Energy Crisis Part II?

0:06Are we headed for part two of the energy crisis? Hi, everyone. Welcome to the Real Vision Daily briefing. With me today is Andreas Steno-Larsen, Real Vision's, my colleague, of course, at Real Vision, our markets editor and founder of Steno Research. Hey, Andreas, great to kick off the week with you. Hi, Maggie. Great to see you. And everyone, of course, our keen-eyed viewer is going to know Andreas is rocking his slightly new look, which we love. Those of you who are listening on audio, you'll catch up. You'll see it. So, Andreas, we had U.S. stocks just closed. a little bit of a lackluster session.

0:41It looks like, actually, you know what? I always like to check at the end. And they're a little bit better than they were just a few minutes ago. It looked like they were all in the red, but they kind of turned around and managed to sort of, for the Nasdaq, a gain of a half a percent. It was down just a few minutes ago. The Russell was the only one that was in the green. So a little bit of late buying coming in here, but it seemed like the real action was once again with bonds, yields moving higher, 10-year yields at one point, 4.54 % high since 2007. What's your take on the action that we're seeing in bonds?

1:21I mean, last week we had a whole series of central bank messages, basically all agreeing that we are very, very close to a peak in policy rates. And that message was delivered amidst what I call a cyclical upswing in everything related to production and amidst a clear rally in energy prices. And when central banks communicate a pause while everything is smoking hot in commodity land, It is the perfect cocktail for a so-called curve steepener in markets. And the reason is that the market simply has to do the dirty work when central banks are not willing to do it. And therefore, right now, right about everyone is fleeing the ship in terms of their bond ownership.

2:18It's been a clear consensus over the course of the early autumn that the central banks would do enough to kill inflation and that the bond trade would be a strong trade into 2024. But right now, that does not seem to be the case, really. Yeah. So is this, does it feel like capitulation? I mean, and is it only a matter of time before equities follow suit? How do you see this playing out? It certainly feels like capitulation at this point. I track the positioning in bond space, both among asset managers, but also among hedge funds. And they're both very long duration risks still. So they're very long bonds in the US Treasury market.

3:00And it is a tricky juncture to be long bonds at because if energy prices keep accelerating, and it seems like they will, then inflation will not reach target within, say, three to six months from here. That's basically out of the question. And then I guess everyone is basically wrong-footed in their positioning and in their views ahead of 2024. As I said, it's been a clear consensus view that bonds would perform into the winter season here. And right now, that seems to be a wrong view, to be honest. Yeah. And gosh, the bond trade has been so painful for so many. The timing has been off. So this gets very interesting.

3:45You spoke with Bob Elliott. First of all, throughout the content series, we just wrapped up, for those of you who are members and got to see it all, crash or boom, how to profit from what's coming next. So we wrapped it. But I heard a lot of the concerns coming, like too many rate cuts priced in. You started to see that bubble up on multiple fronts when you were talking, when we were all talking with a lot of the experts we had on. You spoke to Bob Elliott as part of that series, and he expressed some real concerns about bonds beyond even the timing issue, I think. Let's have a listen and then we'll talk on the other side.

4:20Well, I think the challenge is that most investors have some version of 60-40, whether they like to admit it or not. That's essentially what their exposures are. And what is 60-40 particularly good at? When does it outperform? It outperforms in an environment where there's disinflationary strong growth. And instead, what we're sort of seeing here is an environment of, you know, inflationary weak growth, right? Look at the UK, you know, unemployment is starting to rise. Growth is, you know, zero or a little bit worse, but inflation, core inflation, 6%. Look at the US, it's clearly moderating, but inflation remains elevated.

5:04Europe, basically the same story. And so if you're in that environment where you're holding 60-40 or something related to it, it's not a great environment. And particularly what we've all learned over the last few decades is that bonds are a good diversifier to stocks. And that's exactly the opposite of what's happening. And it's a little bit like how many times do you have to get slapped in the face with the fact that bonds are not a good diversifier for stocks before you finally learn that that is the case. And again, day after day after day, that keeps coming in. I mean, such great stuff. That entire interview was tremendous.

