American Exceptionalism: Is the U.S. Rebounding?

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1:36The signals are telling me to watch energy prices once again after a weekend of turbulence in the Middle East. Welcome to this live edition of Steno Signals. I'm Andreas Steno. I host this show every week on Real Vision this week, a bit earlier, due to the Festival of Learning commencing later this week. But let's have a look at the details. It's been an atrocious weekend in the Middle East, and we've taken a look at the data on what to expect in markets when we have such turbulence geopolitically in the Middle East. And I'll also briefly touch upon the political ramifications of the current developments and whether we should expect that to spill over to higher energy prices, for example.

2:24But if we look at the events in Israel over the course of the weekend first, I think it's fair to assume that the sort of chain of sponsorship goes from Iran to the Palestinian Hamas organization. And you could even expand this chain of sponsorship further by saying that Russia typically state backs the Iranian dictatorship as well. So there's clear sort of link to the current proxy war between Russia and the US in Ukraine as well. We've also seen various U.S. politicians reacting to this as if it was an attack directly on the U.S., Nikki Haley to take an example. So this will likely lead to geopolitical turmoil in coming weeks.

3:22I don't think there's any doubt about that. If we look at the numbers first, I prefer to let the numbers speak for themselves in discussions like this, since it is very, very tricky to time the investment ramifications of such geopolitical turmoil. But what we can look at is the sort of empirical evidence from similar situations unfolding between Israel and Gaza over the course of, say, the past 10, 15 years. And that's exactly what I've done this morning, European time, to try and elaborate on the actual ramifications for markets. And if we look at this table of returns over the past five times that Australian boots have been on the ground in Gaza, I consider that a very likely scenario if they're not already involved as of today.

4:14One thing worth noting is that the dollar on average gains a little bit. I would expect that the dollar gains even more this time around since the relationship between the dollar and oil markets have sort of improved from a correlation perspective since. And if we look at the crude oil and commodity returns in the average of the table here, we see, say, 6 % roughly returns in oil over the course of this following month of the action commencing. We see returns in commodities, even if they exclude energy. But worth noting in equity space that we see a divergence between returns in developed markets and emerging markets.

5:03So actually, we see now performance of emerging markets typically through such a period, likely as a consequence of the returns seen in commodity space. Also, gold tends to perform, and we have quite a mixed picture in the 10-year total return referring to the US 10-year treasury here. So it seems like this will reignite the whole story of higher energy prices. That's at least what we can gather from the empirical evidence. And let's have a look at the details on an asset class by asset class basis. If we look at the ice crude first, so a measure of the oil price in futures terms, we have the last five instances depicted here with 1 to 14 trading days after the special operation began in Gaza on the x-axis.

5:59And it is a pretty decent hit ratio to be long the oil price here, 80 % hit ratio over the past five instances and a pretty uniform picture of at least slightly higher oil prices over such a period. It's not like this is extremely relevant for the oil price on a standalone basis. The consumption of oil in Israel and Gaza is relatively small from a global perspective. But we have a couple of indirect channels impacting the oil price here. First of all, we had early stories of Saudi Arabia negotiating with both Israel and the U.S. around an increase in the oil production from 1st of Jan. It seems like this turbulence over the weekend has sort of put a complete halt to that negotiation process, also due to the sort of geopolitical ramifications of Iran getting involved.

6:58So that's at least one indirect channel that could impact the oil price more significantly. The other indirect impact would be if either the U.S. decided to increase sanctions on Iran again, or whether in the worst case scenario that Israel decides to strike against the dictatorship in Tehran. those two potential scenarios would clearly also impact the oil production in Iran and potentially ultimately also the oil supply globally. So I think it's fair that the oil price is up this morning. And I also think it's fair that we see a broader tendency towards commodities rising. If we take the broad commodities plus 14 days after special operations began in Gaza, we also have the data on the broader commodity index excluding energy here.

7:54We actually have an almost even more uniform picture of rising prices across the commodity complex, among other things, driven by precious metals. And therefore, this is at this short term the thing to watch. as a consequence of the turmoil in the Middle East over the course of the weekend. In relation to equity returns, let's have a look at emerging market equities first, because it's actually interesting that we see such returns in EM equities on the back of such turbulence. It's important to note here that EM equities are relatively loaded with indirect commodity exposures in a positive way, meaning that when you see turmoil geopolitically spilling over to rising risk premiums in commodity space, it's typically not that bad for the broader emerging market asset class due to a couple of big countries being positively exposed to the story.

