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Macro Mondays. Level up your week. Oh yeah.
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Hello out there. Welcome to Real Vision. Welcome to Macro Mondays. My name is Miguel Rosenwald and together with my usual host Andres Dina, I'm trying going to try and unwrap the world of macro and geopolitics. And oh boy, we have a lot to talk about today. We're obviously going to covering the intense rumors and reports about an upcoming sort of deal on the straight of Hormuz and the Iran question in general. It's been taking up all attention over the weekend and driving markets here on Monday. So we're going to unwrap that. Then we're going to take a closer look at where we are in the Hormuz induced inflation wave. What to look out for, what to invest in. Particularly the one special thematic that you've been looking into, Andreas, over the past weeks that's been doing very well so far. So stay tuned towards the end of the show for more more on that. We also recently released our joint steno signals address. That's your usually your weekly editorial. It was this week as well, but I pitched in a little bit about this Iran situation. So if you want a bit more detail and a bit more in depth coverage, be sure to check out the pro tier with Real Vision. It's a little bit expensive but you get a lot of bang for the bug in there. So go in there and, and check that out for the full coverage. This is obviously our free show. We give you a sneak peek into our view and our way of thinking. But to get the full picture you need the pro package that also includes our Friday articles which is a portfolio update of the macro portfolio that we run within Real Vision. In addition to lots of shows insights and just an overall great community. So make sure to check that out. Andreas, before we jump into the straight of removes, I wanted to say it's becoming, it's getting really, really hot here in Denmark. We've had the first true summer weekend in my opinion and this always leads you to sending me this chart that makes the rounds that most Europeans die of summer heat than Americans die of guns. Obviously in Europe we're always making fun of, or perhaps not making fun of police criticizing the US gun policy. But just look at this. How many Europeans die of heat waves each year which is almost a non existent phenomenon in the US and the reason is obviously air conditioning. How's it going in your loft, Andreas? It's, it's, it's of an older date
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as well, the reason being air condition or rather the lack of Air condition.
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Yeah, yeah, that's true.
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So a couple of things. Mikkel, do you notice something? I've shaved for the first time.
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That's the sign of the summer as well. Me too.
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But even you've forgotten what we promised our audience here. I wouldn't shave until we got a deal around the Strait of a Moose. I was so sure that we got a deal on Saturday that I decided to shave because I was, I was tired of carrying that big beard over the hot summer here. So yeah, I've probably jinxed it again. Let me just put it like that, Michael. So I'll allow you to unpack what's ongoing in Iran, because I probably should refrain from saying anything.
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Absolutely. Okay, let's dive into that, Andreas. But before that, remember that just like with Andreas spirit, our show and our recommendations are sometimes, sometimes maybe good, sometimes maybe shit. Absolutely. Okay, Andreas, let's jump into it because I feel like in some sorts we've been here before. Almost every weekend we get new dose of opium. It's tilting a little bit earlier. It used to be Monday morning, then it came out on Sundays. This week it was Saturday. Perhaps it was coinciding so that Donald Trump didn't have to go to his son's wedding. I believe that that was a Saturday evening, but there was a lot of activity and that, that, that, that suggested this, this is the real deal to some extent that a lot of politicians were raised to the situation room discussions were had. And you know what, what, what struck me the most over the weekend, Andreas, was obviously the announcement that we were getting close to memorandum of understanding as usual through Barack Ravid of Axios. For some reason he's the go to guy for this and talks directly with the President. So obviously he, he, he has the best firsthand source you can get. This obviously came on top of a week of heavy talks with between the US and their Middle Eastern counterparts. First and foremost, we heard reports heated and emotional phone call with Benjamin Netanyahu. Netanyahu has been trying to over the past few weeks to essentially pitch the idea of restarting the war to Donald Trump finish the job. That narrative. Donald Trump hasn't bought it this time. I think Netanyahu has lost a lot of leverage because Donald Trump hasn't been satisfied with the results of his previous pitch, which was the entire war against Iran. So that left the US in a position where they now had to consider do we take the peace deal or not. And I think what happened on Saturday, I don't know. But I think Andreas, that Donald Trump tried to test the waters a little bit. I called it a trial balloon. That's probably the best word I have for it, that he tried to leak out that, yes, we have a deal now, it's essentially on Iranian terms. How's that going to fly? And you had a very, very heavy response from the hawk wing of the Republican Party, Lindsey Graham, guys like Roger Wicker here pushing back, very, very tough, very, very heavily against ending the conflict on Iranian terms. My reading is that this caused Donald Trump to pause a little bit, maybe push back a little bit against the Iranians trying to get slightly better terms. Today we had this monster of a post and if you guys don't want to read it, I understand that, I know you don't address it's too long for you, but essentially the TLDR of this is that Donald Trump is now trying to couple these negotiations, Abraham Accords. So he is, which would be a fantastic result, trying to build Iran into the future security scaffolding of the Middle east, to put it like that. So it's a little bit unclear where the negotiations are right now. I think the reports we're getting are more hopeful, suggest a shorter timeline than what we've been looking at before. But are we going to get a deal this week? I simply don't know, Andreas. It's very, very hard to tell.
