Portfolio Return as of 05/27/22:
2020: 25.65%
2021: 29.15%
YTD: 8.65%

Thursday, March 31, 2022

More Bad Policy Proposals from Biden Administration

1. Biden Budget Would Raise Income Tax Rates to Highest in the Developed World

Sensible message, not so sound policy: President Biden’s budget came out this week with a sensible message about the need for stronger economic growth and sound fiscal policy.

Unfortunately, the actual policies laid out in the budget would reduce economic growth and create unsound fiscal policy, with no real evidence provided to support claims to the contrary.

Not good to be number one: The budget proposes several new tax increases on high-income individuals and businesses, which in combination with the Build Back Better Act would give the U.S. the highest top tax rates on individual and corporate income in the developed world.

Several questions also remain about the OECD global tax deal’s prospects, implementation, and effectiveness, which could affect the administration's tax plans for U.S. multinational companies doing business abroad.

On the spending side: The budget proposes increased spending for several public infrastructure programs. Our analysis, like that of the Congressional Budget Office, indicates public infrastructure programs paid for with higher income taxes results in reduced economic growth.

A better path forward: Our federal policy experts suggest that policymakers consider the tax policies we recommend in our recent Growth and Opportunity report—policies that boost private sector incentives to work, save, and invest.

2. Proposed Minimum Tax on Billionaire Capital Gains Takes Tax Code in Wrong Direction

Biden's budget: President Biden's FY 2023 budget includes a new tax proposal that would require wealthy households to remit taxes on unrealized capital gains from assets such as stocks, bonds, or privately held companies.

Not in line with international norms: Biden's never-been-tried before approach goes in the opposite direction of international norms. In fact, most OECD countries tax capital gains when they are realized and at lower rates than the U.S., and tax capital income overall at lower average tax rates.

Invest in America? The proposal would place foreign savers at a relative advantage as they would not face the minimum tax. A higher effective tax rate on capital gains could also discourage angel investing, entrepreneurship, and risk-taking.

Costly, complex, and unstable: Biden’s proposal would be administratively costly without serving as a stable source of permanent funding. Lawmakers have much better options, such as progressive consumption taxes, to raise revenue from top earners.

3. Are Tax Rebates a Good Way to Provide Relief from Rising Prices?

Good intentions, not so good policy: Policymakers understandably want to use whatever tools they have at their disposal to address rising consumer costs, but tax rebates, gas tax holidays, and other temporary tax expedients have the potential to add to existing inflationary pressures while doing relatively little to help those in need.

Inflation and inefficiencies: It isn’t unreasonable for policymakers to prefer these policies to unnecessary one-time government spending, or—worse—to use one-time revenue gains for long-term spending increases. Such policies can have their place, but their ordinary inefficiencies are magnified in a high inflation environment.

What should lawmakers do instead? States should evaluate whether they have the capacity for actual tax reform, not just one-time relief. Most states project sustained revenue growth that could fund real reform or rate reductions. Long-term tax relief also puts more money in taxpayers’ pockets, of course, but with a very different incentive structure.

Bad Economics; Bad Energy Policy

(Updated at 2:13 PM CDT) The Biden Administration, and Democrats in general it looks like, just don't understand good governmental policy or basic economics. The Federal Reserve is no better, and may yet push us into a recession, at the least. 

The Biden administration plans to release around 180M barrels of oil from the Strategic Petroleum Reserve, in what be the largest release from stockpile since it was created in 1975. WTI crude futures tumbled 6.7% to $100.53 on the news, The coming SPR decision would likely see 1M barrels released daily over the course of six months, but analysts are still debating the benefits and whether it would put a dent in the inflationary forces seen in the current environment.

"Stocks of strategic oil have a limit and flows of commercial oil do not. Flows that stop are a bigger problem than strategic stocks can solve over time," said Kevin Book, energy policy analyst at ClearView Energy Partners. "Historically, SPR releases have temporarily sent oil prices lower and are then followed by higher prices as the market prices in insufficient supply," added Josh Young, chief investment officer at Bison Interests. "It is likely that oil prices rise after an initial temporary pullback, and that the SPR may have to be refilled at even higher prices."

According to data from AAA, the national average for a gallon of gas currently stands at $4.23 per gallon, down a penny from a week earlier, but up from $2.87 one year ago. OPEC+ is also scheduled to meet today, but is expected to stick to plans of boosting production by another 400K barrels a day in May despite U.S. pressure to pump more, while the IEA has called an emergency ministerial meeting for Friday to discuss oil supply and coordinate a global release by other countries.

