Ep.46: The Omicron Impact & The Fed Turn Hawkish

So hello and welcome to episode 46 of the Market Maker podcast, where I'm joined by head of trading and co-founder Piers Curran. And to kick things off, a massive thank you. We have made it. We've passed, we've smashed through 100 5-star ratings on Apple Podcasts. We asked, you guys responded.

We're now at 108 Piers, I mean, that is, that is a destruction of that 100 barrier and marching, marching on. What a performance by listeners. I mean, what's the— what I mean, we need to set a new target here and they just smashed that one.

But you know what, look, we did this a month earlier than anticipated, so I'm going to put it out there, let's, let's shoot for 250. Oh, I mean, let's not mess around here. I'm not talking 50 clips here, I'm talking 250.

Let's up that. Let's, let's set up the size. I always— that reminds me of, uh, I remember back on the trading floor back in the day when you were trading well, you'd get called in for a review and then you'd get your size increased. You know, talking about the clip size there. You'd get your clip size increase, just meaning, well done, we now trust you to trade more. And it was absolutely inevitable that the day after you've had your size increased, you'd have a disaster. And because you're trading, like, let's say double what you're used to, a few losing trades, always the P&L is massive. And then the psychology comes in and the wheels would always come off. After the clip size has been raised. So another challenge to the listeners there. Can you deal with a bigger clip size?

That's the question. That's a challenge right there. And I'm not sure if you saw it, Piers, but on Spotify this week they released the year, the year wrapped. It's like a feature for the end of the year and it basically takes a user, uses analytics and creates like a 20-slide deck of like your stats. In a really fun, engaging way. And there was a whole ton of people that were messaging me and sharing on social of our podcast was top, ahead of the FT, ahead of the Wall Street Journal in terms of minutes clocked. Some people were clocking in 1,400 minutes listening to this, which is just amazing.

Can you listen to me and you for 1,400 minutes? That sounds like some kind of punishment.

But yeah, well, look, this, this was happening. True story. So yeah, I mean, again, honestly, just thank you to everyone. Um, you know, as I've said before, I'll say it again, I think of all the things that, that I do from a content perspective, podcasts are my favorite. So I'm just happy that people like to listen. Um, the micro career series as well, which we've still got a few more episodes to come. People have been very, um, well received in regards to that content as well. So yeah, just thank you. And look, we'll push on, um, and I'll see you at 2:50. But this week in review, what's been going on? So usual routine, quick overview. So Omicron has now spread globally, lots of still unanswered questions. We're going to tackle that as our first big kind of conversation piece. Then you've got the Fed pivoting in a more hawkish direction. Team Transitory throwing in the towel finally, as some might have seen. OPEC+ stuck to the plan despite the emergence of the virus. Perhaps a little sweet deal there behind closed doors from the US to get that over the line. But again, we're going to talk about that as our second major feature. Then you had the Dem-controlled US Senate last night passed a bill to fund the government. Through to mid-February. So it seems like they can only kick the can about 2 months down the line now rather than any longer than that. But they've done it again. And actually, I'd say I'm a little shocked that they got that deal done and didn't ruin everyone's Christmas and New Year's. I'm a little bit surprised by the fact that they've managed to get that over the line and avert the risk of another potential shutdown. Then the final things Unsurprisingly, I think US and Iran both sounded very pessimistic after resuming talks after that 5-month hiatus that they had after the Iranian election of an anti-Western hardliner as their president. I think just the fact that they're back to talking is a big step in itself. I don't think you could have expected any more than that. Turkish lira, yep, still going. We're now, we're now 14.

Wow, you asked me last week how high can it go.

