Covid is dead. Energy is the new crisis.

Markets are welcoming victory versus COVID, but the next crisis is upon us: Energy instability. The consequences could be dramatic..

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

BBerg – Apple’s $3 Trillion Valuation Should Unnerve Investors

FT – Political Uncertainty and Brexit will slow UK recovery in 2022, economists predict

WSJ – Omicron Variant May End Up Saving Lives

FT – Hedge Funds struggle to lure new money as performance lags

Bberg – London’s Fintech Boom Opens the Door for Dirty Money

Out of time, and back to the day job!

Bill Blain

Shard Capital, Strategist and Head of Alternative Assets

10 Comments

  1. Its not Asian men, Its Pakistani men or men who were born with the thoughts that women are meat especially who are from Pakistani background. Asia contains many more countries than Pakistan and you are degrading the whole continent because of the culture of one country.
    No offence intended, but there are some good people from Pakistan too, but its problem with them in not pointing out the bad apples among them to cops.

  2. Don’t count your chickens too soon!

    Even if Omicron were to be the last of the major variant waves of the Covid epidemic, the idea that the end is now in sight seems to ignore the situation in China. Due to the poor performance of their vaccines coupled with their policy of suppressing outbreaks using city wide lock-downs means that their population remains highly vulnerable. The extremely high transmissibility of Omicron could well prove impossible to control in this way and the CCP’s inability to adapt and their subsequent failure to face up to such a situation might bring about major disruptions to world-wide supply chains in the coming months.

    But your premise that energy supply will be a major challenge for western governments in the coming months. Had the west wished to prevent Russia by-passing the Ukraine the time to put a stop to the NS2 project was before pipes were laid and compressor stations built.

    Thanks to Angela Merkel’s acquiescence, Putin has already expended a huge amount of capital in building NS2 and is naturally seeking to see this investment properly remunerated. He is, therefore, looking to sign long term supply contracts which will cover a significant proportion of the life of the pipeline. But the West is refusing to co-operate and has delayed its commissioning. This has allowed Putin to put his foot on our necks by restricting the amount of gas he is supplying through the Ukraine on a spot basis. This has prevented western companies building any significant reserves in their storage facilities such that any reserves that have been built up belong to, and can be controlled by, Gasprom.

    If we think the current gas price is high, wait until February – unless of course NS2 is allowed to be commissioned and long term supply contracts are signed.

    • RE:COVID-SCAR=OMACRON-FACE2CAMEROON4NEWVARIANT – https://tass.com/society/1383781https://assets.zerohedge.com/s3fs-public/styles/teaser_desktop_2x/public/2022-01/2022-01-04_21-05-45.jpg
      RE:GAZPROM=PUTIN-SAYS-THOU+SHALL+NOT+STEAL(SIPHON) – https://tass.com/economy/1383745https://memegenerator.net/instance/73030619/vladimir-putin-eating-popcorn-and-so-it-begins
      “KIEV, January 4. /TASS/. Under the pessimistic scenario Ukraine may face gas import problems during this heating season and will have to siphon off Russian gas from the transit pipeline, the former head of the Naftogaz company, Andrey Kobolev, has said.
      “Ukraine is unable to do without considerable amounts imported gas in the first quarter of 2022 to cope with the peak pressures on its energy system during the low temperature season,” Kobolev said in an article published on the website Zerkalo Nedeli (Mirror of the Week) on Monday. According to his forecast under the optimistic scenario the government will have to find and estimated $2 billion to $6 billion to support the largest public company.
      The pessimistic scenario will inevitably result in siphoning off part of gas from the transit pipelines.
      Russia’s reaction to the theft of gas is easy to predict, Kobolev warns. Transit through Ukraine may be suspended and the transit contract signed in December 2019 severed. Moreover, there will follow the launch of Nord Stream 2 and Gazprom’s refusal to use the Ukrainian route, with the Western partners’ tacit consent.”

  3. Don’t count your chickens too soon!

    Even if Omicron were to be the last of the major variant waves of the Covid epidemic, the idea that the end is now in sight seems to ignore the situation in China. Due to the poor performance of their vaccines coupled with their policy of suppressing outbreaks using city wide lock-downs means that their population remains highly vulnerable. The extremely high transmissibility of Omicron could well prove impossible to control in this way and the CCP’s inability to adapt and their subsequent failure to face up to such a situation might bring about major disruptions to world-wide supply chains in the coming months.

    But your premise that energy supply will be a major challenge for western governments in the coming months is spot on. 5Had the west wished to prevent Russia by-passing the Ukraine the time to put a stop to the NS2 project was before pipes were laid and compressor stations built.

    Thanks to Angela Merkel’s acquiescence, Putin has already expended a huge amount of capital in building NS2 and is naturally seeking to see this investment properly remunerated. He is, therefore, looking to sign long term supply contracts which will cover a significant proportion of the life of the pipeline. But the West is refusing to co-operate and has delayed its commissioning. This has allowed Putin to put his foot on our necks by restricting the amount of gas he is supplying through the Ukraine on a spot basis. This has prevented western companies building any significant reserves in their storage facilities such that any reserves that have been built up belong to, and can be controlled by, Gasprom.

    If we think the current gas price is high, wait until February – unless of course NS2 is allowed to be commissioned and long term supply contracts are signed.

  4. I was very impressed you had the balls to speak the truth at the end. Not many people do.

  5. My East Asian wife objects to being lumped in the ‘Asian’ category when we are really speaking about lower class Muslim South Asian males. For once the BBC is correct to drop the BAME label, not that it has the guts to talk about the grooming gangs in mostly northern towns.

    • Fair comment – a number of people have written I should name them as Pakistani males.
      I discovered, over Christmas, that its being going on down south as well.

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