Looking Backwards …
LB #1
The markets were definitely picking up what Jerome Powell was putting down as the Fed left interest rates flat on Wednesday and Powell’s presser came out with a more dovish tone than expected. He didn’t pivot, but he alluded to a pivot and that was all the markets needed. We start by going over to MarketWatch where Christine Idzelis and Joseph Adinolfi summarize a strong week for equites and bonds. The S&P 500, up 2.5% on the week, saw its longest winning streak since 2017 and the Russell 2000 index was up 5.6%. The markets focused on Powell not needing a recession to cut rates and that was soft landing in the eyes of the markets, and they zoomed higher afterward. On Friday New York Fed President John Williams tried to walk back some of the exuberance by saying “We aren’t really talking about cutting interest rates right now.” The credibility on the subject seems lost as the market largely shrugged off his comments. The 10-year Treasury dropped 31.7 basis points on the week, the largest drop since November 2022. The market is euphoric.
LB#2
It seems that the short tensions between Guyana and Venezuela have been eased as both sides agreed to not use force in their territorial dispute over the oil rich Essequibo region. According to Charles Price at Oilprice.com, Guyana was awarded the region by arbitration, but it has been a sore spot ever since. This flare up was caused by the US lifting sanctions on Venezuela because they happen to have the heavy crude that the US needs for refining. Remember, not all crude oil is the same. We produce a lot of light sweet crude, but our refiners are set up for the heavy crude that we used to import from Russia and the Middle East. This is a consequence of not building a refinery in the United States since the 1970s when we were much more beholden to imports. Guyana and Venezuela agreed to meet and converse again in 3 months.
LB#3-
$886 billion is what the new defense bill will cost Americans. Let’s go to ZeroHedge where they write about the 3,093 pages of pork for anyone with money to lobby a government official. $145 billion for AI and hypersonics, $600 million for Ukraine, and $500 million for the Taiwan Foreign Military Financing fund. That last item will not go over well with China who has specifically said that the military isn’t to fund Taiwan. The Pacific Deterrence Initiative spent $9.1 billion, a 40% increase, to boost alliances with most of the South Pacific, aka buying loyalty against the you know who. There was a 5.2% increase for service members so there was something worthwhile that we spent the money on, but I would hardly call inflation beaten if we are raising government wages by 5.2% when the target inflation rate is supposed to be 2%.
Looking Forwards…
LF#1
The markets are expected to be slow for the next couple weeks as everyone digests their holiday dinners and the explosive rally we have just experienced in the past 7 weeks. Barron’s Jacob Sonenshine is looking ahead “First, stocks are now reflecting almost as much optimism as they can, making equities vulnerable to any disappointments. The equal-weight S&P 500 is trading at 16 times expected per-share earnings for the coming 12 months, rising from just below 14 times at the start of the October rally. “ Nothing has really changed except rate expectations in the last 7 weeks and the price of oil has dropped significantly despite Middle Eastern violence, more on that in a minute. This has been expansion of the multiples in stocks, it hasn’t been driven by earnings expectations, they were already high in October. Sonenshine continues, “We struggle to embrace the consensus logic calling for 12% profit growth,”wrote Comerica Wealth Management’s chief investment office, John Lynch, who sees a market drop as likely.”
LF#2
Large shipping companies Maersk and Hapa-Lloyd are telling their ships to bypass the Red Sea after numerous ships have been attacked by the Yemeni backed Houthis’ missiles. We discussed this very problem at the start of the Israeli conflict and zeroed in on the Bab el-Mandeb strait in particular as a possible hot spot, which is where the violence is occurring. This is about money and control. The straight is the narrow strip of water connecting the Gulf of Aden and the Red Sea with Eritrea and Dijbouti on one side and Yemen on the other. Remember in 2021, when the large ship Ever Given was stuck in the Suez Canal sideways and it affected about 10% of the world’s trade, well about 12% uses the Red Sea as this is basically the same water route, and if the Bab el-Mandeb chokepoint makes the Red Sea unusable, then prices are going to rise again as shipping gets more expensive. According to Business Insider, shippers are applying a so-called war risk charge of $50-$100 per container. Costas Paris writes for the Wall Street Journal, “Hapag’s Al Jasrah vessel was hit by an unknown object on Friday traveling through the strait, resulting in a fire that was later contained.” Oil has traded down almost 30% from 3 months ago despite the shipping concerns.
Red Sea violence forcing ships to take the long route
LF#3
Lastly, something caught my eye and like a car wreck, I just couldn’t look away no matter how ghoulish. Ellen Rykers writes for the BBC “The young bull’s head disappears into a plastic green hood. He scoops up a mouthful of dried pellets, chews, flicks his ears, and exhales. The hood is attached to a contraption on wheels that looks a bit like a high-tech mobile pizza oven. But the only thing cooking up here is a precise measurement of methane, a highly potent gas that has a global warming impact 84 times higher than carbon dioxide (CO2) over a 20-year period.” New Zealand is measuring cow’s burps and trying to figure out how to stop global warming by creating new feeds and to make them emit less methane than eating grass. I missed that part of Dances with Wolves when the movie romanticized the time when millions of millions of animals roamed the plains and I never saw one in a hood but then again I never saw a proper bison burp amongst polite company either. Perhaps the bison had superior manners to the bovine of today. This comes from the country that introduced the cow fart tax in 2003. What is it with these New Zealanders? Send your cows to a dog trainer and they will not poop on the rug, burp or fart, and can be taken for walks around the neighborhood in about two weeks.
The real lead was buried in the second to last paragraph of the story though, “If the country fails to meet its agreed emissions reduction targets under the Paris Agreement, it may need to spend billions of dollars on overseas carbon credits to offset its climate pollution, including the methane-laced breath of farm animals.” It is an extortion scam, nothing more and nothing less. New Zealand’s debt to GDP was 33% in the year before the fart tax and by 2021 it had risen to 47%. Remember, when we mention unproductive capital projects, here is another exhibit.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.