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At least it's not ADHD friendly communication that post there.
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Absolutely not.
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You could at least have split it up into a few paragraphs for us
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or you could have had an AI summary button in the button. That's always a great sign that you've written too long. And you and I know all about that, Andreas. We like to post long articles. No killing aside. Andreas, how's the market reaction been today? And do you think it's warranted from what we know?
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So to begin with, I'm actually a little surprised that the market is reacting as much as it is. I mean, we have very strong equity markets. We have oil down between 5 and 6%. In the one month future, we'll probably open with an even bigger drop in the dated oil once we get full confirmation of that. And if you look at interest rates, they're open here in Europe for once we're actually working here while the Americans are off. We're talking, you know, 10, 12 basis points down on the back of something that. And I mean, maybe we're moving towards something, but we simply don't have the confirmation here. We'll have to admit to that.
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Right. So no oil is leaving the straight address. The, the no fundamental, tangible news there.
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Yeah, so. So, Miko, again, I'm, you know, I've actually spent quite some time today trying to figure out what's going on in the Strait of a Moose because, you know, these are the con, you know, the confirmed numbers from Bloomberg and Kepler. So, you know, they typically, they typically want to be fully sure before they pass on the news of vessels leaving the Strait. But we have news from the Iranian side of them letting vessels through. So maybe they've let ships through via some sort of sneaky passage very close to Iranian territorial waters or something, but at least we cannot see it in any Western confirmed data. Let me just put it like that. So it's basically rumors for now that the Iranians have let vessels through. I honestly don't buy it, but we'll have to see. We haven't spent our Memorial Monday watching ships via webcam down there, to be honest. In any case, Mikael, you're right. I mean, we basically need some confirmation that we see a positive rate of change here in the Strait of Hormuz. I think that's essentially the clue of the next days. Because if the Iranians are truly close to accepting some terms, this would probably be the first signs that they're letting, that they're trying to show some goodwill for it to happen, if you know what I mean. And as far as I can judge, we don't really have that goodwill. But they're at least trying to communicate the goodwill now via the FRA as their official state.
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Absolutely. I'm still a little worried that we are going to see the usual sort of weekly slide towards misanthropy throughout the week, lost hope during the week that nothing really happens here. But let's see, at least we have some vibes that things are moving towards a deal. I think Trump tried to test the borders and that obviously signals that he's trying to test what deal can actually land here. What can he, I don't want to say, get away with because he can get away with whatever he wants, but what's going to be viewed as a decent deal that he can sell as a victory to, to his population or to the electorate here?
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A few things. Miguel, I, I promise not to say anything, but I, I still want to say something on this. It seems to me that a few of the hawks were left out of the Situation Room on purpose on Saturday. Right. Which may be a signal in itself. Right. That. That he's maybe not as willing to listen to BP and Lindsey Graham as he A couple of months ago. So I've personally held the view that Trump is one of the very few people with a shorter attention span than me, which is basically what we see now in many ways that he's keen on ending something here. It takes too long. I've had that view geopolitically on Trump for most of his presidency here that he's so eager on getting things done that if you cannot get a good deal within a couple of months. Next topic. And then we can return to it again if we get some chance of, of altering the terms, whatever. Right. But one thing at a time. Get something done, move on. That's how a business leader works and operates. Right.
