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Let’s try a thought experiment here. Fast forward into winter. The Fed has been on autopilot and has continued to raise rates. They’ve managed to crush risk assets and the “negative wealth effect” is rapidly filtering through to the consumer economy. All the guys trading meme stonks and monkey JPEGs have now returned to their prior jobs and the supply chain is “healing.” Wage growth has slowed dramatically, and the influx of labor has led to an increase in unemployment. On a year-over-year basis, every economic metric looks terrible as we comp against record stimulus during 2021. Normally, we’d call this a recession.
Meanwhile, inflation is stubbornly high, driven by oil that is now at $200/bbl, along with accelerating food price inflation. Who could have predicted that turning corn into fuel would lead to a food shortage? Who would have thought that wheat could hit $30 as the Ukraine war drags on for yet another quarter? As a result of accelerating inflation, the GDP deflator has gone bonkers, and GDP is now clocking in at negative 5%. Meanwhile, inflation is in the teens. Effectively, we’ve created an Emerging Markets crisis. We’re now Turkey.
What do you think the government does? Do they reach for more stimulus to appease voters into the election? Or do they realize that it was excessive stimulus that caused this mess? What does the Fed do? Do they continue to chase oil higher by raising rates? Or do they accept that Biden is fixated on creating an energy crisis? Does the Fed simply throw their collective hands up and say that the price of oil is now outside of their mandate? Or do they continue on autopilot because inflation is in the teens? Does the Fed let everything detonate? Or do they do their best to ameliorate the effects of the accelerating energy crisis on the rest of the economy?
If you’ve read this blog before, you probably can guess at where I stand. I believe oil is the wrecking ball that we all deserve. The consensus view seems to me that the Fed will raise rates aggressively if oil hits $200. I have a contrarian view—at $200, I think they’ll panic. I think they’ll blame Putin, hedonically adjust the numbers, and go back to money printing, just like they did with COVID. Remember the deluge of liquidity over the Pandemic crisis? With oil, I believe, they’ll say that Putin is using economic warfare and the economy needs more QE otherwise oil buries it. They’ll reduce interest rates, flood the world with liquidity and activate their acronym programs. The Fed will declare war on oil and use all of their tools.
Meanwhile, I believe the government will come in with all sorts of oil stimmys to ensure that voters do not feel the negative effects of their failed oil policies. The Monetary and Fiscal branches will team up to try and make the bite of oil hurt less. In doing so, I think there is a chance they’ll send oil intergalactic.
Brent adjusted by the Fed’s balance sheet
But Kuppy, isn’t oil up a lot already? According to who? Look above for a chart of Brent oil adjusted by the Fed’s balance sheet. Tell me this won’t normalize?. I believe it’s oil’s turn. Imagine a world where oil is over $200 and oil consumption is suddenly accelerating instead of declining due to stimulus. Meanwhile governments continue to get in the way of the supply response…
Everyone thinks there’s a ceiling to the price of oil. What if the price of oil suddenly becomes reflexive as the Fed panics to prop up the rest of the economy? I don’t think anyone is positioned for this. Most investors seem to be ignoring oil and fretting about the Fed. I believe it is oil, not interest rates that will drive the rest of this decade. Oil traders are the new bond vigilantes. And I think they’ll take the price to a level where every non-energy CUSIP detonates. The insanity phase in oil is about to commence…
Disclosure: Funds that I control are long oil futures, oil futures call options, oil futures call option spreads and various oilfield services companies.
DISCLAIMER
Information or statements provided in this blog (“Communication”) are opinions of the author and may not represent the opinions of Praetorian PR LLC or its affiliates (collectively, referred to as “Praetorian”). Furthermore, the information is for educational and entertainment purposes only and does not represent investment advice. No information is warranted by Praetorian as to completeness or accuracy, expressed or implied, and Praetorian assumes no obligation to update or revise such information if the information becomes inaccurate or obsolete. Certain information may be based on third party sources and, although believed to be reliable at the time of publication, has not been independently verified and Praetorian is not responsible for third-party errors.
The investments discussed herein are not meant to be indicative or reflective of the portfolio managed by Praetorian but rather meant to exemplify the execution of certain aspects of the investment strategy of the author or Praetorian. While these examples may reflect successful trading, not all trades are successful and profitable. As such, the examples contained herein should not be viewed as representative of all trades made by Praetorian or the author. Nothing set forth herein shall constitute an offer to sell, or a solicitation of an offer to purchase, any securities.
External links, if any, may re-direct you to a privately-owned web page or site (“site”) created, operated and maintained by a third-party, which may not be affiliated with Praetorian. The views and opinions expressed on the site, other than those presented by Praetorian, are solely those of the author of the site and should not be attributed to Praetorian. We have not verified the information and opinions found on the site, nor do we make any representations as to its accuracy and completeness as to the third-party information. Further, Praetorian does not endorse any of the third-party’s products and services, or its privacy and security policies, which may differ from ours. We recommend that you review the third-party’s policies, terms, and conditions to fully understand what information may be collected and maintained as a result of your visit to this web site.