9:01A few examples could be Mexico and Brazil within this basket. And if we look at the same chart, just with developed markets returns, we have the S &P 500 as a gauge of that. In the next chart, we see a less uniform positive picture in equity returns over this two-week period after the invasion. You see it here, three observations very close to the index 100, so no movement at all. One very bad observation and then one pretty decent observation. So very close to zero returns to be expected short term. We also see how markets have reacted both in Europe, but now also from the open in the US to this story.

9:46So to sum up, this is typically a positive story for commodity markets due to increased geopolitical risk premiums. I would say on average, at least to slightly high interest rates due to these rising inflation expectations from commodities. For now, it looks like a strong dollar story again as the dollar correlation to the commodity space has flipped due to the scarcity of supplies. And we'll get back to that story in just a second when we talk about why U.S. superiority is still the name of the game in asset markets. Hey, everyone. We're going to take a quick break right now to hear a word from our partners.

10:26We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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11:34Before we get to that story, I'd like to spend maybe a couple of minutes, three minutes on the most important news from last week and why we should watch it again this week. We get this weekly report from the energy agency basically in the US, releasing weekly data on the gasoline inventory, the gasoline production, and the implied demand of gasoline by using these two proxies. It is also a report that reveals the same number for oil and diesel, but ultimately you should remember that refiners are the ultimate buyers crude oil, since they've refined it and sell it as gasoline, diesel, jet fuel, etc.

12:21And we had an outright abysmal report on the US gasoline consumption last week, at least if you're a bull on energy markets. And the report basically revealed, as you can see from the dark blue line here, that the implied demand for gasoline dropped, say, 12, 13 % from the most recent peak. I was immediately caught by surprise, also given that everything we've heard sort of based on anecdotal evidence is that the demand is still very strong for gasoline. So I spent a day or two pondering how to show that this data is off. And one way of showing it is to measure the gasoline demand implied from this both production and inventory variable.

13:13Measure that versus the actual congestion. So how many cars are on the road relative to, say, two, three, four, five weeks ago. And if you look at the light blue proxy from New York, we have pretty decent traffic on the road still. And it's actually rebounded, say, since a couple of weeks ago. So I don't think there is anything pointing to such a sharp drawdown in the gasoline demand. And when we look at high-frequent indicators such as road congestion, port congestion, the amount of flights on a daily basis from the flight radar, so everything related to actual consumption of transportation fuel looks to be doing pretty okay.

14:01So my best guess is that the petrol stations, a proxy for the demand from consumers, have bought less gasoline for their inventories due to high prices and this very rapid price spike that we saw through the month of September. While now that we see slightly lower retail prices again, I think we should expect those petrol stations to buy up again. So my best guess when we get the first set of data on Thursday is that we get a spike again in the gasoline consumption, especially when weekly numbers are turned into monthly numbers. We should expect that revision upwards. So ultimately, I'm not here to say that it's fake news, but I don't see this data on the gasoline demand from the energy agency rhyming with anything high frequent.

14:54and it certainly doesn't rhyme with actual congestion data from ports, roads and airports. So I think the whole sell-off in the oil price last week was based on partially fake news. That's what I'm saying. And if we add this geopolitical turmoil to the mix, might be time to re-enter that bullish energy trade at least short term. So why is this energy trade very related to the other theme of the day, the US outperformance of everything. It is basically most visible in the dollar versus the rest of the world right now. But why are dollar markets continuously outperforming? It's been an ongoing story in equity space for quite a while.

15:38And it's been an ongoing story in foreign exchange space, I'd say also for the past couple of years now. So let's look at a couple of explanations and ultimately also the ramifications for investments. First, I think it's safe to say that the median consumer or potentially even the average consumer in the US is doing better than peers in Europe and in Asia. One way of showing it is to look at a simple gauge of the economic activity in the service sector, so very consumption-heavy sector. Dark blue here is the US service PMI. Light blue is the French service PMI to take one example of a large core country in Europe.

16:23And you can see the divergence growing again now. Basically a divergence we've seen in large periods since the pandemic outbreak. And I think it's very related to also pandemic policies and how fiscal policy basically flawed the demand in the US to a larger extent than what we've seen both in China, but also in core countries in Europe, to take a few peers. And if we look at the US consumer right now, we can make a study based on a methodology developed by the Federal Reserve on the sort of excess savings on an aggregate basis among US consumers. And as you can see from the trend line in light blue and the colored area in green and red, We've gone from a scenario with an extreme buildup of excess savings in the US economy to now a slow grind towards no excess savings.

