Ep.56: Oil Will Never Trade Below $90 Again, Here's Why!

Hello and welcome to episode 56 of the Market Maker podcast. Um, good to be back after my, my week away. I did, I did listen in, uh, Piers, so I did hear the, um, the jibes. But yeah, so yeah, you know, look, I always, always deliver on a bit of market volatility while I'm away.

So yeah, can you explain, or well, are you even gonna bother defending yourself, or are you just gonna let it hang? I mean, are you responsible for global disorder spiking whenever you sort of step away from the desk.

Well, yeah. I mean, look, I know you talked about this as well last week, but it's definitely true. I remember many times in my career prior to when I joined Amplify, when I was running a desk, and you would sit there for hours, right? You'd sit there for 12 hours a day, 15 hours a day watching markets, To the point where I didn't even want to go to the toilet. I didn't even want to eat. Hence my corned beef sandwiches that I come in wrapped in tin foil still to this day that you always have a problem with. But the point being is that people like yourselves who are trading, you didn't give us a pass. We are the ones who had to watch the headlines all day long, right? That's what we're paid for. It's our job. And I do remember distinctly One time when I'd sat there from 6 AM till 12, not a break, nothing. I went for 30 seconds, I ran to the toilet, and within those 30 seconds I remember the People's Bank of China cut rates. And I was like, surprise! Wait, I've been waiting for it for like 6 hours. I go for 30 seconds and then that's what happens. But that is one of a number of events that I can think of over the years.

That's right. It's like trading as well. I remember back in the day on the trading floor, you would— yeah, I mean, obviously, we were short-term, looking to exploit short-term volatility. So obviously, there's certain stuff that you know is going to happen. It's scheduled. So like economic data, right? So you know it's happening at 1:30 PM or whatever, 9:00 AM or so. Right, fine. You're going to be at your desk, done. But then obviously there's the unscheduled stuff where you don't know when it's coming. And it's kind of Sod's Law that something kind of dramatic happens. And yeah, you happen to be using the little boy's room or something. So yeah, we used to sit there. Well, I remember— and actually not only missing stuff, it was also if you're in a trade, then you didn't want to leave your desk because, well, you're in a trade, right? And you've got risk on. You're trying to manage that risk. And I remember a few times people, other traders, basically, because I, you know, if I wasn't in a trade at that point, they would kind of basically persuade me to babysit their trade whilst they then sprint down the aisle, like down the kind of big central aisle of the big trading floor, literally sprint down to the toilet at the end, smash into the toilet do what they're going to do, and then sprint back, trying to do that in about 30 seconds, as you say, just so they can get back and like, all right, yeah, nothing happened. It's fine. But yeah, there's nothing worse as a trader missing, not being at your desk when something kicks off.

Yeah. I mean, the most extreme story that I have was— Through a combination of what I thought was trying to be as good as I could at my job, mixed in with a healthy dose of fear of reprisal if I missed something. I remember one time I was on my own, the others had all gone out, and I really needed the toilet, and like the proper toilet.

So I thought, hey, we're talking number 2 here, talking number 2s.

And so I thought, you know what? No, you know, when you get a dustbin, it has like a plastic bag in it, right, with the COVID over the edge. I pulled over the bin. I'm in a professional office here, pulled over a bin, started undoing my trousers, got my trousers halfway down my ankles, and then someone walked back in. Just what the hell are you doing? Actually, I got, I got, I got kudos for that.

Yeah, well, dedication to the cause.

Yeah, I was ready to drop one, literally, for the team to stay, to stay on, on the call, on the ball for you guys. That's how far it goes.

Well, that's why you're the best.

Well, you say I'm the best. First off, to kick this episode off, I've had, I've had a couple of people call me out from my inappropriate call on Russia, and I hold my hands up. I got it wrong. Definitely got it wrong. I definitely did not think that Putin would do what he's done, definitely not to the level of aggression. I don't think I'm the only one who, who thought that, but certainly for sure I got it wrong. So, so hands up to that first. Secondly, before we go into the, the nuts and bolts of what we're going to cover in, in this conversation, we're going to talk about Russia There's various different parts of this to update you on, which I want to go through and obviously get your opinion, Piers. Then we're going to talk about commodities surging across the board, everything at the moment, whether it's softs, oil, energy, everything is moving higher right now. And I want to get your, your kind of view about what does this mean going further forward for not just Fed policy but risks of recession, some stagflation, those types of things. And then we're going to finish off. There's been a ruling in America about TikTok. And so not all Russia. I know it's hard to find any other stories to talk about at the moment, but we'll also talk about that at the end as well. But last thing was I did release the latest career insight conversation on the previous podcast on Wednesday of this week, and I chatted to a guy called Bilal Hafiz. If you've never heard of him, He's only the former global head of research at Nomura and Deutsche Bank and was an advisor to the CEO of Deutsche Bank for 20 years. So yeah, he's super experienced and super humble and super honest. And he gives a really great insight as to working in investment bank because he actually started in IBD and then he switched into global markets and research. So Yeah, he gives a really good take. He talks about some general advice, tips, things like that. So if you're a student looking to get into finance, 100% recommend go back, check that out. But yeah, let's, let's kick it off and let's talk, let's talk Russia. So I'm conscious of the fact that I've got the news feed up beside me here at the moment while we're talking, just to keep a half an eye on it because it's, it's moving that fast in terms of the headlines. Because you pinged me a message earlier saying Iran 'Nuclear deal?' And I was like, 'No, no, no, you must have been to the toilet because you just missed the headlines. The source has just come out and said no, that's not the case.' So this is the nature of the, the day trading environment right now. Um, also we've just had a report— again, very hard to see, pick through the noise here— but there was apparently a phone call according to AFP the French news agency, that Putin is aiming to seize the whole of Ukraine. That was according to a conversation on a telephone call with French President Macron just a few hours ago. But this comes in the context of Russia— they're claiming to have captured the port city of Kherson in the southern part of Ukraine. So at the moment, they're making good headway there. But geographically, it would kind of make sense from the sense of coming out for Crimea and that southern region where they've already— they're kind of well-equipped militarily. In the north, though, there does seem to be a degree of perhaps miscalculation on the Russian side over the resistance from Kyiv in the, in the capital. But most strategist reports that I have read since that over the last 24 hours would suggest that they're regrouping and they will come again more forcefully. So it seems like The clock is ticking there at the moment. This comes as they've had conversations. There's been a second round of talks between Ukraine and Russia. Haven't really seen the outcome of those come through just yet. We're recording this on Thursday the 3rd of March, um, but I'd say the way to assess any of these conversations between Ukraine and Russia directly at the moment is one of relief, and that is just based on if they agree to continue talking, we're not talking about some kind of solution this early. There's no way that's going to happen right now, but just a commitment to keep the door open could well be favorable for asset prices. The opposite, of course, is complete breakdown, and we get kind of continuation of a lot of the things that we've seen. So there's hopes of an outcome of those are very low, I would say, at this point. The other things are US Secretary of State Antony Blinken. He's kind of rallying the troops in Eastern Europe, just making sure that Team NATO is all on board. So as you would probably expect, um, some other things that have been going on that are probably worth mentioning: the US is postponing what they call the Minuteman III. Ever heard of that?