The Fed Is Fuct (Part 2)…
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Let’s try a thought experiment here. Fast forward into winter. The Fed has been on autopilot and has continued to raise rates. They’ve managed to crush risk assets and the “negative wealth effect” is rapidly filtering through to the consumer economy. All the guys trading meme stonks and monkey JPEGs have now returned to their prior jobs and the supply chain is “healing.” Wage growth has slowed dramatically, and the influx of labor has led to an increase in unemployment. On a year-over-year basis, every economic metric looks terrible as we comp against record stimulus during 2021. Normally, we’d call this a recession.
Meanwhile, inflation is stubbornly high, driven by oil that is now at $200/bbl, along with accelerating food price inflation. Who could have predicted that turning corn into fuel would lead to a food shortage? Who would have thought that wheat could hit $30 as the Ukraine war drags on for yet another quarter? As a result of accelerating inflation, the GDP deflator has gone bonkers, and GDP is now clocking in at negative 5%. Meanwhile, inflation is in the teens. Effectively, we’ve created an Emerging Markets crisis. We’re now Turkey.
What do you think the government does? Do they reach for more stimulus to appease voters into the election? Or do they realize that it was excessive stimulus that caused this mess? What does the Fed do? Do they continue to chase oil higher by raising rates? Or do they accept that Biden is fixated on creating an energy crisis? Does the Fed simply throw their collective hands up and say that the price of oil is now outside of their mandate? Or do they continue on autopilot because inflation is in the teens? Does the Fed let everything detonate? Or do they do their best to ameliorate the effects of the accelerating energy crisis on the rest of the economy?
If you’ve read this blog before, you probably can guess at where I stand. I believe oil is the wrecking ball that we all deserve. The consensus view seems to me that the Fed will raise rates aggressively if oil hits $200. I have a contrarian view—at $200, I think they’ll panic. I think they’ll blame Putin, hedonically adjust the numbers, and go back to money printing, just like they did with COVID. Remember the deluge of liquidity over the Pandemic crisis? With oil, I believe, they’ll say that Putin is using economic warfare and the economy needs more QE otherwise oil buries it. They’ll reduce interest rates, flood the world with liquidity and activate their acronym programs. The Fed will declare war on oil and use all of their tools.
Meanwhile, I believe the government will come in with all sorts of oil stimmys to ensure that voters do not feel the negative effects of their failed oil policies. The Monetary and Fiscal branches will team up to try and make the bite of oil hurt less. In doing so, I think there is a chance they’ll send oil intergalactic.
But Kuppy, isn’t oil up a lot already? According to who? Look above for a chart of Brent oil adjusted by the Fed’s balance sheet. Tell me this won’t normalize?. I believe it’s oil’s turn. Imagine a world where oil is over $200 and oil consumption is suddenly accelerating instead of declining due to stimulus. Meanwhile governments continue to get in the way of the supply response…
Everyone thinks there’s a ceiling to the price of oil. What if the price of oil suddenly becomes reflexive as the Fed panics to prop up the rest of the economy? I don’t think anyone is positioned for this. Most investors seem to be ignoring oil and fretting about the Fed. I believe it is oil, not interest rates that will drive the rest of this decade. Oil traders are the new bond vigilantes. And I think they’ll take the price to a level where every non-energy CUSIP detonates. The insanity phase in oil is about to commence…
DISCLAIMER
Information or statements provided in this blog (“Communication”) are opinions of the author and may not represent the opinions of Praetorian PR LLC or its affiliates (collectively, referred to as “Praetorian”). Furthermore, the information is for educational and entertainment purposes only and does not represent investment advice. No information is warranted by Praetorian as to completeness or accuracy, expressed or implied, and Praetorian assumes no obligation to update or revise such information if the information becomes inaccurate or obsolete. Certain information may be based on third party sources and, although believed to be reliable at the time of publication, has not been independently verified and Praetorian is not responsible for third-party errors.
The investments discussed herein are not meant to be indicative or reflective of the portfolio managed by Praetorian but rather meant to exemplify the execution of certain aspects of the investment strategy of the author or Praetorian. While these examples may reflect successful trading, not all trades are successful and profitable. As such, the examples contained herein should not be viewed as representative of all trades made by Praetorian or the author. Nothing set forth herein shall constitute an offer to sell, or a solicitation of an offer to purchase, any securities.
External links, if any, may re-direct you to a privately-owned web page or site (“site”) created, operated and maintained by a third-party, which may not be affiliated with Praetorian. The views and opinions expressed on the site, other than those presented by Praetorian, are solely those of the author of the site and should not be attributed to Praetorian. We have not verified the information and opinions found on the site, nor do we make any representations as to its accuracy and completeness as to the third-party information. Further, Praetorian does not endorse any of the third-party’s products and services, or its privacy and security policies, which may differ from ours. We recommend that you review the third-party’s policies, terms, and conditions to fully understand what information may be collected and maintained as a result of your visit to this web site.
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