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Deflation (and falling demand) is Still The Main Problem Globally Now?

 In Visual (Videos)

This video is originally uploaded on Youtube at https://youtu.be/0D0IxTnufoo.

 

Jason Burack of Wall St for Main St interviewed returning guest, founder and CEO of Complete Intelligence, Tony Nash.

 

Tony’s company helps many companies solve their global supply chain problems and he has also lived and worked in Asia for 15 years in the past and advised the Chinese government on their economy and trade in the past. Tony’s company also uses AI predictive analytics software to predict stock market and commodity price movements.

 

During this 40+ minute interview, Jason asks Tony about China’s economy, the global chain, the threat of much worse stagflation and volatility in markets like stocks. Tony thinks that the main problem is still deflation and a lack of demand now regardless of the amount of currency, stimulus and bailouts governments do.

 

Show Notes

 

JB: Hi everyone. This is Jason Burack of Wall St for Main St. Welcome back to another Wall Street from Main Street podcast interview today’s special guest is a returning guest he is founder and CEO of Complete Intelligence, Tony Nash thank you for joining me.


TN:
 Thanks Jason.

 

JB: now Tony, I know you’ve lived in Asia for 15 years you’ve done a lot of work with the Chinese government consulting them on their economy. You’ve worked with a lot of companies all over Asia — Singapore, China, Hong Kong — helping them with their supply chains. So let’s talk about the Chinese economy and if you think it’s recovered post coronavirus.

 

You put out a survey about a month or so ago talking about unemployment rates in China with factory order…

 

TN: 50 million because at the time I think China had said that there were five million unemployed as a result of coronavirus and I put out survey saying “is it 0-5 million, 5-25 or something and then over 50.” And the vast majority of people responded over 50 million people. Not vast majority, but majority of people responded over 50 million.

 

I’ve since seen data that estimates unemployment in China alone as a result of coronavirus at 120 million or more. I think it’s safe to say nobody actually knows the real number. But it’s probably big. And it’s probably tens of millions rather than single millions. I think it’s a safe bet to say it’s probably north of 50 million. A number of economists watching China are still assuming that the government number holds.

 

 

JB: I’ve been reading articles quoting some factory owners and some factory owners in China. I don’t know if this is all the factory owners. But at least a few of them that have been quoting articles have been saying that their orders are down 70 percent. So exports are down a lot so there are not purchase orders for a lot of different companies right now is that what you’re also hearing?

 

TN: Sure there was just a piece out today saying that a survey in China has exports for May down 7 to 8 percent year-on-year. Imports are down almost 10 percent year-on-year. That survey data Is possibly under under waiting what the fall is. I don’t doubt that exports are down double digits and there has been some lag. As you remember from the kind of early mid Corona period, there were these supply chain issues of just getting stuff out. So initially, there was this wave of pent up export requirements just to get stuff out of China. But now things are starting to settle in because you have those demand in May, especially with the US and Europe closed, you have real demand depression. I think the main numbers may be overstated a bit and I think the exports may be down even more. Of course, it’s highly unlikely we’ll see that in the official data but it’s terrible.

 

I think things may be recovering a bit. I don’t think that China is in for a V-shaped recovery like we’ve seen, but I do think that they’ll come back maybe not to as much as they had thought they would but I don’t think it’s going to be a long-term depression.

 

My concern with China is in industrial production declines and the employment declines that come as a result of that and then the wage pressure that comes as a result of that.

 

JB: what is the percentage of GDP for exports right now because there’s a lot of people that are I would call them China trolls that tell me that it’s a lot lower amount but the numbers I’ve seen for exports as a percentage of GDP are still very high for the Chinese economy.

 

TN: It’s not as high as I once as I once knew. It’s definitely, I believe as a percent of GDP it’s it’s smaller than it was like five years ago. You do have that growing services economy component you do have growing domestic demand so but I don’t think it’s it’s definitely not as high as it was. Sorry I don’t have the number to hand but it’s really not what it once was>

 

JB: It seems that China has like astagflation problem right now in food prices and rent they’ve had to import an enormous amount of pork last year. All of 2018, they were having the African swine flu problem so the report shortages in China food prices were rising long before the coronavirus, and there’s a lot of videos online of shop owners protesting either rent not being reduced or rent prices going up by their building owner. So would you say that that’s why the Chinese government and the People’s Bank of China has been very hesitant about how much stimulus and QE to inject into their economy right now because they are worried that if they put too much in it will accelerate like a stagflation problem in their rural economy?