Washington has released oil from the SPR roughly two dozen times, but most of them have been on a small scale (around 1M barrels) and in the wake of local disasters or emergencies. Over the past six months, however, the Biden administration has coordinated two mega releases of 30M and 50M barrels, while the latest 180M would be a third. Prior to these, big drawdowns from the SPR were a rare event, only coming after supply disruptions during the Libyan civil war in 2011 and Hurricane Katrina in 2005. The SPR currently holds 568.3M barrels of oil, its lowest level since May 2002.

Wednesday, March 30, 2022

Biden Budget Typical for a Democrat: An Orgy of Spending and Taxes

President Joe Biden’s budget proposal, which the president released today, calls for the federal government to collect a record $4,638,000,000,000 ($4.6 Trillion) in taxes in fiscal 2023.

At the same time that the federal government is collecting those record taxes, according to Biden’s proposal, it would also spend $5,792,000,000,000 ($5.8 Trillion) —resulting in a fiscal 2023 deficit of $1,154,000,000,000 ($1.2 Trillion).

According to Table S-4 in Biden’s budget proposal, the federal government will run a cumulative deficit of $14,421,000,000,000 ($14.4 Trillion) in the ten years from fiscal 2023 to fiscal 2032.

The $1,154,000,000,000 ($1.2 Trillion) deficit the Biden budget proposes running in fiscal 2023 is the smallest federal deficit it anticipates in any of the next ten years.

In fiscal 2021, according to Table S-4 in Biden’s budget proposal, the federal deficit was $2,775,000,000,000 $2.8 Trillion).

In fiscal 2022, the Biden budget proposal estimates it will drop to $1,415,000,000,000 ($1.4 Trillion).


In a section headlined “Building a Better America,” the Biden budget credits President Biden for living up to what it calls his “commitment to fiscal responsibility.”

“The Budget also delivers on the President’s commitment to fiscal responsibility,” it says.

It's a typical budget: Unsustainable spending, recessionary taxation, radical policy priorities, loaded with earmarks and gimmicks, and was 59 days late, as required by law. 

Any who has studied economic history should know that more spending and more taxation will not create prosperity. Look at what Britain did during the 1930s. Their economy had a very different outcome than the United States. 



Gas Tax Holidays: Good Idea?

States around the U.S. are resorting to a gas tax holiday to lessen the impact of rising oil prices due to the foreign policy decisions levied by the west. Here are a few examples:
  • Maryland stepped up to suspend the gas tax for 30 days; net savings per gallon will be 36.1 cents
  • Georgia did the same until May 31, saving 29.1 cents a gallon
  • From April 1–June 30, Connecticut is reducing state gas tax by 25 cents a gallon
Many more states may follow.

And California, of course, has no desire to be outdone by any other state. Its governor is planning on an $11 billion package, not all of which is gasoline. $9 billion of the package will come in the form of sending $400 debit cards to registered vehicle owners.

While the move may save drivers around 30 cents per gallon at the pump, economic and policy experts warn that it is only a stop-gap solution.

"They may not lower [gas] consumption and they might increase it," Patrick De Haan, the head of petroleum analysis at gas price app GasBuddy, told ABC News of the tax holidays. "I would love to pay less at the pump too, but this is a Band-Aid solution."

The national average price for a gallon of regular gasoline is $4.24 as of March 25, according to AAA. Some states, particularly those on the West Coast, are seeing average prices of over $5 a gallon, AAA's data shows.

Last month, the national average price was $3.57 a gallon and a year ago, it was $2.87, according to the association.

Saturday, March 26, 2022

Consumer Confidence at Recessionary Levels

The final March results from the University of Michigan Surveys of Consumers show overall consumer sentiment fell again, hitting the lowest level since August 2011.

The composite consumer sentiment decreased to 59.4 in March, down from 62.8 in February, a drop of 5.4 percent. The index is now down 41.6 points from the February 2020 peak.

The current economic conditions index fell to 67.2 from 68.2 in February. That is a 1-point decrease for the month and leaves the index with a 47.6-point drop since February 2020.


According to the report, “Consumer Sentiment remained largely unchanged in late March at the same diminished level recorded at mid month. Inflation has been the primary cause of rising pessimism, with an expected year-ahead inflation rate at 5.4%, the highest since November 1981. Inflation was mentioned throughout the survey, whether the questions referred to personal finances, prospects for the economy, or assessments of buying conditions.”

One positive note in the survey was continued favorable views of the labor market. According to the report, “The sole area of the economy about which consumers were still optimistic was the strong job market. Consumers anticipated in March that during the year ahead it was more likely that the unemployment rate would post further declines than increases (30% versus 24%).”

The substantial declines in consumer sentiment reflect the impact of higher consumer prices. The surge in prices for many consumer goods and services is largely a function of shortages of materials, a tight labor market, and logistical issues that prevent supply from meeting demand, and has been compounded by surging energy prices as a result of the Russian invasion of Ukraine.

