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- [00:00]
A
Welcome back to the Rundown Interview edition. Today we are Talking to Mike McGlone, senior commodities analyst for Bloomberg Intelligence. Mike's been studying commodity markets for decades. So in today's conversation we talked about the oil market and the impact the Strait of Hormuz is having on oil prices. He also explained why he thinks that prices will head lower soon and why this energy shock could trigger a big stock market sell off. Mike has a lot of thoughts and an interesting perspective, so hope you guys enjoy this conversation. Mike Mlone, welcome to the Rundown.
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B
Oh, hello Z. Thanks for having me.
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A
I want to first start with the overview. Let's talk about the oil. Oil markets first, right? Oil up, you know, it just change, it just keeps going up. Every time I press refresh, it's up what, 25% since the start of the war. Over the weekend, Brent and WTI crude oil are trading north of $90 now, $90 a barrel. So that's a pretty astonishing move in a week, right? I think the biggest move we've seen since 2020. What is your initial reaction when you see a move like that? Were you surprised to see it jump so high or did you expect it to go even higher?
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B
Not surprised to see it jump so high. I initially did not think the straight would be close, so that's what surprised me. So this is a stopping out of shorts and that to me is probably the sign of a key peak. So I'm always looking for. It's not so much what I think of what happens, what I expect to mean for the future. And so as we record on Friday, March 6, the strait is closed. Obviously the war is gearing up and, and Iran has been since attacked 12 countries or so. But this is a tremendous opportunity, I think, in markets. First of all, I think what this is going to do is put a significant enduring peak in crude oil similar to when Russia invaded Ukraine in 2022. Crude oil peaked at 130 and similar to the peak in 2008 at 145. I have to mention that because today what you hear in the tape a lot, you have to be careful of this sensational media. My job as a strategist at Bloomberg is to point out this, this is what it means for markets. This is where it's going to go. And here's why. The average price of gasoline in this country has jumped above 3. Big deal. Why? Because that's the same price. It's first traded in Q1 2008. So we're talking almost 20 years of the same price now. 2008, when prices jumped above $4 a gallon, I was very bearish. I was just waiting for that recession to start. That was my signal to me this is part of kicking in the signal that this recession the US is going to kick in the bottom line, the macro. Think about everything in terms of energy and crude oils. The price of WTI we see as we speak is $91 a barrel. Now it's up 60% on the year in January. On January 28th, the front natural gas future was up 100% on the year and now it's down 15% in the year. Let's talk with make a prediction right now. If I'm wrong, I won't it by the end of the year, I think the price of gas of crude oil in this country will be down on the year. That means below 50. So you can look out to that. That's the front contract. Now the front contract always gets squeezed recovering shorts. You look to the back. So DEC is the number one traded contract in futures. Usually it trades around $68 a barrel.
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A
Can you explain what that means?
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B
December. So that the future. Yeah. So I apologize for that. I'm a pits guy and you know we use that Pitt.
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A
No, all good. I want to learn from you.
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B
Pitt trading nomenclature. Yeah. And I remember the east was like this in the pits, the symbol. So the December contract, which expires right at the end of November, that's significant because guess what's the front contract when we went through the midterms? December.
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A
That's right.
