What the Headlines Are Missing: Shipping, Rates, and the Global Ripple Effect

Six topics. One conversation. And not a single one of them is getting the attention it deserves.

Michelle Connell of Portia Capital Management and Andrew Tang of Turner Financial Group joined me this week on Wealth Transparency, and we went everywhere. Bond markets, the Strait of Hormuz, mortgage demand, oil futures, ECB leadership, and the IMF. These are not isolated stories. They are all pulling on the same thread. 

Andrew shared a perspective on why the world keeps buying US treasuries that I had never considered before. Michelle walked through how the ripple effects of these supply chain disruptions may take longer to resolve than most people expect. And we touched on how oil trades in the futures market, because the number at the pump is only part of the story. 

This is the conversation that is not making it into your morning meetings. Like it, follow so you never miss what comes next, and send this to the person in your life who wants to stay informed.

Chapwood Investments, LLC, is a partner of Ethos Financial Group, LLC, a Securities and Exchange Commission registered investment advisor. No mention, opinion, or omission of a particular security, index, derivative, or other instrument in this webcast or video constitutes an opinion on suitability of any security. The information and data in this video were obtained from sources deemed reliable. Their accuracy and completeness are not guaranteed. At any given time, principals at Chapwood Investments, LLC may or may not have a financial interest in any or all of the securities or instruments discussed in this webcast or video. The guests appearing on videos do not receive compensation or provide endorsements or testimonials. Past performance is not indicative of any future results.

All investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results. 
No mention, opinion, or omission of a particular security, index, derivative, or other instrument in this webcast or video constitutes an opinion on suitability of any security. The information and data in this video were obtained from sources deemed reliable. Their accuracy and completeness are not guaranteed. The guests appearing on videos do not receive compensation or provide endorsements or testimonials. 
Securities are offered through Innovation Partners, LLC (member FINRA/SIPC). Ed Butowsky is a Registered Representative with Innovation Partners LLC. Ed Butowsky is licensed to business in: CA, FL, LA, TN, TX. 
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Transcript

SPEAKER_01 0:25

Hello, it is Ed Butowski, and this is Wealth Transparency. What we try to do each week is find headline stories that don't get a lot of attention in the press and then explain what people should do with their portfolios as a result of this. I'm honored to have Michelle Connell with Porsche Capital Management and Andrew Tang with Turner Financial Group. Here is my experts. And uh I want to start right off with you know, all the discussion has been about oil prices, but during this time, the bond market has started to cut rates or rates have started to go down lower because people are buying our bonds. So tell me a little bit, Michelle, about the global bond yields dropping sharply and what that means for portfolios.

SPEAKER_00 1:11

Well, when we have the lowering yields, that means that we've got concerned about growth, right? So I think there's a lot of underlying concern that things will slow down as transportation through the Strait of Harmoose slows down, or is it the minimum impeded? So that's why we're seeing the yields fall. And so maybe that won't be such a bad thing because we had initially priced one or two rate cuts at the beginning of the year. Then it felt like, well, maybe that's not going to happen because of oil prices, you know, fueling inflation. Now it seems to be more of a growth concern overall, not only here in the United States, but globally.

SPEAKER_01 1:55

Yeah, I I often look at the inflation chart, and the United States is right in the middle of inflation. I mean, you have some like Venezuela, which is off the charts, lower rates. Is that not going to exacerbate inflation in a lot of these countries?

SPEAKER_00 2:10

Are you asking me or are you asking Andrew? It potentially could, but I think so many of the countries have higher inflation than us, as you said, especially when you look at like the EU and the UK and parts of Asia as well right now. So maybe they're willing to fuel the inflation if they have higher growth, because we're blessed to have the amount of growth that we have here, and other parts of the world don't. So that may be a larger problem for them is a lack of growth. And they're willing to put up with higher prices for a while.

SPEAKER_01 2:47

Andrew, I often say that the United States is the pie piper of the world economy. As the United States goes, goes the rest of the world. So if the United States cuts interest rates, do you think that would increase the probability that the European central bank will decrease their interest rates?

SPEAKER_02 3:06

No, I completely agree with you. I think uh US is going to be the focal point of where capital is flowing for now and also into the near future. If we look at the second largest economy, they're still way too dependent on export. The domestic economy is still in the shambles. They're still not out of the woods from the real estate bubble that burst in China. And then in Europe, the the focus is really not on innovation, it's not there. And in my honest opinion, they are too entrenched into entitlement and regulations, and they regularly themselves out of innovation. That's my honest opinion. And the capital markets, it's not a robust one that we have compared to the United States. So when I see the commitments that are made from countries around the world to invest into the US and mainly revolving around the infrastructure or also buying planes, you know, for the country with money, sure. You know, US really, it seems like there's a neon like open for business. And I see capital flowing from around the world, coming to the US. Um, and and that's that's really going to be the case for the near term and also into the intermediate term.