Yep, so we're now at 14. Um, Erdoğan, he's not, he's not flinching under the pressure. Uh, Fitch last night downgraded the country to a negative outlook because of their policies at the moment. And then we've just had non-farm payrolls come out, uh, so obviously recording this on the 3rd of December, and so first First Friday of the month, latest payrolls came in at 210,000, quite a bit below the expected 550,000. Smallest monthly increase since December. So does this alter then this perception about the hawkish Fed pivot? We'll discuss in a moment, but let's kick it off with Omicron. That's the main thing. And a few different points here. I, I listened to a really great, uh, podcast from Morgan Stanley. During the, the week, and I wanted to just summarize a couple of key points to take away. And perhaps, Piers, you can comment on some of these as we go through. And they basically break this down into 3 key elements to look out for, for the here and now as far as the markets are concerned. Number 1 is transmissibility, number 2 vaccine escape, and number 3, a word I find incredibly hard to say, lethality. How lethal is the actual variant in itself? And this is all just trying to determine whether or not it has a different makeup to that of Delta and so forth. So just explaining the— this bit by bit through the three parts. Transmissibility. So South Africa has sequenced a number of recent COVID patients, and the vast majority of those have this new variant. Suggests it will overtake Delta But of course, there's always a but, it's a small size. It's just a tiny amount of people that has been sequenced so far, albeit it's, I think the number was 74% had Omicron over Delta. So it's overwhelming, but it's not a population sample. The one thing that MS pointed out, which I thought was quite interesting, and I don't know all the mechanics of how this works, but they were talking about a figure they look at is PCR testing. And a certain time of what they call deletion that you can pick up in the test has gone up basically from 5 to 50%, suggesting that the new variant then is very much dominant. And the PCR testing is much wider scale, so that's a better data point to look at considering where we're at at the moment, albeit the sequencing will pick up. Um, to, to give you an idea of timelines, they said that trying to figure out this whole how transmissible is it, it's about a 2-week process. You take the virus, you grow it, you get a sample of it, you then take blood of people who have recovered and who have been vaccinated, and you find out, out how much of the virus you kill. And it basically tells you how effective the serum from vaccinated or previously infected individuals are. Against the new variant. And so a lot of this is, is timing. We'll talk about mortality in a moment. That you can't actually tell for over a month.

Yeah.

Um, with this first part, transmissibility, it's still very early days. There's a lot of assumptions being made without really statistical supporting quality evidence at this point in time. Why are people concerned about vaccine evasion? So known mutations that they're saying so far are very similar to, to Beta. I think we briefly touched on this last week, and Beta was the original one that had— it wasn't very transmissible, but it was— it did have a much higher— in fact, it reduced vaccine effectiveness sixfold. Ah, the beta version. It just never really took off.

Yeah.

Now the problem that you've got now is the mutations that are happening in this particular variant in its early signs have evolved in such a way that it could be highly transmissible but also then carry the same properties as beta. And that's what's got people a little bit spooked about vaccine evasion. Potential. So this is where a lot of this is coming from. And to back this up, overnight there was a comment out of, uh, the NICD. I had never heard of them before today, but they're the South African National Institute of Communicable Diseases.

Okay.

And basically they had a study and it showed Omicron variant reinfection risk is 3 times greater than any of the prior COVID-19 variants as well. So it is looking like this is definitely something to monitor early doors and probably the swings in volatility. I mean, I was just looking at a stat for a newsletter that I'm going to put out at the weekend and the VIX highest level since January we hit on Wednesday. We've gone on a roller coaster this week. Stocks down, up, down. And everything in between. And then the final part, just to wrap it up, and I'll hand it over to you for your take, is lethality takes about 4 to 5 weeks to understand the underlying impact on mortality or hospitalizations. One of the things is you probably would have seen a chart, I'm sure, in the press. South African hospitalizations have been ticking up a little bit, but that's not necessarily a reflection of the current status of where we are, because that won't, that won't materialize in those figures for another month or so. Another thing, and I think a really important thing, is a lot of people will say, okay, let's say this is a really bad scenario, how economically damaging is it going to be? And a good point that MS make is, look, we're in a different situation now. We have other effective treatments, antibody therapies and oral therapies. While some antibody therapies won't necessarily be effective Some will, is what data is suggesting. And oral therapies give mechanisms that are delivered via a different action that basically would not be impacted by the mutations that exist. And so remember, when you take that oral one, I think it's the Merck one that got approved, this isn't about preventing you, it's not a replacement for an injection. It just increases your ability to, well, it decreases the likelihood of mortality. So it's for people who've already got the variant and it just helps them not to die, basically, right, in a rather crude way. But these exist and they obviously did not exist in March, April, May, June of 2020. Yeah, when we were in the very worst part.

The key thing about that in particular is about preventing that nightmare where the hospitals get overwhelmed and the ICU beds are full, because then you're in trouble.

So yeah, so the overall take here essentially is it definitely is a, it's a moving target at the moment. We need to wait for the updates, uh, even if it is significant, uh, the impact on vaccine efficacy, it shouldn't be as bad as what we saw in 2020, even in a, let's say, worst case, not base case scenario. Because base case, the markets seem relatively content to go with the flow at the moment. There's been fairly mild in terms of what's been deemed as the symptomatic issues. The final points are, it's worth noting President Biden, he had a speech last night and he outlined his winter COVID strategy, and people were getting a bit nervous about lockdowns and things like that. Europe's been very, uh, very much severe in some cases. Germany is the latest to stop unvaccinated people from basically doing anything. Um, US is a little different. Biden has said that the, the plan does not include shutdowns. I would suggest that obviously that can change very quickly. The New York mayor commented as well last night and has said we should assume there is a community spread of the new variant in New York City. And then later, later it was reported that New York has registered the most daily COVID-19 cases since January. And obviously this is— we've not even got into Christmas yet, and we're just probably coming off the back of Thanksgiving. Probably the Thanksgiving bump that you're likely to get out of more transmission effects through that period of last weekend haven't yet emerged, so Yes, there's a few moving parts here. How do you feel about where we're at at the moment and how people are perceiving the, the risk?

