Friday Highlight Reel - Edition #3
A sampling of interesting observations from the Haymaker's network of market experts and favorite resources.
“We don’t have inflation because the people are living too well. We have inflation because the government is living too well.” -Ronald Reagan
Hello, Haymaker Readers:
We have a healthy assortment of highlights and accompanying factoids for your reading pleasure just below. Before you scroll on down for a quick intake of our curated topics, we wanted to let you know that some of our subscribers have noticed occasional Haymaker editions being rerouted to their spam folders over the past year (or nearly a year; more on that next). If you’re reading this, that’s probably not the case for you; however, if ever you find yourself missing a Monday or Friday edition, be sure to check your spam box or just visit the Haymaker page directly to find our most recent content.
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#1: IEF Note, shared with us by one of my “Three Wise Oil Men” friends, Jim Edsel
“Annual upstream investment will need to increase from $499 Bn in 2022 to $640 Bn in 2030 to ensure adequate oil supplies. This estimate is 18% higher than we assessed a year ago primarily b/c of rising costs. A cumulative $4.9 Tn will be needed between 2023 and 2030 to meet market needs and prevent a supply shortfall, even if demand growth slows toward a plateau.” -International Energy Forum
Chart: IEF
Haymaker Take: Capital spending starvation with regard to fossil fuel production has been a long-running and overarching theme of mine. Yesterday, I heard Jamie JP Morgan CEO, Jamie Dimon, warn Jim Cramer of the same risk to the West’s future energy security. As he also pointed out, a consequence of this has been a surge in burning coal and wood to generate electricity in both the developed and developing world. Talk about the law of unintended consequences! This is one reason why I felt U.S. natural gas was a steal when it touched $2 earlier this week. Oil in the mid-70s, which is more like the mid-50s adjusted for inflation versus 17 years ago, is also deeply undervalued, in my view. Growing global demand, especially in the developing world, is nearly certain to have a cataclysmic collision with the supply shortfall implicit in the above image.
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#2: Reuters on Domestic Gas Production/Prices
“A rout in natural gas prices will hurt first-quarter earnings and cash flows at gas producers as hedges - the industry's version of price insurance - were inadequate to offset the expected losses, analysts and industry experts said.
Producers starting the year with fewer hedges than historically will have to sell more gas at the market rate of about $2.45 per million British thermal units (mmBtu), below the breakeven prices for producing gas in some regions, and that may force some companies to reduce drilling and put off completing wells.
Hedges, or contracts that lock in prices for future output, help producers protect cash flows against price swings, helping them drill and complete wells - crucial at a time when Europe has looked to the United States for gas.” - Reuters
Haymaker Take: This is a classic case of the cure for low prices being low prices. Frankly, I lucked out a bit with my bullish call on natural gas in this week’s Making Hay (Almost) Monday. But you know what they say about lucky vs good. Expect to see more of these types of production-curtailment announcements despite the 15% rally in gas prices since we ran that piece. Two-dollar natural gas is simply not sustainable with Russian exports largely shut-in and the global demand for gas rising. (In fact, leading natural gas producer Chesapeake Energy announced yesterday it is taking almost 20% of its drilling rigs off-line.) Unlike five years ago, U.S. gas is now able to be shipped in liquefied form to nations desiring its high energy density and clean-burning characteristics. Its bargain status is too extreme to continue, at least for more than a few months, particularly with Europe needing to refill its gas storage soon (not to mention cutting back on using highly polluting forms of energy).