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B
And what's Mr. Trump's motivation here? So we have to put all the iterations in places. Let's look at two. So I fully expect it to be lower partly because there's one key factor that's here that's happening in terms of all these themes in the past. The US is the largest energy producer on the planet and a net exporter. That's an oxymoron compared to the past of crude oil and natural gas significantly. So in increasing the key question you have to ask yourself is what's the type of pump in price going to do for that supply versus demand in the U.S. so this is obviously U.S. centric right now. But the big the key thing is the producers who are producing in the US in the Western Hemisphere, which is from Canada to Argentina, which is now the price maker in crude oil, will be the prudent thing to do when prices pump up is to sell little forward, hedge your production and then bring on that supply. That's what's happening right now. So this is going to just increase that trend. I expect the price prices to be plunging by the end of this year. And one key fact we have to consider is the leader of Like Mr. Trump, the world's largest energy producer and crude oil net exporter and natural gas exporter wants lower energy prices. Right. He's going to get it. And obviously we're seeing some of the methods now. Let's not talk about the methods. I have to talk about what it means for markets since this has started and the Russians invasion of Ukraine and everything that pumped up prices. But since that started, the anti American governments have fallen in Syria, Venezuela, Iran and Mr. Trump says Cuba's next see what's happening there. Russia is horribly losing this war. Four years now, China's getting on the back step and Mr. Trump's going to get what he wants. So here's the iteration. We get to the midterms and the war has gone poorly. What does that mean? Republicans are getting hammered and Mr. Trump's legacy will probably be ruined for history. What's the other iteration? War goes fine, we're done. The US Just used more and more lethal weapons to take out an enemy and energy prices have collapsed and everything's in. Mr. Trump's legacy might have been improved. So to me that's the second iteration is probably going to happen because as a leader like him, you don't make a decision like this slightly unless you know you have the complete upper hand. Okay, so that's where we stand now for markets. I think crude oil is going to fall. I think the bottom line to remember here is we're seeing significant volatility in and very significant volatility in precious metals. It's very rare for that kind of volatility not to trickle up to the stock market. And the key fact I like to point out is we have the US stock market cap to GDP about 100 year high and 180 day volatility on S&P 500 and Nasdaq is running near a 10 year low. My base case for this year is that volatility from all the other markets is going to triple up to the stock market, maybe mean a pressure on stock market prices, which means post inflation deflation. I'll explain what that means. Every time things go up a lot, we pump a lot of money into the system and prices go up a lot. We always get a hangover. Now China's doing that. Now China. I'll end with this. The 10 year note bond yield in China is 1.8% in the U.S. the 10 year note bond yield as we speak is 4.13%. There's severe deflationary forces in the world's largest exporter of deflation and the second largest economy. And I fully expect to trickle over to the rest of the world.
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A
You hit us with a lot there Mike. So I'm trying to process everything. I guess what I first heard is that despite the disruption in oil supplies in the Middle east, it looks you predict that U.S. oil producers will able to. Will come in and make up for that. Make up for that disruption.
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B
Well that'll help not so much make up for it because it'll be all recycling. Unless there's a major destruction of the ability to create supply. That means at the well pump. I mean refineries are a different story because if you take out a refinery that means less demand for crude. We're talking about crude right now. That's another story. If you want to talk about things like gasoline and heating oil. But the underlying price of crude oil is going to is the key point is it just doesn't matter as much anymore. OPEC supply unfortunately, which all comes, most of it comes out of straight out Hormuz. And guess where it mostly goes. China. This is a major negative for China. Never the largest crude oil importer on the planet. They import around 11 barrels a day which has been flat for five years. And see the problem, it's starting to go down. And that's what us, the US used to import. And like 2008 now we're net export. Almost 4 million bills a day but not so much to make up for it. But when prices spike like this, what does it do for demand? Curtails it. What does it do for supply? Brings it back on in just a matter of time. But the key point is the price maker status on the whole planet is shifted over to the western hemisphere led by the US From Canada to Argentina all the way down. Venezuela in the middle probably next Guyana in there and Brazil in there. This is just enhancing their ability to bring out more supply. So give you an example what happened in 2022. We had the big spike in all commodities and we put in pretty significant peaks in crude oil and grains. One example is corn. And those markets still remain in severe bear markets. Why? Because they went up too much. Provided that incentive to bring on more supply. And we're still in the hangover from that. We have to probably get to what we call a low price cure. So for now this is a short term aberration if we wake up Monday in a straight of home use and when markets start close, start opening Monday and straight home use is still closed, that's still a problem for crude oil. But at some point I have a feeling a switch will flip. We'll have the straight open and realize $90 crude is too expensive. We'll probably go back to the historical price which is basically US break even cost. $55 a barrel is the US break even cost. The bottom line is when you have an excess supply, which we did before the war, typically have to get below that break even cost. I think most people get that. But right now this is all about a war and it's pretty significant one. And good example I like to bring out is I was, I remember this1 well 1979 I was a teenage gas jockey at a gas station in duh, south side of Chicago where we say dub bears, not dubbears. And we had to start pricing a gallon, gallon of gas price and gallon gasoline in half gallons because none of the analog pumps, they didn't even consider that it might go over a dollar a gallon. It did. And that's what's basically happened with US imports. I have a measure on the Bloomberg terminal. I love this metric. It's called US net imports of crude oil. It's negative because when they first created the index they never thought that we'd have be a net exporter.
