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Get the Firehose

Updated: Jul 20, 2023

At this moment in time, we are experiencing one of the most complex economic environments we’ve ever seen. The confluence of so many shocks to the system this year is, in our view, unprecedented. Inflation is at levels more than half of Americans have never seen before, 401K’s have been decimated, and my new oven still isn’t expected to arrive for nine more months as supply chain restraints continue to disrupt everyday life.

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We are in a fuel price spiral that is destroying the middle class, yet when Energy Secretary Jennifer Granholm was asked about plans to lower gas prices, she replied with this diamond:



She later preposterously claimed, “It is not the administration’s policies that have affected supply and demand.”


At least she was kind enough to inform us that the administration has zero intention of doing anything that will affect the price of our gasoline, natural gas, heating oil, or even fertilizer and that the reason for that is because they haven’t had anything to do with the problem. I mean, she’s totally misguided, but she didn’t lie, which is sort of refreshing, right?


However, I find her argument that canceling the Keystone Pipeline, suspending new federal oil and gas leases, and stopping production in the Arctic National Wildlife Refuge all had nothing to do with high fuel prices to be downright vapid. Nevertheless, the issue for investors is not what caused it but what to do about it.


At its monthly meeting last week, OPEC+ accelerated its monthly quota increases by 50% in July and August. The White House was probably hoping for a sharp decline in oil prices, but that didn’t happen. Instead, WTI crude hit a new all-time high on Friday, closing more than 130% higher than the day Biden took office. That is a helluva year and a half.


Unfortunately, OPEC's "increase" does not mean an overall increase of OPEC+ output targets. Rather, the decision merely moves up (and spreads out) September’s planned increase.


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Secretary of the Interior Secretary Deb Haaland failed to explain in her recent Senate testimony why her department is slow-walking federal oil and gas leases at a time consumers are paying between $5 and $6 a gallon-- or more-- for gas:




She was unable to provide answers to simple questions about when new leases will result in more supplies of oil and gas, and her panicked aides starting sliding talking points to her, realizing that she was incapable of providing senators with basic information about U.S. energy production on federal lands.


A few weeks ago, the Biden administration enacted further restrictions on pipeline construction after the Federal Energy Regulatory Commission (FERC) announced new guidelines requiring that any new projects meet climate change thresholds. The ruling is part of a pattern of making it harder for energy companies to operate more freely, which is currently striking most of America as a not-so-great idea. The only way to make this green policy more difficult for the middle class will be for the government to start arresting anybody who doesn’t drive an electric vehicle.

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Another enormous inflationary pressure has been the supply chain disruptions that are paralyzing the U.S. economy. The nation’s two largest ports of Los Angeles and Long Beach have been a mess for more than a year. Since last fall, dozens of cargo ships have been continuously backed up to the horizon, and thousands of trucks are bottlenecked at the port.


As the mess was unfolding last Fall, Transportation Secretary Pete Buttigieg was not at work. Instead, at the height of the crisis, he took a two-month paternity leave to be with his husband and two newborn babies. I admire such paternal concern, but we should probably consider that it was Buttigieg’s job to ensure that life-or-death supplies reach millions of Americans who are hurting-- some for lack of what? Baby formula, of all things. (Don’t’ worry, though; Pete’s babies are fine. It’s just the irony that is so fantastic.)


Secretary Buttigieg’s response from afar was to tell shippers to go to Oakland and to mandate that the ships waiting to come into Long Beach or LA wait 140 miles out to sea, on the other side of the horizon where they can’t be seen from shore, presumably so that they will be like the Secretary himself-- out of sight, out of mind.


This winter, trains entering and leaving Los Angeles were routinely looted in the Old-West style of train robbing-- to the tune of 90 containers a day-- without much of a response from Secretary Buttigieg. Union Pacific saw a 160% year-over-year increase in theft in LA county, and a Union Pacific train derailed in Lincoln Heights, the area pictured below, in January. I wonder why.


Los Angeles, CA


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President Biden's approval rating is now below that of former President Trump, and the Fed hasn't even started to really unload its bonds (i.e. quantitative tightening) yet in earnest.


So, the question is, does anybody really think that if energy and food prices continue to soar and stocks and housing fall that politicians will refuse additional stimulus?


Canada has already answered this question. Quebec Premier François Legault's CAQ government unveiled its fourth budget— the final one before the fall election— in late March, and the 470-page behemoth calls for a $500 payout for anybody who makes less than $100k a year.


Two congressmen have already proposed bills to give $100 a month to all citizens who live in areas where gas prices are above $4 per gallon. In case you were wondering, the math on that works out to be an annual bill of $168 billion.


And of course, once you do it with gas, there is no reason not to do it with food, rent, medical bills or anything else. Are we in for a vicious cycle of government forever printing money to compensate for the consequences of previous money printing? Seems sort of like getting out the firehose to use on the guy you’ve been waterboarding for six months.

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According to Goldman Sachs, the equity market has historically fallen 2% on average in the 6-month run up to an inflation peak. However, in the subsequent 12 months after a peak, equity market returns averaging 10% have resulted, even if a recession ensued. (By the way, that Goldman report is available for our wealth management clients; please contact me to receive a copy.)


We believe equity markets are well positioned for a recovery should inflation normalize, but given our government’s current lack of will when it comes to energy and supply chain issues, that seems unlikely to occur for several more months. Therefore, we expect equity returns to remain challenged for the short-term.


In the current environment, we (continue to) recommend implementing non-traditional investments to amplify selective positioning, diversify return streams, and manage episodic volatility, and we recommend utilizing active positioning and nimble portfolio management with the recognition that this market has been shooting at the generals.





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