Comment of the Day
Video commentary for March 24th 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: gold and bitcoin rebound, oil pauses as backwardation narrows, Treasury yields steady and stocks firm,
The Year Ahead In Crypto
This note from Panterra Capital may be of interest to subscribers. It is more of a retrospective look at what happened in 2021 but includes some interesting copy on the broad macro environment. Here is a section:
The next step in their complicated minuet – after “taper” comes “run off”. That’s not going to get it done either. The Fed’s holdings make it impossible to fight inflation by waiting for higher interest rates based on runoff. More than 97% of the $2.6 trillion in mortgage-backed securities owned by the Fed won’t mature for at least ten years. Only 20% of the Fed’s $5.6 trillion in Treasury securities will come due in the next year. 42% have maturity dates longer than five years out.
And
“Inflation persistently below its goal”? This is embarrassingly behind the curve. Measured inflation is at 7.0%. That includes the spurious owners’ equivalent rent of only 3.1%. If real housing inflation were included it would be double-digits – all 1970’s style. (The lagged effect of true housing inflation will show up in CPI over the next two years.)
My view - The Fed is talking about accelerating pace of the balance sheet run off. With 20% of its holdings maturing in the next 12 months, that offers significant leeway to make run-off the primary tool for restricting inflationary pressures.
The Oil Crisis is Unfolding in Slow Motion
This article from Goehring & Rozencwajg which may be of interest to subscribers. Here is a section:
If an EROEI of 10:1 resulted in de minimis economic growth, what can we use this 10:1 number to infer about how high oil prices can go today? An EROEI of 10:1 means that 10% of all energy goes to sustain the energy supply. If energy is a good proxy for general economic activity, then an economy should stagnate once 10% of its GDP goes towards producing (and by extension consuming) energy. Evidence backs this up. Many academic studies suggest an economy will fall into recession once energy takes up 10% of total GDP – an empirical result that agrees with our theory.
In 2008, energy prices were approximately 10% of GDP right before the global financial crisis. If oil represents about half of all energy consumed, this means an economy will stall when oil represent about 5% of GDP. In 2008, the US consumed 18.8 m b/d. At $120 per barrel that equated to $823 bn or 5.6% of the $14.7 tr US GDP. The economy fell into recession shortly thereafter. In 2012-14, oil consumption never exceeded 3.5% of US GDP and prices stayed between $90 and $100 per barrel with no impact on either demand or economic activity.
Today, oil represents less than 3.3% of US GDP and would have to rise to $140 per barrel before approaching the critical 5% threshold. Why do we focus only on the US? Demand is the most elastic in wealthy countries with high energy intensities and the least elastic in developing countries that need energy to fuel their ongoing development. In 2008, prices spiked as high as $145 per barrel albeit temporarily. In this cycle, we believe oil prices will at some point reach, and potentially significantly exceed the previous $145 per barrel peak before we begin to see evidence of demand destruction.
My view - How high do prices have to go to limit demand might not be the correct question. It’s well understood that oil spikes are one of the leading causes of recessions, because energy is a tax on consumption. That suggests the speed of the price rise is at least as important as the headline rate.
Chinese Navy Growth: Massive Expansion Of Important Shipyard
This article from Navalnews may be of interest. Here is a section:
The incredible growth of the Chinese Navy has seen several shipyards expanded already. Jiangnan shipyard, which is situated next to the new site, has itself been expanded massively in recent years. Added to this, new facilities to build large numbers of submarines has been set up near Wuhan. And the nuclear submarine facilities at Huludao have also been massively expanded. Now the new work at Jiangnan takes this further still.
The new facilities will dramatically increase capacity at the yard. It is expected to have a basin for fitting out ships and a large multi-berth dry dock.
A Fleet of 6 Aircraft Carriers
The U.S. Navy expects that the Chinese Navy may operate 6 aircraft carriers by 2040. Currently only two are operational, built at Dalian in Northern China. But the third, the improved and enlarged Type-003, is under construction at Jiangnan. It seems likely that one or more of the additional carriers will also be built at Jiangnan.
One hypothesis is that China will build nuclear powered aircraft carriers. These may be even larger still than the Type-003, which is anyway almost the same size as the U.S. Navy’s Ford Class. The larger ship, and new technologies involved, may dictate a new construction site. This is one explanation for the new site.
My view - There is an abundance of evidence to suggest we are going to be living in a more volatile geopolitical environment for the foreseeable future.
The Chart Seminar June 6th & 7th in London
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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.