Perfect Storm Brewing

A quick look at the markets early (5 am) this morning is a bit scary–a perfect storm seems to be brewing. Spiking energy prices and rising interest rates – certainly are troublesome.

I have thought that we would see higher interest rates with all the debt that the globe has floated in the last 10 years – sooner or later investors would demand to be paid a higher rate of return for buying this junk. BUT I only want higher interest rates if the pace of the move higher is at the rate that is most beneficial for me–ha ha as if anything ever does what I want it to do. The 10 year treasury is at 1.535% right now.

I have watched energy prices, in particular in Europe, over the last number of months and at the gas pump where I spend plenty of time. Filling the tank at $2/gallon is certainly a lot less painful than filling up at $3/gallon—honestly not a big deal for me, but the tread is scary. Europeans, Americans and the Chinese should hope for a warm winter because it is going to get plenty expensive to heat your home.

Of course these much higher energy prices feed right into the ‘transitory’ (not) inflation–it is part of the cost of everything.

The bottom line is we need to ‘batten the hatches’ a bit and be prepared for some rocky months. Maybe some opportunistic sales in low coupon issues—maybe some opportunistic buying in some higher coupon issues, but by and large not trying to be too ‘cute’. Decades of experience shows that we are not smarter than the market—over trading and trying to outsmart markets through the use of options, inverse ETFs etc. seldom are beneficial to us.

Lastly one should start getting the ‘watch list’ built—what do you want to buy when markets panic?

36 thoughts on “Perfect Storm Brewing”

    1. Same here. As well as LTSF (showing 12??) , LTSK, and SLMNP. And likely a few others. Are there any brokers allowing purchases now?

  1. Well, So much for my wish for a gradual drop…… It is a good day to not look at the portfolio!

    1. Such low vol on it. Did they even start to sell the new shares yet? Last week I thought they might have but someone corrected me

    2. I sold mine at 21.20 eating a 10 cent loss then repurchased them at 19.00 this morning. It wouldnt surprise me if it drops below that. But the plan is for it to go up sometime and sell, lol.

  2. I have been expecting some adverse changes in the tax structure for hydrocarbon companies. So far, Washington seems to have resisted that urge. Maybe the exploration companies will get “greedy” again and stop distributing their free cash flow to increase drilling.

    The key may be how Washington reacts to the enhanced profits and cash flow that the energy companies experience in the next two quarters. Any whiff of an excess profits tax would drive down drilling and push the price of oil even higher?

  3. Tim

    In looking at the perfect storm, was surprised you did not bring up the activities here in Washington, DC.

    Over the next two weeks, there is a good chance the US government will be shut down and a ratings company will downgrade US credit (again). I have been raising a little cash and have been using this site to develop and refine my shopping list.

    1. Greg–I would like to but trying to avoid anything that will start a ‘political’ discussion since those aren’t allowed.

    2. Could be another short term shutdown. Panic selling could be a buying opportunity if you can time it right. And Yes, the US credit rating should be downgraded.

      1. US Credit rating downgrade is meaningless.
        The US government debt is all denominated in US Dollars, so they can always pay, it’s only the political will “to pay or not to pay” and at the end of the day they will always pay, with delay at most.

        Sovereign Credit ratings make more sense for debt denominated in a foreign currency, because that can be more iffy, especially if the country can’t access enough of the foreign currency to pay off the debt/interest.

  4. With FORDS Mammoth announcement yesterday of spending $7 BILLION DOLLARS to build 3 new plants for their EV’s and battery plant one can’t help but wonder how much of it will be in bonds or preferreds?????

  5. Where is $2 a gallon gas!?! Filled up my 1997 Honda Civic yesterday on the way to work with $2.89 gas. Guess I could leave the 20th century behind, but that thing still is in great shape at 271,000 miles and paid for in 1999! We heat with Natural Gas here in North Carolina and expecting bigger bill over the winter due to increasing price. I hope things move slowly up or down…. Easier on my blood pressure.

    1. Don’t worry DJ… The parade of those who think inflation is ‘transitory’ is quiet long. Surely they cannot be wrong. Just listen to the spin from Jay Powell. Oy…

      1. Bloomberg consensus is for 3% CPI in Q2 2022 in the US and 1.75% Eurozone. I assume you’re taking the over. How are you playing that?

        1. Bloomberg? Yes, THE authoratitive source on inflation statistics – I see. You were already addressed on 9/13/21. Refer to that thread.

          1. Bloomberg consensus is the average forecast of research analysts for inflation — i.e., what the market is pricing in. Do you have a better source for that statistic? And yes, most people consider Bloomberg to be the authoritative source for financial statistics and data.

            I found your 9/13 reply. Didn’t realize you had replied. Sounds like this is your basket that we can track:

            Long
            DBC, TIP, VNQ

            Short
            XLY

            There were other ideas like using options, gaming VXX and using term preferreds but that’s not really trackable as a basket.

            1. Have fun with your basket game, LI. You’ll be the only one playing it. I didn’t mention DBC, nor VNQ, nor XLY, nor shorting anything. Word salad games again… And yes, I fully understand what each of them are/do.

              I mentioned the word “consider” 7 different times after stating that the list was a sampling and not complete.