Uh, not until today.

No, it's the intercontinental ballistic missile test. They had it planned for this week, and it sounds, sounds pretty frightening, just the words intercontinental ballistic missile. But yeah, Iran do it. Well, yeah, everyone does it. North Korea, China does it.

North Korea doesn't mind a missile test every now and then. But I guess here's quite an interesting point. Obviously, if North Korea have a missile test then the Western press go, oh my God, it's the big risk, you know, this guy can't be trusted, you know, are we in range of his missiles? And but obviously we're testing missiles all the time as well.

But, and we hold proportionately a phenomenally outnumbering every other country on planet is the US, which then they get upset about another country holding a hand.

I honestly think this is the very, very, very first time I've heard in the media about the West, like the US or the UK or anyone in the West, testing a missile and maybe not testing a missile because of geopolitical reasons. First time ever.

Yeah, well, look, don't get me started on my personal views on this. I've been, uh, I've had my hand slapped already online for giving away too many of my own. Feelings on these things. But no, I think, I think you're, you're right. And obviously the, the US tactically are just trying to calm the situation because of the, the raised status of which Putin had said before. And I commented on this in the session earlier today about the kind of what we call saber rattling, which is kind of what Korea does, which is, yes, they are test firing these missiles, but this is the rhetoric. And the rhetoric of using the threat of escalation like Putin has done with the nuclear alert level is not uncommon. Um, this is the main point. So the other things then are Russia's rating was cut to junk by Moody's. Fitch also slashed it by 6 levels to junk. And MSCI has eliminated Russian equities from its EM index. So just wanted to get your take on What does that really mean? What does junk status mean? And also, why is that important for fund managers, portfolio managers, when we see the EM index being changed in that way?

Yeah, so this is actually— it's kind of a— it's like a sanction in a way, because so if we look at bonds, okay, so Russian government bonds, right, and any kind of any bond generally has a rating. And this is where one of the— what's called the— one of the independent credit rating agencies. And there's loads of rating agencies, but there's 3 giant ones that really cover the world's, you know, top-level kind of bonds. So it's S&P, Moody's, and Fitch. Okay, these are the big 3. And look, it's their job to assess the creditworthiness of the borrower and assign a rating to that borrower depending on their creditworthiness. And they tend to review these borrowers from time to time, and if their economic situation shifts and changes, well then fine, the rating agency then may well change that rating accordingly, right? And you have rated like AAA, you'll have heard of, that's the top notch, okay? That's the safest, that's like where the borrower is the most creditworthy. And actually since the financial crisis, just as a slight aside, since 2008, we had a load of downgrades going on as the global economic environment went majorly south and debt levels went majorly up. And so actually we do live in an age where there just aren't many AAA-rated bonds anymore. And this does make it tricky for investors who want to who have an investment strategy that's very low risk, you know, it's very difficult when there aren't many low-risk assets left. And so actually they're forced into taking more risk, just— and I'm talking about like big pension funds here would be a good example. So big giant pension funds would tend to have low-risk income-bearing strategies, but they're having to take more risk now just because there isn't enough kind of AAA-rated stuff out there. Anyway, that's, that's an aside, right? So AAA, and then it goes like AA, single A, and then it goes into the Bs— triple B, double B, single B. And you've got pluses and minuses in here as well. So for example, in the double— in the triple Bs, you've got triple B plus, triple B, triple B minus. And then you go double B plus, double B, double B minus, and so on, right? But basically you've got AAA down to CCC, or sometimes D, and D is default. Okay, so AAA, super safe, the likes of Germany, for example, German government bonds, and then D is default, right? Um, halfway down the range, the top half of the range is called investment grade. So if you're BBB- rated or higher, then you're what's called investment grade. Okay, if you go below BBB, so if you go from BBB- down to BB+, that BBB to BB+ line is your move from investment grade to non-investment grade. And non-investment grade, the nickname for that is junk. So everyone, I'm sure, will have heard of this, this idea of junk bonds. Well, they don't mean they're rubbish, you know, worthless throw them in the bin. It's a reflection of the fact that the creditworthiness of the borrower has dropped below investment grade. Now, the point here is when you get rating changes like Fitch have just— what did you say? 5 notches down?

6 notches.

