Who Caused Energy Inflation?

Right now partisans are blaming Biden policies for reducing US oil supply causing high prices. Is this true? Here's US Oil Production:

Source: ARC Energy Charts dated 6/13/2022

Today, production is at its highest level since the mid-2020 lockdown price collapse. We have yet to recover to pre-pandemic levels but production has been rising for the last two years. 

What about demand, is US demand way up?

Source: ARC Energy Charts dated 6/13/2022

Well, we've recovered from lockdowns but US demand looks pretty stable to me. Probably demand SHOULD be higher and is holding back the US recovery. But in fact, this is not demand pull inflation. And this is the conundrum facing US policy makers. US energy policy is NOT the cause of the fantastic rise in energy prices.  What IS the culprit?

Other headlines have blamed US refineries for lower production.

Source: U.S. Energy Information Administration

Refinery production has hardly changed, if anything, its slightly higher for the last few weeks! It's not that. Its not refineries. 

Conclusions

We have to face that US, and maybe world, supply and demand, production and consumption, is NOT the culprit. The Sherlock Holmes maxim "when you have excluded the impossible, whatever remains must be the truth" begs the question, what remains?

First acknowledge inflation is NOT solely a US problem. Its WORLD prices that are rising. While we haven't excluded every possible explanation, the costs and complexity of the global energy value chain remains. Shipping, transport, storage, that is, supply chain disruptions may be the source of today's energy price inflation. The policies and causes of today's disruptions, mainly, pandemic and war, are topics for other posts.

Why ARC Energy Charts? They are industry standard energy information sources with better graphics than US Energy Information data. Both sources are easily accessible by anybody. Sources are available upon request. 

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal

SPY Up 0.2% and QQQ Down 1.6% in May

While May was a mostly flat month for stocks and bonds, SPY and QQQ are down sharply year-to-date. 

Daily chart where 12/31/2021 = 1000

SPY = SPDR S&P 500 ETF Trust 

QQQ=Invesco QQQ Trust

BND = Vanguard Total Bond Market Index Fund

Source: Yahoo Finance.

SPY and BND have their worst Jan-May losses since inception (1993 and 2007, respectively). QQQ has its worst year-to-date loss since 2002 (1999 inception). BUT, half of all Jan-May declines, ended higher by their year-end.

What does any of this mean for individual investors? Not much! 

First, lets see the stock market time machine. Exactly how bad IS this decline, expecially in the face of outsized gains of recent years? 

Today's break, as bad as it is, only takes us back one year in the SPY, to the Covid recovery of June 2021; and, in QQQ, to April 2021.  How quickly will we recover to the year-end 2021 highs? No one knows. But all we know is history.

Next, for those who follow Bogle's admonition to "Stay the Course" through market declines, we have to recognize that market breaks are inevitible, and, in the end, market breaks are the price we pay to earn the highest long-term gains of anyone in the market. 

Why the SPY, QQQ and BND? Because anyone can BUY them. You cannot buy an index but these ETFs are constructed and, historically, match the return of the S&P 500, the Nasdaq 100 and the Total Bond Market index-the largest broadest and most popular indexes on the planet.  

Why NOT bitcoin? Two answers: for most people they don't understand it and they don't want it, for others, the complexity of creating and entrusting funds in a bitcoin wallet is a bridge too far, ignoring the fact that bitcoin is just a computer program with no intrinsic value. What about GBTC? The Grayscale Bitcoin Trust has been about the easiest way to own bitcoin, through your trusted broker, since its inception in 2015. But that begs the question WHY? Yes, GBTC has matched bitcoin's speculative gains, it is also matching the current decline.

This is yahoo.com data that anyone can access free. My excel spreadsheet (ETFs 20220602) is available upon request. 

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal

Commodities Up 1.4% in May - Smallest Gain of the Year

The well diversified Bloomberg Commodity Excess Return Index rose 1.4% in May, the smallest monthly gain of the year. Commodity sectors, though were much higher. And 28.1% was the highest ever Jan-May return in the history of the index going back to 1991.

Source: bloomberg.com

Looking at the above, we see gains concentrated in energy and agriculture. The war in Ukraine will keep the pressure on both of these sectors. Oddly enough, and despite headlines to the contrary, wholesale meat prices (livestock) and precious metals (gold and silver) are DOWN for the year. 

There is another contradiction, not shown here, that corporate profits, usually booming in time of inflation, may be pressured due to the odd Covid driven nature of the price pressures-mainly supply and labor bottlenecks. That is for another post.

So much for the past. What does the mixed message tell us, if anything about the future? If anything, we can look to the predicate causes - Covid and war - showing their effects. This may not be an economic problem, or much less of a problem if these causes go away. Will oil go to all time highs? Will food prices continue rising? Maybe, on both accounts, if the war gets much hotter and if pandemic (Covid AND monkeypox) spreads. 

In the alternate case, if either one or both - war and virus - cools off or goes away, commods can return to their deflationary equilibrium. 

Why the Bloomberg Commodity Index? Because it is a DIVERSIFIED index, not an essentially energy index like the S&P GSCI.  Why the "Excess Return" version of the index? Because it is a pure futures price index unlike the "Total Return" headline index which distorts commodity price returns by inexplicably including TBill interest earned on collateral. This is bloomberg.com index data. My excel spreadsheet is available upon request. 

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Send request to gdrahal@outlook.com to follow this blog and for additional information. 

© 2022 George Rahal