Much like a rerun of Baywatch, I got a little cheeky last week discussing Old Man River Joe Biden. Do we really think that he hoodwinked the world and whipped inflation, lowered interest rates, found a buyer for the bond markets, cured cancer, and won Dancing with the Stars all while showing the Saudi Crown Prince that fist bumping a dude from Delaware was a mistake. In late September and early October there was a problem, and we don’t know how serious, or who knew what, or why. Maybe there was a liquidity problem somewhere or a currency issue, but regardless they had to act. Perhaps Biden played hardball on oil (I know I know, he doesn’t control the oil production) and said we are going to pump more oil and fill the cuts you are making OPEC+, more on that in a minute. Yellen could have spent a suspicious $150 billion dollar as the drawdown in her Treasury General Account went from $820B Oct 20, right before she started telling half-truths and the auctions were terrible to $670 B in the first week of December when her 30-year auction functioned smoothly. $150B would be a nice buyer to get everyone on board and then a little turn of the market and then some technical momentum and boom, you have a massive everything rally, and people are lining up to buy government bonds a full 1% lower than they were 2 months ago. Don’t sleep on Forex markets either when the Japanese Yen started turning back down from 152 at that time either. Was it Yellen’s money being diverted or was the Plunge Protection team involved and stepping in to buy US debt, the single most important market in the world and one that was on the brink 2 months ago. Even Jerome Powell went along and perhaps said he would change his narrative to support their actions. He had the most dovish presser on Dec 13 imaginable and the markets continued to run all through December because he signaled that the Fed is done raising rates and the fight on inflation is won. Now we have been cheering on our last Jedi, Jerome Powell for a year, and he pivots this quickly when there was no reason to? Since when does the Fed need to pivot when the stock market is making all-time highs? Now this doesn’t make sense so let’s go back and look at November how this played out in both the treasury market and then we will look at oil.
We mentioned that Yellen and a terrible treasury bond auction in October and then Yellen couldn’t sell bonds again on November 9, another terrible 30-year auction. This is a real problem for a gal that is forced to sell more bonds than any Treasury Secretary before. “Wrote Karishma Vanjani writes in Barron’s “The Treasury’s auction of 30-year bonds on Thursday went about as badly as it could, indicating investors are reluctant to own long-dated government securities. “Today’s 30 yr auction was outright bad,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.” This was after her refunding arrangement that had started the conflagration in equities and bonds. That announcement brought plenty of buyers into the market on the short end for a couple weeks but remember the Alamo. Santa Ana’s soldiers are the debt. Fred data is produced by the St Louis Fed on their website, and I have been spending more time lately on Fred than Wilma Flintstone. It shows the Reverse Repo facility is now down to $683B from $768B on Dec 1. We have a couple months left of front-end liquidity left to buy Treasury Bills. I said on our October 29 LBLF that the bond market was in trouble. The 30-year auctions were terrible, and the government was having trouble selling long term paper at 5%. This is a fact if you look at the auctions. The front end of the curve and the short-term T-Bills have been sucking reverse repo dollars out of the Fed and into the Treasury market for many months now. Yellen shifted some of the borrowing to shorter term paper on the Treasury Refunding announcement and shifted the narrative, and then used some of the Treasury General Account, the government checking account, and maybe some pals at the plunge protection team, the Japanese or another government helper agency to make it so. That announcement was a real catalyst day and for what reason? We are still selling a ton of debt, but we have a buyer at the front end of the curve. Why?
Matthew Piepenburg mentioned something on the Palisades Gold Radio podcast this week about the US Treasury running a backdoor easing to prop up the bond market, and sure enough there is about $150 billion drawdown from the Treasury General Account since October 29th. We know Yellen moved more borrowing to the front of the curve because she was having trouble selling long term bonds. If they helped turn the bond market to get the public to jump into the bond market, then that is insidious, because they know how many more bonds they have to sell in the near future and how difficult it will be to hold down the price of oil which makes this whole narrative possible.
Which brings us to our word of the day- insidious. Intended to entrap, treacherous.
Next quarter, we will have to sell more and then more. Yellen needed a real rally, and the only way that was going to happen was with Fed help. She is selling the front end of the curve and what does the Fed control, the front end. It can’t help much on the long end, but if the front end likes what it hears then maybe the back end will drop as well. Remember, tax receipts are declining, from $7.6T last Q3 to $7.4T this Q3. Receipts down and spending up, which is why we have $2T deficits. We were at $27.3 T three years ago and now we are at $33.9T. That’s a 7.5% compound annual growth rate or CAGR. A kegger aptly describes the party the government has been having at the citizens expense, but that kegger is spelled kegger.
