Month: June 2021

After today’s mixed US payrolls report, today’s Chart of the Day from DB’s Jim Reid shows we are still 7.6 million jobs away from where we were when the pandemic hit.

We lost 22.4 million in the first 2 months and have gained 14.7 million over the last 13 months. 2021 has “only” seen an average monthly payrolls increase of 478k though May.

And while some saw only disappointment in the May jobs data, it was a truly Goldilocks report: as Reid says, “there was clearly something for everyone in the report. The Fed will continue to suggest they are a long way from their employment goals and the inflationists will cite the higher earnings in the release as evidence that it’s hard to find employees at the right price.”

Meanwhile, according to BofA, the report leaves the Fed “to remain patient, slowly and carefully taking baby steps to set the stage for tapering but unlikely to send an explicit signal until the September FOMC meeting.”

Maybe, Reid asks, you can have a relatively slow jobs recovery and inflation.

“If that does happen then the Fed will have difficult decisions to make at some point.”

On that, the DB strategist concludes that “next week’s US CPI will be the most watched economic report of the year so far.”

Authored by MN Gordon via EconomicPrism.com,

Jerome Powell might be done as a useful Federal Reserve Chairman.  Not that Fed Chairs provide a use that’s of any real value.  They mainly excel at destroying the wealth of wage earners and savers for the benefit of member banks.

But as Powell loses a grip on price inflation the business of supplying credit at a fixed rate of return becomes less fruitful.  Consumer price inflation, as measured by the consumer price index (CPI), is rising at an annual rate of 4.2 percent.  That’s well above interest rate of a 30 year fixed mortgage, which is currently 3.1 percent.

It doesn’t take much imagination to foresee a CPI over 6 percent.  At that rate of price inflation, what good to the bank is a home loan that’s only paying 3 percent?  This, among other reasons, is why Jay Powell is toast.

Powell, no doubt, has been going along to get along since long before he took over the reins of the Federal Reserve.  He’s always done what everyone asked.  He’s rapidly expanded the Fed’s balance sheet to fund massive government deficits and backstop the mortgage market.

Of course, he’s not alone.  The central planners in the U.S. and abroad manufactured this price inflation through decades of mass money printing, credit market intervention, and currency devaluations.  Anyone with half a brain knew the day would come when the glut of money and credit would jack up consumer prices.  Quite frankly, what took so long?

This is a complex question to answer.  One that’s much to intricate for us to comprehend.  Still, today we attempt to unfold one wrinkle of the complexity:

How the delicate trade relationship between the U.S. and China suppressed consumer prices in the U.S. over the last three decades…and how that delicate relationship has reversed to exasperate rising consumer prices going forward.

Paper Lanterns

The latest out of China, as reported by the Wall Street Journal, is that rising raw materials and a shortage of factory workers have put the pinch on small manufacturers.  Some manufacturers have passed higher costs to overseas buyers, including U.S. consumers.  Others, however, are refusing to accept new orders.

For example, Zhongshan Xiliwang Electrical Appliances Co., a kitchen ventilator producer based in southern China, has been operating at a loss since April.  Surging prices for metals, glasses, and switches have eroded profit margins.  The company told clients in mid-May it would stop accepting new orders temporarily.

The strategy of delaying orders is based on the hope that raw material prices will weaken, along with demand for consumer goods.  But what if the price of raw materials continue to climb?  And what if consumer demand tightens?  Won’t this lead to more shortages in consumer goods and, ultimately, higher consumer prices?

Rising raw materials prices for Chinese manufacturers are leading to rising consumer prices in the U.S.  Yet, at the same time, rising raw materials prices for Chinese manufacturers are also leading to order delays and shortages in consumer good.  These shortages in consumer goods are further leading to higher consumer prices in the U.S.

For several decades Chinese manufacturers kept U.S. consumer prices in check through a managed exchange rate that supported cheap labor costs.  Those days appear to be over.  China now has a shortage of manufacturing workers.

A large aluminum processing firm, for instance, reports it can’t find enough workers to fill orders.  And that’s after raising salaries by 10 percent this year – more than triple the usual 3 percent annual increase.  Still, there aren’t enough factory workers.  Young people in China want to be deliverymen, not drudging factory workers.

In the midst of rising raw materials prices in China, and rising consumer prices in the U.S., the Chinese yuan has hit a three-year high against the U.S. dollar.  This, no doubt, is unacceptable to the communist central planners.

