Mike Green

Erik:    Joining me now is Mike Green, Chief strategist and portfolio manager for Simplify Asset Management. Mike, it's been way too long, it's great to get you back on the show. I want to talk about everything that's going on. But let's start with this banking crisis. You know, this is one of those things where it seems like everything's okay. But wait a minute, this whole system is designed with an incentive for them to tell us everything is okay, when it's not okay. Because this is a confidence game. So how do we make sense of this? How do you even know when the banking crisis is over?

Mike:    Well, the quick answer is that the banking crisis will be over when we actually start to treat the underlying condition. And the underlying condition, unfortunately, is that banks themselves are or depositors or more accurately long a call option on their deposits at banks. They can withdraw them at any time. The value of that call option is a function of the spread between interest rates that are available elsewhere, for example, in money market funds, versus the interest rate that they can earn on their deposits. And the value of any call option is positively associated with the increase in volatility. So by hiking interest rates incredibly rapidly, and driving an extraordinary spread between what banks could afford to spend, and to pay on their deposits and what it can be earned on returns from US Treasuries. They created a huge hole in bank balance sheets, the only way to reverse this was one to have moved much more slowly to this process of this level of rates. And two, no unfortunately, they're going to have to reverse it.

Ole Hansen

Erik:    Joining me now is Ole Hanson, head of commodities research for Saxo Bank. Ole has prepared a slide deck to accompany this interview that you're not going to want to miss. So I highly recommend that you download it and refer to it as we will be discussing the charts and graphs that contains throughout the interview. Ole, it's been way too long since we've had you on MacroVoices, welcome back and why don't we dive right into the slide deck and talk about US interest rates because so much else hinges on that. What's the outlook?

Ole:    Oh gosh. I wish I knew Erik. Thank you very much for inviting me back. It's most certainly still a market that's throwing up a lot of surprises and talking points. But yes, the direction of interest rates, short term interest rates in the US has clearly been a major focus in the market over the past six weeks going from expecting a year of no change in terms of rate cuts and further hikes to suddenly a dramatic round of cuts in response to the banking crisis. And since then the market, that's once again, you have just basically looking for heights in the short term, and then cuts later in the year, and then that's really I think, creating a lot of confusion in the market and also uncertainty and it's still it's amazing how resilient some of these markets have been. I would say especially stock is not, it's not my area of competence. But I think we've seen quite a stable market despite all the uncertainty that's out there.

David Rosenberg

Erik:    Joining me now is Rosenberg Research founder David Rosenberg. Rosie, it's great to have you back on the show. It's been way too long. Let's start with the big picture. We're climbing away here with what some people think, is a recovery to maybe new all time highs in the stock market. I'm skeptical myself, how do you see this market? What lies ahead?

David:   Well, we have a long way to go to get back to those early 2022 highs. So that is a bit of a stretch. I think that the markets, whether it's the equity market, or whether it's the credit market, has gone into pricing a soft landing. So I think that they more or less bought into the Jim Bullard view from the Fed, that all is good, the business cycle has been repealed, there is no recession. And the green light is there to bid up the forward multiple back almost to 19 earnings. So this is a very expensive stock market right now and it's priced for Goldilocks. So all of a sudden, recession apparently is off the table and investors are embracing the soft landing once again.

Erik:    I have a feeling David, that you are not quite as sold on this idea as some others are that it's all uphill from here. What's your outlook and what do you see on the horizon?

Larry McDonald

Erik:    Joining me now is New York Times best selling author and Bear Traps Report founder, Larry McDonald. Larry, it's great to get you back on macro voices, it's been too long. I want to dive right into Fed policy but with a twist. I've been talking to a lot of guests recently about this balancing act the Fed has gotten itself into. Where they're kind of backed into a corner now to where, you know, they need to hike in order to fight inflation, yet they need to cut in order to prevent markets from having a meltdown here. It seems to me there's a whole other dimension to this conundrum that very few people are even talking about, which is we've got a debt ceiling showdown coming up this year. And it's going to be I think, more interesting. I think the fireworks will be more interesting in an environment where Fed policy is already constrained. So how does the debt ceiling factor into monetary policy?

Larry:     Well, what's amazing about it is you have a dynamic toward the middle of the year of 2023, where you're going to have about $1.2 trillion of treasury issuance in arrears that are going to have to get cut and because right now, Janet Yellen and her team are really suppressing issuance because of the debt ceiling. And all of that issuance is going to have a colossal catch up from late July, early August, all the way through the end of the year. And then there's the normal financing period. And so this is a dynamic that is so powerful. I think that if the economy turns which we think it's going to, we could see the Federal Reserve in the yield curve control, QE by the fourth quarter, because there's just so many bonds that have to be sold to the public.

