Transcription
Welcome back to Real Vision. I'm your host Ash Bennington. Today I'm joined once again by Malia Bengalli, founder of MB Commodities Capital. Malia, great to have you back on the show with us.
It's lovely to be back, Ash. Always a pleasure.
Well, our timing couldn't be better. We're in the soup here today. Market's very much in motion across asset classes. A lot of red ink on the screen here today. Malia, big picture, 50,000-foot overview, what do you see happening right now?
I think the market has and now that we've digested the end of the war, I think the market's focused on a very hawkish Fed because given what she's given a very soft hawkish pressure as he did meet with the FOMC. Market's now repricing that risk. We can get into a little bit more detail, but the risk now is AI CAPEX spend, free cash flow, productivity, dollars denominate cuts. So, I think market's going to figure out the new paradigm going forward and I think there's some interesting things happening and the market is really losing sense of what really has happened as opposed to focusing on the bigger, you know, the main headline.
Well, what has happened in review? Let's break it down. Top of the screen there, you said about AI. This seems to be on just about everybody's mind right now. No matter where you go, people are talking about AI even outside of financial markets. What do you think's going on? How do you frame it?
So, we've spoken about in the last session we had with you that, you know, the hyperscalers has spent about maybe close to a trillion dollars in the next few years into the AI CAPEX spend. We know that cycle expansion is real. We know they're seeing productivity, maybe not at the pace the investors expect, but the Magnificent 7 names are pretty much underperforming the market because their free cash flow is getting more and more negative. We spoke about that, how that rate to change is making it unpopular for investors to be long Magnificent but they're buying the other names, the 493 names of the S&P 500 and the Russell 2000 as the recovery broadening trade plays out. Because the smaller companies are benefiting from a pickup in AI. Now, the issue just very recently is in terms of Microsoft talking about pricing, tokenization, how they maybe even considering looking at China's AI players rather than Anthropic and OpenAI because pricing is an issue. You know what happened with Deep Seeker a year ago when pricing was taken down. So, I think the market is seriously worried about the deflationary aspect. And that's something you guys talk about, you know, Raoul and you guys talk about the deflationary aspect of AI, infinite labor supply, and how that's going to be very, you know, good for the future. But the market is worried about the pricing pressure.
Now, let's take a step back from that. Before the Iran war happened, I think it's very important to understand that the US economy is doing really well. We have real GDP growth start close to 3.2%. Unit labor cost is not inflationary, and we are recovering. The market is seeing actual earnings expansion. And you know, people keep comparing the dot-com bubble to today, but the difference is that more than 50% of the earnings expansion is coming from actual earnings. Whereas in dot-com, we saw PEs expand without earnings catching up. So, you can argue, as Yardeni puts it out, this is a FEMA, fabulous earnings momentum. So, you can argue that it's actually not that expensive. The earnings are backing the price recovery. Yes, there's a lot of stock selection of themes you want to be involved with the semiconductors, the picks and shovels of the market value rather than the actual hyperscalers. And that rotation is very, very evident in stocks. So, you know, people look at the S&P and Nasdaq and say, "Hey, why is the market not rallying?" But within underneath the hood, there's so much stuff happening. And I think this is very much an active market. And we also talked about how this war is going to be playing out this year. So, I think that's And then the war kicked in. And then we saw oil prices go to 120, 130 dollars a barrel. So, inflation became front and center for investors. And we argued at, you know, a couple months ago that the longer this war goes on more than two or three months, inflation will be a huge issue because the Fed can't cut rates. And we've seen that play out. And guess what? Exactly three months into the war, guess who concedes? Trump. You know, Iran has gotten pretty much everything they possibly ever wanted. You can argue this is worse than the JCPOA, what Obama had. They're going to probably get 300 billion dollars in reparations, 200 billion dollars in unfrozen assets, and plus they get to even keep the uranium. And Trump even said, "Why not let them have a little bit of uranium for domestic gas purposes?" So, there's a massive U-turn and now oil prices are down $40, Ash. So, can you imagine the CPI that we saw in May of 4.2%? We're going to see a really good CPI number in the next few months. The market is going to hawkishness and we we played that hawkishness, but now I think we might just get a very dovish surprise and lo and behold, the Fed's going to be able to cut rates. So, that's what we're angling right now. We were getting hawkish into 6 months with the war. The war subsided at the right nick of time before the bond yields blew up about 5% and Trump watches bond yields and oil price. Now, we're a point where Bush Bush has gone completely hawkish, but we're not going to get two rate hikes. We wouldn't get one rate hike. I don't know, but I think that's what the market is not pricing in for. So, it's interesting how that paradigm is shifting right now.
