The Trading Floor: Trump’s Energy Play & China’s ‘Japanification’
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Welcome to the Market Maker podcast, hosted by me, Anthony Chung, where every Friday I talk to a member of the team about what happened in markets this week. From macro themes and single stock news to cryptocurrencies and careers in finance, our aim is simple, to make finance interesting and easy to understand for everyone. So let's get to it.

Okay, welcome back to the trading floor. Coming to the end of the week, so I've got a couple things in global markets to discuss with you all, but it feels a little bit unusual, probably sound a little bit different, feel a little bit like a pilot on an airplane with my headset on, sat in the middle of the office at the moment, having to perform in front of an office full of people. And also, I'm sat down. You might have realized, anyone who watches the pod on video format,

I never sit down. You've taken a role reversal, actually. Well, yeah, I'm stood up. So, yeah, let's see how this goes. I already feel better getting up. I might buy one of these stand-up desks for the home office. Do you know the cost-effective way of doing that? Go on. Ironing board. Yeah. I saw a student do it once for a HireVue interview. Genius. Yeah. Good tip. Yeah.

There you go, save a few pennies this Christmas. But in this episode, we're going to talk about the future for oil prices. And in particular, because some comments by President-elect Trump, who did say in his pre-election pledge, he was going to cut energy costs in half within 12 months. So

So ambitious guy, of course, but it's not only he who can influence things. And we'll talk a little bit about government policies and the ways in means he might achieve that, but also the other key variables at play, which determine the level of prices of oil and trying to understand how much it could move. That's the first thing. And then we're also going to look at the fixed income markets where France has been plunged into political turmoil and

again and the chinese bond market grapples with japan come on come on japanification japanification you've got to say it like trump to get those sorts of words out we're going to talk about what exactly does that does that mean because it's been super important uh for yields at the moment some things are happening that you should be aware of before that though

Spotify raps just dropped for this very show. So just wanted to say a huge thank you to all our listeners. A couple of quick fire stats for you because this is what rap does, as I'm sure all Spotify listeners are seeing at the moment with their own accounts. But for the podcast show, followers are up 95% on the year. Number of streams up 99%. And number of listeners, 96%.

We were streamed in 112 countries. Don't ask me. I didn't even know there was that many countries. So the breakout episode was when, you remember when there was this kind of US recession fear thing?

Japanese interest rates, stronger yen. There was a big sell-off in one day. People were panicking about lofty tech valuations. That was the breakout episode. Did slide into the top 10 business charts in October. And we're a top 10 show for nearly 8,000 listeners. But question I'm going to ask you.

is it tells you what's the number one music genre of the people who listen to our podcast. So what do you think? Do you think it's classical music? Do you think it's... I think it's hard house or a bit of German techno. Wow, I didn't know you were a cool guy, Piers. But rap. Go on. Obviously. Rap. All right. Rap is the number one genre of our listeners of the podcast show, so...

There you go. Okay. You got any, what we need to challenge you is kind of an end of year sort of quiz. Well, no. Amplify me rap. Okay. As in R-A-P. Okay. We'll end it there. So let's talk then. You know, I love the comment talking about this oil story. Donald Trump, he's a man of, he's an eloquent man.

and in the pre-election his campaign was drill baby drill so that was his goal to cut energy costs in half in 12 months but perhaps you could tell me a little bit more about this what was he why was he talking about this what was he saying and then let's dive into then the mechanics of what's going to drive the price of oil going forward well look Trump likes to kind of position himself as a sort of

even though he's a billionaire, likes to position himself as a bit of a man of the people. So this kind of language is very much aimed at the people, right? Your everyday Joe,

Middle America and drill baby drill. You know, they love these kind of Trump throwaway lines, these slogans and people can just get it. And what's really, so we've had an inflation crisis. What I would say is most sort of incumbent governments and politicians, none more so than the Biden administration have failed to tackle the inflation problem

in a way that is meaningful for a household. People, normal people living their everyday lives.

um and what trump understands way better than biden it seems is that you know what do you buy as a you know going about your day you know what's the stuff you're buying and food inflation in supermarkets was one of the keys right that was off the scale and that's what was hurting people were turning up at the shop you know on the news they're going oh the fed's celebrating because inflation's

The inflation crisis is behind us and we're going to start cutting rates. And there you are at the till and you're going, what? I'm still paying a crazy amount here more than I used to like one, two years ago. The other key thing for America is, well,

What's the price of the petrol pump? How much does it cost me to fill up my car? And that's a really key part of my daily, weekly, monthly, yearly spend as a consumer out there on the street. And Trump knows all too well that if you can get the petrol pump price down, then not only...