Furthermore, the newly initiated Fed tightening cycle raises the risk of a policy mistake and adds to the extreme level of risk and uncertainty to the overall economic outlook.

Sources: Seeking Alpha, Schwab

Get Lucky and Become a Deadbeat


 A client called one afternoon and said, “I need $50,000 out of my IRA account.”

“Uh, ok. Why?” I responded.

“To pay off my credit cards. The interest is killing me.”

“Yeah, I get that. Why are your credit card debts so high?”

“Well, I just don’t make enough money to pay for the things I need.”

“Ever thought about getting another job or moving to a less expensive house?”

“Nah, I like my job and house.”

I fulfilled her request and a year later it repeated. Eventually, her nest egg was, well like Humpty Dumpty.

Not exactly sure what she did after that. She never calls. I kind of feel lonely.

Now, my wife and I use credit cards. She has a wallet full of them. Different ones for major companies we buy from. They give us discounts or we build points.

But every month we pay off the balances. No carryover and no interest. Just convenience and rewards.

The credit card companies have a name for people like us: “deadbeats”. No kidding.

My wife was talking with a credit card service person recently who asked her, “How much do you owe on your card?”

My wife responded, “Nothing.”

“Wow, you’re so lucky.”

If you’re not so “lucky” perhaps it’s time to re-evaluate your values and become a “deadbeat” too.


Six Steps to Financial Freedom

Wednesday, March 23, 2022

A Look at the Housing Market

Has the housing market reached its limits?

When you imagine a $2 million house, it’s probably big and fancy.

Well, here’s what that kind of money gets you in a “middle class” suburb in the San Francisco Bay Area:


The house is just what it looks like: An ordinary 3-bedroom home. And it sold for $2.23 million in December 2021. This is the sort of astronomical price that has investors wondering if housing prices will crash like they did in 2007/2008.

We are certainly hearing echoes of the housing bubble. In the five years before the housing crash, US homes prices soared 60%, according to the S&P/Case-Schiller Home Price Index. In the past five years, housing prices have soared 51%.

The key difference is: This time there is no concrete catalyst to push housing prices lower.

The MBA Mortgage Application Index declined 8.1% last week, following the prior week's decrease of 1.2%. The downward move came as a 14.4% drop in the Refinance Index was accompanied by a 1.5% fall for the Purchase Index. The average 30-year mortgage rate extended its climb, jumping 23 basis points (bps) to 4.50%, and is up 114 bps versus a year ago.

In other housing news, new home sales fell 2.0% month-over-month (m/m) in February to an annual rate of 772,000 units, shy of the Bloomberg consensus forecast calling for a rate of 810,000 units, and below January's downwardly-revised 788,000-unit level. 

The median home price rose 10.7% y/y to $400,600. New home inventory rose to 6.3 months from January's level of a 6.1-months supply at the current sales pace. 

Sales jumped m/m in the Northeast, and were higher in the Midwest, while lower in the South and West. Sales in all regions were lower y/y, except for the Northeast which gained ground. 

New home sales are based on contract signings, offering a timelier read on housing activity compared to the larger contributor of existing home sales, which are based on closings.

A Record 8% of U.S. Homes Are Worth At Least $1 Million


That’s nearly double the pre-pandemic share. The biggest jump was in Anaheim, where 55% of homes were worth $1 million or more in February, up from 27% two years earlier. As expensive homes take up a larger chunk of the housing market, many Americans are getting priced out.

Nationwide, a record 8.2% of U.S. homes (6 million) were valued at $1 million or more in February. That’s up from 4.8% (3.5 million) two years earlier, just before the coronavirus was declared a pandemic. The Bay Area led the way, with nearly nine out of 10 properties in both San Francisco and San Jose falling into the $1 million-plus category. Meanwhile, the biggest increase was in Anaheim, CA, where the share of homes worth at least $1 million nearly doubled to 55%.




The number of Austin homes valued at more than $1 million tripled since before the pandemic — more than any other Texas city and a new record for the metro area.

State of play: The share of homes worth at least $1 million in the Austin metro sat at 3.9% in February 2020. That number has only grown, reaching 12.3% last month, per a new report from Redfin, the discount real estate brokerage.

It's a trend playing out across the country, with the percentage of U.S. homes valued at $1 million or more reaching a record high — a trend led by the Bay Area.

Seven of the top 10 cities with $1M+ homes are in California — led by San Francisco, where the percentage of properties worth that amount was a whopping 88.7% in February.

Why it matters: While rapidly appreciating home values are a windfall for those who own them, they also mean that more Americans are priced out of the market.

Incomes are rising, but not as quickly as home prices — leaving many people stuck as renters.

