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New week, Big moves.
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You ready? Andreas on the data maker on the floor. Turn the headline into trade. You can know from yields to inflation, every chart, every trend. Get the story, get this set up. From the open to the end. They try to be as actionable and as honest as possible. But keep in mind that their predictions might be sometimes maybe good, sometimes maybe good. Sometimes maybe sometimes maybe.
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Summertime, it may be good. Summertime it may be.
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It's Macro Mondays. Big picture Clear play. Stock, bonds, fx, Crypto on the way. Get context. Strategy right now on your screen. Macro Mondays. Level up your week.
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Hello out there. Welcome to Real Vision. Welcome to Macro Mondays. My name is Mikael Rustenwalden and as usual, I'm joined by my co host, Andreas. Welcome to the show, Andreas.
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Thanks, Mikkel.
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It's been a great weekend for me. I know for you, Andreas, it's been really, really hot here in Copenhagen and we've got a red hot week as well to discuss and unwrap here in Macro Mondays. We're going to be talking about finally some movement in Hormuz, some actual news, some kinetic action status on the expected inflation wave, and then a bit of a look into the much debated AI bubble. Are we there? What did we learn from all the reports from last week? But before we get started, remember that this is our free show at Real Vision. We publish three articles at least every week on the pro tier and one on the alpha tier as well. So you can catch that with a paid subscription to Real Vision. One of those reports include our portfolio update every Friday where you get access to our Macro portfolio with the pros here. So very much recommend that before we get started with the show, let's also get past our usual little disclaimer here because although our portfolio has been doing very, very well for the month of April here, Andreas, we have to remember people that our suggestions might be.
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Summertime is maybe good. Summertime it may be shit.
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Absolutely. There we go. Andreas, it was quite a week last week. What was your sort of main vibe, main takeaway? Jay Powell, one of the big Max 7 reports. What filled up your mind over the weekend, Andreas?
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Now I managed to throw some soda at myself here. I have a good day here. I think last week's highlight was, was probably the Microsoft Quarterly Report for me. I was a little bit scared that we would see some hiccups related to their partnership with OpenAI. But they still report a growing backlog, so contractual backlog with OpenAI, roughly accounting for, say, between friends, $300 billion. So it's a it's a pretty big deal in many ways, but it's also very relevant for the whole discussion around whether we have an AI bubble or not, whether Microsoft is scared of that backlog or not. And for now it seems like they're not writing this off. And I think that's very important. I looked at the, you know, the three big hyperscaler quarterly reports and basically conclude that we're still accelerating, we're accelerating in terms of CapEx, we're accelerating even more in terms of the backlog, which is a very important point, that the backlog is actually growing faster than the capex. I think that's a very underreported fact during this whole build out and, well, NASDAQ is doing well. So for now I think we can part the bubble discussion another while. You know, it may resurface. It will resurface, I'm pretty sure, but it will not fully resurface until we have an alteration of the trend within the credit space. And I don't see that despite the war ongoing in Iran yet.
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Very interesting. Andreas, what stood out to you particularly? You just mentioned Microsoft here, but a lot of talk also about the meta. Is that enough to keep Meta in the talk for these mega. I know you brought along this chart in your report on Friday as well.
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Yeah, I guess Meta is a separate discussion in many ways. Meta also increased their guidance on CapEx, but in contrast to Amazon, Microsoft and Alphabet, they don't really have a backlog that supports the kind of capex that they're undertaking. They're trying to paint the picture that the average price of their ads has increased due to AI. And I guess there is some logic to that, but I just don't think it passes an empirical test, to be honest, because assuming that the ads were improved due to AI during the past quarter, you'd probably expect Meta AI to be a relevant player in the consumer AI space, which they're not really. I mean, they're growing, but from an incredibly low base. So the last time I had a look at the number of minutes spent by consumers on various AI outlets, Meta AI was basically irrelevant. So I think it's more storytelling than actual AI facts, if you know what I mean by now. And that's why I remain unconvinced of the CAPEX spent by by meta. They're obviously trying to develop this super intelligence, but it seems a lot less tangible what they're building for than what Microsoft is building for, what Amazon is building for, because they have an actual backlog that they can use to defend this with.
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What are the pitfalls for this AI wave? Andreas, some people talking about OpenAI may have some issues with keeping up the growth of their platform. Or is it really interest rates that could topple this capex boom?
