Round 2: Trump Vs. OPEC

With oil prices having staged a recovery during the first quarter of 2019, primarily due to the withholding of oil supplies from Saudi Arabia, President Trump has once again entered the oil market as a threat. Not since OPEC’s founding in 1960 has an American president been as vocal or involved as Trump.

Trump’s intervention in “Round 1,” summarized below, shocked the market, causing a massive price collapse. However, with close scrutiny of the president’s views, both before taking office and over the past year, the market should not have been so surprised.

Saudi Arabia is in a delicate position. On the one hand, it needs oil prices in the $80s to support it's country’s budget, even if lifting costs are $10 or less. It also knows that a “high price” is not the best price longer-term, due to cutbacks in demand and the increasing availability of substitutes, such as U.S. shale.

But possibly most importantly, it depends on the U.S. for its security. And looking forward, it wants U.S. investment to help diversify its economy as the oil age wanes.

Simply put, it cannot afford to ignore this U.S. president, whose first international trip was to KSA. There is an important political and economic link to the U.S. that it did not have even one president ago (Obama). And its arch-nemesis, Iran, at the same time is being severely harassed by President Trump. Continue reading "Round 2: Trump Vs. OPEC"

The Fed's New Dual Mandate

As most of us probably know by now, the Federal Reserve operates under a “dual” mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” (Leave it to the federal government to give a “dual” mandate three goals. But I digress).

Since the Fed effectively gets its mandate from Congress, it stands to reason that Congress can also change the mandate if it wants. Forthwith, I am humbly suggesting that it do just that. Namely, the word “moderate” should be replaced by the words “zero percent,” while the Fed will be given a new directive to ensure that stock prices rise by at least 8% a year. Given this new command, the “stable prices” mandate may have to go, but I’m sure reasonable people can agree that’s a small price to pay (no pun intended) for a guarantee against any investor losing money.

I’m confident that this is one thing that President Trump, who says he’s a “low-interest person,” and the Democrats in Congress, who need lots of wealthy people to support their socialist agenda, can wholeheartedly embrace. I’m sure Fed chair Jerome Powell and his successors will be happy, too, since it will forever protect them from any political criticism. Continue reading "The Fed's New Dual Mandate"

Sorry, Virginia, There Is No Santa Claus

So who looks more right now, President Trump or Federal Reserve Chair Jerome Powell? Based on the market’s reaction to last week’s Fed rate increase, we’d have to say it isn’t Powell.

That doesn’t mean he isn’t right, at least looking at the situation objectively and what Powell is supposed to be doing as Fed chair. While it’s certainly arguable that the Fed does need to take a pause from raising interest rates for a few months to fully digest the recent economic data, which is showing the economy slowing some – but nowhere near a recession – it is right to continue tightening, no matter how unpalatable that is to the market.

Quite frankly, most of the calls for the Fed to refrain from raising interest rates are blatantly self-serving. Of course, investors don’t want the Fed to ever tighten policy, because, as we’ve seen, higher rates mean lower stock prices. Not many people like that, especially when it’s been ingrained in them over the past 10 years that stock prices only go one way – up – and that “buying the dips” is a no-lose strategy to make up for past losses.

Welcome to reality, folks. Continue reading "Sorry, Virginia, There Is No Santa Claus"

Are We Better Off Today Than Two Years Ago?

Two weeks from now Americans will head to the polls to vote in what has been billed as “the most important election of our lifetime.” That may be a bit of hyperbole, but it will no doubt be one of the most important – maybe not as important as the previous one in 2016, but certainly a close second.

Since then, there have been some huge changes in the financial markets and the economy, nearly all of them wildly – and demonstrably – positive. CNBC was nice enough to quantify them the other day in this chart, and the numbers are startling.

I’ll just mention a few:

  • S&P 500: Up 32% since the 2016 election.
  • Average hourly earnings: Up 5%, to $27.24 from $25.88.
  • Nonfarm payrolls: up 4.4 million, to 149.5 million from 145.1 million.
  • Unemployment rate: 3.7%, down from 4.9%.
  • Consumer confidence: up 37 points, to 138 from 101.
  • Corporate tax rate: 21%, down from 35%.
  • Assets held by the Federal Reserve: down 6%, to $4.22 trillion from $4.52 trillion.

Needless to say, there have been some negatives: Continue reading "Are We Better Off Today Than Two Years Ago?"

Moment of Truth Approaching on Iran Sanctions

OPEC’s market monitoring committee met on September 23rd to assess conditions just about six weeks before new U.S. Iran sanctions go into effect, targeting Iran’s oil sector. Buyers and sellers are in the process of finalizing their loading programs for November, and so this assessment is of particular importance as to the question of whether oil supplies will be adequate once those sanctions go into effect.

The market focused on the lack of public discussion of President Trump’s demand on Twitter last Thursday for OPEC to increase supplies to get prices down:

"We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember. The OPEC monopoly must get prices down now!"

However, Saudi Energy Minister Khalid al-Falih was quoted as saying, "Our plan is to respond to demand. If demand [for Saudi crude] is 10.9 million b/d you can certainly take it to the bank that we will meet it. But the demand is 10.5 million b/d or 10.6 million b/d. I think October will be more than this."

Iran Sanctions
Source: AFP

In a more recent news story, it was reported that Saudi Arabia and its allies discussed adding 500,000 b/d to supply. Saudi Aramco plans to add 550,000 b/d of new capacity in the Khurais and Manifa oilfields in the fourth quarter of 2018. Continue reading "Moment of Truth Approaching on Iran Sanctions"