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Good morning and happy Monday! Investment markets ended last week with modest gains after digesting a growing concern of bank liquidity stress and inflation that appears to be stubbornly hanging on. Here’s what we’re talking about this week (partially compiled from my daily economy journal that you can read and subscribe to at “Think Like A Rich Guy”):
- Oil Update: OPEC+cuts production, Japan breaks the Russian price cap, Dealing without the Dollar
- GDP revised downward due to drastically lower consumer spending
- Small Business sentiment improves slightly
Oil Update:
OPEC+ nations unexpectedly cut production
By far, the biggest macroeconomic event of the previous week happened just yesterday morning, when the OPEC+ nations announced a “surprise” cut in oil production of more than 1.6 million barrels per day (bpd), starting May 1. The announcement said this would continue for all of 2023. The breakdown of the cuts by nation includes: Russia (500k) bpd, Saudi Arabia (500k), Iraq (211k), the UAE (144k), Kuwait (128k), Kazakhstan (78k), Algeria (48k), and Oman (40k).
This move is one of several over the last few weeks that have placed serious strain between the United States and Middle- and Far-East relations. What is most striking are some of the comments that accompany these surprise geopolitical and economic developments that seem to indicate a political and economic realignment taking place right before our eyes.
The White House issued a statement saying OPEC+ should not make production cuts at this time, which was completely ignored.
Obviously, a cut in production is very bad news for oil prices, and indeed, as this is being written, oil futures have spiked over 10% on the news of the production cuts:
Source: Google Finance
This also comes as the United States was preparing to refill its strategic petroleum reserves, which the Biden administration dramatically depleted over the last few months to lower the price of gasoline at the pump for American voters. Biden has so far drained the reserves to their lowest level since 1984.
The administration intended to refill the reserves at a price point of $70 or less per barrel, but now either must do so at much higher prices, or delay replenishing the critically important reserves. We’ve always believed the draining of the reserves themselves, which were meant to be used only for serious national emergencies, was profoundly ill-advised because the U.S. government does not dictate the price of oil and would always have to endure market pricing to refill the reserves. It must now pay much more than expected, and compete with its own people’s demand for oil while it does so.
Japan breaks with the West and pays Russia above the price cap for oil
Another development that drew significant attention was that Japan, a long-standing U.S. ally and trading partner, broke with the West’s moratorium and price cap for Russian oil purchases, and negotiated with Moscow for oil at prices higher than the agreed-upon maximum price per barrel.
This is concerning on two fronts: first, because it shows a lack of political resolve among the current U.S. allies to go “all the way” with the Biden administration in their efforts to economically choke-hold Russia over its invasion of Ukraine, and second because such a significant and important ally and trading partner “went rogue”, it shows a dramatically reduced U.S. influence abroad in terms of foreign policy, diplomacy, and economic might.
Dealing without the Dollar
Japan’s move comes after other significant developments in just the last couple of weeks from Middle and Far-East nations to erode the paradigm of the United States Dollar being the primary global reserve currency. Repeated statements and new trade agreements by China, Russia, Egypt, Saudi Arabia, Brazil and many others, are displacing the dollar as the trading currency, and are primarily moving toward the Chinese Yuan as the new preferred currency for commerce.
We do not believe this is an immediate and sudden end of the Dollar as the dominant currency in the world, be we do believe the trend has started. Indeed, the dollar currently sits near historic highs in currency valuations, mostly due to Federal Reserve efforts to reduce the available money supply in the hopes of crushing inflation. However, in recent months, the dollar is fading in strength versus a significant number of the world’s major currencies. This graph shows the strength of those currencies vs. the dollar (so if we were looking at the dollar’s strength against these currencies, we’d see this graph upside-down):
Source: Google Finance
So again, we don’t believe the dollar’s decline as the world reserve currency is imminent. But we do believe the trend has begun. What makes it especially dangerous for the U.S., in our opinion, is that the dollar’s value has largely been held up by oil-producing nations since President Nixon took the nation off the gold standard in 1971. This is far too much of a history lesson to delve into in this update, but here is a good explanation of the Petrodollar and why Middle East politics has been such a major part of our lives as Americans in the last 50 years.
What this means to you
We are not alarmists here at nVest; just realists trying to assess how specific macro events will affect the decisions of companies and families here in the U.S. (micro). In fact, our Macro model has remained invested in both the energy sector and in broad-basket commodities precisely because we expected oil prices to climb again as we go into the summer, and have been concerned that inflation would remain stubbornly resilient. These changes are actually good news for U.S. energy producers in the short term, who will see their product rise in price per barrel and will likely have more of an opportunity to supply more to fill the void, but production can’t be ramped up overnight, and transporting oil overseas is a complicated logistical process.
We remain bullish on energy companies for now, but higher energy costs will push up the prices of many other products and services further exacerbating the Fed’s efforts to curb inflation and more quickly weakening the economy as consumers face even higher energy bills and gasoline prices in the coming months. It’s generally true that where energy goes, so goes everything else.
We are also growing more concerned that there is a concerted effort by these countries to stymie or even replace the dollar as the world’s dominant reserve currency. It won’t happen overnight or without at least a figurative fight from the West, but there does seem to be a new economic bloc forming in the Middle East, Africa, and Asia (sort of an expanded BRIC).
