Blain’s Morning Porridge – Jan 4th 2022: Covid is dead. Energy is the new crisis.
“Trying to fire-up the induction hob by rubbing two sticks together proved a waste of time..”
This morning: Markets are welcoming victory versus COVID, but the next crisis is upon us: Energy instability. The consequences could be dramatic..
Back to the grindstone with a vengeance today – holidays are over and the Christmas decorations are back in their boxes. Time to get serious about 2022. Time to buy or time to sell?
I am unconvinced many market participants understand just how much the ground has shifted over the last quarter – particularly in relation to Energy pricing. The first few months of 2022 are going to be about the market learning what the new landscape looks like, and how it adapts to a new and changing economic reality. This new year is going to be fundamentally different and more challenging in terms of how to invest “smart” in a new and utterly changed financial market environment.
On the plus side, the outlook for 2022 has rosy overtones: Increasingly it looks like the back of Coronavirus has been broken. Infections of the new Omicron might be running out of control around the globe, but new variant hospitalisations and deaths are way down. The crisis is now coloured by issues such as the number of workers off sick – or more likely isolating at home with positive test results and minor symptoms. Official UK vaccine numbers (rather than dubious source material from the University of Facebook) show booster shots are 88% effective against Omicron, and the hospitalisation risk of the new variant is 1/3rd of the previous Delta.
Hallelujah! Ding-Dong! Yippee…
The market bulls are predicting a massive economic boost from the global economy reopening. We’ll see that confirmed by a host of new supply chain blockages, rising job vacancy numbers, short-term pressure on wages and increasing consumer confidence as the pandemic scales down from end-of-the-world contagion to a bad flu. That is the way viruses evolve and mutate – we learn to co-exist.
Even if interest rates start to rise as central banks address the “transitory” inflation effects caused by supply chain bottlenecks, and scale back asset buying programmes, the market bulls believe normalised interest rates will not prove an insurmountable barrier to continued market upside on the back of 2 years of covid-repressed demand. (Central Banks are hoping a post-pandemic boom will prove their stay-out-of-jail card..)
But, but and but again… Things are seldom so simple. Contain your enthusiasm.
The big issue will be Energy – a factor I’ve commented upon many times in the Porridge.
This new energy crisis has been a long-time brewing – unnoticed by the markets, and hidden under a bushel of ESG wokery, underinvestment, and neglect of energy security by governments. (The UK government’s blithe assumptions future energy security could be safely covered by the markets now look bumptiously foolish.) Energy prices will remain volatile on the back of increasing shortage – and the effects of a Gas Shock (in particular) will rock markets. Fixing energy security is a long-term issue, and will be made more complex and expensive by green politics.
Energy matters. It is one of the 3 core ingredients of economic growth. To make economies work you need a willing workforce to make and buy stuff, access to capital to build the economy, and energy to transform raw materials into finished goods. Long-term inflation and economic destabilisation will occur when any of these become prohibitively expensive.
If you want to know how an energy crisis impacts markets, go do a Wiki search on the 1973 Oil Shock. When I was clearing out my parents house last year I found petrol rationing coupons from 50 years ago hidden at the back of a drawer.
Markets are serious underestimating just how painful and economically destructive sustained energy price and supply volatility could be. Thus far we’ve had an incredibly mild European winter – simply delaying the impact. We’re all going to feel it in Q1 when the power bills tumble through the letterbox.
The short-term outlook the market is taking to the bigger Energy crisis was illustrated y’day in the price action on Tesla. The stock rocketed 13.5% higher – up $144 bln in market cap – on the back of Tesla’s success in overcoming the supply chain issues that have so blighted the rest of the autosector. It delivered a record 308,600 electric cars in Q4, confirming is got the manufacturing ability to deliver. It nearly doubled 2021 production (to 936k cars) from 510k in 2020! Respect….
But…. Increasing production is retrospective news.
Surely, Tesla’s already massively bloated market valuation included the expectation Musk was going to deliver his promised 1 million cars? Musk promises much – and gradually, very gradually, he is now delivering cars. They are, apparently, good cars and I won’t dwell on stories about people driving them over cliffs, or blowing them up because of repair costs. (Finland: where the owner unsurprisingly found his battery didn’t last long in sub-zero conditions, and when faced with a $15k bill for a new battery pack, simply dynamited the car instead)!
Tesla is now a good auto manufacturer with a very valuable franchise value garnered through its lead in the EV sector. It now faces growing competition in the EV space, which it will counter from its first mover status. It promises, and promises and promises, autonomous driving – just like everyone else. While Musk seems impervious to the delivery delays on his self-driving car, what happens as the price of lithium batteries becomes unsustainable, and folk start to realise the charging costs of an EV have risen by a factor of 4? Or when someone launches a non-lithium battery?
Energy costs will impact across the economy. Energy inflation will impact consumer spending – which probably explains the briefness of Apple’s flirtation with a $3 trillion valuation. How many bright shiny things can we afford to buy when we can’t heat the house? Never forget the old story about 70% of American workers being one pay-check from penury – what happens when their pay-checks stretch half-as-far.
There are, of course, a host of other energy-inflation consequences I haven’t mentioned this morning – particularly what happens in high-yield bond markets when higher-energy bills come due this quarter.. just saying, but Slaughter on Junk Avenue is a theme I expect to write about soon.
The knock-on effects and consequences of higher energy prices are only dimly understood by markets…
An aside – Crimes against women.
Through the holiday I followed the saga of the Maxwell trial. After 500 days of speculation and solitary she was found guilty. The papers are full of tributes to the bravery of the women who testified and are now able to bury the hurt and damage done to them. I couldn’t help but wonder at the media circus around it.
Sexual abuse doesn’t stop at Epstein. It happens across the globe. There are multiple cases of Sexual Grooming, Pimping, and Rape being perpetrated by gangs of Asian men on vulnerable girls in UK cities. We’ve known about it for decades, but the police still don’t record the ethnicity of perpetrators (for fear of upsetting minorities). There have been few successful prosecutions. The lives of literally thousands of young girls are being blighted in perpetuity – but you ain’t seeing any of them receiving a penny and definitely not multi-million dollar payoffs, or supported by the press to pursue their abusers.
There is something distinctly unsavoury about the whole Maxwell trial. One law for the rich and wealthy, versus none for the poor? Something has to change.
Five Things To Read This Morning
Out of time, and back to the day job!
Shard Capital, Strategist and Head of Alternative Assets