This wasn’t a party though, someone got scared, very scared. If the government can’t sell debt, that’s it. It’s over. When the gilt market spiked, Liz Truss was gone in a week in the UK. Rumors began that the data was going to make the Fed pause or pivot and lukewarm data was treated like Manna from heaven. A little algo FOMO and the markets spiked and are now in the midst of a 9-week rally with all-time highs either broken or in sight. Powell’s dovish tone on the 13th was a departure from his tone at the first of the month. So, the question is why? Does Powell think the economy and prices are coming down too fast? Is he worried about global demand? The Chinese walking pneumonia has China and Singapore masking up again and it has now spread to Europe with some Covid variants. Did this spook Powell that oil demand and prices would fall? Does he think the lags are finally catching up to prices and that they might come down too fast and go right through 2% and lead to a recession? I think it is important to note, the Fed didn’t pivot. They just said they were talking about it. The media and the market assumed it was a done deal, going to happen soon, and was going to be far bigger than the Fed dot plots even showed. The markets are desperate, as they need lower rates like a Karen needs a no whip Macchiato. Could it be that Powell is worried about something else? OR
I personally think he is watching what is going on at the city and state levels. We mentioned that California is now $68 billion in debt, and we have mentioned that some of the biggest bailouts of Covid were to the state governments that had lost sales tax revenue during the shutdowns. We have also chronicled some of the dumb ass things California has done with money in the last 18 months, so when they show up in Washington with hat in hand, I hope Powell tells them to piss off. However, it isn’t just California, but cities as well with San Francisco in trouble. Josh Koehn writes for the San Francisco Standard “Two months after Mayor London Breed and supervisors passed a record-high budget of $14.6 billion despite signs of future deficits, San Francisco department heads are now being tasked with making immediate cuts to address an expected general fund shortfall. Breed said that the city “simply cannot wait until next year’s budget process to begin to address our growing structural deficit, which at this time, we project to be at least $500 million in Fiscal Year 2025-26 alone.” New York City also has issues with Greg David writing for the City, “After the budget modifications, the city is facing budget gaps of 6% of revenues next year, 8% in 2025 and 9% in 2026.” Does Powell know that the feds can print money but states and cities can’t? OR
Another option-The word on the street is that the Epstein list is going to be opened, and it is likely that there will be some pretty powerful people in that little black book. Does he have some insight to the names? These are maybes and some speculation, but what isn’t speculation is what is happening in the oil market and that is probably where he both gets his salvation and where it can be taken away.
The oil market dropped almost 30% from late September until two weeks ago. The US has been pumping record amounts at over 13.3 M barrels a day and the rig counts are climbing fast. I’m attaching a link to the American Oil & Gas Reporter that shows weekly rig counts and they have risen from a post Covid low in Aug of 2021 of 244 to 780 rigs just last week. That is US shale coming back and we are pumping 2 million more barrels than two years ago. No one expected that. That is pro GDP, and I’ve attached a Statista chart showing that most new wells have break evens in the upper $50 to $60 per barrel range meaning that it is profitable to start new wells. Why is this important? We have to go back to the last inflation and the last financial crisis.
In the 70s, it was the oil shocks that drove inflation as much as anything else. Oil affects the price of everything and when America which wasn’t oil independent got an embargo thrown its way for supporting Israel, again, in the Yom Kippur war of 1973. Gas lines and hard times were here for a decade. In early 2008, oil prices went to $140 a barrel and America was consuming about 20 million barrels a day and we were only producing only 5 million barrels which was down from 10 million barrels pre-embargo in the 70s. Problems galore and more on top of the housing and banking and financial disaster. We were obviously having to import millions of barrels a day and then along came 0% interest rates courtesy of the Great Financial Crisis and with it came fracking.
It was a new form of drilling that was expensive but low interest rates and high prices were a great recipe to get production and exploration going and American achieved oil independence briefly. Fracking changed the American oil producing scene and we became a threat to OPEC+ as we discussed last week, and we are today. Well, all good things come to an end and by Covid the overproduction of the US and demand decreases from shutting down the economy pushed futures prices for oil into the negative and wells were stopped. Higher interest rates don’t help capital intensive business, so they stayed shut until Russia began their conflict with the Ukraine and when prices took off and the frackers came back, but they had learned some lessons. The technology is better now, and we are pumping more oil despite having fewer rigs to do so. Rig counts are still down 30% from pre-Covid. Fracking is a very capital-intensive industry and capital has gotten expensive right now, and fracking wells deplete quite quickly and companies are burning through their inventory. But American became a net petroleum exporter in 2020 for the first time since 1949. Biden is using this hammer to push OPEC+ around right now and they are fighting back, by stirring up the hornet’s nest. Hamas, Hezbollah, and the Houthis are all friendly with or backed by Arab Opec+ countries. The Red Sea is quickly closing to sea maritime traffic because they can pretend this is about Israel or Gaza, but this is a crude oil war. Nothing more and nothing less. Russia energy out of Europe, American energy in, liquefied natural gas in, Russian pipelines blown up, now Israel and Hamas and the Red Sea is unsafe to ship goods. Inflationary and higher oil prices are the opposite of what Joe Biden wants and what Joe Biden wants he gets dammit. If oil spikes and gas prices spike then the Powell pivot is probably off, the markets tank, bond yields rise again, and Democrats struggle in November. This is exactly where we were two months ago and if the price of oil goes back up, everything that just happened can reverse. I don’t think the Arab world is that devious but more simply interested in their own welfare as they need a high oil price to balance their own governmental budgets.
The US intervention to slow down the Gaza destruction makes more sense especially considering the Arab protests abroad and the surprising pro-Palestinian reaction in American amongst the collegial youth. Fox news senior strategic analyst, retired four-star Gen. Jack Keane says “I am absolutely stunned that we’re still sitting there in a defensive mode. I mean, obviously, we have the capability to defend ourselves. There’s no disputing that. But to shut these people down, you have to take away their capability to do it. So you go after that. You go after the rockets. You go after the missiles you’ve left at storage sites. You go after their entire command and control system. We have very good intelligence on the Houthis, to be sure. And I also believe you go after the Iranians on this because they’re really calling the shots here. Make no mistake about it, why we’re still in this defensive role makes no sense to me whatsoever.” Now Biden isn’t exactly a chess grandmaster, but he pulled us out of an embarrassing military campaign and I am sure he is hesitant to get involved in another. Even he knows escalation in the Middle East probably means escalation in the oil price and sure enough the Red Sea shipping disruptions have already cost Brent crude to rise almost 10% in the past week. Missile and drone attacks by the dozen and our carriers and destroyers are heading there now so maybe Biden will escalate.
This is a game of chicken with a timer…the timer is the US supply of oil… Part 3 coming up next.
Sincerely Yours,
C Thomas Printer
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