Why Consumer Price Inflation Is Here To Stay

Thus, on Monday, the People’s Bank of China (PBOC) said it will hike the foreign exchange reserve requirement ratio for financial institutions to 7 percent from 5 percent.  This increase will make it more expensive for banks to hold dollars.  The PBOC’s goal is to slow the yuan’s pace of appreciation by discouraging the inflow of dollars.

How this is achievable, given China’s massive trade surplus with the U.S., is unclear.  But the PBOC will pursue it nonetheless.  In fact, a strange conundrum is developing.  Here we turn to Michael Every of Rabobank in an attempt to better understand what’s going on.

“Countries usually push back against FX appreciation because it is deflationary, and encourage depreciation because it is inflationary.  Yet the U.S. doesn’t like that a weaker USD also means higher commodity prices, partly because of Chinese demand: they want the juice of a stimulus-driven weaker USD with none of the pith and pips of inflation.  For its part, China doesn’t like a stronger CNY partly because it encourages commodity inflation by making the price of these USD-priced imports cheaper in CNY terms, which allows demand to stay high even as USD prices rise.

“So both sides can perhaps agree short term that a signal of weaker CNY helps both fight inflation.  However, in the bigger picture, both want a reflationary weaker currency (and China a ‘stable’ one) and lower commodity prices – which can only happen if the other’s commodity demand drops significantly.  How is FX cooperation going to work out then?  ‘Success has many parents, but failure is an orphan’ as they say.”

The ability of U.S. central planners to export price inflation to China is finally breaking down.  This ability masked the effect of loose fiscal and monetary policies in the U.S. for several decades, as the consequences of enormous deficits and radical money supply expansion were offset by low cost consumer goods.  Those days are over.

Fed Chair Jay Powell says rising consumer prices are transitory.  What a fool.  Consumer price inflation is here for at least a decade – possibly two.

You can take that to the bank.

Time is officially no longer on the side of millennials. 

In “almost every way measurable”, millennials are up against the clock to build wealth – and are losing ground, according to a new Bloomberg report.

The report speculates that if a Covid “recovery” is even legitimately going to happen (which we take with a large grain of salt), that it may be the last chance for those around the age of 40 to build the wealth they will need for their later years.

But most millennials, instead of basking in an incredible recovery and acutely focusing on re-bulding (or building for their first time) their finances, feel like 40 year old Kellie Beach, a real-estate attorney. She rode out the pandemic like most Americans: “I stayed afloat with credit cards. I was just used to swiping and overspending.”

Now that the government dole is running out and the Covid scapegoat is working its way (albeit, slowly) out of the discourse, it has become clear that it’s time to pay closer attention to her finances. She told Bloomberg: “Now I have this feeling — like this fire — of urgency. I’m not going to be in this place again. I can’t wait to get out of this debt. I can’t wait to save up for my emergency fund and invest again.”

40 year old Dustin Roberts was similarly situated – he had $38,000 remaining in student debt when finally put together what he could to buy his first house in April.  

He said: “My dad had always tried to tell me how important it was to buy a house, how that was a mode of financial security for him. I’m making more than my dad did, but am I better off? I don’t know that I can say yes.”

Millennials were 27 years old when Lehman went bankrupt and are now about 40 years old coming out of the Covid crisis. They have ridden out two major recessions during peak saving and investing years, the report notes. William Gale, senior fellow in the Economic Studies Program at the Brookings Institution said: “The Great Recession knocked everyone for a loop. It caused unemployment. It caused slow wage growth. It made it harder to accumulate wealth.”

Like Roberts, more millennials borrow to finance college that previous generations. “Millennials, who started college in 1999, paid an average of $15,604 per year for undergraduate tuition, fees and room and board,” Bloomberg wrote. “When Gen Xers and Baby Boomers started college, that number — adjusted for inflation — was about $10,300 for each of them.”

40 year old Summer Galvez went to Clark Atlanta University in Georgia for a couple of semesters before pulling out because it cost too much. She now “relies on her own skills and hustle,” working two jobs and still paying off loans from 20 years ago. 

“There are always economic factors that could happen that could just really upend your life,” she said.

Lowell Rickets, data scientist for the Institute for Economic Equity at the Federal Reserve Bank of St. Louis commented: “That’s one of the stark evolutions of the job market, where education has become a greater predictor of success.” 

Buying homes has been a scramble coming out of the pandemic, forcing prices higher and contributing to why millennials have a lower home ownership rate than previous generations at the same point in their lives: 61% for millennials versus 68% for Gen Xers and 66% for baby boomers. 

Millennials pay a median of $328,000 for homes while boomers only had to pay $216,000, the report notes. 