Yeah, we're in that— well, obviously we're still in that sort of, um, no man's land where the risk has materialized and yet we don't know enough about it to make any sound judgments on how big a risk that might be. So as you're saying, it takes weeks, and with that fatality rate can take weeks and weeks and months, like, even, right? So, um, and then there's so much conflict in terms of commentary about this. I mean, you listed out some of those kind of, I would say, the more negative ones and alarmist ones where, you know, oh, it's maybe the beta version, but in terms of evading the vaccines, but it's almost— it's also as transmissible as— it's like the worst nightmare, right? But then I heard one of the South African specialists saying that actually it looked— early signs are showing that it is a lot milder as a disease. Now they did slightly undo the validity of their own comment by then saying that actually that was one risk around that assessment is that all we've really got is we're judging that based on a quite a relatively young pool of people. So it was school kids and stuff. So obviously, the younger generations don't get affected by this disease as much. And so anyway, look, the point is that we don't know. And as we always talk about on this podcast, and everyone knows, uncertainty is the biggest force on markets, the biggest negative force on things like stocks. It's the not knowing that's the worst. So we're in that kind of phase at the moment. I mean, I'd say that, I don't know, okay, I think it was the head of the Moderna vaccine rollout, he was saying that he's worried that the current vaccines aren't gonna be able to do the job, but then on the other hand, these companies are equipped now to roll out variations of the vaccines in a couple of months, right? So there's always these positives and negatives. What I'm interested in actually is, from an economic perspective, has this— obviously, we don't know yet how bad this will have an impact on economies because we don't know if lockdowns are coming or not broadly across the world. But what I would say, what I'm interested in, let's take China, for example. I mean, one of the big risks I think is China from an economic point of view and how damaging let's say another phase of lockdowns might be, because China's kind of adopted this very much zero tolerance COVID policy, where any hint of one case and then bang, let's lock down the whole region. Now, obviously, that policy is great from one respect, where it means it dramatically reduces the number of people that get it. Great, fine. But of course, it has a very negative impact on the economy. but the kind of medium to long-term negative, you can call it that, is that their herd immunity levels are super low, right? So it just means that this up and down roller coaster of COVID where it's, you know, new variant, cases rise, lockdown, fine, cases drop, reopen, new variant, cases rise, lockdown, variant, you know, cases drop, reopen. That cycle is going to last a lot longer in countries with zero tolerance who have a lower herd immunity. I think this is where obviously there's a really heavy cost to having a high herd immunity. That means a lot more deaths, and obviously that's— I mean, this is the, you know, the, you know, that ultimate kind of moral dilemma as a leader and as a government, you know, do— which pathway do you choose? In a couple of decades' time, maybe we'll be able to look back at the data, and it might be that actually there's no real difference in the end in terms of fatality rate. It may be that countries like the UK, where we've had a lot of deaths relatively, you know, maybe we've just got it out of the way early, and our herd immunity now means we don't have to quite go through these severe ups and downs economically with full lockdowns because our herd immunity will, will help us kind of deal with these variants. Whereas, you know, you might have that longer pathway the likes of China are taking where there is more economic disruption, but actually in the end maybe the kind of impact ends up being the same from a sort of death rate point of view. But, you know, who knows, it's speculation, right? But my My concern is the big giant kind of economic juggernauts like China, because they're so important, obviously, for Asia, massively important economic hub, and second biggest economy in the world. And I think at the moment their growth rate's at 5%. And that's the lowest rate, basically, apart from that one major spike lower, spring 2020, when the first COVID first hit. Apart from that, 5% growth rate's the slowest China's grown for 30 years. So China's growth rate is a concern. But look, from a market's point of view, clearly stock markets have come off. We've had our biggest kind of downward phase that we've seen for a while. The S&P's kind of pulled back to test the high points that we were seeing well, what, but let's say the start of September highs, we're kind of tracking around those areas. The US stock markets are still relatively high. It's not like they've given back huge amounts here. We talked about this last week. Some other European stock markets, given they've gone into full lockdown already in places like Austria, are seeing a much heavier toll. I like stuff like— and we'll talk about inflation in a minute, because what we have seen is the yield curve has flattened. That's because ultimately you've got risk-off buying of the long end, which suppresses long-end yields, but then the Fed's turned super massive, the biggest hawk in the history of birds, which is keeping the short-end rates higher. You're getting a flattening of the yield curve, which is always a signal of economic stress. From a market's point of view, we've had that initial— we're in the uncertainty zone. What I would say is over the next week or two, we're going to start to get some proper information on this. And then we go from there. And I don't want to say right here and now that we're definitely going to bounce and markets are going to make all-time highs into year-end. I mean, that would be my odds-on probable favorite scenario. But clearly, if the COVID situation turns out to be more on the worst-case scenario, well, then clearly we're into a new situation.