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A
You mentioned something about the stock market not being very volatile. But when I look at the stock market this week, kind of brushed off the attacks, kind of ignored it essentially. And now with the oil prices, you know, jumping, that's when the stock market's kind of getting, getting, getting killed right now. So I, I wonder if like if it's, if that correlation is going to kind of dominate the markets for the next couple of weeks. Whereas like if the oil prices stay elevated, if markets take a dip and what does that do to everything? Because we know that Trump likes to watch the stock market.
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B
Oil prices stay elevated, everything is going down, all risk assets are going down. Oil is still the most significant commodity, industrial commodity on the planet. But $90 a barrel is not a big deal now 150 is 130.
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A
Does it get there?
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Well, I can't predict what's going to
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A
happen in the short term.
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Right, right, sure can get to in the short term, but that's not what matters. It's a long term that matters. What happens as I point out, is what will we be as we head towards the midterms, towards the end of the year. That's what's going to matter. In the meantime, the bottom line for me is we, we have virtually never seen this kind of volatility in energy and precious metals with such subdued volatility in the stock market. So I'll give you a key measure. 180 day volatility on the NASDAQ is 15%. That's the lowest since 2008. How long can we stay there? The number one lesson you learn trading options and volatility is always mean reverting. Now it could stay low for longer but it's very rare to stay this low when you have spiking volatility in energy and precious metals. To me that volatility is going to trickle over which is just a matter of time. But here's one key metric for you. You look at 20 or 30 day voltage, sure things are picking up. But you look at a longer term measure. That 180 day volatility measure on gold is 2.4 times the S&P 500. People call gold a safe haven. It's no longer a safe haven. Now it's a speculative asset.
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A
It's a meme stock.
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Well, but it's the highest in 20 years. 2006 that was a great time to buy gold. But this time it's probably a great time to sell gold. The point is that was a great then start selling stocks. The point is this was a pre warning before the invasion. Now we actually have the war and if it doesn't go well that's really bad. But I look at this as part of kicking in of the potential. What I've been waiting for is a bit of a global recession in the back of one key fact. The most you look at the most stretched market in history. That's the US stock market versus the rest of the world. That came back a little bit last year and certainly versus GDP highest in almost 100 years. I'm just expecting a little bit of reversion on that. And this could be part of that catalyst the invasion.
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A
So you think that all of this happening with the oil prices spiking and everything just kind of happening could just be a catalyst to a correction in the stock market because the stock market is elevated historically speaking.
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B
Well that's the key thing I want to change a little bit. We have been since 2008 there's only been two down years in S&P 500 total return 2018, 2022 that's bought the best. One of the best.
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A
22 was like a blip in the Radar like it was like a 10 minute recession.
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B
So people keep calling a correction. I'm predicting, I've been predicting this for way too long. I've been early. But this is a classic setup for an enduring bear market. Means prices don't make records, they go down S&P 500. Just imagine here, here's one quote for you. If we drop 10%, that's 20, almost 25% in GDP. That will be the most in history for a 10% correction. Okay, you can compare it to 1929, didn't matter. That was very similar to what happened in 1990, early 1989. In 1990 in Japan, you see the problem here. Stock market has to stay up. Yet things like cryptos led the way up have already collapsed. Volatility and precious metals have taken off. And there's this one key pillar holding the whole world from a normal recession. That's that U.S. stock market. I think it now has a worthy catalyst to kick in. Now we saw today unemployment was a little bit weak. Yeah, as expected, we had a bad winter. But the key thing is retail sales for the second month in a row, if you look at the, the annual retail sales, they're running negative versus cpi. That doesn't matter. So that's bad. But when you have the greatest wealth effect in history and retail sales are declining versus cpi, there's a problem.
