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Working The Problem

Market Musings

This week's inspiration comes from the under-rated, entertaining film "The Martian."  Actor Matt Damon gives a Tom Hanksesque performance similar to "Cast Away" where we see nothing but the one actor for a majority of the movie.  The Director of "The Martian," Ridley Scott, does a nice job of mixing in what's going on at NASA to keep the viewers from getting bored, unlike in the Tom Hanks' epic.  Matt Damon's character, Mark Watney, encounters multiple problems while alone on Mars and keeps "working the problem" until he conquers space.  I feel like the current administration could simply work the problem of energy independence, but perhaps I'm giving too much credit to our fearless leaders.  

Here's what we're seeing so far this week...

Fun, Fun, Fun, 'Til D.C. Takes the T-Bird Away.  The 10 cents worth of decline in gas prices that we got in early December of last year seems like a decade ago.  While the administration was touting the small decline, OPEC and Russia had other plans.  Since then, gas prices have increased 30%.  It's important to remember that gas prices have been increasing for nearly 2 years now, since the pandemic began to ease.  Once people started to get out and travel, demand for oil increased exponentially.  The problem - oil production had slowed at the onset of the pandemic, then the Keystone XL pipeline was cancelled, OPEC+ cut oil production, and oil & gas leases were halted on public lands.  It takes time to develop leases to insure that oil can actually be produced from that lease.  Recent statements from Mike Sommers, CEO of API, insinuated that the administration was playing loose with statement that "9,000 approved permits not being used."  According to Sommers, "Just because you have a lease doesn’t mean there’s actually oil and gas in that lease, and there has to be a lot of development that occurs between the leasing and then ultimately permitting for that acreage to be productive."  In fact, if you read the U.S. Bureau of Land Management's regulations on developing oil & gas leases (see right), you'll realize the complexity and length of time (in some cases years) to actually get oil out of the ground.  Mr. Sommers went on to say that the oil industry "is using a higher percentage of federal onshore and offshore leases than at any time in the past."  The reality is that the administration is playing politics with energy and a major crisis has occurred (i.e., Ukraine) that caught the administration with its proverbial pants down.  In the pursuit of "green energy," the administration failed to help domestic oil companies keep pace with demand.  And now, the American consumer is paying the price at the pump.

In terms of the administration's push for "green energy" and electric vehicles, the pursuit of both development of natural resources and green energy can be accomplished at the same time.  The pursuit of one or the other is not wise and actually speaks more toward zealotry.  There are currently approximately 1.5 million electric vehicles registered in the U.S. There are more than 290 million gas vehicles on the roads in the U.S.  The Secretary of Transportation's answer to higher gas prices is to simply go out and purchase an EV so that you don't have to deal with higher gas prices.  There are several problems with that proposed solution:

  1. There are no electric vehicles to be had - delivery times for any automobile is 60-90 days out and the prospect for oil being higher by then means more pain at the pump in the short-term.
  2. The average electric vehicle costs approximately $55,000.  That price range is untenable for lower-income families (who represent nearly one-third of the U.S. population) who's median income is approximately $26,000 per year.
  3. While the average gas vehicle requires considerable metals for construction & maintenance, the average electric vehicle nearly doubles the requirement.  For example, a gas vehicle requires 18-49 lbs of copper, while an EV requires 189 lbs of copper (not including the battery).  Oh, and by the way, commodity prices have surged along with gas prices, which will likely raise the cost of an EV.
  4. With last week's Jobs Report, we also learned that wages are not keeping up with inflation (more on that in a minute), which means that the vast majority of Americans (except the uber-wealthy) couldn't afford to just run right out and purchase a new vehicle (gas or electric) even if they wanted to help conserve energy.  And, with interest rates rising, any loan to purchase an EV will cost more over the long-term due to lenders charging more for the loan.

At this point, I think that Astronaut Mark Watney's advice to the administration would be to "work the problem."  Instead of making excuses, simply provide the incentives to green companies to continue developing new technologies and increase domestic oil production to bring gas prices down as soon as possible.  It's not an either/or.

Potential for Good News Out of Ukraine. On Tuesday, the news out of Ukraine took a slightly positive turn as Ukrainian President Zelensky stated that the country was no longer pursuing NATO membership - which was one of the reasons for the Russian aggression - and that he is even willing to "discuss & find compromise." In addition, Russia came to the table on Monday with an offer to cease hostilities if certain conditions are met. Both of these salvos could mean that things are starting to loosen up between the two nations and some kind of deal could be brokered. The importance of such a deal would likely mean a correction for commodity prices and a rebound for equities. Equities at this point feel over-sold and commodities appear over-bought.  The VIX (volatility) index hit an intra-day high of 37.52 on Tuesday which is nearly identical to the previous high of 37.51 on January 29, 2021.  The VIX bounced lower after reaching the previous high and is now trading 19% lower.  If that support does not hold, the next support level for the VIX would be the October 29, 2020 high of 41.09.  Conversely, Crude Oil opened Wednesday at $125/barrel and is now off 15%, trading at $106/barrel.  In fact, most commodities are slightly lower after peaking on Tuesday.  If we were to get some kind of final cease fire in place, expect equities to rally.  Regardless, it appears that any tiny piece of information on the crisis seems to sway markets one way or the other quickly, so making hasty investment decisions right now would be unwise.

What About Inflation?  Yesterday, we got the reading on February's Consumer Price Index (inflation).  The market was expecting +0.8% increase month-over-month for CPI. Over the last 11 releases, analysts have missed 9 times on the expected number.  For the first time in 8 months, the analysts finally actually got it right, as CPI came in at +0.8%.  Inflation is now out-stripping wage growth by 2.8%.  If the intent is to let inflation run so hot that consumers can't afford anything, it's working.  It's no wonder new electric cars, or any other car for that matter, are so unaffordable.  How much pain will consumers continue to bear until they start making considerable changes to their discretionary spending patterns?  The lower-income groups are feeling the pain most.  For households that earn $50,000 or less annually, the amount of spending on gas is much steeper than households earning more than $125,000 (perhaps cause for some of the disconnect among the elite).  On top of that, we're starting to see consumer behavior change on discretionary items.  Spending on furniture and going out to eat is on the decline.  Credit card spending on discretionary items is also starting to wane.  


What's the Fed Going to Do Next Week?  Futures for Fed Funds points to a 98% probability of only a 25 basis point rate hike.  At 10:30 Wednesday morning, the last QE purchase of bonds by the Fed was completed, so QE is officially over.  The market will likely cheer only a 25 basis point move as a balance between addressing inflation and accepting the fallout from the Ukraine situation.  I feel like the administration and the Fed need to once again hear from Astronaut Mark Watney and "work the problem."  We seem to be suffering from "Stagflation without the Stag."  While inflation is raging, unemployment is not.  The JOLTs report on Job Openings came out today at 11.3 million jobs available - that's 4 million more than those currently unemployed.  If more of those workers come back off the sidelines and into the workforce, demand will certainly out-strip supply.  There are still disruptions in the supply chain (we've already mentioned automobiles) as ships continue to be anchored waiting for unloading at Long Beach, Los Angeles, New York, Savannah, and Charleston.  So, there are some solutions that wouldn't erase inflation, but at least ease the pain:


  • Increase oil production
  • Encourage people to get back into the workforce
  • Ease restrictions at the ports

Astronaut Mark Watney...where are you when we need you most?