Market Watch Ep.16: Elon Musk, cyber hacking & Inflation scaremongering

Okay, very good morning. It's Friday the 14th of May and welcome to episode 16 of the Market Watch podcast. And as ever, I'm joined by Head of Trading Piers. How's it going, Piers?

Good morning, good morning. Very good, looking forward to the chat.

Yeah, and, and it's been a pretty busy week. In fact, it's been quite a lot going on and I thought actually what I'm going to start with, a little bit different from our usual routine. I'm going to go through a quick-fire round where I want your shortest possible answers. And I'm going to go through a couple of the highlight reels of the week from the news perspective.

You know how long my short answers are, right?

I do. So hence the Friday challenge. So going to kick it off with Elon Musk. What do you reckon? We've had, we've had the SNL appearance which saw the big decline in the crypto space. Tesla stopped Bitcoin payments. The company shares, not Bitcoin, down about nearly 15% on the week. He's pumping Dogecoin overnight again. What do you think?

I think that, well, the, the flip-flopper in chief, um I don't know, I'm just thinking about like Tesla's PR department, and I just think he's both the worst possible nightmare, but also the most amazing thing that you can have for PR, um, in that he's headline news globally. Um, great, that's fantastic for PR, but what he's saying, I don't know, I just think it's quite farcical. I think it's just— it's dangerous, actually. And he seems to have— he's like the Warren Buffett of crypto, in so much as whatever he says, the markets then do. And, you know, when you're talking about volatility like we see in crypto, this, this could be phenomenally dangerous for, for people who are invested in that stuff. And you're literally on the whim of whatever he wants to say or tweet next. I just don't know how you deal with that as a trader. I just don't know how you trade an asset like that where anything can happen and it's just down to one man. So dangerous.

This whole argument that he has then about that decision on the Bitcoin stuff about the environmental consideration. I mean, it's a pretty well-known fact that mining Bitcoin is just a small, just a very little bit, quite saturating of energy I think the stat is something like uses the same amount of energy annually as the country of Netherlands in the year 2019 at the moment. Any thoughts on that?

Well, we were talking about this, weren't we? I don't know what podcast it was, but I actually used the stat that it was same as Bangladesh, but I assume Bangladesh uses the same amount of energy as the Netherlands. But we were saying at the time when Tesla announced they're buying Bitcoin, we're saying this is ridiculous. And, um, and, and yes, and then it was again a distraction stunt, um, to anything to draw attention away from the fact that Tesla can't produce electric vehicles profitably.

Well, it's going to be interesting to see where he goes because the one thing that's always true with markets is that markets become to expect. It's like that age-old adage from the Fed and central bank communication. If you keep saying something and we keep expecting it, you got to keep the show rolling sort of thing. And cool, I'm interested to see what he's going to come out with next, but I can tell you now, he will flip this Bitcoin view. I can tell you in 48 hours, I reckon by Monday he's changed his mind again. And perhaps we're all the suckers here.

And it's, and it's, um, well, they do still own a billion dollars worth of Bitcoin, remember? I think they bought $1.5 billion. Didn't their quarter one earnings show that they then sold, I think, $500 billion worth? So they're still very long Bitcoin. So, uh, yeah, he's got to be a little bit careful.

Okay, we'll, we'll move on.

Yep.

Colonial Pipeline, that was a big thing happened on Friday. We had a bit of a gap in prices, quickly reversed though midweek, but the hackers got away with $5 million. What do you think about this whole cybersecurity issue?

Well, my first thought is, only $5 million? Um, I, I— they've missed a zero or maybe two of that. But, um, that's— I don't know, for the importance, the strategic importance of that pipeline. $5 million is literally nothing. So I'm not surprised they paid up and, look, let's just get on with it. That's just one point. Another point is cybersecurity. Look, any firm with technology, literally any firm anywhere, and that includes our company, it is— yeah, it's like your worst nightmare. And it's a very very significant problem and something that the companies of the world are going to have to address. And they have— there's a— they're hugely behind here. I mean, the vast majority of companies with tech haven't even bothered to start looking. They don't even know what cybersecurity is, never mind actually getting on with dealing with it. So yeah, at the moment it's like the Wild West out there. These, these hackers can just roam around pick and choose their victims, and they put you in a spot that is incredibly— you know, you basically have to pay up otherwise.

