“There is a real risk of energy shortages”
This week’s title comes from Hemingway’s The Sun Also Rises, or the sparknotes for those short on time, and is offered in the context of going bankrupt. While there doesn’t yet appear to be much of that going on (though the latest crypto debacle has brought up questions of “insolvency”), there are quite a few places across markets and the economy where things appear to be accelerating.
Power supplies are a clear case of this phenomenon. Having discussed some small problems last year (France’s pulling nuclear reactors offline for repairs, for instance), there are now increasingly dire signs of issues coming to a head. Take, for example Illinois, where utilities are warning that the typical residential customer “is expected to see a 54% increase in their energy bill starting in June of 2022”. Admittedly this is partly due to a decrease in energy supply. As this article explains, “power supplies are down because some coal plants were taken down early without enough backup power built out”. Consequently, power prices in some places are “up more than 300% from last year”. This may however seem like paradise to the increasing number of people who are being warned of brown/blackouts both stateside and abroad. Australians were recently warned about “power interruptions” as price caps kicked in and “some generators revised their market availability”. This elicited some recommendations on how those affected could “try and manage their electricity consumption”, including “turning off computers and other household appliances in standby mode” and turning off “pool pumps and second fridges” (echoes of “Let them eat cake”?). What’s more, all of this is in the context of ongoing supply chain issues; while it may have been a bit of an inconvenience not to have semiconductors for new cars, problems acquiring necessary infrastructural parts, such as transformers or drill pipe are a different matter altogether.
Hydrocarbons have also been a contentious area, but problems there too continue to gain momentum. The political angle is certainly part of the issue, with Russia’s latest restriction viz a vis Nordstream taking centre stage. But while the political restrictions on supply might be reversed in a matter of days or weeks (though it’s not a good idea to hold one’s breath), resolving deeper issues will take much longer. This is at the center of the latest tiff between the Biden administration and oil companies. The administration is on the offensive as policymakers continue to threaten a windfall profit tax (see the UK), considering using the DPA “to boost refining capacity”, and urging companies to do their “patriotic duty”. However, it’s not quite that easy. As this article from FreightWaves explains, sure there’s been a “loss of refining capacity in the U.S. in recent years”, but the overall situation and hurdles involved are more complex. What’s more, as one commentator quoted in the article wondered, are companies willing to “invest hundreds of millions of dollars” “in an environment where fossil fuel demand has plateaued and government and state policies have been enacted to reduce demand”? In response to a letter from the Whitehouse on the subject, telling companies they “have an opportunity to take immediate actions to increase the supply of gasoline, diesel and other refined products”, Exxon let the administration know that it had been investing, even “through the downturn”. It additionally suggested that the “government can promote investment through clear and consistent policy” and through “support for infrastructure such as pipelines”. Touché.
Central banks are also beginning to move rather quickly. While Powell had previously said that a 75 basis point increase was “not something the committee is actively considering”, the FOMC delivered such a move (teased early by the WSJ). In his prepared comments, Powell pointed to inflation that “again surprised to the upside” and rising “indicators of inflation expectations” as the reason for the “larger increase in the target rang”. The ECB also appears to be hitting the accelerator on its policy shift (tapping the brakes harder?). Following an emergency, aka “ad hoc”, meeting on Wednesday, they announced not only some new flexibility in PEPP reinvestment, but further said its corps was tasked with accelerating “completion of the design of a new anti-fragmentation instrument”. The SNB also joined the acceleration crowd and surprised the market, not only raising rates for the first time in more than a decade, but opting for 50bps and saying that future increases “cannot be ruled out”. However, it’s perhaps the BoJ that is the best example of gradually then suddenly. Having been resolute in ignoring the weakening Yen, sticking to YCC despite its being tested for the first time in years, and inflation that finally hit its target, the resolve appears to be dissipating. Following insensitive comments from Kuroda about the Japanese and their acceptance of bearing rising costs (which he was subsequently forced to take back) there’s speculation that change may be afoot at the BoJ.
P.S. Housing also appears to be switching into a new gear of deterioration. The latest NAHB data shows a deterioration in confidence that “points to economic troubles ahead”, housing players Redfin and Compass both announced layoffs, and one Canadian mortgage lender is putting the brakes on new loan applications.
Want more MI2? Check out the latest Macro Insiders Ask Me Anything session with Julian Brigden and Roger Hirst, where Julian digs into what the hell is happening with macro markets and tries to help viewers understand what it might look like going forward.
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