Richard Fry, a senior researcher at Pew Research Center, noted: “The basic way that middle American households build wealth is through their homes. Millennials have been less likely to be homeowners. Fewer of them have begun the process of building home equity.”

William Gale of the Brookings Institute, noted about home ownership: “Conceptually, that could help their wealth accumulation because they’d be paying less for rent and they could save more. But in practical terms of what happens is it’s an indicator of lack of economic status.”

The rise in prices is “great if you’re a homeowner,” Gale said. “But it’s terrible if you’re a renter trying to buy a home.”

Net worths have also declined. Where boomers would have about $113,000 in today’s money in wealth in 1989, that number for millennials has shrunk to $91,000 in 2019. The pandemic – and the ensuing response from central banks – has only served to widen the inequality gap. 

“As we diversify the country, if we continue to see these inequities, it suggests that we’re really going to have a hard time achieving financial stability and upward mobility more broadly among American families,” Ricketts said. He also commented about millennials receiving inheritances later in life: “It might be too late for them to take advantage of it and meet some of those mid-life goals that wealth really helps with achieving.”

The simple fact is that millennials are playing a massive game of catch-up; and they’re losing ground. Juan G. Hernandez Ariano, a certified financial planner and director at WealthCreate, stressed the importance of a budget and catching up: “Bottom line: Are millennials behind? Yes. Can you catch up? Yes. How? First and foremost, defining your goals. Once you define your goals: build a budget, improve that budget, diversity not only from an investment perspective but an income perspective.”

Signe-Mary McKernan, an economist and co-director of the Opportunity and Ownership initiative at the Urban Institute in Washington concluded that it isn’t too late just yet: “I don’t think it’s too late. If we set up this stronger foundation for economic security, if it’s institutionalized for everyone, then it could make life better for young millennials, for older millennials, for future generations and for the country as a whole.”

But if you’re a millennial, the clock is ticking…

By Doomsberg Substack

“We see a shift from stigmatization toward criminalization of investing in higher oil production.” – Bob McNally, former White House official, “This Time Is Different” Bloomberg May 30, 2021

“From today, halt all investment in new fossil fuel supply projects and make no further final investment decisions for new unabated coal plants.” – IEA Roadmap to Net Zero by 2050

Whether you think global warming is a hoax and no technology has done more to uplift billions of people out of abject poverty than the harnessing of fossil fuels, or you think the burning of fossil fuels is irreversibly destroying the planet and urgent action to halt their use should be the top priority of humankind, or even if you think both of these things, this article is for you.

I can assure all sides the following: unless something substantial changes – and soon – the price of oil is going way higher. Is $300 oil probable? Perhaps not, but it makes for excellent clickbait. Is $300 oil impossible? Absolutely not.

Consider some history.

In the third week of February, 2021, a massive cold snap impacted much of the Lower 48 states. The power grid in Texas nearly collapsed. Just as demand for heating and power was reaching its most desperate apex, the supply of natural gas collapsed. The infrastructure simply couldn’t handle the depths of the freeze. The result? Prices of natural gas at several large trading hubs across the US skyrocketed to unthinkable levels. This chart from the US Energy Information Administration captures it well:

So how can we compare these prices to the price of oil? One of the problems with comparing quoted prices for different sources of energy is they are priced in different units, which is mostly an accident of history. For example, natural gas is priced in dollars per million British thermal units (BTUs), whereas oil is priced in dollars per barrel (a barrel being 42 gallons), and gasoline is priced in dollars per gallon (a gallon being a gallon). Habits are hard to break.

To create an apples-to-apples comparison of what these prices mean, a useful trick is to first levelize everything to millions of BTUs, which is how natural gas is sold anyway, and it just happens to be a direct measure of the inherent energy content embedded in a fuel. A standard barrel of oil contains 5.8 million BTUs. If you take the current price of oil (in dollars per barrel) and divide it by the current price of natural gas (in million BTUs), you’ll almost always get a number higher than 5.8, which makes sense because oil is generally more useful than natural gas and natural gas is often a byproduct of oil production. But on an energy-content-equivalency basis, 5.8 is the number. To put natural gas prices into an energy-contained-in-oil-equivalency basis, we simply do the reverse and multiply the price of natural gas, expressed in millions of BTUs, by 5.8.

We are now ready to put the prices for natural gas in the chart above into shocking context. On an energy-contained-in-oil-equivalency basis, natural gas prices reached the following levels in February:

            SoCal Citygate: $835 per barrel

            Chicago Citygate: $752 per barrel

            Houston Ship Channel: $2,320 per barrel

            Waha: $1,196 per barrel

            OGT: $6,919 per barrel

            Henry Hub: $137 per barrel

            Agua Dulce: $528 per barrel

Do I have your attention?