SPEAKER_01 4:19

Yeah, I I often wonder uh why countries buy US bonds. I mean, our rates are so low. Um and you have other countries that have higher credit ratings. I think the United States has a credit rating of about nine or ten in the world.

SPEAKER_02 4:37

Yeah, it's it's really the intrinsic value of a country's currency. I I've I've said this before, is is the ability to collect taxes. So if a country has the growth and they will have a larger tax receipts, of course, if you look at the ability for other countries to collect taxes, it's horrible. It's horrible. Of course, European, they have a higher rate, but to be honest, many, many individual corporations they have ways to go around it. If you compare it to GFC's period for Greek, Spain, and Italy, it's just incredibly difficult to collect taxes. So the confidence of a country's fiscal and monetary system, it's also another amazing factor on the demand for the treasuries, for the company's sovereign debt. And so, therefore, when you add those two together, you will see that US treasury debt, it is still the number one sought-after instrument in the world that is still considered risk-free. So, in the formula of calculating risks, you know, treasury yield is considered risk-free.

SPEAKER_01 5:42

And so you brought up an interesting point that I never thought about. And that is, you know, we do have, you know, this interest rate. Let's say it's on the 20-year treasury, but we have the ability to tax and we have a really good system to bring money in. And that maybe is one of the reasons why these countries uh, you know, like China and Japan invest in the US-backed bonds. I never even thought about that, Andrew. I appreciate it. So let's let's turn our attention to shipping. And there are a thousand ships that were stuck in the Strait of Hermoods partially reopening does not fix the logistics uh problem immediately. Insurance costs and risk premiums will remain elevated, and you should expect supply chain disruptions, even if oil prices drop. Michelle, what do you think the succession of events are going to be once the bottleneck is opened up?

SPEAKER_00 6:38

Well, even if it is opened up fully, which we can't count on in in the near term, rates, shipping rates will remain high, insurance rates, as you said, also will remain high because there's been a backlog of need for the oil and the natural gas, especially in Asia. Farmers needing the fertilizer. There's a type of fertilizer, about 50% of it goes through the Strait of Harmoose. That's really critical. So I also add on top of that, helium, which is used for cooling in the manufacturing of semiconductors, it's going to be a while before all those things start flowing through on a normal basis, and the backlog of need kind of unwinds itself. So, what does that mean? Higher prices that are going to be passed on in terms of food, manufacturing, etc. I don't see things coming down for a while.

SPEAKER_01 7:39

Yeah, um, Andrew, I'm not sure if you know this, but which countries ship fertilizers through the Strait of Hermouth? I mean, I only think of the Middle East as a bunch of desert. I don't see them as fields of growing fertilizer.

SPEAKER_02 7:56

Yeah, you you have a uh a global demand coming throughout the world, and many of which uh the fertilizers that you know that they're coming from or must pass through the Straits of Hermoose. There are literally over roughly about 700 ships there waiting, you know, to pass through. Yesterday's news actually uh have said that a Chinese oil tanker were testing the waters to see if they could pass through, but they were stopped. And so I don't have to follow the minute by minute, play by play of what's going on, but I know that a resolution is near. Every time when there are policies, extreme talks, the most important thing is that they're working at it. I know that there is some tail end we're at risk here, that inflation, higher prices, the disruption of free trade, all this is going to be causing inflation and also causing goods to you know to not move freely. But there are even talks of uh, you know, in putting in a tow, a two million dollar per ship, for example, for Iran to collect and US, you know, jump right on it and say, hey, let's make this a joint venture so that both of us will be able to collect money. Now, I don't know if this is gonna open up a can of worms because then the other canal and other passageway just gonna, you know, put people like furring Somalia is gonna say, okay, you pass through my country, then I'm gonna collect the toll too. You know, that's where all the pirates begin. I'm not sure if this is a good thing, but if this is going to reduce the insurance cost of shipping a vessel, ultimately I think this could work out economically. And so I'm pretty optimistic in this particular case. I believe that you know the resolution is near. I don't believe this is going to go on for more than six months, for example. And so if you can see polymarket and cauchi, their probability of the you know situation resolving towards July or the end of June is actually quite high, somewhere around 60%.

SPEAKER_01 10:03

So it's interesting because the Strait of Hermouth is international shipping, it's not part of Iran. So how do they collect a toll in international waters?

SPEAKER_02 10:14

Yeah, exactly. Because it's so close to Iran side. The other side is so shallow that the the large ships they just can't go through it. And that's why the ships are forced to ride and you know move along the coastline of Iran. And that's why it is so easy for Iran to attack these ships. And unfortunately, that gives them an advantage of controlling the situation, and it is very unfortunate.

