Oil Prices Are Likely to Remain High. What's Next? My Rant.
I wrote the other day that the price of oil likely has a floor of $100 for the rest of the year. So what’s next?
More of the same is what’s next, but the U.S. Government has less of a glove to soften the economic blow. That economic blow could have a comparative increase in force commensurate with the likes of a Floyd Mayweather Jr. jab compared to a Harry Greb hook.
Ignore CPI. Real world price increases are much higher. Food for example is up much more than the reported 0.6% from March to April, as a result of higher input costs (oil/fertilizer) and every supplier on the value chain taking their cut.
So, why does the Government have less ammunition to cushion the economic blow? Simple. Washington emptied both chambers in 2020-2022. Massive fiscal and monetary stimulus, which of course always has a cost when the stimulus comes from a net debt position, which manifests itself in a weaker Dollar, which is precisely what has happened since 2020. You simply cannot cheat the Dollar. You cannot print at scale and not have price inflation unless of course that printing is supported by commensurate productivity increases. I’ve got news for you - AI does not justify the 5% year-over-year growth in the money supply that rarely gets mentioned despite the fact that money supply growth outpaces GDP.
Here are some of the arrows in the Federal Government’s quiver:
Strategic Petroleum Reserve: Guess what? There is less oil in the SPR to go around. What a cluster. We may have lines at the pump a la Jimmy Carter by July. Or, gasoline could simply hit $10-12 per gallon.
Monetary and Fiscal Policy: No doubt incoming Liberal Fed Chair Kevin Warsh is salivating at the thought of QE, whether its in the form of direct Fed asset purchases or a BTFP-like facility. Make no mistake, you cannot sit on the Fed Board and not be a big spending, money-printing Liberal. Ditto for the fiscal side. Other than Ron Paul and Calvin Coolidge, the U.S. Government has not had a small Government-minded person serve in any capacity over the past 100 years. Not even former Fed Chair Paul Volcker. If you are a small Government-minded individual, you want to burn the Fed down, not sit on the Board as the institution destroys the Dollar with its every action. The Fed is Treasury’s banker. That’s the scam. The Fed is not here to help. Treasury is not here to help. The Federal Government and its bloat by definition cannot help, even if it wanted to. There is not one function the Federal Government performs that cannot be performed by some combination of the private sector and/or state and local government. Even foreign policy can be managed by a coalition of the states. Yet here we sit while Washington will blow through $8 trillion this year and generate another $2 Trillion deficit on top of the existing $40 Trillion. High treason I say.
More debt: That’s coming. Treasury Secretary Bessent has no choice but to issue paper. Thus, yields are going higher. 4-5% yield on the 10YR is laughable for a country that is $40 Trillion in debt, where debt grows faster than GDP, where deals are being struck for oil without Dollars in those transactions. The Petrodollar is weakening. Who can blame countries for not wanting to deal with our paper, especially when we weaponize the USD as we did to Russia in 2022 (in a war that we provoked with the Clinton/Obama Ukraine policy of 2014). Sucks when the chickens come home to roost. Tough times breed tough men. Good times breed weak men. We have been living high off the hog since WWII. Next big shoe to drop? No more Social Security or Medicare by 2035. 9 more years max. Otherwise, the ASP for a new car will be $200K.
More layoffs: Punchline: AI is not the reason why companies are cutting. A weak economy is the reason.
QE and lower rates: QE and lower rates are likely incoming, but heck, we already have a zero percent reserve requirement. We will definitely have more bank failures, which means BTFP 2.0 as banks will not be able to restrain themselves as rates come in. This means more lending to unproductive causes such as PE firms that don’t build anything and datacenters that serve LLM builders despite a lack of end user demand. More credit directly translates to a larger money supply. Money supply expansion without productivity gains means more price inflation. Thus, easing will bite us in the ass.
Iran War: I just don’t see it ending soon. The Defense contractors are licking their chops. Iran is running circles around the U.S. No scenario in which the Iran War is good for the American people. None. I could go on an on, but I won’t.