Last week after writing my tour de force against technology and AI, I pushed myself back from my typewriter and went outside and hitched up my two horse team to my buckboard and went for a ride in the country. Sometimes when I am analyzing markets and world events, it is easy to say I was wrong. I was wrong that China hasn’t yet invaded Taiwan. I was wrong that Elon Musk wouldn’t be jailed yet for stock interference. Wrong can also be not yet and both cases still apply although I did think both of those things would have happened by now. Being wrong is part of the game and like a winning sports gambler that only has to be right just over 55% of the time I had to think about the events of the last few months. Ceteris paribus, meaning all else being equal, is an economic term best used in anti-septic learning laboratories of higher education because it seldom has any place in the real world where all parts are moving, and every government and politician and federal agency has an agenda and large amounts of power and money at their disposal.
I started thinking back to this rally in the last 7 weeks and what has changed, which is basically nothing? I did some digging on some old themes that can help explain how the current game is rigged. We need to remember the two most important markets in the world right now according to Luke Grohmen, the price of energy and the market for US treasuries, as we did for answers.
Now remember the politics that have transpired in the last 12 months or so in the Middle East. In October of last year Biden warned there would be consequences if OPEC cut production as this was seen siding with Russia by keeping the price artificially high and aiding Russia’s revenues by selling oil at a higher price than the US wanted. Biden famously got a fist bump and then rebuffed by Saudi Crown Prince Mohammed Bin Salman in the summer of 22. In December of 2022 to contrast, Xi made a visit and got a parade. High energy prices are a political problem for Biden and the US. Remember, higher gas prices will screw up the inflation dropping narrative, and that means Powell can’t lower interest rates which are killing banks, private equity, corporates, the housing market, and Biden’s reelection chances remember the recent polls? Biden’s popularity with everybody needs lower energy prices.
As Doomberg says, “Energy is life.” In June of 2022 when inflation peaked what drove it, gas prices, as they peaked as well. When inflation started dropping what also dropped, gas prices. There were more surprise cuts by OPEC in April 23 and the price of oil again went over $90 briefly, but then it dropped again back to the $70 range. The US sent Anthony Blinken, the secretary of state, over to meet with the Saudi Crown Prince Mohammed Bin Salman on June 6. Oil had been trading in the $70-$75 range for a couple months.
Two weeks later oil takes off and gains 27% to almost $100 a barrel in three months to those October highs. In September, Americans with student loans had to start making their payments again. This was a liquidity drain in that money that was going into the economy was going to pay bills instead. What did gas prices do this summer? They rose all year and peaked in September about 80 cents a gallon higher than they were in December of last year. The US consumer was being pinched again and they didn’t like it. Forbes Wayne Duggan writes “On September 5, Saudi Arabia announced it will be extending its 1 million barrel per day production cuts through at least the end of the year. Russia has announced it will be cutting production by 300,000 barrels per day (bpd) through December 31 as well… Saudi Arabia has its own motivations for higher oil prices. Bloomberg Economics recently estimated Saudi Arabia may need oil prices to be near $100 per barrel to finance Crown Prince Mohammed bin Salman’s ambitious government projects, such as building the $500 billion futuristic city of Neom.”
On September 27 crude oil hit $97 a barrel on Brent. Gas prices were the highest in 9 months. By October 3rd, the Dow Jones Industrial average had broken had fallen from through 33,000 from its annual highs in July 35,500. On October 4th the Brent Crude price had fallen to $83 a barrel, a decline of 14% in a week. What happened? Three days later, Hamas rides motorcycles and paragliders into Israel catching one of the world’s most untrusting and suspicious armed forces completely unaware. The whole world has been trying to kill Israelis for 75 years and then they just let their guard down? I suppose that is like Pearl Harbor or 9/11. If you are going to war, you need justification. Iran was instantly blamed in the media for backing Hamas. Brent crude bounces back above $93.
The next week while oil was bouncing on geopolitical risk, back in the US on Oct 12, the 30-year Treasury had a terrible auction, Karishma Vanjani wrote for Barron’s about the treasury market “If there are tons of folks looking to buy that yield would be a lot lower,” Chris Gunster, partner and head of fixed-income strategies at Fidelis Capital told Barron’s. “It suggests demand isn’t matching expectations.”