SPEAKER_01 10:45

So let's let's take a look at a different subject and that has to do with mortgage demand. And higher rates plus uncertainty equals a drop in home loan applications, early signal of consumer pullback, not yet headline news. So, Michelle, what do you believe is happening with the mortgages? Um, are higher rates going to slow down people looking to apply for mortgages?

SPEAKER_00 11:09

I think people are very cognizant and of mortgage rates because it affects their monthly payments so much. So when you have a drop of uh 1% in mortgage rates, it increases existing home sales by 5 to 10%. That's what I was able to find this morning through through AI. And that's a lot. So if you look at the other side of that, if you have an increase of 1%, you're you could lose 5 to 10% of your home sales. And home sales have a huge impact on our gross domestic product. It's about 16% that there's a a follow-through or a ripple effect from home sales. It's critical that if you're a home buyer, you want and or a seller, because you have a lot of people that have been seen on the sidelines not willing to sell their home. So if we could get rates lower, I think you're gonna get more movement through the home uh buyer and seller market, and therefore it'll help the economy, help keep it going.

SPEAKER_01 12:15

Yeah, and and so far we've been talking all about interest rates in the bond market. And to me, that is what happens first. You know, A happens before B and B happens before C. So A is where interest rates are, and then B is where stock prices move in relationship to where A happened, meaning the interest rate move. So when you're looking at trucking and transport and building, what what do you see there, Andrew, in terms of uh the weekly price adjustments and logistics? Because that goes right to earnings for a lot of logistics companies.

SPEAKER_02 12:49

Yeah, they're definitely are climbing uh due to due to the recent volatility and the geopolitical risk. Fuel oil, gasoline, it's over$4 per gallon for the national average. You have a one-way direction for labor. It's always going up. I rarely see labor costs coming down voluntarily unless there's a crash or there's some type of uh catastrophic event. In that, in those two combinations, you see that adding geopolitical risk, it's just it's gonna cost uh a continuation of a higher cost of delivery. Amazon already is adding uh uh, you know, a fee to the delivery costs for some of the items. For airlines, especially if you're flying economy, they're adding a baggage fee and they're adding$10 to the baggage fee. And so you're seeing across the board businesses are starting to pass through these costs to consumers. But again, the consumer in the US is very resilient. And so I still think even when oil is at$100, the US economy will still survive. I just wrote a piece about it in my weekly notes is that the US economy will prevail because if you look back at history in the last 10 years, there were two to three periods when oil was over$100. 2022 was the most recent period. Did the GDP go down? No, not at all. It was consistently growing. So the businesses, intermediary and the US consumers, in today's age, we have many choices. And we have the ability and the flexibility to navigate around to deal with this higher for longer oil prices. So, in my opinion, these pass-throughs are still temporary, transitory, however you want to put it. It's the same reason why the Federal Reserve decided to not raise rates just to deal with the oil spike. Because by the time the effect takes place, most likely the oil situation will be resolved. And so I still look at this as transitory as a short term.

SPEAKER_01 15:08

So so leadership matters to everything. I mean, when when Trump took over as president again, the direction of the country completely shifted. The European central bank leadership is under quite a bit of uncertainty. And I I want to to draw Michelle on your knowledge about the ECB and the policy direction changes that might be taking place there.

SPEAKER_00 15:32

Christine Lagarde, I think that's how you pronounce her name. Her term ends as the the president of of that part of the world, uh 2027, but there's been some speculation, and maybe she's kind of implied it as well, that she may leave her position early because she wants to help Macaron, the president of France, as well as the chancellor of of Germany, have some tr transition power as their term's end. So that's kind of concerning to me in terms of stability because she's always been a very strong person. And her leadership, I think, has been very, very good. So if she decides to leave her position earlier with the European Central Bank, I think that could be an issue, and we should be watching that closely because they don't have the growth that we have. And I think interest rates to them are even more important for them to be able to have profitability growth than they are than it is to us.

SPEAKER_01 16:40

Excellent point. Andrew, you can add to that, but at the same time, I want to talk about how oil trades because people oftentimes don't really understand that oil trades in the futures market and that it sometimes will exaggerate things on the upside and exaggerate things on the downside. So I'd like you to take us through how oil trades, or if you want to add to the ECB uh discussion.