 

TN: I think that’s a concern. I think there’s also just concerns about the fiscal resources if the Chinese government has. Of course, they can print as many fun tickets as they want as long as it’s in CNY. But I think that is a concern.

I’m quite frankly more concerned about about deflationary pressures in China and just just on the face of it naked deflationary pressures through obviously the rest of Q2 and into Q3 and then how they potentially get out of it. I think China really hasn’t had an issue or had a problem with contriving inflation when needed. But if we do have the industrial production issues and the wage issues that I’ve been concerned about, I do think that deflation is more the overall and more serious concern there.

 

JB: That’s interesting because you’ve been predicting that the Chinese yuan against their exchange rate against the dollar it gets devalue down 7.2, right?

 

TN: That’s right.

 

JB: How would that jive then with deflation if they’re trying to devalue their currency?

 

TN: I think you’ve got both of those trends moving in the same direction. Unfortunately with energy prices down into the 30s, of course you have into the 40s. Yesterday or today, you have Brent move into the 40s. Sorry WTI. With the resources depressed, again, this is on a year-on-year basis.

 

But I think there’s serious downward pressure and will be continuing a series downward pressure on resources and commodities so the secondary impacts will also show a bit of producer price deflation. And then you have just the function of overproduction in China and having to sell those inventories. You don’t necessarily have the take off from the US. Partly I mean, this is a two or so year-old trade war, but because of our discussion, but because of the trade war, and then you have the issues in Europe with demand as a result of COVID, so I think you’re looking at more supply in China of manufactured goods.

 

They’re looking at commodity prices that I don’t believe we’ll come back dramatically. It’s it’s an ongoing issue. At the same time, you have the what I believe ongoing concerns for industrial production as a result of this and then there are the jobs and wages issues. If you have wages declining, then people just can’t pay for those goods so that’s disinflationary. Again I’m worrying about this where I think a lot of other people aren’t worrying about this. But it is something that I’m actually quite concerned about in China.

 

JB: It looks like the government can create even more distortions with what they try to do with intervention and central planning with the currency. We’re recording this interview right now in June 5th, the currency is that the Chinese Yuan is at 7.081 to the Dollar.

 

I’ve been reading articles that a lot of Chinese manufacturers are producing but there’s not really demand. So they’re stockpiling a lot of stuff. I’ve been reading a lot of articles lately too about a lot of oil companies in China importing more oil. I think they built another or the atleast announced another Strategic Petroleum Reserve. How many is that what five or six now? They are buying more oil. I don’t know if they’re using the oil because my friend tracks Chinese auto traffic data and he says it’s nowhere near the pre-coronavirus 2019 levels and there’s almost no traffic whatsoever on the weekends in the major cities. Only at rush hour is there actually like anywhere close to normal traffic levels and the other data throughout the day and night and on the weekends is nowhere is way way off.

 

TN: It’s not surprising at all. What it reminds me of is the kind of quotas for stockpiling for Soviet production and the kind of deflationary impact that had in many ways on certain goods in the former Soviet Union. In China, over production and stockpiling, I mean we’ve known about this and things like steel for years. But as it comes to finished goods, that’s hugely problematic given the volume that I suspect overproduction is happening and given the disappearance of demand in overseas markets and obviously domestic markets. Areas like automotive auto parts electronic goods these sorts of things that just people are not going to be renewing. Of course that’s not an absolute statement. It’s an incremental statement, but these things really hurt the manufacturing complex in China. We’ve all taken a pause generally from consumption in Q2 globally. In China it’s been a bit more stark.

 

JB: I think the factory orders are not coming in like you said in the stockpiling is just increasing the amount of credit that I think the Chinese government is injecting I’ve seen from China beige but they put an article out on their Twitter it was like 400 billion in a month pace. But I think a lot of that’s just going to keeping the factories running right now so they don’t go bankrupt.

 

TN: Yeah and that’s not surprising. I mean they don’t want people to be unemployed because they don’t want to see civil unrest. We’ll see more and more social controls in China so that there isn’t civil unrest because people are just bored out of their minds.

 

JB: Speaking of social unrest you know all the rules changes and stuff going on with Hong Kong. We’ll talk about U.S. and China trade relations in a couple minutes, but do you think that China one of the main reasons they’re going into Hong Kong is economically? Do you think that the Chinese government is eyeing that $400 billion that the Hong Kong Monetary Authority has to protect their dollar pay?