5:42Andres killed it with Bob. They discussed so many important things. I encourage you all to go watch it. Bookmark it if you're on the news site. And if you're joining us on YouTube, this is only the tip of the iceberg. So I met a fantastic fella at our NYC gathering for our first VIP New York City gathering. And he said for the longest time, he thought that the YouTube channel was all we did. Okay, that blew my mind. No, no, no. We have an entire platform of content, educational courses, and a network of amazing community members. So if you have not ventured past YouTube, and we love seeing you there, but if you have not ventured past that, you need to head over to, I'm going to say it in case you're listening audio, www.realvision.com and become part of this amazing hive mind that we're building.

6:32He really blew my socks off with that. Okay. So, Andreas, this is a big concept. We've been talking about it consistently here for like probably the last year, but it keeps coming up and it worries me when people like Bob say this, that this 60-40, so many people are still using some kind of format and that it's not going to work anymore. Where do you come down on this? Do we all need to take a really hard look at our own bond exposure? Yeah, we do. I mean, the big issue here is the bond exposure because typically you want the bond exposure to protect you in times of turmoil. And really, if you look over the past two to three years, that has not been the case.

7:20Every time you needed the bonds, they did not perform. And therefore, I've kind of switched my thinking around this 60-40 concept. And in my own sort of medium-term portfolio, I've introduced energy as a new sort of way of protecting my portfolio from downside risks to equity markets. If you look at it over the past, say – Wait. So, Brian, do me a favor. Hang on one second with that thought, Andreas, which I think some people are going to say, wait a minute. because energy seems like it's so volatile. Brian, if you could go on the new platform and pull up some charts, I think Andreas will probably be able to guide us.

8:03If you could pull up, because we have charting now on the site, if you haven't been, if you could pull up some charts that might sort of help illustrate what Andreas is talking about. And go ahead, Andreas, if there's one that you'd like, maybe you can guide Brian from here. Yeah, maybe we can pull up a chart on the 10-year treasury rate versus the oil price because it's been relatively evident, I'd say, since 2020 that oil prices tend to dictate broader inflation trends. And they also tend to dictate the sort of pace of rate hikes and everything related to central bank reaction functions. And now, as you can see from the chart Brian is pulling up here, we're stuck in a scenario with rising interest rates also in the long end of the yield curve at the same time as the oil price is picking up momentum again.

8:54And I think it relates to the very tight supply and commodity markets that we've seen basically since the pandemic and the energy markets now being basically in the driver's seat of everything related to central banks and how they react to the economy. And therefore, if you look at it empirically, say over the past five, six years, to either have energy at the very top of the leaderboard or at the very bottom of the leaderboard return-wise on a yearly basis. So energy has been the only clear diversifier of macro portfolios, meaning that in times of turmoil, energy tends to perform. And I think it's essentially exactly what we see again through September here.

9:43energy is one of the few bright spots in equity space. If you look at physical energy markets, they are also up materially alongside this sell-off that we've seen in equities since early August that they're about. And that's a very, very interesting mix because it essentially means that every time we're stuck in a situation where there's a surplus of demand relative to supply and energy space, energy is your only friend in these markets. Yeah, that's so important. That's so different. It's such a different world than the one we've been in. Ralph saying energy helped me today. So that's sort of working.

10:22And also, everyone's things are coming in slightly weird because we haven't migrated into one site, which will be happening within the month. So we're kind of operating still on the beta. But somebody else saying absolutely love the new platform. It's amazing. Thank you. We think so, too. So before Before we dig a little bit more into energy, I do want to get one question that came in earlier today in anticipation of it because it's sort of related to the bond side of things. And that is from Gaetan. Wanted to ask you your view on why the spreads are so tight. So if bonds are not working as a diversifier and there's this sort of trouble brewing, why are we seeing those credit spreads hang in?

