Good Friday Morning! Especially to the NFL, which is finally back. I say this every year, but it’s good to be back to normal. Expectations are high, everyone is undefeated, and Cinderella stories are waiting to get written. I haven’t talked myself into believing anything extreme yet. That will happen later on in the season.
CNN reported this week about a kid severely injured in the Highland Park shootings. The kid is paralyzed and dealing with several horrific injuries. The curious thing in the report, he can only see his family once a week: “And the emotional toll is just as heavy: Cooper misses his home and his family. While he is with his parents “constantly,” he can see his whole family only once a week, the family clarified on Thursday. He has begun looking forward to when he’ll be able to join his twin brother in third grade — which could still be weeks away, his family has said.”
One of my favorite anonymous accounts on Twitter, @AgeofShoddy, remarked:
I will simply note here that we’ve managed to create a world in which pride flags are ubiquitous, while one of the fundamental rights gay people once fought over – the right to be with a loved one in their hour of need – is now being lost for all, with few much noticing or caring.
The spirit of the age is to murder the substance while exalting the image, so we live as best we can in a prison of bootleg off-brand Christless Christianity.
I’ve heard a lot of descriptions of the age we live in, but that may be one of the best. Our era’s secular religion is dead and lifeless, more so than any idol of previous times. We’ll dig into the Fed minutes below and discuss economic conditions – links to follow.
Where you can find me this week
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[8/15/2022] Democrats open Pandora’s Box with Trump Raid – Conservative Institute
Peak inflation? Fed says no.
One of the sneaky stories of the last week was the release of the Federal Reserve’s meeting minutes from the July meeting, where they raised interest rates again. These minutes are usually only interesting for a niche set of traders, but otherwise pointless for most people. However, with the Fed assessing the threat inflation poses to the economy, those minutes have more importance than usual.
What I found interesting was how different outlets covered these minutes. We’re going to focus on the financial outlets:
- Fed sees interest rate hikes continuing until inflation eases substantially, minutes show – CNBC
- Fed Officials Saw Need to Slow Rate-Hike Pace ‘At Some Point’ – Many participants saw risk of over-tightening policy, Officials saw significant risk of entrenched inflation – Bloomberg
- Fed Officials See Need for Continued Interest-Rate Increases, but Less Certainty Over Destination: Officials at last month’s meeting acknowledged risks from raising rates too little and too much – Wall Street Journal
CNBC covered the minutes with a hawkish frame. This coverage makes sense for them. They’re primarily focused on traders and retail investors in the stock markets. For that crowd, any interest rate hikes are a disaster and lead to poor market returns. CNBC is desperate to declare peak inflation and the rate hikes over.
Bloomberg covered things more dovish, focusing on slowing down rate hikes. They play on the tension between over-tightening the market, which leads to a recession while acknowledging the threat of inflation. This framing tends to suggest that recession is more dangerous than long-term inflation.
The Wall Street Journal took a more middle-of-the-road approach and showed an uncertain Fed. A headline that suggests the Fed doesn’t know the destination implies much uncertainty. That uncertainty allows CNBC to cover these minutes as the end of the world and Bloomberg to look for a Fed looking for an off-ramp.
I like the WSJ’s framing the best of the three. Further, the WSJ’s version of this narrative is the most notable. When the Federal Reserve needs to leak something, they’ve picked the WSJ journalist of that piece, Nick Timiraos. If he’s framing this as a Fed unsure of what to do or where to go, that signals serious issues ahead. Fed-speak will call this “going by the data,” not choosing a direction but responding to the latest information.
The WSJ says they don’t have a plan anymore. That’s not good.
We know that the decline in CPI from the most recent report is from oil prices dropping. The FOMC meeting minutes agreed with this assessment, saying:
Market participants perceived falling commodity prices—particularly for oil—and the FOMC’s commitment to bringing inflation down as pointing to lower inflation ahead. Market-based measures of near-dated inflation compensation declined and continued to suggest that inflation would ease in coming quarters. In the Desk surveys, respondents also expected inflation to decline substantially in 2023 but assigned meaningful probabilities to a wide range of potential outcomes, including scenarios involving continued elevated rates of inflation.
The key to understanding this statement is the phrase “but assigned meaningful probabilities to a wide range of potential outcomes, including scenarios involving continued elevated rates of inflation.” I raise that point because while everyone is praising 0.0% month-to-month inflation, the Fed is quietly pumping the brakes. When you don’t have a plan or destination, saying there’s a wide range of possibilities suggests high levels of uncertainty on anything said.
Nick Timiraos caught this too, and highlighted this specific passage from the minutes:
Participants further observed that inflationary pressures were broad based, a pattern reflected in large one-month increases in the trimmed mean CPI and core CPI measures. Participants remarked that, although recent declines in gasoline prices would likely help produce lower headline inflation rates in the short term, declines in the prices of oil and some other commodities could not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound. Participants also noted that the high cost of living was an especially great burden on low- and middle-income households. Participants agreed that there was little evidence to date that inflation pressures were subsiding.
Emphasis is mine. If the Federal Reserve openly suggests that commodities could jump again, it’s worth examining what could cause that situation. It’s also worth considering that this scenario might happen, since the underlying tightness in commodities markets hasn’t changed. For that, we look to the Biden administration.
On July 22, 2022, a Biden administration advisor said they planned on ending releases from the Strategic Petroleum Reserves. When are they concluding this? Right around the midterms.
One of Biden’s top energy aides confirmed Friday the administration won’t extend the oil releases from the Strategic Petroleum Reserve that are scheduled to end this fall.