Investors may not consider the 30-year the best predictor of bond market demand given its long duration, but the Treasury also saw a weak auction recently for the 10-year and three year Treasuries. That suggests there are fewer takers on government debt across various points on the curve.”
Problems galore for Biden and Blinken. The B&B boys loaded up airplane politico and first Blinken went to Israel, Jordan, Qatar, Bahrain, Saudi Arabia, the United Arab Emirates, and Egypt from Oct 11-17. He condemned the attacks of Hamas on Israel, but he backed Israel’s right to defend itself, and he wanted to call on these countries to help the violence from spreading in the Middle East. Then he joined Biden who visited Israel on Oct 18 and was planning to visit Jordan, but that visit was cancelled after the Gaza hospital was bombed on Oct 17. Arab protests broke out in Lebanon, Iraq, Turkey, Iran, and Jordan in response to the blast. On October 18, Brent crude traded at $93 a barrel while the next day the 2-year Treasury hit 5.54%. Problems galore and more for the B&B boys.
We have asked for over a year who is going to buy the bonds, and at what price? If the answer turned out to be the institution that is supposed to be selling them, well we have stumbled into complete corruption. Why be so naive C Thomas? Of course, they are doing this. Don’t you remember the Plunge Protection Team? They step in and buy stocks to keep the market from falling so fast and have been trotted out during 2008 and 2020. Formally, they are the Working Group on Financial Markets and they were created by the executive order of Ronald Reagan after the crash of 1987. They include the offices of Biden, Yellen, Powell, Gary Gensler the head of the SEC, and Rostin Behnam, head of the Commodities Futures Trading Commission. Ellen Hodgson Brown writes in her book Web of Debt about their function, “To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its function. “ Oh Ronnie, how could you? Perhaps his intent was pure, but now the government’s fox was in the henhouse and now they could interfere at will. Did the Plunge Protection Team just join the bond market?
Let’s go back and look at September and October for a moment. Days before this big rally started on October 26, 2023 Danielle DiMartino Booth tweeted “Janet Yellen is a delusional national embarrassment.” We follow Danielle’s work at Quill Intelligence closely and agree that the Treasury Owl Yellen is not our brightest beacon of capitalism. It seems Yellen took that personally or maybe she became fed up (that was coincidentally was the name of Danielle’s book about the Federal Reserve, an organization Yellen led poorly for a while), and the Great Owl took it upon herself to change the Treasury market. Why? While all this Middle East conflict was going on, what was Yellen up to?
On October 24 Reuters’ David Lawder had an article about Yellen, “It’s not unexpected that in a world of increased volatility that liquidity should diminish somewhat or the cost of transacting might rise a little, but my assessment is that markets are well functioning, trading volumes are large, traders are not having difficulty executing trades,” Yellen said. Lawder then writes this, “An index of near-term volatility in the Treasury market from ICE/Bank of America Merrill Lynch is near the highest level since the spring of 2020 when market dislocations during the early days of the COVID-19 pandemic forced the Federal Reserve to step in to restore order.” WoW! Three days later on the 27th Lawder wrote again for Reuters saying “Yellen said the Treasury was continuing to study diminished liquidity in the U.S. Treasury debt market, saying this was a function of broader market volatility, but added: “We don’t see problems.” And then she dropped this whopper “She noted that Treasuries are now attracting a lot of foreign buyers because of their attractive yields.” Here is Chelsey Dulaney and Megumi Fujikawa not 2 and a half weeks later calling bullshit on that with their piece in the Wall Street Journal that begins as plainly as can be “Foreigners no longer have an insatiable appetite for U.S. government debt. That’s bad news for Washington.” Here is the real important nugget from their article, “Earlier this month, a U.S. Treasury auction of 30-year bonds was met with tepid demand, spooking markets broadly as investors feared more supply-demand disruptions to come. A group of Wall Street executives that advise the U.S. Treasury, known as the Treasury Borrowing Advisory Committee, recently flagged waning demand from two big-time buyers: banks and foreigners.” Yellen called the B&B boys and told them to get to work. The petrodollar works when the Middle East sells oil for US dollars, but those dollars buy bonds…
Blinken then went back to Israel November 2 before visiting Jordan, Iraq, and Turkiye. Brent crude had now dropped to $84 a barrel and by the end of his trip it had traded below $80. By now the tone had changed to the civilian carnage in Gaza and how he was working to ease tensions. Israel was as mad as a hornet not 4 weeks earlier and now the US has done a 180 and was being the voice of reason trying to talk them back from exterminating Hamas while having an airtight perimeter around Gaza? As Sergeant Tanner once said, “It’s Torretto Brian, the rest are just fumes.” Torretto is oil. Israel was told to stand down and do it quietly so not to enflame the region and keep the oil price low. If they wanted our weapons and our support, that was the price. There was a ceasefire, hostage exchange and there you go. The narrative as US as peacemakers in the region is still keeping the price of oil down…for now.
