Animal Spirits and the Vanishing Rate Cut

Animal spirits can be scary and can work for both declines and advances in a very volatile environment. It is pretty easy to see the risks to the current economy, including inflation, global conflict, chaotic leadership, and questions about economic growth. As we have discussed before in Market volatility is head spinning, markets do not need much to become unsettled when uncertainty is already elevated.

David and Goliath Is Not Dead

You do not need to be a superpower to cause disruption in the global economy, especially a global economy dependent on fossil fuels. Any chance of a Fed rate cut is disappearing rapidly. Markets are hoping that peace negotiations and a cooling of the Iran conflict will keep oil prices from rising enough to damage markets.

Even before the war, chances of a Fed rate cut were already fading as persistent inflation above the Fed’s target and a stabilization in the employment market suggested that another rate decrease was not necessary. That fits with the broader inflation concerns we outlined in What’s the anticipation on inflation? and Actions speak louder than words.

Political Pressure and the Fed

These factors weigh against the administration’s desire for a rate decrease and the replacement of Powell with Trump’s choice, Kevin Warsh, who by the way is married to an Estée Lauder heir worth $1.5 billion. Currently Powell is being investigated by the DOJ per Trump’s request, and Republican Senator Thom Tillis, who holds a key vote, will not approve Warsh until the DOJ investigation is withdrawn.

Critical Indicators At-A-Glance

Supply Chain Pressure

As far as supply chain costs, fertilizer costs are increasing because the main element in fertilizer, urea, is shipped through the Strait of Hormuz. Farmers are hurting again because costs have increased while prices are frozen at 20 years ago.

Why Oil Exporter Status Does Not Mean Cheaper Prices

Also, if America is an oil exporter, how come our prices are not lower than other countries that are importers of oil? The answer is that oil is a global commodity. This means that a barrel produced in Texas is largely interchangeable with a barrel produced elsewhere.

U.S. oil companies are private entities, not state-run utilities. If the global market price for oil is high, there is little incentive to sell it domestically for less. If prices in the U.S. were significantly lower than in Europe, traders would buy up cheaper U.S. oil and ship it overseas to make a profit, pushing domestic prices back up toward global levels.

There is also a refinery mismatch. Many U.S. refineries, especially on the Gulf Coast, were built decades ago to process heavy, sour crude like that from Venezuela or the Middle East. However, the U.S. shale boom produces light, sweet crude. We often export our light oil because we have too much of it for our specific refineries, while continuing to import the heavier oil our refineries were designed to process.

Peace negotiations begin Saturday, so it should be an interesting week.

This website is informational only and does not constitute investment advice or a solicitation. Investments and investment strategies recommended in this blog may not be suitable for all investors. SAS Financial Advisors, LLC and its members may hold positions in the securities mentioned within this newsletter. SAS Financial Advisors, LLC is not responsible for any third-party content referenced.

The SAS Newsletters are posted weekly on the SAS Blog: https://www.sasadvisors.com/blog

Legal, privacy, copyright and trademark information

Privacy Policy