— And no, I do not have rocks in my head!
— The continuous drone of the media and politicians about inflation and interest rate the horrors of out-of-control energy and food prices is a sentiment killer.
— How to prosper from this discussion
The Media and Politics
In the midst of what is one of the best times ever to be a worker in the United States the media continues to accentuate the negative, and politicians seize on those negatives in the continuing game of one-upmanship that goes with their territory. We are at full employment. The “baby boom,” that demographic pig in the python that started coming into and disrupting the workforce in the 1970s, is disrupting things now as they retire. Emigration policies are limiting the use of both skilled and unskilled foreign labor. Anyone willing to work can get a job. Not only can they get a job but it will be at hourly wages and benefits unheard-of before the pandemic. In most cases state and local minimum wage laws raising the minimum to $15 an hour over a period of years are in the rear view mirror. The federal minimum of $7.35 is a relic of the distant past. Years of wage suppression as a side effect of globalization and the disinflation it brought are out the window. Supply chain disruptions and higher wages abroad are bringing jobs back to the US. Lest we forget we have a major boost in infrastructure spending in the wings
Yet all we hear about is gas and food prices/inflation, higher interest rates and a Fed that is about to drive us into recession or worse. The media loves this because bad news keeps butts in the seats and eyes on the screen. The loyal opposition loves this as a cudgel to be used daily to wallop the administration. It is no wonder the AAII (American Association of Individual Investors) bullish sentiment stood at 21% for the week ended June 8, just a few clicks away from its record low. This is the 29th consecutive week that measurement has been below its historic average of 38%.
When sentiment stats lean so far in one direction betting against that trend has provided extraordinary opportunities in the past. For example at the very bottom for energy stocks in April 2020, a well-known TV pundit on financial matters who shall remain nameless deemed energy “un-investable.” Most people would have agreed with this assessment at the time. We all know what happened after that.
A few thoughts on energy and food inflation
I believe high oil prices have nothing to do with administration policy but everything to do with industry self-preservation after the trauma of 2020. This was all about a confluence, of a Russo-Saudi price war, a turn toward policies all around the globe to encourage green alternatives to fossil fuels (the Paris Climate Agreement-196 signatories) and a Covid driven worldwide economic shutdown. For the first time in history there was evidence of real competition for the internal combustion engine … empirical evidence … a swarm of Teslas on the road.
The industry, including sovereign producers, circled the wagons and took up an untraditional response … no more “drill baby drill” at the advent of higher prices. The new tact is to preserve capital, pay down debt, pull back drilling budgets, take care of shareholders (with buybacks and dividend increases) and prepare for an uncertain future. Ergo, we have not seen anywhere near the supply response that $100/bbl oil would have brought in the past.
Overlay the effect on oil supplies of embargoes on Russian crude in the wake of its invasion of Ukraine and you can see that Fed or fiscal policy would have little or no impact. Another red herring raised by the media and the pols has to do with the deep-sixing of the Keystone XL pipeline. Even it if construction were still in progress today it would not be a factor in easing our current energy pain as it will not have been completed for years, plus the Canadian oil and gas industry is acting in a similar manner to its south-of-the-border counterparts (not rushing to increase production).
The previous peak in retail gas prices occurred in 2014 at $3.77 a gallon. The current price average for regular gas is $5.01 per gallon. Prior to the pandemic in January 2020, the average was $2.66. The price has doubled over the past twelve months. When I was a youth during the 1973 Arab Oil embargo the price of a barrel of oil went from about $3.00/ barrel to about $13. Retail gas price went from $.25 to $1.25 gallon. In the run-up to and aftermath of the 1979 Iranian revolution the price jumped from near $12/barrel to $39.00. Admittedly the current situation is painful but we have survived a lot worse. No use or need for investors to set their hair afire on the release of data like this nor should they readily blame the Fed or administration.
Food Prices: “We have met the enemy and it is us.”
All those years enjoying less expensive goods made with cheap foreign labor have come back to bite us because we have created huge middle classes abroad who wish to live and eat like we do. Food prices in the CPI are up 12% year-over-year. There is big new competition for many resources that only the West was demanding 30 years ago. Then, of course, there is climate change. There is no denying we have it and it is just possible that we may have contributed to it. Prolonged droughts have decimated land that was once arable, failing water resources and a hot war in the bread basket of Eastern Europe are other elements that the Fed cannot address. So, media and politicos please quit yammering for it.
In case you hadn’t noticed they are up big time since the first quarter point bump in the Fed funds rate. The yield on the 10-year Treasury note has more than doubled to 3.165%. A 30-year mortgage will cost you 5.431% (bank rate.com). BTW, I would have given my eye teeth for a rate like that on my first house (I paid 9% in 1975). According to CNBC mortgage originations have dropped to the lowest level in 22 years (May need subscription to view). This is area where the Fed’s moves to raise rates are beginning to have a real effect , an area where we’ve seen some real inflationary pressure.
Rest in peace Irving Berlin and pardon me for usurping your 1920’s song title to make a point. The point is that over the past twenty-two years we have drifted into periods of economic slowness and decline where the fear was that we might be heading for a real deflationary period like the “great depression.” There was a desire on the part of economic policy makers to drum up a more inflationary environment as an offset. OK, now we’ve got the inflation and everyone wants to go back to the good old days.
— If you back away from the media noise for a bit you can see that despite the obstacles out there for perfection in the economy things are not that bad. Unemployment is low. Wage growth, especially at the low end has been spectacular. Mobility and the chance for advancement in higher paying positions has never been greater.
— Energy and food prices are out of our and the Fed/administration’s control, but in the case of energy prices and interest rates we have survived significantly worse periods.
— The reversal of a long-term bifurcated market that has favored growth and innovation (without regard to valuation) over all else has been particularly painful for those who embraced the former to exclusion of more value oriented, cyclical and smaller cap sectors of the market. Yet those sectors, like the babies in the bath water, have be thrown out too and offer great opportunities.
— Any business slowdown we might have may already be priced into the market.
— Finally, the sentiment data seems to be screaming that this is good time to be greedy with stocks. I believe the way to prosper is by bending away from what the crowd is thinking and feeling.
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