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A
What about, you know I've, that's a very interesting perspective. I think a lot of people are just assuming that we're never going to get a recession again or any major drawdowns again. And one reason for that is because kind of how like the market dynamics have changed. I think the biggest thing is over the last 10 to 15 years there's this. Everyone just kind of automatically invests in the stock market every two weeks through their 401k and all that stuff. This passive investing movement has really taken off and it just kind of adds money to the stock market. No matter what's going on, you just 10% of your paycheck, 5% of your paycheck gets invested in the stock market boom. And that just provides more, more, more money going towards the market. And because of that that acts as a buffer from any major correction. I find that to be a very interesting perspective. Curious to get your take on that. Is that enough to prevent a 25, 30% correction that we've seen in the past?
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B
So the consensus is different this time and I reject that. I just look for triggers for normalization and the prices of risk assets. And I've been saying this for too long, I admit it. I've been wrong in that. But one thing I've been able to do is find decent alpha in cryptos. Cryptos gave us great alpha until last year and then great alpha in gold. What it did last year was good. It was the warning. When gold grabs alpha like it did last year, and it takes alpha from everything, most notably beta, the stock market, it's warning you. And now we're starting to kick into what's going to happen. And that is just a normal correction. It's the key thing that Benjamin Disraeli, former Prime Minister of UK pointed out is what we generally expect seldom occurs. So it's this thing as a strategist, when that's priced in. Priced in that we'll never have another recession or at least not have a 20% drawdown, the S&P 500, it stays down. That's a problem. So here's my prediction is we are on the cusp of the third 50% drawdown in the S&P 500 since the beginning of 2000. Now you think that's serious? Well, we've already had two since the beginning in 2000. And price is the more most expensive now than ever. And we're so dependent and we're, you know, just. It's the classic thing you're supposed to do as a strategist. When there's sound, you're supposed to be yelling. Yeah, I've been early on that. But yeah, just look for signals.
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A
Yeah. I mean, Mike, I gotta say we could, we could probably Talk for another 30 minutes. You're hitting you with a lot of stuff. I wanna, I can pick your brain for, for, for, you know, another 30 easily. But I'm gonna have to go back and digest all the information that you hit me with and I'll have, I'll have a lot more questions. I'm glad that I got. Got a chance to do this. You have a lot of wisdom and, and thoughts and hot takes, I gotta say, a lot of hot takes. Which is good, right? Because it's contrarian. It's not whatever everyone else is saying. So I'm looking forward to kind of digging into that stuff even more. I appreciate you kind of breaking down everything happening this week and hopefully we'll have you back on pretty soon to kind of do a, do a deeper dive on some of the stuff.
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B
Well, it's my pleasure being on because part of my job is 90% in. The job is coming up with profound research. That's a little different. And the fun part is being able to play show and tell with people like you. So thank you very much for having me. I'm looking forward to our next time.
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A
Of course. Thanks to. Thank you again. And hopefully next time it's not as intense of a week and we can try to chill out a little bit more.
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B
I fully expect that things will be less. More calm in the Iran war.
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A
Yeah, let's hope so. Thank you again, Mike.
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B
Thank you.
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A
Well, all right, guys. Hope you enjoyed that conversation with Mike McGlone. I gotta say, Mike has some contrarian takes that I can't say that I agree with them, but it's always great to hear different perspectives. Let me know what you guys thought about the conversation in the comments on Spotify and YouTube. And while you're at it, consider giving us a five star rating wherever you like. Listen to your podcast. All that engagement really does help us out and it helps other people find the show. Thank you guys so much for listening, watching and commenting. Shout out to Mike and Connor for all the work behind the scenes and we'll see you guys back here tomorrow.