 

TN: Of course they are. I think the US was really smart to take away Hong Kong status very, very quickly because the incentive was that Hong Kong would continue to be this buffer zone and that China would continue to be able to benefit from that buffer zone and it’s fine if it’s a buffer zone and it really is a free market because in its heyday, and this is not that long ago like months ago, Hong Kong was the freest market in the world. But as you have the mainland authorities take over things like the judiciary, then Hong Kong no longer become the freest market in the world. So I think that was the reason or there are a lot of reasons but that was one of the reasons for them to grow assertive. China is looking for reasons to distract from the economy, which i think is extremely dangerous, but I think Hong Kong is one way for them to distract from their domestic economic issues.

 

JB: I completely agree. I think there was multiple reasons for what they did with Hong Kong and then what Trump does they gonna blame it on Trump.

 

TN: Right of course and that’s fine and that’s easy. Anything to distract, whether it’s incursions in India or whether its South China Sea or its Hong Kong or whatever it is. The Chinese ambassador to the UK making stupid statements about the Tiananmen, well kind of circumventing that. They’re doing anything they can to distract from their own domestic economy.

 

JB: I think yesterday was the anniversary of Tiananmen.

TN: that’s right

 

JB: For our listeners are not familiar, I think one of the tricks that what not the a lot of Chinese companies were getting around to not pay the tariffs last year was they were exporting their goods from mainland China to Hong Kong and then they were taking advantage of that. So they were re-exporting out of Hong Kong to avoid the tariffs that the US had put on. I think that was quite common practice, right?

 

TN: Sure yeah. Any sort of third country trans-shipment, but Hong Kong was as viable as any other, and because it had this relationship with the US, it was a very easy solution. But I think that’s becoming more and more difficult. Regardless of the goods, I think it’s becoming more and more difficult. Even things like exporting components or knocked down goods for assembly and their locations even that stuff is becoming more and more difficult.

 

JB: So now I want to transition to the US and China trade relations. We still occasionally get a tweet out from Trump or one of his representatives in the Trump administration or White House about how the US-China trade deal is progressing. But really, there’s been very little positive actions on China’s end about the trade deal. I think they made one purchase of soybeans. The trade announcement was in October 2019. So we have October, November, December, January, February, March, April and May. Finally, the Chinese government buys some soybeans in May. It was a fairly decently large order. But look at all the months that they didn’t really buy anything, it didn’t comply with phase one. So do you think the phase one trade agreement is dead?

 

TN: I don’t think it’s necessarily dead, but I think China is very good at negotiating agreements and very bad at going through on them. This is why the Americans were very focused on the enforcement mechanism within the phase one agreement. So I think the real question is, will the US follow through with enforcement? If the US doesn’t follow through with enforcement, then it’s just a piece of paper. It doesn’t really matter that much. But if the enforcement mechanisms come through, then I think it’s possible. Again, I’m skeptical. I was pleasantly shocked and surprised when the agreement was made in Q4. At the time, I was like most people skeptical about the ability to have that enforced because what are you gonna do? You can’t force people to buy stuff from you. That’s the real problem. Now with Hong Kong coming into the picture and with the US has action on Hong Kong coming into the picture, I think it’s going to be harder and harder for those for those the agreement terms to be exercised.

 

JB: My contracts in China, when the phase 1 deal was announced, they were really happy for the Chinese government. They were celebrating because no more tariff hikes. That was the main goal for the Chinese government for phase 1 announcement the trade deal was to make sure there was no more tariff hikes.

 

TN: Right. Evidently some of the state-owned buyers have started to look at soybeans and other products more recently. I’m just not sure that that’s real. I mean, this is some stuff that we’ve been hearing some transactions in the market. But stopping the tariff hikes is the first thing but actually getting them to buy is the more interesting part on the US side of course.

 

JB: But did Beijing just almost now for the last month or so there’s been press release announcements back and forth, back and forth between the US and China like Trump is now blocking the retirement savings I think of a lot of military and government employees from being invested in China, China then threatened to remove Chinese companies listing from US exchanges. Those are just a couple examples but back and forth back and forth back and forth. This is going. It doesn’t seem like this is Trump’s crazy way of negotiating from the art of the deal but this just doesn’t seem like it’s productive towards a trade agreement.

 

TN: I think it’s more of a recognition that these things haven’t been happening anyway. We may very well see more purchasing later in the year but I think this stuff is that there has to be well, there is tension between the US and China. China has become more aggressive in South China Sea in Hong Kong and other places, India. I think part of this is maybe not necessarily a direct hit on what may seem to be a problem it may be related to actions that China has been taking toward relationships that the US is becoming closer to. I don’t necessarily see trade as a single issue. I see trade as a multi-layered issue.

