No Relief Until 2027—Then Stocks Face Reset | Peter Berezin

Peter Berezin (0:00)

AI companies will need to generate something in the order of 10 trillion dollars in annual revenue to justify all the capex that they're putting into data centers. So if the capex peaks maybe in 2028, stocks could peak in 2027 So the size of the shock could be larger, and the policy response more muted. That's a recipe for a weaker economy.

David Lin (0:22)

People around the world, especially in the West, want to know when relief is coming from higher oil prices, higher interest costs, and perhaps a slowing economy. Here with Peter Berezin, Chief Global Strategist at BCA Research, discussing exactly that. Welcome back, Peter. Good to see you.

Peter Berezin (0:35)

Good to be back.

David Lin (0:37)

It's an interesting time when stock markets are at near all time highs. Business activity is growing. PMI is still above 50 But we have consumer confidence, according to many surveys, including the University of Michigan survey, at near record historic lows since they've been doing this the last couple of decades. This is worse than COVID. It's worse than 2008 It's worse than tech bubble burst in 2000

Why are consumers feeling so despondent right now at a time when markets are still storing and business to business development, according to some manufacturing data, is still growing as well?

Peter Berezin (1:15)

Well, we have a K-shaped economy. Real personal disposable income has barely grown since Liberation Day. So, consumers aren't seeing increases in their take-home pay.

Yes, stock prices have gone up, and that's great if you own a lot of stock, but most people don't. For most people, the house is their number one asset, and home prices aren't rising anymore. If anything, the housing market has become increasingly strained by rising mortgage rates. So, it's not an economy that's firing in all cylinders. It's not going to be able to keep up with the rising mortgage rates across the entire income distribution. And I would also add that if you look at the stock market, more than half of stocks are trading below their 200-day moving average right now.

The stock market is near an all-time high, but that's because tech stocks have been powering ahead. But for many companies, it's not a particularly great market.

David Lin (2:13)

Your recent report in September wrote, some relief for yields could come in 2027 if oil prices could come down and the AI capex boom turns to bust. Let's touch on these critical assumptions here. Focusing on oil as we speak today, Brent is still above $100 a barrel.

Despite the reports coming in that oil has now, the volume through the Strait of Hormuz has now somewhat normalized. Trump has even posted on Truth Social last week that everything has returned to normal. I'm pretty sure you've seen that chart. Despite those reports, oil is still at $100 a barrel. When do we see oil come down and why would it come down, Peter?

Peter Berezin (2:57)

Well, it's certainly true that the flow of oil through the Strait of Hormuz has increased, but the price of shipping that oil has gone through the roof, because increasingly you have to transfer the oil from one tanker to the next. And also most importantly for consumers, it's not the price of oil that matters, but the price of the refined products that they buy and so-called crack spreads, what refineries earn and margins, they've increased dramatically because there's a shortage of refined product. Ukraine is taking out a lot of Russian refineries, that has caused the price of diesel and to a lesser extend the price of gasoline to remain very, very high. And again, you asked me before, why are consumers upset? Well, they're upset because the price of filling up their vehicles is much higher now than it was a year ago.

David Lin (3:51)

How much demand destruction can we actually expect? Oil is relatively inelastic good, and so even with $100 a barrel, people still have to fill up oil at the gas pump. How much of that does that actually eat into their discretionary spending?

Peter Berezin (4:06)

We haven't seen much of a decline in volumes of gasoline purchased in the US despite higher prices. There's been some reduction, but not a lot. Right now, the US is relying on inventories, which are being steadily depleted. We have seen more demand destruction outside of the US, but in countries such as Bangladesh, Philippines that aren't integral to the global economy.

But ultimately, this situation in the Middle East will need to improve because inventories can't be run down indefinitely.

David Lin (4:48)

Well, we're talking about oil because not only does it affect the consumer sentiment, it affects how the economy grows. Do we have any evidence to suggest that at a certain point, the oil market is going to cause S&P profit margins to start to contract as well, Peter?