6. I think that's got to be one of the biggest ratings changes I've ever seen. Anyway, the point here is if they take them into non-investment grade, then Um, certain funds, um, have a risk constraint where they're not allowed to have any non-investment-grade assets in their portfolios. So if an asset gets changed from investment grade to non-investment grade, they're forced to sell it. And so this is kind of the idea here, uh, on the bond side with the credit rating change is basically forcing funds to sell Russian bonds. And then that big wave of selling actually makes matters even worse because then the price of this debt drops and the yields rifle higher. And it's a bit of a vicious cycle actually. Now on the MSCI World Index side, it's similar but different, right? There's a lot of index trackers out there. That's equity funds that track indices. And so their job is to track that index as closely as they can. And the way they do that is that in their ETF they'll have all of the shares that are in the index that they're tracking. But if the index decides, right, we're going to take some of these shares out, well then these ETFs have to sell those shares. So if you take out Russian equities from the MSCI index, then it forces certain ETFs to sell those shares. And again, that drives the price down, exacerbating the problem. So it's like a sanction. It's like a clever kind of financial market sanction, if you like.

Yeah, to give that a real world overlay, I was just pulling up an article I was reading last night where US asset managers like Capital Group, BlackRock, Vanguard disclosed large exposures when their last filings. So going back to that last time that was, which was the period starting Sep 21 through to Feb 25th of this year, it's not that long ago, they total over $60 billion US— Russian $60 billion when considering the top 100 open-end funds and exchange-traded funds worldwide in terms of estimated US dollar exposure to Russian securities. Right.

Yeah.

So big, big names here on that list. The top 10 funds: Invesco Developing Fund Market Fund, $3.6 billion in equities. PIMCO Income Fund, same size. Vanguard, same size. Another PIMCO one's on there. Goldman's GQC Partner International, they have another fund, $1.72 billion in equities.

Where's BlackRock? Where's BlackRock on that list then?

So don't— BlackRock, $264 million, but around $5 billion when including their iShares ETFs in equity and fixed income, right?

OK, I was going to say, because BlackRock are the biggest— like, assets under management, they're kind of up to almost like $10 trillion or something crazy. And so I was surprised when you weren't saying BlackRock there. And certainly, their kind of iShares and their ETFs, they're kind of giants.

Maybe BlackRock have got a deal with Reuters and just tuck it in there. It's public information, but don't shout about it. Um, but yeah, in terms of Sberbank, the country's number 2 bank, they've— they got cut off from SWIFT. And I know in the last podcast episode that was what you and Will were talking about, as in the next level of major escalation would have been SWIFT. And I think it was Saturday that they did that.

Yeah.

Um, so they've been hit by the full blocking of sanctions from the US. And, um, bit of context there, so VTB and Sberbank, the 2 big ones, the state controls 92% of VTB and 50% percent of Sberbank. Uh, and Sberbank were down in terms of London-traded Russian companies. They're all down about nearly, basically 100%. Yeah, they've all died almost. Sberbank's down 99%, Gazprom's down 98%, um, for the numbers. So yeah, so it'd be interesting to see how some of these funds fare. Um, they've had a pretty rough time really in many different ways trying to call the shots over the whole COVID situation, um, then with the switch of the Fed catching people a little off guard as well, the positioning with the yield movement we were talking about a few months ago. Now you've got this Russian situation. It's been a tough one.

It's been a tough one. I mean, I guess like in any, you know, super volatile period, it's really hard, but I mean, there's huge opportunity out there. If you can kind of just get it right and always timing it, isn't it? It's timing it right. That's the key. It's all in the timing. But obviously whilst there's huge opportunity, of course there's massive pain being reaped out across the asset space. Because yeah, if you're on the wrong side of these and you're not dealing with that, then yeah, it can get can get pretty ugly. Actually, I guess a lot of listeners, I imagine, have been— let's say crypto is obviously a very popular asset class. It's been a huge volatile period and a huge period of downside for a lot of these coins. It's just tough. It's tough to deal with it.

Got to have diamond hands, Piers. This is it. Yep, huddle.

What? Clam the huddle.

Hold, hold, everything will be okay is the, uh, the Wall Street—

I was talking, I was actually at, um, showing your age now. I was right, yeah, I was running an event at university yesterday actually, and, um, talking to a guy who's a crypto trader, and I was saying, yeah, you know, how, you know, have you— how's it been over the last couple of months? Because obviously there's been some serious downside. And he goes, oh yeah, well, yeah, you know, it's, it's fine, it's actually almost fully rebounded now. And I said, what? Sorry, what? I'm not quite sure what charts you're looking at. But he said, oh well, you know, it's nearly rebounded. And I said, all right, let's have a look at a chart then. I pulled up the chart, it's like, I don't know, it's bounced in the last couple of days I don't know, maybe 10%, 15% of the full sell-off. In his mind, because he's— it's so interesting, the psychology behind that. He now thinks, right, it's all gone back to the highs almost.

Well, let me add a bit of flavor to that. We peaked in Bitcoin. I'm looking at futures just because I have futures charts up all the time. Forgive me. For anyone who's looking at the actual price of Bitcoin, looking at futures. So we peaked 10th of November, we were trading up at 69, just short of 70,000. We hit the low in the end of January of this year. It was down 52% from that high. The rally that your man's talking about is from basically the last week. We've gone, we're up about 30%.

Yeah, off the low.

Yeah, off the low, correct. So we've recouped, I mean, if you look at it, we've recouped about just over a quarter of the move on the sell-off from what we had.

Basically, if you want to put it in monetary terms, it sold off $32,000. The price dropped by $32,000. And it's bounced by 7,000 or 8,000 or 9,000. So we dropped 32,000, it's bounced about 8,000 or 9,000.