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So yeah, the only problem was the straight of Hormuz because everything else he could have, you could have just left. You say, okay, we, we have some long term working group discussion forum on nuclear disarmament, whatever. Nobody would have cared really. And nobody really cared when he, when, when he tore up the Obama deal back in 2016 or 2018, he pulled it over. So he could have done that. Just accept the straight up Hormuz thing and let's see what they get out of it. I don't think they're going to get a much better deal than Obama got in 15, but I'll cover that in my piece later this week because it's not truly relevant to markets. Whether this is a good deal or not. What's relevant to market is that this will de risk the situation in, in the Middle East a lot. If this deal happens, it will make the Israelis angry, but again, not too big of a deal for markets. Hopefully it will ease the pressure on global supply chains and hopefully it will ease the pressure on inflation. And that's where I want it to be heading, Andreas, because we've talked a lot about inflation for the past few weeks. You unpacked a bit more today looking at the US consumer side of things. So again, the big question here, Andreas, is if we get a solution here, does that evaporate the inflation situation or is that enough or what's your take on.
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I honestly think it will. So let's start on page 10, Mikkel, because I'm actually usually not in favor of using these inflation X this and this and that charts because obviously inflation is inflation. Right. If you measure it somewhere in the economy, you obviously have to include that. But still, if you exclude stuff that is basically derived from the straight of moves, food and energy to a large extent. Right. Then I cannot really see that inflation pick up, to be honest. We had some technicalities around the shelter component in the last inflation report. So if you set those three things aside, we're basically moving sideways, maybe even slide it down. And therefore Kevin Warsh is now officially the new chairman. I think it's very underappreciated that he takes the opportunity in June to talk about his view on productivity, his view on technology being disinflationary and all of that. And he's got a pretty decent excuse here if we actually have an off ramp for this whole energy situation. Maybe, and I'm speculating now, Warsh has told Trump that, I mean, from what we've seen over the past week, even Trump's loyal lieutenants within the committee have started sounding the alarm around inflation. So Kevin Walsh is under a massive pressure ahead of that meeting in June. So maybe Walsh has told him, you simply need to provide me with some sort of leeway to talk about inflation in benign terms in June. Otherwise I'll struggle to come across with a decently benign message to markets. If there is an off ramp ahead of that meeting, it will probably be a meeting where they decide upon a wait and see approach, where, okay, let's see whether inflation comes down once this is resolved. And therefore we'll just have a neutral stance to everything until we know, and that's been my best guess around central banks for a while, that we're still in this situation where energy markets are actually pretty balanced due to some of the extraordinary measures taken by both China and the US and it has sort of bought central banks a few months of time because they're not super keen on hiking into this. But we all know that it's a lot more comfortable to hike into a demand driven inflation picture rather than a supply driven demand, sorry, inflation picture. And therefore, as long as you give them something to work with, if you know what I mean, they'll probably kick the can down the road and tell markets that, sure, we're all able to see the inflation now, but it's still a very isolated inflation picture. And if we can remove the root cause, which is basically the straight of a move still, it may be good enough for us to wait and see. I'm probably past the point where I think it's feasible to project rate cuts into the second half of the year, because what typically happens when you see a big spike in inflation driven by energy and other necessities is that you get second order effects alongside or further down the supply chain after a couple of quarters at the latest. So I think what will happen during the second half of the year is that we'll start to see some consumer inflation in other good categories. But if you get that inflation alongside energy coming down, you have two factors neutralizing each other, if you know what I mean. And therefore my best guess is still that the inflation report for May that is released mid June will be the peak. But it obviously depends on whether we solve the trade of a move over the next eight weeks. Because we can keep the energy market in balance for eight weeks roughly here, from here with the extraordinary measures taken by the US and China. But we cannot keep the energy market in balance through the year unless there is some movement in the strait.
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Interesting address. Okay, and looking into that inflation picture, you posted a great chart on the running beta with the CPI of various sectors here. Let's get it on the screen here. Is this the way to play your expected peak in inflation? And what's the timing in these sectors?