I think the US had tried to get the Middle East to use their oil profits to buy more long-term treasuries and they said not long-term treasuries. Why? They are aligning with BRICS, the US has a spending problem, and the word of the US can’t be trusted anymore after we froze the foreign reserves of a major nation in Russia. OR they said, we are OPEC, and we regulate the supply of oil and you aren’t playing the game by increasing your production. Either way we were pissing in their cheerios and they were pushing back.
Carl Surran writes for Seeking Alpha,
“Crude oil production from the U.S. reached a new all-time high of 13.2M bbl/day in September, according to data released last week, outpacing expectations and causing a big problem for OPEC+, which agreed last week to further output cuts in an effort to prop up faltering prices.
The U.S. accounts for 80% of the expansion in global oil supply this year, according to the International Energy Agency, and its production is expected to grow by 850K bbl/day, well below the pace reached earlier in the shale revolution but much faster than analysts had forecast.
The American supply juggernaut is “the main reason” why markets have not tightened as many expected, Rapidan Energy president Bob McNally told Financial Times.”
He nailed it. OPEC is cutting production, and the US is filling the gap and keeping a lid on prices. Old man Biden is swinging the fracking hammer at the Saudis and Iran. This began in September and front ran the drop in yields, inflation, and the rally in bonds.
What is the one way to get inflation and bond yields down? Use a hammer and pound them down, and with that Joe Biden became the greatest friend the US oil market has ever known. The Green President is pumping more oil than anyone else in history. Why? Because money talks and bullshit walks. If oil goes up, then inflation goes up, the Democrats get crushed in November of next year. Make a few comments about oil demand dropping, which OPEC didn’t agree with, and then broadcast that you are pumping records here in the US and Boom! Oil has dropped 25-30% in the last two months, inflation comes down, Powell says we can finally talk pivot, more on that later, and Yellen has her buyers of treasuries accordingly. No one wanted to buy the 2-year bond at 5.5%, but now they can’t get enough of them at 4.4%? That doesn’t make any sense, I know! But that is what is happening because they think everything is great, but it was just a temporary government intervention like always- call it the Fed put or the Powell put even though he was hardly involved in October when this started.
Biden used the dollar as a weapon against Russia and that didn’t work and now, he is using oil as a weapon against the Middle East. He started this before the Hamas attack on Israel, he did this before the Houthis missile attacks started closing the Red Sea to shipping, he did this before we sent aircraft carriers and destroyers to the Med and the Middle East. We have the Red Sea being bypassed for shipping and yet the oil price is off 30%. Joe Biden, between naps and ice cream, has managed to bring inflation down and checkmate the Middle East at the oil game. He has become a great friend to the American oil industry and has become the legend that he has always thought himself to be…
Part 2 next week….
Sincerely Yours,
C Thomas Printer
On this date in history… 163 years ago to be exact, South Carolina became the first state to secede from the Union beginning the Civil War.
This week’s fun fact, 1/6 of all retail sales are made at Christmas.
Also born on this date, the only man to win a Super Bowl ring and an Olympic gold medal, Dallas Cowboy Bullet Bob Hayes.
Many people this holiday season want to give a gift that keeps on giving, but C Thomas Printer would like to receive a gift that stops giving so please support Congressional term limits.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.
https://www.statista.com/statistics/215492/receipts-of-the-us-government-by-quarter/
https://fred.stlouisfed.org/series/RRPONTSYD/
https://www.cnn.com/2022/10/05/energy/opec-production-cuts/index.html
https://www.npr.org/2023/10/18/1206504384/what-you-need-to-know-about-bidens-wartime-trip-to-israel
https://www.npr.org/2023/10/17/1206282283/gaza-aid-israel-hamas-biden-visit
https://www.barrons.com/articles/treasuries-weakness-demand-a2bec374
https://seekingalpha.com/news/4044909-record-breaking-us-supply-is-weighing-on-the-global-oil-market