Zoom out: That's deeply felt in Austin, which saw the second-highest increase over two years among non-California cities. Seattle was the only other non-California city to top Austin, with a 21% increase since February 2020.
  • Dallas' share of $1M+ homes grew by 2.1 percentage points, reaching 4.4% last month.
  • Houston saw a 1.3 percentage point increase, hitting 2.7% last month.
  • And 1.5% of homes in San Antonio are more than $1 million, a 0.9 percentage point change.
The big picture: Low mortgage rates and pandemic trends like remote work have helped pour gasoline on the hot housing market, where real estate agents and buyers alike complain about the historically low inventory of homes for sale.

"During the four weeks ending Feb. 27, the number of homes for sale plummeted 50% from two years earlier to an all-time low of 456,000," Redfin says.

"That helped fuel a 33% rise in the median U.S. home-sale price, which hit a record high of $363,975," the company adds.

Details: Here's a selection of metro areas and their percentage of homes worth more than $1 million:
  • Albuquerque: 25%.
  • Boston: 18.1%.
  • Austin: 12.3%.
  • Washington, D.C.: 10.9%.
  • Denver: 9.7%.
  • Phoenix: 7.8%.

This analysis uses the Redfin Housing Value Index—a model that incorporates the Redfin Estimate, public records and MLS data to estimate the current and historical value of more than 85 million properties in the U.S. The figures in this report represent February 2022, unless otherwise noted. See the end of this report for a detailed methodology.

Tuesday, March 22, 2022

ICYMI: Bond Yields Rush Higher

A bond selloff (lower prices means higher yields) is deepening after Monday's (March 21) comments from Jerome Powell, which said the Fed is prepared to act even more aggressively to tackle inflation.

The yield on the 10-year Treasury has soared 20 basis points to 2.32% since the remarks, leading to the worst month for the asset class since 2016. Meanwhile, the 2-year Treasury yield broke above 2%, jumping almost 24 bps over the past 24 hours to reach 2.19%, as the yield curve hurtles towards an inversion (or one of the best indicators of a coming recession). Stocks are hanging in there despite the latest comments - closing in positive territory yesterday - while futures linked to the major averages are up another 0.4% Tuesday morning.

Quote: "If we determine that we need to tighten beyond common measures of neutral (i.e. an interest rate that neither hinders nor fuels economic growth) and into a more restrictive stance, we will do that," Jerome Powell announced during a speech at the National Association for Business Economics. He even went as far to say that the central bank is prepared to raise interest rates by 50 basis points at the next policy meeting. 

Consumer prices took a turn for the worse in February as CPI growth rose by 7.9%, representing the largest 12-month increase since January 1982.

What happened to transitory? "In my view, an important part of the explanation is that forecasters widely underestimated the severity and persistence of supply-side frictions, which, when combined with strong demand, especially for durable goods, produced surprisingly high inflation," Powell declared at the conference. However, he's somewhat optimistic that central bankers will be able to engineer a so-called soft landing, in which the rate is raised high enough to keep the economy from overheating but not so much that it triggers a recession. "While some have argued that history stacks the odds against achieving" this, there are three episodes - in 1965, 1984, and 1994 - where the Fed "significantly" raised rates without a downturn. "I hasten to add that no one expects that bringing about a soft landing will be straightforward in the current context - very little is straightforward in the current context."

Analyst commentary: "Investors are taking Powell's transparency as a step further to say 'he's just preparing us for the worst,' whereas, the bond market is saying, 'no, no, he's telling you he's going to do at least seven [rate hikes], and you aren't listening,'" said Shannon Saccocia, chief investment officer at Boston Private. "For the long term, 2.3% on the 10-year is not such a high figure at all," added Linda Duessel, senior equity strategist at Federated Hermes. "What spooks the market is when you have very quick moves, such as what we're having now." 

Conclusion: If you haven't been, now is the time to watch your basket like a hawk, being prepared to take action if necessary. 

Sunday, March 20, 2022

Biden's Claim Over Gas Prices is Not Reality

Biden's chart is wrong. The second chart shows price of gasoline futures, April contracts. The third chart shows price of oil, WTI, April contracts. There is always a time-lag between what is paid at the well-head or by the refinery.  Individual retailers set gas prices based on what they expect their future fuel deliveries to cost. But they have no clue right now due to all of the global uncertainty. Oil prices have plunged this past week in part because the United Arab Emirates said it would urge OPEC to pump more. But the cartel might not. 

Another thing that the graph tweeted by Bloomberg's Blas shows is that the national average for gas did not jump as high as the cost of oil. In fact, it shows that oil and gas companies would have been generating less profit as oil prices spiked.