              For factual statistics and not speculation, one can consider actual authoritative government sources such as the BLS, BEA, and the Federal Reserve. Any monkey can throw a dart at a board and come up with a guess. Funny how some ppl who lambaste analysts for getting so much wrong, prop them up stiff and strong when they want to hide behind them to make a point.

              If one thinks the price of gasoline and food and healthcare and vehicles will be lower a year from now, rock it out and make that coin. If one thinks interest rates will be lower and RE more affordable a year or two from now, do your thang and make that coin. Reverting to energy dependence on the Middle East MUST be a good thing, right? Shipping/transportation costs and wage inflation are all forecast to drop substantially in the coming year or two or whatever, right? No need to worry about the solvency of Medicare or Social Security, right? etc, etc, etc. Just some random thoughts here on and off topic of things affected by inflation/debt/governmental incompetence…

              Here’s an interesting quote on how transitory inflation is: Back in 1988, a dollar could buy you four postage stamps; today it gets you less than two.

              I’ll agree that we disagree and keep it moving.

              1. “For factual statistics and not speculation, one can consider actual authoritative government sources such as the BLS, BEA, and the Federal Reserve”

                They all only provide backward looking statistics which are largely worthless for investment purposes which are all about discounting the future.

                “Any monkey can throw a dart at a board and come up with a guess.”

                These aren’t monkeys. They are research analysts who’s forecasts are used to invest trillions of dollars. They are the market. The market doesn’t always get it right but it pays to understand where the market is at and be selective in going against the market.

                ” Funny how some ppl who lambaste analysts for getting so much wrong, prop them up stiff and strong when they want to hide behind them to make a point.”

                You’re the one who seems more interested in making points than making money.

                “Reverting to energy dependence on the Middle East MUST be a good thing, right?”

                Case in point. I do like $KSA here, though.

      2. Not sure how many people on this site actually go to the grocery store with their wives and get the privilege of paying for their groceries every week but I DO. I can tell you with 100% conviction that groceries have NOT gone up 2 to 3%. Its a helluva lot more than that. We use to average around $200 a week and now we’re averaging $300 a week. In particular paper products and meat have really jumped up alot. But everything has jumped up quite a bit.

        1. Same here Chuck. The price inflation at the grocery store is eye popping. Thankful I have an affinity for investing to try to keep ahead of the curve. And, that I learn so much from the guys and gals on this site. Kudos to Tim!

      1. Yep. And some things have stayed the same price, but smaller packages, what used to be $3.00 for 12 ounces is still $3.00 for only 10 ounces etc. Whenever a utility bill or insurance goes up it certainly isn’t by 1 or 2 % it is usually closer to 7-10% or more. I saw the same thing in the late 70’s and early 80’s, nothing new, Fed way behind the curve as usual.

        1. “…and when they try to catch up…”
          as M.Z. (Who? The man who used to wear the market on his face) used to say to (hint) Louis Rukeyser, “then it’s three steps and a stumble…”
          Nothing moving toward my buy stops
          Biggest loser the new VNOOP yielding just over 4.55 on last price.

  6. “Europeans ,Americans and the Chinese should hope for a warm winter”

    Don’t forget Brazil. Their 100 year drought is creating an energy crisis. Some say that will be the new normal. Of course, in Brazil they’ll be hoping for a cool summer while the northern hemisphere hopes for a warm winter.

    Will be interesting to see what happens at the 10/4 OPEC meeting in light of these high oil prices.

  7. Yeah, let’s keep attacking North American hydrocarbon production and transportation while begging SA & Russia to produce more so we can stay warm and go wherever and whenever on cheap gas. It works very well–IF you are loaded up on energy stocks.

    JMO

    1. camroc,
      Its all about the partnership sharing and dividends. I have to pay for that gas somehow

    2. As camroc alludes, to me Russian energy stocks look if not cheap then at least good relative values. I am long Gazprom and Tatneft. I thought the analysis of Tatneft by Danil Kolyako on SA was pretty good.

    3. Camroc; I think you are onto something there. I will just say that the thinking in an eastern bound city is truly upside down. We have an huge abundance of Oil & Nat Gas in this country. No reason not to use it.

  8. $3.00 for gas at the pump?
    WOW, I want some. We are up to a average of $4.35 here.
    Last winter I was shopping on Amazon for a propane heater for my garage and was reading comments. A few renters in the Northeast were asking if they could be used indoors. Living in all electric apartments in the Philly area with the power went out during a winter storm they had no heat.
    Those floating rate preferred are looking better all the time.

    1. I’m on vacation in California and the average looked around $4.79 a gallon with a few places over 5. I left Florida on Thursday am and was able to get gas there for $3 a gallon.

      1. Yes, I live in California and have been paying $4.65 a gallon here on the Central Coast for Chevron middle grade (Plus) for months. But about $1.20 of that is taxes and other onerous fees.

        1. Bill S. I wish there was a way on this site to send a private message as I have a question for you about the Central Coast of California.

    2. Charles,
      More and more, I come across egregious examples of inflation in the SF Bay Area. I seen recently was a $9 basket of cherry tomatoes(1.5lb) that are not even organic or a $20 bottle of laundry detergent.

      I guess I better get the cash under my mattress ready to refill my preferreds. All my juiciest ones have been called away.

Leave a Reply

Your email address will not be published.