago here in the US. All right, data scalpel, please. Dissection in process. I start with the fact that over the last two months, the monthly increases in the last two months, are the largest back-to-back monthly increases of the year Of the year. It's 1%, which is a 6% annualized number over the last two months. The cities there's 24 cities that report, I believe it's 24, they split them there's one month and half the next month, so every other month you get half of the cities. This month, nine of the 12 cities reporting reported 0.9 or higher for the month. That's a double digit rate of inflation year over year in nine of 12 US cities that just reported, the places where most people live. Inflation was high here in August, september. Let's look at some of the cities Dallas, 1.0. That's 12% annualized. Think about Minnesota, 18%, annualized at 1.5% for the month. San Diego 1.3, tampa 1.1,. New York City 1.0,. Washington DC 1.3. Huge monthly numbers. Third, I will note services, ex-energy Services 5.7. Is it down from its high? It is, but guess what? It's still 5.7. It's almost three times the feds Goal target rate and its services. All right. And when you start talking about services, rent a big part of services, of course 7.2%. All right, is that down from its peak a little bit, but it's 7.2%, for the largest monthly expense has one of the highest inflation rates still. And this is sticky because, guess what? You don't change the amount of rent you pay every month. You change it once a year, Maybe once every two years, and guess what likely it's gonna go up next year anyway. So this is sticky inflation that has a big impact on the amount of money people have to spend on discretionary items. Case closed. This is big. I'll throw another one at you. Garbage and trash collection up 6.9%, still 7%. And when you look at the index, I like to look at the index itself sometimes and they go back to 1971 when the Nixon closed the gold window, took the dollar off the gold standard. When you look at the Lodging index, okay, and lodging doesn't mean, you know, hotels and stuff, it means rent hotels and all this. You're talking about a clear upside acceleration in the last 18 months, going all the way back to 1971. It's a pretty smooth, you know angle, the line of the index going back decades Until now. Now it's like almost gone, parabolic, straight up and down. Same with something like food Food when you normally focus on food at home, but food away from home is still 6%, still 6%. So when you look at these kinds of things and you think to yourself, guess what energy is going to kick in With the base effect here, let's talk about that, because you know, crude oil right now I'm actually going to look at the board. As I'm speaking here on a Saturday morning, crude oil is Went out. The December crude went out, wti at 86, 64. Seen that? Right, yeah, 86, 64. So right now it's the same as October a year ago 86, 81 to October year ago. But November last year we went to 8050. December we went to $70 last year. Do you see, by staying here by December you have a $15 year-over-year increase in crude oil prices. Natural gas is even more pronounced. All right, natural gas. Right now as we go out to December, contracts 361. It's risen. I kind of like it here too. Last December it was 720, but by the beginning of December, by the end of December, is 443, by January was 270 and by February is 196. So again, energy from natural gas and crude oil alone. Gasoline is a little, you know, gaslings come off a little bit, so it's less of an impact there, but every move. Hiring gasoline from here does add to inflation because the base is zero. Energy is to the upside here from now on, in terms of you know where it's likely to go, based on the mathematics, even if it just stays where it is. If it rises, holy mackerel, the year-over-year Dynamic will kick in and you will be at a five handle of inflation real fast and the feds policy will be neutral. And then what? Then they have to go again. That would really bring the economy down. But frankly, isn't part of this. They want the economy to come down. They said this pain. I have been saying now for a couple of months here, really since you know, middle of late August, that the Fed, especially after September and how's comments the Fed wants disinflation in the market. All right, and if you look at what the dollar is, it's kind of, you know, dollar Higher here is bears for stocks, it's bears for commodities. If the Fed, if pal, wants to do what he says he wants to do, which is to ensure that inflation is defeated, defeated, use the dollar. And that's where the hawkish rhetoric continues. They don't necessarily have to hike rates again unless inflation does rise again, okay. So in the meantime, you know, to stimulate the, you know, hawkish monetary conditions dynamic, which is clearly, we see, because the dollar has gone up relative to gold in a big way here. All right, even with the rallying gold, which I like, but still dollar higher means economy Disinflation, commodities, food and energy, with all things room, other