• The election result in Brazil Brazil election: Lula makes stunning comeback – BBC News
• Biden’s tax move on oil companies Joe Biden threatens higher taxes on oil companies amid high gas prices (cnbc.com)
• China’s lower than expected factory activity China’s factory, services activity skids on relentless COVID curbs | Reuters
• Labor market indicators
• European outlook
• Can Australia and Canada, raising interest rates less than expected, influence Fed’s decision today?
Happy Hump Day! Welcome back to Looking Backwards, Looking Forwards. I’m C Thomas Printer and I’m here with Austerity Jones.
Austerity: Happy Wednesday, C Thomas. A lot of things going on last week. Let’s start in Brazil. What did you think about Lula winning?
C Thomas: Well, has he won? I think that’s the thing. He hasn’t quite got that concession from Bolsonaro, but it sounds like he did, in terms of the percentages. But the question is, is Bolsonaro going to peacefully transition power? Like this is kind of out of the Trump playbook and says like “Hey, I was cheated out of the election” and now there’s protests and the protests seem to be growing and there seems to be the threat of an issue with the peaceful transition of power from one party to the other. It’s very important that we peacefully transition power. When you lose, you lose. And, if you want to go to the courts and try to prove that the election was stolen, by all means, go for it. But if we lose that, we just start fighting and saying everyone’s lying. Bolsonaro went on record and said that he would do a military coup if he lost. I’m not saying that’s what he’s doing now, but when that talk and rhetoric start, it’s getting out there. That’s not good for anybody. And it’s especially not good for the economies, which we like to talk about because who wants to invest capital in a place that you’re not sure about the stability.
Brazil is very strong with commodities. But hey, we might be looking at a commodity super-cycle? The mining stocks are down, oil stocks are now producing great profits. Those are things that Brazil does pretty well. But if they’re gonna lag behind in terms of capital investment because of the politicians and the fact that they’re not as stable as they need to be, that’s not good for Brazil. So even though Lula is definitely left leading, and that’s traditionally not the greatest environment for economic strength, I think we’ll have to see how the politicians play out and if we can peacefully transition power. I still think Brazil has a bright future ahead of it, but they have to get over this thing and Bolsonaro has to do what I consider to be the right thing and pass the power over to the winner of the election.
Austerity: The oil companies released their Q3 earnings. They were profitable, and Biden was unhappy with that.
C Thomas: Well, Biden announced that the biggest oil companies made $70 billion in the last three months, and he isn’t gonna stand for it. I have two lessons for you, Joe. First, there are 50 states, not 54 as you recently said. And second, if you want oil prices to go down, increase supply, or lock Americans down in their homes again, and oil will go back to minus $37 a barrel. If you don’t like those two options, then shut the hell up because you’re the problem, not the solution. No one seemed to be looking out for the interest of big oil when they were losing $20 billion, which was two years ago when you locked everybody down and nobody used oil, and the demand crashed. So now that they’re making money, as we’ve opened up our society, they have gotten their businesses in a much better place. They’re much more efficient. Their balance sheets are cleaned up. They’ve gone through really tough times. They’ve done the really hard lifting that we as a nation need to do, and now you’re going to penalize them.
You want to have a windfall tax. Let me ask you this, Mr. Biden. Did you ever approach a windfall tax when Apple was raising the price of their cell phones? Because just about everybody in the country has a cell phone. How about Pepsi? When they announced that they were able to pass on prices, the street said, “hey, that’s fantastic and we’re gonna reward you with the stock price that’s higher”. Did we have a windfall tax at Pepsi? How about Chipotle? They’ve said they’ve raised prices on their burritos three times in the last year. Are we gonna have a windfall tax on them? Who gets to decide? This is just political playing that Biden is trying to do in a desperate attempt to help his fellow Democrats in the election.
The fact of the matter is, Biden is the biggest enemy of the oil companies. But his policies are so bad that he’s actually the best friend the oil companies have in the world because the more dumb things he does, the more money they’re making. They probably are looking at him saying, “Hmm, yep, that’s too bad”. Because all he’s doing is limiting supply, right? And if you limit supply, guess what? As long as demand doesn’t crash, you know they’re gonna make a lot of money.
Austerity: Another thing that could slow down oil profits is a continued China slowdown. Their factory activity data was released and it was lower than expected. What does the future hold for China?