Well, look, let's not make it any worse for this chap because Bitcoin's already down another $1,500 as we speak.

So yeah, well, it's a really important— like, anything around like that $45,000, $44,000, $45,000 handle is really key for resist— technical resistance on Bitcoin. That was the kind of off that initial kind of January low where we tested $35,000, big bounce to— I mean, it wasn't quite $45,000 but almost. And that, that's really been a topside barrier. We tested that yesterday and it's pulling back now, so it looks like that, that resistance area has just done its job and, uh, pushed things back lower. But yeah, so technically, obviously these cryptos are very, quite strongly influenced, more influenced by technicals, I'd say, than pretty much, right?

Some of the talk earlier in the week, of course, was about— because of all of the degree and stringency of the sanctions in play— was looking at the inflow because of people trying to come out of rubles. Yeah. And then whether or not there was any play into that, into Bitcoin and other crypto. So it did get a decent bounce 2 days ago.

And it makes sense, right? I mean, you know, this is like the first, I don't know, major economy who's seen their currency collapsing where the— well, hang on. Now I'm saying this, obviously Turkey have been through this as well, but for obviously different reasons. But shifting your rubles into Bitcoin or whatever other crypto is the perfect hedge. What I'm interested in is why didn't crypto bounce when the invasion started for that reason? Why did the bounce in crypto happen 5, 6 days into the invasion? So that doesn't quite marry together in my mind.

The other thing as well is that the French, I think, were talking 2 days ago, and they were saying that they basically— in particular cryptocurrencies and crypto assets— it should not be used to circumvent the financial sanctions decided upon by the 27 EU countries. I thought Bitcoin's not supposed to be subject to this sort of thing.

Well, that's a bit of a soundbite. It sounds like Macron doesn't quite understand.

Well, it wasn't Macron.

Oh, sorry, it wasn't Macron.

It was someone else. Yeah, it was one of his teammates.

Yeah, I think they've kind of misunderstood the whole thing there, haven't they?

Well, yeah, that's what I thought. I was like, EU to make sure Russia cannot circumvent sanctions with crypto assets. How do they do that? Maybe I'm—

well, unless they can seize crypto assets on, let's say, US-based crypto exchanges, or what if their wallets are based in the US? Maybe. I mean, I don't know.

Yeah, and Coinbase actually has Coinbase, I think, to be honest. Yeah, so yeah, you're right, that would be it.

Cool.

Well, look, I mean, this is heading then towards the, the conversation of commodities, because WTI crude Futures have hit a high today of $116.50 per barrel. It's the highest level since 2008. We did have an OPEC+ meeting yesterday, and actually it's one of the shortest ones in recent history. I read that it lasts 13 minutes.

Oh wow, really?

Which is very uncommon because normally there's a lot of bartering and horse trading and so on to get, to get an outcome. I guess some people might have been looking towards OPEC as to, you know, is there any deals that to be made for them to increase what has been the pattern of a slow gradual 400,000 barrels coming back to market, which has been the kind of direction of travel for some time. And they didn't blink at all. I guess without going too deep into it, there's just too many relationships to manage here for them to get anywhere interested in moving that needle, right?

And I— yeah, and also it's just too— it's too much of a live situation where so much can change so quickly that it's almost impossible to make kind of decisions on. Because like when you went late, you know, it's not like this is a tap like you've got in the kitchen, right? If you want to increase or decrease oil production levels, then it's— I know people often think, well, you just turn off the tap, right? Well, it's quite as easy as that. There's huge industrial production facilities that it's not quite switch on or switch off the switch. It's so, you know, making a decision literally a few days into the conflict about your oil production levels over the next 6 months, you know, you can't really make decisions based on that. So I think the next OPEC meeting, because they do it monthly now, they never used to, right? It used to be only every 6 months. An OPEC meeting, but these days it's once per month. And so that's another reason why they didn't make any decisions here, because look, they got another one in 4 or 5 weeks, right? So, and, and by then, yeah, maybe things will be a bit clearer as to what this situation in the Ukraine might look like more on the medium-term basis, and then fine, you can start to make decisions, maybe better decisions based, based on that.

And a lot of this commodity movement is not just isolated to energy. I know you were talking a couple of episodes ago, really before all of this really kicked off, about wheat and soft agricultural goods. And in terms of prices for wheat, it's gone past $11 a bushel to the highest level in 14 years. So to recap, Ukraine-Russia shipped more than a quarter of the world's wheat wheat exports. So the fighting that's happening is closing ports, is holding up transportation, just basically a logistical nightmare to call it mildly of what it is at the moment. One of the other interesting things I saw was some of the rationale as well about how aggressively bid it's been is to do with the fact that it's kind of the knock-on effects because this isn't like oil, right? Where it's a physical hard commodity, where the oil deposits are in the ground. And so you can just go into the ground and take it out, whether it's rain, sun, snow, whatever the case might be. But with a soft agricultural good, it follows a seasonal pattern. And so plantation, and then harvesting your crop and so on, we're talking about the potential risk here of the shortages spilling over to next season beyond. Yeah, because, um, and, and I think that implication actually, if anything, is, uh, is probably underplayed in a certain respect.