Well, by making that phrase, you wouldn't get a job at JPMorgan. They've been out, call to arms, buy the dip, middle of the week. They are— so on the Street, you've basically got JPMorgan who are like perma-bulls. And on the complete polar end of this, you've then got Morgan Stanley, who are the most bearish. I'll talk about this battle royale happening on Wall Street when we talk oil. There's a good one emerging. That's a huge gulf in opinion of where oil is going to go. But yeah, JP Morgan was saying this week that the recent turmoil caused by Omicron virus strain offers a chance to position for trend reversals in reopening and commodity trades. They were basically— they've just gone full board. It's more transmissible, but it's not deadly. By that fact, then this is natural historical virus evolution, and therefore it's positive risk.

That's just reckless. You know what, they're coming out and with their scientific opinion, this is not a risk, buy everything. That—

but this is what I want students to be aware of. If you go back through the last 12 months, so the year of 2021, JP Morgan, I think— I can't remember the guy's name. Kolevich, I think, is the chief strategist. And basically, he got a promotion. This was, I think, at the beginning of the year, right? He got shifted up a level.

Buying the dip for 10 years.

And he's— yeah. Well, yes. Basically, he's been banging that drum. And he's been right all year.

Yeah, every year.

Look at it.

Yeah, all year, every year for a decade.

And now he's just— he's committed now, rightly or wrongly. He's like, nope, not changing my mind, we're doing it.

This reminds me of someone called, uh, Dr. Doom. It's kind of an opposite scenario, but Roubini, this analyst called Roubini who spent the whole of the noughties saying that the global economy is going to blow up. The biggest bear in town, and markets went up, and they went up, and they went up, and they went up. And guess what? No one had ever heard of Roubini because he was wrong every year, every year, every year, every year. Wrong, wrong, wrong, wrong. And then all of a sudden, he was exactly right as the financial crisis hit. And then Roubini became this massive celebrity. Yeah.

He was like a rock star, wasn't he? Yeah. Type in Nouriel Roubini and yacht. And Nouriel Roubini is not probably what you'd describe as, you know, he's not, he's not like the David Gandhi, like, male model, Mr. Universe. He's, you know, he's, he's an economist. Can't have it all. And, uh, but he's on the back of a yacht with 20 incredible other looking women, and it's the most hilarious picture because he's— it's just like the— yeah, this the shift that he went through. But do you know what?

He's got one of the best nicknames, though. Dr. Doom.

Dr. Doom. Do you know what he's super bearish on and has been now for the last 2 years? He keeps— he's really angry about it.

Probably Bitcoin. Yeah. Or crypto, is it?

He hates Bitcoin and crypto. He's just—

how's that view going?

Well, until he's right.

Yeah.

Well, okay, let's flip it over to the Fed. And I was going to talk about Powell first, but actually I've got my charts in front of me as we're doing this. And we're selling off at the moment, US equities across the board. Now, it's fairly heavy, but not spectacular, but it's the reverse of what we initially had. So just to explain, payrolls just came out. An hour or so before we were recording this conversation. And it came out headline change in nonfarm payrolls in the US, 210,000. Analysts were expecting 550,000. So it was a miss on expectations on the headline reading at least. And actually equities spiked up. Now, of course, the rationale being there was, oh, the jobs market's not very good. And therefore, well, the Fed can't go ahead and this acceleration, super hawkish moves that they've done. Maybe it's a bit of relief. And now to me, this feels more like a true interpretation of that move, which is that the unemployment rate fell to 4.2%, well below expectations of 4.5% and previous 4.6%. Participation rate ticked up a tiny bit. Employment to population ratio has gone up to 59.2%. And to me, what this looks like I don't know about you, Piers, but the Fed are going to now go ahead with— I mean, they go into their blackout period now until the 15th when they have their next meeting, and they've made this flip purposefully with the timing of that for whatever reason. They, you know, whether it's inflation, whether it's misunderstanding of transitory, we can talk about in a moment. So here you've got a labor market that's perhaps not firing quite as consistently as they might have thought after you had the half a million print last month, but they're going to go ahead nonetheless. I mean, this payroll now doesn't change that. So for equities, it's just another little— it could be a little bit better economically, at least. And then you've obviously got the variant thrown in the mix, which is a kind of a weighted factor.