11:04It's been sort of mystifying everyone. So if we look at central banks globally, and now I'm not talking about the Federal Reserve, but I'm talking about, for example, the European Central Bank, the Bank of England, etc. They've bought a lot of corporate bonds and they've bought a lot of sovereign bonds. And most of these large central banks have concluded that it is the time to sell parts of the sovereign bond holdings while they keep the holdings of corporate bonds relatively steady on a global scale. I think that is one reason why we see very narrow credit spreads in a scenario like the current, because obviously we've seen almost mayhem in sovereign bond markets, both in the UK and the US and elsewhere, while credit spreads have remained fairly orderly given all of this.

11:57But it goes to show that central banks do support market pricing of corporate risks to an extent that is not healthy, if you ask me. In any other case, credit spreads would have been much wider by now. But simply due to the fact that the stock of holdings from central banks in credit space remain elevated relative to their holdings of sovereign bonds, I think we have this very narrow spread between corporate risk and sovereign risk. and it is not long-term sustainable, if you ask me. Yeah, that's a great answer, Andres. It makes a lot of sense and something I haven't really heard highlighted before.

12:36So thank you for that. So when you're talking about energy as a diversifier, are you talking about the commodities themselves or a fund of holding commodities? Are you talking about energy equity stocks? So I specifically refer to the equity stocks. The one I use is the XLE ETF. It's a broad exposure towards oil and gas companies. It works tremendously well as a diversifier, at least if you look at a five-year horizon. And the performance in XLE has been pretty decent again in September. It was very decent in August. and it's essentially the only subsector in equity space that has been up over the past, say, six, seven, eight weeks here.

13:23So we performed as a diversifier again when it was needed the most through the early autumn year. While if you look at the physical markets, you tend to get a lot more volatility relative to the energy stocks. So you need to think about the scaling of your position if you enter physical positions in oil, natural gas, or similar energy commodities because of the large volatility relative to the spillovers to the stocks sort of with companies underlying that energy commodity space. Hey, everyone. We're going to take a quick break right now 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.

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15:14We asked at the top of the show whether we're headed into part two of the energy crisis. And you're sitting in Europe. We know what the concerns were last year. They sort of moved to the back burner. What is the status of energy supplies as we turn the corner into the winter? So if we look at oil markets first, the demand for oil is now picking up. And as of today, we are in a situation where we use more oil barrels per day than we did ahead of the pandemic. And right about every professional forecaster would have said no to such a scenario back in 2020. but now we use say 102, 102 and a half million barrels a day.

16:03And that's a lot compared to the supply being stocked below 100. So there's a gap of say two to two and a half million barrels a day, roughly thereabout. That is an issue given that we are no longer in any reasonable sort of control of supply in the West. The US production is essentially roughly maxed out unless there is a political U-turn around the corner. I don't foresee that U-turn. The supply is maxed out in Norway and other European producers. So we are simply stuck in a situation where we have to rely on exports from Russia, China, Saudi Arabia reaching global markets again. And Saudi Arabia and Russia have basically agreed to supply cuts through the remainder of the year, meaning that it goes beyond doubt that there is a clear deficit in oil markets throughout the fourth quarter.

17:10It's just a matter of how big a deficit it will eventually turn into be. But there's no doubt that we simply lack the supply to match demand through the fourth quarter. We have a few things we can do in the West. One thing is to release barrels of oil from the SPR, the Strategic Petroleum Reserve in the US. But if Biden decides to match the deficit throughout the fourth quarter, he'll have to release a couple of million barrels a day. or thereabout. And eventually that will leave him, say, 150 days of SPR left. And that is to me very early to empty the SPR, basically more than a year or roughly a year ahead of the actual election date.