Well, and that's why the prices reacted more than, let's say, the price of oil. I mean, when we were talking about wheat as a commodity to watch for, as a really good barometer for this geopolitical situation, we were talking about this a couple of weeks ago, the price was below $8. Okay, it tested $12 today, so let's just call that a 50% rally. So oil has rallied, but oil's gone from $90 to $115, right? So it's obviously not— that's less than a 50% rally. So wheat generally has gone up higher, and that, and that's because, yeah, you're looking at this situation not impacting— not only impacting supply in the short term, but possibly impacting supply over the medium term. So that just needs to get reflected in more— there's more supply risk for wheat over the medium term, which is why the price reaction has been much greater. And to put that into context, by the way, at $12, the last time wheat got above $12 was 2008, the start of January 2008. And that was only briefly. And that was the whole— I mean, that was a phenomenal 6 months for general commodity markets. That was the 6-month period where oil hit $150 and we were all worried about peak oil and commodities were going crazy, and that was just before the financial crisis. But other than that, this is basically a record high for wheat prices, like, ever. So yeah, again, it's definitely— people are asking me now. I had a friend who was asking me yesterday about, look, should I buy wheat? And I'm like, uh, well, if you haven't bought it, if you didn't buy it already like a couple of weeks ago, then I would suggest not buying it now. And that's just because when you have a 50% spike, well then where'd you go from there? Do you go higher still? And maybe, I don't know now, it's just really hard to call. And what definitely happens is the volatility level, like you get price moves in both directions and the amplitude of that volatility massively increases. And so if you— often one of the classic mistakes of a trader is you miss that first big move and then you jump in because that FOMO, right, you— that fear of missing out. You think you— there's going to be another 50% move. It's fine if I get in there, you know, I'll grab this move and it'll be great.

I could probably like hypothesize that 90% of our listeners did that with crypto. Well, at some point, because, well, I hope that, you know, when they, they held, when it was, um, because I know that, you know, that even, even before the $20,000 break and it soared higher, you know, there were Bitcoin $20,000. Yeah, yeah, there's always been huge swings. Yeah, I know a lot of people shortly after when it had some wicked pullbacks, we got, got some pain trades there.

Yeah, absolutely.

Just to manage accordingly.

But, but also what I mean, maybe I wanted to just touch on the fact that, you know, we've been talking about sanctions, you know, governments issuing sanctions, but what's been really interesting to me is how markets have been almost self-sanctioning Russia. Like, there's a couple of good examples. If you took oil, I mean, one of the reasons why oil is higher. Obviously you just go, oh well, it's supply risk, of course. And yes, that's true. But actually, what's going— if you take— if you have a look at Russian oil, so that's, that's, that, that's basically the— it's called the Urals crude. I mean, we often talk about WTI crude, which is the stuff that comes out of the Gulf of Mexico. So if you want to call it American crude or whatever, right? Or we talk about Brent crude. Um, Rurals crude— oh, sorry, Urals crude, um, doesn't often get much airtime, um, but that right now is trading— so if you think oil's going up, well, Urals crude isn't. That price has dropped by— it's now 8— it's trading at an $18 discount. Urals crude is trading $18 per barrel lower than Brent crude. And you think, well, hang on, what? Why is that? And that's because no one wants to buy it. And actually, no one can buy it. Because to get this Urals crude from Russia, well, obviously, there's transportation in the mix. And fine, there's various pipelines and all the rest of it. But a lot of it still gets shipped. And there's a huge amount of financing and insurance that goes into this process. And right now, the banks aren't prepared to issue lines of credit credit to insure shipments of Urals crude coming from Russia. So actually, therefore refineries— and it's the refineries, the big refineries in Europe like Germany, Italy, Netherlands, Poland, Finland, Lithuania, Greece, Romania, Turkey, Bulgaria— these lot are the big buyers of Urals crude. These are refineries, right? You get the crude, take it to a refinery. The refinery process then kind of cracks it out into its thin component parts which are then usable, like petrol or gasoline or whatever, and paraffin and jet fuel and all this kind of sub— these are all subcomponents of crude oil, right? So the big refineries are buying Russian oil, but they're not anymore. So this stuff, they can't sell it.

And so I know, I know who's going to buy it.

Go on. Abramovich. Now he's, um, got a bit of cash coming into the bank.

Apparently the Chinese, the Chinese always— Iran has problems, gets sanctioned, China buys it discount. And so they just stock it up like nobody's business. And they'll do this again with Russia. And although Putin has seemingly gone about his business perhaps not informing China of his actions, which has probably caused a degree of disdain, particularly when there's some major political events to happen in China about the whole succession, extended term of Xi Jinping. He does not want to be belittled on the international stage by small Vlad, in his probably opinion. And so there's a, there's an easy way to fix that, which is ship me some of that crude.

And then China have just come out though, and, uh, for the first time seemingly criticizing Putin and Russia's move into the Ukraine?

I, I, I think, well, there's two parts of this. I think short term, um, they have to do that in terms of just making sure— not so much the relationship with the West, I don't think. I don't think it's managing that. I think it's managing Putin to tell him, right? I mean, it seems to me clear that China was not in the loop with a lot of the details on the timing and size of the scale of the invasion involved. And so this is a little bit of like a reminder, but don't forget, just bring up a map, type in the Silk Road into Google, look at that map and look at the existing railway network that runs through Russia. China cannot operate without Russia. It cannot. And never mind the fact that there's an economic belt that's going to run through inland transportation infrastructure guess what, through Ukraine into the proposed railways that are going to come south of Ukraine, coming up then into Western Europe.

So, well, that— I mean, how— that's their problem. They can't, they can't side with Russia because that will annoy Ukraine, though, right? But they can't side with Ukraine because that'll annoy Russia. So I guess, I guess you're right in that they've got to stay neutral-ish. But today they have, they have moved off the neutral fence. That's just to keep slightly in favor of—

that's just to remind Putin, I think. Yeah, my opinion that, look, just this reminder here, because it was when the Winter Olympics, um, started, I think that's when Putin was in China and they signed like a big accord about— we— I can't remember the exact phrase that they said. It was something very, um, very clear, like, we will do— there's no there's no exception to how far our relationship will go. I think that's what they said in a joint communiqué, and here we are, and China have apparently turned a little bit.

What's, what's your view on the Taiwan risk then?