Because there was a friend of yours who, yeah, who ran quite a big firm. We won't mention names, but yeah, he had that exact real-life example, right?

Yeah, friend of Will's actually. Um, yeah, absolutely. And this is just— I think it was just a law firm, and this is a law firm, right? And they got hacked, and yeah, their business stopped. And they got, uh, I think the ransom was— the small firm, but the ransom was like $750,000. The thing is, they're quite clever. When I go back to my first point, $5 million, that's not enough— I guess they're quite clever. Well, they're very clever on the one hand in that they're hacking and doing their job, but, um, they're asking for amounts of money that are just about affordable if you kind of go out of your way to claw in cash and capital from left, right, and center, you can just about afford it. And you're kind of in that position where, ah, this is painful, but just better things. I've just got to pay up here.

But look, a stat I saw earlier this week is by 2025, cybercrime is expected to cost the global economy $10.5 trillion a year working out at $20 million every minute. Now on this—

$5 trillion.

Yeah, a year. Now one of the things here is we had someone come on. So through Amplify Live, we have this masterclass series, get people from industry come in. And it was asset manager we spoke to, and he was talking about a cybersecurity ETF called RIZE, R-I-Z-E, which is about cybersecurity and data privacy. Just wonder what your thoughts are on that type of investment and what type of time horizon you'd be kind of looking at on that regard.

I think it's a really good space. As I've just said, I know firsthand that cybersecurity is a really key factor that we're looking at and that I know other people are starting to look at. But as I said, the vast majority haven't even begun. So I think actually as an investment, idea, investing in cybersecurity either via just broadly, let's just buy up an ETF rather than having to scour around and pick individual companies. It's still an industry that's not massive, so there's not many publicly listed companies. But so any one of these ETFs I think is a good idea. And I would say time horizon, you know, if you're thinking, well, that stat you've just said right there, I mean, By 2025, $10 trillion, I'm not sure I believe that. That's maybe based on the idea that no one gets any cybersecurity at all, which isn't the case, of course. But I'd say right there, in the next few years, so that's a trade for the next few years. If you stick it on now, and just let it just brew, and then I think over that horizon to 2025, I think You know, it's definitely— it's one of those no-brainers that it's an industry that's going to grow, fact. And so I think it's a good one for a long-term trade. Yeah.

Okay, next subject, the Indian variant headline in the news, of course, in the UK here this week. The stats are there's been just under 1,800 sequenced cases of the most concerning strain. This is coming from India, which we know are facing incredibly challenging time at the moment themselves. I won't go into the actual formula name for the variant in itself, but one of the key things here that they've said, and I've read, is that perhaps it's even more transmissible than the Kent variation, which if you remember was the one that exploded and really led to that big breakout across the nation back at Christmas, New Year's, and we hit that kind of peak at the time. So at the moment, the numbers are very small. The thing here is that sample sequence over the past 2 weeks have basically doubled, and now this Indian variant accounts for around 15% of all of the cases in the UK. Any thoughts on that?