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Okay, so to begin with, just to explain the chart here, if you have a sector with a positive beta to the CPI basically means that the sector performs in equity markets when the inflation is rising and vice versa with, with those with a negative number. So you have energy at the very top of the leaderboard and you typically have stuff like technology towards the very bottom of the leaderboard and everything related to the consumer. Basically, this time around, we've had energy and technology working well in tandem, which is very odd, but it's been 100% spot on our thesis. And why did we get that thesis right? Well, I have one rule of thumb when it comes to investing. Always buy the stuff that is causing the inflation. So in this case, we basically have three things that are truly inflationary in the basket right now. Energy, food, fertilizers, and AI hardware. I want to show a chart on page 14 on how unusual it is to see hardware being such an inflationary force. To give you. Just before we get to the details of this chart, you can just pull it down for a second before I show it. You and I know very well actually when we met each other to begin with, you worked in a TV store. It's long, long, long while ago, but I remember that. And it's one of the things that you've always told me. Never expect inflation. In electronics, the price simply goes down in nominal terms, which is true. I mean, look at your flat screen or your laptop or whatever. You probably pay less in nominal dollars than you did a decade or two ago. So it is incredibly rare that hardware is a source of inflation, right? To some extent that's also driven by what's called hedonic changes to the inflation basket. And allow me to unpack that for a second. For example, the nominal price of an iPhone goes up. Not by a lot, but it goes up. But typically you get more and more memory space. For example, for the same dollar, you get a better and better and better camera for the same dollar. And you make quality adjustments for that in the CPI basket. So even though it's normally more expensive, you get more space, you get better camera, et cetera, for the same dollar. And therefore it is seen as disinflation. So even the few electronics going up in price are still seen as disinflationary. I have the odd view now that hardware will look bad for a couple of reasons. The actual price is going up now. You'll start seeing that soon buying a desktop computer or a laptop computer, et cetera, because of the Ramageddon basically, right? The price of memory has gone up mass. The price of other semiconductors has gone up massively. That's point number one. Point number two, given the price of memory, I could guarantee you that Apple will not release an iPhone 21 or whatever number we're at now with more memory at the same price as they typically do. That's what they've done for a decade or two, and that's why it's seen as disinflation in the basket. They would probably. If you see an iPhone that is unchanged in nominal terms price wise, it is probably because they have 64 gigabyte in there instead of 124. So they do the opposite, what they've done for a couple of decades and that is by these quality adjustments, also an inflation factor. So the one place where I can actually see a lot of inflation coming is in the electronics and goods baskets, you know, related to hardware. And it is incredibly out of the ordinary to see that. Just look at page 14. Now I'm ready to talk about it. This is a chart that was sort of democratized by Joe Weissenthal, just to quote the source here, the host of odd lots. And it basically shows the price of memory storage in hardware terms in the PPI in red and in the CPI pces on consumer prices in dotted blue. And as you can see, we've basically trended sideways for as long as you measure this right or maybe even slightly down. Look at the left hand axis here. I mean, often we have observations below zero and now we're talking, you know, 20% in the year in some cases. If you look specifically at the PPI related to, to printed circuit assemblies, loaded ports and modules, et cetera, but very related to the memory slash storage. Ramageddon, again, we're talking an increase of. Yeah, I don't know how many percent. It's 160% as far as I can see on the screen here. Right. So. And I even think this is underestimating it. So I mean, and we've never seen it before, never ever seen it before. So this is incredible. And this is the exact reason why all of the pundits, all of the portfolio managers that keep worrying that, okay, we get consumer inflation now that is typically bad for technology, they've completely missed this because why would you sell the exact stocks that pass on the costs to the consumers that is basically equal to the companies making money. So this, you know, I'm screaming at the microphone almost now, but this is the exact point we've gotten, right? We've looked at what is the root cause of the PPI inflation. It is was energy due to the strait of a moose, but it's hardware, so why not buy hardware, which has basically been our biggest bet this year. And that's why we've done well.
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And this is obviously part of the inflation drivers that will not turn around if we get a solution to Hermus.
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Yeah, yeah.
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So just turning back to this chart address, what's the play if you're right, that inflation peaks in June? It's obviously still hardware, I suppose. But when energy flips, where do you move?