C Thomas: China is something definitely worth keeping eyes on. Their factory data was 49.3 versus expectation of 50, which was negative, but I think even bigger than that is huge lockdowns. They’ve got lockdowns of almost 250 million people. That is almost two-thirds of the size of the US. That’s a ton of people that are not producing activity. They lock guests down in the MGM Casino in Macau? They lock down Shanghai Disney. That’s definitely not the happiest place on earth today. And then even in a Foxconn plant, where they’re producing the iPods, people were climbing the fences to get out of the lockdown and walking home 25 miles. Those people are tired of being locked down over there. Just as we were in America and everyone else around the world, but this is just continuing over there and I think it’s probably really affecting. It’s gonna affect their bottom line. And I think it’s really dangerous for US companies that are invested over there as well. Right. If Apple is trying to produce iPods and they can’t rely on a steady source of supply, no wonder they’re trying to move some of their plants to India.
Austerity: Correct. With that, we looked back. Now let’s look forward, C Thomas, what will you be watching this week?
C Thomas: The first thing we need to do is keep an eye on the labor market, Austerity. So the labor market is a lagging indicator, it isn’t like a canary in a coal mine, but more like dead fish washing up on the shore confirming there was an oil spill. And, the problem with the Jolts number is that it is suspected of double counting. There’s a lot of macro analysts that say it just does double counting. How do we post jobs in today’s society? We’re much more mobile as a workforce with work from home. So they might be looking for an analyst position in LA but they might post that in Richmond, Virginia, Miami, Florida, Nashville, and Tennessee. And then they’re counting all of these open. They might have a filtering process, but most people believe that those are highly inflated numbers.
So we probably need to just keep an eye on the unemployment claims and the non-farm payroll report out later this week. And, I never focus too much on any one metric, but the problem is when the labor market starts turning, we will know that we have gone too far. And it’s really tough to slow that down. That’s the problem with using this as our compass – it’s just a lagging indicator. It’s the last to know.
Austerity: I understand but if labor is a lagging indicator, what are you watching that might be a leading indicator?
C Thomas: There are a lot of leading indicators out there, but the biggest macro thing that I’m watching, to be honest, is Europe. And the reason is, they are in a worse financial state than we are. So anything that’s going to affect the US will probably filter into some of these regions that have a little more structural weakness. We saw a little bit of that already in the British guild market with the pension markets almost blowing. We have the Eurozone PMI out later on Wednesday here, and then Christine Lagarde is speaking again on Friday. The one thing we got to keep an eye on there is there’s a lot of interconnected pieces in Europe. Germany is definitely struggling. Italy is struggling, and Spain is struggling. Huge inflation numbers that were outside of the expectations last week. We need to keep an eye on them first because the whole world, the whole bond market, all of these things are so interconnected that when one thing starts breaking on the periphery, it’ll probably trickle back to the US in that type of manner. It could be something like Japan and their Yen, and what the Bank of Japan is doing. But I keep thinking that it’s gonna be in Europe. And so when we have these little earthquake tremors, like the British pension market, I think that’s probably the first place that I’m looking for other than the fact that, there’s some other leading indicators to watch out for.
Austerity: The Fed is going to announce its rate decision later today. Do you think Europe in any way will affect the Fed’s decision? Especially after Australia and Canada both raised interest rates less than expected, would Powell do the same?
C Thomas: I don’t think so. I think Powell has telegraphed things pretty clear. Their communication going out has said, “Hey, this is the plan we’re on. We’re gonna stick to this”. He is reducing the amount of forward guidance so he doesn’t trap himself like before when he said, “Hey, I’m gonna wait all these months before we start quantitative tightening” or, “Hey, inflation is transitory”. We can’t just flip on a dime. And I think he’s gonna say less and less. So he has more and more options going forward. But you know, Australia and Canada both raised less than expected. They’re worried about going too far. I think Powell realizes going too far is what’s needed. And yes, it’s tough. Powell knows that. Everyone’s like, “well, he’s gonna go and break something”. And everyone’s talking about that being a bad thing. And I keep thinking: We need to break something. Powell knows we need to break something. We have a crazy amount of debt. We have a crazy amount of stimulus in this country that is still flowing through our veins and we need to stop this lunacy. We can’t keep running one and a half trillion dollar deficits. We have to slow these markets down. You can’t have a housing market go up 20% year after year after year, like we have since Covid. You can’t have stock markets that go from 18,000 two years ago to 36,000. That is a runaway freight train that is far worse than having something break something, slow down something, pause, getting our finances under control. People don’t realize that we’re 125% debt to GDP in this country right now. This is Banana Republic territory we’re in. We have to break something. And everyone’s saying, “Well, he’s gonna break something”. And they’re saying like, offhand, like that’s the worst thing that could ever happen. I think that’s exactly what he is trying to do. He is trying to break something and that’s the difference. And I think what’s gonna happen is you’re gonna see Australia and Canada, they have housing markets that are way worse than the US. Them not being as aggressive will come back and bite them in the ass.