Another inconvenient truth for Biden's attempt to make boogeymen out of oil and gas companies? "The vast majority of the nation’s 150,000 gas retailers are mom-and-pop operations" and "fewer than 5% are owned by refiners." For those individual retailers, "profit margins are only about 10 to 15 cents a gallon even when prices shoot up," meaning "small businesses aren’t padding their profits. They’re trying to hedge against big losses if oil prices spike."

Does Biden or his administration care that the narrative they are currently pushing is based on activists' claims rather than reality? Probably not. As he's shown repeatedly during his first 14 or so months in office, he'll divide Americans and direct their anger at straw men in order to save his own hide. Those tactics, as polling consistently shows, are not playing to Biden's advantage.


Price of Gas -- Futures Market
Price of Gasoline, Wholesale

Price of Oil
Price of Oil

Sunday, March 13, 2022

Disney: No Longer a Good Investment and No Longer Kid Friendly

Florida has passed a “Parental Rights in Education bill” - and the Disney corporation, which of course has Disney World in Orlando, is livid. The left has, all too predictably, nicknamed the bill the “Don’t Say Gay” legislation.

Disney, mind you, is the company that focuses on turning out entertainment for kids. And the Florida law is designed to protect kids from kindergarten through third grade from classroom instruction on “sexual orientation” or “gender identity.”

Democrats and the Left are demanding that children between the ages of 5 and 8 receive indoctrination - ah, that would be “classroom instruction” - on, yes, sex and, transgenderism. This at an age when most normal children have zero inkling about sex of any kind. And if they do, parents want to make sure it is they themselves who are teaching their own kids about the birds and the bees.

But in the day and age of woke corporations, even Uncle Walt has become Uncle Woke. As noted here at CNBC: “CEO Bob Chapek said he will meet with Florida Gov. Ron DeSantis and Disney will donate $5 million to organizations, including the Human Rights Campaign, that work to protect LGTBQ+ rights.”

But not woke enough, understand, to stop doing business with China, the very same China that has generated this headline over at Human Rights Watch.

The Disney corporation is demanding Florida’s children between the ages of 5 and 8 be instructed on transgenderism and sex at the very same time they are stone cold silent about doing business with a Chinese government that is engaging in the “forced separation of children” and “separating Uyghur and other Turkic Muslim children from their families.” The company is giving money to leftist supporters of woke sex doctrine organizations. But Disney is silent not only on doing business with the country busily separating children from their parents, but on making a donation to a group like Uyghur Projects Foundation, which is actively trying to help the Uyghurs and their children.

To add fuel to the fire, Pixar employees have taken to social media to complain that Disney has cut "overt scenes of gay affection" from its productions. Pixar staff have alleged: “Nearly every moment of overtly gay affection is cut at Disney’s behest, regardless of when there is protest from both the creative teams and executive leadership at Pixar.”

Pixar’s response went on to list some demands on Disney.

“We are calling on Disney leadership to immediately withdraw all financial support from the legislators behind the ‘Don’t Say Gay’ bill, to fully denounce this legislation publicly, and to make amends for their financial involvement,” the Pixar rebuttal reads. “While signing on to donate to the [LGBTQ+ civil rights group] HRC [Human Rights Campaign] is a step in the correct direction, the shareholder meeting on Wednesday made it clear that this is not enough.”

The employees urged that Disney “take a decisive public stand” against this and similar legislation.

Florida Governor Ron DeSantis said: "And when you have companies that have made a fortune off being family-friendly and catering to families and young kids, they should understand that parents of young kids do not want this injected into their kids’ kindergarten classroom,” he warned. “They do not want their first-graders to go and be told that they can choose an opposite gender."

Amazingly, Disney CEO Bob Chapek dug an even deeper hole for Disney by issuing a statement apologizing to Disney’s LGBTQ+ employees for not opposing the Parental Rights bill earlier. Incredibly, in his statement Chapek said: “It is clear that this is not just an issue about a bill in Florida, but instead yet another challenge to basic human rights.”

Note: there was not a single word of apology from Chapek to the Uyghur Muslims and their children. Nor did the offended Disney employees apologize for accepting money from the oppressors of the Uyghur Muslims and their children.

Disney and its employees are ostentatiously standing up for indoctrinating young Florida children on sex over the objection of their parents - but falling silent on doing business with a Chinese government that goes out of its way to separate children from parents. Because it makes them a buck.

Disney stock is down 35% in the last 12 months. 

Friday, March 11, 2022

Inflation remains at high levels; 50% windfall tax proposed on oil

With inflation running at percent 8 percent annually, according to CPI numbers released March 10, and energy prices at nearly all-time highs, some in Congress want to impose a windfall profits tax on crude oil. 