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I don't think that we'll see a reversal of the AI trend until central banks decide to pull the rock from under the credit cycle. It is very important for all capex cycles, whether the price of money is low or high. And for now, especially since inflation is growing as we speak, more or less, while interest rate remain pretty anchored in the front end, the real interest rate is actually declining, especially when you look at it in the very front end of the curve. And that's not a bad scenario for AI, for example. So it was essentially what happened in year 2000 as well. It was what happened in 2008. We need Central banks, and I say central banks here across the globe to pull the rug from under the credit cycle via higher price on money. Last week, both bank of England and the European Central bank basically kind of postpone the hiking talk. It's not that they're not admitting to the risk that they have to hike interest rates, say in Q3 or thereabout, but they're also watching this straight of a moose issue with a bit of patience now because it's a very obvious binary setup. Right? And yet you would look like a fool as a central bank precedent if you hiked interest rates two days prior to a peace deal or something like that. Right. So at least for now, they're treating it with the patience that the straight of Hormuz issue deserves. And I especially think that holds true for the Federal Reserve. We obviously have a new incoming Fed chair ahead of the next meeting. To sum up the Fed meeting last week, Jay Powell basically said, I'm not fucking leaving to phrase Jordan Belfort. And he also kind of hinted that Kevin Walsh job will likely be pretty difficult from June and onwards. And yeah,
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so. So this is the other meme that was, that was my takeaway from last week, that we ain't cutting shit, bro. I mean, do we have an outlook of a cutting season or. It's going to be a very, very tricky board for Kevin Walsh to navigate.
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I mean, you shouldn't, sorry, cut interest rates right now and they won't, in my opinion. The question is whether they'll just remain patient for a long time here to see what happens with the Strait of Hormuz. That's probably the most likely outcome. Also, given that you have one Part of the committee very aligned with Trump's administration and one part of the committee not aligned with it. So the very uniform, the very consensus driven Fed that we saw under Jay Powell is, is one for the history books now. And I think Kevin was, will have a very difficult time finding common ground.
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Okay, interest. Let's dive into Iran. We've already touched a little bit on it and we've had a few weeks of essentially a deadlock, both countries trying to outweigh one another. And then every Monday, we've usually gotten our dosage of Hopium and today was no exception. We actually got it last night. But still come for the Monday market open in the form of the Project Freedom. Apparently the US Is now willing to support commercial vessels going through the Strait of Hormuz, despite the Strait of Hormuz being officially closed by the Iranians. So let's begin. Maybe, Andreas, how did you gauge the market reaction from this? Are markets still in sort of mode of apathy or did you sense the, the hope that was the supposed conclusion from this?
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There was a little hope in futures. Overnight we had, say, a modestly positive risk asset development on the back of this announcement from Trump. And then I think it's roughly four hours ago, the Iranian state media suddenly announced that a US Warship was hit by two missiles. And then we had a spike in oil of say, four or five dollars a barrel until Axios reported, basically quoting a US Official, that it was not true. Then on top of it, we've seen the United Arab Emirates lamenting an attack on a vessel, I guess, sailing under United Arab Emirates flag. And by the time of speaking right now, we're sending live here a little bit past 10am Eastern. It's actually not crystal clear to me whether we have a good or bad development in the strait because, you know, the two counterparties of the conflict are delivering, you know, contrasting messages. But I, I'm of the view that it is a smart move to try and, and break the deadlock. So, so, so maybe let's focus on that because right now we, we cannot, you know, with any degree of conviction say that the, that strait is open live. But I think there's sequential progress again, if I'm allowed to use that phrase. So, Mikael, what do you make of it? Will this break the deadlock in your opinion?
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It depends on the Iranian reaction. I think what Donald Trump is trying to do here is call the bluff or to smoke out the Iranians by saying, okay, you're blockading the strait. Let's see if you're really blockading the strait. Let's try and get some ships shipped through. And of course, you know, trying to get US Naval vessels through or US Commercial vessels, they will probably be shooting in that. But third party, neutral country merchant vessels, the Iranians are supposed to stop them to, to either board them or sink them or shoot at them. Are they really going to do that? Trump is now putting that to the test and trying to call their bluff. So he's essentially trying to get third party commercial vessels to run the blockade by probably, we don't know the details of this, but probably by underwriting their insurance, guaranteeing for that and providing some sort of token military support. He's not going to be escorting them, he's not going to be pulling destroyers up and say, okay, now we take 10 ships in a convoy and get you through. So. So it is very, very unclear what's happening. And I have to say I'm still a little bit worried that this is just a dose of Monday Hopium, as I mentioned, but at least there's some hope. I think this could be a very shrewd move because it puts the pressure on Iran. If these ships actually try to run the blockade and Iran begins to either board them. I'm not really sure to what extent they could do that, but if they are firing at 10, 20 ships each day, that's something else. Now, I know people telling me on Twitter that Iran has been firing at ships for two months. Yes, that's true. But they haven't been firing at 10, 50, 100 ships per day. That's a whole different uptick and visual here. You already saw very, very strong remarks from UAE today on potential attacks and vessels. You might see even more of that if they begin attacking South African, Indonesian, Brazilian, Chinese vessels. That's a whole other visual. If we're talking great numbers each day, you then you're beginning to build the image and the narrative of Iran is the aggressor here. Iran is the party disrupting the flow of trade.