17:22But still, as of October 23, we have little less than a couple of$100 billion left in this accumulative measure of excess savings since the outbreak of the pandemic. And if you look at the left-hand scale, the aggregate excess savings are still running at, say,$600 billion thereabout. I extrapolate a bit towards month and year. But that's quite the buffer still. And we've been stuck in a discussion on when will these excess savings be fully depleted. And if you look at the trend right now, I'd say mid-Q1 is a decent approximation. So it still takes time for this extreme buildup of excess savings due to handouts, due to extremely loose fiscal policy, due to bailouts, due to buffers introduced by both the Trump and the Biden administration to get to a scenario where the sort of excess savings pool is depleted in the US.

18:25And we're closer to a complete depletion of that excess savings pool in the US, sorry, in the Eurozone and especially in China. so I'd argue that the US consumer is a reason for the US superiority in asset markets the other thing of relevance and that is back to the energy question here is that the US energy policy is just so much less risky than the European and Asian peers and you can basically show why in one chart I'm not going to quote-unquote ratify everything that the Biden administration has done on energy, but it's certainly a fact that the US is less dependent on the rest of the world compared to China and Europe, again, to take the two biggest peers.

19:16You can see here that the US is net-net an exporter of crude oil and petroleum products. A sharp change of scenery from, say, 2008 or thereabout, and on a trend basis, is still pretty decent development, even under the Biden administration, I'd say. So that, of course, allows the U.S. to be much less prone to all of the issues surrounding the scarcity in energy markets. Of course, the U.S. will see spillovers from higher prices elsewhere. But the natural gas market is a perfect example, even amidst the perfect storm in natural gas markets in Europe and in Asia last year. The price of natural gas in the US was probably five to 10 times lower in currency translated terms, et cetera.

20:05So, I mean, yes, there are ramifications for the US economy. They're much smaller than they are for peers when we see the scarcity of energy in them, when we see this geopolitical turmoil leading to supply chain bottlenecks in energy and elsewhere. And it also means that the correlations between the energy space and the commodity space and ultimately the US dollar have flipped completely since 2020. And I want to emphasize this conclusion once again because it is so important from a portfolio perspective. Let's have a look at the empirical evidence here. If we look at 120 months of data on the right-hand side of US dollar pairs and the beta to what I call the ISM spread, but it meant essentially a gauge of the demand for energy.

20:53Then over the past 10 years, the correlation was negative, meaning that a spike in energy prices would lead to a weaker dollar. If you go to the left-hand side of the slide now, you have the same calculation over the course of the past two years. The dollar gains versus right about everything if energy prices increase now. because of the US being in a much better spot when it comes to energy self-sufficiency and when it comes to energy costs relative to Japan, China, Germany, you name it. And that is a massive game changer for how the dollar works and for how the dollar impacts the other asset classes.

21:44And therefore, I think it's relatively safe to say that if we get turmoil in oil markets due to what's ongoing in Israel now, the dollar stands to gain from it, not lose from it. And that's something to bear in mind. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

22:09And then ultimately, this is not rocket science, but still it kind of is, because if we look at the equity composition of the US and also if we look at the composition of the economy of the US, it is so much more tech heavy than industrialized nations such as Germany and China. And even if China considers itself a tech nation, I'm not sure that they will anytime soon catch up to the relative importance of technology in the US economy. So when we look at returns in the US, if you just look at it on an index basis, but even also if you look at it on a technology index basis, returns are so driven by technology over time that the US basically stands to gain ground relative to peers just as a consequence of the quote unquote industrial mix of the US, which is so much more technology heavy than peers.

23:12Of course, if technology suddenly breaks down as a theme, this will hit the US hard. But, I mean, we have plenty of subject matter experts here on the Real Vision platform explaining why that is probably not going to be the case. So watch out for energy prices again. Expect a strong dollar. and expect this dollar superiority theme to continue across asset markets due to a better energy balance in the US and due to the strong technology sector in the US. I think those are the main conclusions from this week's edition of StenoSignals. Obviously, we're going to watch over the next days whether Israel will decide to sort of widen the efforts in the region, whether those efforts will include strikes on Iranian territory.

24:08If such thing happens, I think it is safe to say that the conclusions from my initial empirical study will be multiplied by a couple of times. So especially watch out for that relationship to Iran and whether the U.S. administration decides to turn around on that relationship again after Biden sort of tried to soften up a little bit against Iran over the course of the past, say, two, three quarters. Question from one of the viewers, and I think it's a very relevant question. So thank you for asking that. I probably didn't address it clearly. Do you think it's worthwhile, Andreas, trading, investing in politically driven events?

24:57Also, your table suggests that the price consequences are far from dramatic. And one thing I've always emphasized is that if geopolitical events stand alone in your analysis, I think it's almost impossible to create any alpha out of it. What I like about the current setup in energy is that I think there is a fundamental reason to expect the oil rally to resume due to flawed data last week on the gasoline consumption. And if you then pair that with the geopolitical risk, then you have a cocktail pulling you in the same direction, right? So I add the geopolitical layer to an already fundamental macro layer.