Well, I mean, it's obviously very worrying and for the global population. I think sadly, you know, if the UK are, well, we're well placed, right? I think it just comes down to the vaccine rollout and the vaccines are proving to be incredibly effective. Against reducing transmission, even, even if the variant is more transmissible, and that's kind of countered by the fact these vaccines are reducing transmissions. And then the key is about keeping people out of hospital and obviously making sure deaths don't start rising again. I think in the end that's the most important thing, and I think if you've had a really successful vaccine rollout, then fine, you're going to get you're going to get episodes where cases rise, but hopefully hospitalizations and deaths don't. Now, that's all very well and good if you're in a country where the vaccine rollout has been fantastic, but unfortunately what's happening is these variants like the Kent variant, like now the Indian variant, it leaves countries incredibly vulnerable if they haven't had a successful vaccine rollout. And so from a, from a global perspective, yeah, this thing's not over, uh, by any means. Uh, it's easy to forget that when you're in countries like the UK where lockdowns have been released, like again now Monday, May the 17th coming, you know, further relaxation of measures. We're allowed back into hospitality venues and back into sports stadiums and all the rest of it. But, um, you know, in other parts of the world, this thing's raging and it's at its the worst it's been. So yeah, this is the— but, but again, I— what I would say is this is not a surprise. Um, you know, these variants, that's, that's how viruses grow and adapt. And so, you know, the experts were talking about this 12 months ago, and so it's happening, and so we shouldn't be surprised about it. But yeah, it's, it's just an unfortunate—

yeah, on that, on that demographic, um, so at the moment where this Indian variant is located is in the northwest of England. And actually, when you start looking at it by age category, it's the 5 to 24-year-olds which are seeing the most aggressive outbreak, followed by 25 to 39, 40 to 59. The 60-plus is pretty much flat.

Well, in some ways that's really reassuring in that those young guys, there's a super, super low chance of any kind of hospitalization or death because of their age, and it just proves the vaccines work.

Yeah.

Well, more—

I guess we'll get further updates next week and we'll have greater data that's going to allow these guys to draw greater analysis, I guess, about the trajectory of it. We, at the moment, as far as Mark is concerned, there isn't an impact on this. But final thing then for the quickfire round—

gone—

the, the— or the not so quickfire, quick slow fire rate. Anyone who was listening to episode— I think it was episode 1 that we did. Might be in episode 1, episode 2. But in the news, obviously, in the UK, you can't get away from the fact that Boris Johnson and spending— was it $200K he spent refurbishing his flat? So expenses. Let's say this is Boris Johnson. Draghi yesterday.

Oh, yeah.

He's waived his $140,000 salary completely. He said, do not pay me. I will serve as the Italian premier fully unpaid.

I didn't, I didn't read that.

Okay, he's just gone up for even further up your pedestal now, hasn't he?

I'm not sure he can rise further in my estimations, but I think he just has. Um, that's, uh, that reminds— didn't Trump— did Trump, uh, did he waive his salary? I can't remember now. If I made that up— no, probably not.

He's not a Draghi, so no, he didn't.

Draghi is an absolute legend. And, uh, another kind of measure of that fact right there. Gotta love it, man. Super Mario.

So going back to the main focal point of the week, no doubt has been this kind of, this battle going on, it seems, amongst market participants and playing out definitely much more in the equity market. And I think that's an important component here to discuss as well, amongst other things, is that it's the equity market that seemingly is sensitive to this. Is inflation transitory, temporary of nature, or is it something more long-lasting? And it's the equity market that struggled to, to weigh that up, bearing in mind we have been at record high territory. And we saw that extension last Friday on that poor jobs data as well. So it's kind of like we're up there and it was quite ripe for a bit of a pullback, some would say. But we've seen continuation big tech suffering generally as well. So there has been some sector differentials as well between financials and energy and so on. I just wanted to get your take really on this whole update on the transitory argument.