#3: Securities as Analyzed by Horizon Kinetics
“Prevailing rates will replace the low rates on outstanding debt as securities mature and are replaced by higher interest paper. This will happen sooner than one might think - about half the Federal Debt Outstanding matures in the next 3 years.” -Horizon Kinetics
Chart: Horizon Kinetics
Haymaker Take: Frankly, I’ve been having a serious debate with myself about the advisability of extending bond maturities. For over 40 years, I’ve consistently done this for clients (and myself) whenever the yield curve has inverted (short rates higher than long rates). With the yield curve in one of its most severe inversions on record, it is very tempting to buy longer-term treasuries, despite the counterintuitive aspect of accepting a lower yield for a longer maturity. Historically, doing so has been a consistent winner when there is a definitive inversion. Yet, as the brainy team at Horizon Kinetics describes in the above table, the amount of U.S. treasury debt that needs to be refinanced by early 2026 is staggering. There is also a killer wave of corporate debt maturing over the next few years, which could approach $10 trillion. Consequently, there is a substantial risk of supply overwhelming demand, driving interest rates up, even in a recession. This is a risk I covered at length in our The Reckoning, Part II, and it remains greatly underappreciated in my opinion.
#4: Vincent Deluard’s Glut-to-Squeeze Savings Theory
From Vincent: “We are living (at) a historical running point, the transition from (a) secular savings glut to a secular savings squeeze. The three main drivers of the global savings glut of the 2000s and 2010s were excess savings in Germany, China, and commodity exporters, where were recycled into Western financial assets in general and US Treasuries in particular. These surpluses, which once accounted (for) 8% of global GDP, are now all shrinking, because of demography (the ageing of Europe and East Asia will raise these continents’ dependency ratios and consume their savings) and geopolitics (Russia and China no longer recycle their surpluses into Western assets)…I believe the transition to a world of secular inflation and capital scarcity is the single most important global macro trend of this decade.”
Haymaker Take: That last sentence is quite a statement considering the plethora of other critical big-picture trends impacting the world these days. By its very nature, this is a debatable postulation. However, it is consistent with what my great friend and partner, Louis Gave, also believes. In my mind, there is little doubt we are moving from excess savings to a shortage situation. If nothing else, this is due to the mammoth sums of money that now need to be spent on defense, as well as the Great Green Energy Transition. (I’m pretty sure I heard Jamie Dimon estimate the latter to be in the $4 trillion-per-year vicinity in his interview with Jim Cramer; regardless, it’s going to require an immense amount of capital.) Further, it seems to me governments are likely to encourage their banking systems to fund these expenditures, including on traditional infrastructure, by guaranteeing loan repayments. (Doing so, keeps the debt off sovereign balance sheets that are as stretched as is the truth in almost any political speech.) This has the potential to greatly accelerate the velocity of money, adding even more napalm to the inflationary fires. Accordingly, I’m in full agreement with Vincent that the global economy is undergoing a radical transformation, with profound implications for investment positioning.
#5: From Jones Trading’s Chief Strategist, Mike O’Rourke
O’Rourke, earlier this month: “Consider that markets have reentered an episode of meme mania and bankruptcy short squeezes. Furthermore, any company with Artificial Intelligence or AI in its name or ticker is entering a bubble phase. A mega-cap company that missed on deliveries and in is starting a price war has rallied 70% in the span of three weeks…These are clear signs of easy financial conditions. Chairman Powell's denial that financial conditions have eased and his choice to measure progress against the easiest financial conditions environment of modern financial history simply provided a green light for the speculation to continue. Just because the Chairman of the Federal Reserve has blessed a speculative frenzy, it does not mean it will help the deteriorating fundamentals companies are facing.”
Haymaker Take: First off, any resemblance between the mega-cap company he mentions and Tesla is purely coincidental, I’m sure. Second, the Fed’s stance on financial conditions is mystifying. Last month, it had publicly warned investors not to underestimate its tightening resolve. Fed minutes contained this section: “An unwarranted easing in financial conditions, especially if driven by a misperception by the public… would complicate the committee’s effort to restore price stability.” (By “committee”, this is referring to the Federal Open Market Committee, FOMC, which sets interest rate policy.) Basically, the Fed was telling the world that as stock and bond markets continue to rally its job is made harder by rendering financial conditions easier. In turn, this works against the Fed’s mission to cool inflation. Earlier this month, however, Jay Powell indicated he wasn’t concerned about renewed frothiness in the stock market, despite that the rally has been led by the most speculative names. In my view, sending such mixed messages is not in the Fed’s, or investors’, best interest.