Will that be a huge boost for his ratings? But actually, if it can be sustainably lower, the petrol pump, that's a real catalyst for economic growth through providing all consumers with extra disposable income. They're no longer paying more at the pump. Right, let's get down the shops and buy more stuff there. So, you know, that's his angle. It's a real populist move. And let's try and get the economy, you know, on a tear as a result.

And do we have any details here? I seem to recall him talking about declaring a national emergency in order to get some of these policies over the line. Is that just, again, the wordplay to amp people up for what might come as opposed to the realities of what might transpire? Yeah, I mean, yes and no. I mean, obviously, we'll see, right? I mean, he talks a good game.

Can he deliver it? I mean, he'll try, but there'll be roadblocks. I would say that obviously there's an environmental element to all of this. And the Biden administration was more, you know, in favor of that more green energy policy, that pivot to green, a measure of that.

what the Biden administration have done to apply for a drilling permit. Because look, it's all very well and good, Trump going, right, drill, baby, drill. I think his new kind of energy czar wants to see 3 million barrels a day increase to US production. They're on about 14 million barrels a day at the moment. So adding an extra 3 million, I mean, that's a lot, right? Can they do that?

How long will it take? Now, you have to apply for a permit if you want to have a new drill site. And during Biden's administration, the length of time it takes to secure a permit increased. So during Trump's term, it was 172 days. Now it's up to 258 days. And so this is a...

both a measure of Biden's administration and their preference for moving away from fossil fuel generated energy more into the green space. And number two, it's also a very clear function of the red tape that the sort of the left and the Biden administration have been throwing at this, this whole deregulation play by Trump. This is a perfect example of what he means. It's like, let's get out of people's way

when they want to, you know, get on with it and be more productive. And so Trump's going to obviously address that length of time to get a permit issue and get it at least back to what it was in his time, which was 172 days. But I'm sure with Elon and the Doge crew, they're going to want to get it even below that, right? And so if they are successful, if, then yeah. I mean, why not? We can see US production increase. They've got

They've got the supply. I mean, it's there. So it's just about, you know, drill, baby, drill. However, there is one. And so that's fine. Well, what will happen if they pull that off? Let's say this time next year, we're talking US oil productions at 17 million barrels a day. Well, what happens? Well, more supply, price goes down. Here's the kicker, because a lot of that

extra and indeed a lot of the existing oil production in the US is shale oil, which is still, it's an expensive business. It's an expensive extraction process, shale oil. And so there is a natural balance here because the lower price drops when that

output and production increases, the lower price drops, you may well get to a point where actually that whole shale process becomes a little bit, you know, the margins go and it's no longer economically viable and you're going to start to see these pumps getting turned off. So there is a natural flaw to price. I don't know necessarily what that is exactly. Maybe it's 50 bucks. I don't know. But

I guess we'll find out and that'll be quite interesting where that natural floor is with regards to US production and the profit margins involved with shale producers. So just thinking though, is there a note of caution here about the natural assumption being that it almost might act as a stimulant, you were saying?

If you lower the price of the pump, the consumer starts to feel great. They start to spend or economically it becomes cheaper for the fuel literally to fire up your economy. But is that just a too one-dimensional way to look at this because...

understanding supply and demand is looking at OPEC. It's looking at China. It's looking at these forgotten things pretty much. I mean, when was the last time I heard about the Middle East, the war in the Middle East and what's happening in Ukraine? That seems to have disappeared a little bit off mainstream media, but surely that all still plays a significant part. Well, this is it. And that's the really interesting thing about specifically crude oil prices. There are so many multiple different sort of elements of

to that equation, you know, what is the price of a barrel of oil? And right now, I mean, okay, US growth, we've spoken about this, is hot and Trump's coming in and he's going to pump it again, right? US looks strong. Go outside of the US, not so strong.

So actually, and particularly China, so China's the second biggest kind of consumer of oil behind the US. I think they account for 15% of global oil consumption. And look, we'll talk about China in a bit later in a different angle on this pod. But for now, look, their growth rates are weak. And so in fact, Chinese oil demand has been flat for three quarters in a row now.