US GDP revised downward due to a sharp cut in consumer spending
We got a revision to the Q4 2022 GDP number for the U.S. last week (these can be common as newer data arrives). The new data showed that previous projections of consumer spending during the last part of 2022 was pretty far off the mark and far too optimistic. As actual consumer spending data came in, the country’s economic output looked worse at the end of 2022 than originally estimated.
In the economies of most developed nations consumer spending accounts for roughly 70% of the total country’s economic output, so seeing what you and I are doing with our paychecks is critically important to economists, business strategists, etc. And that makes sense: if spending is way down, is it such a good time to expand a factory or introduce a new product line? Is it the best time to raise prices? Likely not.
Although the Q4 2022 GDP is still a positive number, the number was revised down by almost 25 bps due to this new look at consumer spending:
Consumer spending can have a major impact on the economy. When consumers have lots of money to spend, we soar (and inflation rises quickly). We can see this after the stimulus checks and PPP loans during Covid:
However, as prices soared, consumers felt the “pinch” in their budgets and began making adjustments to their spending habits. This has created a backlog of inventories at many manufacturers and import distributors, who all ramped up production following the Covid-fueled spending spree of late 2020 and early 2021.
That demand is now gone. Here’s a good example of where you can see this – in the demand for trucking of goods across the country. For a while in 2020 and 2021, you could hardly find an available truck to ship your products to the store shelves. That has now completely reversed, and many trucking companies are aggressively looking for customers:
We’ve also discussed the manufacturing indexes in recent updates, showing that factory production is also slowing dramatically as new orders slow down and inventories climb. Some third-party analysts are predicting further slowdowns are looming. In this case, Moody’s is predicting further erosion in consumer spending:
U.S. Jobless Claims rise
The jobless claims in the U.S. increased for the fifth week in a row, signaling that there is softer employment out there. It also means that many of the earlier layoffs reported weeks and months ago may finally be working their way through severance packages and are now having difficulty finding work elsewhere:
To be sure, our labor market is still incredibly tight, at or near multi-year lows in terms of unemployment claims. However, the trend is now toward the middle of the pack in terms of new weekly claims figures…
…while continuing claims remains very steady (though, as you can see for all years except the Covid pandemic in 2020, the trend going into spring and summer is for continuing claims to drop pretty dramatically. This year is an outlier in that regard as it runs a straight line where every year previous to this saw pretty significant declines in continuing joblessness by now.
We still have a significant number of vacant positions, so it appears at least some of our continuing jobless claims are people who are not actively seeking work or refuse to take some of the open positions. This will change as the number of available jobs dwindles in the coming weeks and months (in our opinion).
What this means to you
The jobs statistics are showing we are hitting the brakes on hiring, albeit slowly for now. This will change in coming weeks as the economy continues to slow down. We might even see a drop in the continuing claims in inflationary pressures resume (we believe they will, in very short order), and household budgets require unemployed or under-employed people to pick up work to help make ends meet.
There has been much interest in our weekly Macro updates, and information is coming faster than ever as our economy winds down into a recession we’ve long been forecasting. Readers of the nVest Advisors Weekly Macro Update can now get more current information each morning by following CEO Jeremy Torgerson on his separate personal finance blog, “Think Like A Rich Guy”. These daily journal entries will be then consolidated into the weekly macro update you are reading here.
We strongly urge you to follow the daily updates if having a daily look at the changing economy is vital for your investments or business activities. You can do so by visiting Think Like A Rich Guy.
Bottom Line:
Download our brand-new E-Book “7 Hacks To Recession-Proof Your Financial Life” today.
We are at the economic tipping point. We’ve been shouting warnings for over a year. No one knows exactly when a recession will be declared, but we firmly believe most of the larger economies of the world are right at the door of one now. Recessions can take years to recover from, which is why we believe it is vitally important to get your family and business finances ready to weather through such a storm.
We predicted the beginning of a turn in the current market rally last week, and we reiterate that sentiment now. There will always be market movement that moves counter to the economic data because markets are much more short-term focused, and let’s face it: until fear takes hold, greed is the prevailing emotional state of most market participants. We do believe, however, that the recent rally has fully run its course, and there will soon be a strong shift from stocks into safer investment options such as corporate and government bonds. With interest rates this high, getting a 5% or better yield, risk-free is becoming a more and more attractive option for investors concerned about the coming economic uncertainty. Once there is consensus that either the economy is earnestly deteriorating, or the Fed announces the end of rate hikes, the move from stocks to bonds will accelerate.
Whether you are our client or not, you need to consider the broader economy (and much less so the daily market fluctuations) when making investment decisions. The economy is telling us clearly what is coming, and you need to have your investment accounts prepared before that happens.
Just this week, I’ve published an ebook to help you get your finances ready for the recession directly ahead. It’s yours totally free, just for the asking. Just click on the book image to access and download it.
Use these economic reports, and those of others working in this space, to prepare. You can not only avoid much of the pain that is coming, but you might actually profit from it, if your investments are properly positioned, and you’ve done what you can to shore up your business’ and family’s financial situation. If you need help with this, nVest Advisors has amazingly affordable personal financial planning and fiduciary investment management services to help you.
This is what we do for a living, and we’re very happy to partner with you on that endeavor.
Reach out to us for a totally free financial and portfolio checkup today if you’re concerned about where your finances sit for the coming few years, particularly if you are at or approaching retirement age. We’re delighted to offer you our thoughts. You can schedule that time with us below:
Watching This Week:
- Jobs Report
- Service Sector Update
- Commodities