Yeah, it's not a great cocktail. I mean, I think with that nonfarm payrolls payrolls or the labor market report more generally, it's one of those classic reports where the headline number is like, oof, that's bad. That's a much worse than expected situation. But then you look at everything else and you go, wow, actually, that's really strong. There's two things. Certainly on that headline one, there's been a real pattern in recent months where the first time that month's job creation figure is announced, it's artificially very low. Then when we go to the next month, that last month gets revised up. Then when we go to the month after that, it gets revised up again. So we're in this trend where you're getting constant upward revisions to previous months. So the point is about this month being such a low figure, the idea is, well, actually, it'll probably get revised up. In the next 1 and 2 months' time. So actually, in reality, it's probably not as bad as it looks. Everything else is pretty strong. One thing that is a real outlier, really strong, is actually something called the household survey, which found that employment rose— employment rose by 1.136 million, which is a massive figure. We've been talking in weeks, gone back about this— there's a whole load of people sat on the sidelines. There's millions of people not yet working who were working before COVID And it looks like some of these are coming back to markets. That was really strong. The one thing that was a bit weaker, though— well, worse, lower than expected— was the average hourly earnings figure. So we'll talk about inflation in a minute. The inflationary element of the report, that wage growth figure, came in at 4.8%, which was lower than the 5% that was expected. But yeah, I mean, look, I think even though the headlines are missed, there's nothing in this report that's saying to the Fed, wait, wait, wait, the economy's not as strong as you think. Stop, don't go, don't push the foot on the accelerator, the tapering accelerator. I don't think this report is going to change the Fed's direction. The only thing that will change it is if we get information about this virus variant and whether it is the worst-case scenario where current vaccines aren't going to work. But I want to talk about this, because really, the reason why the Fed have turned hawkish and then more hawkish, and then more hawkish. It's like every week they just keep getting more hawkish. It's like I've— literally, I've never seen anything like it. I've never seen the Fed pivot and move stance so quickly. So they're obviously panicking. And I personally think they've actually— they've now gone too far the other way. I mean, sure, maybe they were too dovish. Yes, maybe. And I was guilty as well of being in camp transitory, probably for too long. And so I think they were too dovish, but that's their natural stance. Right now, they're swinging. And I think they've just gone too far on the hawkish scale. But to defend them, people obviously think, well, if we have to go back into lockdown, then obviously, actually, won't this inflationary problem go away? Because won't— won't consumption collapse, and therefore inflation's going to vanish? And there's a real problem with that argument. And actually, there's definite arguments that you could put forward to say that actually more lockdowns would just increase inflation even more. And here's the rationale for that. So obviously, In the first lockdown, although we've had more than one, but consumers have gone into this huge buy everything online, right? Demand for goods that you buy online, and these are goods that are typically manufactured, let's say, in places like China or Vietnam, for example, these emerging markets that are the mass manufacturing engine of the planet. So we buy a lot of stuff online, gets made in Vietnam, it gets shipped. Right? That's what happened. And that's where the inflation spike has come from. We've got all these supply bottlenecks and shortages and microchips and whatever else. Right? If we go into another lockdown, all of those goods that have created this inflation spike in the first place, they're the goods that's going to see an increase in demand. So you're going to get an increase in demand in the goods where prices are already elevated, couple that with if you do get more zero-tolerance lockdowns in China or Vietnam, well, then there's your supply bottleneck getting even worse. So there is an argument to say the way that inflation is going to drop is actually opening up. And I know that sounds a bit counterintuitive, because if economies open up, then, weh-heh, everyone spends all their money and actually— well, but actually we spend our money on other stuff. Like we go to a restaurant. We're not buying a good that's manufactured in Vietnam. We're buying something on a plate that's physical that we eat. So we're buying stuff where the inflationary pressures aren't there. And actually that then alleviates the over-demand and the undersupply on goods that come from places like Vietnam. So that's one thing to think about. Obviously, you can think about the demand side, though. And this is the unknown, right? It could be that if it is full-on lockdown, well, then the counterargument is, well, hang on a minute. Can governments support people through another full-on lockdown like they did last time? Can there be another furlough scheme? Can it be afforded? If not, well, then maybe the economic impact to individuals will be much greater, in which case they won't be able to buy their Peloton, or they won't be able to buy their stuff from Vietnam. And so there's obviously uncertainties around that demand side as well. But yeah, so I don't know. I think the Fed are right. I think they're right to be more hawkish. I think they've gone too far. I get that they had this time period where the lockout is coming, and we need— like, if we're gonna go at the next meeting, we need to tell them now. Um, so I guess— so it really— I think Powell found himself squeezed into a corner where he felt he had to properly get more hawkish to give us at least a couple of weeks warning before they push the button. Um, so it's definitely not an ideal situation for Powell. I think the one of the key winners of all of this is the dollar. And that's the other kind of third kind of uncertainty around all of this, by the way, is the dollar's impact on emerging markets. And we talked about this with Turkey, particularly last week, but this goes across the spectrum, right? If you get dollar strength, then think about inflation. If you're getting dollar strength because of a super hawkish Fed, then that's actually inflationary for emerging markets because their currencies drop in value Meaning their imports, the prices go up. And so you've got a whole cocktail of different angles to think about this, which is why it's so hard. And at the moment, the default response is that stocks are down, but not— I'm looking at US stocks. They're down, but they're not down, down. But certainly the dollar is kind of— and obviously oil, we'll talk about oil in a minute. But the dollar, yeah, is a big beneficiary here. And that's probably going to continue because it looks like the Fed are going to— looks like they're on.

