Transcripts

Erik:    Joining me now is Gavekal co-founder, Louis-Vincent Gave. Louis, it's great to get you back on the show. Let's start with the burning topic on everybody's mind, Trump tariffs, China-US. Okay, first we thought it was this great big tariff build up. Then it seemed like we had really high tariffs. Then all of a sudden, there's a weekend deal. I think everybody's head is spinning, kind of feeling like, Okay, where are we in this story? When do the weekend deals end? When do we get to stability? Are we almost there yet? Are we just in the first of several rounds of negotiation? How is this all going to wind up, and how close are we now in terms of the latest revision to the trade deal?

Louis:   My head is spinning for sure. Anyway, thanks for having me, Erik. It's great to be back. Good to catch up with you. It's been too long since we caught up. I'm delighted to be here. So, thanks a bunch for having me. And yeah, it's probably a good time to catch up as to where we are in the world. It's been, obviously, a pretty roller coaster two months, you know, a lot of facts changing on the ground, a lot of policy shifts. China moving towards more stimulus, Europe moving towards more stimulus. Now, you mentioned this weekend, we have the Geneva deal between the Chinese and the US, we also have, yesterday, we had the US government dropping in a budget that's pretty stimulative. When you think that just a month ago, the discussion out of the Trump administration was all about DOGE and cutting spending and tightening belts, etc., that seems to have gone out of the window almost as fast as the tariffs against the penguins.

So, to your point, where do we stand now? I think we stand where we're probably going to end up, which essentially is 10% on pretty much everybody, and then China somewhere between 25% and 40%. And out of all of this, you could say we could have started here and foregone all the drama, foregone all the other headaches. Of course, that would have made it less exciting, that would have meant less time in the media for the for President Trump and for the various members of his administration. How does the world look with 10% on everybody? I think 10% on everybody really doesn't move the needle all that much. It does end up, I think, still being a little bit inflationary for the US, especially since, contrary to a lot of people's expectations, turns out that tariffs do not strengthen your currency, it probably weakens it. And so instead of going up on this news, the US dollar had a tendency to sort of pull back. So, if you think, okay, we have 10% on everybody. We have tariffs that bring up some of the cost, even if perhaps some are eaten by a little bit by the producers. The bigger question mark is, where does China end up? Is it going to be 25%? 30%? 40%? If you end up at 40% for most of the Chinese goods, I think that could still lead to some supply chain dislocations, that could still lead to some issues. Now, granted, perhaps the big difference is, if you'd said, okay, we're putting China at 40% and we're leaving it there. Maybe you get a different outcome than where we're now. What we've just experienced, where you start up saying, oh, we're going to put China at 130%, everybody freaks out. Everybody is very worried the impact on growth, the impact on supply chains. Then you turn around, you say, actually, forget it. We're not going to do 130%, we're just going to do 40%. 40%, but we're just going to do it for those 90 days, and then we'll see afterwards. And now, if you're Walmart or if you're Costco or Home Depot, you think, hmm, okay, 40%, I don't like it, but I can live with it. So, I'm just going to load up now, make sure the shelves stay stacked for the summer. Load up on everything I can. I think this is essentially where we are, which perhaps we wouldn't have been if we'd started at 40%. Bottom line, here we are, 10% on everyone, 40% on China, probably an inflationary impact for the United States, especially if at the same time you get an easing of fiscal policy. I guess that's where we stand.

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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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