 

JB: Interesting. How important do you think what’s happening with Huawei and how the Huawei CFO, her extradition process in Canada is continuing, how important do you think that is?

 

TN: It’s very, because Huawei is kind of a crown jewel in China and I think as the UK starts looking to other technology as Huawei technology becomes an issue for Germany and they start looking at other sources, I think that removes China’s centrality to the deployment of these types of networks. Of course, that’s obvious. But the services, the information and other things that you can sell off of owning that network equipment is huge. So it’s not just a one-time sale. It is a long relationship. Now that doesn’t just have impacts on Huawei. It has impacts on places like China export-import bank or CDB. It’s not just the equipment, it’s the financing of the equipment. These centrally planned economies or heavily centrally influenced economies, it’s a game of musical chairs. Once you stop the music, it has knock-on effects for many, many other players. I think the Huawei issue with Canada and the US  is that on its own is an embarrassing issue. But stopping the purchase of Huawei equipment in Europe and the US and other places has long-term commercial effects with Huawei, but also the whole value chain including places like Export Import Bank and other places that are supporting those purchases or supporting the financing of those activities, whether it’s Exim Bank or another bank doesn’t matter, but it’s the overseas financial services impacts in China is also stopped or slowing dramatically.

 

JB: Do you think then if the Huawei CFO, if the charges aren’t dropped, if this doesn’t stop with what’s going on with Huawei, that that’s a deal-breaker for the US and China trade relations? Are they going to be able to figure out a workaround?

 

TN: There are a number of layers here. First of all, it shows that the law is not the law in China, that you can be of a certain class and rank and the law doesn’t really apply to you, if in fact she broke the law, right? If she broke the law and China is still upset then, it’s a very clear indicator to Chinese citizens that the law doesn’t apply to people of Ming stature. That’s a problem for China. While they fight for her return, I think a very bad development for them would be that she has found guilty yet China still wants her let free and they let her go. That’s a real perception problem in China for Chinese citizens. But do I think it will impact the US-China trade war? I think every issue is connected when you’re talking to China. So now from the US side, the way Trump thinks is he bundles issues, and so the way American administration’s typically think is they think in an unbundled way. So the State Department typically cannot walk and chew gum at the same time. We’ve seen that for decades State Department will be happy about finishing one agreement when another agreement that should be linked isn’t and they can never get it done or something like that. What Trump and what his administration actually does very well from my perspective is they bundle things extremely well and so I don’t think the Trump administration itself sees that trade agreement as discrete and different from the main issue or from Taiwan or South China Sea or Hong Kong or any of these issues. I thing the administration sees everything is bundled which is not dissimilar from the way the Chinese diplomats and central government see things. They see everything is bundled.

 

JB: I see Huawei is one of the most important things for China because they have such long-term plans for it like you said like it’s their main cornerstone company, it’s their main technology company and then once Huawei has control over the 5g networks and all the other infrastructure there for communications, then the other Chinese companies the financing companies and all the others start to follow suit after that.

 

TN: Yeah. I think that’s fair.

 

JB: Let’s talk then about the global supply chain. It seems in January and February, the global supply chain started to break. Do you think that it’s being fixed now?

 

TN: Do I think it’s fixed? I don’t. Our US supply chains fixed. I don’t think they’re fixed. Is the Chinese supply chain infrastructure moving again? Yes. I think what’s happening is a number of important US importers and US manufacturers and even global manufacturers are trying to find places to reduce their risk and exposure to China. And not because they want to abandon China. I don’t believe that’s the case at all. I think we see people who are say super nationalist or whatever who want to act like these guys are interested in leaving China completely. I don’t believe that’s the case at all. I think global manufacturers are looking for incremental manufacturing capacity to reduce their risk if there is a second wave of Corona, if there is political unrest in China, if there is some sort of retribution or something. I think they want incremental manufacturing for that. And for that, they’ll look to places like Mexico, parts of the US parts, or Europe or somewhere else, other place in Latin America. I don’t necessarily see a wholesale substitutional effect for supply chains out of China at least for the first two to three years. I think over time, there may be more substitutionality. But right now, I think it’s more of an incremental discussion.