And actually it's believed, if you go and talk to the IEA, the International Energy Association, they believe that actually Chinese demand will peak in 2025. Then we'll start to decline. You've already seen that in developed economies where that demand has peaked and now it's starting to come down. And we're expecting that in China next year. So from a demand point of view, outside of the US, economic conditions look weak.

And so that's a negative for oil price if that demand weakness, if you expect that demand weakness to continue. Then you've got your geopolitics. Now, I mean, what's been interesting, I would say about, well, let's take the Israel-Palestine situation. Well, I guess it's more broad than that. Let's take the Middle East situation. Broadly speaking,

The sensitivity of the price of oil to that has been fairly muted, meaning we haven't really seen much flare up in the price of oil as a result of supply risk, unless Iran get into the mix. So whenever you've seen Iran-Israel come head to head and tussle, which has happened whatever, two or three times during this last 12, 24 months,

Whenever Iran pops in, then you actually do get a little blip higher in the price of oil. Iran are a big producer of oil. But outside of Iran getting involved, there's really no supply risk, Middle East supply risk priced into the price of oil at the moment. There's just that assumption that Trump's going to come in and, I don't know, magically there'll be a ceasefire and all things will settle down. And I assume it's not just about...

although Iran is, say, fourth largest within OPEC, which is very large, but it's about stoking tensions then with the largest of the OPEC member, which is Saudi Arabia. And that's when that's the significance of the Iran engagement. It's almost the proxy stuff that goes on via Yemen into Saudi. And if Saudi gets disrupted...

then there's a problem. Then there's a big problem. I mean, your top five producers, well, really, there's three big producers of oil on the planet. It's the US, Saudi, and Russia. Then there's a big step down, but then your next kind of ones are like Canada and Iraq. And then you're kind of talking about the Irans and the Kuwaits and those sorts. But yeah, I mean, for sure, when anything happens in the Middle East, ultimately...

It's Saudi Arabia that's the focus when it comes to you trying to figure out what the supply risk is. And currently, it seems, rightly or wrongly, the market doesn't believe there's much Saudi supply risk. And so that's why if you go and look at the price of oil, I mean, the price of oil trading $68.50 right now, that's WTI crude. Brent crude is $72.00.

you know, these prices are, you know, trading basically at the lowest prices of the whole year. Yeah, so I was going to ask you that exact thing. So, Scott,

Besant, the treasury kind of pick, he's the one who was talking about, let's boost US oil production, 3 million barrels per day. That's a 25% jump in US production. That then, and we haven't even mentioned yet, tariffs on China. You talked about their economic plight at the moment, but then the risk of tariffs. So why isn't oil moving then now? This seems to be multi-dimensional in all the reasons why. Is it because a lot of these are

counter of each other and so it's a little bit of a status quo to see a couple things there's the opec delayed meeting which i'm sure we can talk about but there's also trump still to come in and like you said earlier what he says and what happens and the timings and sequence of that can often be quite different look there's lots of risks to all of these what these things that might happen in 2025 as in

varying levels of confidence that they might or might not happen. But fundamentally, bottom line, what do we know for a fact? Total world production right now is higher than total world consumption. That's even with OPEC's cut to production. We are pumping more than we need.

So there's a natural oversupply. For that to correct, you're going to need to see a couple of million barrels a day come off the daily production levels, right? But what are we expecting to happen? We're not expecting production to go down. We're actually expecting it to go up, not just from Trump coming in and drill baby drill, but OPEC. You know, they've cut production and they're saying they're,

going to extend those cuts, number one. Number two, a lot of those OPEC countries just say they're going to cut, go back home and don't bother, which is infuriating for the Saudis. And so there's one real uncertainty is about what OPEC do next. And do Saudi go, you know what, let's just increase production again? Of which, if they do that and the US do that,

And we're heading seasonally into the winter maintenance period for refineries when oil demand dips. It's like the perfect storm. Yeah. Coupled in with ongoing concerns about growth in the second biggest consumer in the world, which is China. And let's be honest, Europe, obviously another big consumer. We're worried about German growth, obviously problems kicking off in France, etc.

You know, generally speaking, things are the fundamentals, both on the supply and the demand side. Let's put it that way. Geopolitics aside, the fundamentals are all pointing south for the price of oil. Right. So you mentioned France. Let's talk a little French here. So plunge back into political turmoil. Michel Barnier.