Yeah, I mean, we'll talk about it, but I definitely still think it's transitory. With regards to— so we'll come back and dig into that. But in terms of stocks, historically, certain sectors are more vulnerable to inflation than others. Some sectors are actually— inflation's perfect and really plays into their sort of business model. So for tech, inflation's bad. And inflation's bad on the one hand for the giant tech. So when you're looking at the S&P's and the NASDAQ's of this world, right, where you— yeah, absolutely, you've seen some pretty sharp downside this week, although we'll albeit rebounding yesterday. Inflation's bad because they carry such massive cash piles. So Apple are at the top of that list. Apple have sat on about $100— well, let's just round it— $200 billion in cash. So the value of that money is obviously part of the valuation of that business. But what is the value of that money? And so we talk about future value. And the future value of money is eroded if inflation's rising. So the faster inflation rises, the less value $1 has. And so basically, we're revising down the value of these future cash flows, or indeed, the value of these future— or the value of these cash mountains. And this is one key reason why the tech sector has been hit. Now, there are other companies that it's the opposite, actually. In inflationary environments, you tend to see energy companies do well, you tend to see financials doing well. You know, inflation for financials— inflation helps to— I won't get into the detail too much, but it helps to steepen the yield curve, which means that the differential between the short-end yields and long-end yields increases. And then this helps to basically increase the bank's profit margin on their loan book. So yeah, for some companies, inflation's good. For most, it's not, though, I would say. I mean, look, for most companies, if you think more tangibles, if you're a manufacturer, well, then inflation means that the stuff, your components that you're buying from your suppliers, the prices of those components are going up. So it's making it more expensive for you to build your product. So of course, that's, that's hitting bottom line profitability. So what do you do? Well, okay, let's cancel that. We're gonna have to increase the price at which we're selling these products. And really, that's what obviously then leads through to inflation. But there's many different measures of inflation, and it depends on which ones you're looking at as to whether you're freaking out about an inflation spike, or whether actually you're a little bit more calm.

Yeah, you talked about it there from like what we often hear referred to as factory gate prices. And earlier this week you had Chinese, um, factory gate prices rose to a 3-year high of 6.8% last month year over year. Again, it's those types of numbers, again, it kind of makes people a bit sensitive. But going back to the CPI report out of the US, used car prices actually contributes to a large portion of this. I just wanted to get into the rationale why the central bank and yourself see this as transitory on some of the underlying effects that saw this number come in. I mean, it came in at a pretty spectacular figure, way above the top end of even the most highest estimate on the street. Yeah, as you said, economies reopening, soaring commodity prices, these supply constraints. But under the bonnet, so to speak, used cars prices, things like used car prices, airfares. This was an April reading which Easter sat at the beginning of the month as well. Base effects, generally energy was the biggest contributor to it.

Yeah, I think the cars and trucks, I think this is a really good example as to why it's transitory. They're right in this moment where supply and demand functions are both very sharp positives for that end unit price. On the supply side, there's two factors that are having an impact. Number one, it's computer chips. Everyone knows this. Currently, there's a mass shortage of computer chips. A lot of these computer chips, that's a key component in a lot of these vehicles that these days, and not just electric vehicles either, by the way, normal vehicles that have a lot of electrics controlling various things, right? So computer chips, mass shortage. So that means that car manufacturers aren't able to produce as many vehicles, which means there's a shortage of supply, which means then prices get driven higher. Okay, also to kind of compound that, it's not just computer chips, it's actually just generally Shipping components, and it depends where you source your components from, obviously. But for example, to ship something from China to America right now, it's 3 times as expensive as it was before the pandemic. Now, a lot of that is the legacy of the pandemic where global shipping ground to a halt. And what happened was we had— and we talked about this in previous podcasts— we had empty ship containers being left in random places around the world, and i.e., they're not in China. Where they need to be filled up with stuff and then shipped to America, for example. And so what's happened is in the shipping industry, prices have gone through the roof. So of course, who pays for this? Well, obviously it's the businesses that are— so, so that's— it's not just a computer chip problem, it's actually just generally a shipping problem is more expensive. That's just on the supply side. Now, what we saw, um, in the summer of last year we actually saw all of these kind of supply-side issues reduce as we came out of lockdowns in the summer of last year. So there is previous here. And so we'd expect these price spikes to alleviate as we go through this summer as well. Okay, now that'll help with the inflation side. Just on the demand side, well, this is where people were just coming out of lockdown, right? So people want to get out and see their relatives. But there's still a lot of people that are nervous about flying or using public transport, for example. So they need a car, right? And so they're buying cars. Also, they've just had a fat check from Mr. JB in the White House, so another $1,400. So what are you going to do? Well, I'll buy a one-off expensive purchase like a car, right? So I think on the demand side as well, there are— these are temporary factors. I would see both the demand and the supply side factors beginning to taper as we go through the summer and into the latter part of 2021.