18:04So to me, the very cynical analysis here would be that Biden decides to wait until, say early summer next year, they're about to release the SPR once again, because he obviously wants to ensure that the price at the pump is lower or lowering ahead of the actual election date. So too early for him. I think that's a wide open, a lot of people share that cynicism with you, Andreas. But that's the oil market. And obviously the oil price currently reflects that we basically have one-way traffic in oil. And even though it's very visible to everyone and everyone seems to be on top of this story, we just keep on adding to that momentum more or less day in and day out at the moment.

18:47So I wouldn't rule out that we get substantially above$100 a barrel through the fourth quarter this year. Then we have natural gas. And that was sort of the main issue of the 22 energy crisis, in my view. We had natural gas prices through the roof, both in China and Europe, and to a certain extent in the US. And we haven't really seen a big price reaction in natural gas yet. But I need to remind you that the supply of natural gas into Europe is down roughly 22 to 33 % on daily basis relative to before the invasion of Ukraine, meaning that the demand for natural gas needs to be permanently lower for prices not to accelerate again.

19:42The industrial demand for natural gas is down 25 to 27 % in Germany, for example, meaning that the German industry is basically stuck in some sort of depression. If there's just a tiny tick up in the demand for natural gas in Europe again, it will be filled all over the globe because there is essentially a lack of supply to meet that demand. And we actually got some numbers from the German industry this morning, European time, suggesting that there is now early science, green shoots from the German industry for the first time in say a year and a half. And that's interesting because if we get a confirmation that the German industry is picking up just a slight bit from here, based on lower input costs, natural gas prices are very low relative to a year ago, then natural gas prices will basically spiral out of control again, if you ask me.

20:40And I think that's a very big risk for the fourth quarter. I would not rule out that we see, if not a replay of 22, then something similar to that happening again in natural gas markets into the winter season here. Yeah, and which will be so painful to have to endure for everyone, you know, has major implications for the economic outlook, not to mention some of those inflation readings. So, Maggie, maybe I can show a chart on the platform of relevance to this discussion on energy versus Europe and the US.

21:15Brian's now getting roped in. Poor Brian. He not only has to do all the other stuff. Now he's our sort of platform master. But Brian, see if you can pull that up. What should he pull up, Andres? So the interesting thing here is that there is a new pattern forming in foreign exchange markets relative to energy prices. And we can, for example, pull up a chart on the broad dollar index, the DXY versus the oil price again. We could have used the natural gas price, but the oil price is sufficient as well. And if we look at the relationship right now, it is crystal clear that the US dollar gains when energy prices gain momentum.

21:56That is 100 % upside down to what we're used to. Say between 2008 and 2020, every time the oil price spiked, it was in conjunction with a weaker dollar. Because a weaker dollar basically allowed the rest of the world to buy oil cheaper since it's priced in US dollars. But now what happens is that Europe, Japan, China, some of the countries and regions are very reliant on energy imports. They suffer big time every time there is a price spike in energy, meaning that the euro sells off, the Chinese wang sells off, and the Japanese yen sells off versus the US dollar every time there is price action in oil and natural gas space.

22:44So the lesson learned here, if you're watching this show from Europe, is that every time there is an issue in the energy space, you better need to hide out in dollar assets because then you gain from the foreign exchange effect of the dollar gaining versus the euro. It's the same conclusion if you're watching in China or Japan. I don't know whether we have many followers in China. We have our bill, but it's not even populated yet because we haven't put everyone on it. But you can spin it around and easily see where folks are. So, yes, we do. We know we do have viewers in Asia. That's a hugely important point.

23:22And I think we often forget about the foreign exchange market. But it is where we see those strains show up, isn't it, Andreas? It is. And it is one of the very clear expressions of this relative weakness of countries and regions with a big reliance on energy imports. I had a discussion with another macro pundit on whether you can even label yourself a country in this kind of environment if you're not self-sufficient on energy because you're basically in the hands of a lot of countries that you don't want to be in the hands of, right? So the US is in a much, much, much better spot than peers such as Japan and Germany in an environment like the current.