I'm sure many UK listeners will remember fondly or not fondly from the Brexit situation. He's been ousted after just three months as the French prime minister. The shortest French premiership since the Fifth Republic was founded in 1958. So why did it happen? Barnier's fall comes down to lots of problems trying to get their budget for next year over the line. That included 60 billion euros in tax increases.

never a good look, and spending cuts to reduce the French deficit. So there were other things playing into that. Barnier, you know, it never particularly goes well where you use constitutional powers to force through and pass laws. And the reason for that being how fragmented the French parliamentary composition is at the moment. All of this has led to a no confidence vote.

And so it's all transpired very quickly. But French yields have been moving for quite a bit of time. That's all going to play out probably between now and Christmas because Macron's got to move pretty quickly here to try and resolve this matter. A couple of things, though. One was...

Talking of yields, because there's been a couple of things that have been quite interesting. You mentioned that at the top of the show about Chinese long-term bond yields and this comparison to Japan and them switching for the first time ever, I think. And then we were looking earlier in the week, people were focused on this French situation. It almost felt like a bit of a hand grenade. It's now gone off. And it was French yields that are taking Greek yields.

which is, I wanted to ask you as someone who had lived and traded through the sovereign crisis, so 2011, 2012, and the fallout thereafter, and it was Grexit, people talking Frexit, and all these different types of things. So, A, can you believe what is happening now? But I guess more my question is, again,

Can you explain to me how market psychology or behavior works? Because if this was back then and we were talking France, this would have been huge monument seismic waves going through the market. And yet it seems quite domestic at the moment, at least. Yeah. I mean, if you are old enough, so 2011, basically 2010 into 2011 and 2012, basically Greece was...

You would say there was a high chance of default. There was a high chance of Greece being forced out of the Eurozone. There was a high chance of a extreme Greek depression. And basically Greece was falling off the side of Europe into the Mediterranean to sink to the bottom. And they were the, you know, everything went to measure Greece.

how good or bad the Eurozone debt crisis was going, the number one metric was Greek 10-year bond yields. And at one point in 2011 and start of 2012, their 10-year yield was above 35%, which is basically, I mean, pretty much pricing in bankruptcy, right? 35%, right?

France, of course, second biggest economy in the Eurozone, just behind Germany. Italy, number three. But France, relatively speaking, absolute rock solid, second largest entity in the system. Steady in terms of debt and deficit and a bit of a kind of anchor point for all the peripheral European countries just to try and latch onto. So fast forward, not even 15 years.

And to have Greek yields below French yields is just, it's like, what? That's kind of insane. And as a function of both how well Greece have done more recently in terms of their recovery. So remember, as yields climb, maybe I should just say, as yields increase, that's really a function of credit worthiness. So, you know, what's the risk of this borrower defaulting?

And the higher those yields go, basically that's the market saying there's the risk of defaults increasing. And obviously yields at 35% are insane. And that's like, wow, default is imminent. But the bond market right now officially is saying France have a higher risk of default than Greece, which is quite extraordinary. And yeah, look, it's a function of the political...

kind of fraction or fracturing, I should say, that we're seeing in a lot of countries combined with then, you know, increased debt burdens off the back of COVID, combined with then left and right debt

side conflict about how to deal with all of this. Does the left increase taxes? Does the right cut spending? France Barnier is trying to do both to try and keep both sides happy in this very unstable coalition. And ultimately, nobody likes it. He's trying to keep everyone happy, but has actually

Kept no one happy. So it's all imploded. And yeah, if they don't sort out their budget for 2025, and I guess this is the risk that you're seeing the blowout in those yields in French bond markets. It's like 2025 budget is currently on, this hasn't been signed off. Look, we're four weeks off. And yet currently there's no government now, nevermind a deal on the budget. And so this is where markets really start to panic.

Okay. And then how does this tie into the story that you've kind of brought to my attention about China and Japan and the significance of that and why it's happening? Yeah, I saw it was just interesting that there is might caught my eyes because I saw that French Greek bond yield crossover. I think it was last week and literally double take. And it was like, what today or yesterday? Sorry. I almost had a similar kind of moment.

We're just flicking through the FT like you do. And I saw another chart and it was exactly the same chart in one sense, where it was looking at 30-year bond yields of two different countries. And one country's bond yield had gone above the other one for the first time ever. And the countries are China and Japan. And it was another one of those moments. It's like, wow, that is such a interesting measure of how extraordinary things, the distance through

things have shifted in kind of recent times. Again, you need to be old and know your history here to really kind of get a bit geeky, excited about this kind of stuff. But, you know, Japan bond yields have basically been zero or negative for forever, right? And this is the fallout of the, you know, the kind of big financial crisis that Japan had back in the 1990s, okay? If you go back to the early 90s,

The few decades after the Second World War, Japan were on fire. Growth rates through the roof. At one point, early 90s, the US very kind of upfront had a strategy where they were worried Japan would become the biggest economy on the planet and basically overtake them. But then they had a massive real estate bubble burst. And ultimately that paved the way for what then was a deflation trap that really lasted forever.