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You probably move lower on this leaderboard. Right. Even though we still get some inflation on the good side, which I described in the second half of the year, this end consumer scarcity theme, where you get a lot of pricing power for those with secure supply chains in, in laptops and phones, etc. I really find that compelling. We've timed that entry magnificently. You need to buy the pro portfolio to see exactly the names we're in. But if you're buying a computer maker or a phone maker, I think you'll do well. But look at the supply chains and the pricing power there. Having said that, Michael,
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if you look
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beneath the surface of the current rally, right, it's very, very narrow that rally in equity markets, at least up until now. And we see a lot of the stocks related to broader consumption, not just consumption of anything related to hardware, basically down the drain. They look very weak in a historical context, especially given that the US business cycle is actually doing pretty well. And I guess it is fair, given that when you see a lot of consumer inflation in energy, for example, you extrapolate that forward and end up with the conclusion that, okay, given that a lot of purchasing power is now going to the energy space, we'll probably see less discretionary spending from the same consumers. The issue is on page 11 that we haven't really seen that despite a couple of nasty months related to your energy bill. I mean, we're not seeing more buying in discount shops relative to regular shops. And this is a seasonally adjusted spread between the two. It's a life tracker that I'm really proud of. And for example, we saw during COVID as you can see with the big slide here, that, okay, the inflation pressure got so immense that people started buying in discount shops. We saw the same impact in Europe. By the way, this is a US chart, but now you can barely see it on the chart. So the consumer is actually holding up incredibly well despite this big energy bill. So if we assume that the energy bill actually fades from here, I mean, even drops in nominal terms, remember that the dated oil price, so basically the spot oil price with actual physical delivery, fertilizer prices, helium gas prices, you name it. Everything related to Straight of the Moose is down since April and it's been trending down the energy price basically since early April. I mean, it's been a while now because energy markets are much better balanced and we could even get to an oversupplied market in six months from now or something like that if the Straight of loose functions again. So my point here is that given that consumer is already doing well and if you alleviate some of their concerns related to their gasoline bill and so on and so forth, I think you'll see some pretty decent discretionary spending numbers during the second half of the year. And what's in the discretionary spending bucket? Well, a couple of the big names, at least from an equity perspective, are Tesla and Amazon. I think both names are pretty decent here. But it of course also fits into the broader picture of everything related to luxury goods. You have quite a few decent luxury names in Europe worthwhile catching up to. So that's a theme that we're looking into now. I mean, I'll probably wait and see a little bit to see whether we get some more confirmation on the Strait of a Moose actually opening up. But if we get sequential progress in the Strait of a Moose, I'll buy luxury stocks. That's the logic I'm currently making.
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It's the beginner's portfolio here, Andreas. Disney, Amazon, Tesla and LVMH brand branch portfolio. You're we're looking at here. Very, very interesting address Anything particular you're watching this week? We have a couple of numbers coming out on Thursday on the US growth rate and the core pce. Anything that can drive markets or are we simply waiting for that deal in Iran?
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So I mean the PCE is obviously out with the lag to the CPI as per usual. What's always interesting related to the PCE is how the impacts from the PPI are different from the CPI report. Remember that the PCE report includes a couple of categories directly from the PPI because it basically measures inflation at the exact spending level. And one example of that I'll give you here is that if you're an employee in the us, a part of your health care bill will be paid by your employer. So the relevant categories in the healthcare sub index in the PC are made up by both CPI components and PPI components because in some cases it is actually the producer that pays on your behalf because you have an employer paying part of your bill. Right? So therefore I think the PCE will look nasty, very nasty. Also because of this hot PPI inflation report and therefore this whole alleviated inflation concern, et cetera. We at least need to see some good numbers from the straight of Hormuz to get rid of that nasty vibe on Thursday when the PC is out.
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Looking forward to that. Andreas. A bit of a hopeful tone here, but still very, very much in waiting mode on the Iran war.
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Mik I decided to wear a blood red T shirt today to ensure that I didn't jinx anything from a market perspective. So
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no green tints here, no absolute interest. Do follow our content on social media. Follow us on Real Vision for the absolute best coverage of both the Iran war and the world of macro, including our portfolio update this Friday. That's going to be really, really interesting. That's all we had for you this week. Another very interesting week in macro Geopolitics. Thanks you very much for joining interest. Thanks to everyone for tuning in, whether on real vision, YouTube X or wherever. We'll be back next week.