The Consumer Price Index (CPI) rose 0.8% month-over-month (m/m) in February, in line with the Bloomberg consensus estimate, and up from January's unrevised 0.6% gain. The core rate, which strips out food and energy, increased 0.5% m/m, matching forecasts, and slightly below January's unadjusted 0.6% rise. 

Compared to last year, prices were 7.9% higher for the headline rate—again the fastest pace since 1982—in line with estimates and an acceleration from the prior month's unrevised 7.5% rise. The core rate was up 6.4% y/y, matching projections, and rising from January's unrevised 6.0% rise.

Initial jobless claims came in at a level of 227,000 for the week ended March 5, versus estimates calling for 217,000, and above the prior week's upwardly-revised 216,000 level. The four-week moving average rose by 500 to 231,250, and continuing claims for the week ended February 26 increased by 25,000 to 1,494,000, versus estimates of 1,450,000. The four-week moving average of continuing claims fell by 31,250 to 1,506,500.

In other news, Mr. Ro Khanna, a Democrat from California, introduced a bill Thursday to tax the windfall profits of large oil companies at a 50% rate. Tax proceeds would be returned to consumers earning less than $75k/y through direct payments. The bill, as written, could create challenges and opportunities across the energy value chain.

The tax would apply to those companies producing or importing more than 300kb/d. The rate of 50% applies to barrels produced in or imported to the US. Importantly, the windfall tax is a "top line" tax, calculated as the difference between the average price of Brent oil from 2015-2019 and the current price.

The tax would reduce profits for the large integrated companies like Exxon and Chevron, but also most of the large-cap shale names like Pioneer, Devon, Marathon and Conoco. The proposal could reverse a trend towards consolidation in the industry, as smaller assets would become less valuable once integrated into a larger operation.

The US imports ~6mb/d of mostly heavy oil for the production of diesel and jet fuel, while exporting excess light oil grades from the shale patch. Refineries profit from the narrow difference between the price of products like gasoline and the price of crude oil. In Q4, Valero, for example, earned $4.71 per barrel processed. Applying a top-line tax at multiples of profits, would create havoc with financial results and refinery operations.

The reason oil markets were oversupplied and prices were low from 2015 to 2019 is because US oil companies spent all their income (and then some) to invest in the oil patch and grow production. The bill hopes to provide consumers with $120 per year in stimulus. If levying a windfall tax reduces industry's willingness to invest, consumers around the world could bear the consequences of sustained high oil prices. (Sources: Schwab, Seeking Alpha)




  

Tuesday, March 8, 2022

United States to ban Russian energy; Europe will not

As the Russia-Ukraine war continues to shatter whatever hopes remained of Europe’s post-pandemic economic recovery, Brent prices are already trading near $130 per barrel. Biden's announcement of a ban on Russian energy imports, including oil, coal, and LNG, has only added to the upward pressure in oil markets. 

While European powers have made it clear they will not ban Russian energy imports (the U.K. will restrict imports), European natural gas prices are at all-time highs, dragging coal along to unprecedented levels as well. Moreover, with hopes of a quick Iranian deal cooling, there is no sign of relief for the current oil price rally.

In a speech on Tuesday morning, President Biden confirmed that the United States would ban Russian energy imports. In his speech, Biden confirmed that its European allies will not be joining the U.S. in this measure due to their relative lack of energy security. Oil prices and gasoline prices both climbed on the news.

He also addressed the US oil & gas industry directly, and alluded to further conversations with producers.

While the Russian oil import announcement was expected, comments directed at energy producers were not. Oil and gas CEOs have been perplexed by silence from the Administration of late, and Tuesday the President clarified his position on domestic production. President Biden said, "to the oil and gas companies and finance firms that back them, we understand war is causing prices to rise, but it's no excuse to exercise excessive price increases ... it's no time for profiteering or price gouging." 

Editor's Note: This is a typical Democratic complaint about inflation: that companies are price gouging. Yet, inflation has only been an issue during the last several months, not the last 40 years. And the price of oil and gas tend to march together. Oil price goes up, so does gas. See chart. 


CEOs from Devon and Pioneer have indicated a willingness to increase production. Pioneer's Sheffield recently said industry could grow production by ~1mb/d annually for three years. Sheffield went on to say his firm would participate in a coordinated effort to accelerate US production growth. 

Exxon is planning to grow Permian production by as much as 25% in 2022. While Biden's statements allude to the need for more production (NYSEARCA:USO), they do not point to a coordinated effort from the White House.

President Biden ended his speech saying, "and now I'm off to Texas." It could be that the President's trip is unrelated to the current global energy crisis. However, it's also possible the President would prefer to meet with producers privately, rather than enflaming public debates related to energy security and climate change.

