Why the Oil Shock Could Trigger the Next Recession | Mike McGlone

0:00Welcome back to the rundown interview edition today. We are talking to Mike Maglone senior commodities analyst for Bloomberg intelligence Mike's been studying commodity markets for decades. So in today's conversation, we talked about the oil market and the impact the Street of Hormuz is having on oil prices. He also explained why he thinks that prices will head lower soon and why this energy shock could trigger a big stock market sell. You know, Mike has a lot of thoughts and an interesting perspective. So hope you guys enjoy this conversation. Mike Maglone, welcome to the rundown. Oh, hello, Zia. Thanks for having me. I want to first start with the overview. Let's talk about the oil markets first, right? Oil up, you know, it just keeps going every time I press refresh. It's up what 25% since the start of the war over the weekend. Brent and WTI crude oil are trading north of $90 now, $90 a barrel. So that's a pretty astonishing move in a week, right? I think the biggest move we've seen since 2020. What is your initial reaction when you see a move like that? Were you surprised to see

1:02it jump so high? Or did you expect it to go even higher? Not surprised to see it jump so high. I initially did not think the straight would be close. So that's what surprised me. So this is a stopping out of shorts. And that to me is probably the sign of a key piece. I'm always looking forward. It's not so much what I think what happens. What I expect to mean for the future. And so as we we record on Friday, March 6th, as straight as closed, obviously the war is gearing up. And you know, Iran has been since attacked 12 countries or so, but this is a tremendous opportunity, I think, in markets. First of all, I think what this is going to do is put a significant enduring peak in crude oil similar to when Russian invaded Ukraine in 2022. Peak crude oil peaked at 130 and similar to the peak in 2008 at 145. I have to mention that because today, what you hear in the tape a lot, you have to be careful of this sensational media. My job is a strategy of Bloomberg's point out, this is what it means for markets. This is where it's going to go. And here's why the average price of gasoline in this country

2:05is jumped above three big deal. Why? Because that's the same price as first traded in Q1 2008. So we're talking almost 20 years of the same price. Now, 2008 when prices jumped above four dollars a gallon, I was very bearish and I was just waiting for that recession start. That was my signal. To me, this is part of kicking in the signal that this recession US going to kick in the bottom line, the macro to think about everything in terms of energy and crude oil. The price of WTI, we see as we speak, it's 91 dollars a barrel. Now, it's up 60% on the year. In January, on January 28th, the front natural gas future was up 100% on the year. And now it's down 15% in the year. Let's talk with make a prediction right now if I'm wrong, I won't. By the end of the year, I think the price of crude oil in this country will be down on the year. That means below 50. So you can look out to that. That's the front contract. That's front contract. It always gets squeezed or covered in shorts. You look to the back. So look at these. These are the number one traded contract in futures usually. It trades around 68 dollars a barrel.

3:08Can you explain what that means? December. So the future. Yeah. So I apologize for that. I'm a pit guy. You know, we use that pit. No, all good. I want to trade in no manclature. Yeah. And I remember that the East was like this in the pits, the symbol. So the December contract, which expires right at the end of November, that's significant because guess what's the front contract when we went to the midterms? December. That's right. And what's Mr. Trump's motivation here? So we have to put all the iterations in places. Let's look at two. So I fully expect it to be more partly because there's one key factor in that's here that's happening on terms of all these themes in the past US is the largest energy producer on the planet and a net exporter. That's an oxymoron compared to the past of crude oil and natural gas, significantly slowly and increasing. The key question you have to ask yourself is what's the type pump and price going to do for that supply versus demand in the US? So this is obviously US centric right now,

4:09but the key thing is the producers who are producing the US and the Western Hemisphere, which is Canada, the Argentina, which is now the price maker in crude oil will be the prudent thing to do when prices pump up is to sell a little forward hedge your production and then bring on that supply. That's what's happening right now. So this is going to just increase that trend. I expect the prices to be plunging by the end of this year. And one key fact we have to consider is the leader of like Mr. Trump, the world's largest energy producer and crude oil net exporter and natural gas exporter wants lower energy prices. Right. He's got to get it. And obviously we're seeing some of the methods now. Let's not talk about the methods. I have to talk about what means from markets. Since this is started in the Russians invasion of Ukraine and everything to pump up prices, but since that started the anti-American governments have fallen in Syria, that is where the Iran and Mr. Trump says Cuba's next. See what's happening there? Russia is