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And Miguel, I noticed the truth from Trump. Was it late yesterday where he called this a humanitarian gesture? Exactly. It's, of course, an important part of the messaging here and it is designed to make it difficult for Iran to interfere with it.
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Exactly. And this is also why I'm getting the feeling, just as I was with the counter blockade of Iranian oil exports. This is not something Pete Hex has thought about over a beer. This is actually well thought through. It's been well coordinated with the US Military. They tweeted right away supporting this. They've been tweeting all day to show that this is coordinated. It was planned. Then we'll have to see how well executed it is. But this is something else. It's on a whole different level. And this gives me confidence that this could actually have some effect, could maybe push the Iranians to the negotiation table, which is, at the end of the day, is, is, is the, is the, the. The goal here? But let's see. Andreas, we're. I think we're allowed a little bit of hope today. It is Monday. It is hope day. And then let's see if we're. If that hope is squashed throughout the week as we are becoming used to.
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Can, can I say, say one thing about this? M. And I also see that we've brought along a few charts on it. This whole idea of labeling this a humanitarian gesture is, I think, first of all, smart by Trump and his administration. But it's also very telling since it is basically some of the poorest countries on earth that are suffering the most from this strait of a moose crisis currently. And I've lost count of the number of research papers, both from banks, but also from pretty serious financial media outlets, telling me that we'll have a shortage of energy to some extent, food, et cetera, in the west this summer and into the second half of the year. I consider that utter nonsense. And the most recent piece of empirical evidence we had on something that looks just barely reminiscent of what's going on right now is the crisis of 2022, probably the biggest NAT gas crisis in history, where a country like Germany basically lost access to all of its NAT gas more or less overnight. Did that lead to a shortage of NAT gas in Germany? Well, sure, but not really, because instead Europe outbid Pakistan, Bangladesh, Indonesia, et cetera, for the liquid natural gas that was floating around on sea. So what's the moral of that little story? Well, the Western consumer is obviously in a better position to deal with a higher price of food or energy than the consumer in Bangladesh or in Pakistan or, yeah, you name it, some of the surrounding countries using that same energy and same food supply. And what typically happens when there is a global shortage, which is correct, there is a global shortage of some oil products, fertilizer, and therefore ultimately also food, is that flows will be redirected from EM countries to DiEM countries. I will bet, whatever, that we will not face food shortages in the West. It's not going to happen. We'll outbid countries poorer than ourselves. Which is the sad but cynical truth.
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Yeah, And I mean, Andreas, obviously, I mean the global oil consumption is 100 million barrels per day. We're missing, let's say 10 million barrels we're missing per day. Who's going to drop their consumption to meet that? The ones who are least able to pay. I mean it's as simple as that. It's cynical but it's as simple as that. If we were lacking 70 million barrels per day, then sure we would have problems in Europe because us would probably be at the top of the picking order also because they're producing it themselves. But I mean then Europe could be in trouble. But I mean there is enough oil for Europe. It's just a matter of do we want to pay what it takes to get it ahead of others. And the answer is obviously yes, especially at these rates. And we're seeing that, I mean, yeah, okay, gas prices are higher, people are still filling up their trucks, people still flying around Europe. We may see some, some adjustment, we may see some adaptation of this. But, but, but, but in the broad scheme of these of things, no, we might have an issue on jet fuel very, very specifically. But, but, but in the broadest terms of things, especially when it comes to food. No, I agree with you completely Andreas. This doesn't mean that this is, isn't an issue in em countries. It's a huge issue in Indonesia and other countries. Perhaps not to the point of social unrest yet, but we could get there over the summer.