I, well, I heard what you said last week, and I, I totally agree. I think the risk assessment is radically different in terms of the risk-reward of that move. I just think Taiwan, um, the sovereignty, the nature of the sovereignty of that island is more an ideology of this One China view rather than a strategic move, say, for the transportation of all the infrastructure of oil and gas. Yeah, yeah, that's different now. And, and then you throw in the whole, um, like you said, like, what is the sixth largest semiconductor producer in the world? So China know that, and they know that trade with the US is still integral to their own economy. So I, I don't see that as a thing.

What about this hypothesis? Xi Jinping waits till November when you get the once every 5 years Party Congress, and he's going to be anointed as the permanent king of China, or whatever you want to call it, right? And I think getting past that hurdle is absolutely— that's all he cares about. Once past that hurdle, does that— does he feel like that's his endorsement to then set about those kind of agendas of bringing Taiwan back into the fold? Or do you just think, actually, we've miscalculated this, and, and that's That's not going to happen.

I think Taiwan, and I think Ukraine, I think these are much more long-term ambitions. I definitely don't think that what's happened in Ukraine right now, although the timing and the aggressiveness, as I said, of the, the invasion that's happened now was slightly surprised, the fact that Russia are trying to take sovereignty from Ukraine is not new. And this war has been ongoing non-stop since 2014. It's just not in a physical form, it's been happening in a cyber form.

Yeah.

And so I don't think that, um, well, whatever happens with this Russia situation is too hard to tell right now in the short term. In the long term though, I do think that it will end up being the case of these countries will gradually take sovereignty of these areas. They both, both know— Russia, I think, and China, in the way in which their political system is structured— that they've got time. And so what's happened here, I think, is an overt kind of step forward in aggression. But ultimately, I think probably the best case scenario here is that Putin gets what he wants, which is eastern part of Ukraine. And then it just slightly more goes the way of Russia. But I'd probably say we'll be here again in another 10 years and he'll take another slice. I think with Taiwan, it's just the same over a protracted long period, just given the fact that Xi is not in any rush at all. All the meanwhile, economically, I know let's ignore the short-term deceleration in China that we're seeing right now, but the demographic change and shift economically is it's all heading that way anyway. And I just think it's just why— this is why I was surprised a lot with Putin. And I think with China, I think they do try to go about it— well, you've seen it, they're changing the way of which they deal with issues on climate change, on all these different types of things. China has tried to modernize to a certain respect on the international scene. This, this kind of riding shirtless on the back of a bear, like Putin style. I mean, you don't see Xi doing that. So I think it'll be a much more long way out until we got to see Taiwan. I definitely, to ask your question, this is not going to lead like, right, end of the year, they go gung-ho in, we're taking Taiwan. That's not going to happen, I don't think. But I was wrong with Russia, with what just happened now. So Yeah, that's what I think. Okay, but look, away from this then, what this is resulting in is we talked about energy, we talked about soft, talk about base metals, zinc higher since '07, aluminium record high. So what we've got here at the moment is inflation on an annualized basis in the US is 7.5%, it's a 4-decade high. Now you've got this. We already knew it was going to go above the 7.5% anyway. I mean, in the UK now we're talking— I can't keep up with the latest forecast now. 8%, 9% we're talking now. So what does this mean going further forward? Because does this start to tilt us into dangerous territory now as far as what happens beyond what we can see, which is then they start hiking rates aggressively, to tackle inflation, what does this mean for the probability of recession risk going forward?

Yeah, and I think, well, for sure this Ukraine-Russia geopolitical situation with the secondary knock-on impact to drive broad commodity price spikes then has a tertiary impact of meaning inflation is going to stay higher for longer, which means central banks then are, well, got an even more difficult challenge to try and deal with it. But the problem you have probably in 2022 is that ultimately is, I guess, into the end of last year and the start of this year, what you had was a rebound economically as economies reopened after, let's say, Omicron, or, you know, and so that real strong economic kind of engine was firing. And so central banks can hike rates quickly, although markets don't like it. Central banks can hike rates quickly to try and contain high inflation and get away with it if the economy is really strong. I think the worry here is now that this situation is going to last for longer, and so long that actually that COVID opening up rebound is going to slow, and then you're left with still really high inflation and economies that are losing momentum. And this is what we call then stagflation risk. It's the kind of worst-case scenario where you've got inflation too high and economic growth too low. Because the central bank to tackle that high inflation, where you hike rates, but that puts a brake on consumption. It's a negative for growth. So if growth is already dangerously weak and you're hiking to contain inflation, then that's where you get a recession. And, and, you know, with these commodities, everyone's talking, and they're right. The only way these commodities come back down in the near term, and certainly when you think about things like oil is if demand just collapses. Because at the moment, the whole supply side spectrum is just positive for price, everything. And it's not just short term with Russia and so on. You've had stuff like— what's gone on this week is insane with BP, who own 20% of Rosneft, have said, right, we're binning it. We're out. We're divesting out of Russia. Shell own a huge chunk of Gazprom. We're out. Everyone's out. ExxonMobil this week cut that again— or today, sorry. We're out as well. Everyone's divesting. And Russia's a hugely important strategic location for, you know, discovery of more kind of resources that can be pulled out of the ground and more supply, right? And infrastructure being invested in. And this whole infrastructure investment to increase production, of course, the green wave has meant that the investment going into that has been collapsing anyway. And now you're getting these big energy giants pulling out of Russia, and it just makes the supply situation— meet short, medium, and long-term supply situation now is looking really weak, okay, which is very positive for price. So the only way price can come back down for stuff like oil is if demand collapses. That'll only happen if this whole scenario drives a really sharp global recession. And I think at the moment that won't happen. You won't get a sharp global recession. I think you might get a milder inflation-driven, you know, higher rates recession. So mild recession, which will maybe obviously dent demand, but not to the point where oil is going to go back to I don't know, $60, $70. You know, I honestly think that— will we ever see oil— here's a statement— will we ever see oil trade back below $90 ever again? I'm not sure we will.