#6: Lyn Alden on Collective Net Worth
If you haven’t heard one of her podcasts, you are missing someone of exceptional intelligence and lucidity. She recently tweeted this nifty factoid: “From 2007 to 2011, the net worth of the bottom 50% of the population fell from $1.5 trillion to $260 billion. Almost completely wiped out.” However, in her next tweet she noted: “From 2019 to 2022, the net worth of the bottom 50% of the population increased from $1.2 trillion to $4.5 trillion, or a 114% gain.”
Haymaker take: Speaking of big percentage gains, consider the rise from $260 billion in 2011 to $4.5 trillion just over a decade later. That’s a 1630% increase, or about 26% per-year compounded. Even using the 2007 peak of $1.5 trillion, it’s a triple or about 8.2% annually; i.e., this is still quite respectable. The problem, of course, is that the trillions of government deficit spending it took to bring about this increase created the worst inflation in 40 years. This tends to be hardest on the less affluent who typically don’t have the ability to protect their assets from high inflation. (This is outside of their homes which have been an excellent hedge against rising consumer prices; however, spiking property taxes are adding to the cash flow squeeze many Americans are currently enduring).
#7: The Hustle on U.S. Housing
From their February 24th post:
“The total value of US homes declined by $2.3T in the second half of 2022.
That 4.9% dip from a record high of $47.7T in June represents the largest drop since the Great Recession, according to real estate brokerage Redfin, which analyzed 99m+ properties.
Homebuyer demand has been sluggish, partially the result of the Federal Reserve’s inflation-fighting efforts roughly doubling mortgage rates since early 2022, making it harder to afford a home.
In January, the median US home sales price was $383.2k, down from a record high of $433.1k last May.
Despite the drop, the total value of US homes in December was actually up 6.5% YoY, ~$13T higher than it was in early 2020.”
Chart: The Hustle
Haymaker Take: It seems like everyone with any interest in the economy, more broadly, and the real estate market, more specifically, is just waiting for a 2008 sequel to finally materialize. There’s been a general feeling that the stilts upon which American housing has been standing for the past few years are just about to give. But even with corrections like the one reported on above, it seems that a couple of factors are keeping things at least relatively stable, if not necessarily sustainable. First is that whereas the 2008 crash caught a lot of people off guard, economists, consumers, and the Federal Reserve itself have been decidedly on-guard in recent months. However imperfect they might be, policies are being implemented to prevent a massive crash, and with some degree of success. How short-lived that success will be is yet to be seen. Second is that coming off a pandemic, Americans are perhaps a bit more cautious in their consuming activity; you likely don’t have as much in the way of over-leveraged homeowners, and certainly fewer “NINJA” loans floating about.
It appears the housing market escaped the pandemic in relatively good health, ironically enough, particularly considering today’s report on new-home sales (670,000, as compared to the 620,000 forecast). Consumer sentiment also slightly topped expectations (67, rather than 66.4). In short, we can all go back to holding our collective breath, as this anticipated crash seems to have been averted for yet another month. Regardless, the $2.3 trillion drop in American home values is a shot across the bow to consumers. For many of them, their abode is their most valuable asset.
Great post, I will re-read this next week as there are many great nuggets of wisdom here to think about and digest. It seems as if Mr. Powell is celebrating the decline in housing and energy. With inflation and petro prices off the front page of the news wires, his job at the Fed is much easier. I think future inflation is primarily dependent upon oil prices. I believe that oil prices will remain subdued until the threat of near-term recession has ended. The temporary break in oil prices will not last. Eventually oil prices will climb higher; recession or not. When that happens, the real recession threat will begin. I am really concerned what happens to our economy (US) when oil is sustainably over $100 and the Fed has to be more aggressive with rates. Where is the S&P at when interest rates revert back to the mean of the last 50 years? What I see in our future is stagflation and government deficit spending (state and federal). I am trying to imagine a world with high oil prices and higher interest rates.
Nice mix of viewpoints.