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Yeah. Remember how for example the Arab Spring and such events basically unfolded on the back of similar crises in food and energy space. So that's an important conclusion as well. But maybe let's show this sharp to page 10 miggle because I think that's, I've used this chart a lot over the past couple of weeks to try and give people a feeling of the leads and lacks of an energy input shock that we've seen. And as I've said, the supply will not be meaningfully impacted in the West. Of course there will be pockets. We've seen diesel shortages in a few places in Australia. We see some jet fuel issues in Europe, et cetera, but usually be able to pay ourselves out of the mess, to be honest. And therefore the true impact on the western business cycle is the imported impact from the increasing price pressures globally. We've outsourced most of all manufacturing. I know Trump is trying to reverse that trend, but we've done that on a trend basis, say three, four decades in a row. Meaning that, you know, the very oil consuming manufacturing is no longer particularly present in The West. So typically what happens in a shortage like now is that you'll start to see some issues locally in Vietnam, China and some of the bigger manufacturing hubs globally, you'll start to see price increases on the back of these shortages and you'll slowly but surely see that price impact being imported to the West. And that is when central banks start to discuss internally, okay, do we have to do something about this? Do we need to increase the price of credit and money? The exact discussion we had to begin with on AI and the credit cycle, and that is when you should worry in the west, this nonsense that we won't have food this summer is. Yeah. I cannot stress how wrong it is. But in 12, 15 months from now, sure, this could be an issue for the business cycle. But due to the imported impact, the response from central banks and the subsequent impact on the credit cycle, that's how
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it works so very much it's a delayed effect and at that point probably watered out as an effect by other, at least for stock markets, at least for equities here. Andres. Okay, dress, let's look a little bit ahead because I feel like one very, very overlooked macro theme right now is the upcoming Trump Xi meeting. We don't know exactly if it's going to take place, where, how, when, what, but it is beginning to fill up in my head and you asked me to bring along this chart and rest the global trade choke points. Great little chart from the Economist here. So I'm beginning to worry. I'm not saying that the Chinese are going to shut off the Indonesian straits, but there are a lot of straits in, in, in, in place here. Andreas? What? Do you have any. Do you think we can get this crisis done by then? Do you think what will be the market impact if we go into that summit and get a very, very hostile reaction from the Chinese?
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So a couple of things when I look at this chart from the Economist. First of all, if you look at straight of the, straight of the moves top left of the panel here, the issue is obviously that there is no alternative. When you look at the Indonesian straits, well, you can find alternatives at least.
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Right.
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So it makes it less, you know.
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Yeah.
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Less dramatic in that sense and ultimate by the end of the day. The Strait of Malacca has been discussed a lot as well. The Singaporean authorities have explicitly mentioned that if we're going to see toll being implemented in the Strait of Hormuz, it may be the event that suddenly leads to a whole series of events in maritime law and the way that international organizations have typically safeguarded the Free Passage and all of that. And that was I, which is something I haven't thought about for a long time that I was, you know, I, I almost, and now part of my friendship, I almost felt horny when I saw that Danish Straits are actually placed right alongside the straight moves up there. Maybe we should chip in with a bit of toll on, on, on our straits as well here to, to, to, to get to the table internationally because we're, we're not really present at the moment.
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Kidding aside, Michael, I don' updated since the 1700s, but there is this thing called the Keel Canal that the Germans built in the 19th century to, to get across. But anyway, that's a side. There are alternatives.
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There are alternatives. Having said that, Miguel, this, this upcoming summit with XI is relevant on, on a range of parameters. First of all, they've already, I think it was a few weeks ago, weaponized the supply chain of solar panels. Now that is on top of the weaponization of this supply chain of rare Earths that we saw last year. And at least as of now, we're still in this 12 month ceasefire on rare Earth supply from China. Both solar and rare Earths are very important to the Western supply chain. Solar probably more important to Europe than the US at least for now. But it just goes to show again that for example, in Europe we talk about, okay, we need to get rid of our dependence on the Middle east by implementing solar, but that's just introducing a new dependency. And that is why this meeting is basically about dependencies by the end of the day. And I hold a lot of sympathy for the overall strategic view held by the Trump administration that the west needs to take the independence back in many of these supply chains. And I think at least beneath the hood, one of the key reasons why we're stuck in this situation in Iran, why the US was so adamant on overthrowing Nicolas Maduro in Venezuela, is obviously to get on top of some of the oil supply chains to have something to negotiate with China with.
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Absolutely. It's going to be very, very much in focus on Real Vision over the coming weeks. If we even get the summit. It might be delayed once more, but, but let's hope we finally have some progress in Hermus and that we finally can get some, some clarity on the, on the trading. That's all we had for you this week. It's going to be a very, very interesting week in Global macro. As usual, make sure to keep on top of all our research at Real Vision on the various tiers and if nothing else. Check back with us next Monday. See you out there.