Comment of the Day
Video commentary for March 15th 2022
A link to today's video commentary is posted in the Subscriber's Area .
Some of the topics discussed include: deep oversold conditions ahead of Fed meeting tomorrow suggest potential for a relief rally. Gold and oil at potential areas of support, bonds are also deeply oversold having priced in seven interest rate hikes. a dovish turn by the Fed would be positive for risk assets.
The Ukraine crisis: what's at stake for investors?
This note from Pictet may be of interest to subscribers. Here is a section:
Our analysis shows that every time the oil price surged 50 per cent above trend – as it has now – a recession followed. Even though the world is less reliant on oil than a generation ago, crude still makes up a substantial slice of global GDP and it drives inflation expectations and, in turn, consumer confidence.
The impact of these shocks won’t be evenly distributed. For instance, the euro zone’s dependence on energy imports from Russia – they represent 40 per cent of the region’s gas consumption – leaves it particularly vulnerable.
At the same time, large public sector budget deficits and high inflation rates leave limited, if any, headroom for additional fiscal or monetary stimulus from the world's major economies. The market still expects US interest rates to rise some 150 basis points this year. As for the euro zone, the market is discounting two rate hikes this year – down from three before the invasion. And while a European Central Bank intervention to support the euro zone can’t be ruled out, it would take a bad recession or spreads on Italian government bonds to move above 250 basis points for the ECB to launch fresh stimulus.
But even if the risks have clearly risen, it is important to highlight that geopolitical shocks tend to be short-lived. Typically, crises such as military conflicts trigger a 10 per cent decline in equities over a period of one to two months, only for that sell-off to give way to strong rally once a resolution begins to take shape.
My view - Gasoline prices are on everyone's lips at present and that has a psychological impact on purchasing decisions. For example, this graphic depicting spending on clothing over the last three months shows a steep decline for the poorer quadrant of the population. The correlation with the spike in energy prices must be at least partially to blame.
Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales
This article from the Wall Street Journal may be of interest to subscribers. Here it is in full:
Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar's dominance of the global petroleum market and mark another shift by the world's top crude exporter toward Asia.
The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.
The Saudis are angry over the U.S.'s lack of support for their intervention in the Yemen civil war, and over the Biden administration's attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.
China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China's currency.
My view - Gold is a monetary metal because it is the barometer against which we can compare the performance of fiat currencies. However, gold stopped being a currency when President Nixon took the USA of the gold standard in 1971.
By 1973, the surge in oil revenues created an excess reserve issue for Gulf states and recycling savings into Treasuries made sense. That created the so-called petrodollar system. Since oil is used in every country in the world it is also used as a unit of account.
Powering Up
Thanks to a subscriber for this report from Aviva which may be of interest. Here is a section:
For the grid to work, supply must match demand – all the time. “There are already times when we produce so much green electricity, we don’t know what to do with it,” says Hartman. “That can be in the middle of the day when the sun is shining, or in the middle of the night when we are not using so much electricity, but we are producing a lot from wind turbines.” At certain times, energy goes to waste; producers are paid to take capacity offline.
On the other hand, the vagaries of the weather mean generation can fall short of expectations as well. For instance, on rare occasions both Germany and the UK have experienced ‘not much sun’ and ‘not much wind’, so respective energy outputs slumped at the same time. Hence the hive of research activity around energy storage. Behind it is a key idea: if storage can be made cheap enough, dense enough and extensive enough, it becomes viable to operate an energy mix with a much higher percentage of renewables.
This is driving deployment of grid-scale storage; something companies like Tesla, LG Chem and Samsung are anticipating as they construct battery megafactories around the world15 (see Figure 4). Combining renewables with large, preassembled battery units to store excess power, with energy fed back into the grid when demand requires it, has taken off.
The relative attractiveness of this has shifted “seismically” recently, according to energy consultancy Wood MacKenzie.17 Producing energy using solar and wind power already undercuts natural gas on a levelised cost basis (see Figure 5) and recent discoveries suggest further efficiency gains are possible.
Henry Snaith, professor of physics at the University of Oxford, describes solar “being in 1965 in silicon technology terms,” for example, with “lots of room to improve”. (In Search of Wild Solutions has more details.) Now battery costs have fallen rapidly as well, so ‘solar PV + large-scale battery storage’ are cheaper than ‘solar PV + natural gas’ as back-up to meet peak demand.
My view - Large numbers of battery factories are under construction. When they come on line, it will represent a voracious appetite for everything from copper, nickel, manganese and lithium to steel and aluminium. Between now and then there is still time to argue about the extent of the bull market.
The Chart Seminar June 6th & 7th in London
Now in its 53rd year, the first venue for The Chart Seminar in the post pandemic era will be in London on June 6th and 7th at the Army & Navy Club.
To reserve your place please contact Sarah@fullertreacymoney.com.
Delegate Rates:
Full fee: £1799
Each additional delegate: £850
Fuller Treacy Money Subscriber rate: £850
Prices exclude VAT where applicable
Eoin's personal portfolio: equity index long closed at a small loss March 1st
One of the questions subscribers as most often is how to find details of my open trades. To make it easier I will simply repost the latest summary daily until there is a change.