 

JB: Do you think India is gonna benefit from this because we’ve seen headlines where India is talking about subsidizing, trying to get more Apple supply chain out of China? I think they’ve gotten one company to move from China to India but they’re going after a lot more than that. They see this as an opportunity and the sentiment online, Tony, I don’t know if I’ve ever seen this before where lots of people here in the West in the US and Europe are talking about boycotting Chinese products. Now that’s easier said than done because a lot of stuff that’s partially made in China is finished assembling here in the US and then it’s stamped made in the US but it’s all the components that go into it are not fully made in the US.

 

TN: Do I might think India will benefit from this? I love India. I really wish India would benefit from this. But I think there’s so much corruption in India. I think it’s very, very difficult. I think it’d be a very difficult thing for any manufacturer to make a significant commitment to India. While I would love for India to benefit from this, and while I would love for manufacturers to move to India, I think the reality is from a bureaucratic, from a corruption, from a just sheer logistically difficult position, again, you know I spent a lot of time in India in the same way I spent a lot of time in China. I just don’t see that happening. I wish it would, but I just don’t see it happening.

 

JB: That’s sad.

 

TN: Yup.

 

JB: it’s sad, they have an opportunity to do it too.

 

TN: They do, but I think the institutional issues are so great that it’s gonna take them years and years to root that out. Look, having services functions moved to India? No problem at all. This is why the BPO sector started booming in India 20 years ago. But actually having physical Manufacturing, and physical logistics, I think it’s probably still a very difficult proposition.

 

JB: In some of your answers, you said that the large corporations don’t want to leave China said they don’t really care if some of their intellectual property or research and development or forced technology transfer or a forced Chinese silent partner they were okay with that?

 

TN: No, I’m not saying they don’t want to leave China. But they already have a large amount of investment there and so moving wholesale from China over the next two to three years presents a big risk for them. So I think, what they’ll do is initially move incremental production away from China. Let’s say it’s a new model or a new product line or a regionalised product line. Let’s say they do something just for North America or something, I think they’ll move that stuff first because those are new supply chains that they would be building out. New manufacturers or expanded with existing manufacturers and then they look at either new physical transport or expanded physical transport. All these things are things that they have to be careful of not just the risk in China, but the risk within the new supply chains that they’re developing in other places.

 

So I don’t think any major US manufacturer will rush out of China unless they’re absolutely forced to. I think they’ll develop parallel supply chains and incremental supply chains first. Test them out for a couple years and then gradually, some of that may be rapid some of that may be slow, but gradually move stuff out.

Before the financial crisis in 2008-09, many manufacturers, particularly Japanese manufacturers, but many manufacturers were looking at something that they called their “China plus one” or “China plus 2“ or “China plus 3 strategy”, where they were looking at manufacturing goods in China but having other locations as backups. Now when the financial crisis came about, all these manufacturing firms wanted to just get rid of risk and they saw these other supply chains as risk so they doubled down on China and they continue to build out in China for all the new equipment and hiring and everything else in China as well. So they saw it as de-risking or at least not growing risk, but actually by concentrating their activities it actually became riskier. Now with a place like Japan, we saw with the 2012 riots and protests and other things that the Chinese did against Japan, this was over the Senkaku Islands, we saw a lot of Japanese manufacturers move their manufacturing out of China. Initially it was slow, and then it became much faster. I think people looking to exit China will look at that as a template. It wasn’t that long ago. It was 2012, 13, 14 when this stuff started and then it moved. So I think they look at that as a template rather than China try to invent something wholesale.

 

JB: I think it could take years for more factories to leave China. Could take a significant amounts of the supply chain to move. There’s billions of dollars of investment. Some of these factories now are not cheap to build. It’s a lot of technology involved, a lot of investment. And given the global economy right now, and how the consumer has not come back, some of these investments may be delayed.

 

TN: Yeah, I don’t think I’ll take as long as a decade. But I do think it’ll take years. But having said that, I don’t think many of these manufacturers will completely want to remove their operations from China either. It’s a big market and the Chinese spend money just like anyone else. So they’ll have their China operations for China and maybe they’ll build for other parts of Asia or they’ll build especially parts or something like that. But I don’t think many of them will have global manufacturing based in China. I think we’re going to see re-regionalization of supply chains and we may have talked about this before, but the move away from say the NAFTA and Euro area around 2000, it was a zero sum where most of the stuff went to China over the next 10 years, 15 years, particularly in the first five years. But then it kind of bled over the next five to eight years and then it became completely concentrated in China and then with the centrality of China, kind of the regionalization complete now we’re starting to see the re-regionalization even if it is a higher manufacturing price because the risk associated with closing again with an event like COVID is so high that people just need to have supply chains closure at home.

