Posted May 04, 2022
By Sean Ring
Energy to Inflation to Spending
- No matter what the NGOs say, we need energy - cheap and effective energy.
- When energy prices go too high, inflation results.
- When inflation kicks in, consumer spending is lower.
Energy: Oil and Gas
Energy is the cornerstone of the global supply chain.Whether or not we admit it is a vastly different story.Natural gas prices have moved to a record during the Shale Revolution, just now taking out the 2007 highs.Natural gas is a critical component of everything: electricity generation, heating homes, andpowering facilities.Its also a key input to everything from petrochemical creation to refining and fertilizers.Energy prices have risen across key variables driven by under-investment, political turmoil, and geopolitical shifts.As supply remains constrained, we can only get a meaningful adjustment through demand reductions.Another vital factor is diesel prices, which have been relentlessly rising.Diesel prices have just hit a new record, driven by global shortfalls that are unlikely to fall back to normal in the near to intermediate term.There is no quick solution to creating more diesel without a sharp drop in demand.The last time we saw this kind of move was in 2008, and it only started to move lower after demand fell off a cliff.Diesel prices hit every part of the supply chain, and given the current storage levels globally, we are in a tough spot to see this drop off without some extensive pain.Diesel surcharges are now included in delivery breakdowns, and it has added more to the underlying cost of many items.Typically, fuel and labor are straight pass-throughs to the end-user.Diesel is more expensive than ever.Diesel price this year (light blue) versus prior years performancesCredit: BloombergGot Crude?
When a refiner creates 1 barrel of diesel, it also creates about 2 barrels of gasoline, and its hard to adjust that ratio.But a key issue is the type of crude available because there are a wide variety of crude grades.Europe and the U.S. have stopped importing Iranian barrels and are shunning Urals (Russian crude), adding to the shortage of distillate.Ive mentioned before in the Rude this is one of the main reasons I oppose Russian sanctions. We simply need the Urals crude to make our fuel.These barrels typically yield a higher distillate cut during the cracking process that creates different refined products like gasoline, diesel, kerosene, and propane.The distillate is the liquid product condensed from a vapor during the distillation process.The above is a helpful chart to see the different types of oils and where they sit on the sulfur and gravity axes.Crude oil is typically measured by:- sweet/sour (how much sulfur is in it)
- heavy vs. light (the API gravity or viscosity of it)
- TAN (acid)
Are Workers That Expensive?
Labor and fuel are typically a straight pass-through, only moving higher across the board.As March-June typically sees a big hiring boost, we had employment costs move back to new highs.Given the tightness in the labor market, companies are paying up to bring on new employees.Inflation, but not as much Wage Inflation as youd think
Consumer prices are already hitting John Q. Public hard.Wages have failed to keep pace, which will keep the pressure on retail sales.GDP, CPI, and Spending
The US consumer makes up 70.5% of GDP.The G7 ex-US average consumer is 60% of GDP, which gives you an idea of how much the US consumer buys relative to his international cousins.As the U.S. consumer goes, so does U.S. growth.The slowdown is causing a big step up in inventories, resulting in a slowdown in new orders.The consumer now faces a mountain of price increases, wages that have risen but not enough, and elevated inventories.This is a recipe for Im going to skip the store this week or Im not going to buy that (insert item) right now.The below chart shows the savings rate has taken a nosedive, while inflation rates push to a multi-decade record.Credit: BloombergThe problem remains a fickle consumer, but the shifts are apparent: US consumers are still spending, but theyre doing so with more discretion.Many people have already purchased items with government transfers, which is why a fiscal drag is a real thing.In the U.S., a typical American receives a check for $2,000 and will spend $5,000.So not only were the needs met, plus those prices have gone up by over 30% with more pressure coming.Spending on services should be a growth spot in Q2.But as prices keep rising, we expect a significant drop off into the end of May/June.And as interest rates rise, it will put more pressure on available credit as financial conditions only get tighter in the next few months.The fiscal response (government) has already been tapped out.With over 50% of our budget sourced from treasury bills, the cost of borrowing will rise.Rising rates will also hit emerging markets even harder as global manufacturing output has already moved into contraction.As global real wages continue to fall, so will economic growth.Wrap Up
Energy is expensive, which leads to higher costs, which eats into disposable income, which eats into discretionary spending.And since were not spending as much, manufacturing is down into contraction territory.It seems like the natural result of unnaturally low interest rates, fatuous fiscal policy, and reckless monetary policy.But hopefully, this gave you a roadmap from energy to end-user.Until tomorrow.All the best,SeanP.S. If you havent caught my interview with Addison Wiggin, check it out here. We talk about Russia, China, and US policy. Watch on 1.5x speed to get the details and none of the verbal graffiti. Enjoy!Helping Hurts
Posted March 28, 2024
By Sean Ring
Once again, the New York taxpayer takes it in the bottom for empathy’s sake.
Chubby Digits
Posted March 27, 2024
By Sean Ring
A Citi trader cost his bank $50 million by typing an extra zero.
Key Bridge Collapse
Posted March 26, 2024
By Sean Ring
It’s incredibly early, but is there more to this story?
King: First Thoughts on the Moscow Attack
Posted March 25, 2024
By Sean Ring
Byron King lays out last Friday’s atrocious attacks' plot, subplots, and actors.
DEI: Didn’t Earn It
Posted March 22, 2024
By Sean Ring
It’s time to ridicule DEI out of existence.
Prez Pressuring Powell?
Posted March 21, 2024
By Sean Ring
The Fed is talking about three rate cuts this year. For what?