I want to talk a little bit more about those global thematic in just a second, but I'm just looking at the screen right here. So, State Street, uh the technology select sector spider ETF XLK off right now 2.87%. This is on the day. Nvidia down about uh 2 and 1/2%. VanEck semiconductor's ETF, this is SMH off 5% here on the morning. Uh this is roughly uh 36-37 uh minutes into trading. These are some significant significant moves.
You're absolutely right. These are big U moves right now, but you know, there there is not really a bear market. Like you can see the max are down, but the semiconductor names are doing really well. Look at the SMH versus the S&P. We're still on an upward trend. You can argue that there's actual momentum there. So, like I said, the big debate right now was inflation macro. So, there are two things running the market. One is the macro, dollar, rate, yields, and and Japanese yen also. And the other sort of micro problem is the gap expand. So, we're sort of oscillating between macro and micro where is where is investors are positioned for the upside. And the other thing right now is also technical setup. The June OPEC expiry, and I know you're going to love this because you're quite, you know, technical. We have massive option expiration and the triple witching, the quadruple witching has massive moves. What that means is the market has so many calls and puts around 7,400 and 7,500 that when the market squeezes above 75 or below 74, you get market makers aggressively buying and selling hedges delta in the opposite way. That's called negative gamma hedging. I'm a derivative trader, right? So, we do this all the time. The market freaks out that it's breaking, and we saw this morning below 7400, we went to 7360, and the market's back up. People don't understand what's happening, but that's just negative gamma hedging. So, you want to offset that. So, the the derivative setup with all these macro rises is really like really getting people worried. They don't know where the market goes. But, if take a step back, focus on the bigger picture, economy growth, disinflation, lower cuts, where do you think markets go from there in the next 6 months?
Uh well, S&P 500 right now 7410 on my screen. Let's flip the script. The story I was telling you a little bit earlier on the year, this is year-to-date. Uh and let's let's actually take a look at 12 month trailing 12 months. State Street uh select sector right now up 65% uh the last 12 months. Nvidia up 60% the last 12 months, and that VanEck Semiconductor ETF up 140% trailing 12 months.
Yep. Yep, that's absolutely right. And I think if you look at the Russell versus, you know, the the theme has been to go global, go emerging markets ex-China, cuz China has been the lagging one out of the US. The US market's doing well, but the other ones like the Russell and all are probably doing better than US. So, depends on the view of the dollar. Now, into the 3 months of the war, we saw US markets outperform some of the emerging markets, but that somehow has now been unwound as we've seen a cease-fire deal. So, really is the view do you want to be long emerging markets, do you want to be long US? The demand side in the Asia is a bit weak. We can say US demand is a lot stronger, uh, but the valuation upside on this AI broadening trade will really help some of the emerging market names as they're doing really well.
I also want to talk to something you touched on earlier, which is oil prices, something that I know you focus on rather intensely. Uh right now looking on my screen, uh WTI trading around 73 bucks a barrel. Uh this is a story this this uh this 12 month chart on this is an interesting one. I'd love to get your view on this. A slight steady drift down, maybe 18 month period, and then you get the spike uh with the war beginning uh February of 2026 bumping up over significantly over 100 bucks a barrel to where we are right now on the news of the ceasefire agreements, memorandum of understanding, etc. 73 bucks. What's your view? What's your take? How do you frame it?