Sure, the price of natural gas didn’t stay there, but it went there. I use this extreme example to illustrate an important point. Fossil fuels are hugely inelastic commodities. Shortages send prices soaring because they are needed and there are not yet fungible substitutes. Society might hate fossil fuels, it might even hate them for very good reasons, but society is trapped in its need for fossil fuels, at least for the time being.

We can’t escape fossil fuels without significantly higher prices. Higher prices will level the playing field for alternative technologies by making them more competitive. Higher prices will spur significant investment in new energy R&D. Higher prices will also be the only way to motivate society to cut fossil fuel use. Said another way, fossil fuels are so useful for humankind that they will never be substituted unless prices skyrocket. Higher prices it shall be. The only way out is through.

There are at least four forces aligning as huge tail winds for fossil fuel prices. First, and most important, the ESG/progressive crowd has utterly and totally won the narrative war and they will press the consequence of their undeniable victory to the maximum by attacking supply at every opportunity. Second, the fossil fuel industry is coming off a period of extended underinvestment in capital projects already, which was exacerbated by the fallout from the COVID-19 crisis. Third, massive monetary and fiscal stimulus is stoking demand for commodities globally, and fossil fuels will not be exempt (on the contrary, since fossil fuels are critical to the production of other commodities, they will feel an amplified effect of this phenomenon). Finally, and related to the third force, fiat currencies are being debased at an unprecedented rate.

In this post, I’ll only focus on the first. Larry Fink, chairman and CEO of Blackrock, is not a trained scientist. He has no particular expertise in environmental issues. He holds a BA in political science and an MBA in real estate, both from UCLA. There’s nothing wrong with these degrees, and he has parlayed them into astonishing business success. But Larry is now in charge of global oil policy. There shall be less drilling, less exploring, less permitting, and less capital spending, period. Larry has decided to make it so, and it shall be.

You can celebrate this (yay!) or bemoan this (boo!), but the one thing you can’t do is deny it. Don’t believe me? Ask the CEO of Exxon Mobil. Memo to Darren Woods: You now work for Larry, and Larry is calling the shots – his shots. Larry wouldn’t really mind $10 gasoline. It’s not like he has driven himself in decades, nor is he up for reelection, at least I don’t think he is. I certainly don’t remember voting for him. Oh – and don’t feel too bad for Darren, he is about to go from stupid rich to crazy stupid rich. Not quite Larry crazy stupid rich, but close enough for you and me.

Now for the fun part. How high can oil go?

Clearly, this chicken strongly believes all the pieces are in place for oil to make new all-time high. But what does this mean? In July 2008, the price of oil peaked at $145 a barrel, but that’s in nominal terms. A dollar today, 13 years later, does not have the same purchasing power as a dollar then. If we use the official Consumer Price Index (CPI) inflation rate of approximately 2%, the actual all-time high for oil in today’s dollars is closer to $190 a barrel. What if, as most sound-minded people believe, the government has been systematically underestimating inflation in the official numbers for decades? If you believe the real inflation rate has been 4% since 2008, the new peak oil price becomes $240 a barrel. At 6%, it becomes $310 a barrel.

Have we experienced 6% inflation per year since 2008? According to shadowstats.com, if you merely calculate CPI the way the government used to in 1990, you get an average inflation rate over this period near that number. If you calculate CPI the way the government used to in 1980, it approaches 10%. It should be noted that when the US government changes its inflation calculation methodologies, it never seems to lead to higher reported numbers. I wonder why that is?

Let’s look at it another way. Assume you believe, like I do, that gold is the only real money. How much gold buys you a barrel of oil? Today, it is a shockingly low amount – only 0.036 ounces. Yes, you read that correctly. Roughly 1 gram of gold does the trick. When oil was trading at $145 in mid-2008, its price in gold was 0.15 ounces. With gold now trading at $1,900 an ounce, that works out to about $285 a barrel oil.

Does $300 seem like clickbait now?

Look, I know what you are thinking. “On the one hand, this chicken is making a lot of sense. On the other hand, I’m reading a blog written by a chicken on Substack. How seriously can I take this stuff?” 

I’ll leave you with this. If Bloomberg is flippantly dropping criminalization quotes in above-the-fold news articles detailing a sea change in how people with the real power in our society are viewing the fossil fuel industry, it’s best you sit up, pay attention, and prepare accordingly.