5:11horribly losing this war four years now. China is getting on the back step and Mr. Trump's kind of getting what he wants. So here's the iteration. We get to the midterms and the war's gone poorly. What does that mean? The Republican is getting hammered and Mr. Trump's legacy will probably be ruined for history. What's the other iteration? War goes fine. We're done. The U.S. just used more and more lethal weapons to take out an enemy and energy prices have collapsed and everything's in Mr. Trump's legacy might have been improved. So to me, that's the second iteration is probably going to happen because as a leader like him, you don't make a decision like this lately, unless you know you have the complete upper hand. Okay, so that's where we stand now. For markets, I think Crudeau is going to fall. I think the bottom line to remember here is we're seeing significant volatility and energy and very significant, significant volatility and precious metals. It's very rare for that kind of volatility not to trickle up to the stock market and the key fact I like to point out is we have the U.S. stock market cap to GDP. I'm bought a hundred year high

6:12and 180 day volatility on S&P 500 and NASDAQ is running near a 10 year low. My base case for this year is that volatility from all the other markets is going to triple up to the stock market, made me mean a pressure on stock market prices, which means post inflation deflation. Now explain what that means. Every time things go up a lot, we pump a lot of money into the system, prices go up a lot. We always get a hangover. Now China's doing that now. China, I'll end with this. The 10-year-note bond yield in China is 1.8 percent. In the U.S., the 10-year-note bond yield, as we speak, is 4.13 percent. There's severe deflationary forces in the world's largest exporter of deflation, and the second largest economy, and I fully expect that trickle over to the rest of the world. You hit us a lot there, Mike. So I'm going to process everything. I guess what I first heard is that despite the disruption in oil supplies in the Middle East, it looks, you predict that U.S. oil producers will come in and make up for that disruption.

7:21That will help. Not so much make up for it, because it'll be all recycled, unless there's a major destruction of the ability to create supply. That means that the well pump. I mean, refiners are a different story, because if you take out a refinery, that means less demand for crude. We're talking about crude right now. That's another story if you want to talk about things like gasoline and heating oil. But the overall underline price of crude oil is going to, the key point is it just doesn't matter as much anymore OPEX supply, unfortunately, which all comes. Most of it comes out as straight-of-home moose and guess where it mostly goes. China. This is a major negative for China. Never a lot of the largest crude oil import on the planet. They import around 11 mirrored barrels a day, which has been flat for five years and see the problem. It's starting to go down. And that's what U.S., the U.S. used to import in like 2008. Now we're a net exporter, almost four million barrels a day. But not so much make up for it. But when prices spike like this, what does it do for demand? Courtails. It was a do for supply, brings it back on in just a matter of time. But

8:24the key point is the price maker status on the whole planet is shifted over to the western hemisphere, led by the U.S., from Canada to Argentina, all the way down Venezuela in the middle, probably next, Guyana in there and Brazil in there. This is just enhancing their ability to bring out more supply. So give you an example. What happened in 2022? We had the big price spike in all commodities and we put in pretty significant peaks in crude oil and grains, one example is corn. And those markets still remain in severe bear markets. Why? Because they went up too much and provided that incentive to bring on more supply. And we're still in the hangover from that. We have to probably get to what we cause a low price cure. So for now, this is a short term aberration. If we wake up Monday in a straight-aharmus and when markets start closed, start opening Monday and straight-aharmus is still closed, that's still problems for crude oil. But at some point, I've ever feeling a flip, a switch will flip. We'll have the straight open and realize $90