I mean, the oil market is a phenomenal question right now. So, let's break it down. Before the war, we were averaging WTI let's let's talk about WTI as probably easiest uh between 60 65 TI. Now, we know US shale costs massively positive around 45 50. So, the US producers are loving it. Then comes the war. Prices go up to 110 115 TI as much as 120 Brent. Now, US players are loving it because there's a shortage. We said or we've always said there is no shortage. There's it was just a stoppage. You know, Iran was actually sending oil to China through other routes. Yes, in all honesty, we lost about 9.8 million barrels per day of oil for the 3 months. But, then you had US SPR being released. You had the European markets with the inventory. You had China demand. China imports fell 50%. So, on back of that, Chinese markets have actually, you know, taken up some of the slack that you had evident in the market on the side. So, people were like, "Hang on, why are we not going to 150 or 200 like the government view?" But, then again, we are at SPRs trading at massive lows. We talked about demand. Demand destruction as well as China pulling back plus the release of the oil made prices come back down. So, obviously, oil prices were massively in supply. And now, you know, for instance, you know, the big debate was people may not be getting the oil, but Iran was still using creative ways looking at, you know, going to water Pakistan, using rail networks to get the oil to China. So, oil was flowing. We even saw Abu Dhabi and you know, UAE use double the capacity in a pipeline that went past the Fujairah, right? So, and Saudi Arabia doubled the capacity with the Yanbu pipeline. Yes, we lost We didn't lose 20 million. We lost maybe 10 million. But, oil was flowing. So, now, let's talk about what really happened. During the war that happened, we had OPEC cuts. OPEC cuts were probably in the region of 3 and 1/2 to 5 million barrels per day that kept the market supported at 70. Now UAE has left the OPEC. That means they are free to produce up to 5 million barrels per day. That's 2 million more into the next year. They've left the OPEC. For the longest time Saudi's been controlling the market to prevent prices from crashing. The real price of oil is probably 50 or 55, but it's trading higher because of these OPEC cuts. And now that the war is over, free for all, Ash? Why would UAE stop back? Why would Saudi pull push back? So we have Iran now putting in getting 3 and 1/2 million barrels. Saudi using all its capacity. UAE, why would oil stay higher? So there is no shortage. And, you know, you can argue that the real price of oil could be somewhere between 60 and 65. And that's why it's falling. Oil's out.
I'm curious about the UAE story leaving OPEC. How significant a story is that from a structural perspective in terms of the demand dynamics?
It's huge.
the supply dynamics.
It's a huge thing. Now, obviously this is a very contentious topic, so I have to obviously be careful which audience I'm talking to. Well, uh for the sake of real vision. So if you go back maybe 3 years post COVID, we know that UAE has an excellent job in expanding their production capacity. They've been building up because they went and diversified their revenues from oil about maybe 5 or 10 years ago into tourism, you know, other sort of havens. Saudi Arabia was a bit late to that expansion and diversification because they lost out. So they started expanding the last 3 or 4 years. So their fiscal break even is close to $90 barrel Brent even though the cost of production is 12 or 15. So Saudi Arabia needs a higher for longer oil price. This is in the last 3 years. So during the after COVID, we know there was a bit of a rift between the two of them because Saudi wanted the cuts and UAE said, "Hang on. You know, you guys want the cuts, but we've been expanding, so we need to pump as much oil to make money for pump our crown jewel." And we could see that bit of a rift. And now with the war because we've seen geopolitically Saudi and UAE have gone the other way. I mean, there's a massive geopolitical changes happening. Saudi Arabia and UAE, they've seen what happened with the war with Gulf states, how they lost out infrastructure. They've said that maybe having US bases been a big liability. Saudi Arabia not taking a step back and they're not supporting US as openly and they've gone to the way of Qatar, Turkey, Iran, and Pakistan. So, they're lining more with the Gulf, which is great thing for them because now they're going to think about oil flows in and not being a target, being, you know, a US ally. Whereas UAE, their alliances have been more with Israel and you and US, which is also why they got attacked more. There's been a lot of reports about why they got hit. They got hit because they've been so involved in in in pro-Israel measures. So, Iran has given them as an ally and that basis were used to attack. So, I think with them leaving, this is not just a single issue about the war. This has been building for the last three or four years and UAE has wants to be a bigger player. They want to have the control of their own fate. They want to be able to sell oil when they need to as opposed to controlled by OPEC. So, this has been a big announcement and I think people have to realize that OPEC, in my sense of the world, doesn't really exist now because other than Russian and and Saudi, who is there, right? Because the big guys are have been these guys.
