Weekly Points – 5 Things To Know In Investing This Week

The Higher For Longer Again Issue

Lots of interesting news this week where we address these important questions:

• Was this the most hawkish “pause” ever by Jerome Powell?

• Will reduced Russian refining capacity cause the price of oil to rise even more?

• Will rising energy prices continue to crush disinflation?

• Can rate hikes produce more inflation? Is counter-intuitive inflation a thing? DKI detailed report is on the way!

• This week’s unemployment report – does it mean more higher for longer?

Ready for the week? Let’s dive in:

• The Fed “Pauses” And Still Takes Down Markets:

As expected, the Federal Reserve left the fed funds rate unchanged. The real news was in the “dot plot”. The dot plot is where each Fed Governor gives an opinion on the level of interest rates at various points in the future. This one showed that despite market hopes that the Fed is done raising rates this cycle, they still expect to raise again this year. Of greater significance, expectations for 100bp (1%) of rate cuts for 2024 have been cut to 50bp (.5%).

Screenshots from Chairman Powell’s press conference last week.

DKI Takeaway:  I was focused on the Fed estimate that the long-term neutral rate of interest is 2.9%. The neutral rate refers to the level of interest rates that are neither stimulative nor restrictive. With Congress overspending by $2 trillion a year and running the money-printer, I’ll take the “over” on that bet. Say it with me: “Higher for longer”.

• Sanctions Are Affecting Russian Refining Capacity – Oil Higher or Lower?:

A reliable FinTwit energy expert reports that sanctions are hurting Russian refineries. They can’t get catalysts and other equipment needed to operate. This means they’ll need to export unrefined product. (Credit to B.O. who prefers to remain anonymous.)

Russia will be shipping more unrefined oil in the future.

DKI Takeaway:  Refined oil and gas prices reflect crude oil prices, refining cost (crack spreads), and transportation. Some say additional Russian exports will reduce the price of oil. I think a reduction in refining capacity means higher crack spreads and higher transportation cost resulting in higher oil prices. What do you think?

• Energy Prices Rising Again:

Fears of a worldwide recession have either been incorrect or premature. (I admit I thought things would have gotten worse by now.) With continually increasing demand and more restrictions on exploration and production, energy prices are now reaching 2023 highs. Hilariously, AFTER prices rose from the low-$70s to the mid-$90s, the sell-side raised their price targets.

The sell-side raised their price targets this week – not helpful. Chart from Markets Insider.

DKI Takeaway:  The primary reason for this year’s disinflation has been the reduction in energy prices from their stratospheric levels in 2022. With oil prices rising, we’re now seeing an increase in the CPI (consumer price index). That’s going to keep the pressure on the Federal Reserve to keep rates “higher for longer”.

• Can Federal Reserve Rate Hikes Produce More Inflation:

During times of high inflation, the Federal Reserve raises interest rates to slow the economy and reduce pricing pressure. It’s a crude tool, but historically effective. It’s also never been tried when government debt is $33 trillion. Those rate hikes mean a higher borrowing cost and interest expense is already at $1 trillion annually. The only possibility is more money-printing leading to more inflation. It’s counter-intuitive inflation.

Interest expense will continue to rise from here. We’re well into Ponzi scheme territory.

DKI Takeaway: The short answer is the Fed may be trapped where no matter what they do, we get more inflation. This interpretation correctly puts much blame on Congress. It’s also why we’re closely watching Japan as an example of what happens when you hit debt death spiral territory. It’s a complicated topic and DKI will soon produce a detailed report explaining the issues involved and what it means for your portfolio. We’ll have it too you in the next couple of weeks.

• New Unemployment Claims Approaching A 2023 Low:

Unemployment claims fell again this week to 201k new applications. That’s approaching a low for the year and is below the 225k expected. Powell and the Fed are watching the labor market closely and need it to cool off before reducing interest rates.

Companies don’t want to let people go. It’s a good time to be looking for a job.

DKI Takeaway: The labor market is holding up despite premature claims that it is getting weak. A prolonged strike by the auto industry could change the above picture and a potential government shutdown is a temporary wildcard. We’ll see what happens in Detroit. A strong labor market combined with continued wage increases means a further-delayed Fed pivot. “Higher for…”. Never mind, you already know.

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