24:07I need to emphasize that. Yeah, and of course, you know, that is a result of the shifting geopolitical tensions that we've seen that blew up in our face just over the course of the last year or so. So in that respect, it really highlights these strains that before were not as present. 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.

24:40andres we've got some other energy questions but i just want to bring this up because i i feel like uh by the way i should mention we are hosting a twitter spaces with tony greer and tracy shukart aka shy girl at 5 p.m eastern so they're going to be all over the commodity and energy story. And I know we have some questions about uranium. So set your clock. That's going to happen just at the top of the hour. So that's going to be really interesting and fun. So Andreas, I would be remiss if we didn't bring up technology. Can you be an energy bull or have, you know, wanting to have energy in your portfolio and a tech bull at the same time?

25:20Or are those sectors tied to different narratives? Because if you live on Twitter, sometimes you think they are. if you look at returns in equity space over the past 10 years in energy space and in tech space they are basically each other's opposite in the sense that if tech is at the top of the leaderboard you have energy at the bottom of the leaderboard and vice versa but i'd actually argue that it's the exact right portfolio mix to have in equity space anyway because the point here is that that energy will protect the downside in your technology position when you need it the most, while technology is one of the very few sectors able to outpace inflation and interest rates at the levels that we see right now because of the tremendous growth rates that we see, for example, in AI and similar topics within the tech space.

26:18So yes, I actually do think that it makes sense to have technology and energy in your equity portfolio at the same time, because it is the perfect diversified mix. Yeah, and barbell, right? The good old barbell. But it makes so much sense given what we've seen. So we have in the news, you mentioned AI, news say that Amazon was investing up to$4 billion in Anthropik, right? Rival to chat GPT, looks like maybe a little bit more on the enterprise side. Raoul spoke to Beth Kindig last week, and she had some terrific insights into the AI bull run? Because we know so many people have been questioning it.

26:54Let's have a listen to that and we'll talk on the other side. The impact it will have on GDP as what you're describing is unlike any technology in modern times. And it's because it will drive down costs, increase productivity. So the contribution there is infinitely higher than something like mobile. And the reason I anchor a lot back to mobile is because we all know that the things, if you could have invested 10, 15 years ago in the FANGs, you would have. So what I'm describing is four to five X larger than the FANGs. So of course, what we're gonna do, what will be the result is some massive winners, just like I would call the FANGs massive winners within mobile and AI will blow mobile away in terms of it's not only contribution to GDP, but you have a$15 trillion market.

27:50Mobile was about a$4 to$5 trillion market. Immediately, right out the gate today, we have 3X, but I think that that's very low because it's not incorporating all of the software innovation that we can't even imagine yet. As bullish as she is long-term, really important to point out, she did talk a lot about patience when it comes to finding entry points. And Beth's so great because she has really robust, granular research behind her thinkings when it comes to individual names. So great to hear her give us some thoughts on what companies are in a prime position to take advantage of the AI boom, who she thinks is going to be able to sort of optimize on this.

28:32Really, really interesting. Again, go over to our website if you want to see the entire interview, including what she likes right now, www.realvision.com. And there's some great offers, which we'll tell you more about as the week goes on. We're going to have a birthday bash on Wednesday, and we can tell you more about that. So, Andreas, how are you thinking about AI right now? So I sold my exposure to the AI ETF called VTI back in late June, there about with almost the perfect timing. I'm not as lucky as that always, but it's very transparent. I update my macro views and the macro portfolio each and every Thursday in StenoSignals on the Real Vision platform.

29:20And my thinking at the time, and it's essentially still my thinking, is that the current momentum in long bond yields is something you need to worry about because it is essentially a sign that markets will have to do the dirty work for the central banks to try and stop the momentum in inflation from re-accelerating. And it's been evident over the past, say, six to eight weeks that at least headline inflation is no longer slowly but surely dissipating towards the 2 % target anymore. We are rather headed for 4 % plus numbers over the course of the next month or two. And that is not good news for equity markets, broadly speaking.