So, so does that impair their ability uh to have pricing power in terms of markets? I'm curious what you think about that.
Absolutely. But, the big guys gone, so you have Saudi and on 10 million barrels per day, Iran about three and a half, UAE's up to five. That is a big chunk out. All the little players are probably follow suit like Kuwait and other people. But, I think now we have US shale, you know, the US US producers have been doubling the exports of product and crude during the Iran war. So, they've made more money than ever because they've been sending all their oil to Europe that, you know, Europe couldn't get from the Gulf and China obviously in Asia. So, US has been making money on gas and oil. So, now effectively you have no cohesion, you have no uh union between Saudi and Gulf and OPEC. You can argue that why would anyone be cutting barrels because it's about market share. And Saudi, I'm sure, I don't know, but they will not be liking UAE to take market share, right? So, it's a free-for-all, pump at will. My argument was that oil should have never been at 60 65 after COVID. Real value is 45 50, but they were too scared to let it fall and that's why demand did not pick up. And we've always said commodity markets, you need to let prices fall. Demand picks up, then you get a better recovery later on." But they were too scared to let fall. Short-term pain, long-term gain, right? We spoke about that. So, now I think there's a massive issue that if the war is settled and there's no more, obviously, issues with Lebanon, Israel, and Iran, we can argue that the oil is flowing. Just in the last 2 days, 40 million barrels of oil have been flowing. So, Iran is pumping. US has issued them license to sell to China. US refiners will be buying oil from Iran. How's that? You know, and into the war, one more thing I should have forgot to tell you was when the blockade happened, a lot of people were like, "Wait, why is oil not rallying?" Because there was so much floating oil of Iran sitting on onshore tankers out of the blockade that they were using that. So, there was a bit of a window, and Trump knew that. So, even though they were like being all hard, they knew that oil was flowing because they could not afford the oil market to to to go to 200 because, end of the day, Trump cares about bonds, yields, inflation, midterm elections, and he knows he has a window, and their window is getting smaller and smaller. And guess what? Iran knew it, too, which is why they didn't flinch. They knew it's a war of attrition. They just had to keep going. They didn't need to win. And US always had a lot more to lose, and they knew it.
And so, let's talk about some of what you just mentioned there. I'm specifically interested in the demand side. How do you see that? What's your frame?
So, the demand side that really helped the oil price not rallying was China. China imports massive fell. We know China had inventories about 1.2 million barrels for the last 4 years. They're very clever. They buy low, they sell high. When prices get too high, they pull back on the key oil refineries, refinery run cuts. And now when prices fall down, I think they'll probably look to be storing some of that, right? Maybe not at 70, maybe at 65, you don't know. So, we're keeping a very close eye to see what China does with this price pullback. It's not cheap enough yet, but I think that's going to be a bit of a floor. But the floor that people are arguing is is probably a lot higher than what we think is. So, that is the question. Obviously, you put your pricing in your models. But demand, and the other thing is rate cuts. I mean, there is a a cash up economy where you have a very good labor market. Retail spending is happen you know, with the top 10% of the market, but the bottom US population is suffering. You have really good You have a lot of inflation, and you don't have that many jobs for the low-income class. So, there's a bit of a issue as to how that spending power will materialize for the consumer. Gasoline prices down the palm is going to help, but you know, net net it demand is still I think the key to the demand side will be rate cuts. And I think the market in January this year priced in two rate cuts, and now they're pricing in two rate hikes. And that's why the dollar has rallied. So, now the question I have to ask you is or to the audience is if you do get a dollar pullback or a wash being able to push his rate cuts. You want You saw how he was very clever in dodging every single question about forward guidance, and he said we have this task force for five different departments, and you know that the Fed uses trimmed mean and plays around massages with the number. CPI inflation trimmed mean is 2.2. So, guess what? It looks really nice and convenient for them to push a cut through. We know the agenda is to cut. The question is how does it get the masses to admit, you know, agree to it? And I think it's it's it's interesting how the oil price has come back down in the nick of time.
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