SPEAKER_02 17:06

Yeah, uh a couple of things that you you know you did mention is that India is looking to cut rates while the European banks, ECB is looking to raise rates. Well, the ECB doesn't have dual mandate, they only have to deal with inflation. That's one. And then secondly, they've experienced unusual inflation that really ticked up. And also look at where their rates are. So ECB in general, their rates are somewhere around 2, 2.15, meaning they're already at such low levels, and that's why they're even contemplating raising rates. India, on the other hand, what is their rates? Their rates is at five and a quarter. So that's why it is the natural direction that they're looking to cut rates so that they can stimulate their economy. They also have high unemployment to deal with. Same with Europe. So that's why, you know, when when you reach one end of the pendulum, it's the other way to go. So I'm actually grateful for the Fed not cutting so fiercely, you know, in the past and just doing a quarter. And then sometimes you have to understand and agree with that the pauses are actually good. Now, going to oil, most businesses, if they use a lot a large amount of oil, they have to buy the futures to basically hedge against their cost. And so if you, for example, you go to a CNBC, you click on the crude, you see the May 2026 contract. You know, right now it goes up and down. And yesterday it dropped below 100 and now boop, right back up. Now is at 101 again. And so you can understand that, for example, airlines, they have to use futures and options to protect themselves from their inventory costs so that they can understand that how much to charge an airline ticket, right? They can't just let a component of their costs to be flowing so freely when it's volatile. Same with other businesses, you know, that consumes a large amount of oil. And uh it really is uh it really is different, you know, when you trade on, you know, the futures market versus spot. And most Americans, they just look at gasoline prices, which is a refined product, very different from crude because the refinery cost is not there.

SPEAKER_01 19:25

So the actual trading of futures, are you comfortable discussing how that works?

SPEAKER_02 19:31

Yeah, I mean, uh mechanically, you know, it is it is all derivatives, and basically, what is the price that you will pay for a future delivery of goods? So these are the commodities is uh regulated by the FTC, and it will always calculate in and price in geopolitical risk, inventories that are measured by the you know, uh EIA on a monthly basis, and also looking at the demand and and again geopolitical risk around there. And so all that is priced in, and that's how the futures trade. And again, businesses, they use it, and also people also trade it for profits as well.

SPEAKER_01 20:09

Okay, so finally, Michelle, let's talk about the IMF uh focus shifting to post-conflict economic scars. So the IMF, can you explain what that is? And when they're starting to shift their attention to the post-conflict economic scars? What is what is meant by that?

SPEAKER_00 20:29

The IMF is the International Monetary Fund, and they focus on the economic health of the entire globe. And what they're seeing right now is that there are a lot of parts of the globe that have not recovered from COVID. Hard to believe, right, when we're six years out approximately. And they're seeing areas that don't have the growth, that are are suffering a lot from not only that, but having famine, et cetera. And so they're trying to take some of their resources towards the parts of the world that don't have the economic prosperity that we do in the developed parts of the world.

SPEAKER_01 21:13

Well put. And Andrew, in conclusion, the IMF is not just about coming in after a war, as Michelle said, but going to places where there is famine and disease, uh, and that's usually Africa where a lot of it is happening. How much attention and how much money should we be putting to the IMF? And are they a respectable group? Uh, you know, or or are they skimming money off the top and as Trump would call it, fraud?

SPEAKER_02 21:43

Yeah, it it's very difficult to say, but I I believe as a first world nation, you know, with the largest GDP in the world, I believe we do have a duty and a responsibility to look after uh you know the the rest of the world. It's also the same reason why we are we we took on the role of the world police right here. So we butt our nose in to help uh defend nations that are weaker uh and not be able to defend. themselves and also we try to be involved in many of the situation and obviously behind the scenes is really about resources and and and trying to arrange and and have a say in the world order. But their main purpose is a humanitarian one after World War II. I believe they started in the in the 40s. Uh try to uh prevent the kind of uh economic instability that is attributed to certain events or catastrophic event. And so from post-uh-tragedy event morphing away to prevent uh or proactive measures, I think IMF is doing great work, but you know, uh who who can who can say that there is no corruption, you know, uh, you know, in between. So hopefully, you know, through the use of AI and technology, we will be able to find these levels uh or any kind of corruptions uh by holding people accountable, certain department you know, accountable and trace the money and so on and so forth. I believe with the with the innovation and technology, we will be able to do this job more effectively, just like underwriting and and preparing for taxes and things as such. So we can actually put AI to good use. And I think in conclusion, it is our responsibility for those who have the resources to take care of those who don't.

SPEAKER_01 23:40

Well, what AI can't do and won't do is replace your thoughts, both of you. And I appreciate you doing this very much. So this is machine with uh Porsche Capital Management and Andrew Tang with Turner Financial Group. I encourage all of you watching this to reach out to one of these individuals if you need any help in analyzing your existing portfolios and seeing what these two brilliant minds have as suggestions for you. So thank you very much to both of you.

SPEAKER_02 24:10

Thanks for having me, Ed.

SPEAKER_01 24:11

Sure. Bye-bye.