other things being equal, disinflation and and the stock market disinflation, because if you've seen the charts that I've offered you, you see how correlated it is. The dollar down is good for stocks, the dollar up is not good for stocks, case closed, case closed. And To disinflate all of this would ensure that they could declare victory on inflation. Not that I think they ever can't. I don't think they can't. I think they're gonna be forced out Of this sooner rather later. I think you're gonna have some real problems with energy. It's gonna cause the stock market to to sway and that's gonna, you know, kind of soften their tone and they're gonna acquiesce to a higher level of inflation and a lower standard living and a kind of a lower general, you know, economic growth dynamic. And this is bad, given all the debt it really is. It's a problem. But having said that, what do we do portfolio wise as we close it out today? We'll spend the last few minutes on what to do, right? Well, right now we're split in our, you know, standard kind of stock portfolio. I wouldn't say standard are actually our select. Top select portfolio would be about half energy, half info tech. Yeah, I still like info tech. We'll talk about that in a second. But in terms of energy also have to have some other things in here. So long dollar, you can use the ETFs we have. We have the portfolio playbook. We do now that actually linked to the podcast with the same name, so you can check that out and get a free copy if you want to mail, email me at sales at Weldon online dot com. But it's also being long to dollar. Here. It's also having some long length, some exposure to the short end of the US curve In, just in case you do get some kind of you know real problem that erupts all of a sudden and you will see a rally in bonds and we want to take advantage out in the short end because the short end I think is, you know, overcooked relative to the long end and then Even potentially having, like the SH or the, the S triple Q as some short stock index exposure. I'll talk about that in a second. I also don't mind owning one of, if not all, at certain times going forward. Right now, I own silver, owning silver, gold and Bitcoin. I Lot of more people can buy Bitcoin and run to a bullion dealer by gold in case where the currency is getting wasted or something Geopolitically is happening. So I still do like Bitcoin for that reason. In terms of energy, yeah, the XL E is the thing. If you take out 8425, though in the downside in the XL E, I'm not so sure I want to like it anymore because everything could go down here if you get some kind of you know event, so to speak, and I think the odds of an event are increasing by the hour. All right, but more so the commodities USO is the Crudall ETF, uga is the gasoline ETF and I really have liked and you know we've talked about this uranium you are a is the uranium ETF. I like all of those. In terms of the tech, the high tech, the info tech, the high flying tech I should say that's what I meant to say. The XL K if the XL K, which is the information technology S&P ETF, gets below 160, I don't like it anymore. I'm also taking tells from Nvidia. Why? Because it has this huge gap and then a huge move down to like 406 and had another big rally that came down and I thought I was gonna break and try and fill the gap, which is all the way down to like 380 or 360 is 409 in Nvidia. You get below 409 in Nvidia. I think that's worthy of note and you know, I kind of do think that the S triple Q, the short, you know, bear index, which is the leverage one be careful, this is not for everyone really need to watch yourself on this. It's a highly risky dynamic to play this. Having said that, aggressive traders with risk capital only that can afford to lose some money. If we're wrong Above 1473 is kind of a breakout in the S triple Q and that would go hand in hand If you had a move in the NASDAQ below 14600. It's a massive double bottom at 14600 in the cash NASDAQ you have now created with the most recent high you set this week, which was a an a downside reversal day, by the way, for lower highs. That's a really reliable pattern. If you break the lower end, you're gone All right. Not only that at the lower end is right in the middle between the hundred and two and today You're exponential moving averages and beyond that. My proprietary oscillator algorithms I wrote in the 80s and still use today are At new lows in both the S&P and the NASDAQ and what that typically means is those lows in price are going to be taken out. That is 14600 in the NASDAQ. I think it's coming. I just did a piece that shows that chart specifically in Our in a macro market minute. It is one minute. Videos that I post on YouTube for free. All right user backslash Gregory Weldon capital G, capital, ww. One word, gregory Weldon. Check out my YouTube channel Also. Follow us on Twitter. I can follow me on Weldon live on Twitter at Weldon live or Follow the podcast man. We post some cool stuff on there at money underscore podcast, greg Weldon here. Thanks for listening until next time.