Talk to me about McDonald's. I know you love a McDonald's, but there's a special reason why we're talking McDonald's.

Well, this ties into that jobs data from last week, because that happened after we recorded the podcast, of course, the jobs data. We were talking about, oh, we're going to need— yeah, we're going to need a number above 2 million. For the Fed to really sit up and pay any attention. And my God, how wrong were we? Not that we were predicting 2 million, but it was like 1 million was the sort of estimate. It came in at whatever, 260,000. So that was a real shocking surprise. I was like, wow, OK. I was not expecting that. And the question is, why? And this ties into inflation. Because what's happening is companies are finding it really hard to hire people. And actually, right now, at the moment, the job openings— so that's the number of positions that are being advertised— is at a record-ever high. Yet you've got millions of people unemployed because of the pandemic. So this doesn't quite marry together here. Hang on, you've got loads of people unemployed, and there are job openings at a record high. Why aren't they getting jobs? And And why was that payrolls figure so low? And I guess there's a couple of points around this, of course. But one is— and actually, to point this out, so you mentioned about McDonald's. So McDonald's are just finding it hard to hire. So why? People aren't bothering to turn up for interviews. So there's a few branches of McDonald's in America that are now paying $50 for you to just come for an interview. It's not like you've got the job, right? They're just— people aren't just— they're just not turning up. Okay, so why, why aren't people turning up? Well, firstly, Joe Biden is handing out cash left, right, and center. So he gave people $600 in January, he gave people another $1,400 in April. So you've just had $2,000. And what we saw from that is people have gone, well, hey, great, you know, that job at McDonald's that I hate, that I get paid minimum wage for, you know what? Fuck that. I don't want it anymore. I'm not going to buy it.

I've got Dogecoin.

Right. So it's definitely a— one part of it is about people are currently short-term cash rich. And it is short-term, because obviously, if you don't have a job, in the end, that cash is going to run out. And then you're like, oh, OK. Perhaps I'll go and see if that opening at McDonald's is still available. So that's one thing. There's other stuff like people are still fearful about the vaccine, well, about the virus. So maybe people aren't ready to go back to work. What we've seen is actually interestingly, there's the stats are showing that the amount of jobs open are at their highest in jobs that involve, you know, less social distancing or jobs that are inside like hospitality jobs. Like McDonald's, for example. And actually, there was a weird stat that weirdly in America, the, the most— like, what job do you reckon? What's the stats show? There's one job that has been the most lethal from a COVID point of view. More people have died in terms of the percentage of that sort of population than any other job.

Trying to think of what on public transport you do where you're just seeing an interchange of people constantly.

Yeah, well, I'm going to tell you: a chef, apparently, which is maybe one reason why McDonald's are finding it hard to hire, right? But actually, what we're seeing in like other industries that's like outdoors, let's say construction, well, actually, job openings are lower now than they were before the pandemic. All right, there's a housing boom. We talked about that last week as well in terms of house builders. But, you know, so anyway, the point is that this does feed into inflation, because Delta Airlines canceled 100 flights in April. Why? Because they were short-staffed. So actually, that means there's just less flight availability, which means demand and supply equation changes, and the prices of flights go up. So actually, this lack of where this lack of workforce is also contributing to— but it's temporary, because as I said, you know, this $2,000 that Joe Biden's given you, you know, in the end you're going to spend it. There is one caveat, and that's on the unemployment insurance, you know, the benefits side. They're still getting $300 extra per week, which is further kind of incentivizing people to stay at home on the sofa, you know, and enjoy a bit of time off with this cash injection they've had from the government. But it can't last, and it won't last. So that's why inflation is temporary.