Well, until now, you would basically generally say. So they've been trapped in deflation. The economy hasn't grown for 30 years. Yeah, deflation is a hard thing to get out of. But weirdly enough, what was an inflation crisis for the rest of the world, where inflation got forced up for Japan? I mean, literally one of the best things that could have ever possibly happened.

And so their inflation's now gone from negative, where it's been stuck for 30 years, and it's bumped up into positive territory. And this is a good thing for their growth and their kind of recovery from that 30-year problem. So Japanese yields are on the way up, okay? The Bank of Japan's hiking rates. It's like, what? Okay, and there's actually inflation. So that's really good for Japan. But then you switch over to China,

whose yields are now lower than Japanese yields for the first time ever. And it's all the exact opposite. And people are starting to use the word Japanification. See, nailed it. Japanification. So basically, is what happened to Japan 30 years ago now happening to China? There's some real similarities. So the real estate bubble bursting. There's a demographics problem.

And actually you would say, right, so you could say both had a real estate bubble burst. Okay, so that kind of kicked things off. Now, the demographic issue in China is actually worse than it was in Japan in the 90s. That just means that the population is shrinking. The population's aging. They've got a birth rate, chronic birth weight.

birth rate problem. Okay. And that's all bad news from an economic point of view, unless you can fire up Elon's robots and somehow, you know, replace what was a human workforce with robotics and somehow get productivity moving. But it's too early for that. So right now we've got a demographic issue. And actually what's also worse, you could say China's

economic system and the consumers within it are more exposed to the real estate bubble bursting than Japan was. That's because China is generally a poorer nation if you look at GDP per capita and mostly their wealth is tied up in property. Way more so than the much richer economy of Japan was back in the 90s. So look, people are worried that China are sliding

inevitably into deflation and into a trap that Japan found themselves in. So Chinese yields are on the way down and Japanese yields are finally on the way up for the first time in 30 years and they crossed. And it's just one of those wow moments and just amazing how things have changed. So listening to everything that you've discussed in the last half an hour then, to conclude, going into 2025, Germany's economic struggles are quite clearly apparent.

Europe, France is now gone into this political disarray. China, you described at length. Is this only going to fuel further the outperformance of the US stock market and US-centric assets, if you like, at least in the near term? Yes.

Here's the convincing answer. I mean, definitely. And it's important to just clarify the near term there. Obviously, stuff can change. Maybe Trump comes in and it just doesn't. Maybe he adds tariffs and inflation comes back and the Fed's got to hike again and find that stalls their economic momentum. Maybe this political...

disaster going on in Europe and France right now. Maybe that forces finally a change one way or the other. They lean right or they lean left. And then you get more radical policy. But who knows, might lead to a turnaround in the economic situation. Maybe, as I said, AI...

Maybe that revolution speeds up. And actually, maybe in 10 years' time, we'll look back and we'll go, wow, we really overpanicked about that demographics thing, didn't we? But who knows, right? All that's for the future. So all you know for sure now is there's a lot of economic risk everywhere apart from the US. And look, Trump's coming in in January. I mean, he can't mess it up.

like straight away, right? So you would have thought quarter one, maybe H1 2025, Trump will be on that crest of a wave, first 100 days kind of thing. And so, yeah, it does look like when you look at the numbers, the US is way overvalued compared to the rest of the world. But it's looking like, if anything, that overvaluate, that valuation gap may widen still further in the coming months.

Yeah, that was a really good thing to remind me of, actually. That first 100 days will be so important to him. Yeah. To really get as much over the line as possible. And he'll be juicing it as much as he can. So, look, fascinating stuff as always.

And once again, thank you for everyone who is a regular listener. If you're new, welcome to the community. And yeah, thanks, Piers. Catch everyone. I think we probably squeeze another episode in before the Christmas break. So if anyone has any suggestions, reads a headline that they think warrants us having a discussion about, just drop us a comment if you're listening on Spotify and we'll see what we can do. All right. Thanks, Piers. Thanks, everyone. Cool. See you later. Bye.

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