9:24crudes to expensive. We'll probably go back to the historical price, which is basically U.S. breakeven cost. $55 a barrel is the U.S. breakeven cost. The bottom line is when you have an access supply, which we did before the war, typically you have to get below that breakeven cost. I think most people get that. But right now, this is all about a war. And it's pretty significant one. And a good example I liked to bring out is I was, I remember this one well, 1979. I was a teenage gas jockey in a gas station in South Chicago where we say dub bears, not dub bears. And we had to start pricing gallon of gas, pricing gasoline and half gallons because none of the analog pumps didn't even consider that it might go over a dollar a gallon. It did. And that's what's basically happened with like U.S. imports. I have a measure on the Bloomberg term when I love this metric. It's called U.S. net imports of crude oil. It's negative because when they first created the index and never thought we'd have been in that exporter, you mentioned something about the stock market not being very volatile, right? But when I look at the stock market this week,

10:28kind of brushed off the attacks kind of ignored it essentially. And now with the oil prices, you know, jumping, that's when the stock market's kind of getting, getting, getting killed right now. So I wonder if like, if it's, if that correlation is going to kind of dominate the markets for the next couple of weeks, whereas I give the oil prices, they elevated if markets take a dip. And what does that do to everything? Because we know that Trump likes to watch the stock market. Oil prices stay elevated. Everything is going down. All risk assets are going down. Oh, it's still the most significant commodity, industrial commodity on the planet. But $90 a barrel, it's not a big deal. Now 150 is 130. Does it get there? Well, I can't predict what's going to happen in the short term. Right, right, right. Sure can get to, and in the short term, but that's not what matters. It's a long term that matters. What happens as I point out is what will, will we be as we head towards the midterms towards the end of the year? That's what's going to matter. In the meantime, the bottom line for me is we have virtually never seen this kind of volatility in energy and

11:33precious metals with such subdued volatility in the stock market. So I'll give you a key measure. 180 day volatility on the NASDAQ is 15%. That's the lowest since 2008. How long can we stay there? The number one lesson you learn, training options in volatility is always mean we're very, now it could stay low for longer. But it's very rare to stay this low when you have spiking volatility in energy and precious metals. To me, that volatility is going to trickle over, which is just a matter of time. But here's one key metric for you. So, you know, you look at 20 or 30-day volatility. Sure, things are picking up, but you look at a long-intermeasure. That 180-day volatility measure on gold is 2.4 times the S&P 500. People call gold a safe haven. It's no longer safe haven. Now it's a speculative asset. It's a mean stock. Yeah, well, it's, but it's the highest in 20 years. 2006. That was a great time to buy gold. But this time, it's probably a great time to sell gold. The point is, that was a great time that it started selling stocks. The point is this was a pre-warning before the invasion. Now we actually

12:39have the war. And, you know, if it doesn't go well, that's really bad. But I look at this as part of kicking in the potential. What I've been waiting for is a, you know, a bit of a global recession in the back of one key fact. The most you look at the most stretched market in history, that's the US stock market versus the rest of the world. And that came back a little bit last year. And certainly versus GDP. Highest in almost 100 years. I'm just expecting a little bit of reversion. And then this could be part of that catalyst, this, this, the invasion. So, so you think that all of this happening with the oil price is spiking. And everything just kind of happening could just be a catalyst to a correction in the stock market because the stock market is elevated historically speaking. Well, that's a key thing I want to change a little bit. We have been since 2008. There's only been two down years in S&B 500 toll to return. 2018, 2022. That's about the best one of the best. 22 was like a blip in the radar. Exactly. It was like a 10 minute recession. So people can call that a correction. I'm predicting,

13:40I've been predicting this to way too long. I've been early. But this is a classic setup for an enduring bear market. Means prices don't make records. They go down S&B 500. Just imagine here, here's one quote for you. If we drop 10%, that's 20, almost 25% in GDP. That will be the most in history for a 10% correction. Okay. You can compare it to 19, 29, didn't matter. That was very similar to what happened in 1990, early 1989 in, in 1990 in Japan. You see the problem here, stock market has to stay up. Yet things like cryptos led the way up. I've already collapsed, volatility and impressionist metals have taken off. And there's this one key pillar holding the whole world from a normal recession. That's that US stock market. I think it now has a worthy catalyst to kick it. Now we saw today, unemployment was a little bit weak. Yeah, let us expect we had a bad winter. But the key thing is retail sales for the second month in a row. If you look at the annual retail sales, they're running negative versus CPI. That doesn't matter. So that's bad. But when you have the greatest wealth effect in history and retail sales are declining versus CPI,