 

JB: Yeah. You told me to call it localization and not de-globalization like Peters Ayhan has been calling it regionalization.

 

TN: Regionalization, yeah. I think the globalization is a bit of a, it’s charged first of all but I also think it’s not really accurate. I think we’re still globalized. We still have globalization. But I think we’re Re-regionalizing. Things were pretty regionalized in the 90s and then they de-regionalized, they globalized with China as the epicenter but I think we’re going through a phase of re-regionalization and I think we’ll dip into globalization as needed, we’ll dip into regionalization as needed because people can run pretty sophisticated supply chains now and so whereas 20 years ago it was harder to do that.

 

JB: Yeah, I totally agree. I’ve been reading articles and also my last interview with you where you talked about it, our listeners can go back I think in December 2019, where you’re talking about your company Complete Intelligence and the supply chain management software, the improvements it’s had just in the last couple decades. So in the past, when there wasn’t good supply chain management software, it might take a purchasing manager or manager, even a senior manager at the company, might take them days or weeks with phone calls and tracing to trace orders and exact amounts of the supply chain. Now they can do it on their on their iPad.

 

TN: Sure, yeah. Just the track and trace stuff, the location of stuff, that’s old technology and it’s very easy. I think what’s harder for people is to understand the true cost and cost scenarios for manufacturing a good. What is the cost at the element level or the component level of that phone that you’re building or that electronic equipment or that food item or whatever. What we’re able to do and I think things are moving is much more precision around taking those costs, breaking them out, understanding where they’re going over the next one to say 24 months so that you can really plan where the best location is, what the right price is, all this stuff. The geopolitics and the trade policy around trade, I don’t think that stuff will ever leave us. The precision with which you can plan around cost and price and other things, I think those things are allowing manufacturers to adjust really, really quickly and really have a bottom line impact within say 90 days something like that.

 

JB: I think a lot of these governments are talking about trade so much because they all are seeing that they want to bring back manufacturing for jobs.

 

TN: That’s right. Whether it’s Europe or the US or South East Asia. You look at a place like Malaysia. A lot of Malaysian manufacturing was transitioned to China between say 2000 and 2012, 2015. And now global manufacturing companies or for the past couple years they’ve been looking at places like Malaysia and Thailand again because it’s simply not China and so it’s not just localizing manufacturing in North America it’s looking at other regions and arbitrage in the regulations and the tariffs instead of arbitrage say the electricity price, which is one of the reasons people after Mexico, or regulatory in taxes, which is part of the reason people of the US. So, this isn’t just say a Western or European US issue. It’s regionalization in the truest sense.

 

JB: So these governments and central banks, it’s not just the US and the Federal Reserve. The European Central Bank, the Bank of Japan, the People’s Bank of China is doing some but nowhere near the amounts because I think they are really worried about the stagflation component, but they are flooding in general the global economy and asset markets with currency. Some people are getting what twelve hundred dollar checks. There’s SBA loans. Is this going to put a lot higher costs in the global supply chain? Are you seeing higher cost yet?

 

TN: I don’t necessarily foresee that, but I do think we’ll see incremental costs. So what you’re talking about is so much money is out there that chasing those goods will become more expensive. I think you’ll see that maybe in futures markets or in financial trading markets. But I think in terms of demand-led consumption, actually people buying tangible things, I think we’re in an environment where prices are hard for us to rise. Granted you see oil trading like I said earlier WTI broke I think $40 today, which is great. It’s healthy. But when that actually transitions into physical demand and how that transitions into other areas, I’m not really sure. Meaning, that $40 or how much price pressure is that going to have on downstream goods? Because $40 is much less than it has traded even though we had negative 37 and 20 and 28 and 32 for a long time, those prices are still pretty far depressed from where they have been historically. So I don’t see that. Typically when we have this type of stimulus that cash makes its way into things like real estate and equities and that sort of stuff. Will there be inflation there? Probably. But will we see it in supply chains? Probably not as much as one would think initially.

 

JB: So you don’t see a stagflation scenario where people in the US are going to be given more $1,200 or more checks per month and then because the global supply chain is not functioning at pre coronavirus levels, that there’s going to be less goods and services to purchase, so there’s going to be more currency creating less goods and services which would be stagflation airing that in my opinion?

