I had a great visit with my kids over the weekend in New Orleans. I got home late Tuesday night, and apparently I picked up some supercharged bayou germs cuz I’ve been in bed ever since and my head still feels like it’s filled with cement.
The result is that I am having difficulty holding a single thought for long, so today I’m just gonna throw out a few thoughts and observations that may, or may not, have any relevance…
****So the Fed hiked interest rates yet again on Wednesday. I actually set my alarm for 2 pm ET so I could see what happened. The Fed delivered a 25 basis point hike, as expected. And that hike took the Fed Funds rate (the interest rate the Fed charges banks to borrow from the Fed) to the 4.75%-5% range.
The market took it in stride, for about an hour…
Then at 3:15 pm, holy moly. Investors took what had been a 34 point gain for the S&P 500 and turned it into a 75 point loss for the day.
I’m sure some bulls finished the day whimpering “but…but… Powell said he was gonna pause the rate hikes…? Shouldn’t that be good?”
Well, if the banking sector weren’t breaking apart, then sure, a pause in the rate hikes would be good news. But sadly, it’s not about inflation anymore…
Now we have a brewing credit crunch as banks have no choice but to curtail lending to protect their impaired asset base. This is no small thing – one report I read pegged the dollar amount of U.S. banks’ unrealized losses at $1.7 trillion…with a “t.”
A sharp drop in lending will do the Fed’s job for it. For all intents and purposes, inflation is no longer a problem. Banks are…
*****Oil prices are sending mixed signals about inflation. Or maybe I should say that investors are struggling to figure out just what message oil prices are sending…
On the one hand, China’s economy appears to be moving right along. And that should mean strength for oil prices, because demand from China accounts for 40% of the world’s oil demand growth.
But on the other hand, oil inventories have risen a bit here in the U.S. Saudi Arabia is talking about cutting production to support prices. And who knows, maybe the U.S. economy is about to see a nasty recession, which wouldn’t be good for demand and prices.
So which is it? Is the oil market wrong? Should oil prices be higher because of Chinese demand? Or should the uncertainty about U.S. and European demand be driving prices?
First off, I’d caution against deciding that the market is wrong and that oil prices should be higher. Maybe they should be, but you’ll be better off waiting for oil prices to actually start moving higher before you jump on for the ride…
And besides that, I’m more interested in how the oil market has changed since Russia invaded Ukraine. Because Russian oil is a wild-card for oil prices. Sanctions and price caps have curtailed the free flow of Russian oil to Europe, so Russian oil isn’t really competing with Brent crude or Texas Intermediate crude prices…
But what does that mean for China’s demand? I read that Russian oil now accounts for 35% of Chinese imports. Saudi Arabia and Iraq combine for another ~30%. Is there any reason to believe these numbers are accurate?
Nope – especially when it comes to the amount of oil Russia is selling to China. And frankly, I wouldn’t put much faith in the GDP numbers coming out of China either.
It seems to me the global oil market has broken in half. And I’m not sure to what degree Russian oil sales to China should be affecting U.S. demand statistics and prices.
*****So, Silicon Investment Bank – a $200 billion bank – failed. A few more American regional banks needed massive capital infusions to prevent failing. Credit Suisse (NYSE: CS) failed. And now that investors are looking a little side-eyed at Deutsche Bank, a Citi analyst came out with a note today saying:
“We view this as an irrational market…The risk is if there is a knock on impact from various media headlines on depositors psychologically, regardless of whether the initial reasoning behind this was correct or not.”
Irrational?!?! Of course it’s an irrational market! It’s a market…human beings, ruled by fear and greed, buying and selling assets and trying to make a buck!
Next thing ya know this analyst is gonna complain that life’s not fair. Sheesh!
Here’s the deal. There are a lot of analysts and strategists out there who have never seen a real bear market. The last one, the Great Financial Crisis, was 15 years ago. It’s been even longer since many of these youngsters have seen relatively high interest rates.
One thing I can tell you: mistakes will be made…
*****Which reminds me of the Hemingway about bankruptcy from The Sun Also Rises.
Q: “How did you go bankrupt?”
A: “Two ways. Gradually and then suddenly.”
This bear market has been pretty gradual so far. I expect it will change to “suddenly” before its over.
That’s it for me today, take care, have a great weekend and I’ll talk to you on Monday