And just a few points on timing. You mentioned there about what happened with the kind of reopening that we did see last summer, and as we head into the months ahead. So a couple of things from a Fed perspective. They've been particularly vocal this week. There's been speeches every 5 minutes. As they've tried to kind of reassure the market. And I thought Brainard, who's a board member at the FOMC, pretty much summed it up. She said, quote, a persistent material increase in inflation would require not just that wages and prices increase for a period after reopening, but also a broad expectation they'll continue to increase at persistently higher pace going forward. So that's that timeline of getting over the hump, so to speak. But then Interestingly, Bostic said— and now we start getting into— because we know that there's no definitive timeline of what exactly does the Fed see. They're not going to come out and pin their flag in the sand and say, okay, yeah, 3 months' time, 6 months' time. But Bostic, who's the Federal Reserve Atlanta president, said he expects bouts of volatility around inflation through September. The White House economic aids have classified transitory inflation as potentially lasting till the end of the year. And then an interesting comment out of Deutsche Bank, their research team, they said in general the Fed won't be able to get a sense of the new normal, which is what they need to see to make these decisions obviously, until at least the fall of this year because of the need to assess school reopenings. And then to add it all up, in summary they said it will be at least 6 months for the Fed to get a sense of whether inflation pressures are transitory and more likely 12 months to draw a firm conclusion. I mean, that pretty much— I agree with that. And doesn't that just put this to bed? And interestingly, as we said, going back to the asset class mix, it seems like, yes, rates markets, money markets have brought forward the first rate hike into now— I think it's Dec 2022 is priced in at 100%. But the rates market's relatively calm. Yeah, it's the equity markets having a wobble, but isn't that because of other reasons? That's right.

Yeah, exactly. And yeah, you're right, in the rates market, you know, all like 10 years, 5 years, 2 years, you name it, whatever duration, they're all trading below the levels that we were seeing back in March, for example. That's, that's yield. So yields are all lower. All right, they've ticked higher a little bit over the last couple of weeks, but they're still below those, those highs when we were kind of panicking about inflation earlier in the year. But yeah, look, it's going to be difficult to predict how long is transitory. One thing, like, oil's a good one— just, oil's a bad one when talking about inflation because the Fed aren't interested in oil and energy costs. So they look at more core inflation, and indeed they tend to look at something called PCE rather than even CPI. But just the point about inflation, for it to continue to rise rapidly you need prices to continue to rise rapidly. So when you think about oil, right, at the moment, oil is trading at $63. This time last year, oil was trading like down at $20-odd. Well, let's just make— let's just super round these up. Let's say it was $30 a year ago, and it's now $60. So it's doubled. For inflation rates just to stay at the same rate as they are now— so that's not inflation continuing to go up. That's inflation to stay at the same rate— oil would need to be at $120 in 12 months' time. That's just for inflation to tread water at this high level. Inflation to carry on going up, oil would need to be $150, $200. You see? So in the end, the very longest transitory is going to be is till April 2022, because then we're going to hit this this cliff where prices have just jumped in 2021. And prices are going to have to jump equally again in 2022 to maintain that inflation rise. And that's not going to happen.

Yeah. And I was just looking— I was just bringing up of the CPI number we had on Wednesday, the biggest increase we recorded in gasoline. And that gasoline alone was 49.6% of the CPI figure. 50%.

Yeah, there you go. That's why the Fed don't look at it. That's why— just everyone calm down, it's all going to be fine. The Fed aren't going to hike in 2021. They're not going to hike till the very earliest, the end of 2022. I, I, I definitely believe that.

Okay, on that call, we'll leave it at that. And, uh, Wish you, Piers, a good weekend, and everyone listening, take care. And yeah, we'll see you next week for next episode. Thanks, Piers.

Thanks a lot. See you guys.