 

TN: Certainly that’s possible. Not necessarily my central view. I think once you see these, the benefits and this $600 a week extra for unemployment, I think once you see that end at the end of June, I think we’ll see people really try to get back to work as quickly as possible. I think we will see some wage deflation among kind of white-collar workers especially in places and things like oil and gas. I’m based in Houston, Texas so I think you’ll see that stuff as those jobs become more competitive. But I don’t necessarily see a fully stagflation airy environment in the US.

 

JB: I think one of the main points though is the distortions that all these government interventions and the central bank intervention is creating because look at the stock market now that the stock market the Dow is over 27-thousand and I we haven’t seen any examples really of a recovery in the US economy yet.

 

TN: Again, markets are trying to find their levels and what I’ve been explaining to our clients is we will likely see quite a lot of volatility between now and say August, where we’ll see markets rise and we’ll see markets fall.

 

In hindsight, if we look let’s say on a monthly average basis, they may look like pretty boring markets. But in reality, we’ll see things rise and fall quite a bit until those markets, whether it’s say a copper price or whether it’s sp500 ETF. They’ll bounce around quite a lot. So again nobody really knows this is this is the problem it’s price discovery. When we talked with say procurement people, our supply chain people, even revenue planning people within companies, they’re all kind of making their best guesses. But they don’t really know and I think whether it’s somebody allocating a portfolio or whether somebody buying for a product, the planning, the precision of planning, the tools that people you are using really are not that precise and they really don’t incorporate a number of scenarios. We do have a lot of planning teams and let’s say portfolio strategy teams who are really kind of guessing and that’s why we see and we believe we will see the volatility in markets because it’s easy to look at the Dow or the S&P and say, “wow that’s too high” and then next week it swings 5% lower and then the week after it swings up 3% and so we see these things go up and down until we find that price where market participants agree that it should be in general region. I think we’re gonna be having that debate in markets for the next two to three months.

 

JB: I expect a lot more volatility even though the VIX is down below 25 that was below its support levels at 28. It was in a new trading range a higher trading range now it’s below that. But the Fed has talked about Powell and the Fed have talked about wanting to reduce volatility. Temporarily, they have reduced stock market volatility. But I’m looking for data out of the real world economy especially in the US economy where there’s improvement and I haven’t really seen improvement yet, now they are gonna we’re hopefully gonna restart the economy, but who knows if we’re gonna get a second wave of the coronavirus soon.

 

TN: Well if you look at driving right now, it’s at like 80 percent of pre corona. And this is part of what’s giving strength to crude oil markets. People are getting back on the roads. Not really getting back into planes that much yet. But they are getting back on the roads and I’m optimistic about that. When we start to see some of these basic signs of life at say 80% level, I think that’s positive. I do understand why markets were up today given the unemployment data and things like the road data that sort of stuff. Are they at the right level? I don’t know that anybody really knows but I think there is growing optimism that things may be coming back. The rate at which they’ll come back? Again, I think markets are going to debate that for at least a couple more months and then we’ll see real tangible, sustainable activities say late July August and people get an idea of where things will land for the rest of the year.

 

JB: Do you think the US economy is gonna have to make some really radical changes as in a lot of the bricks and mortar retailers, a lot of a lot of these casuals sit down in restaurants, they’re going to go away and the transition to e-commerce and online sales is gonna, it was already happening before the coronavirus, but now it’s gonna be a rapid acceleration than in the coming years?

TN: I think in general, I would say no. But I do think that a lot of your marginal businesses in strip malls or your marginal franchises or whatever that we’re just barely making it, I think it’s like this is a good time to cut those losses. I think things like real estate obviously you’ll see some changes there. But you know I think most people just want to go back to normal whatever that is. If we look at say pre 9/11,  everyone said the world was going to change. It ended up being kind of a TSA check and so I think yes it’s easy. It’s been pretty easy over the past couple months to kind of extrapolate today into the future and today is forever. Normal is not normal anymore. But I think most people just want to get back to normal. Of course there’s going to be changes, but we’ve seen from some from some of the say protest activity over the past week, people will get out and they’ll go in public for whatever their right reasons are. Do I think the dining experience is going to change dramatically? I don’t. Do I think the shopping experience is going to change dramatically? I think it’ll change a little bit, but I don’t think it’s going to be some new normal of every single thing being done online and everything being delivered to house. Of course, people want that especially that’ll take off or continue likely in urban areas in a big way. But I think at the end of the day most people just want to get out of the house right now. They’ve been there for so long that they’re just trying to trying to get out and do something else aside from eat another meal in their house.