In other news, Russia’s deputy prime minister Alexander Novak has warned that if the United States and the European Union were to ban imports of oil from Russia, oil would move to $300 per barrel.



Saturday, March 5, 2022

Biden's Plan for Inflation is Full of Hot Air

President Biden at his State of the Union address vowed to fight inflation, though that has been a struggle, with consumer prices soaring 7.5% over the past 12 months. 

Biden said during his speech before Congress: "My top priority is getting prices under control. We have a choice. One way to fight inflation is to drive down wages and make Americans poorer. I think I have a better idea to fight inflation: Lower your costs, not your wages. Make more cars and semiconductors in America. More infrastructure and innovation in America. More jobs where you can earn a good living in America instead of relying on foreign supply chains, let's make it in America. My plan to fight inflation will lower your costs and lower the deficit."

Even if making it (supplies?) in America would work, it would take several years, but that is not the underlying cause of inflation. Inflation is caused by two major factors: Too much money in the financial system and more demand than supply. 

Inflation Rate
U.S. Inflation Rate 1920 to 2022

The Federal Reserve has put approximately $5 trillion into the financial system since the beginning of the COVID-19 pandemic. This enormous sum is slowly trickling from the financial economy into the real economy, which is pushing the price of goods and services up. It will persist for a couple of years, even as the Federal Reserve moves to curb the effects. It was necessary to flood the financial system with liquidity to prevent a financial crisis during the pandemic, and inflation is an unintended consequence the Fed will have to deal with as the pandemic comes to an end.

Supplies of all types of goods are constrained for several reasons, but demand remains strong because consumers are still flush with cash from pandemic relief supplements. Since February 2020, spending on goods has grown 6-fold compared to spending on services. Spending on goods is up almost 30% while services spending is up only 5%. When demand rises faster than supply can keep up, prices rise.

Supply is in large part constrained because global supply chains have not healed from lockdowns. Supply chain problems are pushing prices higher because consumers have to pay more for scarce goods and businesses have to pay more for the inputs they need to produce these goods.

In the U.S., we have 4.6 million more job openings than workers to fill them. Businesses cannot make their products or provide their services at the levels necessary to meet demand without the appropriate number of workers. This is further exacerbating supply constraints. Additionally, businesses are having to pay workers substantially more to come to work, which is increasing their operating costs.

Clearly, businesses are raising prices because of market forces that are beyond their control.

Businesses raise prices when input prices rise. Both the prices of materials and labor are rising rapidly because of shortages and strong demand. Businesses can either see their margins shrink and start losing money, or they can raise prices to offset those higher costs.

In a broadly inflationary environment like we are in now, other businesses and consumers expect higher prices, so the market allows businesses to pass along their increased input prices. Their competition necessarily does the same. If a business refrains from raising prices, it will see its profitability suffer compared to others in its industry, even if it gains sales. These are the basic economic facts, and they reflect mere survival in competitive markets.

Plain old supply and demand play a large role here, too. If a business can only make a limited amount of its product because it does not have enough workers and cannot get the inputs to produce its product, but demand for the product remains robust, then market prices rise. That is what we are seeing now.

Those making the corporate greed argument need to grapple with the fact that businesses did not raise prices before COVID-19 or even during the height of the pandemic. Were they acting out of beneficence then? No, they were setting prices given market conditions – just as they are now.

High inflation (above the Federal Reserve’s 2% target) is likely to remain with us for some time, although likely not at the current 6% rate. It will come down through the middle of the year as supply chain problems ease and more workers come back to the labor force. We should see it dip to between 3-4% by the end of the year.

Inflation will remain high because the best tool for fighting inflation is through monetary policy, and there are substantial lags when it comes to implementing monetary policy to correct inflation.

Friday, March 4, 2022

February jobs report tops forecasts, Treasuries moving higher

Nonfarm payrolls rose by 678,000 jobs month-over-month (m/m) in February, above the Bloomberg consensus estimate of a 423,000 rise, while January's figure was adjusted higher to an increase of 481,000 from the initial reading of a 467,000 gain. Excluding government hiring and firing, private sector payrolls advanced by 654,000, versus the forecasted rise of 400,000, after increasing by 448,000, revised higher from the preliminarily reported 444,000 gain in January. The labor force participation rate ticked higher to 62.3% from January's unrevised 62.2% figure, where it was expected to remain.

The unemployment rate declined to 3.8%, from 4.0%, with forecasts calling for it to dip to 3.9%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—rose to 7.2% from the prior month's 7.1% rate. Average hourly earnings were flat m/m, below of projections calling for a rise of 0.5%, and compared to January's downwardly-revised 0.6% rise. Compared to last year, wages were 5.1% higher, south of forecasts of a 5.8% rise. Finally, average weekly hours increased to 34.7 from January's upwardly-revised 34.6, where it was expected to remain.