Well, if we have a— if we do have a demand collapse and governments need to step in and we start— they start handing out the stimmy checks again, I'll share with you my spreadsheet of pump and dump meme stocks and we'll—

yeah, let's go.

Okay, well, just to round off this segment, there's one thing that I read this morning I thought was quite interesting, which I just wanted to kind of COVID with you before we then move on to OPEC to, to go into the final point. And so there was an interview basically in the New York Times with a Democratic pollster, Brian Stryker is his name, this week. And following the recent Republican victory in that governor race we had a few months back in Virginia, which was a US state Biden won easily. Stryker conducted a series of focus groups with voters who had voted for Biden last year, and then now to Republican candidate who won Virginia, Glenn Youngkin, this autumn. Um, highlight from the findings essentially was as follows: voters believe the economy is bad and no amount of stats can change their mind, at least in short term. Job numbers, whether wage numbers and a number of people they've put back to work don't matter anymore. The numbers will have, will have a limited impact when people are seeing help wanted signs all over Main Street, restaurant sections closed for lack of workers, rising prices, supply disruptions. Even where things are getting better, Biden doesn't get credit.

ABB, anything but Biden. Too late. The damage is done. And people's attitudes are very much— the mindset is, this guy's not who we wanted. He's not it. And as you say, it doesn't matter now. All they see is the bad. All they have is a bias. Now, it's confirmation bias, right? And that's your opinion. And then anything you see, okay, bad news yet? See, I told you, he's just rubbish. Anything that's good, well, they either don't see it or they try and spin an argument that actually is good, but nothing due to Biden.

Right. And do you know who had an exclusive TV interview? I think it was yesterday with Nigel Farage.

Oh, God. Donald Trump, obviously.

Did you not see that?

I didn't know.

Farage, you know, Farage is, you know, he's punching above his weight. He had a 2-hour special with the former president on what channel? I think it was GB News. He's now the anchor of GB News.

I was wondering, I hadn't heard about him for a lot— well, since he was last on in Trump Tower, in fact, when Trump won.

So Trump, you know, I was just looking at some of the comments Trump was saying, I mean, of all the criticisms, he definitely does know how to like tap into middle America, middle UK psyche.

You're talking about Farage or Trump, right? Trump, right.

He laid into Meghan Markle, and look, I'm not here to judge, but I would say on balance that probably is in keeping with what a lot of British people feel, and he was like criticizing Prince Harry and so on and so forth. Farage asked him, are you gonna run in the election?

Yeah.

And he said, I quote, if you love your country, you have no choice. Oh, Donald. He's coming back.

That's it. He's just— that's why he's just announced. Why is that not news? Hang on, that was last night. Why is that— why is that— why is that not in the mainstream press today? Or have I just missed it and it is?

Maybe you're stuck in a different, a different political color echo chamber. Okay, EJT.

Back in the house.