I've got my, uh, title for the podcast episode now. Thank you.

I'm genuinely— I'm not— I don't— I'm not sure we will.

Okay, well, look, on the demand side, that's not going to help either. The Wall Street Journal were reporting last night that China is considering dropping its zero tolerance to COVID policy.

Oh right, I missed that. Is that right?

So Beijing is unlikely, unlikely to do this until next spring, but apparently the report was suggesting they're gonna—

extreme—

they're going to experiment with measures in certain cities.

It's insane.

So last night, um, travel, leisure, all the Macau-related gaming stocks, they all soared near double-digit percent last, last night, right, um, in China. So yeah, that could be a—

hang on, this isn't going to start for another 12 months, right?

We're talking China here, Piers.

Come on, it's just, it's just crazy. Crazy policy. My friend's currently in the Hong Kong, um, hotel for the uninfected.

Yeah, it's bad.

That's actually what it's called. Yeah, the hotel for the uninfected. Uh, he's— and you've got to be there for 3 weeks as you enter into the country. Um, 3 weeks quarantining. On entry, even if you, if you don't have it.

Yeah, I mean, yeah, yeah, yeah. I was supposed to go to see my, um, my grand— my granddad actually, um, later this year. He turns 100.

Oh, why?

But I don't think we're going to be able to go, to be honest, not at this rate. So yeah, we'll see. The golden peach, they call it in China.

Well, turning 100, yeah, you have to give—

you have to— I have to give him a basically a gold peach.

That's all right.

Yeah, it's in like a little glass box, pair of peaches.

I like it. Um, here, all you get here is you get a letter from the Queen, right?

Right, which is, yeah, a nice touch, but it's not gold.

No.

Yeah, and gold's pretty pricey right now, so absolutely. So the other thing then here is that we had the semi-annual testimony, and in any other normal time this would be the major talking point that you and I would be discussing right now. This is kind of like the platform where Powell sets out the stall of policy and latest monetary policy thinking. But obviously it's being dominated by, as we discussed, Russia. But Powell said on that point, they'll need to proceed carefully, emphasizing the need to be nimble to incoming data and the evolving outlook. Importantly though, he said that he's inclined to back a quarter basis point hike. So he explicitly said that. So 50, it's gone.

Yeah.

And the other second important point he said was before you get too hasty flipping in the other direction thinking, oh, okay, let's just price all the hikes off because of what's happening, he did say we are open to a series of rate hikes. And the market pricing last time I checked a few hours ago is 5. We've priced in for 5 now. I think we got as much as 7 before, which is the full, the full sweep of the year of '22, but it's come back a little bit. Any thoughts on, on Powell, on those numbers?

Yeah, I mean, I think the Fed have to hike, and it's got to be the start of a cycle. And for me, it's just the speed of the hiking cycle, that's the only variable. I don't, you know, unless there's a big recession, which there might be, in which case, fine, they might have to revise things. But right now, for the next— for 2022, it is the speed of the hiking cycle that's the only variable. And I mean, look, I, I was never ever anywhere near the 7 rate hikes prediction. I thought that was insane. Even though, like, Goldman's and I think JP Morgan, was it, were kind of And the whole market was kind of got a bit carried away in pricing in 7. And I think Powell's used that. He kind of— he almost had 50 in the bank, right? He had a 50 hike. He had a March 50 hike in the bank, right? And so what I mean by that is markets had already priced it in. So markets wouldn't have freaked out any more than they'd already have done if he'd have hiked 50. So it's actually quite a nice luxury to go, well, actually, you know what? We're going to hike by less. So the whole mindset from a market's point of view is then, all right, great. It's less rate hikes than we thought. So it's a positive. But they're still hiking. And look, they need to because this inflation thing's out of hand. So whether it's 5, I don't know. I'm still a 4. I'm a 4 hike. Man, once a quarter.

Okay, well, look, let's, let's end it there for Russia. Let's just do our final part where, just to change it up, we thought we'd have a quick chat about TikTok because I know probably the majority of people listening are on and use TikTok on a daily basis, it would seem, because I'm going to run through a few stats here before we talk about why we're talking TikTok. So here's TikTok by the numbers. Active users, 1 billion. That's 1 billion monthly active users. Market penetration, there are 4.8 billion internet users. 20.83% use ByteDance's video sharing services. TikTok has now surpassed Twitter, Telegram, Reddit, Pinterest, Snapchat in monthly users. TikTok is the most engaging social media app. The average Session length is 10 minutes, nearly 11 minutes. That blows my mind because I remember when Facebook was first monetizing its platform, which wasn't that long ago. Yeah, a couple of years, right? When they IPO'd, then it was like, oh, how are they going to monetize these users?

And it was like more than a couple of years. Hang on, hang on, it's like 2014, 2015. Facebook IPO.

Okay. Perhaps I'm showing my age. Felt like a few years ago. But the point being there is that I remember the conversations are pivoting around like minute, 2 minutes.

Yeah.

11 minutes here. I mean, that's insane. And then to look at this globally, the average time spent on TikTok per day, so over the day, is 52 minutes, which just blew my mind when I read that. With 90% of users accessing it on a daily basis. TikTok's Generation Z penetration, the highest in America of all places. 47.4% of their active users are aged between— check out the bottom end of this range— 10 to 29. And I saw this at Christmas, actually. My brother-in-law, his daughter, who is 7, she was like a zombie. She was like zonked. I mean, I get it, like Christmas gets boring, right? You sat around eating, watching rubbish TV. But it was like, it was like something had become her, and she would just sit there with the phone in her face, like hiding in the sofa. Well, incredibly long.