14:43there's a problem. What about you know, I've that's a very interesting perspective. I think a lot of people are just assuming they were never going to get a recession again or any major drawdowns again. And a one reason for that is because kind of how like the market dynamics have changed. I think the biggest thing is over the last 10 to 15 years, there's this everyone just kind of automatically invest in the stock market every two weeks through their 401K and all that stuff. This passive investing movement has really taken off and it just kind of adds money to the stock market. No matter what's going on, you just part 10% of your paycheck, 5% of your paycheck gets invested in the stock market boom. And that just provides more more money going towards the markets. And because of that, that acts as a buffer from any major correction, I find that to be a very interesting perspective, curious to get your take on that. Is that enough to like prevent like I've 25 30% correction that we've seen in the past? So the consensus is it's different this time and I reject that. So I just look for triggers

15:46for normalization and the prices of risk assets. And I've been saying this for too long. I admit it. I've been wrong in that. But one thing I've been able to do is find decent alpha and cryptos. Cryptos gave us great alpha until last year. And then great alpha and gold. Gold, what it did last year was good. It was the warning when gold grabs alpha like it did last year. And it takes alpha from everything. Most know will be beta, the stock market. It's warning you. And now we're starting to kick into what's going to happen. And that is just a normal correction. It's the key thing that Benjamin's Israeli former prime minister of UK pointed out is what we generally expect seldom occurs. So let's just think as a strategy is when that's priced in, priced in that will never have another recession or at least not have a 20% drawdown. That's me 500. It stays down. That's a problem. So here's my prediction is we are on the cusp of the third 50% drawdown in the S&B 500 since beginning of 2000. Now you think that's serious. Well, we've already had two since beginning 2000. And prices are the most expensive now than ever.

16:46And we're so dependent. And we're, you know, just it's the classic thing you're supposed to do as a strategy is when they're sound you're supposed to be yelling. Yeah, I've been early on that. But you just look for signals. Yeah. I mean, Mike, I gotta say we can probably talk for another 30 measure hitting you with a lot of stuff. I want to I could pick your brain for for, for, you know, another 30 easily. But I'm going to have to go back and digest all the information that you hit me with. And I'll have I'll have a lot more questions. I'm glad that I got to get a chance to do this. You have a lot of wisdom and thoughts and hot takes. I got to say a lot of hot takes, which is good, right? Because it's it's contrarian. It's not whatever everyone else is saying. So I'm looking forward to kind of digging into that stuff even more. I appreciate you kind of breaking down everything happening this week. And hopefully we'll have you back on pretty soon to kind of do a do a deeper dive on some of the stuff. Well, it's my pleasure being on because part of my job is 90% of the job is coming up with profound research that's a little different. And the fun part is we don't play show and tell with people like you. So thank you very much for having me and looking forward to our next time. Of course, thanks to thank you again. And hopefully, hopefully next time it's not as intense of a week and we can we can try to chill out a little bit

17:47more. I fully expect that things will be less more calm in the Rand War. Yeah. Let's hope so. Thank you again, Mike. Thank you. Well, all right, guys. Hope you enjoyed that conversation with Mike Maglone. I got to say, Mike has some contrarian takes that I can't say that I agree with them, but it's always great to hear different perspectives. Let me know what you guys thought about the conversation in the comments on Spotify and YouTube. And while you're at it, consider giving us a five star rating wherever you listen to your podcast. All that engagement really does help us out. And it helps other people find the show. Thank you guys so much for listening, watching and commenting. Shout out to Mike and Connor for all the work behind the scenes. And we'll see you guys back here tomorrow.