 

JB: The food delivery companies, they’re way overcharging on fees. I’m paying for a couple of my deliveries I think I ordered like a pizza and a couple other things and it was fifty bucks. It’s way more than than the normal cost.

 

TN: It’s very inflexible demand, very inelastic so if they can charge it, they will and I don’t blame them. I wish I was in that position.

 

JB: They still can’t make money if you look at their earnings report. Jim Chanos like put out a he posted an interesting article on his Twitter about like there’s an the Pizza arbitrage. Did you see that article?

 

TN: no

 

JB: Yeah. So him and his buddy who’s a restauranteur, they figured out that GrubHub was under-pricing pizzas so they bought ten pizzas at the GrubHub subsidized price and then they were able to basically make $100 per order risk-free, 80 to 100 dollars cash for is free. There’s an article that I could send you. It’s pretty funny.

 

TN: They could sell it to other people.

 

JB: They could resell it, but it was basically, they were there was an arbitrage trade because of like doordash and GrubHub were intentionally under-pricing the menu items and so people would order from them and their call centers so they could sell to Wall Street that there was growth that there was revenue growth for deliveries so the stock would still go up.

TN: Wow fantastic, what a game, huh?

 

JB: well I’m not the CEO of a publicly traded company like that but yeah it’s a bad and said there’s a lot of added incentives right now in society.

 

TN: Yeah.

 

JB: Well, Tony, I really enjoyed our discussion today. We live in very interesting time. One last question here about the dollar. So you think the dollar shortage is real and that the dollar is gonna start rolling soon?

 

TN: “Soon” is relative. So do I think the dollar shortage is real? Yes. Do I think the dollar is going to rally soon? I think it’s inevitable, but I think it really all depends on several things. But I do believe that emerging markets will continue to try to devalue their currencies because their exports especially China, I think that the dollar is in demand because there is so much debt globally, and they have to have dollars to pay down their their US dollar denominated debt. I do believe that Brent Johnson, his view his milkshake theory, I think is very solid and I think there’s a level of patience behind that theory and I don’t see the fundamentals changing that much. I think it’s a pretty elegant in the way he’s put that together.

 

JB: It’s a sound theory, but I think the US government the US Treasury President Trump who’s tweeted a lot about the dollar in the last two years, there’s a lot of ways that Congress and Trump and the Treasury can spend, can hand out checks, can do a plaza court agreement, if things get bad enough, they can do what FDR did in 1934. And if the dollar does get to those levels that Brent Johnson is predicting at 120 and the dollar index I mean that would collapse everything.

 

TN: Maybe. I don’t know that it would collapse everything. But I think it would certainly put strains on emerging markets. I don’t know that it would collapse everything, but I think it would certainly harm and I think emerging markets would have to live within limits that they haven’t had to for probably 30 years. So, and this is the basis of the end of the Asian century is they borrowed against the next 30 years to pay for the last 15, right. It’s just not sustainable since they don’t have a global currency and I think if you get a dollar north of say 105 close to 110, I think Asia just starts having serious serious problems.

 

JB: Yeah, I agree. And emerging markets have an interesting business model since China joined the WTO. So they set up to export to China either luxury goods or commodities and then they started borrowing in dollars especially around what after 2009, when the dollar index in what 2011 to some of the all-time lows there with Ben Bernanke just doing the QE programs. They basically started shorting the dollar at the worst possible time when the dollar was already relatively low and they were doing a lot of exports to China but then borrowing in dollar so it was a dangerous game that the emerging markets had set up.

 

TN: Very dangerous. I think being in those markets, betting against the dollar is a really hard proposition especially right now because the relative strength of the US, the US is in pretty good position compared to a number of these markets. It’s in a good position compared to say Europe. I’m not just talking like this month, I mean we’re all hurting this month. I think over the medium and long term from demographics to resources to other things, the US is in a is in a pretty good position it’s not in an excellent position I don’t think anybody globally is but I think it’s in a pretty good position.

 

JB: I want to thank you so much for your time today, Tony. If my listeners want to follow you more on Twitter or take a look at your company Complete Intelligence and the work you do, how did they do so?

 

TN: Sure, our company website is at completeintel.com on Twitter the company URL is or the company tag is @complete_intel. My personal twitter is @TonyNashNerd.

 

JB: Putting out a lot of good surveys and a lot of good stories, too, about the global trade in China as well.

 

TN: Thanks Jason. Thanks so much for your time.

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