Adam Rozencwajg

Erik:    Joining me now is Adam Rozencwajg. Co-founder of Goehring and Rozencwajg, a commodity research firm and fund manager. Adam, it's great to have you back on the show. I want to start out with you know, the last time we talked, you and I were in strong agreement about something that well, either we were wrong or it hasn't happened yet. And that is that we both thought there would eventually be a very significant increase in energy prices due to lack of supply because of insufficient investment. I still hold that view, although it's on hold until the coming recession plays out. It seems like the expectation that increasing Chinese demand was going to be the catalyst that would really take things forward. It was going to change everything... Didn't really happen. Now as we're speaking, we've just had a surprise OPEC announcement which has jerked the oil markets considerably higher. But that was a reaction to a surprise move on OPEC. Before that, we were really plumbing lows that you and I didn't expect to see last time we talked. So what happened? Has the outlook changed? Is the hypothesis different now or is it just a matter of waiting for things for the market to stay irrational for as long as it can before it finally turns on our direction?

Adam:    Lots of great questions and thanks so much for having me back. Happy to be here. Really looking forward to our discussion today. So, before we started recording, we confirmed here that we said the last time we spoke was last July, so July of 2022. And as you mentioned, depending on exactly when, in the month we spoke, but natural gas prices here in the US were probably around $7 and oil prices were over $100. And here we are, we outlined, like you said a very bullish view a year ago or just under a year ago. And here we are today before the OPEC announcement, oil was down to 70 and gas, which is even more shocking was all the way down to 2 bucks. You know, which is basically approaching the all time or 20 plus year low, which reached about $1.91 or so back in the summer of 2020. So like you said, the question is what's happened. And for the most part, in fact throughout, I would say that everything we talked about last year is still very much true. And when we look back five, six years from now, we're gonna say what was this decade about, and it'll have been about the decade of shortages. And the reason for that is because we just have not spent enough money in the sector. It's really as simple as that. If you look at capital spending in the energy business, you're still down 60-70%, from where you were in 2014. And you're almost at the all time low, you're up a little bit off the COVID lows, which is sort of understandable. But you're still 30% below pre-COVID levels on oil and gas spending. And so until you fix that problem, you're really not going to change the bigger theme here.

Where we did get things, we were early is that we had expected the fourth quarter of last year to be a really tight pinch point in global gas markets and global oil markets. And that didn't come to pass. And there's some really interesting reasons... Why? The fourth quarter normally is a period of very strong demand for both natural gas and oil. A lot of it has to do with the weather, you know, as things are cold. We use natural gas to generate electricity for air conditioning in the summer, but we use a lot more of it for heating purposes throughout the winter. And so winters are typically most energy intensive season. And this past winter, we just had incredibly mild weather in both the United States and in Europe. And something else happened from a gas perspective in the US. And that is we lost one of our biggest export terminals, the Freeport LNG natural gas export terminal down in the Gulf Coast. That caught fire back in April of last year. It was 2 Bcf/d and that was offline for over 200 days. So it's about 400 Bcf (billion cubic feet) of natural gas demand that we effectively lost last year. And we saw inventories in the US increased by about 400 Bcf/d. Thy are 4 BCF or other total relative to averages. So I think that's entirely explained by the fact that we lost Freeport.

And then in Europe, they went from a very, very tight gas market to a very loose gas market, because winter just never came. And you and your listeners may have heard articles or listen to podcasts alluding to that. But when you look at the numbers, it's really, really shocking. You're talking about the warmest winter in Europe in 40 years. And thank God that happened. It really got them out from a very, very tough spot with Russian gas volumes curtailed after, you know, first of all the Russian invasion of the Ukraine and then the Nord Stream pipeline issues and things of that nature. You lost 15 Bcf a day of your imports. That's huge. And the only way that they could be bailed out being Europe was by really, really mild weather and that's what they got. So that explains the gas market. The question, of course, is now when you look forward in the US here, Freeports back up and running again. So those two Bcf a day are flowing, that demand is back. And in the rest of the world, the question now turns to okay, great, we had this warm winter, we can either hope we keep getting record warm winters, or we're going to have to find some way to replace that 15 Bcf a day of Russian pipe imports. And if you were to put that all in the LNG market, the liquefied natural gas seaborne market where you cool gas and to tankers, and you put it out on the water and in vessels, that would be like a 35-40% increase, 35 of a percent increase in the global LNG market. So that can't be absorbed. So I think you've now gone from what would have been a bullish macro story, you know, long term macro story with a very, very near ter acute pinch point being the fourth quarter last year, that's clearly been pushed out. But you haven't changed any of the main big picture macro drivers in the energy market, which still points to very, very, very, very tight balances going forward.

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MACRO VOICES is presented for informational and entertainment purposes only. The information presented in MACRO VOICES should NOT be construed as investment advice. Always consult a licensed investment professional before making important investment decisions. The opinions expressed on MACRO VOICES are those of the participants. MACRO VOICES, its producers, and hosts Erik Townsend and Patrick Ceresna shall NOT be liable for losses resulting from investment decisions based on information or viewpoints presented on MACRO VOICES.

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