The Strategic Petroleum Release “was really a stop-gap measure,” says Amos Hochstein, Biden’s Special Presidential Coordinator for International Energy Affairs. “We can’t be an oil supplier. It’s a reserve and so we have to keep that.”
He vowed that ending the releases won’t spur supply shocks, noting that the private sector has assured him that it will be able to ramp up production once there’s no longer access to the reserve.
“I myself had those conversations with the leadership of several of the companies,” added Hochstein, who formerly worked in the oil industry.
At least some companies are investing right now in the months-long process of ramping up production, he said, making him optimistic that the fears of a fall surge in prices may be overblown.
So there you have it, ending the Strategic Petroleum Reserve releases, which were done expressly to lower gas prices for political reasons ahead of the midterms, won’t impact oil prices later this year. At least according to the Biden administration, which is pitching that version of events on more of a hope and prayer rather than serious analysis.
It’s hard to take this seriously when US refineries are already running flat out. No new refineries are getting built. And there’s no evidence that gasoline demand has changed in any way.
Several large banks are sending notes to investment clients that a commodities rally, led by higher oil prices, is coming later this year. OilPrice.com summed it up like this:
One of the prime indicators of commodity prices is the Constant Maturity Commodity Index, UBS CMCI, which we’ve seen plunge by 11% since its June peak. That’s still 16% higher year-on-year, but it’s been flatlining for the past 7 weeks.
UBS, however, remains undaunted, eyeing up to 20% returns for commodities–across the board–over the next six to 12 months, according to interviews with analysts on CNBC.
Likewise, Goldman Sachs is anticipating a rally in another key index, the S&P GSCI commodity index, of over 23% by year’s end.
The first half of the year was characterized by supply-side constraints that pushed commodities prices up significantly. Now, supply is not the biggest issue, says UBS. Instead, the issue is a less-than-ideal outlook for global economic growth, coupled with a strong U.S. dollar and China’s real estate problems.
What do higher commodity prices mean? Higher inflation.
And that’s just here in the United States. It’s becoming common belief that Europe and the United Kingdom will be in a recession by the winter. Germany, Italy, and the UK are all bracing for an energy crisis this winter, led by higher oil prices. Summer droughts have made trade through rivers more expensive or impossible. Lower river beds make it harder to ship goods throughout the EU.
Europe will experience much higher inflation too. China is still dealing with lockdowns surrounding COVID-19. Still, with the big political party meeting coming this fall, everyone expects a full re-open of the Chinese economy to ease tensions among the populace.
If the Fed is willing to say commodities could pop back up, the Biden admin is cutting its one policy to lower prices, and Wall Street banks are positioned for higher prices, what do you think is going to happen? Nothing is a given, and I’ll grant you that. But the question is this: have any of the primary drivers of inflation changed or fixed?
If that’s the case, we should plan on higher prices and more interest rate hikes later. Odds are we are experiencing the mirage of recovery right before the elections because the Biden White House wants the data to look good for a few months. However, gravity is likely to take back over.
Maybe I’m wrong. I’m willing to admit that (and it’d be great if I was), but the Federal Reserve is making the same case in their minutes. And the journalist the Fed relies upon for leaks right now is pointing to that same passage.
An older adage among traders says, “don’t fight the Fed.” That means if you’re trying to make money on the markets, trade with the direction the Federal Reserve wants markets to go, not against it. As better economic data comes in right now, you have to remember to check the underlying fundamentals. Do those facts point towards or away from more inflation?
Right now, it’s more inflation. The Fed has not achieved enough rate hikes to break inflation yet. And commodities are primed to rip again.
Links of the week
Social Media Was a C.E.O.’s Bullhorn, and How He Lured Women: Dan Price was applauded for paying a minimum salary of $70,000 at his Seattle company and criticizing corporate greed. The adulation helped to hide and enable his behavior. – NYTimes
RAF ‘pauses job offers for white men’ to meet ‘impossible’ diversity targets: The alleged move has prompted the head of recruitment for the Royal Air Force (RAF) – herself a senior female officer – to resign in recent days in protest. – Deborah Haynes, Sky News
Wall Street Bets the Fed Is Bluffing in High-Stakes Inflation Game: The market rebound reflects a belief that inflation has peaked and rates will go down sometime next year, an outlook Fed officials have tried to dismiss – Akane Otani, WSJ
U.S. Home Sales Dropped in July for Sixth Straight Month: Median sale price eased last month to $403,800 from June record of $413,800 – David Harrison and Nicole Friedman, WSJ
UK power sector to ‘wargame’ energy rationing amid threat of days-long blackouts: Exclusive: Industry insiders are preparing for energy rationing measures, and the government has discussed the risk of mass non-payment of bills – The Independent
Sex between men, not skin contact, is fueling monkeypox, new research suggests: The claim that skin-to-skin contact during sex between men, not intercourse itself, drives most monkeypox transmission is likely backward, a growing group of experts say. – NBC News
The Biden Administration’s Quiet Failure on Monkeypox – Jim Geraghty, National Review
“A Hunger Games Contest”: How Unforced Errors Hobbled America’s Monkeypox Response: As vulnerable Americans scramble to find scarce vaccine doses, critics say the FDA dragged its feet, “the CDC can’t operate its way out of a paper bag,” and a 333-page smallpox response plan was never “activated.” Can Team Biden right the ship before it’s too late? – Katherine Eban, Vanity Fair
Biden’s bogus boast of 1 million ‘construction jobs’ – Glenn Kessler, Washington Post
Why We Lost Trust in the Expert Class – Victor Davis Hanson
In Utah, no child support, no hunting or fishing – NewsNationNow
Twitter Thread(s) of the week
Satire of the week
Thanks for reading!