It's great, like, because yeah, in America it's 120 million users in America. So we— I was just looking at the demographic kind of age splits and Because you like, naturally, I say someone who's in their 40s, right? So I've got a daughter who's 15, so she's like spot on, bang in the, the kind of, at least like, well, hang on, the lower end of the definite age range. And she's obviously on it, and all her friends are on it all of the time. You know, you mentioned 52 minutes a day there. I am absolutely not surprised I'm surprised it's not more looking at the usage that I see with my own eyes. But in America, so between the population between the ages of 15 and 34, which you'd think that's going to be most, it's 80 million people, aged between 15 and 34, 80 million. But there's 120 million US users. So yeah, there's got to be people below 15 and below 10. And I mean, on the upper, going above 35, I guess. I mean, I'm in my 40s and I don't use it. My— none of my friends use it. I don't know if that's unusual. Do you use it?

No.

You're basically in your 40s now, right?

Almost. Um, no, none of my friends use it. Yeah, like, so we're in our, like, late 30s.

Yeah, so look, that's a lot of usage going on, um, in America. But what was interesting— yeah, the top, you know, the top usage— that— so it's America's number one, 120 million. Then it's Indonesia, 87.5 million active users. Then it's Brazil, 73 million. Russia next at 5— 49 million. Mexico 42. The UK, it's actually down on in 10th place. Obviously our population's not as big as the likes of the US's and the Indonesians and the Brazils, but, um, yeah, 10th place, 20 million users here in the UK.

Yeah, and so the reason why we're talking about TikTok in such a way is that 8 states, including California, Massachusetts, in the US announced midweek that they've launched a bipartisan nationwide probe of TikTok, focusing on whether the app causes any physical or mental harm to young people. And that will probably resonate because of the fact that it was a similar thing that they were going after with Facebook and Instagram. This is just prior to the pivot to Meta Platform that we had at the time, amongst a whole bunch of other stuff that Facebook were facing at the time. So yeah, I mean, what, it's been banned in India. That was a huge market for them. I guess a lot of this is coming out of what, data privacy concerns? The idea that this is a Chinese-owned app?

Yeah, I mean, in India that's true. India was the biggest, you're right, but they banned it because of data privacy concerns. Other countries have banned it for other reasons, like Pakistan have banned it for immoral and indecent content, for example. But, um, Yeah, I mean, look, you— we, we've had some, you know, certainly the data privacy and the Chinese situation in, in the US has been aired, but I think this is— this seems to be different. This seems to be very squarely about mental health. And I know firsthand, again, as a parent of a child who uses TikTok— and look, I don't want to just pigeonhole TikTok here, just the general social media, you know, Snapchat Basically, my daughter uses TikTok and Snapchat, not so much Instagram, but definitely not Facebook. But, you know, these kind of— this online world, right? It's like the pre-Meta sort of online world. It carries great benefits, don't get me wrong, in terms of connectivity, but also I think carries huge challenges. For particularly young people, and I see it firsthand. I think what this is from the US point of view— personally, I think this move, these noises about flagging the mental health situation, I think is squarely aimed at parents in the US ahead of the midterms. Um, and I think this is Biden trying to play a card here to up his ratings and win a few votes by saying, look, we're aware of the mental health issues, 'We know you're aware of them, we know you're concerned about them, and we've— we're on it. We're going to do something about it.' And I think that— and I think this is a political maneuver to try and engineer a bit more support amongst the parent demographic in America. Now, is it going to actually go anywhere? Does it mean anything for usage of TikTok in America? Definitely not. In the short term? Absolutely not. Medium term? Probably not. We'll probably, you know, America's been going after the Facebooks of this world for years, right, in terms of regulatory risk and threats, and obviously nothing yet has happened. And so I think this falls into that category.

Yeah, and with the kind of side angle that complements that, I think, in a way, the optics from Biden's administration's point of view is kind of talking about the— just the nature of— just trying to think how to put it. So it's like with inflation going higher at the moment, people are going to get poorer because wages are not going to keep pace. And so all this meantime, we've seen large corporations get larger and larger and larger. And so you just want to to appear to be siding with the average Joe, to be doing what you can to go out of your way, protect their children as you said, but also to have a fair playing field that's not being penalized by big corporate America, nothing will change. Like you said, it's just strategy to, to position yourself accordingly to pick up a certain pocket of what might register with one of the many different variables that voters look at when they're making their decision. So yeah, I think that's an interesting take. And I'd say I would agree with you. Biden needs it. All right, well, look, we'll wrap it up there. As I said, go back and feel free to check out some of the career insights that we've put out the last couple of weeks. There's 3 actually. We've done one with a portfolio manager. Gives a really good insight into that as a role. Because I know that's one where I guess there's a bit of mystique around that. It's kind of like, how do you actually become a PM? Because a lot of people think that sounds pretty cool, like managing billions of dollars, but how do you actually get to that point? What are the stresses when you're there? What are the skills needed for it? There's one on that. There's one from a former trainee of ours, Ayman Rahman, from 10, well, 11 years ago. Who now runs one of the biggest players in the energy market based here in London. And he did a session with me which was really great, gave 5 top tips that he'd give to any finance student about what helped him at least have success for himself. And then the last one I mentioned with Bill House. So yeah, go and check those out if you're a student listening. Otherwise, that's it for this week. Good to be back. Thanks for the hour, Piers, as ever.

Can you not go away from the desk ever again?

Or some people might say, can you go on holiday again? Depends what you want the market to do, basically.

Going to check that passport for any kind of eBay auction stamps.

Cool. All right. Thanks, Piers. And thanks, everyone, for listening. And see you next week.

Have a good weekend.