All right, well, let's, um, talk a little bit about oil and OPEC. And the group agreed yesterday, on Thursday, to add 400,000 barrels a day of crude to global markets in January. However, they did make a nod to fast-changing conditions. They said they stood ready to reconvene, quote, pending further developments of the pandemic, and to continue to monitor the market closely and make immediate adjustments if required, according to their group communique. The officials, the oil ministers, said they remain in session, is the words that they used according to the statement, though the next meeting to decide on February output, that's not scheduled till the 4th of Jan now. Um, so that was the main kind of takeaway. Oil prices actually dipped quite aggressively. We went from around a $67 handle to a $62.50 mark and then you tune in 3 hours later and you're like, what? That's just happened?

Because who put that trampoline there?

The communiqué details didn't really— weren't that explicit talking about this kind of open-endedness to continue to be responsive. What the newswire snapped, which created the initial selling pressure, was purely they've gone ahead, they've not halted. And markets were a little bit on the fence whether or not they were going to halt. Um, they didn't. So reaction against market positioning was this is more supply, and spec traders just hit it. But then the reversal came. Now, one detail that I saw which I thought was interesting is that OPEC+ delegates said the output hike will be partially offset by so-called compensation cuts. Owed by members that had exceeded their quotas in the prior months. So countries will have until June to implement those extra cuts to make good on their overproduction, but obviously that can be maneuvered around as they see fit to use as and when they want.

But do you— how big are these compensation cuts?

Well, I was looking at the I haven't got the breakdown to hand, but I think the overall compliance at the moment is tracking somewhere just under 120%.

Right.

So there's room to maneuver in that respect.

And that's 120%. Yeah, OK, fine. Interesting. I mean, so just to be clear, they're hiking production at 400,000 barrels each month. And the idea was that they would cut that increase to 200,000, right? No, I think the market—

the market was expecting— so how they're doing this is, um, they've gone from pre-pandemic 6-month meetings to monthly, just given how fluid the dynamic on supply and demand pandemic-wise is. They've talked about then a strategic plan to return 400,000 barrels a day of crude oil and increasing the supply amount by 400K every month. And they talk about this one month ahead of time. The expectation was they were just going to leave it stand pat, no change this month, chiefly because of one, the SPR tap of $50 million from the States in coordination with China, India, the rest, looking to flood the market to tame high higher price and the feed-through on energy-based inflation. And then two, the Omicron uncertainties about the impact on demand.

I mean, look, I think the reason why oil's bounced, in my opinion— so as you said, almost got down to $62 looking at WTI crude. We're now trading almost $69, which seems like a really big rebound, and it is, but it actually only gets us back to Wednesday's high. Um, the reason for that is, I think, is because even though they have announced they're continuing to increase production by 400,000 barrels a month, I think that will not continue for much longer. And apparently the sources were saying internally OPEC's own forecasts are predicting that supply could well overwhelm demand by as early as next year. And obviously with the Corona variant uncertainty, supply could overwhelm demand in a few weeks' time. And so I think that they're gearing up to wind down that supply increase. And I think weirdly, it's a temporary you know, nod to Biden. You know what, you know what this is? OPEC. Biden's situation is so bad, they actually just feel sorry for him. It's like, oh, poor old Joe, you know, we'll just throw you a bone just for, just for a month, but then we'll have it back. Because what happened was apparently, um, a Washington delegation has been over in Riyadh showering them with praise and, I don't know, taking lots of presents and basically kneeling down and just at their feet just praying, please give us something.

And so, yes, context: Biden, since his administration came in, has basically said he doesn't want to talk to MBS. I I talk to King Salman or no one. And so it's been quite a backstep and deterioration of that relationship. There's the ongoing Iran sanctions going on, and there's a lot of—

And one of his key policies around Saudi, Biden, this is, when he was running for election, was, look, we're going to definitely play it differently to Trump. Trump was very much big mates with MBS and getting loads of arms deals. Signed off and, you know, America's great and we're back, blah blah blah. And Biden's like, I'm taking the opposite stance. Hang on, have you heard this Khashoggi scandal? Have you seen their human rights abuses? We are very much going to take a different stance against Saudi Arabia than Donald Trump. And yet here we are a couple of years later, and Biden's groveling at MBS's feet. Please don't cut please carry on with your oil production increases because my polling is shocking and I need petrol prices to come down at the petrol pump in America now, otherwise I'm dead.

Well, one bank that Joe's not gonna like is JP Morgan. I said earlier, so they see oil overshooting $125 a barrel 2022. They see it going to $150 a barrel in 2023. They said that— so this is one guy I was, I've, uh, quoting here. He's called Christian Malik, JP Morgan. He's a managing director at the firm. He said shale is in a straitjacket. When has spare capacity been in single digits as a percentage of total capacity, that's when the risk premium shoots up. Yeah, well, I think he's talking— yeah, he's talking about the capacity side, right? Globally. Um, well, he's talking about shale, but I think it's— well, one of the things, first thing I did when I saw this comment, I'll walk you through my rationale.