Treasuries remain higher despite the employment data amid the continued volatility surrounding the Fed and the crisis in eastern Europe. The yield on the 2-year note is declining 7 basis points (bps) to 1.47%, the yield on the 10-year note is dropping 8 bps to 1.76%, and 30-year bond rate is decreasing 6 bps to 2.17%.

Thursday, March 3, 2022

What Will the Fed Do? Will It Be Enough?

Fed chair Jerome Powell was appeared before Congress yesterday to give his semi-annual monetary policy report. In no uncertain terms, he backed a rate hike at the Fed's upcoming meeting on March 15-16. Specifically, Powell said he was "inclined to propose and support a 25 basis-point rate hike"-- the kind of plain-speak you rarely hear from Fed chairs, ever, about future tightening plans.

Goldman Sachs reiterated their call for seven hikes -- one per meeting -- this year soon after Powell's remarks. The market isn't fully pricing that in yet. Of course everybody is extremely nervous about how poorly events could play out in Ukraine, or even closer to home, based on Russia's continued military action. But as Powell himself noted, we have no idea how those events will play out. What we do know is the impact they already having -- an impact that is undoing the Fed's efforts to tighten and lessen inflationary pressures in the U.S. economy.

How so? 

(1) Interest rates have fallen, from 2.05% on the 10-year Treasury in mid-February to as low as low as 1.68% this week. We're back around 1.87% this morning. The problem with that is inflation hasn't slowed, nor has the economy. (Jobless claims this morning were extremely low.) In other words, rates are too low and are acting to stimulate an already overstimulated economy at the very time that the Fed is trying to remove said stimulus. Mortgage rates, which the Fed is trying to raise, have now actually fallen even as home prices just set another record high.

(2) Inflation expectations have actually risen. In the same time period, since mid-February (prior to the Ukraine invasion), the market's expected inflation rate over five years has surged from 2.9% to nearly 3.25% yesterday. That's nearly a point higher than the highest readings we saw in the decade following the financial crisis. The spike in oil prices--the U.S. benchmark hit a fresh cycle high of $116 this morning--isn't helping. This means "real yields," which I mentioned above, are down even more relative to higher expected inflation rates.

(3) The economy isn't stalling, and leading indicators are still strong. Weekly new jobless claims totaled just 215,000 this morning, and the four-week average of continuing claims hit its lowest level since 1970. The monthly jobs reports have been surprisingly strong. Durable goods orders just came in much stronger than expected for January. Same for retail sales. 

Just be prepared for some volatility in the market and have an exit plan if that should become necessary. Otherwise, stick to your investment plan

Wednesday, March 2, 2022

WTI Hits $111 a Barrel. When Does it Stop?

Oil's price ascent is showing no signs of slowing down ahead of one of the most important OPEC+ meetings since the beginning of the pandemic. WTI crude futures (CL1:COM) climbed another 6.6% overnight to top $110 per barrel, and that was despite the U.S. and other members of the IEA agreeing to release 60M barrels from the Strategic Petroleum Reserve and other emergency stocks. The coordinated drawdown would be only the fourth in the agency's history, sending a "unified and strong message to global oil markets that there will be no shortfall in supplies as a result of Russia's invasion of Ukraine."

Analyst commentary: "Although the sanctions are still being crafted to avoid energy price shocks, we believe this aggressive-but-not-maximalist stance may not be sustainable, with disruptions to oil and gas shipments looking increasingly inevitable," Evercore ISI wrote in a note to clients. "Russia is casting a long, dark, unpredictable, and very complicated shadow." Part of the issue is that many Western banks, shipowners and refiners are hesitant to do business with Moscow, fearing legal/reputational risk, or an eventual sanctioning of Russia's energy sector.

Meanwhile, the OPEC+ group, which Russia is a part of, commands broad control of the oil market because its members account for more than 40% of global crude production. The alliance has been recently increasing output by 400K barrels per day each month after unwinding historic cuts of nearly 10M bpd implemented in April 2020 due to the pandemic. Despite the current turmoil in energy markets, only a modest increase is expected at today's meeting - if any at all - which could fluctuate based on the situation in Ukraine or the world's response to it.

Inflation watch: A general rule of thumb states that for every $10 increase in the price of an oil barrel, U.S. inflation rises by 0.4 to 0.5 percentage points. That's hammering consumers at the pump, with the national average for a gallon of gas standing at $3.65 per gallon, according to data from AAA. "Global energy security is [also] under threat," according to IEA Executive Director Fatih Birol, "putting the world economy at risk during a fragile stage of the recovery. (Source: Seeking Alpha)

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