25:45I will never trade geopolitics on a standalone basis. So had the fundamental outlook been different in oil, then I would never have used this geopolitical excuse to reenter a position. We also have a question on natural gas, which is a great timing, given that natural gas markets have been smoking hot over the past two or three trading days, including today. So is Europe still getting that gas from Russia? And is there enough storage in Europe to make it through the entire winter? Do they publish their inventory somewhere? I can see every week, a month. Yes, they do. The inventory is 96 % to 97 % full.

26:31The last part of the inventory that is not filled up is placed in Ukraine. And I'm not necessarily sure that we should expect that inventory to be filled up or storage capacity to be used. So yes, Europe is in a strong position from a storage perspective. The issue is that the storage in case of a black swan event from a weather perspective will not keep you warm for more than, say, one and a half to two months. So if we get a very, very cold winter, that's not going to do it. And secondly, from a flow basis, we're still not receiving a whole lot of flows, especially not from Russia. A little bit is running through the Brotherhood pipeline in Ukraine still.

27:15A little bit is running through the pipeline towards Turkey and that region. But those are smaller numbers relative to what we're used to. And the daily flow of natural gas into Europe is down roughly 32 % on a daily basis, meaning that demand needs to be down almost as much to keep things in check. Currently, the demand is almost down as much. So it basically means that you should not expect any sort of industrial pickup in Germany. And if we get that pickup in industrial activity in Germany, we will immediately see higher natural gas prices. So still very much one to watch. Natural gas prices are up almost 20 % by the time of speaking in the Eurozone today, partially due to the turmoil in Israel, partially due to Israel asking Shebron to close down the gas field just outside of Israeli shores called Tamar, one of the larger deliverers to the Mediterranean pipeline, and partially driven by continued pickups in demand from the heavy industry for natural gas.

28:24So I think the natural gas outlook looks very bullish still. In all transparency, I'm long the Henry Hub front month contract here. It can be traded by the UNG ETF, UNG, as a decent proxy of that front month contract, the Henry Hub. I think I've made 15%, 16 % since just Thursday on that bet. Final question, in the US consumer debate, isn't it also important that the consumer currently earns an interest of 5 % pro anno? Doesn't that mean that consumption might be more robust than in the last 10 years? It certainly holds true for those with excess savings. So the answer is clearly yes for wealthy individuals, for corporations with a lot of excess liquidity.

29:09Those kind of agents will continue to consume due to strong interest earnings relative to interest payments. And this is clearly one of the reasons why the recession keeps getting postponed in the US. What I fear now is that, say, the bottom 25 percent percentile of the US economy is now close to having completely depleted savings. And in such case, you could not care less whether the interest on savings is 5 or 6 percent. You'd probably rather care whether the interest on loans is 5 or 6 percent. So sadly so, we start to see delinquency rates on the rise, especially for those with lower incomes.

29:51as a consequence of rising interest rates. So as always, the Fed strikes towards the bottom of the labor market first. That is typically what happens in a rates hiking cycle. And therefore, Powell is currently telling those people to expect a very tough winter. That is the sad but harsh reality that those consumers are currently faced with. I will leave it at that for this week's edition of StenoSignals. As per usual, if you have questions or remarks, when watching this after the live edition, please leave them in the commentary section and I'll make sure to address the questions next week. Other than that, please remember that this is just a window into my thinking around macro.

30:33I'll make sure to elaborate on a weekly basis on how I see the things develop, but I cannot guarantee that you have the same risk appetite or risk horizon as I have. With those words, if you enjoyed the content, please do remember that we have an exclusive offer for the Real Vision community. If you want to have a look at my live portfolio, if you want to have a look at the live data that I present on my macro thesis, you can go to the link shown on the page here and use the exclusive offer RB40RB40 to get 40 % off the subscription. Thank you very much for watching this edition of Stenos Signals.

31:11Enjoy the Festival of Learning this week at Real Vision. We'll be back with so much more valuable content this week, and I'll see you again next week for the next edition of the StenoSignals show.

31:43payments in space, discussions on the rights for humanoid robots, machine intelligence that may outperform our own, simulated worlds where autonomous AI agents write code for other autonomous AI agents. It's a world full of opportunity and full of difficulty too. You see, we are living history and it's happening much, much faster than any of us can comprehend. This is Reid's law, Metcalfe's law squared. Humanity has never gone through anything like this. But we have to comprehend and understand what is happening. It is into this world that The Exponentialist is born. The Exponentialist is a new service from me, Raoul Pal, and David Matin, author of New World, St.