First thing, check his Instagram.

A little bit unconventional. Not far off. So I, I, when I hear a comment like that, I'm like, who the heck is this guy? I mean, 150 oil, give me a break. He might be right, he, you know, I might have egg on my face. But I was like, right, LinkedIn. If he's an MD at JP Morgan, what, who's this guy? What's his background? Yeah, profile picture, he must be hanging out with Roubini again. He's on the back of the yacht. No, he's got black shirt, white jeans, he's even got the little white collar thread coming through the collars, like on his black shirt, like, it's pretty special. And I thought, yeah, you can go for $150. And then the other— this, this is, um, uh, the other thing was Deutsche Bank came out with a report this week and they said, we see oil next year $60. Okay, so you got $60 to $125 as your spread, Piers. Yeah, where you shoot— where are you shooting?

In the middle, I think. Well, 60— I mean, we pretty much hit 60.

Yes, let me give you the 60. Their rationale says it would be misguided to think of an OPEC pause on Thursday as bullish since we have assumed that our model and still end up with a surplus of— in Q1, we would be sellers of rallying crude on the back of any OPEC pause.

Yeah, I mean, look, I think obviously the biggest influence— does oil get to $150 or $160? Obviously, Corona is the biggest influence. Um, OPEC can mess about with supply. It's really hard for that group because it's such a big group to make decisions, certainly radical decisions, where they're going to change their supply positively or negatively by a lot. Which hardly ever happens, right? You know, Biden tapping his reserves by 50 million barrels, but look, they're going to release 32 million barrels over the next several months. And by the way, to put into context, 50 million barrels, that's 2.5 days of US consumption. This isn't a lot of barrels, and they're going to spread it over a few months anyway. I don't think, to be honest, I don't think that makes too much of an impact. So personally, I think you've got a lot of uncertainty, right? But in the end, we've had a decade or— well, you've had 7, 8 years of chronic underinvestment in oil production infrastructure. And in the end, medium term, That's the big one. I don't know, your mate from JP Morgan may well be using that as an argument, I don't know, or maybe he just wants to grab the headlines. I think in the end, that's where the supply— who's going to win the demand and supply game? Well, it's going to be demand will overweight supply because of this chronic lack of investment for a period, but then as the world is transitioning away from fossil fuels into the greener realm, then obviously that demand side will start to calm down as people switch to green, but that's going to take a long time as well. Right? So thinking about the medium to long term, I think you're going to get prices rising because of the lack of investment in supply before then that demand curve starts to properly permanently trend lower because of a transition to green. So I I'd favor prices being closer to— I'm going to say— you're talking about by the end of 2020 now, these predictions, are they? I don't know.

Maybe we'll put the conversation on pause, and I'll check out what you're wearing in your LinkedIn profile first.

I'm going to say by the end of next year, prices will be closer to 100 than they will to 60. Okay, I'm gonna be 80, I'm gonna be, I'm gonna go $90 in 12 months.

You heard it here first.

Yep, $90.

Yeah, I mean, as, as you were rightly saying, it was the, the chap at JP said OPEC+ is not immune to the impacts of underinvestment. So it's very much like, right, kind of talking about. But look, let's wrap it up there. Um, and yeah, once again Nightly, thank you to Piers for going, sticking with me through 46 episodes.

What, are we gonna have a party for 50? We need to have a live on-air party for the 50th episode.

Well, you know what, I saw one of the most popular podcasts in the UK. There was a husband and wife and they were on the Graham Norton Show last week. Oh yeah, I think it was called, it's something like Shag, Marry, or Argue or something like that is their like podcast. And you know what, they would— so the guy was a comedian before, so we can't compete with that because we're, you know, we're not that good. But essentially, um, they're now selling out the O2 doing a live podcast. Wow. All right, come on, Piers, let's forget 250. I want to sell out the O2.

No, okay, so the 100th episode we're going to sell out the O2. To start with, how about for the 50th episode, why don't we invite on some— a listener or two or three?

Oh yeah, that's nice.

Do you think about that?

Maybe we do a little comp. Yeah, so someone who's got a good view and they can come and like— yeah, bring it, bring it to us, Dragon's Den style.

And yeah. Let's do that. We'll arrange it, give you the details next week of how you can apply, but let's get some listeners on.

Yeah, cool. All right, with that, thank you, Piers, and, uh, thank you everyone for listening, and we'll see you next week.

See you guys, bye.